E2open Parent Holdings, Inc. (NYSE:ETWO) Q3 2023 Earnings Call Transcript

E2open Parent Holdings, Inc. (NYSE:ETWO) Q3 2023 Earnings Call Transcript January 9, 2023

E2open Parent Holdings, Inc. misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.07.

Operator: Greetings. Welcome to the E2open Earnings Call for Fiscal Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Adam Rogers. You may begin.

Adam Rogers: Good afternoon, everyone. At this time, I’d like to welcome you all to the e2open fiscal third quarter 2023 earnings conference call. I am Adam Rogers, Head of Investor Relations here at e2open. Today’s call will include recorded comments from our Chief Executive Officer, Michael Farlekas; followed by our Chief Financial Officer, Marje Armstrong. And then, we’ll open the call for a live Q&A session. A replay of this call will be available on our website. Information to access the replay is listed in today’s press release, which is available at e2open.com in the Investor Relations section. Before we begin, I’d like to remind everyone that during today’s call, we will be making forward-looking statements regarding future events and financial performance, including guidance for our fiscal fourth quarter and full fiscal year 2023.

These forward-looking statements are subject to known and unknown risks and uncertainties. E2open cautions that these statements are not guarantees of future performance. We encourage you to review our most recent reports, including our 10-Q, or any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. And finally, we are not obligating ourselves to revise our results or these forward-looking statements in light of new information or future events. Also during today’s call, we will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are included in today’s earnings press release, which can be viewed and downloaded from our Investor Relations website.

And with that, we’ll begin by turning the call over to our CEO, Michael Farlekas.

Software

Software

Michael Farlekas: Thank you, Adam, and thanks to everyone for joining our fiscal third quarter earnings call. We had a strong third quarter against the continued backdrop of a challenging macro environment. We exceeded our guidance for subscription revenue, our primary focus, while expanding profitability and free cash flow. We look forward to sharing our results with you and providing an update about our business. During the call, I’ll discuss our third quarter highlights, how our clients are using our network and platform and an update on the FY23 strategic investment areas we discussed previously. Marje will cover the third quarter financial results in more detail. And lastly, we will open up the call for Q&A. Let’s begin with the third quarter.

We had a strong quarter. We exceeded our subscription revenue guidance, generating a record $135 million in subscription revenue, which represents 82% of our total revenue. We continue our track record of being highly profitable, delivering record adjusted EBITDA of over $56 million. This translates to a 34% EBITDA margin. The organic growth rate of subscription revenue, our primary focus, was over 10% for Q3 on a constant currency basis. In the nearly two years as a public company, we have consistently grown subscription and total revenue while maintaining very strong profitability. Our consistent subscription revenue growth in the double digits for the last six quarters is a result of our breadth of product offerings, the diversity of markets from an industry and geographic perspective and the value our innovations unlock for our clients who leverage our mission-critical applications.

Stated more simply, we have multiple ways of winning. Let me provide you with some examples of what I mean by multiple ways to win, illustrated by how our clients are using the platform and our network. We recently signed an expansive contract with global retail leader, HUGO BOSS. The agreement covers a range of our solutions from supplier collaboration to logistics, providing end-to-end supply chain visibility and control. Specifically, HUGO BOSS will leverage our network and applications to optimize and manage internal and outsourced manufacturing. The solution enables collaborative capacity and forecast visibility, a robust procure-to-pay solution and agile transformation management capabilities. This project will give them full visibility and significant reduced cycle times, ensuring exceptional on-time delivery, which are the key performance indicators for any fashion company.

It’s a significant new logo win and brought to us specifically because of the marketing investment we initiated earlier this year. Our network and product breadth were the primary factors in winning this large multiyear contract. On the other end of the industry spectrum, we also signed a contract that includes multiple solutions for a global agribusiness innovator. That contract, along with HUGO BOSS, helps demonstrate that our end-to-end supply chain platform works well across a wide range of industries. Like all quarters, Q3 brought many go-lives for new and existing clients, with a few I’d like to highlight. We recently went live with the first phase of Amazon Kuiper’s satellite project, which will enable high-speed internet access to unserved and underserved parts of the world.

We have been working with Kuiper for the past year to help them build their supply chain focused on manufacturing, collaboration and planning. Cloud network leader, Extreme Networks, went live with e2open’s Partner Performance Incentives application, paying to their distributors over $66 million using our application within the first week of go-live. We don’t always discuss our channel business on these calls, but our solutions are value-add to the entire network, helping facilitate payments and rebates while offering greater pricing visibility. An international mining and metals company is using e2open for global trade management. They now have a single platform for global regulation, a centralized product classification repository, automatic export and import controls on all shipments and more with eyes towards future logistics capabilities.

One of the world’s largest consumer goods companies went live on e2open and Maersk’s NeoNav platform, a collaborative next-generation solution that offers complete logistics visibility, control and decision-making through the integration of all trading partners and data in one closed-loop system. The system provides predictive visibility and traceability throughout the supply chain in real time. This project delivers on multiple strategic objectives for the Company, a single operational process, a control of inventory, both upstream and downstream, reduce costs through purchase order collaboration, and increase customer service levels. In addition to new logo wins and expanding client opportunities, network innovation is also a strategic priority for us.

In November, we introduced e2open’s Carrier Marketplace as part of e2open’s broader strategy to expand the network ecosystem. The Carrier Marketplace offers carrier partners and shippers powerful new capabilities, including access to more data that allows both, carriers and shippers to make better proactive decisions. Over 8,000 carriers leverage this network today, and we believe our new marketplace will help unlock more value for the entire ecosystem. Now, I’d like to update you on our progress against the stated strategic investment areas we laid out at the beginning of the year: investing in sales and marketing; increasing brand awareness; and our work with strategic partners and our initiative to build systems integrator ecosystems. We’ve seen good progress in our sales and marketing and brand investments.

As evidenced in top-of-funnel pipeline growth since initiating these investments, and as noted earlier, opportunities specifically generated by this investment that are now flowing through as new client wins. Our brand awareness metrics have dramatically improved as measured by share of voice where we are now consistently number 1 or number 2 in share of voice for our cohorts. Even though our investments in this area have been relatively modest, we’ve seen great success. On the strategic partnership front, this work continues with both, our strategic partners and building our integrator ecosystem. This is long-term work that does not happen overnight. That said, we are making solid progress in both areas and are hitting our internal marks. Both initiatives will have the effect of decoupling our services growth rate from our subscription growth rate, with our primary focus on growing subscription revenue.

By enabling the SIs such as our partners, Accenture and KPMG to build their own practice and business on our platform, we’re unlocking the extraordinary influencing capacity these global partners bring to our business. This means that services will continue to decouple from subscriptions and be a shorter-term drag on overall growth by design to support long-term subscription revenue growth. Finally, I’d like to mention a few other corporate highlights. We continue to build on our ESG initiatives. E2open released its second annual environmental, social and governance report in the third quarter. Our software can have an enormous effect by reducing the environmental impact of our clients as they produce transport and distribute their products.

And to this end, ESG is part of our road map development. As a company, e2open held an enterprise-wide employee giving campaign supporting Water For People. Water For People facilitates the development of clean water, improve sanitation and health and hygiene in 9 countries across Latin America, Africa and India. We ran this campaign through the end of 2022, and e2open provided matching donations to this amazing organization. Lastly, we were named the top enterprise SaaS solution of the year in 2022 Best in Biz Awards, along with others for most innovative SaaS solutions. E2open remains focused on our clients. We have multiple ways to win. And despite the macro environment, we continue to deliver consistent subscription revenue growth while being highly profitable.

Our performance in Q3 and our outlook for the year are evidence of our focus on profitable growth and disciplined operations. This focus allows us to maintain our EBITDA and free cash flow targets even while our total revenue expectations for the year have come down due to FX, economic and business reasons that Marje will discuss in more detail. We delivered adjusted EBITDA margins of over 30% as reported for the last seven quarters. E2open is a reliable growth company that generates high margins and significant free cash flow. We are a mission-critical software company with durable revenue, consistent growth, long-tenured clients and are also highly profitable. We are laying the foundation to become the world’s preeminent supply chain software company.

We have work to do, but then realize the opportunity as we are clear on the mission and our strategic path forward. Lastly, I’d like to thank our nearly 4,000 team members for their continued work and dedication to excellence for our clients, our communities and our company. Marje will now review our financial performance in greater detail. Marje?

See also 20 Biggest Employers in the World and 10 Most Advanced Countries in Dentistry.

Marje Armstrong: Thank you, Michael, and good afternoon, everyone. I hope everyone had a wonderful holiday season and a fantastic start to the New Year. First, I wanted to thank the broader finance teams at e2open. Your efforts to get us ready for earnings working through the holidays are much appreciated. I’m incredibly proud of the stellar team around me, and I’m looking forward to all that we can accomplish together in 2023. As Michael mentioned, we had another strong quarter, and we’re excited to share those results with you today. I will begin by reviewing our fiscal third quarter results. I will then briefly touch on our progress integrating our recent acquisitions and then finish with an update to our guidance. Thereafter, Michael and I will open the call for your questions.

As a quick note, I will talk about our results on a non-GAAP basis. We show a reconciliation to GAAP measures in the press release, which is available in the Investor Relations section of our website at e2open.com. In the fiscal third quarter of €˜23, we reported subscription revenue of $134.9 million, reflecting an organic revenue growth rate of 8.0% on a pro forma basis or 10.2% on a constant currency basis when adjusting for the negative $2.7 million year-over-year impact from foreign exchange fluctuations. This was above the high end of our guidance range of $131 million to $134 million. In the first nine months of fiscal €˜23, subscription organic revenue grew 11.0% on a pro forma constant currency basis. Delivering the consistent and predictable subscription revenue stream remains our core focus and is the foundation of our durable and highly profitable business.

Professional services and other revenue were $30 million, reflecting an organic growth rate of negative 9.2% on a pro forma basis or negative 6.6% on a constant currency basis when adjusting for a negative $900,000 year-over-year impact from foreign exchange fluctuations. We have a stated strategy to focus on durable high-margin subscription revenue over services revenue. In addition, as Michael mentioned and we have also discussed on our previous earnings call, we are strategically shifting our services revenues to new partnerships with system integrators as part of the planned expansion of our channel ecosystem in order to aid our future subscription revenue growth. However, our services revenue is underperforming against our expectations, while our services gross margins improved from Q2.

We are focused on addressing two main key areas to turn services revenues back to growth. First, we mentioned last quarter that Logistyx, a business we acquired earlier this fiscal year, has been a drag on the services revenues due to free service hours as we transition certain clients to our cloud platform. We continue to address this issue and expect the trend to improve as we move into fiscal 2024. Second, there are some pockets of unmet demand as we ramp trained employees and contractors to be fully billable. We’re working to adjust the supply and demand balance of our team to better anticipate client needs by product, so we can more closely match the demand we see with the supply we have. Aside from these two items, there are also macro impacts beyond our control as select customers, especially in the technology space, are temporarily slowing or pausing larger transformation projects.

We expect those impacts to normalize and the projects to be picked up again as the macro environment stabilizes. We expect our services revenues to return to being additive to our top line growth profile as we work through the near-term issues over the next couple of quarters. We reported total revenue in the fiscal third quarter of $164.9 million, reflecting the total organic revenue year-over-year growth rate of 4.4% on a pro forma basis or 6.7% on a constant currency basis when adjusting for a negative $3.6 million year-over-year impact from foreign exchange fluctuations. In the first nine months of fiscal €˜23, total organic revenue grew 8.9% on a pro forma constant currency basis. Our gross profit was $113.6 million in the fiscal third quarter, reflecting a 4.9% increase on a pro forma basis or 6.1% increase on a constant currency basis.

Gross margin was 68.9% for the third quarter of fiscal €˜23 compared to 68.6% in the comparable period in fiscal €˜22 or 68.2% on a constant currency basis. I will now walk you through the supplemental slides we prepared to help bridge the year-over-year impacts to our gross margin. These slides are also posted to the Investor Relations section of e2open.com. As you can see, the first bar on the slide represents FX, which had an approximate $1 million negative year-over-year impact to our gross margin. The second bar shows a strategic system integrator spend impact to gross margin, which was $2 million this quarter, but was not present in the year-ago period. As mentioned earlier, we’re building a global systems integrators ecosystem and have been investing in training staff and developing go-to-market capabilities with organizations such as KPMG and Accenture.

This is part of the previously disclosed $20 million investment spend for fiscal year €˜23. Net organic margin growth was a $7 million positive impact to our gross margin, primarily driven by higher subscription revenue. Adjusted EBITDA was $56.2 million compared to $46.0 million in the prior third quarter, an increase of 22.1%. Adjusted EBITDA margin was 34.1% or 32.6% on a constant currency basis for the third quarter of fiscal €˜23 as compared to EBITDA margin of 29.1% during Q3 of fiscal €˜22 on a pro forma basis. The next slide details the items impacting our third quarter fiscal €˜23 EBITDA when compared to the year-ago period. FX was an approximately $1 million year-over-year benefit to our EBITDA line. As discussed during our previous earnings call, we have natural cost hedges to our largest top line currency exposures, which are the euro and the pound, along with additional costs in other currencies.

The second bar on this slide, investment spend, refers to the previously disclosed $20 million fiscal year €˜23 investment in system integrator ecosystem, marketing and internal support for investment spend, which totaled $6 million in the third quarter. Similar to our second quarter, approximately $2 million of the $6 million investment spend relates to the system integrators, and therefore, sits within our gross margin line. The balance of $4 million is part of OpEx and only impacts EBITDA. Net organic margin growth was $9 million positive impact to our adjusted EBITDA, primarily driven by gross margin improvement, coupled with various OpEx cost saving initiatives. Net income for the third quarter of fiscal 2023 was $5.5 million and adjusted earnings per share was $0.06 on approximately 341.4 million adjusted basic shares outstanding.

Now on to cash flow. I want to spend some time on this topic as generating compounding free cash flow growth is a core focus for us. As a supplement to the GAAP cash flow view, we have been providing an adjusted unlevered free cash flow view that starts with adjusted EBITDA and subtracts normalized CapEx, that is CapEx, excluding onetime M&A spend. Adjusted unlevered free cash flow for that definition was $50.4 million for the third quarter and $132.4 million for the first nine months of fiscal 2023. Going forward, in order to provide a clearer view of our normalized cash flow, we will start with GAAP operating cash flow that already takes into account cash interest, net working capital and cash taxes as opposed to the previous view that started with adjusted EBITDA.

We adjust the GAAP view for nonrecurring onetime and M&A cash payments to derive an adjusted operating cash flow. Our adjusted operating cash flow for Q3 was $50.7 million, and for the first nine months of fiscal €˜23 was $75.0 million. We will continue to provide the disclosures on normalized CapEx expenditures similar to what we have done in historical periods to drive adjusted free cash flow. Our adjusted free cash flow for Q3 was $44.9 million and for the first nine months of fiscal 2023 was $51.4 million. This format should provide more clarity on operating cash flow generation adjusting for nonrecurring items, particularly given our historically acquisitive nature. We have included the year-to-date view in the supplemental slides this quarter, and we will be presenting it in our quarterly press release going forward.

We will be retiring the old adjusted unlevered free cash flow view, but it can still be easily derived by taking our EBITDA minus the normalized CapEx figure that will still be provided in the adjusted cash flow walk. Timing differences of cash inflows and outflows can have a significant impact on quarterly cash flows as a normal course of business, which is why it is important to look at cash flow on a rolling basis, normalizing out quarterly fluctuations. As an example for our Q3 cash flow, I would point out two items. First, it includes the catch-up on delayed billings from Q2 BluJay ERP migration that depressed collections in that period. Second, Q3 cash interest payments were below normal run rate due to a timing shift of cash payments into Q4.

As a result, we will see Q4 cash interest payments approximately $12 million above normal run rate. To reiterate, building a business that generates compounding cash flow is a core focus for us. And finding additional efficiencies and levers for cash flow growth generation will continue to be a priority for us. Now to provide a brief update on our recent acquisitions. We are complete with our integration of BluJay Solutions that closed on September 1, 2021. As mentioned last quarter, we surpassed our original synergy target of $25 million. Now turning to the Logistyx acquisition. Total synergies related to the recent Logistyx combination are still projected to be just over $10 million. We expect to action approximately 75% of run rate savings and realize 50% to 60% of the run rate savings by the end of fiscal 2023.

As previously discussed, the Logistyx systems integrations are taking slightly longer than expected. However, we remain excited about the long-term additive value of this acquisition and are confident in our ability to achieve the previously announced synergies. Now on to guidance. Our GAAP subscription revenue for fiscal €˜23 is now expected to be in the range of $533 million to $536 million, which includes an approximate $2 million positive FX impact compared to the last time we reported earnings as the euro and the British pound have incrementally strengthened against the dollar. We now expect an approximate $9 million negative headwind year-over-year from FX. Our subscription revenue organic constant currency year-over-year growth is expected to be in the range of 9.9% to 10.5%.

We are adjusting the lower end of our GAAP subscription revenue guidance on a constant currency basis, down by $3 million, and tightening the range to $3 million, representing the guidance range of $542 million to $545 million. As mentioned last quarter, we have seen delays in select large deal closings due to a volatile macro environment. While some of the deals delayed from Q2 did close in Q3, some are still delayed, and we’re seeing a similar trend carrying through Q3 and Q4. We do expect those projects to be picked up again as the macro environment stabilizes in the coming quarters as the demand for our mission-critical platform remains as strong as ever. Total GAAP revenue for fiscal €˜23 is now expected to be in the range of $655 million to $660 million, including an approximate $2 million positive FX impact since the last time we reported.

We now expect an approximate $12 million negative headwind year-over-year from FX. Our total revenue organic constant currency year-over-year growth is expected to be 8.2% to 9.0%. On a constant currency basis, we’re adjusting down the lower end of our guidance range by $14 million and tightening the range to $5 million. It is now expected to be in the range of $667 million to $672 million. Most of the revision is coming from the services revenue due to the headwinds outlined earlier. We continue to expect non-GAAP gross margin to be in the range of 68% to 70%. We’re also reaffirming our adjusted EBITDA guidance in the range of $217 million to $223 million. We’re likely to come in at the low end of the EBITDA guidance for the year, but we expect to still reach the EBITDA guidance established at the beginning of our fiscal year despite the headwinds to our revenue.

We’re able to do that due to our keen focus on the operational efficiency of our business additionally supported by the way we have set up our business to provide natural FX hedges on the cost side that offset the FX headwinds to the top line. Despite the continued evaluation of our cost base, we’re still continuing to invest in future growth of our business and committed to our previously announced strategic investment spend of approximately $20 million this year, which is included in our guidance range. Now to quickly touch on Q4 guidance. GAAP subscription revenue for the fiscal fourth quarter of €˜23 is expected to be in the range of $137 million to $140 million, including a $2 million year-over-year FX headwind. This guidance range represents a 7.0% to 9.3% year-over-year growth rate on a constant currency basis.

In conclusion, we’re proud of our year-to-date results and the trajectory we’re on for the rest of the year. Our sales and marketing teams have done an incredible job navigating the ever-changing macro dynamics impacting our customers. We’re also clear on the improvement opportunities internally and have a clear action plan that we’re aligned on. We remain excited about the multiple growth opportunities in front of us and are committed to a balanced approach to growth and profitability, targeting compounding free cash flow growth as our North Star. Thank you, everyone, for joining us today. We look forward to finishing this year strong and updating you on our results and progress next quarter. With that, Michael and I would now like to take your questions.

Operator, we’re ready to begin the Q&A session.

To continue reading the Q&A session, please click here.

2 Comments

  1. Your article gave me a lot of inspiration, I hope you can explain your point of view in more detail, because I have some doubts, thank you.

Leave a Reply

Your email address will not be published. Required fields are marked *