Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Q2 2019 Channeladvisor earnings Conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference is being recorded I would now like to introduce your host for today's conference Traci Mangini you may begin.
Thank you Jamie good morning, and welcome to Channelize Channeladvisors Conference call for the second quarter 2019. My name is Tracy in Jeans Director Investor Relations and with me on the call today are David Spitz, Channeladvisors, Chief Executive Officer, Rich, calling out a challenge Pfizer's Chief Financial Officer, and that's the goal yet channeladvisors newly appointed Chief operating officer.
This morning, we issued a press release with details on our second quarter 2019 performance as well as our outlook for the third quarter and full year 2019. This press release can be accessed on our Investor Relations section of our website at <unk> IR Dot Channeladvisor Dot com.
In addition, this call is being recorded and a replay will be available after the conclusion of the call.
Now 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 could differ materially from expectations.
These results are summarized in the press release that we issued today.
For a further discussion of our material risks and other important factors that could affect our actual results. Please refer to those contained in our most recent Form 10-K or Form 10-Q , as well as other filings which are available on the F.B.C. website at www Dot FCC Dot Gov.
During the course of today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, which excludes depreciation amortization income tax expense interest and stock based compensation expense.
Our press or press release that we issued today include GAAP to non-GAAP reconciliation for gross profit gross margin operating expenses operating loss operating <unk> operating margin adjusted EBITDA non-GAAP net loss and free cash flow. We also provide a GAAP to non-GAAP reconciliation schedule in our supplemental financial presentation posted on the Investor Relations section of our website at IR Dot channel advisor Dot com.
And finally at times in our prepared 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 quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future with that let me turn the call over to David for his prepared remarks, thanks, Tracy and good morning, everyone. We're pleased to report second quarter revenues of 31.9 million near the high end of our guidance range continued strong expense discipline also yielded adjusted EBITDA of three point onemillion significantly above our guidance range and up over 600 basis points as a percentage of revenue compared to the same period last year free cash flow 2.3 million in the quarter was also very strong.
Overall GMT performance was stable with continued weakness on ebay offset by strength on Amazon and Walmart, We believe Amazon, where we saw an uptick in GMB growth in the second quarter compared to the first quarter, so incremental share gains from its investments and one day prime delivery.
We also saw good results with newer marketplaces in particular, Google shopping actions after launching a year ago became our fourth largest marketplace by geography in the second quarter with more and more sellers going up.
Target plus small school early and invitation only have also shown very strong results for sellers. We ended the quarter with 142 marketplace integrations globally up from 133 at the end of last quarter, highlighting our industry, leading breadth of channel support.
Importantly, our overall sales performance bounced back from a tough first quarter with a few key highlights I'd like to touch on.
First bookings in the quarter were the best we've seen in two years. Although this partly reflects viavi carried over from the first quarter.
Coupled with continued improvements in churn and downgrades. We also had our best overall net bookings performance since the fourth quarter of 2017 indicate an incremental progress.
Second the quarter included continued strong performance in our EMEA and Australia regions with solid revenue and bookings growth.
Setting the stage for a positive revenue growth outlook in both regions. Despite continued headwinds in China, Our international revenues increased 6% in the second quarter compared to the same period last year, partially offsetting a decline in the U.S. and now represent more than 25% of our total revenues, reflecting the strength in our EMEA and Australian operations.
We also achieved historic high in terms of average deal value for new logos in the second quarter and related about a third of our new logo sold in the quarter with brands, reflecting our continued focus on signing larger customers and working with more brands, who are embracing digital channels. We're also seeing early success positioning channeladvisor as a full stack ecommerce platform for brands, whether it's helping with digital marketing them where to buy the marketplace management at the drop shipping and fulfillment.
Brands recognize us as a leader in the space with industry, leading breadth and a global footprint in short we're seen as a strategic partner that brands can grow with along their digital journey.
We also can they continue to see strength in customer expansions, reflecting the strategy many of our newer customers starting to specific solution like Amazon advertising or dropshipping and quickly grow into other solutions because they prefer to keep everything on one platform. For example, during the quarter, we expanded relationships with notable brands like Eightsix and avocado Green brands and although our net customer count declined in the second quarter. We saw the number of brand customers increase which is positive.
Customer count declines remain concentrated among smaller and retail oriented customers.
Now despite our progress this year and some of those key highlights our outlook for medium term revenue growth remains muted, while we've seen strong momentum in EMEA and Australia that momentum has been offset to a certain extent by headwinds in China and the U.S.
We firmly believe we can improve our U.S. performance overtime, especially in new customer acquisition, which has been a soft spot for us in recent quarters, but we also believe it is important to simultaneously improve our profitability to ensure that our investments are aligned with that growth outlook.
Consequently, we conducted a thorough review of our business during the second quarter to evaluate expense levels in various areas of the company and concluded it was appropriate to implement a reorganization of our operations to reduce headcount and other costs to better align investments with our near term growth profile and ensure that we're deploying capital appropriately.
As a result of that evaluation, we decided to make two important changes to our business, which we implemented in late July .
First we made the strategic decision to discontinue our physical operations in China.
China is an important region in E Commerce and has been part of our expansion strategy for a number of years.
After several years of early success. However, we began to faced execution challenges in 2018, which we've spoken about previously and while we've made progress improving results since our reorganization in China in late 2018. It has not been enough to indicate an inflection in revenue growth over the next 12 to 18 months.
Coupled with the fact that our China operations up in a net consumer of cash and taking into consideration the less hospitable trade and political environment between China and the U.S. The currently exists we decided that our current course and levels of investment we're not sustainable without a faster return to revenue growth in the region and so we made the difficult decision to discontinue physical operations there.
Now I want to be clear that we're going to continue to serve customers in China as well as sell to new Chinese customers Opportunistically from a base of operations in Australia, just as we did prior to opening an office in China, a few years ago.
Because China has a higher churn rate than other regions and because we do not expect to backfill that churn with comparable sales levels into China going forward, we do expect revenue declines to accelerate in China for the remainder of the year and reflecting this in our updated guidance. Despite the expected impact to our revenues. We expect this change to positively benefit our adjusted EBITDA and cash flow for the remainder of the year and going into 2020.
Second given our modest revenue decline in the U.S. compared to our growth in EMEA and Australia, we decided to really reduce head count in the U.S. some of which we anticipate to offset with increased hiring in Europe and Australia in support of these regions.
These reductions were concentrated in DNA, where we felt we had opportunities to improve efficiency and in select areas, where we intend to rebalance our head count geographically for example, we intend to migrate some of our customer support function to our Madrid facility.
Both to improve our support for our growing on their customer base and to improve our cost structure. We also took the opportunity to evaluate layers of management that span of control and determine that there were selective opportunities to simplify our management structure in the process.
Overall, this reorganization impacted about 10% of our employees with roughly half of that attributable to discontinuing our physical presence in China and the rest primarily confined to our US operations. We believe that these head count reductions, while never easy should better align our expense profile with our growth expectations in various regions and improve our overall cash flow and profitability as reflected in our increased adjusted EBITDA guidance for 2019 that rich will detail in a moment.
We're also announcing the Paul 40, our Chief revenue Officer. Since 2017 has decided to leave Channeladvisor after spending the last two and a half years commute into North Carolina, Paul I'd like to spend more time with his family and pursue new opportunities Paul's made valuable contributions to our sales organization, which we can continue to build on going forward and we'd like to thank him for his work and wish him. The best of luck going forward.
Consistent with our objective of streamlining our operations and simplifying our management structure, we do not intend to backfill the chief revenue officer position at this time.
Instead, our EMEA and APAC sales leaders will report to me directly and Paul Colucci, a longtime Channeladvisor leader, who has been with US for 11 years will step into the role of head of North American sales and report to me.
Paul has successfully run our enterprise and brand sales teams in the past and most recently spent the last two years building up our strategic partnerships and indirect sales channels with solid results.
Paul will hit the ground running with an immediate focus on improving our U.S. results and will also retain responsibility for our strategic partnership efforts I'm excited to see Paul's responsibilities expand and work more closely with him and our other regional leaders, who performed so well for us.
Our anticipated improvements in profitability and cash flow our important element of our strategic framework as our core business matures in particular by increasing our capacity to fund the pickup potential acquisitions or excel and to accelerate our work with brands. We believe that our healthy balance sheet with no debt a strong cash position and our focus on cash flow generation provide us the flexibility to invest appropriately in growth opportunities including acquisitions.
For instance, we feel great about our value proposition for brands, but we also believe there are many other areas where brands could use help that align with our strategy of building out a full stack solution for them and we think there are opportunities to jumpstart those efforts by acquiring those capabilities versus solely building them organically.
We are particularly interested in companies that offer tech enabled commerce for brands, who could benefit from our global sales reach.
That said valuations appear generally elevated to us and while we're eager to execute on our acquisition strategy. We're also financially disciplined buyers. So it's difficult to predict when the right opportunities will arise.
And of course, our product teams continue to make great strides in our platform.
In April we rolled out a simplified and more modern user experience and are thrilled with the results about 95% of our users have now switched over and so that migration is nearly complete and the feedback has been exceptionally positive. We think this newer user experience will help improve the speed and quality of customer onboarding and lead to improved retention rates, especially for newer customer newer customers.
We also launched a pilot for Standalone Amazon repricing. After we're calling elevate our first truly zero touch self sign up and self launch App, we anticipate that absolutely elevate can expand our addressable market by cost effectively bringing some of our capabilities to new customers through partnerships and serving as a source of potential future customers for our full platform.
Over the last year, we've made huge improvements to our algorithmic repricing capabilities and many customers who previously used other vendors for this capability have migrated over to channeladvisor simplifying their operations and saving the money in the process.
Now these capabilities are available on a standalone basis, and we're excited to see how this evolves.
In conclusion, our core business remains solid and while we have work to do to improve our revenue and customer acquisition performance in the U.S.. We continue to see strong progress with brands and our international regions and we believe our improved profitability positions us well to invest in key growth initiatives and acquisitions going forward.
Finally, it is my great pleasure to announce the promotion of Pepsico VR to Chief operating officer.
That's joined US two years ago as VP of global services and has demonstrated that rare combination of strategic thinking strong leadership and an ability to roll up our sleeves and get into the details of our business on a customer by customer basis under her leadership, we've experienced improvements in churn, our postpaid customer engagement and our ability to expand with customers in her new role. That's responsibilities have expanded to include general operations.
Human resources, and the products and engineering.
Put simply that get things done and I'm thrilled to see her take on new challenges in particular this will allow me to focus more of my attention on sales strategic partnerships and potential acquisitions as we continue to seek improved revenue growth and profitability in the years to come.
Thats has joined us on the call today, so I'm going to ask her to spend a minute introducing yourself Beth thanks, David and good morning, everyone. I am very excited to be taking on this new role and I appreciate the opportunity to share a little about my background in vision after spending over two decades and customer facing roles spanning supply chain marketing sales operations customer operations and services at Lenovo Niobium I joined Channeladvisor to lead the global services team I have been in this role now for nearly two years overseeing implementation technical support account management and managed services delivery I am proud of our accomplishments. During this time, we have improved customer engagement and hearing every client has an account management contract to that focuses on their full relationship with channeladvisor and in the vertical in which our client compete.
And we've established an effective leadership structure and global standards across roles client deliverable and operational management.
These efforts have produced improvement and major metrics associated with client management, including reducing churn and client contraction and increasing client expansion, all while maintaining high customer satisfaction as measured by transactional survey.
The pace of innovation continues to accelerate in the world of ecommerce everyday something changes that eliminates or creates new opportunities for our customers to gain advantages over other seller. We at Channeladvisor provide the technology and strategic insights that enable our customers to be successful and finding that next effective strategy that leads to their success is why I get excited to come to work every single day in my role as COO I see an opportunity to lead our organization forward by continuing to drive leadership in the market through innovation and our platform capability integrated operations to ensure we execute in the most effective and efficient way and of course to continue the daily engagement with customers to ensure their success.
I am looking forward to working with David and the executive management team in this new role to further develop our business and deliver positive herself.
Thanks, Beth and congratulations on the new role and with that I'd like to hand, the call over to rich for his prepared remarks, you will recall that rich stepped into the CFO role here in May and I can say that rich has been doing a fantastic job, so rich or do you.
Thanks, David I really appreciate that and best congrats on the walls or promotion. Thank you.
Good morning, everyone and thanks for joining the call today.
I'd like to start off by reviewing some of the highlights of our second quarter performance.
And then transition to a more detailed discussion of the business review conducted during the quarter Capitalone allocation plans for the future and finally, how all of this impacts our Q3 and full year guidance.
So let's discuss some of the details for the second quarter and please bear in mind is consistent with our historical practices. My comments regarding expenses will be on a non-GAAP basis, and all comparisons on a year over year basis, unless otherwise specified.
As David mentioned, we are pleased with our second quarter results with revenue, finishing at the high end of the guidance range significant adjusted EBITDA margin expansion that easily exceeded the high end of our guidance range and strong free cash flow.
Total revenue was 31.9 million down, 2% or down 1% on a constant currency basis.
Breaking it down by revenue type.
Fixed subscription fee revenue was 20 $425.7 million or 81% of total revenue.
Regarding revenue was 6.2 million, representing 19% of total revenue.
Fixed revenue was up 4% for the quarter compared to year ago period, and continued to increase as a percentage of total revenue.
This positive mix shift toward higher recurring revenue was driven by our marketplaces and digital marketing offerings.
Variable revenue was down 21%, which was primarily driven by unusually high partner revenue under our other revenue segment in the second quarter of 2018, making for a difficult comparison.
Also contributing to the decline in variable revenue was weakness in ebay GMP.
However, we do expect a year over year comparison for ebay GMB to ease in the second half of 2019.
Looking at revenue by product, our marketplace's platform revenue was $23.6 million for the second quarter, essentially flat compared to the year ago period and was 74% of total revenue.
Importantly, fixed revenue for marketplaces was up in the quarter.
Digital marketing posted another solid quarter with revenue of $4.7 million up 3% from the prior year period and represented about 50% of total revenue.
Amir was.
Primary driver for growth in the quarter as was Amazon Amazon advertising in the us.
There is a growing trend of convergence of our digital marketing the marketplaces offerings lending increased up sell opportunities that we expect to continue.
From a geographic perspective, as David mentioned revenue from outside the U.S. increased 6% and continue to increase as a percentage of total revenue from the year ago period.
The strength in international revenue was driven by EMEA, and Australia, which were up 9% and 6% respectively.
And despite declines in China, which was down 20% from year ago period.
EMEA and Australia have been great success stories for us with their growth driven by strong leadership and great sales execution.
Further EMEA benefits from a relatively higher concentration of brands customers, which continued to bear had better unit economics compare to retailers.
Now, let's talk about some customer metrics.
Let me preface this by repeating that a meaningful driver of the positive net bookings for the quarter was expansions of existing customer contracts, which do not however add to our customer account.
As David mentioned earlier, we had several new big name customers, who started out with relatively small contracts late last year, a quickly saw the value and strength of our platform and proactively reached out to us to expand the products or level of service we provide.
We ended the second quarter with 2715 customers down 2% from the end of the first quarter. The decline was driven by our smaller customers as well as retailers.
As for average revenue per customer it continued to improve reaching $46757 for the second quarter on a trailing 12 month basis, an increase of 4% from year ago period.
The increase reflects the continued shift to larger customers, particularly those with annual contract values over 100000, and an increasing percentage of customers that are brands for perspective in the second quarter brands on average had a 27% higher average revenue per customer than retailers.
As for the rest of the PML adjusted EBITDA improved substantially to $3 million for the quarter up $2 million and representing adjusted EBITDA margin expansion of 600 basis points from the prior year period and this is before recognizing any of the expected benefits from the reorganization completed in July .
The strong gains in adjusted EBITDA were driven by improved efficiencies and lower operating expenses.
Specifically, we benefited from lower compensation expense and approximately 1 billion of lower costs associated with our annual E Commerce Conference.
These declines were partially out partially offset by higher GA expenses, primarily due to executive severance of approximately 500000 recognized in the second quarter of this year.
Turning to the balance sheet, we finished the quarter with cash and cash equivalents of 49 million an increase of 600000 during the quarter and $1.8 million in the first half of the year free cash flow of $2.3 million was strong for the quarter and we expect to be cash positive for 2019, despite payments in conjunction with the reorganization of our operations early in the third quarter.
These results highlight a significant improvement from the net use of cash of $6.2 million in the full year 2018.
So that wraps up the review of our second quarter performance I'd like to shift gears now and focus on our recent business review of operations.
Oh my appointment to CFO in May we began a detailed review of our business focused on understanding the sales challenges we faced at the start of the year and how our expense profile stacked up against our revenue guidance issued on May nine.
As David mentioned earlier, we enjoyed a bit of a sales rebound in the second quarter with the best quarterly net bookings results, we've seen since the fourth quarter of 2017.
Driven by continued outperformance in EMEA and Australia with also some improvement in the US that said overall bookings growth in the U.S. remains challenged so we intend to allocate our resources to sharpen our focus on improving results in the U.S., while investing appropriately to support our momentum in EMEA and Australia.
With regard to our analysis of expenses, we went through an extensive companywide process to identify areas of our business that were not providing appropriate returns to support our operations.
This included a full assessment of every department throughout the organization and every geography with a focus on capital allocation.
Our assessment resulted in some difficult decisions, specifically for our us and China operations.
As a result of the actions we took based on this assessment, we expect to achieve gross annual operating expense savings of approximately $8 million.
As David mentioned earlier, we intend to reinvest some of these savings to fund areas, which strong growth potential and as a result, we expect annual operating expense savings to net over $5 million.
Now let me take you through some of the details.
Regarding China as noted earlier, despite some net bookings improvement in the first half of 2019 customer churn continued to be a challenge there and remain expensive to support our operations. So we ultimately made the decision to close our office in China, and while we will continue to support our customers in China from Australia office, we recognize that these customers and their revenues now we have an increased risk of churn as a result of this decision.
Now, while we expect the closure of the China office to weigh on our 2019 revenue performance. We expect this decision to provide net annual operating expense savings of over $2 million.
Let me U.S., we identified opportunities to improve expenses, primarily within the G. In a category, but also within our sales and R&D our organizations by consolidating responsibilities.
Moving resources to other areas of our business or lower cost markets in which we operate to better support day to day operations.
In addition, we also took a close look at our current vendor relationships and spend.
Our plans include the reallocation of some capital to other areas of our business that are producing strong results or need for capital injection to reinforce early signs of improvement.
Such investments include increasing our direct sales capacity in the us and Australia and services and support personnel in EMEA, where a meaningful percentage of our customer contracts are managed relationships.
On a net basis, we expect these efforts to provide annual savings of over $3 million.
I want to stress that we are confident that the actions, we took will drive meaningful improvement and adjusted EBITDA margins over the remainder of 2019 and into 2020.
Now, let's talk about guidance.
Our guidance for Q3, and the remainder of 2019 reflects the closure of our office in China, which we anticipate will result in an acceleration in revenue declines from this market.
Our guidance also reflects the overall operating expense reductions from the reorganization efforts in the us in China.
And the potential foreign currency impact on the British pound against the U.S. dollar, which primarily impacts our EMEA operations.
As a result of these factors we are issuing guidance third quarter 2019 guidance of 31.5% to $32 million in revenue and $4 million to $4.5 million and adjusted EBITDA.
Now, we do expect to incur approximately $1 million in expenses in the third quarter related to the reorganization actions, but given the nature of these onetime expenses they will be excluded from adjusted EBITDA.
For the full year 2019, we are adjusting our guidance compared to what we previously issued on May nine.
We are guiding to a range of $129 million to $131 million in revenue compared to our previous range of $131 million to $134 million.
However, we are raising our adjusted EBITDA guidance to a range of $17 million to $18.5 million compared to our previous range of $15 million to $17 million.
At the midpoint. This represents an improvement of adjusted EBITDA margin of 600 basis points compared to 2018 and positions us with a stronger more efficient model to leverage growth in the future.
In closing, we look to the future with a strong and driven management team, a leaner and more efficient operating structure and a dedicated employee base of whom I could not be prouder and more appreciative of that faced each day with a passion and commitment to provide leading edge technology and service to our customers with a unified vision. We are working with a sense of urgency to execute our strategic framework with a goal to deliver sustained recurring revenue growth and margin expansion.
With that operator, we'd like to now open the call to questions.
Ladies and gentlemen at this time if you have a question. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key to prevent any background noise. We ask that you. Please place your line on mute. Once your question has been stated and our first question is from Ryan Macdonald from Needham. Your line is now open.
Hi, good morning, David enrich.
Thanks for taking my questions I guess I just wanted to start out.
Regarding a bit on the reorganization here.
One just as we go back a quarter and talk about sort of the sales reorganization that you had implemented sort of mid way during the quarter. It sounds like from your commentary that the bookings, particularly in the US remain challenged still just wondering sort of what the.
You know, what you're seeing there and maybe what improvements you still need to see I guess within the us markets.
Through that sales reorg.
Hey, Ryan this is David Thanks for question.
Well, so we actually saw a pretty good improvement from Q1 to Q2 in in the us.
I think my comments are kind of a little bit broader than that that if I look over the trends over the last number of quarters.
We've seen strong performance and customer expansions, but but I'd like to see stronger performance in net new customer acquisition in the U.S.
That that's an area, where I think we can drive some improved improve performance. So this is less about Q1 or Q2 as it relates to U.S. sales is just about some some broader trends that but I'd like to see improved.
And and then I go.
Sorry, I'll I'll address the.
The reorganization itself did not have an impact on sales capacity or anything like that in fact I. It's my view that we have an opportunity to actually increase sales capacity in the U.S. and that's something we're going to be working on.
Got it Okay, and then I guess as you look at sort of.
Driving new bookings moving forward, obviously brands are a large focus so maybe I heard a little bit less of a focus on some of the indirect channels and so if you could update us on your progress on on those indirect channels as well as sort of the progress on adding a strategic reseller this year as well as love to hear that thanks.
Yes, Thanks, Ryan So yes, we continue to make good progress on that front, we've announced a number of strategic partnerships this year that.
That we think can continue to contribute good revenue streams for us.
Not in a position yet at this point to announce strategic reseller, but that does continue to be.
An important focus for us.
Got it thank you very much.
Thanks Ryan.
Thank you and our next question is from Colin Sebastian from Baird. Your line is now open.
Hi, Thanks, and good morning.
Maybe first just a bit of a higher level question, but given how quickly. The end market is changing I'm wondering what you think are the two or three biggest areas of growth opportunity in terms of product and then how do you balance the focus on operating efficiency and profitability with.
We'd likely investments required to capture those those product opportunities and then and then secondly, Dave I think you called out Google shopping is an area of strength.
I guess I'm wondering if that represents incremental revenue opportunity for you guys. If you are seeing conversion to that's and if that's a shift of client sales from other channels marketplaces.
Thanks, Colin I'll start with the second part and go back to the first so yes, Google shopping has been.
Fantastic program for us over the last year, we've onboarded hundreds and hundreds of clients. There are a significant number of clients that are also signed up but still working through the process of going live.
And so as you can imagine difficult to predict exactly what the full benefit will be as we go into Q4, but.
But I'm pretty bullish on the program overall and just based on the success that we've seen that we've seen for it so yes, I do expect that to.
To contribute incremental revenue as we go forward going back to your prior question in terms of products.
Number one I'm pretty excited about some of these standalone apps that we've been developing we've talked about this now I think for probably a couple of quarters.
And the opportunity specifically to work with strategic partners, who are looking for.
An opportunity to bring a more self service soft launch app to to markets as I mentioned in the call. We were in beta right now are in pilot with with an app that we're calling elevate this our Amazon repricer.
That any Amazon seller can sign up for its got a relatively low price point.
In the one hundreds of dollars per month and.
And so that I think has the opportunity to expand our our addressable market.
Without incurring cost of sales or a significant cost to support and so as.
As apps like that start to go out through through various partners.
We expect not only some potential incremental revenue streams, but also a good source of potential customers for our for our bigger platform. Obviously some of the customers on those apps will probably be too small for for our whole platform, but we do expect that a number of folks who sign up will actually be good candidates either immediately or at some point down the road for for our full platform. So I think I think those apps records on one area to expand our addressable market and also.
Leverage partnerships, which has been part of our key strategy.
Over the last year and then ultimately we obviously continue to invest in our in our core platform, but I do think that there are acquisition opportunities out there there are.
It's a very fragmented space and particularly when it comes to brands and Tech enabled commerce for brands.
There are hundreds and hundreds of various point solutions out there that are specific to a very particular need or very particular, geography, and and we think there's an opportunity to pull more of those capabilities into our platform. Obviously some of that will focus on developing organically, but we also think there are opportunities to to acquire those capabilities.
Okay, and then just lastly, the new platform user experience.
In terms of.
Customer retention.
I know, it's still early but are you seeing any material change in renewal rates or or or other metrics around retention as a result of adopting the new user experience.
Yes, it's a little hard to say at this early juncture, just because most of the retention metrics that we look at our for example first year.
Or rolling 12 month kinds of things and so since we rolled this out in April we don't yet have that kind of data to to share. So at this point. What we have is anecdotal feedback, which has been which has been really positive and.
I think that when you really look at what our focus was on this new user experience. It was not only modernizing the app, but.
The primary focus was making on boarding easier like helping customers new customers I understand all right now that I have signed up for the platform, where do I start where do I go with my next step and so I have a hard time imagining that all the work that we did there is not going to have at least on the incremental benefit to customers.
Getting started on the platform one of one of the I will add that one of the.
I'm not going to hear the number per se, but our first year renewal rates in Europe .
That will correct me if I'm wrong I think this is a Q on Q1 or Q2, maybe end of Q2 stat.
We are phenomenal.
In terms of customers first the first year renewals and I think thats an indicator that is not just about new user experience, obviously, but I think it's also just about some of the service model that we deployed in Europe , but just really demonstrates that we can have those kinds of renewal rates that are that our enterprise grade.
Okay. Thank you.
Thanks, Tony.
Thank you and our next question is from Alexia to Sim gas from D.A. Davidson. Your line is now open.
Thanks for taking my question. So once again suggest that implementation of online sales taxes. Following last year's ruling by the Supreme Court negatively impacted.
Gms growth by 100 basis points in the June quarter.
Other e-commerce companies such as.
Indicated that they are being negatively impacted so how if at all or is it affecting your performance.
Thanks Alexia.
It's hard to say.
We don't necessarily have visibility into traffic and bounce rates that the marketplaces would would see so at the end of the day, we get to the transaction if it happens if it didnt happen because somebody had second thoughts around tax we wouldnt necessarily have visibility to that.
I will say that we saw stable as I made in my mind.
As I commented in my prepared remarks, we did see stable GMB performance.
Q1 to Q2, we saw some incremental gains on Amazon, we saw strength on Walmart, we did see some.
For a consistent weakness with ebay, although we do think that that comp will ease a bit as we go into the back half of the year.
As we look over the last last year performance on on ebay. So.
My.
My philosophy on sales tax impact is that.
While it may.
Have some short term impact on various channels.
I personally believe that the the benefits and the conveniences presented by e-commerce , especially as delivery speeds continue to increase.
Really outweigh the negative impact of sales tax and so I know that theres going to be at the margin probably some consideration when people are making purchase decisions around around whether sales taxes included or not but in my view the value proposition of ecommerce overall to the consumer outweighs outweigh sales tax considerations and that's that's supported by data we've looked at in the past like for example, some number of years ago. I think it was 2000, and maybe 16 or 2015, when California rolled out an online sales tax.
We saw we actually saw a pull forward of purchases on certain channels in advance of the sales tax.
Effective days and we saw a bit of a depression. After it but then things kind of went back to normal so.
Maybe maybe a shorter term impact that the margins, but I don't think of it as a long term secular headwinds.
Great. Thanks for taking my question.
Thank you.
Thank you and our next question is from David Gearhart from first analysis. Your line is now open.
Hi, Good morning. Thank you for taking my questions. My first question in the last couple of quarters, you provided the brand growth in revenue over the prior 12 months I just wanted to get that metric if possible.
Hey, David I don't think we have that handy in front of it may or may not be in the queue. I can we can potentially have rich follow up with you. If it's in the if it's in the Q.
But we continue to see strong performance with brands.
As a as I've, just overall proportion of our customer base and proportion of revenues. So I don't know that its a metric we're necessarily going to be in the habit of providing every single quarter.
But it's an area of strength for our business and I expect that to be continue to be a strategic area for us going forward.
Okay, and then in regards to the guide with China.
Is there any.
Ability at this point just given its impact on the year for us to give us for for you to give us the percentage of revenue that China represents and then.
Guidance was down by $2.5 million at the midpoint is that all China, if you had to.
Handicap, what it represents in terms of the guide reduction.
Hi, David This is rich so.
It does represent a significant portion of the guide down in revenue.
Historically, China is been in the low single digit range of revenue performance.
So, but we also as I mentioned in my prepared remarks, the downturn of the downgrade in revenue was driven also by from foreign currency.
Specific to the value of the pound versus the US dollar I think we would say on the China. The China change represents a significant majority of the change in revenue.
Got it and then in regards to.
The product elevate.
Just just curious your thoughts on it actually drawing.
Smaller customers to the platform and are just given your shift from small to enterprise that was self service tools. It could actually start bringing smaller companies back into the fold into your customer base any thoughts on that and how it would affect your profile.
Yes, that's a great question.
The reason, we strategically moved away from smaller customers over the last several years.
Is because they do exhibit higher churn rates, which is probably not a surprise.
But that that was not really compatible with a direct sales model right. So a direct sales model.
Implies that there are certain certain unit economics that you'd have to say that for a direct sales model to really to really be cost effective and so we moved away from small customers because that was really our primary path to two markets, what's different with elevate and some of the other apps that were working on is that these are zero touch self sign up self launch apps that do not go through our direct sales force. So the idea is that for example, we expect in the third quarter to launch elevate on the Amazon App store.
We are working on other self service apps that would be deployed through partners.
And so are our expectation is that there would be virtually zero cost of marketing and cost of sales associated with these with these apps. So even if there is a higher churn rate.
The unit economics would still would still workout and.
Not only provide potentially a source of incremental revenue.
But I think equally as important to us start to highlight.
Potential customers like I said for our for our broader platform.
Got it. Thank you so much for the color.
Thanks, David.
Thank you.
And our next question is from Zach Cummins from B. Riley FBR. Your line is now open.
Hi, good morning, David and rich.
I guess, just starting off I mean over this past earnings season. It seems like a few software companies have pointed out some some weakness in the European region with concerns to kind of the overall geopolitical concerns and some macroeconomic weakness although your European business has been doing well have you seen any of that pressured or does that raise any concerns here in the second half of the year.
No. It's a great question I think our European team.
And this is concentrated in the UK and in Germany.
Have been just pretty heads down focused on.
On customer acquisition and so.
I think I think it'd be silly to say that there is some uncertainty with how Brexit plays out.
Obviously, the British pound as as experienced some significant weakness.
The dollar continues to strengthen and so there are some externalities like that that are a little bit hard to predict with their with their impact is.
But I would say as of the moment.
We aren't really seeing an impact as it relates to concerns about brexit or or economic economic slowdown so.
And really.
I just attribute that to our teams being heads down in focus and not spending a lot of time pontificating about externality isn't really just doing the good old fashioned blocking and tackling of working with with prospects and customers and helping them expand.
You know I have seen I've been in this business a lot of time to say that.
As much as a positive economic environment can be helpful.
Ironically, I think sometimes even a challenged economic environment can be helpful to ecommerce because it does tend to.
To drive consumer behavior, if I look back at the financial crisis and Orlando nine.
Obviously, we saw a slowdown in e-commerce , but I think it also drew in more consumers, who are looking who are more price conscious and and had to be more selective about about how they purchase product. So.
Im not going to say that E. Commerce is immune from those kinds of trends in the industry, but I think it's a little bit less impacted.
Then maybe other other segments, so but the short answer is right now havent seen anything obviously, we're going to have to I think like the rest of the world see what happens with all this Brexit stuff.
And hopefully it is.
Hopefully it is it is not not to impactful.
Understood. Thanks for that and then in terms of customer account for in the quarter can you provide a little more color around what really drove the decline in customer town and it appears that metric could be under a little bit of pressure here in the near term, but over the longer term kind of say the next 12 to 18 months. How are you thinking about this metric and its importance in terms of revitalizing organic growth in the business.
Yes, it's a great question I've said in the past that.
For long term sustainable growth, we do have to grow our customer base.
It's obviously a partial metric right.
Excuse me because.
We actually had really good bookings in the quarter.
A lot of those were expansions right and so those are those are valuable bookings their expansions with existing customers.
But if I peel the onion, a little bit some of it was contributed in some of the decline was contributed by China for some of the reasons that we touched on.
But I would say the proximate cause of the decline of customer count is.
Insufficient new customer acquisition in the U.S. that is really the area that we need to focus on.
I think it's great that we're expanding with customers, it's not that I don't want to do that we obviously want to continue to do that that's that.
That tends to be high value long term revenue.
But there's there's still in my view plenty of market opportunity in the U.S. and it's something we really need to focus on improving so.
So we were always evaluating our metrics and what makes what makes sense.
And I'm sure as we get into next year, and we think about.
The types of disclosures we provide.
That and all of our metrics will be on the in the consideration set.
Understood and then final question for rich with the expectation now that you are going to be having increasing profitability and actually generating cash in the business. I think you highlighted a potential areas for uses of cash.
Could you kind of highlight.
The actual or rank the priorities in terms of uses of cash in and is there any potential that you could consider returning cash to shareholders.
Either share repurchase or potentially a dividend if you can't find other ways to deploy that cash.
Yeah. So.
Thanks for the question so as far as.
Reallocation or investment I pointed to two specific areas.
Specifically with sales capacity within the us and Australia, we've seen tremendous.
Growth in Australia, as well as in EMEA with some some sales capacity growth there.
But with regard to the services and support organizations in EMEA as I mentioned also my.
Prepared remarks, our majority of our many of our customers. There are managed service customers right. So we need to continue to support them and best team has done a tremendous job over there.
Maintaining our customer base we've had.
Little to no churn over the last couple of quarters. There is in the in the UK. So.
We see a lot of positive momentum there as far as returning.
Invest or investing or returning to our shareholders returning to our shareholders not something that we're looking at right now, but always considered for.
Future.
Thoughts and ideas and potential.
Move forward I plant has excellent one thing I'd add is I touched on I touched on this I do think that there are some.
Some acquisition opportunities there, we do think that there are opportunities to continue to grow the business.
Obviously, both organically I think we can drive improvements in our in our U.S performance.
We take kind of a private equity view I would say from an acquisition perspective, we do have IR thresholds that we would like to achieve we are financially disciplined.
But we think that our current revenue levels were not necessarily at a revenue scale that would allow us to really optimize for profitability or or potentially share buybacks right. So.
So we'd like to see continued revenue growth, whether it's organic or inorganic to get to a sufficient level of scale that we can continue to drive cash returns.
Cash on cash returns to investors.
Understood well, thanks for taking my questions and best of luck in the second half of the year.
Thanks, Matt Thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Traci Mangini for closing remarks.
Thank you everyone for joining us today and for your continued support.
Thank you again.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program you may now disconnect.