Continuing to successfully navigate its transition to a software-as-a-service business model, logistics software and services provider Descartes Systems Group yesterday reported a 13.6% rise in revenue for the first quarter of its fiscal 2008, ended April 30.
Despite the revenue increase, the Waterloo, ON, company saw a 9% slip in first-quarter earnings. The lower net earnings were the result of negative foreign exchange impacts during the quarter as well as expenses from the company's acquisition last year of Flagship Customs Services, Inc. and ViaSafe. Excluding those acquisition-related expenses and other charges such as taxes, depreciation, and amortization, Descartes reported EBITDA of $3 million, up 25% from EBITDA of $2.4 million reported in the first quarter a year ago.
"We had a great start to the new fiscal year. We are not just surviving; we are thriving," said Descartes CEO Arthur Mesher, in remarks to financial analysts yesterday.
Mesher described Descartes' now 3-year-old turnaround initiative as ahead of schedule, but he warned that, in many respects, it is still fragile. Although many large transportation and logistics service providers have signed on as customers of Descartes' on-demand Global Logistics Network, many others are just now piloting the service and evaluating whether to fully engage with Descartes. As recently as 2003, the company reported an annual loss of $138 million.
"As much as we'd all like to think this is a completed turnaround situation, it's not," Mesher told analysts. "We're still midstream. We still have to focus on stability, cash flow, and making sure our core platform is prepared to allow us to acquire companies, integrate them together ... and improve relations with customers," he said. "Top-line growth isn't as important as achieving core predictability to the business."
During the quarter, Descartes reported revenue of $13.3 million, compared with $11.7 million in the first quarter a year earlier. Net earnings of $1.1 million were down from $1.2 million in the prior-year period. Foreign exchange losses cost Descartes $200,000 during the quarter, and acquisition-related expenses another $500,000.
Ninety-two percent of Descartes first-quarter revenue — or $12.2 million — came from services, such as its on demand software, which addresses strategic delivery planning, warehouse optimization, daily planning, reservations, transportation management, supply chain visibility, mobile/dispatch/AVL, and connectivity and messaging. Descartes' services revenue for the quarter grew by 15.1%.
The company received $1.1 million from software license sales during the quarter, equal to the first quarter of 2007. Although the company's revenue from software sales is relatively low, Descartes will continue to offer customers the option to purchase its software. "We still see a market from customers wanting to own the technology," Mesher told analysts.
Descartes said the gross profit margin on its software license sales was 91% during the quarter, while gross profit margins on the services portion of its revenue was 63%.
During the quarter, Descartes saw strong growth in its Americas and Canada regions, but less robust business in other regions. Descartes' revenue from the Americas grew 7.8% to $8.2 million, and its revenue from Canada was up 157% to $1.8 million. Revenue from its Europe/Middle East/Africa region, however, was flat at $3 million, and Asia Pacific revenue fell 25% to $300,000.
Mesher told analysts that growth in Decartes' Americas and Canada regions has outstripped growth elsewhere in part because its recent acquisitions have brought mainly North American customers to the business. In March, for example, Descartes completed the acquisition of certain assets of Ocean Tariff Bureau, Inc. and Blue Pacific Services, Inc., both based in Long Beach, CA. Ocean Tariff provides tariff filing and publishing services, and Blue Pacific helps shippers secure surety bonds.
Descartes plans to grow its European business, at least in part, through acquisition, Mesher told analysts. "We are active [in Europe] from a targeted acquisition standpoint," he said. "We want to grow Europe from a core services standpoint."
By virtue of a recent public share offering in Canada, Descartes will have additional resources with which to pursue Mesher's acquisition plans. Late last month, Descartes closed a public share offering that raised $22.3 million from the sale of 5 million common shares.
Descartes declined to provide specific guidance on future quarterly results. That is, in part, because the company cannot predict when prospective customers evaluating its services may commit to subscription contracts.
Still, Mesher said, the company's recovery is ahead of schedule. Three years ago, Mesher said, the company's goal was to report EBITDA of 10% of total revenue within one year and EBITDA of 20% of revenue within three years. The company reported EBITDA of 23% of revenue in the most recent quarter.
Now, Mesher said, Descartes' goal is to report recurring EBITDA from the services part of its business equal to at least 20% of revenue. On that metric, Descartes is running at about 16% of revenue, Mesher said.