Descartes Systems Group Inc.

Descartes Systems Group Inc. (TSX: DSG), is a technology company focused on logistics and supply chain management business processes. Its solutions are cloud-based and are focused on the productivity, performance, and security of logistics-intensive businesses. 

Key highlights

• Proven financial success: Despite the upheaval caused by Covid-19, the Company kept up its momentum and delivered a strong performance sales and net profits. The Company is always working closely with customers, and as a result, its presence is growing in tandem with volume, which is commendable. Revenue and net income increased by 18% and 67%, respectively, in the first quarter of 2022. It should also be emphasized that the firm has not only demonstrated continuity, but has also improved over time, achieving a solid CAGR.

• Industry beating margins: The management’s solid determination helped the group in leaping the industry median margins on many fronts in Q1 2022, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this.

• Rising cash flow from operations: Higher revenues mainly due to growth in services revenues from new and existing customers helped the company to clock healthy growth in its cash flow from operations in Q1 2022, which stood at USD 40.9 million against USD 27.5 million in the previous corresponding period.

Source: Company

• Strong balance sheet: The company is having a strong balance sheet with no debt and sufficient liquidity to support its business objectives in the fiscal year. As on April 30, 2021, the group reported USD 138.1 million of cash balance and line of credit worth USD 350.0 million with the potential to upsize to USD 500.0 million. We anticipate that as the firm generates additional cash flows, this stated liquidity would improve, allowing the group to focus on its core skill of mergers and acquisitions.

Financial overview of Q1 2022 (In Thousands of USD)

Source: Company

• The company reported total revenue at USD 98.8 million in Q1 2022, against USD 83.7 million in the previous corresponding period. The rise was primarily due to growth in services revenues from new and existing customers which contributed higher revenue.
• Income from operations in the reported quarter stood at USD 23.4 million, against USD 15.7 million in Q1 2021, primarily due to high revenues, partially offset by higher operating expenses.
• The company posted higher net income of USD 18.4 million, increased 67.3% in Q1 2022, against USD 11.0 million in the previous corresponding period.

Risk associated in investment

The company is exposed to various risks such as system or network failures, information security breaches or other cybersecurity threats in connection with the services and products.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock recommendation

The company is continuously innovating to help its customers prepare for tomorrow’s challenges and is adding more solutions and trading partners to its network. As a result, the customers have trusted them with more of their business, again resulting in healthy set of numbers in Q1 2022. The group's recent acquisitions have also started paying off in terms of revenues and going forward this would improve the group's financial position. In addition, the group hold a strong balance sheet with no debt and sufficient liquidity to support the core competency of the group that is mergers and acquisitions, which would open the fresh gateways for the future cash flows. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 78.03 as on June 07, 2021. We have considered Kinaxis Inc, Enghouse Systems Ltd, Evertz Technologies Ltd, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on June 07, 2021). Analysis by Kalkine Group

Sierra Wireless Inc

Sierra Wireless Inc (TSX: SW) is a leading wireless communication equipment designer and Device-To-Cloud IoT solutions provider. The company's product and services portfolio contain high-speed cellular modules and services such as connectivity services, cloud platforms, etc.

Key Highlights

• Introduces 5G Router Portfolio: Recently, the company launched the next evolution in market leading routers with its new XR Series of multi-network 5G routers. World's Most Advanced 5G Router Portfolio would enable the customers to leverage the higher data speeds and lower latency of 5G, required for real-time video streaming and voice communications in mission-critical environments and high-performance business-critical 5G applications.
  

• Launched IOT solution for asset tracking: Acculink Cargo, a new managed IoT solution for tracking the location and condition of high-value and sensitive assets, was recently launched by the company. Asset tracking and other supply chain visibility solutions are a large and rapidly growing market, with a CAGR of 13.45% expected to grow from USD 17.14 billion in 2020 to USD 34.82 billion in 2026.
  

• Revenue guidance for Q2 2021: Due to continued strong demand and the investment in working capital to combat the industry wide tightness in supply, the company expect its revenue for the second quarter of 2021 to be in the range of USD 118 million to USD 122 million. We believe these guided numbers are excellent, keeping in view the current economic conditions.
  

• Secured hardware orders and recurring revenue: In Q2 2021, the business obtained hardware orders and recurring revenue that were roughly 20% higher than the mid-point of its Q2 2021 revenue projection, owing to robust demand for goods and services. However, the group is facing a tight global supply chain environment that is constraining our ability to source all the necessary components and fully deliver to this level of demand.

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported revenue of USD 108.0 million, compared to USD 103.0 million in the previous corresponding period. The increase was primarily attributable to continued growth in Connectivity, Software, and Services revenue, partially offset by reduced hardware revenue.
• The gross margin improved slightly and stood at 34.9% in Q1 2021 as compared to 33.9% in pcp. The modest increase was driven by product and customer mix changes in its Embedded Broadband and IoT Solutions segment.
• The company posted a lower loss from operations at USD 23.0 million in the reported quarter compared to the loss of USD 27.8 million in pcp. The lower operating loss was primarily due to controlled operational expenses, although the admin expenses increased to USD 16.0 million V/s USD 11.7 million.
• The company reported higher net loss of USD 29.8 million, against a loss of USD 22.6 million in Q1 2020, primarily due to foreign exchange loss and loss from discontinued operations.
  

Risks associated with investment

The current economic downturn impacted the Company's operating segments adversely through lower automotive revenue and weak demand for its hardware products. Any further shutdown could result in material and adverse effects on the Company's ability to conduct business. Other risks such as currency fluctuations, technology risks, regulatory risks are also present.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

In Q1 2021, the company did well by managing costs despite a tight supply chain environment and lowered its operating expenses, as a result it brought down its Operating loss compared to the previous corresponding period. The management expects its revenue to be around USD 122.0 million as they witness strong demand for its products and services in Q2 2021. They also secured hardware orders and recurring revenue of approximately 20% above the mid-point of its Q2 2021 revenue guidance. We believe these guided numbers are exceptional, keeping in view the current economic conditions. The group holds healthy liquidity with almost debt free books. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 20.11 on June 07, 2021. We have considered NETGEAR Inc, TESSCO Technologies Inc, Evertz Technologies Ltd, etc. as the peer group for comparison.

One-Year Price Chart (as on June 07, 2021). Source: Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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