Q2 2023 E2open Parent Holdings Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the E. Two opened fiscal second quarter of 2023 earnings call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host Adam Rogers.
The floor is yours.
Afternoon, everyone. At this time I would like to welcome you all to the east to open physical second quarter 'twenty three earnings conference call.
I am Adam Rogers head of Investor Relations you already to open.
Today's call will include recorded comments from our Chief Executive Officer, Michael Fire that gets.
Followed by our Chief Financial Officer, Maria Armstrong, and then we'll open 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 availability to open dot 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 third quarter and full year 'twenty three.
These forward looking statements are subject to known and unknown risks and uncertainties.
When you 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're not obligating ourselves to revise our results or these forward looking statements in light of new information or future events.
Also during today's call, we'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 far Lucas.
Thank you Adam and thank you all for taking the time to join our earnings call for the second quarter of fiscal 2023.
First I'd like to thank our nearly 4000 team members for another great quarter.
Anything we are a people business.
Our software begins with our great team.
Our clients derive immense value from our software because we have assembled what we believe our world's foremost experts in a broader supply chain space.
With a strong second quarter and first half of the year and we're excited to share our financial results with you.
I'll start by highlighting our second quarter results and what we observed in the broader macro environment based on our network and the data we're seeing.
I'll focus much of our call on Q2 commercial and operational highlights.
But a critical milestones for us as we pursue our strategic objectives for 2023 and beyond Marine will then cover the Q2 financial results in more detail.
Over seven years ago, we set out to build a scale compounding business generates highly profitable growth focus on one of the largest enterprise software markets solutions for the most complex supply chains in the world.
We have we're not building our business to generate increasing organic subscription growth over time with high margins and a high translation to cash based on operating efficiencies and low capital intensity.
This profile again presents itself in our second quarter results, despite a challenging economic and geopolitical environment.
In Q2, we generated $132 million in subscription revenue.
Which is a key indicator of long term durable client relationships.
<unk> revenue was 82% of our total revenue of $161 million and grew 11% organically on a constant currency basis.
Our Q2, adjusted EBITDA was $48 million and represented a 30% EBITDA margin.
Furthermore, we generated over $40 million of adjusted Unlevered free cash flow.
Legal to 84% of our EBITDA and 25% of our revenue.
Despite significant FX headwinds investing in strategic efforts for our future growth and absorbing integration costs from our recent acquisition of logistics, we remain highly profitable.
A testimony to the resilient business, we have built and our unwavering focus on balancing growth and profitability that drive long term shareholder returns.
While foreign exchange fluctuations are a headwind to our reported results for us and many other global SaaS companies right now.
Our constant currency results reflect the strong underlying fundamentals and our performance.
That said, we continue to see in the data from our network a weakening economy.
Specifically, we have observed that ocean bookings began to decline in the late spring and today are down about 30% from a year ago.
In addition, we are now seeing.
The spot rates for U S over the road transportation drop.
Demonstrating increasing capacity in the North American trucking market another indicator that economic activity is slowing.
As we mentioned in our last call we have carefully built and in many cases transition subscription revenue sources from being volume dependent to fixed in nature, meaning.
Any volume impacts with our clients have a small impact on our revenue.
The unusual and challenging economic conditions today are largely result of three significant changes over the past six months number one.
A rapid and dramatic shifts in consumer behavior as the pandemic yet.
Buying behaviors changed from durable goods consumption to travel and services based consumption.
There was a smaller multiplier effect when supply and service as compared to supplying our hard goods as.
As a result economic activity is slowing.
We saw the opposite of this in our data in the fall of 2020 as the Covid experience began.
The worn Ukraine, and the broader impact to European economy.
And lastly, central banks are rapidly unwinding the support they provided the economy prior to enduring the pandemic period.
Despite the macro challenges we are seeing we are maintaining our guidance on a constant currency basis, while taking prudent actions to invest in the future and absorbing 13 billion FX related headwinds to maintain our original guide on EBITDA and gross margin.
We built this business have multiple ways to win in all environments.
And as such we were able to meet our growth and margin expectations. Despite the elongation of sales cycles.
Great example of multiple ways to win as the expansion of the announcement, we made with Uber freight on our last call.
We are taking our first important step, albeit small to create incremental value for the members of our network of over 400000 connected parties.
This creates an incremental revenue source for us.
I'll provide more details in a few minutes when our share some Q2 highlights.
Each of our strategic objective is to continually generate highly profitable growth by becoming a standard bearer for the look very large supply chain software market.
Each will open as a network business, which was built to support the largest brand owners actually make and ship goods.
Today, they do that through using a network of service providers that need to be continually connected to various sophisticated applications that the brand owners used to make real time decisions as autonomously as possible.
Our network is made up of those various service providers and our software are those sophisticated AI enabled applications that are brand owners rely on every day when.
When we deploy our software we become the primary system of record for our clients and the software and data connections we provide through our network becomes the operational backbone for the world's largest companies providing their connections to our client service providers and best of breed software to our clients.
We become embedded in our clients' operations over time, which allows us to enjoy a 15 plus year relationship with our top 100 clients those relationships and their use of our platform grows over time.
While we have done a nice job building a connected software platform built upon a 400000 part of network of service providers, we know that to accomplish our strategic objectives, we need to become more well known to the broader market and build strategic relationships with the world's largest systems integrators.
This cannot be done without work.
Investment and will not happen overnight.
So next I will discuss our Q2 highlights and describe how these milestones support our FY strategic goals and our broader plans to build our business.
Maria will provide more details on our financial performance and also an update on our previously announced growth investment.
Let me start with our investment this year to further affect our growth rates in FY 'twenty, four and FY 'twenty five.
The purpose for our strategic investment of $20 million this year.
Accomplish two important goals and emerge as the connected supply chain platform.
The first is to build our brand to become more well known in our buying communities and increased our business development operation to identify more top of the funnel opportunities.
Second is to build strategic partnerships with large systems integrators, recognizing the important role they play in the buying and delivery process for software like ours stated a different way.
We have been able to build a 600 million plus dollar business.
Mid 30% Ebitdas growing at double digits without a well known brand.
And without the benefit of strategic support from the integrated community.
We are incredibly excited to show the world what we can do as we build our brand further scale, our commercial organization and add the world's largest system integrators are strategic partners.
We began this work in earnest in our second quarter, we refreshed and positioned our brand as a leader in supply chain and enterprise software.
We launched it open dot com invested in our sales force and made significant gains in the form of key partnerships critical to our future success.
On the brand side, we are seeing our share of voice metrics improved sequentially.
Data indicates we are now number two in the <unk>.
Supply chain technology market.
Further we are at or above target for four of the five milestones. We are built to ensure we are on track with this critical investment we are investing and building an ecosystem of strategic relationships with global systems integrators, such as KPMG, and Accenture and others to increase the universe of certified people to deploy our solutions and also.
To drive more opportunities with increasing velocity and win rates.
We have identified that partners have a significant role with approximately 25% of our Empire pipeline for the balance of this year.
Of these partner with most opportunities several large opportunities have been brought to us directly by them or progress through the pipeline much faster than they otherwise would have.
Although it's early this is a key indicator that our progress is on track by the end of the year. We will have trained and certified over 75 engineers within these integrators, who will serve as a foundation for future train. The trainer efforts. Our goal is to unlock the extraordinary influence and capacity. These global integrators bring through our marketplace by <unk>.
Thing in the training and certification of their engineers.
These certified resources will see the development of the global services practices. These global integrators have committed to building around our software.
This investment is essential to allow our customers to access their own trusted advisors and professional services providers to complement our own world class capabilities, and our selection and deployment of our solutions.
Moving to our platform of integrated best of breed supply chain applications.
Let me highlight one of the many go lives of an end to end integrated solution for large global retailer that describes the differentiated value having a very broad application platform and the foundation of a network creates.
This client story describes exactly our strategy and it is exactly how we scaled our business tenex in seven years, while increasing growth rates and profitability along the way.
This large global retailer selected ETA opening global logistics orchestration solution to use many elements of our platform to provide end to end application with a focus on collaboration across their network of suppliers and service providers.
The solution reduces shipping times feels greater agility in their supply chain and reduces overall supply chain costs.
The solution was sold in the fourth quarter of our last fiscal year.
Combined our global trade solution.
Our collaboration platform.
And then recently acquired Blue Jay Tms solution.
Wave one is now live.
Consisting of trade automation, and our transportation management system or Tms with a focus on providing export visibility across their distribution network in the Gulf region.
Combining global trade and our Tms into one integrated solution is very unique in the market.
It's one of the many strategic reasons, we made the combination with blue Jay in the first place.
We sold the solution one quarter after acquiring bluejay and delivered the integrated solution within six months.
Wave two add supplier collaboration across our clients global network of over 2000 suppliers, enabling greater collaboration and communication between our clients and their suppliers in the final wave going live later this fiscal year, we are deploying it to open full logistics orchestration, providing integrated import and export shipping experience.
With automated bookings global trade and transportation capabilities.
I wanted to focus on this specific example, as it perfectly describes how we provide differentiated value to our clients.
Now embedded our solutions become over time.
This highlights uniquely differentiate solution, we offer when we integrate our combined companies quickly and generate differentiated value for our clients by leveraging all aspects of our platform a very sophisticated applications and.
World's largest supply chain network.
Next I'd like to highlight a recent technical and commercial innovation.
During our last time together, we mentioned our strategic partnership with Uber freight which is not wise.
Our relationship with Uber freight creates an entirely new source of value for our brand owners as well as the freight is a network participant.
This partnership allows Uber freight.
Digital freight broker.
To use our combined technologies to automatically offer real time spot market rates.
To all shippers that use our transportation management system for reference.
Our Tms plans and executes over 60000 truckloads per day.
We're roughly $70 million of transmission spend per day across over 200 clients in one multi tenant system.
Who were afraid can now extend their ability to secure additional revenue to our clients, they're very point of decision, making 60000 times per day.
Automatically with no personnel involved.
This partnership increases Uber freight chance of capturing a portion of that $70 billion market everyday.
For a brand owner clients, they get to access increased capacity and potentially lower freight rates automatically from one system.
Our technical and commercial innovation creates real and substantial value for both the brand owner.
And the transportation provider.
This innovation is an example of capturing the incremental value we saw in the bluejay combination.
This is an initial although small and important step to creating a two sided network, where both participants gain value from our network.
Paying either open a small portion of the value that's created by leveraging our network and our applications. What is most exciting about this is.
We were able to secure two additional large digital freight brokers as clients to use this technology as well as several more in the pipeline.
The scale of our multi tenant CMS application allows us to form a unique marketplace, where both buyer and seller of transportation services benefit greatly.
From this technology.
Partnerships are also a part of our growth strategy.
And we continue that growth in Q2 by expanding our partnership with shipyard.
Leader in providing real time global multimodal transportation visibility this partnership unlocks additional value for our clients by combining an unprecedented level of transportation visibility into each opens full range of supply chain planning execution capabilities, all modes, all geographies beyond simply alerting shippers to a transportation delay.
The platform now enables users to peer inside and understand the specific goods they removed.
Transportation performance went back to their customer experience and most importantly, proactively take the best action.
This level of control on a global scale enables enterprises to improve efficiency reduce waste and operate more sustainably across even the most complex global supply chains.
I'd like to touch on something that is extremely important to me personally.
Our mission statement reversed our desire to lower the cost of everyday living by reducing unnecessary costs in the supply chain.
To improve our environment by leveraging our software to reduce the carbon required to make and bring goods to market.
Yesterday, we released our annual environmental social and governance report ESG.
This is an ongoing journey for us.
And he'd opened is proud to make tremendous progress in this area not only are reevaluating our own ESG commitment as a company.
Well, we had significant leverage to help the global effort by delivering solutions to help our clients' ESG efforts.
Specifically and reducing their carbon footprint.
Monitoring and managing activities outside the four walls and in enterprise is key to managing ESG.
You'll see incremental steps in our platforms quarterly releases and our aim to unify the connected supply chain to make positive impacts for people and our planet then approved planning reduce waste and ghd emissions optimize inventory protect labor and human rights in supply chain and facilitate compliance and reporting.
Our recent release allows our clients to use the temperature approach together ESG data from their suppliers.
The result is a more accurate view of supplier specific ESG risks low score trigger third party audits strengthening due diligence, enabling data driven reporting and risk management.
As I said.
Our ESG report in a preliminary strategy were released yesterday and I encourage you all to visit our website to check it out.
Finally, either open continues to gain third party recognition from industry analysts.
Particularly was being named as a leader in five of the five IDC Mark escape vendor assessments for supply chain planning, including the overall worldwide holistic supply chain tiny markets. Okay.
We were also recognized as a leader in the 2020 to.
Nucleus control tower value matrix in summary, we have been very productive and very busy second quarter.
Building for the future while also producing strong operational and financial results. We are excited about our multiple growth opportunities in front of us and.
And we remain focused on executing our strategy.
I'll now turn it over to Marie to go into more detail about our financial performance for Q2, and the rest of the year.
Thank you Michael and good afternoon, everyone.
As Michael mentioned, we're pleased with our second quarter results.
We reported subscription revenue at the high end of our guidance range, a testament to the tireless focus and dedication of our team.
Like other company, we continue to navigate macroeconomic headwinds, including foreign exchange rate volatility higher inflation and interest rates.
As long as elongated sales cycles.
Clients are distracted by geopolitical and macroeconomic considerations of their own.
Regardless of these temporary headwinds.
The stability of our subscriber base on long term contracts and the further need in the marketplace a robust supply chain solution has not changed.
We firmly believe in a significant market opportunity ahead of us.
<unk> continued to make strategic investments to ensure our long term growth path for the company.
I will detail shortly where we stand with investment spend that was part of the plan for the year outlined at the end of our last fiscal year.
Investing in the future. We also keep a keen eye on near term profitability.
Part of what each open long standing strategy of balancing growth and profitability.
We're taking a measured approach to head count growth remain highly focused on continuing to unlock cost savings by eliminating duplicative system spend and exiting select office spaces.
We are internally aligned in our focus to drive towards the highest long term free cash flow growth algorithm.
That is our north star.
In my first full quarter as the CFO of each open we have also taken a targeted approach to standardizing internal processes and operating cadences.
Revealing team structures and defining improvements to drive additional medium and longer term efficiencies are cross trained.
In addition to identifying operational efficiency.
So looking for ways to reduce financial risk and noise from our results and that low for a focus on the true fundamentals up with it.
As an example, we hedged a portion of our Indian rupee costs this quarter to eliminate future volatility around this cost item, we do not have any Indian rupee denominated revenue only cost, which is why we chose to hedge that currency not the euro or the pound, where we have both revenue and cost exposure, providing a natural hedge.
We will opportunistically look to hedge or eliminate all pure financial volatility and complexity overtime.
To sum up the focus is on simplification transparency and efficiency across the organization in order to scale and drive further future operating leverage for the business.
We will continue to invest in the business to field topline growth, but we will also carefully and continuously evaluate all decision.
To ensure they are long term ROI positive with the eye towards compounding free cash flow growth.
Now, let's get to the details of the quarter I will begin by reviewing our fiscal second quarter results.
Briefly touch on our progress integrating our recent acquisition.
And finish with an update to our guidance.
Thereafter, Michael and I will open the call to your questions.
As a quick note I will talk about our results on a non-GAAP basis.
We show a reconciliation to GAAP measures in the press release, which is available in the Investor Relations section of our website at <unk> Dot com.
In the second quarter of our fiscal 'twenty.
We reported subscription revenue of 131.
That $6 million, reflecting an organic revenue growth rate of eight 6% on a pro forma basis or 10.
10, 7% on a constant currency basis, when adjusting for the negative $2 5 million year over year impact from foreign exchange fluctuations.
In the first half of fiscal 'twenty three.
Ganic subscription revenue grew 11, 4% on a constant currency basis.
Professional services and other revenue were $29 1 million, reflecting a decrease in organic growth rate of one 1% on a pro forma basis or an increasing growth rate of one 2% on a constant currency basis, when adjusting for a negative 700000 year over year impact from foreign exchange fluctuation.
Our subscription revenues are growing faster than our services revenues part of our overall strategy.
Okay.
High margin subscription revenue.
As we mentioned on our previous earnings call. We are strategically shifting our services revenues to new partnerships with system integrators.
As part of the planned expansion of our channel ecosystem.
In order to aid our future subscription revenue growth acceleration.
I will provide more details on these investments shortly.
However, there were also some temporary negative impact to our services revenues in the quarter that we are addressing and expect to normalize the balance of the year.
First we were capacity constrained in Q2, which did not allow us to capture as much services revenue that's what's available.
This is mostly due to higher than normal turnover in our prior quarters as part of broader industry wide trend.
We have focused on bringing new hires through training and expect to see these issues. The date is overall, our attrition has moved back to historical levels.
I would also note that our logistics business product migrations, taking slightly longer than expected and resulted in a temporary impact.
Depressed scrapping is as we are providing free hours to complete the project.
Again, we are addressing both issues and expect the trends to improve for the balance of the year we.
We reported total revenue in the fiscal second quarter of 167.
7 million, reflecting a total organic revenue growth rate of six 7% on a pro forma basis or eight 9% on a constant currency basis, when adjusting for a negative $3 2 million dollar impact from.
Foreign exchange fluctuation.
In the first half of fiscal 'twenty three total organic revenue grew 10, 1% on a constant currency basis.
Profit was $106 9 million in the fiscal second quarter, reflecting a one 6% increase on a pro forma basis.
To that 9% increase on a constant currency basis.
Gross margin was 66, 5% or 66% on a constant currency basis for the second quarter of fiscal 'twenty three.
Compared to 69, 9% in the comparable period in fiscal 'twenty two.
Our gross margin was impacted by several specific items.
That were not present in the year ago period.
Adam is pulling up a couple of supplemental slide we prepared to help walk through the detail.
These slides are also posted to the Investor Relations section of eat two open dotcom.
The first bar on the slide represents FX, which had an approximate $1 million negative year over year impact. The second bar shows strategic system integrator impacted gross margin, which was $2 million this quarter, but not present in the year ago period.
As Michael mentioned, we have been investing and building an ecosystem training staff and developing go to market capability with global systems integrators.
KPMG and Accenture.
This is part of the previously disclosed 20 million dollar investments and for fiscal 'twenty three.
Third we are integrating our logistics acquisition from earlier this year.
We are upgrading the logistics of legacy products to platform integrated with E. Two open common infrastructure, while also adjusting their go to market to our standard approach.
These transition costs represent an approximate $1 million crack to our gross margin on a year over year basis.
And lastly, as we discussed last quarter.
Timing of Merit increases and promotion fell into the second quarter this year versus third quarter in the prior year.
It is purely a timing difference that led to an approximate $2 million negative impact on a year over year basis.
Representing both the September 'twenty, 'twenty, one and June 2020 to merit and promotion.
Adjusted EBITDA was $48 3 million.
That EBITDA margin was 31.
1% or 29% on a constant currency basis for the second quarter of fiscal 'twenty, three as compared to EBITDA margin of 33, 5% during Q2 of fiscal 'twenty two on a pro forma basis.
I will also walk you through the specific items.
<unk>, our second quarter fiscal 'twenty, three EBITDA that were not present in the year ago period.
These are items specific to each opened and in addition to the overall post COVID-19 increase in TMT and other expenses as we have returned to in person work environment.
Similar to last quarter, FX was an approximately $1 million year over year benefit to our EBITDA line.
We have natural cost hedge it to our largest top line currency exposures, which.
Which are the euro and the pound.
Along with additional cost.
Other currency.
The second bar on this slide investments net.
But first to the previously disclosed totaled $20 million fiscal year, 'twenty, three investment and system integrator ecosystem Mark.
Getting an internal support for investment spend.
Which totaled $6 million in the second quarter as.
As we showed on the prior slide approximately $2 million of the 6 million relates to the system integrator spend and therefore it sits within our gross margin line.
For the six daily as part of Opex and only impacts either.
Investment spend had just started to ramp last quarter totaling less than $2 million.
That has now reached the approximate run rate for the year.
Finally, merit increases and promotion represents an approximately $4 million year over year negative impact to EBITDA inclusive of both Cogs and Opex line items and again, representing a double impact as explained before.
There is no negative impact from logistics.
Opex synergies nearly off that higher cost described earlier.
Adjusted Unlevered free cash flow for the second quarter was 46.
6 million, which represents a flow through of 84, 1% of adjusted EBITDA.
Adjusted earnings per share for the second quarter of 2023 with five.
As discussed before driving bottom line profitability and free cash flow continued to be important priorities for us.
I also wanted to provide a brief update on our recent acquisition.
Well logistics I've mentioned before upgrading to logistics legacy products to a platform integrated with each new opening common infrastructure.
Taking a bit longer than expected.
We're seeing some higher than expected transition cost and lower services revenue due to free hours for additional work as a result.
We remain on track with starting to materialize in the Opex cost synergies.
Total synergies related to the recent logistics combination were projected to be just over $10 million.
We still expect to action approximately 85% of run rate savings by the end of fiscal 'twenty, three and realize 50% to 60% of the run rate savings by our fiscal year end.
Now turning to our Blue Jay acquisition.
Nearly complete with the execution phase of our integration of Blue Jay solutions.
Then September one 2021.
Last year, we announced that our total synergy target related to the Blue Jay combination, it's projected to be more than $25 million.
We have surpassed that amount and we have actions over 115% of these synergies.
As of the end of our fiscal second quarter.
Backend integration is nearly complete.
It's a huge lift being able to integrate a company half our size in 12 months.
We feel very good about the combination with Blue Jay and are excited about the continued cross selling opportunities beyond the stated cost synergies.
Now onto guidance.
We are maintaining our initial revenue guidance range it on a constant currency basis for fiscal 'twenty.
Given additional foreign exchange rate moved since we last provided guidance, especially in the British pound and Euro we have adjusted our guidance to the latest rate.
Our GAAP subscription revenue for fiscal 'twenty. Three is now expected to be in the range of 535 million to $543 million, which includes approximately $3 million additional negative FX impact.
Third to the last time you reported earnings.
We now expect an 11 million dollar negative headwind year over year from FX.
Our subscription revenue organic constant currency year over year growth is expected to be in the range of $10 eight.
8% to 12, 4%.
Total GAAP revenue for fiscal 'twenty three is now expected to be in the range of $668 million.
Two $676 million, including an approximately $4 million additional FX impact since the last time, we reported.
We now expect a $14 million negative headwind year over year from FX.
Our total revenue organic constant currency year over year growth is expected to be 10, 7% to 12%. We continue to expect non-GAAP gross profit margin to be in the range of 68% to 70%.
We're also reaffirming our adjusted EBITDA guidance in the range of $217 million.
$223 million after all the previously announced strategic investments.
We can maintain our EBITDA guidance for the year, despite the $13 million incremental FX headwind to our top line due to our natural FX hedging and keen cost control focus as described earlier.
Now to quickly touch on Q3 guidance.
GAAP subscription revenue for the fiscal third quarter of 'twenty three is expected to be in the range of 131 million to 134 million <unk>.
Including a $4 million year over year FX headwind.
This guidance range represents an eight 1% at 10, 5% year over year growth rate on a constant currency basis.
As a reminder, quarterly subscription growth rate.
Shrink from quarter to quarter, which is subject to timing and revenue recognition of new sales renewals and churn of larger transaction.
All growth rates are more indicative of growth rate for our business.
There are also several macro drove an impact to our topline that we already discussed last quarter.
Elongated sales cycles in some cases and pressure on volumes impacting the small part of our subscription base that is subject to volume based variability.
We did see several large deals in our pipeline mainly in Europe pushed from the second quarter into the third quarter.
We still expect these to close in the third quarter, but given there is generally a one quarter lag when we start to recognize revenue our third quarter growth, maybe slightly lower than the full year trend.
These near term macro driven impacts.
Not change the strong long term growth trajectory we're on.
As Michael discussed earlier.
We have an incredibly well positioned software platform.
Large tam.
Long strategy, and a focused and highly capable team to execute the strategy.
We remain excited to be investing in the significant growth opportunity. We see ahead of us with an eye towards long term compounding free cash flow growth our north star.
Thank you everyone for joining us today, we look forward to finishing this year strong and updating you on our results and progress next quarter.
With that Michael and I would now like to take your questions.
Operator, we're ready to begin the Q&A session.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please indicate so by pressing star one on your Touchtone phone.
<unk> Star two will remove you from the queue should your question be answered and lastly, while posing your question. Please pickup your handset listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions. Once again Thats star one if you have a question or comment.
The first question is coming from Chad Bennett with Craig Hallum, Chad Your line is live.
Taking my questions.
So just just maybe a quick housekeeping question for Murray.
See I think you recorded a 500 and roughly $14 million goodwill impairment in the quarter can you give us an idea of what that was related to.
Alright. Thank you so much Greg for the question Yeah, absolutely. So the impairment of goodwill what's just triggered.
By decline in our stock price. This is a GAAP required impairment I'm you know similar to other companies that have had to take back given the.
The market conditions and stock price.
It moves, but that's just a audited GAAP required impairment.
Got it Okay and then.
Michael just in terms of your kind of macro commentary.
On ocean bookings in container rates and spot rates on OTR.
I think.
If the data is correct I mean ocean container rates have been.
Off significantly since the spring and throughout the whole summer.
And I think you know over the road rates have been tough for a while are coming in for a while.
Is there something is it just kind of the the links of kind of the.
Compression in those those macro data points and you know I appreciate the company specific.
Indicators that Murray talked about about elongated deal cycles and a couple of deals in EMEA I think you pointed to some deals in the tech sector in EMEA last quarter. So just kind of trying to reconcile from a company specific standpoint.
You know what you're specifically seeing.
You know.
Well youre still kind of reiterating second half guide from a constant currency basis.
Yes, Thanks Chad.
Yes, I was differentiating the my our view of the macro economic conditions, and then focusing on what it means for us.
So for US we are seeing some elongation that is similar to last quarter Europe and in the high Tech World, but.
Given that a lot of our new subscription <unk> comes from existing customers, we can kind of maintain our revenue guidance for the year.
It is a more difficult environment and my expectation is that's going to continue for a while.
Built this business as I indicated with lots of different ways to win and I think it's really.
Argue just relates to the resiliency, we have on our revenue model.
We can if we can absorb some of those elongation, there's still hit our numbers.
Got it and then.
Maybe one last one for me and I'll hop off but just Michael I think it's been close to a year and a half since since you've really ramped the new logo team over the last five to six quarters and just.
I think the $20 million and go to market investments.
I think a decent part of it.
Just kind of give us a sense of of new logo activity in the current environment.
How that team's progressed and then I'll hop off thanks.
Yeah. Thanks, So you've got 20 million really is for this year. The initial new logo ramp of the team started last year.
And we continue to see good progress on that it is fair to say, though that in a more challenged overall macro environment.
More difficult to get new logos than it is to get existing client subscriptions I think we've historically had been 15%.
Our new net bookings be from new logos and that increased to the mid twenties, and we've seen that dip a little bit, but our pipeline looks strong and our pipeline continues to grow.
Sequentially month on month so.
And entering into a slowing economy, which I think everybody sees and I've been through this in 2000 to 2008.
It's just easier to get more and maintain your growth with existing customers and new logos, mostly because of the customers realizing and not wanting to take additional risks and that means it affects us a little bit on the new logo side for temporary for temporary reasons. So we don't see really anything macro which is that right now it's going to be a tough.
The environment for the next one to.
Three quarters.
Got it thanks for taking my questions. Thanks, Scott.
Up next we have Mark Chapell with look capital Mark your life.
Mark.
Thank you for taking my question.
What's your point in the services business.
Group last quarter.
As mentioned that we're closely watching that business for a few customers you saw delaying some projects and you were going to keep an eye on that any update on that you can provide.
Yeah, we see we see the demand there I think where you kind of touched on this we are seeing two pretty two impacts to our services business.
I'll say three one is the continued detachment from.
Our subscription growth in our services growth in that part of that is because we have additional revenue sources that don't come with any services with a positive because of overall gross margin profile of the other two is we had we were subject to as everyone was through the great transition.
The December January timeframe.
A lot of more attrition than normal that's it everybody saw that.
I think we saw it we're seeing a little bit of capacity constraints because of getting the new people in and then ramped up you have to kind of remember a lot of our services deployed.
Asia, where you have.
Notice periods, so that affects us both on the outside and the inside so its kind of all showing up in Q2 in terms of a bit of capacity constraint and then Marie touched on logistics, we acquired that business on March 1st and that business is a great business for the long term, but it's a smaller business about $30 million and what we've seen for <unk>.
Ladies of that size as we oftentimes inherent issues with customers that we have to absorb and take on and that's kind of been our ethos and how we've been able to grow the business. So those two impacts we see.
Are really kind of driving a little bit of the flatness in services revenue overall in terms of.
The high Tech environment, that's actually gotten a little bit more normalize I think the people that we're going to slow down or slow down and now we're actually seeing some ramp up with some very large projects. So.
Thank the services business.
We will continue to grow slower than our subscription.
Seen that now for several quarters and I do think this issue of capacity constraint.
Logistics kind of little bit of a fixed plan.
Wash out here in the next quarter or two.
Okay, great. Thanks, and then circling back a little bit to the earlier question and I. Appreciate your comments on an ocean bookings.
Spot rates, but macro wise I was wondering if you could just provide some additional details about what you said in your prepared remarks around deals pushing from Q2 to Q3 in Europe , and maybe just a little bit on industries.
Particular.
Countries.
We're seeing this.
I think it just falls into the category of companies when they sign a contract with us they are sending their contract debts.
Intended to last for three years to five years.
Which means the contracts I always get a lot of scrutiny and companies will always kind of revisit.
It's okay. Just writes every time, we want to wait and more checks and we've kind of seen that.
Really kind of in a couple of select cases, especially on the new logo side for.
Where companies Okay, Let's just do one more review I think that's just kind of companies identifying that the market overall is in a very choppy condition right now.
You have a lot of cross currents, that's happening in the environment with interest rates.
Clear indicators of economic slowdown, but then you have full employment. So I think companies are really trying to figure out like everybody look we are how do you how do you reconcile all of those data points I.
I think that just means to a little slower decision, making overall the main indicator for us is pipeline.
And our pipeline continues to grow in excess of what we close.
And that's been the case now for several quarters and really for the past year. So.
We don't really see anything other than just might take a little bit longer a month or two to close some deals, but you know I think that's kind of normal in this environment I say nothing too specific just kind of overall that tends to happen in this kind of environment.
Thanks, and then one final question product wise.
Any particular trends or strengths.
Certain products this quarter versus other quarters.
Yes, we mentioned the what we've done with Uber freight and that's a pretty it's pretty.
And important to us.
Before 1000 participant networks, that's really important to deliver the solutions.
We can for our clients, it's really kind of our biggest and most important differentiator and a moat and now we are identifying interesting ways to add significant value to not just the brand owners, but also as it were.
Participants so Uber freight as an example of that where we effectively are started the beginnings of a marketplace. So that that's really interesting for a lot of people are coming to us for that service I think thats, one and the other is continuation of global trade.
We have a lot of interest in terms of what I can ship to whom when.
And we're really seeing that and that's actually one of the big areas that accenture is investing heavily in because they see that kind of in their data as well. So those two are really kind of a big big areas that I'd highlight right now.
Great. Thank you that's all for me.
Right.
Once again, if you have a question or comment please indicate so by pressing star one on your Touchtone phone.
We have Andrew Oregon with Bank of America, Andrew Your life.
Good evening. This is David Ridley Lane on for Andrew.
Could you talk about pricing in the current environment have you taken any steps to increase pricing or the annual price escalators on new contracts.
Customers receptive to that.
Yeah, we have been taking price.
For the past call it year.
We've taken price in our services business are pretty consistently.
We've taken.
And I also kind of one of the things that we always do is kind of focus on the pricing of our services for for that business.
Also taking price in terms of just raising our list pricing that two quarters ago.
And what we found is that our average discount rate has actually gone down while we raised our overall list price.
It doesn't flow directly through to us because of the nature of our contracts in a week, we have three year contracts on average but.
But since we extend contracts with additional sales about 20% of our contracts renew so we are seeing that flow through it just doesn't have an immediate and dramatic impacts to our business right in the current.
Its current one or two quarters, but we are taking price and we have been able to do that and I think it's also indicative that on our escalators, they're much easier now to put into contracts.
Where two years ago. When you had basically zero CPI you got a lot of pushback from purchasing agents now that's becoming much more acceptable in terms of getting <unk>.
Escalators within the contract period itself.
A lot less pushback than we normally got a couple of years ago. So I think the idea of pricing is definitely real for everybody and we're certainly taking our share there.
Got it and then.
Obviously, it takes time to ramp strategic alliances.
<unk>.
With systems integrators.
But could you help us frame what success would look like for you in fiscal year 'twenty four sort.
Calendar 2023.
You mentioned I think partners and try and say 25% of the pipeline what would what would success look like.
From there I think relationships.
Yeah. Thanks for the question.
It really comes into three categories. The first is.
Having a larger ecosystem of people that can actually deploy our software and as we said we have on track David to go over 75, this year, which is a lot.
Way more than we've ever even thought about.
That's going really on us to plan I think a great a great indicator for us would be to ramp that up to 50% maybe by if we had the same metric when we started Q1.
And then maybe get that to two thirds and asking floating out there, but I think the big the big metric for us is going to be.
And tracking and that this is going to take more time is how many deals those folks kind of bring to us.
And the partnerships, we formed have been around the concept of us as a platform that was kind of our going in proposition and part of our.
Part of our agreement to invest with them is that we're not really interested in these big partners talking about either open as this particular part of the supply chain or that but actually for the idea of an integrated end to end outside in platform.
So the real opportunity is what they will kind of bring to us. We've seen this happen in sporadic cases, we had actually one seven figure deal. This year. So so far I think it's going to start slowly.
And again the investment is going to take time.
And I'll see what I think we'll see this more in 'twenty four and then towards the back half, where we hope to see that bring us more deals and if youll see more deals where they have a customer that they already have kind of talked about a completely different strategy, it's going to take a little time and the real reason, we're investing now is to be able to kind of get that that influence as we look into next year.
Yeah.
Up next we have Fred Lee with Credit Suisse. Fred Your line is live.
Hey, Michael Thank you for taking my question.
I had a quick question Blue Jay.
And if you could remind us the historical contract duration there.
How renewals have been trending more recently.
Congratulations on the 115%.
Synergies so that's fantastic.
So yeah I think they have their contracts were not as.
And as we found this a lot like most companies we have acquired kind of looked like this Friday. They would have a three year contract to start and then they would have annual kind of the ability to auto renew.
On a subsequent year. So if you look at the kind of duration of their contracts, it's very long, although the contract length as the contract was written as was actually three years, but there, but they have a longevity and not quite as long as ours, but several several years that'll cycles. Our strategy has always been to change that where we would actually not liked to auto renew but we're really actually.
Have a renewal points and our best contract looks like three years, where the contract just kind of ends and there really isn't an opportunity for the client to just auto renew and we found that really helps us in terms of setting a line of demarcation in price and also creating an environment, where we can really talk about the <unk>.
Next three year deal and add something to that.
So that's going to take a year or two to kind of wash through the system. So to answer your question three year contracts, but that doesn't tell the whole story because most of those contracts are on some kind of auto renewal.
And we go through systematically and try to adjust that to another three year term at the at the time of all renewals since they can auto renew we obviously can't do that on our own we have to work with them to kind of make that adjustment.
Got it that makes us that makes sense. It does makes sense. Thank you and if so how would you characterize the renewal success.
Getting away from auto renewed thus far.
I think it's well I mean, just in the numbers they were kind of running at a nine plus percent churn we were running at five and now we're kind of down to five ish a little below five I think now the latest number so.
We have seen historically, we've seen our ability to lower churn pretty important to our overall strategy.
And we've seen that here with so I think that kind of indicative of how we're seeing those renewals going.
So I think it's pretty important part of our strategy is to drive lower gross churn and I just wanted to just put some context on that churn number.
Gross churn to include reductions.
And subscription so our client churn would be much much less than that 5%.
Cost structure I think you've.
Got it that's very helpful. Thank you and a quick question on the gross margin drag from logistics would be platforming the pro services issues.
Sounded like most of that is behind the company or is there a little bit more to go.
Yes, Murray do you want to talk about them.
Yeah, absolutely and anti fraud, and so I would say that there is still a parts of it that we are working through how we want to be very.
Thoughtful and make sure that we do everything in the right way so you'll see some of it still trickle through in the next couple of quarters, but it should be trailing off and we'll make sure to you know again to be transparent and disclose that on ongoing basis as well.
Got it okay. Thank you and then my final question is with regard to the goodwill write down that was asked earlier, sorry, which asset was that specific to.
The goodwill they stayed higher.
Holiday did the entire company again, it's a it's a E Y our audit a requirement based on you know triggered by the stock price moves for the entire.
Tire company.
Okay. So.
Is that typically a bottoms up for you asset by asset.
Goodwill allocation.
I was just wondering if there was a larger portion that was that was specific to any other any any specific asset.
So this is a traditional auditor.
Kevin It looks at multiple different.
Things such as D. C S multiples everything in one reporting unit basis like that it's a holistic company valuable analysis again that you know auditors as all companies do on a periodic basis.
Got it okay, we could we could take this offline. Thank you. Thank you very much. Thanks.
Thanks, Brett.
There are no further questions in queue. This completes the Q&A portion of the call I'd now like to turn the call back to management for closing remarks.
Yes. Thank you everybody for taking the time to visit today and just kind of recap.
We were very excited about how we're continuing to build the business I'm very excited about kind of what we're accomplishing as a team. So look forward to seeing you all.
So have a great day.
Thank you ladies.
<unk> and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.