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Descartes Systems Group (DSG) Stock | TSX: DSG.TO

Covered by Stratosphere

A Leader in Logistics Software

The Descartes Systems Group ("Descartes") provides a software solution that allows users in the shipping industry to communicate with one another. The core product is the Global Logistics Network, which is a transaction-driven platform. Descartes charges clients to send and receive messages, data, and documents on the GLN (the transactions). Customers typically contract for a monthly minimum over a multi-year period. The GLN platform allows for Descartes to upsell additional software modules as well, typically provided through a subscription-style software-as-a-service ("SaaS") model.

Stratosphere Score












Balance Sheet


Investment Thesis

  1. Descartes' marquee asset, the Global Logistics Network is a logistics communication software that has helped clients connect with each other in a supply chain to improve their logistics network and communicate seamlessly. This software has helped many businesses improve their network and increase efficiency.

  2. Descartes is a growth by acquisition company, completing 28 acquisitions in the last 7 years, integrating each company into the business model to either provide new services or complement pre-existing ones on the Global Logistics Network.

  3. The secular growth of the logistics industry will help Descartes provide more services to clients as businesses are continuing to see the importance of having a robust logistics network.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

The GLN Advantage

The Global Logistics Network ("GLN") is Descartes’s prized possession. The GLN helps to manage the data flow of commercial, logistics, customs, and product information all in one place, connecting thousands of businesses in over 160 countries.

Many logistics solutions today are clunky and manual, fragmented, and not well integrated. Manufacturers and suppliers are left to navigate these fragmented technologies on their own, which may not exactly meet their needs. Typically, this results in sub-par communication with other members along an organization's supply chain, leading to suboptimal results - costs are high, sourcing is not optimized, and selection processes are broken.

Descartes's GLN solves many of these issues. This competitive advantage of the GLN is also the competitive advantage that Descartes's users gain from using the platform. Descartes is a true single-source, comprehensive and well-integrated, and network-based provider that helps organizations manage their logistics from end to end.

The supply chain or a logistics network is only as strong as its weakest link. In other words, communication is paramount in logistics - if messages are not received, miscommunicated, delayed, and / or not aligned with another party in the network, the flow of movement stops and breaks the supply chain. There is then a ripple effect felt across the entire supply chain. Descartes is correct in saying that "the movement and sharing of data between parties involved in the logistics process is equally important to the physical movement of goods".

With a network-based, integrated end-to-end platform like GLN, manufacturers and suppliers can be confident that each step in place that manages the flow of goods is taken care of. These organizations connect with trading partners on an automated basis with standardized multi-business processes through the GLN. Logistics and supply chains are complex and fragile - Descartes ensures that no communication is ever lost nor are bottlenecks being created.

We believe the value in the network-based GLN establishes several competitive advantages for Descartes - network effects from increasing numbers of users on the platform (which helps Descartes constantly improve it for everybody), switching costs given the well-integrated, end-to-end nature of the platform (the alternatives are costly), and broad differentiation by providing a comprehensive solution to a highly complex process that is otherwise achieved by contracting with several providers to create a (suboptimal) process.

Descartes Global Logistics Network graphicSource: Descartes Investor Relations

Pricing Flexibility

Logistics networks and supply chains are highly complex, which also means that there are nuances to each organization's ways of managing logistics. With that, Descartes employs a flexible pricing model, offering subscriptions, transactional fees, or perpetual licenses for its services.

While many customers prefer Descartes's legacy license-based products, the uptake of the SaaS offerings at Descartes has been strong. Around 90% of revenues at Descartes are generated from services with the balance coming from license fees, professional services, and other revenue.

By maintaining a flexible structure, Descartes ensures that its remaining legacy customers are within reach. Had the company chosen to fully overhaul the pricing structure to subscription-only, it is possible these customers could have been lost to other providers. Instead, it gives Descartes a chance to transition them over to the SaaS model at a pace that makes sense for the customer.

We believe this is a pricing structure that embeds trust in Descartes and bodes well for the company's future as a business-friendly provider of logistics services.

The SaaS Model

Lastly, Descartes brings it home with all the benefits customers get when they get on the subscription model.

In the subscription model, customers have lower upfront costs and lower maintenance requirements as the platform is continuously updated by Descartes. Instead of focusing on the IT processes powering their logistics network, manufacturers and suppliers can rely on the updates made on the platform to ensure they are communicating effectively, moving goods efficiently, and meeting all compliance and regulatory requirements.

Additionally, capturing customers onto its subscription-based platform allows Descartes to cross-sell and upsell modules and applications that would have otherwise not existed on the license-based products. This is what Descartes is doing today, and gross churn is fairly low (between 4-6% as measured by annualized recurring revenue in one period vs. the same period the year prior as a historical average).

Opportunities Ahead

  • The logistics industry is expanding and growing increasingly complex while becoming more difficult to navigate. As e-commerce penetration rises and the prominence of it around the globe expands, logistics and supply chains will become only more complex. Descartes will be able to appeal to manufacturers and suppliers as this secular trend rages on.

  • Businesses are emulating Amazon by trying to rectify their own logistics networks to ensure a product can be transported from point A to point B in the most effective and quickest way possible, prioritizing efficiency and costs. E-commerce sites such as Amazon are able to flex their logistics power, having the ability to ship out and deliver packages within a matter of hours. This is due to the robust logistics network that Amazon has created to transport a product from a warehouse into a customer’s hands.

  • After being highly active over the past decade with acquisitions, Descartes's pipeline for new acquisition targets remains robust. The market is highly fragmented with many providers of niche logistics solutions and services. Descartes specifically seeks targets that: (1) are complementary technologies (2) have close adjacencies in logistics and (3) can be strategically integrated to bolster the GLN. This acquisition strategy ensures Descartes is consistently providing added value to new and existing customers.

DSG Acquisitions ChartSource: Descartes Investor Relations



What is a strength for Descartes is also a major vulnerability. A security breach, network failure, or any system downtime that compromises the GLN for any period of time could shatter global supply chains.

As we have seen throughout the pandemic, supply chains are highly vulnerable to any changes or downtime at any point within the logistics process. The web of interconnections between organizations around the world are essentially too complex to withstand a prolonged network or platform outage of any sort.

Any significant downtime of the system would likely affect a substantial portion of revenues.


The movement of goods is a cyclical business. More specifically, the freight and transportation markets are vulnerable to shifts in economic growth. If the economy slows, these markets tend to slow substantially.

During these periods, Descartes's transaction-based revenues would be severely impacted. The volume of shipments dropping would create headwinds for Descartes.

Regulatory Environment

The movement of goods also consumes tons of energy. Greenhouse gas emissions and climate change have been topics attracting tons of attention as of late.

Descartes would be affected by any new regulations, taxes, charges, or penalties imposed on customers by any new regulations. Additionally, Descartes may face headwinds and costly obstacles by navigating the compliance world, ensuring that every organization can use Descartes while complying with local regulations. The regulatory environment will likely get more complex over time, meaning this is a likely risk area that Descartes should work hard to anticipate well in advance and overcome.


Descartes relies on acquisitions for two main things: platform expansion and growth.

Employing a growth-by-acquisition model has several risks. For one, there is always a chance that opportunities have not been vetted correctly, resulting in poor integration or utter lack of strategic fit. Poor integrations could result in customer frustration, especially if highly anticipated services were brought on that did not work as effectively as expected.

Another major risk is Descartes's expertise. While the company has integrated many companies over the last decade, there is no guarantee that the company will know how to integrate the next acquisition. Additionally, if internal development slows, the overall expertise of management may stall, again impacting the ability to integrate targets.

Lastly, there is always the risk of overpaying for acquisition targets. If Descartes grossly overpays for assets, it may take years to recoup the expected return, if at all.

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