Q2 2024 E2open Parent Holdings Inc Earnings Call

Participants

Andrew Appel

Dusty Buell; Head of IR; E2open Parent Holdings, Inc.

Gregory Randolph; Chief Commercial Officer; E2open Parent Holdings, Inc.

Marje Armstrong; CFO; E2open Parent Holdings, Inc.

Adam R. Hotchkiss; Business Analyst; Goldman Sachs Group, Inc., Research Division

Chad Michael Bennett; Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division

Mark William Schappel; MD; Loop Capital Markets LLC, Research Division

Taylor Anne McGinnis; Equity Research Analyst for Software; UBS Investment Bank, Research Division

Presentation

Operator

Greetings. Welcome to the E2open Second Quarter Fiscal Year 2024 Earnings Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Dusty Buell. You may begin.

Dusty Buell

Good afternoon, everyone. At this time, I would like to welcome you all to the E2open Fiscal Second Quarter 2024 Earnings Conference Call. I am Dusty Buell, Head of Investor Relations here at E2open. Today's call will include recorded comments from our interim Chief Executive Officer; Andrew Appel, our Chief Financial Officer, Marje Armstrong; and our Chief Commercial Officer, Greg Randolph. Following those comments, we'll open the call for a live Q&A session. A replay of this call will be available on the company's Investor Relations website at investor.e2open.com. Information to access this replay is listed in today's press release, which is also available on our Investor Relations website.
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 third quarter and full year 2024. 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'll 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 at investor.e2open.com.
And with that, we'll begin by turning the call over to our interim CEO, Andrew Appel.

Andrew Appel

Thanks, Dusty. Welcome, everyone, to the E2open Fiscal Second Quarter 2024 Earnings Call. Before Marje and Greg jump into results, I want to take this opportunity to introduce myself. As all of you learned earlier, the Board has appointed me as interim CEO while they conduct a thorough search to identify E2open's next leader. For more than a year, I have served as a member of E2open Advisory Board. And through this work, I have met much of the executive team and have developed a strong understanding of the company's promising growth potential. I am honored that the Board of Directors has placed their trust in me to lead E2open at this important time in its company's history.
I have spent the last 30-plus years of my career as a strategic operator, focused on B2B technology-centric businesses and serving the world's leading corporations on their most complex business challenges. During my 14 years at McKinsey, I advised many of the world's leading companies on both strategy, operations and technology programs. During my 6 years at Aon, where I was the named executive officer, I was the CEO of $2 billion plus divisions, led the operational transformation of the company, and was promoted to be Aon's first ever Chief Operating Officer. During my tenure at Aon, the stock tripled in value.
Following Aon, I served as President and CEO of IRI, now Cercina, where I led a team of dedicated individuals as we transformed IRI from an insights provider to a firm leveraging data, technology and prescriptive analytics. This enabled our clients to deliver consistent growth by leveraging our capabilities into technology-focused big data global company. During this period, revenues nearly tripled and the company's valuation increased significantly.
Over the past 14 months, I've had the privilege of serving as a member of E2open's Advisory Board or is able to interact with management and clients. During that time, I have developed immense respect for the company's people, technology and solutions as well as introduced its capabilities to a number of major organizations that I had relationships with. As I take this new role, I feel very fortunate to have the opportunity to work with Marje, Greg and all the other members of the E2open's strong and experienced leadership team. They are a talented group of individuals, each with a track record of success at both E2open and a variety of other leading companies. They enjoy my strong support as well as the full competence of our Board and I will look to them as an important source of continuing guidance as I dive into all aspects of the business over the coming weeks and months.
Before closing, I want to emphasize that I look forward to meeting the fully to open team our many customers and partners and our investment community and to gathering perspectives and sharing views on how we can best build the company and deliver distinctive products and solutions to clients. I am confident that this company has a very bright future with a committed workforce and an engaged management team that are energized by the progress we could make together.
With that, I will turn the call over to my new friend and our Chief Financial Officer, Marje Armstrong.

Marje Armstrong

Thank you, Andrew. On behalf of all of E2open, I'd like to welcome you to your new role at the company. Andrew's extensive experience in the technology industry, plus its proven expertise and business strategy and innovation, provide a complete set of skills to accelerate our core strategy and improve our business performance. Andrew is very well versed in all aspects of our business, including the many opportunities we have for profitable growth as well as the concrete steps we need to take to realize that potential. We're confident that Andrew will quickly make an impact at E2open.
Importantly, on behalf of the entire company, I want to recognize and thank Michael Farlekas for his many contributions to E2open over the last 8-plus years. Under his leadership, E2open acquired 14 companies in 7 years and built a unique asset, the end-to-end supply chain platform that E2open is today. Michael leaves the company strategically well positioned within the growing supply chain software space with a proven track record of providing mission-critical software to the world's largest company. His hard work and dedication have enabled us to build a strong positioning we have today.
I also want to thank our entire E2open team with the focus they've exhibited and hard work they've done all year long. Our company is in the midst of a strategic transformation with a number of changes happening simultaneously. And in this environment, the contributions of every single member of the E2open team matter greatly. On behalf of the Board of Directors and the management team, I want to extend my sincere gratitude and thanks to all of you. There is a lot of positive momentum and change happening that will become apparent in the coming quarters and years.
Finally, before moving on to our second quarter results, I also wanted to extend sincere gratitude and excitement to our many customers and partners. Just last month, we held Connect 2023, which is our annual customer and partner conference in Orlando, Florida. This year's conference was the largest ever, with attendance up over 30% compared to last year. Over 380 customers and partners participated in the 3-day event, including several of our major system integrators. The conference demonstrated the strength of E2open's core client relationships as well as our customers' excitement about the ongoing investments we're making in our products. The event also highlighted the strength of our partner network, including the growing ecosystem of system integrators. We have already partnered closely with our system integrators on select client wins, and we will continue to build on these relationships to grow our partner-led pipeline and access a new tier of client opportunities.
Turning to the business results. I'll begin with a review of our second fiscal quarter. Then I'll introduce our new Chief Commercial Officer, Greg Randolph. Greg will outline the concrete steps he has already taken to transform our sales organization to create a repeatable and scalable go-to-market motion as well as changes he is making to better realize cross-sell and upsell opportunities within our world-class customer base as well as new [local] wins. After that, I will provide updates to our guidance, and then we'll leave time for your questions at the end of the call.
Let's begin with our second quarter performance. Our subscription revenue was $134.7 million, representing 85% of our total revenue and at the high end of our quarterly guidance. However, the 2.4% year-over-year growth rate we achieved was well below our potential. In particular, the Q2 finish was disappointing from a new bookings perspective for several reasons. First, the account coverage changes, action at the end of Q1 led to a larger than anticipated temporary disruption to our go-to-market motion. And second, we continue to see large deal closing delays as customers overall are more closely scrutinizing spend and taking longer to sign contracts. While customer spending is more of a function of the broader macro environment, go-to-market effectiveness is something we have control over, and Greg will talk more about improvements we're making.
Given most of our new bookings happened near the end of the quarter, the impact of softer bookings on our Q2 top line was limited. However, this will cause our second half revenues to be lower than previously expected. Professional services and other revenue in the fiscal second quarter was $23.8 million, reflecting an organic growth rate of negative 18.2%. These results were below expectations as we saw weaker sales of new unattached professional services projects, lower attached services from new subscription bookings and overall continued weak spending by large customers on ongoing services projects. Greg has already taken action to realign the services business as we are determined to reverse the trajectory of our professional services revenues. However, these changes will likely take several quarters to show results as reflected in our lower services outlook for the year. Total revenue for the fiscal second quarter was $158.5 million, reflecting organic growth of negative 1.4% over the prior year quarter.
Before we move from the topic of top line growth to the rest of the P&L, I want to hand the call over to Greg to outline the concrete steps we're taking to fix our commercial execution issues. We're incredibly pleased to have Greg on board to lead the top go-to-market motion in realizing its full potential.
With that, I'd now like to turn the call over to E2open's Chief Commercial Officer, Greg Randolph.

Gregory Randolph

Thank you, Marje, and good evening, everyone. I have joined the company on August 1 and officially taken over full leadership of the commercial organization on September 1 and I'd like to share some of my initial thoughts on E2open's position in the market and what issues need to be addressed to put the company back on a path to sustainable and accelerating growth rates.
Let me start by emphasizing that I joined E2open because I truly believe that the company has all the key ingredients needed to drive organic growth, including an industry-leading suite of software applications, an impressive customer list of household brands and a large and growing addressable market to serve. Additionally, the network of connected partners that E2open has built is unique in the industry and distinguishes us from our competitors. With our end-to-end platform and extensive network, we are ideally positioned to meet growing market demand for supply chain software solutions.
I also believe that my experience leading the commercial functions at software companies with diverse product portfolios, complex sales cycles and large enterprise clients is a perfect fit for E2open. During my first 2 months with the company, I've had a chance to experience all of these attributes firsthand through numerous meetings with our sales and product teams, through many discussions with customers large and small and through multiple visits to E2open sites. My most important initial observations are twofold. First, the internal focus placed on acquisition integration has led to considerable disruption in the sales organization and our customer base. The most meaningful impacts have been high sales force turnover, combined with significant changes to account coverage. 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 are 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. Product and industry knowledge, customer intimacy and time and seek are critical attributes of a high functioning sales force. And today, E2open is behind the curve in these vital areas. In my view, this disruption in the sales organization has been the primary factor and a top line weakness that E2open is experiencing this year.
Second, the company has not succeeded in developing the level of deep comprehensive customer engagement that is an absolute requirement if you are pursuing a strategy of cross-selling enterprise software to large customers. To a certain extent, the time and seat issue I mentioned earlier is a factor. But beyond that issue, the company has much work to do to develop a deep, consistent level of engagement across our broad base of 600-plus enterprise clients.
Since joining E2open, I've seen examples where the company has become an embedded trusted partner to some of the world's leading brand owners. Deep engagement is the key to cross-selling mission-critical enterprise software to large customers and the wide-space growth we have been able to achieve when we engage deeply with clients is clear evidence of what we can achieve when we make client engagement a top priority. The gap we need to bridge a key to unlocking much higher growth is creating the same depth of engagement across our entire portfolio of enterprise clients. There are multiple best practices around customer engagement, we need to implement at E2open and then execute on consistently across our entire sales organization. Some of the changes we need to make our organizational, others are operational and some cultural. But the goal is clear. We have to turn customer engagement into a top priority. Once we do this, we will be in a much stronger position to drive repeat business and successfully cross-sell our large existing customer base as well as to keep churn at a minimum. The end result we want to achieve and what our investors expect is a much smoother and faster transition from an M&A-focused company to one that drives significant organic growth.
Before handing the call back over to Marje, I want to give you a preview of some of the near-term actions we are taking to immediately improve sales force execution and drive more consistent sales attainment. On the professional services side of our business, where our results have been below expectations, we have realigned the organization to both improve service delivery and drive higher attached and unattached services revenue. Until now, responsibility for service delivery has been split across multiple parts of the business. Accountability for [services] sales was similarly shared rather than being centralized in a dedicated PS sales organization. Under the realignment, we have combined all PS delivery personnel into a single services delivery organization, and we have also created a dedicated PS sales team, all under the leadership of an executive team member was sole responsibility for all aspects of professional services. We are confident that these changes will result in more centralized accountability for service delivery and sales, better engagement with our customers and improve PS revenue performance.
Regarding our broader sales function, we have also taken recent steps to flatten the sales organization, optimized spans of control within it and better align sales leadership roles with key elements of our business while not creating any further account level coverage changes. This move is designed to free up critical sales resources and refocus organizational attention on increasing customer engagement. Within a few weeks, we will be kicking off a major project to upgrade our sales enablement function and materials, including creation of sales playbooks and battle cards, refreshes of sales aids and collateral and implementation of new training and coaching programs. As we proceed in our efforts to build a world-class sales organization, we will put a major focus on our performance management system to make sure that we recruit, develop and retain a high-performing sales team.
In sum, my first 2 months at E2open have been very busy, and they have made me an even bigger believer in the future potential of this company. We understand what is holding our go-to-market performance back and are committed to moving quickly to make changes. Although it will take some time for these changes to have a measurable impact on E2open's top line. But the good news is that many of these are standard playbook items for achieving sales excellence. Our near-term focus will be on what I call being brilliant in the basics, which means putting in place the prerequisites for repeatable and accountable sales execution that will increase customer engagement and drive much higher sales productivity. I've seen this work many times before in my career, and I'm confident that it can work here at E2open.
With that, I'll hand the call back over to Marje.

Marje Armstrong

Thank you, Greg. It is great to see how quickly Greg has come up to speed on the business and dug into all the opportunities for improvement, closely collaborating with other areas of the company to improve our sales execution and drive organic growth. The sales improvements that Greg is driving go hand-in-hand with the renewed emphasis we're placing on transforming our client experience model. Our goal is to make it as easy as possible for customers to work with E2open to incorporate the voice of our customer into everything that we do and to drive deeper levels of customer satisfaction across the board. We started the transformation last year by establishing a new global client experience organization that brought together all our customer service functions into one unified team.
We also hired new experienced leaders at all levels within this organization and empower them to create a customer-centric culture of operational excellence. Since then, we have reorganized our customer support team into subgroups that directly align with our [5] software application suites, channel planning, global trade, logistics and supply. We have rolled out a new structure for our customer success managers assigned to our top accounts, so that our CSMs now have smaller portfolios of key customers. We have put in place new metrics, KPIs and an improved customer survey process to rigorously track our progress towards higher customer satisfaction. And we will support this entire initiative with certification requirements and comprehensive training for all customer-facing service personnel. Over time, we're confident that these changes will enable us to deliver consistent service excellence at every point of customer contact and ensure that our clients become referenceable champions of E2open.
In the coming quarters, we look forward to sharing more with you about how our clients are responding to these important initiatives. We remain committed to investing in our business, customer experience, go-to-market motion and our product, while all staying laser-focused on driving efficiency everywhere we can as evidenced in our continued profitability.
Turning back to our financial results. In the fiscal second quarter of 2024, our gross profit was $109.5 million, reflecting a 2.5% increase on an organic basis. Gross margin was 69.1% in the second quarter compared to 66.5% in the prior year quarter. The year-over-year increase demonstrates the strength of our business model and our ability to maintain strong gross margins even in a period of lower-than-expected growth.
Turning to EBITDA. Our second quarter adjusted EBITDA was $56.1 million compared to $48.3 million in the prior year quarter, an increase of 16.1%. The Second quarter adjusted EBITDA margin was 35.4% compared to EBITDA margin of 30.1% for the prior year quarter. This continued year-over-year growth in adjusted EBITDA reflects approximately $5 million in onetime marketing and SI-related spend during Q2 of last year that did not repeat in the second quarter of FY '24. It also reflects additional run rate cost savings achieved during the second quarter of FY '24 related to headcount, consulting spend and other operating items. As always, we're maintaining our focus on an efficient cost structure and operational discipline in order to ensure strong and sustainable profitability during the current period of weaker top line performance. However, accelerating growth remains our #1 goal, and we'll continue to invest as needed to drive the top line.
Finishing up on profitability. Net loss for the fiscal second quarter of 2024 was $38.6 million. The Q2 net loss included a $17.8 million nonrecurring expense related to an arbitration ruling received during the second quarter. This ruling pertains to a 2014 customer contracts entered into by a predecessor company to BlueJay, which, as a reminder, was approximately 7 years prior to our acquisition of BlueJay in 2021.
Now turning to cash flow. During the fiscal second quarter, we generated $7.7 million of adjusted operating cash flow, and our year-to-date cash flow exclusive of nonrecurring expenses, was $45.1 million. As a reminder, on our Q1 call, we noted that second quarter cash flow would be lower than in the first quarter due to the payment of annual cash bonuses and other seasonal factors. Growth in cash flow continues to be a core objective for our management team as it enables us to continue to fund future organic growth. This completes my remarks on our fiscal Q2 2024 results.
At this point, I'll turn to a discussion of financial guidance. For the fiscal third quarter, we expect subscription revenue to be in the range of $130 million to $133 million. This range represents a growth rate of negative 3.6% to 1.4% as compared to the prior year fiscal third quarter.
Turning to full fiscal year 2024. We're updating our full year guidance, largely based on two factors. First, as noted above, our second quarter had a disappointing finish from a bookings perspective. Several expected deal closings pushed into next quarter, while others have pushed out even further. These delayed deal closings will cause our second half revenues to be below previous expectations, and our guidance now assumes that the lower deal close rates during the second quarter will persist for the balance of the year.
Second, we previously expected churn in FY '24 to be notably first half weighted, with significant improvement in second half. While we still expect second half churn to improve compared to first half, we're now taking a more conservative view on second half churn. This is due to the continuing macro pressure on freight volumes and rates as well as higher churn we're experiencing in our long tail of small customer contracts which is an area that has been impacted significantly by the previously discussed sales account coverage changes.
As Greg articulated, we're making across the board changes to our go-to-market organization to address our clear and fixable top line issues. While we are laser-focused on what we need to do to restart our organic growth engine, it will take several quarters to see the results of the actions we're now taking. Based on the above factors, we're updating our full year guidance as follows. We now expect subscription revenue to be in the range of $530 million to $538 million for FY '24. We expect FY '24 total revenue to be within the range of $625 million to $635 million. We expect FY '24 gross profit margin to be within the range of 68% to 70%. And finally, we expect FY '24 adjusted EBITDA to be within the range of $215 million to $220 million. This range implies an adjusted EBITDA margin of 34% to 35% for FY '24.
Emphasizing the strong importance we place on cash flow generation as a key performance indicator, I would like to provide an update on our cash flow related expectations for the year. In terms of key drivers for FY '24 cash flow, our expectations around full year CapEx have not changed. We still expect it to be approximately 5% of revenue in FY '24 versus 7% of revenue in FY '23, which included M&A-related CapEx. We still plan to drive year-over-year improvements in working capital and expect FY '24 working capital to be a modest use of cash. We still expect net cash interest to be within the range of $95 million to $99 million. As a reminder, net cash interest includes the benefit of interest income on excess cash and also cash receipts on the interest rate callers we executed during Q2, which are currently in the money.
Finally, our expectations for full year onetime cash costs have increased primarily due to previously mentioned $17.8 million arbitration settlement, which we paid in early fiscal Q3 FY '24 and as well as higher severance costs, which we expect to incur by year-end. Overall, we now expect full year FY '24 onetime cash costs to be slightly above the $29 million that we incurred in FY '23. Given the above factors, which include lower EBITDA guidance as well as reduced expectations around end-of-year cash balances, we now expect ending FY '24 net leverage to be approximately 4.3x or below by the end of the fiscal year. Before turning the call over for your questions, I want to conclude by emphasizing my confidence in the growth platform that we have assembled at E2open. This company possesses clear competitive advantages that make us truly unique amongst supply chain software vendors, including our large customer base of name brand clients, our broad array of industry-leading software applications and our unique network of interconnected partners, and we're just getting started with the development of other highly promising growth initiatives including our system integrator strategy. But today, we're far from realizing this growth potential. And it is clear that we need to address our shortfalls around sales execution with a greater degree of urgency. I can assure you that our Board of Directors, our new interim CEO and our entire management team are intensely focused on the steps we need to take to put the company back on a long-term growth path.
That concludes our prepared remarks. Thank you all for joining us today, and we look forward to continuing the dialogue as we move throughout the back half of the year. With that, Andrew, Greg and I are ready to take your questions. Operator, please open up the line and begin the Q&A session.

Question and Answer Session

Operator

(Operator Instructions) And our first question comes from Adam Hotchkiss with Goldman Sachs.

Adam R. Hotchkiss

I guess to start, could you talk a little bit more about what changed at the end of the quarter to drive the bookings weakness fully appreciate the commentary around the deal delays, but are any of these deals being delayed indefinitely? And what do you think is driving the lack of visibility on your part here I guess, how much would you break down how much of the underperformance was macro-driven, right at the end of the quarter versus being related to the internal challenges Greg spoke about.

Marje Armstrong

Adam, this is Marje. Thank you so much for the question. So in terms of the second quarter finish, as I mentioned in the prepared remarks, it was definitely disappointing. I would say it's hard to break down the specific macro impacts versus the internal issues we're working through in terms of sales account changes and just overall broader overhaul that we are undertaking under Greg's leadership for the sales team. In terms of the macro, just to touch on that a little bit, the end markets that we've talked about that have been slower for us, where we have larger exposure, including tech and then transportation and carriers continue to show weakness. So I would say that that's continuing. And I would say the other piece is just our exposure to larger deals, right, so really large deals versus smaller deals. The larger deals continue to get scrutinized. I think what was different for Q2 versus Q1 is that we closed several large deals in Q1 and for Q2, those large deals, more -- both got pushed.
Some of them -- some of the deals that got pushed, we've actually closed already and some of them have pushed a couple of quarters and further out. I would say, overall, our close rates were lower than expected, very disappointing for Q2. And as a result, we've taken a more conservative view for the balance of the year -- and applies those similar close rates. Now nothing fundamentally has changed in terms of those deals still being available for us. But we are now expecting that the changes that Greg is making. We'll take a couple of quarters to show results and hence the change to our view in terms of the second half.

Adam R. Hotchkiss

Okay. Great. That's really helpful. And then I guess, philosophically, and this can be for Andrew, Marje or Greg, do the calculus around the trade-off between growth and profitability change here? I mean this is a company that's operated in the mid-30s percentages from an EBITDA margin perspective for a number of years. Do you think there needs to be an investment cycle that needs to happen to get the sales organization back on track? Or is this just a reorientation that you think can be done without significant incremental costs?

Marje Armstrong

Great question. As you know, our stated investment plan and strategy for this year has been the investment in sales team and the go-to-market motion, bringing Greg on board. We've cut down on marketing spend, for example, that had onetime spikes last year and everywhere else. But we're still committed to investing in our go-to-market motion as we've been clear that, that's the plan for this year. In terms of any incremental investment, we don't think that there's necessarily more dollars than we're already in the current plan needed at this point. But the plan that Greg is evolving is obviously really the focus for the company more broadly and the area where we're investing this year. And quite frankly, we're funding it with just finding efficiencies across the board in other teams. And that's the real focus for us is to also increase sales productivity and that will help the top line while keeping the cost in line.

Operator

The next question comes from Taylor McGinnis with UBS Taylor.

Taylor Anne McGinnis

I want to dive into all the changes that have been made from a leadership perspective. So I'm wondering, can you provide us an update in terms of like where we stand in that evolution. So have you guys made all the changes necessary? Are there still more changes to come like within the org, whether that be more restructuring on the sales front? Just an update in terms of where we stand, that would be helpful.

Marje Armstrong

Yes, absolutely. So obviously, in terms of the sales org changes and leadership changes. I'll let Greg speak to that. But obviously, the biggest change that we made this quarter is bringing in Andrew as the interim CEO. There are no other sort of big changes planned at this point that we can anticipate. However, within the go-to-market organization, Greg will continue to evaluate and make changes. So Greg, maybe you can speak to that.

Gregory Randolph

Yes. Thank you, Marje, and thank you, Taylor, for the question. So yes, we made, as I said in my opening remarks, two primary changes to the commercial organization. One is we centralized the PS, the professional services organization to create much more focus around customer engagement, customer delivery and more repeatability in our services revenue.
And then the second piece on the sales side, we -- as I mentioned, some of the changes that have been made in the past created some gaps in account coverage. So we wanted to make sure that we didn't impact account coverage at all. But there were obvious efficiencies that we could gain through simple flattening of the organization and addressing some span of control issues. The net result is creating a sales organization that is laser-focused on driving ARR growth and serving customers. And so I don't expect significant overarching changes. I think the message that I'm delivering to my team and to our customer base is we're going to laser focus on near-term execution and as I said, being brilliant in the basics.

Taylor Anne McGinnis

Awesome. And then my last question is, so now with subscription revenue decreasing quarter-over-quarter and that also implied in the 3Q guide. Can you just provide a little bit more color on the source of the churn that you're seeing in the business? And when we look at 4Q, it seems like there's going to be -- the guide implies a sequential rebound. So Marje, can you just provide more color on the churn rate that you're embedding in the second half guide versus what you guys are seeing today? And why we should expect to see that rebound in 4Q?

Marje Armstrong

Yes. So in terms of churn, as I mentioned in my prepared remarks, we are taking a more conservative view on the second half churn, although we still expect second half churn to be better than first half. But the continuing pressure on freight volumes, rates and higher churn that we're seeing in the long tail of small customer accounts is really the reason for the uptick. Greg has taken action in a very pointed focus on those smaller accounts with one point of ownership. But again, those changes will likely take some time. And just to give you some color in terms of the long tail. There are some -- there's a variety of reasons for that. Many of those are sort of noncore duplicative products we've acquired through M&A. And we need to do a better job in terms of moving those customers to more modern platforms and the right products with a more tailored go-to-market approach around that. We know and we've identified the issues and we know what we need to do. And Greg is closely partnering with the rest of the organization everywhere from customer service to product, to finance, to take action. And we do expect that to bear fruit, but it's just going to take a little longer, which, again, is the reason really for our more conservative approach to churn.

Operator

The next question comes from Mark Schappel with Loop Capital Markets.

Mark William Schappel

Marje, in your prepared remarks around guidance, you noted the deal is being pushed out in the next quarter and into next year. I was wondering if any of those [slip] deals have been lost to competitors.

Marje Armstrong

Thank you for the question. I would say that we lose deals for a variety of reasons. Many times during this period of sort of macro pressures and budget cuts, a lot of customers ultimately decide to kind of do things in-house and kind of maintain the current ways of doing them. You have to remember that our solutions provide sort of an upgrade for those legacy or in-house products and many times, those decisions are just delayed. There are obviously selected times, we lose to customers as well, but I wouldn't say that anything has notably changed on that front. It continues to be the same mix of mix of different reasons. And again, in terms of the deals that we lose to competition, again, focus on go-to-market and the changes that Greg is making, obviously, will help us [bear] tremendously as well over time.

Mark William Schappel

Okay. And then, Greg, a question for you. I appreciate your deep dive on the sales organization in your prepared remarks. Are you comfortable with the current sales systems in place? And are you comfortable with the current sales capacity with the company.

Gregory Randolph

Yes. Thanks for the question, Mark. Yes, I think, clearly, we have improvements to make to scale up this organization. As you know, this company has been assembled by largely acquisitions. And as a result, the focus tends to be less on building scalable processes and systems to drive long-term repeatable top line growth. And so we are absolutely evaluating every aspect of what it takes to do just that.
And we believe that some of the steps that we're taking near term to begin that process are going to start to show momentum near term. There are certainly things that we should do in terms of discipline around sales execution. A small example, we're literally -- I'm leading a weekly call for 90 minutes to review all of the key strategic deals that we need to deliver in the second half. And so if you think about the overall sales capacity, we have the capacity that we need in place to deliver once we get every single individual delivering at the level that we need them to. So we're laser-focused on sales productivity short term. But I'm convinced that over time, we'll have complete clarity on the exact systems and long-term processes that we need to implement.

Mark William Schappel

Great. And then one final question. In the few months or so that you've been with the company, do you believe that there are any gaps in the product suite in terms of, say, product integration or product architecture, that could be contributing to the difficulty on the cross-sell efforts?

Gregory Randolph

Yes. Great question. Look, I'm -- part of why I joined this company is because we have an amazing platform of capabilities. It's a very broad set of capabilities that really are one of the only platforms that offer our customers end-to-end visibility in their supply chain. And I think part of the challenge that we faced in delivering that value proposition is that we've not done an effective job at equipping our sales organization with the proper messaging and value proposition and tools that they need to deliver that value proposition. So we're laser-focused on that. And I'm convinced -- we just launched at Connect, Marje mentioned our big annual user conference, two compelling new products, one called Connected Planning and the other called Connected Logistics that are incredibly compelling in the marketplace. I'm convinced that we have the products we need to drive top line growth near term.

Operator

The next question comes from Chad Bennett with Craig Hallum.

Chad Michael Bennett

So I don't recall, did you guys, at the start of the year, end of last year, raised prices like most software companies are doing, whether it's inflation related or cost of living or whatever you want to call it? And can you give us a sense for how much you did, if you did?

Marje Armstrong

Yes. Thanks for the question. We have not -- we haven't publicly disclosed specific changes to pricing. But obviously, we did also take price similar to other software companies. We haven't previously quantified the specific numbers.

Chad Michael Bennett

Okay. Have we -- just in terms of asking, I think piggybacking on a prior question about kind of the balancing act between growth reacceleration and in EBITDA and free cash flow generation. So it doesn't sound like, at least for this year. There's incremental sales and marketing go-to-market investment needed. Well, I guess, especially which I'd love to know kind of where or how the $20 million was spent in incremental investment last year. But is it fair to say that's not definitive in terms of the need for incremental investment in the next fiscal year?

Marje Armstrong

Yes. Thanks for the question. So if you recall, last fiscal year, we made pointed investments in our brand relaunch as well as marketing overall. Those were onetime investments as articulated last year. We also did made a lot of SI system integrator related investments to kickstart those relationships. Those were the onetime investments last year. This year, we've paired down those, again, last year's onetime investments. And instead, since the beginning of the year, our stated strategy has been to invest in the go-to-market motion. And currently, again, we are really focused on working within that envelope. There could be slight changes here and there. But really, the focus is increasing the productivity and the approach and all the things that Greg has mentioned throughout the call. In terms of next year, again, we're not providing guidance for fiscal year '25 at this point. But again, along with our new interim CEO and Greg, we're going to be working on the plans, obviously, and starting the preplanning for next year, and we'll make sure to update you as those plans evolve.

Chad Michael Bennett

Okay. One last one for me. So just in terms of looking at the business fresh and changing or restructuring things going forward, whether it's go-to-market or otherwise, just in terms of everything that's on the table. I mean, I think everybody appreciates the fact that you have the broadest supply chain end-to-end platform out there in the market. But I think some of the -- maybe the feedback from salespeople at least we've associated with is -- especially if there's a lot of churn in new salespeople is, do you have too much to sell it? And do all these 14, 15 acquisitions over the last 7, 8 years makes sense to be under the E2 umbrella? And I guess it's some type of monetization potential of these assets on the table, especially considering the leverage on the balance sheet. And I'll jump off.

Marje Armstrong

Yes, great question. I think in many ways, you're exactly right. This is what we're doing as a management team right now, again, partnering between sales, finance and product to really define the focus and investment areas in terms of products and also understanding where are the rationalization opportunities in terms of SKUs, noncore legacy products, are there opportunities to divest some of them et cetera. So this is all the opportunity that we're going to be working through as a team in the next coming years and new months, quite frankly. So this is exactly the opportunity that we're -- we have in front of us, and it's part of the broader post a big wave of M&A integration and rationalization.

Gregory Randolph

Yes. And look, I would add that in my 25-year career of leading enterprise software sales organizations, I had a much broader portfolio of products than what exists here. I think the point you're making is a valid point in that we shouldn't try to approach the market by boiling the ocean. And I think the approach that we've got to peel it to take is a very measured, focused approach in the industries, the use cases and the geographies and markets that we play well in and be super focused on delivering the appropriate value proposition in those segments. And I'm convinced that we can absolutely make that happen with the portfolio [products] that we take to market.

Marje Armstrong

And again, just to round that up, ultimately, the end-to-end supply chain software platform that has been assembled through these acquisitions is ultimately going to be a key competitive advantage for us. And continuing to provide cross-sell opportunities. We just need to execute on those. And that's really the task at hand is to make sure that we have the right people in the right seats with the right product knowledge, an ability to understand the customers, understand the products and really execute this broader strategy and vision for the company.

Operator

Okay. We have no further questions in queue. We have reached the end of the question-and-answer session. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.