ChannelAdvisor Corporation
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Q1 2021 ChannelAdvisor Earnings Conference Call. At this time, all participants are in a listen-only mode. I would now like to turn the conference over to your speaker today, Raiford Garrabrant, Director of Investor Relations. Sir, please go ahead.

[Raiford Garrabrant:]

Thank you, , and good morning. Welcome to ChannelAdvisor’s conference call for the first quarter of 2021. With me on the call today are David Spitz, ChannelAdvisor’s Chief Executive Officer; Beth Segovia, ChannelAdvisor’s Chief Operating Officer; and Rich Cornetta, ChannelAdvisor’s Chief Financial Officer.

[David Spitz:]

[Beth Segovia:]

Thank you, David. And good morning, everyone. I'm so pleased to be able to report that Q1 was another stellar quarter for us continuing positive momentum we saw build across 2020. On the customer retention and expansion side of things, the results remained strong. We mentioned last quarter that churn measured in dollars was the best in seven years and we maintained a similar performance level again this quarter. Turning to expansions our account managers did a terrific job leveraging our understanding of client needs and collaborating with our sales team to drive a record level of new business with existing customers. This is a testament to the numerous ways in which ChannelAdvisor is helping customers achieve their online commerce goals. Expansion and improved retention are important drivers of sustained growth and we're super excited about the trajectory we are on. This improvement is rooted in actions we've taken to improve the customer experience with more initiatives underway.

[Rich Cornetta:]

Thank you, Beth. And good morning everyone. Coming into Q1, we felt optimistic about the quarter and the year ahead, given the momentum we saw in the business in the back half of 2020. And Q1 results exceeded even those optimistic expectations with outstanding financial results, record net bookings performance, and a strong start to implementing the growth investments we spoke about on our last earnings call. Continued strengthened sales, along with excellent customer attention, especially with brands led to the third consecutive quarter of acceleration in subscription revenue growth. And following exceptional GMV and variable revenue performance in Q4, GMV volumes remained strong in Q1 and accelerated in March. As a result of the strength in both subscription and variable revenue, total revenue and adjusted EBITDA both meaningfully exceeded the guidance we provided in February and free cash flow for the quarter was the second highest ever achieved in our history. So let's dig into the numbers. Total Revenue reached $39.2 million in the first quarter of 22% year-over-year. This represents the best year-over-year growth rate since 2015. In fact, Q1 revenue was only slightly lower than Q4, which represents strong performance compared to the sequential declines we typically see falling in a seasonally strong Q4 holiday quarter. Subscription revenue reached another record at $30.3 million for the first quarter, representing an increase of 17% yea-over-year. The rapid acceleration of subscription revenue growth we have experienced over the last year highlights the success we have achieved from the investments we made in our sales organization in late 2019 and early 2020. The tremendous progress we've made with customer expansion and retention in our services organization and the benefits of continued platform innovation. Valuable revenue during the quarter totaled $8.9 million, representing an increase of 43% from the year ago period. This was once again driven by broad based year-on-year growth in GMV as e-commerce spending should continue to strengthen the quarter. And as David mentioned, strong GMV volumes continued into April indicating ongoing strength in e-commerce spending. David provided some financial results earlier specific to our brands customers and I'd also like to highlight the outstanding growth. We have seen subscription revenue from brands which increased 42% year-over-year. In addition, brand subscription revenue represented 42% of our total subscription revenue in Q1, which is up 700 basis points from the prior year period. Lastly, over the previous 12 months, we have increased net brand customer count by 46% and average revenue per brands customer has remained significantly higher than retail customers. As every quarter passes, we continue to emphasize and the financial results have shown how brands are becoming a more significant piece of our business. And we believe that all of this progress, along with the strategic investments we are making in 2021 to support our brands focus provide 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 profitability performance. Adjusted EBITDA increased 41% year-over-year to $9.2 million for the quarter, generating an adjusted EBITDA margin of 23% for Q1. The strategic investments we have made in our product in our services organization, as well as incremental investment in sales began to show in our operating expenses during Q1. And we expect a steady increase in expenses throughout the year, as we plan to continue to invest aggressively in support of our stronger growth outlook. More on this in a moment. And it's important to remind everyone that some of our improved profitability is a result of expense savings, such as for travel and conferences that we would not expect to continue as we emerge from the pandemic. Now turning to the balance sheet. We had another remarkable quarter of cash generation during Q1 with cash and cash equivalents finishing at $82.4 million representing an increase of $10.8 million sequentially and $26 million year- over-year. We also saw deferred revenue increase at the highest rate ever, up $2.6 million sequentially and up $6.1 million a year-over-year, driven by the strong net bookings performance we highlighted earlier. As we have shown for an extended period now even with meaningful investments in our sales organization, as well as the strategic investments we have begun to make in our product and services organization, we have successfully managed our expense profile and continued to achieve profitable growth. However, as our growth outlook improves, we see a number of opportunities to invest further in support of that growth. To that end, in addition to the investment commitments of at least $11 million in 2021 we highlighted last quarter, we plan to aggressively reinvest back into our business most if not all of the incremental revenue we generated in 2021, focusing on areas such as sales, global services and support and ongoing platform investments. Consistent with our message in February, we believe it is advantageous to keep our foot on the gas and expand upon our investment cycle in 2021, with the goal of accelerating product innovation, further improving customer retention and supporting top line growth. Now for our financial outlook. Our overall GMV levels have remained elevated, it remains difficult to forecast GMV and variable revenue with any real precision. Therefore, we are not providing a financial outlook beyond Q2. So for the second quarter of 2021, we are issuing a revenue outlook range of between $39.8 million and $40.2 million and an adjusted EBITDA range of between $7.7 million and $8.1 million. It is important to note that our Q2 outlook reflects subscription revenue growth over the prior year in the upper teens as well as the incremental investments and OpEx I spoke of earlier of at least $5 million for the quarter. We expect the strong growth in subscription revenue to be partially offset by a modest decline in variable revenue in the second quarter due to the difficult comparison to the surge in GMV we had last Q2, although we did see double digit GMB growth this April compared to April 2020. Additionally, while we are not providing full year guidance, considering our investments designed to support continued growth, as well as an expected increase in expenses this year compared to last year such as for travel, we anticipate that adjusted EBITDA for the full year 2021 will likely be lower than the full year 2020. But we are also increasing our estimate for full year subscription revenue growth from low double digits to mid teens given the strong net bookings performance we achieved in Q1 and continued to see in early Q2 with potential upside if that performance continues. In short, our revenue growth has strengthened considerably and our continued investments are designed to maintain this momentum. In closing, Q1 represented another quarter of fantastic execution across all areas of the business, leading to record financial results and a promising outlook for the remainder of 2021 and beyond. Moving forward, we plan to continue to focus on sustained revenue growth and investing strategically in our product and in our people while still maintaining happy margins and strong cash flow. I will not pass the call back to David for some final remarks.

[David Spitz:]

Thanks Rich. 2021 is off to a terrific start for ChannelAdvisor as our strong execution has enabled us to capitalize on the large and under penetrated opportunity we believe is in front of us. The lasting impacts of the COVID pandemic have ushered in a new era of e commerce and strong tailwinds for our business and our strategy of empowering brands, digital transformation has continued to pay off and we remain excited about our growth prospects going forward. And finally, I'd like to close by thanking every one of our employees around the world for stepping up to the challenge and once again delivering exceptional results for the quarter. You often hear me say that this is our time and you've demonstrated that it certainly is. So thank you. And with that operator, we'll open up the call to questions.

[Operator:]

Thank you sir. And our first question comes from the line of Ryan MacDonald from Needham. Your line is open.

[Ryan MacDonald:]

Thanks. Good morning, David, Beth and Rich congrats on a great start to the year. The first question for me it really around those GMV trends that you're talking about, obviously a really impressive first quarter with the acceleration in March but maybe even more the double digits that you're seeing an April. How are you thinking about sort of what that flow could potentially look like in the second quarter here given that that's where you start to hit the tough comps but also realizing now that Amazon appears to be setting a Prime Day potentially for late second quarter? We just love your thinking about how you're approaching the outlook for GMV. Thanks.

[David Spitz:]

Hey Ryan, I will make some qualitative comments and then Rich may have something to add. Yes, so it's as I said in my remarks, we continue to see strong e-commerce volumes, we did see double digit growth in April. Last, if I look back at last year, we started to see GMV accelerate towards the end of last March and then in April, as you know, we had the first round of stimulus last year. And so if I were to sort of characterize the shape of April, I would say the growth was stronger in the early part of April year-on-year because it was sort of pre-stimulus check compared to last year. And then a little bit slower in the back half of April, although still saw some growth. So to me, that's pretty bullish. The fact that towards the end of April, we were still seeing, solid year-over-year growth, I think is a positive indicator. Now, May of last year was actually our strongest, I believe it was our strongest growth month, last year in terms of the pre Q4. And so whether we see that strength continue through this May, is frankly hard to say, right, I mean, there is continued uncertainty around various stimulus programs. There's just a lot of moving pieces in terms of the economy and consumer strength and all of that, but I think I expect that GMV will remain solid. I think it's just a question of how strong. So Rich, I don't know, if you have anything to add to that relates to the guidance.

[Rich Cornetta:]

Sure. So the only thing I'll mention, obviously, Ryan you focused on the fact of how Q2 will be a tough comp, variable revenue last year was up at 88% year-over-year. And the quarters that followed ranged in the 40% range. But we mentioned on the last couple of calls that variability in a given quarter as to the rate of GMV, how the way it converts to revenue, it really does depend on customer mix. So every quarter that passes GMV doesn't absolutely correlate to variable revenue performance. But if you look at the outlook that we put out there, our midpoint about $40 million subscription revenue up in the high teens you would, if you, if you ran the numbers, you would you would generate variable revenue close to $10 million around that range. And that would still represent about a 10%, or roughly a million dollar increase over Q1, and represent nearly $2 million over Q3 of last year. So again, we continue to see growth across subscription revenue, which is where we're focused on and the jump from 8% growth in Q4 to 17% in Q1 really sparked a lot of excitement here at the company.

[David Spitz:]

And Ryan, one thing I'll add to that is that long tail of marketplaces continues to be of increasing importance to us. So as I mentioned in Q1 grew again, at triple digit rates, and as I said, in previous quarters, has started to eclipse or other larger channels and aggregate GMV. So to the extent we see continued strength on that long tail that is a nice tailwind for us. And of course, we're adding significantly to the number of supported marketplaces over the next 12 to 18 months. So that's a really interesting story for us and I think is a nice diversified source of GMV string.

[Ryan MacDonald:]

That's great. That's helpful. And then on my second question is really around the incremental investments planned for the remainder of the year. Clearly, the investments you've made over the past 12 to 18 months have really started to bear fruit really nicely with the strong billing but can you help me understand where you think you can get the extra sort of incremental value in terms of return on that investment whether it's between increasing sales capacity expanding coverage versus maybe some account management ads? Or is this more going to be focused on sort of R&D and innovation spend? Thanks.

[David Spitz:]

Yes. It's a great question. And I would say the answer is all of the above. We would expect to continue to increase sales capacity as we prepare for 2022. There are multiple areas of investments on the post sales side and our services organization because we continue to grow our customer base, we continue to sign large strategic, global brands that they need help and they need help in different areas of the worlds and we think that we can accelerate those plans with those customers by increasing our services capacity. And then of course, last but definitely not least, is on the R&D side. There's just a lot of opportunity for us to continue to innovate and deliver value for customers. So I would say it's really an all of those areas where we see opportunities to invest and maintain the momentum we have got.

[Ryan MacDonald:]

Excellent. Congrats again on a great quarter.

[David Spitz:]

Thank you, Ryan.

[Operator:]

Our next question comes from the line of Zach Cummins from B. Riley. Your line is open.

[Zach Cummins:]

Yes. Hi, good morning. David, Rich and Beth, nice to speak with you and congrats on a strong start to the year. Rich, I just wanted to ask around the subscription growth guidance that you gave for the full year, I mean, we're kind of seeing that sustained high teens growth going into Q2, but just given a full year outlook, it implies a little bit of a deceleration in the second half. So I'm just hoping you could kind of be able to speak to some of the dynamics there that maybe would see a little bit of a slowdown in the second half of the year versus the growth that we're going to see here in the first half.

[Rich Cornetta:]

Sure, sure. It’s a great question. So just keep in mind that our comps get a little bit more difficult in Q3 and Q4 given the fact that we -- all of our investments that we made in late 2019 and early 2020, really started to contribute to subscription revenue. We were flat year over year in Q2 and then we saw a subscription revenue growth of 5% in Q3 and 8% in Q4. So we have a little bit of a comp challenge in Q3 and Q4. However, as we -- we did mention there, there is potential for upside. And as long as we continue to perform, like we have, we're calling right now mid teens for the full year for subscription revenue growth. But there's certainly potential for upside if these investments continue along the successful path that they initially started to present.

[Zach Cummins:]

Understood, and Beth on the services team side, it seems like you've made some strong progress with more of your enterprise level focused support teams. I mean, can you speak to some of the initiatives and maybe some of the early areas of success and where you're really going to be focusing on that as you expand this out to a larger cohort of customers?

[Beth Segovia:]

Sure. Absolutely. Thank you for the questions, Zack. We've focused our first quarter efforts on putting the team in place and getting all of our communications and job roles defined and all of the execution pieces in place and then in late March, we began launching the new level of service to customers. So we have had direct conversations with our customers to share with them the new structure that will be supporting them and to introduce their incremental resources and the response from customers has been really wonderful. It's also been collaborative. Customers are getting very excited about the concept of a solution architect now working with them proactively to optimize the integrations with ChannelAdvisor and look for ways to make that more efficient. And look for additional ways to capitalize on those integrations is just one example. So we're directly collaborating with customers to even iterate on that concept as we deploy and as you mentioned, we will finish deployment as we execute through Q2. So our plan is to onboard the plan set of customers for this year in the next couple of months. So we have additional thoughts around how we can continue to scale the organization as we continue to win additional large brands. So we're planning for the second half for additional investment to continue to scale out this capability, but really strong start to the year and our execution, I couldn't be prouder of our team.

[Zach Cummins:]

Understood. And his final question for you David is just focused around the strength that you're seeing with brands. I'm just curious if there's any one particular area that you can point to for the strength? Is a lot of the growth being driven by expansion into new marketplaces adding different capabilities? Just be curious to hear your insight on that.

[David Spitz:]

Yes Zack, I think it's marketplaces is certainly one of them. The fundamental theme here is that for a number of years now brands have seen digital as transforming the way they reach consumers and just really changing that path to the consumer. And of course, the last year just was a significant catalyst to accelerate those plans as traditional retail will shut down and consumer behavior made a step function change towards digital. So we're really seeing strength in a number of areas. Our shoppable media platform, obviously brand analytics, which we acquired last year, marketplace expansion and even things like digital marketing, helping with things like Amazon advertising or reaching consumers on social media like Instagram. Those are all areas where brands and I would say that where a brand starts their journey with us depends a little bit on where they are in their own digital transformation journey. So there are different capabilities that are more or less relevant depending on it. They're early in that journey or more mid cycle or even late stage. So I'd say it's pretty broad.

[Zach Cummins:]

Great, well thanks for taking my questions and best of luck in the coming quarters.

[David Spitz:]

Thank you, Zack.

[Operator:]

Our next question comes from the line of Jonathan your lines open.

[Unidentified Analyst:]

Hi, good morning, everyone. Nice to speak with you all. I am wondering what kind of churn you're seeing from your retailers? And if you're maybe seeing any elevated levels or normal churn levels.

[David Spitz:]

Yes. Hey Jonathan, this is David. The retail churn has also improved over the course of the last few quarters. And I think that's a combination of some of the investments we've made on the product side and on the services side to better serve them. And the fact that increasingly retailers relied on digital and e-commerce last year, at some of their other business in store, for example was impacted by the pandemic. So in short they're seeing more success with online as well. And so we've seen improvements on the retail side as well.

[Unidentified Analyst:]

Great, thank you so much. And just one more quick one for me. From your product upgrades last week, it seemed like there was a clear focus towards improving the company's support for Walmart. Was there a reason for targeting Walmart for this? And like, do you see stronger results from Walmart from this?

[David Spitz:]

Well, Walmart has been a strategic partner of ours since they launched their marketplace at our show in 2016. So we've worked with them for a long time. We consider them a really-really important channel for our customers and part of the ChannelAdvisor philosophy is we want to have the best and deepest and most capable integrations on the market. So as Walmart has continued to improve and mature the platform and add capabilities to the platform, we're not going to wait to make sure that those are expressed through our capabilities. So it's really just making sure that we keep up with the changes and improvements that a strategic channel partner like Walmart is for us.

[Unidentified Analyst:]

Great, thank you so much. Thanks for taking my call and good luck this quarter.

[David Spitz:]

Thank you.

[Operator:]

There are no further questions at this time. Speakers please continue.

[Raiford Garrabrant:]

Great. Thank you, everyone for joining us today and we look forward to speaking with you again soon.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you all for joining. You may now disconnect.