Descartes Systems (DSG:TO) Strong Quarter; Bullish Outlook

For convenient sequential quarterly reference, here is a link to the post for the previous quarter.

The themes remain the same: Strong quarter despite worldwide recession, improving operational efficiency, and more accretive acquisitions planned for the future. Here are the Q2 2010 performance highlights:
  • $18.6m in revenue, up 9% fiscally over Q2 2009, and 7% sequentially over Q1 2010
  • GM at 68%, up from 64% fiscally, and down from 70% sequentially.
  • Adjusted Net Income (EBITDA) at $5.2m, up 27% fiscally, and 11% sequentially. The EBITDA margin for the quarter was 28%, which exceeded consensus expectation.
  • Pre-tax NI at $2.7m, up 35% over Q2 2009, and up 50% sequentially.
  • NI of $0.8m or $0.02 EPS versus $1.4m or $0.03 EPS for Q2 2009, and $2.2m or $0.04 EPS for Q1 2010. Both of the comparative quarters benefited from income tax recovery.
  • DSO was reported at 48 days, a 2 day decline fiscally, and a 1 day decline sequentially.
  • $4.4m in cashflow for the quarter, exiting with $51.2m in cash and short-term investments.
The baseline revenue stream entering Q3 was disclosed on the conference call by management to be $17.7m with $13.7m in operating expenses, inferring a $4.0m or 23% margin.

Management indicated that H2 2010 should benefit from the current upswing in worldwide shipments as economic recovery takes hold. The company should benefit from the integration of both the Oceanwide and the Scancode acquisitions, and should see continued adoption of the 10+2 regulatory solution positively impact financial performance. The outlook is bullish.

Management re-iterated more forcefully its plan to become a global "federated" end-to-end platform for logisitics. By comparison, think of Salesforce.com's AppExchange for CRM. As the Company implements this strategy, investors should anticipate that Descartes will use some of its war chest of cash to make tuck-under acquisitions that will expand its capability as an end-to-end platform.

As a result, the company may look to expand capabilities in asset tracking, transaction management, accounting, workforce mobility, platform computing, and even cloud services via partnerships and acquisitions.

With a strong Q2 2010, a bullish H2 outlook from Management, and a plan to dominate through federation, investors are likely to continue to find the stock attractive. The share price has doubled in value since its lows in March.

Disclosure: I own shares of DSG

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