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

Okay. Here we go. Perfect. Okay. Hello, everyone. Thanks for coming to this session of the UBS 2022 TMT Conference. My name is Taylor McGinnis, I'm the lead analyst covering the SMID-cap application, SaaS and communications space. And with me, I have Michael Farlekas, who's the CEO of E2open. So Michael, thanks for joining.

Thanks for having me Taylor. It's good to see you again.

Awesome. Good to see you, too. So before I start, just to let everyone in the audience know, I'm sure you guys are all well aware of this now. But if you'd like to ask a question, there's a QR code in front of you, you can scan that, submit your question, and then I'll take the last 5, 10 minutes or so at the end and look through those. So with that, let's dive in. So Michael, if you could please just start would be for those that aren't as familiar with E2open, maybe you can just give a brief introduction on the company. Obviously, the company is a lot different today than it was several years ago. So maybe you can give some of that part of the story, too.

Yes, that would be fantastic. Thanks, everybody, for taking the time. So E2open is a scaled supply chain software platform. We have a specific target client, and that's very, very large-scale manufacturers and retailers. So think of the biggest companies in the world, and we provide for them an end-to-end supply chain software capabilities. And that's distinct and different from how the industry was formed over the last 20 years, which was very fragmented individual point solutions. And by that, I mean, software that help companies plan their transportation or help them plan their inventory or help them manufacture. And we have a platform that is brought end-to-end. So we help customers with all the way from demand all the way back through to the supply -- part of the supply chain, so end-to-end. And what also distinguishes us is that we are a network-based company. So we have 400,000 parties that are connected to our network. So we connect the brand owner to their supply and partner base to provide a real-time platform that allows them to interoperate with those partners. It's really critical as you think about all we've been through in supply chain is knowing where their orders are, inventory is really critically important. That's how we help our clients.

Awesome. And now we'll dive into the topic that's on everyone's mind, which is macro, right? So I think last quarter you talked about seeing some weakness in Europe, right? Maybe there were certain verticals. But you mind giving an update for the group, right? What you're seeing today? If there's any new pockets of weakness that have emerged in recent months or even to any similarities that you're noticing.

It's just a very choppy environment. I think we've kind of all seen the news, a lot of crosscurrents and how that affects our business is that our customers have great demand for our services, although we provide very large-scale projects for really big companies. So whenever the economy is a little bit soft or weak or uncertain, they put more pressure and more approvals into the decision-making process. Customers use our software to make their gross margins get better, and they do it for a long time, but they don't [ do ] us to solve an immediate problem. So that's kind of what we've seen in the marketplace. I think that kind of continues. I think it will continue for a while. When you think about what we've all been through with COVID, we see this in our ocean data where companies had in the manufacturing side, a dramatic run-up in the fall of '20. And that's been running very, very hot. And then all of a sudden, last year, everyone says, "I'm not going to buy a bike. I'm going to go on a trip to Italy." So the net spooled down the other way. So I think manufacturers are the ones that are probably affected the most. You see that in the inventory numbers for retailers. I think it has to take another 2 or 3 quarters for the manufacturing sector to sort that out and get normalized. And I think until then, you're going to have a lot of crosscurrents in the market. But it affects our business in that we have very long duration contracts with really important customers and our software is embedded in their operations. So for us it's just, will our growth rate accelerate or maybe slow down a little bit in the short term, is really the only impact to us. So very durable revenue and very durable growth mechanisms, and we translate a lot of our high-margin subscription revenue to EBITDA. So we feel really comfortable as a cash-generative, growing company.

Yes. So maybe two questions off of that would be to some of the weaknesses right in some of these verticals, maybe you can talk about the sensitivity of your business, right, to that, which you talked a little bit about. And then as a second part, I think -- and correct me if I'm wrong, but I think you have 3 major verticals for you guys are manufacturing, tech and consumer, right? So those are areas that have been a little bit pressured recently with the macro. So any color you can provide on what you're hearing from customers in those verticals? And is there anything different you guys are doing, whether that pertains to cross-sell opportunity, right, go-to-market motion to try to adjust, right, to the changing environment?

Yes. We have -- one of the big important parts of the business we've built over the last 7 years is being very diversified across function and diversified across industry. And we kind of did that on purpose. I never really wanted to have a business that was tied to one industry or one part of the supply chain. It's just too volatile, and we don't -- we give up -- the big inflections up like in the last 3 years, a lot of the transportation-oriented companies saw a huge uplift, but now see actually revenues decline. So didn't want any of that. So we kind of diversified. So we don't have that much sensitivity in terms of our overall revenue stream. In terms of the sectors, obviously, the tech sector is one that's really kind of the one that's right now under a lot of pressure for a lot of reasons. And we have a fair number of tech companies. Part of it is because people had bought a lot of their compute power during the pandemic, and that's -- you heard that with Dell and HP in their announcements. And then you see in the -- also the large-scale tech platforms have been doing a lot of things building new products that they're kind of saying, "Well, maybe I won't do as many of those initiatives as possible." So I think that normalizes a bit. It's probably the area that I would say is, it's obvious in the market in terms of what's happening in the equity markets and also with these companies. In terms of sensitivity, though, it's really a matter of, again, how much do we grow. We are a profitable company, and we remain profitable in good weather and bad weather.

Yes. One question we're broadly getting from investors on the software space is wanting to understand how different pricing model might be more or less sensitive to things that are going on in the macro. So the obvious being, hey, you're hearing a lot of layoffs, right, across companies for those that have more seat-based model, right? There might be more exposure there. Can you give the group color on how E2open prices, right, and your pricing model and [ how ] it might be sensitive to some of the things that we're seeing or not in the environment?

Yes. We are very specific in wanting to build long-term contracts that's very durable from a revenue perspective. And the reason for that is we operate at 78%, 79% gross margin. And we want to have -- we know it's very durable so we can then fix our cost structure. We've built a lot of operating leverage into our business to remain profitable. So our revenue model is fixed subscription, generally 3 years in term, noncancelable. They buy a certain amount of capacity, generally not associated with seats because there aren't any uses of our software generally. It's more how much are they're doing of that particular function, but they buy a certain amount that they go over, they have to buy more. And that buy more means not just for that period, but for the length of the contract. So if they buy 100 units and they use that up, and now they buy 10 more because they add that on to the rest of the subscription. They can't go down. So it's a pure subscription model, and it really doesn't affect us if somebody uses less of our application. They don't get the opportunity to lower their price.

Yes. And I know you've been in the supply chain industry for a very long time. And so maybe you can -- like [ what ] you've seen cycles, right, in the past, in good times and bad times. In the supply chain industry, where are -- where do you tend to see the pockets of weakness? Like if the environment starts to get worse next year, where could you start to see that?

This is -- I saw this in 2001 all the way back, then in 2007 a lot and '08, even '18. Companies will never stop trying to lower their gross margin. Like they'll always do that. And how they do that, they reduce the friction and inefficiencies in their supply chain. They can't control their input costs. So manufacturing and retail, most of their cost structure is in the cost of goods. So they're trying to kind of get that down. So they always want to make their supply chains better. If they don't do something today, that means they're going to do something tomorrow. So what typically happens is things get elongated. They push out a little to the right, but the need for that product or that change doesn't really go away. In fact, usually, it amplifies itself over time. You got to remember that we replace software that's been around for a long time, but they get product to market every single day. So they want to improve it. They'll have to improve it. So when things get a little tight and they're uncertain, they'll just say, "Let's maybe take a pause for 1 or 2 quarters." And the most consistent thing that I've seen in my career is companies come to market, they look at a big project and sometimes they go forward, sometimes they don't. And when they don't, they come back again 6 or 9 months later and say, "okay, now the time is right." Because remember, these are big bureaucracies. They have a lot of budgetary issues about what product is going to be the best. So over that -- course of that span, when things slow down, they'll stop and they just push a little to the right. So from a business model like ours, it's a great business to be in. Because once the software comes in, it's really hard to get out, and you know there's [ we all make ] big improvements to it. We think of it as a growth model that has no end, like we can perpetually grow over time given the need for our type of software for those industries.

Right. And you talked earlier about this pretty unique customer base that you guys have, right, where they're very long-term relationships, right? So a big opportunity for you guys today is this cross-sell motion, right, and expanding with a lot of the different modules that you guys have. So can you maybe talk a little bit more about like that opportunity? And to the extent you're able to quantify, right, like where are the big pockets of expansion? Where do we stand today in terms of penetration? And maybe you can talk a little bit about how acquisitions like BluJay, right, and Logistyx and those are playing into that?

The whole thesis is that big companies would rather not buy 8 or 9 different software packages from 8 or 9 relatively small companies and on their own dime and figure how to make them work together. So if you think about supply chain software, it's in its name, they have to work together. But the industry, for lots of important reasons, grow up as siloed applications that do one thing. And the customer has to figure out how to make them work together. So if we think of our strategy is to understand and find the best solution for one adjacent product and then be able to integrate it once on our platform and then be able to have it for all of our customers for the next 50 years. That's the whole idea. And that's been very successful for us. So what we found is we can reduce the cost structure of our business and increase the growth rate over time on every single acquisition we've done. That's true with BluJay. And it just gives us so much more opportunities to help our customers out. And the most consistent theme is we get to offer a solution that's adjacent to something we already have. So if they have global trade, transportation becomes a natural adjacency that we can talk to them about. Or if they're a BluJay customer, we can talk to them about, now we should add on denied party screening. It's a very easy add-on to [what you do with ] transportation. So that's really the model is just to continually layer on a little bit more subscription and extend out the contract a little further. So a good statistic is we sign 3-year contracts, but on average, only 20% of our contracts renew every year. That's because we continually add on. That's what gets us to 5% gross churn number, which is churn and down and downsell for us. So that's a world-class number. That is what really helps us keep our customers and extend our duration of time. So actually, the model is to sell adjacencies to what our customer already has. And every time you sell them something new, the chance of them going away become really low. It's just harder to replace 2 things into it.

Yes. And then one other question that we're getting a lot is, as things get a little bit, if you're in the environment, one place you might have customers look to consolidate vendors, right? And they might say, "Hey, why am I paying all these different vendors across the board. Maybe if I aggregate my spend to one that might be more cost effective." So are you starting to hear at all in your customer base customers evaluate that consolidation play? Is that macro-driven? [ Any color there? ]

I don't think that's really a big driver for our kind of software because the cost of change is so high, right? It's a big cost, so I think the bigger kind of more structural tailwinds we have is most of the solutions they have are very -- have been in for a long time, most of them are actually on-premise. Most of them are very customized. They can't do the things they now want to do that is available to them with mobile and with cloud, so they need to change. That's the more consistent theme. It's not really about "I want to consolidate to reduce my cost." it's that "I want to consolidate to operate better." Now we provide a great alternative because we obviously lower total cost of ownership because they don't have to upgrade 2 packages at once. We've handled the integration on our end. But it's more of that than anything else. The other thing that really helps us is that we find new ways to drive revenue when we acquire companies. Like many times, it's like, "Oh, they have this capability that we can add on to our capability and then we create a whole other revenue [ experience ]." It all ties into our ability to grow the combined business faster and then do that with a more profitable company.

Yes. And then staying on this topic, I'd love to understand all of the different areas that you guys are in and the demand trends that you're seeing there. So you have modules for planning, demand sensing, collaboration. You talked about global trade, transportation and logistics. So can you maybe -- I know there's a lot to cover there. But maybe just simplify, where are you guys seeing the most uptick in interest? And then when you think about -- looking at like a big expansion opportunity and where there are the biggest opportunity to increase average deal sizes, which ones are those? And then on the flip side, where are you seeing maybe there's pockets that are getting a little bit more mature, right, or are being a little bit more heavily impacted by the macro?

So let's kind of think about it in terms of where we are in the supply chain issues we've had. A year ago and through this year, transportation was extremely important. It still is. That's changing a bit from domestic transportation to more global transportation. So we're seeing a lot of interest, especially in the global retailers trying to understand the global footprint. So I want to understand not just the transportation aspects of it, but also how it ties to global trade, how it ties to my actual orders. So we're seeing a lot of that and in terms of "I want to really have a clean picture for everything all the way down to the order. So I don't really need to know where my container is. I need to know where my order is." So that puts us in a great spot. It's been very powerful for us. Global trade is really becoming important as, obviously, with the sanctions. We simplify that greatly for our clients. So they don't have to worry about like "do I have to make sure my lists are updated." We do that for them, push that to them every single day. That's always been pretty powerful. And then now we're seeing a pretty big uptick in the overall demand for planning in terms of "how do I think about the planning cycle." One area that's interesting is that we have a great solution that allows manufacturers to connect their supply base at multiple tiers, very prevalently used in high tech. That's kind of how our company was started 20 years ago. We're seeing that translate into automotive and CPG and food and beverage in a way that really hasn't been there before. So that's kind of a long-term trend we're seeing. That kind of idea and concept coming from the high-tech community, which is always a bit more leading edge, given their very short-cycle times of product and their complexity into other industries that are starting to take on the similar complexities as high tech.

Yes. That's interesting. And then could maybe you talk a little bit about -- because especially on like the transportation, right, and logistics side, with the BluJay acquisition, right, Logistyx, you guys have done a lot, I think, to try to differentiate yourselves in that space. Could you touch a little bit more on that? And like especially now the demand tailwinds that you're seeing there, now with these new capabilities, what that means for you guys from a competitive standpoint?

Sure. So BluJay is a scaled, what's called a transportation management system. So think about you're a large company that ships a lot of things, they had to figure out where -- like what's the lowest cost of transportation and what actual carrier to use. They have to connect them electronically to tender their load to them, and then they want to make sure they receive it and they can track it. That's what a TMS does. And the reason that company was so important to us is that it's the largest multi-tenant TMS in the world, it has some 8,000 connected carriers in our carrier network. And we're able to really leverage that to really help us grow our business. And you saw us do an announcement with Uber Freight and then Surge where we're actually able to use a lot of our technology and APIs to insert a spot rate at the time a decision is made, which is really unique to us, then we've had a great uptick in that idea and -- it's something we've kind of brought to the table as we look at these businesses and how can we make them more of a network business than just an application business. And our strength as a network business, and we think there are all sorts of network flywheels that we can incrementally add to over time that help us grow these businesses faster. So that's a great example of we had something great, we're able to use our technology and our innovation to say, "okay, we can create something new out of it."

Yes. I have more questions on the M&A part. But before I get to that question, any time a software company makes several acquisitions, the integration question always comes up, right? And so do all of these needs to be on one code base, right, and unified versus separate? So maybe one, you can talk about, what you guys have done to bring all of these acquisitions over the last several years together. And two, do they need to eventually be all put on one code base for you guys to succeed?

Yes. So I mentioned that application of collaboration. That's how the company was started. That's what formed our first network. And out of that came a product we have called E2net, which allows us to communicate across multiple systems for our clients. So if you're a manufacturer, we can actually connect to the systems of your supply base 3 tiers down and operate as one. So everybody in that chain can actually operate one application in real-time. Now that's a really important concept because that's no different than how you think about integrating a new company into our platform. It's the same technology. We just use that technology that we were selling to our clients as a way to facilitate an integration story. And the thing that's unique about supply chain is that it's all supply chain software, but the functions are very different. How you think about executing a transportation management system is very different than how you think about building a global trade system. So they're independent engines that do different things for different reasons, but are all interrelated. So what we automate is the interrelated part. We don't have to change the underlying software. In fact, that's the worst idea in the world. We would never want to have all of these on one code base because they can't be. They do different functions. Their functions happen to be very tightly integrated on our solution. So that's what has enabled us to be able to kind of rapidly grow our business from $70 million 8 years ago to where we are now as a $650 million business. It's that capability. That capability was there long before I came in. We just thought that technology could be used for our internal purposes to help us scale our business, but more importantly, offer the market something unique. And that's kind of the story of the business. And by doing that, we were able to pick up 3 or 4 different networks. So we started years ago with 60,000 participants in our network and now we have over 400,000. At the end of the day, the most valuable part of E2open is our network.

Yes. And then I guess, how are you thinking about M&A in this type of environment, right?

Yes, more difficult.

Obviously like multiple evaluations coming in, maybe you can touch on there. And then as a second part, too, is there any areas of the portfolio that you see gaps, right, with some of the other end-to-end supply chain platforms?

Yes. So in terms -- I'll answer the second question first, and I'll go back to your first question. If you think about our application space and our strategy of acquiring adjacent solutions, we're end-to-end, so we have a lot of adjacencies, a lot of surface areas that fulfill that requirement. We have a couple of areas that we don't really participate in. In the warehousing space and the risk management space, and the finance space would be the areas that might be interesting to us. But we don't need any of that to fulfill our growth strategy. We have a huge amount of internal white space of our [ residual ] customers. So we don't need to do any more M&A for us to continue growing and expanding our margins. In terms of the environment now, look, we -- it's not a shock. We are a company that has a little over 4x leverage. We need to get that down to be able to access the debt markets in the future if we want to do M&A, and also the bid-ask spread in terms of private companies is really still -- so I think that some of that is -- we're probably not in the market actively in the short and medium term. And the other thing is -- we integrate aggressively, which means we have a lot of onetime costs in our P&L that need to kind of roll off to kind of really demonstrate and show our true cash flow generation to public investors that might be new to the story. So as we think about that over the next 1, 2, 3 quarters, I think investors will start seeing the power of M&A, and I think of this as a positive for us in the long term. But I think in the short term we have to kind of make sure we [ all ] wash this through and people can actually see the numbers flow as we say they are.

Yes. That's helpful. And then I'm just looking through the questions here. Maybe I'll throw one on to you from [indiscernible] which is which large software companies compete with you? And if they choose to commit to it. So I think the question is, I guess it's just a competitive question. So when you look like the competitive landscape, who are like your main competitors that you go head to head with?

Yes. So it's a very interesting space in that, obviously, the ERP provides software in the supply chain space. And SAP being the largest, I don't know the exact number is -- plus 85% of our clients are SAP shops. But the reality is, for really large-scale enterprise customers, they don't really use SAP for a lot of these really sophisticated functions. They use more point solutions, the best-of-breed solutions. So on one hand, we compete with SAP, but only in really kind of a couple of areas. Other than that, every one of those functional areas will have its own competitive set. So we think of transportation area. It's a company called Blue Yonder and Oracle Transportation Management, that would be the competitive set for us. In planning, it will be a company called Kinaxis and o9, [ Blue Yonder ] and SAP and global trade company it will be company called [indiscernible] and then in some other areas as well. The reality is, though, companies, they want to buy best-of-breed solutions. A lot of times, they're buying much smaller companies than ours. It's a very fragmented space, and it needs a very specialized software. It takes a long time to build software that can go across multiple industries, like it might be 10 years to build a software package that's commercially available for all industries. You cannot build the software overnight. It's just not really possible. So that's really kind of why we've thought about our strategy as there's a wide open lane for a company that could do more with existing customers at a very big scale, very reliably, but have very high functionality.

Perfect. And then maybe moving to the go-to-market motion because that's obviously had some changes to it, right? So I think a significant part of the BluJay acquisition was around bolstering up the sales organization, right, and bringing in more capacity, particularly as it relates to the new logo, acquisition fees. So could you give an update on where you guys stand there today? Maybe you can talk a little bit about the evolution there. And just given the tougher macro, right, with sales cycles elongating, any changes on the go-to-market front?

Look, we have a very efficient distribution model for our software. And it starts with having deep relationships with our biggest customers, and that's permanent in nature. So if you think about most companies in our space, since they offer one product, have most of their sales expense and headcount expense on new logos. So we have so much to offer our clients. We actually invert that. That becomes very powerful for an efficient selling motion. We did invest in a new logo sales force, and that's been pretty successful for us as we became public, and we did pick up more when we acquired BluJay. They have a very simple example, like very few account managers and a lot of new logo salespeople. We would take their customers and put our account management structure on that, and then they're new logo salespeople we'll add them to our new logo team. So that's been pretty effective for us. There is an axiom, though, which is it's way harder to sell a new logo to a new customer than it is to sell an existing customer. And that's even more so when the environment gets a little bit more uncertain. So having such a big distribution network and so many customers in white space really helps us sustain our growth rate over time and then still invest in new logo sales. So we're making investments in growing our business. We can do that and sustain our profitability, we think, for a long time, where -- we're plus Rule of 40 company, and we expect to be that way for a long time.

Yes. And then -- because I think even before you made the BluJay, right, acquisition, you were talking about the growth potential of being this 10% durable growth story. So now that you have, right, more of this new sales capacity you acquired some of that, too, can you talk about how you think about like new logos right and expansion evolving over time, right, and how that gives you comfort right in the durability of the profile? And maybe even two -- is like a part two, so there are too many questions that you -- but obviously, you're doing a partner ecosystem, right? And so I would imagine that's probably helping on the new side, too. So maybe you can talk there.

Yes. I mean we want to build up a business that expands its growth rate as we get larger, as we've kind of talked to that, we've done that now for a lot of years in a row. And we're not -- we don't want to have a business that we overinvest and waste money on sales and marketing to try to sustain unrealistic growth rate. We want to build our growth rate incrementally over time, but remain a highly profitable company. We think that's in the long-term interest of our shareholders. So we're a very solid customer -- a very solid investor profile. In terms of new logos, in choppier times, it's a little harder to get new logos, right? But that's okay because we have a lot of things we can sell to the customer. So again, it goes back to this idea of we really want to be a durable company that we grow profitably over a very long period of time. We think there's so much headroom between where we are now and where we could be. And we're just going to incrementally add, add, add. We want to be a compounding -- profitable compounding growth business is kind of what we're trying to accomplish, and that's what we've built over the last 8 years.

Yes. And I think last quarter you called out that, like, close to 25% or so of opportunities were sourced from partners. So you have some newer partnerships, right, with Accenture. And I think KPMG has been around, but obviously, there's more focus there. Any early signs, right? You've seen as like tailwinds from those, I guess, where could that 25% go?

We -- it's a big change for us. We really never really executed our strategy. And as we have aspirations to be a much bigger company over $1 billion -- aspirations to be over a $1 billion company, we're going to need to drive more relationships through the partner ecosystem. To do that, they have to be able to have a business model that grows with us, and they can actually make money on employing our software. So we're really starting from a very low level of engagement. We've always had them as opportunistic relationships, and now these are much more strategic in nature. The real opportunity, though, and we think the length of time is measured in years to build into that, this is -- these are really big companies, 600,000, 700,000 people are working for them. They will always get to places we can't get to. So the strategy really is -- will help us, but we think it's really there from a much longer-term opportunity to kind of drive more opportunities our way and more revenue our way over time. I don't think it's a strategy that we deployed, and said we're going to really execute this and get an immediate pop. This is really more about how do we sustain our growth rate as we become a $1 billion-plus company. To do that, the only way you can do that is if you have a really robust partner ecosystem. So we've made big investments in 2, and we have demand for others. So over time, you'll see us kind of continue that persistent strategy of building out a partner ecosystem over time. We're not going to overinvest. We're not going to drive our profitability down. We're just going to do it piece by piece, step by step, stone by stone.

Yes. And then maybe turning to some of the financials, and there are some financial questions, too, from the audience. But we estimate that the [ suburbs ] guide in [indiscernible] like 10% constant currency growth in 3Q and then 14% constant currency growth in 4Q, which compares to 11%, 12% constant currency growth [indiscernible] quarters. So you mentioned some headwinds, right, from higher-than-normal employee churn, Logistyx product migrations taking a little bit longer. The possibility for that, right, to normalize. But can you give us a little bit more color on what gives you comfort that in a tougher macro, right, that you could actually see like an acceleration in growth? And maybe just help people understand the [ positioning ] there.

I've always looked at growth rates quarter-to-quarter for us as not specifically indicative of what the long-term growth rate is because it changes a lot based on the previous year, especially when we acquire a company, the pro formas get a little bit wonky. But we have a lot of confidence. Otherwise, we would have changed it in terms of hitting that number. So we see that revenue, we see what it is, and we're pretty confident we're on track for that.

Awesome. And then last quarter, you also talked about some large deals that were pushed, right? So are you still finding that those larger deals in this macro are getting that greater scrutiny? And then maybe you can just touch on any trends in sales cycles that you've seen with those larger deals?

I think it's choppy. And I think it remains to be choppy. I think it's going to be choppy for a while, especially as companies really start to think about next year's budgets in terms of where things are. I think it's the uncertainty of what's going to happen that probably gives people the most pause, right? If they can plan on something, they'll be more aggressive. And if they don't know what's going to happen, they tend to hold. So I think it's still choppy, it's going to be choppy. I think sales cycles are elongating, have elongated. It's going to last a little while longer. But again, for us, it's a matter of what they're not going to do today, they're going to do at some point in the future. And these are long sales cycles anyway, 6, 9 months. So it's just a matter at some time, they all catch up. So we're not too worried about any of that.

Yes. And then this is one from the audience that I think ties into this, the question is, is that you have a high concentration of revenue from top customers. So how can expand -- how can you expand existing smaller customers with significant white space up to a much larger level? And how long does this typically take?

We have a great experience of companies acquiring one piece of software where we acquired them with an acquisition. Typical pattern is $300,000 or $400,000 per sale. And we get to have the opportunity to grow with them in 2 dimensions simultaneously. They can roll out our solution to more geographies or business units. That's a cross-sell. They can put in more solutions. That's -- sorry, that's up-sell and then cross-sell. So we grow in 2 dimensions simultaneously. We have a lot of experience of taking a customer of $400,000 to $3 million or $4 million in a 2- or 3-year period of time. And it happens incrementally. And it generally happens relatively slowly and then it accelerates. So the pattern is they buy one thing, they roll it out to a different geography, we start another solution, we add on to that. And then around the time they get 2 or 3 solutions and the incremental change goes up, and that's how you get to a $3 million or $4 million, $5 million client overall. So we've had that experience kind of over and over. That's the core of the strategy.

Got it. And then maybe turning a little bit to margins. And I think margins are getting a lot more scrutiny, right? Of course, in this type of environment. And so E2open has a history of being 30%-plus, right, adjusted EBITDA margins. You've accelerated into double-digit growth on the subscription line. I guess, how do you think about near-term margin dynamics and longer term? So with respect to cost optimization, savings, right, how you're prioritizing growth versus profitability in near term. Maybe you can just give an update there.

Yes. We're a high-margin business. We start with a subscription gross margin that's close to 80%, 78%, 79%. And that's been pretty solid for a lot of years, and we think that's sustainable for the long term. And then in terms of translation to the bottom line, we think it's also very sustainable. And we have the good fortune of every year being able to literally adjust and taper our spend plan as we see the year evolving, so to then be able to make sure that no matter what happens on the revenue side we can hit the bottom [ line ]. So as we start the year, the amount of revenue that can change is really pretty small because they have so much of it's already built into our long-term contracts. So we have a lot of control over our spend plan even throughout the year, which allows us to kind of adjust as we go forward. So we don't really buy into the trade-off of you have to be way less profitable to grow. We think we can grow and be profitable. That's our mandate. That's my mandate. We're not going to be a growth company that just wants to grow at all costs. E2open was a public company before, and that was what they did. It didn't work out so well. So we're not going to do that again.

Yes. There you go. And then one more from [ the audiences ] more specific on stock-based comp, but does the long-term outlook there and also, too, as like a percentage of revenue?

Yes, I don't have those exact numbers. But I can tell you, we do believe in having stock-based compensation because we want everybody to feel and act like an owner. We also are very sensitive to making sure that it's the right value proposition for investors. We don't really want to have a business that every year investors get diluted and diluted. So we see a lot of companies kind of are on the way other side of the spectrum in terms of having a lot of stock-based compensation. We don't have a lot of stock-based compensation. I think we're committed to that concept. One of the things that we really care about is our stakeholders. We have basically 4 stakeholders. The first is our clients, the second is our teammates, then our investors and then our communities. And we've been very careful and specific about taking care of all of the stakeholders that not one of them suffers to the [ detriment ] of the others. And this is an area that's pretty important. Like we can take care of our people and give them [indiscernible] but we have to be fair to our investors. On the other hand, we could give all of our money away to our clients by having weak contracts, not have a fair exchange of value. That wouldn't leave us money to take care of our people and our investors. So we think very carefully about our stakeholders and trying to make sure all get reasonable returns and a reasonable opportunity from our business.

Got it. And then I think one other thing investors are trying to really think through in the near term is some of the impacts, right, that we saw from COVID, right, versus now going into the macro situation that we're in. And there were some industries that saw a big acceleration in growth rate and saw lots of tailwinds. I think some of the back office or supply chain didn't necessarily see those big tailwinds. So as you're thinking about today and what you're hearing from your customers, like is there a reason why some of what you see in back office or supply chain might be more durable, right, today, like maybe you didn't have that huge tailwind, right, from the pandemic and now you might have customers coming to some of these projects?

Our customers put our software in to operate their business. To operate their business, this is not an add-on, this is not discretionary, this is not something they're going to do to solve a problem for tomorrow. They're not saying, "Oh, I need something that's going to fix an immediate problem." They put our software in to be infrastructure, to run their business. That's what they put in. That's what we want to sell them. We want to be a part of their business for a very long time. As a result, the software is very sticky, but it also is not super simple to put it in. Like you can't just roll it out. Like if you put a Workday solution in, you could literally roll that solution out a year, 1.5 years from an entire Fortune 50 company. We'd never ever do that with supply chain software. No one would ever do that. You couldn't do it. It would be too hard and too expensive, too risky. You probably make somebody go out of business. So nobody does that. So it doesn't go in at the same pace, but it's very long duration. We have 15-year-plus relationships with our top 100 customers. So that's a really important part of why we think it's extremely durable. And also, it goes back to our philosophy is we also don't tie our revenues to our customers' volume. So we don't get to pick up when their volumes go up. We don't really want that volatility. It's not what we want to do because we don't see it on the other way down. So we saw that in COVID where our volumes, our customers' volumes went through the roof. Our revenue didn't change that much. Now they're dropping, our revenue doesn't change that much. So the whole idea of our business is to eliminate the left side of the histogram and give investors the upside in terms of inflecting growth and potential M&A in the future. That's the whole idea of our business, which really starts with having very high gross margins and a very rich translation to profitability on very, very durable revenue. That's what we're trying to accomplish.

Yes. And we're up against time, but maybe with like 1 minute or so, as investors, right, are doing work on companies for next year and thinking through ideas. Maybe you can leave the group with the areas that you think of E2open story that are underappreciated, right, or what investors might be missing.

Two things. One is companies will never ever stop trying to improve their gross margin. That is what we help them do. It's the core of what they're trying to accomplish. They'll do that for the next 100 years. The second thing is we're a network-based business. That network-based business means that we have an incredible moat. And we have a lot of flywheels that we can get off of the network. That is really super exciting for us. It's our source of differentiation. So those would be 2 things I'd say are most important about our business. It's a long-term growth story, and we have a lot of differentiation and a lot of protection to our core market because of our network. You can't form a network overnight, and we have the largest in the industry. So that to me is the most important thing about our business.

Perfect. Awesome. Michael, thank you so much for attending. Thank you to everyone in the audience. It's all we have time for.

Great. Thank you. Thanks Taylor.