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spk02: Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2021 Channel Advisor Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Rayford Garabrant, Director of Investor Relations. Thank you, sir. You may begin.
spk05: Thank you, April, and good morning, everyone. Welcome to Channel Advisors' conference call for the second quarter of 2021. With me on the call today are David Spitz, Channel Advisors' Chief Executive Officer, Beth Segovia, Channel Advisors' Chief Operating Officer, and Rich Cornetta, Channel Advisors' Chief Financial Officer. This morning, we issued a press release with details on our second quarter 2021 performance, as well as our outlook for the third quarter 2021. This press release can be accessed on the Investor Relations section of our website at ir.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 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 Forum 10Q, 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. For 2020 only, adjusted EBITDA excludes transaction costs associated with our July 2020 acquisition of Blueboard, while for 2021 only, adjusted EBITDA excludes the change in fair value of acquisition-related contingent considerations. related as adjusted EBITDA divided by our revenue, as well as free cash flow, which is operating cash flows, less purchases of equipment, and capitalized software development costs. 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 today. on the Investor Relations section of our website. Finally, at times in our prepared comments or responses to analysts' 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.
spk06: Thanks, Rayford. July marked our 20th anniversary in business when our founders, Scott and Aris, started Channel Advisor in 2001, they had a vision that e-commerce would be huge and sellers would need help managing it. And 20 years later, that vision is as true as it's ever been. And so I'd like to thank all of our customers, partners, employees, and shareholders for helping us achieve this milestone, even as we look ahead to the next 20 years. Our momentum continued in Q2, as strong execution, GMV growth, our expanding business with brands, and our growth investments combined to drive record quarterly results. I'm particularly pleased to report that subscription revenue growth accelerated for the fourth quarter in a row to 25% year-on-year, and marketplace GMV grew double digits, indicating durable trends in our business despite tougher comps now that we're lapping a full year of COVID. Overall revenue and adjusted EBITDA both exceeded our guidance for the quarter, and I'll touch on a few of the highlights that keep us bullish on our longer-term growth prospects. First, we maintain double-digit revenue growth despite more difficult year-on-year comparisons, and coupled with continued strong performance in sales and revenue retention, we're increasing our expectation for full-year subscription revenue growth to at least the upper teams. As we've said previously, we view growth in subscription revenues as an important indicator of the longer-term underlying strength of our business. Second, our focus on brands continued to pay off and drive our record revenues. In Q2, revenue from brands increased 39% year-on-year, consistent with what we saw in Q1, and subscription revenue grew a whopping 54% year-on-year, the fastest growth rate we have on record. Brands represented 38% of our total revenue for the quarter, which is up 7 points year-on-year, and represented 44% of our subscription revenue. We believe that the superior unit economics we enjoy with brands will continue to positively benefit our long-term financial performance as they grow to represent a larger proportion of our customer base. Third, strong demand for our products strengthened in the second quarter, helping us achieve our highest gross bookings ever. This was driven by strong new logo activity and record expansions with brands, which continued to represent a substantial majority of our bookings. In addition to robust sales momentum, we saw year-on-year improvements in retention, driven by the efforts of our services team and recent platform enhancements. We expect to see ongoing strength in this area as we plan to continue investing in product innovation, enhancing our services, and growing our brand customer base. Fourth, we've continued to invest heavily in our platform to deliver value and innovation for our customers. As we discussed on our Q4 earnings call in February, we're aggressively expanding our breadth of supported channels globally. At the time, we announced we expected to increase the number of supported marketplaces and channels by nearly 80 by the middle of 2020-22. And so far, we're well ahead of that pace. This matters because this long tail, comprising channels like Zalando, Target+, Shopify, and well over 100 others, continued to grow aggregate GMV at a faster rate than our top three marketplaces in the second quarter and was larger than eBay and Walmart for us, second only to Amazon in terms of GMV. So not only does this further extend our lead in the market, helping us attract more customers, but it's also positive because this fast-growing, broad spectrum of channels reduces our sensitivity to slower-growing channels like eBay, and to a certain extent, even Amazon. In short, this diversification is good for our customers and good for us. Fifth, even as we lean in and increase our growth investments across sales, services, and product, our financial model has delivered healthy margins and robust cash flow. Adjusted EBITDA margin for the second quarter was 22%. and operating cash flow for the quarter increased 19% year-on-year to $9.2 million. With over $90 million of cash on hand, no debt, market leadership, and a large market opportunity in front of us, we intend to continue investing with discipline in growth initiatives. I'm also pleased to announce that in conjunction with Connect 2021, our annual conference, specifically curated to help brands and retailers reach more online shoppers, We'll be hosting a virtual analyst day on September 16th at 9 o'clock in the morning Eastern Time. The agenda will include presentations from management and a live Q&A session and a press release with registration details will be issued later today. We're excited about this event and hope to see you there. And lastly, I'm very proud to share that we were just announced a winner of the Triangle Business Journal's 2021 Best Places to Work Award. This is particularly rewarding because it's our seventh time winning and reflects how deeply we care about our employee experience. And it's especially sweet to have won this distinction after a year that challenged all of us. To all of our teammates globally, thank you. And with that, I'll turn it over to Beth.
spk00: Thank you, David, and good morning, everyone. I'm so pleased to be able to report that Q2 was another excellent quarter for us, maintaining the positive momentum we saw build over the past 12-plus months. As David mentioned, our team achieved our highest gross bookings ever in Q2. We added notable new customers, including 3M, Kodak, Reckitt Benkiser, Remy Cointreau, and Solomon Sass, and formalized a strategic relationship with TikTok. Our account managers, working closely with our sales team, did a beautiful job leveraging our understanding of client needs to drive a record level of new business with existing customers like Clorox and Skullcandy. This is a testament to the numerous ways in which Channel Advisor is helping customers achieve their online commerce goals. In terms of churn, Q2 marked another quarter of year-over-year improvement. Bookings, expansions, and improved retention are important drivers of sustained growth, and we feel really good about the recent trends. Also in Q2, a brand equity survey in our target segments was completed and showed unaided awareness of Channel Advisor up more than 35% since 2017. The same survey also indicated high favorability ratings among respondents familiar with Channel Advisor. We feel good about our position in key markets and will remain focused on promoting our brand and how we can help brands and retailers succeed online. It's gratifying to see the fruits of our efforts to drive customer success and exciting to know that we have more programs underway to enable further progress. We are staying focused on helping our newest customers onboard effectively and realize their e-commerce objectives. And we've continued to roll out our enterprise level of service, deploying the new structure to support three additional cohorts of clients in Q2. With just one cohort remaining, we should be fully deployed in Q3. Our success in attracting large global brand customers has created the opportunity to expand our business and cultivate stickier relationships. With this initiative, we are enhancing our ability to serve their needs by making meaningful investments across the services organization, increasing our coverage and depth of engagement. Customer feedback has been very positive and the initial results are better than expected. Let me now share an innovation update regarding new platform capabilities we've recently released. Enabling brands to accelerate their digital transformation and achieve their e-commerce objectives remains our clear priority. As many customers are telling us they'll add channels as fast as we can enable them, we shared our plan earlier this year to significantly expand our breadth of supported channels by adding at least 80 additional integrations by mid-2022 compared to where we were at the end of 2020. We continue to move with high velocity in Q2. With the recent additions of more than 20 new integrations, Channelvisor now supports over 190 channels globally. New marketplace integrations include Zalando in six new markets, Joom in five markets, and Rakuten in Japan. And six first-party dropship connections with Petco and Chewy in the U.S., Lowe's and Home Depot in Canada, Penny in Germany, and Meijer in Australia. While this initiative is still in the early stages, customer response has been super encouraging. Our product development is also focused on helping customers elevate their brand presence, optimize their operations, and engage online shoppers when, where, and how they shop. To deliver a seamless shopping experience, we've expanded our shoppable media offering. In addition to directing purchase-ready shoppers to authorized stores and retail sites, brands using Buy Online can now display retailers offering curbside pickup or in-store delivery. Providing our customers with actionable insights is something Channelvisor is known for, and in order to provide full visibility and deeper product intelligence, we've launched product tags. This new workflow solution informs critical business decisions for brands by empowering them to monitor and segment their products through system-defined insights, such as new arrivals, top sellers, and recently sold-out products. These new releases are just the latest examples of how Channel Advisor helps brands improve the consumer shopping experience and increase product visibility to drive online sales. A recent case study available on our website demonstrates how Dynacraft, a leading brand manufacturer of bicycles, scooters, and battery-powered ride-on toys, increased their sales up to 100% year-over-year on Walmart.com by leveraging Channel Advisor's managed services team and platform capabilities. Dynacraft uses channel advisor support for Walmart Connect, which provides powerful automation to brands and retailers to help streamline critical tasks for success, including managing advertising campaigns, scheduling, bidding, and achieving product listing optimization. In their words, ChannelAdvisor has always been willing to pivot and shift, providing our e-commerce management team with expert insights and guidance to win the sale. Dynacraft is an inspiring example of a brand that responds to changing consumer expectations and boldly embraces digital transformation to succeed in a competitive e-commerce landscape. Let me now provide you with an update on our progress as we have increased our strategic focus on diversity, equity, and inclusion. We have prioritized employee awareness and enablement, and 70% of our staff have completed unconscious bias training, including 75% of our leaders. In addition, employees have led the formation of seven employee resource groups, pulling together employees with common experiences to enable networking, skill, and career development. We have modified our approach to recruiting to increase access by more broadly advertising available roles and expanding our relationships with a wider set of colleges and universities. We've assessed our vendor spend with minority-owned businesses and by adding numerous new minority-owned vendors are on track to increase that spend in 2021. Finally, in Q2, we adopted a flexible work policy, giving employees the freedom to choose to work remotely, in office, or a mix based on their needs. By allowing employees to decide what works best for them individually, Channel Advisor has empowered each individual to be their best while also expanding our access and talent pool globally. It's wonderful to see us make great progress here and was really gratifying to see these efforts recognized by employees and their feedback that led to Channel Advisor earning the Best Places to Work in 2021 award that David mentioned. To summarize, in Q2, we continue to build on the progress we made in 2020 and Q1, and we are pushing forward rapidly with new initiatives like our enhanced enterprise level of service and our accelerated marketplace expansion to enable customer success. Based on our execution to date, combined with getting a fast start on these exciting initiatives for 2021, we believe we are positioned for more good things to come. With that, I'll pass it to Rich now to provide a detailed update on our financial performance. Rich?
spk07: Thank you, Beth, and good morning, everyone. We're proud to report another quarter of success in the strategic areas of brands acceleration, subscription revenue growth, and investments to drive sustained double-digit revenue growth, healthy margins, and strong cash flow. We entered Q2 knowing that we face a difficult year-over-year comparison to top-line performance, specifically with regards to variable revenue, which increased 88% during the same period a year ago. However, we continued to focus on areas more within our control, and after providing an outlook of subscription revenue growth for Q2 in the upper teens on our last earnings call, we're excited to report that we exceeded those expectations, with subscription revenue growth of 25% over the prior year quarter. Q2 represented our fourth consecutive quarter of acceleration in subscription revenue growth. And as David mentioned earlier, even more impressive is that quarterly subscription revenue from brands increased 54% year over year. The rapid acceleration in subscription revenue growth from brands over the last year highlights the success we have achieved from the investments we've made in our sales organization, the tremendous progress we've made with customer expansion and retention in our services organization, and the benefits of continued platform innovation. Overall, total revenue and adjusted EBITDA for the second quarter of 2021 both exceeded the guidance we provided in May. So let me provide a little more color on our results for Q2. Total revenue reached $41.5 million in the second quarter, up 11% year-over-year, despite the challenging comps I mentioned earlier, and represents our best quarter ever for revenue. Subscription revenue reached another record at $32 million for the second quarter, and variable revenue of $9.5 million was in line with our outlook and up 7% quarter over quarter, driven by continued elevated GMV levels. As for additional financial highlights specific to our strategic brands cohort, brand subscription revenue of $14.1 million represented 44% of our total subscription revenue in Q2, which is up over 800 basis points from the prior year period. Also, over the previous 12 months, we have increased net brand's customer count by 45%, and average revenue per brand's customer has remained significantly higher than retail customers. As we mention every quarter, brands continue to emerge as a more significant piece of our business. And with the strategic investments we are making to attract and retain these customers, we maintain the line of sight to achieving our stated goal of greater than 50% of our total revenue coming from brands by the end of 2022. Moving on to adjusted EBITDA. We finished Q2 at $9.3 million, ahead of the high end of our outlook of $8.1 million, generating an adjusted EBITDA margin of 22%. While still maintaining healthy margins, operating expenses have been building steadily in recent periods as we've made strategic investments in our product and in our services organization, as well as incremental investments in sales. We expect this trend to continue for the balance of the year as we continue to reinvest back into our business the incremental revenue growth we generate in 2021 with the goal of accelerating product innovation, further improving customer retention, and supporting sustained double-digit top-line growth. Now turning to the balance sheet. We had another solid quarter of cash generation during Q2, with cash and cash equivalents exceeding $90 million and representing an increase of $8 million sequentially and $26.5 million year over year. Free cash flow of $15.5 million for the first half of this year was the best first half of our fiscal year in our history. We also saw deferred revenue increase again, up $1.6 million sequentially and up $7.8 million year over year, driven by the strong bookings performance we highlighted earlier. Now for our financial outlook for Q3. Consistent with our practice over the last year, we are providing a financial outlook for only the upcoming quarter. So for the third quarter of 2021, We are issuing a revenue outlook range of between $41.3 million and $41.7 million, and an adjusted EBITDA range of between $6.8 million and $7.2 million. We target continued strong performance in subscription revenue in Q3, and our outlook reflects growth in at least the upper teens. We also expect OpEx and Q3 to increase at least $5 million over the prior year as we continue to reinvest the incremental revenue growth we have generated in 2021. Additionally, while we are not providing full-year guidance at this time, Considering our investments designed to support continued growth, as well as an expected increase in expenses this year compared to last year, we continue to anticipate that adjusted EBITDA for the full year 2021 will likely be modestly lower than the full year 2020. But we're also increasing our estimate for full year subscription revenue growth from mid-teens to at least the upper teens, given the strong bookings performance we achieved during the first half of 2021, and continue to see in early Q3. In short, our subscription revenue growth has strengthened considerably, and our continued investments are designed to maintain this momentum. As David mentioned earlier, we'll be hosting a Virtual Analyst Day on September 16th, and we look forward to providing you some additional metrics on our operational performance and financial priorities. In closing... Q2 represented another quarter of solid execution across all areas of our business, leading to record financial results and increased momentum for the back half of 2021 and beyond. Moving forward, we plan to continue to focus on sustained double-digit revenue growth and investing strategically in our product to further enable our customers as well as our employees to support those customers while still maintaining healthy margins and strong cash flow. With that, operator, we'd like now to open the call to questions.
spk02: As a reminder, if you would like to ask a question, please press star to the number one on your telephone keypad. Your first question comes from Thomas Forte with DA Davidson.
spk09: Great. First off, congrats on the quarter. Second, I have one question and one follow-up, and then I'll get back in the queue because I have a bunch more questions. So, David, I think that you have a pretty amazing vantage point at Channel Advisor, at e-commerce in general, and love to hear your thoughts on what's going on. Is the stickiness in categories where consumers were forced to shop online when physical stores closed in the pandemic less than expected, and or consumers are just spending more money on travel and less on other categories because they weren't able to spend on travel during the height of the pandemic?
spk06: Hey, Tom, thank you. You know, we saw pretty strong GMV volume and growth despite lapping COVID. Growth was slower on some of the larger channels, as you know, some of which have reported and some of which have not. Where we really saw a pretty vibrant growth was in that long tail of marketplaces. So I think it's pretty encouraging that we're actually seeing, I would characterize it as a sort of democratization of e-commerce and And I think that's good and helps, I think, boost our value proposition. As far as sort of consumer trends, you know, I think it's part of the reason we, you know, haven't provided full year still, right? I mean, we've got, you know, things basically reopening and then Delta variant has come around. And as you've seen, you know, that's causing people to maybe rethink things. travel or conferences, and so I think these things are just super hard to predict. I would say, you know, overall spending seems to remain pretty robust, but, you know, it was a tough comp last year. I mean, it was really remarkable how much of a spike we saw in GMB last year. attributable not just to shutdowns, but big stimulus checks, things like that. So I would say it looks to me like the consumer still looks pretty healthy. It's just comping against a bit of a tougher number, and we'll see how the rest of the year plays out.
spk09: Excellent. All right, so I really appreciated last quarter when you highlighted something like eight records that you achieved. Can you talk about the records you achieved in this quarter?
spk06: Yeah, well, so number one, top line revenue. It's been a long time since we had a revenue line in Q2 that beat Q4, which is typically our seasonal high, so that was pretty exciting. Gross bookings, I think, are another one to look at, just indicating continued momentum in our business. the demand for our products and performance of our sales team. And where I get super excited in addition to sort of those headlines is you look at subscription revenue growth accelerating to 25% year-on-year. And again, the variable revenue is going to be a little bit noisy as we go through this lapping period, but that subscription revenue growth of 25% is really strong. And then probably last, but certainly not least, is the acceleration of brand subscription revenue to 54% year-on-year, which is As far back as we could look at our data where we broke those customer segments out was the fastest. So really, really strong performance with brands, which is exactly what we want to see.
spk09: Excellent. All right, I'm going to get back in the queue. Thank you. Thanks, Tom.
spk02: Your next question is from Matt Fowle with William Blair.
spk01: Hey, guys. Thanks for taking my questions and a nice quarter. I wanted to ask just about demand for your solutions as the U.S. economy reopened in the quarter. It didn't seem like anything changed, especially considering you had record gross bookings, but just sort of wondering if there was any change in terms of customer conversations or customers coming into the pipeline as the U.S. economy did reopen more in the quarter.
spk06: Yeah, thanks, Matt. I think it's important. the reality at this point that COVID caused a lot of people that were at a certain point in their digital transformation to accelerate those plans and that level of urgency and acceleration and acknowledgement that they couldn't continue to have a slow-paced digital transformation plan. I think that's permanent, right? So even as we had a step function increase in GMV volumes, which we expect to moderate now that we're lapping it, I think there was a fundamental shift in the demand profile in our market where brands in particular realized that the path to the consumer is no longer what it used to be and that they need to accelerate and advance the ball when it comes to the digital channel and how we reach consumers faster. So that appetite hasn't diminished. If anything, I would say it's increased just based on what we've seen in our sales activity.
spk01: Great. And then I wanted to ask on competition, if you're seeing any change there. Some of the e-commerce software providers have added more channel management functionality to their platforms. Just wondering if that has any impact on you guys.
spk06: I don't expect it to. I think it's a large market that is still really underpenetrated. I think there's a rising tide that can lift all boats. I think it's great to see people come into the space. I think it's an acknowledgement that these are functional needs that customers have. You know, Channel Visor is the leader in the space, and so our ability to chart the course and offer a multitude of solutions globally for our customers, I think, is highly differentiated and important. At the end of the day, we really focus on our customers and what they need, not so much what the competition is doing. We certainly keep an eye on things, but we have great partnerships with a number of different partners in the ecosystem. Sometimes some of their offerings overlap some of ours, and that's okay. We lead with our product capabilities, and the customer ultimately can decide what's best for them.
spk01: Great. Last one for me, just on the commentary around investing, some of the upside that you've seen the past couple of quarters back into the business in the back half of this year. Maybe just what are the key investment priorities over the remainder of 2021?
spk06: Yeah, Matt, I think it's a continuation of the themes that we've had this year. So product innovation is services, sales capacity. Again, we're seeing a strong demand profile out there. We've got a lot of customers asking us to do more things and add more capabilities. And so we expect this demand to be pretty durable. And so we're investing behind that. And Unlike a lot of companies out there, we've been very nicely profitable, very nicely cash-flown. We've got a great balance sheet. We've got plenty of capacity to make disciplined investments. We're very focused on trying to drive good returns on capital, and we make the investment decisions that we do, but we've got a very comfortable profile from which we can make those investments.
spk01: Great. Thanks, guys. Appreciate you taking my questions. Thank you, Matt.
spk02: Your next question is from Joshua Riley with Needham.
spk03: Hey, guys. Congrats on the strong quarter. Thanks for taking my questions. So maybe starting off, how should we think about the impact of the long tail of marketplaces, maybe taking some of the volatility out of the business quarter to quarter when you have events like Amazon Prime Day moving from quarter to quarter as well? And then what was the specific impact of having the Prime Day in the second quarter here?
spk06: Hey, Josh, and welcome to the call. I think a couple of things. The long tail phenomenon has been building for a number of years, but it really became exciting, I think, towards probably mid to end 2019 when we started to see it grow really rapidly and start to rival the size and aggregate of some of our major marketplaces. So just to refresh everybody, we've said this before, our top three marketplaces are Amazon, eBay, and Walmart, and then that long tail phenomenon. And so now that long tail is bigger than eBay and Walmart and has been growing at a really, really rapid clip several times faster than even Amazon. So it represents a really vibrant ecosystem of global channels from Poland to New Zealand to, you know, you name the country. And as we add these channels, that becomes an attractor for specific customers, right? Maybe it's an apparel brand in Germany that wants to sell on Zalando and then eventually expand their footprint to other channels. So this has been a really good thing for us and I think removes a little bit of that overhang that sometimes people said, like, well, what if Amazon ends up owning everything? Or, you know, if eBay is slowing down, how much does that impact you guys? So seeing that long tail become... bigger and continue its high rate of growth is pretty exciting, and it's a great differentiator for us. To your Prime Day question, you know, I wouldn't say it has a huge impact. I mean, it's a couple days. We definitely see GMV volumes increase when there's Prime Day, but, you know, when you take the fact that, you know, there's a degree of correlation but not complete correlation between GMV and variable revenue and how all of that flows, it's, you know, and you're typically talking two days out of a 90-day quarter. You know, we see the bump in our GMV charts, but I don't think it, you know, has a huge effect on our revenue. So we don't spend a lot of time thinking about it. We spend more time thinking about just making sure that everything runs smoothly for our customers than we do thinking about what the, you know, what the financial ramifications are.
spk03: Okay, great. And then it looks like the gross margin compression year over year was a bit above what we had modeled in the quarter. What's driving that?
spk06: Yeah, so as we've indicated, we're making investments in a few different areas. Part of that includes our implementation teams, customer support. As we see rapid growth in our customer base and anticipate that there will be continued strong demand, we want to make sure that we're investing in front of that to make sure that our teams have the right capacity to give the white glove service that our customers have come to expect from Channel Advisor.
spk07: Yeah, and Josh, one other thing that I'll add there is regards to the year-over-year comparison. If you recall last year, the top line, much of the top line growth last year was driven by variable revenue, which essentially flows directly to gross margin. So that's why you'd see some compression year-over-year.
spk03: Okay, great. And then I'll just throw in one more quick one here. The brand customer count being up 45% year-over-year, How much of that would you attribute to some of the incentives that you've added to the sales organization to win these customers versus just natural demand? Thank you.
spk06: Yeah, Josh, it's hard to say with any real precision. I think probably a big chunk of it is just organic market demand that we're seeing. You know, brands are where the action is, and that's the customer segment that has primarily been the one that have woken up and said, wow, we really need to accelerate our digital plans. But, of course, it doesn't hurt that we now have a commission structure that motivates our sales team to focus on brands. So I'm sure that has some effect on it.
spk02: Your next question is from Zach Cummins with B. Reilly Security.
spk04: Hey, good morning. Thanks for taking my questions, and congrats on a strong quarter. I guess, David, just going into the record gross bookings performance, I mean, can you just give us a little bit of a sense of kind of the mix of new logos versus expansions and kind of what percentage of that came from brands?
spk06: Yeah, a pretty heavy percentage overall from brands. I don't have the specific number in front of me, but it's probably in the realm of two-thirds, maybe a little bit higher for brands overall. I would say Q2 was a little heavier on the expand side of the equation than what we've seen in previous quarters. And I think it speaks to a lot of brand customers we've signed over the last year Maybe we're standing something up and getting it off the ground and gotten past Q4. We're now in the mode of saying, okay, you guys did a great job standing us up on two or three different marketplaces. Now we have to put our foot on the gas pedal and expand to 10 more, or maybe it's a country expansion or a product line expansion. So we saw a burst of expansion activity in Q2 that in a typical quarter, we'd see a fairly balanced between new logos and expansions, about 50-50. I don't have a specific breakdown for you on this call, but there was, I would say, incremental weighting towards the expansion side of the equation. And by the way, I would expect... I would expect to see that expansion proportion probably organically climb over time as more and more of our customer base is brands. There's so much opportunity to expand with them. Our estimates have been that we think we're probably maybe 10% to 15% dollar penetrated in our brand customer base. So as a bigger proportion of our customers and revenue comes from brands, I think there will be a sort of natural growth in that expansion opportunity over time.
spk04: I understand that's helpful. And just in terms of your sales capacity, I mean, just given the demand you're seeing in the environment, how are you feeling about the overall sales capacity that you have right now, and what are your plans to continue to add to that team as we move forward in the coming quarters?
spk06: Yeah, so as you can imagine, we're in the thick of 2022 planning right now. At the very least, you would expect some degree of incremental sales capacity ads to maintain the bookings growth and momentum that we've seen. But I would say that we're also evaluating some additional incremental investments to help us continue to succeed with brands as well, both in capacity and in what I would call peripheral investments. be it sales engineering and functions like that. So we're looking at that. Don't have anything obviously specific to say about 22 at this point, but at least incremental growth in line with revenue growth would be my expectation and evaluating whether it makes sense to do a little bit more than that.
spk04: Got it. That's helpful. And then, Rich, just on the Q3 guidance, I mean, can you just unpack some of the assumptions there for Q3? I believe you guided to high teen subscription revenue growth. And I'm just kind of curious of what are the GMB trends assumptions that you're making in the coming months for that variable revenue line?
spk07: Sure. Yeah, so in developing the guidance, we expect continued GMV momentum, similar that we've seen over the last couple of quarters. Again, focus more on subscription revenue growth. We did mention at least upper teens. And I just want to remind everyone as far as, you know, as we – Move throughout the second half of 2021, the comps get a little bit more challenging. In subscription revenue growth, we had pretty much flat in Q2 of last year, bumping to 5% in Q3 and then 8% in Q4. So, you know, coming off of 25% growth in Q2 and still, you know, committing to at least upper teens in Q3, I'm excited about that. And then, you know, as far as, you know, variable revenue, you know, we're expecting similar type results from Q2, just given if you were to use the midpoint of the guidance that we provided. But, again, continued strong momentum in GMV driving, you know, top-line growth.
spk04: Great. Well, thanks for taking my questions, and congrats again on the strong quarter. Thank you, Zach. Thank you.
spk02: Your next question is from Jonathan Rowe with Battle Road Research.
spk08: Thanks for taking my question. So I know your focus is on brands growth, but do you see any potential to improve retailer revenue or any potential growth in this segment?
spk06: Hey, Jonathan. Yeah, I think it's possible. I think we saw some modest growth in that customer segment last year, obviously helped by COVID. I look at our retail customer segment as a more mature business that generates great cash flows and allows us to invest non-belief capital into our business. But I see that as a mature business that is really more in harvest mode, and the growth engine for Channel Advisor is brands.
spk08: Great. Thank you. So just one more. So I know you mentioned your really strong balance sheet. You're looking at, you know, potential strong investments or acquisitions, but like, is there any focus potentially on a specific investment or acquisition that you'd maybe be looking for a segment or type of thing that you'd be looking at for that?
spk06: Well, if I had one, I probably wouldn't disclose it on the call. But, you know, look, I would say we're always giving thought to capital allocation overall as a concept and thinking about what is the right thing to do with our cash, be it organic investments, inorganic, et cetera. We have been somewhat acquisitive over the years, typically smaller acquisitions that are more tucked into nature and typically focused on enhancing or extending the capabilities of our platform. There's certainly no shortage of inbound calls we get. I think markets are a little frothy right now in terms of valuation and what people expect in terms of price given where certain companies are. So we tend to be financially disciplined and don't necessarily bite on things like that. But I do think there are interesting opportunities, again, whether it's platform expansion, expanding our platform capabilities, potentially geographic expansion, and if the right thing comes along at the right time with a reasonable price, which is what we experienced last year with our Blue Board acquisition, then it's something that we would look at. But I would also say that we tend to be financially conservative. We like having a strong balance sheet, and we run everything we do, whether it's an acquisition or investments that we're making organically. through a pretty rigorous IRR process to try to make sure that we have reasonable expectations for what we're going to generate in terms of return on investment capital. So no specific comments, obviously, in terms of acquisition targets, but we're always interested and always looking at things that could be of interest to us.
spk07: Jonathan, this is Rich. I just want to jump in and, again, encourage the listeners to attend our Analyst Day presentation on September 16th. We'll certainly expand a little bit more on our capital allocation framework and financial priorities.
spk08: Awesome. Thank you so much, and congrats on a great quarter. Thanks, Jonathan.
spk02: You have a follow-up question from Thomas Forte with D.A. Davidson.
spk09: Great. Last two for me. Thank you for taking them. So, David, you touched on this before, but can you talk about the sales and margin impact of a dollar of GMV from Amazon versus a dollar of GMV from another marketplace for Channel Advisor?
spk06: Yeah, it's hard to say that with any particular specificity because so much of it depends on the customers that are making up the mix, right? So if we have a lot of new customers signing up for that long tail of marketplaces and In aggregate, they may be below their GMV threshold, and so while they may be growing GMV, they're still in their subscription kind of block, if you will. But what I would say is hypothetically, at a high level, we enjoy now relationships with a large variety of channels and Over the last few years, and it's been a particular focus of ours on our partnerships team, many, in fact, I would say most of those channels come to us and are interested in working with us to get our high-quality suppliers selling on their marketplace. And often that comes with economic arrangements that benefit channel advisors. So it could be subscription fees. It could be variable fees that are tied to volume growth. So I guess you could say that all else being equal, A dollar of GMV coming out of a long tail of marketplaces is probably incrementally more profitable for us than on Amazon. But I don't lay awake at night thinking about, you know, we don't really control how consumers shop and where they shop and where the GMV flows, so I don't spend a lot of time thinking about, you know, can we pull some lever or another to drive GMV somewhere or not. Our main mission is to integrate as many channels as possible, give our customers access to as many consumers as possible, and wherever those consumers shop, you know, try to make sure we're creating value for our customers by making that easier for them.
spk09: Excellent. So my last question, and you touched on this a little before, but I would appreciate, David, your high-level thoughts. There's a lot of antitrust and regulatory scrutiny right now in e-commerce and big tech in general. Is there any high-level thoughts and potential implications for Channel Advisor?
spk06: Well, that's certainly a third rail topic. So I won't, Tom, obviously speak to any specific companies. You know, they're much more qualified than I am to opine on any trust. But, you know, I guess, you know, having been in the technology industry my entire career and studied everything from IBM in the 60s to Microsoft in the 90s and, you know, others, these are very, very long-term companies. you know, battles that play out over, you know, typically a decade or more. And so I don't expect that there will be any kind of, like, sudden or dramatic change in the landscape, you know, in any time frame that is something that I'm going to spend a whole lot of time thinking about, you know, to the extent that there is a more aggressive posture by governments around the world focused on, you know... whether it's splitting up or somehow impeding the growth of larger tech players, I suppose that might accelerate some of the diversification that we talked about on the long tail, and that's, I guess, probably a net positive for us because the more channels there are, the more there is to manage. But, again, I think those, you know, if you look at history, those are decade-plus dynamics that play out over a pretty long time frame, and so we don't, We don't spend cycles thinking about how we plan contingencies on that front.
spk09: Excellent. Congrats again, the quarter, and thanks for taking on my questions.
spk06: Thank you, Tom.
spk02: There are no further questions at this time. I will now pass it back over to Rayford for closing remarks.
spk05: Thank you, everyone, for joining us today. We look forward to speaking with you again soon.
spk02: Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.
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