ChannelAdvisor Corporation
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Q3 2016 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 follow at that time. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Garo Toomajanian of Investor Relations. Mr. Toomajanian, you may begin.

[Garo Toomajanian:]

Thank you. Good afternoon, and welcome to ChannelAdvisor’s conference call for the third quarter of 2016. My name is Garo Toomajanian, and with me on the call today is 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 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 further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent Form 10-K or Form 10-Q, as well as our other filings, which are available on the SEC website at www.sec.gov. During the course of today’s call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, which excludes depreciation, amortization, income tax expense, interest, stock-based compensation expense and for certain periods, one-time severance and related costs. 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 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 pleased with our strong third quarter results as they exceeded our expectations and represented steady and continued progress against our plan. I was especially pleased that our U.S. revenue growth accelerated to 20% year-over-year during the quarter; the fastest growth rate so far this year, so that’s by far our largest region. Our focus on larger retailers and brands is evident and the continued growth of customers with an annual commitment of $15,000 or more including over 40% growth in the number of customers committed to $100,000 per year or more. This contributed to 17% growth in average revenue per customer from a year ago to a record $38,400 on a trailing 12-month basis. Much of this was possible, because of our market leading platform, which we continue to invest in and expand aggressively. We recently released a number of significant upgrades for our platform as part of our autumn release, including support for a number of new channels including Amazon India and Lovato, a marketplace with a presence throughout Southeast Asia. We were also first-to-market to support eBay promoted listings. We expanded support for Facebook and Instagram, and enhanced our analytics for where to buy and product and intelligence modules. We've also expanded our investments in the streamlining and optimization including a new algorithmic repricer that we launched on Jet and Amazon. Early results from this new repricer, which continuously balances profitability and sales velocity has been extremely impressive with early customers experiencing double-digit comparable sales growth or simultaneously expanding profit margins. These results exceeded our expectations and we're so strong in fact that we are racing to convert hundreds of customers to this new repricer in advance with the holidays. Of course, the big industry news in the quarter was Wal-Mart's acquisition of Jet.com. We're excited to see two of our most strategic partners combined, having worked closely with each company to build their respective marketplace platforms. In the depth of our support for both platforms, we think a combination is not only good for them; it’s good for us as well, as it will allow us to provide even more capability and optimization for the combined marketplace to leveraging scale across those. Speaking of Wal-Mart's marketplace, our progress scaling it continues to be strong with over 750 live sellers and nearly 13 million active SKUs on Wal-Mart as of the end of the third quarter. Based on published reports, we believe this represents more sellers and products live on Wal-Mart to ChannelAdvisor than all our competitors combined by a large margin highlighting the scale, reach and the liability of our platform for customers and partners. We are excited to see how the holidays perform on Wal-Mart marketplace and believe that we’ll be a meaningful contributor to our growth in 2017. Simply put we believe there is no platform that can match ChannelAdvisor's breadth, depth, scale and liability and it comes to growing our customers’ business. All of these platform enhancements or network effects continue to help us attract new world-class customers including Microsoft, JVCKENWOOD, Shop Doctor, The Hillman Group, and Lamps Plus to name just a few new clients, who joined our platform in the third quarter. We also expanded our relationship with a number of clients in the third quarter such as Johnson & Johnson; we deployed our Where to Buy solution to a number of additional countries and brands. Our Where to Buy solution has proven very popular with branded manufacturers and helped us to achieve record bookings in our brand division in third quarter. Of course none of these platform enhancements and clients success stories will be possible without an incredible team. This year for the fifth time, we won the Triangle Business Journal's as Best Place to Work Award, competing against top companies in our region. Our employees are clearly passionate about ChannelAdvisor and we are passionate about them. We know that when we take care of our employees, they take care of our customers, and I am proud of how we continue to attract, and retain great talent of ChannelAdvisor. The transformation of our operating efficiency over the last couple of years has been significant. In the first nine months of 2014, for instance, we had almost 17 million in negative operating cash flow and in comparison two years later in the first nine months of 2016; we’ve generated over 9 million in operating cash flow while continuing to main double-digit revenue growth. In short, our strategy continues to produce positive results. As we consider our longer-term outlook, our continued progress of larger customers and brands continues to support our view that we should expect an inflection on our growth rated 2017 with continued improvement, and our unit economics and our overall profitability, and our objective remains to drive revenue growth above the rate to be commerce growth. Finally, I’m excited to share that our annual catalyst conference will be held in national tenancy March 6 through 8 next springs. For those of you have attended in years past, you already know it’s among the best conferences in the industry and we’re thrilled to be hosting it in music city for the first time ever. The show is over quickly so get your tickets put on your boots and get ready for our biggest invest catalyst ever. Now, I’m going to turn the call over Mark for more details on our financial performance. Mark?

[Mark Cook:]

Thanks, David. I’ll now provide additional detail on our third quarter financial performance and our guidance for the fourth quarter and full year 2016. Revenue in the third quarter was $28 million and an increase of 15% or 18% in constant currencies over third quarter 2015. The British pound continued to move lower during the third quarter, if you recall on August, we estimated a negative year-over-year currency headwind impact of about 150 basis points in growth for the quarter. Despite our currency headwind that was double our estimate, we exceeded our guidance for Q3 2016. Pick subscription revenue was $22.3 million, increased $3.9 million or 15% from Q3 a year ago, and was 80% of total revenue. Variable subscription revenue continues to strengthen and was 5.7 million or 20% of total revenue in the third quarter. Variable subscription revenue increased 14% from a year ago. Revenue from outside the United States was approximately $6 million or 21% of our total revenue for the third quarter, compared to 25% of total revenue in the same quarter a year ago, primarily due to current exchange fluctuations. In fact in local currencies revenue from outside of the United States grew year-over-year. We ended the quarter with 2,880 customers, an increase of two from the end of the second quarter 2016. With continued progress attracting large retailers and brands on a trailing 12-month basis, average revenue per customer increased 17% to 38,400. Similar to second quarter, we are providing additional color on this shift in our customer base. During the third quarter, we had 46 net customers with committed annual revenue of less than 15,000, which were terminated. We added 48 new customers with committed annual revenue of greater than 15,000. The number of customers with over $100,000 of committed annual revenue increased 42% from a year ago to 143 and the committed annual revenue for most customers increased 41% to $24 million at the end of the quarter. Among those nine were existing customers who migrated from the lower brands into the $100,000 brands during the second quarter. We believe this represents continued progress and the shift towards larger customers and increase in deal size. As a reminder, committed annual revenue is the fixed amount of annual revenue for which our customer has a minimum contractual commitment and it does not include variable revenue. 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, operating expenses, operating loss and for adjusted EBITDA. We also provided a GAAP to non-GAAP reconciliation schedule on our website, which can be accessed on the Investor Relations section of our website at IRchanneladvisor.com. Third quarter 2016 gross profit increased 17% to 21.5 million, from 18.3 million a year ago. As a result, our gross margin expanded 150 basis points to 76.8%. Transfer revenue increased 7% to 6.5 million from 6.1 million a year ago, considerably slower than the regular revenue. Operating expenses were 21.3 million for the third quarter of 2016, were up 7% from 20 million a year ago. Operating expenses decreased 2.1 million from the second quarter in part to our two Catalyst events which were held during the second quarter. Operating income was 200,000 in the third quarter, a significant improvement from the loss of $1.6 million a year ago. As a result our operating margin for Q3 2016 improved to positive 0.7% compared to negative 6.8% a year ago. The combination of revenue growth, increasing gross margin and operating expenses that were lower than expected produced an adjusted EBITDA gain of $2.2 million for the third quarter of 2016; significantly ahead of our guidance and a meaningful increase from adjusted EBITDA of 708,000 from the third quarter a year ago. For the first three quarters of 2016 adjusted EBITDA grew to 2.2 million compared to the adjusted EBITDA loss of 4.0 million a year ago. Non-GAAP net income was 300,000 and compared to non-GAAP net loss of 1.7 million for the third quarter of 2016. Turning to our balance sheet, our cash position strengthened during the quarter, ending at 64.7 million in cash and cash equivalents, as of September 30th, 2016, an increase of 2.4 million from the end of the second quarter, due primarily to positive operating cash flow of 3.2 million in the third quarter. Now I will turn to guidance, our strong third quarter results make us increasingly confident in our full year expectations, as previously noted for our Q3 2016 results foreign currency fluctuations specifically while in British Pound is expected to be the continuing headwind for our fourth quarter. British Pound 5% to 8% then in average exchange rate in the second quarter and approximately 20% lower compare to Q4 2015 average a year ago. For Q4 2016 guidance we are anticipating revenue of $31.7 million to $32.1.4 million, representing growth of 8% to 9% from the year-ago quarter. As the British pound is continue to drop since our last call, our guidance for Q4 2016 now includes the potential currency headwind impact of almost $1 million or above four percentage points of growth year-over-year. Also keep in mind, exceptionally strong global revenue performance in the fourth quarter of last year, so that contributes to the challenging year-over-year comparison. That I said, we do expect to see season strength in global subscription revenues in the fourth quarter as we have in the past. We intend to continue to strategically invest in the business, primarily in areas that can support our long-term growth, including key brand focused sales reps and account managers. With that in mind, in the fourth quarter 2016, we expect an adjusted EBITDA loss of between $2.6 million and $3 million. As a result for the full-year 2016, we anticipate revenue will be in the range of $113.1 million to $113.5 million representing an increase of the mid-point and grow to 12% to 13% for 2015. Please note that this represent growth of approximately 15% on a constant currency basis. After adjusting for an estimated negative impact of foreign currency for the full-year of 2016, were about $3.6 million when compared to average rates during the full-year of2015. We’re increasing our expectations for adjusted EBITDA and now anticipate and adjusted EBITDA between $4.8 million and $5.2 million for the year. This reflects our goal continuing to invest in our business while generating at least a break even adjusted EBITDA on trailing 12 months basis. Finally, we announced our same-store sales for October this evening. Coincident with our earnings release, as ChannelAdvisor our primary focus is always been on our customers. This is reflecting our recent investments in and analytics which includes our same-store sales that is now available to our customers through our bench marking and analytics platform. As a result the while monthly same-store sale reports to become a popular bench mark within the industry our October 2016, report will be our last regularly schedule same-store sale report. We intend to continue periodically publishing industry commentary by this integrator and analysis through our blog and press release. Especially around the holidays, or when specific events occurs. In summary, we are pleased with our financial results for the third quarter. We believe that our third-quarter results are reflective of our focus on large customers and operational improvements. This was demonstrated by a continued strength in global subscription revenue, further growth in the average revenue per customer and confidence in our outlook for the full-year. Additionally, our third quarter performance makes us optimistic that we are on the path to return sustainable increase in revenue growth and improving profitability in the years ahead. With that, operator, we would like to now open the call for questions.

[Operator:]

Thank you. [Operator Instructions] The first question we have comes from Justin Furby of William Blair & Company. Mr. Furby your line is now open.

[Vinay Mohan:]

Hey guys this is actually Vinay for Justin. Quick question, so just want to get a feel for gross going up next year. Looking out for next year do you think it sort of fix up somewhere in the 14% to 15% range. And then I got have a quick follow up on competitive dynamics.

[David Spitz:]

Hey this David, we are not going to guiding to 2017 obviously at this point. I think our language has been consistent that to the extent we continue to execute in the back half of the year that we expect to see inflection in growth next year, but we haven’t put any numbers on it.

[Vinay Mohan:]

Got it, thanks for that. And then just a quick follow up, have you guys seen any sort of - I mean r you seeing Shopify at all competitive landscape and any commentary on kind of what they are doing in the marketplace based on how that impacts you guys?

[David Spitz:]

No we are not seeing them in deal; Shopify tends to focus more in the SNB segment. I think if you look at some of their published GMV and customer count numbers, you can back into volume levels that are considerably lower than our average GMV per customer, but I think we operate in different segments of the market and in that regard. I’m not aware anecdotally of any deals where we have been going up against Shopify, We actually partner with them in the sense that for a lot of our sellers that are using Shopify, so that’s more solution and they need a more robust platform for marketplace integrations. We have a number of customers in both.

[Operator:]

And the next question comes from Monika Garg with Pacific Crest. Miss. Garg your line is open.

[Monika Garg:]

Thanks for taking my question, just on housekeeping first of all, could you tell revenue breakdown by different geographies trying to understand basically ForEx impact going forward?

[Mark Cook:]

We have not historically broken it out by specific geographies. I think the only thing we have done in the past, I think a year ago we suggested that we had made an exposure to the Pound Store when it was about 15% of course that was a barrier; we have not broken that geography since the time Monika.

[Monika Garg:]

Then I think at your analyst event you talked about your target being 20% top-line growth. When do you see achieving that higher than ecommerce growth towards 20%?

[David Spitz:]

Hey Monika this is Dave. We haven’t indicated a particular timeframe. What we said and repeated today is that we expect to see an infection in growth next year, and that’s as specific as we have gotten at this point.

[Monika Garg:]

Then CommerceHub which is now public, they are also focused on the brands I think in the marketplaces and that business competes with ChannelAdvisor maybe have you seen them in the market any comments on increased competition.

[David Spitz:]

No, CcommerceHub, we compete on a relatively small overlapping area. They had a part of the company Mercent and Mercent provided services like Amazon integrations and a few other to third-party sellers, most of CommerceHub's core business is really around drop ship, which is part of the first party sales to helping been sell first party in marketplaces. So, I would say we're adjacent in the market and not competitive as it relates to the types of sellers that we integrate onto marketplaces.

[Monika Garg:]

Just a last one from me, if you look at currency neutral growth for your guidance, about 12% which is still lower Q-over-Q and you are talking about inflection heading into 2017, maybe first of all why there is this bigger compare year-over-year, is that the main reason and what gives the confidence of infection in growth next year. Thank you.

[David Splitz:]

I'll take a couple of things Mark may want to jump in as well. Number one, currency is certainly a factor, there is no doubt about that, last year we also had a significant spike in variable revenue primarily due to some policy changes we made earlier in the year that you may recall around volume discounting, which led to variable revenue growing quite rapidly last year and culminating in significant growth in Q4. We think that was really kind of a one-time spike relating to those changes in policies that we made; and unlikely to repeat at the same magnitude; so we think it's a little bit of a tougher comp for that reason.

[Mark Cook:]

Yes, I really can't add anything. What David said, I think that's correct?

[David Splitz:]

And I think Monika going back to your earlier question about - the second part of your question about what gives us confidence, the mix shift that we see in our customer base, the quality of customers, the scale of those customers, our ability to penetrate that customer base as Mark indicated to growth in customers for example over $100,000. We know that that segment of our customer base has very, very good retention value. And so those are kind of lagging indicators or leading indicators I guess I should say of our confidence in the quality of the revenue and the retention value of that revenue over time.

[Operator:]

And the next question comes from Scott Berg with Needham. Mr. Berg your line is now open.

[Scott Berg:]

I have got a couple of quick ones here. First of all with as you look back over the last year with the shift in go-to-market strategy in some of these larger customers, are your customers mind anything different today than they were a year ago whether it's GMV bands or other ancillary price. Just trying to get a sense of as you put more focus on those deal cycles or deals, are actually the composition of those are changing?

[David Splitz:]

I think we're clearly selling to larger customers, that much is clear. And so they are going to typically buy into higher bands then what we might have seen historically in the business. The inclusion of our Where to buy product offering and more recently our products [indiscernible] which is really focused towards brands is relatively new offering. So where-to-buy something that we acquired around the beginning of 2015 and stood up the sales team focused on brands to being with this year; and Product Intelligence is something we announced earlier this year, a few months ago. So because those are relatively new offerings from us. And the brand appetite for those products is quite strong and we're trying to about the potential there. Beyond that I would say marketplaces continues to be a strong area of growth, consistent with last years that we've seen in the business whereas digital marketing is a little bit softer than marketplace was, but we're comfortable with that because we think that’s where the puppies going in the industry, we think that more and more transactions on mobile device are go towards aggregators that have you identity and payment and shipping information built in. So think we’re in a position in the right area.

[Scott Berg:]

Got it and my follow up probably for March you had an operating profit in the quarter, congrats great progress in the model there, knowing that fourth quarter is not a good indication of model profitability, because of seasonal basis, half of the fourth quarter is always seems to be better than the prior three quarters. How should we start looking at the model on a go forward basis, is this is perpetually cross models today, or there any reason to think I mean there are some investment have been made in the first half year, that would make the [Multiple Speaker] and that loss for short time?

[Mark:]

I think we continue to evaluate our investments [in the middle of the year] again, obviously we want our continued support to brand and manufacturing area as an example, may be a little more R&D and that types of things. So obviously we demonstrated operating leverage recently, I think we will continue to invest in this business as we spread it and [indiscernible].

[Operator:]

Our next quarter comes from Craig Nankervis of First Analysts. Mr. Nankervis your line is open.

[Craig Nankervis:]

So to me you know, a bit of a change in tone versus Q2 or at least, how you talked about the second half and it seems like 90 days ago, there was tone about, we got to go through sort of a certain trough to get through a more normalized model, that reflects the newer strategy, on which you are executing. And yet 20% growth from your largest geography in the quarter, what is driving that, was there something different in the way the performance played out, versus the way you talked this qualitatively about the near term or how can you help me on this point?

[David Splitz:]

Hey Craig this is David, I think from a tone prospective, we would try to follow like it is, our view of the business earlier, we’re obviously pleased with the third quarter results. I think one element that we saw in the third quarter is that the fact is these larger customers over time, I think are our timing to gain share of wallets in terms of consumer spend. So if you look at where market share gains are generally in the industry they tend to go more towards larger retailers and brand who have the financial capacity to invest in driving consumer traffic. And so I think one thing we benefited from that, we didn’t necessary model in or anticipate earlier this year is the sort of volume growth that we’re seeing in some of those larger customers. This can happen too organically as they grow, and obviously given our business model that can benefit us as well. So it’s hard to say that that’s kind to be continues trend from here on now, but it was a positive impact on the business.

[Craig Nankervis:]

And so it sounds like you are not really factoring that as you should think about the current quarter or am I wrong on that?

[David Splitz:]

Well first thing I would say mark of timing and fourth quarter is always harder to predict than other quarters just because there is no variable revenue and can’t always predict what the holidays are going to look like in terms of consumer spending. So it’s a little bit hard to predict, we obviously feel strongly and have a conviction that larger customers are the right focus for us and we look forward to see how they perform during all of this.

[A –Mark Cook:]

I would agree, I think we don’t forecast macroeconomic events or anything like that even most of our forecast together.

[Craig Nankervis:]

And can you just briefly comment on your re-price, is it the algorithm re-price or I did see some press about that. Is that - how do we look at that I mean is that a unique capability that you are bringing to the market or is this just a trend – it’s not clear to me how distinct that is for you it sounds like it could be versus what else might be out on the markets and how do we think about the sort of unexpected success you are seeing? It’s a GMV driver at the end of the day is that right and so that would to the extent help to GMV that’s going to help you?

[David Splitz:]

Yes, that’s correct. There are competitive re-prices on the market and one of things I mentioned I think on the last call or one of our blogs was the fact that Amazon is getting more crowded in terms of the number of sellers for any particular product. And we know at the end of the day our job is the platform is to help our sellers being competitive and so “rise above the risk.” So we have committed a lot of resources to focusing on the operational aspect of handling the commerce, but also optimizing them and this re-price is a good example of that where we do more dynamic and holistic job of helping our customers achieve prominence whether it's on Amazon or other channels. But also do it in a way also have some lose profitability. So we are - I’m not going to get into all the details of what we do, because I think it's got competitive value, but obviously we have been very pleased with the results we have seen with some of the early customers and we have been working really hard to get as many customer who use a repricing capability onto using our updated version prior to the holiday. So we are pretty interested to see how that turns out.

[Operator:]

And the next question is from Brad Reback with Stifel. Mr. Reback your line is now open.

[Brad Reback:]

David I am not sure if I caught it or if you talk about it but in general did GMV grow faster than U.S. domestic revenue?

[David Spitz:]

Hey Brad this is David. I didn’t speak to GMV; we don’t generally speak to that quarter-to-quarter. I know that I mentioned a little bit on the last call. So I didn’t make any public comments about that, but what I would is that I continue to be pleased with the rate of GMV growth in the third quarter that’s probably as far I could go on it.

[Brad Reback:]

And are you still optimistic that GMV growth and revenue growth converge in the near-term?

[David Spitz:]

I think they converge, you know near-term is obviously the loaded term; I don’t know when they do. I think they converge gradually.

[Brad Reback:]

Okay. Thanks.

[David Spitz:]

Thanks Brad.

[Operator:]

I’m not showing any further questions at this time. I would now like to turn the call over Mr. David Spitz, CEO for any further remark.

[David Spitz:]

So, thank you everyone for participating in the call and 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.