E2open Parent Holdings, Inc. (ETWO) Q3 2023 Earnings Call Transcript

E2open Parent Holdings, Inc. (NYSE:ETWO) Q3 2023 Results Conference Call January 9, 2023 5:00 PM ET

Company Participants

Adam Rogers – Head, IR

Michael Farlekas – CEO

Marje Armstrong – CFO

Conference Call Participants

Mark Schappel – Loop Capital

Adam Hotchkiss – Goldman Sachs

Chad Bennett – Craig-Hallum

Taylor McGinnis – UBS

David Ridley-Lane – Bank of America

Fred Lee – Credit Suisse

Operator

Greetings. Welcome to the E2open Earnings Call for Fiscal Third Quarter 2023 Conference 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 will now turn the conference over to your host, Adam Rogers. You may begin.

Adam Rogers

Good afternoon, everyone. At this time, I’d like to welcome you all to the e2open fiscal third quarter 2023 earnings conference call. I am Adam Rogers, Head of Investor Relations here at e2open. Today’s call will include recorded comments from our Chief Executive Officer, Michael Farlekas; followed by our Chief Financial Officer, Marje Armstrong. And then, we’ll open the call for a live Q&A session. A replay of this call will be available on our website. Information to access the replay is listed in today’s press release, which is available at e2open.com in the Investor Relations section.

Before we begin, I’d like to remind everyone that during today’s call, we will be making forward-looking statements regarding future events and financial performance, including guidance for our fiscal fourth quarter and full fiscal year 2023. 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-Q, or 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 will 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.

And with that, we’ll begin by turning the call over to our CEO, Michael Farlekas.

Michael Farlekas

Thank you, Adam, and thanks to everyone for joining our fiscal third quarter earnings call.

We had a strong third quarter against the continued backdrop of a challenging macro environment. We exceeded our guidance for subscription revenue, our primary focus, while expanding profitability and free cash flow. We look forward to sharing our results with you and providing an update about our business.

During the call, I’ll discuss our third quarter highlights, how our clients are using our network and platform and an update on the FY23 strategic investment areas we discussed previously. Marje will cover the third quarter financial results in more detail. And lastly, we will open up the call for Q&A.

Let’s begin with the third quarter. We had a strong quarter. We exceeded our subscription revenue guidance, generating a record $135 million in subscription revenue, which represents 82% of our total revenue. We continue our track record of being highly profitable, delivering record adjusted EBITDA of over $56 million. This translates to a 34% EBITDA margin. The organic growth rate of subscription revenue, our primary focus, was over 10% for Q3 on a constant currency basis. In the nearly two years as a public company, we have consistently grown subscription and total revenue while maintaining very strong profitability.

Our consistent subscription revenue growth in the double digits for the last six quarters is a result of our breadth of product offerings, the diversity of markets from an industry and geographic perspective and the value our innovations unlock for our clients who leverage our mission-critical applications. Stated more simply, we have multiple ways of winning.

Let me provide you with some examples of what I mean by multiple ways to win, illustrated by how our clients are using the platform and our network. We recently signed an expansive contract with global retail leader, HUGO BOSS. The agreement covers a range of our solutions from supplier collaboration to logistics, providing end-to-end supply chain visibility and control. Specifically, HUGO BOSS will leverage our network and applications to optimize and manage internal and outsourced manufacturing. The solution enables collaborative capacity and forecast visibility, a robust procure-to-pay solution and agile transformation management capabilities. This project will give them full visibility and significant reduced cycle times, ensuring exceptional on-time delivery, which are the key performance indicators for any fashion company.

It’s a significant new logo win and brought to us specifically because of the marketing investment we initiated earlier this year. Our network and product breadth were the primary factors in winning this large multiyear contract.

On the other end of the industry spectrum, we also signed a contract that includes multiple solutions for a global agribusiness innovator. That contract, along with HUGO BOSS, helps demonstrate that our end-to-end supply chain platform works well across a wide range of industries.

Like all quarters, Q3 brought many go-lives for new and existing clients, with a few I’d like to highlight. We recently went live with the first phase of Amazon Kuiper’s satellite project, which will enable high-speed internet access to unserved and underserved parts of the world. We have been working with Kuiper for the past year to help them build their supply chain focused on manufacturing, collaboration and planning.

Cloud network leader, Extreme Networks, went live with e2open’s Partner Performance Incentives application, paying to their distributors over $66 million using our application within the first week of go-live.

We don’t always discuss our channel business on these calls, but our solutions are value-add to the entire network, helping facilitate payments and rebates while offering greater pricing visibility.

An international mining and metals company is using e2open for global trade management. They now have a single platform for global regulation, a centralized product classification repository, automatic export and import controls on all shipments and more with eyes towards future logistics capabilities.

One of the world’s largest consumer goods companies went live on e2open and Maersk’s NeoNav platform, a collaborative next-generation solution that offers complete logistics visibility, control and decision-making through the integration of all trading partners and data in one closed-loop system. The system provides predictive visibility and traceability throughout the supply chain in real time. This project delivers on multiple strategic objectives for the Company, a single operational process, a control of inventory, both upstream and downstream, reduce costs through purchase order collaboration, and increase customer service levels.

In addition to new logo wins and expanding client opportunities, network innovation is also a strategic priority for us. In November, we introduced e2open’s Carrier Marketplace as part of e2open’s broader strategy to expand the network ecosystem. The Carrier Marketplace offers carrier partners and shippers powerful new capabilities, including access to more data that allows both, carriers and shippers to make better proactive decisions. Over 8,000 carriers leverage this network today, and we believe our new marketplace will help unlock more value for the entire ecosystem.

Now, I’d like to update you on our progress against the stated strategic investment areas we laid out at the beginning of the year: investing in sales and marketing; increasing brand awareness; and our work with strategic partners and our initiative to build systems integrator ecosystems. We’ve seen good progress in our sales and marketing and brand investments. As evidenced in top-of-funnel pipeline growth since initiating these investments, and as noted earlier, opportunities specifically generated by this investment that are now flowing through as new client wins.

Our brand awareness metrics have dramatically improved as measured by share of voice where we are now consistently number 1 or number 2 in share of voice for our cohorts. Even though our investments in this area have been relatively modest, we’ve seen great success.

On the strategic partnership front, this work continues with both, our strategic partners and building our integrator ecosystem. This is long-term work that does not happen overnight. That said, we are making solid progress in both areas and are hitting our internal marks. Both initiatives will have the effect of decoupling our services growth rate from our subscription growth rate, with our primary focus on growing subscription revenue.

By enabling the SIs such as our partners, Accenture and KPMG to build their own practice and business on our platform, we’re unlocking the extraordinary influencing capacity these global partners bring to our business. This means that services will continue to decouple from subscriptions and be a shorter-term drag on overall growth by design to support long-term subscription revenue growth.

Finally, I’d like to mention a few other corporate highlights. We continue to build on our ESG initiatives. E2open released its second annual environmental, social and governance report in the third quarter. Our software can have an enormous effect by reducing the environmental impact of our clients as they produce transport and distribute their products. And to this end, ESG is part of our road map development.

As a company, e2open held an enterprise-wide employee giving campaign supporting Water For People. Water For People facilitates the development of clean water, improve sanitation and health and hygiene in 9 countries across Latin America, Africa and India. We ran this campaign through the end of 2022, and e2open provided matching donations to this amazing organization.

Lastly, we were named the top enterprise SaaS solution of the year in 2022 Best in Biz Awards, along with others for most innovative SaaS solutions.

E2open remains focused on our clients. We have multiple ways to win. And despite the macro environment, we continue to deliver consistent subscription revenue growth while being highly profitable. Our performance in Q3 and our outlook for the year are evidence of our focus on profitable growth and disciplined operations. This focus allows us to maintain our EBITDA and free cash flow targets even while our total revenue expectations for the year have come down due to FX, economic and business reasons that Marje will discuss in more detail. We delivered adjusted EBITDA margins of over 30% as reported for the last seven quarters.

E2open is a reliable growth company that generates high margins and significant free cash flow. We are a mission-critical software company with durable revenue, consistent growth, long-tenured clients and are also highly profitable. We are laying the foundation to become the world’s preeminent supply chain software company. We have work to do, but then realize the opportunity as we are clear on the mission and our strategic path forward.

Lastly, I’d like to thank our nearly 4,000 team members for their continued work and dedication to excellence for our clients, our communities and our company. Marje will now review our financial performance in greater detail. Marje?

Marje Armstrong

Thank you, Michael, and good afternoon, everyone. I hope everyone had a wonderful holiday season and a fantastic start to the New Year.

First, I wanted to thank the broader finance teams at e2open. Your efforts to get us ready for earnings working through the holidays are much appreciated. I’m incredibly proud of the stellar team around me, and I’m looking forward to all that we can accomplish together in 2023.

As Michael mentioned, we had another strong quarter, and we’re excited to share those results with you today. I will begin by reviewing our fiscal third quarter results. I will then briefly touch on our progress integrating our recent acquisitions and then finish with an update to our guidance. Thereafter, Michael and I will open the call for your questions. As a quick note, I will talk about our results on a non-GAAP basis. We show a reconciliation to GAAP measures in the press release, which is available in the Investor Relations section of our website at e2open.com.

In the fiscal third quarter of ‘23, we reported subscription revenue of $134.9 million, reflecting an organic revenue growth rate of 8.0% on a pro forma basis or 10.2% on a constant currency basis when adjusting for the negative $2.7 million year-over-year impact from foreign exchange fluctuations. This was above the high end of our guidance range of $131 million to $134 million.

In the first nine months of fiscal ‘23, subscription organic revenue grew 11.0% on a pro forma constant currency basis. Delivering the consistent and predictable subscription revenue stream remains our core focus and is the foundation of our durable and highly profitable business.

Professional services and other revenue were $30 million, reflecting an organic growth rate of negative 9.2% on a pro forma basis or negative 6.6% on a constant currency basis when adjusting for a negative $900,000 year-over-year impact from foreign exchange fluctuations.

We have a stated strategy to focus on durable high-margin subscription revenue over services revenue. In addition, as Michael mentioned and we have also discussed on our previous earnings call, we are strategically shifting our services revenues to new partnerships with system integrators as part of the planned expansion of our channel ecosystem in order to aid our future subscription revenue growth. However, our services revenue is underperforming against our expectations, while our services gross margins improved from Q2.

We are focused on addressing two main key areas to turn services revenues back to growth. First, we mentioned last quarter that Logistyx, a business we acquired earlier this fiscal year, has been a drag on the services revenues due to free service hours as we transition certain clients to our cloud platform. We continue to address this issue and expect the trend to improve as we move into fiscal 2024. Second, there are some pockets of unmet demand as we ramp trained employees and contractors to be fully billable. We’re working to adjust the supply and demand balance of our team to better anticipate client needs by product, so we can more closely match the demand we see with the supply we have.

Aside from these two items, there are also macro impacts beyond our control as select customers, especially in the technology space, are temporarily slowing or pausing larger transformation projects. We expect those impacts to normalize and the projects to be picked up again as the macro environment stabilizes.

We expect our services revenues to return to being additive to our top line growth profile as we work through the near-term issues over the next couple of quarters.

We reported total revenue in the fiscal third quarter of $164.9 million, reflecting the total organic revenue year-over-year growth rate of 4.4% on a pro forma basis or 6.7% on a constant currency basis when adjusting for a negative $3.6 million year-over-year impact from foreign exchange fluctuations.

In the first nine months of fiscal ‘23, total organic revenue grew 8.9% on a pro forma constant currency basis. Our gross profit was $113.6 million in the fiscal third quarter, reflecting a 4.9% increase on a pro forma basis or 6.1% increase on a constant currency basis. Gross margin was 68.9% for the third quarter of fiscal ‘23 compared to 68.6% in the comparable period in fiscal ‘22 or 68.2% on a constant currency basis.

I will now walk you through the supplemental slides we prepared to help bridge the year-over-year impacts to our gross margin. These slides are also posted to the Investor Relations section of e2open.com.

As you can see, the first bar on the slide represents FX, which had an approximate $1 million negative year-over-year impact to our gross margin. The second bar shows a strategic system integrator spend impact to gross margin, which was $2 million this quarter, but was not present in the year-ago period.

As mentioned earlier, we’re building a global systems integrators ecosystem and have been investing in training staff and developing go-to-market capabilities with organizations such as KPMG and Accenture. This is part of the previously disclosed $20 million investment spend for fiscal year ‘23.

Net organic margin growth was a $7 million positive impact to our gross margin, primarily driven by higher subscription revenue. Adjusted EBITDA was $56.2 million compared to $46.0 million in the prior third quarter, an increase of 22.1%. Adjusted EBITDA margin was 34.1% or 32.6% on a constant currency basis for the third quarter of fiscal ‘23 as compared to EBITDA margin of 29.1% during Q3 of fiscal ‘22 on a pro forma basis.

The next slide details the items impacting our third quarter fiscal ‘23 EBITDA when compared to the year-ago period. FX was an approximately $1 million year-over-year benefit to our EBITDA line. As discussed during our previous earnings call, we have natural cost hedges to our largest top line currency exposures, which are the euro and the pound, along with additional costs in other currencies. The second bar on this slide, investment spend, refers to the previously disclosed $20 million fiscal year ‘23 investment in system integrator ecosystem, marketing and internal support for investment spend, which totaled $6 million in the third quarter.

Similar to our second quarter, approximately $2 million of the $6 million investment spend relates to the system integrators, and therefore, sits within our gross margin line. The balance of $4 million is part of OpEx and only impacts EBITDA. Net organic margin growth was $9 million positive impact to our adjusted EBITDA, primarily driven by gross margin improvement, coupled with various OpEx cost saving initiatives.

Net income for the third quarter of fiscal 2023 was $5.5 million and adjusted earnings per share was $0.06 on approximately 341.4 million adjusted basic shares outstanding.

Now on to cash flow. I want to spend some time on this topic as generating compounding free cash flow growth is a core focus for us. As a supplement to the GAAP cash flow view, we have been providing an adjusted unlevered free cash flow view that starts with adjusted EBITDA and subtracts normalized CapEx, that is CapEx, excluding onetime M&A spend. Adjusted unlevered free cash flow for that definition was $50.4 million for the third quarter and $132.4 million for the first nine months of fiscal 2023.

Going forward, in order to provide a clearer view of our normalized cash flow, we will start with GAAP operating cash flow that already takes into account cash interest, net working capital and cash taxes as opposed to the previous view that started with adjusted EBITDA. We adjust the GAAP view for nonrecurring onetime and M&A cash payments to derive an adjusted operating cash flow. Our adjusted operating cash flow for Q3 was $50.7 million, and for the first nine months of fiscal ‘23 was $75.0 million. We will continue to provide the disclosures on normalized CapEx expenditures similar to what we have done in historical periods to drive adjusted free cash flow.

Our adjusted free cash flow for Q3 was $44.9 million and for the first nine months of fiscal 2023 was $51.4 million. This format should provide more clarity on operating cash flow generation adjusting for nonrecurring items, particularly given our historically acquisitive nature. We have included the year-to-date view in the supplemental slides this quarter, and we will be presenting it in our quarterly press release going forward. We will be retiring the old adjusted unlevered free cash flow view, but it can still be easily derived by taking our EBITDA minus the normalized CapEx figure that will still be provided in the adjusted cash flow walk.

Timing differences of cash inflows and outflows can have a significant impact on quarterly cash flows as a normal course of business, which is why it is important to look at cash flow on a rolling basis, normalizing out quarterly fluctuations.

As an example for our Q3 cash flow, I would point out two items. First, it includes the catch-up on delayed billings from Q2 BluJay ERP migration that depressed collections in that period. Second, Q3 cash interest payments were below normal run rate due to a timing shift of cash payments into Q4. As a result, we will see Q4 cash interest payments approximately $12 million above normal run rate.

To reiterate, building a business that generates compounding cash flow is a core focus for us. And finding additional efficiencies and levers for cash flow growth generation will continue to be a priority for us.

Now to provide a brief update on our recent acquisitions. We are complete with our integration of BluJay Solutions that closed on September 1, 2021. As mentioned last quarter, we surpassed our original synergy target of $25 million.

Now turning to the Logistyx acquisition. Total synergies related to the recent Logistyx combination are still projected to be just over $10 million. We expect to action approximately 75% of run rate savings and realize 50% to 60% of the run rate savings by the end of fiscal 2023. As previously discussed, the Logistyx systems integrations are taking slightly longer than expected. However, we remain excited about the long-term additive value of this acquisition and are confident in our ability to achieve the previously announced synergies.

Now on to guidance. Our GAAP subscription revenue for fiscal ‘23 is now expected to be in the range of $533 million to $536 million, which includes an approximate $2 million positive FX impact compared to the last time we reported earnings as the euro and the British pound have incrementally strengthened against the dollar. We now expect an approximate $9 million negative headwind year-over-year from FX. Our subscription revenue organic constant currency year-over-year growth is expected to be in the range of 9.9% to 10.5%.

We are adjusting the lower end of our GAAP subscription revenue guidance on a constant currency basis, down by $3 million, and tightening the range to $3 million, representing the guidance range of $542 million to $545 million. As mentioned last quarter, we have seen delays in select large deal closings due to a volatile macro environment. While some of the deals delayed from Q2 did close in Q3, some are still delayed, and we’re seeing a similar trend carrying through Q3 and Q4. We do expect those projects to be picked up again as the macro environment stabilizes in the coming quarters as the demand for our mission-critical platform remains as strong as ever.

Total GAAP revenue for fiscal ‘23 is now expected to be in the range of $655 million to $660 million, including an approximate $2 million positive FX impact since the last time we reported. We now expect an approximate $12 million negative headwind year-over-year from FX. Our total revenue organic constant currency year-over-year growth is expected to be 8.2% to 9.0%.

On a constant currency basis, we’re adjusting down the lower end of our guidance range by $14 million and tightening the range to $5 million. It is now expected to be in the range of $667 million to $672 million. Most of the revision is coming from the services revenue due to the headwinds outlined earlier.

We continue to expect non-GAAP gross margin to be in the range of 68% to 70%. We’re also reaffirming our adjusted EBITDA guidance in the range of $217 million to $223 million. We’re likely to come in at the low end of the EBITDA guidance for the year, but we expect to still reach the EBITDA guidance established at the beginning of our fiscal year despite the headwinds to our revenue. We’re able to do that due to our keen focus on the operational efficiency of our business additionally supported by the way we have set up our business to provide natural FX hedges on the cost side that offset the FX headwinds to the top line.

Despite the continued evaluation of our cost base, we’re still continuing to invest in future growth of our business and committed to our previously announced strategic investment spend of approximately $20 million this year, which is included in our guidance range.

Now to quickly touch on Q4 guidance. GAAP subscription revenue for the fiscal fourth quarter of ‘23 is expected to be in the range of $137 million to $140 million, including a $2 million year-over-year FX headwind. This guidance range represents a 7.0% to 9.3% year-over-year growth rate on a constant currency basis.

In conclusion, we’re proud of our year-to-date results and the trajectory we’re on for the rest of the year. Our sales and marketing teams have done an incredible job navigating the ever-changing macro dynamics impacting our customers. We’re also clear on the improvement opportunities internally and have a clear action plan that we’re aligned on. We remain excited about the multiple growth opportunities in front of us and are committed to a balanced approach to growth and profitability, targeting compounding free cash flow growth as our North Star.

Thank you, everyone, for joining us today. We look forward to finishing this year strong and updating you on our results and progress next quarter.

With that, Michael and I would now like to take your questions. Operator, we’re ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is coming from Mark Schappel with Loop Capital.

Mark Schappel

Hi. Good evening. And thank you for taking my question here.

Michael Farlekas

Hi, Mark.

Mark Schappel

Mike, starting with you — hey. Just starting with you, if you could just provide some additional color or maybe some of the deal delays that were mentioned in the prepared remarks with respect to are you seeing them in certain verticals? It sounds like maybe high-tech might be impacting things a little bit more than other verticals. Are you seeing it with like certain sized customers, larger versus smaller customers? Again, maybe just give us a little more color on the deal delays.

Michael Farlekas

Yes. And any choppy environment, I think it skews a bit towards larger transactions, become harder to get over the finish line. But certainly, all seen the news in the high-tech with the high-tech companies making pretty significant adjustments across the board. And that’s true, and we mentioned that specifically around our services. We have longstanding relationships with these companies. And sometimes, they say, okay, we’re going to pause a little bit. So, that’s the kind of the primary reason for the services revenue, that and Logistyx we mentioned. But it skews towards larger transactions, and it just takes a little longer for them to get over to finish line that you’d see in kind of any choppy economic environment.

Mark Schappel

Are you seeing any deals actually go away, or are they just being delayed — purchase decisions just being delayed here?

Michael Farlekas

Yes. I think the deals don’t really go away. You either win them, you lose them or they get put off until some period in the future. You have to remember, the reason they put our software in is to fix things for the next 10 years. So many times, we’ll say, well, not this quarter, we’ll see what happens. So I don’t think they really go away. It’s just that they get a stop based on whatever their financial objectives are, whatever they can tackle at certain time. So we don’t really see them going away kind of ever. It’s just a matter of do they push a little bit to the right.

Mark Schappel

Okay. Great. And then with respect to linearity in the quarter, maybe just talk a little bit about any observations there? I mean did you notice that was the slowdown or the deal delays noticed later in the quarter, or was it pretty much even throughout?

Michael Farlekas

No. I think we had a strong start. And I think the quarter was a fine quarter. It just — we had a couple of things that got pushed a little bit. So I wouldn’t say there’s anything kind of different happening than it’s happened throughout the entire year. It’s just a choppy macro environment as everybody can see.

Mark Schappel

Okay. Great. And then, one final question, shifting gears a little bit here. With respect to the Company’s capital structure, maybe you could just give us an update or just give us your — the firm’s views on, say, M&A versus debt reduction versus share repurchases and how we should think about that going forward?

Michael Farlekas

Yes. Thanks for the question. Obviously, we’ve — as we said, we’ve been able to build the business through a pretty aggressive period of M&A. In the current environment, I think it’s fair to say that that avenue for us is going to be a little bit on pause for a while, primarily because of the bid-ask spreads are a little bit still not where we’d like them. But we also have to be cognizant, Mark, of, one, we have our leverage that is outside kind of our range are coming down. So, we want to make sure we get it back into the range we articulated early on. As you think — look at our cohorts, we’re undervalued, we think, in the marketplace. So issuing shares at this point wouldn’t be right for us to do for ourselves and for our shareholders. So, I think overall [Technical Difficulty] building our business and generate free cash flow and mostly delevering.

Operator

Our next question is from Adam Hotchkiss with Goldman Sachs.

Adam Hotchkiss

First, would love to dig a little deeper on where we are with your relationships with the system integrators. Sort of what has the initial feedback been for partners as a result of the investment programs? And then, could you give us a sense for how you’re thinking about what impact that partner ecosystem and some of these investments will likely have on subscription revenue ultimately at scale?

Michael Farlekas

Yes. I think, listen, we’ve made great progress on the ones we’ve announced. And as we dig in, we find more and more pockets of opportunity in other areas. So, I think we have continual relationships and conversations with them, and they’re getting — happening at increasingly higher levels in their organizations.

You have to kind of keep in mind of how large these companies are, especially when you think about Accenture with nearly 1 million people working for them. It’s going to take a little bit of time, and it’s going to take time for us to kind of build on what we’ve started. So, we — this is necessary, I think, for us to become the company we desire to become. But we also are very sober in terms of what it’s going to mean and the length of time. We’ve talked about this. This is a really a ‘24 to ‘25 kind of initiative. And that’s why we needed to make a fairly large jump start to the investment to kind of get things going. So, we’re excited about it, seeing great progress, but this is not a short-term thing. It’s something we’re very highly committed to.

Marje Armstrong

Just to add to that, Adam, as we look towards our next fiscal year, obviously, we’re very focused on working on pipelines and really detailing out the plans together with our partners. And just stay tuned, and you’ll hear more detail as we work through those plans for next year.

Adam Hotchkiss

Got it. Got it. No, that’s super helpful. Thanks for that. And then just on net revenue retention, gross revenue retention, I know these are metrics that you tend to give out annually. Any material changes in those over the last quarter or so from where we were at the end of fiscal ’22, and any drivers of those changes, if any?

Michael Farlekas

No. I don’t really see that much of it at all. Those numbers have been pretty consistent for us for a while. So that’s kind of the nature of our business is to retain these customers. So, we don’t really see that changing in the short term. Not a dramatic way, one or the other.

Marje Armstrong

I think, Adam, we’ve quantified previously that any quarter, they can kind of fluctuate 100 basis points more or less one way or another, but nothing in terms of change from that prior disclosures or trends.

Adam Hotchkiss

Got it, super helpful. Thank you. And then last one for me, just on the marketing investment. You noticed some outsized performance there. Any scenario that you could see even in a difficult macro environment to sort of amplify the brand to lean in there in addition to what you’ve already laid out, or do you think the benefit from those investments has a little bit left to play out before you consider that?

Michael Farlekas

Yes. We make investments in our branding and marketing all the time. And kind of like on the systems integrator, we felt coming out, we needed to put a little more emphasis on it this year, which is why we think a lot of that’s going to be onetime in nature.

One of the things that we brought in Kari a little over a year ago, and before that, we never had a CMO. So we have a capability now, and that’s — that wasn’t part of this onetime investment, but we are making marketing investments, and we continue to expect to be kind of one or two in share of voice, and continue what we started. But we don’t really expect to replicate as much of a onetime spend next year. I don’t think we need to. But it’ll morph back into kind of our normalized sales and marketing spend as a percent of revenue.

Operator

Our next question is from Chad Bennett with Craig-Hallum.

Chad Bennett

So just kind of digging a little bit more into kind of the deal delay commentary. I think last quarter, you were kind of specific to EU, and I think you pointed out the tech vertical also last quarter. Just from a geo standpoint, are you seeing it in more than just the EU kind of from a geographic standpoint?

Michael Farlekas

It’s really situational. It just depends on the company, what they have going on and what their approvals are. And like — just like every company does when things are a bit uncertain is they kind of take a second, third look at things. And it’s a situation that we have some deals that move — we’re selling a lot of software, some deals move through quickly and other ones that we’d expect to move through kind of get slowed down a little bit. So, I don’t really think it’s any particular pocket. I think, obviously, the tech one is a little bit more concentrated, but we’ve all seen that, right? So, everybody is making adjustments with their plans. And historically, we’ve been — we have a lot of longstanding tech clients and relationships.

Chad Bennett

Okay. And then just a follow-up on the SI progress you’re seeing or are seeing right now. I think, again, you’ve talked about at least for the second half of the year, SIs being roughly 25% of your pipeline for the balance of the year and actually mentioned that you — several large deals that you’ve received from them have actually accelerated or progressed to the pipeline faster than if you’re direct. So, is that the case and — just considering everything that’s going on in the world? And then when should we expect to see actual billings, bookings benefit from SIs that would actually move the needle towards acceleration on organic subscription growth?

Michael Farlekas

Yes. Many of the partners we have been partners in the past, and we obviously are making investments to enhance and become bigger partners with them. And again, it takes time with these partners. So, this investment we’re making, again, jump started and to get way more involved and engaged with those companies across the board. And we would see that coming in incrementally over time.

And the way to think about our business is you’re not going to see a huge inflection point up for any 1, 2 or 3 things, but all of these efforts we’re doing are really meant to leverage the fact that we have a very diversified product set, the world’s best companies at scale and increasingly a really large ecosystem of network providers and network customers and then also integrators, all just going into the mix of incrementing our subscription revenue, which is our primary focus. So, that’s kind of how we’ve kind of got here and what we continue to do.

So you’ll see us actually do this and other things as we go. Again, none of them are going to inflect our business up dramatically. This is all just incremental expansion of our subscription growth at a very high margin. We’ve been extremely disciplined in terms of balancing our growth profile with our profitability. If you kind of look over the past seven quarters now, we’ve been — have not taken the bait on trying to grow at all costs. We’ve not taken a bait at over investing in things that we don’t think are super sustainable. We’re highly focused on EBITDA, we’re highly focused on free cash flow and highly focused on expanding our subscription revenue that comes in at high-70s kind of gross margin is extremely long term. So, we’re building a long-term business, and we’re going to stay focused on that.

Chad Bennett

Okay. And just last one for me. It sounds like just from a messaging standpoint, the sustainability and durability of EBITDA margins in kind of that low to mid-30% range is kind of the right way to think. Is that a correct takeaway?

Michael Farlekas

I think it’s 100% the right takeaway, and that’s kind of — since we took the business over in 2015 has been really focused on driving high EBITDA margins and incrementing them up over time and expanding them at a rate faster — growth rate faster than our subscription growth rate. We think that’s the most appropriate way for this kind of business. And there are other business out there that would have a different profile based on where they’re in the business’s life cycle. Our business is one because of the very, very long-term nature of our contracts and the fact that our [Technical Difficulty] primarily mission-critical for the world’s largest — biggest and most important companies. That just is going to generate the highest return over time for our shareholders, and that’s kind of our — as Marje says, our North Star.

Operator

Our next question is from Taylor McGinnis with UBS.

Taylor McGinnis

I believe 4Q constant currency subscription revenue growth guide previously implied 14%, so an acceleration. And now the guide implies a deceleration to 8% constant currency. So, can you maybe talk about just what really changed in the quarter relative to your expectations? And maybe provide more color on the assumptions that were down ticked on. And then, Marje, just given the uncertainty, any changes in guidance methodology or additional conservatism that might be embedded in the outlook?

Marje Armstrong

Hi Taylor, thank you for the question. Absolutely. So, when we put out guidance 90 days ago, the range of outcomes was much wider. As we commented on the last call, we had seen some select deal delays. As we’ve discussed in this Q&A session as well, specifically sort of in Europe and in the tech sector. As we move through Q3, we saw definitely some of those deals that slipped close, but then further again — more of them again pushed to the right. And so, as Michael has articulated, this continues to be a choppy environment where we really don’t think that the demand is going away, but it’s definitely getting pushed to the right. And it’s really hard to focus on the specific quarterly growth rates. But as you said, we have lowered our expectation for the Q4.

And then, in terms of conservatism, I think you’ve seen how we’ve been setting sort of [Technical Difficulty] we really want to be — we want to give you the information that we have and the best estimate at the time. So, I wouldn’t say that there is anything sort of unnatural in the quarter. We always try to be transparent. I think that’s the reputation as a management team we’re trying to build is to really be transparent with you in terms of what we see in the business. And as incremental information arises, we will update that accordingly.

Taylor McGinnis

Great. And then I know the things are obviously very fluid in the environment. But if you look over the last two quarters, sequential subscription rev growth has been in the low single digits. And it looks like the 4Q guide implies something similar. So, just as we think about next year, is it fair to use that sequential growth as a starting point for modeling next year? And anything in terms of seasonality or with the environment in some of these delayed deals that we could — that we should keep in mind?

Marje Armstrong

Yes. I think there is a lot of moving parts. Obviously, we’ve been — year-to-date, we’ve reported subscription revenue in the double digits. And the macro environment is choppy, so the quarterly growth rates may deviate from quarter-to-quarter. But next quarter, we’ll give you a lot more detail in terms of how we think about the year, and we’ll have further updates on the macro environment, et cetera. But I think it’s too early to fully talk about the year. But, again, just to be super clear, we expect — we don’t expect the demand that has been pushed out to disappear. We expect these deals to come back, and as the macro stabilizes, come back. And we’ve also talked about our PS revenue growth. We expect that to become additive to our growth rate. So, we feel good about the outlook looking ahead of us.

Taylor McGinnis

Perfect. And then just my last question is, are you able to quantify the deals that were pushed? And how you’re thinking about timing, let’s say, from that perspective?

Marje Armstrong

We haven’t quantified the specific dollar amount. And I think some of the — as the macro environment changes, again, the time to close just deviates from the normal rhythm that we typically see. So, some of these deals could be just a matter of closing on this side of the quarter or next side of the quarter, right? And we try to make the right economic decisions and not be beholden to our quarter close either, but I wouldn’t say that there’s anything sort of very different that we think we can articulate in terms of beyond the near-term macro choppiness that has changed in our business.

Operator

[Operator Instructions] The next question is from Andrew Obin with Bank of America.

David Ridley-Lane

Good evening. This is David Ridley-Lane on for Andrew Obin. Curious what the feedback was from the Leaders Forum you held in October. And what was the tone of clients there? And any early indication of kind of client budgets here in calendar 2023?

Michael Farlekas

Yes. It was — that’s a remarkable event. It’s the first one we’ve had for in three — the first one in three years, and that’s been going on, I think, for seven years prior. And that particular event, just for — information is oriented towards the very senior executives in a very intimate environment. So we get — it’s about 90% customers telling what they do on our application and our platform, which is really powerful. I’d say, overall, the environment was certainly very enthusiastic about our relationships. And I always learn a lot. You talked to [Technical Difficulty] have customers. I sat — had dinner with one that was the world’s biggest producer of frozen fish, and all the things they do for that and how they’re using our transformation managers to help them get fish to market sooner. So, it’s a really great event.

Overall, I think people in the supply chain business never cease to try to improve their operations. Companies will never ever stop trying to reduce or improve their gross margin. That’s the fundamental nature of supply chain software. And we all have great ideas. And it’s a matter of how do they compete internally for the projects because the companies only have so many people to do so many things at one-time. And that’s the same as it’s kind of always been in my almost 25 years in the business.

In terms of budgets, obviously, everybody is facing the same uncertainties. And I’d say, the macro environment certainly is still a reverberation of COVID, and you see it clearly in the numbers. And I think more — it’s the uncertainty of what’s going to come that people are uncertain about. And I think that kind of needs to be — a little more clarity. I think overall, that’s the issue is that we were talking about a recession now for a year, and people don’t know how to really react to that and deal with that. So I think that’s really the hesitancy is really just a continued uncertainty one way or the other.

David Ridley-Lane

Got it. And just a sort of follow-up on that. I mean, in the past quarters, you’ve talked about pipeline growth exceeding bookings. Are you still adding to the pipeline here even as customers are more cautious?

Michael Farlekas

Absolutely. We’ve seen this story before. Demand doesn’t change. The pipeline still goes. Our yield rate maybe come down a notch or two on conversion. But again, they come to us to solve very complex problems. Those complex problems are not for the here and now. They’re for the next 15 years. So, it’s just a matter of whatever doesn’t get done today usually gets done tomorrow. And we would expect nothing to change in that kind of a cycle.

David Ridley-Lane

Great. And then, one last one for me. Just on the Logistyx — transition for the Logistyx clients. Would that be done — are we talking another 3 months, 6 months? Just sort of better understanding kind of the headwinds on the professional services side?

Michael Farlekas

Yes. It wasn’t an overly large combination for us. It was a $40 million kind of range. And we inherited some things that we had to clean up. And we’re doing that as is our responsibility. And we expect that to last a quarter or two, more maybe, something like that. And then kind of start to normalize out.

Remember, smaller companies usually inherit a little more problems with smaller companies given the nature of their business. That’s something we’re used to dealing with. And it’s something that we’ve had great success kind of fixing over time, and that’s kind of the essence of our business as we make operations better, and we expect to do that here as well. And if it takes a little bit of time, we’ll do it right, and then we’ll have a very longstanding relationship.

On the acquisition, I just have to comment, like the opportunity set there is enormous. I was literally talking to one of our larger clients today. And he was talking about a transition from like the on-premise solution that we have to cloud solution. And he mentioned they had something like 120 servers that they were like dying to have us take over. So, we think the global nature of a parcel solution is very differentiated in the marketplace. And that’s really the primary reason we really liked that company when we saw it and knowing that we had to deal with some stuff to get to the other side.

So, we have a very unique solution that combines with our really great solution or TMS and global trade and also international shipping via our bookings platform. So, we’re really building what we believe is the world’s best Logistyx execution system. And I couldn’t be more excited about where we are with that.

Operator

The next question is from Fred Lee with Credit Suisse.

Fred Lee

Just one more macro question. I was just wondering if the selling environment deteriorated incrementally this quarter versus Q2?

Michael Farlekas

Yes. I wouldn’t say it’s incrementally better or worse. I think I understood the question of, is it incrementally better or worse, Fred? You took that a little bit. I wouldn’t say it’s incrementally better or worse. I just think it continues to be [Technical Difficulty] uncertainty and how companies deal with that uncertainty.

Certainly in the tech environment, you see it, but you really see it real time every day. And companies certainly starting to taper and starting to say, okay, I’m not going to invest in everything all at once. I think that’s the only thing that I would say has kind of more firm up. The rest of it is the same chop we’ve seen for really three quarters now.

Fred Lee

Got it. And then — and just another question on how competition has been behaving, especially some of the venture backed start-ups that might not have as strong a balance sheet. Are they acting any less rational than they have historically?

Michael Farlekas

Well, when you don’t have to generate a profit, you can do a lot of irrational things in the venture — stays close to kind of — are able to essentially subsidize their business. So, that’s not new, though. This has been the case for a long time, and that’s the market we participate in. So, we don’t see them acting any more or less normally than the way they do. And that’s just part of the market. And we believe we have obviously a more sustainable business model because we generate [Technical Difficulty]

Michael Farlekas

I’m sorry. Fred, you broke up.

Fred Lee

Sorry about that. Just one final question for Marje. Can you hear me? Just one final question for Marje on RPO. I know there’s some acquisition always in there, but the $795 million apples-to-apples, what was that growth year-over-year?

Marje Armstrong

So, the number is — obviously, it’s pro forma for acquisitions. So, when you look at the year-ago number, I think — I don’t know it from the top of my head, but I think it was around $731 million versus the $795 million this quarter, so around 8% growth rate.

Operator

We have reached the end of the question-and-answer session. This concludes today’s conference, and you may disconnect your phone lines at this time. Thank you for your participation.