ChannelAdvisor Corporation
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 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] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Garo Toomajanian. You may begin.

[Garo Toomajanian:]

Thank you. Good afternoon and welcome to ChannelAdvisor’s conference call for the second quarter of 2017. 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. After the market closed today, we issued a press release with details on our second quarter performance, as well as our outlook for the third quarter and full year 2017. 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 and stock-based compensation expense. A reconciliation of all non-GAAP measures to the most comparable GAAP measure is included in our press release. 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?

[David Spitz:]

Thank you, Garo. I was really pleased with our performance and momentum in the second quarter. Revenue of $30 million exceeded our expectations and the upper-end of our guidance range and 11% year-over-year growth represented a sequential improvement in revenue growth compared to the most recent two quarters. This revenue strength also contributed to adjusted EBITDA exceeding our expectations. I was especially pleased with our strong variable revenue performance. Even excluding certain nonrecurring items, variable revenue grew double-digit from a year ago to $7.4 million, hitting a record for a non-fourth quarter period. Importantly, underlying the strength was continued improvement in the Amazon same-store sales growth compared to the last couple of quarters building on the improvement we saw in the first quarter. In fact, we exited the second quarter with the strongest Amazon same-store sales we've seen since last summer, a rebound from Q4 that we believe was driven in part by our focus on the analytics optimization and growth re-pricing to help our customers gain a competitive advantage on Amazon. Of course, GMV and variable revenue are inherently difficult to predict and so we're cautious about projecting forward the strength we saw in the second quarter, so I'm very encouraged to see the success of our customers reflected in improved GMV and variable revenue performance. In fact, I can say that for the month of July our continued momentum resulted in the fastest year-over-year growth in GMV we've seen so far this year. Our momentum expanded beyond revenue and GMV to our sales team. Under Paul Forte's new leadership as our Chief Revenue Officer, our sales team turned in their strongest performance in nearly two years. Our net customer count only increased by 2 compared with 29 in the first quarter, customer quality was very strong. We landed 10 customers with committed annual contract revenue of at least $100,000 compared to six such deals in the first quarter with notable new clients like [indiscernible] Group, HP, Asia-Pacific, VTech and a top 10 global beauty company. I'm also excited to report that this was our best quarter ever in terms of signing new brands, highlighting the progress we've made in positioning ChannelAdvisor to serve this important new customer segment as they transition to a digital world. Turning to products, demand for our Marketplaces and Where To Buy offerings continue to be robust with each growing revenues at double-digit pace year-over-year. And although Digital Marketing revenues contracted on a year-over-year basis during the second quarter, we saw business stabilizing revenue growth improved when compared to the first quarter. Furthermore, given the interest we're seeing in the Amazon Marketing Services I expect Digital Marketing revenue growth to not only remain stable, but possibly even turn positive on year-over-year basis as we go into the back half of 2017. Given some of the well documented weaknesses in the overall retail sector, our strategy of offering solutions to brands seeking to establish and optimize their e-commerce strategies have seen success as the market shifts. I personally traveled extensively this year speaking with a number of brands from fashion brands to tire manufacturers and three trends stand out. First, like Nike and [indiscernible] all recognize that working with Amazon is inevitable and are seeking a holistic Amazon strategy. Second, they are reallocating ad spend towards Amazon and in some cases aggressively. And third, they need help with fulfillment as the on demand nature of e-commerce forces everyone to evolve from shipping pallets by the truckload to shipping individual orders to consumers and I'm thrilled because ChannelAdvisor is the only platform on the market that can address those needs globally. From first party to dropped shipment, third party selling, the advertizing and fulfillment and from the U.S. to Europe and China to Latin America, if you are a brand, ChannelAdvisor can be your full stack solution for Amazon worldwide. This is why customers choose us, because they know we are a comprehensive global solution that can be their strategy growth partner for years to come. Speaking of shipping, fulfillment and logistics are an increasing critical battlefield in e-commerce. Consumers expect fast and free shipping and it's something everyone has to get right and that almost no one can afford to do on their own. So we set out to help our customers do as well in fulfillment and logistics as we help them in stimulating and managing demand. As announced earlier this year, the ChannelAdvisor fulfillment network which include native integrations into our platform of carriers like FedEx and UPS. To further accelerate our capabilities in this area we acquired HubLogix, an innovative fulfillment and logistics platform and long time ChannelAdvisor partner during the second quarter. HubLogix does for fulfillment what ChannelAdvisor does for demand. They make it easy to connect to multiple fulfillment partners and intelligently route orders in real time to optimize cost, speed and efficiency and have built a network of over 150 fulfillment partners. Not only expect the financial impact of this acquisition to be immaterial in 2017 we believe there is a substantial cross-selling opportunity into our broader customer base. We expect to rapidly integrate HubLogix into our core platform and I'd like to extend a warm welcome to the team from HubLogix. We're excited to have you join the ChannelAdvisor family. We also continue to make significant organic investments in technology and products to help our customers. Just after the close of the second quarter we opened a new office in Madrid, Spain with the primary objective of aggressively expanding our global R&D team there. We evaluated a number of geographies and settled on Madrid due to the broad availability of talent and attractive business environment and expect that a significant portion of our R&D growth will take place in Madrid. Lastly, growth in our China region continued to exceed expectations with revenue growth in the region accelerating in Q2 to its fastest rate in over a year. We believe we've only scratched the surface in Asia and so in addition to increasing our investments in China going into 2018 we're also targeting our presence in Japan in early 2018 initially serving the export market just as we have in China. We estimate there is approximately $9 billion in export GMV from Japan that is addressable by ChannelAdvisor today and that we have some natural advantages in the Japanese market stemming from our success in China. In summary, the momentum we saw in the first quarter continued into the second quarter and I'm bullish about our prospects for improved growth during the second half of the year as we continue to invest in our market leading products and help customers compete effectively in a fast changing e-commerce landscape. With continued business momentum and the successful execution of our strategy, our revenue growth in 2018 should also represent an improvement from our growth this year. With that, I'll turn the call over to Mark for our financial update. Mark?

[Mark Cook:]

Thank you, David. I will now provide additional detail on our second quarter 2017 financial performance and our guidance for the third quarter and full year 2017. Revenue in the second quarter was $30 million, an increase of approximately 11% over the second quarter 2016 and exceeded the high end of our guidance for the quarter. Fixed subscription revenue of $22.6 [ph] million, increased 8% from Q2 a year ago and was 75% of total revenue. Variable subscription revenue increased to $7.4 million over 25% of total revenue in the second quarter, up 21% from a year ago. Variable subscription revenue in the second quarter included the benefit of $600,000 in nonrecurring business development revenue. Excluding this amount, variable subscription revenue would have increased 11% still representing healthy growth. And total revenue we still have exceeded the high end of our guidance by over $0.5 million. Revenue from outside the United States was approximately $6.3 million and 21% from our total revenue in the second quarter compared to 23% of total revenue in the same quarter a year ago with the difference primarily due to currency fluctuations. We ended the second quarter with 296 customers a net increase of 2 from the end of Q1 of 0.17 and an increase of 28 from a year ago. This excludes approximately 50 net new customers we acquired with HubLogix. At the same time, average revenue per customer grew 11% to $41,029 on a trailing 12-month basis compared to $27,000 a year ago. The continued sequential increase in average revenue per customer reflects an addition of new customers in higher revenue tiers as well as the migration of existing customers from lower to higher tiers as they recognize the value of our platform. In the second quarter we added 45 net new customers who have committed annual revenue of greater than $15,000. As a reminder, committed annual revenue is the fixed amount of annual revenue for which a customer has minimum contractual commitment and does not include variable revenue. In contrast 43 net customers with committed annual revenue of $15,000 or less were either terminated or migrated from annual commitment above that level. And notably, we again saw an increase in the number of customers with committed annual revenue of $100,000 ending the quarter with a 160 an increase of 13 from the first quarter and representing a larger sequential increase we've seen in recent years. The committed annual revenue from those customers increased 19% to $26 million the quarter from $22 million a year ago. Moving to the expense side of the P&L, please note that my comments regarding expenses will be on a non-GAAP basis and all comparisons on a year-on-year basis, unless otherwise specified. Our press release that we issued today includes GAAP to non-GAAP reconciliations for gross profit, gross margin, operating expenses, operating loss, operating margins, adjusted EBITDA, non-GAAP net loss and free cash flow. We also provided GAAP to non-GAAP reconciliation schedule on our website, which can be accessed on the Investor Relations section of our website at ir.channeladvisor.com. Gross profit in the second quarter was $23.7 million an increase of $15% from a year ago representing a gross margin of $78.9% an increase of 3 percentage points from the year ago. This increase was primarily due to our particularly strong variable subscription revenue in the quarter. Operating expenses were $24.3 million for the second quarter were up 4% from a year ago primarily due to the increase of R&D as we invested in enhancing and expanding our offerings. Operating loss was $600,000 in the second quarter compared to a loss of $3.8 million a year ago. Adjusted EBITDA was a positive $1.1 million for the second quarter of 2017 considerably better than our guidance range and compared to an adjusted EBITDA loss of $900,000 for the second quarter a year ago. The strong adjusted EBITDA was due to the combination of better than anticipated revenues, increased gross margins and careful management of operating expenses. Given our primary focus on driving topline growth we expect to invest some of this profitability upside in the R&D and several marketing investments that we believe can support our long term growth. Non-GAAP net loss was $600,000 compared to a net loss of $3.8 million for the second quarter of 2016. Now, turning to the balance sheet, our cash position remained strong. We ended the quarter with $57.9 million in cash and cash equivalents a decrease of $5.5 million from the end of the first quarter a result of working capital requirements due to higher accounts receivables. The $2.2 million cash impact related to our acquisition of HubLogix during the quarter and repayment of $1.8 million in capital leases. Our operating cash flow was a negative $448,000 with free cash flow of negative $631,000 during the quarter after a $183,000 in capital expenditures. Now I will turn to guidance. While we sound very healthy, global subscription revenue in the quarter, the cause of this revenue is inherently difficult to predict still we were pleased to see revenue growth in the second quarter improved in the first quarter and we are optimistic in our growth in the second half of the year when we will exceed our growth in the first half. From a profitability perspective, our objective is to strategically invest in primarily in areas that can support our long term growth including adding key sales reps and account managers as well as increase in our investment in R&D are producing greatly even adjusted EBITDA on a trailing 12-month basis. Our investment in our new engineering office in Madrid, Spain, our recent acquisition of HubLogix, additional investment in China and our planned expansion in Japan are good examples. As such, while we continue to facilitate [ph] adjusted EBITDA for the year we are slightly decreasing our expectations consistent with our strategy to privatize our e-growth over increasing profitability in the near term. For the third quarter 2017 we are anticipating revenue in the range of $29.7 million to $30.1 million representing growth of 6% to 7% from the year ago quarter. Excluding $600,000 in nonrecurring business development [indiscernible] revenue in Q2. This guidance forecasts a small sequential revenue increase which is typical for the third quarter. We expect adjusted EBITDA for Q3 2017 also $300,000 and a gain of $100,000. This is consistent with us financing [ph] a few months ago. For the full year, we anticipate revenue to be unchanged in the range of $123 million to $124.5 million. This represents growth of $9% to 10% compared to 2016 of approximately 10% to 11% on a constant currency basis. Now we anticipate full year 2017 adjusted EBITDA of between $5 million and $7 million. As mentioned earlier, we plan to continue to increase our investment R&D, sales and marketing as well as investments in China and Japan, again reflecting our goal to continue to invest in our business at least break even adjusted EBITDA on a trailing 12 months basis. Note that while we plan to provide detail guidance on 2018 during our fourth quarter call, based on our business momentum which is further supported by investments we’re making for our long term growth we expect our year-over-year revenue growth for 2018 will exceed our anticipated growth to approximately 9% to 10% for 2017. In summary, we are pleased with our progress year-to-date and our business momentum reinforces our confidence that we can profitably drive faster revenue growth trend as we look ahead. We are excited to see revenue growth improve in the first quarter to the second and are optimistic that these improving trends will continue with revenue growth in the second half of the year meeting or exceeding our growth in the first half as a result of our strategy to focus on larger retailers and brands. Now with that operator, we'd like to now open the call to questions.

[Operator:]

Thank you. [Operator Instructions] And your first question is from Monika Garg with KeyBanc. Your line is open.

[Monika Garg:]

Hi, thanks for taking my question. First is just I want to talk about the guidance in the Q1, in Q2 grew nicely 10%, 11% year-over-year, but even if you put the midpoint it's 6.5% growth year-over-year. So, the question is why are we not seen kind of continuous improvement in growth?

[Mark Cook:]

I'm sorry Monika, I didn’t catch the part, the last part of your question.

[Monika Garg:]

I guess the growth is accelerated in Q2 then coming down in Q3 and if I put the midpoint for Q4, again expecting like 13% growth in Q4. So, I guess the question is like why acceleration is then going down and then again acceleration Q4?

[Mark Cook:]

Sure. I think if you recall last year there's couple of components there. One, as you aware, we don’t forecast global revenue the last year is an example, global revenue came down from Q2 to Q3. Also we had a pretty tough comp in Q3 last year. If you recall earlier in the year last year we engaged with Wal-Mart and a number of large customers for Wal-Mart which positively impacted the third quarter of last year, so it make a little bit tougher comp and little bit of headwind in comparison this year.

[Monika Garg:]

Got it. Then the HubLogix acquisition, could you maybe talk about what kind of revenue run rate they were at, if you know what customers they have, is there any overlap of the customers in the ChannelAdvisor?

[David Spitz:]

Hey Monika, this is Dave. Yes, so we did have an overlap with HubLogix. HubLogix actually started out building a platform on top of ChannelAdvisor to solve the need for certain customers and so at the time of acquisition roughly half of their customer base was an existing ChannelAdvisor customer and about half were not ChannelAdvisor customers. So the net 50 that Mark alluded to which I think he clarified were not included in our customer count for this quarter. The net 50 customers were not new to us.

[Monika Garg:]

And any revenue contribution this year from this acquisition?

[David Spitz:]

Well as we said it is, we expect it to be immaterial for 2017.

[Monika Garg:]

And maybe can you talk about how can we, how can we think about growth from this acquisition in 2018, 2019 timeframe? Thank you.

[David Spitz:]

Sure, absolutely. So as I made the point in my remarks we see fulfillment logistics as critical areas to help our customers compete effectively in e-commerce and we have a lot of customers asking for capabilities that we have been building organically as part of our fulfillment network that we announced earlier this year. But HubLogix for us advances the ball in a number of areas and provides a variety of fulfillment options for customers that are seeking to keep up with that rising bar. And so from a pricing perspective we're going to evaluate, we're going to 2018 what the appropriate structure of that is for new customers. But I think, my view is that given that there are roughly 50 overlapping customers at the time of the acquisition we have close to 3000 customers overall. This should be a pretty substantial opportunity to sell into our base. HubLogix did not really have a significant go-to-market team at the time of the acquisition, principally software engineers and relatively small team and had not invested significantly in go-to-market. So we think that by deploying this solution across our sales team we've got - we do have some substantial opportunity to sell across our base.

[Monika Garg:]

All right, thank you so much.

[David Spitz:]

Thank you, Monika.

[Operator:]

[Operator Instructions] And your next question is from Matt Pfau with William Blair. Your line is open.

[Matthew Pfau:]

Hey guys. Thanks for taking my questions. First one to start off on the customer account and I guess if I read your comments correctly, it sounds like the mix of customers added this quarter would in general, what the average committed revenue would probably be higher than what you added in the first quarter. And so, I guess the question is, is that true or was it just more maybe more smaller customers turning in the second quarter versus the first quarter and then, as we sort of think about the cadence of customer additions going forward is the mix in the first quarter or second quarter sort of more indicative of what we should sort of expect?

[Mark Cook:]

Hey Matt, this is Mark. Thank you. Your assumptions are directionally correct and by virtue is adding the larger customers, yes the mix is automatically changing and turning off the smaller ones. So we are as David mentioned in the earlier part of his script is we truly believe the customer quality continues to improve as a result, so yes, we do think the mix is changing and improving.

[Matthew Pfau:]

Got it. Okay and then what about on the, I wanted to touch on the drop ship solution is there any update there on progress made on that product?

[David Spitz:]

No, this is David. Yes, we continue to invest in building up the retail network. We do support a number of retailers today and I think HubLogix plays nicely into that strategy as well by allowing us to attach to a number of third party settlement providers to help our customers who need drop shipping solutions. There's also a broader theme here I would say that a number of the brands that we are acquiring or that are in our pipeline are interested in why I touched on them in the script around full stack solution for brands. So for example, we have one that originally came to us for our whereby offering but actually turned their focus to helping them succeed on Amazon for a combination of Amazon marketing services as well as first party support which and I believe a part of that includes drop shipping as well for them for some of their bulkier items. So, for me the pipeline looks good. The acquisition of HubLogix’s I think expands our capabilities there and really our focus from a development perspective is to continue to build out the retail network as rapidly as we can.

[Matthew Pfau:]

Got it. That's all I had guys. Thanks for taking my questions.

[David Spitz:]

Yes, thanks Matt.

[Operator:]

[Operator Instructions] And your next question is from Brad Reback with Stifel. Your line is open.

[Brad Reback:]

Hey guys, how are you?

[David Spitz:]

Hi Brad.

[Mark Cook:]

Hi Brad.

[Brad Reback:]

Could you give us any update on where things are with Wal-Mart and Jet [ph] right now?

[David Spitz:]

Are you asking an update for Wal-Mart and Jet [ph]?

[Mark Cook:]

Yes.

[David Spitz:]

Yes. They continue to be growth channels for us. It is good differentiator for us because we're really I think seen as the cream of the crop in terms of integrating with marketplaces in general and obviously Wal-Mart and Jet are really interesting ones for a variety of customers. Interestingly we do see a little bit of a diversification or maybe bifurcation is a better word. For example, brands tend to be attracted to the Jet platform from a marketplace perspective and Wal-Mart is more traditional resellers. So but they continue to be attraction points for us as a platform. I didn't provide any numbers on the call, but they do continue to perform strongly for us.

[Brad Reback:]

Is it growing faster than Amazon?

[David Spitz:]

Well, I would say Amazon continues to be a dominant force out there in the market. I think that's pretty well publicized. And at the scale and sampling of the customers that we have, I think our results tend to reflect that as well, so I would say that Amazon continues to grow pretty, pretty nicely.

[Brad Reback:]

Great, thanks very much.

[David Spitz:]

Thanks Brad.

[Operator:]

And I'm showing no further questions. I would now like to turn the call back to David Spitz for any further remarks.

[David Spitz:]

Great, well thank you every one for your time in the call today. We look forward to speaking with you in the near future. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone have a great day.