Driven by a radical shift in business philosophy, Descartes Systems Group Inc. hit another milestone on its road to recovery this week, announcing strong results for its fiscal second quarter 2006, including more robust margins and an 80% hike in earnings over the previous quarter.
The Waterloo, Ontario provider of on-demand delivery management solutions for transportation, logistics, manufacturing, and retail and distribution companies, earned $900,000 in the period ended July 31, nearly doubling the $500,000 netted in the previous quarter and significantly better than the $22.7 million loss posted in the like period last year. Sales for the quarter hit $11.4 million, up slightly from the $11.3 million reported in prior quarter and the $11.1 million inked in the corresponding period last year.
Descartes also made critical improvements to its bottom line. For the quarter, the company achieved gross margins of 60%, up from 57% posted in the previous period and higher than the 47% reached in the year-ago period. The company also reported positive EBITA for the current quarter of $1.5 million, consistent with the positive EBITA of $1.5 million for the previous quarter and a significant change from an EBITDA loss of $20.6 million in the like period last year, which included a $13.2 million charge for restructuring costs and asset impairment.
The results reflect a year of change for Descartes, which led by new management, restructured the company and repositioned its offerings under a new services-oriented umbrella. In 2004, Descartes faced numerous business challenges, including charges of financial mismanagement which led to the firing of its CEO as well as the filing of a class-action lawsuit that was eventually settled.
Descartes also reduced its workforce by 35% in May 2004 amongst other cost-cutting measures, and brought in new leadership as part of its recovery process.
This quarter's strong performance indicates that Descartes is well on course, company officials said. "One year ago, we set out to restructure and to align our expenses to our visible and contracted recurring revenue," said Arthur Mescher, Descartes CEO, during a conference call with financial analysts. "We've since created a metrics-driven culture to deliver results for our customers, our company, and our shareholders. Compared to where we were a year ago, these results are nothing short of dramatic."
Dramatic, maybe but there's still more to go, according to Bob Ferrai, supply chain services program director for Manufacturing Insights Inc. (Framingham, MA), an International Data Corp. market research company focused on the manufacturing sector. While raising its profitability line was a major accomplishment, Descartes still needs to grow its revenue line and garner customers across a broader array of markets, he said.
Descartes' work with key customers on shared risk-reward pilot projects built around its Logistics Network Operating System architecture should certainly help to spur interest. "It's very important that the pilots are underway," Ferrai noted. "Customers want proof points -- they want to know exactly how bullet-proof is the new software."
Descartes' Mescher told analysts the pilots are already fostering interest among potential customers. "With the new service-model, Descartes gets paid for the work to deploy the technology, but it's only if the solution delivers results, that we get paid for the technology," Mescher explained. "Otherwise, we take the technology and go home. But we're pleased with the performance of the technology for these customers, and the large deployments have enabled us to validate the performance of the new architecture."
Descartes is also doing other things to help spread the word about its solutions. The company is rebuilding its sales and marketing organization and is hosting monthly Webcasts and open houses. The firm recently hired industry veterans Chris Jones, formerly with Aberdeen Group's Value Chain Research division, and Mark Weisberger, who held posts at a variety of software firms, to bolster its solutions and markets and field operations groups, respectively.
The company, moreover, is seeing renewed interest from system integrators, and is making resources available to bolster its indirect and OEM channels.
All of these efforts are designed to take Descartes to the next level, although Mescher declined to provide specific growth forecasts. He said Descartes is well positioned to take advantage of key economic trends, including the dramatic rise in fuel costs and the growth in global shipments -- both of which build an important business case for its solutions, which are designed to help companies better manage and build efficiencies for logistics.
Even the devastating Hurricane Katrina could eventually have a positive impact in the long term. "It's not the flow of goods through the port that will affect us as much as the domestic trucking operations that feed those ports," Mescher said. "Sure, there's some exposure in the short term. But they have to rebuild at some point, so there's probably something to pick up on the other side."