Description

We wrote this up Friday but were too slow to publish over the weekend.  We'd love to hear from others on this as this seems like a tactically interesting opportunity.

E2open provides a cloud based software platform that helps companies manage complex supply chains. To their customers, they are mission critical, with many blue chip customers with an average tenure of almost 15 years on average. They offer a wide range of tools and features designed to help optimize supply chains including demanding sensing, global trade management, and transportation & logistics. 

The competitive landscape remains fragmented, including large legacy companies like SAP and Oracle along with more specialized players like Descartes and Coupa with relevant offerings in warehousing and procurement. E2open seems to be one of a few key players that cover supply chain planning, supply chain execution, and procurement all in one platform.The data they get from over 420,000 manufacturing, logistics, channel and distribution partners tracking over 13 billion transactions annually improves their AI/ML capabilities further which further enhances their offering with more accurate analyses and forecasts. 

It's not the fastest growing market but TAM should have plenty of room left to grow into and there are secular tailwinds as supply chains get more complicated and the post-covid trend of strengthening and improving supply chains is a plus. E2open’s mission critical software is embedded deeply into customer's operations which results in strong retention (Gross retention in the mid 90s, net revenue retention above 100%) and long multi- year contracts (~3 years), which gives them a good amount of visibility. 

Acquisition has been the primary use of free cash flow since they returned to the public markets via a SPAC merger in feb 2021 (taken private by Insight ventures in 2015), which has helped them fill out their portfolio and now offer an end-to-end centralized supply chain management platform. They have focused on buying best-of-breed point solutions and integrating them into their core platform, increasing the overall value proposition and cross-sell opportunities. The company has said that ~half of their >1,000 customer base use just 1 SKU, while the rest have 2-3 SKUs, which implies a ~$1B revenue opportunity just from the cross-selling from existing customers. 

The stock has been cut almost in half after releasing q2 2024 results when they confirmed continued macro headwinds, lowered revenue for the rest of the year (mid point at YoY decline of 3.4%), and announced a CEO change. Elevated sales cycle, lower cross-sell and slow new customer traction continue to be an issue to top line growth. And the sales organization within the company does seem to require a bit of a refresh/turnaround which points to weak execution from the former CEO after arguably being overextended from an aggressive M&A playbook. All of these issues combined with an extended balance sheet (>4x fwd EBITDA, currently above the 3-4x range they want to be) was enough to pull down the stock to all time lows, down ~75% since it’s June 2020 IPO .

Recent organic growth has been underwhelming, with subscription review growing less than 3% in the last quarters organically, far below their long term revenue growth target of >10%. A key question the market is asking is whether they can get back to a path of sustainable and accelerating growth rates. The company reported that sales cycles continue to be extended as budget scrutinization and reluctance to engage in longer term contracts have been a real headwind in light of the uncertain macro environment. 

A YoY revenue decline is never an encouraging sign, and organic growth certainly has been disappointing, but subscription growth is expected to stay positive while the professional service revenues is naturally more volatile and is what will bring most of the volatility. 

These trends don't seem to be getting better for the near term and the company's sales efforts also look to require a bit of a turnaround. The company hired a new Chief Commercial Officer in Gregory Randolph in July who brings ~25 years of leading sales teams at fast growing software companies at scale. Though it's hard to know for certain whether these changes will bring positive results, his candid analysis of the problems he has seen so far in his ~2 months with the company and some solutions he thinks well fix those problems was notable. The interim CEO, Andrew Appel, is also someone we are familiar with from his successful tenure at IRI where he led the company to take market share from legacy giant NLSN. 

Management continues to believe that organic growth can accelerate eventually, and it is the largest component of short term and long term management compensation (last year's internal target was 12.5% per the proxy and it carried a 50% weighting in for short term compensation plan). The corporate ethos seems to have undergone a pivot, shifting its emphasis from one steeped in M&A to resolute commitment on fostering organic growth, which we are glad to see. 

There is also a mix of activists (Elliott, Windacre, Eminence) and technology focused PE/VC investors (Insight Ventures, Francisco Partners) which we think validates the underlying cash flow quality and potential for the company. They should help keep management accountable and ensure shareholder interests will be front and center. 

After this week’s blowup, the hurdle is now much lower. If the company can get organic growth above MSD and achieve the 25-30% UFCF margin that we think their financial model can realistically achieve, the stock should re-rate to 4-5x revenues, which implies 100-200% upside from today's ~2.7x revenue thanks to the leverage. There is some level of uncertainty here as we're taking on some execution risk with the new management and a sales team cleanup, and historic FCF is a bit lumpy to extrapolate due to the heavy M&A and its short life as a public company. But if the company maintains it's ~mid 30 s EBITDA margins and inch closer to the 85% UFCF to EBITDA conversion rate which looks to be trending in the right direction despite all the recent noise, we see big upside from today's depressed valuation levels. The company has been cash flow positive for a few years, while the internal hurdles seem readily addressable with a skilled and refocused leadership. Furthermore, the external challenges largely appear to be transitory macroeconomic headwinds, and not indicative of any structural problems. The set up looks promising. 

Update:  Over the weekend Elliott upped their stake to 14%.  https://www.sec.gov/Archives/edgar/data/1800347/000090266423005125/p23-2594sc13d.htm

Catalyst

organic growth acceleration, deleveraging, acquisition candidate