DSGX — Q2 2026 Financial Report Analysis

Descartes Systems Group grew revenue 12% to $201.1 million in the three months ended July 31, 2026, its fiscal second quarter of 2027. Diluted earnings per share rose 33% to $0.57. The revenue growth is mostly the company's own: about $16.9 million of the $21.3 million increase came from new and existing customers, chiefly its global trade intelligence and fleet performance management products. The profit growth is less clean than it looks. A year ago, results carried a $5.1 million charge from a cost-cutting program and $2.4 million more acquisition amortization. Strip out both and operating profit grew about 15%, close to revenue growth plus a modest margin gain.

Descartes, based in Waterloo, Ontario, sells logistics software. Shippers, freight forwarders, carriers and customs brokers use its Global Logistics Network to book and track shipments, file customs paperwork, plan delivery routes, and look up trade and tariff data. About 94% of revenue is "services revenue": recurring subscription and per-transaction fees, not one-time license sales. This is our first report on the company.

Results at a glance

For the first half of fiscal 2027, revenue was $394.7 million (+13%), net income $98.5 million (+33%) and diluted EPS $1.13 (up from $0.85).

Takeaway: This was a steady quarter, not a breakout one. Underlying operating profit grew about 15% on 12% revenue growth. The headline +36% operating income mostly reflects last year's restructuring charge and fading amortization. The bigger story is capital allocation. With $401 million of cash, no debt and $81 million of quarterly operating cash flow, Descartes spent roughly $219 million on TAI and Extensiv right after the quarter. Those deals, more than the quarter itself, will shape the next few reports.

Where the growth came from

Descartes says how much of each period's revenue increase came from acquisitions, so the rest can be treated as organic growth (growth the company would have had without buying anything). For this quarter:

The MD&A credits the customer-driven growth mainly to the global trade intelligence products (trade data, tariff and duty rates, denied-party screening) and fleet performance management. Tariff and sanctions changes make it harder for shippers to stay compliant, and these products sell into that problem. The filing does not break out how much of the growth came from currency movements, so the ~9.4% figure may include some FX.

The growth is concentrated in one region:

In the US, new and existing customers added $16.3 million. In EMEA, customer-driven growth added only $0.2 million, so Europe was essentially flat. The US now makes up about 71% of revenue, up from about 68% a year ago.

The rest of revenue moved little. Professional services and hardware revenue slipped to $12.4 million from $12.8 million, and license revenue was $0.1 million. Gross margin improved by a point to 77.9%. Services gross margin held at 80%, and professional services margin rose to 44% from 38% as lower-margin hardware sales shrank.

What the headline numbers hide

• The jump in operating income is partly a comparison effect. Last year's quarter included $5.1 million of "other charges," mostly from the fiscal 2026 restructuring plan (job cuts and office closures). This year that line was $1.3 million. Amortization of acquired intangibles also fell to $18.1 million from $20.5 million, because some older acquisition assets are now fully written off. Add both back and operating profit was about $84.8 million versus $73.8 million: +15%, not +36%.
• The GAAP vs adjusted gap is narrowing, but not because stock compensation is shrinking. Adjusted EBITDA ($94.4M) is $44.4 million above net income. It adds back $18.1M of amortization, $18.6M of tax, $8.0M of stock-based compensation and related taxes, $1.6M of depreciation, $1.2M of other charges and $0.2M of interest expense, and subtracts $3.3M of investment income. Stock compensation rose to $8.0 million from $4.9 million, which management attributes to fiscal 2026 and 2027 grants. It is a real employee cost, and it grew about five times as fast as revenue.
• Tax took back part of the gain. Pre-tax income rose 38.5%, but the effective tax rate rose to 27.0% from 23.2% because of fewer permanent deductions and lower tax credits than in fiscal 2026. Net income therefore grew 31.6%. Current (cash) tax expense more than tripled to $18.5 million, which MD&A attributes to "certain restrictions on available tax attributes."
• Interest income helped a little. Investment income on the cash pile doubled to $3.3 million from $1.6 million, about 2 cents a share before tax, out of the 14-cent EPS increase. Buybacks did almost nothing for EPS this quarter: the diluted share count fell only 0.6%, to 87.1 million. Descartes did repurchase 346,800 shares for $24.3 million.
• Cash conversion is strong and not flattered by working capital. Operating cash flow of $81.3 million was 1.6x net income and 86% of adjusted EBITDA. Capital spending was $2.0 million, so free cash flow (operating cash flow minus capex) was about $79 million. Trade receivables were $63.5 million at July 31, slightly below January's $64.8 million even as revenue grew. Deferred revenue (cash billed before the service is delivered) rose to $123.9 million from $117.9 million. One part of last year's comparison is weaker: restructuring payments held down cash flow in Q2 FY26, so some of the 28% increase is a low base.
• One balance-sheet line looks alarming but isn't. Accrued liabilities jumped to $109.5 million from $73.9 million. Most of that is a $27.7 million accrual for share repurchases committed under an automatic purchase plan for the third quarter, not an operating cost.

The cash and the deals

Descartes ended the quarter with $401.1 million in cash, no borrowings and an untouched $350 million credit line. Right after the quarter it spent much of that:

• TAI (acquired August 21, 2026, ~$99.3M): transportation management software for freight brokers.
• Extensiv (acquired September 1, 2026, ~$119.9M): warehouse management and fulfillment software for third-party logistics providers.

Together that is about $219 million, more than half of July's cash balance, and both deals were paid from cash on hand. During the quarter Descartes also bought Drivin (Latin American last-mile delivery software) for $29.5 million. Contingent "earn-out" payments of up to $48.1 million could become due on recent deals if revenue targets are met; $17.5 million is accrued so far.

This is how Descartes has always grown: it has completed eleven acquisitions since the start of fiscal 2025. Buying growth is not a problem in itself. It does mean future reported growth will mix bought revenue with earned revenue, and the split above is the number to keep watching.

Outlook

Descartes gives no revenue or EPS guidance. Instead it publishes a "baseline calibration," an estimate of recurring, contracted revenue minus recurring operating costs for the next quarter, before any new sales. As of September 1, 2026, it estimated Q3 FY27 baseline revenue of about $181.0 million and baseline operating expenses of about $111.5 million. That leaves a baseline calibration of about $69.5 million, or 38% of baseline revenue. This is a floor-style planning number, not a forecast. Q2's actual revenue of $201.1 million included new sales and non-recurring items that the baseline leaves out. Management also expects about $15.5 million of further stock-based compensation for the rest of fiscal 2027 from existing grants, and $37.5 million of amortization, before the two new acquisitions are added.

Our read: the recurring business is growing at a high-single-digit organic rate with stable 80% services gross margins and an adjusted EBITDA margin that has edged up from 45% to 47% over four quarters. Nothing in this filing suggests that trajectory is breaking. In particular, the tariff-driven demand for trade compliance data looks like a real driver, not a one-quarter bump. What to watch in the next two quarters:

1. Organic growth holding near 9% once TAI and Extensiv start adding revenue. The acquired contribution will be much larger from Q3, so the "new and existing customers" figure in MD&A is the one that matters.
2. Margin dilution from the new deals. Acquired businesses usually run below Descartes' ~47% adjusted EBITDA margin until costs are integrated. A dip in Q3–Q4 would be normal; a lasting one would not.
3. Europe. EMEA revenue was flat year on year this quarter. If that persists, the growth rests even more on the US.
4. Amortization stepping back up. Two deals worth ~$219 million will add new intangible assets to write off. That will push GAAP operating income below what adjusted EBITDA shows, reversing the tailwind that flattered this quarter's GAAP comparison.

Figures from Descartes' Q2 fiscal 2027 quarterly report (MD&A and unaudited financial statements, filed with the SEC on Form 6-K, Exhibit 99.1) and the accompanying September 10, 2026 earnings release. Descartes reports in US dollars under US GAAP. Adjusted EBITDA is a non-GAAP measure; the reconciliation is above.