E2open Parent Holdings: You Could Make Money Here (NYSE:ETWO)

Back in October, we recommended that you buy E2open Parent Holdings, Inc. (NYSE:ETWO) at $5. This trade paid off, returning over 20% in a few weeks if you followed our advice. That is what we do, we find quality, beaten-down names, and profit from their inevitable reversals higher. Now, this company, one that we have called a rare combination of value and growth, is a company that works to assist other companies in maximizing their supply chain efficiency. Shares have pulled back a little bit since then, but the company has now just reported earnings and we would like check back in on the company.

Here is the deal. E2open Parent Holdings, Inc. continued to lose money this past year, and likely will lose some in 2023, but should ramp up in H2 2023. These types of companies, one that is not making real EPS, has seen shares get crushed, let us be realistic. The company is killing it, in terms of expanding operations, and bringing in new customers. We still think E2open Parent Holdings, Inc. will swing to a profit next year overall, but this macro environment is horrible.

Even with a two day rally, the NASDAQ is still getting crushed, and setting new lows each week it seems. However, if you have a medium-term to longer-term horizon, we really like E2open Parent Holdings, Inc., and think an investment will pay off. Shares of ETWO had held up through this, and were up 19% going into this earnings report from our buy call. So what did this earnings report look like? Let us discuss.

Top line growth still explosive

So we want to remind you that not only is E2open Parent Holdings a tech stock but it is a cloud stock too. Why? Well, the company offers 100% cloud-based, supply chain management software. Cloud stocks have been absolutely hammered the last few months, but E2 held up since our buy call. As we discuss the top line, keep in mind that this company has four pieces to its network, including Demand, Supply, Logistics, and Global Trade. Each one generates revenue from either certain software subscriptions and/or specialized professional services. Although everyone is concerned about the cloud, and about the economy, and business spending, in the just-reported quarter, revenue still jumped higher, but saw some signs of slowing down.

However, the revenues were slightly below consensus estimates. Subscription revenue grew 26.1% from the year-ago comparable period to $134.9 million or 81.8% of total revenue. We also will point out this was a nice 3% sequential increase as well. Organic subscription revenue growth was 10.2% on a constant currency basis.

We still really love the growing subscription revenue. Seeing this revenue rise so much is great because it is recurring revenue, not one time revenue. That is a primary reason why a lot of companies have moved away from one-time sales to promoting subscriptions. Overall revenue in Q3 rose 20.5% from last year to $164.9 million which was slightly beneath consensus by $3.1 million. Where we did see some bearish activity was in profit potential.

Profit power is there, and margins expanded, which was a good sign

You know, software as a service (“SaaS”) usually has some pretty strong gross margins. We first liked E2open Parent Holdings, Inc. because it was expanding margins. With revenue up so much, we once again saw a big increase in gross profit. In fact gross profit widened 31.0% from the year-ago period to $84.0 million. That is strong, and was up $7.0 million from Q2. But, adjusted gross profit grew just 6.1% on a constant currency basis to $113.6 million.

What about margins? Well they drive a lot of the results here, and overall, the company saw 51.0% gross margins compared to 46.9% last year, while adjusted gross margin was about flat at 68.9%. This was up 240 basis points from Q2 and up 70 basis points from a year ago. So, while the top line grew, margins were great. The earnings power overall was still solid.

So revenues were up mightily, and gross profit expanded as margins widened. In Q3 here, adjusted EBITDA was up 22.4% to $56.2 million. Positive adjusted EBITDA is great for an innovative tech company. Adjusted EBITDA margin, perhaps not surprisingly was up as well. It came in at 34.1% versus 29.1% last year. Awesome. Now, with that said, E2open Parent Holdings, Inc. crushed earnings expectations on the bottom line this quarter, as the consensus was for a loss of $0.07 per share.

We saw net gains on a GAAP basis and an adjusted basis. earnings per share was a positive $0.02 for GAAP and $0.06 adjusted. So, we are seeing positive earnings now, even if they are small here. We expect the earnings to continue to be stronger and positive as we moved forward quarter after quarter.

And with earnings becoming positive, this puts a floor under the stock, so long as they stay there. On top of that, the balance sheet is strong.

Balance sheet is healthy

Free cash flow was a solid $50.4 million in the quarter, on top of a very strong $40.6 million in Q2. Here in Q3, we saw free cash flow was 89.7% of adjusted EBITDA. Folks, this is quite strong. E2open Parent Holdings, Inc. has a massive $85.7 million in cash on hand as well.

Value and growth metrics

We love that E2open Parent Holdings is a rare combination of value and growth. The value has only gotten better as share prices have retraced. The metrics are attractive for a tech investment, and Seeking Alpha gives a grade of “A-” for valuation, and for growth, it also assigns an “A-” rating. You still just do not see this combination much, especially in innovative tech.

Looking ahead

Here is where we get excited about E2open Parent Holdings, Inc. and the stock. The macro situation stinks. But the company, while seeing a slight reduction in the pace of amazing growth, is still delivering and growing like crazy. Despite the growing inflationary pressures, the Federal Reserve raising rates, pressuring consumers and businesses, E2open Parent Holdings is still forecasting growth, and was earnings-positive. The thing we like here is the real potential for strong future earnings. We think positive earnings are coming. With all of the issues we saw with supply being unable to meet demand, and transport issues galore last year, supply chain management technology providers like E2open are in demand.

Now the Street is concerned that the fiscal year saw a slight reduction in guidance. Great. Let the stock fall and then buy it back. The subscription revenue continues to grow. Ongoing profits are on the way. E2open Parent Holdings, Inc. is forecasting subscription revenue for the year to be in the range of $533 million to $536 million versus prior guidance of $535 million to $543 million, due to an approximate $2 million negative impact from foreign exchange rate fluctuations.

Total revenue will be $668 million to $676 million also being revised due to constant currency issues, a touch lower. While revenue is guided down some, we are bullish in that adjusted gross profit margin will still be 68% to 70%. This is still very strong, while the adjusted EBITDA was reaffirmed to be $217 million to $223 million for the year. On a per share basis, for the year, we think there could be a loss of $0.05 up to a gain of $0.05, depending on where EBITDA and margins land.

Overall, we still rate E2open Parent Holdings, Inc. stock a buy, with a medium- to long-term outlook. ETWO shares are still attractive at $5-$6.