Descartes Systems operates an unsexy SaaS messaging network for the worldwide supply chain that helps to lubricate the flow of goods across international borders by automating customs and regulatory filings associated with shipping. In addition, DSG provides logistics services for fleets, which has experienced increasing demand due to higher fuel and declining shipments.
Third Quarter was better than expected.
The Company was slightly below expectations in topline sales reporting $7.1 million versus my expectation of $7.3 million due to shipping headwinds. However EBITDA was higher than expected at $4.4 million versus my expectation of $4.1 million. I believe that this is due to greater demand for higher margin services during the quarter. Cashflow was reported at $5.9 million, substantially higher than our forecast of $4.9. This better than expected result was due partly to Days Sales Outstanding (DSO) declining from 53 days to 47 days versus our expectation that DSO would increase to 60 days due to the economic stress of its client base. Reported earnings were 64% higher than my forecast at $2.3 million versus $1.4 million. Part of this difference can be explain by lower than forecasted tax expenses. EPS was $0.04 and a penny higher than my expectations of $0.03 EPS. This Company is growing at a solid rate while many others are faltering.
Outlook Is Positive For Three Reasons.
1. Regulations will increase and make shipping more complex - With the announcement of the 10+2 regulation (aimed at improving product safety) in the US, DSG is well positioned to help its clients comply at minimal relative expense, while the US government continues to keep the supply chain lubricated. By 2011, European Union regulatory harmonization will boost demand again.
2. Worldwide Recession - Shippers will need to become more efficient to survive. Only 5% of all documentation is automated. More automation should be expected, and DSG is in a great position to benefit - especially in North America.
3. Volatility and Uncertainty - These two conditions benefit DSG the most because shippers will need to contend with increasingly complex orders and contracts that may be ammended by the second. This should benefit DSG in the near-term as the only way to deal with this is through automated messaging.
A Stock for the Times
Descartes Systems Group provides a boring but essential service to the Supply Chain. As conditions deteriorate, and volatility increases, while more regulations get enacted, Descartes Systems becomes more essential to Supply Chain.
The Company has no debt and $53.5 million in cash.
A Potential Consolidator
Descartes is in great position to use its balance sheet to accelerate its capture of more regulations worldwide for automation. Its acquisition of Dexx in Europe is an early foray. I expect more to come. I also believe that the Company can extend its messaging concept to other transactions in the value chain. Finally, DSG could leverage its balance sheet to evolve into an outsources fleet management system.
I do not own shares of Descartes Systems, nor do I receive any compensation from the Company, Management, or the Board.
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