ChannelAdvisor's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: ChannelAdvisor Corp (ECOM)
by: SA Transcripts

ChannelAdvisor Corporation (NYSE:ECOM)

Q4 2013 Results Earnings Call

February 6, 2014 5:00 PM ET

Executives

John Baule - Chief Financial Officer

Scot Wingo - Chairman and CEO

David Spitz - President and COO

Analysts

Jobin Mathew - Deutsche Bank

Terry Tillman - Raymond James

Chad Bartley - Pacific Crest

Greg Dunham - Goldman Sachs

Brad Reback - Stifel

Michael Huang - Needham & Company

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2013 ChannelAdvisor Earnings Conference Call. My name is Esteban, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, John Baule, Chief Financial Officer.

John Baule

Good afternoon. And welcome to ChannelAdvisor's conference call for the fourth quarter of 2013. I am John Baule, Chief Financial Officer of ChannelAdvisor. With me on the call today are Scot Wingo, CEO and Chairman; and David Spitz, President and COO.

After the market closed today, we issued a press release with details on our fourth quarter and full year 2013 performance, as well as our preliminary outlook for the first quarter and the full year. 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 during the conclusion of the call.

During today's call, we will make statements related to our business that maybe considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date.

We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today earlier.

For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent Form 10-Q, as well as our other filings which are available on the SEC website at www.sec.gov.

During the course of today's call, we will refer to certain non-GAAP financial measures including core revenue which excludes revenue from two legacy acquisitions that are not a core focus of our business and other metrics. A reconciliation of all non-GAAP measures to the most comparable GAAP measure is included in our press release.

Finally, at times in our prepared comments or responses to your 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.

And with that, I will turn the call over to Scot Wingo for his prepared remarks.

Scot Wingo

Thank you, John, and thanks everyone for joining us today. 2013 was a year of many milestones for ChannelAdvisor. We added over 500 customers in the year, a 26% increase in customer’s year-over-year and ended the year with 2,429 core customers.

2013 total revenue was $68 million. Core revenue increased 29% on a year-over-year basis. On a constant currency basis core revenue grew 30% for the year and 31% in the fourth quarter.

It was also a milestone year for the ChannelAdvisor organization. In addition to executing on our IPO in May, the team opened three new geographies in Brazil, Hong Kong and Mainland China. These new geographies represent significant long-term opportunities for us.

To support our growth the organization matured significantly. We started 2013 with around 400 employees and ended with over 600 employees globally. To support that growth, we've added three new executives to our management team. Please join me in welcoming James Huang, our new MD of China; Diana Allen, our new General Counsel; and Judith Barnett, our new Vice President of Human Resources.

Next I want to congratulate our technology team on a great year where the theme was more channels and more geographies. We now support over 35 global marketplaces. 2013 additions include Best Buy and Groupon Goods domestically, play.com and Tesco in the U.K., La Redoute in France, MercadoLibre in Brazil. Also we expanded our Amazon support to include Italy, Japan and China. Finally, we added New Zealand's TradeMe marketplace.

In addition, we delivered innovative new features around Amazon, Fulfillment by Amazon solutions also known as FBA. We are also getting great customer feedback from our first efforts around Big Data that we call Actionable Retailer Insights.

Another technology milestone for us was Cyber Monday, Cyber Monday was our largest volume day ever and we processed over $500 in transactional volume every second. This represents a 370% increase from the average transactional volume during the rest of the year.

Architecting and building a system that can handle that type of spike and load is not a trivial matter and I wanted to congratulate our technology team on achieving such a huge milestone.

Our efforts in 2013 resulted in several awards including the Triangle Business Journal Businessperson of the Year, North Carolina Technology Association Software Company of the Year, Stevie Awards for Customer Service Department of the Year and finally the award I am most proud of, our third consecutive Best Places to Work award.

For the fourth quarter we had another milestone, our first quarter over $20 million. Total revenues for the fourth quarter of 2013 were $20 million -- $20.5 million which exceeded our expectations. This represents a 28% year-over-year growth rate or 30% when you look at our core revenue.

Our strong 2013, of course, driven by continuing secular trends we are seeing the overall world of retail. We see more and more consumers choosing convenience of e-commerce over traditional retail.

I think if you look back at the fourth quarter of 2013 is a tipping point in adoption of e-commerce. According to retail research firm ShopperTrak foot traffic in malls has declined from 35 billion in 2010 to 17.6 billion in 2013, that's a 40% decline in foot traffic. In fact in the U.S. no new indoor malls have been built since 2006.

The fourth quarter 2013 overall retail sales or offline sales were 2.7%, compared to 11% for e-commerce according to comScore. eBay reported 14% year-over-year domestic gross merchandise value or what we call GMV growth and Amazon grew 22% in the U.S.

You peeled the onion on, on Amazon and look at their electronics and general merchandise business where we mainly participate that business grew 25% well over twice the growth of e-commerce.

The last-minute search and order in e-commerce overloaded the capacity of existing shipping infrastructure. All these headline grabbing data points highlight the continued move by consumers from traditional brick-and-mortar retail to e-commerce.

When we talk to retailers from both our enterprise and mid-market segments, what we hear from them is they dealing with an unmanageable increase in complexity. Google PLA, Amazon FBA, Amazon Product Ads, eBay’s Global Shipping program, cross-border trade, advanced pricing strategies, discounting and promotional strategies, these are all causing increased -- they are important for retailers to stay in the game, yet they are extremely complex to manage, automate and optimize.

While the complexity of these channel increases, we’re also seeing increased fragmentation. For example, back in the fourth quarter of 2012, Google introduced a new program called product listing ads or PLA. A year later in the fourth quarter of 2013, this program was growing at 90% year-over-year on a same-store sales basis and was a larger than the legacy AdWords program for many of our customers.

Unlike ChannelAdvisor’s customers, many retailers were not able to move quickly enough to utilize this new channel and in retrospect, we believe they missed a huge opportunity. Retailers can try to build these capabilities themselves but increasingly they are turning to ChannelAdvisor and are adopting our cloud-based platform to not only survive the label complexity but to thrive.

ChannelAdvisor is the only company offering a feature-rich suite of software that enables retailers to stay ahead of these trends. Driven by these macro trends, ChannelAdvisor’s quarterly and fiscal year results exceeded our guidance.

I wanted to take this opportunity to thank entire ChannelAdvisor team for all their hard work throughout 2013 and especially in the critical fourth quarter. Our growing team of over 600 global e-commerce professionals are the cornerstone of our success.

I also wanted to thank ChannelAdvisor over 2400 customers for their partnership and engagement throughout 2013 and especially in the critical fourth quarter. When we reflect on all these milestones, it's clear that our investments in people, products and customers have paid off in a big way for us in 2013.

Now David Spitz, our President and COO will take you through some operational highlights from the quarter.

David Spitz

Thanks Scott. We were pleased with our fourth quarter performance, especially our continued acceleration of revenue growth and the accelerating growth in our customer base. The $20.5 million in GAAP revenue, core revenue growth of 30% and 142 net new core customers in the quarter, we finished 2013 with a bang and continued to execute well against the strategy we laid out at our IPO.

When we completed our IPO in May of 2013, we highlighted five underlying trends supporting the growth of our business. The growth of -- one, the growth of e-commerce; two, investments in sales and marketing; three, our land and expand strategy; four, geographic expansion; and five, emerging network effects on our business model.

I’m pleased to show that we benefited from continued progress in each of these areas as we finished out the year and remain well positioned as a global leader in helping brands and retailers manage the complexities and opportunities presented by online commerce.

First, e-commerce obviously continues to enjoy broad secular trends. comScore reports U.S e-commerce grew 11% this past holiday season, and China’s Alibaba reported a remarkable $6 billion in sales in a single day on November 11th.

At ChannelAdvisor, we had a record-breaking holiday season with fourth quarter core GMV up over 31% compared to the fourth quarter of 2012. Overall, for 2013, we finished the year with $4.4 billion in GMV passing through our platform.

We believe e-commerce remains a healthy industry with strong secular and global tailwinds and will continue to gain share of consumer spending for the foreseeable future. Second, our investments in expanding our sales team and investing in marketing continue to bear fruits as we drove more in the business in Q4 in 2013 than in any comparable period in our history.

Our net customer count increased by 142 in the fourth quarter, a strong performance considering that Q4 has historically been a seasonally slow period for our sales team as many of our prospects are focused on the holiday selling period. This compares to growth of 32 net -- net new customers in Q4 of 2012.

We believe the strong growth in customer additions is a direct reflection of the investments we are making in sales and market. The size of our sales team has more than doubled since early 2012 and despite the great results this team is generating, we believe the full production capacity of this team is still ahead of us as more and more of our reps gain tender and reached full productivity. We are excited to see what our sales team can produce in 2014 and beyond.

Third, we continue to benefit from our land and expand strategy. The customers who sign on to our platform often find it appealing overtime to consolidate more of the e-commerce management on our integrated platform for the sake of ease of use, consistency in reporting and having a strategic partner to advise them as they grow.

To that end, our average revenue per customer grew 9% in the fourth quarter to nearly $31,000 on a trailing 12-month basis. You may notice that this is a smaller gain that we’ve seen in recent quarters. This is directly attributable to a rapid growth in new customer additions since new customers tend to sign on the price points that are generally below our overall average revenue per customer.

And we believe this does not represent any change in the fundamental average revenue per customer trends in longer tenured customers who continue to grow nicely with us. In fact, if we continue to add customers at an accelerated pace, we believe it is possible that growth in our average revenue per customer metric may continue to decelerate in coming quarters.

As a reminder, we have historically been agnostic as to the proportion of revenue growth stemming from new customers and growth in average revenue per customer. However the rapid growth in our sales team naturally tends to favor a larger proportion of revenue growth from the addition of new customers versus growth in average revenue per customer since new sales reps are generally assigned to new ones.

Fourth, we continued to expand our footprint and investments in international markets. Last year we expanded into Hong Kong and Brazil and this December announced the appointment of James Huang as managing director of Greater China and the opening of our Shanghai office. These regions represent large e-commerce market. I’m very excited to see how our presence in these markets develops overtime.

Fifth, it is exciting to see the emerging network effects taking shape in our business. Over the years, we built a very attractive customer base representing a broad cross-section of brands and retailers and had strong many new channel partners who want to expand the selection of products available on our sites. And as we add new channel partners that in turn attracts even more brands and retailers creating a virtuous and self-reinforcing cycle.

Our vision of building a ubiquitous platform connecting with both supply and demand accelerated in 2013 with the addition of several new channel partners around the world, including Best Buy in the U.S., Tesco in the U.K., Mercadolibre in Brazil and Trade Me in New Zealand among others.

We believe our broadening way of our customers and channel partners is creating a substantial competitive advantage for us and lays the foundation for additional future growth. Finally, I am excited to remind everyone that our favorite event of the year is coming up quickly, our Annual Catalyst conference to be held in March 10th through 12 at The Wynn in Las Vegas, Nevada and April 10th at the Hilton Metropole hotel in London.

Catalyst is our chance to meet with hundreds of our customers, partners and prospects as we explore the rapidly evolving landscape of e-commerce. We expect to have great attendance and hope to see many of you there as well.

In summary, it's an exciting time to be a ChannelAdvisor, our strong performance in the fourth quarter and 2013 reflects continued solid execution against all of our key growth drivers and our vision and as a result, we're optimistic about our prospects for 2014 and beyond.

Now, I would like to turn the call over to John for details on our financial performance for the quarter and our outlook for Q1 in 2014. John?

John Baule

Thanks, David. I’m going to divide my comments into three components. First, I will provide you with a bit of color on the results for the quarter. And second because this is the end of our fiscal year, I will make a few summary comments from the full year 2013. Finally, I will discuss our outlook for the upcoming quarter and for 2014 in total.

Our performance in the fourth quarter exceeded our prior guidance on all key metrics, including core revenue, which increased by 30%. I would like to start by clarifying one item that was not included in our guidance last quarter. We announced in an 8-K in November that we had extinguished $10 million long-term loan early using the proceeds from our secondary offering, resulting in future savings of approximately $1.7 million.

The original loans included warrants, which will be amortized as a debt discount. To account for the early payoff, we recognized a write-off of the unamortized debt discount along with some prepayment penalties, recording a loss on debt extinguishment of $3.1 million, or $0.14 per share. Excluding this item, the EPS loss on a GAAP basis was $0.24, well ahead of our guidance from $0.34 to $0.32 per share. On a non-GAAP basis, our EPS loss was $0.21 a share also well ahead of our guidance.

Total revenues in the fourth quarter increased 28.1% from a year ago to $20.5 million, well above the high-end of our guidance range. Core revenue grew 30% from a year ago to $20.1 million. As Scott mentioned at the outset, especially noteworthy was a significant increase in net customer additions. We added 142 customers in the quarter, more than tripling the number added in the fourth quarter last year.

We believe that this large increase in core customer count in a quarter that is traditionally slow for customer additions reflects the impact of our increased investment in sales and marketing. And as a result, approximately 62% of our total revenue growth was attributable to the addition of new customers, while 38% of our growth was due to increased revenue from existing customers.

We also continue to see an upward trend in the fixed component of our subscription fees to 65% of total revenue in the fourth quarter of 2013, compared with 59% in the fourth quarter of 2012, a significant increase. Sequentially, the fixed percentage of revenue is down slightly from Q3 since holiday spending in the fourth quarter makes retailers more likely to exceed their subscribed monthly GMV threshold and to generate higher variable fees.

Below the revenue line, we continued to see gross margins expand with 30 basis point year-on-year increase to 75%. This increase occurred even with the impact of significant investments in our customer success team to support our new customers.

Moving down the fourth quarter P&L, we reported an adjusted EBITDA loss of $3.2 million, which was at the top end of our guidance range. This adjusted EBITDA loss compared with a positive $1.9 million in 2012, is a direct result of our deliberate strategy of investing heavily and rapidly in sales and marketing in order to help drive strong topline growth.

Correspondingly, sales and marketing expense increased approximately 80% over the same quarter last year. As anticipated, we also saw an increase in G&A due to the build out of our finance, human resources and administrative infrastructure to support the requirements of being a public company and to support our planned future growth.

Since this is our fourth quarter call, I thought it might be helpful to provide a brief recap of 2013. We operate in a largely un-penetrated target addressable market of approximately 110,000 online retailers. So our strategy in 2013 was to grab market share by adding sales reps at a faster pace and building awareness.

Over the course of 2013, our investment in sales reps paid off in terms of net customer additions and in terms of accelerating revenue growth. For the full-year, we added 501 net customers, increasing our total core customer count to 26% year-on-year to 2,429. Revenue was $68 million, an increase of 27% from 2012 and core revenue increased 29% compared with 2012.

In addition, the fixed portion of our subscription fees increased by 540 basis points to 66.8%, providing us with even greater revenue visibility. And finally, our continuing 100% plus subscription dollar retention rates demonstrate the ongoing value of our platform to customers.

Strong performance across all operational metrics translated into accelerating revenue growth over the course of 2013. In today’s press release, we've included a table that provides sequential year-on-year growth in core revenue for the four quarters of 2013, adjusted for the currency headwinds we faced. This table indicates that on a constant currency basis, our quarterly core revenue growth rates accelerated from 25.9% in the first quarter of 2013 to 31% in the fourth quarter.

In addition, gross margins increased by 90 basis points for the full year. And as planned, we increased our sales and marketing investment by 54% compared with 2012, an increase of almost a 1,000 basis points as a percentage of revenues. Finally, we made some major administrative down payments to accommodate our future headcount growth and global expansion, including implementing the NetSuite financial accounting system and the new HRIS system.

With a successful completion of our secondary offering in November, we are beginning the new fiscal year with over $100 million in cash and cash equivalents and no debt. We believe that this provide invest in sales and marketing and to attack our target markets.

Now I would like to discuss our outlook for the first quarter of 2014 and the full year. Let me preface the specific guidance with three clarifying points. First, our annual US Catalyst conference represents our largest single marketing expenditure. This year it'll be held in the first quarter unlike last year when it was held in the second quarter.

As a result, our phasing of expenses in 2014 will be shifted more heavily to the first quarter than last year. In addition, we anticipate that some of our sales and marketing investments, especially in international markets, may be front-loaded to further accelerate our long-term growth.

Second, we're making a substantial push into several new markets in 2014, including China, where we are moving quickly to build out an organization. With almost 70% of the world’s e-commerce activities taking place outside of the US and only 20% of our current business outside of the US, we think this is a significant growth opportunity for us.

While initial estimates of the investments required have been incorporated in our EBITDA guidance, we're still in the early stages of capitalizing on these opportunities and we may decide to alter the amount or the timing of these investments based on our initial results.

And third, as you were updating your models, I thought it would be helpful to confirm that we consider adjusted EBITDA to be a relatively good proxy for cash flow from operations. In addition, we anticipate capital expenditures for the year of approximately $9 million to $11 million.

Now for our specific guidance, for the full year we expect total revenue to be between $84.6 million and $85.4 million which represents strong continued growth of 25% at the midpoint and we are forecasting adjusted EBITDA loss of between $19 million and $15 million.

Our estimate for stock-based compensation expense for the full year is between $7 million and $9 million and we estimate that there will be approximately 24.4 million weighted average shares outstanding for the year. And for the first quarter, we expect total revenue to be between $18.7 million and $19 million.

We expect an adjusted EBITDA loss of between $8.5 million and $7 million. Our estimate for stock-based compensation expense in Q1 is $1.5 million to $2 million and we forecast approximately 24.1 million weighted average shares outstanding for the quarter.

In summary, we are pleased with our results for the fourth quarter and believe we've made some significant advances in 2013 that leave us well-positioned to continue to expand our share of a rapidly growing e-commerce market.

And with that, let me turn it back over to Scot for some closing remarks.

Scot Wingo

Thanks, David and John. In 2013, ChannelAdvisor gained strong momentum. While we are pleased with over 500 customers we added in 2013, John mentioned that there is a 110,000 retailers in addressable market. Therefore with our approximately 2,400 customers, we only had a 2% to 3% penetration rate. To take advantage of our momentum and the large opportunity still very much in front of us, we plan to continue to invest aggressively in 2014.

So with that closing remark, we look forward to answering any questions you had on the quarter or the year. Operator, we’re ready for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) It looks like our first question comes from Karl Keirstead with Deutsche Bank.

Scot Wingo

Hi, Karl, how are you doing?

Jobin Mathew - Deutsche Bank

This is actually Jobin Mathew on behalf of Karl. Thanks for taking my question. It looks like Karl is in an airport and he is unable to take question. We just had a couple of brief questions. So it looks like the sales and marketing expense, it’s up 80%, it continues the acceleration that we saw in the first half of the year. Was there any one-time expense item in Q4 or is it the general trend that we expect to go into next year?

John Baule

I think we expect sales and marketing to continue to grow at a faster rate than revenues as long as we see a return on the investment which we have been seen so far. I don’t think you will see quite the increase year-on-year as a percentage of revenues that you saw in the prior years, but I think we will definitely need to invest heavily in sales and marketing too. As Scot said, we have a big opportunity.

Jobin Mathew - Deutsche Bank

Okay. So in terms of your guidance for the next year, I think you made a comment that your revenues per customer may slow down a bit and that’s a function of adding more customers. Could you elaborate on that a bit in the sense? How long does it take for a new customer to ramp up to the average revenue per customer and what's the general stage and how bigger some of your biggest customers and what’s the general stage in maturity of your average revenue per customer and how big could that get over time? Thanks.

David Spitz

Sure. Hi, this is David. There were few questions in there. So if you look at our average revenue per customer, it’s approaching $31,000 and that’s in a trailing 12 basis. Most of the new customers we signed on for a single module, and so they typically come in at a price point that is lower than our average revenue per customer and that’s been true for many years and continues to be true.

What’s a little bit different now is that because our sales team is signing a significantly increased number of net new customers as you can see in our metrics, the number of new customers that is the proportion of our overall customer base is growing. And so therefore, you’ve got a larger proportion of newer customers in our base. And so that’s basically pulling down the average.

If you look at the cohort of customers that we have that are for example greater than two years and you go back at various tenure rates, what you see is a very strong performance of average revenue per customer which is what gives us the confidence the customers continue to grow with us and it's really just a function of a significant influx of new customers pulling that average down. Does that make sense?

Jobin Mathew - Deutsche Bank

That makes sense. Thanks.

David Spitz

All right. Next question?

Operator

(Operator Instructions) Our next question comes from Terry Tillman with Raymond James.

Terry Tillman - Raymond James

Hey, guys. Can you hear me, okay?

David Spitz

Sure. We can.

Terry Tillman - Raymond James

Okay. Well, first, nice job on the quarter. I guess, maybe, I don’t know, if this is for David that I am going to assume it is. You guys started ramping your investments in sales and marketing more in '12. Was there any earnings from some of the recruiting of sales reps in '12 that were borne out and you are hiring in '13 where you understood what's better wrap to the point that maybe the '13 class sales reps you started to see productivity faster because you're just getting a better quality of sales rep? Maybe you can just talk about that in terms of the different classes of reps between '12 and '13 and productivity out of the gate?

David Spitz

Yeah. Hey, Terry. This is David. Good question. We've obviously hired a lot of reps and I think are gaining some earnings overtime. I mean, I think one of our most promising paths for rep is to recruit internally. We've an inside sales team, which is essentially our lead qualification team that's -- and what we find is that people who are promoted out of that team, because of their ability to drive a good amount of activity and good conversion from leads to ups.

We find that that people who succeeded in that group, performed really, really well in our sales teams and so one thing that we did in 2013 was promote out of that group and it's going to be a continued heavy focused for us going to the 2014.

We've not only expanded our sales reps, our sales team but we've expanded aggressively size of our inside sales team for this reason. We see that’s a great formulae for our sales team. Is that helped to your answer your question?

Terry Tillman - Raymond James

It does. It does. I appreciate that. Yeah. And I guess for either Scot or David, maybe an update on MercadoLibre, any kind of early business benefits you are seeing from now being able to offer that marketplace solution? And then I had a follow-up question for Scot on cross-border trade?

David Spitz

Yeah. Terry, this is David. I'll take the -- another question. So it's early, obviously, we do have GMV flowing through our MercadoLibre platform integration. It does takes time to get customers spun up and there are some complexities around cross-border trade and customs and things like that. So as I said in I think in our last call, I think it will be a build to takes time to contribute the material way to revenue but we do see interest in the integration and we do see some GMV flowing through.

Terry Tillman - Raymond James

Okay. And I guess, this is for Scot, you've talked a lot in the past about cross-border trade and the increasing relevant about within your customer base and just the overall good secular growth opportunity? Have you all done any analysis over the percentage of your customer base of these transaction volumes that across-border now? And how often is that actually the initial instigator for prospect to come to you? Thank you.

Scot Wingo

It's has been awhile since we look at that, the last time I look that it is around 15% to 20% of our transactional volume across the border. In the U.K. it's one of the number one reasons that people choose us because the complexity of managing an eBay and an Amazon across the U.K., Germany, Italy, France, Spain, et cetera just increasing the number of marketplaces they deal within BEU. So I'd say there it is probably one of the top two reasons people choose us.

In the U.S., I think it's a second order benefit of the platform for most folks. They usually have more of an acute need with the domestic platform. And then once get on there and we'll make it very easy to leverage some of these kind of gateway programs like the eBay Global Shipping program and what that we will do is it enables them to go cross-border trade without any pain and then they will see inflows orders from maybe the U.K. or Australia then we'll make it very easy for them to light up going direct in to those countries.

So, that's kind of my view. There has been some interesting studies that PayPal has put out. They did a work with Nielsen in the late third quarter, I don't know, if you have seen that, but we can certainly share with you where. They forecast something on the 200% growth in cross-border trade and eBay has for first time announced that 22% of the transactions are cross-border trade.

So definitely a big growth area for us, we are having a lot of conversations and gratuitous plug for catalyst it's going to be one of the key themes of catalyst this year, we'll have a lot more information around cross-border trade.

Terry Tillman - Raymond James

Okay. Thank you.

Operator

Our next question comes from Chad Bartley with Pacific Crest.

Scot Wingo

Hi Chad.

Chad Bartley - Pacific Crest

Hi. Thanks very much. Scot, I was hoping to ask a few questions around GMV in your channel. So GMV growth accelerated fairly significantly last year? Can you give us any color on, do we have that broke down across channels and if you're seeing any material mix shift? And then more specifically, any comments or thought on trends within Amazon and eBay and drivers you might call out for 2014?

Scot Wingo

Yeah. We really pleased with the GMV growth that we generated there and one of the ways we measure our sales is that litmus test of e-commerce growth. So we're really excited that we grew substantially faster than e-commerce. And we view that's part of our customers having ChannelAdvisor as their strategic platform that enables them to rise above the competition and gain share.

So that's what we attribute to, we don't break it down by channel. Any insights we have on eBay and Amazon we typically already put out to the blogs kind of I know you probably read that, so I’ll point out those things. We're -- those great partners and we felt that their quarters that they announced were interesting and kind of in-line with what we saw.

Chad Bartley - Pacific Crest

Okay. Thank you, Scot.

Scot Wingo

Yeah.

Operator

Our next question comes from Greg Dunham with Goldman Sachs.

Greg Dunham - Goldman Sachs

Hi. Yes. Thanks for taking my question. You've done good job of adding customers an accelerating rate this year as you have invested more and you've also grown headcount pretty substantially, basically 50% by my math here? How would you do on the implementation side, is the time that ramp for customers is same as always been and what are you doing to ensure that you can kind of keep up this accelerated rate of hiring and scale the customers profitability?

David Spitz

Yeah. Hi, Greg. This is David. So, great question and I know we talked a lot about the investments in sales and marketing, but not to be loss is also the investment, so we're making what we call customer success. So we have large cotangent of employees on our customer success/services teams and their whole focus is getting customers implemented in launch and successful and gaining competitive, gaining market share within that particular segment.

So as I think John touched on in his prepared remarks, obviously our gross margins improved in Q4, but that belies the fact that we actually invested quite a bit in increasing our headcount in that particular area as well.

So we haven't seen any slowdowns in terms of implementation and backlog in terms of our ability to get customers launched despite the increase in net new customers and that's really a testament to the people we have on the services side and the hiring that we've done there as well. And we've just seen a really good return on having those people, managing e-commerce complex and making sure that we're help in our customers along the way. It’s one of our strategic benefits and we've continued to invest in that area as well.

Greg Dunham - Goldman Sachs

Okay, great. And maybe one for Scot, switching gears a little bit. PLA that was a big topic obviously this holiday season, can we perhaps talk about the impact on your business of the rise in PLAs and how do you position for that going forward?

Scot Wingo

Yeah, Google has had AdWords which is their paid search program and what we're seeing is this data out there from Forrester, for example, that shows that Google is losing share when you think about product search to Amazon, something like 43% of consumer start their product search at Amazon and 11% Google. So Google reacted to that by coming out with a new offering called product listing ads. That's when you do a product-oriented search, you'll see -- typically it's a row of four by two metrics up in their brand, right hand side of images with prices and products.

Now what’s interesting about that is if you think about complexity, the most complex thing we help each other is with is the marketplace because you're selling products somewhere else. You’re managing inventory, you're getting orders, you're pushing tracking numbers, you're handling returns of off your website and then the other end of the spectrum is paid search because you are just dealing with some keywords.

PLA, I think, just kind of squarely in the middle, you are starting to bring into effect the inventory, more product images and targeting there. So that has been a nice solution for us because it does increase the complexity that you face in the search world. You also have to ask questions like if I can be in both programs, what do I pay for each of them and having a company that can help you with that and understand that managing on (inaudible) really helps you get at the core economics and near real time where as if you are managing it differently, you never get to the -- maybe 60 days later you would figure out what those economics are.

So it's been a big win for us because it's complex. It's typically married with search and we're -- because we're -- we have sweet we're able to give people an unparallel view of what's going on there.

Greg Dunham - Goldman Sachs

I guess on follow-up, I know it's relatively recent, but it's actually been on for a year now. I mean can you think it's been a driver to the customer ad number or to the -- some of the growth in existing customers today?

Scot Wingo

Yeah, it's definitely impacted both of those metrics. In the way, it's been out for a year but the way Google introduced it was kind of -- there wasn’t hardly any exposure from a percentage of searches that showed up for in the 2012 year. And it wasn't until maybe middle of '13 that it really started to be on every search page, because they felt like they had to get the coverage up.

So it's had a -- if I would have to chart out the line, it's definitely been back and loaded the amount of impact. Another interesting thing is Amazon’s made the strategic decision not to participate there. So it is more of the few years where retailers can get in front of consumer without having to kind of “compete” with Amazon. So it’s still -- we think there is lot more retailers that could be on the program.

We see a lot of the folks doing it themselves and doing it poorly and you ask one of the things that people can bring upon sales calls as well do a bit of score card and walk retailers do that are doing it manually and show them how our customers are doing it better.

Greg Dunham - Goldman Sachs

Great. Thanks guys.

Operator

Our next question comes from Brad Reback with Stifel.

Brad Reback - Stifel

Hi guys, how are you?

Scot Wingo

Hi, Brad.

Brad Reback - Stifel

So quick question on the sales force. It took roughly two years to double it since ‘12. How long do you think it takes to double it again?

David Spitz

Hi Brad, this is Dave. I think the way we think about it is we want to continue to invest aggressively. We have resources obviously, first IPO, that we didn't have pre-IPO and we continue to deploy them heavily into the sales team. The way I really look at it is as long as we continue to see the returns that we wanted to see out of our sales team, we're going to continue -- as John and Scot -- what we believe it will be a very large market opportunity that's underpenetrated and a lot of opportunity in front of us. And so we're going to continue to invest pretty aggressively.

As long as we see the returns on that investment come to fruition, so I don't know if that from a time horizon perspective, it's hard to answer that question other than to say we're going to continue to aggressively invest and monitor our performance over period of time and continue to expand. If you look at -- I think if you look at for example our entry into China that we just announced last year, a, with the opening of Hong Kong office and b, with the appointment of the Management Director and the office in Shanghai.

At the beginning of the year of 2013, I think we had one or possible two sales reps covering China. And so when you think about the size of scale of that market relative to really having almost nobody focused on it. There is a lot of capacity there for increasing our sales count. I would say the same is true Latin America. Certainly in Europe, there is -- we continue to higher aggressively and potentially other regions beyond. So I would hesitate to sort of put a pin on exactly when we might double again, other than to say we're going to continue to invest at a pretty aggressive face.

Brad Reback - Stifel

Okay, great, one quick follow-up. So given that you've added capacity less than the people that you hired as they ramp and you're hiring more. Is there any reason or thing that new customer add as a percent wouldn’t be at least in line, if not higher than the 25-ish percent you put up in '13? Thanks.

Scot Wingo

Yeah, great question. So as a reminder, we always remind people to look at both net customers ads and average revenue per customer because we sign -- we sign customers across a pretty wide spectrum of size, right. We have what we call mid-market customers that are smaller or with large enterprise customers like for example, OfficeMax, we announced, I think after a second or third quarter last year.

And so it’s a pretty broad range and we may have a quarter that skews more enterprise or may have a quarter that skews more mid-market. And so you are going to have varying degrees of average deal size in there and therefore, an effect on average revenue per customer. So, I would look purely at net customer additions.

In isolation, I would look at that and I would also look at average revenue per customer. So it depends on the pipeline mix in any given quarter and how that shakes out. But obviously, we continue to be confident that our sales team will continue to deliver good result and that’s why we continue to invest.

Brad Reback - Stifel

Great. Thanks very much.

Operator

Our next question comes from Michael Huang with Needham & Company.

Michael Huang - Needham & Company

Thanks very much. Hey guys.

Scot Wingo

Hey, Mark.

Michael Huang - Needham & Company

So in terms of the strength of customer adds in Q4, despite what you typically would see as challenging seasonality. Was wondering, how much would you attribute to just kind of the ramp sales capacity or sales execution? And how much would you attribute to just the strength of underlying demand trends, or something else going on in the industry? I mean, is customer behavior any different this year than what you saw last?

David Spitz

Hey, Mike. This is Dave. Obviously, I don’t have a quantitative answer for that. Every customer joins our platform for their own reason. I would say a substantial contributor obviously is the ramping of our sales team and our ability to reach more prospects and to manage a larger pipeline. That’s obviously one of a core thesis for the investments that we’re making. But I do think that some of the things that Scot touched on in terms of increased complexity, things like PLA, the rollout of new marketplaces like Best Buy and Tesco and others that we’ve talked about.

Those have certainly contributed, right. So retailer’s space are sort of accelerating need to invest in e-commerce and to make sure they're keeping up. There are new channels that are opening up and a lot of our channel partners work closely with us from a business development perspective, because they want to see more selection and therefore, they drive more customers.

So, I sort of touch on that in the network affect point that I made earlier, where the more channels we add, they work. Those channels -- it's not like we integrate and then we part ways. We integrate and we tend to have a strategic partnership with them because it’s in our mutual interest to drive as many customers on to a platform as possible. So, again, I don’t have a quantified breakdown for you, but qualitatively it was a mix of all those things and they were all healthy trends for us.

Michael Huang - Needham & Company

Got you. Now, you kind of touched on this earlier, but in terms of some of the newer marketplaces that you’ve added, including MercadoLibre, Tesco and Best Buy. Which one of those do you think has the biggest impact in the near-term? I mean, did you have just a sense for which one could be the bigger contributor as we look out kind over the next year or two, I know it’s really across all of them?

David Spitz

Yeah, Mike, it is early and it's frankly probably too early to call. I mean, they've all been good partners in different ways, right. So, some are more withdrawal from our cross border trade perspective. Some are obviously more addressed towards domestic markets. I think that they all serve a need and they all represent something that's attractive to a segment of our customer base. And again, our mission really here is to connect as many different points of demand and supply as possible. So, I think it’s early to say that any one or two of these is going to become bigger or more substantial than any other at this stage.

Michael Huang - Needham & Company

Got you. Okay. And last question for you. Just wanted to touch on China real quick so, I know that you’ve been able to kind of sign up Amazon China. But can you remind us again, where are your other key channel partners in China and does the hiring of the GM of China, does that signal that we’re going to see more channel partners kind of added this year or in the near-term? Thanks.

David Spitz

Yeah, great question. So as a reminder for those who maybe not as familiar with our history, a lot of our -- so we have an existing stream of business and stream of revenue attributable to China. And so far it's been almost entirely what I would call export-driven, right.

So these are typically Chinese manufacturers that are using our product to export their product and settle on, for example eBay or Amazon in the U.S. or into Europe or Australia. And that is the vast majority of the business that we picked up in China over the last year-to-year and a half.

And so, the reason we decided to invest more heavily in China and to appoint a Managing Director is first and foremost, because we think that export business is a very large opportunity and we've only really just scratched the surface of it. So, I think for the immediate future that is really the focus of our team and China is to continue to build on that export business.

There are obviously opportunities in terms of import -- importing western brands into China. There's -- as everybody know, a very fast-growing consumer middle class in China and there's more disposable income and there’s an interest in a number of western product categories and western brands. And obviously that’s something that we’re looking at and something that’s interesting to us.

And then, I would say the third category that's probably furthest out is the interior market of China. So that would be helping near Chinese retailers and Chinese manufacturers selling on in interior channel within China. That’s kind of the sequence or the logical flow or expansion that we see in our business over time.

Michael Huang - Needham & Company

Thanks so much, guys. Take care.

David Spitz

Thanks, Mike.

Operator

Looks like there are no further questions, I’m going to turn the call back to Scot Wingo for closing comments.

Scot Wingo

Thanks, everyone. We are real proud of our 2013 and thank you for being on the call today.

Operator

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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