E2open Parent Holdings Inc (ETWO) 2022 Q2 法說會逐字稿

Good afternoon, everyone. At this time, I'd like to welcome you all to the E2open Fiscal Second Quarter 2022 Earnings Conference Call. I'm Adam Rogers, Senior Director of Investor Relations, here at E2open. Today's call will include recorded comments from our Chief Executive Officer; Michael Farlagus; followed by our Chief Financial Officer, Jared Janik. And then. We'll open the call for a live Q&A session. (Operator Instructions). A replay of this webinar will be available on our website. Information to access the replay is listed in today's press release, which is available at e2open.com in the Investor Relations section.

Before we begin, I'd like to remind everyone that during today's call, we will be making forward-looking statements regarding future events and financial performance, including guidance for our full fiscal year 2022. These forward-looking statements are subject to known and unknown risks and uncertainties. E2open cautions that these statements are not guarantees of future performance. We encourage you to review our most recent reports, including our S-1, 10-K and our 10-Q or any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. And finally, we are not obligating ourselves to revise our results or these forward-looking statements in light of new information or future events.

Also during today's call, we will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are included in today's earnings press release, which can be viewed and downloaded from our Investor Relations website.

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

Thank you, Adam, and thank you all for taking time to join us for our second quarter fiscal year '22 earnings call. Q2 was a blockbuster quarter for E2open across the board. We exceeded our targets on every dimension and accomplished a quarterly organic growth rate of nearly 13%. We reached double-digit organic growth 1 quarter earlier than expected and also raised our guidance for the second time in 6 months.

E2open will reach an 11% annual organic growth rate on a stand-alone basis for FY '22 as compared to our original projections of 10% growth for this fiscal year.

Before I provide more detail regarding our recent results, I'd like to share my perspective on the long-term trends that are contributing to our success and to our accelerating growth rate. Our core client base of very large global companies, demand supply chain visibility and control across their extended supply chain networks. Their networks are increasingly complex, relying on hundreds, if not thousands of trading partners and tens of thousands of people to make and bring goods to market. The well-publicized product shortages, port congestion and overall supply chain challenges, have created more focus on global supply chains than at any other point in my 30-year career in this industry. The trend towards more complex supply chains is accelerating and our core client base are turning to E2open to resolve this complexity.

Supply chain excellence is no longer relegated to functional leaders. It's now firmly a Board and CEO imperative. Their focus is on improving their end-to-end supply chains. And to do so, they need better software. We have a tremendous opportunity in front of us, as evidenced by our very strong second quarter earnings a robust and growing pipeline, expanding yield on that pipeline and expanding new client wins. Our platform helps clients avoid problems on 1 hand and react to problems more quickly on the other. We do this by bringing a company's entire ecosystem of partners into 1 interconnected platform. Our approach creates a much more accurate and granular view of future demand while allowing our clients to adapt more quickly to changes they will inevitably encounter.

The only way to solve these seemingly intractable supply chain problems is to connect real-time data with the world's best algorithms that is E2open. Our largest clients view us as their supply chain. While companies require the ability to adapt to rapidly changing environment, they also want more sustainable supply chains.

I'm proud of how we are helping our environment by making our customer supply chains more environmentally friendly. We do this by reducing waste and helping our clients use the lowest cost transportation, which typically carries the lowest carbon footprint, think ocean transportation versus air transportation. Ocean transportation is 8x less expensive than air transportation and comes with a much, much lower carbon footprint. I'll note that we released our first ESG report earlier this week, and it's available on our website.

Our vision is to become the supply chain operating platform for the world's best and hardest companies. All brand owners operate for complex supply chains. Some more complex than others, some more global than others. They all invest heavily in supply chain software. We believe the current fragmented nature of supply chain technology provides a unique opportunity for E2open. We are quite simply the best positioned company to capitalize on this unique moment in time. The supply chain software market is very large -- over $50 billion. This market is now growing at double digits and continues to inflect upwards. Most large brand owners have a significant footprint of on-premise siloed legacy software. They need end-to-end software. They need that software in the cloud. The move to cloud has clearly begun but it is still in very early innings.

We are an end-to-end cloud-based software company. Most supply chain software companies of our scale are converting to the cloud and provide a silo or singular solution. We are the largest cloud provider in supply chain software. We have the broadest set of functional capabilities, the largest network, and we serve a wide array of industries. We have a powerful and proven M&A engine to further extend our capabilities and our platform. We are in the process of networking the world's industrial capacity, client by client, network by network function by function. Our market perspective and informs us on how to capitalize on our unique position. Our vision is to be the definitive cloud software provider that helps the world's largest companies make and bring products to market.

Our second quarter was a record setting on nearly every dimension. We accelerated our revenue growth to 13%. The highest revenue growth the company has had in the past 6 years. We reached our goal of over 10% growth 1 quarter earlier than projected. We generated over $92 million in total non-GAAP revenue. Given the strong performance in our first half, in early September, we announced in Open will be at 11% organic growth for fiscal 2022 on a stand-alone basis. This raised our revenue guidance for the second time in 6 months.

We raised our revenue guidance again for 3 reasons: one, very high confidence in future revenues, given 82% of our revenue is derived from subscription contracts, most of which are 3 years or longer. 77% of that revenue is from clients with an average tenure of over 14 years. We know our clients; two, before growth investments we previously outlined are materializing much, much sooner than we expected, driving increasing revenue for fiscal '22.

I'll provide more detail on this in a few minutes. We continue to see net pipeline growth and our conversion rate and average selling price are meaningfully expanding. In addition to growth acceleration, We generated strong adjusted EBITDA results for the quarter of nearly $34 million. We have previously announced building 4 growth levers this year to drive incremental growth next year. Those initiatives were, bundling and packaging our solutions more effectively; building a new logo sales team, developing and signing strategic partnerships and monetizing our network. Those growth levers are converting to revenue much more sooner than we had ever imagined.

I'll give you an update on our effectiveness for these 4 areas: bundling and packaging. Historically, for all contracts are renew in a year, the average subscription increase from price and upsell has been 14%. On record company bookings for the first half of FY '22, that metric is 22%, providing us confidence that our approach to packaging and bundling is driving the intended results. New logos. At the beginning of this fiscal year, we announced the addition of a new logo sales team. That addition to our go-to-market engine is clearly kicking in much faster than we had expected. On record first half bookings, -- Our new logo composition was 22% versus our historical average of 16%.

Partnerships. We articulated our objective of signing 3 to 4 new strategic partnerships. We have now signed 2 in the first half and have 3 in total. The partnership with Vizient is a great example and very strategic. Vizient is 1 of the largest GPOs for the health care provider industry think hospital networks. And we've all seen just how much supply chain improvement the U.S. health care system needs and monetizing our network. Our previously announced partnership with DNB is providing revenue sooner than expected, but we are still in very early innings in a multiyear growth plan.

In summary, for these 4 growth levers. We had a plan. We thought it was realistic. It turned out to materialize much more quickly than we had ever expected.

Moving to some highlights from our second quarter. We signed notable new and existing client platform deals this quarter. As a reminder, our platform relationship is where we have strategic alignment to roll out significant portions of the platform across a multiyear strategic plan. An existing global automotive client signed a 5-year extension more than doubling their $2 million annual subscription, a new logo in the transportation industry signed a $2.5 million annual subscription. A new logo in the contract manufacturing sector signed $1 million annual subscription. And a new logo win for nearly $1 million of annual subscription with a leading specialty apparel company.

Before I turn it over to Jarett, I'll reflect on our recent recognition by our industry and what we are doing to further build the machinery of our business. In recognition, we are the leader in multienterprise supply chain management, which is, in fact, what supply chains are. We are the #1 provider with each analyst that has a report in this category. Gartner, IDC and Nucleus. In addition to our business, on September 1, we announced the closing of our largest and latest acquisition of Blujay Solutions. Like the previous 11 combinations we have made in the past 5 years, we integrate quickly, having already effectively combined the business into 1 organization and selling platform. The first lease of the combined solutions will occur in February. We are well on our way and ahead of pace when we compare to the previous 11 combinations. Jarett will speak in more detail about the integration shortly. With the progress that Eden has made achieving its growth target and to capitalize on the momentum in the marketplace. We continue our investments in sales and marketing. Most recently hiring Chief Marketing Officer, Kari Janavitz. Kari joins us from TE Connectivity and is known as an innovative and game-changing CMO with a proven track record for companies and brands. She will be a vital part of our leadership team as we continue to accelerate growth.

Lastly, as I mentioned in my opening, E2open released its inaugural environmental, social and governance report this week. While our own company's environmental impact is small, we believe our software can have an enormous impact by reducing the environmental impact for our clients as they produce transport and distribute their products. You can find the report on our website at e2open.com.

With that, I'll turn it over to Jarett to provide more detail regarding our financial results. Jarett?

Thank you. As Michael mentioned, we're pleased with our results for the second quarter, and we continue to see positive momentum in the market. Today, I'll begin by giving an update on the Blujay integration and then review our fiscal second quarter results. I'll comment on our outlook for the remainder of our full fiscal year 2022 and and then finally, quickly touch on our long-term growth targets. Thereafter, we'll open the call to your questions. We'll start with an update on the Blujay integration. We are deep in the execution phase of our integration of Blujay Solutions, which we closed on September 1. Total synergies related to the recent Blujay combination are projected to be $25 million. or 25% better than previously announced, $20 million. The company expects to achieve between 50% to 60% of run rate savings by the end of fiscal 2022. The action synergies of 50% to 60% represent the achievement of run rate savings as compared to the total annual synergy value. Realized synergies of between 25% to 30% will be earned in fiscal '22, and they represent the portion of those action synergies that have been recognized in earnings during the periods presented. We anticipate this metric moves to nearly 90% for fiscal 2023 with 100% of the synergies being executed and just the remaining year-over-year growth in earnings from those synergies that we anticipate will action in the first half of 2023 to come in the following fiscal year.

As a reminder, 1 aspect of this transaction I'd like to highlight is that most of our core investors that were subject to a lockup that was set to expire on August 4, have agreed to extend their lockup as part of the transaction for an additional 6 months from the closing of the combination, which occurred on September 1, including the significant selling shareholders of Blujay Solutions.

This afternoon, I'll talk about our results on a non-GAAP basis. We show a reconciliation to GAAP measures in our press release, which is available in the Investor Relations section of our website at e2open.com. We generated total revenue in the fiscal second quarter of $92.3 million, representing an increase of 12.8% from the fiscal second quarter of 2021. As Michael mentioned earlier, we're very excited to have achieved this important milestone 1 quarter earlier than we had planned at the beginning of the year. Looking down by reporting segment. Subscription revenue was $75.9 million, up 10% over the prior year period. Our professional services revenue was $16.4 million, a 27.9% increase from the fiscal second quarter in 2021. The principal non-GAAP adjustment to revenue in the period is related to the amortization of a fair value adjustment to our deferred revenue balances resulting from the business combination with CCMB1 in February. We expect to have a similar adjustment related to the acquisition of Blujay. The increase in subscription revenue was mainly due to new organic sales in prior periods across our customer portfolio. The increase in services revenue reflects a return to normal for our business as the prior year quarter was impacted by delayed delivery of services due to the COVID-19 pandemic.

Our services margin also improved and was due to this return to more pre-COVID levels but was partially offset by our ramping of headcount for increased services demand that we are currently seeing in the business and projecting in the back half of this year.

Continuing down the income statement. Gross profit was $68.1 million in the fiscal second quarter, up 16.5% from the prior year period. The increase in adjusted gross profit was primarily related to new subscription sales from the prior year, coupled with the return to normal of our services business. Gross margins improved to 73.8% for the second quarter of fiscal 2022 from 71.5% for the second quarter of fiscal 2021.

Adjusted EBITDA was $33.5 million compared to $26.2 million in the prior year's fiscal second quarter. Adjusted EBITDA margin improved to 36.3% for the second quarter of fiscal 2022 compared to 32% for the second quarter of fiscal 2021. And as a direct result of strong operating results related to organic revenue growth coupled with the leverage we've built into our business around scaling of our costs. Also, we are just beginning the return to normal as it relates to travel in certain office-related expenses.

Now I'd like to reaffirm our non-GAAP revenue guidance and increase our guidance for adjusted EBITDA for the remainder of fiscal year 2022. For the full fiscal year 2022, we expect total non-GAAP revenue to range from $470 million to $474 million, representing an organic revenue growth rate of over 10% and up from the initial guidance of $466 million on a like-for-like basis. Adjusted EBITDA is expected to be in the range of $161 million to $163 million, an increase of $3 million to $5 million from the $158 million guidance provided at the announcement of the Blujay transaction, again, on a like-for-like basis. Non-GAAP gross profit margin is expected to be in the range of 70% to 72%.

To provide the appropriate comparison of our actual results, we've included in the press release the tables that will help walk forward the projected pro forma performance of the business, including Blujay for the full fiscal year 2022. We have, for comparison purposes, shown the full fiscal 2021 for E2open in the period September 1, 2020, through February 28, 2021, for Blujay. Similarly, for the as-reported guidance, we are incorporating the full year of E2Open and the period from closing September 1, 2021, through February 28, 2022, based on our original acquisition model. We are increasing our guidance based on the anticipated performance of the combined business.

I want to finally quickly touch on our long-term growth targets and remind everyone what we said last year and how we are progressing towards them today. Because of our momentum and progress, we are confident in reaffirming our long-term growth objectives. We believe, we can grow in the low double digits for a very long time and this quarter, we achieved an important milestone. We have a lot of operating leverage in our business, which you can see in our margins, which we will operate in the mid-70s for gross margin and mid-30s for our EBITDA margin. We will continue to invest in our ability to grow faster as we grow larger, balanced with the appropriate return on those investments. We will continually reevaluate these targets and update you as our business expands, and as we continue to invest in the company to accelerate our growth rate.

In summary, E2open had a fantastic second quarter from both a financial and operating perspective. We remain laser-focused on executing our growth strategies to capitalize on our multibillion-dollar market opportunity.

With that, we would now like to take your questions. Adam, we're ready to begin the Q&A session after a brief pause.

Thanks, Jarett. Please give us a moment to turn our cameras on and get situated. (Operator Instructions). And our first question will be from Taylor McGinnis from UBS.

Great. Can you hear me?

Yes.

Perfect. Congrats on the quarter. Maybe to start, I think you mentioned bookings growth of 22%, which I think compares to 80% last quarter. So since we don't have much visibility into the trends historically, can you maybe bridge the gap between the 2? Like whether it was an easier compare or if there was a difference in large deal volume? And also maybe on that, too, I know you guys made some pricing and packaging changes. So curious if that started to contribute at all.

Yes, that bookings number is not the bookings growth overall. That was to compare upsell from the previous periods, which historically ran 16% in historical periods and now is running 22%. And that's a result of our effectiveness in packaging and pricing on just the upsell. So that's not our entire bookings number. I just wanted to focus on that 1 area of growth.

Got it. Are you able to provide maybe like color or even directionally how the business has been trending from like a bookings perspective or a pipeline perspective relative to what we saw last quarter?

Sure. The pipeline continues to expand, and we've seen that through the first half, and it continues to expand even to start the third quarter as well as our our yield is expanding as well. So we had a record first quarter and a record second quarter, and we're hitting on all cylinders and bookings. So very positive results on the booking side.

Got it. And maybe my last one, just on Blujay. Now that it's part of the business, can you talk a little bit more about the cross-sell potential and overlap between the 2 businesses and maybe anything that could be embedded in the guide or what could be potential upside going forward? And then as a part 2 to that, just on the EBITDA margin raise and the additional synergies. Can you just provide a little bit more color on what are the drivers there?

Yes. I take -- I mean, sorry, Jarett, I want to take the second question, and then I'll sit back into the first .

Yes, absolutely. So just a quick update, Taylor, on where we are on the synergies. We've executed all of the people synergies and communications during the month of September. And in finalizing all those plans and putting the right people in the right seats and assigning reps to accounts and the like, we ended up doing better than we had originally built into our forecast model to underwrite the deal. So we ended up landing on total run rate savings of $25 million. Part of that is reflective in the upping the EBITDA guidance. Part of that is just from the normal health of the business doing better than we had anticipated at the beginning of the year. So it's a little blend of both. The bulk of the synergy realization will happen next year. And then, there is a little bit of year-over-year that will benefit from looking '23 versus '24. But there -- all of the synergies will be done in our next fiscal year in terms of achieving that run rate safe.

On the and on the opportunity with Blujay, our acquisition strategy, accommodation strategy is predicated on functional additions where we don't like to think about overlapping products. And this is no different. Blujay has about 250 or 300 enterprise customers, and that's the same number we have. There is very little overlap, maybe 10%. And Blujay had primarily the TMS focused on that enterprise class customer, which is 1 product. We have 7 other product families. So we think the upsell, cross-sell is -- opportunity is extraordinary because they sell to the same types of customers that are large over $10 billion in revenue and have the complexity and need for all of our products. So that process starts immediately. We reset the team to 1 go-to-market platform, starting on November -- September 22. And we are actively pursuing opportunities as we speak. So we think there's a tremendous opportunity for us to continue cross-selling, upselling just into a much larger overall customer base.

Our next question is from Andrew Obin of Bank of America. Andrew, i think you're still on mute.

Okay. Can you hear me now?

Yes.

Let's try the zoom thing. So I guess, 1 of the questions in terms of client response to supply chain pressures. Have you seen any noticeable shift in the sales cycle basically at clients speeding up or slowing down over the last 6 months?

Yes. I think overall, projects are moving through our customers' system faster. And I think that shows up in our new logo uptick. Usually, those cycles take much much longer, and we're seeing those kind of actually happening more quickly. We noticed 1 automotive customer, and we're going to start with the chip side, and we think we can add great amount of opportunity to help them smooth out some of those issues. So I do think things are moving faster. And the big reason is, this is now a much more cross-functional decision at a much higher point in the organization. So no longer are our sales cycles at functional levels mostly -- they're much higher. And that would be at the Board and CEO level. And those projects tend to move faster than a functional leader trying to drive a project. So we do see kind of acceleration in our overall sales cycles.

Yes. And I'd add that I think you can see some of that too and where clients would have bought in 3 parts are now buying in 1 part, we don't have enough data points yet Andrew to say it's a complete trend, but the ASP and the number of things that are being bought together has, I believe, increased so far in this fiscal year.

Got you. And maybe among the 7 product groups, sort of just to talk about demand across solutions, what's seeing the strongest uplift in demand currently versus the start of the year?

Yes. I think transportation logistics, for sure. And then, we're also seeing a pretty big uplift in our collaboration side of our business. That part of our business connects the supply base to the manufacturers and multi tiers. And we've seen significant traction in that area. So those are 2 big areas. Demand sensing for us is a very differentiated product. And that always has a high demand. But I think from an uptick from maybe 9 months ago, I think those 2 areas I mentioned will be the greatest uplift.

And I'm going to be very selfish. And -- It's -- but it's just a question I get asked every day. When do you guys think supply chain pressures will get better.

They're going to get incrementally better. It's going to take some time. And I know that obviously, the President made some comments today about focus on ports, which will be helpful. But you essentially have a supply-demand imbalance going on at this point and it's going to take a while for that to work its way through the system. So I think this issue is going to be here with us for 6, 9 months at least. And I think the implication for us is that people need a different kind of infrastructure to manage a more complex supply chain. And what companies really want to do is understand demand more clearly and then be able to react to problems more quickly and our platform does just that. So I think the companies that invest in these areas will do better. The ones that don't, will continue to struggle.

Our next question comes from Mark Schappel with Loop Capital.

Can you hear you, okay?

Yes.

A very nice job in the quarter. Congratulations, and thanks for taking my question here. Some of my questions have already been answered, but Michael starting with you, given the growing headlines around the log jams we're seeing in the U.S. ports, are you seeing increased interest in your intra-ocean shipping platform along that front?

More on the visibility side. So we already are pretty -- have the a very large percentage of ocean bookings, and that continues. But we definitely see visibility being 1 of the very hot topics. So companies, obviously, if they don't know where their products are in the cycle, they want to understand first where it is and then they also want to link that to what the order was so they can start to understand what implications they have upstream and downstream. So companies ship product for a specific reason. And our platform allows them to understand not only where the product is, but also understand why were shipped in the first place. And then what that means is they can react more proactively to try to meet their needs of the business on an ongoing basis.

Great. And then while I'm on the ocean shipping theme. On the partner front, I realize it's still early days, but I was wondering if you could just give us an update on your partnership with shipping giant I mean...

Going really well. And I think we're seeing a lot of positive momentum and uptick. We are in the process of kind of calibrating for what they see as a very, very large demand. And we're super excited about what that means to us on a very long-term basis. So I couldn't be any happier with that partnership. We couldn't be any happier with the reception in the marketplace for that product.

Great. And then finally here, I was wondering if you could just comment a little bit on pipeline yields. I mean they have been growing throughout the last couple of quarters, which is good. And I assume it's fair to assume that pipeline yields continue to improve for you.

Yes. We measure pipeline and yields very carefully. The pipeline size gives us an indication of what the future is going to hold. The pipeline continues to grow even though we're having very large booking quarters. And we're getting incrementally better yield on the larger pipeline. So we see that as very positive for our business and very positive for the next several quarters.

Our next question comes from Will Kafoure from (inaudible).

Congrats on the results. So you mentioned this year some new logo win partnerships this year, and I guess, what I would consider less represented industries for you to open historically. I guess, health care was mentioned his most recent quarter. Maybe talk about what you're seeing from a more broad-based basis and demand from those industries and how large this might be potentially?

Yes, it could be very large for us, we expect it to be. And it will take time because what we're really identifying are markets that really need our platform but are a little off center for us in terms of our core market presence. And we identify companies that have large market presence in those areas, but don't have technology solutions, but would like to offer them. So for us, it's a matter of developing a much more larger indirect channel and allowing us to participate in markets more quickly than we otherwise could. So we think we can add these partnerships sequentially over time, and we think they grow larger as they go. So we think there's a compounding element to these partnerships, and we mark is the 1 where we signed the earliest. And we're actually seeing that compounding opportunity happening as we enter the quarter. So we're super excited about those, and we have several more of those types of partnerships in the pipeline that we're actively pursuing.

Okay. That concludes our conference call this afternoon. Thank you, everyone, for attending.

Thank you all. Have a great day.