CIBCSeptember 4, 2024 Earnings Update
DESCARTES SYSTEMS GROUP INC.
Q2/F25 – Results Roughly In Line; M&A Environment Robust
Our Conclusion
Descartes posted FQ2 results with revenue 2% above expectations and
adjusted EBITDA in line. Margins were 90 bps below expectations. Both the
revenue beat and lower margins were driven by a hardware refresh at
GroundCloud, as the business rolls out AI-enabled cameras. With the
hardware refresh expected to be completed by the end of FQ3, we see this
as a temporary impact. With +30% of revenue based on transaction
volumes, we continue to see upside from an eventual freight recovery. The
M&A environment also remains robust, with Descartes ending the quarter
with $253MM in net cash. We retain our Outperformer rating and US$108 price target.
Key Points
Q2/F25 Results: Revenue of $163.4MM was 2% above consensus
($160.2MM), driven primarily by higher-than-expected hardware revenue.
Adjusted EBITDA of $70.6MM was in line with consensus ($70.7MM). Adj.
EBITDA margin of 43.2% was 90 bps below consensus, but up ~100 bps Y/Y
post the GroundCloud integration and recent restructuring. Descartes
recorded $33.1MM in free cash flow, below consensus of $44.4MM. Cash
flow was impacted by $25MM in contingent acquisition consideration for
previously completed deals, which performed better than expected.
Organic Growth Up Sequentially On Hardware Refresh: Descartes
announced constant currency organic services revenue growth of 9% in
FQ2, up sequentially from 8.5% in FQ1. However, the organic growth figure
includes the Groundcloud hardware refresh, which we consider more one-
time in nature. The freight market remains uncertain, although Descartes
continues to see higher ocean freight volumes, which should be a leading
indicator of future trucking volume increases.
Acquired BoxTop FQ2: Descartes made one small tuck-in this quarter,
acquiring BoxTop Technologies for roughly $12MM. BoxTop provides small
to mid-sized logistics service providers a platform to manage the movement
of goods from quoting through to routing, booking, and final delivery. U.K.-
based BoxTop was an existing Descartes partner, and we see opportunities
to integrate it with more solutions on the GLN and into new geographies.
Descartes has spent $154MM on M&A year to date, above its full-year spend
last year. Management continues to see an attractive M&A environment, with
the challenging freight environment creating M&A opportunities, especially
with smaller firms. The company ended the quarter with $253MM in net cash.
FQ3 Calibration: Post the BoxTop acquisition in Q2, the FQ3 calibration
implies a 4% sequential revenue increase (versus 4% in FQ2) and a 3%
sequential adj. EBITDA increase (versus 5% in FQ2). The implied adj.
EBITDA margin calibration is flat sequentially. The FQ3 calibration includes
another $2.5MM in lower margin GroundCloud hardware revenue. Post FQ3,
management believes the hardware refresh will be mostly complete.