E2open, Inc. Posts Results, Lowers Outlook

EOPN reported fiscal second quarter 2014 results last night, delivering total revenue and subscription that met our forecast while non-GAAP EPS of $(0.10) beat our (and the Street’s) estimate by a nickel. While the important metrics of subscription revenue and bookings guidance for FY14 remain intact, investors are likely to focus on the meaningfully lowered outlook for total revenue and EPS, which was attributed to an accelerated shift in professional services revenue to partners.

While EOPN’s F2Q results and bookings outlook suggest that the core business is intact, we expect the stock to come under heavy pressure today because many investors are likely to focus on the headline risk (e.g., “E2open’s Stock Falls Sharply on Outlook”) and leap to the conclusion that growth is grinding to a halt. However, core business growth is intact, the lowered outlook is driven by an accelerated shift in consulting revenue to partners and we’d use any meaningful pullback in the stock as a buying opportunity. The company remains in a solid position to harness the emerging new category of next-generation collaborative supply chain solutions that allows trading partners to procure, manufacture and distribute products in a complex supply chain environment.

EOPN reported fiscal 2Q total revenue, subscription revenue and non-GAAP EPS of $17.5 million ($18 million GAAP), $13.6 million and $(0.10), which were respectively inline, fractionally below and a nickel ahead of our estimates. ICON–SCM, acquired on July 31, 2013 contributed $300,000 in subscription revenue and $800,000 in professional services revenue. Excluding ICON, organic subscription revenue grew 27% in the quarter and there were three new customers vs. seven a year ago. Cash flow from operations was -$3.9 million and FCF was -$4.1 million.

Professional services revenues tumbled 42% y/y to $4.2 million (including ICON), consistent with management strategy of pushing its lower margin consulting business to partners. We reiterate our belief that offloading this less strategic and less profitable revenue stream should be positive for long-term multiple expansion of the stock given the increasing percentage of higher quality subscription revenue in the model, even though total revenue growth is depressed in the short run. On the new partner front, the company signed KMPG as an implementation partner, EOPN’s first large system integrator.

New/upsell bookings growth and subscription revenue were reiterated (subs revenue increases only to account for ICON). FY14 total revenue and EPS guidance (midpoint) go to $73.7 million and $(0.55) from $78.3 million and $(0.35) due to the accelerated shift of professional services revenue to partners.