Descartes Systems Group

We are discontinuing analyst coverage of Descartes Systems.

We will discontinue analyst coverage of Descartes Systems on or about Sept. 11. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Our fair value estimate for Descartes is $94 per share, which implies a fiscal 2027 enterprise value/sales multiple of 10 times, an adjusted price/earnings multiple of 30 times, and a 2% free cash flow yield. We see revenue growth as largely normalized from a covid and global supply chain-fueled peak in fiscal 2022 that is then weighed down at least a little by ongoing military conflicts and an unsettled trade war. We model revenue growth at a more normal cadence in the low-double-digit percentage range annually for the next five years, driven by a growing customer base, organically growing usage of the GLN from existing customers, growth in software from additional seats, pricing, and continued execution of the company’s acquisition strategy. We expect the supply chain to remain global despite covid disruptions. Similarly, we see prolonged trade uncertainty as benefiting Descartes. Throughout our forecast, we see services revenue, which includes GLN transactional revenue as well as SaaS revenue, as the driving force of the company’s growth. Our forecast for non-GAAP EBITDA margin to increase by several hundred basis points by fiscal 2031 from 45% (actual) in fiscal 2026.

We assign a narrow moat rating to Descartes, driven by high customer switching costs and a network effect that has historically enabled the company to generate returns on invested capital in excess of its cost of capital. We believe excess returns will more likely than not continue for the next 10 years. Given the unknowns surrounding the impact AI will have on many software companies, we think it is inappropriate to assign a “near certainty” level of confidence to the return profile. We note the company is acquisitive and therefore has a sizable goodwill balance that depresses ROICs.

In our view, software switching costs are often driven by several factors. The more critical the function and the more touch points across an organization a software vendor has, the higher the switching costs. There is also the direct time and expense of implementing a new software package for the customer while maintaining the existing platform and retraining employees on a new system. Additionally, there is an operational risk associated with changing software vendors, including business process reengineering, data loss during the changeover, and overall project execution. A major implementation is likely to involve a system integrator and can take in excess of a year in bad cases. Lastly, lost productivity is likely to be an issue as customers move up the learning curve on the new system, along with the distraction caused by users involved in the function where the change is occurring.

Retention metrics typically help inform investors on both the presence and the durability of a moat. These come in two flavors: gross, which describes what percentage of the customer base remains customers after a given period, and net, which highlights what percentage of customer spending is retained by the software provider after a given period. We believe Descartes’ customer retention is approximately 95%, which we consider to be excellent and provides quantitative evidence for a narrow moat. It seems unlikely that Descartes’ customers—entities directly involved in moving goods—will be inclined to switch software platforms that help them move goods more efficiently. Further, we think the large network, combined with the various related software modules, represents a compelling logistics solution for users, making the integrated platform that much stickier.

Descartes provides the largest neutral network for connecting manufacturers, suppliers, shippers, logistics providers, and retailers. The network connects users and their back-end software systems to allow for direct communication of important shipping information, such as container contents, departure time, shipping nodes along the way, and scheduled delivery time. Different transportation modes (truck, train, air, sea) have different needs and must comply with regulations that can vary widely by country. Further, as far as users are concerned, they must connect to one platform, rather than individually to each trading partner, a la early electronic data interchange connections.

We believe this network attracts and retains users because of both its size and its neutrality. Descartes’ Global Logistics Network boasts thousands of customers and approximately 200,000 connected parties in more than 160 countries that send about 20 billion transactions over the network annually. The fact that so many users are already on the GLN helps attract new users who know their shipping partners also use it.

Having alternate suppliers and shippers is critical to manufacturers, as inventory management tends to be just-in-time and manufacturing lean. A broad and connected network makes finding second sources or alternate transportation routes essential to avoid disruption. The breadth of Descartes’ network was on display during the coronavirus pandemic, which idled manufacturing facilities in China and forced the supply chain to be both creative and flexible. The same can be said for the tariff and trade changes during 2025. We also think neutrality is important for connected parties. This ensures that larger shippers are not favored over smaller shippers and that no party is forced to use a competitor’s software system. It also gives suppliers and manufacturers confidence that they are getting the best possible service at pricing they are most comfortable with.

Shipping needs have evolved as the supply chain has become global, and customer expectations have been reset by the Amazon experience. A modern approach to shipping requires visibility, intelligence, and advanced capabilities. Descartes delivers in this regard, with a wide variety of add-on software modules to address specific shipping challenges. Beyond the GLN, the company’s software includes customs and regulatory compliance, transportation management, routing, mobile and telematics, and broker and forwarder enterprise systems. We think the most critical software modules involve customs, brokers and forwarders, and routing. Taken together, we believe these three areas account for the vast majority of software-related revenue beyond the core GLN. Among its software offerings, the company is best positioned in customs and regulatory compliance, where it is a leader, in our view.

We believe Descartes’ software solutions address real-world challenges that users on the network face. For example, the trend toward unilateral trade agreements between the United States and other countries increases complexity for companies worldwide from a customs and tax perspective. An easy way to ensure or maintain compliance is through the GLN and its customs software, so we see customers relying more on Descartes. Another popular module, routing, mobile, and telematics, helps retailers with delivery fleets improve truck usage and better plan routes. Descartes has helped customers such as Home Depot save more than $10 million annually just on its delivery planning and execution. Further, the solution allows Home Depot’s customers to schedule specific delivery windows by date and time, so everyone is better off.

The market for supply chain software is highly fragmented. The major enterprise resource planning providers, such as SAP, Oracle, and Infor, have supply chain modules that are regularly used, but by definition, none of these include neural networks. While we do not view Descartes as a clear leader in any of the niche software categories it serves, we think it is generally considered among several leaders, at least in customs and transportation management, and is a trusted partner providing software solutions that solve a problem that the ERP systems might not, or may be unnecessarily large for the needs of smaller companies. The company is one of the largest independent supply chain management software vendors. Lastly, SAP, the largest supply chain software provider, has partnered with Descartes for years to help offer a neutral communication network and the widest possible network of trading partners to its suppliers.

Descartes operates the largest neutral shipping network, connecting parties across air, land, and sea transportation modes.

The company enjoys a growing portfolio of software solutions that address challenges specific to the shipping, supply chain, and logistics industries.

Increasing globalization of the supply chain drives increasing complexity, especially with unusual events like the covid lockdowns and tariff wars, which benefits Descartes.

Descartes’ acquisition model makes organic performance impossible to parse out and makes ROICs look worse. Acquisitions may also increase costs, distract management with integration issues, and increase the risk of overpayment.

Instead of more traditional guidance, the company offers “baseline calibration,” which is a view of what revenue and adjusted EBITDA will be in the quarter if no additional customers are signed and no acquisitions are made.

Ultimately, Descartes is competing with the major ERP vendors, which have greater reach and more resources.