E2open Parent Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 9, 2024

There are 9 speakers on the call.

Operator

Greetings. Welcome to the E2 Open Third 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. Please note, this conference is being recorded.

Operator

I will now turn the conference over to your host, Dusty, Beaul, you may begin.

Speaker 1

Good afternoon, everyone. At this time, I would like to welcome you all to the E2 Open Fiscal Third Quarter 20 24 Earnings Conference Call. I am Dusty Buell, Head of Investor Relations here at E2 Open. 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, Marie Armstrong. Following 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 that 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 Q4 and full year 2024. These forward looking statements are subject to known and unknown risks and uncertainties.

Speaker 1

Need to open 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'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 Interim CEO, Andrew Appel.

Speaker 2

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 E2 Open as the Interim CEO 3 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 has leading to will transform our commercial function and improve our sales execution. Finally, Marie will review our Q3 financial results and guidance, And then we'll open up the call for your questions.

Speaker 2

I'll start my comments with a simple but important note. I believe that E2 Open possesses the key ingredient Successful high performing company that delivers unparalleled value for clients, generates healthy organic growth and generates attractive and shareholders return. 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 3 months being advised prior to that, I believe the ingredients that position E2 Open for success are the following. First, we have a software portfolio that is unique in its breadth, execution capabilities and ability to leverage connected networks and data.

Speaker 2

This strong product offering has made us trusted partners are in 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 3rd party analysts as industry leading and they provide a powerful ready built foundation for growing our business. 2nd, the addressable market for E2 Open'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 E2 Open, this presents a major market opportunity.

Speaker 2

And finally, I'm very impressed with the people of E2 Open. They are the world's supply chain experts with a deep understanding of our clients' operating models And a passion for collaborating to deliver reinvention and impact. While E2 Open has the right ingredients 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.

Speaker 2

As we all know, building a scaled company through M and A requires much management time and attention. E2 Open'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 reaccelerate growth by moving back to an approach that leverages our client centric From my perspective, the first priority is to lower our churn rate back to historical norms. Since the Q4 of FY 'twenty three, we've experienced higher churn that has negatively impacted our revenue.

Speaker 2

As we have noted previously, the main drivers of this higher have been soft high-tech spending, M and 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 Over the past 6 weeks, I have conducted multiple in-depth half day reviews of every situation where there is a risk will churn through the end of FY 'twenty five. Our visibility into this issue is now greatly improved and we have action plans in place turn most of these clients into net promoters of E2 Open in short order. In addition to controlling churn, An equally important priority is to win more new business.

Speaker 2

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 at 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 1st full quarter in the role, we saw encouraging signs of positive momentum and better sales execution.

Speaker 2

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 traditionally marketed solutions based on features and functionality, I believe E2 Open has much to gain by quantifying and clearly communicating the unique operational and financial impact that our solutions can drive to 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 the singular goal of delighting our clients.

Speaker 2

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 projects 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 reduce churn and it can facilitate far better execution of our land and expand strategy to drive new cross sell and up sell business with our world class client base. And it can generate more referenceable clients, both companies and individuals that will serve are powerful advocates for E2 Open as we seek to win new logos or expand into white space at existing customers. In sum, my 1st 3 months at E2 Open have been busy, enlightening and productive.

Speaker 2

The observations I've shared with you today are a snapshot 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, we 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.

Speaker 2

In the meantime, I'm very proud of the way our teams are pulling together and collaborating towards a common goal. And I'm 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.

Speaker 3

Thank you, Andrew, and good afternoon, everyone. On our Q2 earnings call, I outlined the issues I believe 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 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.

Speaker 3

And during the Q3, I brought new sales leadership into the organization in 2 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 E2 Open. 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 we are taking to achieve sales excellence.

Speaker 3

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 E2 Open's 5 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 our cross 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 E2 Open.

Speaker 3

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 SIs and other key distribution relationships. The goal of this strategy is to materially expand E2 Open'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 E2 Open 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've now visited most of E2 Open'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.

Speaker 3

Going forward, this type of proactive routine customer touch point will be at the core of E2 Open's 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 4th quarter churn to remain elevated.

Speaker 3

Overall, my philosophy and the way I will manage the commercial organization is that E2 Open 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 3rd quarter. This improved execution, which spans cross sell, up sell, new logo wins and new attached and unattached professional services engagements clearly demonstrates E2 Open's potential for growth as we fully implement the sales execution changes I've described. For example, on the cross sell and up sell side, we booked 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.

Speaker 3

And on the new logo side, we added well known global suppliers of transportation and agricultural equipment are welcome 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 selling a range of solutions, including transportation and global trade management, multi tier supplier collaboration, Global logistics orchestration and channel optimization.

Speaker 4

As I noted,

Speaker 3

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 E2 Open's competitive strength 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 E2 Open. At this time, I like to turn the call over to Marie for a discussion of our Q3 results and updated guidance.

Speaker 5

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 have brought to E2 Open 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.

Speaker 5

I will begin with an overview of our 3rd quarter results. Our subscription revenue was $132,800,000 representing 84% of our total revenue. While this is near the high end of our quarterly guidance, The negative 1.5 percent 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 $1,000,000 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.

Speaker 5

However, the better sales execution in Q3, along with all the work we're 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 $24,700,000 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 3rd 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.

Speaker 5

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 Q3 was $157,500,000 This reflects organic growth of negative 4.5 percent over the prior year quarter. Non GAAP gross profit for the fiscal Q3 was $109,700,000 Reflecting a 3.4% decrease on an organic basis. Non GAAP gross margin was 69.6% in the 3rd quarter Compared to 68.9 percent in the prior year quarter.

Speaker 5

Our Q3 gross margin performance benefited in part from cost efficiencies in our services business that will be actioned this fiscal year. Turning to EBITDA, our 3rd quarter adjusted EBITDA was $55,400,000 compared to $56,200,000 in the prior year quarter, A decrease of 1.4 percent that was mainly driven by lower revenues. 3rd quarter adjusted EBITDA margin was 35.1% compare to EBITDA margin of 34.1 percent 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, were maintaining our focus on operational efficiency in order to ensure strong and sustainable profitability.

Speaker 5

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 Q3 of 2024 was 740,000,000 This net loss includes non cash impairment charges of $717,700,000 during the quarter. Similar to impairments we recorded in Q4 FY2023 and Q1 FY2024, the triggering event for the Q3 impairments was the decline in our share price that followed our Q2 FY 'twenty four earnings release. The Q3 net loss was also impacted by higher one time expenses, Including $4,300,000 of severance related to CEO and COO transition as well as other headcount actions. We also incurred higher non recurring professional fees during the quarter, mainly related to executive transitions.

Speaker 5

Now turning to cash flow. During the fiscal Q3, we generated $5,400,000 of operating cash flow. This figure was significantly impacted by non recurring cash expenses paid during Q3. These included The $17,800,000 litigation settlement related to 2014 Bluejay predecessor contract that we previously discussed are 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 Q3, we generated $34,000,000 of adjusted operating cash flow and our year to date cash flow, exclusive of non recurring expenses, were $79,000,000 As these results demonstrate, our underlying business continues to be a very healthy cash generator.

Speaker 5

Driving cash flow 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 concludes my remarks on our fiscal Q3 2024 results. At this point, I'll turn to a discussion of financial guidance. For the fiscal Q4, we expect subscription revenue to be in the range of $131,000,000 to 134,000,000 This range represents a growth rate of negative 4.3 percent to negative 2.1 percent as compared to the prior year fiscal 4th quarter. For the full fiscal year 2024, our guidance remains in line with what we communicated during our 2nd fiscal quarter earnings call, Except that we are now able to narrow the range given our Q3 results and our Q4 outlook.

Speaker 5

We're updating our full year guidance as follows. We expect subscription revenue in the range of $533,000,000 to $536,000,000 for FY 2024 versus our prior guidance of $530,000,000 to $538,000,000 We expect FY 'twenty four total revenue to be within the range of $628,000,000 to $633,000,000 versus our prior guidance of $625,000,000 to 635,000,000 We continue to expect FY 'twenty four gross profit margin to be within the range of 68% to 70%. Finally, We continue to expect FY 2024 adjusted EBITDA to be within the range of $215,000,000 to 220,000,000 This range implies an adjusted EBITDA margin of 34% to 35% for FY 'twenty four. Emphasizing the strong importance we place in cash flow generation as a key performance indicator, I would would like to provide an update on our cash related expectations for the year. In terms of key drivers for FY 'twenty four cash flow, Our expectations around full year CapEx continued to be approximately 5% of revenue in FY 2024 versus 7% of revenue in FY2023, Which included M and A related CapEx.

Speaker 5

We still plan to drive year over year improvements in working capital and expect FY 'twenty four working capital to be a modest use of cash. We expect net cash interest to be within a tighter range of $97,000,000 to $99,000,000 versus our prior expectation of $95,000,000 to $99,000,000 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 35,000,000 Contributing factors, as noted previously, include the $17,800,000 arbitration settlement, which we paid In fiscal Q3 FY 'twenty four as well as severance and professional fees. Considering the above cash related factors as well as our current expectations around FY 'twenty four adjusted EBITDA, we remain on track to generate a healthy increase in balance sheet cash by the end of this fiscal year, Both compared to fiscal Q3 and versus the end of FY2023, we continue to expect net leverage Approximately 4.3 times or below at the end of this fiscal year. As Andrew emphasized, E2 Open Possesses unique assets and capabilities and our addressable market is large and expanding.

Speaker 5

We have tremendous potential to drive organic growth and we're very encouraged by signs of improved business performance as we exited our fiscal Q3, 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 and A, I want to briefly acknowledge the Schedule 13D filed on behalf of Elliott Management on October 13th last year. Each Open routinely engages are in ongoing and collaborative dialogue with shareholders, and our Board and management team are committed to evaluating all potential have ways to maximizing shareholder value. Beyond this acknowledgment, we do not plan to make additional comments on this issue at the present time.

Speaker 5

That concludes our prepared remarks, and thank you all for joining us today. Operator,

Operator

Thank you. At this time, we will be conducting a question and answer the first question comes from Adam Hajkes with Goldman Sachs. Please proceed.

Speaker 6

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 plan to address those specific hotspots, just any more color on that would be helpful.

Speaker 5

Hi, Devin. This is Marie. Happy New Year. Great to hear from you. In terms of churn, our second half outlook has not changed.

Speaker 5

In terms of churn where we've seen elevate churn for this year. It's the same reasons that we discussed last quarter. The additional uptick from the middle of the year has elevated our outlook. For second half, it's really in the long tail of customers. We discussed a little bit how we've addressed it as a plan were in the last quarter, but since then, Andrew and Greg have really dug into this specific topic.

Speaker 5

So I'll let Andrew Add a little bit to this. But overall, our outlook and the reasons really haven't changed, but our approach to how we manage it has. So Andrew?

Speaker 2

Yes. Hey, Adam. How are you? Great. Thanks.

Speaker 5

All

Speaker 3

right. So on the I think I

Speaker 2

alluded to it in the Introduction. Our view on churn is that it ultimately comes from not Delivering clients everything that their expectations are. So that's back to like we need to delight our clients. I think we've done that. We're beginning to like get our arms around it.

Speaker 2

I've held 4 hour workshops to go through the largest accounts that have any You know, semblance of churn, we've got action plans in place. We've identified which ones are bendable, which ones are not, which ones are There's a time lag associated, but we are all over kind of caught every account that's over a certain threshold. So that to me is like Not long tail, whatever, may tail churn. And then concurrent with that, we have Counts below a threshold, call it long tail churn, for systematic solutions that will work Across that portfolio, that's probably this second half of January's work is to then Triage, because we do have a recently large long tail. My guess is we'll end up with 4 task forces, 4 to 6, each focused on some subset Of something we bought because that from some acquisition that isn't really part of our Enterprise Corp.

Speaker 2

Standard, but our aspiration is to come up with a kind of a joint an offer that will work for the bundle. The first task force is long tail transportation clients that are smaller. And so we are working With an offer effectively to retain as many of those accounts as makes sense for them as clients, right, as we

Speaker 6

Great. That's incredibly helpful. Thanks for that. And then I think it was either Andrew or Greg who talked about the FI strategy. Would just love for you to talk a little bit more about that.

Speaker 6

I know it was a relatively nascent strategy prior to You both joining E2 Open, but just any observations around the current state of the indirect channel and your confidence building it out priorities would be useful.

Speaker 3

Yes. Hey, Adam, it's Greg. Good to talk with you. Yes. Look, I think if we look at all of the growth levers that exist in this business, our SI channel provides one of the largest growth opportunities of all of the opportunities that exist.

Speaker 3

As you know, E2 Open has made significant investments over the last year in this market. And those investments are starting to pay off. The way I look at it is we've got a foundation in place now that we can build from. And much like what you hear from the new leadership at E2 Open, We are challenged with execution excellence in a number of aspects of our business. Sales obviously is one of them and our approach to the SI channel needed an uplift around execution as well, which is why I brought in are a new leader for that business.

Speaker 3

He is off to a very fast start. We have got core momentum From a pipeline perspective, with each of our top SI partners, we see significant upside from this business. It is something An area of growth that we're going to continue to invest in, continue to focus on, and again, we've made progress, But there is tremendous potential for this segment of our market.

Speaker 2

Yes. Hey, Adam. One Small thing to add to what Greg said, I think is that when we think of SI, we think of the major SIs As well as the hyperscalers and the Google Cloud, Hazards, etcetera. So we think of it broadly and it's already contributed to a couple new accounts that we've added to our portfolio in the last this year, let's say.

Speaker 6

Okay, really helpful. Thanks for taking the questions.

Operator

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

Speaker 7

Yes. Hi. Thanks so much for taking my question. So The first one is you provided a lot of color on the changes in the sales organization, but what inning are you in making those changes? Are there still bigger hires that need be made, still some restructuring that needs to happen.

Speaker 7

And just as we look into 4Q and beyond, when are you Expecting to see more stability in the sales force.

Speaker 3

Yes. Hey, Taylor, it's Greg. Thanks for the question. Look, I think I would tell you 1st and foremost, I'm super pleased with how the commercial organization has responded To the focus around being brilliant in the basics, as I said last quarter, and the focus around sales execution Has been very well received. We saw, if you remember, Taylor, from last quarter, I mentioned That we should start to see momentum over the 2 to 3 quarter period.

Speaker 3

And quite frankly, I'm are very pleased with how the team has responded, and we've established that momentum that I talked about. Separating the professional services organization from the traditional sales has had a really positive impact on both our professional services business as well as our traditional subscription business. So As I told my team, our challenges are reasonably basic and straightforward And quite clear, we don't need sophisticated organizational changes to tap into our potential going into the new fiscal year. So we're going to we saw significant momentum around the things that we've implemented. We're going to stay the course and continue to capitalize on the momentum that we've established.

Speaker 3

Essentially, what Andrew laid out in his opening remarks being laser focused on customer engagement and delighting our customers is our priority and we'll continue to build are the processes and the programs that drive that behavior and ultimately that engagement with our customers.

Speaker 7

Awesome. Appreciate it. And then just for my second question for Marie, a 2 parter for you, if you don't mind. So it looks like you lowered the midpoint of the 4Q subscription revenue guide by roughly a point, but it still assumes stronger sequential quarter over quarter growth than what we saw in 3Q. So Can you just comment on what you're seeing in the environment versus maybe your expectations that's driving that and some of the assumptions embedded?

Speaker 7

And then as a follow-up, I know you aren't giving guidance for next fiscal year, but just as we look Into next year, would it be fair to use the 4Q quarter over quarter growth as a Starting point for sequential growth next year, if we assume that sales productivity maybe is expected To improve, maybe that could ultimately lead to better sequential growth, but anything you can share in terms of the puts and takes there, I think would be helpful.

Speaker 5

Absolutely. Thanks for the question. So in terms of the first part of your question for Q4 guide, Overall, as you look at our guidance for second half, our view hasn't changed, right? And so quarter to quarter, as you obviously The timing of bookings, churn, even FX can really impact the revenues quarter to quarter when you're looking at year over year growth rates. Obviously, The year ago comps of the similar factors have an impact as well.

Speaker 5

So I wouldn't read into that I wouldn't read that into that at all. I think what the message really here is that our Q3 momentum and just the execution as we exited The quarter was materially improved versus Q2, which kind of gets to your second part of the question in terms of the quarter over quarter Improvement, obviously that has a positive impact sequentially for Q4. And also, obviously, Q4 in general is our Yes, just seasonally stronger quarter given the 2 kind of year ends we have in our Q4, Meaning the December normal year end and then our old fiscal year end in February. So we are very pleased to see sort of Better momentum, better execution, and really having an impact from Greg and Andrew and the team On the bookings side and also just a sharp focus as outlined on churn, but overall it takes a bit longer to effect, but we Definitely see how the plan will start taking hold there as well. In terms of the your last part of your question, in terms of FY 2025, Like you said, we don't guide to that yet.

Speaker 5

So the goal is to do everything you said, improve continue to improve, get back to the growth rates that we should have in double digits and build on momentum, but it's going to take some time. So again, stay tuned to FY 25 guidance when we provide it. But Where we sit now, we're very encouraged by the early signs that we saw this quarter.

Speaker 7

Great. Thank you so much.

Speaker 5

Thank you so much. Happy New Year.

Operator

The next question comes from Mark Schappel with Loop Capital. Please proceed.

Speaker 8

Hi. Thank you for taking my question. Andrew, starting with you, if I recall correctly, there were several ocean contracts that were coming up for renewal this year. And given that annual shipping volumes are down, I was wondering if you could give us a sense of whether you're starting to see ocean customers kind of renewing it at much Lower rates and maybe give us a sense of any kind of step down you're seeing.

Speaker 5

Maybe I'll start. Hi. Thank you for the question. Maybe I'll start and I'll hand it over to Andrew. The Ochin volumes and carrier, Sharon, who talked about previously, That's fully embedded into our guidance as you see it.

Speaker 5

And obviously, these are important customers to us and Both Andrew and Greg are very involved in working with them. So there's no nothing really new in terms of surprises here necessarily, but I'll let Andrew add to that as well.

Speaker 2

Yes. Look, I'll only add. We are in active, continuous discussion with all of our largest shipping clients. I think Our goal is to find new ways to serve them. We have called this morning with the team on one of them to Offset any volume based relationship that we have with them with new solutions that will help them achieve some of their aspirations in terms of growing their business.

Speaker 2

Well, it's just the nature of client relationships, right? Over time, they migrate, right? If you keep trying to sell the same thing, Then you'd be like selling an iPhone 6 today, right? So I just think You have to refresh your services. So in those discussions with carriers, of which I happen to be involved in 2 of the 5 or 6, They're all about a little bit of that, right, volumetric, coupled with here's 3 other things that we should be working on together to grow your business.

Speaker 8

Great. Thank you. And then, Greg, a question for you. With respect to the sales comp plans that you inherited when you came on board, Do you believe they're adequate or appropriate to generate the right level of sales productivity at the firm? Or do you think you need to make some changes to the comp plans here are this year.

Speaker 4

Yes. Hey, Mark, great to hear from you.

Speaker 3

Great question. Sales compensation drives sales behavior, And it's super important. I will tell you that I made some modifications For the second half, by the way, day 1 when I joined, I tweaked, made a modification to the comp plan To ensure the right behavior in the second half, but I'll tell you there's been one of the things that Lisa, our new operations leader in the commercial organization is taking on is an initiative to simplify are FY 'twenty five comp plan. And I love a scenario where a sales organization is are highly motivated and incented to drive the behavior of the results in top line profitable growth. And she and I have done this before and she's in really the final stages of finalizing an initiative have to put forth an optimized plan for next fiscal year.

Speaker 3

So I appreciate the question. It's something I'm super excited to roll it out, quite frankly.

Speaker 2

Yes, let me Great, thank you. Yes, I think what makes What Greg has done organizationally, which is to refocus the organization on a separation between the sales, delivery and The life, retention, whatever you want to call it, makes the opportunity for Simple like pay for growth, that's what sales do for. We want like we want to pay more sales comp because that means we're selling more stuff. At the same time, I think We need to figure out how people get rewarded for keeping what you got, which is a completely separate thing. Doesn't always have to be commissioned, doesn't always have to be something, but people need to feel like I get benefits from keeping, not just from winning.

Speaker 2

And so that's also something we're focusing on together.

Speaker 8

Thank you.

Operator

Okay. The next question comes from Chad Bennett with Craig Hallum. Please proceed.

Speaker 4

Great. Thanks for taking my question. So Just as whether it's Andrew or Greg, just as you meet with clients and review the product portfolio and all the assets that the company has acquired over the years, just curious kind of do you think everything kind of fits in the platform or in the portfolio going forward. Just curious on kind of how you think about the competitive positioning or product strength within the different segments, where you think you're stronger or where you think you could improve?

Speaker 2

This is Andrew. Look, I'd point out that first, the 1st 3 months has been very laser focused on churn, retention, clients, implementations and Delighting new clients and bookings. So I will say that, that has been the focus. What I would say in that process, I'm pretty impressed with the position of our main product lines. Nothing comes to mind.

Speaker 2

We're not in the Portfolio re optimization world, we're in the migrate all our clients to our latest versions of our great products So we have a pretty significant R and D spend that to make sure our products retain their competitiveness. And when we look at non wins, they're not out of whack with what you'd Exactly, an industry with 3 or 4 players in each micro space. Yes.

Speaker 3

Hey, this is Greg. I would just add that I've spent a lot of time with customers, in the last 90 days I've been to Europe twice, I've been throughout North America. I've got a West Coast tour next week are focused on meeting with customers. I am super connected with Pawan, our Head of Product. He and I spent a lot of time talking about the future of our product platform, our competitiveness near term.

Speaker 3

And if I look at the wins that we had in Q3 and the interactions I've had with our existing customers, I am more energized and optimistic about our future than I've been since I've been here. And If I think about the value proposition that our existing customers get from our platform, it's remarkable. And If I think about the wins that we experienced in Q3 and the level of value and honestly, the competitiveness of our sales team was super impressive to be a part of. And so like any company that has a broad product portfolio, we will always evaluate the fit to the market, but I couldn't be more excited about what we have to take to market and the value proposition that exists across our portfolio.

Speaker 4

Got it. And then maybe I appreciate the color. That's great. Just maybe On the as we look into next year, and I understand you're not giving guide into next year, but It appears this is obviously, as you've indicated, a multiple quarter transition and revenue likely will be under pressure heading into next year, probably even the first half. Just in terms of The durability or sustainability of the EBITDA margins in that mid-thirty percent range, is that something that

Speaker 2

Sorry, I stepped away for a second. It sounds like a Marie question.

Speaker 4

So either way, either way, sorry, yes, Marie or Andrew, either way.

Speaker 2

Look, I think Our cash flow and our margin are incredibly important to us to maintain the momentum that we have. So the short answer is yes. We're going to retain our target margin at the level that it's at today. We invest in clients and we invest in clients to make sure that they're excited about what we do. And I think We've demonstrated even in the last couple of months that there's an ability to do that without changing the margin profile of the business.

Speaker 4

Got it. I appreciate the color. Thanks much.

Operator

The next question comes from Andrew Obin with Bank of America. Please proceed. This is David Ridley Lane on for Andrew. So your churn is expected to remain Elevated in the Q4, you also noted churn decisions are made significantly in advance. So when do you expect sort of the changes in the work that you're doing to really read out in the reported churn metrics?

Speaker 3

Yes. Hey, David, it's Greg. Great to hear from you. Thanks for the question. Look, the reality is We are seeing improvements every day in the approach we're taking to laser focus are on serving our customers and delighting our customers, as Andrew said.

Speaker 3

And I think that the changes that we made are going into the Q3 to focus our teams in the markets that are best are applicable to where they focus. For example, if you remember from last quarter, we separated the sales organization, both PS and the commercial sales team. But within the commercial sales team, we also separated enterprise from what we call long tail, which is really the volume and velocity business, Thousands of customers, thousands of transactions where we have experienced recent increase in churn. By dedicating that team solely focused on the volume and velocity business, this long tail business, we've already seen signs of better visibility And to where we have risk, improvement in recovering some of the churn that had been identified, And more important, building out a more strategic plan going into FY 'twenty five that not only protects that base of revenue, What creates a growth engine for that aspect of our business? As you know, in enterprise software, you can't treat In a $15,000 transaction the way you treat a 7 figure transaction, you can't treat a multibillion dollar company the way you treat are $400,000,000 company.

Speaker 3

So we're approaching those markets differently with different DNA, with a different daily approach, And we're starting to see signs from that approach. The thing that Andrew mentioned in his opening remarks are that you've got a commitment from the top of the organization to get super involved And every customer who has some level of dissatisfaction. And Andrew and his leadership has created an atmosphere within this company So make customer success the number one priority when it's all said and done. So We're just getting started. We've been at this for 90 days.

Speaker 3

We've seen significant improvement, but the organization is rallying around This mindset, and we're expecting to continue to see improvements as we continue to roll out the plan that we've articulated.

Speaker 2

Got it. Thank you

Operator

for that. And then just a question on bookings. I'm just sort of reading the T leads here. Were bookings actually up year over year in the quarter?

Speaker 5

Thanks for the question. As you know, We don't report bookings and or year over year growth of those, but overall bookings are under pressure this year. We are encouraged by The better execution and better results than we anticipated. But again, we don't give specific guidance on bookings and year over year trends there.

Operator

Thank you very much. I would now like to turn the floor back to management for any closing remarks.

Speaker 2

Yes. I have I thought I would just close with a couple of general messages that are very similar that we're sharing with our colleagues, which is, 1, I see myself as an operating execution Gen oriented Growth CEO. So I am in every aspect of this business focused on delighting clients. I was going to say, sure, it has never gone until it's gone. I will fight for every penny.

Speaker 2

Same thing with making sure we delight and implementations, our goal is that they're leaving feeling like it's on budget, on time and they're happy with excited with the work. I am bringing I think this operational discipline, frankly, that the 3 of us are bringing to this organization will have an immense impact. It's just been a missing, right? And it's a natural that when you grow through 14 acquisitions that you don't have that level of operational Look at every single item as if it's your own, right? Treat it like it's your own money and you'll treat it differently And treat those clients like you want to work with them for the rest of their life and then the next life.

Speaker 2

So that's the third point. I think At the foundation of every great company are great products, right? That's the foundation. I've often said it starts with not losing the existing clients, The way you do that is by delivering exceptional products. And I think as I have reflected in the 3 months I've taken here, we have great products.

Speaker 2

Products are highly competitive in the marketplace. No product is perfect, but from external advice, we get Pretty good ratings from the products. The 3 of us are joined at the hip. Greg, myself, Marie, Paula and the ELT We joined at the hip, very focused. You heard Greg say it more times than I said it, that we're about delighting clients.

Speaker 2

And it's not that complicated, right? We've got to win new clients, keep the ones we got and make sure that when we win them that we deliver our solutions And to do that, I think about the word collaboration, right? When you're in a business and I've been in B2B all my life, Right. So I know that since you're 32 of serving businesses, and the only way you serve businesses With distinctiveness as you act like one team all the time, you collaborate and you collaborate to delight clients. And so we all watch a lot of NFL, right?

Speaker 2

The teams it takes a team to win a game. Everybody has a role to play. And so I am feeling good about the 1st 3 months. And I think we got a lot to do, but I think you should leave the call knowing that you have folks that are laser focused on making this a fantastic company through operational execution. I mean, I'm looking at spreadsheets of clients.

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Earnings Conference Call
E2open Parent Q3 2024
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