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ChannelAdvisor Corporation (NYSE:ECOM)

Q1 2014 Results Earnings Conference Call

May 5, 204; 04:30 p.m. ET

Executives

Scot Wingo - Chairman & Chief Executive Officer

John Baule - Chief Financial Officer

David Spitz - President & Chief Operating Officer

Analysts

Brad Reback - Stifel

Michael Huang - Needham

Greg Dunham - Goldman Sachs

Colin Sebastian - Robert Baird & Co.

Karl Keirstead - Deutsche Bank

Justin Furby - William Blair

Shawn Milne - Janney Capital Market

Eric Lemus - Raymond James

Chad Bartley - Pacific Crest

Operator

Good day ladies and gentlemen and welcome to the first quarter 2014, ChannelAdvisor earnings conference call. My name is Derek and I’ll be your operator for today.

At this time all participants are in listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. (Operator Instructions)

I would now like to turn the conference over to Mr. John Baule, Chief Financial Officer. Please proceed.

John Baule

Good afternoon and welcome to ChannelAdvisor's conference call for the first quarter of 2014. This is 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 first quarter performance, as well as our outlook for the second quarter and full year 2014. 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 following 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 the actual results to differ materially from expectations. These risks are summarized in the press release that we issued today.

For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent Form 10-K, as well as our other filings which are available on the SEC website 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. 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, let me turn the call over to Scot Wingo for his prepared remarks.

Scot Wingo

Thanks John and welcome everyone to our first quarter 2014 conference call. Results for the first quarter exceeded our expectations. Revenue came in at $19.3 million compared to last year’s revenue of $14.9 million, representing a 30% year-on-year increase.

Core revenue came in at $19 million, a 32% increase over last years $14.4 million. comScore reported that U.S e-commerce grew at 15% year-over-year for the first quarter of 2014, so we are pleased to be growing more than twice that rate.

It was great to see many of our shareholders and analysts at Catalyst U.S. and Europe this year. Both Catalyst events had record attendance and are the only venues where retails can see the top players in e-commerce such as Amazon, eBay, Google, MercadoLibre and Alibaba.

At this year's Catalyst, in my keynote I introduced a new e-commerce trend we are seeing that I wanted to share here on today’s call. For about a year we’ve been doing a lot of research and work in the e-commerce market in China. There are a lot of data points in China that are mind-blowing, but the one that really stood out for us is that the top e-commerce channel category in China is market places with a 90% share compared to the other types of e-commerce channel such as such engines and comparison shopping engines.

To put that in perspective, here in the U.S. market places had a 25% share for e-commerce channel. Europe is similar to the U.S. and Latin America is in the 33% to 50% range. So China’s market places have 90% share and the U.S. market places are 25%.

We look at the data point and ask ourselves, is the U.S. leading or lagging this trend? We think the U.S. is lagging and that leads us to believe that we are in the early stages of a surge in market place share in the U.S. In homage to Marc Andreessen’s, Software Is Eating The World essay, I’d like to call this new trend, Marketplaces are Eating the e-Commerce World.

This is just a fundamental question, why are marketplaces so popular with consumer globally? First, the way we define a marketplace is in e-commerce venue with multiple sellers and where the consumer buys from the venue and not directly from the seller’s web store. Examples in marketplaces are eBay, Amazon’s third party business, Tmall and MercadoLibre.

Marketplaces have four features that differentiate their bio-experience from other e-commerce channels; selection, values, convenience and confidence. In China e-commerce broadband and mobile, all hit it about the same time, along with innovated approaches from Alibaba, Jingdong and Tencent; the favorite market places that caused them to be the dominant channel in that region.

If you look at the U.S. we see signs that marketplaces are already taking share, such as Amazon’s 27% year-over-year growth rate for the electronics and general merchandise, often called the EGM category that I announced in the first quarter. The tremendous growth of mobile usage in the U.S. and the success eBay and Amazon are having on mobile platforms is putting pressure on non-market place e-commerce channels like Google Search Engine.

For example, in our same-store sales data, desktop ad words convert at about 3% and in mobile devices at about 1%. They are essentially a third less efficient due the degraded user experience on mobile devices. Because of the lower conversion rates, retailers are not willing to pay as much for those clicks. This challenge showed up in Google’s first quarter results where they announced that CPT was down 9% year-on-year.

In summary, we believe over the next five years there will be continued use towards the market places and you’ll see several indications; retailers will continue to add market places, existing global market places such as eBay, Amazon and Alibaba will accelerate their global expansion out of their normal region; companies like Google, Apple, Facebook and Twitter that do no currently operate marketplaces may potentially enter the space. Finally, innovative new mobile first models like those operated by Wanelo and Poshmark will gain acceptance and become major e-commerce marketplaces over time.

The second big topic at Catalyst this year was cross-broader trade, commonly abbreviated as CBT. When they talk to our customers about their strategic priorities, what we hear is that our U.S. customers, which are primarily retails and manufacturers want to sell their products into Europe, Asia Pacific and Latin American.

Our European customers want to sell across Europe into Asia, into North American and Latin American and all of our Chinese customers want to sell into Europe, Latin American and North American. In fact Nielsen recently published a forecast that predicts cross boarder trade will grow 200% to $300 billion by 2018.

Recently on their first quarter call, eBay mentioned that cross border trade grew 24% year-over-years and now represents 22% of their business. This growth rate is twice the rate of their organic growth.

ChannelAdvisor’s are uniquely positioned to help retails at cross border trade. At a high level, our platform connects supplier from retailers and manufacturers to demand from hundreds of millions of consumers active on e-commerce channels. By adding global channels such as Tmall and MercadoLibre, we give our customers a direct pipeline to nearly tens or hundreds of millions of e-commerce buyers in these new regions.

When we talked to retailers, many of them are both excited and concerned about cross border trade. Traditionally, cross boarder trade has been a very heavy model, requiring both millions of dollars of investment in plus years.

We started by creating a foreign subsidiary, building out a complete logistics network, then building a website and then finally start selling. That traditional model is very risky, because it puts all the cost at the front on the cycle with revenue and customer feedback at the backend of the cycle. So retailers naturally worry, what if we invest $10 million in a China or a Brazil cross boarder trade initiative and nobody shows up, may never pay for itself.

Our platform allows ChannelAdvisor to provide a new approach that borrows may of the concepts from agile software development. We call it agile cross border trade. With agile cross border trade, instead of front-loading investments, we recommend that the retailer put their products in front on the consumers first in the online marketplaces like MercadoLibre and Tmall.

This has a dual benefit of generating sales immediately and starting to understand the cross-broader trade consumer sooner rather than later. Then the retailer can iterate towards the end of goal of a substantial local offering, but with lower risk and time investment. These two trends illustrate the challenging rapidly evolving environment that retailers must operate in and increased fragmentation and complexity they are faced with every day.

With those two trends in mind, here are some of the product innovations we’ve delivered in our platform since that last call. Digital market: Before Google product listing ads, there use to be a clear differentiation between pure ad programs like Google AdWords and data feed driven programs like comparison shopping engines. At Catalyst we announced our new digital marketing solutions that combines our existing search and comparison shopping engine capabilities with new features and enhancements to provide a comprehensive solution for the digital marketer.

Smarter re-pricing: Customers love our ability to dynamically re-price their products on Amazon’s market place, depending on the competitive environment and situations. In concert with Amazon, we have added significant net features and capacity to our re-pricer such as predictive modeling, real time price change detection and many new business role capabilities.

Smarter fulfillment: Imagine you have orders flowing in from 10-plus market places, as well as your webstore on the front end and on the back end you have two to three different fulfillment centers plus maybe you also have product stored at Amazon fulfillment by Amazon warehouses. Our smarter fulfillment feature optimizes this and allows the retailer to prioritize distribution centers by either location, profit, etcetera.

Web-store amplifiers: Midmarket customers frequently start their e-commerce lifecycle on marketplaces and then they want to add a web-store, so they can use our digital marketing suite. We found that these platforms come in and out our favor quite frequently. So they help our customers easily spin up a move platforms. We've released web store amplifiers for Shopify and BigCommerce, two of the most popular cloud based platforms.

These are just some of the product innovation that we coalesced into our spring release. If you are interested in learning more, you can download the details at our website or view one of the spring release oriented webinars.

With that, I’ll turn it over to our President and COO, David Spitz, who will take you through some of the operational highlights for the quarter.

David Spitz

Thanks Scot. Q1 year-over-year total revenue growth of 32% was the fastest organic quarterly growth rate we’ve seen in seven years. We have more customers selling more products and driving more GMV and revenue in more countries than at any time in our history.

Our investments in sales and marking, geographic expansion, platform enhancements and services are paying off, but that’s not even the most exciting part. What excites me more is that in addition to record revenue growth, we also booked more new business in Q1 than any question in the company history and despite those record bookings, we also still finished the quarter with the largest pipeline in the company’s history. In short, we are just warming up.

Over the past year since our IPO, I’ve made it a point to highlight and describe the five underlying trends driving the growth of our business, mainly growth in e-commerce, investments in sales and marking, our land and expand strategy, geographic expansion and network effects in our business model.

Today, given our strong results I’d like to spend some time focusing on sales and marking , the topic our investors frequently ask about, specifically around our go to market strategy and sales rep productivity and what gives us confidence that our investments will continue to pay off.

We believe there are well over 100,000 potential customers for our platform around the world and with just over 2,500 customers today, we also believe that the vast majority of the opportunity is in front of us. That’s why we’ve been investing so aggressively. We a leader, but an early leader and we seek to become the largest network connecting supply and demand for e-commerce globally.

But we are also very systematic in our approach to managing the sales funnel, because we believe that’s what will provide us long-term leverage in the model. We track our sales and marketing metrics very closely. In order to generate a certain level of revenue growth, we have to drive a certain about of bookings. And working up the funnel from there based on historical conversion rates, we know how many sales qualified opportunities our inside sales team used to generate and how many leads our marking team used to product, and we can break this down by region, market segment and products.

Our entire operating plan for the U.S. produced and managed this way and we track our pipeline progression stats consciously and we also have a well developed organizational structure, to ensure we have the right structure and resources applied in each respective area of demand generation and sales.

To stimulate demand, we produce and mange a significant volume of value added content and thought leadership to generate demand and awareness for our platform. You can see this in the volume of webinars, conferences, blogs, case studies and general PR that we do. Very little of what we do is marketing in a traditional sense, instead from our signature catalyst events to webinars and eBooks, everything we do is geared towards helping our customers and processing the competitive advantage and is a very dynamic and fast moving industry by sharing unique insightful and timely content.

As we work to simulate demand, we make advanced use of our marketing site. We are enthusiastic and long-time users of both market and sales force, to both automate and optimize our marketing and sales activities. When prospects are ready to engage, our sales team is there to efficiently work with them to match their needs to the solutions we offer.

This sufficiency and focus on customer success, is part of the reason our average sales cycle remains about 50 days. From there, customer success team takes over to insure a smooth on boarding process and long-term success for our customers. This system has allowed us to continue to invest aggressively and show results. We are signing and on-boarding more customers than ever and we believe our system has scaled to continue and grow as we increase our market share.

On a related topic, we also get asked about sales rep productivity. As expected, we have seen a modest downtick in average rep productivity over the last couple of quarters measured in bookings per rep, attributable primarily to the influx of new reps and to the increases proposition of reps in newer markets.

Importantly, we continue to see very consistent performance from reps when viewed on a cohort basis. Meaning, we do not see the diminishing of productivity from tenured reps and we also continued to see productivity metric for our reps that are consistent for the last couple of years.

So while the influx of new reps continue to dilute our overall productivity, when viewed on a cohort basis our performance remained strong and consistent and within historical ranges. As for the mix of international versus domestic sales reps, put simply our North American sales team is a well oiled machine, our most mature market while methods and processes are highly evolved.

Our North American sales team or our software products, we would be on Version 8 and consequently we find that reps in North America are roughly twice as productivity as those in other regions where we are maybe on version 4 or 5 in Europe and Australia and version 1 or 2 in China and Brazil.

Reps in those regions tend to be less tenured in aggregate due to disproportionate investments we’re marking there and where there is lots to learn about our solution and brand. But we believe that over time reps in these regions will gradually catch-up to the productivity we see in North American as time passes.

In fact, I’d like to highlight that I was particularly pleased with our time results in Q1. Not only is China our fastest growing geography, but our relatively new team there based in Shanghai deals with both revenues and bookings significantly ahead of plan in Q1, coupled with our budding strategic partnerships with Alibaba, we are very enthusiastic about our long term potential in Chan and expect to invest significantly against our opportunity there during the remainder of 2014, an investment John will touch on momentarily.

Finally, I wanted to provide some comments around composition of our sales and marking headcount. In our recent 10-Q, we categorized 344 employees in sales and marking, but its important to note that substantially less than half of that headcount is what we term quota carrying sales reps. The remainder includes categories like product marketing, insight sales and account management among others.

Account management in particular has been one areas where we significantly ramped up hiring in the last couple of quarters due to the increased phase of customer applications and to better cover our broadened customer base.

Inside sales, our team responsible for re-qualification, there’s another group that expanded significantly to help handle are growing pipeline, as well as serve as a recruiting ground for potential new sales reps. Thus the growth and magnitude of our sales and marketing headcount expands several functional areas, not just quota carrying sales reps.

In summary, I’m very pleased with our Q1 performance. We believe the combination of strong, accelerating revenue growth, coupled with a very healthy pipeline and solid execution in our marketing and sales functions and good early attraction in our newer geographies and with our new partners, position us very well to continue growing significantly faster in the e-commerce industry and given the size of the opportunity before us, we expect to continue to with our firmly planted on the gas pedal.

Now, I’d like to turn the call over to John for details of our financial performance for the quarter and our outlook for Q2 2014. John.

John Baule

Thanks David. As Scot highlighted, our business continued to grow at an accelerating phase in the first quarter. Total revenue of $19.3 million exceeded our guidance. Our core revenue grow at a rate of 32%, due primary by a 28% increase in our core customer account and a 7% increase in average revenue per customer.

Also worth noting, our fixed subscription revenue as a percent of total revenue increased to 73% in Q1 compared with 65% in the first quarter of 2013, as customers traded to higher GMV level to better match their increase to online revenues.

Our operating thesis has been that an incremental investment in sales and marketing would enable us to increase our revenue growth trajectory and this thesis has been validated by our performance over the last five quarters, with our year-over-year core revenue growth accelerating from 26% Q1 of 2013 to 32% growth this quarter.

Now, let me add some color to our results. Starting with gross margins. Gross margins remain above 70%, however, this quarter they are below recent levels, as well as the first quarter of 2013. This temporary reduction is attributable to the acceleration in our rate of new customer additions. Beginning in the second half of 2013, we began adding new customers at an accelerated pace. Especially noteworthy was the tripling of fourth quarter net ads in the season where retailers were generally reluctant to sign up for new systems.

In anticipation of continued strong demand for our platform, we accelerated our hiring of launch personnel, resulting in additional expense in the first quarter. The impact of this acceleration is largely confined to the first quarter and we anticipate gross margin levels for the full year of 2014 to be in line with the levels we reported in 2013.

As anticipated, sales and marketing expense increased, up 77% compared with the prior year. As I discussed on the fourth quarter 2013 call, the year-on-year comparison was impacted by the change in timing of our U.S. Catalyst conference in Las Vegas. Last year we held this conference in April; this year we held it in March.

Our net cost for the conference was approximately $1.5 million. So excluding that item, the growth rate of sales and marketing expense is approximately 58%, which is in line with the recent quarters and reflect our aggressive sales force expansion.

In addition to bookings, which David discussed, we measure the effectiveness of our sales and marketing investment by tracking net customer additions. During the first quarter, we nearly doubled our net customer additions compared with the first quarter of 2013, adding 136 net new customers. Based upon both of these indicators, we intend to continue to pursue our aggressive market penetrations strategy, by expanding our global sales force.

And I’d like to highlight our investment in global expansion. Less than 30% of our customers are outside of the U.S., yet approximately 70% of e-commerce takes place outside of the U.S. To help ensure that we are well positioned to seize our appropriate global share, we are making significant investments in Brazil and China in 2014.

In China alone, we are planning to invest between $4 million and $6 million this year, with the bulk of that investment occurring over the next three quarters. While growth in China will not have a material impact on revenue in 2014, over the next three years we expect it to be a major growth driver. It’s also worth nothing that China was our fastest growing market in the first quarter.

With regard to research and development expenses and G&A expenses, year-on-year changes are impacted by the fact that 2014 will be our first full year as a public company. Over the long term, we believe that we will gain leverage on both of these P&L lines. Beyond 2014, we believe that R&D expenses will grow at approximately two-thirds with the rate of revenue growth. At that level, we believe that the scale of our R&D will allow us to add features at a rate that will be difficult for potential competitors to match and further enhance our position the leading e-commerce platform.

We believe that beyond 2014 G&A will grow at less than half of the rate of revenue growth, reflecting the highly scalable infrastructure we had built over the last year.

Now before I get into guidance, I want to remind everyone that the one-time revenue, that was included in our second quarter of 2013 results and which I discussed at length on that earnings call. In that call I explained that approximately $300,000 of that quarter’s revenue was attributable to items, which were one-time in nature, such as marketplace integration projects.

To properly assess our growth in the second quarter of 2014, you should exclude this $300,000 from the Q2, 2013 base revenue. So for comparative purposes, Q2 2013 revenue will be approximately $15.7 million and Q2, 2013 core revenue will be approximately $15.2 million.

For the second quarter of 2014, we are projecting total revenue of between $19.8 million and $20.1 million, which would represent year-over-year growth of approximately 27% at the mid point, compared with the adjusted total base revenue of $15.7 million. We are projecting an adjusted EBITDA loss for the quarter of between $5.5 million and $7 million, and we estimate that our share count will be approximately $24.5 million and our stock compensation expense will be $1.5 million to $2 million in the second quarter.

For the full year, we are increasing our guidance for revenue to $85 million to $86 million, a 74 basis point increase at the midpoint. We are maintaining our previous adjusted EBITDA loss range of $15 million to $19 million, with a bias toward the higher end of that loss range to reflect our continuing investment in sales and marketing and our expanded investment in China and Brazil. Our projected share count for the full year is $24.6 million and we maintain our estimate of full year stock compensation expense of between $7 million and $9 million.

In summary, our performance in the first quarter of 2014 represents another solid step towards our goal of becoming a core platform for the 110,000 potential customers in our target market. With just under 2,600 customers at the end of Q1, record quarterly revenue growth and significant potential for global expansion, we believe that we have a long runway for growth.

And with that, I’ll turn it back to Scott.

Scot Wingo

Thanks David and John. Before we turn it over to Q&A, I wanted to thank (inaudible), our customers and partners for a great start to 2014. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will be from the line of Brad Reback from Stifel.

Brad Reback - Stifel

Hi guys, how are you?

Scot Wingo

Hi Brad.

John Baule

Hi Brad.

Brad Reback - Stifel

Hey, I’m sorry if I missed this. The composition of the new customers you added, is it pretty consistent with what you’ve seen in previous quarters and years?

David Spitz

Hey Brad, this is David. Yes, it is very consistent. We continue to make progress both on the mid-market and enterprise side. One stat you‘ll see in our Q is that our penetration on the IR 500 went from 27% at the end of last year to 30% at the end of this year. So a good progress across our entire customer base and prospect base.

Brad Reback - Stifel

And if we look out a little bit as it related to China, how should we think about number one, the customers coming on from China; and number two, as it relates to new customer ads, what type of percent do you think that could represent a couple of years down the road.

David Spitz

Well, so I’ll characterize a couple of things around China. One is, to remind everybody that there are kind of two sides to the China equation for us. One is the import business and one is an export business. So our team in Shanghai is predominantly focused on the export side of the equation, which is manufacturers and similar companies in China who are using our platform to sell into western countries. That’s a line of business that has been active for us two to three years now, but we put a team in Shanghai really to focus on building out what I think is a significant opportunity there. So our Shanghai team is based primarily, is just primarily focused on the export side of the equation.

The recent announcement we made with Tmall is more than import opportunity. That is to say western brands selling goods into China using Tmall Global or Tmall Copper and that business development activity, although we’re obviously getting assistance from our China team, will largely be driven by our U.S. and European teams where the customers are located, so I just wanted to make that clarification.

And then as far as speculating as to what percentage of our customer base ultimately would be in China, that’s hard to say Brad. We think there’s a large opportunity there. Obviously we think we need to invest there, but it’s difficult to speculate.

Brad Reback - Stifel

Great, thanks very much.

David Spitz

Thanks Brad.

Operator

Your next question will be from the line of Michael Huang, Needham.

Michael Huang - Needham

Thanks very much guys. I was wondering if you could share with us how many of you’re customers currently are participating in cross border trade and what are your assumptions for how this ramps?

Scot Wingo

Yes, this is Scott, how are you doing Michael?

Michael Huang - Needham

Yes, doing well thanks. A little bit sick, but hanging in there.

Scot Wingo

Yes, that’s not a metric that we released. We did an informal survey and something came back around 15%, that’s about six months ago, just to give you an idea. And it tends to be most of our European customers are doing some cross border, because of just the nature of Europe.

The U.S. is a smaller percentage, but I would say what’s interesting is if you look back two years ago, the number one strategic priority for folks was channel expansion and that CBT is kind of working its way up the list, definitely into just one of the top spots if not the top spot and its because I think that there’s a lot of headlines out there about what’s some of the exciting things going on, both in China and Latin America and what not and when your going 15%, 25%, 30%, it looks pretty appealing.

And its also I think when you look – when retailers look at their traffic trends, your able to on the Internet see the source of traffic. When I anecdotally talk to retailers, they are seeing a pretty big spike in traffic coming from Chinese and Latin America consumers. That’s kind of causing them to really reflect on that and think about how they can optimize that traffic.

Michael Huang - Needham

Got you. And do you have an assumption for, like as we look out two or three years. What percentage do you think that that of your customer base could be cross border by that time?

Scot Wingo

When we look at – the best forecasts I see are from Forrester, and then the Nielsen when I referenced in my prepared remarks, in the mix we have the date point of eBay, so those are the three things we look at.

When you look at the Forrester data, I think it’s about 2017, the U.S. is about 25% of e-commerce. Now they don’t slice out the cross border trade part of that, but that just gives you a feeling for, we look at that and we’re at trailing wave to that trend and we want international to grow up pretty big for us, so that US is a minority like it was being forecast there.

Then eBay has, I think 22% of their sales are cross border. I think that’s a good, they are probably the leader in cross border trade right now, and just the infrastructure they have built out there, so that’s a good kind of market for us to run out of the next three or four years.

Michael Huang - Needham

Got you, okay. And then congrats on the Tmall win here. So I was wondering, I mean as you look at the global landscape, are there any marketplaces now, like any global marketplaces now that would be kind of highest priority for you that you don’t have yet and then maybe to just comment on, of your newer marketplaces, which ones are further along and outside of Amazon and eBay. Thanks very much.

David Spitz

Hey Michael, this is David. We obviously look for large pockets of GMV that are currently unaddressed by yesterday. In that category I would put Aliexpress, as one example, which is fairly significant. Again, a cross border trade mechanism for Chinese sellers, predominantly selling to Russia, Brazil and North America. That’s a platform with which we have not announced in the integration at this point.

Another one might be Yandex in Russia, which has traditionally been a search engine class/comparison shopping site and late last year consistent with Scott’s marketplaces being again, transitioning to a marketplace model.

So those are two multi billion dollar pockets of GMV if you will that I think are fairly interesting and then from there are certainly other large retailers that are either doing third party marketplaces or have publicly commented that they are thinking about doing market places, so I think they represent additional points of demand for us as well.

So we continue to focus on how to reopen up those avenues through additional demand for our customers, so I think it’s a fair statement to say that we’re continuously evaluating the decline in effort it will take to integrate it to some of those new channels.

Next question?

Operator

Your next question will be from the line of Greg Dunham, Goldman Sachs.

Greg Dunham - Goldman Sachs

Hi, thanks for taking my question. I wanted to switch gears. The digital marketing platform that you announced at Catalyst, how has the customer response been to that and in concert with that you mentioned marketplace is kind of eating the e-commerce world. What are you seeing from a PLA perspective? Any changes you see from that opportunity and any changes you would expect on the comp? Thanks.

David Spitz

Hey Greg, this is David. I think on the digital marketing front, I was really pleased to see this come together. This was a combination of some substantial new functionality that we developed, as well as a pulling together of elements of our platform that were previously sold separately if you will and as Scott alluded to, the emergence of PLA and other trends in the industry are really pushing together the need for not just sophisticated bid management and predictable analytics, but also really strong data feed management to make sure you got high quality data feed in these algorithms.

So we are very well positioned for that, but also want to make sure that we were positioning and packaging the product in a way that was easily understandable by the market and so I would say that the initial reception to that has been strong.

One thing I would – as I mentioned on one of the earlier questions, we had a fairly substantial increase in our penetration at the IR 500, which typically skews more towards digital marketing. We’re talking about large enterprises that invest quite a lot of money in our websites and they are more likely the mid market customers who want to seek digital marketing solutions to drive traffic to their website as opposed to for example, selling on Amazon. So I think that up-tick in penetration on the IR 500 is at least an early sign of the acceptance and excitement we’re seeing around this new product roll out.

Scot Wingo

Yes, on PLAs, I actually think that kind of dovetails into in with this marketplace when we are eating the e-commerce world, because you think this marketplace is one end of the spectrum where your buying from the venue and you got a really rich experience. The AdWords are the other end of that spectrum, where I just see some text ads and maybe I see a price if the advertiser is really sophisticated. PLAs are kind of step in the middle there. So to us it feels like PLAs are a step towards Google becoming a marketplace.

That being said, Google is into a lot of innovative things around PLAs and we like to feel that we’re pretty far in front of a lot of these changes. They just did something called Google shopping campaigns, which is interesting. Its meant to simplify it, but what you find as a retailer is a lot of these things what Google does are meant to simplify something. It means you can’t get in there and surgically change what you want to do.

So for example, PLAs are already kind of hard to manage in a black box and now there’s a bigger black box. So we’ve just had some support out of this part of our spring release that really we think gives retailers an unparallel ability to kind of de-black the black boxes that we’re seeing inside of there and having much more control, kind of contra to how Google is rolling out their tool set.

So a lot of these things become opportunities for us, because they just make the world more complex and we welcome that and that our role is to de-complex all of these things for our customers.

Greg Dunham - Goldman Sachs

Okay, great. Thanks.

Operator

Your next question will be from the line of Colin Sebastian, Robert Baird & Co.

Colin Sebastian - Robert Baird & Co.

Great, thanks a lot. Scott, a lot of the focus among investors is clearly on the sales and marketing per activity, but I wonder if you’d be able to touch on R&D and just given the fast pace of change in e-commerce technology, whether your comfortable with the current level of technology and platform investments or do you think there’s some opportunities to invest incrementally in engineering as you look at the growth strategy?

Scot Wingo

Yes, thanks Colin, good question. So let me start by just kind of saying how we would think about this. So we’re in a very target rich environment. So the number one thing, we have a lot of inputs into kind of the R&D cycle. One of those inputs is reducing our customer lot and react to what they would like.

So I think your seeing the spring release for example, that feel, like iterations on something you’ve already done, like smarter re-pricing, that‘s based on primarily a lot of feedback from customers saying, right, you already gave me a business rule for bidding by margins, but I really want to look at slowly landing cost that takes into consideration shipping and handling, things like that, so that’s one set of input.

Another big set of inputs is what are our channel partners doing? So we’re fortunate that eBay, Amazon, Google and the like, increasingly with the Tmalls Global and MercadoLibre, these channels are living, breathing things and they have their own release cycles. So we tend to be briefed on those pretty far ahead and that helps inform our R&D model.

So for example, some of the features in the smart re-pricing actually were based on feedback we’ve given Amazon that said, hey, our customers would like to see X, Y and Z. They implement the APIs on their side and they’ll enable us to enrich those features on our side.

The first set of things we do are really kind of strategic in nature and that’s where the executive team here and our team at ChannelAdvisor, we have a lot of feelers out there in the industry and so a lot of the time in thinking about these concepts like what’s going in with the marketplaces, where do we think things are going next, the way that we’ve already shared with you big data. So that’s where we kind of say this is going to be kind of evolutionary versus incremental and what can we do there.

So those are some inputs and we try to make a very balanced kind of portfolio approach of how we’re investing against that, so that’s kind of long answered. I think what we’re saying is we expect R&D to grow about in line with revenue growth, and maybe two-thirds as fast. So it’s definitely more scalable than sales and marketing at this point in time and we think that that’s reflected in our guidance, what we think is appropriate for this year.

Colin Sebastian - Robert Baird & Co.

Okay great, thanks. And then as a follow-up, on the cross border trade commentary, I just want to make sure I understand correctly. If you see this trend as an incremental revenue opportunity, meaning are these additional services that you can sell into your customer base, the sale of cross border or is it more generally about driving incremental volume for your customers?

Scot Wingo

Yes, right now – and we get this question in a lot of different things, so you’ve enhanced your product this way or in the big data do you add some pricing. We really like the simplicity of our pricing that allows us to get our foot in the door, the curing makes sure that as the customer grows we grow along with it. So it’s really just – we’re not going to charge “extra” for cross border trade. That doesn’t mean we’re giving away for free there.

What we want to do is have a really nice portfolio of channels with the necessity of cross border trade that our customers are selling on and we enjoy the alliance success business model that gets them moving up tiers and we do effectively get paid more, because if someone’s tapping into new markets and effectively doubling your sales, then our revenue will track that relatively closer.

It’s also this data, it’s an attractive capability for a lot of our prospects who are global in nature, right. So rather than finishing the prospect of working with multiple point solutions in different geographies, the fact that our large brand, either in Europe or the US, we’re trying for that matter Australia, to work with us as one strategic partner, knowing that we’ve got a foothold in virtually every e-commerce market in the world, that tends to be a fairly attractive point, whether they are operating in those regions or not, most brands have an aspiration to expand their global operations and we can certainly grow with them.

Colin Sebastian - Robert Baird & Co.

Great, that’s very helpful. Thanks guys.

Operator

Your next question will be from the line of Karl Keirstead, Deutsche Bank.

Scot Wingo

Hi Karl.

Karl Keirstead - Deutsche Bank

Thank you. Yes, hi. My question actually is for John. John I’m just looking at the adjusted EBITDA guide. Given your Q2 guide, I guess it will be negative $13.5 million in the first half. So to reach the high end of the adjusted EBITDA guidance for the full year, $19 million, the loss is going to have to obviously narrow to $5 million, $5.5 million in the second half, while your investing aggressively in China, Brazil, etcetera. So I just wanted to understand that dynamic. What might you be traveling a little back on in order for the loss to narrow in the second half? Thank you.

John Baule

Good question Karl. A couple of things, one is as I mentioned, I think we’ll see a resumption of our growth margins, but more on what I call normal levels going forward and the second thing is remember that Q4 is by far the biggest quarter and we tend to be much more profitable in that quarter.

And the last thing that’s worth noting is, in the first quarter we tend to have a lot of expense related to our audit and the tax and consulting associated with the audit, we request all of that in the first quarter. So when we look at G&A, that’s probably $600,000 to $800,000 at least that comes out of that as we go onto the rest of the year.

Karl Keirstead - Deutsche Bank

Okay, very helpful. Thanks John.

Operator

Your next question will be from the line of Justin Furby, William Blair.

Justin Furby - William Blair

Hey, thanks guys. David, on the record bookings number this quarter, it didn’t look like it was the highest net customer ad. So the obvious assumption is that either deal sizes are going up or your doing a better job on the cross sell piece. I was wondering if you could address, were there any outsized deals in the quarter? Are we seeing better pricing terms, more modules, etcetera and then how much of this do you think was sort of catalyst driven or do you think you could again see a similar result in Q2.

David Spitz

Hey Justin, I think on the net ads, we’ve always been pretty clear I think that that number in isolation is going to have some volatility. You obviously have to look at things like average revenue per customer in conjunction with customer account and that net deployment in customer ads as well and from one quarter to the next, it could reflect of a mix, different mixes in our pipeline. We might have some quarters where there’s a heavier skew towards enterprise, obviously meaning larger deal sizes and you may have a quarter where it shifts towards mid market.

I wouldn’t say that there were any meaningful outsized deals. In other words I wouldn’t point to one deal or two deals that somehow meaningfully altered the bookings results. It was an across the board strength that we saw across our different segments and different geographies and frankly I think we’re flexed more than anything. Just the growing scale and the maturity our sales team, as well as the folks that we brought on broad in Q3 and Q4 of last year started producing.

So nothing kind of specific or one time as it relates to Q2. It’s really in the quarter. I don’t typically speculate on how the sales team is going do this early in the quarter, but I’m comfortable and happy with how the team performed in Q1 and I don’t have any reason to suspect that they will slow down in any regard in Q2 or going forward.

Justin Furby - William Blair

Okay, and then on hiring side of things, I certainly appreciate the commentary around productivity and cohorts etc, but where are you at the end of Q1 versus planned and sort of how you are thinking about the rest of the year on the sales rep hiring side.

Scot Wingo

Yes, a great question and I do know that this comes up. I feel pretty good with where we are. There is always more that we can do. You’re going to in all likelihood see us invest. We have been investing substantially in other geographic, but even here in the U.S. I think you’ll see us invest in some of our other office locations in the not distant future.

North Carolina is not the only location we have here in the U.S. and we obviously want to have access to the broadest pool of talent that we can get. So I’ve been pleased with where we stand. Of course we have an aggressive plan, which means we you can’t rest. We have to continue going strong on the hiring front for the rest of the year. But I’d say where we stand right now, I’m pleased and I’m comfortable and it’s an area that I feel like for the rest of the year we should perform in line with plan.

Justin Furby - William Blair

Okay and then maybe for John and/or Scot, do you feel like this is sort of a trough year from an EBITDA margin perspective? Do you feel like – obviously not looking for ‘15 guidance, but is this the year and then you start to scale out in ’15, ’16 or is a potential where we reinvest again next year and margins are similar, if not down from this year.

John Baule

Yes, I think Justin what we do is as David mentioned, we look really closely at our bookings performance and the other leading indicators we get and that kind of determines how much we want to invest in the up coming years and that’s something that we get further into 2014. We’ll obviously look at our performance and make a call on that, but maybe little bit too early to say at this point.

Justin Furby - William Blair

Okay, great. Thanks guys.

Operator

Your next question will be from the line of Shawn Milne, Janney Capital Market.

Shawn Milne - Janney Capital Market

Hey Scot, I know you learnt how to pronounce that. How are you?

Scot Wingo

Hello Mr. Milne, how are you?

Shawn Milne - Janney Capital Market

I’m good. One of the things that, so you think back at Catalyst, again there is a lot of talk about Tmall global and MercadoLibre. We got the sense that Tmall was maybe a little bit further out, but the maybe you were closer at hand on MercadoLibre. How far out in the distance are those deals? If you can kind of characterize sort of milestones and what you are working on there.

David Spitz

Hey Shawn, this is David. These are both partnerships where I would expect us to be flowing GMV this year for a multitude of customers. So they are this year Catalyst, I guess I would say. I feel very good with the progress that we’ve made there and the customer interest that we got and the initial traction that we got in those two market palaces.

I don’t think it will in 2014 rise to a level of material revenue contribution, just because I think its going to take time to stand up to material level of GMV volume, but I would be very comfortable saying that we will be generating GMV across both of those platforms this year.

Shawn Milne - Janney Capital Market

Okay and I know you do give out GMV quality, but would you characterize your same store sales as flattish growth from Q4 to Q1? Was there any real change and Scot, it certainly seemed like a quarter were it started very soft in e-commerce and picked up a little bit and as you know noted, Amazon seemed pretty strong. I wondered if you could maybe add a little bit more color to what you saw from a timing perspective and do you think if you are expecting things to pick up a bit and then as we move forward in the second quarter and in the second half. Thanks.

Scot Wingo

Yes, I think pretty much most of the commentary is out there in the same store sales that we publish. When we look at the e-commerce channel in the same store sales its important to note that there’s many reasons that doesn’t track ChannelAdvisor.

So for example, a customer maybe under there threshold for a tier and grow 10% and our revenue doesn’t change. Also same store sales by design excludes new customer adds. So all these awesome new customers we added last year are not in that metric.

So with that caveat, when we look at the data from the same store sales January was, it did seem to be some weather related muting in the January, February months and then March you know literally spring came in and everything’s bought out. I think what we feel about e-commerce is reflected in our guidance and I'm not going to pontificate beyond that. I’ll leave that to the Forresters and the ComScores of the world.

Shawn Milne - Janney Capital Market

Okay. Thanks a lot.

Operator

Our next questions is from the line of Eric Lemus, Raymond James

.

Eric Lemus - Raymond James

Hey guys, thanks for taking my question. I only have one quick one for you. You talked a bit about the marketplace business, but looking ahead aside, the non-marketplace business how do you guys think of that? Is that kind of a drag on growth going forward?

Scot Wingo

I’ll start and David can give some color. So, we talk about market place in the world, people kind of have a major reaction. We don’t care about charts of comparison-shopping anymore. I think marketplace in the U.S. are in the minority at 25%, so we very much care about comparison-shopping in search.

We think that this a long term five year plus kind of a trend in the U.S. Its interesting to us because we are so involved in all the different channels that we are seeing. An explosion of channels largely driven by new market palaces and there is not a bunch of new search engine, there are new changes in the comparison-shopping industry. A lot of those are going mobile, a lot are turning into market places and the whole industry is being somewhat disrupted by PLAs.

So we continue to think the whole digital marketing areas is very important for our customers and we’ll continue to invest there and a lot of the wins that we saw in the quarter were from that segment as well as the market place segment. David, you want to add there?

David Spitz

No I mean think is Eric it just goes back to the question earlier about digital marketing and how that’s been received. I mean while we certainly think that over a long arc of time measured in years, that market places provide ultimately a better consumer experience when they are looking for e-commerce activity. There is no doubt whatsoever that Google AdWords and Bing and traditional comparison-shopping sites and even some of the nascent social sites traditional advertising will continue to be a very, very important part of any marketers portfolio. So this remains a strong and growing component of our business to be clear.

Eric Lemus - Raymond James

Great. Thanks guys.

Operator

The next question is from the line of Chad Bartley, Pacific Crest.

Chad Bartley - Pacific Crest

Hi, thanks very much. Two questions, first one just wanted to ask about the land and expand strategy as it relates to the growth in revenue per customer. Last couple of quarters we have seen that in the single digits. As we think about the rest of the calendar year, will that grow slow, should that remain in the single digits and when that might return back to the double-digit range. Thanks.

David Spitz

Hey Chad, this is David. So a great question. I think it would not surprise me to see it continue to slow, especially to the extent that our sales team continues to generate a significant influx in net customer ads.

Our average price point for deals although consistent in recent history is below our average revenue per customer and so to the extent we’re adding a significant number of new customers to the platform, that will have a diluted effect on average revenue per customer.

I will add through, that if you look at it again on a cohort basis, if you look at customers that are two plus years, one or two years and less than a year, I see very strong dynamics in those numbers. I feel very good about what a customers trajectory looks like from first year to second year and beyond the second year. Those trends are very consistent and strong and so I think you have to sort of feel the engine a little bit and look through the dynamics there, just adding a lot of new customers that you are seeing on average revenue per customer.

But I do think that in the near term it would not surprise me for that number to remain in the single digits. If our sales team has a couple of blockbuster quarters, it could even flatten out or even get negative and that’s why we strongly encourage everybody to look at both average revenue per customer, as well as total customer account and not either one in isolation.

But also to a certain extent it depends on the pipeline mix that we got. So our sales reps are certainly free to sell to existing customers, as well as new customers and if for some reason a given quarter of the pipeline is more heavily weighted towards existing customers, you’d see that numbers tick back up.

But the fact remains that when we hire new sales reps, they buy and large get assigned to new accounts, new prospects as opposed to existing accounts and so essentially by definition, the new reps that we’ve got are really going after new accounts and so that’s why I would expect that number to probably continue to decrease in terms of both the growth rate before it comes back.

Chad Bartley - Pacific Crest

That’s helpful and if I could squeeze in a couple quick questions. One follow up on that David is, you’ve given data on kind of how a sales person raps and in terms of their productivity. Can you give a similar data point around how long it would take for a new customer to ramp and before they cross over to spend more than that average revenue per customer. Any sense there? And then Scot could you share your thoughts on Google and acquisition of range span and kind of what that means for the industry and what that might mean for the competitive landscape? Thanks.

Scot Wingo

Yes Chad, on the run time for our customers, there is quite a high range and that’s because it depends essentially on what they are doing before they jointed our platform. So for example, if it’s a customer that’s already been fairly activity on the channels, for examples, selling on Amazon and eBay and they were just really looking for a platform to help them scale, those types of customers can ramp quite quickly. I mean in a matter of weeks. So we are essentially shifting gears from whatever they are doing before to what they are doing now.

Typically we’ll see some nice gains in terms of our ability to help them growth their business and the money that we save them operationally often gets pumped back into the system in the form of lower prices they can now afforded or better sourcing or what have you or spending more on advertising. So those types of customers it can be a very fast payback or time to ramp.

If you are looking at customers that are new to the channel. For example, they’ve never sold on Amazon or they’ve never sold on eBay or done Google Advertising, I think more typically you’ll see a span of a few mother where they are essentially getting going and they have integrated and seeing initial sales come through and then of course in the first year getting up to those thresholds of GMV and then obviously post that first year, as well as have a lot of opportunity to then expand them either to additional modules or additional channels, once they got their operational sea legs under them.

So it’s a fairly wide range just depending on the type of customer and what they were doing previously.

John Baule

John, on range span just so everyone knows, just so a little bit there. Its hard to speculate on why is Google doing something, but we’ll just tell you what we know about the company.

So last week Google acquired a private company called Rangespan. They are UK based in London. The founding team of Rangespan are all ex-Amazoners from the UK and they are the team in the UK that’s gone up to third party market place. So they left Amazon and started Rangespan and what Rangespan did is provided a, what we call a drop ship network.

So they go out to a bunch of drop shippers out there, some of these are distributors like a tech data or Ingram micro-type of companies. They aggregate that together and then they provider retailers like lets say Tesco, the ability to that product, almost like a market place, but much more in a drop ship network kind of way with EVI and what not on the back end into their store fronts.

So not a competitive channel advisor, that was the first questions we got, but really more of I think the possibility of Google to do this, number one is they are doing a lot of acqui hires in the e-commerce area and it is hard to find great e-commerce folks. So we feel proud that we have a concentration of over 600 folks that know e-commerce and there is a lot of value there.

The second piece is again market places are reading e-commerce world with long thought that Google kind of needs to build at least a mobile market place. If I was doing something like, hiring a bunch of ex-Amazon people that built their market place would be pretty handy. So that kind of tightens the acqui hire thing.

And then to do a drop ship network you need a lightly weight order management system and a global product catalog, because lets just three drop shippers have the same product, you want to be able to reconcile that and present one product, so that’s why we call it global product catalog. The order management in the global product catalog are pieces you would need if you are building an Amazon like market place.

So its hard to say. It could just be acqui hire or it could be that they are getting some pieces and staring to build out the lego blocks here. We’ll kind of have to wait here and see what happens there, but we thought it was definitely an interesting acquisition for them.

Chad Bartley - Pacific Crest

Great, that’s helpful. Thank you.

Operator

At this I’m showing no further questions in queue. I would like to turn the call back over to Mr. Scot Wingo for any closing remarks.

Scot Wingo

Yes, we would like to thank everyone for joining today and also later this week we are going to be at the Baird Growth Stock Conference in Chicago and look forward to meeting folks there. Thank you.

Operator

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

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Source: ChannelAdvisor's (ECOM) CEO Scot Wingo on Q1 2014 Results - Earnings Call Transcript
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