ChannelAdvisor Corporation
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third 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] I would now like to introduce your host for today's conference Garo Toomajanian, Investor Relations. Please go ahead, sir.

[Garo Toomajanian:]

Thanks. Good afternoon and welcome to ChannelAdvisor's conference call for the third 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 third quarter performance, as well as our outlook for the fourth 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. Our results in the third quarter were mixed. We delivered strong revenue and adjusted EBITDA at the high end of our guidance range with revenues of $30.1 million representing year-on-year growth of 8%. We also saw continued strength in variable revenue which grew 10% year-on-year in the third quarter. Offsetting our solid overall P&L performance, was a combination of slower recovery in digital marketing than we've been expecting and a relatively soft performance on our North American sales region coming off of a strong Q2. The latter was driven primarily by a sales reorganization in the U.S. and changes to our territory structure that we believe will pay dividends and improve sales or our productivity over time. Specifically to our sales changes; we appointed Kevin Garabedian as Vice President of North America during the quarter, created a new strategic accounts team, announced the opening of the Denver sales office and made significant modifications to our named account and lead allocation processes during the quarter. These changes to our North American sales organization follow similar successful changes we implemented in our Europe and Asia-Pacific regions earlier this year, changes that have paid off. Notably the international team delivered very strong performance in Q3 as evidenced in part by international revenue growth accelerating to 16% year-over-year in the third quarter. Given the success we've seen from those changes, we decided to move more aggressively with similar changes in North America and as such I am bullish that our North American team is not far behind our international teams and we should see improved results going into 2018. As a result of our digital marketing revenues recovering more slowly than we previously anticipated along with the effect of these sales changes, we expect our full year revenue to be moderately lower than previously anticipated as reflected in an updated guidance that Mark will provide in a few minutes. Now all of that said we had a lot of momentum building up in a number of areas that make us optimistic about our long-term prospects. First, our customer's GMV continued to perform well in Q3, growing at the fastest year-over-year growth rate in the third quarter that we have seen so far this year driven primarily by continued improvements in our Amazon and eBay GMV, both on a gross and same store sales basis. We believe platform enhancements like our Algorithmic Repricer as well as our growing mix of Chinese sellers helps drive strong performance on the marketplace channels. Second, we also invested in a new strategic indirect sales team. From a standing start during Q3, this team has already built a multi-million dollar pipeline of potential incremental strategic partnership revenue. We have seen particular traction in our logistics space since companies that move packages for living are seeing increased demands from their customers to open new digital routes for the consumer especially through marketplaces like Amazon. Indirect selling is a new path to market for ChannelAdvisor as historically all of our selling has been through our direct sales force. And so over time I expect indirect channels to become a substantial proportion of our revenues and I'm excited about the business opportunities this team has uncovered in a very [short time]. Third, China continued to drive very strong growth for us accelerating to its fastest year-over-year growth rate in Q3 that we've seen in the last two years. China represented 4% of our revenue in the third quarter, up from 2% in Q3 of 2016. We expect to increase our investments in China in 2018 to continue building on this momentum. Now please note that we don't intend to necessarily break out revenue from China on a regular basis but are providing here to help investors understand its recent contribution to our business as we gear up for additional investment in the region. Fourth, digital marketing despite recovering more slowly than expected did show signs of improvement, while still declining on a year-on-year basis, the decrease in the third quarter was the smallest year-over-year decrease for the quarter so far this year. In particular we saw very strong interest from brands for our new Amazon marketing capabilities, which I expect will at least partially offset general weakness from traditional larger retailers. As I've previously discussed we believe advertising on marketplaces is becoming table stakes and anticipate that renewed growth in digital marketing will ultimately be driven by Amazon Marketing Services where we have seen strong pipeline growth. Most brands I speak to are reallocating a meaningful portion of their ad spend budgets towards Amazon and we are well positioned to help them manage this. Therefore although digital marketing is unlikely to return to positive revenue growth this year, we believe it continues to have strategic value to us as these trends play out and I'm optimistic we should see this revenue stabilize in 2018. Fifth, our drop ship initiatives, is also gaining momentum. Unlike some of our competitors we do not believe that retailers many of whom are struggling in a rapidly changing environment should have to pay a heavy price to integrate suppliers and extend their virtual inventory. Our disruptive approach has allowed us to integrate over a dozen retailers already this year with a growing supply network. Suppliers like that they can get a single integrated platform with ChannelAdvisor to manage the full spectrum of wholesale, drop ship and third party selling models. It was a [indiscernible] time to build out our network but we believe our efforts here position ChannelAdvisor's most complete platform for brands, suppliers, manufacturers and sellers alike. Six, our investments in logistics including our HubLogix acquisition, are paying off. Since the acquisition we have added or expanded more than 20 customers on HubLogix's platform and target continued investment in making logistics and fulfillment easier for our customers helping them stay ahead of the ever increasing consumer expectations for fast delivery. And finally, I'm pleased to have Beth Segovia join us as our Vice President of Services. Beth has over two decades of experience in services mostly recently with Lenovo. She is responsible for customer success globally and I'm excited to have someone of her caliber join our executive team to help customers become even more successful using our platform. All of these factors reinforce our confidence that revenue growth will improve in 2018 although modestly on a full-year basis. We also plan to maintain an investment posture oriented towards driving future growth. Specifically we intend to ramp-up our investments in China and Japan, expand our indirect sales efforts and continue expanding our platforms capabilities in the areas of machine learning and analytics, price and demand management, drop shipping and expansion of our first party retail network and logistics and fulfillment optimization, all to ensure we remain the most comprehensive platform on the market to connect and optimize the world of e-commerce. By doing so we expect we would be even better positioned to capture a meaningful share of the large opportunity that we believe is ahead of us. For all of these reasons I'm as excited and confident as I've ever been about our prospects in 2018 and beyond. And 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 details on our third quarter 2017 financial performance and our guidance for the fourth quarter and full year 2017. Revenue in the third quarter was $30.1 million, an increase of approximately 8% over the third quarter of 2016 and at the upper end of our guidance for the quarter. Fixed subscription revenue of $23.9 million increased 7% from Q3 of a year ago and was 79% of total revenue. Variable subscription revenue of $6.2 million increased 10% from a year ago and represented 21% of total revenue. Recall that in the second quarter, variable subscription revenue benefited from $600,000 in non-recurring business development revenue and as such excluding this amount from the second quarter, year-over-year variable revenue growth in Q3, '17 was roughly in line with the second quarter. Revenue from outside the United States was approximately $6.9 million or 23% of our total revenue in the third quarter compared to 21% of total revenue in the same quarter a year ago. This represents an increase of 16% from the year ago primarily due to strong performances in the U.S. and China, as we focused on expanding our presence and improving our gross processes in those regions. We ended the third quarter with 2,902 customers, a net decrease of 4 from the end of Q3, 2017 and an increase of 23 from a year ago. This count excludes approximately 50 net new customers we acquired with HubLogix in Q2. At the same time, average revenue per customer grew 9% to $41,748 on a trailing 12 month basis compared to $38,400 a year ago. The sequential increase in average revenue per customer reflects a combination of increased volume across the ChannelAdvisor platform from existing customers and the continued trend of adding larger new customers. For example during the third quarter, we added 1 net new customer who committed annual revenue of greater than $15,000. While this was offset by the decrease of 5 net new customers who had committed annual revenue of $15,000 or less, which were either were either terminated or migrated to an annual commitment level above that level. I would like to emphasize that these are net changes in customer numbers and though we had a decrease in net customers before, our total committed annual revenue increased during Q3, 2017. As a reminder, committed annual revenue is a fixed amount of annual revenue for which a customer has a minimum contractual commitment and does not include variable revenue. We continue to see an increase in the number of customers with committed annual revenue of over $100,000 in the third quarter at a total of 163, for an increase of 3 from the second quarter and 20 from the same quarter last year. The committed annual revenue from those customers increased 17% to $27 million at the end of the quarter from $23 million a year ago. Now 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 are 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 margin, adjusted EBITDA, non-GAAP net loss, and for free cash flow. We also provide a GAAP to non-GAAP reconciliation schedule on the Investor Relations section of our website at ir.channeladvisor.com. Gross profit in the third quarter was $23.8 million, an increase of 11% from a year ago resulting in a gross margin of 79.1%, an increase of more than 3 percentage points from a year ago. This increase was primarily due to a combination of high revenue coupled with slight decline in the cost of revenue compared to the year ago quarter. Operating expenses of $25.1 million for the third quarter were up 18% from a year ago. The majority of this increase would be the higher sales and marketing headcount related investments compared to last year, as well as increased marketing and advertising expenditures. The bulk of the remainder of the increase in operating expenses was from additional investments in R&D to further enhance and expand our offerings including staff acquired through our HubLogix acquisition. Operating loss was $1.3 million in the third quarter compared to operating income of $185,000 a year ago. Adjusted EBITDA was a positive $360,000 for the third quarter of 2017 considerably better than our guidance range as a result of solid revenue and continued expense management. Our adjusted EBITDA in the third quarter was lower than the $2.2 million we reported for the third quarter a year ago, our results were consistent with and reflect our intentions to invest in R&D and sales and marketing. Usually these investments will position us for success and support our primary focus of driving top line growth. Non-GAAP net loss was $1.2 million compared to a net income of $313,000 for the third quarter of 2016. Our non-GAAP net loss compared to our operating loss reflected the increased investments described earlier. Now, turning to our balance sheet, our cash position remains strong and we finished the quarter with $54.2 million in cash and cash equivalents, a decrease of $3.7 million from the end of the second quarter. The decrease in cash and cash equivalents during the third quarter was a result of $2.4 million in working capital requirements including accounts receivables, payments relating to [Indiscernible] disclosure of the earnings for sales tax in certain jurisdictions and timing of their payments, plus $1.9 million in payments for capital expenditures related to refresh of network gear and other hardware requirements. Operating cash flow for the year-to-date is a negative $2.2 million with free cash flow a negative $4.6 million after $2.4 million in capital expenditures. Now I will turn to guidance. As mentioned last quarter we continue to strategically invest in the business primarily in areas that can support our long-term growth including adding key sales reps and account managers as well as increasing our investments in R&D. We have done this while producing breakeven adjusted EBITDA on a trialing 12-months basis. Third quarter this year we've invested in a new engineering office in Madrid, Spain, acquired HubLogix, and made additional investment in China. We've also initiated our planned expansion in Japan. These investments reflect our medium and long-term confidence as David described. Variable subscription revenue remains inherently difficult to predict, particularly in the fourth quarter where it is seasonally strongest. Now that said we do expect fourth quarter seasonally to drive a meaningful sequential increase in variable subscription revenue. However, due to the combination of a slower than expected recovery of our digital marketing business and the impact of our North American sales performance in Q3, we do not expect meaningful sequential growth into the subscription revenue in the fourth quarter. Therefore we are slightly decreasing our full year expectations and are prioritizing investment in areas that we believe can generate longer term revenue growth. For the fourth quarter of 2017, we're anticipating revenue in the range of $34 million to $34.6 million representing growth of 79% from the year ago quarter. This guidance reflects the sequential revenue increase which has been largely driven by variable revenue as outlined previously. We expect adjusted EBITDA for Q4, 2017 to fall between a gain of $3.7 million to $4.3 million. This is consistent with the investments that I mentioned a few moments ago. For the full year, we anticipate revenue to be in the range of $122.4 million to $123 million. This represents growth of 8% to 9% compared to 2016. We now anticipate full year 2017 adjusted EBITDA of between $4.4 million and $5 million. As mentioned earlier, we plan to continue to increase our investment in longer term revenue growth initiatives in R&D and sales and marketing as well as investments in China and Japan. While we intend to provide detailed guidance on 2018 during our next earnings call on February, we expect our revenues for 2018 to be in the low-to-mid $130 million range, exceeding our anticipated growth of approximately 8% to 9% for 2017. In summary, we continue to make steady progress towards our goal of attracting larger customers through our growing product portfolio that allows retailers, brands and manufacturers to expand and optimize our e-commerce initiatives. We're even more confident that initiatives in which we have invested will lead to a meaningful impact on our 2018 results. With that, operator, we'd like to now open the call to questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Scott Berg of Needham. Your line is open.

[Scott Berg:]

Hey David and Mark, thanks for taking my questions here. I guess let's start with the sales re-org. Wanted to try to understand maybe when you started this in the quarter and what you think the duration of the impact to bookings is going to look like? Don't know -- your guidance suggest next year's numbers are not substantially lower than where we are on the Street. But it kind of suggests maybe you believe this impact is maybe only one to two quarter type of impact?

[David Spitz:]

Hey Scott, that's my expectation. So we hired Kevin, the Head of North American sales in July and obviously he had some time to make his initial assessments and work with Paul and ultimately me. And fundamentally decided there were a few things that we had seen work well internationally as I have mentioned, and just decided to make some of those changes more rapidly than we might otherwise have done. So it was over the course of the quarter. Of course our quarter tends to be a bit back end loaded. So it wasn't materially clear until the end what kind of impact we would have. And I would say probably the biggest change is the territory assignments. I think the sales leadership and I [supported] in this that our existing territory refinements were suboptimal for the long-term scaling of the sales team and so worked to reallocate territories to improve the breadth -- the overall breadth of sales performance in the [payment]. So position -- positioned our organization for continued scaling. So my expectation is that it's a relatively short-term impact. I would characterize its only one month into Q4 -- but I would characterize the start to Q4 as a strong start which I think is encouraging.

[Scott Berg:]

I wanted to talk about your ARPU growth numbers. Your ARPU growth numbers have -- at least the growth rate has declined for the last several quarters. I wanted to try to understand is this just purely a function of maybe easy comps early in your go-to-market teams are kind of out of the way right now and what kind of stable rate with adding some of these larger customers or maybe with some of these sales teams we expect that to accelerate further? Just trying to understand, how with this rate our expectation should be like I guess over the next maybe three or four quarters?

[David Spitz:]

This is David. I'll give you some qualitative commentary and let Mark have something to add, but if you look at our sort of average ticket size for net new customers it has been for a long time and continues to be below the ARPU of our fully blended customer base. And I would actually expect that as the sales team continues to ramp and produce and drive ultimately an increase in net new logos, perhaps we could produce pressure on ARPU. So we don't necessarily manage specifically to growth in customers versus growth in ARPU, but I think the natural thing in our business -- you are right we've annualized some of the changes that we made and I think that's moderated the growth in ARPU a little bit. But I would expect that as the sales team continues to build out and execute that hopefully we will see growth in customer accounts versus growth in ARPU specifically.

[Mark Cook:]

And Scott I don't really have anything to add I think new observations on those.

[Scott Berg:]

Last question from me is on the guidance Mark and I don't know if it's for yourself or for David. Your implied guidance looks like the variable revenues are up -- will cost $5 million sequentially from Q3 to Q4 that's more in line with what the business experienced in '15 versus last year that have some impacts from those Amazon changes that we all know well around pricing. Looks like your guidance assumes none of that impact from Amazon, just wanted to; a, verify that; and then b, if it's not I guess what are you kind of seeing so far quarter-to-date?

[Mark Cook:]

Scott, we don't provide specific guidance on variables. As you know Q4 is our largest -- as you've suggested Q4 is our largest quarter when it comes to variable revenue and with that in mind we are cautiously optimistic with the quarter from that perspective versus last year where as you mentioned we had the impact for us in some of the Amazon experience. But again we don't break that out but just to [Indiscernible] year-over-year.

[David Spitz:]

Scott this is David. One data point I can give you and guidance is only through October is that the GMV strength that we've seen recently continued in through October into Q4 including same-store sales and an acceleration on Amazon. So this is obviously a harder thing to predict but at this particular point in time we do see continued strength and reasons for optimism there. We've seen same-store sales on Amazon improve sequentially throughout the year, bottoming out I think it was last December and so that's been a good trend to see and I think a lot of it is we talked about the increasing mix of Chinese sellers, who have substantially higher same store sales growth. We've talked about things like Algorithmic Repricer. So a lot of the things that I think we've done to mitigate some of that risk appear to be taking hold. But obviously we're watching it very carefully.

[Mark Cook:]

And one thing that we are watching as well as mentioned in variable marketing that tends to one its most -- it's more seasonal quarter. So we're watching that as well.

[Scott Berg:]

Thanks for taking my questions.

[David Spitz:]

Thanks Scott.

[Operator:]

Thank you. Our next question is from Matt Pfau of William Blair. Your line is open.

[Matthew Pfau:]

Hey guys thanks for taking my questions. First want to start out on the anticipated acceleration in revenue growth for 2018. And then David, you’ve laid out a bunch of the different aspects of the business that you sort of feel bullish about. But I guess as we think about that guidance for '18, which of those are sort of the most important there to achieve that acceleration?

[David Spitz:]

Well that's a good question. I think there is probably a couple of areas that I would point to. And I'm just reviewing the list here. So I think GMV performance is pretty core to our customer success and customer health. And I've been just really pleased with how that's stayed out over the course of this year as I was just mentioning on the previous answer. We saw some challenges last Q4 and throughout this year. It looks like it's really rebound on some of our largest channels, including eBay by the way. And so that's been very positive to see and hopefully we continue to see that improve through capabilities that we're offering our customers. I think the indirect sales team, as I mentioned for the entire history of ChannelAdvisor our go-to-market has been a direct sales organization. And obviously it's been a great organization and it has carried us a long way. But we've had a lot of partners coming to us -- as you well know like there is a lot of disruption going on in a variety of industries principally from Amazon. And as a consequence of that I think a lot of different companies are sitting in their boardrooms and discussing how do they adapt to this new digital world of commerce. And so whether it's a supplier or a 3PL or a logistics company, we have a lot of people coming to us who have customer bases that are potentially getting disruptive and looking for new routes to market. And so we decided to create this indirect team to -- and it's not necessarily only seller or all referral or all rev shares, it's actually a mix of a variety of different opportunities, of people who are looking for a technology capability a platform like we have that they can bring to their customers. So that's a little bit hard to quantify. But just given the pace with which they built up that pipeline, I'm pretty excited about what that can do us, because it will be a real amplification of our traditional direct sales model. I can't go further without mentioning China. I just have been super pleased with China. Our team is still relatively small there and when I look at just the vastness of the opportunity, I think that we could invest quite a bit more there and still just be scratching the surface. And of course, logistics I think that's more of a completing our platform type of initiative, because as people continue to see ways to gain efficiencies in inventory and how they shift and how they handle logistics, I think tying more of that into our platform just helps make the platform stickier. So I know that I'm kind of picking almost all of the things I said. But I think those are all drivers for optimism for me.

[Matthew Pfau:]

Got it. And then the other thing I wanted to touch on was on the drop ship product. You mentioned that there is about a dozen retailers that you are now integrated with and if I remember correctly I think the initial focus on this was kind of on the Amazon, Walmart and like Overstock from -- to be able to capture products that ship from 3P to 1P. So maybe you can sort of talk about it seems like you've move beyond that and so how that's evolving? And then in terms of the relationships you are building out with these integrations and other retailers, how does that typically work? Do you have to go to the retailer and get approval and I guess what does that process look like?

[David Spitz:]

Yeah, great question. So we definitely started with some of the retailers that we knew best and had work with historically like Amazon, Walmart, Overstock as you mentioned and from there though we've been branching out based on supplier demand. So there are different categories, obviously the different suppliers fall into and what we've decided to do is really focus on the categories that our supplier customers are driving us towards. So we have seen strong interest for example in DIY home improvements and general home goods and so that's an area of focus for us. To your second point I think that if you were to look at the landscape the few years ago it was a very proprietary landscape. You might have had to integrate with a retailer through a proprietary interface or through a third party that you are required to go through and we think that world is essentially eroding because a lot like that, for example if you look at Walmart, a lot of retailers have opened up KPIs to get out from under this yoke if you will. They have to pay a lot of money to integrate their suppliers. So a lot of the retailers now have programs where you can do these integrations and it doesn't require multiple millions of dollars of investment on their project -- more of their platforms and that's something we've been leveraging pretty aggressively and I think with good success.

[Operator:]

Thank you. Our next question is from Aaron Kessler of Raymond James. Your line is open.

[Aaron Kessler:]

Maybe just first on digital marketing side, if you talk a little bit about the eBay product ads as well as type of attraction you are seeing on kind of the social out channels if possible? And then also just on that maybe if you are seeing -- I know [what] free marketing you do but is there any impact from Apple, ITP impacting digital marketing things?

[David Spitz:]

Yes, so I'm very bullish generally speaking on marketplace advertising as I think I eluded to in my comments, sponsored listings or Amazon marketing services. I mean this is really I think going to be table stakes. I think we can draw lessons from [Timol] in China, right, that has long had a promotional capability in such a crowded marketplace with millions and millions and millions of sellers that you have to leverage promotion and advertising to kind of rise above the noise. And so our view and our council to our customers is, this is, if you are not doing this you need to be doing it. And so that's a scenario of growth for us. As I mentioned a very, very strong interest from customers in how to leverage digital marketing on marketplaces channels and I'm pretty bullish about that. I think that weakness that we generally see continues to be in the larger retailer segment where, kind of like to remind you of all the headlines going on in large retail. So I think that's just an area where you see kind of continued risk and folks struggling a little bit. We don't directly do much at all in the way of retargeting. We do power a lot of feeds for other vendors and customers that may use our product data feeds for those purposes. But those tend to be -- we don't measure those on the basis of GMV where we're kind of like technical underpinning for a lot of those initiatives. So at this point, I don't know that I can point to a meaningful impact from ITP that we see. But obviously something we're monitoring. I have seen some of the other companies out in the ad tech space have to confirm that. But at this point it doesn't seem like something that's meaningful for us at this point.

[Aaron Kessler:]

Got it. And just to clarify on China, is the 4% number is that from China sales on the platform or is that more revenues going through some of the China platforms like Alibaba or JD, et cetera?

[David Spitz:]

That is virtually all export from China, cross border trade out of China into western channels like Amazon, eBay, Walmart, et cetera.

[Aaron Kessler:]

Got it, okay. Great, thank you.

[David Spitz:]

Sure. Thanks, Aaron.

[Operator:]

Thank you. Our next question is from Thomas Forte of D.A. Davidson. Your line is open.

[Tom Forte:]

Great thanks. So you just added a couple of incremental comments on China, but could that be 10% of revenue three years from now? And is there any difference in the margin profile for that revenue versus the revenue outside of China, that's my first question?

[David Spitz:]

Yeah, great question. Absolutely and candidly I'd be disappointed if there weren't a little sooner in that given that we're about to invest more significantly in the region. And what I would tell you is part of the reason I'm excited to invest in China, [indiscernible] has done a fantastic job. Almost all of their metrics are favorable or comparable to what we see in our traditional North American from sales reps productivity, higher ticket values, size of customer and this is very, very strong business profile there. The one metric that's a little more negative in China probably not surprisingly is churn. It's a more fluid and dynamic market and that team there has done really good job bringing churn down to what I would consider good levels for that market. But virtually every other metric that we look at is really quite positive there. So I would certainly expect it to breach 10% of revenue and I would hope that beyond time frame that's a little quicker than what you indicated.

[Tom Forte:]

Great. And then for Amazon and eBay, third party units on Amazon went from 51% to 50%. So it is the first time in the second quarter ever is more than 50%. Do you fear those kinds of moves or is that too small of a change to have an impact on your results?

[David Spitz:]

That's a hard question to answer. We saw last Q4 it [sit] down from 50% to 49% and we did see that as I mentioned during that quarter -- after that quarter that we did see some weakness on the Amazon GMV side and our hypothesis was that [indiscernible] kind of shift towards promotional environments like Prime Day or Holiday that demand tended to go to products for Amazon controlled pricing. So not only they're on proprietary devices like Echo, but also first party products like where they can provide 40% off pricing on a TV or something like that. What's been a little bit different this year is obviously -- and we also hypothesized that an increasing mix of Chinese sellers on the Amazon platform in general, as probably also creates some pressure on other sellers. So we've been investing more in China as we just talked about. And what I would say is this year our Prime Day performance on a same store sales basis with Amazon sellers was significantly better than what we saw last year and if that is an indicator of what's to come in Q4 then that makes me incrementally more confident that the things that we've done around algorithmic repricing, a lot of the other capabilities around FBA optimization, et cetera is creating an improved advantage for our sellers and allowing us to get more effectively and therefore maintaining strong GMV levels. And as I said in response to an earlier question, we saw a bottoming out of same store sales on Amazon in I think it was December of last year on a monthly basis and sequentially this year I've just seen it pick-up month-over-month which has been great to see and even into October same-store sales for Amazon October is the highest we've seen so far this year. Now I think GMV can be a volatile thing, so I can't promise what November or December will bring but all indications are that the things that we've done to address that risk and that concern seem to be helping.

[Tom Forte:]

And then lastly eBay is starting to see some material signs of improvement with accelerating GMV growth in the platform and you now have a more close partnership with them, is there something we could see in your results in there going forward including '18?

[David Spitz:]

Yes, I think so. I mean we're not qualifying or breaking it out. I think eBay is doing a lot of smart things. I was up last week at a brand summit, the first brand summit that eBay held, where they had rolled out a number of I think very compelling capabilities for brands to see eBay as a platform that has wide reach and ability to allow brands to paint their story and tell their story the way they want it, things around authenticity and so on and so forth. So I think a lot of things that eBay is doing are consistent with the trends that we're seeing in the market and we're pleased to be working more closely with them than they have in the past. So not something I can quantify necessarily from a 2018 perspective but we do think it's been beneficial for both of us to be working more closely than we have in the past.

[Operator:]

Thank you. And our next question is from Jason Celino of KeyBanc. Your line is open.

[Jason Celino:]

David and Mark, thanks for taking my question. I am on for Monica today. I had a couple of questions on drop shipping. First of all I mean can you give us any color around kind of revenue expectations for the drop shipping business for 2018? And you kind of talked about the DIY and home goods retailers, can you comment on kind of the size of them?

[David Spitz:]

Jason this is David. So we're -- I know you wanted but we're not breaking out the drop ship revenue at this point and I think even if we wanted to it could be potentially a little bit difficult because a lot of our customers are multiple -- have multiple nodes of selling. So we might be able to drop -- break out. We might be able to breakout order volume or something like that but parsing it down actual revenue contribution might be a little tricky so. But -- and I do think it will take a while to build out the network but that's not a breakout that we're providing at this point. And can you repeat the second question you had around DIY just wanted to make sure I understood it?

[Jason Celino:]

Yes. So can you talk about kind of the size of the retailers that you are kind of signing for drop shipping, which you kind of talked about DIY and home goods, any commentary there?

[David Spitz:]

Yes, so our focus is on larger retailers because they are the ones that are driving the volume, right. So in order to build out the supplier network that we think it's going to be important, it's important that we bring a significant amount of demand to the [payable sale]. What I would say is that our focus is on the larger retailers in each of the categories and segments that we're going to be targeting.

[Jason Celino:]

Okay. And then how long does it usually take to kind of integrate the retailer on the platform for the drop shipping?

[David Spitz:]

Well it varies, because they have individually different capabilities. But this is a capability that we announced earlier this year and as I said we've integrated a dozen of them. So you can do a little bit of math and figure out what our kind of blended time is for that.

[Jason Celino:]

Okay. And I mean kind of alluded to in your comments, can you talk about why these kind of retailers decided to choose you kind of against some of your competition like CommerceHub? And then were these kind of retailers that you signed to 12, were they also looking at CommerceHub or any commentary there?

[David Spitz:]

Yeah. So I'll go back to a response I gave earlier. This is not necessarily an either or proposition. I mean there certainly are some retailers that have exclusive relationships with a provider -- a drop ship technology provider and then they have long-term contracts. So those may be offering this for some period of time. But there is a growing number of retailers that have decided that that's not necessarily in their strategic interest. And so they have broken open their APIs and provided essentially public access for other providers to be able to tie in and bring suppliers to their platform. So it isn't necessarily a matter of a long protracted negotiation with a retailer and a multi-million dollar multi-year type of agreement. I believe our model is more disruptive kind of in line with what we've done historically with marketplaces, where our customer is primarily the supplier or the seller. And we're bringing that supplier to the platform and not necessarily looking to the retailer who's -- all these guys are -- if they're not in distress they're certainly looking at digital disruption at some level. So our view is rather than try to approach them and squeeze about millions of dollars in capital they probably find precious and don't necessarily want to part with, we're going to take our marketplace model of bringing an army of suppliers to the equation and tackle it that way. And I think that's made it easier for us to go in and integrate these retailers.

[Jason Celino:]

Great thanks. That's some pretty good color.

[David Spitz:]

Thanks Jason.

[Operator:]

Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to David Spitz for any further remarks.

[David Spitz:]

Great. Thank you very everybody for your time on the call today. And we look forward to speaking with you again in the near future.

[Operator:]

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