Q3 2023 E2open Parent Holdings Inc Earnings Call
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Greetings.
Welcome to the E. Two open earnings call for fiscal third quarter 2023 conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host Adam Rogers.
Good afternoon, everyone. At this time I'd like to welcome you all to the E. Two open fiscal third quarter 2023 earnings conference call.
I'm, Adam Rogers head of Investor Relations here at <unk> to open.
Today's call will include recording comments from our Chief Executive Officer, Michael part of it.
Led by our Chief Financial Officer, Gary Armstrong.
And then we will 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 available to you 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 our fiscal fourth quarter.
Full fiscal year 2023.
These forward looking statements are subject to known and unknown risks and uncertainties.
<unk> 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 will 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 part of it.
Thank you Adam.
Thanks to everyone for joining our fiscal third quarter earnings call.
Had a strong third quarter against the continued backdrop of a challenging macro environment.
We exceeded our guidance for subscription revenue, our primary focus while expanding profitability and free cash flow.
We look forward to sharing our results with you and providing an update about our business.
During the call I'll discuss our third quarter highlights how our clients are using our network and platform and an update on the FY2023 strategic investment areas, we discussed previously.
Maria will cover the third quarter financial results in more detail and lastly, we will open up the call for Q&A.
Let's begin with the third quarter, we had a strong quarter, we exceeded our subscription revenue guidance generating a record $135 million Antitrypsin revenue, which represents 82% of our total revenue.
We continue our track record of being a highly profitable delivering record adjusted EBITDA of over $56 million.
This translates to a 34% EBITDA margin.
The organic growth rate of subscription revenue our primary focus was over 10% for Q3 on a constant currency basis.
In the nearly two years as a public company, we have consistently grown subscription and total revenue, while maintaining very strong profitability.
Our consistent subscription revenue growth in the double digits for the last six quarters.
As a result of our breadth of product offerings, the diversity of markets from an industry and geographic perspective.
And the value our innovations unlocked for our clients to leverage our mission critical applications.
Stated more simply.
We have multiple ways of winning.
Let me provide you with some examples of what I mean by multiple ways to win.
Illustrated by how our clients are using the platform and our network.
We recently signed an expansive contract with global retail leader Hugo boss.
The agreement covers a range of our solutions from supplier collaboration to logistics, providing end to end supply chain visibility and control specifically Hugo boss will leverage our network and applications to optimize and manage internal and outsourced manufacturing.
The solution enables collaborative capacity and forecast visibility.
Bust procure to pay solution.
And agile translation management capabilities. This project will give them full visibility and significant reduced cycle times, ensuring exceptional on time delivery, which are the key performance indicators for any fashion company.
It's a significant new logo win it brought to us specifically because of the marketing investment we initiated earlier this year.
Our network and product breadth were the primary factors in winning this large multiyear contracts.
On the other end of the industry spectrum. We also signed a contract that includes multiple solutions for our global agribusiness innovator that contract along with Hugo boss helps demonstrate that our end to end supply chain platform works well across a wide range of industries.
Like all quarters Q3 brought many go lives for new and existing clients with.
With a few I'd like to highlight.
We recently went live with the first phase of Amazon Capers satellite project.
Which will enable high speed internet access to Unserved and underserved parts of the world.
We have been working with driver for the past year to help them build their supply chain focused on manufacturing collaboration and planning.
Cloud network leader extreme networks went live with either openings partner performance incentives application.
Paying to their distributors over $66 million using our application within the first week of go lives.
We don't always discuss our channel business on these calls for our solutions our value add to the entire network.
Facilitate payments and rebates are offering greater pricing visibility.
And international mining and metals company is using you to open up for global trade management. They now have a single platform for global regulation, a centralized product classification repository automatic export and import controls all shipments and more with ice towards future logistics capabilities.
<unk>.
Yes.
One of the world's largest consumer goods companies went live on either open and mask near that platform.
<unk> next generation solution that offers a complete logistics visibility control and decision, making through the integration of all trading partners and data and one closed loop system.
The system provides predictive visibility and traceability throughout the supply chain in real time.
This project delivers on multiple strategic objectives for the company.
A single operational process control of inventory, both upstream and downstream reduce cost through purchase order collaboration and increase customer service levels.
In addition to new logo wins and expanding client opportunities network innovation is also a strategic priority for us in November we introduced you to opens carrier marketplace apart as part of <unk> broader strategy to expand the network ecosystem.
The carrier marketplace offers carrier partners and shippers powerful new capabilities, including access to more data that allows both carriers and shippers to make better proactive decisions.
<unk> 8000 carriers levers that work today, and we believe our new marketplace.
Help unlock more value for.
For the entire ecosystem.
Now I'd like to update you on our progress against our stated strategic investment areas, we laid out at the beginning of the year.
Investing in sales and marketing.
Increasing brand awareness.
Work with strategic partners.
And our initiative to build the systems integrator ecosystems.
We've seen good progress in our sales and marketing and brand investments.
As evidenced in top of funnel pipeline growths since initiating these investments and as noted earlier opportunities specifically generated by this investment that are now flowing through as new client wins.
Our brand awareness metrics have dramatically improved.
As measured by share of voice, where we are now consistently.
Number one or number two and share of voice for our cohorts.
Even though our restaurants in this area have been relatively modest we've seen great success.
On the strategic partnership front. This work continues with both of our strategic partners and building our integrator ecosystem.
This is long term work that does not happen overnight that said, we are making solid progress in both areas and are hitting our internal marks.
Both initiatives will have the effect of decoupling, our services growth rate from our subscription growth rate.
It was a primary focus on growing subscription revenue.
By enabling the size such as our partners Accenture and KPMG to build their own practice and business on our platform. We're unlocking the extraordinary influencing capacity these global partners bring to our business.
This means that services will continue to decouple from subscriptions and be a shorter term drag.
Our overall growth by design to support long term subscription revenue growth.
Finally, I'd like to mention a few other corporate highlights.
We continue to build on our ESG initiatives.
E. Two open released its second annual environmental social and governance report in the third quarter. Our software you can have an enormous effect by reducing the environmental impact of our clients as they produce transport and distribute their products and to this end ESG is part of our roadmap development.
As a company it opened held an enterprise wide employee, giving campaign supporting water for people Warner for people facilitates the development of clean water improved sanitation and health and hygiene.
Nine countries across Latin America Africa, and India.
We ran this campaign through the end of 2022 and either open provided matching donations to this amazing organization.
Lastly, we were named the top enterprise SaaS solution of the year into 2022 best in Biz Awards, along with honors for most innovative SaaS solutions.
You know open remains focused on our clients, we have multiple ways to win and despite the macro environment. We continue to deliver consistent subscription revenue growth, while being highly profitable.
Our performance in Q3, and our outlook for the year are evidence of our focus on profitable growth and disciplined operations.
This focus allows us to maintain our EBITDA and free cash flow targets, even while our total revenue expectations for the year have come down due to FX economic and business reasons that Marie will discuss in more detail.
We delivered adjusted EBITDA margins of over 30% as reported for the last seven quarters.
And as a reliable growth company that generates high margins and significant free cash flow.
We are mission critical software company with.
With durable revenue consistent growth.
Walter in your clients and also highly profitable.
We are laying the foundation to become the world's preeminent supply chain software company, we have work to do but there lies the opportunity.
As we are clear on the mission and our strategic path forward.
Lastly, I'd like to thank our nearly 4000 team members for their continued work and dedication to excellence for our clients our communities and our company.
Maria will now review, our financial performance in greater detail Marine.
Thank you Michael and good afternoon, everyone.
I hope everyone had a wonderful holiday season, and a fantastic start to the new here.
First I wanted to poke the broader finance teams had to open.
Our efforts to get us ready for earnings working through the holidays are much appreciated.
Incredibly proud of the stellar team around me and I'm looking forward to all that we can accomplish together in 2023.
As Michael mentioned, we had another strong quarter and we're excited to share those results with you today.
I don't again by reviewing our fiscal third quarter results.
I'll then briefly touch on our progress integrating our recent acquisitions and then finish with an update to our guidance.
Thereafter, Michael and I will open the call for 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 web site at E. Two open dotcom.
In the fiscal third quarter of 'twenty, three we reported subscription revenue of $134 9 million, reflecting an organic revenue growth rate of eight 1% on a pro forma basis of 10, 2% on a constant currency basis when it.
Adjusting for the negative $2 $7 million year over year impact from foreign exchange fluctuations.
This was above the high end of our guidance range of $131 million to $134 million.
In the first nine months of fiscal 'twenty three.
<unk> organic revenue grew 11% on a pro forma constant currency basis.
Delivering a consistent and predictable subscription revenue stream remains our core focus and is the foundation of our durable and highly profitable business.
Professional services and other revenue were $30 million, reflecting an organic growth rate of negative nine 2% on a pro forma basis or negative six 6% on a constant currency basis, when adjusting for a negative 900000 year over year impact from foreign exchange.
<unk>.
We have a stated strategy to focus on durable high margin subscription revenue over services revenue.
In addition, as Michael mentioned and we have also discussed in our previous earnings calls.
We are strategically shifting our services revenues to new partnerships with.
With system integrators as part of the planned expansion of our channel ecosystem.
The order to aid our future subscription revenue growth.
However, our services revenue is underperforming against our expectations.
Our services gross margin improved from Q2.
We are focused on addressing two main key areas to turn services revenues back to growth.
First we mentioned last quarter that logistics business, we acquired earlier this fiscal year.
Has been a drag on the services revenues due to free service towers, as we transition certain clients to our cloud platform.
We continue to address this issue and expect the trend to improve as we move into fiscal 2024.
Second there are some pockets of unmet demand as we ramped trained employees and contractors to be fully billable.
We're working to adjust the supply and demand balance of our team to better anticipate client needs by product. So we can more closely match the demand we see with our supply we have.
Aside from these two items, they're also macro impacts beyond our control our select customers, especially in the technology space I temporarily slowing or potting larger transformation projects.
We expect those impacts to normalize and the projects to be picked up again as the macro environment stabilizes.
We expect our services revenues to return to being additive to our top line growth profile as we work through the near term issues over the next couple of quarters.
We reported total revenue in the fiscal third quarter of 164 9 million reflecting.
Reflecting a total organic revenue year over year growth rate of four 4% on a pro forma basis.
Six 7% on a constant currency basis.
When adjusting for a negative $3 $6 million year over year impact from foreign exchange fluctuations.
In the first nine months of fiscal 23 total organic revenue grew eight 9% on a pro forma constant currency basis.
Our gross profit was $113 6 million in the fiscal third quarter, reflecting a four 9% increase on a pro forma basis or six 1% increase on a constant currency basis.
Gross margin was 68, 9% for the third quarter of fiscal 'twenty, three compared to 68, 6% in the comparable period in fiscal 'twenty, two or 62% on a constant currency basis.
I will now walk you through the supplemental slides, we prepared to help bridge the year over year impact to our gross margin. Please.
These slides are also posted to the Investor Relations section of each open dot com.
As you can see the first bar on the slide represents FX, which had an approximate $1 million negative year over year impact to our gross margin.
The second bar shows strategic system integrator span impact to gross margin.
Which was $2 million this quarter, but was not present in the year ago period.
As mentioned earlier.
We're building a global systems integrators ecosystem and have been investing and training staff and developing go to market capability with organization.
KPMG and Accenture.
This is part of the previously disclosed 20 million investment spend.
Fiscal year 'twenty three.
Net organic margin growth with a $7 million positive impact to our gross margin, primarily driven by higher subscription revenue.
Adjusted EBITDA was $66 2 million compared to $46 1 million in the prior third quarter, an increase of 22, 1%.
Adjusted EBITDA margin was 34, 1% or 32, 6% on a constant currency basis.
The third quarter of fiscal 'twenty.
As compared to EBITDA margin of 29, 1% during Q3 of fiscal 'twenty two on a pro forma basis.
Okay.
The next slide details the items impacting our third quarter fiscal 'twenty to EBITDA when compared to the year ago period.
FX was an approximately $1 million year over year benefit to our EBIT wise as discussed during our previous earnings calls, we have natural cost hedge it to our largest top line currency exposures, which are the euro and the pound.
With additional costs in other currencies.
The second bar on this slide investment spend with first with the previously disclosed 20 million dollar fiscal year 'twenty to reinvestment and system integrator ecosystem marketing and internal support for investment spend which totaled $6 million in the third quarter.
Similar to our second quarter, approximately $2 million of the $6 million investment spend relates to the system integrators, and therefore fits within our gross margin line.
Balance of Formula in this part of Opex and only impacts EBITDA.
Net organic margin growth with $9 million positive impact to our adjusted EBITDA.
Primarily driven by gross margin improvement coupled with various opex cost saving initiatives.
Net income for the third quarter of fiscal 2023.
With $5 5 million and adjusted earnings per share of six cents on approximately $341 4 million adjusted basic shares outstanding.
Now on to cash flow.
I want to spend some time on this topic is generating compounding free cash flow growth is a core focus for us.
As a supplement to the GAAP cash flow deal, we had been providing an adjusted unlevered free cash flow yield.
That starts with adjusted EBITDA and subtract normalized Capex that is capex, excluding onetime M&A spend.
Adjusted Unlevered free cash flow for that definition.
With 50.
$4 million for the third quarter and $132 4 million for the first nine months of fiscal 2023.
Going forward in order to provide a clearer view of our normalized cash flow.
We will start with GAAP operating cash flow.
It already takes into account cash interest net working capital and cash taxes as.
As opposed to the previous view that started with adjusted EBIT.
We adjust the GAAP do you for nonrecurring, one time and M&A cash payments to derive and adjusted operating cash flow.
Alright, just that operating cash flow for Q3, let's.
With $50 7 million and for the first nine months of fiscal 'twenty three with.
With 75 zero million.
We will continue to provide the disclosures on normalized capex expenditures.
To derive adjusted free cash flow.
Our adjusted free cash flow for Q3.
Was $44 9 million.
And for the first nine months of fiscal 2023 was $51 4 million.
This format should provide more clarity on operating cash flow generation adjusting for nonrecurring items, particularly given our historically acquisitive nature.
We have included the year to date deal in the supplemental slides this quarter and we will be presenting at <unk>.
In our quarterly press release going forward.
We will be retiring the old adjusted Unlevered free cash flow view, but he can still be easily derived by taking our EBITDA minus the normalized capex sticker that will still be provided India adjusted cash flow walk.
Timing differences of cash inflows and outflows.
Have a significant impact on quarterly cash flows as a normal course of business.
This is why it is important to look at cash flow on a rolling basis.
Normalizing out quarterly fluctuation.
As an example for our Q3 cash flow I would point out two items.
First it includes the catch up on delayed billings from Q2 Blue chip ERP migration that depressed collections in that period.
Second Q3 cash interest payments were below normal run rate due to a timing shift of cash payments into Q4.
As a result, we will see Q4 cash interest payments of approximately $12 million above our normal run rate.
To reiterate building a business that generates compounding cash flow is a core focus for us and finding additional efficiencies and leveraged for cash flow growth generation will continue to be a priority for us.
Well you are complete with our integration of Blue Chip solutions that closed on September one 2021.
As mentioned last quarter, we surpassed our original synergy target of $25 million.
Now turning to the logistics acquisition.
Total synergies related to the recent logistics combination I still projected to be just over $10 million.
We expect to action approximately 75% of run rate savings and realized 50% to 60% of the run rate savings by the end of fiscal 2023.
As previously discussed the logistics systems integrations are taking slightly longer than expected.
However, we remain excited about the long term additive value of this acquisition and are confident in our ability to achieve the previously announced synergies.
Now I want to guidance.
Our GAAP subscription revenue for fiscal 'twenty three is now expected to be in the range of 533 8 million to $536 million.
Which includes an approximate $2 million positive FX impact compared to the last time, we reported earnings.
As the euro and the British pound have incrementally strengthened against the dollar.
We now expect an approximate $9 million 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 nine 9% to 10, 5%.
We are adjusting the lower end of our GAAP subscription revenue guidance on a constant currency basis down by $3 million and tightening the range to $3 million.
Presenting the guidance range of 542 million to $545 million.
As mentioned last quarter, we have seen delays in select large deal closings due to a volatile macro environment.
Some of the deals delayed from Q2 did close in Q3.
Some are still delayed and we're seeing a similar trend carrying through Q3 and Q4.
We do expect those projects to be picked up again as the macro.
The environment stabilizes in the coming quarters.
As the demand for our mission critical platform remains as strong as ever.
Total GAAP revenue for fiscal 'twenty three is now expected to be in the range of 655 million to $660 million, including an approximate $2 million positive FX impact since the last time, we reported.
We now expect an approximate $12 million negative headwind year over year from FX.
Our total revenue organic constant currency year over year growth is expected to be eight 2% to 9.0%.
On a constant currency basis, we are adjusting down the lower end of our guidance range by $14 million and tightening the range to $5 million it.
It is now expected to be in the range of 667 million to $672 million.
Most of the revision is coming from the services revenue due to the headwinds outlined earlier.
We continue to expect non-GAAP gross margin to be into range of 68% to 70%.
We're also reaffirming our adjusted EBITDA guidance in the range of $217 million to $223 million.
We are likely to come in at the low end of the EBITDA guidance for the year, but.
What do we expect to still reach the EBITDA guidance established at the beginning of our fiscal year.
Despite the headwinds to our revenue.
We're able to do that due to our keen focus on the operational efficiency of episodes.
Additionally, supported by the way, we have set up our business to provide natural FX hedges on the cost side that offset the FX headwinds to the top line.
Despite the continued evaluation of our cost base.
We're still continuing to invest in future growth of our business and committed to our previously announced strategic investors spend of approximately $20 million. This year, which is included in our guidance range.
Now to quickly touch on Q4 guidance.
GAAP subscription revenue for the fiscal fourth quarter of 'twenty three.
Is expected to be in the range of honeymoon $37 million $240 million.
Including a $2 million year over year FX headwind.
This guidance range represents a 7.0% to nine 3% year over year growth rate on a constant currency basis.
In conclusion.
We're proud of our year to date results and the trajectory we're on.
The rest of the year.
Our sales and marketing teams have done an incredible job navigating the ever changing macro dynamics impacting our customers.
We're also clear on the improvement opportunities internally and have a clear action plan that we're aligned on.
We remain excited about the multiple growth opportunities in front of us.
And are committed to a balanced approach to growth and profitability.
We're getting compounding free cash flow growth as 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.
At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone.
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One moment, please while we poll for questions.
And your first question is coming from Mark Chapell.
With loop capital. Please proceed with your question.
Hi, Good evening and thank you for taking my question here.
Starting with you.
I was wondering just starting with you if you could just provide some additional color and maybe some of the deal delays that were mentioned in the prepared remarks.
With respect to are you seeing them in certain verticals. It sounds like maybe high tech might be impacting things a little bit more than other verticals, where you're seeing it with like certain sized customers larger versus smaller customers.
Maybe just give us a little more color on the deal noise.
Yeah.
Choppy environment, I think it skews a bit towards larger transactions become harder to get over the finish line.
But certainly all seen the news and in high Tech with the high Tech companies, making pretty significant adjustments across the board and that's true as we've mentioned that specifically around our services, we have long standing relationships with these companies and sometimes they say, okay, we're going to pause a little bit. So that's the kind of the primary reason for the services revenue.
In logistics, we mentioned.
It skews towards larger transactions.
And it just takes a little longer for them to get over the finish line.
And kind of any choppy economic environment.
Are you seeing any deals actually go away or they just just being delayed.
Decisions just being delayed here.
Yeah, I think the deals don't really go away you either win them you lose them or they could put off till some period in the future.
You got to remember.
The reason that they put our software into this to fix things for next 10 years. So many times I'll say will not this quarter, we'll see what happens so I don't think they really go away.
It just got to get.
Sure based on whatever their financial objectives are or whatever they can tackle important time, so we don't really see them going away kind of ever.
A matter of do they pushed a little bit to the right.
Okay, Great and then with respect to linearity in the quarter, maybe just talk a little bit ago.
Any observations there I mean did you notice that it was a slow down.
The deal delays noticed later in the quarter or was it pretty much even throughout.
No I think we have a strong start and I think the quarter was a fine quarter. It just you know we've.
Had a couple of things that got pushed a little bit. So I wouldn't say, there's anything kind of different happening then happen throughout the entire year, but just a choppy macro environment.
What I can see.
Okay, Great and then one final question shifting gears, a little bit here with respect to the company's capital structure, maybe you could just give us an update or just give us your firms views on say M&A versus debt reduction versus share repurchases and how we should think about that going forward.
Yeah. Thanks for the question, obviously, you know we've as we said.
We've been able to build the business through a pretty aggressive period of M&A.
Current environment I think it's fair to say that that Avenue for us is going to be a little bit on pause for a while.
Primarily because of the bid ask spreads are a little bit still not where we'd like them, but we also have to be cognizant mark of one we have our leverage as outside kind of our range are coming down. So we want to make sure we get it back into the range we articulated early on.
As you think look at our cohorts. We're undervalued, we think in the marketplace. So issuing shares at this point wouldn't.
It wouldn't be it wouldn't be right for us to do for ourselves and for our shareholders. So I think overall.
Yeah.
Well no.
<unk> and generate free cash flow and mostly delevering.
Thanks, I'll pass it to the next the next person.
Our next question is from Adam Hotchkiss with Goldman Sachs. Please proceed with your question.
Great. Good afternoon, and thanks very much for the questions first would love to dig a little deeper on where we are with your relationships with the system integrators sort of what is the initial feedback been from partners. As a result of the investment programs and then could you give us a sense for how you're thinking about what impact that partner ecosystem and some of these investments.
This will likely have on subscription revenue ultimately at scale.
Yeah, I think listen we've made great progress.
You know the.
The ones, we've announced and as we did again, we find more and more pockets of opportunity.
Areas. So I think we have continual relationships in conversations with them and they are getting.
What's happening at increasingly higher levels in their organizations you have to.
Keep in mind of how.
How large these companies are especially when thinking about accenture with.
People working for them.
I'll take a little bit of time.
Time for us to kind of build on what we've started so we this is necessary we think for us to become the company, we decided to become.
But we also are very sober in terms of what it's going to mean in the winter time, we've talked about this this is a really a 24% to 25 kind of initiative.
And that's why we needed to make a fairly large jumpstart to the investment.
Kind of get things going so we're excited about it seeing great progress, but this is not a short term thing or something.
Very highly committed too.
Just to add to that Adam.
As we look towards our next fiscal year, obviously, we're very focused on working on pipelines and really detailing out the plans together with our partners and just stay tuned and you'll hear more detail.
As we work through those plans for next year.
Got it got it no that's super helpful. Thanks for that and then just on net revenue retention gross revenue retention I know these are metrics that you tend to give out annually any material changes in those over the last quarter or so from where we were at the end of fiscal 'twenty, two and any drivers of those changes if any.
No I don't I don't really see that.
Sure much if at all those.
Those numbers have been pretty consistent for us for a while.
So that's kind of the nature of our business is to retain these customers. So we don't really see that changing in the short term not a dramatic way one way or the other.
It got him with quantified previously that any quarter. They can kind of fluctuate 100 basis point more.
More or less one way or another but nothing in terms of change from that prior disclosures our trends.
Got it Super helpful. Thank you and then last one for me just on the marketing investments you noticed some outsized performance there.
Any scenario that you could see even amid a difficult macro environment to sort of amplify the brand to lean in there. In addition to what you've already laid out or do you think the benefit from those investments.
It has a little bit left to play out before you consider that.
Yeah. It was a we make investments in our in our branding and marketing all the time.
And kind of like on the systems integrator, we felt coming out we needed to put a little more emphasis on it this year, which is why we think a lot of that is going to be onetime in nature. One of the things that we brought in a car.
Little over a year ago.
Before that we'd ever had a CFO .
So we have the capability now and that's that was a part of this one time investment, but we are making marketing investments and we continue to expect to be kind of one or two and share of voice.
Continue what we started but we don't really expect to replicate as much of a one time spend next year I think we need to.
But it will morph back into kind of our normalized sales and marketing spend as a percent of revenue.
Really helpful. Thanks, Michael Thanks Marie.
Thanks, Adam.
Okay.
Our next question is from Chad Bennett with Craig Hallum. Please proceed with your question.
Yeah.
Great. Thanks for taking my questions. So just kind of digging a little hey, Michael a little bit more into kind of the deal delay commentary.
Last quarter, you were kind of specific to EU and and I think you pointed out the tech vertical also last quarter.
From a geo standpoint are you seeing it you know.
In more than just the EU kind of from a geographic standpoint.
It's really situational.
It just depends on the company what they have going on.
You know what what their approvals are and like just like every company does when things are a bit uncertain as they kind of say second and third look at things.
And it's situational we have some deals that move here, we're selling a lot of software somebody else move too quickly and the other ones that we would expect to move through kind of get slowed down a little bit.
So I don't really think it's any particular pocket I think obviously the tech one is a little bit more concentrated but we've also seen that right. So everybody is making adjustments at <unk>.
Is it replacing historically have been.
A lot of long standing clients and relationships.
Okay, and then just a follow up on the ESI progress Youre seeing or are seeing right. Now I think again, you've talked about at least for the second half of the year at size being roughly 25% of your your your pipeline for the balance of the year.
And actually you mentioned that you have several large deals.
That you've received from them have actually accelerated our progress through the pipeline faster than if youre direct.
So.
Is that the case and in it.
Just considering everything that's going on in the World and then when should we expect to see actual.
Billings bookings benefit from mass size that would.
You know actually moved the needle towards acceleration on organic subscription growth.
Yes.
Many of the partners, we have have been partners in the past and we've obviously you are making investments to enhance and become bigger partners with them.
And again it takes time with these partners. So this investment we're making against the jumpstart it and to get way more involved and engaged with with those companies across the board and we would see that coming in incrementally over time.
The way to think about our businesses.
Youre not going to see.
Huge inflection point.
For any one two or three things, but all of these efforts we're doing are.
I really meant to leverage the fact that we have a very diversified product set.
The world's best companies at scale and increasingly a really large ecosystem of network providers and network customers and then also you know.
The integrators of all just going into the mix of increments are stripped of revenue, which is our primary focus. So that's kind of how we've kind of got here and what we continue to do so you'll see us.
I actually do this and the other things as we go again, none of them are going to inflect our business up dramatically.
Dramatically. This is all just incremental expansion of our subscription growth at a very high March we've been extremely disciplined in terms of balancing.
Growth profile with our profitability if you got to look over the past six months.
Seven quarters now we've been.
Not taken debate on trying to grow at all costs, we have not taken abated over investing in things that we don't think are super sustainable.
We're highly focused on EBITDA, we're highly focused on free cash flow and highly focused on.
Spanning our subscription revenue that comes in at.
Hi, <unk> kind of gross margin is extremely long term.
So we're building a long term business and we're going to stay focused on that.
Okay, and just last one for me.
It sounds like just from a messaging standpoint, you know the sustainability and durability of EBITDA margins in kind of that low to mid 30% range as is kind of the right way to think.
The correct takeaway.
I think thats, a 100% the right takeaway and Thats kind of you know since we took the business over in 2015 has been really focused on.
Driving high EBITDA margins and interim ending them up over time and expanding them.
<unk> faster growth rate faster than our subscription growth rate.
We think thats the most appropriate way for this kind of business.
I know there are other business out there that would have a different profile based on where they are in the business as lifecycle. Our business is one because of the very very long term nature of our contracts and the fact that our.
On that really mission critical for the world's largest biggest and most important companies.
That just is going to generate the highest return over time for our shareholders and that's kind of our.
He says our Northstar.
Got it thanks much.
Thank you.
Our next question is from Taylor Mcguinness with UBS. Please proceed with your question.
Yeah. Thanks for taking my question I believe <unk> constant currency subscription revenue growth guide previously implied 14 per site or an acceleration and now the guide implies a deceleration to 8% constant currency. So can you maybe talk about what really changed in the quarter relative to your expectations and maybe provide.
More color on the assumption that that we're down ticked on and then Murray just given the uncertainty of any changes in guidance methodology or additional conservatism that might be embedded in the outlook.
Hi, Taylor and thank you for the question absolutely so when we.
You know put out guidance 90 days ago. The range of outcomes was much wider as we commented on the last call. We had seen some select deal delays.
As Ive discussed in this Q&A session as well specifically in Europe and in the tech sector.
As we move through Q3, we saw definitely some of those deals that slipped close but then further again more of them again pushed to the right and so.
As Michael has articulated discontinue.
This continues to be a choppy environment, where.
We really don't think that the demand is going away, but it's definitely getting pushed to push to the right and it's really hard to.
Focus on the specific quarterly growth rates.
Alright.
You know as you said, we have lowered our expectation for the Q4.
And then in terms of conservatism I think you've seen how we've been setting.
We really want to be.
Wanted to give you the information that we have and the best the best estimate at the time so I.
I wouldn't say that there is anything sort of unnatural in the quarter, we always strive to be transparent I think thats the reputation as a management team we're trying to build.
Is to really be transparent with you in terms of what we see in the business and that's incremental information.
Arises we will update that accordingly.
Great and then I know that yeah things are obviously very fluid and in the environment, but if you look over the last few quarters.
So subscription <unk> growth has been in the low single digits and it looks like the <unk> guide implies something similar so just as we think about you know next year is it fair to use that sequential growth as the starting point for modeling next year and anything in terms of seasonality are you know.
With the environment in some of these delayed deals that we could that we should keep in mind.
Yeah, I think there is a lot of moving parts, obviously, we've been yeah.
Year to date with a reported subscription revenue in the double digits and.
The macro environment is choppy so the quarterly growth rates may deviate from quarter to quarter, but next.
Next what I will give you a lot more detail in terms of how we think about the year and we'll have further updates on the macro environment et cetera.
But I think it's too early to fully talk about.
Talk about the year, but again just to be Super clear.
We expect we don't expect that the demand that has been pushed out to disappear. We expect these deals to come back in.
The macro stabilizes come back and we've also talked about Rps revenue growth.
That to become additive to our growth rate. So we feel good about it.
We feel good about the outlook looking ahead of us.
Perfect and then just my last question is are you able to quantify.
The deals that were pushed and how youre thinking about timing, but let's say from that perspective.
And.
I think some of the.
As the macro environment changes again, the that time to closest deviates from the normal retina and that we typically see so.
These deals could be just a matter of clothing.
High end of the quarter and excited of the quota right and we tried to make the right economic decisions and and not be beholden to a quite a close either but.
I wouldn't say that there was anything sort of.
Very different that we think we can articulate in terms of.
Beyond the near term macro choppiness that has changed in our business.
Got it thanks for answering my questions.
Thanks Sarah.
Once again, if you have a question or comment please indicate so by pressing star one on your Touchtone phone. The next question is from Andrew <unk> with Bank of America. Please proceed with your question.
Good evening. This is David Ridley Lane on for Andrew Ogan Q.
Curious what the feedback was from the leaders for them you held in October .
And what was the tone of clients, there and any early indication of kind of client budgets here in calendar 2023.
Yes, it was.
What a remarkable event. So first time, we've had four and three the first one three years and that's been going on I think for seven years prior and that particular event just for information is oriented towards the very senior executives.
A very intimate environment. So we get it's about 90% customers, telling what they do on our application on our platform, which is really powerful.
I'd say overall, you know that the environment was.
Certainly very enthusiastic about our relationships.
And I learned I always learn a lot when you talk to.
Okay.
So we have a customers I had dinner with one that was the world's biggest producer of frozen fish.
And all the things they do for that and how they're using our transfer she manages them to help them get to market sooner.
So it's a really great event overall I think our.
People in the supply chain business never cease to try to improve the operations companies will never ever.
Stop trying to reduce or improve their gross margin that's the fundamental nature of supply chain software.
They all have great ideas and as a matter of how do they compete internally for the projects because the company is when we have so many people to do so many things at one time and that's the same as it is kind of always been in my almost 25 years in the business in terms of budgets obviously.
Everybody is facing the same on <unk>.
<unk>, so I'd say.
The macro environment, certainly is still will reverberate reverberation of Covid, how do you see this year clearly the numbers and I think more it's the uncertainty of what's going to come that people are uncertain about and I think that's kind of needs to be a little more clarity I think overall that's the issue is that we were talking about a recession now for a year.
And people don't know how to really react to that.
And then deal with that so I think that's really the hesitancy is really just a continued uncertainty one way or the other.
Got it and just a sort of <unk>.
A follow up on that I mean.
In past quarters, you've talked about pipeline growth exceeding bookings.
Are you still.
Adding to the pipeline here, even as customers are more cautious.
Yeah.
Absolutely.
We've seen this.
Story before the demand doesn't change the pipeline. So goes our yield rate of yield rate, maybe come down a notch or two on <unk>.
Conversion, but again they come to us to solve very complex problems those complex problems or not.
Not for the here and now they are for the next 15 years.
So it's just a matter of whatever doesn't get done today. It usually has done tomorrow and we would expect nothing to change in that kind of a cycle.
Great and then one last one for me just on the logistics hub.
Transition for the logistics clients yeah.
Would that be done or where are we talking.
Another three months six months I'm just sort of.
Better understanding kind of the headwinds.
Headwinds on Sir on the professional services side, yes. It wasn't an overly large a combination for us it was $40 million kind of range.
We inherited some things that we had to clean up.
<unk>.
And we're doing that as is our responsibility.
And we expect that to last quarter or two more maybe something like that and then and then kind of.
Started normalize out.
Remember smaller companies.
You, usually get hurt a little more problems with smaller companies given the nature of their business.
Something we're used to dealing with.
It's something that we've had great success kind of.
Fixing overtime and Thats kind of the essence of our business as we make operations better and we expect to do that here as well and if it takes a little bit of time with time, we'll do it right and then we will have a very long standing relationships.
On the acquisition I just thought the comment like the opportunity set there is enormous I was literally talking to one of our larger clients today and he.
He was talking about a transition from like the on premise solution that we have to a cloud solution. They mentioned that they had something like 120 servers that they were like dying to have us take over so we think of the global nature of our parcel solution.
Very differentiated in the marketplace.
That's really the primary reason, we really really like that company. When we saw it and knowing that we had to deal with some stuff to get to the other side. So we'll have a very unique.
Solution that combines with our really great solution on the Tms and global trade and and also international shipping via our bookings platform. So we're really building what we believe is.
The world's best.
Logistics execution system and it couldnt be more excited about where we are with that.
Thank you very much.
Great talking to you.
The next question is from Fred Lee with Credit Suisse. Please proceed with your question.
Hey, Thank you for taking my question.
Just one more macro question I was just wondering if the selling environment deteriorated incrementally this quarter versus Q2.
I wouldn't say, it's incrementally better or worse I think I understood. The question of is it incrementally better or worst Fred you talked about a little bit I wouldn't say, it's incrementally better or worse. So I just think it's.
<unk> continues to be.
Uncertainty in how companies deal with that uncertainty certainly in.
The tech environment see it you really see it real time every day and companies certainly starting to taper and starting to say, okay, I'm not going to invest in everything all at once I think that's the only thing that I would say is.
There's kind of more firmed up the rest of it's the same chap we've seen.
For really three quarters now.
Got it. Thank you and then just another question on how competition has been behaving, especially some of the venture backed startups that might not have a strong balance sheet of the acting any less rational or than they've been.
And they have historically.
Well when you don't have to generate a profit you can do a lot of irrational things in the venture.
Supposed to kind of.
Are able to.
Essentially subsidize their business. So that's not new though I mean this is this has been the case for a long time and Thats. The market. We participate in so we don't see them act any more or less the normally than the way they do.
And that's just part of part of the market and we believe we have obviously a more sustainable business model because we generate.
No.
Okay.
Hello.
Hello, I'm, sorry, Fred you broke up.
Sorry about that just one final question for me.
Can you all hear me just one final question for Murray on our appeal.
I know that there is some acquisition noise in there, but the 795 million apples to apples what was that growth year over year.
So the number is obviously, it's pro forma for acquisition. So when you look at.
The year ago number I think I don't know it from the top of my head, but I think it was around 731.
Versus the 795 its quota.
So around 8% growth rate.
Okay.
Thank you very much.
Absolutely.
We have reached the end of the question and answer session.
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