ChannelAdvisor Corporation
Q3 2014 Earnings Call Transcript

Published: 8 Nov 2014

[Operator:]

Good day ladies and gentlemen. And welcome to the Third Quarter 2014 ChannelAdvisor Earnings Conference Call. My name is Phillip, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. John Baule, Chief Financial Officer. Please proceed, sir.

[John Baule:]

Thanks. Good afternoon, everyone. And welcome to ChannelAdvisor’s conference call for the third quarter of 2014. I’m John Baule, Chief Financial Officer of ChannelAdvisor and with me on the call today are Scot Wingo, CEO and Chairman; and David Spitz, President and COO. After the market closed today, we issued a press release with details on our third quarter performance, as well as our outlook for the third quarter and full year 2014. This press release can be accessed in the Investor Relations section of our website. In addition, this call is being recorded and a replay will be available following the conclusion of the call. During today’s call, we will make statements related to our business that maybe 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-Q, as well as our other filings which are available on the SEC website. During the course of today’s call, we will refer to certain non-GAAP financial measures including core revenue, which excludes revenue from two small legacy acquisitions that are not a core focus of our business. 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 comments 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 said, let me turn the call over to Scot for some remarks.

[Scot Wingo:]

Thanks, John. And welcome everyone to our third quarter conference call. We reported another strong quarter with financial results that were above our expectations. Core revenue of $20.7 million increased 28% from a year ago, representing growth that’s twice the level of e-commerce growth as reported by industry analysts. In the third quarter, we achieved record bookings and increased sales productivity, as online retailers chose ChannelAdvisor to prepare for the busy holiday selling season. David and John will provide some additional color on metrics to illustrate why we remain confident in our ability to continue to grow at a healthy pace, while also making meaningful progress towards becoming a profitable company. We are in the very early days of several trends that we believe will drive growth in e-commerce for many years, given these trends, we’ve worked diligently to build upon our leading position as a provider of Software as a Service e-commerce channel management solutions. ChannelAdvisor enables online retailers to automate, optimize and expand sales across three types of e-commerce channels, marketplaces, comparison shopping engines and paid search. Our success is reflected in our growth which is twice the rate of e-commerce. One of the trends in e-commerce we’ve been tracking very closely is an increase in branded manufacturers or brands for short looking to expand to their e-commerce exposure and ultimately selling direct to consumers. I wanted to spend a minute today explaining what we are seeing around this brands going direct trend. In the last six months, we’ve been doing a lot of research and it talks with dozens of brands, what we learned is, brands are lapping retailers in their e-commerce adoption rate but they’re rapidly waking up to the opportunity. There are several reasons they are waking up to the e-commerce opportunity. Brick-and-mortar retail is flat to down, which is causing not only a decline in traditional retail channels, but also many smaller brick-and-mortar retailers are closing, which is reducing the number of offline retail partners brands have to work with. While offline retailers have been under pressure conversely, Amazon is growing north of 30% from those brands has become quite significant. While brands enjoy the sales via Amazon, they’re also interested in understanding how to leverage the Amazon marketplace to increase their selection and augment their wholesale efforts. Finally, in the past, brands took a very restrictive stance on their resellers online channel activities. Now we’re seeing retailers reevaluate that position and look for ways to partner with their resellers. What we have also discovered, there is significantly more brands that are not selling direct yet. But that do want to improve their e-commerce capabilities and take steps towards understanding, optimizing and monetizing the consumer traffic that comes to their websites today. This is a critical step towards a brand taking the e-commerce plans and many brands eventually sell direct to consumers. In fact, a recent Forrester survey revealed that 15% to 25% of consumers visit a manufacturer’s website as part of their online purchase path. How does this relate to ChannelAdvisor, from a ChannelAdvisor standpoint once a brand has decided to go direct either via their own website or a marketplace, they become a prospect for our offerings. In the past we’ve mentioned brands such as Whirlpool and Emerson that have decided to go direct and utilize ChannelAdvisor. However, as I mentioned earlier, given that there are only a small percentage of brands that sell direct today, we historically have not been able to work with the majority of brands as our offerings are not a fit with their lack of direct to consumer strategy. In order to expand our capabilities to address that segment of the brand opportunity, today we announced the acquisition of an early-stage U.K.-based company called E-Tale. E-Tale acquisition gives us a new brand-oriented solution called Where to Buy that appeals to brands that are not selling direct already, thus increasing the number of brands we can work with. The Where to Buy functionality sits on the brand’s website and as consumers come to learn about products, they are intelligently routed to retail partners for conversion. The Where to Buy functionality has three key benefits. First, Where to Buy monetizes consumer traffic to brand websites that today’s effectively a lost revenue and learning opportunity. Second, Where to Buy allows the brand to understand the behavior of the consumer, what product did they buy, what was the price, what was the click-through rate and the conversion rate downstream? Third and finally, Where to Buy enhances and strengthens the relationship between the brand and the retail partners, in fact, we believe there are interesting opportunities at that intersection that we look forward to exploring. To help brands understand how all of the ChannelAdvisor capabilities can assistant them in their e-commerce efforts, today we are launching our new ChannelAdvisor for Brands initiative. We’ve created a micro site at channeladvisor.com/brands that provides a brand centric view of our existing offerings and more details on our new Where to Buy solution. We believe this brand-oriented expansion of our strategy will contribute to our overall ability to drive strong topline growth in the years ahead and give us more exposure to a macro trends happening in the world of e-commerce. In conclusion, we believe that we continue to benefit from the underlying trends that are driving e-commerce growth. The investments we’re making in our sales and marketing capabilities, cross-border trade, marketplaces, digital marketing and our brand initiative are designed to expand our leadership position in the market. I’ll now turn the call over to David Spitz, our President and COO to share greater details on the core drivers to our results in the quarter. Dave?

[David Spitz:]

Thanks, Scot. I was pleased with our execution in the third quarter, in particular our sales momentum coupled with increased efficiency. Looking at some of our key operating metrics, I would point to the following highlights. One, we saw rapid growth in our base of large customers, two, we are beginning to see improvements in our sales productivity, resulting in improved leverage in our P&L, three, we generated strong growth in bookings from existing companies, four, our revenue visibility was further enhanced due to a 41% increase in fixed subscription revenue, compared to the third quarter of 2013, and five, our revenue retention remains strong. We increased our total core customer count by 22%, a sequential increase of 108 customers to nearly 2,800 total customers worldwide. While growth from existing customers drove over 4% increase in trailing 12-month average revenue per customer compared to a year ago. Notably, we continued to see the greatest expansion in our larger customers segments. For instance, our fastest growing segment of the new customers in the third quarter was those whom we expect will generate between $16,000 in annual revenue, with net adds in this segment more than doubling from a year ago. As we discussed last quarter and we’ll reiterate again, while net customer additions are directionally useful, customers of different sizes have different growth and retention characteristics, highlighting the limits of using net customer additions in isolation as a gauge for future revenue growth. Net customer addition implies all customers are equivalent in terms of revenue contribution, in reality they are not due to the wide range of customer size in our business. Consequently, many investors have asked more insight into our visibility of future growth. Internally, we focus on valid bookings and valid retention and we believe these measures taken together provide a more comprehensive view of our growth prospects. I would therefore like to provide you with a bit more insight into how we track bookings and retention. One metric we look at when developing our revenue growth projections is net bookings. Net bookings measures the incremental annual contract value or ACV at or during a period and subtracts the trailing 12 months revenue loss from contract terminations, also known as revenue churn. In this definition, gross bookings is the sum of all ACV added during a period from new or amended contracts and does not include contract renewals. Churn is the sum of all revenue churn. To smooth out seasonality, we measure both inputs on a trailing 12-month basis. We’ve historically found net bookings as a percentage of trailing 12 months revenue to be highly correlated with revenue growth in the following subsequent 12 months. For example, net bookings as a percentage of core revenue for the year ended 2013 were approximately 29% and we project our core business to grow at approximately that rate for the full year 2014. Similarly, as of the end of the third quarter in 2014, our net bookings were 28%, which we believe supports our view for continued strong revenue growth in 2015 as John will detail in a moment. We intend to share net bookings information with you at least annually. In summary, we have continued to consistently grow our net bookings in line with revenue growth and are therefore confident we can continue to deliver strong revenue growth in 2015. While we plan to continue providing directional commentary on our subscription dollar retention rate on a quarterly basis, I also want to provide some additional color on our churn to help put both are gross and net bookings into further perspective. Similar to gross bookings, we measure churn as a percentage of trailing 12-month revenue. Over the past three years, we have experienced consistent revenue churn of approximately 14% to 16% measured as a percentage of total revenue. We never like to lose a customer and we make every effort to retain them all. However, our customers operate in a highly competitive environment and not everyone survives regardless of the platform they use. It is also worth noting that the majority of our churn comes from our niche tenured and smallest customers. Once a customer reaches their second year with us, they are much less likely to terminate in the future. To illustrate the contrast between customer and revenue churn, 72% of the customers we lost over the last 12 months were customers whose trailing 12 months revenue to us was less than $15,000, whereas customers in that segment made up just 11% of our overall revenue in that same period. Small customers typically make up the majority of our churn on a net customer count basis, but account for much smaller proportion of our overall revenue. In contrast, customers whose annual revenue to us exceeds $100,000, experience revenue churn well below 10%. Customers are simply not all equal in terms of revenue and this is why we prefer to focus internally on revenue dollar retention versus customer count. In summary, we believe this additional information concerning net dollar bookings should help investors better understand our growth dynamics and hopefully provide increased confidence in our ability to drive continued strong revenue growth in 2015. Moving on to our execution, we are pleased to see increasing sales productivity after making incremental investments over the past several quarters. As you know, we’ve been investing aggressively and expanding our sales reach. Last year and into the first quarter of 2014, our sales productivity was negatively impacted, not only by the rapid expansion of our sales force, but also by our geographic expansion into China and Brazil. We are pleased to see our sales productivity ramping in 2014 in line with our expectations. In addition, we have made investments in 2014 in our sales support and account management team, with the high point of the investment period now behind us, we believe that we will see further productivity gains and operating leverage as our sales and marketing expenses continue to decline as a percentage of revenue. An important component of our investment strategy this year has been to expand our international reach. We recently announced support for three German marketplaces, Meinpaket, Rakuten und Zalando. Our expansion into China and Latin America is making progress and based on the positive response we’ve seen to-date, we are optimistic that we can be very successful in these geographies and in their contribution to expanding our international presence overall. Importantly, our revenue growth rate in China has nearly tripled compared to the third quarter of 2013, reflecting the strong early success our team in China has had penetrating that market. Our strong execution in China, coupled with the recent IPO and increasing recognition of Alibaba as a major emerging force in global e-commerce, leads us to believe the opportunity for us in China is substantial. Finally, our acquisition of E-Tale brings us a great team and technology to help expand our platform to branded manufacturers. As we integrate the technology and leverage the size of our sales organization, we expect this combination will contribute to our long-term growth and help further expand our leadership position in the market. In summary, we believe the combination of healthy secular trends, our expanded reach, and strengthening technology portfolio will drive continued growth. Now, I’d like to turn the call over to John for details on our financial performance for the quarter and our outlook for Q4. John?

[John Baule:]

Thanks, David. Let me start by providing some context about our financial performance in the third quarter. And then I’d like to provide you with an update on our outlook, including the impact of our acquisition of E-Tale. Total revenue in the third quarter was $21 million, an increase of 26% from the third quarter of 2013 and above the high-end of our guidance range. Within total revenue, core revenue was $20.7 million, an increase of 28% compared to a year ago. As Scott and David discussed, we saw growth in revenue attributable to both increasing customer count and increasing average revenue per customer. Our fixed subscription revenue increased to 79% of revenue in the third quarter compared with 70% in the same quarter last year. With regard to this increase, one contributing factor is that 71% of our trailing 12-month revenue is generated from customers who pay us above $30,000 a year in fixed subscription fees. These larger customers tend to have better GMV visibility and thus are more willing to commit to higher-fixed GMV thresholds. Geographically, in the third quarter, 77% of revenue was from customers based in the U.S. and 23% from customers based outside of the U.S., an increase from 21% a year ago. These figures are based upon the country in which the customer is based. What this revenue split does not fully contemplate is that the increase in the number of customers, both domestically and internationally, who utilize our platform to sell across borders. While our business is heavily weighted toward the U.S. now, e-commerce is a global phenomenon. And we believe that increase in global penetration will be an important component of our future growth. Highlights of the rest of our P&L will be on a non-GAAP basis, unless I specify otherwise. A GAAP to non-GAAP reconciliation is included in the press release we issued today. Gross margins in the third quarter were 72.2%, a sequential rebound after the one-time investment reflected in our Q2 gross margins. With the seasonality of the fourth quarter considered, we anticipate that full year 2014 gross margins will be consistent with 2013 levels. While we continue to invest in sales and marketing, we reached a high-water mark in the second quarter and as a result, saw sequential leverage on this line of the P&L. As David pointed out, we are beginning to see the fruits of our investment in terms of increased productivity. And we expect to see continued leverage in 2015. As we have highlighted in previous calls, we have frontloaded our 2014 investments in order to maximize their benefits. These investments included ramp-ups in customer service and marketing, our highly successful catalyst conferences in the U.S. and in the U.K. and our well-received user conferences. The flip side of this accelerated first-half investment is that we are now beginning to reap the benefits in the back half of the year. This is reflected in our third quarter adjusted EBITDA loss of $4.7 million, which is our smallest quarterly loss of the year and firmly above the guidance range we provided last quarter. We ended the third quarter with $82.3 million in cash and cash equivalents and no debt, a healthy balance sheet by any measure. We believe that the strength of our balance sheet positions us well to continue investing in our growth initiatives. Moreover, with the meaningful operating leverage we expect to begin realizing in 2015 and beyond, we remain confident that we will have a substantial portion of our cash balance remaining at the time we turn the corner to positive free cash flow. With regard to the acquisition of E-Tale, which was just completed last week, the basis of the deal are as follows, The transaction was all cash with approximately $7.2 million paid upfront and another $1 million placed into escrow for 18 months. In addition, there are earn-out provisions that could result in future payments beyond these amounts over the next two years, based upon the achievement of certain milestones. As Scott highlighted, the primary strategic value of this acquisition is derived from the combination of E-Tale’s innovative technology with our expansive R&D and sales and marketing capabilities. With only two months remaining, most of the remainder of 2014 will be consumed with integration activities and we expect the impact on our 2014 P&L to be minimal, both from revenue and EBITDA perspective. However, looking ahead to 2015, we expect E-Tale to contribute approximately $2 million to revenue in 2015 and to have a neutral impact on our adjusted EBITDA. Looking ahead to the fourth quarter, we are anticipating revenue of $25.6 million to $26.1 million and an adjusted EBITDA loss of $100,000 to $700,000. For the full year 2014, we are increasing our revenue guidance to $86.7 million to $87.2 million, representing 28% growth. From an adjusted EBITDA perspective, the combination of our third quarter results and guidance for the fourth quarter translates to a loss for the year of $18.1 million to $18.7 million. In our press release, we have also provided guidance on stock-compensation expense and share count for the quarter and the full year. Finally, let me provide you with a few thoughts on 2014 and how the investments of the past year position us for 2015. Over the last 18 months, we have consistently shared that we were focused on investing our IPO proceeds in sales and marketing, in order to accelerate our revenue growth rate from the low 20% range. Our strategy has been successful. Our growth rate at the midpoint of 2014 guidance is 28%, up from approximately 23% in our last full year prior to going public. During 2014, we have made simultaneous investments in our domestic sales and marketing, in building a strong foundation in China, which has been our fastest growing region this year and in creating an infrastructure to efficiently accommodate years of high growth. We expect to enter 2015 poised to continue to grow at a high rate, while making significant progress towards profitability. Inclusive of the $2 million in revenue contributed from -- expected to be contributed from the E-Tale acquisition, we are anticipating 2015 revenue of $111 million to $112 million or a growth of approximately 28%. From an EBITDA perspective, we are targeting a 1,000-basis point improvement in our 2015 EBITDA margins, compared with our current 2014 outlook. We believe this is further evidence of the long-term scalability of our business model. And we remain confident in our ability to drive the business back to profitability and ultimately to our long-term target model. From a high level perspective, there are two major mega trends that continue to propel our business. The first is the increasing penetration of online shopping as a percentage of total consumer spending. As omnipresent as online shopping may seem to be, it still accounts for a very small portion of total spending. E-commerce is still in its infancy. The second mega trends is that the online pathways that consumers use to find products and that sellers use to find consumers online are becoming increasingly fragmented and complex. Scott’s comments on brands highlights yet another avenue by which manufacturers and consumers connect to each other in the e-commerce world. For sellers and manufacturers who must manage this complexity in the portion of their business online that is rapidly overtaking their traditional business channels, our platform becomes increasingly critical. With our industry leading position in e-commerce, we believe that we have a long runway to be able to grow our revenue at rates of 25% or greater, while continuing to move rapidly towards profitability. And with that, I’ll turn it back over to Scot.

[Scot Wingo:]

Thanks, John. Before we go into the Q&A portion of the call, I’d like to first welcome the E-Tale team to ChannelAdvisor. I also wanted to thank our customers and partners for their support. Finally, I wanted to thank the entire global ChannelAdvisor team. In the world of retail, the third quarter is an extremely stressful time of year. And at ChannelAdvisor, we are all hands on deck to launch new customers and help existing customers put their holiday strategies in place. I truly appreciate all of your hard work this quarter and look forward to an exciting peak season this year. Also, I wanted to invite everyone on the call to a ChannelAdvisor for Brands webinar we’re hosting on November 18, if you have any other questions about the E-Tale acquisition. Details can be found on the webinar section of our site. With that, we’ll turn it over to the operator for Q&A.

[Operator:]

(Operator Instructions) And our first question comes from the line of Michael Huang from Needham & Company.

[Michael Huang:]

Thanks very much. Just a couple of questions for you guys and nice quarter as well. First of all, with respect to productivity, I’d like to hear the qualitative commentary around how you’re seeing some progress there. Was wondering, how much more headroom is there for further sales and productivity improvement across your base of reps? And then, in terms of when you’re thinking about 2015, how should we think about your plans for further sales headcount growth?

[David Spitz:]

Hey Mike, this is Dave. I think -- I’m very pleased with the progress we’ve made in terms of sales of our productivity in Q3. As you know, we’ve made some substantial investments in the last few quarters. And I think we’re starting to see some of those pay off. I think there’s plenty of headroom over the longer term. We have a substantial number of reps on board now, a proportion of whom continue to reach tenure with each passing month and each passing quarter. Some of the investments we made included building up, for example, our inside sales team, which as you know, functions to a large extent as a family for our sales team. So that’s a fairly large team now. And I think will provide us a fantastic, fertile opportunity to move some of those folks up to quota-carrying reps as well as we go into 2015 and beyond. So I would say I’m pleased with how we’re doing. I think we’re going to continue again, over longer periods of time, see meaningful increases in productivity. And I think you’ll see us continue to expand our sales force next year at a pretty reasonable clip. We still think there is a substantial opportunity. A lot of the investments, like I said, have been areas outside of quota-carrying sales reps. So that’s an area where I think you’ll see a shift in some resources during the course of 2015.

[Michael Huang:]

Got you, okay. And then in terms of, kind of, what you’re seeing on the enterprise front. I mean, it seems like -- I think in your prepared remarks, you talked about that grow in 3 exit, I think it was or something along those lines. What is driving the strength there? I mean, is that just a function of product capabilities or increased sales coverage or is there something else that’s kind of driving the strength that you’re seeing there?

[David Spitz:]

Well, I think, Mike, it’s probably a mix of things. I think it’s increasing coverage and the size of our sales team. We’ve invested quite a lot in marketing over the last year, one of the objectives being to increase our brand visibility and brand awareness amongst large retailers and now with the acquisition of E-Tale, increasingly towards brands and manufacturers as well. And I think some of that recognition is starting to pay off. So I think it’s a combination of factors there.

[Michael Huang:]

Great. Okay. Thanks guys.

[Operator:]

The next question comes from the line of Colin Sebastian from Robert W. Baird.

[David Spitz:]

Hi, Colin. Colin? Hello.

[Operator:]

All right. Our next question comes from the line of Eric Lemus from Raymond James.

[Eric Lemus:]

Hey, guys, thanks for taking the question and I appreciate all the metrics, as far as the booking numbers there, that’s really helpful. Last quarter in July, you talked about price increases that you guys made. What is you guidance philosophy on price increases moving forward and how meaningful is that to driving growth over the next several years?

[David Spitz:]

Hi, Eric. Dave Spitz here, great question. So I think a couple of answers to that. One, we firmly believe that we are the premium platform in the space from both technology, scalability, breadth of channels that we provide access to, our global reach, the feet on the ground that we have around the world to help customers, especially larger customers who are also global and would like a strategic partner to work with on a global basis. So for all of those reasons, I think we do have some inherent pricing leverage in the market. Our philosophy over the years has been to not do anything dramatic in anyone period of time, but to gradually adjust the pricing dials and to be sensitive to any kind of reactions we see in the market. This -- in the last three years -- the price increase I talked about in the last call was the fourth -- what I call, incremental increase we have done over the last several years. I see no negative reaction from the market on that. It’s something we continue to evaluate as we go into 2015 in terms of the structure of our pricing. But I think we have firmly established ourselves as a significant leader in this space. I think more and more customers -- I was just talking to Mike about enterprise customers increasingly turning to us as a strategic partner. So, I think with a premium platform and a premium company, it has the opportunity -- it comes with the opportunity to price to value. And I think our customers, our market have been on board with that. So it’s a philosophy of gradualism, I would say but also making sure that our pricing model accurately and fairly represents the value that we are providing to our customers.

[Eric Lemus:]

Great. Thanks, guys. And then my next question. It’s been quite a few quarters since the IPO and you guys have added quite a few different marketplaces onto the platform, including some internationally, which have been great. But has the reliance on the two main marketplaces, eBay and Amazon, has that reliance come down relative to the other marketplaces and how do we think about that moving forward?

[Scot Wingo:]

Hey. It’s Scot. We don’t discuss the different share of each of the channels we support. But what I will point you to is we do the same-store sales. And we’re starting to see some really robust growth there from what we, we kind of bucketizes the other third-party marketplaces. Last month, it was over 40% growth which is great and that’s a same-store sale metric. So it’s not really capturing all the adds that we have in there, as well as people turning on to those new stiff platforms. So, I think we’re really pleased and we do see a lot of our customers exploring and choosing us because of the platforms we support. I think, Dave had something to throw in there.

[David Spitz:]

Yeah. What I would add is that we embarked on this expansion of our third-party marketplace strategy a few years ago just because we saw mobile as a trend that would drive, both mobile and intense competition amongst retailers, looking for ways to grow business. We saw that is ultimately driving the expansion of third-party marketplaces. And so we, as you know, aggressively pursued a number of those. I would say that, that has been a resounding success for us as a strategy, both from a revenue perspective and also from a customer perspective. The marketplaces that we support beyond eBay and Amazon have grown meaningfully as a share of revenue. And now, really are beginning to become meaningful contributors to us from a revenue perspective. And not only that, but I think ultimately serve as an attractor to customers who, when they survey the landscape and say who can help me sell in the maximum number of potential channels and who can help me worldwide? Really, only ChannelAdvisor emerges as the name that can do that. So this strategy, I think, yes, clearly these channels have grown as a share of both GMV and revenue for us. And I think strategically have been a real home run for us.

[Eric Lemus:]

Excellent. Great. Thanks, guys. And nice job on the quarter.

[David Spitz:]

Thanks.

[Operator:]

Our next question comes from the line of Justin Furby with William Blair & Company. Please proceed.

[Justin Furby:]

Hi, guys.

[Scot Wingo:]

Hi, Justin.

[David Spitz:]

Hey Justin.

[Justin Furby:]

Thank you. Thank you for the metrics. I really appreciate it. I want to start with the -- David, go through real quickly, the percentage that you broke out -- the 28%. Just kind of break it into a little bit more. What does that mean, the 28% LTM bookings as of the end of Q3?

[David Spitz:]

Yes, sure, Justin. I know there’s a lot of numbers. So, I’ll articulate as clearly if I can and certainly feel free to follow-up if you want some clarification. So if you -- let me just give you a hypothetical example of a company, just to lay it out in the clearest possible terms. Suppose you have a company that’s doing a $100 million in recurring revenue. Forget about variable revenue and all of that. Just say, you’ve got $100 million in recurring revenue. And you have a sales team that adds, in the course of a year, $30 million in incremental revenue. It could be from new customers, it could be from up-selling existing customers, et cetera. So that $30 million is what we would call the incremental ACV, or incremental bookings that you’re adding on top of that revenue base. And then also suppose that you lose some number of customers that, in aggregate, represent $5 million in trailing annual revenue. And so what we do is, we take that $30 million, we subtract the $5 million. And we say -- okay, that means that we have added a net annual contract value -- incremental annual contract value of $25 million. And so $25 million over $100 million in total revenue would give you a 25% net bookings rate. So we take the aggregate new activity from signing new customers and expanding existing customers. We deduct any lost revenue and we do this over a trailing 12 period to smooth out seasonality and we take that as a percentage of revenue. And what we’ve found historically, as I mentioned in my remarks, is that ends up being at least historically, a very good approximation. Within a couple of points obviously, because it depends on what happens in the intervening periods. But it gives us a pretty good degree of visibility on a forward 12-month basis into what we expect revenue to be over those next 12-months. Does that make sense?

[Justin Furby:]

Yes. It’s perfect. And then I just -- follow-up on the revenue churn, the 14% to 16%, so that’s gross churn. So if you were to do it on a net basis and you might not have it, but would it be -- what does it look like net of the customers who are re-uping on ACV or with the overage component in there?

[David Spitz:]

Yeah, that’s a great question. I don’t have a specific figure to publish for you right now. But you’re right that is a raw, kind of revenue churn figure, right. We are not incorporating up-sells. We’re not incorporating anything else into that particular metric. Now, if you were to look at a cohort of customers and you were to take churn, but also netted out against up-sells and things like that, clearly the number would be substantially higher. We do publish our subscription dollar retention rate to the extent that it’s over 100%. Obviously and I know that’s a little ambiguous. But somewhere between our subscription dollar retention rate, which is in excess of 100% and our raw revenue churn of 14% to 16%. Somewhere in there would be essentially a cohort analysis that would be net of up-sells. But we tend to think of those up-sells and things like that as actually flowing into the gross bookings numbers. So when we think about retention -- when we think about revenue churn, we tend to think of this raw number that I shared.

[Justin Furby:]

Okay. And again, just to be clear, the 28% is already net of all that churn, so that’s a clean number without taking out the churn?

[David Spitz:]

That’s correct. And so you can fairly easily deduce sort of gross bookings as a percentage of revenue, if you chose to.

[Justin Furby:]

Awesome. Okay. And then, John, on the guidance for the 1,000 point expansion and maybe I missed it, but how do you -- what are the biggest drivers of that?

[John Baule:]

It’s leverage on every P&L line. I think I said last time, we think G&A and R&D will grow at rates significantly less than the rate of revenue growth next year. And we think we will see leverage on the sales and marketing line also and so leverage on every line.

[Justin Furby:]

Got it. Great. And then just one more for Scot, if I can. Scott, on the eBay and the Amazon and some of the dynamics you talked about last quarter, do you feel like those are now gone as you enter Q4, in terms of some of their programs to get rid of some of these different vertical customers?

[Scot Wingo:]

For the third quarter, they were very similar to the second quarter. One of the interesting things is eBay has kind of backtracked on a couple of policies that we were concerned about. So we’ll have to wait and see how that plays out over the next - the rest of this quarter.

[Justin Furby:]

Got it. Okay. Great. Thanks guys. And again, I appreciate the metrics.

[John Baule:]

Thanks.

[Operator:]

Your next question comes from the line of Frank Robinson from Goldman Sachs. Please proceed.

[Frank Robinson:]

Hi. Yes. Thanks for taking my questions. Last quarter, actually you disclosed that you added 16 retailers in the IR 500 list. Do you have an updated figure for this quarter?

[David Spitz:]

We do. It’s in our Q, I believe. We went from 31% of the IR 500 to 32%, I believe is what’s in our Q, Frank.

[Frank Robinson:]

Okay. Perfect. And then I guess that’s one of the things you are trying to deemphasize is the number of core customers added and in particular, any particular core, given that you seem to have seen a lot of churn at the lower end, with core customers down almost 30% this quarter. I guess, is this a dynamic you expect to continue to play out over a couple of quarters or is it kind of a new norm, or has that likely played out at the lower end to where we should expect to see the core customers accelerate from here?

[David Spitz:]

Frank, yeah, this is David. A great question. And this is part of the reason we try to share some additional information around net bookings. We really don’t manage to a net customer count per say, for reasons I’ve talked about. We have such a wide dispersion of customers, from $10,000 a year in revenue to over $1 million a year in revenue. So while we think net customer count is directionally helpful, I don’t think it necessary tells the whole story. And it’s possible that this metric could be volatile in a period where, as we’ve talked about we see increased competition at the low end and eBay and Amazon, kind of raising the quality bar. You can see pressure on those smaller customers. But as I indicated in my prepared remarks, the vast majority of our customer churn is very small customers for us, who collectively represent a small minority of our overall revenue. So what we ultimately care about is our revenue growth and therefore, that’s why we manage and track more closely around dollar churn and dollar bookings. So we don’t guide to a specific net add number. We don’t specifically manage to it. I don’t compensate my teams based on whether the net add is 108 or 150 or 200. We really manage to a dollar basis because ultimately that’s what matters.

[Frank Robinson:]

Okay. And one last one. Sorry.

[John Baule:]

Frank, I think that was the primary reason for giving that net bookings percentages. People intend to use the net adds number as an indicator of next year’s revenue and we want to be clear that the dollars are really important. The net bookings percentage that David provided is a good indicator for our comfort level with the next 12 month’s revenue.

[Frank Robinson:]

Okay. And last question. When customers actually churn at the high end, what are they moving -- what kind of competition do you face at the higher end of the market? Who do you consider your biggest competition?

[David Spitz:]

Hi, Frank. This is Dave. I think it depends a little bit, I would say. If you look at the digital marketing space, it’s a more competitive space where we compete, for example, with agencies. And many of those agencies are very broad in their offerings. They just don’t do, for example, Google PLAs. They’ll do everything from Google PLAs to affiliate email management display, maybe even print and television. And so we tend to be very vertically focused from a retail perspective and specialists when it comes to Google PLAs and feed management. But sometimes larger customers have -- the larger prospects have a relationship with a broader agency. So even if that agency isn’t necessarily best-of-breed and product listing ads or feed management, the one throat to choke, so to speak, can be attractive to some customers. So we do see that from time to time.

[Frank Robinson:]

Okay. Thanks a lot.

[David Spitz:]

Thanks Frank.

[Operator:]

(Operator Instructions) And our next question comes from the line of Shawn Milne from Janney Capital Market.

[Shawn Milne:]

Great. Good afternoon, guys. And again, I appreciate all the metrics as well. It certainly seems like the growth outlook is solid, given that metric you talked about in terms of getting into ‘15. But David, I wanted just to pick around the change from Q2 to Q3 a bit in terms of your core growth decelerating. Is it really -- is it partly the impact of the churn at the lower end, maybe taking some revenue out? Or is it really the same-store sales slowdown from eBay dragging that number down a little bit? Any more color there would be great. And then I have a quick follow-up on the branded side.

[David Spitz:]

Thanks, Shawn. Great question. So a couple of things. One, in Q2, we did have some one-time revenue benefits that John spoke about on our last call related to some services we provided to customers to help translate their products to a variety of international countries. And so that was one reason that you saw a sequential downtick. I would say beyond that, frankly I don’t really think this is a trend. In any given quarter, we have things that I wouldn’t necessarily characterize as one-time items, but you may have quarters where there is some more significant deferred revenue releases. I think we saw some of that last Q3 that made the comp a little tougher this Q3. But as John has given you in our guidance for Q4, the growth rate in Q4 we expect to tick up from Q3. So when you look at our sequential changes in growth rates, a 1% difference in growth rate is a relatively small amount of revenue that I would say generally could be accounted for by potentially swings in deferred revenue that aren’t necessarily substantial, but they could move maybe 1% on our growth rate. So I don’t really think it’s a trend.

[Shawn Milne:]

I just wanted to dig in just a little deeper on that, given the revenue impact from 100 basis point change which you’ve talked about. We clearly have seen the eBay same-store sales, as everyone knows, slower and perhaps it pick up a bit in Q4, but wouldn’t that be part of this?

[David Spitz:]

No, I think clearly to the extent that eBay has seen a slowdown, that’s going to affect the level of GMV that customers are seeing, maybe an incrementally smaller number of customers are upgrading to their next tier. So it will have those kinds of impacts, what I would call at the margins. So I am not going to say that there is zero impact from that, but I don’t think it’s a significant or meaningful impact. Remember the vast majority of our revenue are contractually committed revenue. I think it’s 79% here in Q3. So yes, you might see a little bit of impact from that. And if eBay is tightening the screws on quality of customers, you might see some impact there, as well. But like I said, I wouldn’t look at the sequential change in growth rates from Q2 to Q3 as a meaningful trend for our business at this point.

[Shawn Milne:]

Okay. Great. And just on the branded side, it’s interesting we’re seeing, first of all, this growth in the brands going direct. But it sounds like this solution, this redirect out-of-the-box, how will you be able to work with some of these brands to actually drive GMV? Is that just more -- is this more of an opportunity to drive GMV down the road?

[Scot Wingo:]

Hey, Shawn, it’s Scot. Thanks for the question. So as we’ve talked to brands and you guys have done a lot of really great research on this topic as well. So, we appreciate that. It always gives us more to think about. What we found is we have a lot of brands that talk to us and they went to increase the amount they are going direct to consumer, but they don’t want to upset their existing channel partners. So what that means at the end of the day is, they don’t have transactions on their website, but they have all this traffic coming to their website. So what this solution allows us to do is, say, if you’re interested in buying this widget, click here to see a list of the retailers that carry that. And then we send the traffic downstream and frequently we’re able to measure what happens down there. So it’s lots of the GMV story in this particular solution and more of a -- I think it will be mostly fixed type revenue and it’s really more of helping these brands get their head around some of the e-commerce traffic trends that are happening, what are the conversion rates downstream and helping them get to this lifecycle that we have identified. There is a lot of people kind of stuck at 0% direct to consumer and some folks have already made it to 100%. We think there is many more 0% than the 100%. So it kind of gets you in the middle there, where at least you’re not just having this traffic come to your website and wondering what happens to it. You can -- in a very channel-friendly way, without disrupting your retail partners, you can figure out, you can reward them for being retail partners and figure out what consumers are doing as they go to your website?

[Shawn Milne:]

Okay. And I would assume as all these bigger brands get enabled to do consumer direct, you would be in a good position after setting it up this way?

[Scot Wingo:]

Yes. And then if they are direct, so the where to buy solution actually works at their direct. So a number of the folks that have done this, they keep it alive, even if they do have transactions, because they still want to say, hey, you can buy for us, but here is also our retail partners. And sometimes they will have two buttons. There will be a buy from us and a where to buy, other places online. Other times there will be just one of the retailers listed in the widget. So they will have their own brand in there with the Amazons and the Best Buys and those kinds of folks. So to your point, when they do go direct, then we can start selling them the rest of our suite and we do today. So the way I like to think about it is, we used kind of to address people when they get to end of their lifecycle. This kind of pushes us up way earlier into the lifecycle, so we can start having meaningful discussions. And hopefully, we can have an impact on them and get them to go to that lifecycle faster, as well.

[Shawn Milne:]

Thanks, Scot.

[Operator:]

Our next question comes from the line of Jobin Mathew from Deutsche Bank.

[Jobin Mathew:]

Hi, guys, thanks for taking my question. I just wanted to focus on that net bookings growth rate that you mentioned. I think you mentioned it was 28% at the end of Q3 and it was 29% at the end of last year. I think this metric is helpful because it helps us understand that the business is still healthy. But as you look at those two growth numbers, just given that you have increased the sales force heading into this year and you’ve also had the China expansion and some of the international markets expansion. Any thoughts on why the growth rate has not stepped up from the end of last year?

[David Spitz:]

Hi, Jobin, this is Dave. Well remember this as a percentage on the basis of trailing 12 months revenue at that time. So while the percentage has stayed relatively constant, the denominator of revenue has grown meaningfully over that time. So on a raw dollar basis, you would see some meaningful growth in that particular metric. So I think that what you’re seeing is a good return on investment. The other thing I’ll add, because I think it’s a good question, is a meaningful proportion of the investments we made in sales and marketing over the last three, four quarters, five quarters, have been what I would characterize as also longer-term investments. For example, we invested substantially in our inside sales team, which is not quota-carrying reps, that’s our farm lead for future quota-carrying reps. They don’t directly drive bookings in the current period. I would expect that a substantial proportion of today’s inside sales reps will be tomorrow’s quota-carrying reps. We invested a lot in account management. And as that team comes up to speed, they will help more customers become more successful over time. We invested a lot in marketing this year on a year-over-year basis really positioning ourselves in our new markets like China and Brazil, but also elevating our brands and driving more awareness. And these are all things that certainly contribute in the near term, but we also expect the longer-term payoff to be measured over a period of the next couple of years, not just the next month or two. So those investments are things that were substantial. I expect them to pay dividends for us, but I also expect us to see increasing leverage over the near-term as we harvest some of those investments But just to make sure that we’re very clear, those net bookings percentages, they’re not growth rates, they are percentages of revenue and so a relatively constant rate of net bookings is a growing amount of incremental annual contract revenue when revenue is growing. Does that make sense?

[Jobin Mathew:]

Okay That’s helpful. When you look at some of these new customers are coming in, I think you mentioned there is 32% i.e. [500 versus] (ph) 31% last quarter. What are the larger customers buying?

[David Spitz:]

Yes, great question. It’s a range of things I would say. I would say a general pattern is that larger customers, IR500 customers. We made some substantial penetration for example in the IR10 over the last couple of quarters. Generally speaking, those prospects and those customers are more interested in digital marketing. For example, if you’re an IR10 customer and you have an established brand and an established website, you’re probably less inclined to be diversifying onto eBay or Amazon. Maybe you see Amazon as a competitive threat. What you want to do having invested millions of dollars in your website is to drive more traffic to it. And that’s where ChannelAdvisor comes in, with a very efficient platform for driving feed management, product listing ads, Bing, et cetera, Yahoo, to their website. So I would say as you go towards larger enterprises, you tend to see the mix shift go more toward digital marketing versus marketplaces versus as you go towards the medium and smaller sizes of scale, you tend to see more market places and maybe a less proportional shift on digital marketing.

[Jobin Mathew:]

Okay. As you kind of look out into next year in terms of the guidance that we have, how should we think of the new growth coming in from new customer adds versus ARPU? Is it going to be more ARPU versus what there new customer adds are over there?

[David Spitz:]

Jobin, that’s a good question, but I don’t think we’re ready to give much guidance there. We’re already two or three months ahead of last year in terms of giving 2015 outlook. So I think we’ll give more detail in the next call.

[Jobin Mathew:]

Okay. One last question for my side is, in the past, you’ve talked about these new emerging channels which could come out. There are names like Twitter, Facebook, Google. Any new channel that you think is exciting that ChannelAdvisor could either partner, or become material to your success in the next one year?

[Scot Wingo:]

Hi, it’s Scot. We pretty closely follow what’s going on with all these new channels and work with our engineering team to prioritize what’s going on there. Nothing to announce today, but we’re watching everything very closely. I think we are excited by the overall theme that there is increased fragmentation and numbers of channels. So you’ve probably heard me say that when we -- we spent a lot of time in China and it’s really interesting because when you go over there, 90% of e-commerce is marketplaces. And marketplaces are infused in everything. So even offline shopping and definitely more integrated with smartphones. So things like Apple Pay and the Facebook, the Twitter, et cetera they make us feel like that trend is really accelerating here. If you read that China play book, the next one would be some of the chat kind of stuff that they do. I just saw an announcement today that one of the popular cab platforms has promoted chats with brands. So a lot of really interesting things going on there that we think are -- we’re really well-positioned to help retailers understand and optimize because of our platform.

[Jobin Mathew:]

Got it. Thank you.

[Operator:]

At the time, we have no further questions. This will conclude the question-and-answer session of today’s call. I will now turn the call back over to Scot Wingo for closing remarks.

[Scot Wingo:]

Thanks everyone for joining our third quarter conference call. We hope you all have a great holiday and we will talk to you in another 90 days or so. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you all for your participation and you may now disconnect. Have a wonderful day.