Q2 2021 ChannelAdvisor Corp Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Q2.2021 Channel Advisor earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question during the <unk>.

Thank you April and good morning, everyone. Welcome to Channel Advisors Conference call for the second quarter of 2021 with me on the call today are David Spitz Channel Advisors, Chief Executive Officer, Beth Segovia Channel advisor, Chief operating Officer, and Rich Cornetto channel advisor of Chief Financial Officer.

And this morning, we issued a press release with details on our second quarter 2021 performance as well as our outlook for the third quarter 2021.

This press release can be accessed on the Investor Relations section of our website at IR Dot channel advisor Dot Com and.

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 debt.

We disclaim any obligation to update any forward looking statements or outlook.

These statements are subject to a variety of 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-Q as well as our other filings which are available on the SEC website at SEC Doc up.

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

For 2020, only adjusted EBITDA excludes transaction costs associated with our July 2012 acquisition of the Bluebird.

While for 2021, only adjusted EBITDA excludes the change in fair value of acquisition related contingent consideration.

We also refer to the related measure of adjusted EBITDA margin, which is calculated as adjusted EBITDA divided by our revenue as well as free cash flow, which is operating cash flows less purchases of equipment and capitalized software development cost for.

The press release that we issued today includes GAAP and 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 and our supplemental financial presentation posted on the Investor Relations section of our website.

Finally at times, and 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 of the future with that let me turn the call over to David.

Thanks.

July marked our 20th anniversary of the business when our founders of Scott and Rs start of channel advisor and 2001. They had a vision that e-commerce would be huge and sellers would need help managing it and 20 years later that vision is as true as it's ever been and.

And so I'd like to thank all of our customers partners employees and shareholders for helping us achieve this milestone even as we look ahead to the next 20 years.

Our momentum continued in Q2 and strong execution GMB growth, our expanding business with brands and our growth investments combined to drive record quarterly results and.

And I'm, particularly pleased to report the subscription revenue growth accelerated for the fourth quarter and of ROE to 25% year on year and marketplace GMB grew double digits, indicating durable trends and our business. Despite tougher comps now that we're lapping a full year of COVID-19.

Overall revenue and adjusted EBITDA, both exceeded our guidance for the quarter and I'll touch on a few of the highlights of the keep us bullish on our longer term growth prospects.

First we maintained double digit revenue growth despite more difficult year on year comparisons and coupled with continued strong performance and sales and revenue retention, we're increasing our expectation for full year subscription revenue growth to at least the upper teams.

As we've said previously the <unk> growth and subscription revenues as an important indicator of the longer term underlying strength of our business.

Second our focus on brands continued to pay off and drive our record revenues in Q2 revenue from brands increased 39% year on year consistent with what we saw in Q1 and subscription revenue grew a whopping 54% year on year the fastest growth rate we have on record.

Brands represented 38% of our total revenue for the quarter, which is up 7 points year on year and represented 44% of our subscription revenue.

We believe that the superior unit economics, we enjoy with brands will continue to positively benefit our long term financial performance as they grow the represent a larger proportion of our customer base.

Third strong demand for our products strengthened and the second quarter, helping us achieve our highest gross bookings ever.

This was driven by strong new logo activity and record expansions with brands, which continued to represent a substantial majority of our bookings and addition to robust sales momentum we saw year on year improvements and retention driven by the efforts of our services team and our recent platform enhancements, we expect to see ongoing strength in this area as we plan to continue investing and product innovation.

Enhancing our services and growing our brand customer base.

And we've continued to invest heavily and our platform to deliver to deliver value and innovation for our customers as we discussed on our Q4 earnings call. In February we are aggressively expanding our breath of supported channels globally at the time, we announced we expect it to increase the number of supported marketplaces and channels by nearly 80% by the middle of 2020.

And 22, and so far we're well ahead of that pace. This matters because of this long tail comprising channels like the XI endo target plus shopify and well over 100, others continue to grow average aggregate GMB and a faster rate than our top 3 marketplaces, and the second quarter and was larger than ebay and Walmart for us second only to <unk>.

Amazon in terms of GMP, so not only does this further extend our lead and the market, helping us attract more customers, but it's also positive because of this fast growing broad spectrum of channels and reduces our sensitivity to slower growing channels like E Bay and to a certain extent even Amazon.

In short this diversification is good for our customers and good for us.

Fifth even as we lean in and increased our growth investments across sales services and products. Our financial model has delivered healthy margins and robust cash flow adjusted EBITDA margin for the second quarter was 22% and operating cash flow for the quarter increased 19% year on year to $9.2 million with over $90 million of cash on hand, no debt market leader.

Chip and a large market opportunity in front of US, we intended and tend to continue investing with discipline and growth initiatives.

I'm also pleased to announce that in conjunction with connect 2021 of our annual conference specifically curated to help brands and retailers reach more online shoppers will be hosting a virtual analyst day on September 16th at 9 o'clock in the morning Eastern time. The agenda will include presentations from management and a lot of Q&A session and a press release with registry.

And details will be issued later today and we're excited about this event and hope to see you there.

And lastly, and very proud to share that we were just announced the winner of the triangle business Journal of 2021 Best Places to work award. This is particularly rewarding because its our seventh time, winning and reflects how deeply care about our employee experience and it's especially sweet to of walnuts distinction. After a year of the challenged all of us to all of our teammates globally. Thank you.

And with that I'll turn it over to Beth.

Thank you David and good morning, everyone I'm. So pleased to be able to report that Q2 was another excellent quarter for us maintaining the positive momentum we saw over the past 12 plus months.

As David mentioned, our team achieved our highest growth bookings and Q2, we added notable new customers, including <unk> and Kodak Reckitt, Benckiser, Remy Cointreau, and Salomon SAS and formalized the strategic relationship with Tic Tac our account managers and working closely with our sales team did a beautiful job leveraging our under the.

Any of the client needs to drive a record level of new business with existing customers like Clorox and candy.

This is a testament to the numerous ways and links channel advisor and is helping customers achieve their online commerce call.

In terms of churn and Q2 marked another quarter of year over year improvement bookings expansions and improve the attention are important drivers of sustained growth and retail and really good about the recent trends.

Also in Q2 of brand equity survey and our target segments with completed and shallow unaided awareness of channel guys are up more than 35% since 2017 the.

Same survey also indicated high favorability ratings among respondents familiar with channel advisor.

Feel good about our position in key markets and we will remain focused on promoting our brand and how we can help brands and retailers and succeed online.

It's gratifying to see the fruits of our effort to drive customer success and exciting to note of that we have more programs underway to enable further progress.

We are staying focused on helping our newest customers on more effectively and realize their ecommerce objected.

And we've continued to rollout our enterprise level of tariff deploying the new structure to support 3 additional cohorts of clients and Q2.

And with just 1 cohort remaining we should be fully deployed and Q3.

Success in attracting large global brand customer has created the opportunity to expand our business and cultivate stickier relationship.

With this initiative, we are enhancing our ability to serve their needs by making meaningful investments across the services the organization, increasing our coverage and depth of engagement.

Customer feedback has been very positive and the initial results are better than expected.

Let me now share and innovation update regarding new platform capabilities. We've recently released.

Enabling brands to accelerate their digital transformation and achieved our ecommerce objective remains our clear priority.

As many customers are telling us they will add channels as fast as we can enable them. We shared our plan earlier this year to significantly expand our breath of supported channels by adding at least 80 additional integrations by mid 2022 compared to where we were at the end of 2020.

We continue to move with high velocity in Q2.

And with the recent additions of more than 20, new integrations channel of either now supports over 190 channel globally, new marketplace integrations and take the lander and 6 new markets June and 5 markets and rack and <unk> in Japan, and 6 first party drop ship connections with Petco, and Chile, and the U S Lowe's and home depot.

And Canada, and Germany, and Meyer and Australia. While this initiative is still in the early stages of customer response has been hey, Brian current King.

Our product development and also focus on helping customers elevate the brand presence and optimize their operations and engage online shoppers, when where and how they shop.

The deliver a seamless shopping experience, we've expanded our chaparral media offering and.

In addition to directing purchase of <unk> shoppers to authorize stores and retail sites brands do you think by online can now display retailers, the operating curbside pickup or in store and delivery.

Providing our customers with actionable insights and something channel of either is known for and in order to provide full visibility and deeper product intelligence, we've launched product tag. This new workflow solution and forms critical business decisions for brands by empowering them to monitor and segments of our product or system defined and site and such.

As new arrival.

Seller and recently sold out products.

These new releases are just the latest example of how channel of either house brands and prove the consumer shopping experience and increased product visibility to drive online sales.

A recent case study available on our website demonstrates how Diana craft, a leading brand manufacturer of bicycles and scooters and battery powered right on toy increased and sales up to 100% year over year on Walmart Dot com by leveraging channel Visors managed services team and platform capability.

Dino copy of the channel advisor of support for Walmart connect which provides powerful automation to brands and retailers to help streamline critical tasks for success, including managing advertising campaigns, and scheduling and bidding and achieving product listing optimization.

And their words channel of either has always been willing to pivot and shift providing our ecommerce management team with expert and types and guidance to win and the sale.

China crafted and inspiring example off of brands that respond to changing consumer expectations and boldly embrace the digital transformation to succeed and a competitive e-commerce landscape.

Let me now provide you with an update on our progress as we have increased our strategic focus on diversity equity and inclusion.

We have prioritized employee awareness and enablement and 70% of our staff of completed unconscious bias training, including 75% of our leader and.

In addition employees have led the formation of 7 employee resource groups pulling together employees with common experiences to enable networking skill and career development.

We have modified our approach to recruiting to increase access by more broadly advertising available roles and expanding our relationships with a wider set of colleges and University.

We've assessed our vendor spend with minority owned businesses and by adding numerous new minority of on vendors are on track to increase that spend and 2021.

And finally in Q2, we adopted a flexible work policy, giving employees the freedom to choose to work remotely and office or a mix based on their needs by allowing employees to decide what works best for them individually channel advisor has empowered each individual to the aircraft while also expanding our access and <unk>.

<unk> for globally.

And it's wonderful to see of made great progress here and was really gratifying to see these efforts recognize my employees and their feedback that led to channel of either earning the best places to work in 2021 of warm as David mentioned.

To summarize and Q2 the continued to build on the progress we made in 2020 and Q1 and we are pushing forward rapidly with new initiatives like our enhanced enterprise level of service and our accelerated marketplace expansion to enable customer success.

Based on our execution to date combined with getting a fast start on these exciting initiatives for 2021, we believe we are positioned for more good things to come.

With that I'll pass it to rich now to provide a detailed update on our financial performance rich.

Thank you Beth and good morning, everyone.

We are proud to report another quarter of success and the strategic areas of brands acceleration subscription revenue growth and investments to drive sustained double digit revenue growth healthy margins and strong cash flow.

We entered Q2, knowing that we faced a difficult year over year comparison to topline performance, specifically with regards to variable revenue, which increased 88% during the same period a year ago.

However, we continue to focus on areas more within our control and after providing an outlook of subscription revenue growth for Q2, and the upper teens on our last earnings call. We're excited to report that we exceeded those expectations with subscription revenue growth of 25% over the prior year quarter.

Q2 represented our fourth consecutive quarter of acceleration and subscription revenue growth and as David mentioned earlier, even more impressive is the quarterly subscription revenue from brands increased 54% year over year the.

The rapid acceleration and subscription revenue growth from brands over the last year highlights. The success, we have achieved from the investments we've made and our sales organization. The tremendous progress we've made with customer expansion and retention and our services organization and the benefits of continued platform innovation.

Overall total revenue and adjusted EBITDA for the second quarter of 2021, both exceeded the guidance, we provided and Max.

So let me provide a little more color on our results for Q2.

Total revenue reached $41.5 million and the second quarter up 11% year over year. Despite the challenging comps I mentioned earlier and represents our best quarter ever for revenue.

Subscription revenue reached another record of $32 million for the second quarter and variable revenue of $9.5 million was in line with our outlook and up 7% quarter over quarter, driven by continued elevated <unk> levels.

As for additional financial highlights specific to our strategic brands cohort <unk>.

<unk> subscription revenue of $14.1 million represented 44% of our total subscription revenue in Q2, which is up over 800 basis points from the prior year period.

Also over the previous 12 months, we have increased net brands customer count by 45% and average revenue per brands customer has remained significantly higher than retail customers.

As we mentioned every quarter brands continue to emerge as a more significant piece of our business and with the strategic investments, we are making to attract and retain these customers. We maintain the line of sight to achieving our stated goal of greater than 50% of our total revenue coming from brands by the end of 2022.

Moving on to adjusted EBITDA, We finished Q2 at $9.3 million ahead.

Ahead of the high end of our outlook of $8.1 million generating and adjusted EBITDA margin of 22%.

While still maintaining healthy margins and operating expenses have been building steadily in recent periods and as we've made strategic investments and our product and and our services organization as well as incremental investments and sales.

We expect this trend to continue for the balance of the year as we continued to reinvest back into our business the incremental revenue growth we generate in 2021 with the goal of accelerating product innovation further improving customer retention and supporting sustained double digit topline growth.

Now turning to the balance sheet.

We had another solid quarter of cash generation during Q2, with cash and cash equivalents exceeding $90 million and representing an increase of $8 million sequentially and $26.5 million year over year.

Free cash flow of $15.5 million for the first half of this year was the best first half of our fiscal year and our history.

We also saw deferred revenue increase again up $1.6 million sequentially and up $7.8 million year over year, driven by the strong bookings performance, we highlighted earlier.

Now for our financial outlook for Q3.

Consistent with our practice over the last year, we are providing a financial outlook for only the upcoming quarter. So.

So for the third quarter of 2021, we are issuing a revenue outlook range of between $41.3 million and $41.7 million.

And an adjusted EBITDA range of between $6.8 million and $7.2 million.

We target continued strong performance and subscription revenue in Q3 and.

And our outlook reflects growth and at least the upper teens.

We also expect Opex in Q3 to increase at least $5 million over the prior year as we continued to reinvest the incremental revenue growth we have generated in 2021.

Additionally, while we are not providing full year guidance at this time, considering our investments designed to support continued growth as well as an expected increase in expenses. This year compared to last year. We continue to anticipate that adjusted EBITDA for the full year 2021 will likely be modestly lower than the full year 2020.

But we're also increasing our estimate for full year subscription revenue growth for mid teens to at least the upper teens given the strong bookings performance. We achieved during the first half of 2021 and continue to see and early Q3.

In short our subscription revenue growth has strengthened considerably and our continued investments are designed to maintain this momentum.

And David mentioned earlier, we'll be hosting a virtual analyst day on September 16th and we look forward to providing you some additional metrics on our operational performance and financial priorities and.

In closing Q2 represented another quarter of solid execution across all areas of our business leading to record financial results and increased momentum for the back half of 2021 and beyond.

Moving forward, we plan to continue to focus on sustained double digit revenue growth and investing strategically in our product to further enable our customers as well as our employees to support those customers, while still maintaining healthy margins and strong cash flow.

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

As a reminder, if you would like to ask a question. Please press star and the number 1 on your telephone keypad.

Your first question comes from Thomas Forte with D. A Davidson.

Great first off congrats on the quarter.

And I have 1 question and 1 follow up and then I'll get back in the queue.

A bunch of more questions.

So David I think that you have a pretty amazing of vantage point and channel advisor.

E Commerce, and general and love to hear your thoughts and what's going on is the stickiness and categories, where consumers were forced to shop online when for.

Physical stores closed and the pandemic less of expected.

And or consumers are just spending more money on travel and less on other categories.

Because they weren't able to spend and travel during the height of the pandemic.

Hey, Tom Thank you.

And we saw pretty pretty strong <unk> volume and growth despite lapping COVID-19.

Growth was slower on some of the larger channels.

Some of which of those have reported and some of which have not.

And where we really saw a pretty vibrant growth was and that long tail of marketplaces. So I think it's pretty encouraging that we're actually seeing I would characterize it as a sort of democratization of.

E Commerce, and I think thats good.

And it helps boost our value proposition as far as sort of consumer trends I think it's.

As part of the reason, we haven't provided full year still right I mean, we've got things basically reopening and and the Delta variant of the has come around and as you've seen that's causing people to maybe rethink.

Travel our conferences and so I think I think these things are just super hard to predict I would say overall.

Overall spending seems seems to remain pretty robust, but it was the tough comp last year I mean, it was it was really remarkable how much of the spike we saw in gene and the last year.

<unk> not just the shutdowns, but big stimulus checks and things like that so I would say it looks to me like the consumer is still looks pretty healthy.

It's just comping against the bit of a bit of a tougher number and.

We'll see how the rest of the year plays out.

Excellent Alright, I really appreciate it last quarter when you highlighted something like 8 records that you achieved can you talk about the records achieved in this quarter.

Yes, well so the number 1 top line revenue.

It's been a long time since we had of our revenue line and Q2 the beat for Q4.

And which is typically our seasonal high so that was that was pretty exciting.

Gross bookings I think are another 1 for look at just indicating continued momentum and our.

The demand for our products and performance of our of our sales team.

And where I get Super excited and in addition to sort of those headlines as you look at subscription revenue growth accelerating to the 25% year on year and again the variable revenue is going to be a little bit noisy as we go through this lapping period, but that subscription revenue growth of 25% is really strong and then probably last.

Certainly not least of the acceleration of brand and subscription revenue of 54% year on year, which.

As far back as we could look at our at our data, where we where we broke those customer segments out most of the fastest so really really strong performance with brands, which is exactly what we want to see.

Excellent alright.

Back in the queue. Thank you. Thanks.

Thanks, Tom.

Your next question is for Matt.

William Blair.

Hey, guys. Thanks for taking my questions and nice quarter.

And wanted to ask just about demand for your solutions as the U S economy reopened and the quarter.

It didn't seem like anything changed, especially considering you had record gross bookings, but just sort of wondering if if there was any change in terms of customer conversations are of customers coming into the pipeline as the U S economy and reopened more and the quarter.

Yes, Thanks, Matt I think it's I think it is.

The reality at this point the Covid caused a lot of people that had a certain the we're at a certain point and their digital transformation to accelerate those plans and that level of urgency and acceleration and acknowledgment of that they couldnt continue to have a slow pace of digital transformation plan.

I think thats permanent right. So even as we had a step function increase and G&P volumes, which we expect a moderate amount of we're lapping it.

I think there was a fundamental shift and the demand profile and our market where.

Brands in particular and realize that and the path for the consumer.

And is no longer where it used to be and and that they need to accelerate and advance the ball when it comes true.

2 of the digital channel and how to reach consumers online so that appetite hasnt diminished if anything I would say to increase just based on what what we've seen in the.

And our sales activity.

Great and then wanted to ask on competition and if you're seeing any change there some of the.

E Commerce software providers of have added more channel management functionality to their platform. Just wondering if that has any impact on you guys.

I don't expect it to I think it's a large market that is still really underpenetrated I think there is a rising tide that can lift all boats I think it's great to see people come into the space I think it's an acknowledgment that these are functional needs the customers have.

Channel <unk> leader of the space and so our ability to to chart. The course and offer a multitude of solutions globally for our customers I think is highly differentiated and.

And.

And at the end of the day, we really focus on our customers and what they need not so much of what.

The competition is doing and we certainly keep an eye on things but.

We have great partnerships with the number of different different partners and the ecosystem, sometimes some of their offerings overlap some of ours and that.

Okay, and we lead with our product capabilities and the customer ultimately can decide what's the best.

Best for them.

Great last 1 for me just on the commentary around investing in some of the upside that you've seen the past couple of quarters back into the business and the and the back half of this year, maybe just what are the key.

And the investment priorities over over the remainder of 2021.

Yes, I think it's a continuation of the themes that we've had this year so product innovation.

Services sales capacity again, we're seeing a strong demand profile out there we've got a lot of customers asking us to do more things and add more capabilities and so.

We expect this.

This demand to be pretty durable and so we're investing behind that and.

Unlike of lot of companies out there.

Been very nicely profitable very nicely cash flow and we've got a great balance sheet.

Got.

Plenty of capacity to make disciplined investments wakely and we're very focused on.

Trying to drive good returns on capital and we make the investment decisions that we do but we've got a very comfortable profile from which we can we can make we can make those investments.

Great. Thanks, guys I appreciate you taking my questions.

You bet.

Your next question is from Joshua Reilly with Needham.

Hey, guys congrats on the strong quarter. Thanks for taking my question.

So maybe starting off how should we think about the impact of the long tail of marketplaces, maybe taking some of the volatility out of the business quarter to quarter. When you haven't gone for like Amazon Prime and Prime day, moving from quarter to quarter as well and then what was the specific impact.

Of having the <unk>.

The day in the second quarter here.

Hey, Josh and what Luca.

I think I think the couple of things the long tail of phenomenon has been building for a number of years, but it really became the exciting I think towards.

Probably mid to end 2019, when we started to see it grow really rapidly and start to.

I'll start to rival the size of an aggregate of some of our major marketplaces. So just for just to refresh everybody and we've said this before our top 3 marketplaces are Amazon ebay and Walmart and then that long tail and so now of that long tail is bigger than ebay and Walmart and has been growing at a really really rapid clip several of several times faster than the need.

And Amazon So it represents a really vibrant ecosystem of global channels from Poland and to New Zealand and 2 you name the name of the country and as we add these channels that becomes an attractor for specific customers right and maybe its and apparel brand in Germany that wants to sell on the <unk>.

And then eventually expand our footprint to other other channel. So this has been really good thing for us and and.

I think removes a little bit of that overhang that sometimes people said like what what would of Amazon ends up owning everything or if ebay is slowing down how much does that impact for you guys. So seeing that long tail become <unk>.

Bigger and continue its high rate of growth is pretty exciting and it's a great differentiator for us.

And this and our customers of come to the spectrum channel advisor.

Yeah, and Joshua and other thing done all of their as regards to the year over year comparison, if you recall last year the topline much of the top of mine growth last year was driven by variable revenue, which is essentially flow directly to the bottom of gross margin.

So that's why you would see some some compression year over year.

Okay, Great and then I'll, just throw and 1 more quick 1 year the brain customer counting up 45 per cent year over year, how much of that would you attribute to the and some of the incentives that you've added to the sales organization to wendy's customers versus just natural demand. Thank you.

The address.

It's hard to say with any real precision and I think I think probably a big chunk of it is just organic market demand that we're seeing.

That's.

The brands are aware of the action is and that's.

The customer segment that is primarily the Milan, the that woken up and said that we really new to accelerate our digital plans.

But of course, it doesn't hurt that we now have a commission the structure that motivates our sales team too.

The focus on brands, so I'm sure that has.

Some some effect on it.

Your next day, Thanks Man.

And that kind of names with the wireless security.

And and good morning, Thanks for taking my questions and and congrats on the strong quarter.

I guess, David just going into the record gross bookings performance and I mean can you just give us a little bit of a sense of the kind of the mix of new logos versus expansions and kind of what percentage of that came from brands.

Yeah.

Pretty heavy percentage overall from from brands I don't have the specific number in front of me, but it's probably in the realm of of 2 thirds, maybe a little bit higher for for brands overall.

I would say Q2 was a little heavier on the expand side of the equation.

And then what we've seen and previous quarters and I think it speaks to a lot of brain customers and we signed over the last year and maybe we're the standing something up and getting it off the ground and gotten the past few for now and the mode of saying okay.

And did a great job standing us up on 2 to 3 years of marketplaces now we have to put our foot on the gas pedal and expand to the 10 more maybe it's the country expansion and or a product line expansion. So.

So we saw burst of expansion of activity and in queue to that of.

And the typical quarter, we'd see it fairly balanced between new logos and expansion of about 50.50.

I don't have the specific breakdown free on this on this call, but it was.

I would say incremental waiting towards the expansion side of the.

Equation and and by the way I would expect I would expect to see that expansion proportion probably organically climb over time as more and more of our customer base is brands, there's so much opportunity to expand with them.

Our estimates of been and that we we think we're probably maybe 10% to 15% dollar penetrated and our and our brand customer base. So as a bigger proportion of our customers and revenue comes from brands.

I think I think there'll be a sort of of natural.

Growth and and that expansion opportunity overtime.

Understood. That's helpful and just in terms of of your sales capacity I mean, just given the demand you're seeing and the environment.

How are you feeling about the overall sales capacity of of you have right now and and and what are your plans to continue to add for that team and as we move forward and the coming quarters.

Yes, so as you can imagine we're in the in the thick of of 2022 planning right now.

At the very least you would expect some degree of incremental sales capacity adds to maintain the bookings growth and momentum that we've that we've seen.

But I would say the we're also evaluating some additional incremental of investments.

To help us continue to succeed with with the brands as well both of them and capacity and and what I would call peripheral investments B a sales engineering.

And and functions like that so.

So we're looking at that don't have anything obviously specific to say about 22 at this point, but at least incremental.

The growth and line with revenue growth would be my expectation and and and evaluating whether it makes sense to do a little bit more than that.

Got it that's helpful and and rich just on the Q3 guidance I mean can you just unpack some of the assumptions there for Q3, I believe new guided too high teen subscription revenue growth and I'm, just kind of curious of.

What are the GMB trained assumptions that you're making and the coming months for for that variable revenue line.

Sure so and.

And developing the guidance.

We expect continued GMB momentum similar that we've seen over the last couple of quarters again focus more on subscription revenue growth.

We did mentioned at least upper teens and I, just want to remind everyone as far as as we.

Move throughout the second half of 2021, and the comps get a little bit more challenging and subscription revenue growth we had pretty.

Pretty much flat and Q2 of last year, bumping to 5% and Q3, and and 8% and Q for so coming off of 25 per cent growth and <unk> and still committing to at least up for teens and Q3 I'm excited about that.

And and as far as.

Variable revenue.

We're expecting.

Similar type results and from Q2, just given if you were to use the midpoint of the guidance that we provided but again continued strong momentum and GMB driving.

<unk> the line growth.

Great well, thanks for taking my questions and and congrats again on on the strong quarter.

Exactly.

Your next question and some kind of thing wrong with that of reality.

And thanks for taking my question. So I know your focus is on the brain's growth, but do you see on the potential to improve the retailer revenue I need to pay for growth and the settlement.

Hey, Jonathan.

And I think it's possible I think we saw some some modest growth in that customer segment last year, obviously helped by Covid.

And I look at our retail customer segment as a more mature business.

That the generates great cash flows and allows us to invest nonetheless.

Capital into into our business.

I see that as the mature business that is really more and harvest mode and the growth engine for channel Buzzers brands.

Great. Thank you.

So just 1 more so I know you mentioned, you're really strong balance sheet. You were looking at you know potential strong investments and acquisitions, but like is there any focus potentially on the specific investment of the acquisition of what you may be be looking for a signal of type of thing that you'd be looking out for that.

Well, if I had 1 I probably wouldn't disclose on the on the call [laughter], but.

Look I would say I would say, we're always giving of thought to capital allocation overall as a concept and thinking about what is the right thing to do with our cash the it organic investments and organic et cetera.

Have been somewhat of acquisitive over the years typically smaller acquisitions that are going to more tuck in the nature and typically focused on enhancing or extending the capabilities of our of our platform.

There's certainly no shortage of inbound calls we get.

I think the market's over the property right now in terms of evaluation and what people expect in terms of price given aware of certain companies are.

So we tend to be financially disciplined and don't necessarily buy on things like that but.

But I do think of interesting opportunities again, whether it's platform expansion keep the expanding our platform capabilities.

Potentially geographic expansion and.

And it's the right thing comes along with the right time with the with the reasonable price.

Which is what we experienced last year with a reward board acquisition.

And it's something that we would we would look at but I would also say that.

Tend to be financially conservatives, we'd like having a strong balance sheet.

And we run everything we do whether it's and acquisition or investments that we're making organically.

Through a pretty rigorous.

Process to try to make sure that we have reasonable expectations for what we're going to generate in terms of return on investment capital. So.

So no specific comments, obviously in terms of acquisition targets, but the.

We're always interested and always looking and things that could be.

Of interest to us and you.

Jonathan This is rich I just wanted to jump in and again encourage the listeners to attend our analyst day presentation on September 16th well, we'll certainly expand a little bit more on our capital allocation framework and financial priorities.

Awesome. Thank you so much and congrats on the great quarter.

Thanks.

And I have a follow up credit came from the Thomas.

David.

Great last you for me. Thank you for taking them. So David you touched and this before but can you talk about the sales and margin impact of the dollar of G. M V from Amazon versus the dollar of G. M V from another marketplace and chips for channel advisor.

Yeah.

It's hard to say that with any particular specificity because so much of it depends on the customers that are making up the mix right. So if we have a lot of of new customers signing up for that long tail of marketplaces.

And aggregate there may be below the govt threshold and so while they may be growing GMB, they're still in the subscription kind.

Block, if you will so, but but what I would say is hypothetically.

And a high level, we and.

Drawing how relationships with a large variety of channels and over the last few years and it has been a particular focus of ours on the on our partnership scheme.

Many and in fact, I would say most of those channels come to us and are interested in working for us to get our high quality supplier of selling on their marketplace and off and that comes with economic arrangements the benefit channel advisor so it could be.

It could be subscription fees it could be variable fees that are tied to volume growth. So.

So I guess, you could say the all else being equal.

1 dollar GMB coming out of of long tail of marketplaces is probably incrementally.

More profitable for us and.

But on Amazon, but.

But I don't I don't lie awake at night thinking about.

Really control, how consumer shop, and where they shop and where the GMB flow. So I don't spend a lot of time thinking about can we pull some lever or and other to drive and be somewhere or not our main mission is to.

The integrated many channels as possible and give our customers access to as many consumers as possible and wherever those consumer shop.

Try to make sure we're credit value for our customers by making that easier for them.

Excellent hurts and my last question and you touched and there's a little before but I would appreciate David your high level of thoughts, there's a lot of antitrust and regulatory scrutiny right now and E Commerce and Big Tech in General and is there any high level of thoughts and potential implications for channel advisor.

Well, that's certainly the third rail topic, so I want the Tom obviously speak to any specific company is out of it.

They're kind of they're much more qualified than I am to opine on any trust, but.

I guess, having been and the technology industry my entire career and studied everything from I B M. In the sixties, the Microsoft and the nineties and others.

These are very very long term.

Battles the play out over typically a decade or more and so.

I don't I don't expect that there will be any kind of like southern and are dramatic change and the landscape and.

And any time frame that is something that I'm going to spend a whole lot of time thinking about.

To the extent that there is a more aggressive posture by governments around the world focused on.

Whether it's splitting up or or somehow impeding the growth of larger tech players I suppose that might accelerate some of the diversification that we talked about on the long tail and.

And that's I guess, probably a net positive for us because of the more the more channels. There are the more of their has to manage.

But again I think those if you look at history of those those are decades, plus dynamics that play out of her a pretty long time frame and so we don't we don't spend cycles thinking about how we eat and how we plan contingencies on that front.

Excellent congrats again and the quarter and thanks for taking all my questions.

Thank you Tom.

Yeah.

Thank you for it.

The closing remarks.

Thank you everyone for joining us today, and we look forward to speaking with you against the.

Ladies and gentlemen, and concludes today's conference call. Thank you for participating you may now disconnect.

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Ladies and gentlemen, thank you for standing by and welcome to the Q2.2021channel advisor earnings Conference call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

You ask a question during the session you will need to press star 1 on your telephone.

You require for any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today Raiford Garrabrant director of Investor Relations. Thank you Sir you may begin.

Thank you April and good morning, everyone. Welcome to Channel Advisors Conference call for the second quarter of 2021.

With me on the call today are David Spitz Channel Advisors, Chief Executive Officer, Beth Segovia Channel advisor, Chief operating Officer, and Rich Cornetto channel advisor of Chief Financial Officer.

This morning, we issued the press release for details on our second quarter 2020 of our performance as well as our outlook for the third quarter 2021.

This press release can be accessed on the Investor Relations section of our website at IR Dot channel by the Dot com.

In addition, this call is being recorded and a replay will be available to 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 day.

We disclaim any obligation to update any forward looking statements for the.

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 and our most recent form 10-Q as well as our other filings which are available on the SEC website at SEC Gov.

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

For 2020, only adjusted EBITDA excludes transaction costs associated with our July 2012 acquisition of the board well for 2021 of the adjusted EBITDA excludes the change in fair value of acquisition related contingent consideration. We also reversed and related measure of adjusted EBITDA margin, which is calculated as adjusted EBITDA.

And the design of our revenue.

As well as free cash flow, which is operating cash flow is less purchases of equipment and capitalized software development costs press.

The 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 and our supplemental financial presentation posted on the Investor Relations section of our website.

And finally at the times and our prepared comments or responses to the analyst questions. We may offer metrics that are incremental to our usual presentation to provide greater insight and 2 the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail of the future with that let me turn the call over to David.

Thanks Raiford.

July marked our 20th anniversary and the business when our founders of Scott and Rs start.

The start of channel advisor and 2001, they had a vision the ecommerce would be huge and sellers would need help managing debt and 20 years later that vision is as true as it's ever been.

And so I would like to thank all of our customers partners employees and shareholders for helping us achieve this milestone even as we look ahead for the next 20 years.

Our momentum continued in Q2 and strong execution GMB growth, our expanding business with brands and our growth investments combined to drive record quarterly results and I'm, particularly pleased to report the subscription revenue growth accelerated for the fourth quarter and a row, the 25% year on year and marketplace GMB grew double.

Indicating durable trends and our business despite tougher comps now that we're lapping the full year of Covid.

Overall revenue and adjusted EBITDA, both exceeded our guidance for the quarter and I'll touch on a few of the highlights of the keep us bullish on our longer term growth prospects.

First we maintained double digit revenue growth despite more difficult year on year comparisons and coupled with continued strong performance and sales and revenue retention, we're increasing our expectation for full year subscription revenue growth to at least the upper teams.

As we've said previously the <unk> growth and subscription revenues as an important indicator of the longer term underlying strength of our business.

Second our focus on brands continued to pay off and drive our record revenues in Q2 revenue from brands increased 39% year on year consistent with what we saw in Q1 and subscription revenue grew a whopping 54% year on year the fastest growth rate we have on record.

Brands represented 38% of our total revenue for the quarter, which is up 7 points year on year and represented 44% of our subscription revenue.