Acquisition of icon-scm
July 31, 2013 08:30 AM ET
Greg Kleiner - IR
Mark Woodward - President and CEO
Peter Maloney - CFO
Brendan Barnicle - Pacific Crest Securities
Richard Davis - Canaccord Genuity
Michael Huang - Needham & Company
Mark Schappel - Benchmark
Greetings and welcome to the announcement for E2open's acquisition of icon-scm. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Kleiner with investor relations. Thank you, Mr. Kleiner, you may now begin.
Thank you, welcome everyone to today’s call where we will be discussing the E2open’s recently announced acquisition of icon-scm. Joining me today to briefly discuss the transaction are Mark Woodward E2open’s President and CEO; and Peter Maloney, E2open's Chief Financial.
The primary purpose of today’s call is to provide you with information regarding this acquisition and not the company’s business performance, we will not be providing any preview or update or taking any questions regarding our second quarter fiscal performance ending August 31st, 2013.
As a reminder, some of our discussion and responses to your questions may contain forward-looking statements. In particular, commentary regarding our product roadmap and the financial impact of the acquisition or forward-looking statements. These statements are subject to risks, uncertainties and assumptions and discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission, should any of these risks or uncertainties materialize or should our assumptions proved to incorrect, actual company results could differ materially from these forward-looking statements.
Finally, before I turn the call over to Mark, please be advised that during today's discussion, we may reference certain unreleased services or features not yet currently available. We cannot guarantee the future timing or availability of these services or features and not to recommend the clients who purchase our services make their purchase decisions based services and features that are currently available.
And with that, let me turn the call over to Mark.
Thanks very much. Hello everyone and thanks for joining us today. I am very excited to announce that we have closed the acquisition of icon-scm, a leading vendor in the supply chain planning and collaboration in software market. With this acquisition we have created a company with the first truly integrated real-time solution for supply chain planning, collaboration and execution. His strategic move will help accelerate our product roadmap, expand our market opportunity and further cement our leadership position in the collaborative planning and execution space.
We hear over and hear the global corporations are struggling to integrate real-time data into the batch planning system, hampering their ability to respond in a timely and accurate fashion to the most current state of their business. We are also recently seeing the planning function migrating out of the four walls of companies and into the network itself, so the overall supply chain planning process can be become more customer-centric and operate based on real-time data
As a result, we have been working for a while now to expand our presence into the planning space based upon the feedback from our customers and partners. Gartner has noted this trend by establishing the new response portion of the overall supply chain planning market to describe the capabilities companies are using to improve their ability to sense and respond to actual events, enabling them to react to changes in a rapid and profitable way. We highlighted a small portion of our vision here on last quarter’s conference call with the release of our rapid resolutions, supply demand workbench. In the icon-scm acquisition accelerates our move into this planning space even further.
More broadly we believe that market forces are driving toward the merger of supply chain planning market and the supply chain execution market the collaboration being the catalyst.
We have all seen historic examples of enterprise software application markets merging to create a much larger combined market and companies, manufacturing's MRP merged with finance to create ERP; sales force automation merged with customer support to create CRM, e-procurement outsourcing combined to create spend management, and many others. We believe the similar market broadening is occurring in the supply chain management today.
We did a comprehensive review of the planning market and found icon-scm to stand out as the best fit for our vision allowing E2open to significantly expand its network planning and response capabilities for our customers. In particular, retracted their proven customer success delivering the rapid planning capabilities that possess unique support for multi-tier planning, integrating real-time supply demand data in complex scenario optimization and thereby providing the ability to rapidly resolve issues based on changing conditions.
As we listened to icon-scm's customers, we heard a lot of the same stories we hear from our customers, improved response times, increased productivity, higher levels of supply chain visibility and a significant return on investment over a short period of time.
From a technology point of view, icon-scm has a robust product operating in the large scale production environment that has similar capability to that they were on a long term product roadmap. When combined with our strong product pipeline, we believe this transaction effectively accelerate our roadmap by at least 24 months. Our product stack is currently broken down into four segments analytic, planning and response, process management, and cloud connectivity and in the second segment planning and response that icon-scm’s new product will fold into as was hope of the combination our product line up in the strategic phase will neatly go from two products to six.
When we take a step back little and tell you bit more about icon-scm in our integration plan, they were found in 1992 our base in Germany and also have U.S. base presence San Jose California. Overall, their vertical footprint is concentrated in high-tech and telecom ranching up more recently in the aerospace and defense and industrial machinery. They currently have more than 20 customers three of which are common customers of ours. The global brands using icon-scm include HP, Avnet, Western Digital, HTC, Sanmina, Radius, Foxconn, JDSU and Pratt & Whitney, among others.
On the partnership side, they had a deep relationship with SAP that would like to spend the moment discussing. SAP has several tiers of partnership the highest of which is solution extension or SolEx. SolEx partners have their product go through the same validation in Q&A process as SAP product and on the SAP price list and sold on their paper. Globally, there are only 20 partners at this level and out of those partners icon-scm was the only supply chain vendor included on this last with SAP distributing the solution as SAP, SCRM or supply chain response management and they have been doing this since November 2010.
The strong validation of both the company and their products as result of the acquisition SAP has stated they plan to discontinue the SolEx partnership but we still continue to support existing customers, so what is this mean E2open? I mentioned earlier the significant new customers and products will get this acquisition, this will broaden our addressable market, allow us to cross sale product into our respective installed basis and further will head in the collaboration planning and execution market, this will also expand our global operations by increased our sale capacity in EMEA and gaining valuable resources across R&D, professional services in sales engineering with extensive supply chain plan and experience.
We plan to retain both icon-scm's offices and complete the integration over the next 90 days. The icon-scm products are currently sold on professional basis but we will immediately be transitioning those to subscription now that the acquisition is complete. From an employment point of view some of their installations are running on-premise by their customers and some currently run on hosted basis. Going forward all new implementations will be handled in a hosted manner and will eventually be run on our network; however, we will continue their voice support for existing customers in the current configuration as long as they keep their maintenance active.
So from a product roadmap let me walk through few details, for the first six months we’ll provide the first-stage update integration while we work on common looking field. All new implantations will be hosted and sold on a subscription basis with the possible exception of few deals currently in the pipeline that Peter will describe in a moment. In early calendar 2014, we will begin implementing the product on a SaaS basis in our network providing common log in integration in our cloud connectivity capabilities.
At this time, we will also begin to offer migration path for existing customers. Over the balance of calendar 2014, we will launch the first fully converged product as version 2 of the Rapid Resolution workbenches. These products will join the other E2open products on the unified platform and architecture with identically usability, scalability, and reliability.
By calendar 2015, the product conversions will be fully completed in addition all customers on coexist conversion will be eligible for upgrades. I hand the call over to Peter, I want to reiterate excitement about this transaction by adding the people, products, customers and relationship icon-scm we’re accelerating our plans to further expand our presence in the collaborative planning market adding to our strength in the collaborative execution segment and leading the market in the merge collaborative planning and execution market.
The combined product operating extends our leadership position this large and grossing market enable us to better serve the evolving needs of the our customer.
I will now turn the call over to Peter.
Thanks Mark, let me get to the details of the transaction at its impact on our company going forward. AS mentioned in the press release, the total consideration for the acquisition is approximately $24 million out of this we’re paying roughly $80 million from our existing cash balances. Additionally approximately 460,000 shares of stock valued at roughly $9 million and assuming about $7 million of that. We will be adding approximately 50 employees as a result of the transaction some of whom were still open physicians. In calendar of 2012, we currently estimate that icon-scm generated revenue of approximately 10 million in US dollars, which was a mix of license maintenance and professional services. Right now we’re working with our auditors to convert their figures from German GAAP to US GAAP and to complete the necessary audits. The full financial details will be disclosed in an 8-K once the process is complete. As a result of the ongoing financial work, we won’t be updating our guidance for Q2 or the balance of the year at this time. However, we will call out the impact of icon-scm when we report our Q2 results, so it is clear how E2open performed against our prior guidance.
In addition, I’d like to provide color on how we see icon-scm impacting our financial profile so there was a base level of understanding. From a top line perspective, let me discuss each of the three revenue components separately. In terms of product revenue, as Mark mentioned earlier, the company had previously sold their offerings on a perpetual license basis. This sales practice will now be converted to a subscription basis as part of E2open with the possible exception of one or two deals that are currently in place in the SAP channel. If these deals cannot be converted to subscription format, we will take them as perpetual deals. If this does occur, we will report a separate line for license revenue. Absent the impact of these particular deals, all future product revenue will flow from our subscriptions and support line as the new offerings will be sold by our sales force in a combined manner going forward.
For maintenance revenue we will begin reporting a third revenue line as we will fully support icon-scm’s existing customer base and as such we’ll continue to collect maintenance revenue from them for these installations as long as they are active or until such time that we are able to convert them to subscription clients. Icon-scm has a backlog of professional services revenue that will flow through our P&L in the same manner that this revenue line is currently treated by E2open. As a side note, we will be forced to right down a portion of icon-scm’s deferred revenue as a result of purchase accounting but we will report the associated revenue in both a GAAP and a non-GAAP format adding back the impacts from the write-down.
In terms of the bottom line impact we will be taking a non-recurring charge associated with the transaction of approximately $1.5 million, a portion of which will be cash related. This figure will be a mix of transaction expenses, balance sheet charges, audit fees and various payments related to severance and contract cancellation. There were also be ongoing charges related to the amortization of intangibles associated with the acquisition. Both of these items will impact our GAAP results but we will exclude their impact from our non-GAAP results.
From the perspective of the ongoing impact to the business, we intent to run the icon-scm segment at roughly breakeven on a non-GAAP basis for the balance of the year so there will be no significant impact to the earnings guidance we previously provided absent the charges I just mentioned. We expect the deal to be slightly accretive in the next fiscal year as the combined offerings ramp in a more meaningful way.
During the Q2 earnings call, we will discuss both the deal’s contribution to the quarter and the expected revenue and profit impact to our guidance for the third quarter and full fiscal year. So overall we were excited to have completed the acquisition of icon-scm, their addition will enable us to accelerate the expansion of our product portfolio, help us to meet the needs of the world’s most sophisticated supply chains. Our combined product footprint broadens our addressable market and reinforces our leadership position in the collaborative planning and execution space.
And with that, we’ll open it up for questions, operator?
At this time, we’ll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of (inaudible) with William Blair. Please proceed with your question.
Thanks for taking my question. Just a couple of them here, first, when I look at icon-scm and I think about the market they’re placing. Just some color into what products are you replacing, is this the old i2 or Manugistics products set that they are partially replacing.
There are some products in the planning space whether it’s a overlap; there is also something’s they do that are very unique. I think that the thing they’re really focus on is that we are taking that firm being a on-premise product like mostly other things in this space, we’re going to be doing this into integrated SaaS offering on top of our network platform which going to make it, which will highly different the product from anything else from the space.
Okay. and then when you look at the companies that are on obviously for a while now and spend out of HP but given the length of the time it have been in market, the revenue run rate seems a little surprising. So, could you help us just understand, was it the sales process or was it evangelical sale that sort of longer sale cycle, what sort of drove that sort of 10 million run rate you suggested for last year.
When you think of the legacy guys space like iTunes menu, the other vendors that are left in this space are all pretty small, the challenges that this company had in particular was, yes, they really made an investment in growing this company and about two years ago, they turned the sales of the product 100% over the SAP which became their only channel, and that actually turned into problem.
My next question is there is when you look at your customers not when you look at your customers, base, how many are SAP customers? And given SAP is now assuming their partnership, what does that means for of the growth and the business there?
It means nothing because if you look at our customer base of our pre-icon, 80 customer of which about 60 of those mainly 55 or 60 our SPA customer, we surly don’t need SPA to sell in the SPA environments. I think, we have selling into the SPA environments is that it is coming out of certification level that most of the products don’t have because it’s been partially kind of co-developed and tested SPA sales force for the past couple of years. The other thing is that there is nothing specific about SPA relative to the importance of the solution.
So, the solutions have been focused on the SPA market and they obviously, we are going to be selling into a much broader market than that.
So it would be applicable to the Oracle set or whatever?
Absolutely, one of the things we do get out of it is there is I think technology they haven’t spoke to data hub which is if you will like information broker or data broker that is the connector if you will from SPA or now we’ll get SPA directly in each orbit. So we actually gain a much better connector into the SPA environment and automatically integrate into that and do much robust data sharing in a much more automotive way. So, that’s kind of one the side benefit of this deal is this SPA integration that we get as a part of it.
Just as a higher level strategic question, as you look at quick response on supply chain which is becoming more and more a key factor here. If the perpetual model that Icon have sort of inhibit that and sort of I’m thinking that the layering of this on SaaS business and into the network further enhances kind of a quick response on the supply chain.
Completely, I mean the thing that they didn’t have was they didn’t have the network in the integrated network based applications that we have and so it was the classic planning to where is batch oriented where we take static data load it in and get response and we have to find the way to communicate the results of that plant that was created, we address all of that, where the data becomes is real-time and we can diagnose these issues and come up with recommendations in real -time and then communicate them out to everybody in the E2open network in real-time. So, yes, it’s a very big difference.
Next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Please proceed with your question.
Brendan Barnicle - Pacific Crest Securities
Mark on the services side, in comment you give us about what you guys were doing for implementation so that’s going to focus for you guys in terms of building out service piece, did they bring anything or it’s just with the term one more thing you’re going to have sort of get focus trained on in and what’s the strategy for doing that.
We could not have had a better situation in that regard in to that, as we are building up our business, we were looking for people that have expertise in doing implementation in this space that we did not have. So, it’s not just part to do work, it’s very specific expertise in the space which in some cases some of the stuff is absolute rocket science and kind of the right people is difficult. So, we were able to instantly pull in a group of people that are doing implementations and have that level of information. They also have existing relationships with a couple of integrators, PWC and Accenture, who are also working with them, who are trained up on these products. So we start relationships with those two integrator firms who already have knowledge of these products and, again, this expertise with these people. It's not a large services business, and we will break that out for you when we list from the Q2 call, but we think it folds in very well with our business and the strategy we have of our services.
Brendan Barnicle - Pacific Crest Securities
Great; and Peter, can you give us that breakdown again of the consideration? I couldn't get it all down.
Sure, so $18 million in cash, $9 million in shares which is approximately 460,000 and then we are assuming about $7 million of that.
Thank you. Our next question comes from the line of Richard Davis with Canaccord; please proceed with your question.
Richard Davis - Canaccord Genuity
So a quick question, how long were you looking at the acquisition? Was the deal competitive? Have you assigned an integration team? And then just broadly with regard to M&A, do you kind of view this as like; A, like this is the first important acquisition, we kind of digest this? And you know there's no obvious answer. But would you make another acquisition soon, or is it more likely to get this under, squared up and then we can step out with however X number of months or quarters away and do something else, possibly?
Sure. Well, we actually started speaking with them in March, and had our first meeting with their team in March. And pretty much in that meeting we spent about half a day with the executive team. We came to the decision that this was a great thing to do and kind of proceed it forward pretty fast. I got these guys to immediately sign a no-shop, and so it kind of once we came up with this idea of how this integrated product line could really revolutionize the market, that’s all that anybody focused on. They did have a ROFR with SAP that we had to deal with and I would say that our timing was just absolute perfect because this all happened between their SAPPHIRE conference and the massive reorganization that they did. Acquisition by SAP had to have the approval of every executive board member and we were just able to basically close this transaction inside their decision window. They couldn’t operate fast enough based on terms of the ROFR and how fast we were ready to move. So that was fortunate for us. It did probably make the deal a little tougher than it needed to be, but we were able to navigate through that successfully. So we are quite happy with that. In terms of the integration, Richard, you know me from my past job. We've bought about 12 or 15 businesses over the course of a couple of years. I think I got pretty good at doing integration and how to plan these things and so we built integration teams, starting in March. And we have been doing the integration work up to this point and we have extremely well-thought-out integration plan already by this point. We just signed this thing about 8:30 or 9 o’clock last night. We already now have made all the employee changes, so everyone who is no longer coming over, or is a transition employee has already been notified. Everybody knows where they are in the organization. We at this very moment are doing all-hands meetings over in Karlsruhe, which is outside of Frankfurt, which is for well all the people out in Germany. The rest of the world, I will do a conference call about mid 9 o’clock. From a product standpoint, we have the product roadmap at a very detailed level, already sketched for the next two years. We are already off and running, running like an integrated company, day one. We are only bringing over 50 people, so it's not a lot. So the actual physical integration is going to be pretty easy. But we think we have it thought out to a very detailed level and a really good team has been working on this, four months. So in terms of future deals, I think we mentioned when we did the IPO that one of the reasons we did this was to get the currency, both the both the cash and the stock, to do deals just like this. And we talked about deals in 10 million to 15 million dollar range. This is right in the middle; it’s a fairway for that. I would say that we’re continuing to look for other opportunities similar to this. I wouldn’t say we are going to be doing anything in the next month or so, but I think we are going to be able to integrate this pretty quickly. And be opportunistic of something comes long in the fairly short term. We will be ready to start the same process again, I think.
Thank you. Our next question comes from the line of Michael Huang with Needham & Company; please proceed with your question.
Michael Huang - Needham & Company
Thanks very much, just a few questions for you guys. First of all, in your view, what does this do to ASPs in the intermediate term? I know it's still early and obviously we are executing here on bringing the pieces together. But how does this change the pricing per customer?
So this is really, Michael, just an execution as to acceleration of the strategy that we've already been talking about, so some of these, these modules be priced between $250,000-500,000 a year (inaudible), that doesn't change we go from having two of those to sell for six, pretty much immediately and so I think it will just gives us more stuff to sell. I don’t think it's take our ASPs from 1 million to a 1.5 million overnight but I think it gives us incremental products to sell into our install base and it could have increased the average price of the initial deals but like we said it is early and we'll see how quickly we sort of both these on into our sales processes. The thing that is nice is that, as I said we've already got a pipeline of business that was going to fulfilled by products that we had in the pipe some of which will be there, which are going to be replaced or transitioned to these new icon products. We have products that are now available 24 months earlier than we had anticipated and we also have a few new products that we didn’t have on our roadmap at all. So, ultimately, it obviously gives us more stuff to sell, we just have to wait and see the impact on actual initial prices. But I think it will result in overall larger fees from our customers over time.
Michael Huang - Needham & Company
Got you, and I guess I just wanted to clarify so, so will these products be re ridden to sit on top of the E2Open network, so what I'm asking is, if you're a prospect in a pipeline now potentially doing a perpetual license or an on premise deal, are you likely to wait for better visibility to kind of what the new product's going to be or do you still go forward and buy now.
We will take the products available today and they should run it on a hosted basis they do this for some of the customers already and we will convert the business model to be subscription fee as opposed to a perpetual fee and then over the next six months we will be doing an integration that will give a common look and feel so it'll feel much more like an integrated platform and within about a year it will be running as an integrated platform. So we have a very clear way, presentations are ready, sales, I think these are done trying to train salespeople today on that messaging about how that transition works, but somebody who is in the pipeline today, let's say who was going to buy from SAP we have a way to sell that to them today, it will be at a hosted model with a subscription license and will show them how that evolves into being integrated into our platform.
Michael Huang - Needham & Company
Last question, I'm not sure if you, did you guys mention what kind of the revenue mix, I know that you're still going through the audit here, but did you kind of mention product versus professional services, how is that split.
We did it at this point like I said, we're still working through the historical audit and they're in German GAAP so we're just not ready to give that at this point. We'll walk through that though in detail on the Q2 call.
Thank you, our next question comes from the line of Mark Schappel with Benchmark; please proceed with your question.
Mark Schappel - Benchmark
Mark, building on one of your earlier questions I was wondering if you could address in a little more details the specific areas of the planning process that this transition, this transaction takes you into, for instance I was wondering if it took into demand planning arena or the S&OP area or say finance scheduling.
Yes, so it doesn't take us directly into demand planning, I mean there's some demand supply function that we have, it doesn't take us directly into demand planning space it does cover a lot of things in S&OP. I don’t have, actually the product presentation is in front of me, so I probably can't give you the detail that you'd like to see right now. But happy to do a follow-up call with you to take you through a complete pitch of all the levels, in the supply chain space. You're the one guy on this call this understands this stuff better than me, so it'll probably be more appropriate for us to take that offline and we can do a deep dive on that if you like.
Thank you, ladies and gentlemen we've come to the end of our allotted time for Q&A, Mr. Woodward I'd like to turn the floor back over to you for closing comments.
I'd just like to thank everyone for attending our early call this morning. We've put a lot of work into this especially the last couple of weeks but quite excited to be where we are, we're excited about the important new company that we believe that we're creating today and we're going to be attending both the Pac Crest and the Canaccord conferences in the week of August 12th and we've got a really full schedule already but I look forward to seeing a number of you there and talk about this more in detail, thanks very much for attending.
This concludes today's teleconference; you may disconnect your lines at this time, thank you for your participation.
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