Descartes Reports Fiscal 2017 Second Quarter Results

Record Revenues and Cash Provided by Operating Activities

WATERLOO, Ontario, Sept. 08, 2016 (GLOBE NEWSWIRE) — The Descartes Systems Group Inc. (TSX:DSG) (Nasdaq:DSGX) announced its financial results for its fiscal 2017 second quarter (Q2FY17) ended July 31, 2016. 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).

“This was another quarter of superior financial performance for Descartes, with record revenues and cash provided by our operations,” said Edward J. Ryan, Descartes’ CEO. “We believe that Descartes’ strong and growing margins demonstrate the leverage in our business model and Global Logistics Network to efficiently deliver quality services to our global client base. Descartes is a solid platform for continued growth and acquisitions, with the capital capacity and opportunities to continue or accelerate our pace of profitable growth.”

Q2FY17 Financial Results
As described in more detail below, key financial highlights for Descartes in Q2FY17 included:

  • Revenues of $50.5 million, up 12% from $45.2 million in the second quarter of fiscal 2016 (Q2FY16) and up 3% from $48.9 million in the previous quarter (Q1FY17);
  • Revenues were comprised of license revenues of $1.9 million and services revenues (non-license) of $48.6 million. Services revenues were up 14% from $42.8 million in Q2FY16 and up 2% from $47.5 million in Q1FY17. Services revenues comprised 96% of total revenues for the quarter;
  • Cash provided by operating activities of $16.6 million, up 30% from $12.8 million in Q2FY16 and up 4% from $15.9 million in Q1FY17;
  • Net income of $5.8 million, up 14% from $5.1 million in Q2FY16 and down from $6.0 million in Q1FY17. Net income as a percentage of revenues was 11%, compared to 11% in Q2FY16 and 12% in Q1FY17;
  • Earnings per share on a diluted basis of $0.08, up 14% from $0.07 in Q2FY16 consistent with Q1FY17; and
  • Adjusted EBITDA of $17.2 million, up 18% from $14.6 million in Q2FY16 and up 4% from $16.6 million in Q1FY17. Adjusted EBITDA as a percentage of revenues was 34%, up from 32% in Q2FY16 and consistent with Q1FY17.

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
FY17
Q1
FY17
Q4
FY16
Q3
FY16
Q2
FY16
Revenues   50.5     48.9     48.0     47.4     45.2  
Services revenues   48.6     47.5     46.3     45.5     42.8  
Gross margin   73 %   72 %   72 %   72 %   70 %
Cash provided by operating activities   16.6     15.9     16.2     13.4     12.8  
Net income   5.8     6.0     5.4     5.2     5.1  
Net income as a % of revenues   11 %   12 %   11 %   11 %   11 %
Earnings per diluted share   0.08     0.08     0.07     0.07     0.07  
Adjusted EBITDA   17.2     16.6     16.3     15.8     14.6  
Adjusted EBITDA as a % of revenues   34 %   34 %   34 %   33 %   32 %
       

Year-to-Date Financial Results

As described in more detail below, key financial highlights for Descartes’ six-month period ended July 31, 2016 (1HFY17) included:

  • Revenues of $99.4 million, up 11% from $89.6 million in the same period a year ago (1HFY16);
  • Revenues were comprised of license revenues of $3.3 million and services revenues (non-license) of $96.1 million. Services revenues were up 14% from $84.5 million in 1HFY16. Services revenues comprised 97% of total revenues for 1HFY17;
  • Cash provided by operating activities of $32.5 million, up 32% from $24.6 million in 1HFY16;
  • Net income of $11.8 million, up 18% from $10.0 million in 1HFY16. Net income as a percentage of revenues was 12%, up from 11% in 1HFY16;
  • Earnings per share on a diluted basis of $0.15, up 15% from $0.13 in 1HFY16; and
  • Adjusted EBITDA of $33.8 million, up 17% from $28.8 million in 1HFY16. Adjusted EBITDA as a percentage of revenues was 34%, up from 32% in 1HFY16.

The following table summarizes Descartes’ results in the categories specified below over 1HFY17 and 1HFY16 (unaudited, dollar amounts in millions):

  1HFY17 1HFY16
Revenues   99.4     89.6  
Services revenues   96.1     84.5  
Gross margin   72 %   70 %
Cash provided by operating activities   32.5     24.6  
Net income   11.8     10.0  
Net income as a % of revenues   12 %   11 %
Earnings per diluted share   0.15     0.13  
Adjusted EBITDA   33.8     28.8  
Adjusted EBITDA as a % of revenues   34 %   32 %
             

Cash Position
At July 31, 2016, Descartes had $69.6 million in cash. Cash has increased $14.0 million in Q2FY17 and $32.4 million in 1HFY17 primarily due to strong cash flow provided by operating activities.

The table set forth below provides a summary of cash flows for Q2FY17 and 1HFY17 in millions of dollars:

  Q2FY17 1HFY17
Cash provided by operating activities   16.6     32.5  
Purchase of marketable securities       (0.2 )
Sale of marketable securities   3.4     6.1  
Additions to property and equipment   (1.7 )   (3.0 )
Acquisition of subsidiaries, net of cash acquired   (0.3 )   (10.6 )
Proceeds from borrowing on credit facility       10.8  
Credit facility repayments   (2.4 )   (2.4 )
Payment of debt issuance costs   (0.3 )   (0.9 )
Issuance of common shares, net of issuance costs     0.1       –  
Effect of foreign exchange rate on cash   (1.4 )   0.1  
Net change in cash   14.0     32.4  
Cash, beginning of period     55.6       37.2  
Cash, end of period   69.6     69.6  
             

Conference Call
Members of Descartes’ executive management team will host a conference call to discuss the company’s financial results at 8:00 a.m. ET on Thursday, September 8. Designated numbers are +1 888 465-5079 for North America and +1 416 216-4169 for international, using Passcode 7064637#.

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 11:00 a.m. ET, and until September 15, 2016, by dialing +1 888 843-7419 or +1 630 652-3042 followed by Passcode 7064637#. 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, cloud-based 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.

Safe Harbor Statement
This release contains forward-looking information within the meaning of applicable securities laws (“forward-looking statements”) that relates to Descartes’ growth in margins; continued growth and acquisitions; rate of profitable growth; demand for Descartes’ solutions; growth of Descartes’ Global Logistics Network; 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 the global economic downturn; 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 nine acquisitions since the beginning of fiscal 2015, 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 Q2FY17, Q1FY17, Q4FY16, Q3FY16 and Q2FY16, which we believe is the most directly comparable GAAP measure.

(US dollars in millions) Q2FY17 Q1FY17 Q4FY16 Q3FY16 Q2FY16
Net income, as reported on Consolidated Statements of Operations   5.8     6.0     5.4     5.2     5.1  
Adjustments to reconcile to Adjusted EBITDA:          
Interest expense   0.2     0.1     0.1     0.1     0.1  
Investment income   (0.8 )   (0.5 )           (0.1 )
Income tax expense   2.0     1.9     1.4     1.9     1.8  
Depreciation expense   0.9     0.7     1.1     0.8     0.8  
Amortization of intangible assets   7.6     7.2     7.3     6.9     6.0  
Stock-based compensation and related taxes   0.7     0.5     0.4     0.5     0.5  
Acquisition-related expenses   0.8     0.7     0.6     0.4     0.4  
Adjusted EBITDA   17.2     16.6     16.3     15.8     14.6  
           
Revenues   50.5     48.9     48.0     47.4     45.2  
Net income as % of revenues   11 %   12 %   11 %   11 %   11 %
Adjusted EBITDA as % of revenues   34 %   34 %   34 %   33 %   32 %
                               

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 1HFY17 and 1HFY16, which we believe is the most directly comparable GAAP measure.

(US dollars in millions)       1HFY17 1HFY16
Net income, as reported on Consolidated Statements of Operations         11.8     10.0  
Adjustments to reconcile to Adjusted EBITDA:          
Interest expense         0.3     0.2  
Investment income         (1.3 )   (0.2 )
Income tax expense         3.9     3.9  
Depreciation expense         1.6     1.5  
Amortization of intangible assets         14.8     12.0  
Stock-based compensation and related taxes         1.2     0.8  
Acquisition-related expenses         1.5     0.5  
Restructuring charges             0.1  
Adjusted EBITDA         33.8     28.8  
           
Revenues         99.4     89.6  
Net income as % of revenues         12 %   11 %
Adjusted EBITDA as % of revenues         34 %   32 %

THE DESCARTES SYSTEMS GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(US DOLLARS IN THOUSANDS; US GAAP; UNAUDITED)

     
Year Ended    July 31,   January 31,
    2016     2016 
ASSETS    
CURRENT ASSETS    
Cash   69,644     37,213  
Short-Term marketable securities       4,639  
Accounts receivable (net)    
Trade   24,901     25,614  
Other   2,942     3,131  
Prepaid expenses and other   4,993     4,205  
Inventory   175     155  
    102,655     74,957  
OTHER LONG-TERM ASSETS   1,539     468  
PROPERTY AND EQUIPMENT, NET   10,506     8,604  
DEFERRED INCOME TAXES   15,455     16,804  
DEFERRED TAX CHARGE   643     906  
INTANGIBLE ASSETS, NET   128,266     133,562  
GOODWILL   224,813     217,486  
    483,877     452,787  
LIABILITIES AND SHAREHOLDERS’ EQUITY    
CURRENT LIABILITIES    
 Accounts payable   4,052     4,473  
 Accrued liabilities   18,189     16,844  
 Income taxes payable   1,936     2,086  
 Deferred revenue   18,001     16,639  
    42,178     40,042  
LONG-TERM DEBT   8,055      
LONG-TERM DEFERRED REVENUE   805     941  
LONG-TERM INCOME TAXES PAYABLE   4,357     3,672  
DEFERRED INCOME TAXES   8,962     6,097  
    64,357     50,752  
     
SHAREHOLDERS’ EQUITY    
Common shares – unlimited shares authorized; Shares issued and outstanding totaled 75,814,184 at July 31, 2016 (January 31, 2016 – 75,761,184)   252,834     252,471  
Additional paid-in capital   447,600     446,747  
Accumulated other comprehensive loss   (30,428 )   (34,880 )
Accumulated deficit   (250,486 )   (262,303 )
    419,520     402,035  
    483,877     452,787  

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,
    2016    2015      2016    2015 
           
REVENUES   50,516     45,172       99,427     89,596  
COST OF REVENUES   13,785     13,489       27,474     26,872  
GROSS MARGIN   36,731     31,683       71,953     62,724  
EXPENSES          
Sales and marketing   6,337     5,153       12,019     10,623  
Research and development   8,904     7,473       17,694     14,944  
General and administrative   5,956     5,668       11,290     10,614  
Other charges   764     372       1,473     530  
Amortization of intangible assets   7,577     5,994       14,728     11,970  
    29,538     24,660       57,204     48,681  
INCOME FROM OPERATIONS   7,193     7,023       14,749     14,043  
INTEREST EXPENSE   (165 )   (135 )     (294 )   (279 )
INVESTMENT INCOME   788     71       1,301     146  
INCOME BEFORE INCOME TAXES   7,816     6,959       15,756     13,910  
INCOME TAX EXPENSE          
Current   1,061     438       1,772     709  
Deferred   976     1,449       2,167     3,228  
    2,037     1,887       3,939     3,937  
NET INCOME   5,779     5,072       11,817     9,973  
EARNINGS PER SHARE          
Basic   0.08     0.07       0.16     0.13  
Diluted   0.08     0.07       0.15     0.13  
WEIGHTED AVERAGE SHARES OUTSTANDING (thousands)          
Basic   75,792     75,498       75,777     75,492  
Diluted   76,483     76,396       76,451     76,370  

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,
    2016    2015    2016    2015 
OPERATING ACTIVITIES        
Net income   5,779     5,072     11,817     9,973  
Adjustments to reconcile net income to cash provided by operating activities:        
Depreciation   865     763     1,613     1,430  
Amortization of intangible assets   7,577     5,994     14,728     11,970  
Stock-based compensation expense   545     436     942     797  
Other non-cash operating activities   (936 )       (1,441 )    
Deferred tax expense   976     1,449     2,167     3,228  
Deferred tax charge   37     88     137     88  
  Changes in operating assets and liabilities:        
  Accounts receivable        
  Trade   2,253     1,923     1,377     1,587  
  Other   213     412     257     357  
  Prepaid expenses and other   (381 )   (288 )   (446 )   (457 )
  Inventory   11     24     (1 )   101  
  Accounts payable   (949 )   (423 )   (506 )   (1,351 )
  Accrued liabilities   1,039     (229 )   316     (566 )
  Income taxes payable   (280 )   (470 )   612     (1,874 )
  Deferred revenue   (114 )   (1,985 )   950     (665 )
Cash provided by operating activities   16,635     12,766     32,522     24,618  
INVESTING ACTIVITIES        
Purchase of marketable securities           (241 )    
Sale of marketable securities   3,362         6,140      
Additions to property and equipment   (1,704 )   (1,330 )   (2,976 )   (2,265 )
Acquisition of subsidiaries, net of cash acquired   (276 )   (91,437 )   (10,648 )   (91,437 )
Cash provided by (used in) investing activities   1,382     (92,767 )   (7,725 )   (93,702 )
FINANCING ACTIVITIES        
Proceeds from borrowing on the credit facility           10,801      
Credit facility repayments   (2,414 )       (2,414 )    
Payment of debt issuance costs   (283 )       (922 )    
Issuance of common shares for cash, net of issuance costs   95     19     22     91  
Cash (used in) provided by financing activities   (2,602 )   19     7,487     91  
Effect of foreign exchange rate changes on cash   (1,334 )   (1,358 )   147     (1,888 )
Increase (decrease) in cash   14,081     (81,340 )   32,431     (70,881 )
Cash, beginning of period   55,563     128,512     37,213     118,053  
Cash, end of period   69,644     47,172     69,644     47,172  
                         
CONTACT: Descartes Investor Contact: 
Laurie McCauley +1-519-746-6114 x202358 
investor@descartes.com