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Another Strong Quarter for the Descartes Systems Group

The Descartes Systems Group recently posted their quarterly results, which were quite strong. Thus, the group generated service-based revenues that were $1 million over what the Street predicted and their adjusted EBITDA was on par with forecasts. Overall revenues, however, came in slightly lower than Street estimates with a difference of $100,000, while earnings per share were $0.01 below predictions. These negative variances, though, were mainly caused by license revenues that were slightly under what the Street was expecting. Descartes is pushing recurring revenue solutions over one-time licenses, which is why they are trying to shift focus from license revenues.
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The company has finished the Customs Info integration, which is something analysts were pleased about. Thus, the company is already in talks to convince the Customs Info customer based to purchase their core products and vice versa. Analysts feel that the Customs Info acquisition is more important than most realize because it has provided Descartes with a way to take advantage of a so-far undeveloped opportunity within their existing customer base, as well as a new and extensive customer base to sell their existing products to, such as their global logistics network and routing solutions.

Additionally, this acquisition created a relationship with Oracle, with which Descartes hadn’t had any prior dealings, as well expanding their existing SAP relationship. The relationship with Oracle could prove quite fruitful considering how many of those involved in the shipping process employ the Oracle Transport Management solution. Despite that it will take some time to cement the Oracle and SAM relationships, they could prove to be the most lucrative partnerships for the long-term that Descartes has ever entered into and are likely to push material gains for the company. Descartes has a solid acquisition channel, but they are still concentrating on small acquisitions despite having access to a higher debt facility and the influx of cash.

Descartes’ management did state that they might be making more mid-size purchases, like the Customs Info one. Analysts feel that this move would put Descartes in a position to make acquisitions that would significantly expand their portfolio of products, like what happened with Descartes. Even though they may be making larger acquisitions in the future, analysts are expecting the company’s management to continue their prudent and discerning policy in choosing the target companies.

The company’s management is targeting 10 to 15 percent gains for the adjusted EBITDA, despite the fact the company exceeded this percentage range in gains this quarter. However, any upside the company achieves is earmarked for reinvestment into the business. Analysts have increased the adjusted EBITDA estimates from $50.4 million to $51.3 million and are expecting the company to close the year close to or over the higher end of its growth target for adjusted EBITDA when taking into account the acquisition channel, the custom filings products and the MRM adoption, as well as channel business power.

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