3 SAAS companies present tech opportunities

3 SAAS companies present tech opportunities

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Software-as-a-service is a tech growth area. Fluctuations in this sector may present investors tech opportunities.

Since summer of 2013 until its recent March, 17th high of $15, Descartes Systems Group (DSGX) stock appreciated 30%. In the last three weeks, however, market participants have been taking profits. This is despite Descartes having a moat in the software-as-a-service (“SaaS”) at the supply chain level. If economic conditions are worsening, Descartes would not be immune to the decline. Yet since Descartes was last covered as a stock to buy, it made two acquisitions and ended its fiscal year with higher revenues. While heightening risk, which is incidental to any acquisition, Descartes’s pullback in share price. This creates a buying opportunity for investors.

What is Descartes Systems

Descartes is a leader in global logistics solutions. It lets companies automate and control supply chain activities in real-time.  RiMMS (“resources in motion management solution”) system manages inventory that is in transit. Supply chain activities from transport, routing and scheduling, inventory, and global trade and compliance are all manageable through this system. Descartes has over 10,000 customers, over $150 million in annual revenue, 800 employees, and spends heavily on R&D. Last year, it spent around 17% of revenue on R&D. Its logistics community is global, and processes 4.5 billion messages a year across 160 countries. Its customers include (to name just a few) Coca-Cola (KO), American Airlines Group (AAL), and Home Depot (HD).

Company updates

Descartes made two small acquisitions in the last six months. This is relatively smaller than the $32.4 million the company spent on KSD Software Norway AS (“KSD”), which Descartes acquired last year in May. For the fiscal year, Descartes recognized $12.3 million in revenue from KSD, along with $1.7 million in a net loss.

Descartes paid $8.2 million in December 2013 for Impatex Freight Software Ltd. Impatex is a UK-based firm that provides electronic customs filing and freight forwarding solutions. It also acquired Compudata, a Swiss company and a B2B supply chain integration and e-invoicing solutions provider. Compudata cost $18.1 million.

Financial analysis

In Q4, service revenue was $36.6 million, accounting for 91% of service revenue. Gross margins were 68%, consistent with the previous quarter (56% in fiscal Q3/2014) and year (68% in fiscal Q4/2014). Days sales outstanding (DSO) for the year improved to 46, down from 55 last year.

For the fiscal year ended January 31, 2014, total revenue at Descartes rose to $151.3 million, up from $126.9 million in 2013. Operating expenses rose 24% while charges doubled, hampering earnings. Descartes earned $9.6 million ($0.15 per share) compared to $16 million ($0.26 per share) in 2013.

Descartes table 01

 

 

 

 

 

 

 

 

 

 

 

Costs and cash

Acquisition-related costs of Infodis, Exentra, and IES contributed to higher operating expenses last year. Impatex and Compudata were smaller contributors to the cost increase. Investors could see further upward cost adjustments from the recent acquisitions reflected in the next few quarters. Restructuring plans and synergies should limit cost increases this year.

Retirement awards to the former Chairman and CEO produced the sharp increase in “other charges.” Restructuring and acquisition-related costs also contributed to the charges.

Cash and cash equivalents rose to $62.7 million compared to $37.6 million the previous year. Descartes had no debt in 2013, but borrowed 46.3 million in 2014 to finance the acquisition of Impatex, Compudata, and KSD. Its total debt obligation is $52 million.

Goodwill also increased, due mostly to the Impatex, Compudata, and KSD acquisitions.

Descartes table 02

Earnings forecast

Descartes plans to grow adjusted EBITDA per share by 19% between fiscal 2011 and 2015:

descartes table 03

Opportunity

Investors could start a long position in Descartes some time after Q1 results. The current quarter (Q1) is the weakest for Descartes due to seasonality and the cyclical nature of shipment volumes. Shares in fact sold off sharply in recent trading sessions. This breaks the upward trend that began in September 2013. At a close of $13.67 at the time of writing, shares are trading at a Price / Operating Cash Flow of 20.66 based on 64.37 million shares outstanding. The forward P/E is 21 if Descartes earns an adjusted $0.65 per share in fiscal 2015.

Seasonal shipment volumes are strongest in the third quarter. Services revenue is expected to be over 90% of revenue. Since services revenue has the highest profit margin, it will add meaningfully to profits. This is supported by the company migrating customers from legacy-based products to services-based architecture. Increased uptake of the Global Logistics Network (GLN) will also sustain high services revenue.

Risks:

A weaker Canadian dollar will lower revenue. A slowdown in the United States will impact results, since 51% of total revenue came from this region last fiscal year.  General economic weaknesses would be another risk for Descartes shareholders. Product demand is dependent upon customer capital and operating expenditures.

Alternative Investments

Oracle (ORCL) and SAP AG (SAP) are the closest alternative investments to Descartes Systems. Descartes is far smaller by market cap.

In being a smaller player and faster growing company, Descartes outperformed SAP and Oracle.

Bottom line

Other than seasonal weakness in its business, Descartes is likely to continue delivering a compounded annual growth rate in EBITDA of 27%. Its acquisitions will be accretive to results to earnings. A pullback in Descartes could accelerate as investors sell off stocks, creating an entry point for investors.

Written by Chris Lau

Use the list of stocks in this article to start your own research on SaaS companies: 

1. Descartes Systems Group Inc. (DSGX, Earnings, Analysts, Financials): Provides federated network and logistics technology solutions. Market cap at $870.43M, most recent closing price at $13.88.

 

2. Oracle Corporation (ORCL, Earnings, Analysts, Financials): Develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide. Market cap at $172.96B, most recent closing price at $38.14.

 

3. SAP AG (SAP, Earnings, Analysts, Financials): Provides business software primarily in Europe, the Middle East, Africa, the Americas, and the Asia Pacific Japan region. Market cap at $94.84B, most recent closing price at $79.50.

 

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