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EOPN > SEC Filings for EOPN > Form 10-K on 30-Apr-2013All Recent SEC Filings

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Form 10-K for E2OPEN INC


30-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this Annual Report on Form 10-K. Our fiscal year end is the last day of February. We refer to our fiscal years ended February 28, 2013, February 29, 2012 and February 28, 2013 as fiscal 2013, fiscal 2012 and fiscal 2011.

Overview

We are a leading provider of cloud-based, on-demand software solutions delivered on an integrated platform that enables companies to collaborate with their trading partners to procure, manufacture, sell and distribute products more efficiently. Our software applications allow network participants to input, access and share data and execute business processes across internal operating units and external entities in a secure, real-time and cost-effective manner. We refer to the combination of our software applications delivered on our cloud-based platform, the content contributed by our network participants and our enabling services as the E2open Business Network. The E2open Business Network supports key operational business processes of our customers and their trading partners, including supply chain management, procurement, sales and finance functions. These functions enable our customers to share product information, forecasts, inventory positions, sales orders, purchase orders, manufacturing work orders, quality and environmental data, shipments, invoices and payments with their trading partners.

The accelerating trends of supply chain globalization and outsourced manufacturing and distribution have combined to increase complexity and risk for brand owners while decreasing visibility into their expanding and evolving supply chains and distribution networks. These trends have created a fundamental shift in the way companies source and distribute goods and services. They have led to an ever more complex product and service delivery paradigm which increasingly relies on specialized, globally distributed trading partners to reduce costs.

As trading networks become more complex, companies are increasingly demanding integrated solutions that facilitate not only collaborative inventory management, but also the demand and supply forecasts, procurement systems, order management and analytics required to efficiently coordinate a company's entire business ecosystem. We believe a significant opportunity exists to help companies improve their competitive advantage by delivering the visibility and control once characteristic of vertically integrated companies while retaining the advantages of outsourcing. The ability to navigate modern supply chain complexities and to resolve problems in a timely and collaborative manner, combined with enhanced knowledge of end customer demand, is critical to enabling businesses to better match supply and demand.

Our agreements with customers are typically three to five years in length with annual billings in advance. The annual contract value for each customer agreement is largely related to the size of the customer, the number of solutions the customer has purchased, the number of the customer's unique registered users, and the maturity of our relationship with the customer. Average annual contract value can therefore fluctuate period to period depending upon the size of new customers and the pace at which we up-sell additional solutions and services to existing customers. Additionally, these new and up-sell customer agreements can create significant variability in the aggregate annual contract value of agreements signed in any given fiscal quarter.

As of February 28, 2013, we had 306 customers, of which 76 are what we refer to as Enterprise Customers who purchase both on-demand software solutions and network connectivity solutions. The remaining 230 customers purchase our network connectivity solutions directly. Our customers represent a wide range of industries and include many of the Fortune 500, among them seven of the top ten as designated in the Gartner Supply Chain Top 25. The E2open Business Network is a community comprised of our customers, over 35,000 unique registered


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trading partners and over 108,000 unique registered users. During the year ended February 28, 2013, we retained 91.2% of our Enterprise Customers and the total dollars billed to these customers was over 100% of the dollars billed to the same customers for the prior year. This reflects our ability to both retain and increase the revenue generated from our existing customers. We believe we have yet to significantly penetrate our customer base and have a significant opportunity to up-sell additional solutions to our existing customers. The total number of Enterprise Customers was 43 as of February 28, 2011, and increased 30.2% to 56 as of February 29, 2012 and increased 35.7% to 76 as of February 28, 2013.

On July 25, 2012, we sold 4,687,500 shares of common stock to the public (inclusive of 937,500 shares of common stock sold by selling stockholders). The public offering price of the shares sold in the offering was $15.00 per share. After deducting underwriting discounts and commissions and offering expenses paid by us, the aggregate net proceeds received by us totaled approximately $49.3 million.

We are headquartered in Foster City, California. We continue to expand our operations internationally. We currently generate a portion of our revenue outside the United States, including through our offices in the United Kingdom, Germany, China, France, Sweden, Malaysia and Taiwan. For fiscal 2013, fiscal 2012 and fiscal 2011, the percentage of our revenue generated from customers outside the United States was 36.0%, 38.2% and 36.9%. As part of our growth strategy, we expect the percentage of our revenue generated from customers outside of the United States to continue to increase as we invest in and enter new and emerging markets. In 2011, we grew our sales team in Europe. In fiscal 2012, we opened an office and established a direct sales force and a sales, hosting and distribution alliance with a local partner in China. In fiscal 2013, we opened offices in Paris, France and Stockholm, Sweden, and continued to hire sales personnel in the United States, Europe and China. We intend to make additional investments outside of the United States in order to expand our geographic reach.

Our financial objective is to create sustainable revenue, earnings and cash flow growth over the long term. Consistent with this objective, we intend to continue to invest in the development of our solutions and network. We expect to continue the aggressive expansion of our field sales organization and alliances to market our solutions both in the United States and internationally. We intend to continue making focused investments to upgrade our network infrastructure in order to improve our ability to profitably scale the business. We intend to enable partners to deploy E2open solutions. This will allow E2open to grow deployment service capabilities for customers while maintaining focus as a cloud software products company and may mitigate potential constraints on company growth caused by challenges in scaling our own professional services organization. We may also evaluate acquisitions to further augment our strategies and objectives and will base our evaluation on a number of factors which may include strategic fit, stage of company, price, geography and industry.

We face challenges and risks related to the growth of our business, similar to other software companies, including the general economic environment, aggressive competition and prospective customers electing to postpone purchase decisions or maintain the status quo. We also face challenges and risks that may be unique to our own growth initiatives. We mitigate those risks, in part, by creating a balanced portfolio of growth initiatives while managing such risks to the best of our ability based on our prior experience and operating history. For example, one of our strategies relies upon our entrance into new vertical markets. Through our experience of entering into new markets, such as the Telecommunications, Technology and Consumer Products sectors, we believe we are better prepared to enter into adjacent markets due to this experience. A subsequent strategy involves expanding our target market to include mid-market customers. We believe our understanding of the complexities surrounding our existing customers has prepared us for evaluating and transitioning our solutions to be applicable to mid-market customers. Historically, we have collaborated, and will continue to interact, with our existing customers to define our product roadmap and specific functionalities. Many of our products, which resulted from such collaboration, have been purchased by our customers. For a more detailed analysis of the risks we face, see "Risk Factors."


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Sources of Revenue

Our revenue has grown to $74.9 million for fiscal 2013 from $59.7 million for fiscal 2012 and from $55.5 million for fiscal 2011. We generate our revenue primarily from selling access to our cloud-based platform of on-demand software solutions, which we refer to as subscriptions and support, through our field sales organization and alliance partners. We also generate revenue from professional services by helping our customers deploy our software applications. Our customer contracts typically have a term of three to five years in length and we invoice our customers for subscriptions and support in advance for annual use of our software solutions.

                                              Year Ended February 28 or 29,
                                             2013           2012          2011
         Revenue by type:
         Subscriptions and support        $   43,793      $ 35,816      $ 39,419
         Professional services                31,145        23,871        16,104

         Total                            $   74,938      $ 59,687      $ 55,523


         Percentage of revenue by type:
         Subscriptions and support              58.4 %        60.0 %        71.0 %
         Professional services                  41.6          40.0          29.0

         Total                                 100.0 %       100.0 %       100.0 %

Subscriptions and Support. We offer on-demand software solutions, which enable our customers to have constant access to our solutions without the need to manage and support the software and associated hardware themselves. We house the hardware and software in third-party facilities, and provide our customers with access to the software applications, along with data security and storage, backup, and recovery services. We invoice our customers for subscriptions and support in advance for annual use of our software solutions.

Professional Services. Professional services revenue is derived primarily from fees for enabling services, such as solution consulting, solution deployment and B2B on-boarding, that help our customers deploy our solutions. These services are sold in conjunction with the sale of our on-demand software solutions or on a standalone basis. We provide professional services both on a fixed fee and a time and materials basis, and invoice our customers in advance, monthly, or upon reaching project milestones.

Our future revenue growth will depend on our ability to increase sales of our existing and new on-demand software solutions and services to new and existing customers. Our revenue generally fluctuates, and we expect it to continue to fluctuate, between periods due primarily to timing of sales of our software solutions, revenue recognition requirements and seasonality, among other factors. As a result, transactions that are expected to be recognized in one period may be recognized in a subsequent period, which may materially affect our financial performance in a reporting period.

Key Operating Performance Measures

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

Bookings, Billings and Backlog. We generally recognize subscription and support revenue from our customer agreements ratably over the terms of those agreements. For this reason, a significant portion of our revenue in any period will be from customer agreements signed in prior periods rather than new business activity signed during such period. In order to assess our business performance with metrics that more fully reflect current period business activity, we track bookings, billings and backlog. Bookings represent the full value of customer orders or contracts signed during a reporting period. The value of our bookings is impacted by new


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contracts, renewals, amendments and terminations. New and upsell bookings represent orders from new customers and add-on sales to existing customers. Renewal bookings represent the extension of the term of a contract with an existing customer. Billings represent invoices issued to customers during the period. Backlog represents the cumulative value of bookings existing at the end of the period less the cumulative amount billed to customers. Due to the seasonality of our sales, bookings and backlog fluctuate from quarter to quarter throughout the fiscal year. Total bookings for fiscal 2013 were up 72.3% to $125.1 million for fiscal 2013 from $72.7 million for fiscal 2012. New and upsell bookings were up 37.8% to $70.1 million for fiscal 2013 from $51.0 million for fiscal 2012.

Number of Unique Registered Trading Partners. We define the number of unique registered trading partners as the number of distinct trading partner entities currently connected to the E2open Business Network as of the balance sheet date. We believe the number of unique registered trading partners is a key indicator of the growth of our network and both our and our customers' ability to receive the benefits of the network effects resulting from such growth. Growth in the number of unique registered trading partners depends, in part, on our ability to successfully develop and market our solutions to our existing customers and companies that have not yet become part of our network. In addition to the growth in number of these entities, we view a large, existing network as providing greater incentive and ease for new customers seeking to join if they share existing trading partners already operating on our system.

The number of unique registered trading partners in the E2open Business Network increased to 35,302 as of February 28, 2013 from 26,440 as of February 28, 2011, or by 33.5%. While growth in the number of unique registered trading partners is an important indicator of expected revenue growth, it also informs our management of areas of our business that will require further investment to support such growth.

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Number of Unique Registered Users. We define the number of unique registered users as individuals within our customers' organizations and their trading partners who are currently authorized to use and access our software applications as of a balance sheet date. We view unique registered users as a key indicator of growth and whether we are providing our customers with useful tools and applications, thereby increasing user engagement. Growth in unique registered users will be driven by our business expansion, growth in the number of unique registered trading partners and improvements to features and products available to our customers. The number of unique registered users increased to 108,846 as of February 28, 2013 from 73,377 as of February 28, 2011, or by 48.3%.

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Key Financial Performance Measures

We monitor the key financial metrics set forth below as well as cash and cash
equivalents and available debt capacity, which are discussed in "Liquidity and
Capital Resources," to help us evaluate trends, establish budgets, measure the
effectiveness of our sales and marketing efforts and assess operational
effectiveness and efficiencies.



                                                  Year Ended
                                              February 28 or 29,
                                       2013          2012          2011
               Revenue               $ 74,938      $ 59,687      $ 55,523
               Gross profit          $ 51,626      $ 38,057      $ 36,218
               Gross margin              68.9 %        63.8 %        65.2 %
               Net income (loss)     $   (709 )    $   (225 )    $  6,643
               Adjusted EBITDA (1)   $  3,853      $  2,517      $  9,371
               Operating cash flow   $   (957 )    $   (826 )    $     88
               Free cash flow (2)    $ (2,095 )    $ (2,495 )    $   (697 )

(1) We define Adjusted EBITDA as net income (loss) adjusted for interest and other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation expense. See "Adjusted EBITDA" below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles ("GAAP").

(2) Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures. See "Free Cash Flow" below for more information and for a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Gross Profit and Gross Margin. Gross profit and gross margin have been and will continue to be affected by a variety of factors, including the average sales price of our products, the mix of solutions sold, the mix of revenue between subscriptions and support and professional services, and our level of investment in operating infrastructure. Our gross profit and gross margin in each of the last three fiscal years was $51.6 million, or 68.9%, for fiscal 2013, $38.1 million, or 63.8%, for fiscal 2012, and $36.2 million, or 65.2%, for fiscal 2011. We expect gross profit and gross margin to decline for fiscal 2014 compared to fiscal 2013 as we invest in the enablement of partners to deploy our solutions.

Gross margin on subscriptions and support revenue was 81.1% and gross margin on professional services revenue was 51.7% for fiscal 2013. Gross margin on subscriptions and support revenue was 79.0% and gross margin on professional services revenue was 40.9% for fiscal 2012. Gross margin on subscriptions and support revenue was 80.9% and gross margin on professional services revenue was 26.9% for fiscal 2011.

An increase in the proportion of our total revenue generated by sales of subscriptions and support for our on-demand software applications would increase our overall margins, due to the higher margins on subscriptions and support compared to professional services. Our gross margin may also fluctuate due to the timing of revenue recognition for our on-demand solutions and services, since our cost of revenue is recognized as incurred whereas revenue on certain arrangements with customers is recognized ratably over the contract term.

Costs and Expenses

Cost of Revenue. Total cost of revenue consists of costs related to third party hosting of our equipment and delivery of our software solutions, software license fees, salaries, and benefits and personnel-related expenses included in our operations, professional services, and support departments, as well as allocated facilities, information technology and supporting overhead costs. The cost associated with providing professional services is significantly higher as a percentage of revenue than the cost associated with delivering our on-demand software applications due to the labor intensive nature of providing professional services.


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Our total cost of revenue has declined in the last three fiscal years as a percentage of revenue. We expect the cost of revenue to increase in absolute dollars as we continue to invest in our business. We expect cost of revenue as a percentage of revenue to increase in the near term as we invest in the enablement of partners to deploy our solutions.

Operating Expenses. Operating expenses consist of research and development, sales and marketing, and general and administrative expenses.

Research and Development. Research and development expense consists of salaries, benefits and personnel-related expenses, software development tools, as well as allocated facilities, information technology and supporting overhead costs. We expect to continue to invest in research and development to enhance and expand our existing solutions and develop new solutions and tools for improved deployment and customer support and, consequently, we expect research and development expense to increase in absolute dollars in future periods.

Sales and Marketing. Sales and marketing expense consists of salaries, benefits and personnel-related expenses, including sales commissions, advertising and marketing materials, trade shows and other marketing events, travel and entertainment expenses, as well as an allocation of facilities, information technology and supporting overhead expenses. We intend to continue to invest in sales and marketing to pursue new customers and expand relationships with existing customers. Accordingly, we expect sales and marketing expense to increase in absolute dollars in future periods.

General and Administrative. General and administrative expense consists of salaries, benefits and personnel-related expenses for our finance, accounting, legal, human resources, facilities and information technology employees; third-party professional fees; communication expenses; allocated facilities expenses; and other administrative expenses. We expect that the costs of being a public company, including the costs of compliance with the Sarbanes-Oxley Act of 2002 and other regulations governing public companies, increased directors and officers insurance, and professional and other services, will increase our general and administrative expense in absolute dollars in future periods.

Interest and Other Expense, Net.Interest and other expense, net, consists primarily of interest income on our cash and cash equivalents, interest expense on our credit facilities, notes payable and capital leases, amortization of deferred financing fees, and foreign exchange currency transaction and remeasurement gains and losses.

Provision for Income Taxes. We are subject to income tax in the United States as well as other jurisdictions or countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax. Our effective tax rates differ from the statutory rate due primarily to valuation allowances on our deferred taxes, state taxes based on margin, foreign taxes and tax contingencies.

Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) adjusted for interest and other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation expense. Management believes that the use of Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their reported GAAP results.

Management believes that it is useful to exclude certain non-cash charges, such as depreciation and amortization and stock-based compensation, and non-core operational charges, such as other expense, net from Adjusted EBITDA because 1) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and 2) such expenses can vary significantly between periods as a result of the timing of new stock-based awards, acquisitions or restructurings, as the case may be.

Our Adjusted EBITDA improved to $3.9 million for fiscal 2013 from $2.5 million for fiscal 2012. This growth was a result of an increase in revenue from both new and existing customers. Adjusted EBITDA was $2.5 million in 2012 compared to $9.4 million for fiscal 2011 as we increased our investment in research and development and sales and marketing, to drive future revenue growth, which increased expenses and decreased Adjusted EBITDA.


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The following table presents a reconciliation of Adjusted EBITDA to net income
(loss) for each of the periods indicated:

                                                Year Ended February 28 or 29,
                                               2013            2012         2011
       Reconciliation of Adjusted EBITDA:
       Net income (loss)                    $     (709 )      $  (225 )    $ 6,643
       Interest and other expense, net             437            411          259
       Provision for income taxes                  264             78           33
       Depreciation and amortization             1,616          1,526        1,859
       Stock-based compensation                  2,245            727          577

       Adjusted EBITDA                      $    3,853        $ 2,517      $ 9,371

Free Cash Flow. Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures. Capital expenditures consist of purchases of property, equipment and software. The following table details our calculation (and reconciliation to net cash provided by (used in) operating activities) of free cash flow. Free cash flow is a key measure used in our internal operating reports and allows us to manage the cash available to fund our debt obligations and potential strategic initiatives. Management believes that free cash flow is useful to investors as a supplemental measure to evaluate our business over time. Further, the use of free cash flow provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

We have historically made significant investments in product development and in marketing our solutions, resulting in net use of cash in operating activities since inception. Our free cash flow improved to $(2.1) million for fiscal 2013, compared to $(2.5) million for fiscal 2012, through increased sales, improved management of our spending and working capital management. Our free cash flow for fiscal 2012 was $(2.5) million compared to $(0.7) million for fiscal 2011 due to increased investment in research and development, sales and marketing and deployment capacity. This is consistent with our strategy to expand our product offerings and customer base to help drive future revenue growth.

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