ChannelAdvisor Corporation
Q3 2018 Earnings Call Transcript

Published: 12 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 ChannelAdvisor Earnings Conference Call. At this time all participants are in a listen only mode; later we’ll conduct a question-and-answer session and instructions will be given at that time [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Traci Mangini. Please begin.

[Traci Mangini:]

Thank you. Good afternoon, and welcome to ChannelAdvisor's conference call for the third quarter of 2018. My name is Traci Mangini, Director, Investor Relations. And with me on the call today are David Spitz, ChannelAdvisor's Chief Executive Officer; and Mark Cook, ChannelAdvisor's Chief Financial Officer. This afternoon, we issued a press release with details of our third quarter performance as well as our outlook for the fourth quarter and full year 2018. This press release can be accessed on our Investor Relations section of our website at ir.channeladvisor.com. In addition, this call is being recorded, and a replay would 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 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 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 and stock-based compensation expense. Our press release that we issued today includes GAAP to non-GAAP reconciliations for gross profit, gross margins, operating expenses, operating loss, operating margins, adjusted EBITDA, non-GAAP net loss and free cash flow. We also provide a GAAP to non-GAAP reconciliation schedule as well as supplemental financial information posted on the Investor Relations section of our website at ir.channeladvisor.com. Finally, at times in our prepared remarks 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 Spitz:]

Thank you, Traci. So before I go into our results, I'd like to begin by laying out our strategic framework, which we spent the last year formalizing because it guides our thinking and should help investors connect the dots when it comes to our activities and priorities. Our framework comprises 3 strategic pillars. First, we will focus on continuing to grow and optimize our core business, but with a strong focus on margin improvement. When we say core business, we mean selling Marketplaces digital marketing solutions to retailers and resellers through our direct sales force. We do not intend to meaningfully increase our direct sales and marketing investments in 2019, relative to this year, but instead expect to increase bookings through improved sales efficiency. Second, we will invest in expanding our indirect sales channel -- channels, including launching our reseller program. We believe this is the best path to expanding our reachable market and improving revenue growth, while simultaneously driving increased leverage in our model. We have a number of great programs and partners already in place from our work this year and anticipate more coming online in the coming quarters, and believe 2019 is the year our indirect channels become meaningful for us. Third, we will focus our product strategy on brands and manufacturers. We have seen strong success working with brands selling our Marketplaces, using Amazon advertising and, of course, our Where to Buy product, and we believe this customer segment is the future of e-commerce. As such, we will look at all of our strategic initiatives through the lens of whether or not those initiatives advance the ball for this segment. We believe this framework, optimizing our core, investing in indirect channels and focusing on brands, best positions ChannelAdvisor for continued growth and improving margins. And we are excited to be executing on it as we close out 2018 and look towards 2019. Turning to our results. I'm pleased to report another quarter of exceeding both guidance and consensus estimates for revenue and adjusted EBITDA. Our Q3 top line performance was driven by continued strength in GMV, along with improved revenue retention and increased strategic partner revenue, areas on which I have personally focused this year. This revenue outperformance, combined with solid expense management, yielded significantly higher adjusted EBITDA than expected, reflecting good progress against our dual strategy of continuing to invest in top line growth, along with margin improvement. I'm also pleased to report a $3.3 million improvement in operating cash flow year-to-date through Q3 compared to the same period last year. All of our product lines contributed to revenue growth in the quarter. Our flagship Marketplace platform grew 5% excluding strategic partner revenue, consistent with the second quarter. We're not satisfied with consistency on this score, however, and believe we can do better given our leadership in the market, and this remains an area of focus for us. Digital marketing also grew in the quarter, up 4% year-on-year, delivering a third straight quarter of growth after 8 quarters of decline, which I'm pleased to see considering what has historically been a highly competitive and limited end market. Driving that growth, in part, has been Amazon advertising as we see brands increasingly encroaching on channels that historically were dominated by retailers. And finally, our Where to Buy platform for brands was again our fastest-growing product and now accounts for about $10 million in annualized revenue. This is important because Where to Buy often represents our first touch point with brands, and once we are commercially engaged with them, we have all sorts of expansion opportunities like Amazon advertising or selling our Marketplaces. Moving to customer dynamics. The quality of our customer mix continued to improve considerably. For example, we added nine net customers with committed annual contract value over $100,000 in the quarter and increased our average revenue per customer in excess of 10% year-on-year. Helping to drive this dynamic was an increasing number of brands using our platform. Now we said that we view brands as a strategic customer segment as digital disruption continues to squeeze middlemen out of the e-commerce picture and drives more brands to go direct-to-consumer. We talk about Where to Buy a lot, but we haven't talked as much about how brands leverage the rest of our platform. We completed a preliminary exercise in the quarter to categorize our customers, and I'm pleased to share a few interesting estimates as they relate to our brand customers versus our retail customers. Please note that these figures are imprecise, but I feel they are directionally useful in understanding the trends in our business. To start, we estimate that brand accounted for close to 20% of our revenues for the 12 months ending September 30, and that revenue growth from this customer segment has accelerated over the last year, reaching close to 30% year-on-year growth at the end of the third quarter when comparing the 12 months ending September 30, 2018, to the 12 months ending September 30, 2017. In contrast, our retailer customer base actually contracted by a mid-single-digit percentage on a customer count basis during the third quarter on a year-on-year basis, including attrition of smaller customers. And revenue growth from our retail customer segment has decelerated to a low single-digit percentage using the same comparison period as per brands. So fundamentally, what we're seeing is a rotation not just on the e-commerce market, but in our own customers from retailers to brands. And it is a strategic imperative that we help it go from 20% of our revenues to 80% as quickly as possible. I am super excited about our position in the market for this strategic customer segment. We believe we are the only company that offers a vertically integrated platform for brands to manage digital marketing, first- and third-party Marketplace listings, drop ship, Marketplace optimization and analytics and fulfillment solutions, all on a global basis. This is a highly differentiated and unique set of capabilities that we think intersects with brands' needs at exactly the right moment and time. Turning to GMV. We saw continued solid growth in the quarter. Amazon GMV continued to grow very well for us, although it remained less than 50% of our total GMV. Our long tail of smaller Marketplaces were collectively our fastest-growing Marketplace group by GMV and now comprise 9% of total GMV, nearly twice the size of Walmart for us. We continue to offer our customers and partners what we believe are the broadest and deepest set of Marketplace integrations available globally, which helps them drive increased sales and efficiency. And we've added more every quarter, as more and more Marketplaces come to us to integrate with our large and high-quality network of suppliers. We also continued to expand our drop ship network on both the retail and supplier side. For example, we recently launched a drop ship program on Walmart and Amazon for a top global beverage brand. So far, this year, we've enabled millions of dollars in drop ship sales for our customers on great sites like Wayfair, Houzz and Amazon, among many others. Although drop ship remains a small part of our business, we believe it is a strategic advantage when working with brands, who must navigate multiple selling models across various Marketplaces and retail channels because they prefer to work with a single integrated global partner instead of having to stitch together multiple platforms in different geographies. One area that impacted GMV and also revenue growth in the third quarter was eBay, which is still our second-largest source of GMV and an important channel and strategic partner. As eBay reported last week, their GMV growth in the U.S. decelerated sequentially in Q3. And while our eBay GMV still grew considerably faster than eBay's reported numbers, we, nonetheless, also experienced a deceleration in the quarter. At this point, we're assuming that eBay GMV growth will remain subdued in the near term. On the strategic partnership side, we've been very busy. We've signed a number of deals to help us to continue to drive scale, differentiation and growth for our customers and to help us reach new customers. As you may recall, I mentioned last quarter, we had expanded our strategic partnership with Google in support of Google Shopping Actions, or GSA, and we're the first integration partner to launch support for GSA. We're proud to partner with Google on this new and potentially significant Marketplace initiatives and are very pleased with our progress. We already have several hundred customers live or in progress launching on GSA, and in many cases, the GMV they're driving on GSA is already significant compared to comparable eBay and Walmart GMV. So depending on how aggressive Google gets with GSA, we believe it could be disruptive as early as this holiday season, and we're bullish about it being a major channel for our customers in 2019. Staying on the theme of disruptive new Marketplaces, we also partnered with Facebook to support its new B2C Marketplace, and as Facebook evolves from more of a C2C to B2C model, we believe it provides an ideal new channel for some of our customers, especially brands. It's early, but we already have a number of sellers live on Facebook Marketplace. Logistics is another area that remains really active for us and interesting. You can't compete for long in e-commerce without great logistics, and we're finding a ton of partnership opportunities in this space. Last quarter, I mentioned that we went live with a global carrier who replaced dozens of in-house marketplace integrations with a single global ChannelAdvisor integration, making it easier and more efficient for its customers to leverage e-commerce to grow. We recently announced that this partner is DHL, a leading global 3PL provider. This strategic partnership supports brands and retailers in foreign markets through DHL's seamless fulfillment and shipping to customers around the world, and ChannelAdvisor will share in the upside of this program with a volume-based revenue structure. It's still early, but it has the potential to be a significant revenue stream for us, over time. We're also pleased to announce that ChannelAdvisor is participating in the UPS customer technology program, where qualified UPS customers may be eligible to receive subsidies to use ChannelAdvisor. It's too early to forecast what this might mean for ChannelAdvisor, but we strongly believe that the path to stronger, more leverage-able revenue growth will be from partners like UPS as we work to help grow our mutual customers. We're very excited about this partnership. With programs like this and others like it, we've grown our referral network aggressively and demonstrated positive steps towards building out our indirect sales channel. As you can see, logistics is a hot area for us, and it's not just about partnerships. We continued to enhance our native shipping capabilities and plan to release this month substantial new features on our shipping platform that we think will allow us to migrate an increasing proportion of our customer base from legacy shipping software providers to our native offering, making our customers' lives easier and saving the money and potentially creating new revenue streams for us through our logistics partners. We've been working on this for the last 1.5 years, and I think this is the most important set of capabilities we have released so far. Interest in our capabilities goes beyond logistics, too. For example, I'm proud to share that just a few weeks ago, we've partnered with IBM. We've built a direct technical integration with IBM Watson Commerce, which will allow brands and retailers whose businesses are powered by IBM to seamlessly connect to ChannelAdvisor and any of our integrated Marketplace and digital marketing channels. We're proud to partner with IBM to help drive growth for our mutual customers. As you can see, further developing the indirect sales channel and preparing for and executing successful reseller model is a top priority for us. It is one of our strategic pillars. A reseller model provides us the compelling opportunity to accelerate more profitable growth beyond our direct sales model but also to expand into new geographies and reach new customer segments more easily. We've continued to make investments in improving the ease of use of our products in preparation for reselling, and we're making great progress on this front. I anticipate we will establish our first 2 reseller programs with partners in 2019, and I believe this could be a game changer for ChannelAdvisor. At the beginning of the year, I shared that improving revenue retention was one of my top priorities, since churn has historically been a stubborn drag on our growth. This year didn't start off great on this front, but credit to Beth Segovia, our Head of Global Services, who joined us late last year, and the entire services organization for making fantastic progress as the years progressed. I'm pleased to share that our nominal dollar churn in Q3 was down 16% compared to Q3 2017 and also down 9% sequentially. Year-to-date, churn as a percentage of revenue has improved nearly a full percentage of point compared to the same period last year. There's more work to do, but I feel good about the initiatives the team has been executing on this year, and I think that we'll continue to see improvements in the coming quarters, which should help support revenue growth. Lastly, I'll turn to sales. Excluding China, our year-to-date bookings have grown over 6% compared to the same period last year, with each region contributing to growth. We're seeing particular strength in Australia and EMEA. Unfortunately, I can't say the same about China, which has experienced bookings contraction this year, large enough to nearly offset some total gains in other regions. China, which only last year was a bright spot for us in terms of growth, has fallen well short of expectations this year. And as a result, our overall bookings year-to-date are up just slightly, which is not enough to drive an improvement in revenue growth and our outlook despite improvements in revenue retention. At this point, we believe our challenges in China are largely execution related and isolated, and we are aggressively and with urgency working to improve results in this strategic region. So when we consider our outlook for the fourth quarter, we have to balance all of the good things we have going on against a couple of near-term headwinds that are keeping us cautious about near-term revenue growth. First, we anticipate China to impact our overall results while we work to improve ourselves there. In addition to China, we anticipate a revenue impact from the fourth quarter related to revenue recognition requirements under ASC 606 that we did not have last year under ASC 605, creating a bit of an artificial accounting-related headwind of up to $500,000. We also had a large release of deferred revenue from a Where to Buy customer in the fourth quarter of 2017 of about $550,000, and we do not, at this time, anticipate a comparable deferred release -- deferred revenue release in Q4 2018, which creates a difficult comp for the fourth quarter. So in total, we have a little over $1 million in comparable revenue headwind compared to last Q4, which we believe is isolated to the quarter and contributed -- contributing to a lower anticipated growth rate for the fourth quarter. Mark will speak more specifically to the details, but we do not believe this will carry over into Q1. In closing, I'm happy with our results in the quarter, although we have work to do in China. I'm excited about our strategic framework and believe executing against these 3 strategic pillars

[Mark Cook:]

Thank you, David. Now I'll discuss our third quarter financial performance in more detail, and after, we'll follow with our guidance for the fourth quarter and full year 2018. Revenue in the third quarter was $32.3 million, an increase of 7% from the third quarter of 2017, and as David mentioned, above the top end of guidance. Our fixed subscription revenue of $25.7 million increased $1.8 million or 8% from the year ago period and $900,000 over Q2 '18. Fixed subscription revenue represents 80% of total revenue. The increase in fixed subscription revenue was driven by our combined sales performance in the first half of the year, strength in our Where to Buy solution as well as contribution from the year-over-year growth in our digital marketing solution. Variable revenue of $6.6 million increased 7% from the year ago period and represent 20% of total revenue. Performance was fairly consistent with our normal seasonal fluctuation from Q2 to Q3 in variable revenue. Variable revenue growth from the year-ago period was driven by a combination of product agreements, which continue to gain traction, as well as general strength in GMV. As you're aware, we adopted revenue standard ASC 606 in 2018, which has some interesting requirements for us related to customer contracts, with customers with extreme seasonality, such as Halloween sellers, and sometimes have contracts where GMV is measured annually, and resulting overdues are paid once a year. This is in contrast to a more typical customer, where GMV is measured and any overdues are billed monthly. For many of these annual customers, this typically occurs in our fourth quarter. Without getting into the technical details, at a high level, ASC 606 revenue recognition for this subset of customers simply making attempt to smoothen revenue recognized over the course of the year. As a result, similar to Q2 '18, variable revenue in Q3 '18 benefited from the application of ASC 606 by approximately $200,000 related to customers having annual GMV contracts. Unfortunately, under ASC 606, the recognition of this revenue in Q2 and Q3 will require corresponding reductions in Q4 '18. From a geographic perspective, revenue from outside the United States was approximately $7.8 million in the third quarter, an increase of 13% or 15% on a constant currency basis from the year ago period. This increase was a result of stronger performance in EMEA and Australia, overcoming the headwinds that we experienced in China. This represents 24% of the total revenue in the third quarter compared with 23% from the year ago period. Now moving to customer count. No different than the last several quarters, we continue to expect changes in customer count to be lumpy from quarter-to-quarter. Our customer count was 2,815, a decline of 14 during the third quarter. The overall decline in the third quarter in customer count was primarily a result of customers with less than $30,000 of committed annual revenue -- contract value, which decreased by a net 30 -- 39 in the quarter. Over the past 12 months, our customers' total committed annual contract value increased by $5.5 million or 6% to $103.7 million as of the end of the third quarter. Further, customers with committed annual contract values over $100,000 increased by 14 during the 12 months and contributed over $4.3 million in total increased value during the same 12-month period. This category's committed annual contract value of $31.6 million at quarter end represented a 16% increase compared with the end of Q3 '17. The customers in this category also increased by 9 customers during the third quarter. As a reminder, committed annual contract value as of a specific date is the fixed amount of annual fees, which a customer has a minimum contractual commitment, and to that date and does not include any potential variable fees. An additional customer metric, which continue to grow, is trailing 12-month average revenue per customer. On a trailing 12-month basis, this metric continued its upward trend, reaching $46,073 at the end of the third quarter, an increase of 10% from the year-ago period. Providing additional breakdown of our revenue. Our Marketplaces platform solutions, excluding related strategic partnership revenue, recorded revenue of $24 million for the quarter, an increase of 5% compared to the year-ago period and represents 74% of our total third quarter revenue. Our digital marketing solutions revenue was $4.6 million for the third quarter, an increase of 4% compared to the year-ago period and represented about 14% of total revenue from the third quarter of this year. As David discussed, we remain optimistic with our earning potential of our Amazon advertising solution. While Amazon advertising is still relatively small, it has been a rapidly growing component of our digital marketing business and strategically supports our Marketplaces business. Other revenue, which includes both our Where to Buy solution for brands as well as strategic partner revenue resulting from our business development program, was $3.7 million in the third quarter compared to $2.7 million in the year-ago period, representing an increase of 36% year-over-year. Other revenue represented about 11% of total revenue for the quarter. Our Where to Buy solution remains our fastest grower and is strategic to helping us build strong customer base of brands with cross-selling opportunities. However, its revenue contribution remains lumpy due to timing and completion of contractual deliverables. Our business development efforts also may be growing contribution to our revenue in the third quarter. Now moving from revenue to expenses. As in the past, my comments regarding expenses will be on a non-GAAP basis, and all comparisons are on a year-over-year basis unless otherwise specified. Gross profit in the third quarter was $25 million, an increase of 8% from the year-ago period and represented a gross margin of about 77.4%, an increase of nearly 70 basis points from the year-ago period. This was primarily a result of stronger revenue discussed earlier and improved efficiencies. Adjusted EBITDA was positive $2.3 million for the third quarter, significantly above the top end of our third quarter guidance. Non-GAAP net income was $686,000 in the third quarter compared to non-GAAP net loss of $1.2 million for the third quarter of 2017. The improvements in both adjusted EBITDA and non-GAAP net income were largely driven by higher revenue and gross profit as operating expenses of $24.3 million in the third quarter were essentially flat compared with prior year due to our accounts control efforts. Notably, research and development expense decreased $400,000 compared to the year-ago period, in part due to the increased capitalized development cost related to new product development initiatives. General, administrative expenses increased about 5% from the same period a year ago, which essentially offset the lower research and development expenses. Turning to the balance sheet. We finished the third quarter with cash and cash equivalents of $48.9 million, a decrease of $4.5 million since the beginning of the year and $2.0 million during the quarter. Our operating cash flow was positive for the first 9 months of 2018, generating cash of $1.1 million for that period and up approximately $100,000 for the third quarter. The total cash decrease for the three and nine months ended September 30 was largely driven by approximately $2.2 million and $1.2 million, respectively, of investing activities related to our hardware refresh and software development costs required to support the continuing growth in customer transaction volume. The remaining cash requirements for both the third quarter and first nine months of the year will be repayments of debt and capital leases related to prior hardware purchases and net cash payments primarily related to the equity compensation programs. Now I'll turn to guidance. As discussed previously, our guidance reflects our goal to drive revenue growth with continued investments in key growth initiatives while also delivering improving profitability in future as we expect to benefit from increased revenue, sales and marketing expenses resulting from improving sales productivity as well as from scale of G&A. We continue to be optimistic about our financial prospects for the remainder of the year, but remind investors that fourth quarter's variable revenue remains difficult to predict. This has been complicated proven by the factors discussed earlier in the call, specifically China operations performance and the impact of ASC 606 against the annual GMV contracts. We expect the negative impact in revenue in Q4 '18 of up to $500,000 related to ASC 606 revenue recognition requirements for annual GMV contracts. Last, we will be incurring highly anticipated cost in Q4 '18 related to our first year implementation of Section 404(b) of the Sarbanes-Oxley Act that requires our audit firm to attest to the effectiveness of our internal controls. Now given thoughtful consideration of these factors into our historical trends for the fourth quarter 2018, we now anticipate revenue to be in the range of $34.2 million and $35 million, representing a change of 0% to 3% from the year-ago period. I'd like to stress the implied growth rate assumes factors we believe are isolated to this Q4. Further, the year-over-year comparison is made more difficult by $550,000 of the deferred revenue released in Q4 '17 and which we are not anticipating a comparable revenue release in Q4 '18, taking into consideration both the impact of ASC 606 and the deferred revenue release in Q4 '17, our implied growth rate in Q4 '18 would have been 3% to 6%. Adjusted EBITDA. Our adjusted EBITDA reflects higher-than-planned cost related to our implementation of Sarbanes-Oxley as mentioned earlier and is anticipated to be in the range of $3.2 million and $4 million. Now this results in guidance for the full year of 2018 of revenue in the range of $130.6 million to $131.4 million, representing year-over-year growth of 6.6% to 7.3%. Now adjusted EBITDA is expected to be $7.6 million to $8.4 million for the midpoint of $8 million, representing adjusted EBITDA margin of 6% at the midpoint of our guidance. You will note that we've widened our normal range for guidance, reflecting the difficulty of forecasting variable revenue and the introduction of other factors mentioned earlier. Last, I'd like to be clear that we believe our Q4 '18 year-over-year growth is muted by some of the factors we've described in our call tonight and not necessarily indicative of our future growth rates as we head into 2019. ASC 606, as an example, is a year-over-year comparables for 2018 interestingly described earlier. It's not limited to variable revenue but also impacts recording fixed revenue for amounts released from deferred related completion developed under certain contracts. Under ASC 606, such amounts as example of release from deferred may not be required to recognize the remainder of the contract life, making growth rate comparables for 2018 to 2017 difficult. Our Where to Buy contracts, as an example, may be impacted by this from time-to-time. As it is our historical practice, we look toward to providing more insight toward 2019 after Q4 '18 is around. We described a lot of exciting initiatives we have in place, ranging from expanded support of our brands and manufacturing strategy to additional product investment, Amazon advertising support of our digital marketing solutions, logistics and shipping, including enhancement of unaided shipping capabilities, driving investments in channels and growing strategic partnerships, resulting from our business development efforts, coupled with our improvements in customer retention, all of which make us optimistic about the future. With that, operator, we'd now like to open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Ryan MacDonald of Needham & Company.

[Ryan MacDonald:]

I guess, just first off, when you look at -- I thought it was an interesting analysis you did with the brands and sort of looking at the opportunity, moving forward. I guess within that analysis, can you kind of go a little bit deeper in sort of some of the interesting trends you're seeing from a customer adoption perspective as well as a usage perspective? And is there really an opportunity or a greater opportunity here to sell additional solutions to these brands, or as you sort of layer in the logistics and the drop shipping opportunities here?

[David Spitz:]

I think what's interesting about brands is they're generally earlier in the life cycle in terms of ecommerce adoption, right? So they remind me a little bit of retailers maybe a decade ago, and so they're looking for a variety of solutions. What's interesting to us is there's a land-and-expand opportunity first within product sets. So if you look at, for example, Where to Buy, it's very common to see a brand start with us with maybe one brand if it's a multi-brand company and a handful of geographies and a handful of retailers, and there's room to expand to other geographies, other retailers and other brands if it's a company with multiple brands. So we frequently see brands that are working with us on Where to Buy, expand from there and grow fairly significantly overtime. But from there, that commercial arrangement that we have with them opens the door because as you can imagine, a lot of brands have a procurement process. They go through a fairly substantial sales cycle. And once you have a relationship with them, the opportunity to then help them, for example, with Amazon content on first-party or a third-party selling, if that's how they sell on various Marketplaces or to do things like drop ship or leverage digital marketing, for example, at Amazon advertising and other programs, you really sort of have an opportunity as a partner that's already working with them to expand, and we've seen a number of cases like that. So it depends a little bit on the velocity that the brand is going through their e-commerce maturation, where they are on that life cycle. Not all products are going to be applicable. For example, if they're not yet doing direct-to-consumer, they may still just be a Where to Buy customer and not ready for other opportunities, but we think it's strategically important because at the end of the day, we do think that the distance between brands and consumers continues to shrink and compress due to digital disruption, and that's why we think it's such a strategic segment for us. The last thing I'll point out is that we tend to enjoy higher average revenue per customer with brands as well as stronger retention rates. They tend to be, as you can imagine, stacking brands and retailers and resellers together, brands tend to be the most stable customers that we have.

[Ryan MacDonald:]

And then just quick follow-up. I guess digging in a little bit deeper into some of the 4Q guidance and the expectations there. Can you go and I guess explain a little more what's going on in China? It sounded like it was execution specific. Was it more of a sales execution perspective? And then also on, I guess, the commentary around eBay. It seemed like there's a little bit of weakness there. Are you expecting that to alleviate as we head into fourth quarter here?

[David Spitz:]

Yes. So in China, we've had some leadership changes earlier in the year. And yes, that did cause a disruption in terms of sales execution, something that we thought would improve faster than it has. And so that is an area that as a result has underperformed, and I'm not necessarily going to opine as to a theoretical impact of tariffs or anything like that. I think it's hard to isolate specific causes. But we think primarily internal execution issues. And having said that, we think it's a strategic region for us. It is the largest e-commerce market in the world. And while we are essentially an export -- on the export side of that, we think it's really important for us to perform well in that region. But I think it's isolated. I think it's sales execution related, and it's something we anticipate improving in the coming quarters. As it relates to eBay, I did make a comment that we do anticipate eBay GMV growth to be muted in the immediate future. We certainly saw that in Q3. We don't have any reason to change our view in Q4, not really looking beyond the quarter at this point in terms of what we anticipate out of that. But we already have the impact of that in Q3 with the revenue over performance that we delivered. So that's, as you can imagine, are already factored into our thoughts about Q4.

[Operator:]

Our next question comes from Elliot Alper of D.A. Davidson.

[Elliot Alper:]

So with more companies rolling out these big 1-day sales events, Amazon Prime Day, Wayfair's Way Day, more recently Overstock's Customer Day, what are your thoughts on the efficacy of those 1-day sales, if anything, and the implications to ChannelAdvisor?

[David Spitz:]

I think they're obviously very popular with consumers, and I think they can be an effective customer acquisition channel. I think my personal view is that, for example, if you look at the Amazon Prime Day, it's a great customer acquisition tool for Prime itself. It obviously drives a lot of sales, and it's great from a GMV perspective, but I think the more strategic rationale behind these things is to get a customer, for example, to sign up for Prime, or if it's Wayfair or Overstock, maybe get that consumer to purchase for the first time on those sites that hasn't done it before. So I view it primarily as essentially a promo code that these Marketplaces are using to attract customers for the first time and hopefully, to develop a longer-term relationship with those customers. We view our role in this as to be supportive of our customers. Frequently preparing for these holidays is -- or excuse me, for these promotions is really important, but also can be difficult to forecast. So, for example, one of the things that we've rolled out on our platform is Demand Forecaster. So it's part of our analytics suite, and it allows customers to make more intelligent forecast and decisions about how much inventory to reserve and to purchase, et cetera, in anticipation of what the likely demand is from those. So as you can imagine, those can be really spiky days with a lot of demand, and you've got to be careful, right? You can't under-invest, otherwise, you're going to miss sales, and if you overinvest, you're going to be a with a lot of excess inventory. So our role in this is to really help our customers capture as much demand as possible. But beyond that, it's I think just got part of the landscape now, and it's -- we're going to continue to see these things happen as we go forward.

[Operator:]

And next question comes from Matt Pfau of William Blair.

[Matt Pfau:]

First, I wanted to discuss the goals on the brand side. And if I heard you correctly, it was to take that 20% to something more like 80%. So just sort of wondering from an operational and business perspective, what that looks like. Does that mean focusing only on adding new brands as customers? Does that involve continued churn of retail customers? How do you get to that business mix?

[David Spitz:]

Yes. Matt, so great question. So as I said, one of our strategic pillars is to optimize our core business. And so we have a really important $130 million business in what we do, which is, as I mentioned, roughly 80% retail and resellers, and that's a really important part of our business, and we're not stopping investment in that. We are going to continue to sell. Those are really, really important -- that's a really important segment for us. I think, when I think about what I mean by the importance of brands and winning in the brand space, as we look out five years, as we look out 10 years, we think it's very likely that more and more of e-commerce, it's hard to say exactly what proportion, but almost certainly an increasing proportion of e-commerce for each of the next number of years is going to accrue towards brands as opposed to retailers and resellers. Because we just think digital disruption could flatten the space and draw them closer together. And we see this in just retail disruption in general, right? Retail is doing pretty well right now. But at the end of the day, it continues to lose share in e-commerce, and we see a lot of brands going direct to consumer. So from our perspective, what that means is continuing to focus our product investments in areas where brands need help, continuing to offer services to help brands and to make sure that our sales team is equipped with all of the products and the positioning and the focus -- to focus on that customer segment. So we're going to continue to sell to our existing customers. We're just going to make sure that the things that we're doing in the market are really biased towards and focused on brands as a strategic customer segment.

[Matthew Pfau:]

And then I wanted to hit on the improved retention. And maybe you just can help us understand a little bit more granularity what's driving that because, obviously, the numbers you broke out, with the difference between brands and retailers, I would expect that mix shift alone to perhaps drive some better retention. But, I guess, within existing customers, ex mix shift, are you seeing an improvement there as well?

[David Spitz:]

Yes. So I think you're right. I think one of the things that we like about brands is they tend to be just more stable customers in general. And so as that mix shift continues, I would expect that retention would benefit from that. I think, really, the big thing that we've seen this year, and I talked about this over the last couple of quarters, is a number of programs that our services and account management organizations have operationalized, whether it's the cadence of reaching out to customers, tracking feature adoption and usage to determine if a customer is using all of the capabilities in the platform or not, so we can do a very targeted reach out. So, for example, one of the things we did, I think it was back in Q2, was a very targeted campaign around customers who were not using our Algorithmic Repricer capability to the fullest extent, reaching out with them with training content and things like that. So it's a much more deliberate and, I think, targeted effort that is focused on the kinds of customers that need certain kinds of help. And I just think the team has done a really good job of operationalizing that and getting that cadence down. And I think it's making a difference for our customers.

[Operator:]

Our next question comes from Dave Gearhart from First Analysis. Your line is open.

[DaveGearhart:]

Real quick. Last quarter, you did talk about the growth rates from a directional perspective for your largest marketplaces, with Amazon growth in Q2 being similar to Q1. Just wondering if you could clarify, was it at a similar level to Q1? And then I think you broke out eBay last quarter, 13% year-over-year GMV growth, highest in four years. Just wondering how much down is it from what you're seeing. And that's my first question. I have a follow-up.

[David Spitz:]

Yes, Dave, this is David as well. We I don't have those growth rates here handy, and it's not something that we necessarily intended to provide on a quarterly basis. What I can say is that I'll reflect back on my commentary, which is that Amazon continues to grow GMV at strong levels and that we did see deceleration in eBay. I would say it was more than a couple of points, probably fairly consistent with the magnitude that eBay saw. Although we do continue to see meaningfully stronger growth in eBay than eBay's reported numbers, which I think still highlights the value that we're providing our customers even in a decelerating line of GMV.

[Dave Gearhart:]

And then lastly, can you talk a little bit about the pipeline? In the past, you talked about it being a record pipeline and very robust. Considering that China headwinds, just wondering if you can, outside of that, just talk about where the pipeline is at directionally.

[David Spitz:]

Yes. I feel good about our pipeline. And I think if you peel our China results out of it and you look at our bookings growth, as I mentioned on the call, we've seen bookings growth year-to-date of about 6%. I'm cautiously optimistic that we'll see incremental improvement as we go through the fourth quarter into next year. So I think from a pipeline and sales perspective, notwithstanding China, I think we're in pretty good shape. We just need to make sure that we get China back on track.

[Operator:]

[Operator Instructions] Our next question comes from Monika Garg of KeyBanc Capital Markets.

[Jason Celino:]

This is Jason on for Monika today. I kind of wanted to ask about the DHL partnership. Can you kind of talk about how that works and kind of the early feedback you're hearing from, maybe from early customers?

[David Spitz:]

Jason, this is David. Yes. So as you can imagine, this is probably not a unique situation. DHL, over the years, at the request of customers all around the world and in various pockets of the organization had built out a number, in fact, several dozen custom integrations to various marketplaces to help those customers pull in orders and essentially do the fulfillment and the logistics around them. And as you can imagine, after a number of years, they've built up some technical depth where replacing -- or maintaining those disparate integrations became, frankly, I think, a little bit unwieldy for them, and it's not really their core competency either. So we ended up in partnership with DHL and essentially replaced all of those custom integrations with ChannelAdvisor, so that DHL is no longer having to worry about those, maintaining those integrations, and then customers are basically pulling down orders through ChannelAdvisor's system. So it's just one example. There's a lot of different things we see going on in the logistics space and different partnerships. But it's just one example of where the things that we're really good at are really, really a natural complement to folks that are -- to carriers and others in the logistics space.

[Operator:]

At this time, I'd like to turn the call back over to Mr. David Spitz for closing remarks.

[David Spitz:]

Absolutely. Thank you, everyone. We hope everyone has a productive holiday season, and please shop online. Thank you. We'll speak to you soon.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.