ChannelAdvisor Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Channel Advisor Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Mr. Rayford Garabrant. Director of Investor Relations. Please go ahead.

Good morning and welcome to Channel Advisors Conference Call for the first quarter 2020. My name is Rayford Garabrant, Director of Investor Relations. And with me on the call today are David Spitz, Channel Advisors Chief Executive Officer, Beth Segovia, Channel Advisors Chief Operating Officer, and Rich Cornetta, Channel Advisors Chief Financial Officer. This morning we issued a press release with details on our first quarter 2020 performance as well as our outlook for the second quarter 2020. This press release can be accessed on the investor relations section of our website at ir.channeladvisor.com. In addition, this call is being recorded and a replay will be available after the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issue today. For further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent form 10-K and 10-Q, as well as our other filings, which are available on the SEC website at SEC.gov. During the course of today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, which excludes depreciation, amortization, income tax expense, interest, and stock-based compensation. Our press release that we issue today includes GAAP to non-GAAP reconciliations for gross profit, gross margin, operating expenses, operating income, operating margin, adjusted EBITDA, non-GAAP net income, and free cash flow. We also provide a GAAP to non-GAAP reconciliation schedule in our supplemental financial presentation posted on the investor relations section of our website at ir.gov. Finally, at times in our prepared comments or responses to analyst questions, we may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that, let me turn the call over to David for his prepared remarks.

Good morning, everyone, and thank you, Rayford. We'd like to officially welcome you to the team. Let me first say that I hope everyone is doing okay during this pandemic, and our hearts go out to everyone who's been personally affected by COVID-19. In these unprecedented times, I'll keep my remarks about our first quarter results brief, as I know everyone wants to hear what we've seen since quarter end, as well as our outlook. Our first quarter results were strong, with revenues of $32 million exceeding our guidance for the quarter. and adjusted EBITDA of $6.5 million, significantly exceeding our guidance for the quarter. Year-on-year revenue growth continued to improve compared to recent quarters, aided in part by an acceleration in GMV driving strong variable revenue in the latter half of March as pandemic-related shelter-at-home directives and retail store closures drove a significant share of consumer spending online. Ongoing cost controls and the scalability of our business model contributed to a significant year-on-year improvement in profitability as well as cash flow. Our strong balance sheet and cash flow gave us comfort as the COVID-19 crisis unfolded, as I wrote in my shareholder letter on March 23rd. From an operational perspective, we activated our business continuity program in late February and implemented a temporary global work from home policy and froze travel early March in order to protect the health of our employees and support our community's efforts to slow the spread of coronavirus. Our transition to work from home went very smoothly and we've experienced no operational issues related to working from home. We set up a special client assistance team to help customers facing financial or operational distress, and Beth will share more about that in a moment. We are prepared to operate virtually as long as necessary, and as much as we were ahead of the curve in moving to a virtual model, I anticipate that we will be behind the curve in returning to our offices, and we'll do so in a phased approach as we prioritize the safety of our employees and communities. COVID-19 affected our first quarter in two ways. On the positive side, as I mentioned, we saw a broad acceleration in gross merchandise value, or GMV, processed on our platform in the latter half of March, which drove strong variable revenue. Offsetting this, our sales to new customers were disrupted in the last two weeks of the quarter as prospects were understandably distracted by the rapidly developing COVID-19 situation and its impact on their own operations. We estimate this impacted our bookings by approximately 20% in the first quarter. We also have customers, like traditional department store retailers, who face financial distress as their physical retail operations have been shut down. And so we anticipate that we're likely to experience an uptick in churn as some of these customers struggle to recover. As we turn the page to April, however, things really got interesting. What was an acceleration of GMV in March became a record-shattering April as a huge amount of consumer spending shifted online during the pandemic. In fact, we exceeded a billion dollars in GMV on marketplaces in the month of April alone and even eclipsed our December 2019 volumes, which is usually our peak selling season by a wide margin. On April 15th, otherwise known as Stimulus Day in the U.S. due to the receipt of government stimulus, direct deposits, and checks, we drove more GMV on Amazon in the U.S. than we did on Prime Day last year. All in, marketplace GMV increased 56% year-on-year in April compared to a year-on-year increase of 15% in the first quarter, illustrating the magnitude of the acceleration we've seen. Volumes in the first few days of May have remained at elevated levels as well. How long and to what extent this continues is really hard to say. On the one hand, as brick and mortar stores gradually reopen and shelter-at-home orders are lifted, it is reasonable to expect that some, maybe even most, of this GMV will subside, although I think retail will be permanently altered by the pandemic and that it will take time for people to feel comfortable in store settings. especially if there are subsequent outbreaks of coronavirus. And we can't ignore the reality that 30 million people have lost their jobs in the last few weeks in the U.S. alone, many more globally. Recessionary pressures have already started impacting reported consumer spending levels. All of that said, my best guess is that the pandemic will prove to be a catalyst that drives a step function increase in e-commerce as a share of consumer spending, and that some level of this GMV increase we're seeing is likely to be the new normal. Turning to sales, we weren't sure what to expect at the start of this quarter considering how tough the last two weeks of March were. And despite a strong starting pipeline, we began by forecasting close rates at roughly 50% of normal levels. I'm happy to report that we finished the month of April having booked almost twice what we initially forecasted and appear to be pacing close to normal close rates insofar as one month represents a trend. After a tough finish to the first quarter, momentum returned in April to our sales floor, virtually anyway. What we're seeing, is that COVID has been a catalyst that is causing many companies to accelerate their digital initiatives, often with a sense of urgency. This is particularly true for brands whose retail distribution channels have been effectively halted by the pandemic and who are fast-tracking e-commerce initiatives. So we have several competing forces that are making the remainder of 2020 hard for us to forecast. One near-term tailwind is strong GMV and the variable revenue it should drive. but it's hard to know how that will play out in May and June, let alone the rest of 2020. Another tailwind is that our value proposition should only be stronger as the shift to digital accelerates, especially for brands. On the other hand, a deep global economic contraction may impact consumer demand and affect our ability to sell and may lead to increased churn as certain categories of our customers, like department store retailers, struggle to recover. All of those factors are difficult to predict and quantify, and so we feel it's prudent and appropriate to withdraw guidance for the remainder of the year. That being said, we are more confident than ever in our mission to connect and optimize the world's commerce, the future of the e-commerce industry, and that our value proposition resonates more strongly than ever. We were able to help our customers adapt to sudden holiday-like volumes without skipping a beat. Our business model, like our platform, has proven to be highly resilient, and our balance sheet and profitability have given us the room to think and invest for the long term, despite this unprecedented environment, especially in product innovations. Having managed this business through several business cycles, including the Great Recession, I believe we're well positioned to lean into the current situation. And with that, I'll turn it over to Beth.