Management from Canadian supply chain software-as-a-service provider Descartes said its customers are still leaning into supply chain solutions even as the macroeconomic environment has cooled.
“What we’re seeing is while our customers are being cautious and they may be covering the brake on some other projects … they continue in the logistics and supply chain space to make investments and continue the investments that they’re already making,” CEO Ed Ryan told analysts on a Wednesday evening call. “Our projects are rolling out. We continue to see a strong pipeline.”
Descartes (NASDAQ: DSGX) reported earnings per share of 31 cents for its fiscal 2023 third quarter ended Oct. 31. The result was 4 cents ahead of consensus and a penny better than the year-ago result.
Services revenue increased 13% year over year (y/y) to $110 million and gross margin was 100 basis points better at 77%. The company said foreign exchange rates, due to a strong U.S. dollar, negatively impacted revenue by $5 million.
“There’s still strong consumer demand,” Ryan said. “For North America, our customers have not seen a pullback in consumers’ willingness to spend money. Rather, they’ve indicated consumers are still flush with cash and willing to spend if the right good is available.”
Europe, however, has been another story as consumers have dialed down spending given higher energy costs, Ryan said.
Descartes raised its adjusted earnings before interest, taxes, depreciation and amortization target given recent outperformance.
Adjusted EBITDA in the quarter increased 13% y/y to $55 million, resulting in an adjusted EBITDA margin of 45%. The improvement occurred even as operating expenses were up 12% y/y given incremental costs associated with recent acquisitions and additional labor costs tied to various investments throughout the company.
Management guided to an adjusted EBITDA margin of 40% to 45% in its fiscal fourth quarter and throughout fiscal year 2024, which begins in February. The company’s prior target was 38% to 43%.
The company’s target to grow adjusted EBITDA by 10% to 15% each year remains in place.
“The pervasive tone in what we hear from our customers is caution,” Ryan said. “To be clear, it’s certainly not pessimism. It’s caution in running their businesses, in part driven by the lack of certainty in the supply chain.”
He noted higher interest rates and broad inflation are pressuring customers’ discretionary spend, but there is “still nervousness about the long lead times required to replenish inventory,” which is requiring companies to invest further in supply chain solutions.
Descartes is seeing strong demand for its Global Trade Intelligence services given turmoil in the geopolitical landscape. The service advises clients on tariffs and duties and provides sanctioned party screening to ensure shipments and customer relationships are compliant with trade sanctions.
“It gets very complicated,” Ryan said. “These lists change every day, and there’s 140 countries that are making changes every day. And if you ship to someone you’re not allowed to ship to, you can get an awful big fine. And ‘I didn’t know’ is not a good answer for the government. We’re the leading solution provider in the world to provide that database because we have more countries than anybody else and we have more accurate data than anyone else.”
Descartes generated $51 million in operating cash flow during the quarter, ending the period with $237 million in cash and no debt, up from a cash balance of $189 million at the end of the July quarter.
“Lead times in the supply chain remain challenging to predict, which makes our value proposition for visibility that much more important,” Ryan said.
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