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Edited Transcript of ECOM earnings conference call or presentation 9-May-19 12:00pm GMT

Q1 2019 ChannelAdvisor Corp Earnings Call

Morrisville May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of ChannelAdvisor Corp earnings conference call or presentation Thursday, May 9, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Spitz

ChannelAdvisor Corporation - CEO & Director

* Mark E. Cook

* Traci Mangini

ChannelAdvisor Corporation - Director of IR

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Conference Call Participants

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* David William Gearhart

First Analysis Securities Corporation, Research Division - Associate Analyst

* Matthew Charles Pfau

William Blair & Company L.L.C., Research Division - Analyst

* Ryan Michael MacDonald

Needham & Company, LLC, Research Division - Senior Analyst

* Thomas Ferris Forte

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Zachary Cummins

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the First Quarter 2019 ChannelAdvisor Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Traci Mangini. Ma'am, you may begin.

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Traci Mangini, ChannelAdvisor Corporation - Director of IR [2]

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Thank you, Lauren. Good morning, and welcome to ChannelAdvisor's Conference Call for the First Quarter 2019. My name is Traci Mangini, Director, Investor Relations, and with me on the call today are David Spitz, ChannelAdvisor's Chief Executive Officer; Mark Cook, ChannelAdvisor's Chief Financial Officer; and Richard Cornetta, ChannelAdvisor's Vice President of Finance and Chief Accounting Officer.

This morning, we issued a press release with details on our first quarter 2019 performance as well as our outlook for the second quarter and full year 2019.

This press release can be accessed on the Investor Relations section of our website at ir.channeladvisor.com.

In addition, this call is being recorded, and a replay will be available after the conclusion of the call.

During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today.

For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent Form 10-K or Form 10-Q as well as other filings which are available on the SEC website at www.sec.gov.

During the course of today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, which excludes depreciation, amortization, income tax expense, interest and stock-based compensation expense.

Our press release that we issued today includes GAAP to non-GAAP reconciliations for gross profit, gross margin, operating expenses, operating loss, operating margin, adjusted EBITDA, non-GAAP net income and free cash flow.

We also provide a GAAP to non-GAAP reconciliation schedule in our supplemental financial presentation posted on the Investor Relations section of our website at ir.channeladvisor.com.

Finally, at times in our prepared remarks or responses to analysts' 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, let me turn the call over to David for his prepared remarks.

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [3]

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Thank you, Traci, and good morning, everyone. Thank you for joining us.

Our first quarter financial results were solid. First quarter revenues of $31.6 million were within our previous guidance range, although, impacted by a deceleration in Amazon and eBay GMV growth, consistent with their recently reported results, which affected variable and strategic partner revenue. Despite this, we posted $2.6 million in adjusted EBITDA, well above the top end of our previous guidance range, highlighting our strong expense discipline through the quarter.

Despite our solid overall results, we had softer sales results in the quarter and were affected by a more pronounced a slowdown in Amazon and eBay GMV growth than we had anticipated. Both of these factors have impacted our outlook for 2019 revenue.

Let me first speak to sales. As we continue to evolve our direct sales strategy to focus less on small transactional deals and more on enterprise customers and brands, we determined that it was time to move away from our historical rotation-based account assignment model and implement a territory-based system more common in enterprise sales organizations. We did this because we believe it will help us scale our sales organization more effectively, drive more focus and efficiency in our processes and allow us to develop deeper and more strategic relationships with our customers and prospects.

We implemented this change mid-quarter. And while it was the right thing to do, it was more disruptive to our sales team than we anticipated as the team worked out the details and adjusted to their new territories. And this caused us to deliver sales results that were below our internal expectations in the quarter.

This is also reflected in the drop of our customer count, which was entirely attributable to the sales shortfall and not a result of an increase in churn. We've actually seen improvements in customer retention, which I'll speak to in a moment.

Now all of that said, we're already seeing strong evidence that this change, which was isolated to the first quarter and is now behind us, has had a very positive impact as we've started the second quarter. Our April sales performance was very strong, achieving 40% of our entire second quarter internal bookings' target, roughly twice the pacing we've seen historically.

I'm very pleased to see this exceptional start to the second quarter, and it gives me confidence that our sales team is better positioned than ever to drive positive results for us for the rest of the year and into the future.

At the same time, while we've made up some of the ground we lost in the first quarter, timing matters in a subscription business. And at this time, we're estimating a roughly $1.7 million impact to full year 2019 revenues attributable to the sales shortfall.

In addition, we also saw GMV growth from Amazon and eBay decelerate more rapidly in the first quarter than we had anticipated. In both cases, we believe our GMV continued to grow faster than the comparable GMV growth reported by each company in their first quarter results reported a few weeks ago with the low levels we saw on the fourth quarter and continuing a deceleration growth trend from the back half of 2018.

Based on the reported results from Amazon and eBay, we believe this was a broader slowdown in overall GMV growth across both marketplaces and not specific to ChannelAdvisor, but it still had an impact on our variable revenue and strategic partner revenue. As we anticipate this trend may continue, we're lowering our expectations for variable revenue for the rest of the year by approximately $3.3 million.

Thus, combining our expectations for variable revenue going forward and our first quarter sales results, we're revising our full year revenue outlook to a range of $131 million to $134 million. Mark will share some of the details of where we're seeing growth and where we're not in his remarks.

While this is, no doubt, disappointing when compared to our previous outlook, we remain financially disciplined and are pleased to share that we are increasing our full year adjusted EBITDA outlook by $2 million to a range of $15 million to $17 million despite lower near-term revenue growth. This reflects our commitment to maintaining strong margin growth through disciplined and thoughtful capital allocation.

Importantly, our outlook for slower revenue growth and increased profitability does not signal a change in strategy. Rather, in fact, we believe it only reinforces the strategic framework we laid out last year.

To refresh everyone, the 3 pillars of our strategic framework are: one, protecting and optimizing our core business for incremental growth and profitability; number two, winning with brands as a strategic customer segment; and number three, investing in indirect channels to drive more leverageable growth. Each of these strategic pillars remains not only intact but more important than ever given our updated revenue outlook, and we are making some progress across each of these areas.

Let me touch on a few highlights. First, in protecting and optimizing our core business, we continued to invest to maintain and enhance our leadership position in the market. We announced a strategic partnership with Target during the first quarter, whereby, we are serving as the primary integration platform to their new Marketplace called Target+. Although the program remains selective and invitation-only, we already saw strong results for participating sellers and anticipate that this will be a strong channel for us and our customers as we ramp it up this year.

This is on top of our recent strategic partnerships with Google and Facebook, which also represent promising new entrants into the Marketplace arena. For example, Google Shopping Actions is already our sixth-largest marketplace by GMV, and we grew active customer count on Google Shopping Actions in the first quarter 20% sequentially from the fourth quarter. So we're excited to see how these channels grow now that they're launched.

In addition to Target, Google and Facebook, other marketplaces around the world continue to come to us and join our platform to gain access to our network of high-quality suppliers. We ended the first quarter with 133 live Marketplace integrations, up from 118 at the end of last year. And overall in 2018, we signed 30 new Marketplace partners, and many of those are still in the process of launching.

Although they are generally smaller than partners like Google and Target, in aggregate, they provide our customers what we believe is unprecedented access to the world's consumers in one integrated platform. In contrast to the GMV growth slowdown we've seen on Amazon and eBay, our long-tail of Marketplaces continues to grow rapidly in the first quarter, growing nearly 4x as fast as our overall Marketplace GMV.

And interestingly, Walmart's Marketplace ticked up in the first quarter, growing GMV for our customers more quickly than at any time since the third quarter of 2017.

We've also been busy on the product side. In April, we launched a suite of new capabilities, including our new demand forecasting product, which uses machine learning to help customers become more efficient by optimizing inventory levels based on historical demand patterns.

Additionally, we rolled out big enhancements to our Algorithmic Repricer, including a simplified console and support for repricing based on sales velocity to help our customers retain their competitive advantage. And we continue to focus on fulfillment and shipping, adding more end points and capabilities to help our customers meet the ever-increasing demands of today's consumer.

We also launched a major overhaul of our platform's user experience in April following an extensive testing period in the first quarter. Feedback from our customers has been overwhelmingly positive, and we thank our product team for this major step up in modernizing our platform and making it a lot easier to use. We believe this will especially help newer customers get up to speed more quickly, which we expect will help with retention.

And speaking of retention, we continue to make solid progress on revenue retention. Nominal dollar churn in the first quarter was $1 million lower in the first quarter of 2018 -- than the first quarter of 2018, and on a rolling 12-month basis, churn as a percentage of revenue has dropped to the lowest level we've seen in 5 years. This is a testament not only to the increased value our top line enhancements have provided our customers but to the great work our services and account management teams have been doing to ensure customers are getting support and the guidance they need to compete effectively in the market.

Turning to the strategic pillar of winning with brands. This is an important area for us. Brands are urgently working to develop and execute digital strategies, and we believe the opportunity for us is huge. To a certain extent, this has been coming at the expense of retailers and resellers. For instance, when Nike decided to sell on Amazon in 2017, an entire cottage industry of third-party Nike sellers was essentially wiped out overnight. And as digital continues to roil the traditional retail industry and compress the distance between producers and consumers, it is critical that we position ourselves to serve those brands and help them [adopt] to the world of e-commerce.

That's why the winning the brands pillar of our strategic framework is so important. We believe brands represent the long-term growth opportunity in e-commerce and for our business.

Happily, we continue to make great progress on that front. In the last year, we've added 50 net new brand customers to the platform. Brands represented 20% of our customer base at the end of the first quarter, up from 18% a year ago. And trailing 12-month revenue growth from brands accelerated to 31% through the first quarter, up from 22% a year ago. This is the right strategic customer segment for us to focus on, and we just need to get there faster.

What's great is that our entire platform is applicable to brands on their digital journey, where to buy, Marketplaces, drop-shipping, digital marketing, fulfillment, the entire platform, and that's what we're building: an integrated digital commerce platform for brands. We don't believe that brands want to cobble together disparate point solutions that aren't integrated and aren't global. We do believe that brands want a single strategic partner they can grow into as their digital strategy evolves.

As to indirect channels, we continued to build out various forms of strategic partnerships that we believe can more efficiently broaden our access to the market and solve key customer challenges. We believe we are very early in our indirect channel opportunity and believe channel partners, over time, can drive 30% to 40% of our revenues, or more, at substantially higher margins than our current business as we complement our direct sales' initiative.

We're thrilled to see traction with our referral network with a notable number of referral customers in the first quarter driven by partners like TrueCommerce, who recently went live with our solution and can now offer its customers a comprehensive marketplace integration platform through ChannelAdvisor, and from newer partners like Avalara and Payoneer, who can help our customers address key needs and help us reach new customers.

Having established internal processes to support these strategic partnerships, enabling and training our sales team and working more closely with these partners, we expect the volume of referrals to continue to increase, and we believe we're on track to launch a strategic reseller for our core platform in 2019.

As I said last quarter, we've been building on all of the great usability work our engineering team has been doing, and we're on track to bring to market new self-service apps in 2019 that offer 0 touch sign-up and onboarding for certain key capabilities. I don't want to expose too much detail for competitive reasons, but we are super excited about how we can deploy these apps through strategic partners to efficiently expand our reach.

Last month, we hosted our annual customer event in Austin, Texas. And, as usual, it was an incredible event with tons of great content, networking and key partners all in attendance. This year, we decided to narrow the focus primarily to customers and go deeper into our platform and our capabilities. Hundreds of customers attended, and I had the privilege to speak to at least a couple of dozen of them over 1.5 days from smaller entrepreneurial customers to some of the biggest global brands on the planet. Next week, we'll be bringing the show to London, and I very much look forward to spending time with our EMEA team and our customers there.

Lastly, this morning, we announced a CFO transition. Mark Cook will be retiring from ChannelAdvisor. And Rich Cornetta, our VP of Finance and Chief Accounting Officer, will be assuming the role of CFO, effective today.

Mark has been a key contributor to our success over the past 3.5 years. And on behalf of ChannelAdvisor's Board of Directors and management team, we thank him for his dedication to the company, and we wish him luck in his retirement.

We would also like to congratulate Rich on his appointment as CFO. Rich joined us as a senior finance executive shortly after our IPO 6 years ago and has been an integral part of the development and operation of the finance department, having successfully spearheaded a number of critical initiatives, including our transition to ASC 606, our full SOX implementation last year as well as the integration of 2 acquisitions.

Throughout his tenure, Rich and I have worked closely together, and his deep knowledge of our business, proven performance and leadership and strong work ethic provide me 100% confidence that this transition will be smooth and seamless. And we look forward to the opportunity for the investment community to meet Rich. And as Traci mentioned, he's joined us on the call today in case there are any questions for him.

In conclusion, despite the revision to our full year revenue outlook, we are committed to investing in and executing our strategic framework while working to deliver improved margins. Our market is changing rapidly, and we are working strategically and with a sense of urgency to manage the business and adapt to those changes while being thoughtful about capital allocation and being good stewards of our balance sheet.

We believe that pressing forward on the key areas of brands and strategic partnerships while focusing on improved capital efficiency is the right balance to position us for future growth and create shareholder value. I'm confident that our best days are in front of us.

And with that, Mark, I'll hand it over to you.

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Mark E. Cook, [4]

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Thank you, David. I'll begin with our first quarter 2019 financial performance and follow with our guidance for the second quarter and full year 2019.

As David noted, our first quarter 2019 revenue was within the guidance range while adjusted EBITDA substantially exceeded expectations.

Revenue in the first quarter was $31.6 million. A deceleration in Amazon and eBay GMV growth dampened the year-over-year revenue growth rate due to particularly strong variable revenue contribution in the first quarter of 2018. Also as expected, China played a role in the lower growth rate as we worked off some of the challenges we faced in the region from last year.

Our first quarter fixed subscription revenue of $25.5 million increased 6% from the year ago period. Fixed revenue represented 81% of total revenue for the quarter. Variable revenue of $6.1 million for the first quarter decreased 18% from the year ago period and represented 19% of total revenue, where revenue was impacted by the deceleration in Amazon and eBay GMV growth. Also the year-over-year growth rate was impacted by approximately $400,000 of nonrecurring partner revenue that was recorded in the first quarter of 2018.

Looking at revenue by product. Our Marketplaces platform revenue was $23.5 million for the first quarter, down slightly compared with the year ago period. While we experienced good growth in our Marketplaces platform revenue in EMEA and Australia, this was offset by declines in the Americas and greater China.

The performance of our Marketplaces solutions was largely a result of the lower variable revenue in the quarter. Marketplaces represented 74% of our total first quarter revenue.

Digital marketing was $4.5 million for the first quarter, up 4% from the prior year period, delivering a fifth straight quarter of year-over-year growth. As in the past couple of quarters, we attribute the growth in part to Amazon advertising.

Digital marketing represented about 14% of total revenue for the quarter. The remaining 11% or $3.6 million of revenue in the quarter came from other revenue, which was up 12% year-over-year. This category includes our Where to Buy platform for brands and strategic partners and revenue resulting from our business development program. Where to Buy revenue was up 29% year-over-year while strategic partnership revenue was down 14% year-over-year in the first quarter.

As mentioned, the first quarter 2018 included approximately $400,000 of nonrecurring partner revenue. And therefore, the comparison mix, the solid traction of our strategic partnership masked the solid traction of our strategic partnership efforts.

Excluding the nonrecurring partner revenue in the first quarter 2018, strategic partnership revenue was up 24% for the quarter on a year-over-year basis.

From a geographic perspective, revenue from outside the United States was approximately $7.9 million in the first quarter, an increase of 13% or 18% on a constant currency basis from the year ago period despite expected headwinds in China. This represented 24% of our total revenue in the first quarter compared to 23% in the year ago period.

Performance in EMEA for the first quarter was particularly strong with growth of nearly 20% year-over-year.

Now turning to customer count. We ended the first quarter with 2,774 customers, down 59 net new customers from the end of the fourth quarter. The net decrease was predominantly customers with less than $30,000 in committed annual contract value, or ACV. This group was lower by 48 net customers during the quarter. Our customers with over $100,000 in committed annual contract value increased by 9 during the first quarter.

To provide some additional color on customer count, retail customers were the singular contributor toward the decline in customer count, partially offset by an increase in brands customers. Specifically, retail customer count declined by 66 during the first quarter of 2019 and by over 140 during the trailing 12-month period ended March 31, 2019.

Retail customer revenue in the first quarter 2019 declined by 6% year-over-year, and the trailing 12-month revenue declined by about 3%. Average revenue per retail customer increased, though, about 4%, both compared to the same year -- same time period a year ago.

Shifting to brands, we were pleased that the number of brands at the end of the quarter increased by 50 compared to a year ago. We estimate that brands represent about 20% of our total customer count, and the revenue in the first quarter 2019 increased by approximately 32% year-over-year.

For the trailing 12 months ended March 31, 2019, average revenue per brand customer increased about 9%. We believe this reflects our continued emphasis on brands and the opportunity to expand with brands as customers.

Rounding out our metrics on customers. I'll discuss some trends in committed ACV, or annual contract value. As a reminder, committed annual contract value is the fixed amount of annual fees as on a specific date for which a customer has a minimum contractual commitment as of that date and does not include any potential variable fees.

As of March 31, 2019, our customers' total committed ACV was $104.2 million, up 3% year-over-year. Customers with less than $30,000 in ACV weighed on the year-over-year ACV growth rate. These customers' total committed ACV was $24.8 million, down $2.4 million year-over-year.

However, our customers with over $100,000 in committed ACV increased their ACV by $4 million to over $33 million as of March 31, 2019, compared to March 31, 2018. While customers with over $100,000 of committed ACV represent approximately 7% of our customer count, they now represent about 32% of our total committed ACV, up 29 -- up from 29% as of March 31, 2018.

Our average revenue per customer continued to grow, reaching $46,530 for the first quarter for an increase of 6% from $43,920 in the year ago period.

Now moving down the P&L. As in the past, my comments regarding expenses will be on a non-GAAP basis, and all comparisons are on a year-over-year basis unless otherwise specified.

These numbers reflect our efforts toward margin improvement, for increased efficiencies and expense management. Gross margin was 77.4% for the first quarter 2019, which was up slightly compared to the year ago period. Operating expenses decreased 6% from the same period last year as a result of disciplined expense control driven primarily by lower sales and marketing and research and development expenses partially offset by a modest increase in general administrative cost. Of note, investing in innovation is a top priority, and while R&D expense declined in the quarter, this was offset by an increase in capitalization of internal-use software development costs compared to the year ago period.

As a result of the disciplined expense control, adjusted EBITDA and non-GAAP net income experienced strong year-over-year improvements for the quarter. Adjusted EBITDA was $2.6 million for the first quarter, up $1 million from the prior year period and significantly above the top end of our guidance range of $1 million. Non-GAAP net income was $1.1 million in the first quarter compared to a loss of $424,000 in the prior year period.

Turning to the balance sheet. We finished the quarter with cash and cash equivalents of $48.4 million, an increase of $1.2 million during the first quarter. Positive operating cash flow of $1.4 million contributed to our increase in cash.

I'll now turn to guidance. Our guidance takes into consideration the deceleration of GMV growth we expect on Amazon and eBay and our recent sales performance as discussed earlier. Further, our focus on continued improvement and efficiency and growing margin through expense management are reflected in our guidance.

Giving thoughtful consideration to all of these factors and to our historical trends, for the second quarter 2019, we anticipate revenue to be in the range of $31.5 million to $32 million and adjusted EBITDA to be in the range of $1.5 million to $2 million.

For the full year 2019, we now anticipate revenue to be in the range of $131 million to $134 million. We are raising adjusted EBITDA to a range of $15 million to $17 million, up $2 million from the prior guidance range of $13 million to $15 million. At the midpoint, this represents adjusted EBITDA growth of 64% over 2018.

Finally, as David noted, I am retiring from ChannelAdvisor. It has been a pleasure, and I really have truly enjoyed working closely with the ChannelAdvisor team for nearly 4 years and wish the company nothing but success in the future.

I am excited about spending more time with my wife and family and potentially serving on Boards of other companies. In the meantime, I am committed to ensuring a smooth transition to Rich Cornetta, who [we have] the utmost confidence. Rich has been with ChannelAdvisor for almost 6 years now, and with his knowledge of the business, he will do a great job taking the company forward.

With that, operator, we'd like to now open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ryan MacDonald with Needham & Company.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [2]

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I guess first off, Mark, congrats on the retirement. You will definitely be missed. And -- but best of luck moving forward, and welcome, Rich.

My first question is around sort of -- can you go a little bit deeper into sort of the kind of reasoning around the strategic shift you're taking on the sales side? And obviously, there was a little bit of a disruption in the quarter but maybe sort of what the goal is here or where you think it can drive maybe some improved performance moving forward?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [3]

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Sure, Ryan. This is David. I think for a long time, we had a model that worked fairly well for us, but I would consider it more of a transactional model where -- sometimes referred to as a rotational model, where, typically, reps would have access to an account for a space of about 30 days based on activity. And then to the extent that there wasn't necessarily an active opportunity at that point, it would rotate through and potentially go to another rep.

And as you can imagine, as we move upmarket and are focused on enterprise deals, at the end of the day, the sales cycles are longer. And so we felt that a more strategic relationship with the account -- with the accounts in question for any given rep were important. So that's why we moved to more of a fixed territory model, where a rep is going to have a relatively stable number of accounts. And they'll still have opportunities obviously to add new accounts as accounts get sold or rotate out of their account. But we felt like this was important.

And just to give you some examples of where we've already seen it in action. We've had, I think, in the last probably 120 to 150 days, at least 3 accounts that I know of that were put into this territory model, where we had some existing sales in Q4, for example, I know of one that was about a $60,000 deal, where we signed it. And then in the first week of April, I think because this rep knew that this account was going to be theirs for the long term, actually up-sold it for another 300-and-something-thousand dollars. And so the ability to penetrate accounts and prospects more deeply and develop that strategic relationship, I think, makes sense for us as we go through.

Now, we hope to -- we'd hope to roll this out prior to the beginning of the year. It's logistically complicated, as you can probably imagine. We didn't want to wait. So it was just something that we weren't able to get rolled out at the beginning of the year, but we didn't want to wait until a full quarter cycle, which is why we decided to do it in mid-February because we felt like the benefits would be strong.

As an example, we actually rolled it out in China in Q4, and it performed very, very well for us. China actually exceeded their target for Q1, and it gave us some good -- the momentum we saw in China gave us some good confidence to roll it out to the rest of the geographies. So -- but it's behind us. It was distracting. It took, I would say, more time and effort and just giving sales reps time to adapt to the changes in their territories than we probably anticipated. But it is behind us, and like I said, the April results, I think, are a -- it's only 1 month, but I think it's a very good indication that it was the right move for us.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [4]

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Got it. And then you started to actually answer a part of my second question, which was sort of how you're progressing in China with the changes there. And obviously it seems like, from what you called out earlier, that making the management level change has had minimal disruption on Australia. But maybe if you could talk a little more about the proof points you're seeing within China and how things are getting better there?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [5]

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Yes. Absolutely. So you may recall that we -- that Simon Clarkson, previously our MD of Australia, was promoted to Managing Director of Asia Pac and took responsibility for Greater China. And so I've been really pleased with the results, especially on the leading indicators of bookings and churn. China performed very well for us in those metrics in Q1. Now revenue is still contracting. As you know, it's a lagging indicator. And we anticipated that it would contract for most in 2019, maybe even the entire year depending on continuing progress we have there. But in terms of bookings and churn, China was significantly ahead of plan in Q1. And so I think we're on the right track there.

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Operator [6]

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And our next question comes from Matt Pfau with William Blair.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [7]

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Just first on the increased leverage in the business, if you can you just give us an idea of where that's coming from?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [8]

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Sure. So as you can imagine, we had an expectation at the beginning of the year for certain revenue levels that also included a degree of hiring. And so part of our adjusted plan for the year is to moderate our expectations for that level of hiring. Obviously, with revenue a little bit lower than we originally anticipated, we don't anticipate on hiring to the original budget plan. So that's a -- probably the single biggest input into the savings at this point. And there's obviously other areas of cost containment that are non-compensation-related that we've also been focusing on like software expense and things like travel. But primarily it's been deferred hiring and hiring fewer people than our original budget called for.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [9]

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Got it. And then on the brand side, maybe you can just give us an idea of what's driving the success there. Have you put more sales effort behind it? Or is it more of a market dynamic where brands are starting to realize that they need to have more of a direct presence with consumers?

And then also just from a revenue perspective, how does a sale to a brand typically compare to a retailer? Is there a higher average selling price potential there?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [10]

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Yes. Great question. So it's, obviously, a strategic focus for us although I would not say that we've -- it's not like we have a dedicated sales team, we have a sales team that's able to sell our products to a broad spectrum of customers. So I actually think it's more of a market dynamic where brands -- I mean, I've spent a good part of the last couple of years traveling around speaking with brands as diverse as apparel companies and tire manufacturers and paint companies, and they all see that their traditional -- we're going through a -- sort of a metamorphosis in the industry where the Blockbuster model is giving way to the Netflix model.

So if you're a brand, if you're a supplier, getting your product in front of consumers takes a different path these days. And even though it's only 10% or 12% of retail spend, for example, in the U.S., the reality is that's where the growth is. And brands see that and brands see not only an opportunity to get a closer relationship with their end consumer, but they see a need to make sure that they [have a] -- new distribution strategies are.

So I'd say more than anything, it's a market dynamic. And I think we're hitting the market at the right time with an integrated platform. Like I said, there are lots of solutions out there, but it's a very fragmented space. And what we go to market with is an integrated platform where we say to a brand, "Look, we have a very, very broad base of capabilities." As I said in my prepared remarks, from where to buy if they're early in their direct-to-consumer life cycle to selling first party or drop ship for third party on Marketplaces, digital marketing, leveraging things like Amazon advertising. So we have a whole spectrum of things we can offer so that those brands can grow with us as they evolve their strategy. And we're global, right? So a lot of the companies that we work with, they're also global, and they don't necessarily want to work with a different vendor in North America and a different one in Europe and a different one in Asia. So I think our platform story and our global footprint is a key differentiator for us in the market.

To your question about the nature of selling to brands, I would say that they are higher ASP in most cases. Sometimes, we start off with a lower ASP just because it might be an individual brand within a conglomerate that wants to get going on something. But generally speaking, it's higher ASP, and I would say moderately longer sales cycle. I wouldn't say it's dramatically longer but moderately because more often with a brand, we're going through a procurement and a legal process that is a little bit shorter than we've seen in the retail side.

But all in all -- the other thing we see, of course, is that there's a -- there's typically a much bigger opportunity to expand once we're within a brand. The example that I just highlighted earlier about the expansion over the last few months from initial customer to significant expansion, those are all brands, the ones that I was referring to. So the unit economics there are just so much better than what we've seen historically on the retail and reseller side. But, that's why I feel like it's such a strong -- and more fundamentally, just to take a -- go up to a macro level, I really do believe that digital compresses the distance between the supplier and the consumer. And it's my view that if we fast-forward 5 years or 10 years, a lot of the folks in the middle get this intermediated, and what you have left is the brands and the producer and the consumer. And our view is that that's why it's such a strategic customer segment for us.

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Operator [11]

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Our next question comes from Tom Forte with D.A. Davidson.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [12]

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Mark, it was pleasure working with you. Best of luck in the future. And then, Rich, congrats on the opportunity.

So David, I think I have 2 -- there's 2 industry events that I wanted you to give your opinion on both from the industry perspective and ChannelAdvisor perspective. The first is when eBay reported their March quarter, they indicated they felt there was a 100 basis point drag on their GMV from online sales tax law changes. And then number two, Amazon indicating it's going to move Prime from a 2-day to a 1-day effort. So from an industry perspective, do you think others are going to try to follow on Amazon?

And then I know you gave your outlook for the second quarter, but is there reason to believe that there could be upside to your outlook on the Amazon side to the extent that maybe this stimulates unit growth for Amazon?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [13]

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Tom, thanks. Great questions. On the sales tax thing, that's hard to know. I mean I have no reason to doubt anything that eBay said. It's entirely possible that it was attributable -- there was some level of GMV drag attributable to sales tax. I'll just take that at face value, and so it's definitely possible.

On the Amazon Prime question, I think it's really interesting. I think, to your first question about will others try to match that or keep up, I think a lot of parties will want to match it but don't have the physical plant to do so. Amazon's been investing for 2 decades in fulfillment and logistics. And as they indicated on the call, I believe they said $800 million planned in the second quarter to advance the ball and go to 1-day Prime. And we just don't see other public examples out there of that kind of commitment to the physical side of e-commerce, the getting boxes from a warehouse to a consumer. And so we think Amazon has a very long lead in that regard. And I do think it'll cause a lot of disruption in the logistics' industry. And I do think people will have to -- other parties will have to wake up and figure out how to answer that question.

It hasn't been well answered in the past, I would say. And so I think this will -- we'll see if this becomes an existential problem for companies and that they're forced to respond. Whether or not it represents upside, I think Q2 is too early. This is an effort that Amazon is making. They're deploying a lot of capital. There's no doubt in my in mind that it will make the value proposition stronger for the Amazon shopper because it's just speeding up the cycle time from purchase to delivery, but I would be very surprised if we saw that materialize in the second quarter.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [14]

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Great. And then I had one quick follow-up. So David, you said something that I thought was very interesting. You talked about the balance or the relationship between sales growth and margin growth, running the business for sales and margin growth versus just focusing on margin growth. So can you quickly give us what gives you confidence in your ability to accelerate sales growth and why you think it's still appropriate to focus on sales and EBITDA growth and not just margin expansion?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [15]

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Yes. Absolutely. I think this territory change that we've made will create some meaningful efficiencies in our overall sales -- our go-to-market strategy in direct sales. And I think that, therefore, we can expect to drive more production from the team without necessarily having to drive more dollars of investment into the team.

And I think the other key element of this is the indirect strategy, right? We're still early in that strategy. But as I've said now, I think, for a few quarters, the fact that a company of our size has had close to 100% of its revenue attributable to its direct sales team is really too high. We really need an indirect strategy and those, as I indicated on the call in my prepared remarks, we believe that the margins that can be delivered through strategic resellers and other types of partnerships is significantly higher just because we don't incur the fully loaded sales costs in those transactions.

So for those 2 reasons, we think we can drive continued improved production out of our go-to-market investment without necessarily putting more dollars into it, which is a part of the reason we have confidence we can drive more leverage going forward without sacrificing our ability to produce revenue growth.

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Operator [16]

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Our next question comes from Zach Cummins with B. Riley FBR.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [17]

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Yes. Mark, congratulations on the retirement, and best of luck going forward. And Rich, congratulations on the promotion.

So in terms of the customer count, it sounds like a lot of that was related to just the changing of the sales strategy mid-quarter. Is there really any concern around that declining customer number? And how should we be thinking about that as we're going forward as you transition your focus more towards these larger brand customers versus the retail customers?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [18]

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Yes. Zach, this is David. Look, all else being equal, I'd like that number to be stable or increasing. I've said that, I think, for a few quarters that for long sustainable growth, we do need to drive to an increase in the size of the customer base. But I think your point is valid. We continue to see a dynamic where the average size of a customer who departs us versus a customer that we add is significantly different, typically much, much -- sometimes even an order of magnitude smaller for the departed ones versus the added ones.

So it's -- I don't -- I would not necessarily read into it the magnitude of the impact on revenue being completely correlated to customer count per se. And if, at the end of the day, we continue to see a ton of success at the upper end of the market and customer count remains relatively stable, I can imagine worse outcomes, but I'd love to have both. I'd love to have a significant number of these larger customers grow customer count.

The only thing I would say is that a fair amount of the sales activity that we're driving with these larger customers is expansion, which makes them stickier, right? So the dynamic with, for example, a brand -- many of the brands we work with have multiple sub brands, right? So you can think of, I'm sure, off the top of your head any number of brands that have acquired other brands over the years. And so, more often than not, the initial relationship we have with a brand is with a single brand maybe in a single geography, and it's because they are trying to tackle a strategic initiative, maybe it's selling on Marketplaces, maybe it's Where to Buy, whatever it is. And once we go through that procurement and that legal cycle, what we very often find, and I think this will accelerate with the new territory model that we have because it'll be the same rep working with that account for the long term, what we see is other brand managers within the portfolio or other geographies within the brand -- sort of overall brand company, see that initiative actually being executed in the other brand. And we have an opportunity there to expand.

So it's not just about a more strategic customer segment, but it's about expanding. And when we expand, if I take -- I think I gave you that example of the $60,000 deal we signed late last year that added another $300,000-something just a few weeks ago, that doesn't change our customer count, but it sure does add a meaningful amount of revenue to the top line. Does that make sense?

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [19]

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Yes. That makes sense. And I guess just can you provide a little more detail around the strong performance that you saw in Australia and EMEA? What are some of the things that you're doing well there? And can you potentially transfer some of that over to either China or the slowing in the North American region?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [20]

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Yes. I think that -- I think, to a certain extent, the leadership that our Chief Revenue Officer, Paul Forte, put in place when he came on board, for example, in Europe, and I've mentioned the names before. Jon Maury is our Managing Director of Europe and Jon had worked with Paul before. So for Paul, Jon was a well-known quantity. They knew how to work together. So there wasn't a lot of necessary acclimation in terms of how they operated it. It was more just Jon getting up to speed on our market.

But they essentially were able to put their playbooks in place not long after Paul joined the organization. And so it's taken longer to get the U.S. side of the equation operating to the level that I know Paul expects them to operate. So I think it's a seasoning of the team under Paul and just making sure that we're operationalizing Paul's playbook.

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Operator [21]

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Our next question comes from David Gearhart with First Analysis.

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David William Gearhart, First Analysis Securities Corporation, Research Division - Associate Analyst [22]

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My first question has to do with the indirect sales channel. I know you mentioned in your prepared remarks that over time getting to 30% to 40% of revenue thereabouts with that focus on that initiative. Can you give us a sense if it's contributing revenue at this point and then some expectations of the timing of when you could get to that guided or thought-about level of that 30% to 40%?

And then also, I think, in a prior call, you had mentioned 20% of revenue is around the brands and at some point, you'd like to flip it and make it about 80%. Any expectations on timing of when to get to those levels?

And it kind of gets to my next question, you guys are having an Analyst Day coming up. Have you given much thought to providing long-term targets in margin and other areas of the business to kind of help guide investors to what ChannelAdvisor could be in the long term?

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David J. Spitz, ChannelAdvisor Corporation - CEO & Director [23]

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Yes. Thanks, David. As far as indirect is concerned, we are generating revenue from our indirect efforts. It's still small though. And so I think we've got a lot of great lines in the water. And as you've seen from our press releases, we continue to execute on strategic relationships. And so we expect that revenue line to grow, but it's still measured in single-digit millions. And so from my perspective, there's a lot of room to run and a lot of growth opportunity to drive that up to be more substantial.

So to your next question about brands and how quickly does it go from 20% to 80%? That's obviously a little bit of a hard question to answer. I'm thrilled with the pace that we're seeing with brands today. It's coming a little bit at the expense of the retail side. If you look at our overall revenues and you do the math, you can see that the retail side is flat to down, and it's really the brands that are driving growth.

But my hope is that we get there as quickly as possible. And so it's not only a strategic focus from a go-to-market perspective but also from a product perspective. There's a lot of things that we don't do that brands would also like to have. And so while we have, I think, the industry-leading breadth of platform for brands, there's a lot more stuff that we want to be able to do for them to just continue to solve their problems holistically under one integrated platform.

And as far as long-term models and long-term guidance, as you can imagine, Rich is going to take, I think, a little bit of time to review kind of what our models might say. And so I think we'll probably need to give him a bit of time to acclimate and make sure that he's got a comfort level before we update anything that is much further out. So on that front, I would say stay tuned.

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Operator [24]

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(Operator Instructions) And I'm not showing any further questions at this time. I'd now like to hand the call back over to Traci Mangini for any closing remarks.

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Traci Mangini, ChannelAdvisor Corporation - Director of IR [25]

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Great. Thank you, everyone, for joining us today, and we look forward to speaking with you again soon.

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Operator [26]

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