ChannelAdvisor Corporation
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

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

[John Baule:]

Good afternoon and welcome to ChannelAdvisor's conference call for the second quarter of 2015. I'm John Baule, Chief Financial Officer of ChannelAdvisor. With me on the call today is David Spitz, ChannelAdvisor’s Chief Executive Officer. After the market closed today, we issued a press release with details on our second quarter performance as well as our outlook for the third quarter and the 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 after the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under Federal Securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent Form 10-K 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 adjusted EBITDA, which excludes depreciation, amortization, income tax expense, interest, stock-based compensation expense and one-time severance and related costs. A reconciliation of all non-GAAP measures to the most comparable GAAP measure is included in our press release. Finally, at times in our prepared comments or responses to your questions, we my offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. And with that, let me turn the call over to David for his prepared remarks.

[David Spitz:]

Thanks, John. Welcome, everyone, and thank you for joining our call today. Revenue in the second quarter was $24.2 million, an increase of 16% from a year ago or 19% on a constant currency basis, and was significantly above the high end of our expectations. Our revenue upside combined with improved operational efficiency produced an adjusted EBITDA loss of $440,000, the smallest such loss we’ve had since becoming a public company, and exceeding the high end of our guidance by over $4.5 million and representing significant and rapid progress towards improving our cash flow and profitability. Our strategy to improve pricing and prospect qualification, to emphasize larger customers and brands with favorable economics, and to better align our staffing and expenses with revenue is showing early signs of success, and I am very pleased with this outcome. Looking at the quarter in more detail, our revenue upside was driven by a number of factors including a better than expected contribution from variable revenue. In fact variable revenue resumed growing following a decline throughout most of 2014 reflecting improved pricing discipline as well as a stabilization of eBay's growth rate. Although we continue to expect variable revenue to decrease as a percentage of total revenue over the long term, our pricing and sales policy changes are having the desired result of realizing more of the value we are delivering to customers, and helping us to shift our customer base away from smaller customers whose GMV growth is disproportionately concentrated on slower growing eBay. In fact, as I predicted on our last call, we crossed a watershed moment in Q2 when for the first time in our history as a company eBay was no longer our largest source of GMV when measured on a trailing 12-month basis and has been replaced by Amazon as our largest channel partner. We believe this is a positive development since eBay continues to grow much more slowly than e-commerce overall, and our GMV mix is shifting towards channels that are growing more quickly than e-commerce, which should help to improve our per-customer GMV growth, and ultimately revenue growth over the long term. Amazon continues to perform very well for our customers, and we see incremental demand even from larger brands and retailers who historically might have resisted selling on Amazon. In short, Amazon continues to gain momentum, and we are pleased they are now our single largest driver of GMV and GMV growth. In addition to Amazon, we continue to expand our platform to other channels, having recently added Jet.com and AliExpress. While it's early for both channels, we are very encouraged by the early significant seller interest and adoption we are seeing on both channels. We also have seen strong interest from other marketplaces in our recently announced marketplace network program which is designed to allow third parties to integrate with our platform, and which we believe will help accelerate the number of marketplaces we offer on our platform. We expect to announce some of our early partners as part of our fall release scheduled for September. All of these efforts and investments continue to strengthen the appeal of our platform to customers globally, and are increasing the competitive gap between us and our competition. We are also participating in Google's new Purchase with Google program, which we believe is crucial to helping retailers fully exploit the significant growth of consumers using mobile devices. In Q2, we realigned our staffing and expenses to revenue to improve profitability. As a result, we have a modestly smaller sales team, although it is also more tenured and focused on larger customers. Consequently and as expected, we saw improvement in sales of our product during the quarter, a trend which I believe will continue. Of note, I was particularly impressed with some of the brand name clients we signed in Q2, reflecting our success upmarket and into the branded manufacturer segment. These new clients included customers like Philips, Asics, and Hewlett-Packard to name a few. We are seeing a clear trend where larger retailers are evolving from website first strategies and embracing marketplaces they might previously have shunned, and branded manufacturers are showing stronger interest in the opportunities presented by more strategically investing in e-commerce and going direct to consumer. As we focus on larger, more profitable customers and brands, we will continue to see muted growth in customer count because we are no longer seeking to aggressively replace smaller customers. As a result, net customer addition totaled 44 in the second quarter, and we ended the quarter with 2,937 customers. However, we are also seeing early improvements in average revenue per customer, which increased 3% to just over $32,000 on a trailing 12-month basis. This is a modest acceleration from Q1 in contrast to the decelerating average revenue per customer growth we saw throughout 2014. I want to be very clear that revenue growth remains our top priority, but it must be revenue growth we believe will be profitable in the long run which is why we have made some of the changes we've made. We are only part of the way through our evolution of our go-to-market strategy, and this may therefore create a period where revenue growth is more likely to decelerate before it accelerates. Our sales team is smaller many we are not replacing smaller customers as aggressively as before. We have increased prices. We've tightened customer acceptance criteria, and we're focusing on larger customers with longer sales cycles. We believe this is the right thing to do to improve unit economics and ultimately our overall profitability, but as we have said, it may take time to replace lower quality revenue with more profitable revenue, and that may affect growth rates for a few quarters. With that in mind, I am extremely pleased with our progress in Q2, and as we look forward we are increasingly confident that the strategy that we established early this year to focus on larger customers and brands, increase pricing discipline, and focus on accelerating our path to profitability, while continuing to enhance and extend our technology leadership was and is the correct path for us to follow. This is also reflected in our updated guidance that John will detail including increasing the midpoint of our full year revenue expectations and significantly improving our anticipated adjusted EBITDA range. On a personal note, we also announced this evening that our CFO, John Baule, will be moving on from ChannelAdvisor to pursue new opportunities, and that we have appointed Mark Cook as our CFO effective September 1. Mark has over 30 years of finance experience and is currently Vice President of Finance and Controller at Red Hat, where he has held various finance roles for over a decade. We believe Mark's extensive experience at Red Hat will be very helpful to us as we continue to grow and mature as a global public company. I would like to personally thank John for his outstanding work managing our IPO, and for helping us to build a world class finance function in our first couple of years as a public Company. I will miss John’s humor and friendship even as I know Mark will be a great addition to our team. So John, thank you very much for everything you've done for us. And now, I'm going to turn the call back over to John for more details on our financial performance.

[John Baule:]

Thanks, David. Before digging into the detailed financials, let me emphasize two overarching points. First, in our previous quarterly call I stated that while we remain committed to medium and long-term revenue growth, during this transition year our short-term focus would be on improving profitability. Our significantly improved year-on-year adjusted EBITDA, and our updated adjusted EBITDA full year guidance clearly demonstrate this focus. Second, it's worth remembering that approximately 70% of our revenue comes from the top third of our customer base. These larger customers tend to have more favorable retention characteristics and thus greater lifetime value. In the first quarter call, we discussed our intent to focus on this segment of larger customers by implementing tighter acceptance criteria for smaller customers. While we believe this strategy will yield greater long term profitability, it will likely have a near term impact on revenue growth. So with that being said, let's look at the financial details for the quarter. Revenue in the second quarter was $24.2 million, an increase of 16% over 2014 and above the high end of our guidance range. On a constant currency basis, our year-over-year revenue grew by approximately 19%. Revenue from outside of the United States represented 23% of our revenue in the second quarter, compared to 25% of revenue a year ago, due to the foreign exchange fluctuations. Fixed revenues continued to grow as a percentage of revenue and represented 78% of revenue in the second quarter, up 2 percentage points from a year ago. Fixed subscription revenue increased 20% from Q2 of last year and 7% from the first quarter, representing the highest sequential growth in the past three quarters, as we continue to focus on improving our pricing dynamics. Variable revenue of $5.3 million increased 4% from a year ago due to higher overage charges which reflects our focus on improving pricing practices to share in the value we are delivering to customers and reversing a trend we have seen in the past four quarters. In addition to a strong variable component, revenue upside in the quarter also came from channel partner implementations that we had anticipated later in the year, and to a lesser degree, from better than expected performance from our Where to Buy solution. Moving to the expense side of the P&L, my comments regarding expenses will all be on a non-GAAP basis and all comparisons will be on a year-to-year basis unless otherwise specified. Our press release includes a GAAP to non-GAAP reconciliation. Gross margin in the second quarter expanded 490 basis points to 74.4%, and excluding the increased depreciation expense, expanded an even greater 610 basis points. We also saw a meaningful decline in operating expense as a percentage of revenue compared with last year demonstrating the significant leverage inherent in our model. As a result of the leverage gained on each lines of the P&L in the quarter, adjusted EBITDA improved to a loss of $440,000, well ahead of our guidance. While a significant driver to our reduced non-GAAP expenses was a realignment that reduced our overall headcount by less than 10%, roughly half of our overperformance in adjusted EBITDA came from better than expected revenue, with the other half resulting from lower than expected cost on all operating lines, particularly in sales, marketing, and G&A. With regard to the lower than expected operating expenses, it is important to note that these are not just due to timing but represent real efficiency gains. On our previous call, we mentioned that exclude one-time expenses related to our realignment from our adjusted EBITDA and non-GAAP net loss. These expenses which totaled $650,000 were less than we anticipated and are excluded from our non-GAAP results. A reconciliation of our GAAP net loss to our non-GAAP net loss is included in our press release. Finally, our cash position remains strong with $57.7 million in cash and cash equivalents at the end of the quarter. We have said repeatedly in the past that we anticipate reaching breakeven operating cash flow while maintaining a comfortable cash reserve. Our sharply improved adjusted EBITDA demonstrates both our intent and our capability to accomplish this. Now let me turn to guidance. With a better than expected second quarter and continued momentum, we are more confident in our outlook for the year and are increasing the low end of our revenue guidance range, now in the range of $95.5 million to $97 million and maintaining the high end of our range. In arriving at this guidance, we put emphasize on three factors. First, as David mentioned, we have made a strategic decision not to replace our smaller customers at the same rate by implementing tighter acceptance criteria. Second, since most of our contracts are for one year, there is a lag in the impact of the sales and pricing policy changes mentioned by David, although the increase in variable revenue in Q2 is an encouraging sign that these policies are having the desired effect. And three, there is a possibility that we will see a pronounced shift in GMV towards the larger customers in the fourth quarter, seasonally our highest revenue quarter and this may affect our variable revenue. Our focus this year is on making meaningful progress towards profitability. Based on our results in the second quarter and our anticipation of further leverage in the second half of the year, we now anticipate an adjusted EBITDA loss of between $7 million and $9 million. This would represent a year-on-year margin improvement of almost 1,500 basis points at the midpoint of our guidance. For the third quarter, we are anticipating revenue of $23.5 million to $24 million. This is down slightly on a sequential basis because we're not counting on some of the favorable factors that drove the upside in Q2, such as better than anticipated variable revenue. Additionally, we continue to expect dampened net customer additions despite strong gross customer additions as we focus on larger, more profitable retailers and brands, and as we don't look to replace smaller customers. From an expense perspective, we expect a slight sequential increase in the third quarter as we strategically invest in areas that can support our long-term growth including international opportunities. Combined with the anticipated decline in revenue, in the third quarter we expect an adjusted EBITDA loss of between $1.5 million and $2.2 million, a wider loss than in the second quarter, but a meaningful year-over-year improvement. In summary, while there is much yet to do, Q2 represented a strong next step in our 2015 transition. We believe that our more singular focus on customers with greater retention characteristics will lead to a long-term, sustainable, and profitable revenue growth. And finally, as David noted, I will be moving on from ChannelAdvisor to pursue new opportunity. My time here at ChannelAdvisor has been personally rewarding and I sincerely enjoyed helping to guide the company through the early days of being public and building a scalable finance function that will support our long-term growth. I would also like to acknowledge the many bright people in the investment community on both the sell and buy sides, with whom I've had the opportunity to interact. It has been a privilege. And finally rest assured that I will do everything in my power to ensure a smooth transfer of responsibilities. I remain an ECOM shareholder, and wish the company all of the best. And with that, operator, we’d now like to open the call to questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Michael Huang of Needham & Company. Your line is open.

[Michael Huang:]

Thank you very much. Nice quarter here, and nice to see the reinflection here. So can I ask you from a channel standpoint or from the newer marketplaces that you guys are connected to, so Alibaba and MercadoLibre, could you provide an update on what you're seeing out of those, and whether or not those represent some of the areas where you might be seeing some better growth?

[David Spitz:]

Hi, Mike. This is David. Performance of the various channels outside of the big three that we've historically talked about, there's quite a lot of variance in there. So there are some that I would characterize as performing quite strongly, and there are some that are small and not necessarily growing significantly. So there's quite a lot of variance in there. And I would say that in aggregate together, they are beginning to contribute overall to our growth, yes.

[Michael Huang:]

Okay. I apologize; I think I missed part of your commentary, but did you say something about in September we're going to be on-boarding more marketplace channels, and you're doing that at an accelerated rate? I'm not sure if I misheard but maybe if you could just walk me through that.

[David Spitz:]

Yes. So one of the things that we announced at our Catalyst show earlier this year is the marketplace network which includes the opening up of an API so the third party marketplaces could connect into us without ChannelAdvisor having to do any integration work, which historically we've been the ones doing the integration switch method. There were certainly opportunities along the way, whether it was a regional marketplace or one that just wasn’t didn’t make economic sense for us to invest in integrating. Now those sites can integrate into us without ChannelAdvisor having to do integration work. We have a number of marketplaces that have expressed an intent to integrate to the marketplace network, and I would expect that list would continue to grow. We expect to announce some of those in September. So it’s a good way for us to pick up incremental marketplaces like I said, maybe in other regions or in particular categories or niches that left purely to our own devices, we might not have been able to integrate directly.

[Michael Huang:]

Got you. Last question, I don't know if there's a way to provide specifics around this, or if you want to qualify it. When you look at the cross-section of your customer adds in the quarter and maybe compare it to the cross-section last year, is there a way to help us understand how much bigger these customers are on average, maybe either by GMV or by some other metric? Maybe help us understand how much bigger these customers are?

[David Spitz:]

Yes. I don’t have a metric for you, Mike. I mentioned some example customers on the call like HP is a good example. Philips is another good example. What I would say is that probably the biggest change that we implemented was, this is going in Q1 and Q2, increases in prices at the lower end of the spectrum and some significant changes on deal qualification for smaller customers. So really what that had the effect of was removing from our pipeline some prospects that previously might have been deals that we signed that just don't meet those criteria anymore. You would expect that to drive a larger average deal size, and obviously we saw a little bit of that in average revenue per customer as well. It will take time for that to hopefully show up in revenue and average revenue per customer over time.

[Michael Huang:]

Okay. Great. Thanks, guys. I appreciate it.

[David Spitz:]

Thanks, Mike.

[Operator:]

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

[Justin Furby:]

Hi, guys. Thanks, and congrats on the results. I wanted to start, David, with the trends that you saw in your customer base this quarter from a macro perspective. I'm wondering whether you saw the same scene play out where the bigger guys are outperforming the smaller players, and whether or not there was any measurable impact to your performance from that?

[David Spitz:]

If you remember in Q4, we did see a mix shift towards the larger customers in our basis as it relates to percentage of GMV that was flowing through them. We saw it come back to more historical levels in Q1, and I would say that trend continued in Q2 within a rounding factor. So so far it looks like of the dynamic that we saw in Q4 was thus far isolated to Q4. Having said that, we're mindful of that as it comes to thinking of revenue for the rest of the year and Q4, which is part of the reason you see some of the guidance there. It's hard to predict exactly what those flows will be and how much GMV and therefore variable revenue will come from different customers. I think an encouraging thing though is that we have seen as I mentioned in my prepared remarks an acceleration in the growth rate of variable revenue which contrasts with last year where we saw variable revenue actually contract on a year-on-year basis. So I think there is a few different factors playing into that. eBay being one, pricing discipline being another, but I view that as an encouraging sign. I’m not prepared to call it a trend yet, but I certainly felt like it was a step in the right direction.

[Justin Furby:]

Okay. Good. Then on the enterprise business, with your existing installed base there, I'd just love any commentary around pricing trends that you're seeing in those customers as they come up for renewal, so the existing base. What's playing out there? As you go through these pricing changes and changes at the lower end, is there any impact to the larger customers in terms of what you're doing from a pricing standpoint?

[David Spitz:]

Yeah. Great question. I think we've said this before. The pricing changes we've made were really focused on the lower end, and really this is a reaction to our view of the lifetime value of smaller versus larger customers. Smaller customers, they're just more volatile. They tend to go out of business with more frequency. When you look at the customer acquisition cost ratio of that to lifetime value, larger customers regardless of the take rate they have on their GMV tend to have significantly larger lifetime values to us and better ratios from a CAC to LTV perspective. That's why we focused the pricing changes on the lower end to really filter out customers that we felt would not have that financial capacity to invest in growing their business, or have the quality of data that is necessary to effectively use our platform, all with the design to improving the odds of a longer and larger LTV for smaller customers. That's a long way of saying that the pricing changes and the deal qualification changes are really focused on lower end of our market segment, and the pricing – we really didn’t make changes on the pricing schedules that we have for larger customers. Those tend to be deals where there's potentially a procurement office involved. They're more I would say kind of market rate if you will, and we do sometimes get some pressure when we're renegotiating deals at the enterprise side, but I would say it's often offset by upsells as well. So expanding the platform. They may be using us for feed management and they want to add in management of bids on digital marketing, or they want to add marketplaces, or they want to go international. I feel like the trends we're seeing on the enterprise segment are healthy. It's the segment that I think is the right long-term bet for us, and I'm generally pleased with how things are going there even though the aggregate take rate on enterprise customers is lower than what you would see on small customers.

[Justin Furby:]

David, are those enterprise opportunities, some of those that you listed in the quarter, what's the mix between? Digital marketing is the entry point for some of the bigger ones, but what are you seeing? Has that's changed at all, and you're seeing more marketplace? In new deals, what are you seeing there?

[David Spitz:]

Yeah. I touched on it on the call, I don’t know if it was clear. We're definitely seeing an interest. We're seeing more interest in marketplaces now from larger brands and retailers than we might have seen in the past, and I think that's a confluence of a few things. Number one, you've got Amazon who continues to be a juggernaut that is forcing everybody to react in one way or another. You have the purchase with Google program coming online which we think of as a marketplace because the transaction is happening somewhere other than a retailer's website. That is a good example, where I spent about six weeks visiting customers over the last couple of months. Customers that would have never really thought about a marketplace because they were just strategically focused on their own website, they see what's going on with mobile. They see that they're getting more than half their traffic now from mobile. They see their conversion rates aren’t good and they realize programs like Purchase with Google have a lot of promise. Marketplaces we've been talking about how marketplaces are quote, “eating the world” and I think that’s reflected in the level of interest we're seeing now from even these larger enterprise customers.

[Justin Furby:]

Okay. And then one more if I can, on the churn, from a gross churn perspective, I was curious what that looked like in the quarter versus maybe the last few quarters. And I'm wondering if you've ever looked at your customer base, not just between enterprise and mid market and low end, but also on a product basis. And if you look at marketplaces customers versus some the others, is there an opportunity not only as you move up enterprise to improve churn from a bigger customer, but also as you improve penetration on marketplaces at the enterprise? Do you think that's also seen as stickier? Two questions, what did gross churn look like this quarter, and two, do you think that's an opportunity as you penetrate on the marketplace side? Thanks.

[David Spitz:]

Yeah, great. So as it relates to churn I don't have a metric to share with you today, but I would say that we’ve seen some sequential improvement in churn certainly from Q3 of last year, which thus far was our high watermark. We're still burning off some of these smaller customers, even though some of those that we signed last Q3 as an example may not renew as we come into this third quarter. We're still seeing some churn at those levels that is what I would characterize as above historical levels. But I would say sequential improvement over the last couple of quarters which is obviously a good thing. And then if I understood your second question, as it relates to would we expect to see improvements in retention as we further penetrate, I think that the answer is we know that historically the enterprise segment of our base as we stratify our customers, customer retention and churn get significantly better the higher up our customer base that you go for a variety of reasons. Yes, I do think that as we gain more share in larger retailers and brands, and as they are using us for more and more capabilities, I think that’s the whole reason we're focusing more up market. Ultimately, we believe those customers will have better lifetime value, longer life spans with us, and ultimately drive revenue that’s more profitable. Did that answer your question, Justin?

[Justin Furby:]

Yes. Thanks, David.

[David Spitz:]

Okay.

[Operator:]

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

[Brian Peterson:]

Thanks for taking the question, and congrats on the quarter. John, I was hoping you could give a little more granularity on the upside, and if we can break out, let's call it, the $2.5 million in what buckets you would put those into with the various drivers. I was hoping to get more clarity on the Where to Buy upside that you mentioned. Are we seeing enough progress there where we're actually starting to see an impact to the model in Q2 and potentially in 2015?

[John Baule:]

First of all, I think I said if you look at the upside, about half of our EBITDA upside was attributable to better revenue than anticipated. The biggest driver of that revenue overage primarily was the variable revenue coming in better than we expected. Secondarily, it was a few things that where we were able to launch a little earlier than we anticipated. The other half of the EBITDA was really from just lower expenses than we even anticipated. I think we just sharpened the pencils and found a lot of opportunity. As far as Where to Buy, it is outperforming what we had initially said we thought it would, not by dramatic amounts but it looks like it's a really strong line for us with a lot of growth potential. I don't know if David wants to add a little bit on Where to Buy piece.

[David Spitz:]

Yeah. Where to Buy is pretty exciting for us because it's really just the first step in what I hope and expect will be a much broader platform for brands. There's a meaningful uptick as I said in the call in interest from brands in a wide variety of things related to e-commerce. And so our ability now to address even brands that are at a very early stage in their e-commerce life cycle, where maybe they just have a website. They don’t do any transactions and historically we couldn’t have helped them with our platform as it stood before. Now we've got something we can offer them at a early stage. So it gives us an ability to establish early relationships with some large global brands and as they mature through the life cycle of e-commerce, we should be able to address a broadening array of their needs over that life cycle. So I am pleased with how we are doing there so far.

[Brian Peterson:]

That's good to hear. My second one, I know you mentioned long-term, David, that the priority's going to be on growth over profitability. Obviously, you've made some impressive progress on margins the last couple of quarters. Could you just hit on what your priorities are for investment? You mentioned international expansion, potentially new products. I'm just wondering where you think the priorities are as we look out into 2016. Thanks.

[David Spitz:]

Great question. So definitely, I do want to be very clear that revenue growth is our top priority but we want to do it within a financial framework if you will that ensures that we’ve got a long runway and our balance sheet has ample amount of cash on it. So that’s really the framework that we are operating in. So as it relates to brands, I think there is a few key areas as it relates to growth and investments, there's a few key areas, one is brands for sure as I just said. We do believe that there's going to be an increasing amount of share that flows directly from brands to consumers. And as a result of that, we are making – not only do we making acquisition to acquire the Where to Buy product late last year, but as I just mentioned in the prior comment I want to see us continue to have spend that product portfolio to address a variety of other needs that brands have online as they go through that lifecycle. So that’s going to be an area of investment for us. Another area of investment for us is data. So I’ve talked about this before and we’ve got billions of dollars in GMV that flow through our system on a global basis across many, many channels including obviously the big ones but also smaller ones. And historically we’ve never really turned that data out to our customers to allow them to see how they compare, how they’re doing in terms of peers and benchmarking and what they ought to be doing in terms of opportunities that they are not leveraging. We rolled out a sneak peak of this at our catalyst show earlier this year and got really, really strong reception from our customers. We did benchmarking reports with them and I would expect in our upcoming fall release that you will see some incremental capabilities delivered there for our customers. I am really excited about that because I think it’s a significant competitive advantage and differentiator for us that other smaller competitors don’t have anywhere near the scale to have that same quality of data that they could expose to their customers. So I think obviously with ongoing investment in our existing business, investing in brands, investing in data and continuing to drive the expansion that we see internationally. Our China team continues to perform very well and grow rapidly, and I am pleased with the progress we’ve seen there. Especially now that we've added AliExpress, we've got what I would characterize as a fairly complete product offering in that region. So there is a lot of areas where we can invest. We just want to do with an framework that kind of minimizes the cash consumption that we’ve got over the short and medium term.

[Brian Peterson:]

Thanks, David.

[David Spitz:]

Thanks, Brian.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Colin Sebastian of Robert W. Baird. Your line is open.

[Ben Gaither:]

Hi, this is actually Ben Gaither filling in for Colin. Two quick questions, as you guys highlighted, sales and marketing came down quite a bit this quarter. I was just wondering if there were any one-time factors in there that you'd like to break out, and if you guys think that this operating productivity can sustain revenue growth going forward. Secondly, I know you guys have written a lot about some smaller marketplaces recently like Jet and New Egg and some others. Could you just talk a little about the traction that those channels are showing, and maybe how much volume they contribute on a relative basis versus maybe Amazon or eBay?

[John Baule:]

Hey, Colin. This is John. I’ll take the first piece and then pass the second one to David. On the sales and marketing, we always have a fairly big sequential drop from Q1 to Q2 because Q1 is when we have our major conference which is Catalyst, and there's spending around that, so that tends to be why you'll have some drop. Of course we made some – we did the realignment which also reduced cost in the quarter. And I think we had said that last call that we expected about $0.5 million related to Catalyst cost to be in the second quarter. It turned out only about $200,000 of them cut over because there was some other things that offset it. So it wasn’t quite as big as we anticipated. So that’s really the reason for the sequential sales and marketing drop. I turn the other one over to David.

[David Spitz:]

So I think it’s premature to talk specifically about channels like Jet as an example. As you probably are aware, they just had their public launch I think July 20 or 21. So we’ve literally got the matter of a couple of weeks of data so far, but I think what I would say is that for some of the ones that we’ve talked about lately like Jet and AliExpress, we have seen significant seller interest which I think is important. It at least proves something about the supply side of the equation. So we will have to get a little bit more time to see how it goes as it relates to GMV and consumer share of wallet.

[Ben Gaither:]

Thank you. That’s helpful.

[Operator:]

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

[David Spitz:]

Great. As I said we were pleased with our Q2 results, and I appreciate everybody’s time on the phone 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.