CHANNELADVISOR CORPORATION Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions, or the negative of such words or phrases, are intended to identify "forward-looking statements." We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II - Item 1A, "Risk Factors," and our other filings with theSecurities and Exchange Commission . Statements made herein are as of the date of the filing of this Form 10-Q with theSecurities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year endedDecember 31, 2019 , which are included in our Annual Report on Form 10-K for fiscal 2019. Our mission is to connect and optimize the world's commerce. Our proprietary software-as-a-service, or SaaS, cloud platform helps brands and retailers worldwide improve their online performance by expanding sales channels, connecting with consumers around the world, optimizing their operations for peak performance and providing actionable analytics to improve competitiveness. More specifically, our suite of solutions allows our customers to manage their product listings, inventory availability, pricing optimization, search terms, orders and fulfillment, and other critical functions across these channels. Our customers utilize our platform to connect with new and existing sources of demand for their products through hundreds of channels, including Amazon, eBay, Facebook, Google and Walmart. Our fulfillment solution makes it easier for customers to connect to their supply chain, which could include distributors, manufacturers and third-party logistics providers. We also offer solutions that allow brands to send their web visitors or digital marketing audiences directly to authorized resellers and to gain insight into consumer behavior. Overall, our platform delivers significant breadth, scalability and flexibility and facilitates billions of dollars in e-commerce transactions annually across the globe. We serve customers across a wide range of industries and geographies. Our customers include the online businesses of brands and retailers, as well as advertising agencies that use our solutions on behalf of their clients. EXECUTIVE OVERVIEW
FINANCIAL RESULTS
• Total revenue of
increased 1.5% from the comparable prior year period;
• Revenue was comprised of 80.6% and 19.4% fixed and variable subscription
fees, respectively, for both the three months ended March 31, 2020 and
March 31, 2019 ;
• Revenue from our brands customers represented 32.1% of total revenue for
the three months ended March 31, 2020 , compared with 28.0% of total
revenue for the three months ended March 31, 2019 ;
• Revenue derived from customers located outside of
percentage of total revenue was 25.3% for the three months ended
2020, compared with 24.9% for the comparable prior year period;
• Gross margin of 78.0% for the three months ended
by 180 basis points compared with 76.2% for the comparable prior year
period;
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• Operating margin of 6.5% for the three months ended
improved significantly from (7.3)% for the comparable prior year period;
• Net income of $2.0 million for the three months ended March 31, 2020
improved compared with net loss of
year period;
• Adjusted EBITDA, a non-
months ended
of
• Cash and cash equivalents were
with
• Operating cash flow was
2020 compared with
and
• Free cash flow, a non-
months ended
months ended
EFFECTS OF COVID-19 ON OUR BUSINESS
In late February, in response to the rapidly-evolving novel coronavirus, or COVID-19, pandemic, we activated our business continuity program, or BCP, led by our business continuity team, to help us manage the situation. In early March, we implemented a temporary work-from-home policy for our various global offices. The transition to a temporary work-from-home model went smoothly because our employees already had the equipment necessary to do their jobs remotely (including laptops and state-of-the-art video conferencing systems), our back-office systems were already cloud-based, and because the majority of our interactions with customers, prospects, and business partners do not require in-person interaction. Accordingly, our business has not been heavily dependent on our physical office locations nor on travel. Early on in our work-from-home model, we conducted a survey of our employees and the vast majority responded that they felt as (or more) productive working from home and that they had what they needed to do their jobs. We believe we will be able to operate effectively under this model for the foreseeable future. COVID-19 has affected e-commerce in different ways. In general, the closing of many physical retail stores and the stay-at-home orders issued by many jurisdictions have driven a substantial shift in commerce to online channels like Amazon and Walmart. During the month of March, particularly in the latter half of March, we saw a pronounced acceleration of gross merchandise value, or GMV, processed through our platform in categories like healthcare products and home office furniture, which benefited our variable revenue. At the same time, sellers of certain categories of products, like apparel, were impacted by reduced demand while concurrently dealing with store closures and, in some cases, disruptions to supply chains or fulfillment operations. We proactively adjusted contract and/or payment terms for some customers who were facing financial or operational distress during the quarter in an effort to help them get through this period and to maintain long-term client relationships. COVID-19 presents our business with both opportunities and risks. Our business has been positively affected by a substantial increase in e-commerce volumes, which inMarch 2020 drove an increase in variable revenue. How long, and to what extent, this level of higher GMV continues is very difficult to forecast. We believe that the heightened GMV levels we have seen are likely to dissipate somewhat over time as retail stores reopen and stay-at-home orders ease, but we also believe it is possible that some level of increased e-commerce during this period may be permanent as customers become more regular online shoppers. We also believe that this trend will increase demand for solutions, like ours, that help brands and retailers continue to shift towards digital channels. In the near term, however, COVID-19 has negatively impacted our ability to acquire new customers as many prospects have been distracted by having to manage their own pandemic-related business disruptions. In addition, in-person events that have been an important source of contracts with new customers and expansion of contracts with current customers, have been postponed, cancelled or converted to virtual events, with our flagship prospect and customer conferences converted to virtual events for 2020. We also anticipate that some customers may face business continuity challenges that may lead to a near-term increase in churn. Thus, while we anticipate some near-term disruption to our ability to acquire new customers and retain certain existing customers, we believe the longer-term demand for our platform will be at least as strong as it has been in the past as the immediate disruptions posted by the pandemic subside. Lastly, we cannot ignore that in recent weeks tens of millions of people around the world have lost their jobs. It is very likely that we will continue to face a near-term economic contraction on a global basis that may impact consumer demand and, hence, e-commerce volumes. How long this economic climate lasts, and whether or not the impact to consumer demand is more than offset by the shift to online shopping that we've seen recently is not knowable at this point. 15
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For all of these reasons, it has become incrementally more difficult to forecast our business for the remainder of 2020, especially as there may be subsequent outbreaks of COVID-19. However, we believe we have ample liquidity and that our business model, which is substantially based on subscription revenues, leaves us prepared to manage through the challenges presented by COVID-19. TRENDS IN OUR BUSINESS The following trends have contributed to the results of our consolidated operations, and we anticipate that they will continue to affect our future results: • Growth in Online Shopping. Consumers continue to move more of their
spending from offline to online. The continuing shift to online shopping
and overall growth has contributed to our historical growth and we expect
that this online shift will continue to benefit our business. Global
efforts to implement social distancing, including stay-at-home orders, due
to the COVID-19 pandemic, have increased e-commerce as many brick and
mortar retail locations have closed and consumers have increasingly turned
to online purchasing for many products they would have purchased at brick
and mortar stores. However, it is unclear to what degree this recent shift
in favor of e-commerce will continue once the public health impacts of the
COVID-19 pandemic have begun to subside.
• Product Offering Expansion. As online shopping evolves, we continue to
expand our product offerings to reflect the needs of companies seeking to
attract consumers. We continue to enhance our product offerings by
increasing online shopping channel integrations, including marketplace and
first-party retail programs, and providing capabilities that allow brands
and retailers to be more competitive. This includes support for
advertising, advanced algorithmic repricing, machine learning-based demand
forecasting, and improving our analytics capabilities, fulfillment
features and user experience.
• Growth in Mobile Usage. We believe the shift toward mobile commerce will
increasingly favor aggregators such as Amazon, eBay, Google and Walmart,
all of which are focal points of our platform. These systems understand
the identity of the buyer, helping to reduce friction in the mobile
commerce process, while offering a wide selection of merchandise in a
single location. We believe that the growth in mobile commerce may result
in increased revenue for us.
• Evolving Fulfillment Landscape. Consumers have been conditioned to expect
fast, efficient delivery of products. We believe that determining and
executing on a strategy to more expeditiously receive, process and deliver
online orders, which we refer to collectively as fulfillment, is critical
to success for online sellers. Therefore, it will be increasingly
important for us to facilitate and optimize fulfillment services on behalf
of our customers, which in turn may result in additional research and
development investment.
• Focus on Employees. We strive to provide competitive compensation andbenefits programs to help attract and retain employees who are focused on
facilitating the success of our customers. We implemented a temporary
global work-from-home policy in
and support our communities' efforts to slow the transmission of COVID-19.
This transition went smoothly, as our workforce is globally distributed
and employees have the equipment they need to work from home, including
global video communications systems. We are not dependent on our physical
office locations or travel for our business operations.
• Seasonality. Our revenue fluctuates as a result of seasonal variations in
our business, principally due to the peak consumer demand and related
increased volume of our customers' GMV during the year-end holiday season.
As a result, we have historically had higher revenue in our fourth quarter
than other quarters due to increased GMV processed through our platform,
resulting in higher variable subscription fees.
OPPORTUNITIES AND RISKS • Dynamic E-commerce Landscape. We need to continue to innovate in the face
of a rapidly changing e-commerce landscape if we are to remain
competitive.
• Brands. As the e-commerce landscape evolves to increasingly favor brands,
we need to continue to add brands as customers. Brands tend to have longer
customer life cycles, stronger financial stability and overall better unit
economics. Brands also offer increased expansion opportunities to grow
their e-commerce business through our platform; however they tend to have
longer sales cycles. To help drive our future growth, we have madesignificant investments in our sales force and allocated resources focused
on growing our customer base of brands.
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• Strategic Partnerships. Our business development team's mission is to
expand our sales and market opportunities through strategic partner
relationships. We plan to continue to invest in initiatives to expand our
strategic partnership base to further enhance our offerings for customers
and to help support our indirect sales channel efforts. The goal of these
strategic partnerships is to further improve the value of our platform for
our customers and, when possible, provide us opportunities for incremental
revenue streams.
• Increasing Complexity of E-commerce. Although e-commerce continues toexpand as brands and retailers continue to increase their online sales, it
is also becoming more complex due to the hundreds of channels available to
brands and retailers and the rapid pace of change and innovation across
those channels. In order to gain consumers' attention in a more crowded
and competitive online marketplace, an increasing number of brands and
many retailers sell their merchandise through multiple online channels,
each with its own rules, requirements and specifications. In particular,
third-party marketplaces are an increasingly important driver of growth
for a number of brands and large online retailers. As a result, we need to
continue to support multiple channels in a variety of geographies in order
to support our targeted revenue growth.
• Global Growth in E-commerce. We believe the growth in e-commerce globally
presents an opportunity for brands and retailers to engage in
international sales. However, country-specific marketplaces are often a
market share leader in their regions, as is the case for Zalando in
opportunity, and to address our customers' needs with respect to
cross-border trade, we intend to continue to invest in our international
operations. Doing business overseas involves substantial challenges,
including management attention and resources needed to adapt to multiple
languages, cultures, laws and commercial infrastructure, as further
described in this report under the caption "Risks Related to our
International Operations."
Our senior management continuously focuses on these and other trends and
challenges, and we believe that our culture of innovation and our history of
growth and expansion will contribute to the success of our business. We cannot,
however, assure you that we will be successful in addressing and managing the
many challenges and risks that we face.
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Table of Contents RESULTS OF OPERATIONS
The following tables set forth our condensed consolidated statement of operations data and such data expressed as a percentage of revenues for each of the periods indicated.
Three Months Ended March 31, Period-to-Period Change
2020 2019 Q1 2020 to Q1 2019
(dollars in thousands)
Revenue $ 32,032 $ 31,574 $ 458 1.5 %
Cost of revenue 7,063 7,529 (466 ) (6.2 )
Gross profit 24,969 24,045 924 3.8
Operating expenses:
Sales and marketing 12,340 14,313 (1,973 ) (13.8 )
Research and development 4,801 5,333 (532 ) (10.0 )
General and administrative 5,735 6,699 (964 ) (14.4 )
Total operating expenses 22,876 26,345 (3,469 ) (13.2 )
Income (loss) from operations 2,093 (2,300 ) 4,393 *
Other income (expense):
Interest income, net 126 183 (57 ) (31.1 )
Other income (expense), net 8 (20 ) 28 *
Total other income 134 163 (29 ) (17.8 )
Income (loss) before income taxes 2,227 (2,137 ) 4,364 *
Income tax expense 220 192 28 14.6
Net income (loss) $ 2,007 $ (2,329 ) $ 4,336 *
* Not meaningful
Three Months Ended March 31,
2020 2019
(as a percentage of revenue)
Revenue 100.0 % 100.0 %
Cost of revenue 22.0 23.8
Gross profit 78.0 76.2
Operating expenses:
Sales and marketing 38.5 45.3
Research and development 15.0 16.9
General and administrative 17.9 21.2
Total operating expenses 71.4 83.4
Income (loss) from operations 6.5 (7.3 )
Other income (expense):
Interest income (expense), net 0.4 0.6
Other income (expense), net 0.0 (0.1 )
Total other income 0.4 0.5
Income (loss) before income taxes 7.0 (6.8 )
Income tax expense 0.7 0.6
Net income (loss) 6.3 % (7.4 )%
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Depreciation and Amortization Depreciation and amortization expense is included in the following line items in the accompanying unaudited condensed consolidated statements of operations for the three months endedMarch 31, 2020 and 2019 (in thousands): Three Months Ended March 31, 2020 2019 Cost of revenue $ 976$ 923 Sales and marketing 155 206 Research and development 70 90 General and administrative 277 327 Total depreciation and amortization expense $ 1,478$ 1,546 19
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REVENUE
[[Image Removed: chart-33c3fdd2ff795566ac9.jpg]]
We derive the majority of our revenue from subscription fees paid to us by our
customers for usage of our platform for a specified contract term, which is
usually one year. A portion of the subscription fee is typically fixed and based
on a specified minimum amount of GMV or advertising spend that a customer
expects to process through our platform. The remaining portion of the
subscription fee is variable and is based on a specified percentage of GMV or
advertising spend processed through our platform in excess of the customer's
specified minimum GMV or advertising spend amount. In most cases, the specified
percentage of excess GMV or advertising spend on which the variable portion of
the subscription is based is fixed and does not vary depending on the amount of
the excess. We also receive implementation fees, which may include fees for
providing launch assistance and training.
Because our customer contracts generally contain both fixed and variable pricing
components, changes in GMV between periods do not translate directly or linearly
into changes in our revenue. We use customized pricing structures for each of
our customers depending upon the individual situation of the customer. For
example, some customers may commit to a higher specified minimum GMV amount per
month in exchange for a lower fixed percentage fee on that committed GMV. In
addition, the percentage fee assessed on the variable GMV in excess of the
committed minimum for each customer is typically higher than the fee on the
fixed, committed portion. As a result, our overall revenue could increase or
decrease even without any change in overall GMV between periods, depending on
which customers generated the GMV. In addition, changes in GMV from month to
month for any individual customer that are below the specified minimum amount
would have no effect on our revenue from that customer, and each customer may
alternate between being over the committed amount or under it from month to
month. For these reasons, while GMV is an important qualitative and long-term
directional indicator, we do not regard it as a useful quantitative measurement
of our historic revenues or as a predictor of future revenues.
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We recognize fixed subscription fees and implementation fees ratably over the
contract period beginning on the date the customer has access to the software.
In determining the amount of revenue to be recognized, we apply the following
steps:
• Identify the promised services in the contract;
• Determine whether the promised services are performance obligations,
including whether they are distinct in the context of the contract;
• Determine the transaction price;
• Allocate the transaction price to the performance obligations based on
estimated selling prices; and
• Recognize revenue as we satisfy each performance obligation.
We generally invoice our customers for the fixed portion of the subscription fee
in advance, in monthly, quarterly, semi-annual or annual installments. We
invoice our customers for the implementation fee at the inception of the
arrangement. Fixed subscription and implementation fees that have been invoiced
are initially recorded as deferred revenue and are generally recognized ratably
over the contract term.
In general, we invoice and recognize revenue from the variable portion of
subscription fees in the period in which the related GMV or advertising spend is
processed.
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Our customers are categorized as follows:
• Retailers. We generally categorize a customer as a retailer if it
primarily focuses on selling third-party products.
• Brands. We generally categorize a customer as a brand if it primarily
focuses on selling its own proprietary products.
• Other. Other is primarily comprised of strategic partnerships.
Comparison of Q1 2020 to Q1 2019 Revenue increased by 1.5%, or$0.5 million , to$32.0 million for the three months endedMarch 31, 2020 compared with$31.6 million for the prior year period. The change was primarily due to a$0.4 million increase in revenue from our strategic partnerships as we continue to leverage those relationships. In addition, variable revenue increased as a result of higher transaction volume during the quarter, which we attribute to the effects of the COVID-19 pandemic.
COST OF REVENUE
[[Image Removed: chart-f72cdf2b10135d01afb.jpg]]Cost of revenue primarily consists of: • Salaries and personnel-related costs for employees providing services to our
customers and supporting our platform infrastructure, including benefits,
bonuses and stock-based compensation;
• Co-location facility costs for our data centers;
• Infrastructure maintenance costs; and
• Fees we pay to credit card vendors in connection with our customers' payments
to us.
Comparison of Q1 2020 to Q1 2019 Cost of revenue decreased by 6.2%, or$0.5 million , to$7.1 million for the three months endedMarch 31, 2020 compared with$7.5 million for the prior year period. The change was comprised primarily of a decrease in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount primarily as a result of our implementation of a plan to reduce expenses and align our operations with evolving business needs in the third quarter of 2019, or the 2019 Actions. 21
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OPERATING EXPENSES
SALES AND MARKETING EXPENSE
[[Image Removed: chart-6fd2abd2dd70595f9bd.jpg]]Sales and marketing expense consists primarily of: • Salaries and personnel-related costs for our sales and marketing and customer
support employees, including benefits, bonuses and stock-based compensation;
• Amortization of capitalized sales commissions and related incentive payments
over their expected term of benefit;
• Marketing, advertising and promotional event programs; and
• Corporate communications.
Comparison of Q1 2020 to Q1 2019 Sales and marketing expense decreased by 13.8%, or$2.0 million , to$12.3 million for the three months endedMarch 31, 2020 compared with$14.3 million for the prior year period. The change was comprised primarily of decreases of: •$1.3 million in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount, primarily as a result of the 2019 Actions; and
•
and travel, primarily due to travel and gathering restrictions as a
response to the COVID-19 pandemic.
RESEARCH AND DEVELOPMENT EXPENSE
[[Image Removed: chart-65d6ef1904d45eb682b.jpg]]Research and development expense consists primarily of: • Salaries and personnel-related costs for our research and development
employees, including benefits, bonuses and stock-based compensation;
• Costs related to the development, quality assurance and testing of new
technology and enhancement of our existing platform technology; and
• Consulting expenses. Comparison of Q1 2020 to Q1 2019 Research and development expense decreased by 10.0%, or$0.5 million , to$4.8 million for the three months endedMarch 31, 2020 compared with$5.3 million for the prior year period. The change was comprised primarily of decreases of: •$0.3 million in compensation and employee-related costs due to shifting certain research and development to lower cost office locations and reductions in headcount, primarily as a result of the 2019 Actions; and
•
in capitalized employee-related costs attributable to software development
to support the enhancement of our product offerings.
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GENERAL AND ADMINISTRATIVE EXPENSE
[[Image Removed: chart-ef7612fc57c45d51b74.jpg]]General and administrative expense consists primarily of: • Salaries and personnel-related costs for administrative, finance and
accounting, information systems, legal and human resource employees,
including benefits, bonuses and stock-based compensation;
• Consulting and professional fees;
• Insurance; • Bad debt expense; and
• Costs associated with
and other regulations governing public companies.
Comparison of Q1 2020 to Q1 2019 General and administrative expense decreased by 14.4%, or$1.0 million , to$5.7 million for the three months endedMarch 31, 2020 compared with$6.7 million for the prior year period. The change was comprised primarily of a decrease in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount, primarily as a result of the 2019 Actions. ADJUSTED EBITDA [[Image Removed: chart-85dd9ecaa956d96c756.jpg]] Adjusted EBITDA represents our earnings before interest (income) expense, income tax expense and depreciation and amortization, adjusted to eliminate stock-based compensation expense, which is a non-cash item. We believe that adjusted EBITDA provides useful information to management and others in understanding and evaluating our operating results. However, adjusted EBITDA is not a measure calculated in accordance withU.S. GAAP and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance withU.S. GAAP. In addition, adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA in the same manner that we do. Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported underU.S. GAAP. Some of these limitations are: • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
• adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
• adjusted EBITDA does not reflect the potentially dilutive impact of
equity-based compensation;
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