EARNINGS
No One Quarter Wonder
Wed, Aug. 23, 2000 07:04
By Thien Huynh, Canada-iNvest.com
Descartes Systems Group (DSG) just came off an impressive fiscal year
2001 second quarter and is already talking about an even greater third quarter
where 60% of revenues has already been locked up. Descartes probably won’t
be returning to its 52-week high that soon but if the company lives up to its
optimistic expectations, investors can’t help but see a rise in valuations.
Anything less than what Descartes reported on Tuesday would have been
considered a failure. The company posted revenues of US$14.6 million, up
50% from revenues of US$9.8 million in the second quarter of fiscal year 2000.
Net loss for the quarter was US$4.5 million compared to a loss of US$6.5
million at the same time last year.
The company’s license and network revenue was the most telling statistic.
Returns from this one division accounted for US$11 million of total revenues,
up 191% from US$3.8 million in the second quarter of fiscal year 2000.
Descartes planned last quarter to shift away from the historical license
revenue model and focus on the network revenue model instead.
“The numbers were nothing short of spectacular. They exceeded all the
estimates. Overall the quarter was a very good example of how phenomenal
the company’s business model is because we saw how exponential growth
added to the bottom line,” says David Dushene of WitSound View.
“In the network and licensing division, some analysts were looking for US$9.2
million and they reported about US$11 million. They blew away the Street
estimates for that. Certainly this is not a one-quarter wonder. I like how the
company was very firm on the fact that a big chunk of that US$11 million is
recurring. A lot of it is transaction and subscription revenue.”
A year and a half ago, the company was a traditional software company that
sold or licensed their applications. The challenge was to increase sales each
quarter but the old model only generated revenues by selling software for an
end of the road one-time fee. The new business model is subscription and
transaction based. As customers use the system and are happy with the
application, they pay Descartes as they go. This model produces more
attractive on-going revenues and better margins for the company. The change
garnered success in the second quarter and has already spilled over into
quarter three.
“We are off to a great start in the third quarter with new sign ups and
subsequent license revenues already higher in the first half of this current
quarter than all of last year. There is significant momentum at Descartes,
specifically growth in license and network revenues. Over 60% of our revenues
are visible next quarter. We are very, very, very confident with the outlook for
the coming quarters,” says Peter Schwartz, Descartes’ Chairman and CEO.
Schwartz explains that when he says “60% of revenues are visible”, he means
that a lot of the revenue that the company is generating now is recurring. The
bulk of the revenues come from repeat transaction and subscription revenue
and that is growing exponentially. That, coupled with the new deals that the
company has on the go, means that Descartes has 60% of revenues for the
quarter firmly in place, despite being just 22 days into the term. On top of
that, the company has already signed more customers this quarter than all of
last quarter, which, in its own right, was considered a resounding success.
The Waterloo-based software firm reported that international sales accounted
for 50% of revenues, up from 30% last quarter. Descartes boasts global
customers such as Vanda Systems, China’s largest systems integrator, and
John Lewis Partnership, a dominant retail chain in the United Kingdom. The
company is big on penetrating the Korean market by licensing its product
ATR Korea, a logistics firm dealing with banking and networks. The South
Korea government has previously stated that Descartes’ technology is of a
national interest to the country and is under review.
Howard Lis, an analyst with Griffiths McBurney Partners, thinks that
Descartes stock is a great buy, considering that the company has exceeded
expectations and is promising a phenomenal third quarter with more to come.
“The financials look extremely attractive. The company is going to be
profitable next quarter, one full quarter ahead of planned. I challenge anyone to
find another B2B infrastructure player who can go through the growth curve the
Descartes is and is going to be profitable,” says Lis.
“In terms of valuations, I think the company is letting the numbers speak for
themselves today and there was a jump in share price. But over the next
month or so, I’m sure we’ll be getting additional good news about progress
with partners and customers. That can only help the stock’s value.”
Descartes closed on Tuesday at $59.20, up $1.30 on the strength of the
positive quarter. Lis has set his 12-month target price on the stock at $160.
Descartes has a 52-week high of $134.95 and a low of $4.60. |
