John F. Baule - Chief Financial Officer Scot Wingo - Executive Chairman David J.

Spitz - President, Chief Executive Officer & Chief Operating Officer

Colin A. Sebastian - Robert W.

Baird & Co., Inc. (Broker) Michael S.

Huang - Needham & Company, LLC Brendan John Barnicle - KeyBanc Capital Markets, Inc. Brian C.

Peterson - Raymond James & Associates, Inc. Justin A.

Furby - William Blair & Co. LLC Greg E.

Dunham - Goldman Sachs & Co. Craig Nankervis - First Analysis Corp.

Shawn C. Milne - Janney Montgomery Scott LLC Jobin G.

Mathew - Deutsche Bank Securities, Inc.

Thank you. Good afternoon and welcome to ChannelAdvisor's conference call for the first quarter of 2015.

I'm John Baule, Chief Financial Officer of ChannelAdvisor. With me on the call today are Scot Wingo and David Spitz.

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 2015. This press release can be accessed on the Investor Relations' section of our website.

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 may be considered forward-looking under Federal Securities laws.

These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we 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. During the course of today's call, we will refer to certain non-GAAP financial measures including core revenue, which excludes revenue from two small legacy acquisitions that are not a core focus of our business.

A reconciliation of all non-GAAP measures to the most comparable GAAP measures is included in our press release. Finally, at times in our prepared comments and responses to your questions, we my 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 for his remarks.

Thanks, John. Welcome, everyone, and thank you for joining our call today.

Revenue in the first quarter was $22.6 million, an increase of 17% from a year ago and slightly above the high end of our expectation. As David and John will discuss, we are making progress towards our path to profitability, which is also reflected in our EBITDA loss of $4.2 million in the quarter, which was more than $2 million better than our guidance.

While I see GMV (2:54) continues to be concentrated among our largest customers, we put a number of processes in place that we expect to reduce churn rates, increase lifetime value, and ultimately drive sustainable growth at higher levels. David will provide more details, but by being more selective and signing new customers, we expect to generate higher quality revenue growth while also realizing the leverage in our business model sooner.

This focus on larger customers where we can deliver greater value means we believe that the size of our average customer will continue to grow as will retention rates. As we said last quarter, the nature of this transition means that revenue growth this year will be below our growth rates in recent years, though we continue to expect to exit this transition with the ability to generate sustainable and more profitable revenue growth.

We recently completed our two Catalyst Conferences in Las Vegas and London. These shows were attended by over 2,000 attendees and set record attendance for each of them.

We had leaders from Amazon, eBay, Google, Jet and customers from Samsung, Tommy Hilfiger, KitchenAid and more. At this year's event in my keynote, I used the popular book series and TV show Game of Thrones as a metaphor for the battle that retailers and brands face in e-commerce.

I talked about contenders for the iron throne of e-commerce, such as eBay, Amazon, Apple, Google, Facebook and Alibaba that are fighting for retailers' allegiances. Then we shared our view that e-commerce battlefield of the future that will decide who wins and looses is five changing consumer behaviors: mobile, social, zero friction, value and cross-border trade.

For example, today, mobile is two-thirds of traffic on retailer sites, which includes tablets and smartphones. This trend is helping Amazon in putting pressure on Google.

Within social, e-commerce is being infused in the social networks via new ad formats, check (4:45) commerce applications, and buy buttons that are either live or announced on Facebook, Twitter and Pinterest. So social platforms are on the rise with retailers and brands and looking for alliances.

Forrester has recently published some interesting data that shows a bifurcation in online consumers into value-oriented and consumer-oriented segments. Zero friction appeals to convenience buyer and is reflected in new payment options and ever faster and less expensive or free delivery capabilities.

These trends benefit Apple and Amazon. For the value-oriented buyer, new innovations in business models like Alibaba and Jet are interesting new challenges.

eBay and Amazon international fulfillment programs allow retailers to get into cross-border trade more quickly. Alibaba's AliExpress is a strong platform for China-based merchants to expand their cross-border trade into Russia, Brazil and the U.S.

We believe that ChannelAdvisor is uniquely situated to help retailers and brands not only survive their own e-commerce Game of Thrones but thrive. To illustrate this, at Catalyst, we also shared some new features that we introduced in our Spring Release.

Support for new channels such as AliExpress and Jet marketplaces, eBay Order Consolidator. When we analyzed 2014's over 100 million of orders in our system, we noticed an interesting trend.

Frequently the same buyer would buy from a seller in a short amount of time. In e-commerce, this is important because it's much cheaper to ship items together versus separate packages.

This trend was largest on eBay, it was about 2% of the orders being consolidatable. In the Spring Release, we implemented a feature called eBay Order Consolidator that automatically consolidates these orders for our customers, saving them as much as $2,000 a month in shipping fees alone.

We also announced Facebook dynamic product ads. Facebook has released new ad formats that are embracing e-commerce.

Facebook dynamic product ads are similar to Google Product Listing Ads and we believe that long-term there will be a big opportunity for retailers to drive transactions on Facebook. These are some of the highlights from the Spring Release.

There is much, much more functionality around Amazon, digital marketing channels, and other areas. Details are available on our corporate blog at ChannelAdvisor.com/blog.

We also previewed exclusively with customer's new functionality around our Big Data initiatives. The feedback in the Spring Release has been very positive and we continue to work on several strategic initiatives, which we believe will further distance us from competitive offerings.

Lastly, before handing the call over to David, I want to add a personal comment. You may have seen that after the market closed today, we issued a press release announcing that our board has appointed me Executive Chairman of ChannelAdvisor and has appointed David the Chief Executive Officer and also a Director of ChannelAdvisor.

Those of you that have met David know he is a highly capable leader committed to the success of ChannelAdvisor and I ask you to join me in congratulating him on his new role. David has been at ChannelAdvisor nearly a decade and his move to CEO is a natural progression for the company.

I look forward to supporting David by continuing to track e-commerce trends and providing active input on ChannelAdvisor strategy and vision as we work to expand on our leadership in the market. With that, I will turn the call over to Dave.

Thanks, Scot. Before I get into my comments on the quarter, let me thank you and the board for the confidence you've expressed in me.

I believe that while we're working through a transition here at ChannelAdvisor, the fundamentals driving our opportunity remain strong and I believe we're well-positioned to expand on the leadership position we've established in the marketplace. I am looking forward to leading the organization forward in my expanded role.

Our first quarter revenue was slightly better than expected. As Scot indicated, we're still in the early days of a transition as we strategically focus our efforts on larger customers and brands with favorable economics and move away from the lower end of the market.

During the first quarter and continuing into the second quarter, we implemented a number of important changes and policies and procedures that we expect to provide long-term sustainable benefits, including strong growth and a faster trajectory to profitability. However, these changes may continue to weigh on near-term revenue growth as we strategically realign our investments towards more profitable revenue streams and shy away from revenue growth that has proven to be less profitable for us.

Recall that there were three primary issues that led to lower than expected revenue results in the fourth quarter: a shift in gross merchandise volume, or GMV, towards larger customers with lower take rates; two, an acceleration in existing customers renegotiating contracts at a higher tier or fixed GMV; and three, continued churn at the low end of our customer base. Our top quartile of customers represented more than 80% of our overall GMV in the first quarter and grew faster than the rest of our customer base, signaling that larger customers continued to share of wallet in terms of consumer spending.

However, we also saw a broadening of GMV concentration and improvement in pricing within our top quartile of customers, yielding a modest improvement in take rate and revenue performance in the quarter compared to the fourth quarter. So the significant GMV shift we saw in the fourth quarter was not as pronounced in the first quarter.

Smaller customers continued to turn at elevated rates, reflecting the difficulty they face in keeping up with the ever rising bar of e-commerce excellence from customer service to logistics and also reflecting the concentration of eBay in the segment, which is growing much more slowly than e-commerce overall and continues to contribute to headwinds in both customer acquisition and retention, since eBay is over-indexed across our smaller customers. We have significantly curtailed mid contract amendments to higher fixed tiers and are firming up pricing and payment terms more generally.

While this focus away from smaller less profitable customers may increase near term customer churn and put pressure on near term revenue growth, we believe it's the right thing to do for the long term growth and the health of the company. We expect the shift to drive increasing average revenue per customer over time, which was $31,630, up 2% in the first quarter compared to the first quarter 2014 on a trailing 12 month basis.

This strategy will naturally meet our net customer growth as it did in the first quarter with 52 net customer additions, but we believe that it will have a positive impact on longer term average revenue per customer, retention and sales productivity, and importantly, accelerating our path to profitability. We are also implementing more stringent acceptance criteria for smaller customers, requiring demonstrated access to structured data, more technical proficiency and the financial capacity to invest in growth before signing them as new customers.

We find that customers who do not meet these criteria have lower customer satisfaction scores, underperform the market and ultimately yield poor economics. Put simply, we have learned that it is better to wait for the customer to be ready for ChannelAdvisor than to sign them prematurely and hope that they succeed.

Fundamentally, our analysis has shown that while smaller customers tend to contribute to revenue growth, the larger retailers that are gaining share of wallet have substantially better lifetime value or LTV as measured on a gross profit basis for us than smaller customers. In fact, the ratio of gross profit LTV to customer acquisition costs for larger customers is nearly three times that ratio for smaller customers.

As a result, we've increasingly focused our sales team on those larger customers and prospects that we expect will improve the aggregate customer lifetime value while reducing overall customer acquisition costs with an eye towards significantly improving the ROI and capital efficiency of our sales and marketing investment going forward. Specifically, with a more direct focus on moving our customer base up market, we believe we can reach our long-term growth targets with a smaller investment in sales and marketing, including a smaller, more senior and more productive sales force.

While we expect to incur near-term expenses associated with rebalancing our sales and marketing investments, we expect to see the benefit of these cost reductions in the second half of 2015. We believe this is in the best interest of the long-term strategy of our company as we shift our sales focus to customers and prospects that can contribute to sustainable and more profitable revenue growth.

From a product perspective, we are better positioned than ever to serve our target customer base with a platform that enables them to address the fast changing dynamics of online consumer behavior. Our Spring Release included a number of significant platform enhancements, including support for Facebook dynamic product ads, support for Jet.com, an innovative new marketplace, enhanced capabilities for cross-border trade, money saving order consolidation features that in many cases can cover the cost of our platform for customers and enhance analytics relating to pricing and merchandising.

We also unveiled an early version of our benchmarking and analytics for customers at our recent Catalyst Conference and the response was overwhelming. Our benchmarking data highlighted for customers how their performance compared with their peers and included clear actionable recommendations for how to improve their results.

We expect to offer this capability to all customers in our fall release and to continue to invest significantly in turning data into a competitive advantage for our customers. Finally, I have also been very pleased with the integration of our Where to Buy technology.

We have a fantastic team working on that and the response from branded manufacturers has been significant. There is much more we can offer brands as we expand our platforms' capabilities and I expect this segment to grow significantly for us in the coming years.

Thus, while 2015 represents a transition for us as we focus on driving profitable revenue growth, we believe our long term prospects remain very strong. Now, I'd like to turn the call over to John for details on our financial performance for the quarter and our outlook for Q2 and the full year.

Thanks, David. As David indicated, there is a lot of activity around the key themes of increasing sales and marketing productivity and shifting our focus to more profitable customers, and I'll give you a financial perspective on these efforts.

First, I'll provide color on our Q1 financial performance, then I'll discuss our guidance for the second quarter and 2015, including the impact of our expense reduction efforts. Taking a look at the first quarter results, revenue came in at $22.6 million, an increase of 17% over 2014 and above the high end of our guidance range.

On a constant currency basis, our year-over-year revenue grew by approximately 20%. Internationally, we generated 22% of our revenue in the first quarter from customers based outside of the U.S.

Continuing an ongoing trend, fixed subscription revenue increased to 78% of total revenue in the first quarter compared with 73% in the same quarter last year. This trend reflects the tendency of existing customers to progress towards higher fixed tiers over time as well as our steady shift towards larger customers and brands who tend to purchase larger fixed tiers and more accurately forecast their GMV to avoid overage (15:58) charges.

Moving to the expense side of the P&L, you'll note that we made a small change in our presentation. Specifically, we have included depreciation and amortization expense as separate line items in the P&L rather than allocating these expenses to the other operating expense lines.

As we focus on leveraging our model towards profitability, we believe that this format provides a clearer view of the sources of operating leverage. Of course this has no impact on EBITDA.

To facilitate your modeling we have provided a breakdown of depreciation and amortization by P&L line item in the press release, and on our website, we have posted our quarterly P&Ls in the new format for the past two years. As in the past, all of my comments regarding expenses will be on a non-GAAP basis and all comparisons will be on a year-to-year basis unless otherwise specified.

Our press release includes a GAAP to non-GAAP reconciliation. Our adjusted EBITDA loss in the first quarter was $4.2 million.

This was substantially ahead of our guidance and also a significant improvement over the prior year, demonstrating the leverage inherent in our business model. Our gross margin has improved by 220 basis points reflecting the larger revenue base and higher contribution margins for existing customers.

Also contributing to our improved adjusted EBITDA, sales and marketing expense declined as a percentage of revenue by approximately 670 basis points in the first quarter compared to a year ago. The majority of the decline was due to slower hiring and timing of Catalyst expenses.

Our U.S. Catalyst Conference took place from March 30 to April 1.

As a result, $0.5 million of the $1.8 million in total expense for Catalyst was incurred in Q2 this year, unlike 2014 where the entire expense was incurred during the first quarter. We continue to have a strong balance sheet.

We ended the quarter with $62.9 million in cash and cash equivalents, and we are debt free. With our emphasis on profitability, we believe we have sufficient cash to execute on our objectives and reach the point of cash flow breakeven while maintaining a healthy level of cash reserves.

Now let me turn to guidance. With a solid start to the year, we are maintaining our full year revenue guidance of $94 million to $97 million.

At the same time, given our strong first quarter performance and the continued leverage we anticipate in our model, we now expect our adjusted EBITDA losses to be between $13 million and $16 million for the full year, reflecting our focus on profitability improvements this year. Looking at the second quarter, we expect that there will be some near term impact from the changes David referenced, such as stricter customer acceptance requirements, which means that we may not replace smaller departing customers at the same rate.

Accordingly, our guidance of $21.4 million to $21.8 million similar to our guidance in Q1 reflects revenue to which we have direct visibility. As part of our effort to drive the business towards sustainable profitability, we expect to incur a one-time cost of approximately $1 million to $1.5 million in the second quarter.

In Q2, we will benefit only partially from actions that we take to become more profitable. Beginning in Q3, however, we expect to see significant leverage on our sales and marketing expenses on an ongoing basis.

We will exclude these one-time expenses from our adjusted EBITDA and non-GAAP net loss and share them as reconciling items with our GAAP net loss. Additionally, as I mentioned, we will see approximately $0.5 million in cost related to U.S Catalyst hit in Q2.

Also in the second quarter, we hold and sponsor various other global marketing events, the largest of which is our European Catalyst event in London at a total cost of approximately $600,000. Therefore, for the second quarter, we expect our adjusted EBITDA loss for the quarter to be in the range of $5 million to $6 million, which does not include the approximately $1 million to $1.5 million in one-time cost.

As implied by our first quarter results and our guidance, we expect our adjusted EBITDA loss to narrow on a sequential basis in the third and fourth quarters. While most of the expense adjustments David discussed are focused on improving our sales and marketing ROI, we expect continued leverage on the R&D and G&A lines going forward as well as we benefit from the scalable infrastructure that we have established over the past two years.

In our previous call, we characterized 2015 as a transition year during which we would focus on our larger and profitable customers and leverage our P&L to reach profitability. This means that in 2015, we will prioritize profitability relative to revenue growth.

We expect to enter 2016 with a business capable of both strong revenue growth and improving profitability. In 2015, we will continue to balance the tradeoffs between rapid revenue growth and profitability.

However, we will air to the side of profitability. In summary, we believe that the first quarter marks a good start to our transition year and that we are taking the necessary actions to create sustainable revenue growth and accelerate our path to profitability.

And with that, I'll turn the call back over to Scot.

Thanks, John. Let's now open it up for Q&A.

Operator?

Great. Thanks and congratulation, David.

I guess, first off revenues came in a bit better than your guidance and growth accelerated a point from Q4, but for Q2 you are expecting a step lower, is that specifically reflecting the additional churn of smaller accounts or is it something further quarter-specific playing on the revenue line? And then, also G&A there was a sequential decline there, was any cost cutting reflected in Q1 G&A or is that seasonality or something else?

Hey, Colin, first of all, thank you for the kind words. I think from a Q2 perspective, as we consider the effects or the potential effect of some of the changes that we're making in terms of where we were focusing our sales team and some of the acceptance criteria, it's somewhat difficult to say exactly what effect that will have.

So, I think we're making some assumptions there about potentially effect that could have. So, I think just being a little bit cautious about what that would be.

As far as G&A, I'll leave that to John.

Yeah, I mean, I think G&A is pretty much – there are always a few things that hit quarter-to-quarter that can affect the run rate a little bit, but we expect to see continued leverage on that line throughout the year.

Okay, thanks. And then, maybe as a follow up, I mean, the customers where you are seeing churn perhaps those that you would rather stay on the platform, are you seeing them simply shutting doors as they struggle on eBay or are they managing channels independently or moving to other tools, any color on that would be helpful?

Thanks.

Yeah, I think I wouldn't characterize it much differently than what we've seen in the past. I think the customers at the lower end of the scale just have long-term viability challenges.

We certainly see eBay as a factor there. eBay as, you know has been growing more slowly than e-commerce.

And I also think that when you're talking about customers that are doing maybe $50,000, $75,000 or $100,000 a month online on a channel like eBay, their ability to maintain a source of product and their ability to be properly capitalized, they just don't have as long a lifespan as a larger customer. So, I wouldn't say it's something that, that has been significantly different other than eBay's performance in the last couple of quarters.

I think more to the point, Colin we've done a pretty in depth analysis following Q4 as it relates to the profitability of the segment, our cost to customer acquisition, the lifetime value of these customers and have decided that unless we significantly filter the type of customer that we bring on board in this segment, it's very difficult to show profitability on a unit basis down at the lower end.

Okay. Thanks, David.

Thanks very much and congrats on the promotion, Dave. Couple of quick ones for you.

First of all, I know you're not going to provide specifics around gross adds, but just was wondering if you would help us understand directionally how that looked by customer segment so obviously as you guys move up market, I would imagine that becomes a nice source of year-over-year comparison, but I was wondering if you could share some commentary around that?

I think truthfully as I said before we don't really focus on net adds undoubtedly when we had larger customers, it'll be smaller number of gross adds at the higher end, but with a lot more revenue associated with it. So, it's not really been our focus.

And truthfully I don't think that we intend to continue to highlight net adds much beyond this year. So from a year-over-year comparison I am not sure that will be a big deal.

Yeah, Mike what I would – this is David – what I would add to it is that I've been really pleased with the receptivity of larger brands and larger retailers to our offering. I would characterize this qualitatively as a source of strength in both our pipeline and in our sales efforts.

And when you take that coupled with the lifetime value of these types of customers and the fact that our customer acquisition costs are – they're larger than what you would see at the lower end of the market but not significantly larger, they're just more attractive economics. So, I think our ability to progress within this market segment, I think is really strong and I think that's supported by the activity we've seen over the last couple of quarters.

Got you, okay. And then, just kind of on that point, so obviously with respect to kind of sales and marketing focus on the kind of moved-up markets, is that kind of where the bigger constraint is right now on being able to kind of drive success up market versus product?

I mean, is there anything from a product standpoint that you need to kind of unleash to be able to support your initiatives to move up market? Thanks very much.

No, Mike. I think our product is very well positioned especially in the realm of Google PLAs and things like Facebook dynamic product ads and adding new marketplaces like Jet as well as our cross-border trade initiatives.

These are all things that appeal really well to that segment. I think there is a lot more that we can do in this segment.

I mean, I've spent the last number of weeks on calls or meetings with a number of a fairly iconic brands both on the major retailer side and the major brand side worldwide and what I found is that there's a lot of interest in what we're doing and there's a lot of pain beyond what we're doing. So, I think our ability to expand our platform to address additional capabilities and additional pain points that this segment has is fairly significant.

So, I'm fairly bullish on the opportunity in this segment.

Great. Thanks very much, guys.

Thanks, Mike.

Thanks so much and congratulations on all the moves. I was interested as you move up market who you see competitively and how that dynamic might be changing?

Hey, Brendan, I think there is a few different competitive segments here, one that we see and we talked about on previous calls is agencies who traditionally provide a fair amount of manpower in executing strategies for retailers and brands. But like a lot of things in the digital realm, manpower is giving way to data and algorithms.

And I think our ability to bring a differentiated technological platform and significant data is a differentiator in the market. I think agencies could support this segment adequately when it came to things like Google AdWords and bidding on terms.

But as you start to see the fast evolution of things like, Scot talked about like mobile, the rise of marketplaces, cross-border trade, just bidding on keyword terms is no longer going to cut it for players in the space. They really have going to focus on technological capabilities, advanced data analytics and using that as a strategic advantage.

So we certainly have foreign competitors, they tend to vary by geography. We have few technological platforms competitors in the U.S.

a different set in Europe, a different set in Asia, and we have agencies that compete from a service or manpower perspective, but I think we are fairly uniquely positioned to address it with a scaled global technology platform that really leverages data and for that reason, I think we're in a good competitive position.

Great. And as we think about margins going forward it looks like, based on the guidance that margins have bottomed here at least for the year.

Is that the right assumption going forward? I mean, will seasonality at all next year potentially push margins back down at these levels?

I think it's fair to say that Q1 and Q2 margins will be the, the lowest, the low point. I mean, we expect margins sequentially to improve in Q3 and Q4, as I highlighted.

Because a lot of it, one, we always carry a fair – the Catalyst event is a fairly big cost for – some hits in the first half both Catalyst events and a bunch of other marketing events happen in the first half of the year. So I think what you'll see is, progressively more leverage in the third and fourth quarters.

Great. And then, John, I don't know that you guys broke it out, I'm assuming maybe there wasn't.

Was there any non-core revenue this most recent quarter?

You know we decided just from a simplicity standpoint not to highlight core, non-core because non-core has been diminishing in materiality just for a point of reference it was $1.3 million last year in total. Non-core revenue declining 30% and we expect that it will probably decline at similar or faster rate this year, especially because we're sun setting one of the platforms.

So I think, it's becoming so small that it just kind of muddies up the conversation.

Great. And then, just lastly, I know in the past you have share GMV.

Do you have that for the group for the customer base?

We usually give annual GMV guidance but we don't usually give it on a quarterly basis, I mean, not guidance, sorry, annual GMV but we don't give quarterly usually, Brendan.

All right terrific, all right. Great.

Thanks guys.

Thanks, Brendan.

Hi, thanks guys for taking the question and congrats, David. Any qualitative feedback you can give on bookings of the size of the pipeline after the Catalyst Conference in March and any feedback from customers on the Spring Release?

Hey, Brian, yeah, I appreciate it. Yeah, Catalyst was a great event for us.

As Scot indicated, we had record attendance both at our U.S. and European events.

It's always a fantastic event both in terms of networking and education and we typically see that it is certainly help move deals along for those who attend. As you know we don't disclose bookings on a regular basis.

We do periodically disclose net bookings but I would say that I was pleased not only with the event but I am also pleased with the activities that we see in our pipeline in particular, as I said before, on our larger retail and brand segment, I think this is the area for us to be and I think the reaction and the receptivity that we are getting has been strong. I will say that we had a dinner the night before our Catalyst events in the UK and we invited a select number of customers and prospects and about one-third of the folks that we had in attendance were actually branded manufacturers who had just a keen interest in not only what ChannelAdvisor was doing but the opportunities in the industry.

So I think from our perspective, the focus on how we can help larger retailers and brands navigate what are the fast changing landscape I think is spot on and we've had great feedback from that show.

And that kind of feeds into my next question. Feeding the brands, I know you guys had Samsung highlights at the Catalyst Conference.

Any early update there in selling that product into the U.S.?

No. I don't have an update for you specifically.

I mean, Samsung has been a successful customer with us but what I would say is that, as I said in my prepared remarks, that the Where to Buy platform has a number of interesting customers and had significant interest from a variety for brands on a global basis from the U.S. to China but I would also say that I consider it a foothold in the segment.

Where to Buy is almost a table stakes capability for brands and I think our opportunity is to really expand that platform from Where to Buy to an additional set of capabilities because brands are – you have a whole spectrum of brands where they are on their lifecycle, right? You've got brands that are on very early in the lifecycle, they may have no transactional capability on their website but they certainly want to point you to authorized resellers both online and offline that's where our Where to Buy solution can help them.

And then, of course, you've got brands that have been selling direct to consumer for many, many years and you got a whole spectrum in between those two end points. So, I think of Where to Buy as an initial foothold in the market.

It allows us to go into an earlier part of the lifecycle compared to what we had before but I would expect us to fairly aggressively build out our platform's capabilities in that regard.

Okay, good to hear. Last one and this is probably for John, just on the FX headwinds for the 2015 guidance, any change on the impact there versus your fourth quarter assumption?

Thanks.

No. I mean, no real change.

Hey, guys thanks. David could you talk about how your sizing TAM now as you kind of refocus efforts up market and can you give us a sense and I know this is probably – there is not a direct answer here but some sort of sense of lower, in terms of the low end of the market now versus what it used to be?

Hey, Justin, great question. So I think it's fair to say that we're certainly reducing the number of customers that we would potentially accept them on to our platform at the lower end and quantifying that is a little bit difficult.

It's not that we're not going to sell to smaller customers, to be very clear, what we are going to do though is implement a set of acceptance criteria and this is something that's already been in the works around some of the criteria that I talked on my prepared remarks, things like technical capability, the financial capacity to invest, et cetera. And so that will have some degree of constricting effect on the low end of the market and it's difficult to quantify and I think it is something we'll have to see as time rolls by.

But I would also point out that I think we have an offsetting effect of adding this brand's addressable market at the upper end. So to the extent we're losing some number of potential customers at least where they are in the life cycle at the low end, I think we are at least offsetting that at the upper end.

Historically in terms of selling to brands, right, unless they were already transacting on their website and prepared to do Marketplaces and digital marketing, we really didn't have an offering for them and now with Where to Buy we got a capability to go into a global brand and offer them a capability that previously, we might had conversations with the brand but because we didn't have the offering we really couldn't include them in our addressable market. And I would also add that I believe that – like I said in my remarks, the lifetime value associated with some of these brands is significantly larger than the equivalent lifetime value of a smaller customer.

So we are not cutting off completely at low end but we are going to have some acceptance criteria that by the way is statistically researched right. So we've done quite a lot of research on the characteristics that make for a successful customer at the low end and for those that pass those kinds of assessment, we'll continue to accept them as customers because we know that to a certain extent some segment of those will grow into larger customers.

But I think shifting our focus towards the larger end of the brands will hopefully at least more than make up for any kind of constriction on the lower end of the TAM. Does that answer your question, Justin?

Yeah, yeah. And may be just a follow on to that, I mean, on the brand side of things, I guess, just curious where you think that leaves sort of the middle market customer, the retailer that doesn't have the brand that's sort of an intermediary.

What does that do to them over the next three to five years as more brand go direct. How does that sort of hurt their proposition in the market?

Well, I think, it's a great question. I think it varies a little bit category by category, geography by geography and when we talk about the lower end of the market, remember that we're talking about customers that are doing $50,000 to $100,000 a month in the channels that we're talking about, may be a $1 million in total online.

So, those are quite small. We think there is a robust market somewhere above that line.

I mean, we continue to sign meaningful volume of what we would call middle market customers that may be doing $1 million, $2 million, $5 million especially looking at segments like automotive and other types of categories where we see a fairly vibrant market. So, I think fundamentally retailers especially those that are in the middle market need to make sure they have a differentiated value proposition.

I think a top segment, an example of a top segment would be consumer electronics, right? If you are going to sell, I don't know, digital cameras or a category of products that's fairly commoditized and fungible and you don't have a differentiated service model and you don't have something that sticks out as a differentiated capability to the consumer, I think it's going to be tough to compete as the bar rate continues to raise in e-commerce.

But I think for certain categories and it could be apparel, it could be automotive, it could be other categories, people can call that a niche, if they are competitive on price, competitive on service and have an experience that draws repeat consumers.

Got it, thanks. And then, David, I joined late, but I thought you said in your prepared remarks that you saw growth accelerate from Q4 and some of that had to do with firming up of pricing.

Can you give any more color here? Is that a comment – well, a) did I hear that right and b) if I did, does that relate to changes for new customers that are coming in the door that you are getting higher rates of existing base that is now being priced higher or what did that comment mean, I guess?

No, I appreciate the question, Justin. I think what we saw was in Q4 we saw a concentration of GMV growth in a set of customers that had volume pricing that was advantageous to the customer.

And what we saw in Q1 was a bit of a broad – what I term the broadening of concentration of GMV. So while the GMV growth continued to increase at the top quartile of customers, it was spread across a larger number of customers and in aggregate that mix of customers had a more favorable take rate and more favorable pricing.

So we saw a benefit from that.

Okay, got it. And then one more.

If you think about just the overall sales team, you mentioned $1 million to $1.5 million of one-time expenses in Q2. Are you actually reducing sales or if you think about the full year, what's the good way to think about what your head count and sales organization could do?

So I would refer back to my prepared remarks, Justin, and just say that we are focusing our sales and marketing investment on this segment of the market and I am not going to get into specifics about exactly how those expenses are going to contract.

Okay.

Just here (42:25), we would point from an efficiency standpoint, if you think about it, 72% of our revenue or 70% to 72% comes from those top 30% of our customers, so the top 900. So there is a lot of opportunity with that focus to be more efficient in the way we go after new business.

Got it. Thanks very much, guys.

I appreciate it.

Thanks Justin.

Hi. Yes, thanks for taking my question.

I actually want to follow up on your answer to Justin's question, David. Am I right to interpret that that mid tier, that $10 million to $50 million in GMV is still very much a focus for your go-to-market?

Hey, Greg. Yeah, I would say that – I want to be very clear.

This is not an abandonment of middle market customers. This is a tightening of what I would call the acceptance criteria for the lowest end of the market where – when we look at our analysis of customers who drive between $15,000 and $30,000 a year to ChannelAdvisor in revenue, that is the segment where our analysis of customers acquisition cost and lifetime value, especially at the $15,000 and below mark is an area where we just don't think the economics are something that is sustainable for us.

So we do know that there is a set of customers that we can sign in that segment that do succeed. And what we spent a great amount of effort on in Q1 was understanding what those characteristics were, so that as we sign them in the future going forward, we know what to look for and what to accept from a customer perspective.

And so this is not at all a notion from our perspective that there is no opportunity in the middle market. It's an acknowledgment that at the lower end of the market, if we don't have some meaningful acceptance criteria that we will not be able to recover profitability on the set of customers that we will now be scrutinizing a little bit more or the prospects I should say.

Does that answer your question, Greg?

It does. It's very clear.

That makes sense. And then one follow-up.

Outside of the changes to the acceptance criteria, are you doing any other organizational changes to drive sales people's behavior?

Well, we've done a number of things. Policy things that we talked about previously around our price change amendments.

We have increased prices at the low end, again, as an economic signal to the market. And, not to get too specific, but some of our acceptance criteria for example require a larger amount of prepayments from customers at the low end to make sure that ones who sign up have skin in the game, if you will.

We are also compensating sales reps partially on a revenue basis, right, so that previously we would look just at bookings, which was anticipated revenue contribution from these customers. Now what we are doing is we're still incorporating bookings, of course, but we're also looking at rear-facing revenue contributions from customers that we've signed.

So I think – and as I said in my prepared remarks focusing our sales and marketing efforts in the area where we know that we can drive not just revenue growth but profitable revenue growth. So you'll see some adjustments there.

So I would say that there is a fair amount of change going on and I'm confident that the results of that change, even if it results in us passing up the opportunity for revenue growth that previously might have not yielded the kind of profitability that we would have wanted, I think these changes will be good for the company.

Okay, great. Thanks, guys.

Thanks, Greg.

Yes, thanks. I guess, maybe John for you.

My question is on your full year revenue guidance, given the dip you expect in Q2, what kind of factors would enable you to retain, say, the upper half of your full year revenue guidance? Things like that would be a pretty big jump either in the second half or Q4 exclusively or whatever, can you just comment why that could happen?

Well, I think what we're looking at now is for the full – it's only – we're only through one quarter, so we're taking a look – we don't have enough to change our view on the full year, the one that we provided earlier. We know that Q2 carries some variables with some of the things that David spoke to you.

We're changing some policies, we know that we might see a little bit of an increased slower rate of replacement for smaller customers that are going to be churning off and not replacing fast. We're kind of using Q2 to see where it is.

What I can tell you, Craig, is that what we're focused on this year, specifically what I tried to highlight is creating a sustainable profitable foundation that we can resume high growth rates going forward from. So we will definitely air to the side of profitability this year if wherever we fall within that range of revenue.

Okay. I guess, that's all I have for now.

Thank you.

Thanks, Craig.

Hey, John, let me just start on housekeeping. I think it was kind of asked before, but I don't think we got the fourth quarter FX adjusted growth rate.

And currencies will weigh more on Q2, I think it was 300 basis points in Q1, so are you guiding more slightly higher FX impact in Q2? Thanks.

No, I am not making any assumptions regarding rate – the way we forecast is we take the rate at the current time and then we forecast them going forward. So whatever it was at the end of Q1, those rates we would have used to create our forecast for Q2.

Okay. And then just trying to get – I think the previous caller was trying to ask about the...

Yeah. I don't remember (49:13) I am trying to remember what it was in Q4, I don't think it was nearly as significant, but I don't really provide it.

Yeah, we didn't provide it in Q4. We don't always call it out, to be honest with you, but I don't think it was as significant as Q1 and we had a lot of other things going on in Q4, so we didn't focus on it.

Okay. And just back to that second quarter guidance, Tom (49:36), obviously there are a lot of changes going on, but David maybe just to clear off at least in my mind, are you going to go out to the customer base and if there are people or businesses that are not meeting certain criteria under a certain threshold, are you going to actively move them away or is this sort of a churn process that's going to take time and constrain the replacement as you put it?

Hey, Sean, great question. No, I mean, clearly to the extent we sign customers, we're going to do everything in our power to make them successful and I certainly expect a meaningful percentage of them to be successful as we've seen in the past.

I think this is really a statement about tightening our customer acquisition policies and our customer acquisition strategy. As I said, we have done a lot of analysis in Q1 following our Q4 results to understand really ultimately, not just where is the revenue growth, but where is the revenue growth that ultimately can yield profit for us and what we see at the lower end of the market, especially when we see prospects that are technologically challenged or don't have all their data in one place or have a few other markers that the – we've just seen statistically that the odds of success of that type of customer is low and it almost doesn't matter what we do, right.

It's not a statement about our platform or our services, it's a statement about the maturity level and readiness of a prospect. And so it's really, our changes are really about not signing those customers at that stage in their lifecyle.

So this is not a statement about existing customers, this is a statement about our customer acquisition strategy and where we're investing.

Okay. And then lastly just on the branded efforts.

We put some numbers around that, but my understanding is you talked about it briefly. Your acquisition is sort of further up the funnel if you will, I mean, it's not a straight monetization of GMV.

When do you really think you'll have a product that's in the marketplace to really drive more of a, I guess, more of a normal business model for your GMV take rate? Is that more into 2016 or is there something that might be helping growth in the second half of the year?

Thanks.

Yeah. Shawn, that's a great question and you're right.

Our current offering in the Where to Buy space with branded manufacturers is not GMV based. And I am not frankly sure that it needs to be GMV based, it's certainly SaaS, it's a subscription model and we get considerable revenues from certain customers that are enjoying that product's capabilities.

But, I am not sure that it requires us to continue to be successful in that market for us to have a GMV based model. So for me this represents a little bit of a diversification strategy.

And, obviously at the end of the day, brands are interested in sales and what they're driving to retailers, but for brands this is really about how do I make sure that customers who are interested in my product and researching my product can find the places to buy it that are trusted and authorized by me as the brand? GMV is kind of a secondary consideration.

And Shawn one thing we see there is there is a bit of ability to up sell the customers. So, even when they sign on frequently it's in a small number of geos, a small number of SKUs and a small number of brands.

We have kind of a three-dimensional matrix there that as they add geos, SKUs, and sub brands, the amount of fees they pay us goes up. So, it kind of has a variable part, it's just kind of different model it's not a percent of sales variable, it's variable across those three dimensions of brands or sites that are managed, the number of SKUs, and then the number of geos.

So, for example, Samsung who we highlighted started, I don't remember the exact history there, they started in one geo and then we've added many more geos, product and then product line, those kinds of things.

Okay, that's helpful. Thanks, Scot.

Hey, guys. This is actually Jobin Matthews sitting in for Karl.

Thanks for taking my question.

Hey Jobin, how are you? We were going to say, hi Karl.

Hi. Thank you, John.

This has been asked before, but just from the point of view of your guidance, it looks like your 2Q was slightly lower than maybe we were expecting, but you've maintained your annual guide. Is that just because your new programs are taking time to fall in place and some of the 2Q revenues pushed out into the second half of the year.

Is this how we should interpret the guidance?

Yeah. The greatest amount of uncertainty Jobin will be focused on the short-term as we roll these things out in Q2.

So certainly the revenue we forecast is supported by our TAM and the opportunity, but in the short-term that's the hardest impact to measure. So that's kind of how we are – that's why we're projecting the way we are.

Got it, okay. And in terms of your cost take outs, what does this mean in terms of the existing investments you've put in international regions; in China, in Brazil and what does it mean for the investments?

Are you planning on taking some of those investments out which may not be as profitable as you may have thought?

Hey, Jobin, this is David. I would say – you referenced China specifically, I have been very pleased with our results in China, and I continue to expect us to invest in China.

I see a huge amount of opportunity there. I think we are very early.

I am pleased with our team and our leadership there. And so I don't see any change from a China perspective as it relates to our investments.

Beyond China, I think it's really just an analysis of where do we have investments positioned, what are the appropriate revenue for head count metrics that we want relative to growth rates. But as it relates to China, specifically, that has been a strong success for us and I would expect us to continue investing there for at least the foreseeable future.

Got it. Okay.

And as you – last question. And as you guys come out of this transition phase, where do you still see your medium term growth and profitability margin targets?

Yeah. So, Jobin, this is David.

We're not providing long-term forecast in that regard. I think we're still early in 2015.

So I certainly don't want to get ahead of our ski tips and start making predictions about 2016 or 2017. I think our near term priority is to make sure that we're focused on improving our profitability driving as much revenue growth as we can, but also driving revenue growth that we know will ultimately yield margins that are acceptable to us.

Continuing to invest in growth, but maybe a little bit more disciplined growth. So I'm not going to provide a specific quantitative figure for you as it relates to long-term, but I certainly think that we can continue to grow at or above the rate of e-commerce and show increasing profitability along that path.

Okay, that's helpful. Thank you.

Thanks, Jobin.

This is Scot. I just want to thank everyone for joining us today and we look forward to speaking with you again soon.

Thank you.