Descartes Announces Third Quarter Fiscal 2020 Financial Results

Record Revenues and Income from Operations

 WATERLOO, Ontario — December 4, 2019 — The Descartes Systems Group Inc. (TSX:DSG) (Nasdaq:DSGX) announced its financial results for its fiscal 2020 third quarter (Q3FY20). 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 continues to deliver predictable results in an increasingly unpredictable business environment,” said Edward J. Ryan, Descartes’ CEO. “Our customers need access to timely, reliable data from multiple sources via a network to fuel decision-making tools that power their businesses. The Global Logistics Network (GLN) does just that, connecting shippers, carriers and logistics service providers on one platform to manage the lifecycle of shipments.”

Q3FY20 Financial Results

As described in more detail below, key financial highlights for Descartes’ Q3FY20 included:

  • Revenues of $83.0 million, up 19% from $70.0 million in the third quarter of fiscal 2019 (Q3FY19) and up 3% from $80.5 million in the previous quarter (Q2FY20);
  • Revenues were comprised of services revenues of $72.6 million (87% of total revenues), professional services and other revenues of $8.9 million (11% of total revenues) and license revenues of $1.5 million (2% of total revenues). Services revenues were up 19% from $61.1 million in Q3FY19 and up 2% from $71.4 million in Q2FY20;
  • Cash provided by operating activities of $27.5 million, up 43% from $19.2 million in Q3FY19 and up 2% from $26.9 million in Q2FY20;
  • Income from operations of $13.7 million, up 27% from $10.8 million in Q3FY19 and up 5% from $13.1 million in Q2FY20;
  • Net income of $9.7 million, up 23% from $7.9 million in Q3FY19 and up 13% from $8.6 million in Q2FY20;
  • Earnings per share on a diluted basis of $0.11, compared to $0.10 in Q3FY19 and $0.10 in Q2FY20; and
  • Adjusted EBITDA of $31.5 million, up 31% from $24.0 million in Q3FY19 and up 4% from $30.2 million in Q2FY20. Adjusted EBITDA as a percentage of revenues was 38%, compared to 34% in Q3FY19 and 38% in Q2FY20.

 

 

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):

 

 

Q3

FY20

Q2

FY20

Q1

FY20

Q4

FY19

Q3

FY19

Revenues

83.0

80.5

78.0

71.0

70.0

Services revenues

72.6

71.4

67.0

62.9

61.1

Gross margin

73%

74%

74%

73%

73%

Cash provided by operating activities

27.5

26.9

23.4

21.8

19.2

Income from operations

13.7

13.1

11.9

10.6

10.8

Net income

9.7

8.6

7.3

7.9

7.9

Net income as a % of revenues

12%

11%

9%

11%

11%

Earnings per diluted share

0.11

0.10

0.09

0.10

0.10

Adjusted EBITDA

31.5

30.2

28.7

25.0

24.0

Adjusted EBITDA as a % of revenues

38%

38%

37%

35%

34%

 

Year-to-Date Financial Results

As described in more detail below, key financial highlights for Descartes’ nine-month period ended October 31, 2019 (9MFY20) included:

  • Revenues of $241.6 million, up 18% from $204.1 million in the same period a year ago (9MFY19);
  • Revenues were comprised of services revenues of $211.0 million (87% of total revenues), professional services and other revenues of $25.6 million (11% of total revenues) and license revenues of $5.0 million (2% of total revenues). Services revenues were up 18% from $178.6 million in 9MFY19;
  • Cash provided by operating activities of $77.9 million, up 38% from $56.3 million in 9MFY19;
  • Income from operations of $38.7 million, up 26% from $30.7 million in 9MFY19;
  • Net income of $25.6 million, up 9% from $23.4 million in 9MFY19. Net income as a percentage of revenues was 11%, consistent with 9MFY19;
  • Earnings per share on a diluted basis of $0.31, compared to $0.30 in 9MFY19; and
  • Adjusted EBITDA of $90.4 million, up 31% from $68.9 million in 9MFY19. Adjusted EBITDA as a percentage of revenues was 37%, compared to 34% in 9MFY19.

The following table summarizes Descartes’ results in the categories specified below over 9MFY20 and 9MFY19 (unaudited, dollar amounts in millions):

 

 

 

9MFY20

9MFY19

Revenues

241.6

204.1

Services revenues

211.0

178.6

Gross margin

74%

73%

Cash provided by operating activities

77.9

56.3

Income from operations

38.7

30.7

Net income

25.6

23.4

Net income as a % of revenues

11%

11%

Earnings per diluted share

0.31

0.30

Adjusted EBITDA

90.4

68.9

Adjusted EBITDA as a % of revenues

37%

34%

 

Cash Position

At October 31, 2019, Descartes had $28.8 million in cash. Cash increased $1.4 million in Q3FY20 and increased $1.5 million in 9MFY20. The table set forth below provides a summary of cash flows for Q3FY20 and 9MFY20 in millions of dollars:

 

 

Q3FY20

9MFY20

Cash provided by operating activities

27.5

77.9

Additions to property and equipment

(1.5)

(3.9)

Acquisitions of subsidiaries, net of cash acquired

(11.7)

(292.1)

Proceeds from borrowing on credit facility

12.0

297.0

Credit facility repayments

(25.5)

(313.4)

Payment of debt issuance costs

(0.1)

(1.9)

Issuances of common shares, net of issuance costs

         0.5

         238.4

Effect of foreign exchange rate on cash

0.2

(0.5)

Net change in cash

1.4

1.5

Cash, beginning of period

       27.4

       27.3

Cash, end of period

28.8

28.8

 

Acquisition of BestTransport

On August 20, 2019, Descartes acquired all the shares of BestTransport.com, Inc. (“BestTransport”), a cloud-based transportation management system provider focused on flatbed-intensive manufacturers and distributors. The purchase price for the acquisition was approximately $11.7 million, net of cash acquired, which was funded from drawing on Descartes’ existing credit facility.    

 

Descartes Evolution — 2020 User Group Conference

Descartes will be hosting Descartes Evolution at The Diplomat Beach Resort in Ft. Lauderdale,  Florida from Tuesday, March 17 to Thursday, March 19, 2020. Descartes Evolution is Descartes’ pinnacle event where customers and partners from around the world get together to network with other Descartes users, meet the Descartes product management team, provide input on Descartes' product development plans, and learn more about Descartes solutions and how to improve their operations. Information on the event is available at the following site:

https://www.descartes.com/usergroup.  

 

 

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, December 4. Designated numbers are +1 888 465-5079 for North America and  +1 416 216-4169 for international, using Passcode 5493847#.

 

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.

 

Replays of the conference call will be available following the call from 8:00 p.m. ET, and until December 11, 2019, by dialing +1 888 843-7419 or +1 630 652-3042 followed by Passcode 5493847#. 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

[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' growth in margins and generation of cash; continued growth and acquisitions; rate of profitable growth; demand for Descartes' solutions; growth of Descartes' Global Logistics Network; 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 to increase at levels consistent with the average growth rates of the global economy; 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 execute on acquisitions and to integrate acquired businesses and assets, and to predict expenses associated with and revenues from acquisitions; 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; the impact on Descartes' business of a global economic downturn; 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 four 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 Q3FY20, Q2FY20, Q1FY20, Q4FY19 and Q3FY19, which we believe is the most directly comparable GAAP measure.

(US dollars in millions)

Q3FY20

Q2FY20

Q1FY20

Q4FY19

Q3FY19

Net income, as reported on Consolidated Statements of Operations

9.7

8.6

7.3

7.9

7.9

Adjustments to reconcile to Adjusted EBITDA:

 

 

 

 

 

Interest expense

0.4

1.4

2.2

0.5

0.6

Investment income

-

-

(0.1)

(0.1)

-

Income tax expense

3.5

3.1

2.5

2.4

2.3

Depreciation expense

1.2

1.1

0.9

1.5

1.1

Amortization of intangible assets

14.5

14.1

12.8

10.3

10.4

Stock-based compensation and related taxes

1.4

1.3

1.0

1.0

1.2

Other charges

0.8

0.6

2.1

1.5

0.5

Adjusted EBITDA

31.5

30.2

28.7

25.0

24.0

 

 

 

 

 

 

Revenues

83.0

80.5

78.0

71.0

70.0

Net income as % of revenues

12%

11%

9%

11%

11%

Adjusted EBITDA as % of revenues

38%

38%

37%

35%

34%

 

 

 

 

 

 

 

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 9MFY20 and 9MFY19, which we believe is the most directly comparable GAAP measure.

 

(US dollars in millions)

 

 

 

9MFY20

9MFY19

Net income, as reported on Consolidated Statements of Operations

 

 

 

25.6

23.4

Adjustments to reconcile to Adjusted EBITDA:

 

 

 

 

 

Interest expense

 

 

 

4.1

1.6

Investment income

 

 

 

(0.2)

(0.1)

Income tax expense

 

 

 

9.2

5.9

Depreciation expense

 

 

 

3.1

3.0

Amortization of intangible assets

 

 

 

41.4

29.9

Stock-based compensation and related taxes

 

 

 

3.7

3.0

Other charges

 

 

 

3.5

2.2

Adjusted EBITDA

 

 

 

90.4

68.9

 

 

 

 

 

 

Revenues

 

 

 

241.5

204.1

Net income as % of revenues

 

 

 

11%

11%

Adjusted EBITDA as % of revenues

 

 

 

37%

34%


 

The Descartes Systems Group Inc.

Condensed Consolidated Balance Sheets

(US dollars in thousands; US GAAP; Unaudited)

                       

 

October 31,

January 31,

 

2019

2019 (Audited)

ASSETS

 

 

CURRENT ASSETS

 

 

Cash

28,848

27,298

Accounts receivable (net)

 

 

Trade

36,231

31,493

Other

5,522

4,331

Prepaid expenses and other

11,353

9,027

Inventory

193

95

 

82,147

72,244

OTHER LONG-TERM ASSETS

12,731

10,510

PROPERTY AND EQUIPMENT, NET

15,757

12,612

RIGHT-OF-USE ASSETS

13,176

-

DEFERRED INCOME TAXES

24,090

3,598

INTANGIBLE ASSETS, NET

270,723

176,192

GOODWILL

523,918

378,178

 

942,542

653,334

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

CURRENT LIABILITIES

 

 

 

Accounts payable

7,954

5,147

 

Accrued liabilities

35,455

29,392

 

Lease obligations

3,987

-

 

Income taxes payable

2,168

1,592

 

Deferred revenue

41,532

34,236

 

91,096

70,367

LONG-TERM DEBT

9,274

25,464

LONG-TERM LEASE OBLIGATIONS

9,692

-

LONG-TERM DEFERRED REVENUE

737

855

LONG-TERM INCOME TAXES PAYABLE

7,750

7,634

DEFERRED INCOME TAXES

15,188

15,507

 

133,737

119,827

 

 

 

SHAREHOLDERS’ EQUITY

 

 

Common shares – unlimited shares authorized; Shares issued and outstanding totaled 84,151,724 at October 31, 2019 (January 31, 2019 – 76,864,866)

524,012

276,753

Additional paid-in capital

457,975

454,722

Accumulated other comprehensive loss

(25,974)

(25,201)

Accumulated deficit

(147,208)

(172,767)

 

808,805

533,507

    

942,542

653,334

       

 

 

 

 

 


 

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

 

Nine Months Ended

 

October 31,

October 31,

 

October 31,

October 31,

 

2019

2018

 

2019

2018

 

 

 

 

 

 

REVENUES

83,026

70,008

 

241,570

204,141

COST OF REVENUES

22,133

19,150

 

63,126

55,695

GROSS MARGIN

60,893

50,858

 

178,444

148,446

EXPENSES

 

 

 

 

 

Sales and marketing

10,142

9,312

 

30,309

27,776

Research and development

13,383

11,901

 

39,469

35,708

General and administrative

8,407

7,931

 

25,113

22,015

Other charges

799

529

 

3,463

2,250

Amortization of intangible assets

14,525

10,354

 

41,404

29,909

 

47,256

40,027

 

139,758

117,658

INCOME FROM OPERATIONS

13,637

10,831

 

38,686

30,788

INTEREST EXPENSE

(497)

(613)

 

(4,100)

(1,678)

INVESTMENT INCOME

39

40

 

151

140

1.      INCOME BEFORE INCOME TAXES

13,179

10,258

 

34,737

29,250

INCOME TAX EXPENSE

 

 

 

 

 

Current

2,327

1,641

 

5,688

4,727

Deferred

1,186

716

 

3,490

1,138

 

3,513

2,357

 

9,178

5,865

NET INCOME

9,666

7,901

 

25,559

23,385

EARNINGS PER SHARE

 

 

 

 

 

Basic

0.11

0.10

 

0.32

0.30

Diluted

0.11

0.10

 

0.31

0.30

WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)

 

 

 

 

 

Basic

84,136

76,854

 

80,818

76,821

Diluted

85,342

77,863

 

81,991

77,767

 


 

The Descartes Systems Group Inc.

Condensed Consolidated Statements of Cash Flows

(US dollars in thousands; US GAAP; Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

October 31,

October 31,

 

October 31,

October 31,

 

2019

2018

2019

2018

OPERATING ACTIVITIES

 

 

 

 

Net income

9,666

7,901

25,559

23,385

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

Depreciation

1,176

1,098

3,143

3,019

Amortization of intangible assets

14,525

10,354

41,404

29,909

Stock-based compensation expense

1,324

1,002

3,588

2,736

Other non-cash operating activities

-

(269)

11

(339)

Deferred tax expense

1,186

716

3,490

1,138

Deferred tax charge

-

(49)

-

(49)

      Changes in operating assets and liabilities:

 

 

 

 

   Accounts receivable

 

 

 

 

Trade

(2,502)

260

2,881

(780)

   Other

276

539

(782)

120

        Prepaid expenses and other

(1,409)

(28)

(3,525)

(2,278)

   Inventory

(51)

17

(87)

67

   Accounts payable

3,591

1,216

2,000

3,588

   Accrued liabilities

1,931

451

3,071

805

   Income taxes payable

228

(357)

579

(1,953)

   Operating leases

106

-

516

-

   Deferred revenue

(2,518)

(3,631)

(3,963)

(3,056)

Cash provided by operating activities

27,529

19,220

77,885

56,312

INVESTING ACTIVITIES

 

 

 

 

Additions to property and equipment

(1,484)

(1,131)

(3,879)

(3,078)

Acquisition of subsidiaries, net of cash acquired

(11,718)

(9,443)

(292,053)

(67,932)

Cash used in investing activities

(13,202)

(10,574)

(295,932)

(71,010)

FINANCING ACTIVITIES

 

 

 

 

Proceeds from borrowing on the credit facility

12,000

9,953

297,015

68,468

Credit facility repayments

(25,514)

(17,956)

(313,376)

(53,493)

Payment of debt issuance costs

(71)

-

(1,885)

-

Issuance of common shares for cash, net of issuance costs

547

(27)

238,350

338

Payment of contingent consideration

-

(1,531)

-

(1,531)

Cash (used in) provided by financing activities

(13,038)

(9,561)

220,104

13,782

Effect of foreign exchange rate changes on cash

197

(393)

(507)

(1,469)

Increase (decrease) in cash

1,486

(1,308)

1,550

(2,385)

Cash, beginning of period

27,362

34,068

27,298

35,145

Cash, end of period

28,848

32,760

28,848

32,760