ETWO - E2open Parent Holdings: Light At The End Of The Tunnel

2024-01-09 17:56:58 ET

Summary

• E2open Parent Holdings, Inc. reported more sales declines.
• The company is focused on implementing action plans to improve sales execution and deepen client engagement to return to sustainable growth.
• Margins and cash flow remain strong, and the company expects adjusted EBITDA for the year to be in the range of $215 million to $220 million.
• Fiscal 2025 should see a return to growth.

E2open Parent Holdings, Inc. (ETWO) is a stock that we had tremendous trading gains in and converted some of the profit to a so-called house position . Members of our service and frequent followers will know that running a house position is something we strongly encourage whenever you have a 20% or more gain in one of our suggested plays, basically, you back out the initial investment, and some of the profit, and let the rest run forever, enjoying all future capital gains, plus future spinoffs, dividends, etc. Folks, this is a great avenue for wealth creation in the long term. It works, try it.

While enjoying long-term potential from short-term money, the thing we like here is that it opens up your capital to make another trade and do the same thing. That is part of our winners playbook. But we do not forget about the holding. That said, we continue to be one of the few firms covering ETWO stock, and the company just-reported fiscal Q3 , which was very anticipated since fiscal Q2 2024 was a bit of a kitchen sink considering performance was nailed and the CEO was departing. Shares spent all quarter recovering.

With that said, let's discuss the just-reported fiscal Q3 results . We remain neutral, holding on and monitoring performance.

Top line revenues fall again

The company was a revenue growth machine up until about a year ago, when revenues flattened out on a comparable basis, and now are on the decline relative to last year. In the just-reported earnings , total revenue was $157.5 million, down $1 million from the sequential quarter's $158.5 million, and down 4.5% from a year ago. However, their subscription revenue came in at the high end of guidance. Still, revenue declines for a company that was a revenue growth machine explains why we have pressure on the stock. Subscription revenue grew was down 1.5% from the year-ago comparable period to $132.8 million, or 84.3% of total revenue. It was also down from $134.7 million in the linked fiscal Q2.

Commenting on the quarter in the press release, the interim CEO Andrew Appel stated:

In my first three months leading e2open, I have seen first-hand the unique capabilities of our product offering and the significant value that our solutions are delivering for some of the world’s largest and best-known companies...Although our revenue growth has been below our potential, we are intently focused on returning to sustainable growth by implementing specific action plans to improve sales execution, deepen client engagement, and deliver flawless implementations. While this change process will take several quarters to materially impact our top line, our teams are excited by the client-centric approach, the early signs of progress we saw during the fiscal third quarter, and the tremendous opportunity we have in front of us

We agree that the revenue growth is well below what the company is capable of. We think that the action plans being put into place should start to materialize in a return to revenue growth in fiscal 2025. The good news is the company is adjusted-EPS positive.

Margins, earnings, and cash flow

Margins and cash flow are critical to cloud computing names, and really all software and services companies. Gross profit did slip with revenues, falling 6.6% from the year-ago period to $78.6 million, and was mostly flat from the sequential quarter. Gross margin dipped to 49.9% from 51.0% last year, but adjusted gross profit margin was up from last year. It was 69.6%, which rose from the 69.1% in the sequential quarter and was up from 68.9% a year ago.

As long-term investors with a house position now, we like these margins. Earnings power remains strong, and if the company can return to revenue growth and maintain these margins, we think the stock recovers.

Adjusted EBITDA was down 1.4% to $55.4 million. Adjusted EBITDA margin was up, coming in at 35.1% versus 34.1% last year. That is good news. The company saw adjusted EPS of $0.04, in line with estimates, and matching the earnings from Q2. Further, the balance sheet remains healthy and cash flow is robust.

Operating cash flow is up markedly through fiscal 2024 compared to the same period of fiscal 2023. Operating cash flow on a year-to-date basis was $56.7 million compared to $43.2 million from the year-ago comparable period, inclusive of non-recurring expenses.

That is positive, and, adjusted operating cash flow on a year-to-date basis, exclusive of non-recurring expenses, was $79.0 million, which represents 47.8% of year-to-date adjusted EBITDA. This is also positive.

Looking ahead to the last quarter of fiscal 2024

Looking ahead, adjusted EBITDA for the year was reiterated at $215 million to $220 million, still good for an adjusted EBITDA margin in the range of 34% to 35%. Adjusted gross profit margin for the year is also still expected to be in the range of 68% to 70%. This will be on the back of subscription revenue of $534 million to $536 million, reflecting a 0.3% organic growth rate at the mid-point, with revenue total of $628 to $633 million. The range was narrowed, but the midpoint is higher than prior guidance. That is a small but noteworthy positive.

E2open Parent Holdings, Inc. has expanded business with major clients in various industries this year, and also closed a new logo business account with one of the largest global commercial vehicle manufacturers. The company plans to aggressively work on its sales force, and is implementing new projects with partners that highlight e2open's supply chain solutions.

We believe calendar 2024 (or mostly fiscal 2025) will show growth from this sluggish fiscal year. We are holding our E2open Parent Holdings, Inc. position, and expect the stock to react modestly positive to this report.

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