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Edited Transcript of ECOM earnings conference call or presentation 12-Feb-20 1:00pm GMT

·40 min read

Q4 2019 ChannelAdvisor Corp Earnings Call Morrisville Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of ChannelAdvisor Corp earnings conference call or presentation Wednesday, February 12, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David J. Spitz ChannelAdvisor Corporation - CEO & Director * Elizabeth Segovia ChannelAdvisor Corporation - COO * Richard F. Cornetta ChannelAdvisor Corporation - CFO * Traci Mangini ChannelAdvisor Corporation - Director of IR ================================================================================ Conference Call Participants ================================================================================ * David William Gearhart First Analysis Securities Corporation, Research Division - VP * 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 ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 ChannelAdvisor Earnings Conference call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions) I would now like to hand the conference over to speaker today, Ms. Traci Mangini. Thank you, please go ahead, ma'am. -------------------------------------------------------------------------------- Traci Mangini, ChannelAdvisor Corporation - Director of IR [2] -------------------------------------------------------------------------------- Thank you, Daniel, and good morning. Welcome to ChannelAdvisor's Conference Call for the Fourth Quarter and Full Year 2019. My name is Traci Mangini, Director, Investor Relations. And with me on the call today are David Spitz, ChannelAdvisor's Chief Executive Officer; Beth Segovia, ChannelAdvisor's Chief Operating Officer; and Rich Cornetta, ChannelAdvisor's Chief Financial Officer. This morning, we issued a press release with details on our fourth quarter and full year 2019 performance as well as our outlook for the first quarter and full year 2020. 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 as well as our other filings, which are available on the SEC website at www.sec.gov. During the course of today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, which excludes depreciation, amortization, income tax expense, interest, stock-based compensation and nonrecurring severance and related expenses. Our press release that we issued today includes GAAP to non-GAAP reconciliations for gross profit, gross margin, operating expenses, operating income, 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. Also included in that supplemental financial presentation are key financial and operational metrics, which may be referenced on this call. Finally, at times in our prepared comments or responses to analyst 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. -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Traci, and good morning, everyone. I was pleased with our fourth quarter results. Revenue of $34.8 million was at the top end of our guidance range, driven by a solid holiday selling period and improved variable revenue trends. And while we reinvested in several key growth initiatives, our focus on efficiency and improving customer quality yielded dramatic improvements in profitability and cash flow, more than doubling our full year adjusted EBITDA compared to the prior year to over $20 million, while driving more than $13 million in operating cash flow for the year. Given that our restructuring took place in July of last year, yielding only 5 full months of benefit, this full year achievement highlights the strong earnings potential of our business. Now I want to be clear that we remain focused on driving revenue growth, and I believe we are well positioned to improve growth, based on several factors I'll detail in a moment. All the same, it's great to demonstrate the improved efficiency of our business and its potential to drive long-term profitability. These results validate our strategy over the last few years of moving towards a higher quality customer base with a specific focus on larger customers, and in particular, on brands. I would, therefore, like to revisit the strategic framework under which we've been operating since 2018 and highlight a few key areas of substantial progress as well as some metrics we believe support our strategy, and why I am optimistic about 2020 in the next few years. Recall that our strategic framework centered on 3 pillars: first, to protect and optimize our core business; second, to expand our business with brands; and third, to drive more business through strategic partners in order to augment our direct sales efforts and efficiently access new market segments. Let me begin with brands. We demonstrated great progress on this front in 2019. Brands are important because we believe that digital continues to disrupt traditional retail and is driving more brands to adopt e-commerce as a strategic channel. I'm pleased to report that brands drove over 26% of our revenue in 2019, up from less than 22% in 2018. And then in the fourth quarter, brands drove 28% of our revenue. What excites me most is that every element of our platform appeals to brands, whether it's Amazon advertising, drop shipping, marketplace selling or helping to manage direct-to-consumer logistics. We have a solution on our platform that serves everyone from the upstart, disruptive, direct-to-consumer brand, to the largest consumer package, if a good company is on the plan. For us, brands are also economically very attractive compared to our historical customer base. Let me call out a few comparisons between our brand and retail customers to give you a sense of why they're so important to our future. First, GMV and share of wallet. In the fourth quarter, same-store sales on marketplaces for our brand customers grew over 30% compared with mid-single-digit growth for retailers and resellers. This demonstrates that brands are increasingly taking command of marketplaces as a selling channel and reflects the fact that consumers are increasingly seeking the assurance of authenticity that brands represent. Second, net revenue retention. In 2019, our net revenue retention for brands customers was in the mid-90% range compared to close to 80% for retailers. There are several reasons we believe this is the case. For one, brands are inherently more immune to some of the disruption that retailers and resellers face due to the proprietary nature of their products. For another, there are more opportunities to expand our footprint with a brand customer over time, leading to revenue expansion opportunities. For example, in 2019, 44% of our expansion bookings were with brands. And then third, speaking of expansion, brand customers are also generally larger. In 2019, average revenue per brand customer grew 13% compared to 2018 and was 33% higher than for retailers in 2019. I'll illustrate this with a real-world example. Rocky Brands is a manufacturer that has been in business since 1932. Their mission is to delight consumers by delivering the best, innovative, comfortable footwear and apparel, and they manufacture products under several different brands. Rocky Brands came to us in 2017 to begin their digital transformation and help grow their direct-to-consumer business. Initially, the scope was limited to a single brand on a small number of channels. But just 2 years later based on exceptional results and sales growth, they've expanded to multiple brands, added several elements of our platform, like Amazon advertising and drop shipping. And a result -- as a result, the scope of our relationship has increased by a factor of nearly 20x compared to where we started. And Rocky Brands couldn't be happier. There is nothing about customers like Rocky Brands that we don't love, and we're doubling down on customers like them. For instance, in 2020, for the first time, our sales commission structure is weighted more favorably towards brands, and virtually, our entire product road map is based on the needs of brands as well. Our strategic objective is to generate more than 50% of our revenues from brands by 2022, and we plan to keep you posted on our progress against this goal on a regular basis. Turning to our indirect strategy. I'm very pleased that we've announced today a strategic partnership with ShipStation, a wholly-owned subsidiary of Stamps.com and a leading web-based e-commerce shipping solution. Through this partnership, ShipStation will be our initial partner for launching our new offering called ChannelAdvisor Starter Edition. Recall that Starter Edition is a lightweight version of our platform, designed for smaller brands and retailers, and to be distributed through channel partners. We're excited to offer ShipStation customers, many of whom would be ideal customers for Starter Edition, the power of this new ChannelAdvisor platform through this partnership. We anticipate the ChannelAdvisor Starter Edition will launch in the second quarter of 2020. Given the strong interest in Starter Edition across our partner ecosystem, we hope to select and launch a second strategic partner for Starter Edition prior to the year-end. And you may ask, why we're interested in smaller brands and retailers, given that we spent the last 5 years moving up market? The reason is simple. We believe there's a lot of market opportunity downmarket as Shopify has ably demonstrated. But it is not economical to reach that segment of the market through a direct sales force, which historically has been our only route to market. What's different here is, one, we have a simpler product to offer; and two, we're bringing to the market through a strategic partner who already has a base of qualified customers. This will not be run through our direct sales team. And as a result, we expect our cost of customer acquisition to be dramatically lower than where we just sell this segment of the market through our direct sales force. Finally, to our strategic pillar of protecting and optimizing our core business, we clearly made great strides in improving efficiency last year as evidenced by big improvements in profitability. While discontinuing physical operations in China last year was not an easy decision at the time, our results clearly shows the right decision, even though we sacrificed revenue in the process. Churn as a percentage of revenue in 2019 fell to its lowest levels since 2016, and I anticipate continued progress on this front in 2020, as we also saw a marked improvement in first year renewal rates across our customer base. And we made progress in addressing the sales capacity issues we had in our U.S. region last year. I credit Paul Colucci, Head of our America sales team and our recruiting team, for substantially increasing our quota carrying sales headcount as we closed out 2019. While it will take time for these new reps to ramp and contribute to bookings and revenue growth, we enter 2020 in a dramatically improved position in terms of quota coverage than we had in 2019. And our global sales leaders are laser-focused on maintaining sufficient quota coverage going forward. As we enter 2020, I'm optimistic that we're well positioned to improve revenue growth. First, as I just described, our improved sales capacity should help. Second, I'm excited about the expected launch of Starter Edition midyear through our strategic partnership with ShipStation. We believe there is significant market opportunity with smaller customers. And by working with a channel partner, I'm hopeful we can efficiently tap a large customer base that we've historically not been able to address cost effectively through our direct sales force. Lastly, I believe we'll see a stabilization of variable revenue. As I think, we have sufficiently shifted our customer base up market and expect to see less downward pressure on the variable percentage of GMV that we're able to earn from customers, which we refer to as take rate compression going forward. We still have some smaller customers that may gradually churn off the platform, but the amount of revenue in this segment is small enough now that, I think, we can call this chapter of our transformation substantially complete. In 2019, we demonstrated we could drive substantial improvements in efficiency and profitability into our business without sacrificing investments in key growth initiatives. Our focus in 2020 and for the next few years is to reignite organic revenue growth, continue to expand our relationship with brand and continue to drive exciting new strategic partnerships with new offerings like Starter Edition. Although the impact of these initiatives may not be immediate, I'm bullish that we're on the right path to increase our scale in a capital-efficient manner. Due to the progress we've made and with these initiatives in place, we are now comfortable issuing a medium-range target of achieving a combined year-over-year revenue growth rate and adjusted EBITDA margin in the range of 25% to 30% by 2022. And with that, I'll turn the call over to Beth. -------------------------------------------------------------------------------- Elizabeth Segovia, ChannelAdvisor Corporation - COO [4] -------------------------------------------------------------------------------- Thanks, David, and good morning, everyone. I'll start by sharing a view on Marketplaces' performance, with Marketplaces' GMV up 12% in 2019. Fourth quarter, our marketplaces GMV was even better, up 14% year-over-year and included our first ever $1 billion GMV month in December. Amazon continued to dominate with GMV up double digits in the fourth quarter. Walmart, our third largest marketplace in terms of GMV, experienced solid performance in the quarter, up double digits for the first time in about 2 years. Shopify, which we include in our long tail, continue to grow very quickly in the quarter. Our integration to Shopify enables our clients to leverage the ChannelAdvisor platform to provision data for all their channels, including their direct website as well as marketplaces. With hundreds of shared clients, we are encouraged to see Shopify continue to grow at such rapid clip. Also, we continue to launch more sellers and expanded into new countries with Zalando, a leading fashion-focused European marketplace. The results have been amazing with GMV, up more than 7x in the fourth quarter compared to the same period last year. The performance on Amazon, Walmart and the long tail is only partially offset by GMV declines on eBay, which has some impact on our variable and strategic partner revenue in the quarter and for the year. As we discussed last quarter, with Amazon GMV now more than double the size of eBay GMV and with the strong growth of our long-tail marketplaces, we continue to believe that eBay will remain an important channel for our customers and us, but its performance should be gradually less impactful to our results over time. Let me shift now to share progress we've made in product innovation. It's been a productive quarter. We continue to advance our product initiatives, building out capabilities for brands, progressing on self-service approaches and improving time to value for many of the core workflows in our platform for existing customers. Brands can now quickly create referral campaigns on social media, using our dynamic shopping links capability and can increase click-through rate for products, leveraging our support for online promotions. Our new Amazon campaign scheduling feature face time and money for brands by automating the campaign life cycle through scheduling, and by leveraging ChannelAdvisor's analysis for purchase behavior to automatically activate campaigns during peak hours. We continue to expand our global network of marketplace connections across verticals by adding support for a number of new marketplaces in the fourth quarter, including fashion sites, Traci in the U.S. and About You in EMEA, and expanded our relationship with Rue Gilt Groupe, who owns the brand's Rue La La and Gilt, as they launch premiumoutlets.com. We also added Container Door, a general merchandise marketplace in Asia Pacific. We have continued to see success and growth with our first-party drop ship program in 2019, with our first-party GMV more than doubling over 2018. We enabled top grocer Kroger as a first-party partner, and we expect to continue to add to our first-party connections in the coming quarters. Within client services, we continuously worked to improve client experience. We implemented a new first year nurturing program, focused on enabling primarily our self-service clients to achieve key milestones in leveraging our software to facilitate channel expansion and optimize their business results. This program led to a 6-point improvement in first year renewals over 2018. In addition, we created category-focused verticals to align our e-commerce expertise to specific client needs and provide more relevant insights to guide clients as they compete. These changes, along with successfully enabling clients to achieve their business goals, have helped us improve churn and maintain contract values as our clients renew. We believe these improvements in client experience, in conjunction with our technical roadmap that plans for significant progress in delivering on our good, better, best strategy of adopting technologies will solidify our ability to help each client succeed no matter where they are in their digital journey. Now I'll pass the call to Rich to discuss the financials. -------------------------------------------------------------------------------- Richard F. Cornetta, ChannelAdvisor Corporation - CFO [5] -------------------------------------------------------------------------------- Thank you, Beth, and good morning, everyone. As David and Beth have shared, we have made significant progress as a company in many regards during the fourth quarter and throughout 2019. So let's talk about how that's translated to the financials. Please bear in mind, consistent with our historical practices, my comments regarding expenses will be on a non-GAAP basis. Our results for the fourth quarter in 2019 were solid. Revenue was at the high end of the guidance range, while adjusted EBITDA, once again, well exceeded the high end of our guidance range, culminating with full year adjusted EBITDA margin more than double our 2018 results. We also achieved another quarter of strong free cash flow and ended 2019 with a substantial improvement in free cash flow compared to 2018. Now let's take a closer look at these results. Total revenue was $34.8 million for the fourth quarter, flat on a year-over-year and constant currency basis, but up modestly, excluding China results. Fourth quarter fixed subscription revenue was $26.4 million, representing an increase of 3% compared to the year-ago period. Fourth quarter variable revenue was $8.4 million compared to $9.1 million for the year-ago period. The revenue mix continued to shift towards higher recurring revenue, which was largely the result of more customers moving to higher fixed fee tiers and some of our strategic partner agreements evolving to incorporate more fixed fees instead of purely variable revenues. The shift was also driven by lower eBay variable GMV. Still, variable revenue in the fourth quarter have (technical difficulty) results for any quarter in 2019. And we believe variable revenue is likely to stabilize going forward, as we have substantially completed our transition to larger customers. Looking at revenue on an annual basis, total revenue was $130 million for 2019, down 1% from 2018 but flat on a constant currency basis. And this performance includes an approximately $1.5 million headwind from our China operations. Fixed revenue increased 3% and expanded to 80% of total revenue, while variable revenue declined 15%. Now looking at revenue by customer type, brands revenue increased 19% for the full year 2019 compared to the year ago period. And as David mentioned, represented over 26% of our total revenue for 2019, up from just under 22% in 2018. As we've mentioned in the past, brands generally have a higher growth rate compared to retail customers as well as higher rates of expansions, overall higher average revenue per customer and better retention. Turning to revenue by product. Marketplaces platform revenue was $25.3 million for the fourth quarter, up 2% compared to the year ago period and comprised 73% of total revenue. Marketplaces performance benefited from growth across all geographies except China. Excluding China, marketplaces revenue was up 5% compared to the year ago period. For 2019, marketplaces revenue was $95.8 million and comprised 74% of total revenue. And we are encouraged to see the revenue acceleration for marketplaces in the back half of the year. Digital marketing posted another quarter of growth with revenue of $5.7 million, up 4% from the prior year period and represented about 17% of total revenue. Consistent with the last few quarters, EMEA was a main driver for growth, as was Amazon advertising in the U.S. For 2019, digital marketing revenue was $19.7 million, up 4% and comprised 15% of total revenue. Lastly, revenue from our other reporting category was $3.7 million for the quarter, down 19% from the year ago period as a result of onetime revenue from a particular strategic partner in the fourth quarter of 2018 that did not repeat in the fourth quarter of 2019. From a geographic perspective, revenue from the U.S. declined 1% in the quarter. However, international revenue increased 5% to 23% of total revenue in the quarter, driven by double-digit growth in EMEA and Australia, offset by declines in China. As for customer details, we expanded relationships with some notable clients in the quarter, such as Bling Jewelry, Crazy Dog T-Shirts, eLuxury, FullBeauty, Randa Accessories, Rocky Brands and Rue Gilt Groupe. Expansions which are an important growth driver in our business are not reflected in customer count, which exemplifies that the customer count metric is becoming less meaningful to gauge our overall performance. We ended the year with just over 2,600 customers. Customer count for the fourth quarter and full year 2019 was impacted by churn of smaller retail customers, and runoff from our China region, following the closure of our office there in July 2019. This mix shift is highlighted by the improvement in total average revenue per customer, which increased 3.5% year-over-year to nearly $48,000 for 2019. And notably, the size of new customer deals increased approximately 30% on both the sequential, quarterly and year-over-year basis. Adjusted EBITDA improved substantially to $9.4 million for the quarter compared to $5.4 million in the prior year period, representing nearly 1,200 basis point increase in adjusted EBITDA margin to 27%. These results include improvements across all reported expense line items during the quarter. For the year, adjusted EBITDA improvement was even more substantial. 2019 adjusted EBITDA was $20.2 million, more than double the $9.8 million reported in the prior year period and represented an adjusted EBITDA margin of 15.5%, again, with improvements across all reported expense line items. GAAP net income also experienced significant improvement, coming in at $5.4 million for the quarter compared to a net loss of $600,000 in the prior year period. And was $3.5 million for 2019 compared to a net loss of $7.6 million in 2018. This strong improvement in adjusted EBITDA and GAAP net income was a direct result of our strict cost discipline in our reorganization in July 2019, which was aimed at reallocating capital to make investments in sales, services and support to enable a return to top line growth in the U.S. and further strengthen our international operations. Turning to the balance sheet. We finished the year with strong results. Cash and cash equivalents were $51.8 million, up $3.5 million during the quarter and $4.6 million for the year. And this includes $1.4 million of payments related to the July 2019 reorganization. Free cash flow was $4.5 million for the quarter and $9.3 million for the year, marking a substantial annual improvement of $11 million from 2018. So that was up to 2019. Let's talk about our expectations over the upcoming year. As our business has and will continue to evolve, we want to be sure that we're providing information and metrics that align with our objectives and offer insights that are relevant to our operations and the understanding of our overall business. As a result, we plan to make some changes to metrics we provide starting in the first quarter of 2020. Specifically, we do not plan to disclose total annual GMV going forward because an increasing portion of our business is tied to GMV -- is not tied to GMV, especially in digital marketing, Where to Buy and in our bundled platform arrangements. For digital marketing, in particular, most of our revenue is now tied to ad spend, and thus, we have less visibility as to GMV, meaning our GMV metric could be subject to underreporting. Also, we do not plan to disclose total customer count or average revenue per customer for our total customer base going forward. Because increasingly, many of our customers are brands who have significant expansion opportunities and do not add to customer count. Making the number of customers less relevant to an evaluation of our overall performance. Furthermore, we believe the introduction of Starter Edition, which has geared towards smaller customers at a lower price point, we'll also render this metric less meaningful going forward. However, we will begin to report on a regular basis, the percentage of our revenues generated from brands on a trailing 12-month basis to help you gauge the pace at which we are moving towards this more strategic customer segment over time. Now let's discuss guidance. Entering 2020, as David said, we believe we are well positioned to drive improvements in revenue growth based on the initiatives underway. At the same time, the magnitude and timing of those initiatives is difficult to predict. Whether it's the ramping of sales headcount, the initial traction of Starter Edition, that is expected to launch through a strategic partner in the second quarter or the stabilization and variable revenue performance we anticipate. And while eBay is a smaller part of our business, it remains a meaningful part. And we anticipate continued headwinds for eBay for the foreseeable future. For those reasons, rather than establish a full year revenue range, we are establishing only an expected revenue for, with which we are quite comfortable, and will work towards increasing it incrementally as the year progresses. On the expense side, we expect to continue to make investments in sales and marketing to fund the expansion of U.S. sales capacity as well as additional marketing events to promote customer and strategic partnership growth. We also plan to continue to invest in R&D to enhance our product offering with a specific focus on supporting our current brands customer base as well as acquiring new brands customers. As a result, for the first quarter of 2020, we are issuing revenue guidance in the range of $31.3 million to $31.7 million and adjusted EBITDA in the range of $4 million to $4.5 million. For the full year 2020, we are issuing revenue guidance of a minimum of $130 million, with potential upside depending on how quickly the various initiatives outlined above take hold. We are issuing adjusted EBITDA guidance of a minimum of $20 million, with potential upside based on higher-than-guided top line growth. Looking further ahead, I wanted to touch on David's comment about our long-term goal of a combined year-over-year revenue growth rate and adjusted EBITDA margin range of 25% to 30% by 2022. We aim to achieve this objective through a balance of both revenue growth and profitability, with a focus on continuing to shift towards brands, newer product offerings, like Starter Edition and the incremental revenue opportunity from indirect channels with its more cost-efficient model, initiatives to continue to reduce customer churn and continued strict cost discipline. In closing, we are pleased with the improved profitability, cash flow and overall efficiency we delivered in 2019. And believe we have built a strong foundation for a return to revenue growth. We enter 2020 enthusiastic, in particular, about strategic pillar focus on winning in the brand segment and leveraging indirect channels, as highlighted earlier on the call. We believe we have the right strategy, people and processes to execute on our objectives of balanced growth and profitability over the coming years. With that, operator, we'd like to now open the call to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Matt Pfau with William Blair. -------------------------------------------------------------------------------- Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [2] -------------------------------------------------------------------------------- Wanted to start off, first, on the Starter Edition. Maybe you can just give us some more detail on how you're thinking about the potential revenue contribution from that product in 2020? Can it be meaningful? Or is this something that's going to take a year or so to ramp up? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [3] -------------------------------------------------------------------------------- Matt, this is David. Obviously, we're not sharing any specific numbers at this point. I think, it's got a lot of potential. I think, it's really going to depend on how quickly we launch. And how effectively -- how effect the uptick is across the customer base and working with the people over ShipStation. So at this point, I think, this part of the reason, we're not providing a range. We're just providing a floor. We obviously expect that it could contribute something. But how big it is for 2020, we'll just have to see. -------------------------------------------------------------------------------- Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [4] -------------------------------------------------------------------------------- Okay. And then on the U.S. business and the hiring you've done there. Do you expect that business to return to growth in 2020 from that hiring? Or how long should we expect those reps that were hired at the end of 2019 to start to contribute to revenue growth? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [5] -------------------------------------------------------------------------------- Yes, Matt. So obviously, we're not guiding to specific geographies. A lot of that hiring, really, the bulk of that hiring was in November and December. And we actually still continue to hire for a few remaining positions. As you would expect, it takes -- I think, we said in the past, typically 6 months or so for reps to ramp. And so it'll take that period of time for them to ramp and start to contribute to bookings, then ultimately, it takes time for those bookings to turn into revenue. So I do expect that we'll spend most of this year gearing up for bookings improvement in the U.S. How quickly they ramp and how much they contribute is obviously still to be determined. So for that reason, we're -- another reason why we're providing a floor on the revenue side, and hopefully, some upside, as we start to see results from this new cohort of reps. -------------------------------------------------------------------------------- Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [6] -------------------------------------------------------------------------------- Okay. Great. And then last question for me. Just back to the Starter Edition. You already have a handful of channel partners that you work with. So maybe just help us understand, why the Starter Edition is initially just being launched with ShipStation? And how come some of these other channel partners aren't going to be selling those Starter Edition initially? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [7] -------------------------------------------------------------------------------- Yes. Well, as the -- as I said in my remarks, we have a number of interested parties in Starter Edition and our partner ecosystem. I would expect that we would launch another partner before the end of the year. So there's actually quite a lot of interest in it. But given that this is a new product's initiative, part of what I think is important to understand is that each partner has some specific needs, as far as how this product will be rolled out. So for example, on the logistics space, there may be some preferences for what kinds of shipping partners or carriers are included. If you look at other types of partners, they might have preferences around what kind of channels are supported. And it's a flexible platform, but we decided to focus on one initial partner that we've worked with closely for many years in ShipStation. We understand each other's businesses really well. We've worked well together for a long time. And our collective view is that, there's a really good fit between what we can bring to the table and ShipStation's customers. So this just felt like a good place to start, but I would expect us to expand the partner roster fairly aggressively once we get going. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from Ryan MacDonald with Needham. -------------------------------------------------------------------------------- Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [9] -------------------------------------------------------------------------------- Yes. I guess just double-clicking a bit on the partnership with ShipStation. Can you provide a little bit more color about maybe some of the mechanics of the partnership? Is this more of a referral agreement? Or how is the incentivization going to look like for ShipStation to be getting Starter Edition into the marketplace? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [10] -------------------------------------------------------------------------------- Yes. So obviously, I'm not going to get into specific numbers or anything like that. But I would look at this as a co-marketing and referral agreement, where we'll be bringing our capabilities to market, in conjunction with ShipStation marketing to prospects that we think would be an appropriate fit collectively for this product. And obviously, expect to deliver some integration synergies as well between our platform and ShipStation. And again, we've worked with ShipStation for many, many years. We have a lot of mutual customers already on our core platform. So this is really about bringing the power of ChannelAdvisor in an easier to use package for customers, that might not be at the scale and scope that will make them ready for our core platform. -------------------------------------------------------------------------------- Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [11] -------------------------------------------------------------------------------- Excellent. And then when you launch Starter Edition in second quarter, do you intend to focus any of your efforts at all on migrating some of the existing customer base to Starter Edition, perhaps customers that are at the lower end of the segment to try to reduce churn at that level of the business? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [12] -------------------------------------------------------------------------------- Yes. We certainly expected that, that there'll be an opportunity to do that. I don't know that we're going to have a prospective program to go out proactively to customers. But we know that customers that are selling below certain threshold have a higher propensity to churn. And historically, we haven't had an option to offer them, right? And so with Starter Edition, we will. And I would expect that we'll be able to provide a migration path to customers who want to downshift to a smaller platform. So at least, opportunistically, I think, the answer is yes. -------------------------------------------------------------------------------- Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [13] -------------------------------------------------------------------------------- Excellent. And then just one more for me. We've now started to hear that some of the changes with the -- to laws in California around programmatic advertising and target advertising are starting to have impact on pricing rates within digital advertising. Are you seeing the impact at all of this in the digital marketing segment? And have you -- is there any, I guess, impact to the guidance, or how we look at 2020 associated with that? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [14] -------------------------------------------------------------------------------- No. We really haven't seen any change in pricing dynamics. We provide, for example, a lot of feed services that power things like retargeting campaigns, but we don't do retargeting ourselves. We're not tracking cookies by and large anymore like we did years and years ago when we were using them primarily for attribution and GMV tracking. So we're -- think of us more as plumbing and data conduits, right? So we're less in the business of things that would be affected, in my view, by not only GDPR but CCPA as well. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question comes from Thomas Forte with D.A. Davidson. -------------------------------------------------------------------------------- Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [16] -------------------------------------------------------------------------------- You obviously touched a lot on brands throughout the call and acknowledging it's a key in growing customer segment. And I know you guys have mentioned, it's kind of rapidly developing, and it's a little -- the visibility maybe -- is not as clear. But could you guys touch upon some of the initiatives that are really driving long-term growth amongst the key customer segment? And then secondly, the -- any growth in the direct sales force based on those brands? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [17] -------------------------------------------------------------------------------- Yes, Tom, this is David. So I think, really the initiatives pervade the entire company, right? So there are specific -- virtually everything in our product road map. And I think I said this in my prepared remarks, is focused on brands, right? So the very first question we ask ourselves when we're evaluating a capability or a feature or whatever is, first and foremost, is it something that's going to advance our capabilities with brands? But it's important to remember that our entire platform already has applicability towards brands, right? So as I mentioned in the prepared remarks, everything from Amazon advertising, digital marketing, if they've got a transactional website to first-party and third-party and drop shipping. I mean, there's really nothing in our platform per se that a brand couldn't make use of, depending where they are in their life cycle. So we continue to invest really the bulk of our R&D resources and continuing to advance the ball there. And as I also mentioned in the call, for the first time this year, we're stratifying our sales commission structure to focus on -- to focus more on brands. And to your point about direct sales, we don't segment our sales team by customer segment. It's something that we've thought about and considered and continue to evaluate. But for the time being, our entire sales team is still able to sell to both brands and retailers. We tend to segment more, based on size and territory, as opposed to customer type. But like I said, we do anticipate that the change in sales commission structure should drive some degree of change in behavior and focus on brands going forward. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Zack Cummins with B. Riley FBR. -------------------------------------------------------------------------------- Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [19] -------------------------------------------------------------------------------- I guess, just in terms of the longer-term initiatives of really focusing on brands. Can you talk about some of the, I guess, necessary actions to really accelerate your exposure to brands from, I guess, kind of the just over 25% this year to getting closer to that 50% target by the end of 2022? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [20] -------------------------------------------------------------------------------- Yes. Thanks, Zach. I think to some extent, the market is coming to us, right? So if you look at the progression of brands revenue or bookings or just even things like net revenue retention, all of the changes we've seen in our business have really been happening in the absence of us having a specific, for example, sales focus in terms of commission structure, et cetera. So I think, some of the things that we're doing now that are more deliberately leaning into the trend that's already there in the market should support those trends, if not, accelerate them. So I think, it's frankly, a secular shift that's just going on. It's a multi-year shift going on in the industry. And I think we're just in a very good position to capture it. So obviously, it starts with product and making sure that everything that we do continues to expand our appeal to brands on a global basis. And everything springs from that ultimately. There -- I think there are some additional things that we can consider that we haven't yet implemented around service level differentiation, for example, looking at different customer segments and how we can ensure that the brands continue to grow and expand with us. If you look at, as I mentioned in the call, the strong net revenue retention we have with brands compared to retailers, it justifies potentially a higher level of service and touch. And today, we don't necessarily distinguish customer segments in our service offering. So that's the type of thing that we're looking at going forward. -------------------------------------------------------------------------------- Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [21] -------------------------------------------------------------------------------- Got it. That's helpful. And for Rich, in terms of the, I guess, adjusted EBITDA guidance for this upcoming year, the floor that you've put out there is actually a little bit lower year-over-year versus the number achieved here in 2019. Can you talk about some of the investments that maybe you're considering that could be, I guess, be a little bit of a headwind to potential margin expansion here in 2020? -------------------------------------------------------------------------------- Richard F. Cornetta, ChannelAdvisor Corporation - CFO [22] -------------------------------------------------------------------------------- Yes, sure. Good morning, Zach. So again, I want to stress the fact that the guidance that we've put out, there is a floor. And we do anticipate, as the year progresses, walking that up as possible with various initiatives we have going on to drive top line growth. With regards to expense savings, we mentioned after our Q2 call, that we expected around $5 million of net savings. And we recognize approximately about $2 million of that in 2019. That additional $3 million there, we will continue to focus on growing our U.S. sales force to support growth in the U.S. geography, marketing efforts, as I mentioned also in my prepared remarks, but also some investments in our product to be focused on our brands, customers, maintaining those customers and driving improved results to support the brand's initiative. So those are the 3 areas, I would say, that we're more focused on. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from David Gearhart with First Analysis. -------------------------------------------------------------------------------- David William Gearhart, First Analysis Securities Corporation, Research Division - VP [24] -------------------------------------------------------------------------------- First question, I just wanted to ask about bookings qualitatively. I know that you've made some late end of year hirings in the U.S., and those are still to ramp. But I just wanted to double-check if you could give us some sense of what bookings looks like, either in the U.S. or in aggregate for the company? Directionally, are we seeing an increase in bookings year-over-year? Anything you could provide would be helpful. -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [25] -------------------------------------------------------------------------------- Yes. Thank you, David. This is David, as well. So I think, what I would say, is that on a net basis, when we look at net bookings progression from 2018 to 2019, we did make progress. I felt good about that. Obviously, that's a little bit of a noisy metric with China in the mix as we discontinued China, obviously, as you'd expect, we saw churn tick up, and obviously, bookings go down in China. But overall, felt good about the progress we made in -- from 2018 to 2019. But we need to do more, right? So in the U.S., in particular, we still saw some pressures last year. And obviously, the hiring that we did at the end of the year is -- was not something that we expected nor did it contribute meaningfully to bookings in the calendar year. So I think in the U.S., it really was all about sales headcount, capacity and quota coverage. And as I said in my remarks, I feel like we've entered 2020 in a much better position relative to our plan than we had last year. -------------------------------------------------------------------------------- David William Gearhart, First Analysis Securities Corporation, Research Division - VP [26] -------------------------------------------------------------------------------- Okay. And then lastly for me, you talked about variable revenue and it's stabilizing. I mean, looking at the year-over-year progression. It is improving, but we're still in the high single digits as a percentage of revenue -- excuse me, high single-digit decline year-over-year for Q4. What gives you the confidence that it's stabilizing? And at what point do you think it will actually be stable on a year-over-year basis? Can you give us some sense of what quarter? Or how we should kind of look at that for modeling purposes? -------------------------------------------------------------------------------- David J. Spitz, ChannelAdvisor Corporation - CEO & Director [27] -------------------------------------------------------------------------------- Yes, fair question. Obviously, we pay close attention to pricing trends and GMV trends and what we're seeing in our business over the course of 2019. And it's a little bit of an art, right? Because variable can be somewhat hard to predict. But as we project forward, some of those pricing trends and contract trends and GMV trends when we look at them holistically give us confidence that we should see some stabilization now. What quarter? That's very difficult to predict and exactly what that trajectory looks like is difficult to predict, which is again a reason why we're providing a revenue floor for the year as opposed to a full range. So -- but looking at what I would call the leading indicators going into 2020, I have increased confidence that, that trend line should continue. Now there's a little bit of noise in there as well around partner revenue. And so I don't want to suggest that there may not be a quarter where it potentially dips down from a prior quarter. That's possible, and we've seen that kind of behavior just in terms of historical partner revenue. But in aggregate, I feel like the trend line should continue to improve as the year rolls on. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- I'm not showing any further questions at this time. I would now like to turn the call back over to Traci Mangini for any closing remarks. -------------------------------------------------------------------------------- Traci Mangini, ChannelAdvisor Corporation - Director of IR [29] -------------------------------------------------------------------------------- Well, thank you, everyone, for joining us this morning and for your continued support. We look forward to speaking with you again, soon. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.