Greetings. Welcome to the E2open Fourth Quarter and Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the conference over to your host, Dusty Buell. You may begin..

Good afternoon, everyone. At this time, I would like to welcome you all to the E2open fiscal fourth quarter and full-year 2023 earnings conference call. I'm Dusty Buell, Head of Investor Relations here at E2open.

Today's call will include recorded comments from our Chief Executive Officer, Michael Farlekas; and our Chief Financial Officer, Marje Armstrong. After those comments, we'll open the call for a live Q&A session. A replay of this call will be available on the company's Investor Relations website at investors.e2open.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'll be making forward-looking statements regarding future events and financial performance, including guidance for our fiscal first quarter and full-year 2024. These forward-looking statements are subject to known and unknown risks and uncertainties.

E2open cautions that these statements are not guarantees of future performance. 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 results or the market price of our stock.

And finally, we are not obligating ourselves to revise our results or these forward-looking statements in light of new information or future events. Also, during today's call, we'll refer to certain non-GAAP financial measures.

Reconciliations of non-GAAP to GAAP measures and certain additional information are included in today's earnings press release, which can be viewed and downloaded from our Investor Relations website at investors.e2open.com. And with that, we will begin by turning the call over to our CEO, Michael Farlekas..

Thank you, Dusty, and good afternoon. Welcome to our fiscal fourth quarter and full-year 2022 results. I'll share my thoughts on our broader performance last year, including what went well and what didn't go as well as we would have liked.

I'll spend some time discussing how we arrive as one of the largest purely SaaS-based supply chain software companies, scaling our business nearly 10x in seven years.

I'll outline how we have begun our pivot from a company optimized for rapid scaling through acquisitions, being optimized to deliver very high margin and double-digit organic subscription revenue growth.

I'll close with a discussion on our strategic focus for FY '24, and share some recent highlights that demonstrate the value the platform creates for our clients. Finally, our CFO, Marje Armstrong, will provide a detailed discussion of our fourth quarter and full-year results as well as our guidance for fiscal 2024.

While we continue to perform well from a margin perspective and delivered solid organic growth in FY '23, economic uncertainty, lower shipment volumes, and in particular, cost spending by high-tech companies, which generate a quarter of our revenue, are combining to prove a headwind for us at the moment.

Our current FY '24 forecasted growth rate are below our potential given our unique and differentiated competitive position. Embedded in our discussion is how we are building our business to realize the potential 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 two investment areas we outlined at the beginning of FY '23.

We began the year determined to build two functions at E2open that were less important when we were scaling through acquisitions, but are foundational to drive repeatable and expanding organic growth, namely a strong marketing organization and robust network of system integrators. These are long-term efforts, and I'm very pleased with our progress.

Having made the important addition to our organization, we can now leverage these critical functions as part of our broader pivot to organic growth. Marketing was simply not a prime focus for E2open during the rapid scaling phase of our business.

Last year, we completed a wholesale refresh of our brand and increased our position for share of voice from last in our category to top three, reaching a number two position for several months.

We now have an effective organization to target high quality prospects and execute sophisticated account-based marketing programs 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 in supply chain technology purchases.

Over time, these partnerships are necessary to increase our growth rate as they help right in our specifications 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 benefit of working with E2open, and we are seeing this work pay off in pipeline and client wins. These initiatives will take time to materialize as bookings and even more time to flow through to our revenue line. In particular, building a partner ecosystem is a two to three year process.

That said, we have made significant progress, and the large upfront investment is now behind us. We've previously communicated that these investments to generate incremental bookings in the second half of FY '24 and into '25.

Based on the growth of our SI-attributed pipeline, and a meaningful pickup in plus $1 million opportunity, we are now on track to meet or exceed this timeline. I also want to remind our investors that our SI strategy requires us to gradually transition portions of our services revenue to the integrated community.

The SIs simply cannot build or practice around our solution if we retain all of the implementation services work. Over the long-term, this is a good trade for E2open 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 growth. The decoupling of subscription growth from services growth has begun. And going forward, we will increasingly communicate our financial performance on the basis of organic subscription growth, profit margins and free cash flow.

While we are pleased with the progress of our two initiatives in FY '23, like many companies, we did have our calendar. Most importantly, we did not carry the momentum of bookings we saw exiting FY '22 into FY '23. A key issue here was the macro environment.

What we saw during FY '23, particularly in the second half of the year, was that in a volatile and uncertain economy, customers scrutinize large commitments and spend lines more than small ones. Our second half results show this clearly. The pace of small run rate bookings came in as expected, flat to slightly up.

While large deal closings over $1 million were down year-over-year, they did not go away. And our pipeline of these large transactions has grown nicely from equally pushing to the right and also some engagement with our SI.

While it's our job to adjust the changing business conditions, the slower deal closures will negatively impact our FY '24 growth, keeping it the lower 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 would put a strain on it. We have done this in the past where we drove tight performance as we integrate acquisitions.

It is fair to say, however, that the size and complexity of these integrations, the speed at which we accomplished them against the backdrop of a challenging economic environment proved a greater challenge to our commercial organization than I anticipated.

This had an impact to our net bookings performance in FY '23 and is the primary reason why we expect FY '24 to be a lower subscription revenue growth year for us. Even with lower growth rate, we are expanding our EBITDA margin as we continue to build our business.

It is useful to remember how E2open arrived to where we are today in a short amount of time. Over the past seven years, we increased the size of our network from 40,000 to over 420,000 selected companies. We've grown revenue nearly 10x and increased our EBITDA from negative $30 million to nearly $220 million.

A key driver of this growth was our rapid acquisition and integration. There were 14 strategic assets into one cohesive integrated supply chain platform, a one of one in our market.

Our strategy was informed by the knowledge that point solution companies have a natural limit to their growth, and many see their growth rates and profitability decline as they reach the natural limit of their single solution orientation.

We saw a lane to scale rapidly by using our unique ability to integrate to create a highly differentiated network business that drives extraordinary value for our clients, produces very long duration subscription, excellent unit economics with very high operating margins.

Over the last 18 months, we scaled our business by 50% with the acquisitions of BluJay and Logistyx. We are now the largest pure SaaS company in the supply chain space. We are built upon a large supply chain network, and our platform serves as a 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 '24 with the heavy lift of integrations largely behind us. Our primary focus now is to calibrate our business from one built to rapid scaling through acquisition to a business focused on robust and reliable organic growth.

In this respect, our largest and most important organic growth opportunity is to increase adoption within our 650 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 a client relationship with several $100,000 per year to several million in a few years. While we have proven our ability to scale and adopt within a client, we now need to scale that activity across our much larger organization, which is our primary focus for FY '24.

To build a scaled growth engine is a company-wide effort that is now well underway. Our team has taken considerable time analyzing our business. We've evaluated the factors we can control and have agreed on the changes we need to make to position ourselves for strong, consistent organic growth and high profitability for the years ahead.

In doing so, we will be guided by four strategic pillars; client engagement, client experience, product excellence and operational efficiency. More specifically, we are taking concrete steps now to reaccelerate our growth.

We are increasing our sales headcount so we can support better sales coverage and build closer client relationships, especially with core enterprise clients. We are refining our go-to-market processes to become more repeatable and scalable.

We remain disciplined and have proven we can consistently produce high margins and generate extraordinary free cash flow. We are able and willing to make the hard choices to balance cost, investment opportunities, and realistic revenue assumptions to 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 enormous potential through rapid scaling, through acquisitions. This strategy yielded a large business with 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 and a very efficient translation of gross profit to the bottom line. We are energized by the opportunity we have created for ourselves. We know it won't be easy.

We'll have our fair share of setbacks. We will overcome each of them to build a truly special business that produce a double-digit subscription growth, while driving very high operating margin and free cash flow. Our drive and focus are immutable. I'll close by highlights some recent customer engagement, starting with the demand side of our platform.

A publicly created global company is utilizing E2open's channel application to visualize sales trends and inventory position for better decision-making. On the supply side, one of the world's largest consumer packaged goods companies has deployed E2open's supplier collaboration suite.

This long time client purchased an additional solution to manage the supply side of the business, adding to the original solution on the demand side. The additional solution connects their supplier community digitally to manage their entire order delivery to production cycle on our platform.

In this supplier collaboration category, we are seeing an uptick in adoption in the automotive and process industry. E2open was fond on delivering this very solution to the high-tech industry over 20 years ago. In logistics, one of the largest North American retailer and a new customer for us will deploy our transition management solution.

As a result of adopting our solution, this client estimated savings over 8x the annual cost of our subscription. Before I turn the call over to Marje for a detailed review of our financials, allow me to share a large scale solution we are delivering for a major automotive client. I recently met with them to 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 talent 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, deploy our supplier collaboration solution and also our logistics solution. They are now connected in real time to 100s of their suppliers to manage their constrained supply and can see both inbound and outbound products as they ship around the world.

This product is being delivered with one of our strategic SI partners and as a clear example of our ability to execute a fivefold expansion within our existing clients. We are now quite literally integral and embedded as part of the global manufacturing process.

These capabilities delivered in one connected platform is unique to E2open and represents a durable competitive advantage and massive potential we see. At this time, I'd like to turn the call over to Marje to review our financial results and discuss our guidance..

Thank you, Michael. And good afternoon, everyone. I want to start by thanking the finance organization and all other E2open teams that worked collaboratively over the last few months to get us ready for year-end reporting, our earnings cycle and our new fiscal year operating plan.

We have made tremendous progress over the last year in building the 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 '24 guidance.

Subscription revenue in the fiscal fourth quarter 2023 was $136.9 million, reflecting an organic growth rate of 5.4% on a pro forma basis, and 6.6% on a constant currency basis when adjusting for the negative, $1.5 million year-over-year impact from foreign exchange fluctuations.

Our subscription revenue came in within our $137 million to $140 million guidance range. For full fiscal year 2023, subscription revenue was $532.9 million and grew 8.1% on a pro forma basis and 9.8% on a constant currency basis.

While this represents solid top-line growth, our fiscal year 2023 subscription revenue performance, which is a critical element of our overall business model came in short at 10% growth versus our original expectations of 11% to 12% set at the beginning of fiscal year '23.

Following a strong FY '22 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 '23 exit.

As Michael noted, we believe that a key factor behind this lower than normal run rate was macroeconomic uncertainty that led some customers, particularly in the tech sector to 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 E2open. In summary, the customers and the demand have 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 increase in down sell that is included in our churn metrics, which slightly impacted quarterly growth and will 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 adjustment provisions that we set 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 would churn when we acquired them through 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.

As the go-to-market changes that Michael described start to yield results, we have a clear path to driving an acceleration in growth as we exit FY '24.

Professional services and other for fiscal fourth quarter was $29.4 million, reflecting an organic pro forma growth rate of negative 6.9% and negative 5.2% on a constant currency basis when adjusting for a negative $500,000 year-over-year impact from foreign exchange fluctuations.

While a key aspect of our business strategy is to place more focus on our subscription business, professional 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 '24 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 adjustments mentioned previously.

These changes should help us maintain our profitable services franchise even as we continue our strategic pivot to shift services work to integrate our partners as a means to drive faster future subscription growth.

Putting it all together, 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 4.3% growth on a constant currency basis. After adjusting for a negative $2.0 million year-over-year impact from foreign exchange fluctuations.

For full fiscal year 2023, total revenue grew 5.9% on pro forma organic and 7.7% on constant currency basis. Turning to gross profit. In the fiscal fourth quarter of 2023, our gross profit was $116.6 million, reflecting a 3.5% increase on a pro forma organic basis, and 4.1% increase on a constant currency basis.

Gross margin was 70.2% 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 the quarter when we experienced softer than expected revenue generation reflects our ability to leverage cost control and operational efficiency as effective tools to drive consistent profitability. Turning to EBITDA.

Our 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 8.8% on a pro forma constant currency basis. Adjusted EBITDA margin for the full fiscal 2023 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 investment spend to improve our marketing capabilities and build our system integrator ecosystem.

The full-year spend totaled $19 million slightly below the $20 million plan announced in the beginning of 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 over time, pay dividends in the form of stronger future pull through of E2open software into large enterprise IT projects managed by these integrators.

For FY '23, despite a 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-oriented investments with our commitment to strong profitability and cash flow. Our goal will remain growth and realized the benefits of operating leverage.

Finishing up on profitability, net loss for the fiscal fourth quarter of 2023 was $303.5 million and full fiscal year 2023 net loss was $720.2 million. The net loss figures include a non-cash 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, E2open's goodwill carrying value was reset 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 clear 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 interests, net working capital and cash taxes, but adjusts our temporary or one-time items such as spending on M&A integration.

For this new presentation during the fiscal fourth quarter and full 2023 fiscal year, we generate $29.8 million and $104.8 million of adjusted operating cash flow, respectively. We're pleased with our improving level of cash conversion as we continue to prioritize strong cash flow growth.

We view cash flow as both the 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 '24 and first quarter financial guidance, and provide our thoughts around key drivers of our forecasted performance. We expect subscription revenue in the range of $545 million to $555 million for FY '24.

This represents growth of 2% to 4% year-over-year, key drivers of the slower than target growth are the softer net bookings momentum in late FY '23, as well as our view that the challenging macro environment will continue to impact customer purchasing levels and the timing of large projects through mid-FY '24.

GAAP subscription revenue for the fiscal first quarter of '24 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 '24 total revenue to be within the range of $655 million to $670 million in FY '24, representing year-over-year growth of 0.5% to 3% as compared to FY '23.

Our total revenue forecasts, which includes our Professional Services business reflects 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 '24.

We expect FY '24 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 demonstrate the strong underlying attractiveness and unit economics of our core subscription software offerings and is the basis for our ability to drive value through profitable growth.

Finishing off on profitability, we expect FY '24 adjusted EBITDA to be within the range of $218 million to $228 million, this represents growth of 0.5% to 5% over the prior year. This range implies an adjusted EBITDA margin of 33% to 34% for FY '24.

In addition, given the importance we placed in generating strong cash flow, I would like to comment on some of its key drivers for FY '24. We expect CapEx to normalize to approximately 5% of revenue in FY '24 versus 7% of revenue in FY '23, which included an M&A-related CapEx.

We plan to drive significant year-over-year improvements in working capital and expect FY '24 working capital to be a modest use of cash as 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 projection assumes that the floating interest rate we pay on term loan debt stays within a range of 4.5% to 5% and that we do not make any prepayments on our term loan during the year beyond required amortization.

Finally, we expect one-time cash costs, including M&A integration, which were $29 million in FY '23 to be substantially lower in FY '24. In conclusion, while we did not hit our full growth targets for fiscal '23, we achieved solid revenue growth, as well as strong profitability and cash flow performance.

Looking ahead to FY '24, 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.

And we look forward to connecting with you again as we proceed throughout the year. With that, Michael and I are ready to take your questions. Operator, please open up the line and begin the Q&A session..

[Operator Instructions]. And our first question is from Adam Hotchkiss with Goldman Sachs. Please proceed..

When you think about the revenue growth guidance for fiscal '24 and some of the near-term growth challenges that have materialized as you discussed on the call, how does that impact your view on getting back to the 12%-plus organic growth long term? And 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?.

Yes. Thanks for the question and good to hear your voice. Yes, listen, we have enormous confidence in our business. We've created a unique asset through, as we 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 that increased our business by about 50% in the last year, this slowed us down from a commercial perspective. So we don't have any hesitation around that long-term growth outlook. And in fact, I think we're more confident than ever.

We do have some challenges from the macro 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 of our solutions to our clients. But we've seen this happen, and we only have to scale that and calibrate our business to do that at scale.

So I think what needs to happen for us is to continue to work on part of our business and just get better commercially at training a large number of people. Integrating companies quickly doesn't come without a cost. And I think it's fair to say, as I said, that this one was a little more -- 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 '24, 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, what is the sensitivity of outcomes that you're baking into fiscal '24 guidance? And when I think about the sort of worst-case scenario versus the best case scenario, what's the percent of your base that's exposed from a volume perspective that we could see vary throughout the year?.

Yes, it's not that much, and 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 a lower revenue. Remember, we have -- nearly all of our revenue comes from subscription.

So if you have increasing churn earlier in the year, it's going to have an outsized impact to 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 that's 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, Adam..

The next question is from Mark Schappel with Loop Capital. Please proceed..

Hi, thank you for taking my question. Michael, starting with you, I was wondering if you could just provide some additional details around some of the internal issues related to the acquisition integration that unfavorably impacted bookings -- or that you expect to unfavorably impact bookings in the coming year..

Yes. I think it's more, Mark, the -- 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.

And as I said, the run rate transactions have come in about where we expected them to, but the larger ones did push to the right and they're larger now, some from pushing to the right and some because of the SIs are contributing more.

In terms of the impact of integrations, 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 down from the acquisitions.

And it's fair to say we have more work to do to train them on how to sell into that environment and how do we build a repeatable organization for the scale we are now. That work has already begun, and we have -- and part of our -- as Marje mentioned, we are increasing our headcount in the sales group.

So we expect that to kind of normalize and get back in the second half of this year. So to us, it's just additional part of our business to build like we built the other parts of our business. So that's kind of how we think about the progression.

Normally, we don't have as large an impact in terms of the integrations, but this one was larger and a bit more complex given the broader nature of the BluJay acquisition..

And just to add in terms of the integrations more broadly, as we've said before, we're done with the BluJay 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, it was actually approximately 80% of the run rate savings realized 60% where we are now. We have also seen sort of improvements. We've talked about Logistyx before, but we've seen improvements in revenue as well as gross margin side.

And we do expect to be fully complete with integration of Logistyx as well by the second half of FY '24. I think what we mentioned in terms of 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 a couple of other churn-related impacts.

So it just all happened at the same time. So I just want to make sure you have that full context..

Great. That's helpful. Just -- and then just kind of building on, Michael, on 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 thought process in adding sales capacity? Because it looks like there's lower subscription revenue growth expected this year.

Just talk about why you think adding sales capacity at this time is the right decision..

Yes. 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 -- thinking about really engaging with our clients.

If you remember, one and a half years ago, we said we needed to build a new logo sales team. We did that and we went -- we increased our kind of bookings percentage from mid-teens to 25% and up. 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 what we know we've done in the past that we do today, which is to increase the adoption of our full suite into those clients. And that's the primary growth in the engine for our business.

So it's all about how do we make sure we meter in those salespeople at a pace that we can train them effectively and maintain our margins. But clearly, that's our biggest opportunity..

Thank you. That's all for me..

Thanks Mark..

The next question comes from Jeff Hickey 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's been volatility and financial services volatility, mainly.

You brought up the commentary around the tech sector, but curious if you're seeing any changes in customer behavior even in the last 6 to 8 weeks versus what you saw in the December and January time frame..

Yes. I think in general, people I think are getting used to a very uncertain future where I'm thinking early part and mid-part and late part of last year is like, okay, what's the next year to drop? And I think people are kind of getting maybe normalized around that. Obviously, the banking issues doesn't help.

I'll let Marje talk about our exposure there. But I think in general, we're seeing customers engage. And like Marje 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, Marje, just talk about some of the banking issues, make sure we're clear on that..

Yes, absolutely. And great question. So in terms of financial sector exposure, we have very, very little to none exposure to the sector from a customer perspective, but then also for E2open as a company, we have really no exposure to the financial turmoil that's 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.

So we're making progress, and nothing has sort of materially changed from the regional banks turmoil..

Okay. The next question comes from Andrew Obin with Bank of America. Andrew, please proceed..

Hi, this is David Ridley-Lane on for Andrew. What are the macro assumptions behind the fiscal year '24 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 '24..

Yes. I think let me break that down into two categories. One is macro and then it's kind of our own outlook in terms of our own business. In terms of macro, I think this is significant. I don't think it's as significant as the beginning of COVID and not as significant as, obviously, 2007 or 2001 going back to my start of 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 informed more by what we see in our own metrics in terms of our pipeline, in terms of what we see working, what we see we have to work more at.

In that regard, we're informed by the pipeline of large deals that's 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 churn and down sell.

So I think it's -- I think we have a realistic view of kind of what the year is. And I think -- as Marje said, we think the back half of the year, things kind of getting back to some kind of a normal run rate for us, and that's what's kind of driving our FY '24 lower growth rate than our potential and what we would like to do.

We think that improves as we get into '25..

And just to add to that, in terms of the assumptions in our guidance, just as Michael mentioned, we had some timing of churn that because of the early in the year timing sort of has an impact right from the start of the year, but will normalize as we go through the year, number one.

Number two, I would say that we are proactively taking steps to also control what we can, and Michael has talked in detail about sort of the go-to-market changes and the pipeline reviews and the pipeline growth that has allowed us to kind of build the internal plan. So I wouldn't say that our guidance hinges on significant macro improvements.

It's all these different items working together that we've discussed on this call..

Just one more. How do you bridge the fiscal year '24 EBITDA? Because I think you have the nonrepeat of the $20 million in strategic investments, but maybe I'm underestimating the magnitude of the sales additions that are planned here for fiscal '24..

Yes. I mean we constantly -- go ahead, Marje..

So just in terms of the numbers, and then Michael, please do add, so when you look at the investments, the $20 million that we announced a year ago that ended up being $19 million for last year, it was a combination of brand and marketing as well as system integrator and then also internal sort of staffing bill to support these investments.

So if you think about the way we've talked about these investments going forward, some of the brand investments on the marketing side was onetime that's going to drop off. The SI spend, there is still a tail there, but that will be lower as well as we go forward.

The internal 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 and the trajectory going forward..

Yes. I think long term, 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 try 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..

Got it. Thank you very much..

Okay. The next question comes from Nick Mattiacci with Craig-Hallum. Please proceed..

Hi, this is Nick on for Chad Bennett. 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.

And I know 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?.

Yes. Listen, we think there's a strong tailwind in overall industry growth. And we think we have a differentiated position and a huge amount of potential right in front of us. And I think we are -- we have a strategy that's distinct and unique.

And our strategy is really about how do we expand from one product category to the other and then have very, very long duration subscription revenue at very high margins. That is the stated strategy. That's what we've been able to accomplish in the past 7 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 has not been helpful. And 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 fill in that gap between what we would see is our potential at our scale as we're larger and kind of what the others are doing.

But moreover, we focus on kind of our strategy and winning at the opportunities we have in front of us, which is that differential between what a large number of our clients have with us and what we know we can deliver for them. And that's kind of the long-term opportunity that we see.

And that's why we're so excited about kind of our long-term guidance in terms of 12%-plus growth and mid-30s EBITDA..

Got it. And 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 Rule of 40 mark if growth remains challenged 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 is generating high margins, mostly because of the unit economics we've created for ourselves and being efficient in terms of translation to the EBITDA line.

And then from there, it's a matter of, okay, what can we responsibly add to our business every year and 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 year and even throughout the year.

And we can easily convince ourselves, spend a lot more money and drive down our EBITDA margins to chase growth, but I don't think that will be the right balance. And I also think it will be the right steward of our investors capital. We think we have an opportunity to sequentially increase our growth rate as we go while generating high margins.

And maybe, Marje, your thoughts on the Rule of 40..

Yes. No, I think that's exactly right. I think we've already proven and shown our ability to cut costs even if our revenue slows, but 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, generating strong cash flow.

Mentioned already previously, but we expect the onetime M&A-related costs to significantly decrease in FY '24, further supporting our strong free cash flow generation, and as a result, also helping take our FY '24 net leverage naturally to 4x or even below that.

So we are very, very focused on making sure that we get back to double-digit top-line 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 continue to invest in the business as well as continue to take our leverage down and really set us up for a lot of strategic optionality going forward..

Good. Thanks for taking the questions..

Thanks Nick..

[Operator Instructions]. The next question comes from Fred Lee with Credit Suisse. Please proceed..

Hey, Michael and Marje. Thanks for taking my question. A quick question for Marje. I imagine you were able to maintain gross margins, which was a solid sequential performance, by the way, due to some cost levers despite revenue weakness.

Can you talk about what those levers were and if there's further room for improvement through fiscal '24?.

Thank you, Fred. Great question. In terms of when you look at the gross margin, right, so as -- a couple of different things working together.

So as our subscription revenue growth increases as a percentage of our total revenue as we continue to emphasize subscription revenue growth over the services revenue growth, there's sort of a natural help to our gross margin.

I would also say that we did take action in terms of just cost cuts last year, including external vendor costs but then also within our own staff and pay and so forth. So we continue to really closely monitor our costs and make sure that we drive profitability along with revenue growth..

Just building on that for one second. So 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 so that we don't increase our cost linearly as we grow our revenue.

So I think we're set up to kind of take advantage of be able to use really a strategic advantage we have to be able to deploy more and more software without incrementing our costs at the same rate.

I think that's one of the reasons we're so confident in our unit economics at a gross margin level, which has been pretty steadily solid at this level for a long time now..

Got it. And then one quick question for you, Michael. Last quarter, you mentioned the 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 has shifted in either direction?.

Listen, we generated a lot of potential for our business, and we generate a high cash flow business through the M&A by thinking about unique assets that we felt were highly unique and very complementary to our platform so we can grow it in our client base. It's a very efficient way to grow your business.

But I think it's fair to say that now, as a much larger company, we had to retool ourselves from one to being one that was built literally for rapid integration to one that's built for long term organic growth. I mean we literally built the business to acquire something every 6 months, and we've optimized it for that.

And now as I look at our business, it's just the next building of our business, to kind of orient ourselves around organic growth at this scale, which is a different proposition than growing a business that's half our size. We're doing it -- 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 an 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 that takes a little bit of time for us to kind of build and get right. I think that's our primary focus right now.

And then once we do that, which we expect to do in the next year or so, then at that point, it's like, okay, now we have -- we're at 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's built on 420,000 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 Fred to hear your 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..