Descartes Earnings: Positive Demand Trends Continue, Leading to More Quarterly Strength

Descartes DSGX/DSG reported strong second-quarter results, with revenue and adjusted EBITDA easily topping our estimates. Demand indicators are positive and consistent with recent quarters. GroundCloud integration efforts are underway and seem to be off to a good start in terms of overall margin performance for the company. While the company made no acquisitions this quarter, management is optimistic on the deal-making front, which we think should help drive growth through fiscal 2025. Management was cautious in its outlook, which is not unusual. Our opinion that the continued evolution of the supply chain toward more complexity and more exogenous shocks benefits Descartes and helps attract more customers to their network remains unchanged. Based on strong results, we modestly increased our near-term estimates for both growth and margins. As a result, we raise our fair value estimate to $74 (CAD 101) per share, from $72 (CAD 98) previously, and view the shares as fairly valued.

Second-quarter revenue increased 17% year over year as reported to $143 million, compared with FactSet consensus of $139 million. On an organic constant-currency basis, revenue grew 6% compared with the second quarter of last year. Good transaction volumes, new clients, and expanded relationships with existing clients all contributed to growth, as did GroundCloud, which was acquired in February. More specifically, visibility, routing, trade intelligence, and e-commerce solutions performed well in the quarter. GroundCloud and Localz both performed well from a revenue standpoint. Services revenue increased 19% year over year to $131 million and drove the entirety of upside relative to our model, as professional services grew 10% year over year and license declined 58% year over year against a challenging comparison.