The stock price of supply chain software provider e2open plunged Tuesday as Wall Street reacted to an earnings report in which the financial numbers weren’t particularly negative but the outlook was.

By the close of trading, the stock of e2open had fallen $1.84 to $4.40, down just under 30% on the day. It touched an intraday low of $3.92. The 52-week high of $9.18 was recorded almost one year ago to the day, on May 4, 2022.

The issues facing the provider of its SaaS product for supply chains appear to be tied to the softness of the freight market but also lingering woes in integrating the operations of Logistyx, a company it acquired last year for $185 million, and the buildout of its network of “systems integrators.”

A statement by E2open (NYSE: ETWO) CEO Michael Farlekas summed up the market situation that e2open faces. The company expects lower growth rates next year, he said, “because of lower bookings in Q3 and Q4, and a small increase in down sell in fiscal 2023.” E2Open is on a fiscal year that ends on Feb. 28, so fiscal ’23 closed this year. 

“To be clear, we are selling a lot of subscriptions and our retention rates remain very high,” Farlekas said, according to a transcript of the call. But the problem is “we are not selling enough.”

On the surface, many of the bottom- and top-line numbers at e2open appeared strong. Subscription revenue for full fiscal year ’23, the heart of the company’s finances, rose to $532.9 million from $335.5 million a year earlier. That 58.8% increase topped by the 44.5 increase in the cost of revenue, rising to $321.9 million from $222.9 million. 

E2open is a money-losing company on a net basis, with earnings before interest, taxes, depreciation and amortization margin is more important than the net loss. For the full FY 2023, the net loss was $720.2 million, widening from $189.9 million a year earlier. 

Measured by EBITDA, it was a year of growth for e2open. For the full year, adjusted EBITDA was $217.1 million, up 10.7% and 8.8% higher on a constant currency basis. The adjusted EBITDA margin was 33.3% and 32.2% on a constant currency basis, compared to 31.8% a year earlier.

In its forecast for fiscal 2024, which began March 1, e2Open forecast that subscription revenue measured by GAAP standards would be $545 million to $555 million, an increase of 3.2% from the full-year 2023 figure of $532.9 million. That percentage increase compares to the more than 58% figure for fiscal 2023 compared to 2022 and is well below even the 18.2% increase in subscription revenue posted for the fourth quarter.

That led Loop Capital analyst Mark Schappel to say the research company had not been “sufficiently cautious going into ETWO’s F4Q print.” The estimate of 3.2% was down from what had been a consensus estimate of 9% among analysts. 

Loop Capital had a buy rating on e2open stock, which it maintained. But it cut its target price to $7 from $9 and kept the buy rating only because, as Schappel wrote, “we believe the damage has already been done and it probably doesn’t make sense to join the anger selling.”

Schappell said Loop’s forecast of adjusted EBITDA was $241 million. But e2open management’s forecast released in conjunction with the earnings sees adjusted EBITDA in fiscal 2024 at $218 million-$228 million.

According to SeekingAlpha, analysts at the independent research firm of Craig-Hallum did cut its rating on e2open stock to hold from buy. Craig-Hallum could not be reached for confirmation. 

One of the larger acquisitions for e2open in recent years was the $1.7 billion purchase of BluJay in May 2021. BluJay is described as a “logistics execution platform.” On the earnings call, CFO Marje Armstrong said the BluJay acquisition has been fully integrated into e2open.

On a smaller scale, e2open bought parcel-focused software provider Logistyx in March 2022 for $185 million. Armstrong said that integration is not complete but is expected in the second half of fiscal 2024.

Armstrong added that there has been integration impact on “churn,” the ongoing departure of some customers combined with new companies coming on board. It’s been a negative so far, she said. “Some of the timing of the churn we already knew at the time of the acquisition just happened to coincide with a couple of other churn-related impacts,” Armstrong said. “So it just all happened at the same time.”

Overall, Farlekas gave e2open a poor grade on integration. The company knew it would “put a strain on us” to integrate two companies at once. But “the size and complexity of these integrations along with the speed at which we accomplish them against the backdrop of a challenging economic environment proved a greater challenge to our commercial organization than I expected,” he added. Integration challenges impacted bookings in fiscal 2023, he said, and are a “primary reason” why 2024 is going to have a lower growth rate than 2023.

Farlekas recapped several other areas that impacted the company in fiscal 2023, will do so in fiscal 2024 or both.

He said the company “did not carry the momentum of bookings we saw exiting FY ’22 into FY ’23,” and that “a key issue here was the macro environment.” Small customer bookings mostly held flat, but deals more than $1 million were “off significantly,” Farlekas said.

During the call, Farlekas said it has grown its network of “system integrators” to widen the reach of the e2open network. A spokeswoman for e2open described a systems integrator as “a company that specializes in implementing, planning, coordinating, scheduling, testing, improving and sometimes maintaining IT systems.” She cited KPMG and Accenture as examples.

But Farlekas said the impact on current finances of growing that network is negative for now. E2open “currently [has] more demand from the partner community than we can responsibly handle at this time” and the demand from them “will take time to materialize as bookings and even more time to flow through our revenue line.” Building that network is a two- to three-year process, Farlekas said.

The costs of building out that network show up in the “professional services and other” line item on e2open’s earnings. In the fourth-quarter earnings, services revenue rose 32.2% from a year earlier. But the costs of services rose 48%, showing the investment needed to build out that strategic integrator network.

More articles by John Kingston

Scheduling standard consortium grows ranks, readies API release

E2open enjoys strong 3Q but warns of softening ahead

E2open junk debt rating remains but logistics software provider’s outlook improving

The post Wall Street greets e2open’s tough forecast with a stock plunge appeared first on FreightWaves.

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