(DSGX-Q, DSG-T) US$45.10 | C$62.06
Q1/F21 Results: Pandemic Shows Some Impact
Event
Descartes reported Q1/F21 results last night.
Impact: SLIGHTLY NEGATIVE
In-line quarter. Revenue of $83.7mm, up 7.3% y/y, was slightly below our $86.2mm estimate, but in line with consensus at $85.2mm. FX affected revenue by $1mm, implying that the results would have been closer to expectations had it not been for the strengthening of the U.S. dollar. EBITDA of $33.0mm, or 39.4% EBITDA margin, was up 15% y/y and in line with expectations. Although Services revenue was in line with expectations, Professional Services revenue missed expectations.
5% pandemic impact in April. Management noted that April revenue was 5% below what it would have expected to see in a typical month. As a result, baseline revenue is $77mm. Q2 has typically been a seasonally stronger quarter than Q1, but the Q2 baseline revenue is 5% below the Q1 baseline revenue, implying a q/q decline. We have consequently lowered our Q2 revenue forecast by 9%, resulting in a y/y flat Q2/F20 revenue estimate. To offset the lower revenue expectations, Descartes is reducing its workforce by 5% and closing several offices where work-from-home arrangements have been successful. The restructuring is expected to cost ~$2mm over the next six months to generate annualized savings of $6mm-$7mm.
M&A should be unaffected. The pandemic has not affected acquisition target valuations yet, but it also has not hindered management's ability to conduct due diligence on potential acquisitions. It reiterated its goal to grow EBITDA by 10-15% this year, which we believe will require acquisitions to achieve, given the pandemic headwinds. The company generated $26.5mm of FCF to end the quarter, with $46.3mm of net cash. It also has $340mm available on the credit facility, with the ability to expand it by an additional $150mm, and $500mm under the existing shelf. We believe that the company is well-capitalized to execute acquisitions, especially if valuations compress.
TD Investment Conclusion
Maintaining BUY rating and US$53.00 target price. Although the quarterly results were in line and the pandemic's impact seems modest, we believe that the shares will pull back today, given that the shares are trading close to pre-pandemic levels. However, we believe that Descartes is well-positioned to continue making accretive acquisitions