E2open Parent Holdings, Inc.

Good afternoon and welcome to the E2 Open Q1 FY 2023 earnings presentation. At this time, all participants are in a listen-only mode, but we will open the floor for your questions and comments after the presentation. If you would like to join the queue to ask a question, you may press star 1 on your keypad at any point. Should you wish to leave the queue, you may press star 2. It is now my pleasure to turn the floor over to your host, Adam Rogers. The floor is yours.

Good afternoon, everyone. At this time, I would like to welcome you all to the E2 Open Fiscal First Quarter 23 Earnings Conference Call. I am Adam Rogers, Head of Investor Relations here at E2 Open. Today's call will include recorded comments from our Chief Executive Officer, Michael Farlikas, followed by our Chief Financial Officer, Marie Armstrong, and then we'll open up the call for a live Q&A session. A replay of this call will be available on our website. Information to access the replay is listed in today's press release, which is available at e2open.com in the investor relations section. Before we begin, I'd like to remind everyone that during today's call, we will be making forward-looking statements regarding future events and financial performance, including guidance for fiscal second quarter and full year 2023. These forward-looking statements are subject to known and unknown risks and uncertainties. We do 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 on 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. And with that, we'll begin by turning the call over to our CEO, Michael Farlacus.

Thank you, Adam, and thank you all for taking the time to join us for our first quarter earnings call for fiscal 2023. First, I would like to thank our nearly 3,800 team members for another great quarter. We are very proud to have achieved strong results in the first quarter that positioned us very well for the remainder of our fiscal year. During today's call, I'll cover our first quarter highlights, an update on market trends impacting global supply chains and our business, our progress on the long-term strategy we previously outlined, an update on our investments and growth, our brand relaunch, and our efforts in ESG. And after those updates, I'll turn the call over to our CFO, Marie Armstrong, to provide further details on our Q1 financial results. Let's start with the first quarter. In Q1, we generated over $160 million in total revenue, $130 million of which was subscription revenue. For those new to our business, Subscription revenue represents over 80% of our total revenue and produces approximately 80% gross margin. For Q1, organic subscription revenue grew over 12% on a constant currency basis compared to last year. Notably, we have delivered organic subscription growth acceleration in this quarter, as well as for five of the six quarters we have been a publicly traded company. We also continued our strong track record of generating high margins and high free cash flow. Our Q1 adjusted EBITDA was $51 million, up 12% year-over-year, and represented a 31% EBITDA margin. Furthermore, we generated over $41 million of unleveraged free cash flow. This is equal to 80% of our EBITDA and 25% of our total revenue. We have built this business with a balanced approach to top line growth and profitability. This remains our focus. In summary, we're off to a great start of the year. We are especially proud of our first quarter results in light of the macroeconomic and geopolitical turbulence that has been impacting virtually every business in the world in one way or the other. Given the quickly changing broader macro backdrop, I wanted to provide my perspective on how EDA opened its position in these evolving market conditions. The economy is slowing. We can clearly see this in our data from both international and domestic transportation volumes, which are clearly trending lower. What's making the overall demand slowdown more complex is that supply chain constraints continue to exist for many physical goods due to the remnants of COVID disruptions, the war in Ukraine, and other geopolitical volatility. Global inflation is very real, given the lingering supply-side disruptions and geopolitical instability, which is further adding pressure to companies across the world. So what does this mean for Eta Open? Eta Open's unique position as the largest cloud supply chain software platform makes us more essential than ever for our clients at a time when navigating complex and ever-changing demand and supply problems requires more than just point solutions. Eta Open is uniquely positioned to capitalize on the broader focus of supply chains given the breadth of our solutions we offer on the platform. My conversations with our client executives continue to focus on them building more agility and resiliency into their supply chain infrastructure so they can be prepared for continued rapid market changes. We continue to hear from our clients that they are managing two significant trends. The continued transition from an on-premise siloed technology infrastructure to an end-to-end cloud-based infrastructure. Supply chains are obviously connected. Much of the software and data companies currently use is not largely connected. A strategic shift within our clients from building very lean but static supply and demand networks to to building very agile and dynamic supply and demand networks. This shift further increases our client's operational complexity, which in turn drives demand for better data and more connected applications. This is exactly what our platform was built to solve. These are long-term trends measured in years. Eat Open is well-positioned to capitalize on these trends, given our platform provides the accurate and timely data our clients need, along with highly integrated end-to-end applications. The legacy approach of companies acquiring multiple-point solutions and having to integrate them on their own simply costs more and obviously adds less value. We see demand growing for our pipeline data, and we continue to see consistent and even improving win rates. That said, we are not totally immune to a global slowdown, and we are seeing some examples of decision delays and project slowdowns primarily from Europe and a few of our large technology clients. In addition, the strengthening U.S. dollar creates an incremental currency headwind for our top line. Given the backdrop of changing economic conditions, I thought it would be valuable to provide some data on why these macroeconomic conditions affect us only on the margin. It did not change our short or medium-term growth and profitability targets. We are profitable. We are in a better position to take market share in a down environment because of our size and our ability to continue a balanced approach to growth and profitability. Where others may need to pull back, we can lean in. Our subscription revenue is very predictable and is not generally tied to transactional volume. So while we did not see a great uplift of revenue when rates and volumes rose through the pandemic, likewise, we do not expect to see a significant reduction in subscription revenue as shipping volumes decline. Marie will provide some more details on this topic in a few minutes. We grow subscription revenue mostly through expanding client relationships. Seventy percent of our bookings are from existing clients. it is always easier and more reliable to expand with existing clients and to win new clients. That is even more true in a challenged macro environment. While we are seeing great results in our new logo sales team, existing client expansion is our primary growth lever. Our client base is made up the largest and most well-known brands in the world. Our clients provide a rock-solid foundation and a reliable path to continued growth. For those reasons, we are extremely well positioned for these changing market conditions. Now to update you on our progress against our growth strategy. The supply chain software market is hyper-fragmented. Our competition is mostly smaller, singular point solution companies, many of which are transitioning from their legacy on-premise applications to the cloud. This is in stark contrast to EatOpen, as we are a network-based platform, cloud-native, and provide an end-to-end solution. As brand owners strive to improve their end-to-end supply chains, deploying multiple niche solutions from many small providers not only costs more, but it also provides inferior results as compared to deploying an integrated end-to-end platform. In summary, we have a differentiated solution built for what the world needs now. Given the opportunity we see, we articulated a growth strategy that is simple and efficient and informed by decades-long relationships with a very rich client base. It has three critical elements. First, organic subscription growth by expanding within our client base while adding new logos to create more expansion opportunities. Second, expand strategic partnerships that further accelerate our subscription growth rate by leveraging channel partners and the integrator ecosystems. Third, organic and inorganic product extensions to increase our TAM, or total addressable market, providing continuous growth opportunities. To expand on point one, about 70% of our new contracts are within our existing clients. This is our primary growth lever. It has proven reliable and effective. Given that our top clients pay us over $10 million per year for our software, And the average enterprise client pays us a little over $1 million. We see nearly a 10X expansion opportunity within our own client base with the products we have today. Throughout fiscal 22, we ramped up our new logo sales and marketing teams. Our success has been more rapid than we expected. In fiscal 21, roughly 15% of new bookings were from new logos. This percentage has increased each quarter significantly. and is now over 30% on a much larger base of bookings. New logos are important not only for our current year's revenue contribution, but they typically expand significantly in the following years. In a few moments, I'll provide an example of a recent new logo win. The first pillar of our growth strategy is progressing very well. Our traction in building partnerships also continues with the recent agreements with Accenture and Uber Freight. We expanded it to a strategic partnership with Accenture, Eta Open's second strategic partnership with the integrated ecosystem in two quarters. A major step in our objective of expanding our ecosystem to include three to four strategic integration partners. We also expanded our partnership with Uber Freight, which will leverage Eta Open's network to provide our clients with real-time rate options for domestic transportation during the shipment planning process. thereby providing access to capacity and also lower our client's transportation spend. This represents EDA opened six partnerships in six quarters, nearly all of which are currently producing revenue. We're making great traction in developing our channel partners and our ecosystem. The next pillar of our growth strategy is inorganic product expansion through M&A. We continue to be able to scale our business further with opportunities that are both strategically and financially accretive to shareholders. When we combine with another company, our organic subscription growth rate increases, as we have more products to sell to more clients. M&A also increases our profitability by reducing duplicative costs like G&A that do not add value to our clients. Our M&A strategy and criteria are also quite simple, focused on cloud companies that extend our platform of mission-critical solutions that our current client base needs and uses. We have executed the strategy 14 times in the past seven years. Let me provide you an example of how valuable the strategy is to Eat Open and our shareholders. A North American food and beverage manufacturer, a new logo client, purchased a subscription worth $1.6 million per year on a three-year committed contract for supply and demand planning, transportation management, and inventory optimization. They will utilize nearly 50% of our connected supply chain platform, including solutions from our recent combination with Bluejack. We won this client because of the breadth of our integrated platform that uniquely solves their connected supply chain problems. This win would not have been possible had it not been for our strategy to extend our platform organically and inorganically. It also demonstrates how quickly we can integrate acquisitions into our platform. One last word on our M&A strategy, and it has to do with our technology. E2Open is nearly 10 times larger than we were seven years ago. We accomplished this. because of our innovation and our technology. Specifically, over the 20 years of our existence, Data Open has built powerful technology and software that integrates data from our very large network and integrates distinct capabilities onto one connected platform. We do this without the need to create a data standard and without the need to have a common technology code base. The software we developed for over 20 years is how we solve the most difficult challenge of any software-related M&A, and that is how to make the software and data work together seamlessly, natively, and quickly. This is our unique value and our innovation. To provide some perspectives, Less than 10 months ago, we acquired BlueJ. A company that was 40% of our size, that combination complemented our platform with significant logistics capabilities. Five months from the date we joined forces, we completed our first joint release of BlueJ's TMF and other capabilities on our platform. In seven months, we sold our first multimillion dollar transaction of a combined solution and have deployed our solutions together several times now. This process of rapid and successful integration has been repeated 14 times in the past seven years. We integrate fully, organizationally, culturally, and technically, and we do it rapidly. We have a process and a method to successfully use M&A to extend our platform's capability. Eat Open is a platform technology company It generates profitable organic growth with the ability to scale quickly. Let me continue with our progress on the growth investments we outlined during our last call. On that call, we outlined our further investment in 2023 to accelerate our growth in FY24 and beyond. The investments are to add more salespeople, invest in our brand and lead generation, and and intensify our work to build an integrator partner ecosystem. We're on track with all three. As an example, last month, E2Open launched its brand refresh, including a new E2Open logo, brand identity, and tagline, moving as one. The strategic brand refresh is designed to increase awareness and help assert E2Open as a platform of choice for the world's leading companies and brands. With recent disruptions exposing the areas ripe for improvement, now more than ever, we're forging the path forward to a more connected, flexible, sustainable, and cost-effective supply chain that moves together as one. The brand refresh and associated digital advertising efforts are part of the growth investments. We are very pleased with the early results these efforts are having on pipeline creation and on brand awareness. We are ramping our hiring plan of new and existing logo sales teams. We now have two strategic partnerships with integrators, well ahead of schedule. We continue to lean into our growth plans and investments we outlined previously, but we'll, of course, monitor the macro environment closely and are prepared to adjust if necessary. We're also proud of our continued recognition that Eat Open receives from industry analysts. Eat to Open was named by Gartner. as a leader in the 2022 Magic Quadrant for Multi-Enterprise Supply Chain Business Networks. If you haven't seen the report, please visit our website. Our position on this Magic Quadrant is pretty remarkable. We are excited about the future for Environmental, Social, and Governance, or ESG. Eat Open Solutions help our clients reduce costs and improve service. which also impacts ESG across all areas of the supply chain. For example, our transportation management system's ability to track emissions can support our clients' reporting of Scope 3 emissions. That reporting is material, and the SEC and other regulatory agencies are looking to implement this on a larger scale in a very short timeframe. In summary, our first quarter was strong. We were excited about the multiple growth opportunities in front of us, and remain focused on executing our strategy. Having lived through several macroeconomic shifts in my career, I am confident in our ability to profitably grow this business in this rapidly changing environment. In fact, I am more excited about our prospects now than I joined the company seven years ago. At that time, we were nearly 10 times smaller than we are today, and where I saw a once-in-a-generation opportunity. Now I would like to introduce Marie Armstrong, our new CFO. Marie is an accomplished leader and brings over 20 years of experience, a strong combination of driving growth at enterprise SaaS companies, plus a well-rounded capital and corporate finance background. Marie joined us less than two months ago, and she's fantastic. She has already added tremendous value to our business, and I'm looking forward to partnering with her as she gets fully integrated to drive the next leg of our growth for our company. Welcome, Marie.