The Descartes Systems Group Inc. (TSX:DSG) (Nasdaq:DSGX) announced its financial results for its fiscal 2022 third quarter (Q3FY22). 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).

“Driver shortages, supply constraints, capacity challenges and shipping bottlenecks are just some of the factors impacting today’s global supply chains and the wider economy,” said Edward J. Ryan, Descartes’ CEO. “Running efficient supply chains is complicated, and the right technology is key to delivering on customer promises in a secure and efficient manner. Our Global Logistics Network was specifically designed to help solve the inherent multi-party, multi-process challenges faced by supply chain participants. We continue to leverage our experience and financial position to grow our Global Logistics Network for the benefit of our customers.”

Q3FY22 Financial ResultsAs described in more detail below, key financial highlights for Q3FY22 included:

  • Revenues of $108.9 million, up 24% from $87.5 million in the third quarter of fiscal 2021 (Q3FY21) and up 4% from $104.6 million in the previous quarter (Q2FY22);
  • Revenues were comprised of services revenues of $97.2 million (89% of total revenues), professional services and other revenues of $10.3 million (10% of total revenues) and license revenues of $1.4 million (1% of total revenues). Services revenues were up 25% from $77.6 million in Q3FY21 and up 4% from $93.5 million in Q2FY22;
  • Cash provided by operating activities of $43.3 million, up 31% from $33.1 million in Q3FY21 and down from $46.4 million in Q2FY22;
  • Income from operations of $27.8 million, up 48% from $18.8 million in Q3FY21 and up 7% from $26.1 million in Q2FY22;
  • Net income of $25.5 million, up 92% from $13.3 million in Q3FY21 and up 10% from $23.2 million in Q2FY22. Net income as a percentage of revenues was 23%, compared to 15% in Q3FY21 and 22% in Q2FY22;
  • Earnings per share on a diluted basis of $0.30, up 100% from $0.15 in Q3FY21 and up 11% from $0.27 in Q2FY22; and
  • Adjusted EBITDA of $48.2 million, up 32% from $36.4 million in Q3FY21 and up 5% from $45.9 million in Q2FY22. Adjusted EBITDA as a percentage of revenues was 44%, compared to 42% in Q3FY21 and 44% in Q2FY22.

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):

  Q3FY22 Q2FY22 Q1FY22 Q4FY21 Q3FY21
Revenues 108.9 104.6 98.8 93.4 87.5
Services revenues 97.2 93.5 88.3 82.7 77.6
Gross margin 76% 76% 76% 75% 74%
Cash provided by operating activities 43.3 46.4 40.9 36.5 33.1
Income from operations 27.8 26.1 23.4 21.9 18.8
Net income 25.5 23.2 18.4 17.2 13.3
Net income as a % of revenues 23% 22% 19% 18% 15%
Earnings per diluted share 0.30 0.27 0.21 0.20 0.15
Adjusted EBITDA 48.2 45.9 41.5 38.6 36.4
Adjusted EBITDA as a % of revenues 44% 44% 42% 41% 42%

Year-to-Date Financial Results

As described in more detail below, key financial highlights for Descartes’ nine-month period ended October 31, 2021 (9MFY22) included:

  • Revenues of $312.3 million, up 22% from $255.3 million in the same period a year ago (9MFY21);
  • Revenues were comprised of services revenues of $279.0 million (89% of total revenues), professional services and other revenues of $29.4 million (10% of total revenues) and license revenues of $3.9 million (1% of total revenues). Services revenues were up 23% from $227.0 million in 9MFY21;
  • Cash provided by operating activities of $130.6 million, up 38% from $94.8 million in 9MFY21;
  • Income from operations of $77.4 million, up 56% from $49.6 million in 9MFY21;
  • Net income of $67.1 million, up 92% from $34.9 million in 9MFY21. Net income as a percentage of revenues was 21%, compared to 14% in 9MFY21;
  • Earnings per share on a diluted basis of $0.78, up 90% from $0.41 in 9MFY21; and
  • Adjusted EBITDA of $135.6 million, up 31% from $103.4 million in 9MFY21. Adjusted EBITDA as a percentage of revenues was 43%, compared to 41% in 9MFY21.

The following table summarizes Descartes’ results in the categories specified below over 9MFY22 and 9MFY21 (unaudited, dollar amounts in millions):

  9MFY22 9MFY21
Revenues 312.3 255.3
Services revenues 279.0 227.0
Gross margin 76% 74%
Cash provided by operating activities 130.6 94.8
Income from operations 77.4 49.6
Net income 67.1 34.9
Net income as a % of revenues 21% 14%
Earnings per diluted share 0.78 0.41
Adjusted EBITDA 135.6 103.4
Adjusted EBITDA as a % of revenues 43% 41%

Cash PositionAt October 31, 2021, Descartes had $171.1 million in cash. Cash increased by $42.7 million in Q3FY22 and increased $37.4 million in 9MFY22. The table set forth below provides a summary of cash flows for Q3FY22 and 9MFY22 in millions of dollars:

  Q3FY22 9MFY22
Cash provided by operating activities 43.3 130.6
Additions to property and equipment (1.2) (3.7)
Acquisitions of subsidiaries, net of cash acquired - (90.3)
Credit facility and other debt repayments - (1.1)
Payment of debt issuance costs - (0.1)
Issuances of common shares, net of issuance costs 1.0 2.5
Effect of foreign exchange rate on cash (0.4) (0.5)
Net change in cash 42.7 37.4
Cash, beginning of period 128.4 133.7
Cash, end of period 171.1 171.1

Conference CallMembers of Descartes' executive management team will host a conference call to discuss the company's financial results today at 5:30 p.m. ET, Wednesday, December 1. Designated numbers are +1 888 465-5079 for North America and +1 416 216-4169 for international, using Passcode 6485 701#.

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 December 8, 2021, at www.descartes.com/descartes/investor-relations.

About DescartesDescartes (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 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 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 ten 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 Q3FY22, Q2FY22, Q1FY22, Q4FY21, and Q3FY21, which we believe is the most directly comparable GAAP measure.

(US dollars in millions) Q3FY22   Q2FY22   Q1FY22   Q4FY21   Q3FY21  
Net income, as reported on Consolidated Statements of Operations 25.5   23.2   18.4   17.2   13.3  
Adjustments to reconcile to Adjusted EBITDA:          
Interest expense 0.3   0.3   0.3   0.3   0.2  
Investment income (0.1 ) (0.1 ) (0.1 ) (0.1 ) -  
Income tax expense 2.1   2.7   4.8   4.5   5.2  
Depreciation expense 1.3   1.3   1.2   1.3   1.5  
Amortization of intangible assets 15.4   15.0   13.8   14.1   14.0  
Stock-based compensation and related taxes 3.0   3.1   2.6   1.9   1.7  
Other charges (recoveries) 0.7   0.4   0.5   (0.6 ) 0.5  
Adjusted EBITDA 48.2   45.9   41.5   38.6   36.4  
           
Revenues 108.9   104.6   98.8   93.4   87.5  
Net income as % of revenues 23 % 22 % 19 % 18 % 15 %
Adjusted EBITDA as % of revenues 44 % 44 % 42 % 41 % 42 %
           

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 9MFY22 and 9MFY21, which we believe is the most directly comparable GAAP measure.

(US dollars in millions)   9MFY22   9MFY21  
Net income, as reported on Consolidated Statements of Operations   67.1   34.9  
Adjustments to reconcile to Adjusted EBITDA:      
Interest expense   0.8   0.9  
Investment income   (0.2 ) (0.1 )
Income tax expense   9.7   13.8  
Depreciation expense   3.8   4.5  
Amortization of intangible assets   44.1   41.8  
Stock-based compensation and related taxes   8.7   4.7  
Other charges   1.6   2.9  
Adjusted EBITDA   135.6   103.4  
       
Revenues   312.3   255.3  
Net income as % of revenues   21 % 14 %
Adjusted EBITDA as % of revenues   43 % 41 %

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

         
  October 31,   January 31,  
  2021   2021  
      (Audited)  
ASSETS    
CURRENT ASSETS    
Cash 171,079   133,661  
Accounts receivable (net)    
Trade 42,482   37,206  
Other 9,570   14,830  
Prepaid expenses and other 22,988   16,939  
Inventory 813   429  
  246,932   203,065  
OTHER LONG-TERM ASSETS 18,195   15,550  
PROPERTY AND EQUIPMENT, NET 11,494   12,089  
RIGHT-OF-USE ASSETS 10,536   12,165  
DEFERRED INCOME TAXES 15,196   15,216  
INTANGIBLE ASSETS, NET 248,756   239,992  
GOODWILL 616,357   565,177  
  1,167,466   1,063,254  
LIABILITIES AND SHAREHOLDERS’ EQUITY    
CURRENT LIABILITIES    
Accounts payable 9,875   7,955  
Accrued liabilities 53,499   38,879  
Lease obligations 4,051   4,168  
Income taxes payable 3,656   3,383  
Deferred revenue 54,483   49,878  
  125,564   104,263  
LONG-TERM DEBT -   -  
LONG-TERM LEASE OBLIGATIONS 7,336   8,895  
LONG-TERM DEFERRED REVENUE 1,112   1,413  
LONG-TERM INCOME TAXES PAYABLE 9,337   8,230  
DEFERRED INCOME TAXES 32,685   29,385  
  176,034   152,186  
     
SHAREHOLDERS’ EQUITY    
Common shares – unlimited shares authorized; Shares issued and outstanding totaled 84,657,403 at October 31, 2021 (January 31, 2021 – 84,494,658) 535,505   531,825  
Additional paid-in capital 471,079   464,102  
Accumulated other comprehensive income (loss) 1,430   (1,189 )
Accumulated deficit (16,582 ) (83,670 )
  991,432   911,068  
  1,167,466   1,063,254  

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,  
  2021   2020     2021   2020  
           
REVENUES 108,911   87,508     312,319   255,256  
COST OF REVENUES 25,607   22,546     74,926   66,810  
GROSS MARGIN 83,304   64,962     237,393   188,446  
EXPENSES          
Sales and marketing 12,246   9,705     34,585   28,448  
Research and development 15,989   13,072     46,681   39,727  
General and administrative 11,139   8,918     33,000   25,986  
Other charges 672   491     1,606   2,945  
Amortization of intangible assets 15,364   14,013     44,110   41,811  
  55,410   46,199     159,982   138,917  
INCOME FROM OPERATIONS 27,894   18,763     77,411   49,529  
INTEREST EXPENSE (292 ) (277 )   (841 ) (909 )
INVESTMENT INCOME 51   40     175   103  
INCOME BEFORE INCOME TAXES 27,653   18,526     76,745   48,723  
INCOME TAX EXPENSE (RECOVERY)          
Current 4,615   2,380     11,481   2,049  
Deferred (2,453 ) 2,838     (1,824 ) 11,777  
  2,162   5,218     9,657   13,826  
NET INCOME 25,491   13,308     67,088   34,897  
EARNINGS PER SHARE          
Basic 0.30   0.16     0.79   0.41  
Diluted 0.30   0.15     0.78   0.41  
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)          
Basic 84,636   84,477     84,569   84,318  
Diluted 86,328   85,917     86,164   85,689  

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,  
  2021   2020   2021   2020  
OPERATING ACTIVITIES        
Net income 25,491   13,308   67,088   34,897  
Adjustments to reconcile net income to cash provided by operating activities:        
Depreciation 1,282   1,465   3,784   4,450  
Amortization of intangible assets 15,364   14,013   44,110   41,811  
Stock-based compensation expense 2,951   1,629   8,118   4,363  
Other non-cash operating activities (73 ) 80   484   131  
Deferred tax (recovery) expense (2,453 ) 2,838   (1,824 ) 11,777  
Changes in operating assets and liabilities 776   (184 ) 8,858   (2,661 )
Cash provided by operating activities 43,338   33,149   130,618   94,768  
INVESTING ACTIVITIES        
Additions to property and equipment (1,254 ) (774 ) (3,850 ) (2,859 )
Acquisition of subsidiaries, net of cash acquired -   -   (90,278 ) (29,374 )
Cash used in investing activities (1,254 ) (774 ) (94,128 ) (32,233 )
FINANCING ACTIVITIES        
Proceeds from borrowing on the credit facility -   -   -   10,196  
Credit facility and other debt repayments -   -   (1,068 ) (10,065 )
Payment of debt issuance costs -   (2 ) (60 ) (40 )
Issuance of common shares for cash, net of issuance costs 1,042   243   2,539   5,949  
Cash provided by financing activities 1,042   241   1,411   6,040  
Effect of foreign exchange rate changes on cash (405 ) (62 ) (483 ) 1,438  
Increase in cash 42,721   32,554   37,418   70,013  
Cash, beginning of period 128,358   81,862   133,661   44,403  
Cash, end of period 171,079   114,416   171,079   114,416  

 

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