E2open Parent Holdings, Inc. (NYSE:ETWO) Q3 2024 Earnings Call Transcript
E2open Parent Holdings, Inc. (NYSE:ETWO) Q3 2024 Earnings Call Transcript January 9, 2024
E2open Parent Holdings, Inc. reports earnings inline with expectations. Reported EPS is $0.04 EPS, expectations were $0.04. ETWO isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the E2open Third Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Dusty Buell, you may begin.
Dusty Buell: Good afternoon, everyone. At this time, I would like to welcome you all to the E2open fiscal third quarter 2024 earnings conference call. I am Dusty Buell, Head of Investor Relations here at E2open. Today's call will include recorded comments from our Interim Chief Executive Officer, Andrew Appel; our Chief Commercial Officer, Greg Randolph; and our Chief Financial Officer, Marje Armstrong. Following those comments, we'll open the call for a live Q&A session. A replay of this call will be available on the company's Investor Relations website at investors.e2open.com. Information to access this replay is listed in today's press release, which is also available on our Investor Relations website. 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 year 2024.
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 event. Also, during today's call, we'll 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 at investors.e2open.com.
And with that, we'll begin by turning the call over to our interim CEO, Andrew Appel.
Andrew Appel : Thank you, Dusty, and thanks to everyone for joining today's call. I'll begin with a high-level review of what I've been focused on since joining E2open. As the interim CEO, three months ago, I'll provide my perspective on changes we need to make to put the company back on a sustainable growth path. I'll then ask Greg to update you on the work he is leading to transform our commercial function and improve our sales execution. Finally, Marje will review our third quarter financial results and guidance, and then we'll open up the call for your questions. I'll start my comments with a simple but important note. I believe that E2open possesses the key ingredients to be successful, high performing company that delivers unparalleled value for clients, generates healthy organic growth, and generates attractive shareholder returns, and it can remain an amazing and engaging place for our team members to work.
Based on my experience in leading the company for the last three months in being an advisor prior to that, I believe the ingredients that position E2open for success of the following. First, we have a software portfolio that is unique in its breadth, execution capabilities, and ability to leverage connected networks and data. This strong product offering has made us trusted partners to many of the world's leading companies, and has enabled our clients to make step change improvements in their increasingly complex supply chains. Our connected solutions are recognized by third-party analysts as industry-leading, and they provide a powerful ready built foundation for growing our business. Second, the addressable market for E2open's product is large and growing.
As the global business environment grows ever more complex, major brand owners are embracing cloud-based SaaS delivered software to make their supply chains more transparent, flexible, and secure. For leading software vendors such as E2open, this presents a major market opportunity. And finally, I'm very impressed with the people of E2open. They are the world's supply chain experts with a deep understanding of our client's operating models, and a passion for collaborating to deliver reinvention and impact. But while E2open has the right ingredients to succeed, our growth performance this year has been below that of our software peers and far short of our potential. In my view, this stems largely from solvable gaps in how we serve our clients.
As we all know, building a scaled company through M&A requires much management time and attention. E2open’s focus on acquisition integration over the last several years, distracted us from the company's core mission of delighting clients, and the impact on our growth was significant. So now our task is to re-accelerate growth by moving back to an approach that leverages our client-centric DNA. From my perspective, the first priority is to lower our churn rate back to historical norms. Since the fourth quarter of FY ‘23, we've experienced higher churn that has negatively impacted our revenue. As we have noted previously, the main drivers of this higher churn have been soft high-tech spending M&A impacts lower ocean freight volumes, and our long tail of smaller customers.
I am closely partnering with Greg to address all aspects of client engagement and satisfaction as part of a broader effort to ensure that we are delighting our customers. Therefore, one of my key objectives is to drive a no churn mindset across all our customer-facing activities including sales, professional services, and customer service, and do whatever it takes at all levels to retain existing revenue. Over the past six weeks, I have conducted multiple in-depth, half-day reviews of every situation where there is a risk of churn to the end of FY '25. Our visibility hence to this issue is now greatly improved and we have action plans in place to turn most of these clients into net promoters of E2open in short order. In addition to control of churn, an equally important priority is to win more new business.
To do this, we will start by communicating the client impact that our solutions are uniquely capable of delivering. And then follow this up with strong sales execution. I am very confident that in Gregg Randolph, we now have the right commercial leader to make this happen. Greg is off to a fast start and has truly energized and refocused our sales organization. And while there is still work to do, I am pleased to say that, in Greg's first full quarter in the role, we saw encouraging signs of positive momentum and better sales execution. After a soft second quarter in Q3, our conversion rates improved and we closed a number of large and strategically important subscription software deals. But even beyond what Greg and his team are doing, our approach to driving sustainable higher growth must be a holistic company-wide effort that will ultimately impact many aspects of how we run our business.
For example, whereas the supply chain industry has additionally market solutions based on features and functionality, I believe E2open has much to gain by quantifying and clearly communicating the unique operational and financial impact that our solutions can drive for clients. Adopting this approach can differentiate us within the industry and improve our competitive position. even more broadly, we must reorient our core revenue-related activities including product development, sales engagement, solution implementation, and customer service to focus on these singular goals of delighting our clients. As we invest further in our products, we must ensure this development work aligns tightly with client needs and expectations. And we must pursue flawless delivery of every solution implementation and service project, so that we always meet or exceed our commitments to customers.
We have work to do in all these areas, but I am confident that a renewed commitment to client satisfaction in all areas of our business can set up a virtuous circle of growth benefits. It can help to reduce churn and it can facilitate far better execution of our land and expand strategy to drive new gross sell and upsell business with our world-class client base. And it can generate more referenceable clients both companies and individuals that will serve powerful advocates for E2open as we seek to win new logos or expand into white space at existing customers. In sum, my first three months at E2open have been busy, enlightening and productive. The observations I have shared with you today are a snapshot of where we stand and where we need to go.
But I believe that, we are just getting started with leveraging improvement opportunities. And as we further refine our growth strategy and execute on key steps to look to implement new operating efficiencies wherever possible. Our goal has not changed. We aim to achieve both strong growth as well as high profitability and cash flow. In the meantime, I am very proud of the way our teams are pulling together and collaborating towards a common goal. And I am encouraged by the early signs of positive momentum and business performance that we are seeing. Most of all, I am very excited about the clear opportunity we have in front of us to create value for our clients and our shareholders. At this time, I'd like to turn it over to Greg for an update on our go-to-market activities.
Greg Randolph : Thank you, Andrew, and good afternoon, everyone. On our Q2 earnings call, I outlined the issues I believed were holding back our growth, including sales coverage challenges, as well as inconsistent customer engagement. I also previewed the key steps we are taking to improve sales execution, such as reorganizing our sales and professional services functions, bringing in new leadership, and implementing a disciplined repeatable approach to the fundamental principles of effective selling. Today, I'm pleased to report that this multi-quarter process is on track and in some areas ahead of plan. And as in all successful change processes, we are working hard to knock some early wins to build confidence and create momentum.
Today, I will provide you with an update on our sales transformation efforts and also highlight some Q3 subscription wins that exemplify the growth acceleration that we aim to achieve. A prerequisite for change is having the right leadership in place, and during the third quarter I brought new sales leadership into the organization in two areas that are critical for our success. First, Lisa Agrella joined my sales leadership team as our new Senior Vice President of Sales Operations. Lisa and I have worked together at a previous growth-oriented software company and she is an ideal fit to lead all aspects of sales operations and enablement at E2open. Lisa will drive a broad range of initiatives including sales process transformation, enhanced sales training, more disciplined pipeline and churn management, implementation quality, and improved forecasting.
Becoming much better in these areas will provide the foundation for many other actions that we are taking to achieve sales excellence. Lisa's team is off to a great start and already in December they rolled out a comprehensive set of new sales training playbooks specific to each of E2open’s five product families. This enhanced training effort will ensure that our sales teams are deeply knowledgeable about our product offerings and can effectively communicate their compelling value proposition to our clients. Ultimately, the change process that Lisa is leading will give our sales organization all the tools it needs to effectively execute across and upsell focused growth model. And second, Matt Hurley has joined my sales leadership team as our new Senior Vice President of Channel and Growth initiatives.
In this critical role, Matt will have responsibility for expanding and optimizing our channel partner relationships, including our highly strategic system integrator network, indirect sales channels and partner alliances represent a major growth area for E2open. We have already made significant investments to create a robust SI ecosystem and Matt will build on the strong foundation by executing a comprehensive channel and partner strategy that leverages the SI’s and other key distribution relationships. The goal of this strategy is to materially expand E2open’s market reach and give us access to promising new growth opportunities. Specifically, on the SI front, Matt and his team are now putting in place a detailed growth plan that directly matches each SI's core competency and implementation experience with specific demand generation targets for each E2open products.
In addition to these leadership additions, I am personally leading a comprehensive effort to make customer engagement and satisfaction a top priority across our sales organization. I have now visited most of E2open’s major customers in North America and Europe, and hearing firsthand how strategic our solutions are to their operations was truly confidence inspiring for me going forward. This type of proactive, routine customer touch point will be at the core of E2open standard relationship and sales motion. Achieving deep engagement with customers is key to selling mission-critical enterprise software, and it will ensure that our customers receive maximum value from our solutions, that their implementations are flawless, and that they share our vision for further developing our software platform.
In addition, improved customer engagement will serve as an early warning system for potential churn risks so that we can take remedial actions much earlier in the process. As Andrew noted, we are actively addressing known churn risks on a priority basis, and we are confident this is a very manageable issue. However, customer churn decisions are often made a year or more in advance, and therefore we continue to expect fourth quarter churn to remain elevated. Overall, my philosophy and the way I will manage the commercial organization is that E2open must apply the same degree of management focus and organizational discipline to delighting customers and minimizing churn that we apply to winning new business. To summarize, we have multiple commercial initiatives in flight and we are making good progress while we still have work to do.
I was encouraged by the stronger finish and improved win rate that our sales organization achieved in the third quarter. This improved execution, which spanned cross-sell, upsell, new logo wins, and new attached and unattached professional services engagements clearly demonstrates E2opens potential for growth as we fully implement the sales execution changes I've described, for example, on the cross-sell and upsell side, we book significant expansion wins with household name customers in a wide range of industries, including software, home and commercial hardware, industrial electronics, and heavy equipment manufacturing. And on the new logo side, we added well-known global suppliers of transportation and agricultural equipment to our already impressive list of major manufacturing clients and in a clear demonstration of the value of our comprehensive software.
We won new business during Q3 by setting a range of solutions including transportation and global trade management, multi-tier supplier collaboration, global logistics, orchestration, and channel optimization. As I noted, we are just getting started with building a world-class sales function. What we must now do is sustain the win rate momentum we saw in Q3, while also rapidly growing our pipeline of high-value sales opportunities that match well with E2open's competitive strengths and overall growth strategy. Putting these two components together will be a powerful combination. I've seen this playbook succeed many times in my career, and I'm confident it will do so at E2open. At this time, I'd like to turn the call over to Marie for a discussion of our third quarter results and updated guidance.
Marje Armstrong : Thank you, Greg. I echo what Andrew said. You truly are off to a fast start. It is remarkable how much process and focus shift you and Andrew has brought to E2open in a short period of time. I'm looking forward to seeing how much we can accomplish together to grow our business, and I believe the good execution results we saw this quarter are just the start. I will begin with an overview of our third quarter results. Our subscription revenue was $132.8 million, representing 84% of our total revenue. While this is near the high end of our quarterly guidance, the negative 1.5% year-over-year growth rate in subscription revenue was well below our potential. However, after relatively soft Q2 bookings performance, Q3 clearly showed encouraging signs of improving business execution, including the closure of several subscription deals of $1 million or more in annual revenue, representing both upsell and new logo business.
We still expect the challenges we have experienced since late FY 2023, including customer budget pressures and longer sales cycles to impact our growth through the end of this fiscal year. However, the better sales execution in Q3 along with all the work we are doing to mitigate churn, gives us confidence that our strong focus on go-to-market execution and client experience is laying the foundation for higher growth. Professional services and other revenue in the fiscal third quarter was $24.7 million, reflecting an organic growth rate of negative 17.7%, which is far short of our potential and reflects continued volatility in customer spending on services projects. We did, however, exit the third quarter with improved new services bookings, particularly compared to a soft Q2.
This was partly driven by new attached services business that accompanied the large subscription deals we closed during the quarter. We also had better unattached bookings, supported by organizational changes we made in our PS business early in Q3. So overall, we saw better execution this quarter by our PS business. As we finish the year, I would note that Q4 services revenue tends to be seasonally weaker for us, in part due to the impact of holidays on our workable service hours. Total revenue for fiscal third quarter was $157.5 million. This reflects organic growth of negative 4.5% over the prior year quarter. Non-GAAP gross profit for the fiscal third quarter was $109.7 million, reflecting a 3.4% decrease on an organic basis. Non-GAAP gross margin was 69.6% in the third quarter, compared to 68.9% in the prior year quarter.
Our Q3 gross margin performance benefited in part from cost efficiencies in our services business, that we actioned this fiscal year. Turning to EBITDA. Our third quarter adjusted EBITDA was $55.4 million compared to $56.2 million in the prior year quarter, a decrease of 1.4% that was mainly driven by lower revenues. Third quarter adjusted EBITDA margin was 35.1%, compared to EBITDA margin of 34.1% for the prior year quarter. The incremental improvement in adjusted EBITDA margin reflects continued cost discipline during the quarter related to headcount and other operating spend items. As always, we are maintaining our focus on operational efficiency in order to ensure strong and sustainable profitability. However, accelerating growth remains our number one goal and we will continue to invest as needed to drive revenue.
Finishing up on profitability. Net loss for the fiscal third quarter of 2024 was $740 million. This net loss includes non-cash impairment charges of $717.7 million during the quarter. Similar to impairments we recorded in Q4 FY 2023 and Q1 FY 2024, the triggering event for the Q3 impairments was the decline in our share price that followed our Q2 FY 2024 earnings release. The Q3 net loss was also impacted by higher one-time expenses, including $4.3 million of severance related to CEO and CLO transitions as well as other headcount actions. We also incurred higher non-recurring professional fees during the quarter, mainly related to executive transitions. Now turning to cash flow. During the fiscal third quarter, we generated $5.4 million of operating cash flow.
This figure was significantly impacted by non-recurring cash expenses paid during Q3. These included the $17.8 million litigation settlement related to 2014 BluJay predecessor contract that we previously discussed on our Q2 earnings call, as well as the severance and higher professional fees that I just noted. Excluding these one-time costs, during the third quarter, we generate $34 million of adjusted operating cash flow and our year-to-date cash flow exclusive of non-recurring expenses was $79 million. As these results demonstrate, our underlying business continues to be a very healthy cash generator, driving cashflow remains a core objective for our management team as it provides us with financial flexibility and enables us to continue to fund future organic growth.
This completes my remarks on our fiscal Q3 2024 results. At this point, I'll turn to a discussion of financial guidance. For the fiscal fourth quarter, we expect subscription revenue to be in the range of $131 million to $134 million. This range represents a growth rate of negative 4.3% to negative 2.1% as compared to the prior year of fiscal fourth quarter. For the full fiscal year 2024, our guidance remains in line with what we communicated during our second fiscal quarter earnings call, except that we are now able to narrow the range given our Q3 results and our Q4 outlook. We're updating our full-year guidance as follows. We expect subscription revenue in the range of $533 million to $536 million for FY ‘24 versus our prior guidance of $530 million to $538 million.
We expect FY ‘24 total revenue to be within the range of $628 million to $633 million versus our prior guidance of $625 million to $635 million. We continue to expect FY ‘24 gross profit margin to be within the range of 68% to 70%. Finally, we continue to expect FY ‘24 adjusted EBITDA to be within the range of $215 million to $220 million. This range implies an adjusted EBITDA margin of 34% to 35% for FY ‘24. Emphasizing the strong importance, we place in cash flow generation as a key performance indicator. I would also like to provide an update on our cash-related expectations for the year. In terms of key drivers for FY ‘24 cash flow, our expectations around full-year CapEx continue to be approximately 5% of revenue in FY ‘24 versus 7% of revenue in FY ‘23, which included M&A-related CapEx. We still plan to drive year-over-year improvements in working capital and expect FY ‘24 working capital to be a modest use of cash.
We expect net cash interest to be within a tighter range of $97 million to $99 million versus our prior expectation of $95 million to $99 million. As a reminder, net cash interest includes the benefit of interest income on excess cash, and also cash receipts on the interest rate callers we executed during Q2, which are currently in the money. Finally, our expectations for full-year one-time cash costs have increased to approximately $35 million. Contributing factors as noted previously include the $17.8 million arbitration settlements, which we paid in fiscal Q3 FY ‘24, as well as severance and professional fees. Considering the above cash-related factors, as well as our current expectations around FY ‘24 adjusted EBITDA, we remain on track to generate a healthy increase in balance sheet cash by the end of the fiscal year, both compared to fiscal Q3 and versus the end of FY ‘23.
We continue to expect net leverage of approximately 4.3 times or below at the end of this fiscal year. As Andrew emphasized, E2open possesses unique assets and capabilities and our addressable market is large and expanding. We have tremendous potential to drive organic growth and we're very encouraged by signs of improved business performance as we exited our fiscal third quarter. In particular, the closure of more large subscription deals and improved services execution, while we still have work to do, we look forward to building on this momentum in the last quarter of the year and for an improved positioning into our next fiscal year. Before I open up the call for Q&A, I want to briefly acknowledge the Schedule 13 D filed on behalf of Elliot Management on October 13th of last year.
Each open routinely engages in ongoing and collaborative dialogue with shareholders, and our board and management team are committed to evaluating all potential pathways to maximizing shareholder value. Beyond this acknowledgment, we do not plan to make additional comments on this issue at the present time. That concludes our prepared remarks, and thank you all for joining us today. Operator, please open up the line and begin the Q&A session.
Operator: [Operator Instructions]. The first question comes from Adam Hotchkiss with Goldman Sachs. Please proceed.
Adam Hotchkiss: I guess to start, I'd be curious, after your deeper review of customers, which specific areas of the business you're seeing, the highest levels of churn whether that's particular client sizes or products or if it's more broad-based than that. And then just any specifics on how you're crafting action plans to address those specific hotspots? Just any more color on that would be helpful.
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