The Descartes Systems Group, Inc. :DSGX-US: Earnings Analysis: Q3, 2017 By the Numbers : December 5, 2016

The Descartes Systems Group, Inc. reports financial results for the quarter ended October 31, 2016.

We analyze the earnings along side the following peers of The Descartes Systems Group, Inc. – Manhattan Associates, Inc., eFuture Holding, Inc., Amber Road, Inc., American Software, Inc. Class A and SAP SE Sponsored ADR (MANH-US, EFUT-US, AMBR-US, AMSWA-US and SAP-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 51.54 million, Net Earnings of USD 5.93 million.
  • Gross margins widened from 57.03% to 58.52% compared to the same period last year, operating (EBITDA) margins now 33.11% from 32.23%.
  • Year-on-year change in operating cash flow of 72.81% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-10-31 2016-07-31 2016-04-30 2016-01-31 2015-10-31
Relevant Numbers (Quarterly)
Revenues (mil) 51.54 50.52 48.91 48.04 47.36
Revenue Growth (%YOY) 8.82 11.83 10.1 8.47 9.99
Earnings (mil) 5.93 5.78 6.04 5.36 5.23
Earnings Growth (%YOY) 13.43 13.94 23.2 49.1 25.79
Net Margin (%) 11.51 11.44 12.34 11.16 11.04
EPS 0.08 0.08 0.08 0.07 0.07
Return on Equity (%) 5.64 5.5 5.87 5.31 5.19
Return on Assets (%) 4.89 4.75 5.13 4.73 4.63

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Market Share Versus Profits

Revenues History
Earnings History

DSGX-US‘s change in revenue this period compared to the same period last year of 8.82% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that DSGX-US is holding onto its market share. Also, for comparison purposes, revenues changed by 2.02% and earnings by 2.63% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 57.03% to 58.52% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 32.23% to 33.11% compared to the same period last year. For comparison, gross margins were 57.71% and EBITDA margins were 32.07% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

DSGX-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 109.35, compared to last year’s level of 109.21 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

DSGX-US‘s change in operating cash flow of 72.81% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 15.79% to 16.83% and (2) one-time items. The company’s pretax margins are now 14.96% compared to 14.79% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

The Descartes Systems Group, Inc. is an information technology company which provides logistics technology solutions. It specializes in cloud-based solutions including modular and software-as-a-service to route, schedule, track, and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access and leverage global trade and restricted party data; file customers and security documents for imports and exports; research and perform trade tariff and duty calculations and to complete numerous other logistics processes. It primarily supports transportation industry, logistics service providers, third-party logistics providers, freight forwarders, and custom brokers. The company was founded on May 22, 1981 and is headquartered in Waterloo, Canada.

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