Q4 2023 E2open Parent Holdings Inc Earnings Call
Greetings and welcome to the E. Two opened fourth quarter and fiscal year 2023 earnings call.
This time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
One should require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded.
Now I'll turn the conference over to your host Dusty you may begin.
Okay.
Good afternoon, everyone. At this time I would like to welcome you all to the E. Two open fiscal fourth quarter and full year 2023 earnings conference call I Endoscopy deal head of Investor Relations here at eat to open today's call will include recorded comments from our Chief Executive Officer, Michael for like US and our Chief Financial Officer Marie Arms.
Strong.
After those comments, we'll open the call for a live Q&A session.
Replay of this call will be available on the company's Investor Relations website at investors that eat you opened dot com information to access. The replay is listed in today's press release, which is also available on our Investor Relations website.
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 first quarter and full year 'twenty 'twenty four.
These forward looking statements are subject to known and unknown risks and uncertainties into open cautions that these statements are not guarantees of future performance and we encourage you to review our most recent reports, including our 10-K and any applicable amendments for a complete discussion of these factors and other risks that may affect our future.
Or the market price of our stock and finally, we are not obligating ourselves to revise our results or are 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 at investors don't eat you open dotcom.
And with that we will begin by turning the call over to our CEO , Michael part like us.
Thank you Jessie and good afternoon.
Welcome to our report our fiscal fourth quarter and full year results.
I'll share my thoughts on our broader performance last year, including what went well what didn't go as well as we would've liked.
I'll spend some time discussing how we arrive as one of the largest purely SaaS based supply chain software company scaling our business panic seven year.
I'll outline how we have begun our pivot from a company optimized rapid scaling through acquisition.
Being optimized to deliver very high margin and double digit organic.
The revenue growth.
I'll close with a look up in orthopedic poker for FY 'twenty four.
Yes.
Delighted that demonstrate the value platform creates for our client.
Finally, our CFO <unk> <unk> will provide a detailed discussion of our fourth quarter and full year results as well as our guidance.
But to your point.
Yeah.
While we continue to perform well from a margin perspective and delivered solid organic growth in FY2023.
Economic uncertainty lower shipment volume and in particular.
Spending by high Tech company generate a quarter of our revenue are combining to prove a headwind for us at the moment.
Our current FY 'twenty, four forecasted growth rate or.
Our below potential given our unique and differentiated competitive position.
Embedded in our discussion is how we are building our business to realize it but that we've created over the past seven years, while delivering significant margin and free cash flow.
I'm proud of what we accomplished in the human.
That's an area we outlined at the beginning of FY2023.
We began the year determined to build coupons that either open that were less important when we are scaling.
But our foundational drive repeatable and expanding organic growth.
A strong marketing organization and robust network system integrator.
He is a long term effort and I'm very pleased with our progress.
Having made the important additions to our organization. We can now leverage these critical path of the part of a broader pivot to organic growth.
Marketing was simply not a prime focus for you to open during the rapid scaling of our business.
Last year, we completed a wholesaler breath of our brand and increase our share.
Share of voice from landmark category the top three.
Several months.
We now have an effective organization to target high quality prospects.
Sophisticated account based marketing program to increase adoption within our client base.
On the partner front, we have built a dedicated network of system integrators to access the critical role they play into why change technology.
Overtime. These partnerships are necessary to increase our growth rate as they help right in our specification early in the client buying process.
Building. This ecosystem is critical to seeing more large scale opportunities that were previously not on our radar screen.
Partners clearly see the benefits of working with you to open and we're seeing that pay off in pipeline and client win.
These initiatives will take time to materialize in the bookings.
And even more time to flow through to our revenue line.
In particular building our partner ecosystem is a two to three year process.
That said, we have made significant progress.
The large upfront investment is now behind us.
We previously communicated that these investments to generate incremental bookings in the second half of FY 'twenty four and into <unk>.
Based on the growth of our <unk>.
We had a pipeline.
And a meaningful pick up in $1 billion opportunity we.
We are now on track to meet or exceed their timeline.
I also want to remind our investors that our Fi strategy requires us gradually.
Portions of our services revenue to the integrator community.
DSI simply cannot build a practice around our solution if we retain all of the implementation services.
Over the long term. This is a good trade for you to open given the relative margin profile.
Of these two business lines and the long duration recurring nature of software subscription.
This trade off has and will negatively impact near term services revenue growth.
And therefore total revenue.
The decoupling us with different broker burden has begun and going forward, we will increasingly communicate our financial performance on the basis of organic <unk> growth profit margins and free cash flow.
While we are pleased with the progress of our Q&A in FY2023 like many companies we did have our talent.
Most importantly, we did not carried momentum in bookings, we saw exiting FY 'twenty two.
Great.
A key issue here was the macro environment.
What we saw during FY 'twenty, three particularly in the second half of the year.
Is that in a volatile and uncertain economy customer routinize, mark commitment and trend lines more than small ones.
Our second half results clearly.
The pace of small run rate bookings came in as expected.
Slightly up.
While large deal closings over $1 million were down year over year, they do not go away.
The pipeline of these large transactions has grown nicely.
From equally put these are right and also the engagement with Rsi.
While it is our job to adjust to changing business conditions.
Slower deal closures will negatively impact our FY 'twenty for growth.
Keeping it below a potential for the next fiscal year.
While the macro environment was a headwind for us.
We must also take responsibility for below par commercial performance.
We were aware that integrating two businesses at the same time, we put a strain on.
We have done this in the past.
Where we drove high performance.
As we integrated acquisition.
It's fair to say, however that the thought.
The complexity of these integrations.
Being that which we accomplished them against the backdrop of challenging economic environment proved a greater down through our commercial organization than I anticipated.
This had an impact to our net bookings performance in FY2023 and is a primary reason why we expect FY 'twenty for it to be a lower subscription revenue growth year for us.
Even with lower growth rate.
Our EBITDA margin as we continued to build our business.
It is useful to remember how it open arrived where we are today.
Short amount of time.
Over the past seven years, we increased the size of our network from 40000 to over 420000 companies.
We've grown revenue nearly tenant.
And increased our EBITDA from negative $30 million to nearly $220 million.
A key driver of this growth was a rapid acquisition and integrations that were 14 strategic assets into one.
Lisa integrated supply chain platform.
And one of one and.
In our market.
Our strategy was informed by the knowledge that point, who has the company.
I have a natural limited our growth.
And many see their growth rates and profitability decline.
As it reached a natural limit to the single solution orientation.
We saw lane to scale rapidly by using our unique ability to integrate to create a highly differentiated network business of <unk>.
Extraordinary value for our clients.
Produces very boundaries of subscription.
Excellent unit economics with very high operating margin.
Over the last 18 months, we scale, our business by 50% with the acquisitions of <unk> and logistics.
We are now the largest pure SaaS company in the supply chain.
We are built upon the largest quite a network.
And our platform third the core operational backbone for many of the largest and well known brands in the world.
While M&A will remain an element of our value creation engine going forward.
As we enter FY 'twenty four with the heavy lift of integration is largely behind us.
Our primary focus now is to calibrate our business.
One built for rapid scaling through acquisition to a business focus on robust and reliable organic growth.
In this respect our largest and most important organic growth opportunity is to increase adoption within our enterprise clients.
Our ability to cross sell and upsell is fundamental to our organic growth model.
We have clearly demonstrated we can execute this strategy on a repeatable basis.
We have proven we can grow our client relationships several hundred thousand dollars per year to several million dollars in a few years.
While we have proven our ability to scale adoption with an acquired we now need to scale of activity across our much larger organization, which is a primary focus for FY 'twenty.
The scale growth engine as a companywide effort that is now well underway.
Our team has spent considerable time analyzing our business we.
In evaluating the factors, we can control and have agreed on its maintenance, we need to make position ourselves for strong consistent organic growth a high profitability for the year ahead.
In doing so we.
We will be guided by four strategic pillar.
Client engagement client experience.
With that Glenn and operational efficiency.
More specifically, we are taking concrete steps now to reaccelerate our growth.
We are increasing our sales headcount.
For better sales coverage and the Lucerne mine.
Secondly, with core enterprise clients.
We are refining our go to market processes become more repeatable and scalable.
We remain disciplined and are prudently Jim's consistently produce high margins and generate extraordinary pre tax.
We are able and willing to make the hard choices to balanced path.
Investment opportunities and realistic revenue assumptions.
We maintain our commitment to strong profitability.
And high free cash flow in all economic environments.
In short over the past seven years, we have created north potential through rapid scaling through acquisition.
The strategy yielded a large business.
Durable competitive advantage and high free cash flow.
We are committed now to building the capabilities needed to realize our potential of robust and reliable growth at scale.
Built on best in Class unit economics in a very efficient translate into gross profit to the bottom line.
We are energized by the opportunity we have created for ourselves.
Well it will be easy.
We'll have our fair share of that that we.
We will overcome each of them to build a truly special business that produced a double digit revenue growth, while driving very high operating margins and free cash flow.
Our drive and focus our beautiful.
I'll close by highlighting some recent customer engagements.
Starting with the demand side of our platform.
Publicly traded global company is utilizing INO openings panel application to visualize the aircraft and inventory position for better decision, making.
On the supply side, one of the world's largest consumer packaged goods company.
As a boy it opened supplier collaborate deeply with.
With long time clients and additional solution demand and supply sides of business, adding that original smooth and orderly manner.
The additional closing connected acquired community digitally to manage their entire order delivery to production cycle on our platform.
In this supplier collaboration category.
We're seeing an uptick in adoption in the automotive and process industries.
With bad one delivering this very fluid into the high tech industry over 20 years ago.
In logistics.
One of the largest north American retailer and a new customer in broth will deploy our transient demand.
As a result of adopting our solution. This client estimated savings over a time general cost of our subscription.
Okay.
Before I turn the call over to Murray for a detailed review of our financials allow me to share of large deals and we are delivering for a major automotive clients.
I recently met with them review, our seven year relationship.
They start with a planning solution from a company we acquired.
We work with them to address the very real talented they face.
With semiconductor shortages, which we all witnessed in the auto sector.
18 months ago, we expanded our partnership to grow our planning solution to the supply side.
We're a supplier collaboration.
And also are difficult.
They are now connected in real time hundreds of their supplier to manage their constrained supply and can see both inbound and outbound product as they ship around the world.
This product is being delivered with one of our strategic Si partner.
There is a clear example of our ability to execute a FIFO expansion within existing clients.
We are now quite literally integral and embedded as part of our global manufacturing profit.
These capabilities delivered in one connected platform.
As you need to eat open and represents a durable competitive advantage and massive potential we see.
At this time.
I'd like to turn the call over to Marie to review, our financial results and discuss our guidance.
Thank you Michael and good afternoon, everyone.
I wanted to start by thanking the finance organization and all other each open teams that worked collaboratively over the last two months to get us ready for Gary and supporting our earnings cycle, and our new fiscal year operating plan.
We have made tremendous progress over the last year in building to finance capabilities that our company needs to support its future organic growth plans and the strategic priorities that Michael outlined.
I'll start by reviewing our fiscal fourth quarter and full year 2023 results and then close with a discussion of our FY 'twenty guidance.
Subscription revenue in the fiscal fourth quarter of 2023 was financed $36 9 million.
Reflecting an organic growth rate of five 4% on a pro forma basis.
Six 6% on a constant currency basis, when adjusting for the negative $1 $5 million year over year impact from foreign exchange fluctuations.
Subscription revenue came in within our $137 million to $140 million guidance range.
For full fiscal year 2023 <unk>.
Description revenue was $532 9 million.
Okay and grew eight 1% on a pro forma basis, and nine 8% on a constant currency basis.
While this represents solid topline growth our fiscal year 2023 subscription revenue performance, which is a critical element of our overall business model came in short of 10% growth versus our original expectations of 11% to 12% set at the beginning of fiscal year 'twenty, Sweden.
Following a strong FY 'twenty two exit rate, we started to see delays in large deal closings as we move through the year ultimately leading to a weaker than planned FY 'twenty should we exit.
As Michael noted, we believe that a key factor behind the slower than normal run rate was macroeconomic uncertainty that led some customers, particularly in the tech sector.
Spend more cautiously and push out decisions on larger projects.
We believe the procurement delays, we have experienced are largely temporary and that these projects still represent attractive sales opportunities for each open.
In summary, the customers and the demand has not gone away, but large scale project spending in many cases has been pushed to the right.
Also as mentioned earlier during the fourth quarter, we saw an out of trend increasing downtown that is included in our churn metrics, which slightly impacted quarterly growth and we'll have a more meaningful impact on subscription revenue during fiscal year 2024.
A combination of one time volumetric adjustments and other macro related factors were the main drivers.
We had some legacy clients with volume based adjustments traditions that reset at lower tiers as compared to the high shipping volumes experienced during the Covid pandemic.
In some select cases, we saw customers respond to budget cuts by reducing project spend.
Timing related to customers that we knew with <unk> when we acquired them. So M&A also had a small impact during the quarter.
As Michael noted our overall retention metrics remained strong and we intend to maintain and improve them as part of our strategy to deliver double digit organic growth in subscription revenue.
Overall delivering on this growth commitment remains a cornerstone of our operating model and business strategy.
It's the go to market changes that Michael described start to yield results, we had a clear path to driving an acceleration in growth as we exit FY 'twenty four.
Professional services and other fiscal fourth quarter was $29 4 million, reflecting an organic pro forma growth rate of negative six 9% and negative five 2% on a constant currency basis, when adjusting for a negative $500000 year over year impact from foreign exchange.
Fluctuations.
While the key aspects of our business strategy is to place more focus on our subscription business.
<unk> services revenue performance in the fourth quarter fell below our expectations.
Weaker services revenue was driven by the same macro factors that affected our subscription business, including scale down customer purchases and longer than typical sales cycles for large projects.
Our proactive shift towards partnering with system integrators also had some impact.
These forces will have a continuing effect in early FY 'twenty four with first quarter services revenue likely to be sequentially softer before strengthening later in the year.
We have recently brought new leadership into our services organization as part of our larger go to market as <unk> mentioned previously.
These changes should help us maintain our profitable service franchise, even as we continue our strategic pivot to shift services work to integrator partners at a means to drive faster future subscription growth.
Putting it altogether total revenue for the fiscal fourth quarter was $166 3 million, reflecting pro forma organic growth of 3.0% over the prior year quarter, and four 3% growth on a constant currency basis.
After adjusting for a negative 2.0 million dollar a year over year impact from foreign exchange fluctuations for full fiscal year 2023 total revenue grew five 9% on pro forma organic and seven 7% on constant currency basis.
Turning to gross profit.
In the fiscal fourth quarter of 2020.
Our gross profit with Huntington $16 6 million.
Reflecting a three 5% increase on a pro forma organic basis, and four 1% increase on a constant currency basis.
Gross margin was 72% in the fourth quarter or 69, 8% on a constant currency basis compared to 69, 9% on a pro forma basis in the prior year quarter.
Our gross margin performance for the full year was roughly in line with our fourth quarter.
This strong gross profit margin, even during a quarter when we experienced softer than expected revenue generation.
It reflects our ability to leverage cost control and operational efficiency as effective tools to drive consistent profitability.
Turning to EBITDA.
Fourth quarter, adjusted EBITDA was $61 2 million compared to $54 1 million in the prior year quarter.
An increase of 13, 2% and 11, 7% on a pro forma constant currency basis.
Fourth quarter adjusted EBITDA margin was 36, 8% or 35, 9% on a constant currency basis.
Compared to EBITDA margin of 33, 5% on a pro forma basis for the prior year quarter.
For full fiscal year 2023, adjusted EBITDA was $217 1 million compared to $196 $1 million versus the prior fiscal year, an increase of 10, 7% or.
Or eight 8% on a pro forma constant currency basis, adjusted EBITDA margin for the full fiscal 2023 with.
It was 33, 3% and 32, 2% on a constant currency basis.
Up from 31, 8% in the prior fiscal year.
This continued margin expansion reflects our focus on balancing profitability with growth.
Our fourth quarter EBITDA included approximately $5 million of strategic investments to improve our marketing capabilities and build our system integrator ecosystem.
The full year spend totaled $19 million slightly below that $20 million plant announced significant Inc. Fiscal 2023.
As Michael mentioned, we remain confident that our strategy of investing in staff training and go to market resources at leading integrators, such as KPMG and Accenture will overtime pay dividends in the form of stronger future pull through of each open software into large enterprise projects managed by these integrators.
Well, that's why 23, despite lower than expected top line, we were able to deliver EBITDA within the original guidance range, a testament to our ability to effectively manage variable costs, including bonus and incentive compensation moving forward, we will remain disciplined as we balance growth.
<unk> oriented investments with our commitment to strong profitability and cash flow.
Our goal will remain gross and realize the benefits of operating leverage.
Finishing up on profitability.
Net loss for the fiscal fourth quarter of 2023.
$303 5 billion.
Full fiscal year 2023, net loss was $720 2 million.
The net loss figures include a noncash goodwill impairment charge of $386 8 million during the quarter and $901 6 million for the full year. These impairments were made in accordance with U S. GAAP.
As a reminder, E children's goodwill carrying value, which we set as part of our IPO transaction using the offering price of $10 per share.
GAAP requires companies to continually monitor goodwill carrying value by evaluating potential triggering events.
Such as share price declines and changes in market conditions.
Now turning to cash flow.
As discussed in our third quarter earnings call. We have changed our presentation of adjusted operating cash flow in order to provide a clearer view of our cash generation starting with GAAP operating cash flow. This revised approach to normalized cash flow includes the full range of key recurring cash drivers, including cash interest net.
Working capital and cash taxes, but it just temporary or one time items, such as spending on M&A integration.
So this new presentation during the fiscal fourth quarter and full 2023 fiscal year.
We generated $29 8 million and Huntington and $4 8 million of adjusted operating cash flow respectively.
We're pleased with our improving level cash conversion as we continued to prioritize strong cash flow growth.
We view cashless, both a key performance metric.
And as a source of financial flexibility to optimize our capital structure and fund strategic growth.
As a result of our strong cash flow generation, we ended fiscal year 2023, with $93 million of cash and cash equivalents.
A sequential increase of $7 million from the third quarter.
This completes my remarks on our fiscal Q4 and full year financial results.
At this point I'd like to introduce our FY 'twenty, four and first quarter financial guidance and provide our thoughts are on key drivers of our forecasted performance.
We expect subscription revenue in the range of 545 million to $555 million for FY 'twenty four.
This represents growth of 2% to 4% year over year key drivers of the slower than target growths are the softer net bookings momentum in late FY2023 as well as our view that the challenging macro environment, we will continue to impact customer purchasing levels.
The timing of large projects through mid FY 'twenty four.
GAAP subscription revenue for the fiscal first quarter of 'twenty four is expected to be in the range of $131 million to $134 million.
Representing a growth rate of 1% to 3% as compared to the prior year fiscal first quarter.
We expect FY 'twenty for total revenue to be within the range of 655 million to $670 million in FY 'twenty, four representing year over year growth of half a percent to 3% as compared to FY2023.
Our total revenue forecast, which includes our professional services business.
Flex our focus on our subscription business and our strategic plan to shift services revenues to our system integrator partners.
Given current exchange rates, we expect FX to have less than 50 basis point impact on our year over year revenue growth rates for FY 'twenty four.
We expect FY 'twenty for gross profit margin to be within a range of 68% to 70%.
The midpoint of this range is roughly flat to what we achieved last year.
Overall, our gross margin targets for the new year demonstrates the strong underlying attractiveness and unit economics of our core subscription software offerings.
As the basis for our ability to drive value to a profitable growth.
Finishing off on profitability.
We expect FY 'twenty for adjusted EBITDA to be within the range of $218 million to $228 million.
This represents growth of 4% to 5% over the prior year.
This range implies an adjusted EBITDA margin of 33% to 34% for FY 'twenty four.
In addition, given the importance we place in generating strong cash flow I would like to comment on some of its key drivers for FY 'twenty four.
We expect capex to normalize to approximately 5% of revenue in FY 'twenty four versus 7% of revenue in FY 'twenty, three which included M&A related capex.
We plan to drive significant year over year improvements in working capital and expect FY 'twenty for working capital to be a modest use of cash is typical for a growing company.
Cash interest expense net of interest income is expected to be in the range of $90 million to $95 million. This.
This projection assumes that the floating interest rate with pan term loan debt stays within a range of four 5% to 5%.
We do not make any prepayments on our term loan during the ERP aren't required amortization.
Finally, we expect one time cash costs, including M&A integration.
With $29 million in FY 'twenty to be substantially lower in FY 'twenty four.
In conclusion, while we did not hit our full growth targets for fiscal 'twenty three.
We achieved solid revenue growth as well as strong profitability and cash flow performance.
Looking ahead to FY 'twenty four we.
We will continue to support our large and growing customer base as they advance their supply chain capabilities.
We remain confident in our strong strategic positioning given the unique supply chain software platform, we have built through strategic M&A.
We have a clear path to achieving higher future growth.
And remain committed to our long term goals of 12% plus subscription revenue growth, 70% plus gross profit and mid 30% plus EBITDA margin.
That concludes our prepared remarks I want to thank everyone for joining us today.
We look forward to connecting with you again as we proceed throughout the year.
That Michael and I are ready to take your questions. Operator, Please open up the line and begin the Q&A session.
Thank you 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 keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment.
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And our first question is.
Is from Adam Hotchkiss with Goldman Sachs. Please proceed.
When you think about the revenue growth guidance for fiscal 'twenty, four and some of the near near term growth challenges that have materialized and you discussed on the call how does that impact your view on getting back to that 12% plus organic growth long term and when you think about what when you think about what some of the things are that.
You have to see go right for you outside of just improving macro could you just go through that for us. Thank you.
Yeah. Thanks for the question and good to hear your voice.
We have enormous confidence in our in our business, we've created a unique asset through <unk>.
Spoke about.
Scaling rapidly by combining unique assets into one platform.
I think it's fair to say the macro environment, along with the combination of the increased our business by about 50% in the last year. This slow us down from a commercial perspective.
So we don't have any.
Hesitation around that long term growth outlook in fact, I think we're more confident than ever.
We do have some challenges from the macro that will and that will subside.
And we do have some things to work on internally as we train our people to kind of sell more than one.
All of our solutions to our clients, but we've seen this happen.
We have to scale that and calibrate our business to do that at scale.
I think what needs to happen for US is to continue to work on part of our business and just get better commercially training a large number of people integrating.
Integrating companies quickly doesn't come without a cost and I think it's fair to say as I said that this one was no more can these two are a little more complex than normal.
And that combined with the macro kind of will make for a lower revenue growth year in FY 'twenty four but we're seeing great green shoots really around the business. So we're as confident as ever Adam.
That's great to hear and then just on the revenue churn that you mentioned on the call.
Sensitivity of outcomes that you're baking into fiscal 'twenty four guidance. So when I think about the sort of worst case scenario versus the best case scenario.
What is the percent of your base that's exposed from a volume perspective that we could see vary throughout the year.
It's not it's not that much.
We had a little bit of uptick in our overall annual churn numbers.
But there was a little bit more in Q4, and we see a little more in Q1, which because of the timing drives lower revenue you remember we have nearly all of our revenue comes from subscription. So if you have increase in churn earlier in the year, it's going to impact your revenue for the year.
So in terms of range of outcomes I think we have a pretty good handle on what that looks like and thats fully informed by our guidance, but we don't really see a dramatic change in that respect at all.
Okay Super helpful. Thank you Michael Thanks, Ed.
The next question is from Mark Shapiro with loop capital. Please proceed.
Alright. Thank you for thank you for taking my question.
Michael starting with you I'm wondering if you just provide some additional details around some of the internal issues.
Related to the acquisition integration, but unfavourably impacted bookings that you expect on favorably impact bookings in the coming year.
I think it's more mark.
As we saw softness in the macro economy.
Last year and some of those challenges as we brought the companies together I think impacted our bookings results specifically on the larger transactions as I said the run rate transactions.
Have come in about where we expected them to but the larger ones did pushed to the right in the larger now.
Some were pushing to the right and some because of the size are contributing more.
In terms of the impact of integration generally it's about having a much larger set of clients that we need to kind of engage with and have our people learn how to sell more than one solution into bigger companies and we get a lot of our sales talent from the acquisitions and it's fair to say, we have more work to do to train them.
Now to sell into that environment.
Do we build a repeatable organization for scale. We are now all that work has already begun and we have part of our as Marie mentioned, we are increasing our head count in our sales group. So we expect that to kind of normalize and get back in the second half of this year so to us its just additional.
Additional part of our business to build.
We built the other parts of our business so.
Kind of how we think about the progression normally we don't have as large an impact in terms of these integrations.
But this one was larger and a bit more complex given the broader nature of the <unk> acquisition.
And just to add.
Yes.
Terms of the.
Integrations more broadly.
As we've said before we're done with the Blue Jay acquisition integration in terms of the logistics integration.
The total synergies are still projected to be over $10 million and just to give you sort of the latest of where we stand in terms of the.
Integration work with auction approximately 80% of the run rate savings realized 60%.
We are now.
We have also seen sort of improvements have talked about logistics before but we've seen improvements in revenue as well as gross margin side and.
And we do expect to be fully complete with integration of logistics as well by the second half of FY 'twenty four.
I think what we mentioned in terms of the.
The integration impact also on churn it's just.
Some of the timing of the churn we already knew at the time of the acquisition just happened to coincide.
Couple of other churn related impacts, though it just all happened St types I just want to make sure you have that full context.
Great. Thank you that's helpful. And then just kind of building on Michael on your.
Your prior comments regarding the sales force and some of its plans for the coming year I was wondering could you just go through the call.
Our process in that.
Adding sales capacity because it looks like.
Bruce lower subscription revenue growth expected. This year just talk about why you think that adding sales capacity at this time is the right decision.
Yes the.
The potential that we created is having.
Adding a lot of clients that have a one or two solutions.
And what we found is the more time, we spend with them. The more we can amplify their subscription more quickly.
So that's really how we thought it thinking about.
Really engaging with our clients if you remember a year and a half ago, we said we needed to build.
New logo sales team, we did that when we went we increased our kind of for bookings percentage from.
Mid teens to 25% so that was successful and then now given the potential we have we think adding more salespeople throughout the year allows us to kind of engage and drive but we know we've done in the past we do today, which is to increase the adoption of our full suite into those.
And that's the primary growth engine for our business. So it's all about how do we make sure we meet our endo salespeople at a pace that we can train them effectively and maintain our margins, but clearly thats our biggest opportunity.
Thank you that's all for me.
Thanks Mark.
The next question comes from Jeff <unk> with UBS, Jeff. Please proceed.
Hey, everyone. Thanks for taking the question would love to just maybe understand some of the more recent trends you're seeing since the end of February , namely March and now into April obviously, there has been.
Volatility in financial services volatility, namely you brought up the commentary around the tech sector, but curious if youre seeing any changes in customer behavior, even in the last six to eight weeks versus what you saw in the December and January timeframe. Thanks.
Yeah I think in.
In general.
People I think are getting used to a very uncertain future where.
The early part in mid part in late part of last year is okay. What's the next shoe to drop I think people are kind of getting maybe normalized around that obviously the banking issues. It doesn't help all let me talk about our exposure there.
But I think in general we're seeing customers engage and like Marie said I think towards the back half, we'll see things kind of be really settled it's kind of our view of it right now maybe Maria just talk about some of the banking issues to make sure we're clear on that.
Yes, absolutely great question. So in terms of financial sector exposure, we have very very little to none exposure to the sector from customer perspective, but then also.
For each open as a company we have.
Really no exposure to the financial turmoil Thats happening I would also say that.
In terms of our customers more broadly.
They are mainly large enterprises that.
Again as a general rule were less impacted by the turmoil in the regional banks.
In general and in terms of trends I think just as a data point.
One of the large deals that slipped from Q4, we have now closed already in Q1, though.
We're making progress and.
Nothing has sort of materially changed from the.
From that which all banks terminal.
Yeah.
Okay. The next question comes from Andrew <unk> with Bank of America. Andrew. Please proceed.
Hi, This is David Ridley Lane on for Andrew.
Sure.
What are the macro assumptions behind our fiscal year 'twenty for subscription revenue.
I'm just wondering how this particular slowdown compares to historical cyclicality.
And I may have misheard, but.
Just to be clear you are expecting bookings to improve in the second half of fiscal 'twenty four.
Yes, I think let me break that down into two categories. One is macro and then it was kind of our.
Our own outlook into your own business in terms of macro I think this is a significant I don't think its significant.
At the beginning of Covid.
Significant as obviously 2007 or 2001 going back to I started my career, so it's significant but I think it's.
Not as significant as other events in terms of how that informs us.
I think we really are in four more by what we see on our own metrics in terms of our pipeline.
In terms of what we see working what we see we have to work more at that.
In that regard we are informed by the pipeline of large deals thats up sequentially from last year at the start.
And our ability to kind of penetrate and have pretty good visibility into that and then good visibility into kind of the overall kind of turned down sell so I think it's I think we have a realistic view of kind of what the euros.
And I think as I've already said, we think the back half of the year things kind of getting to getting back to some kind of a normal run rate for us and thats whats kind of driving our FY 'twenty for lower growth rate than our potential what we would like to do but we think that.
It improves as we get into 'twenty five.
And just to add to that.
In terms of the assumptions.
The assumptions in our guidance just as Michael mentioned.
We had some timing of churn that.
That because of the early in the year timing sort of has that had an impact right from the start of the year, but.
We will normalize as we go through the year and number one number two I would say that we are proactively taking.
Taking steps to also control what we can and Michael has talked in detail about sort of the go to market changes and the.
The pipeline.
Reviews, and the pipeline growth that has allowed us to kind of build the internal plan.
No I wouldn't say that it's.
That our guidance hinges on significant macro improvement.
All of these different items working together that way.
Just on this call.
Thank you.
And just one more how do you bridge the fiscal year 'twenty for EBITDA.
Cause I think here do you have the non repeat of the $20 million in strategic investments.
But maybe I'm underestimating the magnitude of the sales additions that are planned here for fiscal 'twenty four.
Yes, I mean, we constantly go ahead Barry.
So.
In terms of the numbers and then Michael Please do add so when you look at the investments that $20 million that we announced.
Year ago that ended up being 19 million for last year. It was a combination of our brand and marketing as well as system integrator and then also internal.
Internal sort of staffing belt to support these investments. So if you think about the way we've talked about these investments going forward.
Some of the brand investments in the marketing side was one time that is going to drop off.
The ESI spend there is still a tail there, but that that will be lower as well as we go forward.
Investments will be part of the run rate again as we've discussed previously and then as you think about the new and additional investments. They are on the go to market and sell side.
So that is kind of how I would think about.
The new investments in the trajectory going forward.
Yes, I think long term, where we operate with discipline and that means we're focused a lot on margin expansion as we grow and I think that's no different.
This year as we've tried to build the next things we need in our business to become a bigger and a more reliable organic producer of revenue.
And it's just a matter of us kind of making those choices and making trade offs that we need to make every single year.
Yes.
Got it thank you very much.
Okay. The next question comes from Nick Mariachi with Craig Hallum. Please proceed.
Hi, This is Nick on for Chad Bennett, Thanks for taking our questions. Michael maybe if you could comment on the competitive environment. It seems like some of your adjacent SCM peers are continuing to post strong results. Despite the environment.
Not all of them have the same maybe product overlap or same vertical exposure, but just what are your thoughts on your guided growth rate relative to the industry.
Yeah listen we think there is a strong tailwind in overall industry growth.
And we think we have a differentiated position in a huge amount of potential right in front of us.
I think we are I mean, the strategy, that's distinct and unique and our strategy is really about how do we expand from one product category.
And then have very very long duration.
Subscription revenue at very high margins that is to stay the strategy. That's what we've been able to accomplish in the past seven years.
We're going to have different puts and takes as we grow our business and then clearly we have a bigger exposure in the high tech area, which kind of.
<unk> been helpful. And then also we did combine ourselves with two other companies and we have a lot of integration work. We did in the past year to 18 months. So I think those things kind of.
Filling that gap between what we would see is our potential.
At our scale as we are larger.
And kind of what the others are doing but Moreover, we focus on kind of our strategy.
Winning at the opportunities we have in front of us which is.
That differential between what a larger of our clients have with us and what we know we can deliver for them and thats kind of the long term opportunity that we see and that's why we're so excited about kind of our long term.
Our long term guidance in terms of 12% plus growth in mid Thirty's EBITDA.
Got it and then if you could just share your framework on how you think about EBITDA margins relative to revenue growth going forward and kind of what is your appetite to get back towards that that rule of 40 or mark if growth remains challenged them in the back half of the year and into next.
Yes, I think it's I think our guiding principle and what we've always believed in us.
Generating high margins, mostly because of the unit economics, we've created for ourselves.
Being efficient in terms of translation to the EBITDA line and then from there. It's a matter of okay. What can we responsibly and to our business every year.
Permanently build another part of our business to support ongoing organic growth given the large potential we have and those are the trade offs, we make kind of literally every every year and even throughout the year.
And we could easily convince ourselves to spend a lot more money and drive down our EBITDA margins to chase growth, but I don't I don't think that would be.
The right balance and I also think there'll be the right steward of our investors' capital. We think we have an opportunity to sequentially increase our growth rate as we go.
Generating high margins and maybe your.
Your thoughts on the rule of 40.
Yeah, No I think thats exactly right.
I think we've already proven and shown our ability to cost.
Cut costs, even it's even if our revenue slows.
Our current investments really are squarely aimed to accelerate organic growth back to double digits and.
Overall, we remain very committed to balancing revenue growth and profitability and Moreover are generating strong cash flow.
Mentioned already previously back.
We expect the one time M&A related costs.
To significantly decrease in FY 'twenty four.
Further supporting our strong free cash flow generation and.
As a result also helping take our FY 'twenty four net leverage naturally too.
Four times or even below that.
So we are very very focused on.
Making sure that we get back to double digit topline as subscription revenue growth.
Also balancing margins and very importantly, also ensuring that we continue to produce strong and compounding free cash flow.
Growth that will really allow us to.
Continuing to invest in the business as well as.
Continue to take our leverage down and.
And really.
Set us up for a lot of strategic Optionality going forward.
Great. Thanks for taking the questions.
Thanks, Craig.
Once again, if there are any remaining questions. Please press star one on your Touchtone phone. The next question comes from Fred Lee with Credit Suisse. Please proceed.
Hey, Michael <unk>, Thanks for taking my question.
Question from Marie mentioned, you were able to maintain gross margins, which was solid sequential performance by the way.
Due to some cost levers display revenue weakness can you talk about what those levers where and if there is further.
Proving it.
Through fiscal 'twenty four.
Thank you Brad Great question.
In terms of when you look at that gross margin right. So as a couple of different things working together so.
Our subscription revenue growth increases as a percentage of our total revenue as we continue to emphasize subscription revenue growth over at the services revenue growth.
There is sort of a natural help to our gross margin.
I would also say that we did take action in terms of cost cut last year.
Including.
Including external vendor cost, but then also within our within our own staff and and and pay and and so forth that we continue to really closely monitor our costs and make sure that we are.
Drive profitability, Luckily along with revenue growth.
Just building on that for one second so we we have a strategy, where we have a hybrid method of deploying our solutions and we've been doing that for literally 20 years. So that gives us a natural margin expansion in terms of our unit economics over the long term.
We don't increase our costs linearly as we grow our revenue. So I think we're set up to kind of take advantage of.
You'll be able to use really a strategic advantage, we have to be able to deploy more and more software.
Without incremented our cost at the same rate I think thats one of the reasons. We're so confident in our unit economics.
The gross margin level, which have been pretty steadily stall at this level for a long time now.
Got it and then one quick question for you Michael that last quarter, you mentioned, a pause in M&A because bid ask spreads weren't reasonable can you talk a little bit about how the spreads look today and for targets on your radar and if your appetite for acquisitions is shifted in either direction.
We we generated a lot of potential for our business.
We generate a high cash flow business through.
Through the M&A.
Thinking about <unk>.
Unique assets that we felt were highly unique and very complementary to our platform. So we can grow within our client base is a very efficient way to grow your business.
But I think it's fair to say that now is a much larger company we have to.
To retool ourselves from one to being one that was built literally for rapid integrations to one that is built for long term.
Long term organic growth I mean, we literally built the business to acquire something every six months and we've optimized it for that and now as I look at our business is just the next the next building of our business.
To kind of Orient ourselves around organic growth at.
At this scale, which is a different proposition than growing a business that's half our size.
You have to do it differently. So that's what we're taking on now Fred So the bid ask spreads I think are still really kind of not where they need to be in general.
But Moreover, I think we have the biggest opportunity to build the next piece of our business, which is organic.
Organic growth engine at our size remember, we grew our business by 50% by combining two point solution companies that were much smaller than us and.
And that takes a little bit of time for us to kind of build and get right I think thats our primary focus right now.
And then once we do that.
We expect to do in the next year or so.
Then at that point, it's like Okay now we have.
The next level and we can kind of think about what to do next but our core mission is to create a platform that is completely unique because it is built on 420000 connected parties. So having a network of our size is unique having the application set that we have is unique having all the clients that we have is really.
Unique.
So that's the opportunity we see in front of us and now it's a matter of building the organization for that proposition now that we've kind of created as much opportunity for ourselves. That's our primary focus and it will be for the next while and we look forward to being able to realize that potential.
Got it thank you very much.
Thanks, Brett maybe a voice.
We have no further questions in queue. We have reached the end of the question and answer session. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Yeah.