Descartes Systems Group Inc.
(DSGX-Q, DSG-T) US$56.66 | C$73.12
Q3/F21: The Recovery Continues
Event
Descartes reported Q3/F21 results last night.
Impact: SLIGHTLY POSITIVE
Slight beat. Revenue of $87.5mm was slightly above estimates of $84.7mm (TD)/ $85.9mm (consensus). The beat relative to our estimates came from the Services segment, where revenue of $77.6mm was 3.5% above our $75.0mm estimate, and Professional Services, where revenue of $9.3mm was 12.7% above our $8.2mm estimate. Management noted that volumes across trucks and ocean channels have recovered to pre-pandemic levels and have grown slightly, while air continues to improve but remains depressed due to supply limitations. EBITDA of $36.4mm, or 41.6% EBITDA margin, was ahead of expectations of $34.2mm (TD)/$34.8mm (consensus).
Brexit could bring a step-function increase in volume. Management sees five areas of opportunity for Descartes. The imminent Brexit deadlines are expected to be a strong tailwind as Descartes is a leading provider of customs solutions. The event could create a step-function increase in volume as goods crossing the UK/ EU border will need to be declared electronically. Ecommerce continues to be a strong tailwind, especially with Adobe reporting that online sales grew by 21.6% y/y on Black Friday. This should continue to be a tailwind for Descartes' suite of ecommerce solutions. U.S. policy changes are also expected to create demand for customs and regulatory compliance solutions. Management also expects to play a role in distributing the vaccine. Finally, the new working conditions are expected to keep costs low as management re-evaluates its office footprint, and travel and marketing expenses are suppressed.
M&A environment remains active. Descartes generated $32mm of FCF to end the quarter with $114mm of cash and no debt. The company also has access to a $350mm revolver, which can be expanded to $500mm. We believe that the company is well-capitalized to continue executing on its acquisition strategy. Management also noted that the M&A environment remains very active. The re-acceleration of the M&A environment is consistent with what we have heard from other tech leaders and accelerating activity in the market.
TD Investment Conclusion
We are maintaining our BUY rating and increasing our target price to US$68.00.
We believe that Descartes is set up to benefit from the recovery, ecommerce growth, and increasing trade complexity