The ongoing struggles at supply chain software provider e2open have cost CEO Michael Farlekas his job.
On the same day e2open disclosed disappointing results for the second quarter of fiscal year 2024 that ended Aug. 31, as well as a revised downward forecast for full FY 2024, the company announced that the board and Farlekas had reached a “mutual decision for new leadership.”
“The time is right for new leadership,” e2open (NYSE: ETWO) said in a prepared statement Tuesday. “Accordingly, the e2open board of directors has initiated an external search process to identify a new permanent chief executive officer and has retained a leading executive search firm.”
Farlekas had been open about the company’s challenges in earlier earnings calls, particularly one in May in which he conceded e2open “isn’t selling enough.”
Andrew Appel is the new interim chief at e2open. He had been on the company’s advisory committee and his resume includes stints as president and CEO at data and analytics provider IRI, chief revenue officer of Accretive Health, chief operating officer at AON and senior partner at McKinsey.
But on Tuesday’s conference call with analysts, it was another new hire — Greg Randolph, chief commercial officer since July — who seized the mantle and laid out in stark terms just what has been ailing e2open.
First, he suggested that e2open may have made too many acquisitions given the pace at which they can be integrated into the company. The most significant purchase was the $1.7 billion acquisition of BluJay Solutions in May 2021.
In remarks on the call, e2open CFO Marj Armstrong said Farlekas had made 14 acquisitions in seven years.
“The internal focus placed on acquisition integration has led to considerable disruption in the sales organization and our customer base,” Randolph said.
Those disruptions include “high sales force turnover combined with significant changes to account coverage,” Randolph said.
“While the company has done a commendable job of backfilling sales force gaps with new hires and transfers, I was very surprised to find such a high percentage of sales professionals, including people responsible for major clients who are new to e2open, new to the accounts they’re covering or both. In my experience, it is very challenging to execute a world-class consistent sales motion involving a mission-critical software portfolio and large sophisticated customers when salespeople are still learning the products and getting to know the customers they are selling to,” he said.
“Critical attributes” of a well-oiled sales organization are “product and industry knowledge … and customer intimacy,” Randolph said, but “today e2open is behind the curve in these vital areas. In my view, this disruption in the sales organization has been the primary factor in the top-line weakness that e2open is experiencing this year.”
On the surface, the financial numbers at e2open were not significantly worse, but they weren’t significantly better either. Subscription revenue on a GAAP basis was 2.4% more than a year ago at $134.7 million. It represents 85% of total revenue. Total revenue was $158.5 million, down 1.4% from a year ago.
Gross profit on a GAAP basis was $79.2 million, up 2.2%, and non-GAAP gross profit was up 2.5% at $109.5 million.
Adjusted earnings before interest, taxes, depreciation and amortization in the quarter was $56.1 million, up 16.1%. The adjusted EBITDA margin was 35.4% compared to 30.1% last year.
Armstrong put those numbers in perspective. “While we delivered subscription revenue near the high end of our guidance in the second quarter and maintained strong adjusted EBITDA margins, our growth rate remained below our potential,” he said in the earnings statement. “We continue to reposition the company for organic growth and have already taken a number of steps to improve our go-to-market performance and client engagement model in order to reaccelerate growth.”
But e2open stock plummeted after the earnings release, primarily on the back of changes in its forecast. Premarket Wednesday and overnight, the stock was down anywhere from 17% to 19% — though on an outright basis, given the Tuesday closing price of $4.39, it only took about 85 cents of decline to result in a roughly 19% drop in price. The Tuesday increase was 17 cents, a more than 4% gain.
In that forecast, e2open reduced its forecast adjusted EBITDA for FY 2024 to a range of $215 million to $220 million from $218 million to $228 million.
The forecast for subscription revenue was cut to $530 million to $538 million on a GAAP basis, down from $545 million to $555 million.
E2open stock has lagged this past year. According to data from Barchart, it is down roughly 39% from a 52-week high in February and down about 27% in the last year. At the premarket price Wednesday, e2open stock will be down about 71% from a recent high in May 2021.
The comment by Armstrong about the difficulties in integrating all the acquisitions led one analyst to ask whether e2open might be better off trimming its sails and reducing the scope of the product offering.
“This is what we’re doing as a management team right now, partnering between sales, finance and product, to really define the focus in investment areas … and where are the rationalization opportunities in terms of SKUs, noncore legacy products, are there opportunities to divest some of them,” Armstrong said.
Randolph suggested more optimism about making the current lineup work. He said that in prior positions, he has had a “much broader portfolio of products than what exists here.” He told the analysts that the question was “a valid point,” but added that he believed the company could “deliver the appropriate value proposition … with the portfolio of products that we take to market.”
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