E2open Will Find the Public Market Tough

According to Forrester’s research, the cloud computing market will be worth $241 billion by the year 2020. Forrester projects the market to be worth $55 billion by 2014. Driven by such growth potential, E2open, one of the leading providers of cloud-based, on-demand software solutions for supply chain management, went public.

E2open’s Financials
Foster City, California–based E2open was founded in 2000 to enable organizations to manage their supply chain more efficiently across global trading networks. Over the past few years, supply chain management has changed such that suppliers and customers of products and services are distributed around the world across multiple trading platforms. E2open aims to help businesses manage these trading networks by removing “technology barriers” and delivering a cloud-based, collaborative solution that connects partners, manages processes, and provides for efficient decision making.

E2open believes that its competitive advantage lies in the fact that it operates on a collaborative execution methodology that helps brand owners and manufacturers to leverage their partner communities to manage the supply chain process.

E2open refers to its software applications, content, and enabling services as the E2open Business Network. Since inception, the E2open Business Network has grown to more than 32,000 unique registered trading partners. The company’s customer list includes Boeing, Cisco, Dell, the Gap, GE, Flextronics and IBM, some of which are among the top ten supply chains in the world.

E2open earns revenues through subscription and professional services for its solutions. Revenues grew from $37.7 million in 2009 to $55.5 million in 2011 and $59.7 million in 2012. For the quarter ended May of this year, revenues grew from $11.2 million a year ago to $15.5 million. However, profits are still a rare commodity. After recording a loss of $6.6 million in 2010, 2011 saw profits grow to $6.6 million. Last year, though, net income fell to a loss of $0.2 million.

Prior to listing, E2open had raised $306 million from venture capital investors including Crosspoint Venture Partners, JK&B Capital, Invesco Private Capital and B&M Ventures. It listed on the Nasdaq this July, raising $70.5 million through pricing of 4.7 million shares at $15 each. The company has raised way too much money with not enough ROI.

Recently, it reported second quarter results. E2open ended the quarter with revenues of $22.9 million compared with $16.6 million a year ago. By segment, subscription and support services brought in $11.1 million and professional services contributed the remaining $11.8 million. Adjusted EBITDA of $1.1 million fell compared with $2.8 million a year ago but were an improvement over a loss of $1.4 million in the first quarter this year.

For the current quarter, the company expects revenues of $18.3 million-$18.8 million, with an adjusted EBITDA of $0-$0.5 million. It expects to end the year with revenues of $75.5 million-$76.5 million, with an adjusted EBITDA of a loss of $1.6million to profits of $0.4 million.

E2open’s Growth Opportunity

E2open sees growth in the supply chain executing market. According to Gartner, the markets of supply chain execution software, supply chain planning software, and procurement software are projected to grow annually at 9.2% from $7.6 billion in 2011 to $11.7 billion in 2016. Gartner also expects supply chain management solutions market on offer through a software-as-a-service model to grow annually at 21.1% $1.3 billion in 2011 to $3.4 billion in 2016. E2open plans to tap this market opportunity.

For now, its stock is trading below the list price at $13.14, with a market capitalization of $327.55 million. The stock had reached a high of $14.99 soon after listing in July. Given its history of burning through cash with a relatively slow-growth business, I am not crazy about this company.