CHANNELADVISOR CORP - Quarter Report: 2020 March (Form 10-Q)

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•	Total revenue of $32.0 million for the three months ended March 31, 2020 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 the United States as a percentage of total revenue was 25.3% for the three months ended March 31, 2020, compared with 24.9% for the comparable prior year period;

•	Gross margin of 78.0% for the three months ended March 31, 2020 improved 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 March 31, 2020 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 $(2.3) million for the comparable prior year period;

•	Adjusted EBITDA, a non-U.S. GAAP measure, of $6.5 million for the three months ended March 31, 2020 increased 147.4% compared with adjusted EBITDA of $2.6 million for the comparable prior year period;

•	Cash and cash equivalents were $56.3 million at March 31, 2020 compared with $51.8 million at December 31, 2019;

•	Operating cash flow was $5.7 million for the three months ended March 31, 2020 compared with $1.4 million for the three months ended March 31, 2019; and

•	Free cash flow, a non-U.S. GAAP measure, was $4.7 million for the three months ended March 31, 2020 compared with $0.7 million for the three months ended March 31, 2019.

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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.

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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.

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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.

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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.

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Focus on Employees. We strive to provide competitive compensation and benefits 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 March 2020 to help protect our employees 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.

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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.

•	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.

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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 made significant 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.

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Increasing Complexity of E-commerce. Although e-commerce continues to expand 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.

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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 Europe. In order to help our customers capitalize on this potential market 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."

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•	$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

•	$0.4 million in our promotional event programs, marketing and advertising and travel, primarily due to travel and gathering restrictions as a response to the COVID-19 pandemic.

•	$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

•	$0.2 million in compensation and employee-related costs due to an increase in capitalized employee-related costs attributable to software development to support the enhancement of our product offerings.

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•	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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•	adjusted EBITDA does not reflect interest or income tax payments that may represent a reduction in cash available to us; and

•	other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

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•	The amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business;

•	The amount and timing of customer payments; and

•	The seasonality of our business, as noted above, which results in variations in the timing of invoicing and the receipt of payments from our customers.

•	Capitalized expenditures to create internally developed software and implement software purchased for internal use; and

•	Purchases of property and equipment to support the expansion of our infrastructure and acquisitions.

•	Proceeds from the exercises of stock options;

•	Payments on finance lease obligations; and

•	Tax withholdings related to the net-share settlement of restricted stock units.

•	a $1.2 million decrease in deferred revenue as a result of the timing of revenue recognition for managed-service contracts; and

•	a $1.0 million decrease in accounts payable and accrued expenses driven by the timing of payments to our vendors during the period. These decreases in cash were partially offset by increases in cash due to:

•	a $1.0 million decrease in prepaid expenses and other assets driven by the timing of payments to our vendors during the period; and

•	a $0.3 million decrease in accounts receivable as a result of increased cash collections during the period.

•	$0.7 million of capitalized software development costs; and

•	$0.3 million of capital expenditures primarily related to the purchase of computer equipment.

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•	a $3.1 million decrease in accounts payable and accrued expenses driven by payments for certain customer arrangements for which we collect and remit monthly activity-based fees incurred for specific channels on behalf of our customers (referred to as "agency of record" activities) and the timing of payments to our vendors;

•	a $0.8 million decrease in deferred revenue as a result of the timing of revenue recognition for managed-service contracts; and

•	a $0.5 million increase in deferred contract costs consisting of sales commissions and a portion of other incentive compensation that is deferred and amortized to expense over the expected period of benefit. These decreases in cash were partially offset by increases in cash due to:

•	a $1.5 million decrease in prepaid expenses and other assets, primarily related to agency of record receipts (we record the amounts due from customers as a result of these arrangements as other receivables); and

•	a $1.2 million decrease in accounts receivable as a result of increased cash collections during the period.

•	$0.5 million of capitalized software development costs; and

•	$0.2 million of capital expenditures primarily related to the purchase of computer equipment.

•	$0.9 million in cash received upon the exercise of stock options; partially offset by

•	$0.4 million used for the repayment of finance leases.

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•	Potential customers may choose to continue using or to develop applications in-house, rather than pay for our solutions;

•	The channels themselves, which typically offer software tools, often for free, that allow brands and retailers to connect to them, may decide to compete more vigorously with us;

•	Competitors may adopt more aggressive pricing policies and offer more attractive sales terms, adapt more quickly to new technologies and changes in customer requirements, and devote greater resources to the promotion and sale of their products and services than we can;

•	Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their products and expand their markets, and consolidation in our industry is likely to intensify. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share;

•	Current and potential competitors may offer software that addresses one or more online channel management functions at a lower price point or with greater depth than our solutions and may be able to devote greater resources to those solutions than we can; and

•	Software vendors could bundle channel management solutions with other solutions or offer such products at a lower price as part of a larger product sale.

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•	the potential impact of the COVID-19 pandemic on our business and that of our customers;

•	seasonal patterns in consumer spending;

•	the addition of new customers or the loss of existing customers;

•	changes in demand for our software;

•	the timing and amount of sales and marketing expenses;

•	changes in the prospects of the economy generally, which could alter current or prospective customers' spending priorities, or could increase the time it takes us to close sales;

•	changes in our pricing policies or the pricing policies of our competitors;

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•	costs necessary to improve and maintain our software platform; and

•	costs related to acquisitions of other businesses.

•	hire additional personnel, both domestically and internationally;

•	implement additional information management systems;

•	maintain close coordination among our engineering, operations, legal, finance, sales and marketing and client service and support organizations; and

•	further develop our operating, administrative, legal, financial and accounting systems and controls.

•	difficulties in integrating the operations, technologies, services and personnel of acquired businesses, especially if those businesses operate outside of our core competency of providing e-commerce software solutions;

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•	inability to achieve the targeted financial results;

•	cultural challenges associated with integrating employees from acquired businesses into our organization;

•	ineffectiveness or incompatibility of acquired technologies or services;

•	failure to successfully further develop the acquired technology in order to recoup our investment;

•	potential loss of key employees of acquired businesses;

•	inability to maintain the key business relationships and the reputations of acquired businesses;

•	diversion of management's attention from other business concerns;

•	litigation for activities of acquired businesses, including claims from terminated employees, customers, former stockholders or other third parties;

•	in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

•	costs necessary to establish and maintain effective internal controls for acquired businesses; and

•	increased fixed costs.

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•	recruiting and retaining employees in foreign countries;

•	increased competition from local providers;

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•	compliance with applicable foreign laws and regulations;

•	compliance with changing foreign privacy, data protection and information security laws and regulations and the risks and costs of noncompliance;

•	cross-border data transfers among us, our subsidiaries, and our customers, vendors, and business partners;

•	longer sales or collection cycles in some countries;

•	credit risk and higher levels of payment fraud;

•	compliance with anti-bribery laws, such as the Foreign Corrupt Practices Act;

•	currency exchange rate fluctuations;

•	tariffs, customs, trade sanctions, trade embargoes and other barriers to importing or exporting materials and products in a cost-effective and timely manner, or changes in applicable tariffs or customs rules;

•	foreign exchange controls that might prevent us from repatriating cash earned outside the United States;

•	economic and political instability in some countries, including terrorist attacks and civil unrest;

•	less protective intellectual property laws;

•	compliance with the laws of numerous foreign taxing jurisdictions in which we conduct business, potential double taxation of our international earnings and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws;

•	increased costs to establish and maintain effective controls at foreign locations; and

•	overall higher costs of doing business internationally.

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•	hurt our reputation;

•	adversely affect our relationships with our current or future customers;

•	cause delays or stoppages in providing our services;

•	divert management's attention and resources;

•	require technology changes to our software that would cause us to incur substantial cost;

•	subject us to significant liabilities; and

•	require us to cease some or all of our activities.

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•	actual or anticipated variations in our operating results;

•	changes in financial estimates by us or by any securities analysts who might cover our stock;

•	conditions or trends in our industry;

•	stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the software industry;

•	announcements by us or our competitors of new product or service offerings, significant acquisitions, strategic partnerships or divestitures;

•	announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

•	capital commitments;

•	investors' general perception of our company and our business;

•	recruitment or departure of key personnel; and

•	sales of our common stock, including sales by our directors and officers or specific stockholders.

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•	only one of our three classes of directors is elected each year;

•	stockholders are not entitled to remove directors other than by a 66 2/3% vote and only for cause;

•	stockholders are not permitted to take actions by written consent;

•	stockholders cannot call a special meeting of stockholders; and

•	stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.

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+	Indicates management contract of compensatory plan.

*	Filed herewith.

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These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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