Descartes (DSG.TO) continues to march on with another strong quarter.

The Company continues to show exceptional margin growth. Gross margins increased for the the fifth consecutive quarter to 70%, up 5% from Q1, 2009. Increasing gross margin should be considered a good indicator of the health of the business. Adjusted net income margin for the quarter, a proxy to EBITDA, was reported at 27%, at the high-end of the range that management typically guides for. This beat mean analyst expectations of approximately $0.06 per share. Sales came in at $17.4 million, a 6.7% improvement over Q1 2009 performance of $16.4 million, and 10.8% increase sequentially over Q4, 2009 revenue reported at $15.7 million. Sales in the 4th quarter of 2009 were impacted by the recession.

Gross margins should continue to improve into the mid-70 percentage range as services continue to increase as percentage of total sales, while the company further leverages its messaging platform as it scales with the integration of new acquisition of Oceanwide Logistics and Scancode. The 10 + 2 reporting regulations should also help contribute to both scale and gross margins as more of its clients adopt DSG's electronic solution.

The company exited the quarter with $46.9 million in cash and equivalents and no long-term debt. Cashflow from operations was $4.4 million for the quarter, or $0.09 per share.

The outlook for the company should be considered by investor to be strong. With the un-thawing of credit, the beginnings of an upturn in durable goods shipments, and increasing regulatory regimes, Descartes Systems Group is positioned to experience an uptick in traffic on its messaging network. At the same time, the recent acquisitions add more services to its platform and increase its overall footprint as the economy begins to improve during H2, 2009.

DSG is a well operated, well positioned SaaS vendor in the global supply chain. The company should see an acceleration of organic growth in revenue as the world economy grows and margins are likely to remain robust. Investors should expect Descartes to continue to look for more strategic acquisitions during the last half of the year, possibly within the European market.

Analysts are likely to increase their forecasts and 12-month targets for this stock after results from this quarter.

Disclosure: I own shares of DSG

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