Q1 2022 ChannelAdvisor Corp Earnings Call

Good day, and thank you for standing by and welcome to the first quarter 2022 channel advisor earnings Conference call.

All participants are in a listen only mode.

The speaker's presentation, there will be a question answer session.

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And the converts over to speaker today.

Right.

Our relations. Please go ahead.

Thank you Victor and good morning, everyone.

Welcome to channel Advisors conference call for the first quarter of 2022.

With me on the call today are David Spitz Channel Advisors, Chief Executive Officer.

That's the Gavea channel advisors, Chief operating officer.

And rich Cornetto channel Advisors, Chief Financial Officer.

This morning, we issued a press release with details on our first quarter 'twenty to 2022 performance.

Well as our outlook for the second quarter and full year 2022.

This press release can be accessed on the Investor Relations section of our website at IR <unk> channel advisor 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 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.

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During the course of today's call, we will refer to certain non-GAAP financial measures all of which are reconciled in the press release that we issued today.

We also provide a 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. 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 Dave.

Thank you Raiford, we once again delivered strong financial results in the first quarter with revenue at the high end of our guidance range and adjusted EBITDA that exceeded the high end of our guidance range subscription revenue was particularly strong increasing 17% year on year.

This is a direct result of our brands focus strategy, coupled with consistent solid execution.

I'd like to now share a few of the highlights that keep us bullish about our long term prospects and confident that we can achieve our 2025 targets of 250 million in revenue and $50 million and adjusted EBITDA.

First our focus on brands continues to pay off with first quarter revenue from brands up 32% year on year to 45% of our total revenue and an all time high of 49% of our subscription revenue.

We're fast approaching the tipping point, where the majority of our revenues will come from brands.

Because brands are generally stickier and offer greater potential for expansion. We believe the superior unit economics, we've enjoyed with brands will continue to benefit our results as they grow to represent a higher percentage of our business.

Second our strong overall subscription revenue growth helped drive total revenue to the high end of our guidance range. Despite despite slowing ecommerce growth and a more challenging macro environment as we move beyond COVID-19.

We view this as a testament to the durability of our revenue model importantly.

Importantly, we expect our year on year revenue growth to bottom out in Q2, as we finish lapping those tough year on year comps in the quarter and expect stronger growth in the back half of the year as the comps ease.

In fact, but for the significant strengthening of the dollar in recent weeks, we would've expected a return to double digit growth in the back half of the year and for the full year.

Third we've continued to deliver strong value to our customers through ongoing investments in our platform.

Our expanding breadth of supported channels has continued to differentiate us and that's why we maintained our rapid pace of channel expansion in Q1, and we now support over 340 channels globally, including Saks, which I anticipate has the potential to be a significant channel for our customers.

Long tail G. N V. In aggregate was again larger than ebay and Walmart for us second only to Amazon and grew much faster than all three.

Additionally, the landa with a fast growing European marketplace, you've heard US mentioned before was our third largest channel for the first time, surpassing Walmart.

In addition that will speak to some of the many product innovations we've recently rolled out.

Fourth cash generation remained strong in Q1 with cash of $6 million quarter on quarter to 107 million total our.

Our pristine and debt free balance sheet and attractive returns on invested capital have allowed us to make significant investments, while still delivering strong profitability and robust cash flows.

Although we continue to evaluate opportunities to deploy our excess capital we remain committed to a financially disciplined approach and focus on opportunities, where we believe the potential returns aligned with our objectives.

In closing, even as ecommerce growth rates normalize following the remarkable couple of years of pandemic driven growth our outlook remains strong and we are well positioned to drive continued profitable growth and with that I'll turn it over to Beth.

Thank you David and good morning, everyone.

Enabling brands to accelerate digital transformation and achieve their ecommerce objectives remains our priority and we kept the momentum going in Q1.

Coming off a strong holiday season in Q4, we hit the ground running in 2022 to start our account managers worked with our clients to update their specific plans for expansion and growth this year.

Also we recently conducted our semi annual employee engagement survey, 84% of our Africa.

And we are so proud to say that employee satisfaction improved again to a record high in our company history and well above the industry benchmark.

Finally, we delivered significant advancements in terms of product capabilities access to channels and industry leadership and now I'd like to walk you through this in a little more detail.

On the product innovation front brands are actively seeking ways to streamline their ecommerce operations across the entire customer journey.

There is how they promote their products drive traffic to preferred retailers or even how they process orders across channel.

By their spring really gives us more ways to do that with an array of platform enhancements partnerships and integrations that will help brand scale and optimize their marketing selling and fulfillment operations all from a single interface.

One of our top priority is to make it easier for our customer to reach more consumers by expanding our breath of 40 channels last year, we committed to adding at least 80, new integration by mid 2022 as compared to where we were at the end it's funny it's funny.

So a terrific execution by the team we exceeded that call them nearly six months early in January and are planning to add channels at a similar rate again in 2022.

Got off to a SaaS start in Q1, adding integrations for 'twenty, one new marketplaces, including Walmart Mexico.

Our two in 17, new European locale lineal in Mexico, and Chile, and another five loans held for aliexpress as well as two new first party drop ship connections with Douglas in Germany and Austria.

The addition of these new channel Channel advisor now provides our customers access to over 340 market places in retail integration.

It also made it easier for brands to automate the creation of high quality product content by adding support for Amazon vendor content and 12, new locales, bringing the total to 19 third party in 'twenty, One first party locale.

Success, and multichannel commerce relies on more than just having a listing on a given channel. Our strategy is to go deep on key channels and enable our clients to leverage native capabilities, such a fulfillment and advertising.

With our latest product release channel advisor expands our fulfillment support by providing sellers the ability to manage and automate their fulfillment operations across additional channels, including full dotcom and wafer.

With these additional fulfillment integration seller can deliver the best on channel consumer experience, while maintaining flexibility over fulfillment options based on product selection and inventory availability.

On the advertising front, we recently established an API partnership with <unk> to expand retail media advertising opportunities for our customers.

These capabilities should be available mid year.

Channel Advisor also released managed services for advertising on Tictoc pickpockets increasingly used by brands and retailers to reach new audiences.

Continuous product innovations like these have contributed to cementing our position as a leading multichannel commerce platform for <unk>.

Last quarter, we mentioned that we were named the number one channel management vendor by digital Commerce 360 for the 10th consecutive year and this quarter I am pleased to say, we again achieved premier partner status for 2022 in a Google partners program under more exclusive criteria. This year, joining a prestigious list that showcases the top three.

8% of group of partners in the U S.

As a premier partner channel advisor has access to the training and insights needed to help brands drive long term growth and stay ahead of the fast changing e-commerce landscape.

To see a case study that tie this altogether. Please visit our website to learn more about our customer a J <unk>, a leading provider of high quality equestrian Tac apparel and home decor.

Until may of 2020 acres tackling using the TV platform to reach marketplaces, like Amazon Walmart and ebay once their firm managed it will add.

But when a new ownership team came on board. They recognize the advantage of consolidating on one platform by utilizing channel advisor for both marketplaces and digital marketing.

By working closely with our client strategy manager, who focuses specifically on Google as a J tack exceeded expectations with a 44% year on year increase in conversions for Q4, and an 85% of revenue increase during the same quarter.

Also leveraged paralyzers repricing solutions that automatically respond to shifts in demand, noting that quote once we put the reprice or in place we saw results from it almost immediately.

By partnering with Televisor AK tax captures the Amazon buybacks more frequently in their words, if brands are selling on multiple platforms and easy one stop shop support channel advisor is great.

Our momentum and landing new brand customers list evidenced through the addition of new customers such as Perry Ellis Inter parfums.

And St Michelle wine and as David mentioned earlier, our strategic partner <unk>.

In terms of growing our business with existing customers our account managers collaborating with our sales team signed expansions with customers like Macao.

Uh huh.

And Wolverine worldwide.

To summarize our platform approach is resonating with brands in Q1, we continued to build on the progress we made in 2021 and there are numerous initiatives underway to keep the momentum going.

Empowering brands to reach new customers promote their product offerings and streamline operations globally channel advisor continues to be well positioned to capitalize on the positive long term trends in our industry.

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

Thanks, Beth and good morning, everyone.

We entered the first quarter of 2022 coming off a year of record topline results robust subscription revenue growth and strong adjusted EBITDA and cash generation.

Driven by the strategic investments, we have made over the past 18 months.

We look for Q1 anticipated continued strong subscription revenue growth in the mid teens and also acknowledge some challenging year over year variable revenue comps and we expect to continue into Q2.

I'm pleased to report that our results for the first quarter of 2022 came in better than expected with revenue at the high end of the guidance range subscription revenue growth of 17% and adjusted EBITDA that exceeded the high end of the guidance range.

At the same time, we continue to achieve strong cash generation and healthy margins, even with our growth investments.

So let's get into the details for Q1.

Total revenue reached $42 $3 million in the first quarter up 8% year over year, driven by subscription revenue performance, which reached another record at 35 and a half million dollars.

And matched the 17% year over year growth, we achieved last year.

And variable revenue was $6 8 million was in line with what we factored into our Q1 outlook.

Revenue results associated with our brands cohort remains solid during Q1, we achieved total revenue of $18 8 million up 32% year over year more importantly, we realized record branch subscription revenue of $17 3 million during Q1 growing 36, 36% over last year and.

I think 49% of our total subscription revenue also a new record.

This is up roughly 700 basis points from the prior year period.

Brands customer count and average revenue per branch customer continued to increase throughout the quarter.

And our strong revenue retention is driven by the strategic cohort of customers.

Our fastest growing revenue cohort continues to be customers with greater than 100, K and these customers represent the majority of our a R. R.

Given all these factors we continue to expect kind of majority of our revenue will come from brands by the end of 2022.

Now moving on to adjusted EBITDA.

We finished Q1 at $8 2 million well ahead of the high end of our outlook of $7 2 million generating an adjusted EBITDA margin of 19%.

The adjusted EBITDA over performance was primarily driven by the pace of hiring as well as the benefit from lease abandonment, which will continue to assess across our global footprint throughout the year.

While still maintaining healthy margins, we remain bias towards growth and operating expenses had been building steadily over the last year as we made strategic investments in our product and our services and sales organizations.

As mentioned earlier, we had another terrific quarter of cash generation during Q1 with cash and cash equivalents, reaching approximately $107 million and.

<unk>, an increase of more than $6 million sequentially and $25 million year over year.

Operating and free cash flow remained very healthy again in Q1 coming in at $7 9 million and $6 million respectively.

We also saw deferred revenue increase again during Q1 to record levels of $6 million year over year.

Now onto our financial outlook.

For the second quarter of 2022, we're providing our revenue outlook range of between $42 5 million and $43 million and adjusted EBITDA range of between $7 2 million and $7 $6 million.

As David mentioned earlier, the strengthening of the dollar over the last few weeks has had a meaningful impact on our financial outlook lowering our year over year growth rate for Q2 by over three percentage points.

With respect to subscription revenue, we expect continued strength in Q2.

This reflects anticipated subscription revenue growth in the low to mid teens.

If not for the FX headwinds are expected subscription revenue growth would be at least mid teens we.

We anticipate variable revenue to decline year over year similar to what we saw in the first quarter and primarily a result of the difficult comps due to stimulus aided tier ones a year ago, because customers have been trading up to higher tiers over the past year, which benefits our subscription revenue.

Edition.

On Prime day was held in June of last year, driving higher variable revenue in Q2 'twenty one.

So despite the recent volatility we've seen with respect to currency, we will provide a financial outlook for the remainder of the year.

This is due to the good visibility we have with respect to subscription revenue coupled with the normalization, we expect to see for valuable revenue in the back half of the year.

We believe Q2 revenue growth will be the low point, even excluding the impact of FX as we finally lapped the effects of Covid and stimulus tier ones from last year.

So for the full year, we target revenue to be in the range of $177 million to $180 million and adjusted EBITDA in the range of $37 million to $39 million.

On a constant currency basis, our outlook would have resulted in a return to double digit growth in the back half of the year as well as for the full year.

We anticipate full year subscription revenue growth to be in the low to mid teens on top of the significant subscription revenue growth rates achieved in 2021.

On a constant currency basis are expected subscription revenue growth outlook would be at least in the mid teens.

So in closing our strategic focus remains with brands and we are encouraged by the growth rates, we have seen in subscription revenue.

We will remain judicious with our cash on hand, and will only pursue investments that supports our brand strategy and that we believe have the potential to provide an ROI that exceeds our weighted average cost of capital.

We appreciate the continued support of all of our stakeholders.

Operator, we'd like to now open the call to questions.

As a reminder to ask a question press star one on your telephone to withdraw your question press the pound key.

The bond with composite Q&A roster.

Our first question will come from the line of Colin Sebastian from Baird. Your line is open.

Great Thanks, and good morning, everybody.

Have a couple of questions here I guess first maybe David a little bit more on the macro environment.

I think we've seen the spectrum from our results. Thus far Amazon has said theres been really no impact on their business. We've seen certainly other companies indicate there's been a strong headwind in Europe , if not if not.

Globally. So I was hoping you could kind of drill down on that a little bit is what youre seeing channel specific.

What did you see from a linearity perspective during the quarter end and through April April if you could provide a little more detail on that and I have a follow up thanks.

Sure. Thanks Collyn.

Yes, so obviously, we saw a moderation in the in <unk> compared to <unk>.

In the middle of the pandemic and I'll remind everybody that last March we had I think the largest stimulus checks in the U S.

There was issue during the pandemic and so.

I prefer to those previously as Amazon stimulus checks because we can we can sort of see in the on our dashboards. The day those things gets sent out and deposited the spike in <unk>. So we're comping against.

You know that in particular in March and so what we saw from a trend perspective is probably the low watermark in terms of GMB was right around mid March.

Mid to late March coinciding with.

With with last year's stimulus checks, making that a tough comp but but.

But we saw it creep back up towards the end of March and saw that trend continue in April . So I think I think in large part you are looking at a stimulus comp.

That created a little bit of a bubble last year that are that obviously wasn't repeated this year.

Beyond that it's you know I'm I'm speculating of course, but I think that inflation.

You'd have to be crazy to not think that that has some effect on consumer discretionary spending one das is $456 a gallon depending on where you live.

And so I expect that that probably has weighed a little bit on discretionary spending as well, but I would say I would say the patterns were fairly consistent I would not say that they were necessarily channel specific if you look at our church you know the things that I look at it internally.

All the lines sort of followed similar trajectories over the course of Q1 and into April .

Great that's helpful and I wanted to drill down a little bit on the brand subscription <unk> or RPC.

The sort of ongoing increase there can you kind of walk through the drivers of that increase.

And how high you think that could ultimately go sort of on an apples to apples basis.

I'll give you some qualitative assessment and rich if you've got something to add feel free to join in.

One of the nice things about brands is that they can really use the entirety of our platform right. So we have obviously, we're best known for our marketplace integrations, but we also we also offer first party drop ship digital marketing retail media shelf analytics travel media right, we have a wide range of capabilities.

He has them.

99 times out of 100, when we when we initiated our relationship with the brands. They are they are starting with one particular solution because they're trying to solve an acute need but over time, they see lots of opportunity to expand with us they could be adding additional products that could be expanding channels that could be growing into other geographies. Many of the brand customers. We work with actually have a multitude of <unk>.

And so we might start with with one L. One product line and then expand into other product lines. So.

All of those things contribute to.

Two.

A pretty significant expansion opportunities brands one of the things that we said at our analyst day.

Is that we felt that just on our existing customer base alone, we could roughly quintuple our revenue meaning at the time that we did our analyst day I think we were at about $50 million in revenue from brands and we felt the addressable market of our share of wallet within our brand customers that we already had.

Was at least $250 million. So obviously, we're we're we're also focused on adding additional logos as time progresses, but the the expansion opportunity with brands as.

Is is pretty significant and remains an important focus for us.

Yeah, and the only thing I'll add there Colin is I mentioned in our prepared remarks that.

The fastest growing revenue cohort.

Our customers with greater than 100, K and that's driven by our brands focus so just to put some numbers behind that.

Yeah.

Site or how our brands are focused on brands customers. There. It also with regards to our net revenue retention.

We mentioned at analyst day over 100% again, driven by our brands focus there. So just to put some numbers behind David statements.

Thanks, and just to clarify when you.

Beyond sort of the size of the brand.

R R.

In terms of monetization growth or where pricing is part of the expectation that youll be able to drive higher pricing.

As brands are adopting more of these services.

Yeah.

Theres a few different ways, we can grow right. So if they're adding additional products from our platform or expanding to new geographies or additional product lines that they have.

Certainly we know those come those come at a price right. So we charged for those various services.

And of course, I neglected to mention that just growth itself. So as brands join our platform and they they sell more and they grow GMB. That's also another another growth vector for us.

But yeah in virtually all cases, there's there's an opportunity to monetize that expansion, which is why youre seeing that expansion and.

A significant contributor to the expansion of subscription revenue, we have with brands.

Thank you one other thing to add there also is that our brands customers tend to be more managed customers.

So that also is a driver of higher average revenue per customer utilizing our ecommerce experts every day to advance their ecommerce objectives and they pay a premium for that.

Thanks.

Our next question will come from the line of Zach Cummins from B Riley Securities. Your line is open.

Yes, hi, good morning, Thanks for taking my question.

First one for me rich can you talk about some of the currency assumptions youre, making here in the Q2 guidance and kind of what's being baked into that full year outlook as well.

Yeah, it's pretty remarkable what we've seen just in the last two weeks for that matter.

David our forecast a couple of weeks ago.

They made a few adjustments more recently and it was really surprising to us how much of an impact that had on Q2, let alone the rest of the year.

We mentioned in Q2, roughly a three point impact.

Which essentially.

If not for FX, we would be right in line with consensus current consensus for Q2.

For the remainder of the year.

We could see.

Anywhere between four to five point impact as a result of FX.

That's what's baked into our current model.

Yeah.

Understood that's helpful and in terms of the investments I know for the last probably.

A year plus you've really been working to build out the sales force and investing in new product innovation.

Can you talk about where you're at with the Salesforce at this juncture in terms of having enough I guess quota carrying capacity to be able to sufficiently meet the demand that's in front of you.

Yeah, He's act as David.

Really pleased so we came into the year you may recall with a with a bit of a gap there on on sales capacity and we've worked really hard over the course of the last four months to to address that and I would say we are very close to completely closing the gap, we're actually trying to hire to our year end target.

And so we're just a few head count short of that and I anticipate that.

By the end of Q2, we should have that fully resolved and hopefully with a little bit of luck, maybe actually even over here a little bit to create some bench, but we.

We made we made strong progress in the in the quarter and into April on that front.

Understood. That's helpful and final question geared towards the can you talk a little bit about.

I guess the marketplace expansion strategy it seems to be pacing well ahead of expectations from the initial targets that would put out there.

Has there been any sort of key theme in terms of specific regions or specific marketplaces that.

A majority of your brands customers have been interested in breaking into.

Thanks for the question I think it's a good one.

I think you know youre right on the money and that we focus on what our clients are looking to do in terms of expansion, there's still quite a bit of opportunity across Europe as well as a lot of emerging opportunity in Asia Pacific I would say the expansion efforts have certainly done a weighted strongly in those regions.

We certainly added channels.

In the United States and continue to do so that the majority of our.

Activity over the last year has been really focused on European and Asia Pacific marketplaces.

And integrations, we've also seen a lot of activity and one key states, which has driven a lot of connection so.

Beyond that you know we have a wide variety of customers and aircraft fleets on a number of different things and thats whats pretty cool actually about marketplaces as they focus on specific areas or specific product categories and so you know as our customers focus on building out their footprint, we follow same itself.

You know, we just tend to focus on where the market is going in terms of new and emerging marketplaces, and where customers are trying to reach more consumers.

Got it that's helpful. Thanks for taking my question then the best of luck with the rest of the quarter.

Thanks, Ed.

Our next question comes from the line of Matt Pfau from William Blair. Your line is open.

Great. Thanks for taking my questions guys. Just wanted to ask on in terms of the demand environment. So so obviously there is some impact here on the variable revenue from the G. M D front, but in terms of what youre seeing with the bookings relative to either new customers or expansions with existing customers.

Is that impacted at all by some of the normalization of e-commerce or how is that continued the momentum that you guys have been seen.

Hey, Matt.

Yeah, I think the demand environment remains strong.

Obviously during Covid there were a number of companies that.

Went into high gear in terms of their digital transformation and that was that was helpful to us but.

There are many many companies that you know are finally getting to the point, where they can address these things right. They spent the last year or two kind of more in triage mode, where they were dealing with either supply chain or or fulfillment or staffing.

All of those kinds of things and so I would say the demand environment remains remained strong.

Gotcha, and I think part of the some of the initiatives Beth has done with her team is sort of being more strategic with some of the enterprise clients that you have and maybe sort of thinking about longer term road maps that they have is any any change in in I guess, what you are hearing.

From customers in terms of their longer term plans relative to either marketplace expansion or e-commerce in general.

I'll have that's come on that but I would say at a high level I don't really see any change I think.

Nobody expected e-commerce growth rates during COVID-19 to continue indefinitely and trees don't grow to the sky per se, but with.

Everybody understands the continuously increasing importance of e-commerce, the probability that its Scott.

Lot of room to grow in terms of share of wallet and it's not just the growth of E. Commerce for brands. It's also about the their transformation to get closer to the consumer.

Another instructive industries like.

Just look at the media industry right.

Nobody nobody is placing bets on blockbuster video anymore right. It's all about content owners getting closer to the consumer.

It's the Internet has a as a way of compressing the distance between producers and consumers and so in E. Commerce, it's really not any different and brands who have proprietary products are.

Recognize that the path to the consumer is shifting rapidly and in many cases museums gets closer to how they how they reach that consumer so that's the long term kind of fundamental.

Secular dynamic that is changing a lot of behavior on top of just the overall long term growth of e-commerce.

And Beth I don't know if you had anything you want to add just around sort of the customer commentary.

The roadmap.

Yeah, I mean, I would say it's steady as she goes right. So we certainly saw an acceleration of interest and activity and commitment from brands as they realized.

The digital transformation just needed to move more quickly, but I would say you know these efforts are.

Tremendous and time consuming so you know as as brands look to grow their direct to consumer businesses expand on marketplaces build out their fulfillment capabilities.

These things take time and depending on their global footprint and how many countries they want to do that with and how many brands.

It takes a consistent and steady effort and sell while significant progress was made last year and we've expanded channels to meet and lead that demand.

Much more progress that has yet to be made so we are continuing to invest in our enterprise level of service.

We're continuing to apply those new resources to enable those customers to execute their expansion plans and as I mentioned you know every year. We go through an annual planning exercise and we really focus on so what are we doing this here and what's the quarter by quarter plan and how many new channels or are we going to bring on board and so we are in execution mode and I would expect.

That's going to go on for.

They're multiple years with our existing clients and then as we acquire new logos will start the process again with them.

Great and just one more for me and on the Commerce network, maybe just an update on those efforts and what you're seeing there.

I'm sure I'll take that one so.

Commerce network is.

Going well, so we have that.

Our.

Capability that brings both sides of our networks together. So it gives our partners an opportunity to log into our software on a regular basis to seek out and find new retail and brand sellers to bring to market and it also enables our customers obviously to find more channels to go to market.

And so this network and create a matchmaking opportunity and expansion opportunity for both sides of that network and I would say we've seen steady engagement. We've had some very nice engagement as we went through Q1.

The heat of Q4 and execution sort of you know.

Die down a little bit and our.

Customers and our partners started focusing on the plans for the year, we got a lot of profiles hearing in a lot of engagement happening.

Seen an uptick in our partner profile creation and sharing and so I think it's a it's a steady as she goes we are nurturing the platform. We're continuing to plan for and released new capabilities throughout this year and that roadmap goes into next year as well so you'll hear us talk about it more as we gave you.

Updates in future, but its going as planned thank you.

Yeah.

Great. Thanks, guys I appreciate it.

Thanks, Matt.

Okay.

Once again as a reminder, that's star one for a question Star one.

Our next question comes from the line is Thomas Forte from D. A Davidson you may begin.

Great. Thank you for taking my questions.

So the first one David you talked about inflation.

Commerce level I'd like to know about inflation at the channel advisor level, how are you managing it.

<unk> labor inflation.

Hey, Tom Thanks, Yeah. So.

We increased our merit increase for the year for our employees was.

Significantly higher than we would normally do in a year I believe it was more than two X kind of a normal annual increase as we work to keep up with the market and make sure that we're.

We're being thoughtful and standing by our employees. So that's that's been a part of it.

We also kicked off.

Our pricing increase at the beginning of Q2, and so we increased our price book.

And obviously that will take time to work through our entire customer base, but.

We view that as you know.

Helping to helping to offset at least partially offset some of the increases in wages that we've seen.

Great and then my second question and I have.

One more after this one.

Wanted to get your thoughts on the e-commerce industry.

For two items, one discretionary spending returning to trouble.

<unk> seen some companies talk about that and then the second apples emphasis on privacy.

<unk> the efficacy of digital advertising.

Yeah, I'll start with the first or excuse me the second around around privacy I think that's a trend that's just going to keep going right, whether it's pressure from Apple.

Maybe from from Google and some of their App policies.

So on the regulatory front right I don't see an environment, where privacy considerations don't get more stringent overtime and so.

For us I think it's actually been a bit of a tailwind we don't we don't use <unk>.

Cross channel cookies, we're not we're not trying to track users across channels.

And what this is really done in my view is this is this has taken what has historically been kind of a duopoly between Facebook and Google and kind of cracked. It open. So retail media is one of the fastest growing segments for us.

Things like Amazon advertising or in any of the advertising programs that exist across across different.

Retail sites.

And our strategic partnership with <unk> is going to help us.

Attached to a much broader set of those so.

So so privacy I think is actually driving an intense desire to have more first party data and two.

And creating an opportunity for these sites to monetize more directly. So so I think net net it's a benefit for us and probably causes continued AD dollar shift from again some of.

Some of the traditional behemoths to more and more dedicated sites.

Dear to your first question about inflation and discretionary spending and travel.

I'm not I'm, not a macro economist but.

I think I do think the consumer remains healthy.

We're obviously in an uncertain environment as it relates to increases in interest rates, what that what that does and does.

The economy sort of have a soft landing or does it slow down abruptly I saw that the jobs report just came out and it's really pretty strong.

It's probably a lagging indicator you're starting to see.

Unprofitable companies and startups contemplate layoffs, so maybe that's the Canary in the coal mine, but.

It's as I said in response to an earlier question I think it's it's hard to imagine that.

With fuel prices, where they are with you now.

Food when you look at the basics right the necessities food fuel energy.

Those costs have gone up pretty pretty substantially and while I think the consumer is pretty strong.

You have to believe that that has some some impact on discretionary spending travel.

I do think that there is a lot of pent up demand too.

Get out of the house and go somewhere.

Whether that's a meaningful impact on discretionary spending I don't know, but our view the way we look at the rest of the year is that we think first quarter and at least the first part of second quarter are kind of the toughest comps again because of stimulus checks a year ago, we had the child tax credit.

Going out on a monthly basis for a period of time and and that's and that is going away and you have inflation so but.

We expect the comps to ease and for GMB growth too.

To be moderate and sort of normalize in the back half of the year. We have we have prime day, that's another point right I think Richmond in his comments.

Last year Prime day was in Q2 this year, it's scheduled for July So that's Q3 so.

That'll be a pretty interesting moment to see how how prime day compares year over year.

But you know, but we think the back half of the year looks a little bit more normal compared to the first half of the year.

And Tom I would just like to add.

Okay.

I'm sorry to interrupt so just one thing to add.

Specific to financial modeling.

When you mentioned travel we are anticipating.

Some increased travel in the back half of the year as well as in 2023, almost a return to you.

To previous levels, so theres some theres some additional expenses to be incurred.

As more.

<unk> opened up in travel has become more acceptable to <unk>.

Factor that into your financial models.

Excellent alright.

And my third question is almost like a case study David you said something that I thought was remarkable on Atlanta.

Now the number three spot ahead of Walmart.

Is that because.

We've hit some sort of inflection point for e-commerce penetration for apparel in European markets or is it because maybe walmart's emphasizing grocery.

But if you were to step back what's enabled us to achieve the three spot on your <unk>.

Yes, I think I think it's probably a couple of things I think I think Walmart during the course of the pandemic.

So all of these products when you do when you go to one of these sites, they're typically showing up as a result of some kind of search.

And I think Walmart shifted some of the emphasis towards first party products right. Because if you think about what people were buying online. It tends to be you know consumer staples and stuff like that so I think most of our exposure is to marketplace.

And I think there was there was a little bit of a shift towards towards towards one P and so that's.

That's another thing that I think we will lap against you know.

In Q1, and Q2 that should that should dissipate from it from a year on year perspective.

But putting that aside for a moment I think the lando, probably the so for those who aren't familiar it's a it's a European based in Germany, It's a European fashion retailer or fashion marketplace and.

I think one of the things that's Linda has done very well that other marketplaces haven't necessarily done as they really work closely with the brands to help with storytelling and it's not just like everybody gets the same format, one picture kind of transactional sites.

Because it's so focused on fashion. It you know it really provides.

More of a storytelling type of environment and they've done a fantastic job rolling out fulfillment services and continue to.

Established themselves as and one of the things I've said in the past is that the way to compete in the space isn't necessarily to go and be the next big General merchandise marketplace. It has to go be be a winner in a specific category. Because every category has different shopping characteristics. If you think about how automotive is right. So automotive is very geared towards make model year.

Which we call fitment and how to videos and community fashion, obviously is much more image and video based and so you can build sort of.

Category specific experiences that are that are really compelling compared to sort of general merchandise marketplaces. So I think flat is just.

Frankly executed really well we've had a great partnership with them I know they view channel advisor as a strategic partner because we.

We're able to bring those brands on not.

Not only quickly built a high quality integration that ultimately translates to a good consumer experience, which is important for everyone.

And so we've enjoyed a very a very fruitful relationship with with them and I anticipate it will continue to grow nicely for us.

Great. Thanks, David Thanks, Richard Thanks Beth.

Thanks, Tom.

Our final question will come from the line no Josh Reilly from Needham Your line is open.

Yeah.

Hey, guys. Thanks for taking my question nice job on the execution here in the quarter in a challenging macro.

I'm going to throw another macro question out here.

Much of a divergence in trends are you seeing between the U S and Europe and maybe the rest of the world since the war in Ukraine has started are you seeing Europe slow e-commerce trends significantly faster than the U S or is it closer to parity.

Yeah, It's an interesting question and I actually have to go back and re run some of my analysis, because frankly, the biggest impact right now is as rich said currency right. So we have.

Fairly muni exposure meaningful exposure to the British pound into the Euro and if you just look at our chart over the last couple of weeks.

Of.

April or excuse me of <unk> of April .

You'll see that.

Unusually rapid strengthening of the dollar compared to what you would normally see during most of two to three week periods and so so we've seen that that's actually the biggest impact and so I need to go back and sort of recourse neutralizing the effects of currency, but I.

I would say.

Just from a from a demand perspective, we continue to see strong demand in Europe .

I think a lot of that is predicated on a lot of the work we've done around product. So Beth was alluding to some of the channel expansion opportunities that we have that we've had in a good bit of that is based in Europe . Europe is more fragmented from an ecommerce perspective so.

More we sort of cover that fragmented space the more attractive we are to those who want to sell in Europe . So.

So thus far I would not say that the I can tell you that we've seen.

A meaningful decline and I suspect that once we adjust for currency I would I would say, it's actually a pretty strong area for us at this at this point and we don't we.

We don't have a significant exposure at least directly to eastern Europe at this point so.

But most of our exposure is U K, Germany, and then from there probably France.

Spain, Italy, maybe maybe Netherlands so.

So I don't think at least from a direct standpoint that we're seeing a meaningful impact.

At this point anyway.

Got it that's helpful. And then maybe just one on gross margin given the lower variable revenue here, how should we think about gross margin throughout the rest of the year.

And with products like tropical media and.

Randy analytics, which we know are not based on G. M. D are studying the variable headwind to gross margin.

Yeah.

Yeah.

Obviously some of the success we saw.

With art with our margins over the last couple of years and continue to see even further now now was driven by variable revenue and we said that.

Most of the most valuable revenue falls right to the bottom line.

We continued to focus on.

Things, we can control, which is subscription revenue again.

Again, as I mentioned, 17% growth in Q1.

The there is no.

With regards to gross margin, we've made investments there in support of our customer base.

Hugh.

You should expect some.

Some normalization in our in our Cogs line and gross profit in the back half of the year as the investments start contributing.

Two two expansion opportunities with our brands customers base.

But if you see over the last couple of quarters. There has been some deceleration in.

In colleges.

And gross margin.

Sorry of course.

The Cogs line.

And.

Yeah, I just think that.

There's a lot of opportunity there.

Two.

Expand our relationships with our customers through this investment and we will see some some top line benefit.

Future.

Got it thanks guys.

Thanks, Josh.

Thank you I'm showing any further questions in the queue I'd like to turn the call back over to Ray for any closing remarks.

Thanks, Victor and thank you everyone for joining US today, we look forward to speaking with you again soon.

And this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Yes.

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