The Descartes Systems Group Inc. (TSX:DSG) (Nasdaq:DSGX) announced its financial results for its fiscal 2025 second quarter (Q2FY25). 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).

“Our Global Logistics Network is designed to help shippers, carriers and logistics services providers navigate an increasingly complex global trade landscape,” said Edward J. Ryan, Descartes’ CEO. "Supply chains and logistics operations continue to struggle to manage a myriad of factors, including military conflicts, disruptions to trade routes, government sanctions, economic impact on shipping demand and material changes to taxes and tariffs. We continue to make investments to help isolate our customers from this complexity with a broader set of solutions to manage the complete lifecycle of shipments in a secure and efficient manner.”

Q2FY25 Financial Results As described in more detail below, key financial highlights for Descartes’ Q2FY25 included:

  • Revenues of $163.4 million, up 14% from $143.4 million in the second quarter of fiscal 2024 (Q2FY24) and up 8% from $151.3 million in the previous quarter (Q1FY25);
  • Revenues were comprised of services revenues of $146.2 million (89% of total revenues), professional services and other revenues of $15.8 million (10% of total revenues) and license revenues of $1.4 million (1% of total revenues). Services revenues were up 12% from $130.7 million in Q2FY24 and up 6% from $137.8 million in Q1FY25;
  • Cash provided by operating activities of $34.7 million, down from $52.0 million in Q2FY24 and down from $63.7 million in Q1FY25. The principal reason for the decrease in cash provided by operating activities from the comparative periods was the payment in Q2FY25 of $25.0 million in contingent acquisition consideration for previously completed deals, which was not accrued for at the time of acquisition;
  • Income from operations of $45.9 million, up 25% from $36.8 million in Q2FY24 and up 8% from $42.4 million in Q1FY25;
  • Net income of $34.7 million, up 23% from $28.1 million in Q2FY24 and consistent with $34.7 million in Q1FY25. Net income as a percentage of revenue was 21%, compared to 20% in Q2FY24 and 23% in Q1FY25;
  • Earnings per share on a diluted basis of $0.40, up 25% from $0.32 in Q2FY24 and consistent with $0.40 in Q1FY25, respectively; and
  • Adjusted EBITDA of $70.6 million, up 17% from $60.6 million in Q2FY24 and up 5% from $67.0 million in Q1FY25. Adjusted EBITDA as a percentage of revenues was 43%, compared to 42% and 44% in Q2FY24 and Q1FY25, 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, acquisition-related expenses, and contingent consideration incurred due to better-than-expected performance from acquisitions). 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 FY25 Q1 FY25 Q4 FY24 Q3 FY24 Q2 FY24
Revenues 163.4 151.3 148.2 144.7 143.4
Services revenues 146.2 137.8 135.7 130.4 130.7
Gross margin 75% 77% 76% 76% 76%
Cash provided by operating activities* 34.7 63.7 50.8 56.1 52.0
Income from operations 45.9 42.4 37.0 32.4 36.8
Net income 34.7 34.7 31.8 26.6 28.1
Net income as a % of revenues 21% 23% 21% 18% 20%
Earnings per diluted share 0.40 0.40 0.37 0.31 0.32
Adjusted EBITDA 70.6 67.0 65.7 63.5 60.6
Adjusted EBITDA as a % of revenues 43% 44% 44% 44% 42%
(*) Q2FY25 cash provided by operating activities was impacted by the payment of $25.0 million in contingent acquisition consideration for previously completed deals, which was not accrued for at the time of acquisition
 

Year-to-Date Financial Results As described in more detail below, key financial highlights for Descartes’ six-month period ended July 31, 2024 (1HFY25) included:

  • Revenues of $314.8 million, up 12% from $280.0 million in the same period a year ago (1HFY24);
  • Revenues were comprised of services revenues of $284.1 million (90% of total revenues), professional services and other revenues of $28.8 million (9% of total revenues) and license revenues of $1.9 million (1% of total revenues). Services revenues were up 11% from $254.9 million in 1HFY24;
  • Cash provided by operating activities of $98.4 million, down from $100.9 million in 1HFY24. The principal reason for the decrease in cash provided by operating activities from the comparative period was the payment in Q2FY25 of $25.0 million in contingent acquisition consideration for previously completed deals, which was not accrued for at the time of acquisition;
  • Income from operations of $88.2 million, up 20% from $73.4 million in 1HFY24;
  • Net income of $69.3 million, up 21% from $57.5 million in 1HFY24. Net income as a percentage of revenues was 22%, compared to 21% in 1HFY24;
  • Earnings per share on a diluted basis of $0.80, up 21% from $0.66 in 1HFY24; and
  • Adjusted EBITDA of $137.6 million, up 16% from $118.3 million in 1HFY24. Adjusted EBITDA as a percentage of revenues was 44%, compared to 42% in 1HFY24.

The following table summarizes Descartes’ results in the categories specified below over 1HFY25 and 1HFY24 (unaudited, dollar amounts in millions):

  1HFY25 1HFY24
Revenues 314.8 280.0
Services revenues 284.1 254.9
Gross margin 76% 76%
Cash provided by operating activities 98.4 100.9
Income from operations 88.2 73.4
Net income 69.3 57.5
Net income as a % of revenues 22% 21%
Earnings per diluted share 0.80 0.66
Adjusted EBITDA 137.6 118.3
Adjusted EBITDA as a % of revenues 44% 42%
     

Cash Position At July 31, 2024, Descartes had $252.7 million in cash. Cash increased by $13.8 million in Q2FY25 and decreased by $68.3 million in 1HFY25. The table set forth below provides a summary of cash flows for Q2FY25 and 1HFY25 in millions of dollars:

  Q2FY25 1HFY25
Cash provided by operating activities* 34.7 98.4
Additions to property and equipment (1.6) (3.4)
Acquisitions of subsidiaries, net of cash acquired (13.7) (153.7)
Issuances of common shares, net of issuance costs 3.3 7.5
Payment of withholding taxes on net share settlements - (6.7)
Payment of contingent consideration* (9.2) (9.2)
Effect of foreign exchange rate on cash 0.3 (1.2)
Net change in cash 13.8 (68.3)
Cash, beginning of period 238.9 321.0
Cash, end of period 252.7 252.7
(*) $34.2 million of contingent acquisition consideration was paid in Q2FY25. $25 million of that contingent acquisition consideration was accounted for as cash used in operations because the contingent consideration was not accrued for at the time of the acquisitions. The balance of $9.2 million in contingent acquisition consideration was paid out of the amounts accrued at the time of acquisition.
 

Acquisition of BoxTop On June 10, 2024, Descartes acquired BoxTop Technologies Limited, a leading provider of shipment management solutions for small- to mid-sized logistics services providers. The purchase price for the acquisition was approximately $12.1 million (GBP 9.5 million), net of cash acquired, which was funded from cash on hand.

Short-Form Base Shelf Prospectus On July 15, 2024, we filed a final short-form base shelf prospectus (the “2024 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 2024 Base Shelf Prospectus. The previous shelf prospectus, initially filed on July 15, 2022, was withdrawn in July 2024.

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 4. Designated numbers are +1 289 514 5100 for North America and +1 800 717 1738 for international, using conference ID 26331.

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 login is required approximately 10 minutes beforehand.

Replays of the conference call will be available until September 11, 2024, by dialing +1 289 819 1325 or Toll-Free for North America using +1 888 660 6264 with Playback Passcode: 26331#. 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, security and sustainability of logistics-intensive businesses. Customers use our modular, software-as-a-service solutions to route, track and help improve the safety, performance and compliance of 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 X (Twitter).

Descartes Investor Contact Laurie McCauley (519) 746-2969 investor@descartes.com

Cautionary Statement Regarding Forward-Looking Statements

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 potential impact of geopolitical events, such as the ongoing conflict between Russia and Ukraine (the “Russia-Ukraine Conflict”), and between Israel and Hamas (“Israel-Hamas Conflict”), or other potentially catastrophic events, 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 and Adjusted EBITDA margin operating range; 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 Russia-Ukraine Conflict and Israel-Hamas Conflict 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, acquisition-related expenses, and contingent consideration incurred due to better-than-expected performance from acquisitions). 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 five acquisitions since the beginning of fiscal 2024 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 Q2FY25, Q1FY25, Q4FY24, Q3FY24, and Q2FY24, which we believe is the most directly comparable GAAP measure.

  Q2FY25 Q1FY25 Q4FY24 Q3FY24 Q2FY24
Net income, as reported on Consolidated Statements of Operations 34.7 34.7 31.8 26.6 28.1
Adjustments to reconcile to Adjusted EBITDA:          
Interest expense 0.2 0.3 0.3 0.3 0.3
Investment income (2.7) (4.1) (3.4) (2.7) (2.0)
Income tax expense 13.6 11.5 8.3 8.2 10.4
Depreciation expense 1.4 1.4 1.4 1.5 1.4
Amortization of intangible assets 17.4 15.0 15.1 15.3 15.5
Stock-based compensation and related taxes 5.8 4.3 4.7 4.6 4.4
Other charges 0.2 3.9 7.5 9.7 2.5
Adjusted EBITDA 70.6 67.0 65.7 63.5 60.6
           
Revenues 163.4 151.3 148.2 144.7 143.4
Net income as % of revenues 21% 23% 21% 18% 20%
Adjusted EBITDA as % of revenues 43% 44% 44% 44% 42%
           

The Descartes Systems Group Inc. Condensed Consolidated Balance Sheets (US dollars in thousands; US GAAP; Unaudited)
     
  July 31, January 31,
  2024 2024
ASSETS    
CURRENT ASSETS    
Cash 252,653 320,952
Accounts receivable (net)    
Trade 57,504 51,569
Other 16,024 12,193
Prepaid expenses and other 38,976 33,468
  365,157 418,182
OTHER LONG-TERM ASSETS 25,121 24,737
PROPERTY AND EQUIPMENT, NET 12,039 11,552
RIGHT-OF-USE ASSETS 6,804 6,257
DEFERRED INCOME TAXES 2,437 2,097
INTANGIBLE ASSETS, NET 303,871 251,047
GOODWILL 849,991 760,413
  1,565,420 1,474,285
LIABILITIES AND SHAREHOLDERS’ EQUITY    
CURRENT LIABILITIES    
Accounts payable 21,276 17,484
Accrued liabilities 65,194 91,824
Lease obligations 2,947 3,075
Income taxes payable 10,615 6,734
Deferred revenue 103,701 84,513
  203,733 203,630
LONG-TERM DEBT - -
LEASE OBLIGATIONS 4,299 3,903
DEFERRED REVENUE 1,372 1,464
INCOME TAXES PAYABLE 4,814 6,153
DEFERRED INCOME TAXES 39,438 21,101
  253,656 236,251
     
SHAREHOLDERS’ EQUITY    
Common shares – unlimited shares authorized; Shares issued and outstanding totaled 85,480,322 at July 31, 2024 (January 31, 2024 – 85,183,455) 561,850 551,164
Additional paid-in capital 494,060 494,701
Accumulated other comprehensive income (loss) (34,249) (28,586)
Retained earnings 290,103 220,755
  1,311,764 1,238,034
  1,565,420 1,474,285
     
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,  
  2024   2023     2024   2023  
           
REVENUES 163,425   143,393     314,773   280,007  
COST OF REVENUES 40,548   34,974     75,961   67,859  
GROSS MARGIN 122,877   108,419     238,812   212,148  
EXPENSES          
Sales and marketing 19,031   17,321     36,502   34,374  
Research and development 23,909   21,738     46,100   41,805  
General and administrative 16,522   14,591     31,470   28,035  
Other charges 150   2,455     4,068   4,388  
Amortization of intangible assets 17,419   15,484     32,443   30,158  
  77,031   71,589     150,583   138,760  
INCOME FROM OPERATIONS 45,846   36,830     88,229   73,388  
INTEREST EXPENSE (243 ) (340 )   (516 ) (677 )
INVESTMENT INCOME 2,715   2,009     6,774   3,570  
INCOME BEFORE INCOME TAXES 48,318   38,499     94,487   76,281  
INCOME TAX EXPENSE (RECOVERY)          
Current 11,477   12,252     23,795   19,873  
Deferred 2,160   (1,869 )   1,344   (1,061 )
  13,637   10,383     25,139   18,812  
NET INCOME 34,681   28,116     69,348   57,469  
EARNINGS PER SHARE          
Basic 0.41   0.33     0.81   0.68  
Diluted 0.40   0.32     0.80   0.66  
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)          
Basic 85,430   85,083     85,353   85,017  
Diluted 87,241   86,783     87,176   86,764  
                   

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,  
  2024   2023   2024   2023  
OPERATING ACTIVITIES        
Net income 34,681   28,116   69,348   57,469  
Adjustments to reconcile net income to cash provided by operating activities:        
Depreciation 1,386   1,363   2,744   2,628  
Amortization of intangible assets 17,419   15,484   32,443   30,158  
Stock-based compensation expense 5,508   4,451   9,277   7,370  
Other non-cash operating activities (55 ) (148 ) 41   72  
Deferred tax expense (recovery) 2,160   (1,869 ) 1,344   (1,061 )
Changes in operating assets and liabilities (26,439 ) 4,614   (16,796 ) 4,230  
Cash provided by operating activities 34,660   52,011   98,401   100,866  
INVESTING ACTIVITIES        
Additions to property and equipment (1,576 ) (2,180 ) (3,340 ) (3,383 )
Acquisition of subsidiaries, net of cash acquired (13,742 ) -   (153,715 ) (142,700 )
Cash used in investing activities (15,318 ) (2,180 ) (157,055 ) (146,083 )
FINANCING ACTIVITIES        
Payment of debt issuance costs -   -   (38 ) (39 )
Issuance of common shares for cash, net of issuance costs 3,283   566   7,514   6,021  
Payment of withholding taxes on net share settlements -   -   (6,745 ) (4,886 )
Payment of contingent consideration (9,223 ) (6,320 ) (9,223 ) (6,320 )
Cash used in financing activities (5,940 ) (5,754 ) (8,492 ) (5,224 )
Effect of foreign exchange rate changes on cash 329   1,145   (1,153 ) 1,465  
Increase (decrease) in cash 13,731   45,222   (68,299 ) (48,976 )
Cash, beginning of period 238,922   182,187   320,952   276,385  
Cash, end of period 252,653   227,409   252,653   227,409  
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