Descartes Systems (TSX:DSG): Q3 In-Line While New Services Strengthen Outlook.

On Tuesday, Descartes Systems (TSX:DSG) reported Q3 2010 earnings with revenue up 11% to $18.9 million from $17.0 million reported for previous year Q3, and 2% higher than revenue reported for Q2 2010. Revenue was essentially inline with consensus forecasts which were $18.5 million for the quarter.

Adjusted Net Income, which is essentially EBITDA with a couple of non-cash items tossed in such as stock-based compensation, and contingent acquisition costs, was reported as $5.2 million up 13% y/y and flat q/q , which is inline with analysts expectations.

It should be of interest to investors that gross margin continues to strengthen over time. For Q3 2010, gross margin was reported at 69% versus 67% reported for previous year. As the company continues to move towards being a logistics data platform, investor should see gross margin continue to grow over time (notwithstanding the impact of future acquisitions). This a sign of earnings leverage. The company generated $3.2 million in operating cash flow during the quarter.

Management base-line outlook for the Q4 2010 is already ahead of analyst forecasts, and the company has been successful in signing up new clients in all regions. In addition, investors should expect more clients signing up to Descartes "10+2" electronic filing service during Q4 as enforcement begins in calendar year 2010. As a result, there is a chance of surprise upside in revenue growth during Q4 2010, along with earnings potential.

Descartes Systems is not a well understood stock. However, Management has plans to be a global technology platform for logistics data. As regulatory complexity increases over time, most shippers will be forced to move towards electronic records and data transfer in order to compete. Descartes Systems plans to be the only sheriff in town for companies that manage logistics and need documentation. With nearly $100 million in cash and short-term investments, and a history of accretive acquisitions, investors should see Descartes begin a global roll-up of the various pieces required to become an end-to-end data and messaging platform for logistics information globally. One day Descartes could be to logistics what Salesforce.com (CRM) is to sales.

Smart institutional investors are long on this stock because of its steady near-term earnings growth, and its future explosive potential. With the base-line "calibration" going into Q4 already ahead of analyst expectations, investors may see some upward adjustments by analysts in Q4 and FY 2011 forecasts. Some analysts may increase targets as well.

Disclosure: I do not own shares of DGS or CRM

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