ChannelAdvisor Corporation
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good day, ladies and gentlemen. And welcome to the ChannelAdvisor First Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to turn the conference call over to Garo Toomajanian, Investor Relations. Please go ahead.

[Garo Toomajanian:]

Good afternoon and welcome to ChannelAdvisor's conference call for the first quarter of 2016. 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 first quarter performance as well as our outlook for the second quarter and full year 2016. 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 and 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 my 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. Following very strong fourth quarter, I'm pleased to report continued momentum as we kicked-off 2016 with a solid first quarter with revenue and adjusted EBITDA nicely ahead of expectation, our transition up market gained speed and our results show it with average revenue per customer again increasing to $35,753 on a trailing 12-months basis. Constant currency revenue growth of 18% exceeded our expectation and Mark will provide more details on this in a moment. We had our annual Catalyst conference last month in U.S. and in London attracting over 1400 attendees including a significant number of brands this year. Catalyst always my favorite time of the year was packed with a bunch of new product updates from a variety of partners including Amazon, eBay, Facebook, Google, and Walmart. Our theme this year was future proofing e-commerce for our customers and we discussed significant trends around mobile, logistics, Amazon and brands. We hosted our first ever [customer consulate] [ph] conference with a number of retailers and brands where I was encouraged to have our product strategy validated. And we also took the opportunity to highlight significant product updates we've been busy preparing for. First, we announced the new platform for customers to optimize their fulfillment buy Amazon or FBA operations. FBA continues to gain share across Amazon sellers and we expect this new platform will help sellers manage and improve their FBA operations better than ever. Second we announced the extension of our popular benchmarking analytics to our digital marketing suite, enabling advertisers to see how they compare to similar advertisers in terms of spend, ROI targets and conversion rates. This is a significant step in our long term initiatives to turn our billions of dollars of rich commerce data into actionable intelligence for our customers. Third, we introduced a new product for brand whole product intelligence. [Friends] [ph] told us they need help understanding how their products are presented to consumers online, so we built a platform to do that just to help our brand customers see how their products are being merchandized, evaluate gaps and availability and pricing issues and to ensure that the content they invest so heavily in creating is being used effectively. I'm excited to see how this new product performs. I think it's going to be very popular. We also extended our Where to Buy solution for brands to now also include local store locations and sales data further increasing the value of our Where to Buy technology to help brands and try to engage consumers and to shoppers with trusted retail partners. Finally, we announced our strategic partnership with Walmart to accelerate their marketplace initiative. As I mentioned during my keynote the Catalyst, we've been working with Walmart for the last couple of years we provide an enterprise grade integration platform for third party sellers. Despite the limited availability at Walmart marketplace to sellers over the last couple of years, the volumes we've seen have been impressive. Walmart is already our third largest marketplace by GMV and in the fourth quarter of 2015, Walmart was our fastest growing channel in same store sales basis by a wide margin. Walmart is now ready to significantly expand its seller base and we are actively working with them to recruit and onboard a significant number of sellers to the platform in 2016. I will note that although we believe the strategic partnership could become a meaningful driver of new business and revenue to us, it is difficult to estimate the timing and magnitude of any benefit and so we have not incorporated any such benefit into our models or guidance for the remainder of the year. Of course, these are just some of the things we have been working on. We released new code to production on a nearly daily basis to help our customers compete effectively and sell more. And I’m excited about the investments we’ve been making to continue to expand our platforms capabilities. We have an opportunity to keep the defective standard hub connecting brands, retailers and channels online by providing superior, enterprise grading technology, club service and a global footprint. I believe we are better positioned than never to serve our market Speaking of our markets, I’m pleased to announce a number of great new brands who have elected to partner with us including American Apparel, General Mills, Henkel, Dynacraft, Mohawk Home, Sketchers and Overstock.com. We are honor to have earned the trust of these globally recognized companies and look forward to growing with them for years to come. In terms of the transition in our sales organization that we started a year ago, I’m pleased with the progress I’ve made. We now have more sales reps with two or more years of tenure than we’ve ever had and those tenure reps represent a larger proportion of our sales team than any point in the last few years. Consistent with our focus on customer quality over quantity, we ended the quarter with 2,881 customers roughly consistent with a year ago. Our brands business continued to be very exciting with rapid pipeline growth as our new brand sales team ramped up an attractive customer dynamics. Let me highlight one that illustrates the potential of this market. Early in the fourth quarter 2015, we find a large European FMCG brands, FMCG stands for Fast Moving Consumer Goods, for our Where to Buy product in a single country. A couple of months later, still in the fourth quarter, they expanded our relationship to add another country. And then in the first quarter of 2016, they accelerated their adoption to add an additional 12 countries. So in the span of just a few months, our expected revenue with this brand grew by a factor of 10 and it still represents just one of the multiple brands at the parent company. It’s also worth pointing out that all of this counts to just one customer in our customer count. As we move through and complete our transition to focus on larger brands and retailers, our momentum continues to build. With significant improvements to our profitability and cash flow over the last year, we continued strong revenue growth and our focused go-to-market strategy in place and operational, I'm confident that our strategy is beginning to deliver the results we wanted. Now, let me turn the call over to Mark for more details on our financial performance.

[Mark Cook:]

Thank you, David. I will now provide additional color on our first quarter financial performance and our guidance for the second quarter and full year 2016. We began 2016 with a solid first quarter, achieving strong revenue growth, profitability, and cash flow. Revenue in the first quarter was $26.3 million, an increase of 18% in constant currency, and 17% in U.S. dollars over the first quarter of 2015. First quarter revenue exceeded a high end of our guidance range with the other performance primarily due to the strong growth in variable subscription revenue. Consistent with historical patterns and our expectations, first quarter 2016 revenue declined sequentially from Q4 2015 reflecting the normal seasonal shift in revenue mix towards fixed revenue as a percentage of total revenue. As expected, this seasonal shift is a little bit more pronounced than usual after coming off a fourth quarter that had exceptional variable revenue growth. Revenue from outside the United States was approximately 22% of our total revenue in the first quarter, a slight decrease from 23% of total revenue a year ago. Q1 2016 revenue from outside of the United States increased by 12% year-over-year. Fixed subscription revenue of $20.2 million increased 15% from Q1 of year ago and was 77% of total revenue. The remaining 23% of revenue was from variable subscription. As we mentioned at our Investor Meeting in April for the past several years variable subscription revenue has averaged approximately $5 million for each of the first three quarters of the fiscal year. In Q1 of 2016, however variable subscription revenue was $6.1 million, an increase of 23% from a year ago. While one quarter does not make a trend, we believe this increase represents an early sign of success from our continued focus on improved pricing and qualification practices. Now before moving to the expense side of the P&L, I would like to point out that we are - that we no longer find a subscription dollar retention rate in our quarterly filings. So for the first quarter this metric remained above 100% and we're consistent with historical performance. However, we believe our annual net booking disclosures are more useful for investors. Thus going forward we're tying a subscription dollar retention metric. My comments regarding expenses will be on a non-GAAP basis and all comparisons will be on a year-on-year basis unless otherwise specified. A press release includes a GAAP to non-GAAP reconciliation. The first quarter of 2016 reflects a continued benefit of a strategic realignment initiating the second quarter of 2015. First quarter 2016 gross profit increased 20% to $19.7 million from $16.4 million a year ago. As a result our gross margin expanded almost 200 basis points to 75%. Gross margin strength in the quarter was driven primarily by the strong higher margin variable subscription revenue. Operating expenses of $20.9 million for the first quarter of 2016 was down 8% from $23.6 million a year ago. This was primarily a result of lower sales and marketing expense compared to the first quarter 2015. It should be noted that we continue to invest in our long term growth and the full extent impact of enterprise sales hires in the fourth quarter of 2015 reflected in our first quarter 2016 results. Non-GAAP operating loss was $1.2 million in the first quarter for an improvement of $5 million compared to a loss of $6.2 million a year ago. As a result our non-GAAP operating margin for Q1 2016 improved the negative 4.6% compared to a negative 27.3% a year ago. The combination of variable revenue growth, healthy gross margins and lower operating expenses resulted in an adjusted EBITDA of positive $936,000 for the first quarter of 2016, well ahead of our guidance and a meaningful increase from an adjusted EBITDA loss of $4.2 million a year ago. The same factors driving our strong adjusted EBITDA performance also produced a better than expected first quarter non-GAAP net loss of $1.1 million or $0.04 per diluted share. This represents an improvement of $4.9 million from a non-GAAP net loss of $6.1 million or $0.24 per share for the first quarter a year ago. Turning to our balance sheet. Our cash position strengthened further during the quarter ending with $61.7 million in cash and cash equivalents as of March, 31 2016. This is an increase of $1.2 from the end of the fourth quarter 2015 balance of $60.5 million. Due primarily to positive operating cash flow of $2.7 million and the first quarter offset by tax withholding payments related to share compensation. Now I will turn to FY 2016 guidance. We remain encouraged by the successes we have seen from the strategic shift we initiated last year and remain optimistic about the year as a whole. We believe, we have a longer term potential to grow faster and that we have put into place the foundation to realize this potential. For the second quarter of 2016 we are anticipating revenues of $26.6 million to $27 million representing growth of 10% to 12% from the year ago quarter. We intended to continue strategically investing in the business primarily in the areas that can support our long term growth including key enterprise sales and account managers. With that in mind in the second quarter of 2016, we expect an adjusted EBITDA loss of $2million and $1million for the quarter. This includes the impact of costs associated with our two Catalyst user conferences which were held in the second quarter. For the full year 2016, we are increasing our revenue guidance to be in the range $112 million to $113.5 million. This represents revenue growth of 11% to 13% compared to 2015. It also includes the impact of foreign currency exchange, headwind of about 100 basis points. We expect our new enterprise sales team to gain traction and churn levels to improve as a result of the shift in focus of larger customers in 2016. Now from a profitability perspective, we anticipate an adjusted EBITDA between $500,000 and $3 million for the year. This reflects our goal of continuing to invest in the business while generating at least a breakeven adjusted EBITDA on a trailing 12 month basis. In summary, we are pleased with our financial results for the first quarter. We believe our focus on larger enterprise businesses and operational improvements we’re starting to show positive outcomes. This was demonstrated by improving variable subscription revenue trends, increasing average revenue per customer and improved topline outlook for the year. Further, our first quarter performance increases our confidence that we are in the right path to delivering strong, sustainable, topline growth and improving profitability in the years ahead. With that Operator, we'd like to now open the call up to questions.

[Operator:]

[Operator Instructions] Our first question comes from Justin Furby with William Blair. Your line is open.

[Justin Furby:]

Hi guys, thanks and congrats. Just a couple of questions and apology I jumped on late, but Mark, I thought I heard you said you we retiring the metric on retention which I think makes sense based on what you used to call it, but was the - are you going to disclose anything going forward or what were the trends on the growth basis in terms of churn and how are you thinking about that for the balance of the year? And I have couple more follow up. Thanks.

[Mark Cook:]

We are not substituting the new metric specifically for retention but in terms of churn -

[David Spitz:]

Justin, this is Dave. I don’t know if you call it because it sound like maybe going a little bit late, but we did indicate it was above 100% and consistent with historical patterns. So we're really - retiring it just because of the feedback has been – not a useful of metric for investors, not because of any change in performance there. I think our churn levels were acceptable and in line with expectation, we will not disclose a specific number.

[Justin Furby:]

Got it. And then David you listed several brands, American Apparel et cetera. Are most of those where to buy, or what were those supposed coming in at. And you also mentioned somebody that kind of expanded scope in terms of countries on Where to Buy. Have you started to see some of these brands that are also moving over to marketplaces or is it too early for that?

[David Spitz:]

Well it’s a mix Justin, of the companies that I listed. There are certainly Where to Buy clients and there is - exclusively Where to Buy to be clear. And as it relates to extending the marketplaces, we see some of that, we work with some brands for a number of years on marketplaces. But I think in general, probably a majority of our activity in the grand space is going to be around Where to Buy product intelligence and those products. It's still I think early for some number of brands to be directly selling on marketplaces although certainly some do.

[Justin Furby:]

Got it. And then one more if I can. In terms of bookings, just any commentary David in terms of how you felt about the quarter versus last Q1 and then just sort of building your plan this year, I think last year you shared you bookings number in sort of the low teens, as a percentage of revenue. Is a goal to do something higher than that or what kind of target – I know you can’t give the exact number but just directionally how should it trend this year versus last. Thanks very much

[David Spitz:]

Great question. Obviously we don't share our internal targets but we hired a number of enterprise reps as you know at the very end of last year and a few of them started I think January 4, of this year right at the beginning of the year. So this is the team that I would say was essentially in ramp mode in Q1, obviously getting trained and educated somewhere existing sales reps that transformed into that team and somewhere net new sales reps to our company. And so Q1 for them was primarily around training and beginning pipeline building which, as I mentioned, I was pleased with our growth in our pipeline there. So as awe go in through the rest of the year, I’d expect that – obviously we’d expect that investment to begin to pay-off in the form of increased bookings. So I'd say in general, I think the team that we've got in place as I said in my comments, the go-to-market strategy, it’s established, the team is in place. We’ve obviously looked to execute during this year.

[Justin Furby:]

Got it. Thanks very much.

[Operator:]

[Operator Instructions] Our next question comes from Craig Nankervis with First Analysis. Your line is open.

[Craig Nankervis:]

Yes. Congratulations, good afternoon. I might have missed it, but are you talking at all about the breakdown, the digital marketing contribution for example versus marketplaces. I know you've started to give us a picture of that a few weeks back. I’ll start with that.

[David Spitz:]

Hi Craig, this is David. We did, for those who may have missed it, we do provide some documentation in the form of the presentation on our website following our investor and analyst day that we broadcast from our show a few weeks ago. And we did break down the revenue contribution from our major product lines over the last few years. It's not our intentions to break that out on a regular basis. We felt like it was helpful thing to just understand - help investors understand the scale of some of the different points of our business and how that changed over time. But we haven't disclosed anything there for Q1 and I don’t expect that we are going to make that a regular metric at least to this point in time.

[Craig Nankervis:]

Sure, okay. And are there any new influences on your guidance. I assuming heard you discuss that Walmart is not a part of the plan this year that you are guiding for. But the newer excess products or the product intelligence, is there anything that you contemplate this year from those things?

[Mark Cook:]

No, we haven’t specifically mentioned things such as access, ChannelAdvisor as an example within our guidance or anything like that. Walmart, as David mentioned earlier is not being factored in, leaving significant amount. But one thing I do want to continue to highlight is that for those who either working in your models in Q2, obviously the timing, the catalyst is different compared to last year. So when you think about that from an expense perspective, definitely keep that in mind.

[Craig Nankervis:]

And there were two Catalysts, right?

[Mark Cook:]

That’s correct, yes. We had the Catalyst in the U.S. as well as one in the U.K. The one in UK was a little bit smaller than U.S., it’s a one-day affair.

[Craig Nankervis:]

If we took - okay so the impact. And was that the case in Q1 last year? Where there two Catalyst in Q1? I’m sorry if you -

[David Spitz:]

Craig, this is David. I don't have that in front of me. I know that was a year, it may have been last year where we actually straddled Q1 and Q2 or that may have been 2014, I obviously don’t remember that.

[Mark Cook:]

That's a larger in Q1.

[Craig Nankervis:]

Okay. So at the end of the day, there are no new influences that you are factoring in guidance. That's what I am hearing you say on top line guidance for the year.

[Mark Cook:]

Not today.

[Craig Nankervis:]

Okay. That does it for me. Thank you.

[Operator:]

Thank you. Our next question comes from Brad Reback with Stifel. Your line is open.

[Brad Reback:]

Great. Thanks very much. So building on that last question with respect to the revenue guide. Since the pricing issue in the back half of '14, you guys have been very consistent in sort of this mid to upper teens and you've given the guide that you've laid out, it’s basically very, very low double digits, roughly 11%, 12% for each of the next three quarters. So maybe you can help us understand what type of headwinds you are facing here or the degree of conservatism that's big into these numbers. Thanks.

[David Spitz:]

Hi Brad, this is David. I’ll start off and Mark may have something to add. As you know, topline revenue growth is a lagging indicator and one of the things we disclosed at the end of last year was our net bookings as a percentage of revenue was, I believe it was 14% if I recall correctly. And so that is something in that range like low-to-mid teen ranges is what I would have expected following that period of time now. I think we're - positively exceeded our expectations in Q4 and again here in Q1 one of the factors that's a little bit harder to project forward is variable revenue. So a good bit of over performance in Q4 and into Q1 as well has been on a variable revenue upside and so when we think about guidance, now what Mark comment further, when we think about guidance we sort of necessarily have to take a little bit of a discount for that in the future because it's just inherently harder to predict, so that's always one factor. Mark?

[Mark Cook:]

I think the variable revenue I think if you recall on the meeting at Catalyst that we - again which is one the website as well, the variable revenue was typically $5 million per quarter for Q1, Q2 and Q3 over the past couple of years with the top occurring in Q4. Obviously variable revenue in those Q1 was higher than that at $6.1 million and overseeing here is a little bit of mix change but we don’t know whether that will trend or not. So, in our guidance we've not necessarily forecast again a substantial difference at all from the historical trend in variable.

[Brad Reback:]

Got it. So just to be clear you are using somewhere in that $5 million as oppose to the step-up that we saw on this current quarter?

[Mark Cook:]

Since you have the numbers from the Catalyst that is available, I would allow – maybe pass trends from that perspective if you kind of help you model.

[Brad Reback:]

Perfect. Thanks very much.

[Operator:]

Thank you. I’m showing no further questions. I would like to turn the call back to David Spitz for closing remarks.

[David Spitz:]

Great. Thank you everyone. We look forward to speaking with you in the near future.

[Operator:]

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