Descartes(DSGX) - 2025 Q2 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of the company's financial performance, liquidity, and capital resources, along with key trends and risk factors Overview Descartes delivers cloud-based logistics and supply chain management solutions through its Global Logistics Network and modular applications, recently expanding through key acquisitions - The company's core business is providing modular, software-as-a-service (SaaS) and data solutions to manage logistics processes, including routing, tracking, customs filing, and global trade data analysis[9] - The Logistics Technology Platform is built on the Global Logistics Network (GLN), which manages the flow of data and documents for inventory, assets, and people in motion across multiple transportation modes[14] Fiscal 2025 Acquisitions | Acquisition | Business Focus | Purchase Price (net of cash) | | :--- | :--- | :--- | | OCR Services, Inc. | Global trade compliance solutions | ~$82.8 million | | Aerospace Software Developments (ASD) | Global trade compliance solutions | ~$62.5 million | | BoxTop Technologies Limited | Shipment management solutions | $12.1 million | Consolidated Operations Q2 FY2025 saw total revenues increase to $163.4 million and net income rise to $34.7 million, driven by acquisitions and organic growth, with services as the primary revenue source Q2 FY2025 vs Q2 FY2024 Financial Highlights (in millions) | Metric | Q2 FY2025 | Q2 FY2024 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $163.4 | $143.4 | +14.0% | | Gross Margin | $122.9 | $108.4 | +13.4% | | Income from Operations | $45.9 | $36.8 | +24.7% | | Net Income | $34.7 | $28.1 | +23.5% | | Diluted EPS | $0.40 | $0.32 | +25.0% | - The increase in Q2 FY2025 revenue was primarily driven by a $8.2 million contribution from the 2025 acquisitions (OCR, ASD, BoxTop) and $7.5 million from organic growth with new and existing customers, particularly in global trade intelligence, routing, and transportation management solutions[19] Revenue by Type - Q2 FY2025 (in millions) | Revenue Type | Amount | % of Total | | :--- | :--- | :--- | | Services | $146.2 | 89% | | Professional services and other | $15.8 | 10% | | License | $1.4 | 1% | Revenue by Geography - Q2 FY2025 (in millions) | Geography | Amount | % of Total | | :--- | :--- | :--- | | United States | $109.6 | 67% | | EMEA | $38.4 | 24% | | Canada | $10.4 | 6% | | Asia Pacific | $5.0 | 3% | Quarterly Operating Results The company achieved consistent sequential revenue growth over eight quarters, with Q2 FY2025 revenues reaching $163.4 million due to acquisitions and organic expansion Quarterly Revenue Trend (in millions) | Quarter | Revenue | | :--- | :--- | | Q3 FY2023 | $121.5 | | Q4 FY2023 | $125.1 | | Q1 FY2024 | $136.6 | | Q2 FY2024 | $143.4 | | Q3 FY2024 | $144.7 | | Q4 FY2024 | $148.2 | | Q1 FY2025 | $151.3 | | Q2 FY2025 | $163.4 | - Revenue growth in Q2 FY2025 compared to Q1 FY2025 was driven by a $6.1 million incremental contribution from the OCR, ASD, and BoxTop acquisitions, and $3.1 million from new and existing customers[48] - The company notes minor seasonal trends, with historically lower shipment volumes in Q1, increased ocean services revenue in Q2, peak volumes in Q3, and holiday-impacted transaction numbers in Q4[47] Liquidity and Capital Resources Cash decreased to $252.7 million by July 31, 2024, primarily due to acquisitions, while the company maintains a $350.0 million undrawn revolving credit facility and strong operating cash flow - Cash balance decreased by $68.3 million in the first half of fiscal 2025, mainly due to $153.7 million used for the acquisitions of OCR, ASD, and BoxTop, partially offset by $98.4 million in cash generated from operations[49][57][60] - The company maintains a $350.0 million revolving credit facility, expandable to $500.0 million, which was fully available as of July 31, 2024[50][51] Summary of Cash Flows - First Half FY2025 vs FY2024 (in millions) | Cash Flow Activity | H1 FY2025 | H1 FY2024 | | :--- | :--- | :--- | | Cash from Operating Activities | $98.4 | $100.9 | | Cash used in Investing Activities | ($157.1) | ($146.1) | | Cash used in Financing Activities | ($8.5) | ($5.2) | | Net Change in Cash | ($68.3) | ($49.0) | Commitments, Contingencies and Guarantees The company's commitments include $7.9 million in operating lease obligations and potential contingent consideration of up to $41.5 million for acquisitions, with equity derivative contracts hedging DSU and CRSU plans Operating Lease Obligations (in millions) | Period | Amount | | :--- | :--- | | Less than 1 year | $3.3 | | 1-3 years | $3.5 | | 4-5 years | $1.0 | | More than 5 years | $0.1 | | Total | $7.9 | - Up to $41.5 million in contingent consideration may be payable for the Supply Vision and GroundCloud acquisitions if certain revenue targets are met. The fair value of this liability is accrued at $1.5 million as of July 31, 2024[68] - The company has entered into equity derivative contracts to substantially offset its cash exposure to fluctuations in its stock price related to its DSU and CRSU plans[65] Outstanding Share Data As of September 4, 2024, Descartes had 85,480,625 common shares outstanding, along with 1.6 million stock options, 1.0 million PSUs, and 0.5 million RSUs Share and Equity Award Data (as of Sept 4, 2024) | Security Type | Outstanding | | :--- | :--- | | Common Shares | 85,480,625 | | Stock Options | 1,618,941 | | Performance Share Units (PSUs) | 1,014,961 | | Restricted Share Units (RSUs) | 492,110 | Application of Critical Accounting Policies and Estimates The company's critical accounting policies and estimates, including revenue recognition and asset impairment, remain consistent with its fiscal 2024 Annual Report - The significant accounting policies are unchanged from the Company's 2024 Annual Report[76] - Critical accounting estimates include revenue recognition, impairment of goodwill and long-lived assets, stock-based compensation, income taxes, and business combinations[76] Change in / Initial Adoption of Accounting Policies Descartes will adopt new segment reporting and income tax disclosure standards in fiscal 2025 and 2026, with no material impact anticipated on financial results - The company will adopt ASU 2023-07 (Segment Reporting) in Q4 fiscal 2025 and ASU 2023-09 (Income Tax Disclosures) in Q4 fiscal 2026. Neither is expected to have a material impact[77][78] Controls and Procedures No material changes were made to the company's internal control over financial reporting during the second quarter of fiscal 2025 - No material changes were made to the Company's internal control over financial reporting during the quarter ended July 31, 2024[78] Trends / Business Outlook The company anticipates continued global shipping uncertainty, projecting Q3 FY2025 baseline revenues of **$141.0 million** and maintaining a focus on services revenue Q3 FY2025 Baseline Calibration (as of Aug 1, 2024) | Metric | Estimated Amount | | :--- | :--- | | Baseline Revenues | ~$141.0 million | | Baseline Operating Expenses | $87.5 million | | Baseline Calibration | **$53.5 million** | - The company expects its focus to remain on generating services revenues, which accounted for 89% of total revenues in Q2 FY2025[85] - Anticipated capital expenditures for the remainder of fiscal 2025 are approximately $2.0 to $3.0 million, primarily for network and security infrastructure[91] - The company expects an effective tax rate of between 25% to 30% for the remainder of fiscal 2025[96] Certain Factors That May Affect Future Results Key risks impacting future results include system failures, economic conditions, acquisition integration challenges, trade regulation changes, and freight movement disruptions System or network failures, information security breaches or other cyber-security threats IT network disruptions or cybersecurity breaches could lead to service unavailability, data compromise, reputational damage, and revenue loss - The company relies on IT networks and systems, and any disruption could prevent customers from receiving products, potentially for an extended period[100] General economic conditions Customer demand is vulnerable to adverse economic conditions, inflation, interest rate hikes, and geopolitical events, which can reduce spending - Decreased capital and operational spending by customers, caused by economic uncertainty or geopolitical events, could materially harm demand for the company's products[104] Acquisition and Integration Risks Challenges in identifying and integrating acquisitions may lead to customer or personnel loss and failure to achieve anticipated transaction benefits - Risks associated with acquisitions include difficulties in integration, loss of customers and key personnel from the acquired business, and the potential for valuation assumptions to be erroneous[107][109] Disruptions in the movement of freight The company's revenue is highly dependent on freight movement, which can be adversely affected by disruptions from labor disputes, weather, or political instability - Since the company generates transaction revenues from freight movement, any disruptions due to labor disputes, weather, or political instability will negatively impact traffic volume and revenues[113] Condensed Consolidated Financial Statements This section presents the company's financial position, operating results, comprehensive income, shareholders' equity, and cash flows Condensed Consolidated Balance Sheets Total assets increased to $1.57 billion by July 31, 2024, driven by acquisitions, with total liabilities at $253.7 million and shareholders' equity at $1.31 billion Key Balance Sheet Items (in thousands) | Account | July 31, 2024 | January 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash | $252,653 | $320,952 | | Intangible Assets, Net | $303,871 | $251,047 | | Goodwill | $849,991 | $760,413 | | Total Assets | $1,565,420 | $1,474,285 | | Liabilities & Equity | | | | Deferred Revenue (Current) | $103,701 | $84,513 | | Total Liabilities | $253,656 | $236,251 | | Total Shareholders' Equity | $1,311,764 | $1,238,034 | Condensed Consolidated Statements of Operations For Q2 FY2025, revenues reached $163.4 million and net income was $34.7 million, representing significant year-over-year growth Statement of Operations Highlights - Three Months Ended July 31 (in thousands) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Revenues | $163,425 | $143,393 | | Gross Margin | $122,877 | $108,419 | | Income from Operations | $45,846 | $36,830 | | Net Income | $34,681 | $28,116 | | Diluted EPS | $0.40 | $0.32 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income for Q2 FY2025 was $36.4 million, comprising $34.7 million in net income and a $1.7 million positive foreign currency translation adjustment Comprehensive Income - Three Months Ended July 31 (in thousands) | Item | 2024 | 2023 | | :--- | :--- | :--- | | Net Income | $34,681 | $28,116 | | Other comprehensive income (loss) | $1,734 | $8,435 | | Comprehensive Income | $36,415 | $36,551 | Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $1.31 billion by July 31, 2024, driven by $69.3 million in net income and stock option exercises - Shareholders' equity grew to $1,311.8 million at July 31, 2024, from $1,238.0 million at January 31, 2024. Key drivers were net income ($69.3 million) and proceeds from share exercises ($10.7 million), offset by other comprehensive loss ($5.7 million)[160] Condensed Consolidated Statements of Cash Flows Cash decreased by $68.3 million in the first half of FY2025, with $98.4 million generated from operations largely offset by $157.1 million used in investing activities Cash Flow Summary - Six Months Ended July 31 (in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Cash provided by operating activities | $98,401 | $100,866 | | Cash used in investing activities | ($157,055) | ($146,083) | | Cash used in financing activities | ($8,492) | ($5,224) | | Net (decrease) in cash | ($68,299) | ($48,976) | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements Note 3 – Acquisitions In fiscal 2025, Descartes completed three acquisitions totaling approximately $157.4 million, contributing $10.2 million in revenue and $1.7 million in net income in the first half Fiscal 2025 Acquisitions Summary | Company Acquired | Description | Purchase Price (net of cash) | | :--- | :--- | :--- | | OCR Services, Inc. | Global trade compliance solutions | ~$82.8 million | | Aerospace Software Developments (ASD) | Global trade compliance solutions | ~$62.5 million | | BoxTop Technologies Limited | Shipment management solutions | ~$12.1 million | Note 16 - Stock-Based Compensation Plans Stock-based compensation expense for Q2 FY2025 was $5.5 million, with significant unrecognized costs for outstanding stock options, PSUs, and RSUs Stock-Based Compensation Expense (in millions) | Period | Q2 FY2025 | Q2 FY2024 | H1 FY2025 | H1 FY2024 | | :--- | :--- | :--- | :--- | :--- | | Expense | $5.5 | $4.5 | $9.3 | $7.4 | - As of July 31, 2024, unrecognized compensation costs were $13.8 million for stock options, $15.7 million for PSUs, and $8.0 million for RSUs[216][222][225] Note 21 - Segmented Information Descartes operates as a single segment, with the United States contributing 67% of revenue and services revenue accounting for 90% of total revenue in the first half of FY2025 - The company operates in one reportable business segment: providing logistics technology solutions[237] Revenue Breakdown - Six Months Ended July 31, 2024 | Breakdown | Category | Revenue (millions) | % of Total | | :--- | :--- | :--- | :--- | | By Geography | United States | $211.2 | 67% | | | EMEA | $73.6 | 23% | | | Canada | $20.4 | 7% | | | Asia Pacific | $9.7 | 3% | | By Type | Services | $284.1 | 90% | | | Professional services & other | $28.8 | 9% | | | License | $1.9 | 1% | Corporate Information This section provides details regarding the company's stock listings and other general corporate information - Descartes' common stock trades on the Toronto Stock Exchange (TSX) under the symbol 'DSG' and on The Nasdaq Stock Market under the symbol 'DSGX'[241]