A restructuring in fiscal year 2005 continues to reap positive returns for Descartes Systems Group Inc., a provider of on-demand delivery management and logistics tools based in Waterloo, ON.
Announcing the company's fourth-quarter and year-end results on a conference call with analysts, CEO Arthur Mescher categorized the year as "the birth of a new company."
A glance at Descartes' top-line, however, appears to belie the company's claims of success over the past year. In fiscal 2006, revenues declined slightly to $45.7 million from 2005's $46.4 million. Evidence of the turnaround can be found in other financial metrics: the company earned $1 million in the fourth quarter, reversing a loss of $1 million a year earlier; it closed the year with net cash on hand of $33 million, up from $21.8 million in the fourth quarter of 2005; and posted gross margins that improved from 55% to 64% year over year.
The company found similar success in improving its EBITDA, the calculation of its cash position before recognition of interest, taxes, depreciation, and amortization. Descartes CEO Arthur Mescher explained that the company's internal measure of success in this turnaround year has been its EBITDA margin, which measures the percentage of revenue allocated to operating expenses. The goal had been a margin of 20% by the end of fiscal 2007; by the fourth quarter of 2006 it had already reached 19%.
The quarter caps a strong year for Descartes -- its first full year of sustained profitability in seven years. The company reported net earnings of $3 million, reversing a fiscal 2005 loss of $55.3 million. 2006 was also the first year in which the company offered its applications via an on-demand model.
The company's portfolio of on-demand logistics tools answer a host of questions, according to Mescher. Among them: How can I make deliveries most efficiently? How do I communicate with all the people I ship goods to or receive goods from? How do I manage all the information and connect all of my trading partners that need to share this similar information?
In the past year, Mescher has referred to the "New Descartes," a term that encapsulates the turnaround the company has executed after years of poor performance. And yet beneath the din of the "New Descartes" mantra lingers the question of revenue growth, which eluded Descartes in fiscal 2006.
When asked by an analyst if management was content with flat top-line results, Mescher was emphatic. "I'm going to give you the same answer I always give, which is we're focused on growing EBITDA and cash flow in this company and we're not focused on the top-line result issues. ... We're focused on making more money every quarter and that's what we've done ever since we got here."
His comments were echoed by CFO Brandon Nussey, who stated that "affecting EBITDA and growing EBITDA is the primary focus for us."
Revenue growth was also hampered by vestiges of the old Descartes. Nussey noted that the company shed $3.5 million worth of legacy business -- on-premises software installations that the New Descartes, with its SaaS bent, has mostly, though not entirely, left behind.
That loss helped mask the 25% growth in sales of new products and services achieved in fiscal 2006. Nussey said Descartes has renewed some legacy contracts, while other legacy customers mull the transition to the new hosted model.
For the fourth quarter, revenue broke down to $10.3 million from services and $1.2 million from licenses, a reflection of the company's shift away from license-based revenue.
For this still-young turnaround, Mescher emphasized that Descartes' initial priorities were to guarantee that the delivery mechanism for its services was of the right quality and that the price was at the right level before the company began investing in growth strategies.
A driving force behind the company's turnaround and subsequent prospects, according to Mescher, is the Descartes Dozen, 12 companies that were early adopters of the on-demand offerings and have served as references for other interested businesses. Earlier today, Descartes announced a contract win with Canon Europe, which will deploy the visibility and event-management products across its European operations.
Mescher outlined the next steps: "We really need to look at how to syndicate our services now. We have a great network, but ... there comes a time when our centralized network needs to federate and distribute itself across trading partners," he said. "That's really the beginning, I think, of how Descartes can come to a whole new level."
One characteristic of the company that may play favorably into its revenue-growth efforts is the business world's growing acceptance of the on-demand model, which has seen interest from some industry heavyweights of late. Last month SAP formally revealed its entry into the software-as-a-service market with a hosted CRM product, and Microsoft's CRM 3.0 is currently available for on-demand delivery.
"I'm sure we'll see people chip at it more going forward," said Chris Jones, Descartes' executive vice president for solutions and markets, in an interview with Managing Automation. But for now, the markets Descartes serves are underrepresented by the software behemoths. "The majority of our competitors are smaller, single-product companies."
For his part, Mescher said he doesn't feel pressured by those would-be intrusions, and pins some of the Descartes' growth opportunities on the dearth of competitors in its space. "I think it's important to note [that] 70% of our revenue comes from logistics service providers, and this is not the market that Microsoft, SAP, or Oracle serve," he said.
As for a new Descartes Dozen, Jones believes the concept is worth repeating. "You'll probably see some version of it" in the future, he said.
In announcing the year's results, Mescher also introduced Greg Cronin, Descartes' new executive vice president of business development and corporate strategy. Cronin is a former executive at Manhattan Associates, and, most recently, founder and CEO of TrenStar, a provider of outsourced mobile asset management products.
When asked whether the management team needed more fiddling, Mescher answered, "I'm quite happy with the team that we've got," but noted that Descartes was always looking for industry specialists to help develop the company's vertical products.