E2open Parent Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 10, 2023

There are 10 speakers on the call.

Operator

Greetings. Welcome to the E2 Open First Quarter Fiscal Year 20 24 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. On your telephone keypad.

Operator

Please note, this conference is being recorded. I will now turn the conference over to your host, Dusty Buell. You may begin.

Speaker 1

Good afternoon, everyone. At this time, I would like to welcome you all to the E2 Open fiscal Q1 2024 earnings conference call. I am Dusty Beall, Head of Investor Relations here at E2 Open. Today's call will include recorded comments from our Chief Executive Officer, Michael Farlakas and our Chief Financial Officer, Marie Armstrong. After those comments, we'll open the call for a live Q and A session.

Speaker 1

A replay of this Call will be available on the company's Investor Relations website at investors. E2open.com. Information to access the 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 Q2 and full year 2024. These forward looking statements are subject to known and unknown risks and uncertainties.

Speaker 1

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 may affect our future results or the market price of our stock. And finally, we are not obligating ourselves to revise our results for these forward looking statements in light of new information or future events. 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.

Speaker 1

E2open.com. And with that, we'll begin by turning the call over to our CEO, Michael Farlakas.

Speaker 2

Thank you, Dusty, and thanks to everyone for joining us today. I'll begin with some high level remarks on our fiscal Q1 performance as well as an update on our key strategic focus areas. I'll highlight a few important client success stories and provide my perspective on what they indicate to our strategic market position and our go forward growth potential. Finally, Marie will review our first quarter financial results and provide our Q2 guidance. We'll then open up the call for your questions.

Speaker 2

Let's begin with our Q1 performance. Overall, we had a solid quarter led by our subscription business. Subscription revenue for the Q1 was $135,000,000 representing 84% of our total revenue and above the high end of our quarterly guidance. Although we beat guidance, Our Q1 subscription growth rate of 4% in my view is below our potential. Despite the slower growth period we are experiencing in FY 2024, During the quarter, we maintained high profit margins, drove strong cash flow and continue to build operating leverage in our business as we grew adjusted EBITDA faster As we communicated on our Q4 earnings call, the softer subscription revenue growth We are experiencing this year is primarily a function of 2 factors.

Speaker 2

The first is the delay in large deal closings as clients continue to scrutinize their on long range strategic projects due to the current macro environment. The second is the timing of churn being more heavily weighted in Q4 of twenty twenty three and the first half twenty twenty four. So far in FY twenty twenty four, as we had expected, The overall macro trends have remained similar to the second half of twenty twenty three. It is still taking longer to close new deals. However, during the Q1, we were able to close several deals that were delayed in FY2023.

Speaker 2

I'll describe one of those for you in more detail in a few moments. Our professional services business continues to be impacted by weaker spending by some of our larger technology clients on ongoing services projects. That said, our professional services results also reflect the early signs of success in building a robust ecosystem of system integrators as part of our broader growth strategy. As a reminder, our system integrator strategy as well as our addition New subscription products that have little to no attached services revenue will cause our services growth rate to be lower than our subscription growth rate as we transition a portion of the information services work to the SI ecosystem. This is consistent with our bedrock principle of profitable growth as we focus our attention on driving very high margin subscription revenue.

Speaker 2

As I emphasized on last quarter's call, A top priority for etoopen is transitioning from an acquisition oriented company to one that can drive rapid and sustainable organic growth at scale. Over the last year, we have taken multiple actions to strengthen our go to market capabilities, including a brand refresh, hiring our 1st regional EMEA President and bringing in new leadership in professional services and sales operations. During Q1, we made changes to our sales model to increase sales coverage ratios for high potential clients and reallocate spend for account based marketing. Today, we took another important step in this process with our announcement that Greg Randolph will join e to open in the newly created role of Chief Commercial Officer. In this new role, Greg will lead our commercial organization with a keen focus on increasing our subscription growth rate.

Speaker 2

Greg is a highly accomplished executive who has led high performing sales teams and go to market transformation at leading software enterprises such as Quest Software in CA Technologies. He has significant hands on experience in selling motions that are similar at Etoopen, including managing complex sales cycles with large enterprise clients, marketing and selling a platform that consists of diverse solutions, and utilizing cross sell to expand existing clients' use of our platform. Greg is a great fit for our organization and for the new role of Chief Commercial Officer. He and I will work closely over the coming quarters to enhance and further build out our repeatable sales model to drive the organic phase of Eden Open's growth. Before concluding my remarks and turning the call over to Marie, I want to describe for you some exciting business highlights from the Q1.

Speaker 2

In the Q1, we closed large project with Ford Motor Company that builds on Etoopen's prior success and strength in the automotive industry transformation. We believe this win demonstrates our ability to deliver on multiple levers of Hido Open's strategy. It advances Unopen's path to become the SaaS supply chain platform provider of choice, the largest network enabling multi tier Supplier collaboration across the automotive industry. It exemplifies the need for multiple solutions across our connected supply chain platform for business operations. It also proves our ability to engage our clients for cross sell opportunities and demonstrates that system integrators are integral strategic partners, particularly This new project deserves special attention because it highlights the value and potential We see in our platform in areas such as technology leadership, strategic partnerships and organic growth.

Speaker 2

Our prior work with this iconic client allowed us to build deep collaborative relationships and provide a strong basis for engaging them on additional areas of their business. The automotive industry is undergoing a major technology shift from traditional internal combustion engine vehicles to smart electric vehicles that heavily rely on microchips and sensors. These critical components are globally constrained. There are simply not enough of them to meet the diverse needs of the global economy. As a result, the auto industry has been challenged to meet customer demand for cars and is now adapting to manage constrained supply much in the same way that the high-tech industry adapted over the past 20 years.

Speaker 2

Our network and applications were built specifically for this purpose and are ideally positioned to help the auto sector adapt to an increasingly complex manufacturing process. Drawing it open's deep experience in executing transformative projects with automotive leaders, This win demonstrates Eaton Open's ability to expand client relationships and implement multiple solutions across our connected supply chain platform. A key ingredient to this success, especially for supplier collaboration, is InnoOpen's reusable network of our 420,000 connected parties. This win and several other transformational wins in the quarter highlight our primary competitive advantages, namely The unique nature of our network centric software platform and our deep experience serving large customers with complex global supply chains. We also had several other success stories from our Q1.

Speaker 2

During the quarter, a leading provider of IoT services for transportation and logistics application Selected Etofen's advanced supply chain planning and collaboration solutions to manage demand, supply and inventory across its operations. The client will now be able to automate more tools and communications across the supply chain network, stay ahead of potential disruptions and respond more quickly to changes in customer demand. Our technology leadership also received a major recognition during the Q1. For the first time, Eta Open was named a leader in the 2023 Gardner Magic Quadrant for Transportation Management Systems. We believe that combining key aspects of our global network and platform with the highly scalable multi mode and multi regional transportation management system We acquired the Blue Jet combination helped us achieve this improved position.

Speaker 2

During the quarter, we completed multiple go lives across a number of product suites, Industries and Geographies. This includes deploying Edopen's global trade management solution for Rio Tinto, The world's 2nd largest metals and mining company operating in 35 countries. Each quarter, we add new functionality to our software platform to better serve the supply chain needs of our diverse client base. As just one example, during the Q1, we released Enhancements to our Global Logistics Orchestration Solution or GLO that further automates and reduces risk associated with global shipments. These enhancements automate previously time consuming manual tasks such as rebooking all legs of committed shipments and screening against government list of denied or restricted parties.

Speaker 2

Speaking more broadly about software innovation, I also want to comment on our company's approach to artificial intelligence. While the world is now paying close attention to how AI can be commercialized more fully, I want to make clear that Eden Open has used artificial intelligence and machine learning to enhance our software offerings for nearly 2 decades. AI is a core element of our demand sensing and inventory optimization solutions that support the global operations of some of the world's largest companies. We also rely heavily on AI to process the billions of transactions that flow through our network and perform critical functions such as data anomaly detection. AI is and will remain very important to our product innovation strategy.

Speaker 2

As we make further investments in our software platform, we will continue to look for ways to further leverage the power of AI for the benefit of all of our clients and our company. Before closing, I want to express my many thanks to EDO Open's 4,000 talented team members around the world for demonstrating our company's operating principles and values every day. Your commitment to build stronger client relationships, to innovate and to operate efficiently are key to our company's success and to the unique value proposition we provide to our clients. And now, I'd like to hand the call over to Marie to review our Q1 financial results. Marie?

Speaker 3

Thank you, Michael, and good afternoon, everyone. I want to start by thanking the E2 Open Finance team as we've had an incredibly productive start to the year with several notable accomplishments. We went live with the ERP integration of our acquired logistics business, Drove a variety of improvements focused on driving cash flow and operational efficiency across multiple company functions and completed the build out of our finance leadership team. These efforts helped e2open achieve strong profitability and drive operating leverage during the Q1 despite the below normal top line growth rate. As I mark my 1 year anniversary As the CFO of E2 Open, I'm proud of what the Impinance team has accomplished in a short time.

Speaker 3

Turning to results, I'll start by reviewing our fiscal Q1 2024 and then close with a discussion of our Q2 and full year FY 24 guidance. Subscription revenue in the fiscal Q1 2024 was $134,900,000 reflecting an organic growth rate of 4.2% and 4.4% on a constant currency basis when adjusting for the negative $300,000 year over year impact from foreign exchange fluctuations. Our subscription revenue came in above the high end of our $131,000,000 to $134,000,000 guidance range, primarily due to the timing of large deals that closed earlier than expected during the quarter. Professional services and other revenue in the fiscal Q1 was $25,200,000 reflecting an organic growth rate of negative 18.2 percent and negative 17.1 percent on a constant currency basis when adjusting for a negative $300,000 year over year impact from foreign exchange fluctuations. On our last earnings call, We noted that our fiscal 2024 Q1 services revenues were expected to decline sequentially from our Q4 of FY 2023.

Speaker 3

We expected this decline in part due to the strategy we have undertaken to transition services revenue to our system integrator partners. However, Q1 services revenues came in weaker than expected, primarily due to the continuing trend of weak Spending by large customers on ongoing service projects that have traditionally been an important source of baseline service revenues for us. As Michael noted earlier, we have recently brought new leadership in tourist services organization as part of our larger plan to enhance and reorganize our go to market function. These changes should help us maintain our profitable services franchise even as we continue our strategic pivot to shift services work to integrators partners as a means to drive faster future subscription growth. We're seeing positive momentum with our customer base on expanding existing TS projects and discussing new engagements.

Speaker 3

We expect services revenue to be sequentially flat to slightly higher in the second quarter and to further improve sequentially in the second half of the year. Total revenue for the fiscal Q1 was $160,100,000 reflecting organic growth of negative 0.2 percent over the prior year quarter and 0.2% growth on a constant currency basis after adjusting for a negative $700,000 year over year impact from foreign exchange fluctuations. Turning to gross profit. In the fiscal Q1 of 2024, our gross profit was 110,400,000 reflecting a 0.8% decrease on an organic basis and 0.7% decrease on a constant currency basis. Gross margin was 69.0 percent in the 1st quarter or 68.7% on a constant currency basis, compared to 69.4% in the prior year quarter.

Speaker 3

The small year over year reduction was mainly due to lower Q1 Professional service margins, which we expect to improve in the second half as services resource utilization improves. Turning to EBITDA. Our first quarter adjusted EBITDA was $53,800,000 compared to $51,400,000 in the prior year quarter, an increase of 4.6% and 3.4% on a constant currency basis. 1st quarter adjusted EBITDA margin was 33.6% or 33.0% on a constant currency basis, compared to EBITDA margin of 32.0 percent for the prior year quarter. This continued growth in adjusted EBITDA, which grew faster than total revenue during the Q1, reflects an incremental benefit in the Q1 from headcount related cost actions as well as lower spend on consulting, contractors and facilities.

Speaker 3

More broadly, our EBITDA performance again demonstrates our ability to realize the benefits of operating leverage, which is fundamental to how we run the business. While accelerating growth Is our number one goal and we are committed to invest as needed to drive the top line. We will maintain our strong focus on an efficient cost structure and operational discipline. Finishing up on profitability, net loss for the fiscal Q1 of 2023 was $360,900,000 This net loss figure includes a non cash goodwill impairment charge of 400 and 10,000,000 during the quarter. As previously discussed, the carrying value of E2 Open's goodwill increased significantly as part of our IPO transaction, because it was reset using the offering price of $10 per share.

Speaker 3

GAAP requires companies to continually monitor goodwill carrying value by evaluating It is important to note that the triggering event for the Q1 impairment was the decline in our share price that took place following our Q4 FY 2023 earnings release. We want to emphasize that the impairment charge was not driven by operational performance issues related to any of our products or acquired businesses. Now turning to cash flow. During the 1st fiscal quarter, We generated $37,300,000 of adjusted operating cash flow. The primary driver of this strong cash flow was good collections performance during the quarter, which is a testament to the broader finance team's commitment to driving working capital improvements this year.

Speaker 3

I would note that due to a combination of seasonal factors and our annual cash bonuses being paid now in the beginning of Q2, We expect sequentially lower cash flow in the 2nd quarter. Growth in cash flow continues to be a core objective for our management team, and we view cash flow growth as a strong indicator of the competitive advantage of our business model and as an important source of financial flexibility as we seek to optimize our capital structure and fund future strategic growth. Before turning to guidance, I want to provide an update on our integration efforts related to our acquisition of Logistics. Since closing this transaction in 2022, Multiple E2open teams have worked hard to drive the integration process and meet our cost and operating synergy targets. I'm very pleased to report that shortly after the end of the Q1, we completed the integration of logistics into our existing ERP platform.

Speaker 3

With this project behind us, the logistics integration is now substantially complete and all of E2 Open's Four business operations and entities are on a single ERP instance. I'm also pleased to report that we have exceeded our synergy targets for the logistics acquisition. Total transaction synergies were originally projected to be just over $10,000,000 As of the end of Q1, we have actioned $10,100,000 of synergy and now expect to realize for Q1 twenty twenty four results. At this point, I'll turn to a discussion of financial guidance. In terms of new guidance for the fiscal Q2 of this year, We expect FY2024 second quarter subscription revenue to be in the range of $132,000,000 to 135,000,000 This represents a growth rate of 0.3% to 2.6% as compared to the prior fiscal year Q1.

Speaker 3

Turning to full fiscal year 2024, we are reiterating the full year guidance we issued last quarter, which as a reminder consists of the following elements. We expect subscription revenue in the range of $545,000,000 to $555,000,000 for FY 2024. We expect FY 2024 total revenue to be within the range of $655,000,000 to 670,000,000 We expect FY 2024 gross profit margin to be within a range of 68% to 70%. Finally, we expect FY 2024 adjusted EBITDA to be within the range of $218,000,000 to $228,000,000 This range implies an adjusted EBITDA margin of 33% to 34% for FY 2024. On our Q4 earnings call, in addition to providing formal guidance on revenue margin and adjusted EBITDA, we also provide additional details around certain key drivers of cash flow generation for FY 2024.

Speaker 3

Emphasizing the strong importance we place in cash flow generation As a key performance indicator, I would like to provide an update on our cash flow related expectations for the year. Overall, we continue to expect FY24 to be a strong cash flow year and we're off to a strong start with our robust Q1 cash performance. In terms of key drivers for FY 'twenty four cash flow, our expectation around full year CapEx has not changed. We still expect it to be approximately 5% of revenue in FY 2024 versus 7% of revenue in FY 2020 3, which included M and A related CapEx. We still plan to drive significant year over year improvements in working capital and expect FY 2024 working capital to be a modest use of cash.

Speaker 3

We now expect net cash interest to be within a range of $95,000,000 to $99,000,000 an increase of approximately $5,000,000 from our estimate provided last quarter. This increase is primarily because The LIBOR sulfur curve through our fiscal year end has steepened, reflecting revised market expectations for sustained higher Fed funds rates. Our new projection for full year cash interest includes the benefit of interest income. We are earning due to our strong cash generation and also cash receipts on the interest rate callers we executed during Q1 that have now moved into the money because of rising rates. Finally, we still expect one time cash costs, including M and A integration, which were $29,000,000 in FY2023 To be substantially lower in FY 2024.

Speaker 3

Given our outlook for strong FY 2024 cash generation, We still expect to reduce our net leverage to 4 times or below by the end of the fiscal year. To sum up, We continue to focus on driving cash flow and profitability, while strategically investing in our business to lay the foundation for faster organic revenue growth. That concludes our prepared remarks. Thank you all for joining us today, and we look forward to continuing the dialogue as we move throughout the year. With that, Michael and I are ready to take your questions.

Speaker 3

Operator, Please open up the line and begin the Q and A session.

Operator

At this time, we will be conducting a question and answer session. Our first question comes from Adam Hajjkis with Goldman Sachs. Please proceed.

Speaker 4

Great. Thanks very much for taking my questions. You talked a little bit about the organic sales efforts and some of the spend reallocation In reorganizing your sales efforts for organic growth, could you just talk a little bit about how that's been going? How you think about what the right level of spend there is? And then when you think about the timeframe around ramping that new sales coverage for that reallocation, what does that look like in terms of driving Thanks so much.

Speaker 2

Thanks, Adam. Good to hear your voice. Yes, so we've done most of that work in the early part of the fiscal year. And we've kind of are through kind of the change. And the change is really more allocating more resource to our largest clients where we have the most opportunity.

Speaker 2

So in the middle and back half of the year, we'll start adding additional headcount as we kind of work into next year. So that kind of lift is behind us now and we would expect to see that step up with the other initiatives we have through the rest of the year All in the idea of getting our growth back to where we think it should be.

Speaker 4

Great. That's super helpful, Michael. And then Marie, just on the Subscription revenue guidance, it looks like you maintained that despite the pretty strong results in the Q1. Anything To read in there other than just being prudent around the uncertain macro environment?

Speaker 5

Yes. Thank you for the question, Adam.

Speaker 6

We're very

Speaker 5

proud of our Q1 results and coming in above our guidance range. As mentioned in my prepared remarks, it was really primarily due to sort of Timing of some large deals closing earlier in the quarter, which again is a good sign, but this early in the year, We think it's prudent to maintain the guidance range as set. And again, it was set really 2 months ago. And overall, I would say things are progressing as we had expected, so no update to full year guidance.

Speaker 4

Great. That's really helpful. And then last one for me. Just wanted to touch on the services business. Could you just give us a sense on how you parse out That base of revenue between things like ongoing discretionary services, that may be impacted like things you saw in the quarter versus The more one time implementation costs, just to be great to understand and get some more color on how much of that services revenue is exposed some of the headwinds that you mentioned in the Q1 number.

Speaker 4

Thanks.

Speaker 2

Yes. Thanks for that. We have A fair amount of ongoing services work mostly from many of our very large high-tech customers who've been with us a long time, where they continually Adjust and upgrade and tweak, the implementation. Many customers have been using the platform for 8 to 10 years. That got curtailed a bit really in this period, a little bit after that last year as most of the Technology companies were suffering from always a result of macro conditions and their own desire to get more profitable.

Speaker 2

We haven't really kind of broken that out, But it's a fairly large percentage of that and that kind of was reset, which I think on a year on year basis is why it's come down. We expect that to kind of normalize as you get in the back half of the year as that work kind of comes back on. The other thing that I'll mention is that on the service We are giving up some of our services revenue to the system integrators, as that part of our growth strategy Starting to materialize. And then lastly, we are having additional subscription products that come with very low attach rates mostly on the network side of our business. So those three things kind of in unison are affecting our services business for now, which is why we expect that to continue to decouple from our subscription growth rate going forward.

Speaker 4

Great. Really helpful. Thanks, Michael. Thanks, Marie.

Speaker 2

Thanks, Alan.

Operator

The next question comes from Taylor McGinnis with UBS. Please proceed.

Speaker 7

Yes. Hi. Thanks so much for taking my questions. The first one I have is, I know Greg hasn't started yet, but just any high level thoughts You can share on expectations you have for him in this new role. I know you've talked to like last quarter, you talked about some of the sales disruption And some of the changes, it sounds like that you've made, you're starting to see some normalization there.

Speaker 7

But just curious if there's any future sales changes that anticipating or anything on that front? And then the second part of this question is Marie, just curious how this impacts They're not your comfort level with the guidance on the top line and the margins.

Speaker 2

Yes. Taylor, thanks for As we've kind of articulated, we built this business over the past almost decade, now 8 years Around the idea of scaling rapidly, we did that, grew the business 10x and became a very profitable company in doing so. We kind of centered our attention on operations as that was the necessary requirement for that part of our growth strategy and our COO, And it was titled that way because it was operationally oriented. I think our as part of our multi step plan and we're kind of getting To the place where we want to be is that we really need to have a regular way organic sales driven leader that has grown up in that part of the world and Greg brings all those attributes from his experiences and mostly around selling for large companies at scale. Last company is with And really understanding how to build a scaled sales team that is on repeatable process, and that's kind of what's necessary for us going forward.

Speaker 2

So I think it's just the next part of our process. Super thrilled to have them and Really excited about the go forward in terms of that. In terms of next steps, we've been making these incremental steps along the way. So I don't expect a rapid or dramatic shift, but just incremental improvement as we kind of build a very repeatable organic sales engine. Marie?

Speaker 5

Yes, absolutely. Just to add to that, in terms of the impact to our top line, again, we're reiterating our full year guidance. A lot of the changes that we've talked about, it's all part of the plan for the year, right, and was contemplated when we set guidance. And in terms of the cost impact, it goes same way. There is no change to guidance from this change.

Speaker 5

We talked about incremental investments On the sales team and go to market overall, but nothing really to update. Again, this is all part of the plan, sort of for the year.

Speaker 7

Awesome. Super helpful. And then my last question is, you talked about when you think about the back half Of the guidance or what's implied for the full year, on a sequential basis, it sounds like subscription revenue subscription revenue improving versus what we saw in 1Q. You talked about services revenue sequential growth improving versus what we saw in 1Q. So just curious What you guys are seeing maybe from a bookings perspective or you talked about some large deals that closed in the quarter that I guess is giving you That comfort that we could see some recovery in those numbers?

Speaker 5

Yes, absolutely. So as mentioned, As you're referencing, we had mentioned that we expect second half of the subscription business To be better and that's primarily driven really the first half the churn being more first half weighted this year. And then as you mentioned, we have seen some large deals close in Q1, which is encouraging. But again, in terms of the macro and overall, I would say it's as expected, sort of stabilizing, but we're not seeing Anything very different than what we discussed 2 months ago in terms of the macro impact. And then on the services side, as we mentioned Earlier, we do expect services revenues to be sort of flat to slightly up in Q2, And we are seeing some encouraging signs in the business, very excited about the new leadership there And just really the momentum that some of the changes are taking on and we're really hopeful that second half will Be better based on the initial signs.

Speaker 5

And again, no real change in terms of What we saw when we last spoke 2 months ago.

Operator

Okay. The next question comes from Fred Lee with Credit Suisse. Please proceed.

Speaker 6

Hi, Michael, it's good to hear from you. Last quarter, just to expand a little bit more on macro, just because last quarter, You talked about the first half being tougher than the second half for fiscal 'twenty four. I was just wondering if macro deteriorated sequentially from fiscal Q from Q4 to Q1. It sounds like it stabilized a little bit, but I was just wondering just to be crystal clear if it's deteriorated or if it's stabilized into the end of Q1.

Speaker 2

Hi, Brad. How are you doing? No, I don't think it's deteriorated. I mean, it's still The market is still choppy. And you look at kind of and other parts of our business, especially on the freight side, still Kind of trying to work it through its process.

Speaker 2

On the trucking side, you see that all over the place. But I don't really think it's deteriorating. I just think it's choppy. Some companies doing well, some companies not doing so well. So I just think it's choppy for right now, but I would not say deteriorating.

Speaker 2

I'd say more it's more on the stabilizing side than deteriorating at this point. That's how I'd characterize it.

Speaker 6

Okay. Okay. That's good to hear. My second question is related to your appetite for incremental acquisitions now that the integration of logistics sounds like it's largely behind the company, sounds like most synergies have been realized. Have valuations come in the private marketplace Enough to pique your interest.

Speaker 2

Yes. Listen, we grew our business through acquisitions and we have a great mechanism to do that. However, for us to really realize the potential we see, we really kind of need to focus our attention on A sustainable organic growth rate and kind of a more regular way sales organization as we are a scaled business now in our revenue size. That's our primary focus. I don't think it will be our primary focus forever, but it is our primary focus for the time being.

Speaker 2

And in terms of valuations, look, there's going to be a time when all these Smaller companies come to market. I don't think it's there yet. And I think price expectations are still pretty high. So I think now's a great time for us You'll build an organic sales engine that we know we can.

Speaker 6

Got it. Thank you. My last question is just related to your conviction in churn declining in the back As we kind of look through your subscription revenue, the implied numbers and the growth in the back half of the year, how do we gain conviction that churn is going to downtick over the next couple of quarters? Thank you.

Speaker 2

Yes. We've done a lot of analysis on this, and we kind of looked at it 9 pages from Sunday, Brad. We have a very specific way of understanding where our clients are. And we have a Pretty strong conviction that in the back half of this year and into next that, churn normalizes. And remember, we have world class churn and it ticked up a bit.

Speaker 2

It It just happened that it happened in Q4 and in the first half of this year. So we expect it to normalize and then kind of be back where we were. And then Obviously, that has an impact for revenue as a lagging indicator and we expect that to kind of get better as we go into next year.

Operator

Okay. The next question comes from Mark Schappel with Loop Capital. Mark, please proceed.

Speaker 8

Hi, good afternoon. Thank you for taking my question. Michael, starting with you, I was wondering if you Just give a little more comments or details on the forward win. I appreciate your comments, but I was wondering if you provide additional details on maybe some of the products or solutions that they're using And also, what were some of the drivers for their decision to, it looks like, deepen their relationship?

Speaker 2

Yes. It was a great win or a great company, obviously, iconic company and couldn't be any happier. They're super important to us, So have been and are obviously in now. Unfortunately, we're not really able to kind of go into more details. We're thankful for them to allow us to use Their name was that was a big lift and a big appreciation that I have for them.

Speaker 2

I can speak a little bit about the automotive industry and what I see there From a supply chain perspective, this is a generalized comment about automotive supply chains. Automotive supply chains are multi tier and And for a long time, automobiles are made with readily available materials. I need aluminum, I need tires, I need things that are made in mass and readily available. The change that has happened in the last 3 years is that the Supply materials and componentry is much more constrained on a global basis. So understanding deeper into a company supply chain, What their constrained supply is, has a really big impact to what they can actually produce every day on a production line.

Speaker 2

And the further they can look out into what that supply base looks like, the more the confidence will have and be able to not have A car that's 99.9% complete, but doesn't have the right chip has to be reworked. This is the same problem that the high-tech Industry solved literally 20 years ago, which has to do with making a much more network based connected supply chain. So that's an industry Automotive Industry, your perspective that I have and I've been talking to many automotive companies. So I just want to give you that perspective in terms of the auto industry and kind of The change that is happening within the auto industry. But Ford's a great company and I really can't speak anymore about what we're doing with them other than our Comments I've made in the press release.

Speaker 8

I appreciate your comments there. And then secondly, in your prepared remarks, you noted that subscription growth while above guidance was still below what you thought was the company's potential. I was wondering if you could just maybe add some clarity to those remarks. Was there something you saw in the quarter that led you to that? Or is it just going back to prior quarters?

Speaker 2

No, this is just a general comment, Mark. I appreciate that clarification you allow me to make. I just think we have more Potential to grow this business organically and I think we have to kind of change our business a bit to kind of get to that potential. So it has nothing to do with the quarter, But as we have long term guidance out there, that's in 12% plus. We think that's been very possible At these margin levels, and I think that's an important clarification, we are focused on generating high margins in the business.

Speaker 2

We think we can do both, which makes us a very unique Kind of company. That's what I meant by below our potential. And I believe that we have greater potential to grow and we have some operational things You will take care of in terms of our go to market.

Speaker 8

Appreciate that. That's all for me. Thanks.

Operator

Thanks. Okay. The next question is from Chad Bennett with Craig Hallum. Please proceed, Chad. Great.

Operator

Thanks for taking my questions. So just want to

Speaker 6

make sure I understand the large deal commentary. I think Marie, You indicated in your prepared remarks that you saw several large deals hit earlier in the quarter. And then I think Michael indicated that There were large deals that you actually recouped from prior quarters, this Are those 1 in the same commentary wise?

Speaker 2

Yes. Good to hear your voice, Craig. Yes, I think what we're saying is we had as we We said last time, our large deal pipeline was has grown. A lot of that's because they pushed. And Because of that, we are able to get some of those in.

Speaker 2

We had a pretty good quarter with large deals. And this happened to happen a little earlier in the quarter, which kind of helped us out from a revenue We signed large deals that are somewhat impactful given the kind of the quarterly revenue flow. So I think they are one of the same. That's a good catch.

Speaker 6

Okay. So with that in mind, if you recoup some and I guess you incrementally added some, Your calculated subscription billings were effectively flat year over year And you guided for subscription growth of call it 1.4%, mid 1% growth for the Q2 year over year. So I think other people have asked this on the call. So the conviction, I guess, Churn improving in the second half, are you expecting in the macro to improve in the second half? How do we and I'm not saying it's a high bar, but you got to see pretty significant reacceleration in the second half relative to where we are in Q2 And where billings were in Q1, to get to kind of your midpoint, so I'm just kind of trying to understand the logic there.

Speaker 5

So Chad, I think when you're looking at Billings growth, it was over 4% in Q1. I think maybe what you're not doing is normalizing out the logistics impact from a year ago. But happy to go through

Speaker 6

With subscription billing?

Speaker 3

Yes.

Speaker 6

Okay.

Speaker 5

Happy to go through those numbers specifically with you later.

Speaker 6

Sure.

Speaker 5

But I think you're not taking out the logistics From last year.

Speaker 6

Well, logistics should have annualized, right?

Speaker 5

Yes. So Normalized for logistics subscription billings year over year growth was just over 4%. So Sorry, what's the follow-up from that question? I just wanted to correct that, but

Speaker 6

Okay. Didn't you have the logistics of full quarter last year also or am I wrong?

Speaker 5

So That's a you basically need to normalize that out from the balances from that quarter. It's a normalized change in the accounts receivable. But happy to walk through on that happy to walk through how that normalization works.

Speaker 6

Okay. And so you don't expect any macro improvement in the second half, maybe that's the best way to ask it?

Speaker 2

I think we're expecting it to be as we kind of said, Greg. I think we're kind of seeing, I mean, as expected, And we didn't build a lot of macro build into our overall plan for the year. So I think things are progressing as expected.

Speaker 6

Okay. And then is there a way to think about just in the existing base today, Michael, How many customers have more than 2, 3, 4 modules from a penetration standpoint?

Speaker 2

We do some of that work and we know that especially with the addition of the last two acquisitions, which were at more customers And specifically, Blue Jay had a lot of larger customers added. We are seeing incremental pickup, but many of them have either 1 or 2 still when we kind of bring them in. So by definition, they come in with as a single point solution company because that's all that company had. So that process, that doesn't happen overnight. We have many examples of adding solutions to clients, and we I mentioned one on the call today, but that process continues.

Speaker 2

I think that's really the long term potential we see in the business is that People don't change their supply chain applications overnight. They don't just change them out because they now have more access under a single Partner, but over time, our probability of success is incremented because there are already clients, already know us, already have proven success with us. Kind of what takes me back to Mark's question around our conviction about growth It's because we have a lot of solutions, we have a lot of customers and it's just a matter of penetrating that over time, which gets us back to the long term nature of our strategy, because those customers don't aren't going to go away and their need for supply chain software only increases over time.

Speaker 6

Got it. Thanks for taking my questions.

Speaker 2

Great. Good to hear your voice.

Operator

The next question comes from Andrew Obin with Bank of America. Please proceed.

Speaker 9

Good evening. This is David Ridley Lane on for Andrew Obin. So Just wondering on the Q2 guidance, and what that implies sort of on a sequential basis for subscription revenue. How much of that is just the last bit of this elevated churn versus what you're expecting in bookings? What are sort of the puts and takes If you looked at it sequentially.

Speaker 5

I would say, churn, as you mentioned, is a big part of that. And again, we don't provide specific bookings guidance, but obviously churn has a the elevated churn in the first half that we've talked about In prior quarter and this quarter has the main impact here.

Speaker 9

Got it. And then Based on the bookings so far this year, Are you starting to I know you mentioned a couple of client wins, but more broadly, I think the large client Behavior was the sort of the thing that had shifted on you. Are you starting to see signs that that's improving?

Speaker 2

I'd say, it's partly because we had a number of deals that were in our pipeline for a long time that come through. But I don't really see I still think big companies are very judicious about writing long term commitments for large ticket items overall, and they're very cautious at this point. So they're not rushing to do that. So the things that do get approved Go through multiple steps. I don't think that really has changed.

Speaker 2

So the duration is has increased in our pipelines. We see that. Now obviously, that means they tick up a bit. And then when you have a lot of large deals go, it goes down a bit. But I don't I think there's a lot of change in behavior or sentiment at this point.

Speaker 2

I think people are still trying to understand this macro environment where you have High inflation, high employment at the same time, and you have an increasingly aggressive monetary policy. So I think every time we're trying to figure out what that looks like in as the year goes on. And there's been a forecast of recession now for the last 5 quarters or 6 quarters and everybody's trying to figure out is that going to happen or not happen. So I think this is for us in our particular markets a

Operator

We have no further questions in queue. We have reached the end of the question and answer session. This concludes today's conference and you may disconnect your lines

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Earnings Conference Call
E2open Parent Q1 2024
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