ChannelAdvisor Corporation
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter ChannelAdvisor Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to Garo Toomajanian, Investor Relations. You may begin.

[Garo Toomajanian:]

Good afternoon, and welcome to ChannelAdvisor’s conference call for the first quarter of 2018. My name is Garo Toomajanian, and with me on the call today are David Spitz, ChannelAdvisor’s Chief Executive Officer; and Mark Cook, ChannelAdvisor’s Chief Financial Officer. This morning we issued a press release with details on our first quarter performance as well as our outlook for the second quarter and full year 2018. 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 a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent Form 10-K or Form 10-Q as well as our other filings, which are available on the SEC website at www.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, stock-based compensation expense and a one-time charge related to sales tax obligations. A press release that we issued today includes the GAAP to non-GAAP reconciliation for gross profit, gross margin, operating expenses, operating loss, operating margin, adjusted EBITDA, non-GAAP net loss and free cash flow. We also provide a GAAP to non-GAAP reconciliation schedule on the investor relations section of our website at ir.generaladvisor.com. Finally, at times in our prepared comments or responses to your 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 for his prepared remarks. David?

[David Spitz:]

Thank you, Garo. Our first quarter results reflected solid execution against plan as we previewed in our preliminary results a few weeks ago, strengthened GMV in particular on Amazon and eBay translation to strong variable revenue performance during the quarter. Continued adoption of key features like our Algorithmic Repricer helped our customers compete more effectively and win more business, while we help them drive more efficiency in their operations, for example, with advanced demand forecasting and fulfillment optimization. In our mission to connect and optimize the world’s commerce, we continue to innovate on behalf of our customers and our first quarter results highlight the value we’re providing to them. I was also pleased with the performance of our sales team in the first quarter. Coming off a strong fourth quarter, the team kept its momentum going with another strong show in the first quarter and yet still managed to start the second quarter with a record pipeline. So the momentum we’ve been building over the last couple of quarters is encouraging. We also saw continued gains in sales rep productivity, as well as increased contribution from our partnerships and indirect sales efforts which you may recall was a strategic initiative we initiated last July. We believe these two factors will drive improved long term efficiency in our go-to-market strategy and that this increased leverage will allow us to continue investing in growth initiatives, while driving towards improving profitability going forward. We still have work to do improve revenue retention which remains a key focus area for me. Under our VP of Global Services, Beth Segovia, the team has made a number of structural and process changes since the beginning of the year that I expect will begin to having a positive impact in the second half. Additionally, we’re working on a key initiative to improve what we call, time to value, meaning improving the ease of use of our platform so that customers can get going faster and see value more quickly after signing up with us. For example, we rolled out a dramatically faster launch process for new customers who are already using market places that can cut launch times for weeks to days. Additionally, while we are really pleased with the GMV and variable revenue performance we saw in Q1, these metrics are difficult to predict and as such we are inherently cautious about counting on that kind of outperformance going forward. So as you will hear from Mark in a minute and consistent with our approach to guidance earlier this year, we continue to forecast variable revenue prudently to the rest of the year especially in Q4. Having said that, I will share that through April we have seen continued strength in GMV, so this is not meant to say there are any current weakness we’re seeing. But again, we feel it’s appropriate to be cautious about projecting that kind of performance in the future results of this kind. With that commentary as a caveat, I thought I’d share a few interest in GMV data points that help drive our variable revenue performance in Q1. First, we continue to see an acceleration in Amazon GMV in Q1, with Amazon GMV growing the fastest year-on-year in the quarter since the first quarter of 2015 three years ago. We also saw a continued strength in eBay, where we continue to collaborate with them on seller growth and feature adoption through our strategic partnership. Walmart which underperformed relative to our expectations in Q4 seems to have stabilized over the course of the first quarter as well. Interestingly, beyond Amazon, eBay and Walmart, our growing network of 100 plus market places has contributed to what is now a significant and fast growing portion of our GMV. And those market places in aggregate now drive substantially more GMV than Walmart for us, making that long tail our number three market place by aggregate GMV and interestingly that long tail of market place GMV grew in aggregate faster in Q1 and even Amazon on a year-over-year basis. So while none of our market place partners match the scale of Amazon or eBay today, it is notable that the rapid expansion of our portfolio supported market places has really started to drive the sizeable GMV and variable revenue stream for us, differentiating our platform and opening up new revenue streams for our customers. Also contributing to our revenue performance in the first quarter was digital marketing which grew 4% year-over-year, our first quarter of year-over-year growth in digital marketing since the fourth quarter of 2015. Some of this is due to the anniversary of a tough year-ago first quarter when we lost a large departmental store customer, but part of it is also driven by the growth of our Amazon Marketing Servicing or AMS business, where we are now working with numerous brands to leverage Amazon more holistically. Digital marketing is a lumpier business, so I can’t promise that it will contribute to growth for the whole year, but its growth in the first quarter is encouraging. I’m especially pleased with the number of brands we signed AMS in the last year, since AMS is rapidly becoming table stakes for selling on Amazon and aligned with our strategic focus on first party and brands. We hosted our annual catalyst event in the US a few weeks ago, and our catalyst Europe event just yesterday in London. We made a number of product announcements at the show, details of which are available on the press release section of our website. I’m particularly pleased with the continued expansion of our network. We’re up to 30 integrated drop-ship retailers and continue to expand our market place support. And the years since catalyst 2017, we added support for 17 additional market places, bringing our global total as of last month to 107 including house and google shopping actions. We already have the most robust network with marketplaces in the world, and as we grow it, we continue to track sellers to our platform and as we add net quality sellers to our network, we also attract new market places. This virtuous cycle is a strong network effect that we believe continues to add value to our network of selling channels. Beyond platform enhancement though, what I wanted to touch on during this call was the strategic partnership we announced at Catalyst, because I think they represent a significant opportunity for us. These strategic partnerships are a direct result of our initiative to drive more business through our ecosystem of partners. We announced a number of strategic partnerships especially in the logistics and fulfillment areas. You may recall that the identified logistics is a key force shaping the ecommerce landscape, and a critical aspect of any ecommerce operation. So we’ve been focused on adding value to our platform to help our sellers keep up with rise in consumer expectation of fast fulfillment in logistics while also being sufficient as possible. A couple of years ago it was up to our customers to take orders from our platform and figure out how to fulfill and ship them. This frequently required attaching other software to our platform which added cost and complexity for our customers. Today, we offer native shipping integrations with the major US carriers and order orchestration through our acquisition of HubLogix, meaning our customers can now implement advanced fulfillment and shipping strategies completely within our platform, simplifying their operations and helping them drive more efficiency in their fulfillment and logistics operations. Adding to these capabilities of our strategic partnerships we recently announced with FedEx, UPS, DHL, Pitney Bowes, XPO Logistics and several other logistics partners. Although each of these partnerships has unique characteristics, they generally share common themes. First, everyone here moves packages for a living and seeking ways to help their customer’s better capture ecommerce growth and ChannelAdvisor is the natural choice as a global partner to offer value-added solutions to their customers. Second, these partnerships expose us to potential revenue streams we haven’t had before, such as revenue shares or per order fees on package shipments as well as referral and reseller programs. Our customers’ processed over 200 million order on our platform last year and our native integrations now provide us the opportunity to influence how our customer shift and through these strategic partnerships our ability to begin capturing economic value from those orders represents a significant opportunity for us. At this early stage, it’s difficult for us to access the timing and magnitude of these revenue opportunities. So we’re not incorporating them in our forecast at this point, but we believe they represent a meaningful revenue opportunity for us. So with a solid first quarter behind us and new opportunities to grow our business, while improving profitability, we’re feeling pretty good about the business. And with that, I’m going to turn the call over to Mark for our financial update. Mark?

[Mark Cook:]

Thank you, David. I want to provide some additional color on our first quarter financial performance as well as our guidance for the second quarter and full year 2018. Both our revenue and adjusted EBITDA came in above the guidance range we provided in February, and we also (inaudible) with the preliminary results we announced a few weeks ago. I would like to remind everyone that as previously indicated, we adopted the new revenue recognition accounting standard, ASC 606 in the first quarter 2018 on a modified retrospective basis, meaning, that we did not restate our 2017 results. More information regarding the financial statement impact of adopting ASC 606 maybe found within our SEC filings including our Form 10-Q. The estimated impact of ASC 606 has been considered in previous guidance for 2018. Revenue in the first quarter was 31.4 million, an increase of 11% in the first quarter of 2017, and above the top end of our guidance. Fixed subscription revenue of 24 million increased 8% from the year-ago period and represents 76% of the total revenue. Variable revenue was very strong in the first quarter at 7.5 million, an increase of 20% from the year ago period. As I noted during our analyst day in April, variable in the quarter included approximately $400,000 of non-recurring partner revenue. This is very similar to the $600,000 in non-recurring partner revenue that we had in the second quarter of 2017. I will point out however, that even without this 400,000 of non-recurring variable revenue in the first quarter, our total revenue was still more than $1 million above the high end of our guidance range. From a geographic perspective, revenue from outside the United States was approximately $7 million in the first quarter, an increase of 20% from the year ago period. This represented 22% of our total revenue in the first quarter, up from 21% in the year-ago period, representing strong performance in our international operations. For the past several quarters, we have made good progress in shifting our customer profile from smaller to larger customers. We stated recently that it will be important to begin increasing our total customer account as we continue to move towards larger customers and as the decline in the count of smaller customers slows. We are pleased that we added 15 new customers in the first quarter, increasing the total customer count now to 2,855. Net ads represent gross customer additions plus any customer attrition. While revenue from the new larger customers might take longer to ramp up, we believe longer term benefits include higher total committed annual values, average selling prices and unit economics. As an example, five of those 15 net new customers added in the quarter have committed annual contract value to over $100,000. In the past 12 months, our customers’ total annual committed contract value has increased by $7.3 million. A large part of this increase is attributable to the 27 net new customers added over the same period, having a committed annual contract value of over $100,000. These 27 customers compared with over $5.2 million to that increase over the same 12 months period since March 31, 2017. We also saw net ads of 15 and the tier for customers were less than $15,000 in committed annual contract value in the first quarter. Our attrition in this period remains elevated. We are seeing early traction with one of our partner referral programs which we believe has added higher quality customers within this tier. As a reminder, committed annual contract value is the fixed amount of annual revenue for which the customer has a minimum contractual commitment and does not include any potential variable revenue. In addition, average revenue per customer on a trailing 12 month basis also continued its upper trend reaching $43,920 at the end of the first quarter, an increase of 10% from the year ago period. Now, more on the breakdown of our revenue; our marketplaces platform solution recorded revenue of $24 million for the quarter, an increase of 9% compared to the year-ago period and represented 76% of our total first quarter revenue. As David mentioned, our digital marketing solutions revenue was $4.3 million for the quarter, an increase of 4% compared to the year ago period and marked the first year-over-year increase in quarterly digital marketing revenue since the fourth quarter of 2015. Digital marketing represented about 14% of total revenue in the first quarter of this year. We are pleased with this modest increase year-over-year for digital marketing. While we continue to anticipate challenges and growing digital marketing revenue this year, we are seeing early traction with our strategic application of digital marketing technology to Amazon marketing services. We expect to continue to see momentum in this area. Other revenue which includes our Where to Buy solutions for branded manufacturers as well as partner revenues resulting from our business development program was $3.1 million for the first quarter, compared to $2 million from a year ago period. Coming to expenses, as in the past, my comments regarding expenses will be on a non-GAAP basis and all compares on a year-over-year basis unless otherwise specified. In the first quarter, we reclassified certain sales and marketing expenses to the cost of revenue. This reclassification is reflected in our reported results for the first quarter of 2018 as well as for the year-ago period results. While this reclassification has the effect of [marginally] reducing gross margin, we’ll have no impact on operating or adjusted EBITDA margins. More information may be found in our SEC Form 10-Q that was filed this morning. On this basis, gross profit in the first quarter was $24.3 million, representing a gross margin of 77.3%, an increase of more than 300 basis points on the year ago period on a comparable basis. Operating expenses of $24.7 million in the first quarter decreased 5% from the year-ago period. Sales and marketing expense declined about 3% from the same period last year, partially offset by increases in R&D and G&A. As a reminder, in 2017, our annual catalyst customer conference in the US was held during the first quarter, while in 2018 this year, the conference took place in the second quarter. As such, catalyst related expenses which have typically been about $1.5 million will have an impact on our second quarter 2018 operating results. For those that were not able to attend or listen to our presentation at our analyst day with Catalyst in April, we stated that we believe we can begin driving margin improvement through gains in sales and marketing efficiencies. This will take time, but we believe this can be achieved through increased sales productivity and expansion of our indirect sales channels. Operating income was a loss of $418,000 in the first quarter, narrowing significantly from a loss of $3.6 million in the year-ago period as a result of higher revenue and lower total expenses discussed earlier. Adjusted EBITDA was positive $1 million for the first quarter, a meaningful improvement from a loss of $800,000 in the year-ago period and significantly above the top end of the first quarter guidance. Non-GAAP net loss was $424,000 in the first quarter, compared to a net loss of $2.6 million for the first quarter of 2017. Now turning to the balance sheet; we finished the first quarter with cash and cash equivalents of $54.7 million, an increase of $1.3 million since the beginning of the year. This increase was largely driven by positive free cash flow of $1.6 million consistent with operating cash flow of $2 million that’s approximately 500,000 in capital expenditures. Now I’ll turn to guidance; as previously discussed, our guidance reflects our goal to drive revenue growth with continued investments in key growth initiatives, while also delivering improving profitability in the future, as we benefit from increased leverage of sales and marketing expenses resulting from improving sales productivity as well as benefits from scale through G&A. We continue to be optimistic about the year, but note that our first quarter upside was driven primarily by strong variable revenue part of which was non-recurring. We do not yet expect first quarter variable revenues to be in the baseline. Variable revenue remains difficult to predict, further I want to remind everyone that Q2 2017 variable revenue included $600,000 of non-recurring partner revenue making for a tougher comp year-over-year. As a final reminder, the timing of Catalyst 2018 which was held in April will impact our expenses for the second quarter. Now with all this in consideration in the second quarter of 2018, we anticipate revenue will be in the range of $31.2 million and $31.6 million representing growth of 4% to 5% from the year-ago period and adjusted EBITDA to be in the range of a negative, a loss of $1.3 million to the negative 900 or a loss of $900,000. For the full year 2018, we are increasing our revenue expectations to reflect variable revenue upside in the first quarter, while remaining mindful of the risk and forecasting variable revenue in the second half of the year, and now anticipate revenue for the full year to be in the range of $129.5 million to $131.5 million, an increase of $1.5 million compared to the former earnings of 128 million to 130 million previously. Increasing adjusted EBITDA guidance to 7.2 million to $9.2 million range compared to the range of $6 million to $8 million previously. This new guidance represents an adjusted EBITDA margin of 6.3% at the midpoints of our guidance, compared to 3.4% of 2017. In summary, we’re off to a good start in 2018. We are committed to delivering a healthy combination of revenue growth and margins expansion and believe we’ve established a solid footing to which we can deliver these objectives in 2018 and beyond. Now with that operator, we’d like to open the calls to questions.

[Operator:]

[Operator Instructions] our first question comes from the line of Scott Berg of Needham. Your line is now open.

[Scott Berg:]

I have two quick questions here, first of all David, I wanted to just see if you could further comment on the sales productivity improvement that you guys discussed at the customer conference. You also made a number of or you talked about making a number of investments in to the company this year on your first quarter call. Wanted to understand if the investments that you’re making are in the same areas that you or that you saw the productivity improvement and then just wanted to dissect the sales productivity improvement, was it more US versus international, was it maybe by product line in the market places versus digital marketing because we saw a growth there, any info that would be helpful.

[David Spitz:]

I think sales productivity in general is or improvement in sales productivity, in general were broad based from a geographic perspective. I think what we’re beginning to see is the results of the program that Paul Forte started putting in place last year and obviously continues to run, so just a broad based improvement in rev productivity. Also I think the benefiting productivity probably somewhat indirectly is broader array of attainment across our sales force. So historically we’ve had, I would say more concentrated rapid payments and part of the results of Paul’s program is that we’re seeing a significantly broader array of sales reps in their numbers, which is as you can imagine helping productivity. So there’s a lot that went in to that obviously in terms of how to lead allocation and so on and so forth. But I would say all of those programs are starting to come together and deliver good improvements. Your second question was around investments, and I would say, two areas that we continue to focus on, one, clearly is R&D. We continue to build our software development team, we opened an office in Madrid last year with the intention to continue to invest in things like drop shipping all of the filming stuff that we were doing, things like the Algorithmic Repricer, the machine learning, there’s a lot of things where I think we’re still pretty in what we can do, and just given the pace of the industry, we think it’s important to continue to invest strategically on the product. I would say, also investing in services, as we continue to move upmarket and we continue to sign large enterprise customers, for example, large global brands we want to make sure that we’re also investing appropriately on the post-sale side to make that those customers have a really positive experience with us.

[Scott Berg:]

Then my follow-up question would be around your comments on revenue retention and some of the initiatives that you’re putting in place there. I guess from a retention perspective, just wanted to keep some of the smaller customers that of course historically churn at higher rate or is there something in those initiatives to keep some of the enterprise customers that you’ve been more focused on and maybe that’s in relation to the services that you just talked about. But I don’t know if it was something --.

[David Spitz:]

I think it touches on both. I think our view historically is smaller customers really haven’t had the benefit of any sort of account management with us historically and so we actually created a team earlier this year to focus on smaller company renewals doing the kinds of things you expect them to do, looking at customers' adoptional capabilities, customer growth evaluating their risk profile and then working a little bit more proactively than we have in the past to make sure that those customers have everything they need to get over that renewal threshold. That’s part of it. I think the other part of it too is really focusing on helping our customers succeed. So, we’re moving our internal metrics from churn being the primary metric that we measure our post-sale of activity on to net revenue retention, net dollar revenue retention. So our stronger focus on customer performance that we would expect would have a positive effect on long term revenue retention. So, for example, making sure that are adopting whether they are small or large, making sure that they are adopting all of the capabilities that we have to offer on a platform, because it is a real platform with a lot of capabilities, making sure that the customers adopting the strategies that we recommend, for example, around fulfillment. So having, I would say a more holistic focus on customer help versus just trying to make sure that they are happy enough to renew I think is important for us. And I think also managing, if you will, a pipeline post-sales, so just like we measure obviously on the sales side of pipeline, the services team has gotten really good at managing how customers could drive more pipeline in terms of new business and we land and expand with them.

[Operator:]

Our next question comes from the line of Tom Forte of D.A. Davidson. Your line is now open.

[Tom Forte:]

Wanted to ask you David about the Supreme Court reconsidering online sales tax, where you think that could have an effect as far as your customer base, the market places you sell on and whether or not if they did decide to override their prior decision that would create an opportunity for you to help sellers on the market places navigate the new environment.

[David Spitz:]

We obviously don’t have too much commentary on that particular issue. It’s clear ultimately is overturned, I think it probably does create some substantial new complexity for online sellers, as you know there are something like 12,000 different distinct sales tax jurisdictions in the US. I think it’s possible that it has some short-term, it creates some short-term disruption in the market as the sellers have to figure out exactly how to manage all of that. But from where I sit, I don’t think as such the long term ecommerce trend from continuing to gain share of wallet. We historically have not offered capabilities in our software to manage sales tax complexity, there are other software platforms out there that can help sales with that. So I would expect that if there is any disruption from a potential decision that I would expect for it to be relatively short lived versus a longer term issue for ecommerce.

[Tom Forte:]

A quick follow-up, over the course of time Amazon started collecting tax in a lot more states as they added fulfillment centers. Did you see a noticeable change in trend based on a short term basis in Amazon, when they started ramping the states that they are collecting sales tax?

[David Spitz:]

Not anything significant. I think we did a [blind] post some number of years ago when they started collecting in California where we say actually an increase leading up to the sale tax, the date of that sales tax became effective or when they started collecting sales tax and then a bit of a drop off after that. But it was, as I recall, it was fairly isolated in time and I would characterize it as a minor bump in the road, it didn’t seem to have any long term implications.

[Operator:]

Our next question comes from the line of Matt Pfau of William Blair. Your line is now open.

[Matt Pfau:]

Just wanted to first hit on the customer addition and so you’ve had nice increase in terms of the net customer additions this quarter. Where do you think we are in terms of getting back to consistent customer additions and perhaps churning some of the lower value customers that have been on your system?

[David Spitz:]

This is David, I’ll take a stab at it and let Mark have anything to add, he’ll jump in as well. I think it’s our view that to consistently and sustainably grow the company we’re going to have to grow the customer base, there is no doubt about that and I think we’ve done a good job of rotating the customer base towards the larger customer as evidenced by our average revenue per customer growth over the last several years. We still do have a number of smaller customers on our platform. If you may recall or if you’ve seen our analyst day presentation, Mark did a nice job of breaking out both customer account and revenue contribution from various customer size and cohort. So that number could still be volatile, I’m not going to promise necessarily that in any given quarter we might not see a dip in customer account in that area. I think that one of the initiatives that I mentioned in my response to Scott was this theme now that is focused on smaller customers and health. I think that a measure of their success will be, obviously I would expect that they would have a positive impact on retention even at the smaller side. So I do anticipate that over time we will start to see a more consistent in customer account, but it could be volatile still, there could be a quarter or two here and there where it’s negative.

[Mark Cook:]

Scott, this is Mark. David’s correct, I mean that [lowering], I do we feel like that we’re improving the quality of that market around customers and I think that the result of some of the referral programs that we mentioned and so again it will be from quarter-to-quarter we’ll probably see volatility as they’ve suggested deliver the long haul increasing customer accounts especially at the higher end as well it will continue to be important.

[Matt Pfau:]

Got it. And just wanted to ask one more on market places, and David to get your long term view. So, you have these group of 100 market places that now are the – collectively the third largest on your accounted for GMV on your platform. Do you see this market as a sort of , you have a few big market places at the top and then you have all these long tails or can some of those in that grouping or do you see the potential for them to break out and maybe just (inaudible) or perhaps a more diverse less long tail type business with the market prices.

[David Spitz:]

That’s a great question and I don’t really know the answer to that. I suspect that there will always be a long tail at some level because they survey particular category or a particular region well. I mean some of these are, you may have never heard of them, but they may be the largest market place in a particular European country or Southeastern Asia or excuse me in Southern Asia region. So, I think we will always have that long tail whether or not one of them finds an opportunity to break out and start to threaten the size of the eBay or Amazon, I think is anyone’s guess. We do see an uptick in interest in the market for these models, from larger retailers. We worked with a partner called Miracle who offers essentially a market place stack in a box and they’ve done a good job of signing a number of larger retailers and they have a partnership with Miracle where we essentially bring the supply to those market places. So whether anyone of those retailers is able to make a significant dent in the continued gains by Amazon we’ll (inaudible). But I do anticipate seeing more retailers doing market places rather than fewer overtime.

[Operator:]

Our next question comes from the line of Monika Garg of KeyBanc. Your line is now open.

[Monika Garg:]

David, first you talked about those 30 drop-ship customers, some of them like Macy’s, Kohl's, Bed Bath & Beyond and some other ones are also commercial customers, so maybe could you talk about why would a retailer need to use two drop-ship providers?

[David Spitz:]

Sure Monika, you may recall through some of my previous commentaries that we are not necessarily requiring a retailer to use our platform, for example, some of the provisioning and other work flows that companies like (inaudible) will offer. We’re really focused on the supplier needs. So there are suppliers who need to sell across multiple drop-ship networks and need the ability to manage multiple EDI interactions and so we see ourselves as a new entrant in this space and therefore we have a strong willingness to connect in to any number of systems including systems offered, for example, by (inaudible) or TrueCommerce or any number of other providers. So we see our approach as a little bit more of an open solution and that’s been our philosophy as we’ve done after expanding this market.

[Monika Garg:]

And then how are you thinking about the pricing, is it like per order basis, is it subscription fee?

[David Spitz:]

We’re being a little bit flexible at this point, just to understand better the needs of the market. Historically over the last year we’ve been doing more of our traditional model percentage of GMV with the same kind of subscription tiers that we have for market place dwellers because many of the supplies that we have are existing ChannelAdvisor market place sellers who also have adopted business after bringing it over to ChannelAdvisor. We’re also are very aware that per order fees are fairly common practice within the industry, and I expect that for customers who want to operate that way, we’ll be happy to accommodate them. So again we are sort of the new entrant in this space and our view is that we’re going to bring fresh technology and better economics to this space, but also be very flexible to make sure that we’re meeting everybody’s needs in this space.

[Monika Garg:]

And when do you expect some kind of revenue contribution [negative] from this drop-ship product?

[David Spitz:]

Well I would say we’re already generating revenue from it, you’re probably asking when it becomes material. I don’t have a timeframe for you, it is a growing business for us as you can see just by the retailer network and I expect it to continue to grow. We do have the internal target this year that we’re trying to achieve.

[Monika Garg:]

And then Mark could you talk about, could you share how much ASC 606 benefiting lower expenses on a yearly basis. And even I’m asking as sales and marketing expense is down about 1.1 million year-over-year for Q1. So just trying to understand what do you is the impact of 606 in that?

[Mark Cook:]

There should be a recline out there relating to (inaudible), basically from an expense perspective it was about $1.9 million for the first quarter and we can’t give you a [fill] for that number. And that 1.9 million is predominantly related to the one-time adjustment on the balance sheet that will make you (inaudible) earnings in the equity section of the balance sheet that we amortization over a period time. So 1.9 million again for Q1.

[Monika Garg:]

So the 1.9 for Q1 should I just annualize that number, so it’s like close to 7.6 million for the year.

[Mark Cook:]

I think we gave a range of, I can’t recall that at the top of my head Monika, it’s something like 6 million to 8 million for the full year, so it’s somewhere in that ballpark.

[Monika Garg:]

And then another question, you beat the Q1 revenue by almost 1.8 million. The variable revenue was 400,000 of that. So what was rest of the beat and then why we are not seeing that flowing in to Q2, because Q2 revenue is more like flattish quarter-over-quarter, and the way (inaudible) was only 400,000.

[Mark Cook:]

I think that beyond Q1 we had very strong variable revenue growth, and as we’ve said earlier in the call today that variable revenue continues to be difficult to predict. So we’re not again assuming that we are adding new paradigm so to speak on variable revenue. So I think that’s the reason for the basis of our balance for Q2.

[Monika Garg:]

Then David you commented that Amazon’s GMV is growing faster or due fastest in the Q1. What would you attribute this to, is it some change in Algorithm by Amazon or maybe color you can share?

[David Spitz:]

It’s always hard to pinpoint exactly because we don’t see Amazon’s data internally. I believe that it’s the driver adoption of a number of the optimization capabilities that we’ve been bringing to the platform over the last year to year and a half. So things Algorithmic Repricing for film and optimization, we recently rolled out demand forecasting to help customers’ better stay on top of inventory velocity and make sure they’re stocking the right amount of inventory. So I think all of these things help our customer’s help our customers compete more effectively and do it more efficiently, and I think that’s contributing to GMV growth. If we look at the, I don’t have the numbers right in front of me, but if we look at the difference, for example, between customers who use Algorithmic Repricer versus those that don’t, the growth rates are substantially higher for those that use repricer. Another thing that is helping a lot our support for Amazon marketing services in our platform, again this is another area where the data are clear that customers who leverage AMS saw significantly more on Amazon than those who don’t, all else being equal. So, I think just the broader array of capabilities we’ve bought to the platform in particular for Amazon and some of the optimization capabilities are contributing substantially to that outperformance.

[Operator:]

[Operator Instructions] And our next question from the line of Aaron Kessler of Raymond James.

[Aaron Kessler:]

A couple of questions, may be first on the advertising side. Can you just give me a little more detail on Amazon advertising, what area specifically you are seeing strained for? Similarly with eBay what are the amount of listing or maybe uptick that you’re seeing there. And finally, did you hear anything on China, let’s say if you have an update on China progress as well.

[David Spitz:]

As you probably know there’s a couple of different flavors of Amazon marketing. We really don’t do anything in the AMG space where we’re really focused on AMS. So sponsored ads, headline ads, and so as you know there’s a few different component of those programs, and so what we’re really focused on is helping our customers bridge what they are used to doing on Amazon in terms of listing and automation etcetera, etcetera and tying those to add campaigns to make sure that they are driving traffic to their particular listings, but also spending an appropriate amount of money based on the performance of the various product. So it’s really AMS focused versus AMG. And I would say on eBay sponsored listing, you know same concept. We’re I would say too many things we’ve been working with eBay on over the course of our strategic partnership with them is making sure the customers understand how to use it, how to deploy it, how to measure those programs, the efficacy of those programs. We think as kind of taking it up a level a little bit more philosophically, we think advertising on market places is really table stakes at this point. I would say T-Mall probably led the way early on with those capabilities, but we think it’s only natural for it to happen across all the different market places that are out there. You don’t see it for example yet on Walmart, it’s not a capability for third party sellers to leverage advertising. But this is one of the reasons that we think our digital marketing asset even it hasn’t grown significantly over the last few years is a strategic assets because it ties really nicely in to our market place capabilities and we think all these things converge ultimately. And then to your question on China, we are not making it a habit to break out the regional performance on a quarter-by-quarter basis for us. It continues to grow nicely, we’ve actually hired a new head of China, the person that preceded and he was fantastic, his name was James Huang, he was great for building it up, but for personal reasons he ended up having to move on and so we hired a new head of China named Charles [Ma], who I’m very bullish on and very excited about. He’s been in this field I think now for probably about two months, two and a half months.

[Operator:]

[Operator Instructions] I’m showing no further questions at this time. I’d like to hand the call back over to management for any closing remarks.

[David Spitz:]

Thank you everyone. We look forward to speaking with you again soon. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Everyone have a great day.