ChannelAdvisor Corporation
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the ChannelAdvisor First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I'd like to introduce your host for today's conference, Chief Financial Officer, John Baule. Please go ahead, sir.

[John F. Baule:]

Thank you. Good afternoon and welcome to ChannelAdvisor's conference call for the first quarter of 2015. I'm John Baule, Chief Financial Officer of ChannelAdvisor. With me on the call today are Scot Wingo and David Spitz. 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 2015. This press release can be accessed on 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 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 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 measures is included in our press release. Finally, at times in our prepared comments and 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. And with that, let me turn the call over to Scot for his remarks.

[Scot Wingo:]

Thanks, John. Welcome, everyone, and thank you for joining our call today. Revenue in the first quarter was $22.6 million, an increase of 17% from a year ago and slightly above the high end of our expectation. As David and John will discuss, we are making progress towards our path to profitability, which is also reflected in our EBITDA loss of $4.2 million in the quarter, which was more than $2 million better than our guidance. While I see GMV (2

[David J. Spitz:]

Thanks, Scot. Before I get into my comments on the quarter, let me thank you and the board for the confidence you've expressed in me. I believe that while we're working through a transition here at ChannelAdvisor, the fundamentals driving our opportunity remain strong and I believe we're well-positioned to expand on the leadership position we've established in the marketplace. I am looking forward to leading the organization forward in my expanded role. Our first quarter revenue was slightly better than expected. As Scot indicated, we're still in the early days of a transition as we strategically focus our efforts on larger customers and brands with favorable economics and move away from the lower end of the market. During the first quarter and continuing into the second quarter, we implemented a number of important changes and policies and procedures that we expect to provide long-term sustainable benefits, including strong growth and a faster trajectory to profitability. However, these changes may continue to weigh on near-term revenue growth as we strategically realign our investments towards more profitable revenue streams and shy away from revenue growth that has proven to be less profitable for us. Recall that there were three primary issues that led to lower than expected revenue results in the fourth quarter

[John F. Baule:]

Thanks, David. As David indicated, there is a lot of activity around the key themes of increasing sales and marketing productivity and shifting our focus to more profitable customers, and I'll give you a financial perspective on these efforts. First, I'll provide color on our Q1 financial performance, then I'll discuss our guidance for the second quarter and 2015, including the impact of our expense reduction efforts. Taking a look at the first quarter results, revenue came in at $22.6 million, an increase of 17% over 2014 and above the high end of our guidance range. On a constant currency basis, our year-over-year revenue grew by approximately 20%. Internationally, we generated 22% of our revenue in the first quarter from customers based outside of the U.S. Continuing an ongoing trend, fixed subscription revenue increased to 78% of total revenue in the first quarter compared with 73% in the same quarter last year. This trend reflects the tendency of existing customers to progress towards higher fixed tiers over time as well as our steady shift towards larger customers and brands who tend to purchase larger fixed tiers and more accurately forecast their GMV to avoid overage (15

[Scot Wingo:]

Thanks, John. Let's now open it up for Q&A. Operator?

[Operator:]

Thank you. [Operator Instruction] Our first question comes from Colin Sebastian of Robert Baird. Your line is open.

[Colin A. Sebastian:]

Great. Thanks and congratulation, David. I guess, first off revenues came in a bit better than your guidance and growth accelerated a point from Q4, but for Q2 you are expecting a step lower, is that specifically reflecting the additional churn of smaller accounts or is it something further quarter-specific playing on the revenue line? And then, also G&A there was a sequential decline there, was any cost cutting reflected in Q1 G&A or is that seasonality or something else?

[David J. Spitz:]

Hey, Colin, first of all, thank you for the kind words. I think from a Q2 perspective, as we consider the effects or the potential effect of some of the changes that we're making in terms of where we were focusing our sales team and some of the acceptance criteria, it's somewhat difficult to say exactly what effect that will have. So, I think we're making some assumptions there about potentially effect that could have. So, I think just being a little bit cautious about what that would be. As far as G&A, I'll leave that to John.

[John F. Baule:]

Yeah, I mean, I think G&A is pretty much – there are always a few things that hit quarter-to-quarter that can affect the run rate a little bit, but we expect to see continued leverage on that line throughout the year.

[Colin A. Sebastian:]

Okay, thanks. And then, maybe as a follow up, I mean, the customers where you are seeing churn perhaps those that you would rather stay on the platform, are you seeing them simply shutting doors as they struggle on eBay or are they managing channels independently or moving to other tools, any color on that would be helpful? Thanks.

[David J. Spitz:]

Yeah, I think I wouldn't characterize it much differently than what we've seen in the past. I think the customers at the lower end of the scale just have long-term viability challenges. We certainly see eBay as a factor there. eBay as, you know has been growing more slowly than e-commerce. And I also think that when you're talking about customers that are doing maybe $50,000, $75,000 or $100,000 a month online on a channel like eBay, their ability to maintain a source of product and their ability to be properly capitalized, they just don't have as long a lifespan as a larger customer. So, I wouldn't say it's something that, that has been significantly different other than eBay's performance in the last couple of quarters. I think more to the point, Colin we've done a pretty in depth analysis following Q4 as it relates to the profitability of the segment, our cost to customer acquisition, the lifetime value of these customers and have decided that unless we significantly filter the type of customer that we bring on board in this segment, it's very difficult to show profitability on a unit basis down at the lower end.

[Colin A. Sebastian:]

Okay. Thanks, David.

[Operator:]

Thank you. Our next question comes from Michael Huang of Needham. Your line is open.

[Michael S. Huang:]

Thanks very much and congrats on the promotion, Dave. Couple of quick ones for you. First of all, I know you're not going to provide specifics around gross adds, but just was wondering if you would help us understand directionally how that looked by customer segment so obviously as you guys move up market, I would imagine that becomes a nice source of year-over-year comparison, but I was wondering if you could share some commentary around that?

[John F. Baule:]

I think truthfully as I said before we don't really focus on net adds undoubtedly when we had larger customers, it'll be smaller number of gross adds at the higher end, but with a lot more revenue associated with it. So, it's not really been our focus. And truthfully I don't think that we intend to continue to highlight net adds much beyond this year. So from a year-over-year comparison I am not sure that will be a big deal.

[David J. Spitz:]

Yeah, Mike what I would – this is David – what I would add to it is that I've been really pleased with the receptivity of larger brands and larger retailers to our offering. I would characterize this qualitatively as a source of strength in both our pipeline and in our sales efforts. And when you take that coupled with the lifetime value of these types of customers and the fact that our customer acquisition costs are – they're larger than what you would see at the lower end of the market but not significantly larger, they're just more attractive economics. So, I think our ability to progress within this market segment, I think is really strong and I think that's supported by the activity we've seen over the last couple of quarters.

[Michael S. Huang:]

Got you, okay. And then, just kind of on that point, so obviously with respect to kind of sales and marketing focus on the kind of moved-up markets, is that kind of where the bigger constraint is right now on being able to kind of drive success up market versus product? I mean, is there anything from a product standpoint that you need to kind of unleash to be able to support your initiatives to move up market? Thanks very much.

[David J. Spitz:]

No, Mike. I think our product is very well positioned especially in the realm of Google PLAs and things like Facebook dynamic product ads and adding new marketplaces like Jet as well as our cross-border trade initiatives. These are all things that appeal really well to that segment. I think there is a lot more that we can do in this segment. I mean, I've spent the last number of weeks on calls or meetings with a number of a fairly iconic brands both on the major retailer side and the major brand side worldwide and what I found is that there's a lot of interest in what we're doing and there's a lot of pain beyond what we're doing. So, I think our ability to expand our platform to address additional capabilities and additional pain points that this segment has is fairly significant. So, I'm fairly bullish on the opportunity in this segment.

[Michael S. Huang:]

Great. Thanks very much, guys.

[David J. Spitz:]

Thanks, Mike.

[Operator:]

Thank you. Our next question comes from Brendan Barnicle, Pacific Crest Securities. Your line is open.

[Brendan John Barnicle:]

Thanks so much and congratulations on all the moves. I was interested as you move up market who you see competitively and how that dynamic might be changing?

[David J. Spitz:]

Hey, Brendan, I think there is a few different competitive segments here, one that we see and we talked about on previous calls is agencies who traditionally provide a fair amount of manpower in executing strategies for retailers and brands. But like a lot of things in the digital realm, manpower is giving way to data and algorithms. And I think our ability to bring a differentiated technological platform and significant data is a differentiator in the market. I think agencies could support this segment adequately when it came to things like Google AdWords and bidding on terms. But as you start to see the fast evolution of things like, Scot talked about like mobile, the rise of marketplaces, cross-border trade, just bidding on keyword terms is no longer going to cut it for players in the space. They really have going to focus on technological capabilities, advanced data analytics and using that as a strategic advantage. So we certainly have foreign competitors, they tend to vary by geography. We have few technological platforms competitors in the U.S. a different set in Europe, a different set in Asia, and we have agencies that compete from a service or manpower perspective, but I think we are fairly uniquely positioned to address it with a scaled global technology platform that really leverages data and for that reason, I think we're in a good competitive position.

[Brendan John Barnicle:]

Great. And as we think about margins going forward it looks like, based on the guidance that margins have bottomed here at least for the year. Is that the right assumption going forward? I mean, will seasonality at all next year potentially push margins back down at these levels?

[John F. Baule:]

I think it's fair to say that Q1 and Q2 margins will be the, the lowest, the low point. I mean, we expect margins sequentially to improve in Q3 and Q4, as I highlighted. Because a lot of it, one, we always carry a fair – the Catalyst event is a fairly big cost for – some hits in the first half both Catalyst events and a bunch of other marketing events happen in the first half of the year. So I think what you'll see is, progressively more leverage in the third and fourth quarters.

[Brendan John Barnicle:]

Great. And then, John, I don't know that you guys broke it out, I'm assuming maybe there wasn't. Was there any non-core revenue this most recent quarter?

[John F. Baule:]

You know we decided just from a simplicity standpoint not to highlight core, non-core because non-core has been diminishing in materiality just for a point of reference it was $1.3 million last year in total. Non-core revenue declining 30% and we expect that it will probably decline at similar or faster rate this year, especially because we're sun setting one of the platforms. So I think, it's becoming so small that it just kind of muddies up the conversation.

[Brendan John Barnicle:]

Great. And then, just lastly, I know in the past you have share GMV. Do you have that for the group for the customer base?

[John F. Baule:]

We usually give annual GMV guidance but we don't usually give it on a quarterly basis, I mean, not guidance, sorry, annual GMV but we don't give quarterly usually, Brendan.

[Brendan John Barnicle:]

All right terrific, all right. Great. Thanks guys.

[Operator:]

Thank you.

[David J. Spitz:]

Thanks, Brendan.

[Operator:]

Thank you. Our next question comes from Brian Peterson of Raymond James. Your line is open.

[Brian C. Peterson:]

Hi, thanks guys for taking the question and congrats, David. Any qualitative feedback you can give on bookings of the size of the pipeline after the Catalyst Conference in March and any feedback from customers on the Spring Release?

[David J. Spitz:]

Hey, Brian, yeah, I appreciate it. Yeah, Catalyst was a great event for us. As Scot indicated, we had record attendance both at our U.S. and European events. It's always a fantastic event both in terms of networking and education and we typically see that it is certainly help move deals along for those who attend. As you know we don't disclose bookings on a regular basis. We do periodically disclose net bookings but I would say that I was pleased not only with the event but I am also pleased with the activities that we see in our pipeline in particular, as I said before, on our larger retail and brand segment, I think this is the area for us to be and I think the reaction and the receptivity that we are getting has been strong. I will say that we had a dinner the night before our Catalyst events in the UK and we invited a select number of customers and prospects and about one-third of the folks that we had in attendance were actually branded manufacturers who had just a keen interest in not only what ChannelAdvisor was doing but the opportunities in the industry. So I think from our perspective, the focus on how we can help larger retailers and brands navigate what are the fast changing landscape I think is spot on and we've had great feedback from that show.

[Brian C. Peterson:]

And that kind of feeds into my next question. Feeding the brands, I know you guys had Samsung highlights at the Catalyst Conference. Any early update there in selling that product into the U.S.?

[David J. Spitz:]

No. I don't have an update for you specifically. I mean, Samsung has been a successful customer with us but what I would say is that, as I said in my prepared remarks, that the Where to Buy platform has a number of interesting customers and had significant interest from a variety for brands on a global basis from the U.S. to China but I would also say that I consider it a foothold in the segment. Where to Buy is almost a table stakes capability for brands and I think our opportunity is to really expand that platform from Where to Buy to an additional set of capabilities because brands are – you have a whole spectrum of brands where they are on their lifecycle, right? You've got brands that are on very early in the lifecycle, they may have no transactional capability on their website but they certainly want to point you to authorized resellers both online and offline that's where our Where to Buy solution can help them. And then, of course, you've got brands that have been selling direct to consumer for many, many years and you got a whole spectrum in between those two end points. So, I think of Where to Buy as an initial foothold in the market. It allows us to go into an earlier part of the lifecycle compared to what we had before but I would expect us to fairly aggressively build out our platform's capabilities in that regard.

[Brian C. Peterson:]

Okay, good to hear. Last one and this is probably for John, just on the FX headwinds for the 2015 guidance, any change on the impact there versus your fourth quarter assumption? Thanks.

[John F. Baule:]

No. I mean, no real change.

[Operator:]

Thank you. Our next question comes from Justin Furby of William Blair. Your line is open.

[Justin A. Furby:]

Hey, guys thanks. David could you talk about how your sizing TAM now as you kind of refocus efforts up market and can you give us a sense and I know this is probably – there is not a direct answer here but some sort of sense of lower, in terms of the low end of the market now versus what it used to be?

[David J. Spitz:]

Hey, Justin, great question. So I think it's fair to say that we're certainly reducing the number of customers that we would potentially accept them on to our platform at the lower end and quantifying that is a little bit difficult. It's not that we're not going to sell to smaller customers, to be very clear, what we are going to do though is implement a set of acceptance criteria and this is something that's already been in the works around some of the criteria that I talked on my prepared remarks, things like technical capability, the financial capacity to invest, et cetera. And so that will have some degree of constricting effect on the low end of the market and it's difficult to quantify and I think it is something we'll have to see as time rolls by. But I would also point out that I think we have an offsetting effect of adding this brand's addressable market at the upper end. So to the extent we're losing some number of potential customers at least where they are in the life cycle at the low end, I think we are at least offsetting that at the upper end. Historically in terms of selling to brands, right, unless they were already transacting on their website and prepared to do Marketplaces and digital marketing, we really didn't have an offering for them and now with Where to Buy we got a capability to go into a global brand and offer them a capability that previously, we might had conversations with the brand but because we didn't have the offering we really couldn't include them in our addressable market. And I would also add that I believe that – like I said in my remarks, the lifetime value associated with some of these brands is significantly larger than the equivalent lifetime value of a smaller customer. So we are not cutting off completely at low end but we are going to have some acceptance criteria that by the way is statistically researched right. So we've done quite a lot of research on the characteristics that make for a successful customer at the low end and for those that pass those kinds of assessment, we'll continue to accept them as customers because we know that to a certain extent some segment of those will grow into larger customers. But I think shifting our focus towards the larger end of the brands will hopefully at least more than make up for any kind of constriction on the lower end of the TAM. Does that answer your question, Justin?

[Justin A. Furby:]

Yeah, yeah. And may be just a follow on to that, I mean, on the brand side of things, I guess, just curious where you think that leaves sort of the middle market customer, the retailer that doesn't have the brand that's sort of an intermediary. What does that do to them over the next three to five years as more brand go direct. How does that sort of hurt their proposition in the market?

[David J. Spitz:]

Well, I think, it's a great question. I think it varies a little bit category by category, geography by geography and when we talk about the lower end of the market, remember that we're talking about customers that are doing $50,000 to $100,000 a month in the channels that we're talking about, may be a $1 million in total online. So, those are quite small. We think there is a robust market somewhere above that line. I mean, we continue to sign meaningful volume of what we would call middle market customers that may be doing $1 million, $2 million, $5 million especially looking at segments like automotive and other types of categories where we see a fairly vibrant market. So, I think fundamentally retailers especially those that are in the middle market need to make sure they have a differentiated value proposition. I think a top segment, an example of a top segment would be consumer electronics, right? If you are going to sell, I don't know, digital cameras or a category of products that's fairly commoditized and fungible and you don't have a differentiated service model and you don't have something that sticks out as a differentiated capability to the consumer, I think it's going to be tough to compete as the bar rate continues to raise in e-commerce. But I think for certain categories and it could be apparel, it could be automotive, it could be other categories, people can call that a niche, if they are competitive on price, competitive on service and have an experience that draws repeat consumers.

[Justin A. Furby:]

Got it, thanks. And then, David, I joined late, but I thought you said in your prepared remarks that you saw growth accelerate from Q4 and some of that had to do with firming up of pricing. Can you give any more color here? Is that a comment – well, a) did I hear that right and b) if I did, does that relate to changes for new customers that are coming in the door that you are getting higher rates of existing base that is now being priced higher or what did that comment mean, I guess?

[David J. Spitz:]

No, I appreciate the question, Justin. I think what we saw was in Q4 we saw a concentration of GMV growth in a set of customers that had volume pricing that was advantageous to the customer. And what we saw in Q1 was a bit of a broad – what I term the broadening of concentration of GMV. So while the GMV growth continued to increase at the top quartile of customers, it was spread across a larger number of customers and in aggregate that mix of customers had a more favorable take rate and more favorable pricing. So we saw a benefit from that.

[Justin A. Furby:]

Okay, got it. And then one more. If you think about just the overall sales team, you mentioned $1 million to $1.5 million of one-time expenses in Q2. Are you actually reducing sales or if you think about the full year, what's the good way to think about what your head count and sales organization could do?

[David J. Spitz:]

So I would refer back to my prepared remarks, Justin, and just say that we are focusing our sales and marketing investment on this segment of the market and I am not going to get into specifics about exactly how those expenses are going to contract.

[Justin A. Furby:]

Okay.

[Scot Wingo:]

Just here (42

[Justin A. Furby:]

Got it. Thanks very much, guys. I appreciate it.

[David J. Spitz:]

Thanks Justin.

[Operator:]

Thank you. Our next question comes from Greg Dunham of Goldman Sachs. Your line is open.

[Greg E. Dunham:]

Hi. Yes, thanks for taking my question. I actually want to follow up on your answer to Justin's question, David. Am I right to interpret that that mid tier, that $10 million to $50 million in GMV is still very much a focus for your go-to-market?

[David J. Spitz:]

Hey, Greg. Yeah, I would say that – I want to be very clear. This is not an abandonment of middle market customers. This is a tightening of what I would call the acceptance criteria for the lowest end of the market where – when we look at our analysis of customers who drive between $15,000 and $30,000 a year to ChannelAdvisor in revenue, that is the segment where our analysis of customers acquisition cost and lifetime value, especially at the $15,000 and below mark is an area where we just don't think the economics are something that is sustainable for us. So we do know that there is a set of customers that we can sign in that segment that do succeed. And what we spent a great amount of effort on in Q1 was understanding what those characteristics were, so that as we sign them in the future going forward, we know what to look for and what to accept from a customer perspective. And so this is not at all a notion from our perspective that there is no opportunity in the middle market. It's an acknowledgment that at the lower end of the market, if we don't have some meaningful acceptance criteria that we will not be able to recover profitability on the set of customers that we will now be scrutinizing a little bit more or the prospects I should say. Does that answer your question, Greg?

[Greg E. Dunham:]

It does. It's very clear. That makes sense. And then one follow-up. Outside of the changes to the acceptance criteria, are you doing any other organizational changes to drive sales people's behavior?

[David J. Spitz:]

Well, we've done a number of things. Policy things that we talked about previously around our price change amendments. We have increased prices at the low end, again, as an economic signal to the market. And, not to get too specific, but some of our acceptance criteria for example require a larger amount of prepayments from customers at the low end to make sure that ones who sign up have skin in the game, if you will. We are also compensating sales reps partially on a revenue basis, right, so that previously we would look just at bookings, which was anticipated revenue contribution from these customers. Now what we are doing is we're still incorporating bookings, of course, but we're also looking at rear-facing revenue contributions from customers that we've signed. So I think – and as I said in my prepared remarks focusing our sales and marketing efforts in the area where we know that we can drive not just revenue growth but profitable revenue growth. So you'll see some adjustments there. So I would say that there is a fair amount of change going on and I'm confident that the results of that change, even if it results in us passing up the opportunity for revenue growth that previously might have not yielded the kind of profitability that we would have wanted, I think these changes will be good for the company.

[Greg E. Dunham:]

Okay, great. Thanks, guys.

[David J. Spitz:]

Thanks, Greg.

[Operator:]

Thank you. Our next question comes from Craig Nankervis of First Analysis. Your line is open.

[Craig Nankervis:]

Yes, thanks. I guess, maybe John for you. My question is on your full year revenue guidance, given the dip you expect in Q2, what kind of factors would enable you to retain, say, the upper half of your full year revenue guidance? Things like that would be a pretty big jump either in the second half or Q4 exclusively or whatever, can you just comment why that could happen?

[John F. Baule:]

Well, I think what we're looking at now is for the full – it's only – we're only through one quarter, so we're taking a look – we don't have enough to change our view on the full year, the one that we provided earlier. We know that Q2 carries some variables with some of the things that David spoke to you. We're changing some policies, we know that we might see a little bit of an increased slower rate of replacement for smaller customers that are going to be churning off and not replacing fast. We're kind of using Q2 to see where it is. What I can tell you, Craig, is that what we're focused on this year, specifically what I tried to highlight is creating a sustainable profitable foundation that we can resume high growth rates going forward from. So we will definitely air to the side of profitability this year if wherever we fall within that range of revenue.

[Craig Nankervis:]

Okay. I guess, that's all I have for now. Thank you.

[John F. Baule:]

Thanks, Craig.

[Operator:]

Thank you. Our next question comes from Shawn Milne of Janney Capital Markets. Your line is open.

[Shawn C. Milne:]

Hey, John, let me just start on housekeeping. I think it was kind of asked before, but I don't think we got the fourth quarter FX adjusted growth rate. And currencies will weigh more on Q2, I think it was 300 basis points in Q1, so are you guiding more slightly higher FX impact in Q2? Thanks.

[John F. Baule:]

No, I am not making any assumptions regarding rate – the way we forecast is we take the rate at the current time and then we forecast them going forward. So whatever it was at the end of Q1, those rates we would have used to create our forecast for Q2.

[Shawn C. Milne:]

Okay. And then just trying to get – I think the previous caller was trying to ask about the...

[John F. Baule:]

Yeah. I don't remember (49

[Shawn C. Milne:]

Okay. And just back to that second quarter guidance, Tom (49

[David J. Spitz:]

Hey, Sean, great question. No, I mean, clearly to the extent we sign customers, we're going to do everything in our power to make them successful and I certainly expect a meaningful percentage of them to be successful as we've seen in the past. I think this is really a statement about tightening our customer acquisition policies and our customer acquisition strategy. As I said, we have done a lot of analysis in Q1 following our Q4 results to understand really ultimately, not just where is the revenue growth, but where is the revenue growth that ultimately can yield profit for us and what we see at the lower end of the market, especially when we see prospects that are technologically challenged or don't have all their data in one place or have a few other markers that the – we've just seen statistically that the odds of success of that type of customer is low and it almost doesn't matter what we do, right. It's not a statement about our platform or our services, it's a statement about the maturity level and readiness of a prospect. And so it's really, our changes are really about not signing those customers at that stage in their lifecyle. So this is not a statement about existing customers, this is a statement about our customer acquisition strategy and where we're investing.

[Shawn C. Milne:]

Okay. And then lastly just on the branded efforts. We put some numbers around that, but my understanding is you talked about it briefly. Your acquisition is sort of further up the funnel if you will, I mean, it's not a straight monetization of GMV. When do you really think you'll have a product that's in the marketplace to really drive more of a, I guess, more of a normal business model for your GMV take rate? Is that more into 2016 or is there something that might be helping growth in the second half of the year? Thanks.

[David J. Spitz:]

Yeah. Shawn, that's a great question and you're right. Our current offering in the Where to Buy space with branded manufacturers is not GMV based. And I am not frankly sure that it needs to be GMV based, it's certainly SaaS, it's a subscription model and we get considerable revenues from certain customers that are enjoying that product's capabilities. But, I am not sure that it requires us to continue to be successful in that market for us to have a GMV based model. So for me this represents a little bit of a diversification strategy. And, obviously at the end of the day, brands are interested in sales and what they're driving to retailers, but for brands this is really about how do I make sure that customers who are interested in my product and researching my product can find the places to buy it that are trusted and authorized by me as the brand? GMV is kind of a secondary consideration.

[Scot Wingo:]

And Shawn one thing we see there is there is a bit of ability to up sell the customers. So, even when they sign on frequently it's in a small number of geos, a small number of SKUs and a small number of brands. We have kind of a three-dimensional matrix there that as they add geos, SKUs, and sub brands, the amount of fees they pay us goes up. So, it kind of has a variable part, it's just kind of different model it's not a percent of sales variable, it's variable across those three dimensions of brands or sites that are managed, the number of SKUs, and then the number of geos. So, for example, Samsung who we highlighted started, I don't remember the exact history there, they started in one geo and then we've added many more geos, product and then product line, those kinds of things.

[Shawn C. Milne:]

Okay, that's helpful. Thanks, Scot.

[Operator:]

Thank you. Our next question comes from Karl Keirstead of Deutsche Bank. Your line is open.

[Jobin G. Mathew:]

Hey, guys. This is actually Jobin Matthews sitting in for Karl. Thanks for taking my question.

[Scot Wingo:]

Hey Jobin, how are you? We were going to say, hi Karl.

[Jobin G. Mathew:]

Hi. Thank you, John. This has been asked before, but just from the point of view of your guidance, it looks like your 2Q was slightly lower than maybe we were expecting, but you've maintained your annual guide. Is that just because your new programs are taking time to fall in place and some of the 2Q revenues pushed out into the second half of the year. Is this how we should interpret the guidance?

[John F. Baule:]

Yeah. The greatest amount of uncertainty Jobin will be focused on the short-term as we roll these things out in Q2. So certainly the revenue we forecast is supported by our TAM and the opportunity, but in the short-term that's the hardest impact to measure. So that's kind of how we are – that's why we're projecting the way we are.

[Jobin G. Mathew:]

Got it, okay. And in terms of your cost take outs, what does this mean in terms of the existing investments you've put in international regions; in China, in Brazil and what does it mean for the investments? Are you planning on taking some of those investments out which may not be as profitable as you may have thought?

[David J. Spitz:]

Hey, Jobin, this is David. I would say – you referenced China specifically, I have been very pleased with our results in China, and I continue to expect us to invest in China. I see a huge amount of opportunity there. I think we are very early. I am pleased with our team and our leadership there. And so I don't see any change from a China perspective as it relates to our investments. Beyond China, I think it's really just an analysis of where do we have investments positioned, what are the appropriate revenue for head count metrics that we want relative to growth rates. But as it relates to China, specifically, that has been a strong success for us and I would expect us to continue investing there for at least the foreseeable future.

[Jobin G. Mathew:]

Got it. Okay. And as you – last question. And as you guys come out of this transition phase, where do you still see your medium term growth and profitability margin targets?

[David J. Spitz:]

Yeah. So, Jobin, this is David. We're not providing long-term forecast in that regard. I think we're still early in 2015. So I certainly don't want to get ahead of our ski tips and start making predictions about 2016 or 2017. I think our near term priority is to make sure that we're focused on improving our profitability driving as much revenue growth as we can, but also driving revenue growth that we know will ultimately yield margins that are acceptable to us. Continuing to invest in growth, but maybe a little bit more disciplined growth. So I'm not going to provide a specific quantitative figure for you as it relates to long-term, but I certainly think that we can continue to grow at or above the rate of e-commerce and show increasing profitability along that path.

[Jobin G. Mathew:]

Okay, that's helpful. Thank you.

[David J. Spitz:]

Thanks, Jobin.

[Operator:]

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to management for any further remarks.

[Scot Wingo:]

This is Scot. I just want to thank everyone for joining us today and we look forward to speaking with you again soon. Thank you.

[Operator:]

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