E2open: Not Opening Up Yet To This Supply Chain Solution Provider (NYSE:ETWO)

E2open (NYSE:ETWO) is an interesting name, one of the few potential beneficiaries of the global supply chain chaos. The company is basically a modern commerce supply chain management platform which went public early in the SPAC rage, but so far has not lived up to its expectations. Fast forwarding nearly two years in time, shares are down 20%, despite the sound positioning, with the underperformance arguably driven by a too ambitious deal making strategy and lack of real earnings.

The Business

E2open provides integrated supply chain issues to its clients. This starts with a physical network which includes connectivity with and visibility into trading partners. The data which originates from here is harmonized and synchronized after which it is fed to applications, used for decision-making, resulting in a harmonious collaboration across the ecosystem.

The company is active across the global trade network managing billions of transition from hundreds of thousands of corporations amidst the supply, demand, global trade and logistics ecosystem. While the business sounds relatively new, the company has been around for a while as these tenure of top clientele amounts to some 15 years, indicating real loyalty and stickiness from customers.

Given its positioning, E2oepn believes that it has a huge opportunity ahead of itself with a huge opportunity to outgrow home-grown and excel solutions, all while the company believes that its valuation compares favorably compared to peers like Manhattan Associates (MANH), Descartes (DSGX), Kinaxis (OTCPK:KXSCF) and SPS Commerce (SPSC), all while claiming to offer a more integrated nature of solutions.

Where Do We Come From?

E2open went public through a SPAC in the summer of 2020, being early in the hype called SPACs. After initially trading around the issue price, shares have been trading range bound between $8 and $13 per share, trading at the lower end of the range right now.

In May 2021, the company posted its fiscal 2021 results and while revenues rose 8% to $330 million, organic revenue declines were posted, offset by the acquisition of Amber Road. The company posted adjusted EBITDA of $108 million, for compelling margins of 32%. The bottom line results were a bit hard to reach into given the SPAC merger which complicated the finances, but the gap to real earnings from EBITDA margins is what is the interesting case here.

The company outlined a solid guidance for its fiscal year of 2022. Revenues were set to rise to $370 million with EBITDA seen around $120 million. That guidance changed altogether as the company acquired BluJay later that month in a $1.7 billion deal, set to bolster the business to a $550 million revenue run rate and $200 million in EBITDA, as that deal was completed on the first day of September.

Early in January the company posted third quarter results, with 2022 being overshadowed by the BluJay deal of course. The company updated the full year revenue guidance to $475 million in sales with EBITDA seen at $162 million, with the results of course coming in between the original 2022 guidance and the pro forma numbers following the BluJay deal. This deal increased indebtedness to $820 million on a net basis, with leverage high, but manageable.

With some 225 million shares trading at $8, the market value of the firm has fallen to $1.8 billion or about $2.6 billion if we factor in net debt, indicating the degree to which the business is only valued after accounting for the $1.7 billion BluJay deal. With revenues trending at $550 million, valuation multiple looks reasonable at just below 5 times sales amidst 10% organic growth, but margins are a different story.

The company posted a third quarter GAAP operating loss of $55 million which is entirely explained by acquisition related costs and amortization charges, but otherwise profits would be flat, and on the same metric some modest losses were reported in the first nine months of the year. This is where the real issue stems from.

I Get The Disappointment

Following the discussion above, the lack of margins is what makes investors including myself cautious, certainly as the BluJay deal looks to be quite expensive as the focus seems to be largely on deals rather than value creation. Amidst all of this, it is not comforting to see another more than bolt-on deal in March of this year. Early in March, E2open reached a deal to acquire Logistyx Technologies, a global parcel and e-commerce shipping and fulfillment technology business.

This deal comes at a $185 million deal tag, equivalent to 7% of the enterprise valuation ahead of the deal. With a $40 million revenue contribution and 11 times EBITDA multiple being paid (including some synergy estimates), the deal looks very reasonable and very profitable. Nonetheless, net debt will inch up quite a bit, coming in at a billion on a pro forma basis.

With the company set to generate $200 million in EBITDA on a run rate pro forma of the Blu Jay deal, and if we factor in the contribution from the most recent deal and some organic growth, leverage ratios likely come in between 4 and 5 times. While this is looks manageable on paper, integration of past deals is not done yet, leverage is high, numbers are adjusted and a few weeks after this deal we are dealing with a CFO resignation, all far from perfect conditions.

Concluding Remarks

The truth is that E2open trades at very reasonable multiples which looks comforting, but that is about the good news. While the EBITDA multiples looks compelling, the actual strategy can be discussed as numbers are quite distorted, and I am not a backer of the current strategy. While valuations here look much more comfortable, I have real concerns about the real profitability of the business, making me very cautious despite the underperformance of the shares.