ChannelAdvisor Corporation
Q2 2021 Earnings Call Transcript

Published: 8 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2021 ChannelAdvisor Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Raiford Garrabrant, Director of Investor Relations. Thank you sir, you may begin.

[Raiford Garrabrant:]

Thank you, April and good morning everyone. Welcome to ChannelAdvisors conference call for the second quarter of 2021. With me on the call today are David Spitz, ChannelAdvisor, Chief Executive Officer; Beth Segovia, ChannelAdvisor, Chief Operating Officer; and Rich Cornetta, ChannelAdvisors, Chief Financial Officer. This morning we issued a press release with details on our second quarter 2021 performance as well as our outlook for the third quarter 2021. This press release can be accessed on the Investor Relations section of our website at ir.channeladvisor.com. In addition, this call is being recorded and a replay will be available after the conclusion of the call. During today's call we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For our further discussion with the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent Form 10-Q, as well as our other filings which are available on the SEC website at SEC.GOV. During the course of today's call we will refer to certain non-GAAP financial measures, including adjusted EBITDA, which excludes depreciation, amortization, income tax expense, interest and stock-based compensation. For 2020 only, adjusted EBITDA excludes transaction costs associated with our July 2020 acquisition of BlueBoard, while for 2021 only adjusted EBITDA excludes the change in fair value of acquisition related contingent consideration. We also refer to the related measure adjusted EBITDA margin, which is calculated as adjusted EBITDA divided by our revenue as well as free cash flow, which is operating cash flows less purchases of equipment and capitalized software development costs. The press release that we issued today includes GAAP to non-GAAP reconciliations for gross profit, gross margin, operating expenses, operating income, operating margin, adjusted EBITDA, non-GAAP net income and free cash flow. We also provide a GAAP to non-GAAP reconciliation schedule in our supplemental financial presentation posted on the Investor Relations section of our website. Finally at times in our prepared comments or responses to analyst questions we may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that let me turn the call over to David.

[David Spitz:]

Thanks, Raiford. July marked our 20th anniversary in business. When our founders Scot and Aris started ChannelAdvisor in 2001, they had a vision that e-commerce would be huge and sellers would need help managing it, and 20 years later that vision is as pure as it's ever been. And so I'd like to thank all of our customers, partners, employees and shareholders for helping us achieve this milestone, even as we look ahead to the next 20 years. Our momentum continued in Q2 as strong execution, GMV growth, our expanding business with brands, and our growth investments combined to drive record quarterly results. I'm particularly pleased to report that subscription revenue growth accelerated for the fourth quarter in a row to 25% year-on-year and marketplace GMV grew double-digits indicating durable trends in our business despite tougher comps now that we're lapping a full year of COVID. Overall revenue and adjusted EBITDA, both exceeded our guidance for the quarter and I'll touch on a few of the highlights to keep us bullish on our longer-term growth prospects. First, we maintain double-digit revenue growth despite more difficult year-on-year comparisons and coupled with continued strong performance in sales and revenue retention, we're increasing our expectation for full-year subscription revenue growth to at least the upper teens. As we've said previously, we've seen growth in subscription revenues as an important indicator of the longer-term underlying strength of our business. Second, our focus on brands continued to pay off and drive a record revenues. In Q2 revenue from brands increased 39% year-on-year, consistent with what we saw in Q1 and subscription revenue grew a whopping 54% year-on-year, the fastest growth rate we have on record. Brands represented 38% of our total revenue for the quarter, which is up 7 points year-on-year and represented 44% of our subscription revenue. We believe that the superior unit economics we enjoy with brands will continue to positively benefit our long-term financial performance as they grow to represent a larger proportion of our customer base. Third, strong demand for our products strengthened in the second quarter, helping us achieve our highest gross bookings ever. This was driven by strong new level activity and record expansions with brands, which continued to represent a substantial majority of our bookings. In addition to our robust sales momentum, we saw year-on-year improvements in retention driven by the efforts of our services team and recent platform enhancements. We expect to see ongoing strength in this area as we plan to continue investing in product innovation, enhancing our services, and growing our brand customer base. Fourth, we've continued to invest heavily in our platform to deliver value and innovation for our customers. As we discussed on our Q4 earnings call in February, we are aggressively expanding our breadth of supported channels globally. At the time we announced that we expected to increase the number of supported marketplaces and channels by nearly 80 by the middle of 2022, and so far we're well ahead of that pace. This matters because this long tail comprising channels like Zalando, Target Plus, Shopify and more over 100 others continue to grow aggregate GMV at a faster rate than our top three marketplaces in the second quarter and was larger than eBay and Walmart for us, second only to Amazon in terms of GMV. So not only does further extend our lead in the market helping us attract more customers, but it's also positive because this fast-growing broad spectrum of channels reduces our sensitivity to slower growing channels like eBay in to a certain extent even Amazon. In short, this diversification is good for our customers and good for us. This even as we lean in and increase our growth investments across sales, services, and product, our financial model has delivered healthy margins and robust cash flow. Adjusted EBITDA margin for the second quarter was 22% and operating cash flow for the quarter increased 19% year-on-year to $9.2 million. With over $90 million of cash on hand, no debt, market leadership, and a large market opportunity in front of us we intend to continue investing with discipline and growth initiatives. I'm also pleased to announce in conjunction with Connect 2021, our annual conference specifically curated to help brands and retailers reach more online shoppers, we will be hosting a virtual Analyst Day on September 16 at 9 o'clock in the morning Eastern Time. The agenda will include presentations from management and a live Q&A session and a press release with registration details will be issued later today. We're excited about this event and hope to see you there. And lastly, I'm very proud to share that we were just announced a winner of the Triangle Business Journal's 2021 Best Places to Work Award. This is particularly rewarding because it's our seventh time winning and reflects how deeply we care about our employee experience. And it's especially sweet to have won this distinction after a year the challenge to all of us, to all of our teammates globally. Thank you. And with that, I'll turn it over to Beth

[Beth Segovia:]

Thank you, David and good morning everyone. I'm so pleased to be able to report that Q2 was another excellent quarter for us maintaining the positive momentum we saw build over the past 12 plus months. As David mentioned, our team achieved our highest gross bookings ever in Q2. We added notable new customers including 3M, Kodak, Reckitt Benckiser, Remy Cointreau and Solomon SaaS and formalize the strategic relationship with TikTok. Our account managers working closely with our sales team did a beautiful job leveraging our understanding of client needs to drive a record level of new business with existing customers like Clorox and Gocandy. This is a testament to the numerous ways in which ChannelAdvisor is helping customers achieve their online commerce goals. In terms of churn, Q2 marked another quarter of year-over-year improvement. Bookings, expansions and improved retention are important drivers of sustained growth and we feel really good about the recent trends. Also in Q2, a brand equity survey in our target segments was completed and showed unaided awareness of ChannelAdvisor up more than 35% since 2017. The same survey also indicated high favorability ratings among respondents familiar with ChannelAdvisor. We feel good about our position in key markets and we'll remain focused on promoting our brand and how we can help brands and retailers succeed online. It's gratifying to see the fruits of our efforts to drive customer success and exciting to know that we have more programs underway to enable further progress. We are staying focused on helping our newest customers onboard effectively and realized their e-commerce objectives. And we've continue to rollout our enterprise level of service deploying the new structure to support three additional cohorts of clients in Q2. With just one cohort remaining we should be fully deployed in Q3. Our success in attracting large global brand customers has created the opportunity to expand our business and cultivate stickier relationships. With this initiative, we are enhancing our ability to serve their needs by making meaningful investments across the services organization, increasing our coverage and depth of engagement. Customer feedback has been very positive and the initial results are better than expected. Let me now share an innovation update regarding new platform capabilities we've recently released. Enabling brands to accelerate their digital transformation and achieve their e-commerce objectives remains our clear priority. As many customers are telling us they'll add channels as fast as we can enable them we shared our plan earlier this year to significantly expand our breadth of supported channels by adding at least 80 additional integrations by mid-2022 compared to where we were at the end of 2020. We continue to move with high velocity in Q2. With the recent additions of more than 20 new integrations ChannelAdvisor now supports over 190 channels globally. New marketplace integration in Zolando in six new markets, Joom in five markets and Rakuten in Japan, and six first party dropship connections with Petco and Chewy in the U.S., Lowe's and Home Depot in Canada, Penny in Germany and Myer in Australia. While this initiative is still in the early stages, customer response has been super encouraging. Our product development is also focused on helping customers elevate their brand presence, optimize their operations and engage online shoppers when, where, and how they shop. To deliver a seamless shopping experience we've expanded our shoppable media offering. In addition to directing purchase ready shoppers to operate towards in retail sites brands using by online can now display retailers offering curbside pickup or in-store delivery. Providing our customers with actionable insights is something ChannelAdvisor is known for and in order to provide full visibility and deeper product intelligence we've launched product tag. This new workflow solution has forms critical business decisions for brands by empowering them to monitor and segment their products through system defined insights such as new arrivals, top sellers and recently sold out product. These new releases are just the latest example of how ChannelAdvisor helped brands improve the consumer shopping experience and increased product visibility to drive online sales. A recent case study available on our website demonstrates how Dynacraft, a leading brand manufacturer of bicycles, scooters, and battery powered ride on Toys increase their sales up to a 100% year-over-year on Walmart.com by leveraging ChannelAdvisor's managed services team and platform capabilities. Dynacraft uses ChannelAdvisor support for Walmart Connect, which provides powerful automation to brands and retailers to help streamline critical task for success, including managing advertising campaigns, scheduling, bidding and achieving product listing optimization. In their words, ChannelAdvisor has always been willing to pivot and shift providing our e-commerce management team with expert insights and guidance to win the sale. Dynacraft is an inspiring example of a brand that response to changing consumer expectations and boldly embrace the digital transformation to succeed in a competitive e-commerce landscape Let me now provide you with an update on our progress as we have increased our strategic focus on diversity, equity, and inclusion. We have prioritized employee awareness and enablement and 70% of our staff has completed unconscious bias training, including 75% of our leaders. In addition employees have led the formation of seven employee resource groups, pulling together employees with common experiences to enable networking, scale and career development. We have modified our approach to recruiting to increase access by more broadly advertising available roles and expanding our relationships with a wider set at colleges and universities. We've assessed our vendor spend with minority-owned businesses and by adding numerous new minority on vendors are on track to increase that spend in 2021. Finally in Q2 we adopted a flexible work policy giving employees the freedom to choose to work remotely, in office, or mix, based on their needs. By allowing employees to decide what works best for them individually ChannelAdvisor has empowered each individual to be their best while also expanding our access and talent pool globally. It's wonderful to see us make great progress here and was really gratifying to see these efforts recognized by employees in their feedback that led to ChannelAdvisor earning the Best Places to Work in 2021 award, as David mentioned. To summarize, in Q2 we continue to build on the progress we made in 2020 and Q1 and we are pushing forward rapidly with new initiatives like our enhanced enterprise level of service and our accelerated marketplace expansion to enable customer success. Based on our execution date combined with getting a fast start on these exciting initiatives for 2021 we believe we are positioned for more good things to come. With that, I'll pass it to Rich now to provide a detailed update on our financial performance. Rich?

[Rich Cornetta:]

Thank you, Beth, and good morning everyone. We are proud to report another quarter of success in the strategic areas of brands acceleration, subscription revenue growth, and investments to drive sustained double-digit revenue growth, healthy margins, and strong cash flow. We entered Q2 knowing that we faced a difficult year-over-year comparison to topline performance, specifically with regards to variable revenue, which increased 88% during the same period a year ago. However, we continue to focus on areas more within our control and after providing an outlook of subscription revenue growth for Q2 in the upper teens on our last earnings call, we're excited to report that we exceeded those expectations with subscription revenue growth of 25% over the prior year quarter. Q2 represented our fourth consecutive quarter of acceleration in subscription revenue growth. And as David mentioned earlier, even more impressive is that quarterly subscription revenue from brands increased 54% year-over-year. The rapid acceleration in subscription revenue growth from brands over the last year highlights the success we have achieved from the investments we made in our sales organization, the tremendous progress we've made with customer expansion and retention in our services organization, and the benefits of continued platform innovation. Overall, total revenue and adjusted EBITDA for the second quarter of 2021 both exceeded the guidance we provided in May. So let me provide a little more color on our results for Q2. Total revenue reached $41.5 million in the second quarter, up 11% year-over-year, despite the challenging comps I mentioned earlier and represents our best quarter ever for revenue. Subscription revenue reached another record at $32 million for the second quarter and variable revenue of $9.5 million was in line with our outlook and up 7% quarter-over-quarter driven by continued elevated GMV levels. As for additional financial highlights specific to our strategic brands cohort, brand subscription revenue of $14.1 million represented 44% of our total subscription revenue in Q2, which is up over 800 basis points from the prior year period. Also over the previous 12 months, we have increased net brands customer count by 45% and average revenue per brands customer has remained significantly higher than retail customers. As we mentioned every quarter brands continue to emerge as a more significant piece of our business and with the strategic investments we are making to attract and retain these customers, we maintain the line of sight to achieving our stated goal of greater than 50% of our total revenue coming from brands by the end of 2022. Moving on to adjusted EBITDA. We finished Q2 at $9.3 million ahead of the high end of our outlook of $8.1 million, generating an adjusted EBITDA margin of 22%. While still maintaining healthy margins, operating expenses have been building steadily in recent periods as we've made strategic investments in our product and in our services organization as well as incremental investments in sales. We expect this trend to continue for the balance of the year as we continue to reinvest back into our business the incremental revenue growth we generate in 2021 with the goal of accelerating product innovation, further improving customer retention, and supporting sustained double-digit top-line growth. Now turning to the balance sheet. We had another solid quarter of cash generation during Q2 with cash and cash equivalents exceeding $90 million and representing an increase of $8 million sequentially and $26.5 million year-over-year. Free cash flow of $15.5 million for the first half of this year with the best first half of our fiscal year in our history. We also saw deferred revenue increase again, up $1.6 million sequentially and up $7.8 million year-over-year, driven by the strong bookings performance we highlighted earlier. Now for our financial outlook for Q3. Consistent with our practice over the last year, we are providing a financial outlook for only the upcoming quarter. So for the third quarter of 2021 we are issuing a revenue outlook range of between $41.3 million and $41.7 million and an adjusted EBITDA range of between $6.8 million and $7.2 million. We target continued strong performance in subscription revenue in Q3 and our outlook reflects growth and at least the upper teens. We also expect OpEx in Q3 to increase at least $5 million over the prior year as we continue to reinvest the incremental revenue growth we have generated in 2021. Additionally, while we are not providing and full-year guidance at this time, considering our investments designed to support continued growth as well as an expected increase in expenses this year compared to last year, we continue to anticipate that adjusted EBITDA for the full year 2021 will likely be modestly lower than the full year 2020. But we're also increasing our estimate for full-year subscription revenue growth from mid-teens to at least the upper teens, given the strong bookings performance we achieved during the first half of 2021 and continue to see in early Q3. In short, our subscription revenue growth has strengthened considerably and our continued investments are designed to maintain this momentum. As David mentioned earlier, we'll be hosting a Virtual Analyst Day on September 16 and we look forward to providing you some additional metrics on our operational performance and financial priorities. In closing, Q2 represented another quarter of solid execution across all areas of our business, leading to record financial results and increased momentum for the back half of 2021 and beyond. Moving forward we plan to continue to focus on sustained double-digit revenue growth and investing strategically in our product to further enable our customers as well as our employees to support those customers, while still maintaining healthy margins and strong cash flow. With that, operator, we'd like now to open the call to questions.

[Operator:]

Your first question comes from Thomas Forte with DA Davidson.

[Thomas Forte:]

First off, congrats on the quarter. Second, I have one question and one follow-up and then I'll get back in the queue because I have bunch more questions. So, David, I think that you have a pretty amazing vantage point at ChannelAdvisor, e-commerce in general and love to hear your thoughts on what's going on. Is the stickiness in categories where consumers were forced to shop online when physical stores closed in the pandemic less than expected and or consumers are just spending more money on travel and less on other categories because they weren't able to spend on travel during the height of the pandemic?

[David Spitz:]

Hey, Tom. Thank you. We saw pretty strong GMV volume and growth despite lapping COVID. Growth was slower on some of the larger channels as you know, some of which have reported and some of which have not. Where we really saw a pretty vibrant growth was in that long tail of marketplaces. So I think it's pretty encouraging that we're actually seeing, I would characterize it is a sort of democratization of the e-commerce and I think that's good and helps I think, boost our value proposition. As far as sort of consumer trends, I think it's as part of the reason we haven't provided full year still right, I mean, we've got things basically reopening and Delta variant has come around and, as you've seen, that's causing people to maybe rethink. Travel or conferences and so I think these things are just super hard to predict. I would say overall spending seems to remain pretty robust but it was a tough comp last year. I mean it was really remarkable how much of a spike we saw June, July last year attributable not just to shut downs, but big stimulus checks and things like that. So I would say, it looks to me like the consumer still looks pretty healthy. It's just company against a bit of a tougher number and we'll see how the rest of the year plays out

[Thomas Forte:]

Excellent. All right. So I really appreciated last quarter when you highlighted something like eight records that you achieved. Can you talk about the records achieved in this quarter?

[David Spitz:]

Yes, well. So number one, topline revenue. It's been a long time since we had a revenue line in Q2 that beat Q4, which is typically our seasonal high. So that was pretty exciting. Gross bookings, I think our another one to look at just indicating continued momentum in our, the demand for our products and performance of our sales team. Where I get super excited is in addition to sort of those headlines is you look at subscription revenue growth accelerating to 25% year-on-year and again the variable revenue is going to be a little bit noisy as we go through this lapping period, but that's subscription revenue growth of 25% is really strong. And then probably last but certainly not least is the acceleration of brand subscription revenue to 54% year-on-year, which as far back as we could look at our data where we book those customer segments out was the fastest. So really, really strong performance with brands which is exactly what we want to see.

[Operator:]

Your next question is from Matt Pfau with William Blair.

[Matt Pfau:]

Thanks for taking my questions and nice quarter. I wanted to ask just about demand for your solutions as the U.S. economy reopened in the quarter. Didn't seem like anything changed, especially considering you had record gross bookings, but just sort of wondering if there was any change in terms of customer conversations or customers coming into the pipeline as the U.S. economy did reopen more in the quarter.

[David Spitz:]

Yes. Thanks, Matt. I think it's a reality at this point that COVID caused a lot of people that had a certain, there were a certain point in their digital transformation to accelerate those plans and that level of urgency and acceleration and acknowledgment that they couldn't continue to have a slow pace digital transformation plan. I think that's permanent. Right. So even as we had a step function increase in GMV volumes, which we expect to moderate now that we're lapping it. I think there was a fundamental shift in the demand profile in our market where brands in particular to realize that the path to the consumer is no longer what it used to be and that they need to accelerate and advance the ball when it comes to the digital channel and how research generates online. So that appetite hasn't diminished, if anything I would say, it's increased just based on what we've seen in our sale back to the…

[Matt Pfau:]

Great. And then I wanted to ask on competition if you're seeing any change there, some of the e-commerce software providers have added more channel management functionality to their platforms. Just wondering if that has any impact on you guys.

[David Spitz:]

I don't expect it to. I think it's a large market that is still really under penetrated. I think there is a rising tide that can lift all boats. I think it's great to see people come into this space. I think it's an acknowledgment that these are functional needs that customers have. ChannelAdvisor leader in the space and so our ability to chart the course and offer a multitude of solutions globally for our customers, I think is highly differentiated and you know at the end of the day, we really focus on our customers and what they need, not so much with what the competition is doing. We certainly keep an eye on things, but we have great partnerships with a number of different partners in the ecosystem. Sometimes some of their offerings overlap some of ours and that's okay. We lead with our product capabilities and customer ultimately can decide what's best for them.

[Matt Pfau:]

Great. Last one for me, just on the commentary around investing some of the upside that you've seen the past couple of quarters back into the business in the back half of this year, maybe just what are the key investment priorities over the remainder of 2021.

[David Spitz:]

Yes, Matt. I think it's a continuation of the themes that we've had this year. So product innovation, services, sales capacity, again we're seeing a strong demand profile out there. We've got a lot of customers asking us to do more things and add more capabilities and so we expect this demand to be pretty durable and so we're investing behind that. And unlike a lot of companies out there we've been very nicely profitable, very nicely cash flow and we've got a great balance sheet, we've got plenty of capacity to make disciplined investments, we're very focused on trying to drive good returns on capital and we make the investment decisions that we do, but we've got a very comfortable profile from which we can make those investments.

[Operator:]

Your next question is from Joshua Reilly with Needham.

[Joshua Reilly:]

Congrats on the strong quarter. Thanks for taking my question. So maybe starting off, how should we think about the impact of the long tail of marketplaces, maybe taking some of the volatility out of the business quarter to quarter when you have events like Amazon Prime Day moving from quarter to quarter as well? And then what was the specific impact of having the Prime Day in the second quarter here?

[David Spitz:]

Hi Joshua, welcome to call. I think there's a couple of things, the long tail phenomenon has been building for a number of years, but it really became exciting, I think towards probably mid-to-end 2019 when we started to see it grow really rapidly and start to rival the size and aggregate of some of our major marketplaces. So just to refresh everybody. We said this before, our top three marketplaces are Amazon, eBay and Walmart and then that long tail. And so, now that long tail is bigger than eBay and Walmart and has been growing at a really, really rapid clip several times faster than even Amazon. So it represents really vibrant ecosystem of global channels from Poland, to New Zealand, to you name the country. And as we have these channels that becomes an attractive for specific customers. Right, maybe it's an apparel brand in Germany that wants to sell on Zalando and then eventually expand its footprint to other channels. So this has been really good thing for us and I think removes a little bit of that overhang that sometimes people say like, what if Amazon ends up owning everything or if eBay is slowing down, how much does that impact you guys. So seen that long tail become bigger and continue its high rate of growth is pretty exciting and it's a great differentiator for us. To your Prime Day question, I wouldn't say it has a huge impact. I mean, it's a couple of days. We definitely see GMV volumes increase when there is Prime Day. But when you take the fact that there is a degree of correlation, but not complete correlation to in GMV and variable revenue and how that flows, it's typically talking two days out of a 90-day quarter. We see the bumper on our GMV charts but I don't think it has a huge effect on our revenue. So we don't spend a lot of time thinking about it. We spend more time thinking about just making sure that everything runs smoothly for our customers and we do thinking about what the financial ramifications are.

[Joshua Reilly:]

Okay, great. And then it looks like the gross margin compression year-over-year was a bit above what we had modeled in the quarter. What's driving that?

[David Spitz:]

Yes. So as we've indicated, we're making investments in a few different areas, part of that includes our implementation team, customer support, as we see rapid growth in our customer base and anticipate that there'll be continued strong demand, we want to make sure that we're investing in front of that to make sure that our teams have of the right capacity to give the white glove service that our customers come to expect from ChannelAdvisor.

[Rich Cornetta:]

Yes. And, Josh, one other thing that I'll add there is regards to the year-over-year comparison. If you recall last year the top line, much of top line growth last year was driven by variable revenue, which is essentially flows directly to the bottom to gross margin. So that's why you'd see some compression year-over-year.

[Joshua Reilly:]

Okay, great, and then I'll just throw in one more quick one here. The brand customer count being up 45% year-over-year, how much of that would you attribute to the, in some of the incentives that you've added to the sales organization to when these customers versus just natural demand? Thank you.

[David Spitz:]

Yes, Josh. It's hard to say with any real precision. I think probably a big chunk of it is just organic market demand that we're seeing. That's brands are where the action is and that's the customer segment that is primarily been the one that woken up and said, wow, we really need to accelerate our digital plans, but of course it doesn't hurt that we now have a commission structure that motivates our sales team to focus on brands. So I'm sure that has some effect on it.

[Operator:]

Your next question is from Zach Cummins with B. Riley Securities.

[Zach Cummins:]

Thanks for taking my questions and congrats on the strong quarter. I guess, David just got another record gross bookings performance. I mean, can you just give us a little bit of a sense of kind of the mix of new logos versus expansions and kind of what percentage of that came from brands?

[David Spitz:]

Yes, a pretty heavy percentage overall from brands. I don't have the specific number in front of me, but it's probably in the realm of two-thirds, maybe a little bit higher for brands overall. I would say, Q2 was a little heavier on the expand side of the equation, than what we've seen in previous quarters. And I think it speaks to a lot of brand customers we signed over the last year and maybe we're standing something up and getting it off the ground and gotten past Q4, we're now in the mode of saying, okay, you guys did a great job standing us up on two or three different marketplaces, now we have to put our foot on the gas pedal and expand to 10 more or maybe it's a country expansion or product line expansion. So we saw a burst of expansion activity in Q2 that in a typical quarter we'd see it fairly balanced between new logos and expansions, about 50 50. I don't have the specific breakdown, to be honest on this call, but it was, there was, I would say incremental weighting towards the expansion side of the equation. And by the way, I would expect to see that expansion proportion probably organically climb over time as more and more of our customer base is brands. There's so much opportunity to expand with them. Our estimates have been that we think we're probably maybe 10% to 15% dollar penetrated in our brand customer base. So as a bigger proportion of our customers and revenue comes from brands, I think there'll be a sort of macro growth in that expansion opportunity over time.

[Zach Cummins:]

Understood. That's helpful. And just in terms of your sales capacity, I mean, just given the demand you're seeing in the environment. How are you feeling about the overall sales last year as you have right now and what are your plans to continue to add to that team as we move forward in the coming quarters?

[David Spitz:]

Yes, so as you can imagine we're in the thick of 2022 planning right now, at the very least you would expect some degree of incremental sales capacity adds to maintain the bookings growth and momentum that we've seen. But I would say that we're also evaluating some additional incremental investments to help us continue to succeed with brands as well, both in capacity and, what I would call, peripheral investments, be it sales engineering and functions like that. So, we're looking at that don't have anything obviously specific to say about 2022 at this point, but at least incremental growth in line with revenue growth would be my expectation and in evaluating whether it makes sense to do a little bit more than that.

[Zach Cummins:]

Got it. That's helpful and then Rich, just on the Q3 guidance. I mean, can you just unpack some of the assumptions there for Q3. I believe you guided to high-teen subscription revenue growth and I'm just curious of what are the GMV trends assumptions that you're making in the coming months for that variable revenue line?

[Rich Cornetta:]

Sure. Yes, so in developing the guidance, we expect continued GMV momentum similar that we've seen over the last couple of quarters. Again focus more on subscription revenue growth we did mention at least upper teens. And I just want to remind everyone as far as we move throughout the second half of 2021, the comps get a little bit more challenging in subscription revenue growth. We had pretty much flat in Q2 of last year, bumping to 5% in Q3, and then 8% in Q4. So coming off of 25% growth in Q2 and still committing to at least upper teens in Q3. I'm excited about that. And then as far as variable revenue, we're expecting similar type results from Q2, just given, if you were to use the midpoint of the guidance that we provided. But again continued strong momentum in GMV driving top line growth.

[Zach Cummins:]

Great, well thanks for taking my questions and congrats again on the strong quarter.

[David Spitz:]

Thank you, Zach.

[Operator:]

Your next question is from Jonathan Rowe with Battle Road Research.

[Jonathan Rowe:]

Thanks for taking my question. So I know your focus is on brands growth but do you see any potential to improve the retailer revenue, anything growth from this segment?

[David Spitz:]

Yes, I think it's possible, I think we saw some modest growth in that customer segment last year, obviously helped by COVID. I look at our retail customer segment is a more mature business that generates great cash flows and allows us to invest, allow us to move capital into our business, but I see that as a mature business that is really more in harvest mode, and the growth engine for our Channel Advisor's brands

[Jonathan Rowe:]

So, just one more. So I know you mentioned you're really strong balance sheet. You're looking at potential strong investments or acquisitions. But like, is there any focus potentially on specific investment or acquisition that you may be looking for segment or type of thing that you'd be looking at for that?

[David Spitz:]

Well, if I had one I probably wouldn't disclose on the call, but -- look, I would say we're always giving thought to capital allocation overall as a concept and thinking about what is the right thing to do with our cash, be it organic investments, inorganic, et cetera. We have been somewhat acquisitive over the years, typically smaller acquisitions that are been a more tuck-in in nature and typically focused on enhancing our spending the capabilities of our platform. There's certainly no shortage of inbound calls we get. I think markets are a little frothy right now in terms of valuation and what people expect in terms of price given where certain companies are. So we tend to be financially disciplined and don't necessarily bite on things like that. But I do think there are interesting opportunities again, whether it's platform expansion, expanding our platform capabilities, potentially geographic expansion and you know, if the right thing comes along at the right time with a reasonable price, which is what we experienced last year with our BlueBoard acquisition, then it's something that we would look at. But I would also say that we tend to be financially conservative. We like having a strong balance sheet and we run everything we do, whether it's an acquisition or investments that we're making organically through a pretty rigorous IR process to try to make sure that we have reasonable expectations for what we're going to generate in terms of return on invested capital. So no specific comments obviously in terms of acquisition targets, but we're always interested and always looking at things that could be of interest to us

[Rich Cornetta:]

And Jonathan, this is Rich. I just want to jump in and again encourage the listeners to attend our Analyst Day presentation on September 16. We'll certainly expand a little bit more on our capital allocation framework and financial priorities.

[Operator:]

We have a follow-up question from Thomas Forte with DA Davidson.

[Thomas Forte:]

Last few from me. Thank you for taking them. So, David, you touched on this before, but can you talk about the sales and margin impact of a $1 of GMV from Amazon versus a $1 of GMV from another marketplace for ChannelAdvisor?

[David Spitz:]

Yes, it's hard to say that with any particular specificity because so much of it depends on the customers that are making up the mix. Right, so we have a lot of new customers signing up for that long tail of marketplaces in aggregate they may be below their GMV thresholds and so, while they may be growing GMV they are still in their subscription kind of block if you will. So, but what I would say is hypothetically at a high level, we enjoy now relationships with a large variety of channels and over the last few years and it's been a particular focus of ours on our partnership team, many, in fact, I would say most of those channels come to us and are interested in working with us to get our high quality suppliers selling on their marketplace and often that comes with economic arrangements that benefit ChannelAdvisor. So it could be subscription fees, it could be variable fees that are tied to volume growth. So I guess, you could say that all else being equal $1 dollar GMV coming out of a long tail of marketplaces is probably incrementally more profitable for us than on Amazon. But I don't spend cycles thinking about. We don't really control how consumer shop and where they shop and where the GMV flows. So I don't spend a lot of time thinking about, can we pull some level or another to drive VNB somewhere we're not. Our main mission is to integrate as many channels as possible, give our customers access to as many consumers as possible, and wherever those consumer shop, trying to make sure we're creating value for our customers by making that easier for them.

[Thomas Forte:]

Excellent. So my last question and you touched on this a little before but I would appreciate, David, your high level thoughts. There is a lot of antitrust and regulatory scrutiny right now in e-commerce and big tech in general. And so, any high-level thoughts and potential implications for ChannelAdvisor?

[David Spitz:]

Well that's certainly the third rail topic. So I won't, Tom, obviously speak to any specific companies. They are much more qualified than I am to opine on any draws but I guess having been in the technology industry my entire career and studied everything from IBM in the '60s, to the Microsoft in the '90s and others, these are very, very long term battles that play out over typically a decade or more. And so, I don't expect that there will be any kind of like sudden or dramatic change in the landscape in any timeframe that is something that I'm going to spend a whole lot of time thinking about. To the extent that there is a more aggressive posture by governments around the world focused on whether it's splitting up or somehow impeding the growth of larger tech players. I suppose that might accelerate some of the diversification that we talked about on the long tail and that's I guess probably a net positive for us because the more channels there are, the more there is to manage. But again, I think those, if you look at history, those are decade plus dynamics that play out over a pretty long timeframe. And so we don't spend cycles thinking about how we plan contingencies on that front.

[Operator:]

There are no further questions at this time. I will now pass it back over to Raiford for closing remarks.

[Raiford Garrabrant:]

Thank you everyone for joining us today. We look forward to speaking with you again soon.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.