E2open Parent Holdings, Inc. (ETWO) Earnings Call Transcript & Summary

Welcome to the Deutsche Bank Tech Conference, everyone. My name is Matt Robbins. I'm with the Deutsche Bank team, and I am joined here today with 2 executives from E2open, Michael and Jarett. Hopefully, everyone can see them. We have -- hey, Jarett, thanks for waving.

Hello, Matt.

Michael, hello. So we have about 35 minutes in this session. I'm going to give some brief intros upfront and hand it over to the speakers to fill in any gaps where I've missed anything and give a brief opening to E2open, and then we'll dive into some questions. Brief note to the audience members right now. This will mostly be Michael and Jarett sort of answering my questions, but if you have questions yourselves, you can submit them and then Michael, Jarett and I can all see them and we'll answer them as they come in. The way you can submit a question is at the bottom of the screen below the video chat to the right of the auto refresh check box, there's a tiny little gray button with a plus sign. When you mouse over it, it says Ask a Question. You can click that, you can submit your question, and we'll answer it in the order in which we receive them. So with that out of the way, I want to introduce everyone to the CEO of E2open, Michael Farlekas; and the CFO, Jarett Janik. Thank you both for joining us.

Thanks for having us. We look forward to the conversation.

Yes, it should be a great one. So as I said, 35 minutes, we'll maybe try to leave some at the end for Q&A. But why don't I dive into some intros? And then -- don't worry, gentlemen, I will hand it back to you, so you can correct any errors I've made. So Michael joined E2open in 2015 as CEO. Prior to joining, he was VP and GM at Roadnet Technologies, which is now Omnitracs. And prior to that, he spent 11 years at RedPrairie, which is now JDA Software. He's also held senior leadership roles in petroleum and chemical distribution and rail transportation businesses. Michael holds a Bachelor's in Mechanical Engineering from Fairleigh Dickinson University and an MBA from Jacksonville University. Welcome, Michael.

Thank you, Matt.

Let me give a quick intro to Jarett as well, and then I'll hand it over. So Jarett is the company's CFO and joined E2open in 2018. Prior to joining the company, he was CFO of Forterro Group and Allegro. He's also held executive and senior finance positions at Infor, Certegy and Netzee. Jarett holds Bachelor's in Business Administration and Tourism Management and an MBA, both from the University of Denver. Welcome, Jarett.

Thank you very much, Matt.

Thanks both for joining. Michael, why don't I hand it over to you? This session is meant to be sort of a meet and greet and also get people excited about the E2open story. I have a list of questions, but I thought maybe what makes sense is for the first few minutes, I'll just hand it over to you to give an overview of the business, say anything you want to say and fill in any gaps.

Sure. Thank you very much, and thanks to the audience for participating. E2open is a supply chain software SaaS platform. We focus on the largest, most iconic brands in the world. The larger and more global they are, the more likely they are to be a client of ours. We help customers with that end-to-end problem. So when people go and get a macaroni and cheese off the shelf. I think it's a very simple process. I just go to a grocery store and get macaroni and cheese or I order it from a delivery agency. But there's a lot that goes into how that product got to the shelf. And it always starts back with the raw materials that go into the manufacturing process across multiple different geographies and multiple different types of transportation and multiple different processes. All of that is underpinned by very sophisticated software that manages a very complex end-to-end problem. That's what E2open solves for. And we help clients, mostly manufacturers, but also increasingly retailers, help them bring product to market. And what's most interesting about this -- today's supply chains is that most of the activities are outsourced, meaning companies don't really make product themselves, they don't source their materials for their products themselves, they don't ship it themselves, they don't store it themselves, they don't sell it themselves. All that activity happens outside of their infrastructure. It happens in their partner systems. And E2open is a network-based company where we connect to now over 270,000 parties, connecting that data to a series of machine learning and AI applications to help them solve all that complexity. That's just, in essence, what E2open does.

Perfect. Thanks a lot, Michael. Jarett, do you want to say anything upfront before we sort of dive in?

No. I think Michael hit it. We're a platform, it makes us different. We're a network, which brings together not just the applications but the data and the participants all into one ecosystem to allow our brand owners to make the best decisions around their supply chain. And we'll get into more of that as we kind of drill into some of the questions, I think, Matt.

Great. Thanks, Jarett, and thanks, Michael. So I have a list of questions here. I'll probably say which one of you they're meant for, but obviously, either one of you can feel free to jump in at any time. So it's a super exciting story for a number of reasons. The pace of change, I'd say, is pretty incredible over the past even 6 months. But Michael, you've seen it for some 6 years now or so, right? Joined the company in 2015 right after the take private by Insight. Now you've grown the business from about $70 million in revenue, say, to maybe $450 million or so today, and you're the clear leader in this space. You recently closed an acquisition of BluJay on the heels of going public again, this time by a SPAC. So first of all, congratulations to both of you on the huge success of your business. Not most -- most people don't achieve such heights. So congratulations. But I'd love, Michael, if you could just give us a little bit of a history, maybe what you're -- what you've seen over the past 6 years? You can start before that if you want. What excited you about joining E2open? And sort of why you're excited about the changes that you've seen in the last 6 years?

Yes. Let me start with why we're really excited today, and then I'll kind of give you a little bit of walk down memory lane. But what so exciting for us is that you can't turn on any news outlet or a web page without seeing supply chain problems. And what that means for us is the things that we've been doing -- our company is doing for over 20 years are now reaching the boardroom in a much more significant way, where companies are now looking at supply chains as, well, not just a means to an end of getting product to where it needs to be, but actually as a competitive differentiator. And you see that with some automakers doing better in the chip area than others. You can see that with some companies that are actually building their business through global disruptions and some not. And that's because the ones that are -- have a very forward-looking view of having a very connected supply chain, and that's what E2open does. So that's what we're so excited about is that it's becoming a much more boardroom issue really across all of our clients. And that just plays right to our strength. So E2open was founded in 2002 in the cloud. So it was a cloud company before there was really cloud software or before there was subscription software. It was formed by a consortium of high-tech manufacturers to solve one very sophisticated manufacturing problem and growing that business to, as you said, about $75 million until it went private in 2015. And what excited me about the business was that the problem that it solved, which is connecting, at that time, tens of thousands of companies to brand owners in a very complex process and managing that complexity was extraordinarily valuable for that one part of the supply chain and for one market. So when we took the business private, it was a manufacturing solution. So companies in the high-tech area saw a very complex manufacturing process. And even in 2001, high-tech manufacturers had completely outsourced everything. They didn't actually make any product, they would just outsource the entirety of it. And what we saw was an opportunity to consolidate the entire end-to-end supply chain by function. And in doing so, we can move from having 1 product category, manufacturing, to -- and 1 industry, high tech, to all industries, and really all major functions of the supply chain. And in doing so, we grew the business to, I think, our pro forma number is like -- more like [ 5 70 ], I think, this year, and having well over 5,000 clients from a company that was about $70 million and had about 70 clients. In doing so, we created a business that grows much, much faster and has grown every year as it's gotten bigger and becoming much more profitable. So one last thing I'll say is that we solve mission-critical solutions for the world's biggest brands. And by mission-critical, I mean if our software does not work every day, they can't ship product. That translates to a very resilient and enduring revenue stream that we operate at very high gross margin, like, 81%, 82%. That's what really gives us a fantastic foundation to build great relationships on.

So just dig into use case. Okay. So the world's largest brands, you have thousands of customers, mission critical. You mentioned the macaroni and cheese example in your prelude, right? So maybe could you just walk through a quick -- so let's say a manufacturer of macaroni and cheese needs some inputs, produces some outputs, needs transportation. Can you just spend like 30 seconds going over a specific use case?

Let's say, you're a run-of-the-mill macaroni and cheese provider, the very first thing you need to figure out is how much am I going to sell over the next 12 weeks, 24 weeks, a year, because figuring out what I'm going to sell at the item store level, like how many boxes of macaroni and cheese at how many -- and which stores and what geographies is critically important as an input to figure out, guess what, what I have to make and where I have to put it. So we first help customers figure out what they have to -- what they're going to sell with the most sophisticated demand sensing algorithm as proven. We've been in this space. So we help companies be more accurate about what they're going to sell in the future. We'll call that a demand signal. So they understand the demand signal. From there, we just move back up all the way through to somebody who actually procures that material from the providers. So that means all of the planning activities around how I'm going to make it, where I'm going to make product, where I'm going to store product. We help companies with the transportation part of that. How am I going to get it to the stores or to the retailer. We help customers with it when it goes across border. There's lots of regulations you have to file and tariffs you have to file. We help companies file that across borders. And then we help companies figure out how to make that product across multiple tiers of manufacturing because that macaroni and cheese company doesn't actually always make the product themselves, they use co-packers, they use people that provide the cardboard and the film and the actual cheese and the actual macaroni. They don't make it all. They just assemble it, in a way. And we help companies with that entire end-to-end process. Most of our clients start with one discipline that I mentioned and that we grow with them across that end-to-end spectrum over time. So a typical client with a new logo will start at a $300,000 or so subscription on a 3-year transaction, and we'll typically grow that customer to $1.5 million or $2 million over a 3- to 4-year period by expanding across those different functions. And what that gives them is one company to provide more of a connected supply chain operation for them versus them having to spread that across 5 or 6 different individual providers.

So you do a heck of a lot for businesses that rely on their supply chain. Where does your product stop? Like what key integrations? What's like the bookends of your products?

It starts with, as I said, somebody actually buying something across the shelf. So we'll receive information of when that happens. We receive it and know how much somebody sells. And that's where kind of -- we think that as a starting point, if you will, and -- because it drives everything. And then if it ends, it ends with the raw material provider bringing raw materials or ordering raw materials into their manufacturing cycle. So it's completely end-to-end. And just about everything in between. Not everything, but most of the things they would need to do as a company, we provide functionality for them. And what's most interesting is, what differentiates us most, as Jarett said, is it's completely connected. And that's a huge differentiation because most companies have built individual siloed applications to handle those functions I mentioned and had to figure out how to connect them together themselves. We do all that for them.

So I want to ask one more question about the market and then hop over to Jarett for a few. So the last 1.5 years, Michael, have been hugely disruptive for a number of ways. And they have -- it's shed some light on the fragility of global supply chains, which you help manage, right? So I just wonder if you could talk about -- broadly about some trends you're seeing in the supply chain space and sort of how your customers have been impacted over, especially, the last 1.5 years.

Yes, there's been two major disruptions in supply chains. First was the tariff wars and what was happening with all the tariffs and regulation change. The second, obviously, and we are on the heels of that, was obviously, COVID. Both of those kind of events or things resulted in either supply shock or demand shock. And obviously, in the case of the China tariffs, there was obviously a supply shock. While a company has all their manufacturing base in China, when their tariffs increase by 30%, well, that causes a pretty big problem pretty quickly. So companies began immediately starting to diversify their supply base, meaning I -- maybe I shouldn't have 100% of it in one region in China. Maybe I should diversify that across several regions, so with the advantages I get with making things globally but not be so dependent and reliant on one geopolitical entity. Second major event was, obviously, COVID, which had, obviously, again, supply shock, but then demand disruptions as well where you see some companies have demand falling very, very low; some were zero. You have some companies whose demand went through the roof. It all depends on which side of that spectrum you're on. If you're equipment maker and in home gyms, well, guess what, you have really high demand. If you're a company that's providing it to retail outlets, then maybe not so much. So that's the biggest change. It all translates to companies wanting to be more resilient in their supply chains and build that over time. That resiliency means mostly diversity, and diversity increases complexity, and complexity means we need more software. So it all circles back to what I said originally, which is, all that complexity that companies are building into their supply chains bubbles up to senior leadership that are saying we have to really think about a much more digital supply chain than we ever had before. And that's what's been really great for our business.

I mean one potential reaction to the supply chain disruption is to move all of your suppliers closer to you, right, which may increase cost, but it would increase the robustness of your supply chain. Are you seeing that? And would that impact E2open?

Not closer but different. So instead of thinking about it, I'm just going to be closer, think of it as not as [ monolithic ] as I [ previously ] was. So maybe that means [ we do ] bring some functions closer, maybe that means I diversify my supply base. And what it really means is that I have a much more complex global supply chain to manage than I used to have before. Less diverse, more programmatic, and now it needs to be more agile. I mean I need to be able to react to a problem here or a problem there based on what's happening in the world. So I wouldn't think of it as shifting from mostly off-shoring into mostly on-shoring, but just dramatically increasing the number of nodes or connection points a company might have, that just requires more software to help them manage it.

I see. That makes a lot of sense. Jarett, I'd like to [indiscernible] and again, these questions don't need to be speaker specific, but I'll just direct these at you, Jarett. So again, congrats on your success since joining the business and congrats on the recent successful return to the public markets and on closing the BluJay acquisition. I mentioned this upfront, but a lot of change. You also raised your fiscal '22 financial guidance. Your stock is up 15% or so since closing the SPAC. It's really amazing story. Again, I can't say congratulations enough. Your net retention is well north of 100%. Maybe you could talk about how your customers, your strong competitive position and your products are translating into the financials, and maybe like what you're doing particularly well that's driving the hugely successful financial story of the business.

Yes. Absolutely. I think some of the underpinnings of it go to how we've organized our business and our go-to-market strategy. And we're very different than a lot of our competitors and other software companies in that we really organize our go-to-market around customers and not products. We build one-on-one relationships with those customers to have very deep understanding of their supply chain needs and then those dedicated resources to a customer. So think about each salesperson has a handful of customers that their job is to be inside their four walls all the time, understanding their business. They're able to sell them all of our products. And it really has driven what I think we do the best, which is, the cross-sell, upsell opportunity and growth engine that we've built over the years, that each time we bring in a new product through acquisition or a new customer base through acquisition, it continues to fuel that engine that gives us the 108% net retention that we've published and talked about. But it also allows us, as we focus now on a new growth driver of new logos, to continue to seed the field of opportunity relative to that cross-sell, upsell motion. And that comes, as Michael mentioned, to adding more product into the portfolio that a customer may have. But oftentimes, in the example of the macaroni and cheese customer, they need a solution for making tomato sauce and cereal and bringing other products to market to other business units or divisions or brands for that matter in the cases like a Procter & Gamble or somebody like that. So it just really provides us that enormous TAM that we've got, both in our customer space, which we estimate to be north of $1 billion, but then for the total market that now combined with BluJay, we think is for North America and Europe-based companies is somewhere around $54 billion.

So the acquisition story for you is a really interesting one. I'd say you've been on the more acquisitive side. You just closed the BluJay acquisition. Let's just talk about that one in particular because that was a large one. Maybe you could go over, for the audience, the acquisition rationale. You mentioned cross-sell and upsell as being a big driver -- or sorry, acquired products as being a big driver of cross-sell and upsell. Is that the story behind BluJay as well? Or is there something else there?

No, I think, absolutely. I mean we have several things that we focus on when we look at a good acquisition target. But I'd say one of the over -- underpinning principle is it's financially accretive and strategically important and accretive. And BluJay was both, ultimately. We look primarily for businesses that are adjacent in terms of the product offering that they have, which again leads to the strategy around cross-sell, upsell and build out a holistic platform that allows those brand owners to manage the end-to-end supply chain, as Michael talked about. We also look at those as a way to enter a vertical market of customers where that target has relevance, whereas E2open might not have relevance. When we started in high tech, we were very relevant in high tech and people knew who E2open was. But when we went to try and make a sale in CPG, they had no idea who E2open was and didn't see the relevance of how can we help them make soda pop if we make computers. Like, they're totally different things. Yet the way they manage the supply chain has a tremendous amount of commonalities. So in a lot of ways, we've bought our ways into product offering that we're able to integrate into a platform and deliver seamlessly as well as that into vertical markets where we can then offer our broad platform to that newly acquired customer base.

Do you have to expand into new verticals with acquisition? Or is that just sort of the fastest path to get there? Like, how hard is it to build into a new vertical?

Michael, do you want to take that one?

Yes. It's very hard if you're not known by that vertical. Like, we faced a particular challenge in 2015 where everybody in the high-tech world knew us. We were a household name. Nobody in any other market really knew us. So when you walk and knock on the door on some of these big companies, they say I don't even know what you folks do. And it's very hard to break into that industry. So our strategy and our very first acquisition speaks to that, which was a new product category for us, but had 20 of the top 25 food and beverage CPG companies. Well, all of a sudden, now, we can walk in the door and actually have a meeting because they're relying on our software. They need our software. And we've executed that strategy over and over again sort of [ 12 1 ]. We have it acquisitive. And the purpose for all of our acquisitions, all of them, is to grow the collective business faster than each individual business could possibly grow on its own. And the very simple reason that's effective for us and has been effective for us is that we simply are able to sell our products into that company's customer base, and we're able to take that company's product and sell it back into our customers. So you could -- neither company could do that on their own. So whatever the growth rate of an each company was before, now we get to augment that and lift that up by this cross-sell, upsell that Jarett mentioned. And what -- a funny thing happens when you sell more products to a customer, they tend to buy more and they tend to churn less, which makes sense because they have to replace 3 or 4 functional areas versus 1. And that underpins the entirety of our strategy, and that's how we've grown the business to where we are today.

Yes. The network effect element of your business is -- it's not unique, but it is certainly different from most supply chain businesses out there. So I think what you're saying makes a ton of sense. One last point on acquisitions. Do you see -- I think you mentioned this just now, Michael, but do you see the sort of acquisitive trend continuing? Are there particular areas of your business where you're trying to put dollars?

Yes. We will continue to be acquisitive because it allows us to continue to grow our business faster and gives us more capabilities we can offer to our clients. Our clients want more capabilities from us. So there isn't one particular area we need. We have a very big business, and we have, as Jarett said, over $1 billion of TAM within our own client base, within our own client base. That's tremendous for us. Plus, it's a great big market with $50 billion plus of TAM, which is very, very large. So we will be judicious in our acquisitions. And as Jarett said, we have a specific strategy, which is mission-critical applications for [ capillary ] functionality, all serving the same kind of customers in terms of large complex multinational companies. That is the strategy.

Yes, I think, Matt, on top of that, like, our primary mission is organic growth, not inorganic growth. But inorganic growth fuels future opportunity to continue that low double-digit growth rate for a decade by expanding the product offering, expanding into niche vertical markets that we're not today, as further opportunities to take advantage of that engine that we built in how we go to market and the platform that we built and why it's relevant to be able to cross-sell when they're all interoperable and connected. So we're not selling a collection of things, we're truly selling a platform of interoperable applications to run a seamless activity being supply chain.

Right. Okay. That makes a lot of sense. Thanks for that.

We have some questions from the audience.

Yes. Thank you. Let's see. Yes, we could just -- I think you could see them, right? So E2open trades at a large discount supply chain peers despite leading the Rule of 40 metrics. Why do you think the discount exists and what would lead to closing it?

Yes, we're not a -- we know a lot about supply chains, and we're learning a little bit about capital markets, but we obviously think we have a great business. We focus on hitting our projections, which we laid out when we went public. We've hit them and we've exceeded them. We've increased our guidance, I think, twice now, [ Jarett ]. And that's a little unusual from other companies that came to market the way we did. But we think we have the large -- we know we have the largest supply chain software platform that's in the cloud. We operate at high margins. We have a huge chair in front of us, so we have the world's best customers. So we do acknowledge that there is a [ gap in terms of ] valuations. And we also know that physics applies to the same world in the same way. So we just think it's a matter of time to get our story out to prove ourselves, and we have to prove ourselves, and we're up and ready for that, and we're doing it every day. So we just think it is a matter of time. And I think you see that by -- really the world's best investors are Insight and [indiscernible] and [ Francisco Partners ] and [ CC ], really extending their lockups and making a very long-term bet in our business. So we're in this for the long term. They're in this for the long term, and we want to build a very large -- a very high -- fast-growing business that's operating at high margins.

Thank you. The next question was about TAM. I believe we answered that. There was sort of $1 billion of white space comment as well as the $50 billion overall market. So I think we can jump past that one. There's a competitive question. I also have a competitive question, so I'll just expand this one slightly. The question from the audience is just how do you compete with large incumbent solutions like SAP and Oracle, or Blue Yonder, Kinaxis? I would just mention the supply chain market is $50 billion, as you mentioned. There's room for many, many people. There are also network-specific vendors. You talked about like 1 network in Infor Nexus, right? There was a huge slew of competitors. So the question is just how do you differentiate? And why are you better than the others?

Got it. So the very first thing I'll tell you is that roughly 80%, 85% of our clients are SAP shops. So that's the first. And that's been the case really since the very beginning. And the cohorts you mentioned at the end of this question also kind of operate in that same category. Now why is that? Well, it's just that SAP doesn't provide all the functionality that companies like ours provides. First of all, they don't even have a solution in many cases. And in a lot of cases, the solution they do provide isn't fit for purpose for the most complex and largest supply chains, meaning the largest supply chains in the world need the most sophisticated software to make it run efficiently. And increasingly, they move to companies like ours, which they would consider best-of-breed. So we compete quite well and effectively against the large incumbents as the question implies, SAP, Oracle, because we have something they don't have. They don't have a network and they don't have all the functionality. In terms of the other providers mentioned, which are niche, they provide one thing, not several things, one thing. We just provide a more holistic solution, and we have a network. So as you mentioned, there are companies that provide a network solution, like the ones you mentioned, only and not applications. Then there are companies like on this question of Blue Yonder and Kinaxis that provide a function, and they don't provide a network. But they provide one function. So how do we compete? We compete by providing our customers more capabilities across that end-to-end platform, so the customer doesn't have to buy 5 solutions from 5 different vendors. Like, no one would want to do that. If you were to draw this industry up, you wouldn't draw it up this way. This evolved this way, mostly because how broad and large the market is. So it all comes back and it forms our acquisition strategy, which is to consolidate the industry by function, thereby expanding our customer base, our markets, providing a huge cross-sell, upsell opportunity which allows us to grow faster than we could have otherwise. That is the entirety of our strategy.

Do you see customers building their own solutions? Or are you saying that there is a point solution for everything already in a way that...

Let's go back a little bit and talk about the solutions. Companies that have been using these kind of solutions for 20 years, most of them were provided in the cloud -- on-premise and have been customized over time. So it's not as if they build their own or they have a packaged solution in the past. It's more like they bought a solution, put it on-premise and change it over time. So now that solution looks pretty customized and pretty bespoke to that 1 customer. All of that has to move to the cloud and will move to the cloud. And the reason they'll move to the cloud is because the provider that provided that capability no longer offers an on-premise solution. And not only that, but it's been so customized, it has to be basically replaced with something that is much more packaged. And all that is delivered through the cloud, which we're the largest cloud provider in the supply chain software space. So that all just gives us a gigantic tailwind. The market is extraordinarily fragmented. And that really kind of speaks to why we think our strategy of consolidated by function makes so much sense.

Okay. Excellent. We have 2 minutes left in the session, and counting down, the final question from the audience is about the current state of your pipeline. I would suggest keeping all of this to the public information. They're asking growth rates and expected organic growth acceleration this year.

Yes. So when we became a public company, we articulated a 10% growth rate this year organically, [ Jarett ]? We recently announced increasing that to 11%. We can do that because of 2 things: one is our pipeline, as it is growing sequentially; and our close rates are increasing. And that really informs why we can increase our expectations as we go forward. So in general, we do see our pipelines growing. And we also see our close rates or win rates going back to not quite where they were pre-pandemic but just about there. So we're super excited about the future and what we have to build upon.

Great. Well, thank you for that. I think we should probably wrap up the session here. There is a session starting in another 6 minutes, so I want to be respectful of everyone's time. Thank you so much to Michael and Jarett for giving us the 35 minutes today. This has been an awesome session. And thanks for the great questions from the audience, too. So I hope everyone has a great time at the rest of the Deutsche Bank Tech Conference. And we'll see you soon. Thanks, everyone.

Thanks, everybody, for attending.

Thank you.

All right. Goodbye.