Q3 2020 ChannelAdvisor Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Q, we had plenty plenty at Channeladvisor earnings Conference call.
This time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. These best buys and then zero on your Touchstone telephone as a reminder, this conference call is being recorded I would now like to turn the conference.
Over to your host director of Investor Relations Mr., Li like Japan, you may begin.
Thank you Aaron good.
Good morning, and welcome to Channeladvisors conference call for the third quarter 2020.
With me on the call today are David Spitz, Channeladvisors, Chief Executive Officer.
Sylvia Channeladvisors Chief operating officer.
And rich Cornetto, Channeladvisors Chief Financial Officer.
This morning, we issued a press release with details on our third quarter 2020 performance.
As well as our outlook for the fourth quarter and fiscal year 2020.
This press release can be accessed on the Investor Relations section of our website at IR Dot Channeladvisor Dot 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.
These risks are summarized in the press release that we issued today.
For 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, and 10-Q as well as our other filings which are available on the FCC website that FCC dot 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.
For the current year adjusted EBITDA also excludes transaction costs for our acquisition of Blue Board in the third quarter.
Well for the prior year, but also excludes nonrecurring severance and related costs in connection with our corporate reorganization.
We also refer to the related measure adjusted EBITDA margin, which is calculated as adjusted EBITDA divided by our revenue.
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 provided GAAP to non-GAAP reconciliation schedule in our supplemental financial presentation posted on the Investor Relations section of our website.
Finally at times in our prepared comments or responses to analyst questions Weve.
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 on the future with that let me turn the call over to David.
Thank you raiford and good morning, everyone. We continued to deliver strong financial results in the third quarter as solid execution and heavy E. Commerce volumes drove success for our customers and double digit revenue growth for us exceeding our guidance for the quarter.
Revenue from brands was particularly strong up 29% year on year in the quarter.
I was also pleased to see solid cash generation, even accounting for our acquisition of the board, which I think will turn into one of the best acquisitions, we've done as a company.
What I'm most excited about however isn't the numbers presented in our financials as good as they were it's the outstanding performance, we had in sales execution and revenue retention during the quarter, which should position us for improved fixed subscription revenue growth going forward.
Coming off what was.
Well performance in the second quarter, our team again grew bookings significantly year over year and sequentially to one of our best quarters ever and about two thirds of that year over year bookings increase was from brands, including EPS and us Gantz, Geox Omron and Universal Music group.
Compounding the success, we also enjoyed better revenue retention than we've had in many years.
Net bookings, which we calculate as the sum of all bookings minus churn and down sales were the strongest weve had in six years coming.
Combined this led to a solid acceleration in year over year fixed revenue growth and an increase in deferred revenue as well as a double digit increase in customer count even without including the customers. We gained through our acquisition of the board.
I attribute the strong results to improve sales and services execution expanded sales capacity, an increase mix of brand customers and revenue and the acceleration in E commerce driving demand for our solutions, especially from brands.
In short our execution was exceptional in the third quarter and we believe this momentum will continue as we close out the year as our pipeline has continued to grow.
It is gratifying to see the hard work of the last few years begin to pay off in the form of improved fixed subscription revenue growth and the underlying strong unit economics, we've seen.
We are often asked how much of the recent surge in E commerce will stick and.
And that's obviously hard to say and we did see GMP levels moderate somewhat in the third quarter compared to the second quarter, Although GMP levels have remained stable and well above pre cobot levels, thus far including through the month of October.
We conducted a survey of 1000 consumers in the third quarter. The results of which suggests that much of the shift in consumer behavior as permanent as a majority of respondents said they expect to shop online more than before the pandemic.
Indeed, we saw record GMV during Amazon Prime day in mid October exceeding even the level of daily GMB. We had mid April at the height of Lockdowns and us federal stimulus stimulus programs.
Even though it's possible that some of the Prime day GMP represents demand that has been effectively pulled forward from November and December the biggest concern in the industry. This holiday season is that the shipping industry won't be able to keep up with E. Commerce volumes. So we expect volumes to remain strong through the holidays.
Ultimately, we think most of these new habits will stick, which should drive continued strong demand for our solutions.
Speaking of trends are long tail of marketplaces has continued to perform very well in terms of aggregate GMB growth.
Comprising channels like target plus the Lando Shopify Big Commerce and over 100 other channels. The aggregate GMB of these channels is approaching what we see on ebay and has continued to grow at triple digits year on year growth rates.
In fact, if third quarter growth rates hold steady the GMB on our long tail of marketplaces could exceed the GMV, we see on ebay within the next year.
Regardless this channel diversity highlights the breadth and depth of our portfolio and why brands, who are serious about digital transformation turn to channeladvisor as their trusted global strategic partner.
Ecommerce adoption has accelerated and demands for our solution has increased our.
Our focus on brands is resonating in the market has continued to yield the desired benefits and improved unit economics in particular net revenue retention and revenue growth.
Furthermore, our strong financial position has continued to give us the flexibility to invest in long term sustainable revenue growth. We intend to continue making these investments across the board from product to increase sales capacity and services to continue delivering industry, leading capabilities and quality to our customers.
We believe this is our time and we're leaning in to capture the opportunity in front of US we are pumped and excited to finish out a record year with increased momentum and with that I will turn it over to Beth.
Thank you David and good morning, everyone.
I'm delighted to be able to share with you today and in addition to the strong financial results reported for Q3, our organization has made significant progress towards the goal of increasing retention and expanding with existing clients by improving the customer experience, we were able to reduce churn measured in dollars to levels not seen in.
Almost seven years, when channeladvisor with about half that size. Despite the challenges of the current environment and its impact on certain retailers.
Expansions with existing customers dominated by our brand clients also showed their strong commitment to our platform and increased significantly year over year. This.
This is a testament to the numerous ways in which channeladvisor can help customers with their digital journey.
Expansions and reduce churn are important drivers of sustained growth and it's encouraging to see the trends have moved in such a positive direction.
The improvement in churn and significant growth and expansion is the result of hard work and specific actions, we've taken over the past year to elevate service level and improve customer satisfaction.
Some examples include creating client specific account plans with clear objectives, and quarterly alignment or adjustments to help ensure our goals are achieved and.
And improved focus on new clients and sharing the key milestones of success and their first year are delineated and tracked in a shared vision with the client demo.
Demonstrating flexibility during the COVID-19 pandemic to help clients weather the storm and finally aligning more resources to provide technical and strategic guidance to our smaller clients to enable growth of their ecommerce businesses.
In addition to improving first year client success and client achievement of calls we have spent the last six month planning and have now deployed a new services infrastructure to enable clients to improve their ability to successfully answer questions solve problems and learn new feature.
We have launched an entirely new knowledge center with improved self-help content that is easier to find and scored to promote the most effective content as well as a new set of foreign to encourage and facilitate client engagement.
In addition, we deployed a new set of tools to enable our support technicians to quickly and accurately answer client questions as well as identify trends and those inquiries to enable new content to be developed to support sales help.
This has been a major IP transformation and we believe this sets us up nicely to be able to support our clients through the Q4 holiday period and to 2021.
All the EPS, while employees continue to work from home I couldn't be prouder of the passion stamina and dedication of our team.
Now that we've covered our strong financial results and progress around enabling customer success, let me turn to sharing a few product highlights from this past quarter.
We recently expanded our capabilities to enable label brands with the launch of Shoppable media, a comprehensive suite of multichannel solutions designed to help businesses reach purchase ready consumers more efficiently.
I added features such as dynamic shopping links to our where to buy capabilities, we're helping customers like Oh theater, a leader in household cleaning products connect consumers with more online purchase options.
Oh Theater noted that our new Shoppable media tools provide a vital connection from their brand site to retail partners. So that consumers can find their products on their own terms and are a natural step for them to help make life, a little easier for consumers as they research and purchase of Cedar home cleaning products online.
On the digital marketing front, we introduced search terms generator for Amazon and operator and offerings that enable sellers to save time and resources by automatically generating an updating search terms based on advertising performance to help improve organic listings.
With respect to support for a new marketplace and drop ship integration, we continue to expand our reach.
In Q3, we added to our digit global total of more than 100 marketplace integrations by introducing support for six new marketplaces, including Kroger and the U.S. and fundings Marketlink and Australia.
We also added support for first party retail dropship connections with Walgreens Bluestone and take cloud that the U.S. as well as auto vol in Germany.
In our ongoing effort to enhance the client experience to improve operational agility, we introduced a new order pipeline dashboard, which helps brands and retailers minimize costly order processing delays.
A new channel health console, which allows users to assess operational health across all channel integration.
And the deal planner, which offers a new way to manage short term promotion.
The progress we've been making was highlighted at our recent Channeladvisor connect to 2020 virtual event hosted in October for 2600, registrants and over 66 countries, where a number of clients spoke to how we help them navigate their digital journeys and the turbulence of the postcode that world.
One testimonial that was particularly enlightening, what's from Pepsico, the global food and beverage company that most people wouldn't necessarily associate with selling directly to consumers online.
During the state of ecommerce keynote hosted by David Pepsico noted that by working with Channeladvisor and multiple capacities they've been able to push the envelope with their digital strategies, whether it be helping them stand up marketplace brand stores or their own web stores, using our fulfillment services platform to establish shipping locations quickly.
Or using our one p. platform to backstop inventory. They said, they're excited by the breadth and capability that we've been building.
Given the investments we've made in our technology platform and our service delivery capabilities. We believe we remain well positioned to support our customers during a holiday shopping season that we expect to drive historic levels of E Commerce.
To summarize I'm Super proud of how we've engaged at the company to continue operations and support our clients given the challenges of the current environment and so pleased that our customers have responded in kind by renewing and expanding their relationships with us it's exciting to see the results driven by investments in our capabilities that go beyond.
On to that is driven by just the pandemic related surge in E commerce.
The challenges of the day reinforce the need for our products and we see promising indications that the company specific actions. We have undertaken have helped to position us for sustained growth.
With that I'll pass it to rich now to provide a more detailed update on our financial performance rich.
Thank you Beth and good morning, everyone.
Following the second quarter of historic proportion from a financial performance perspective, there was much uncertainty about the sustainability of ecommerce demand and how that would translate into GMB and topline performance in Q3.
As we noted on our last earnings call July GMB results were strong and that momentum continued throughout the quarter, albeit at a moderately low lower levels than what we saw in Q2 as we anticipated run.
Revenue and adjusted EBITDA meaningfully exceeded the guidance, we provided in August and were complemented by exceptional operating cash flow during the quarter right.
Revenue grew 11% and adjusted EBITDA increased 44% versus the prior year quarter.
Clear indication of the scalability of our business model and benefit of our shared success pricing model.
Although valuable revenue was a meaningful driver of our year over year revenue growth.
Fixed revenue growth exceeded expectations during the quarter driven by our investment in sales headcount over the last few quarters and our strategic focus on brands customers.
Taking a closer look at these results total revenue was $35.3 million for the third quarter.
Up over 11% year over year.
Variable revenue during the quarter totaled 8.2 million, representing an increase of 40% from the year ago period.
This was once again driven by broad based year on year growth in GMB as ecommerce spending continued to be strong during the quarter.
As I mentioned earlier, we are thrilled to report that fixed subscription revenue reached record levels at $27.1 million for the third quarter, an increase of 5% sequentially and year on year.
Coupled with our strong variable revenue results and record fixed subscription revenue. We are also encouraged by the significant improvement we saw in net bookings performance during the quarter as the investments, we're making to drive sustainable growth has started to bear fruit.
Looking at revenue by customer type brands revenue for the quarter increased 29% year over year.
And brands fixed revenue degree even more than that.
Revenue from our brands customers represented 34% of total revenue for the third quarter.
Up from 29% for the prior year period.
Remain very pleased with this continued shift towards brands and as this pandemic has illustrated brands are generally more resilient and better position than retailers when it comes to the shift to digital channels.
Our strategic focus on brands with a driving force behind our acquisition of Blue Board in July and the investments we have made in our platform to support our brands customers have been paying off during this crucial time of ecommerce demand.
From a geographic perspective revenue from do you think you EPS increased approximately 12% in the quarter, representing the third consecutive quarter of revenue growth.
This growth is primarily a result of strong variable revenue performance and as I mentioned above the investments we've made to drive sustained growth has started to contribute to better fixed subscription revenue growth as well.
International revenue increased 10% for the third quarter also driven by strong variable revenue results.
Moving on to profitability performance.
Adjusted EBITDA increased 44% to $7.4 million for the quarter.
Compared to $5.2 million in the prior year period.
Generating an adjusted EBITDA margin of 21%.
Almost 400 basis points year on year.
These results include improvements across all reported expense line items as a percentage of sales.
It is important to note that our adjusted EBITDA results for the second quarter were strengthened by approximately $1.7 million of expense savings related to the COVID-19 pandemic.
Our annual connect 2020 event moving to a virtual format in Q4, the elimination of business travel and a reduction in facilities costs were the main drivers of these expense savings.
So some of our improved profitability is attributable to factors, we would not expect to continue under our normal more normal operating environment.
The Rolling 12 month period ended September Thirtyth.
Adjusted EBITDA totaled $34.8 million, highlighting our continued commitment and ability to manage expenses and drive profitable growth.
Turning to the balance sheet.
Consistent with our strong piano performance cash and cash equivalents were $66.4 million.
From $63.9 million in Q2.
Representing cash generation of $2.5 million during the quarter, even after disbursing over $9 million for the Bluebird acquisition.
Cash from operating activities was $12.5 million and free cash flow was $11.2 million for the quarter.
Provide arrange for both revenue and adjusted eat stuff.
So for the fourth quarter, we are issuing a revenue outlook range of between $37.3 million and $38 $3 million and then adjusted EBITDA range of between 8 million and $9 million.
It is important to note that are cute for outlook reflects accelerated year over year fixed revenue growth as well as incremental investments in Opex, which is David mentioned earlier, we believe will enhance our long term growth profile.
For the fiscal year 2020, we are issuing a revenue outlook range of between $142.1 million and $143 $1 million and then adjusted EBITDA range of between $33.5 million and $34.5 million.
No at the end of every email Davidson store employees.
It's the hash tag this is our time as.
As one team we had been living and breathing. This motto since the start of the pandemic for our customers for our strategic partners for our fellow employees.
And for our shareholders.
We believe we are well positioned to capitalize on the E commerce opportunity to achieve sustained growth in queue for into 2021 and beyond.
I will now pass the call back to David for some final remarks.
Thank you rich I'd.
I'd like to close by thinking Mark Huffman, a director of the companies since 2016, we announced this morning that Mark will not be standing for reelection when his term expires at our annual meeting next may <unk>.
Going to the recent announcement of his promotion to C. E O a black line and his need to focus his time and attention on that rule.
Mark has been exceptionally helpful to us over the last few years as we've shaped and executed our strategy and I speak with the entire board and company when I say, Thank you Mark for your contributions R.
Our team continues to amaze me with their resilience and focus on our customers and I'd like to thank all of them for a strong performance in the third quarter and this year. We're excited to see how the holidays play out as we begin looking towards 2021 and beyond with that operator, we'd like to know open the call to questions.
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Right. After your first question will be giving a chance, but yeah. They are up and I'm looking to go back into the queue for your follow up with you.
Possibly get some on them to come out of Germany last day.
Yeah. The first question will come from the line of output from da Davidson. Your line is not like go helpful.
Great. Thank you for the question Ah curious if you could expand on the variable of revenue in the quarter gross slightly decelerated sequentially wondering if showers with doctor the Prime day shift in the queue for any other color you can provide there. Thanks.
Surely this is David I think there's you've seen with some of the other larger channels that have reported like Amazon and ebay I think generally what you've seen in the industry is is a little bit of a deceleration from Q2, which was you know historic by by really any measure so we on our last call.
<unk> that there might be some deceleration as stores reopened and some of the lockdowns situation relaxed a little bit. So so we did see some some level of modulation and G. M B, but as I noted in my comments, we still saw stable sustained G. M. B rates that were well above the pre covid level. So.
I think that was just a cute cute too was really I think quite exceptional in and we didn't expect in order to be C Q3 coming to quite the same level Uhm, having said that of course variable revenue still group you know quite quite well and I think it was 40%. So uhm. So we're we're pleased with that performance.
Yeah. The only thing that I would add here is that you know it's important to note that G. M. V results don't consistently correlate to valuable revenue results. It really depends on on the the mix of customers you know where the <unk> the tears in which the customers have signed up for it and one in the timing of when they're exceeding.
Last year, So you know it.
Did you have the performance quarter over quarter may not be consistent with with the revenue performance quarter over quarter.
<unk>. Yeah next question will come from the line of map file from William <unk> like are happening.
Hey, guys. Thanks for taking my question wanted to ask on the on the book is performance that you had in the third quarter and then also the the strong bookings in the second quarter, how should we think about those in terms of when they will start to impact the financials and the fixed revenue and then you know is that.
Entire bookings performance sort of captured and and the deferred revenue or or does that take awhile to be captured. Thanks.
Hey, Matt.
What we said historically and I think it's it's still a reasonable to look at it this way it it it's typically.
Three to six month lag from bookings in a particular quarter to work their way I would say into into our financials I think the uptick we've seen and fixed revenue revenue in Q3, probably partially reflected some of what we saw on and Q2 and you know probably not a whole lot of impact from the bookings we did and.
Two three so so that's what gives us confidence that our performance in Q3 will will drive.
Some good results going forward as as it relates to deferred revenue no. It would not capture the totality, we have a mix of payment terms with customers arrange from monthly quarterly semiannual annual and only proportionately certain proportion of our customers prepay annually. So I would say that the deferred revenue.
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There's only a partial reflection of our our success with bookings in in revenue attention to the corner.
Yeah.
Got it and and and just as a follow up in terms of the the sales team in the U S and the investments you've made there where are they add in terms of ramping up to productivity and and and sales coverage.
Yeah, I think we are well on our way through the ramping processes. As you know we we just we grew capacity significantly towards the end of last year and and through the the first half or so of of this year and obviously, we're we're thrilled with the performance of of the team.
So you know I I think we do see continued opportunity to increase capacity as we go into 2021, so at some level or you know or or we're always adding some people to the team that are going to ramp, but but I would say that the team last quarter and this quarter has been firing on all cylinders and and were you know really.
Pleased with where I pipeline sits in the productivity of the team. So so I'd say, we're in really good shape from a sales perspective.
Great. Thanks, guys.
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Yeah cause playing that come from the line the Orion Mcdonald from them and I live my life, perhaps.
Yeah, It's morning, David Rich and bass, congrats on an excellent quarter and especially on a fixed revenue component. That's excellent uhm, we'd love to get more color on the expansion activity or seeing is this really customers, adding new marketplaces or additional functionality. What are you seeing I guess more of the uplift there.
Beth you want to take this one.
Sure happy to so I think we've seen a number of different things, we certainly see customers continue to expand their channels. So whether it's market places or N. K O N P dropped chip channel set channel expansion, it's always a method for growing their businesses, but in addition, we've seen a lot of cross.
Over additions have capabilities. So we have seen clients sorry to pick up on our new brand in Atlanta Olympics offering a trade it blew board acquisition that we purchased in July. In addition, we're saying pick up on Amazon advertising services as well as the other digital marketing capability. So we're really saying ma'am.
Think broadly about their digital strategies and think about how channel of either as can help them expand our reach and we've seen them consistently add not only channels that other product capabilities.
Thanks, and N as a follow up and maybe for your best can you give us an update on on how the adoption starter edition is progressing and and your expectations are thoughts as we start to think about a fiscal 21 and when that could be a material revenue contributor. Thanks.
Uhm sure I'll take that and David you can add on comments, if you'd like so starter edition, we continue to partner strongly with or go to market partnership station, we're releasing capability. It for two additional connections through their product. So we have released Walmart and now the commerce to our trail users.
The platform I'm, hoping to see additional adoption as a result of that activity and there's new campaigns going on this week as a result of those New addition to the product. So we're continuing to see nice adoption and nice feedback on those customers. They were doing 2021 planning in a moment so what to expect in next.
Sure. It's still an open question for us.
Thank you ma'am, we're done with this time I would like to remind everyone. If you have a question I'll have a follow up question. They can pass Taiwan I get a telephone coupon.
Possibly just a moment to compile for further questions.
Yeah next question will come from the line of Zappa come home from be valleys Achates online is that when I was gonna help me.
Yeah, Hi, good morning, David Ritchie Beth Congrats on the strong quarter and a strong bookings performance just a question around queue for guidance I mean, what sort of G. M. V assumptions are you making for this acute for guidance.
You know with regards to our our.
Guidance projections with regards to G M V and variable performance Uhm.
It's it's the holiday season, right and you know where you were obviously this quarter have a tougher comp versus last year. We are anticipated anticipating obviously growth over pre covid levels, you know I hope <unk> certainly gross over a growth over two three.
Could it be a a quarter like you to certainly possible right. Now we have we have built in our model more focused on on fixed revenue growth and and and that that's that's kind of where our focus is more longer term. So you know G. M. B levels will <unk> will continue to.
Be strong right. Now October results are are are starting to come in and we've seen some nice performance there how much that pulled forward any november or December activity transactional volume is still uncertain at this time, but we do anticipate the queue for results from a G. M V performance and viable revenue.
[noise] performance to be strong once again.
Up, but I would say.
By far the significant driver of improvement in fixed and the bookings activity that we're seeing is really around.
New customer acquisition.
Which which we think is exciting because what weve seen particularly with brands is that we typically start with a particular.
Particular solution set or or a smaller number of channels at the beginning and then the opportunity to expand its pretty pretty significant for typical brand. So those initial engagements are.
Are usually good indicator, but what we can do with those customers going forward and that's that's really the primary driver of what we're seeing but.
But.
Do you have anything to add as it relates to how we help customers when they are looking to step up their volume levels.
Yeah, I think the only thing that I would add is as we negotiate renewals with clients were always looking to assess whether or not they're in the right here, whether the tier batches their outlook and does that their contract term sort of suit the balance between fixed and variable fees and certainly in the last two quarters.
First we've seen clients, who are very successful want to negotiate their tears up and of course, we've done that but I would agree with David that the primary driver has been the.
Do bookings.
Great. Thanks for taking my questions.
Exactly.
Thank you.
And again at this time, ladies and gentlemen, if you have a question I have a follow up question. Please press Star then the number one on your telephone keypad.
And I am showing no further questions at this time I would like to turn the conference back to Mr. garbarino for any closing remarks.
Thank you everyone for joining us today, we look forward to speaking with you again soon thank you.
Thank you. Thank you so much for that ends and again. Thank you everyone for participating. This concludes today's conference you may now disconnect spacing and have a lovely day.
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