ChannelAdvisor (ECOM) Q3 2019 Earnings Call Transcript

ChannelAdvisor (ECOM)
Q3 2019 Earnings Call
Nov 07, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the third-quarter 2019 ChannelAdvisor earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Traci Mangini.

Traci Mangini -- Director of Investor Relations

Thank you, Carmen, and good morning, and welcome to ChannelAdvisor's conference call for the third quarter 2019. My name is Traci Mangini, director, investor relations. And with me on the call today are David Spitz, ChannelAdvisor's chief executive officer; Rich Cornetta, ChannelAdvisor's chief financial officer; and Beth Segovia, ChannelAdvisor's chief operating officer. This morning, we issued a press release with details of our third-quarter 2019 performance, as well as our outlook for the fourth-quarter and full-year 2019.

This press release can be accessed on the Investor Relations section of our website at ir.channeladvisor.com. In addition, this call is being recorded, and a replay will be available after 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 or Form 10-Q, as well as our other filings which are available on the SEC website at www.sec.gov.

During the course of today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, which excludes depreciation, amortization, income tax expense, interest, stock-based compensation, and nonrecurring severance and related expenses. Our press release that we issued today includes GAAP to non-GAAP reconciliations for gross profit, gross margin, operating expenses, operating income, operating margin, adjusted EBITDA, non-GAAP net income, and free cash flow. We also provide a GAAP to non-GAAP reconciliation schedule in our supplemental financial presentation posted on the Investor Relations section of our website at ir.channeladvisor.com. Finally, at times in our prepared comments or in responses to analysts' questions, we may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results.

Please be advised that we may or may not continue to provide this additional detail in the future. With that, let me turn the call over to David for his prepared remarks.

David Spitz -- Chief Executive Officer

Thanks, Traci, and good morning, everyone. Our performance in the third quarter was solid. Revenues of $31.7 million were in line with our guidance range. And the work that we did to improve profitability in July, began to yield positive results as we posted adjusted EBITDA of $5.2 million.

Substantially better than our previous guidance and more than doubling as a percentage of revenue compared to the same period last year. Yield cash flow of $4.8 million also represented a nearly $6 million improvement compared to the same period in 2018. Once again, our EMEA and Australian regions both drove strong double-digit year-over-year revenue growth for the quarter on a constant currency basis. The primary driver of our performance in these regions has been solid execution against bookings and churn targets in our recent quarters, particularly with brands.

This should position both regions for continued near-term revenue growth. Domestic revenues declined slightly compared to the same period last year. And although this represented a modest sequential improvement from the second quarter, we firmly believe we can do better than this, and improving results in the U.S. is our primary area of focus.

The fundamental driver of our domestic revenue performance has been a lack of bookings growth in the U.S. over the last couple of years. And contributing to this has been a gradual decline in the number of quota carrying headcount over that period. When Paul Colucci stepped up to run U.S.

sales for us in the third quarter, we quickly agreed on the need to hire additional sales reps to get our sales capacity to appropriate levels. I'm really pleased to report that in the span of the last 60 days, we've already brought those resources on board and they're running them through training as we speak. We believe this improved level of sales capacity, better aligns our U.S. coverage with what we have in EMEA and Australia and improves our ability to drive bookings growth in the U.S.

in 2020. Importantly, the cost of this incremental investment will have been largely offset by reductions we made in other areas in our July reorganization and was already contemplated in the numbers Rich shared with you on our last call. Our sales leadership transition in the third quarter went smoothly, and coupled with improvements in revenue addition, I'm pleased to report that we've seen an improvement in net bookings year to date compared to last year. Making us optimistic that we're better positioned to drive revenue growth going into 2020.

As for channel performance, GMV on Amazon accelerated in the third quarter to the highest year-over-year growth rate in a year mirroring Amazon's overall accelerating revenue growth rate, which is great to see. Our strong Prime Day performance in July and the benefits of one-day shipping have been solid contributors. Amazon has been on tail lately, and this is also showing up in our digital marketing results, which continued a stream of recent year-over-year growth for the quarter. Notably, in the third quarter, for the first time, we managed more ad spend on Amazon than we did on Google, reflecting how quickly Amazon has become table stakes as a digital marketing channel.

We believe we remain uniquely positioned as the most complete solution to help brands and retailers manage Amazon holistically from advertising to first-party selling, drop shipping, marketplace management, price optimization and fulfillment, and we expect to continue to see success on Amazon as our largest channel. The strength on Amazon was partially offset by GMV declines on eBay, which had a modest impact on our variable and strategic partner revenue in the quarter. Interestingly, this year, through the third quarter, we've reached a point where Amazon GMV to our platform is more than double what we see on eBay. So while we expect that eBay will remain an important channel for our customers and us for a long time to come.

This trend suggests that eBay's results are likely to be less impactful gradually to our results over time. Continuing recent trends are long tail of supported marketplaces enjoyed the solid year-over-year GMV growth. To highlight one that I haven't talked about before, Rakuten U.S., which is a division of Rakuten Ichiba, the largest e-commerce site in Japan and among one of the world's largest by sales, had strong performance for us in the third quarter. While we supported this marketplace for some time, we've recently expanded our strategic relationship with them and have experienced a substantial improvement in seller adoption and GMV volume as a result.

As demonstrated by our work with Google on shopping actions, our work with Rakuten highlights the mutual benefits we see with our partners when we collaborate closely with them. And speaking of collaboration targets in the marketplace, Target+ continued to perform well. While invitation-only for sellers Target+ has climbed to our largest marketplace in terms of GMV after launching in 2018. We believe our industry-leading breadth of supported channels across dozens of countries provides exceptional value to our customers and makes us the preferred partner for newer marketplaces.

We also continue to make good progress in acquiring, expanding and servicing our brands customers with brands now comprising over one-fourth of our trailing 12-month revenue and becoming an increasingly important driver of our business. And as Beth will touch on in a moment, this continues to be a key strategic focus for us. Now I want to emphasize that our primary focus over the next few quarters is blocking and tackling with the objective of improving our core execution, especially in the U.S., as we work to improve revenue growth. We're pleased with our improved profitability this quarter.

Our smooth sales leadership transition, the progress we've already made in getting our U.S. sales staffing to appropriate levels as we prepare for 2020. And we look forward to driving another successful holiday selling season for our customers over the next few weeks. As we think about our outlook for the next year.

It's a little early to call the numbers, but we're focused on returning to revenue growth and driving continued margin expansion in 2020. We'll obviously have more to talk about on this front on our next call. And now I'll turn the call over to Beth for a few remarks. You'll recall that last quarter, Beth was promoted to chief operating officer, and she's been busy over the last couple of months absorbing in integrating several new teams, including our product organization.

Beth?

Beth Segovia -- Chief Operating Officer

Thanks, David, and good morning, everyone. It's been a productive few months since assuming the role of COO in August. Our first step was to implement some organization changes, which included reallocating resources and leadership within key areas of the operations to streamline and optimize business performance. We are very happy with the structure we now have in place, and we are already seeing improved operating efficiency and inter departmental collaboration.

Let me share a few of those changes. We have consolidated all of our internal operations teams into one organizational unit. This has allowed us to get more efficient with reduced resources. In addition, we've created a new business intelligence team that will monitor key performance metrics for the business, providing analytics, improving visibility and delivering more actionable intelligence across the company.

We are pleased to share that Steve Frechette recently took on the role of vice president, product management. Steve came to ChannelAdvisor in 2017 as part of our HubLogix acquisition, where he held the role of chief technology officer. Prior to that, Steve served as the VP of engineering at Qlik, a leading business intelligence and analytics platform. Steve has 25 years of software development and product management experience across a variety of software enterprises and start-ups, and we are excited to see him take on this critical leadership role.

Working with Steve and our entire talented product and engineering team, we will focus our development road map on maintaining our market leadership position and further enhancing our already strong value proposition for brands. By building out a comprehensive platform for them to leverage no matter where they are in their digital journey. So let me talk a little bit about some of our recent innovations in our technology and where we are going. In April of this year, we rolled out a simplified and more modern user experience and to improve speed and quality of customer onboarding and retention rates, especially for newer customers.

In just five short months, we reached a 100% adoption, and the feedback has been extremely positive. Clients tell us the new layout saved them clicks, makes more sense to them, is easier to use, and they like that it shows them relevant health topics embedded in the app when and where they need that information. Throughout the year, we've continued to invest to maintain our leadership position in marketplaces. From the deployment of multiple new pricing capabilities, including our cross marketplace velocity repricer and our Amazon pricing console to enhancements in our Amazon advertising capabilities like sponsored brands, support, keyword automation and sponsored display to building out our shipping management suite, and finally, adding exciting new channels like Checkout on Instagram, Google Shopping France, and Amazon Turkey and UAE.

With our priority focus to build capabilities for brands, we have continuously deployed new features as part of our Where to Buy and Buy Local solutions. Including enabling by local on demand, which provides real-time product availability at local retail stores by local promotions and improved visibility with our 360 analytics for products. We have also been working to develop improved self-serviced approaches, including enabling a try then buy business model and products. In October, we launched ChannelAdvisor Elevate for Amazon, our first zero-touch self lineup and self launch applications.

This is important because it provides a solution to clients who want a lower cost algorithmic repricing technology for Amazon. In addition, it gives us the opportunity to cost-effectively bring some of our enterprise capability to new customers. Finally, this approach is enabling us to learn what it takes to further simplify our user experience to enable improved self-service for our overall platform. This new endeavor is very early yet, and we are watching it closely as it evolves.

Looking forward, our product road map continues to enable clients to self-service and also focuses on serving the needs of brands in all core categories, from third-party and first-party marketplace solutions, digital marketing, Where to Buy and fulfillment. Continuing to pursue the path of improving self-service and self launch, we will create a starter addition version of our marketplace capability. This would take us one step further in enabling a good, better, best strategy for adopting our technology. This solution is expected to be launched through strategic partners and create an opportunity for us to address the needs of sellers at different stages in their e-commerce journey.

For brands, we plan to enable online promotions, expand our 360 analytics and enhance our social media capabilities within our Where to Buy platform. Longer-term, we plan to leverage our existing Where to Buy technology to build out new capabilities to expand visibility for brands around product availability, content usage, ratings, placement, price, and promotion. Finally, we will continue to invest in our current clients by improving time to value for many of the core or closed in our platform, including improved usability for launching new channels and listening error resolutions. As always, we plan to add channels with marketplaces and retailers as we identify those partners and opportunities.

We are proud of the many innovations we've released in our platform so far this year and feel strongly that we have provided critical technologies to position our clients for success. We are looking forward to working with each of them to achieve their goals this coming holiday season. Now I'll pass the call to Rich to discuss the financials.

Rich Cornetta -- Chief Financial Officer

Thank you, Beth, and good morning, everyone. I'd like to start my prepared remarks by thanking the ChannelAdvisor team for their collaboration following our reorganization in July. Together, we have used this opportunity to identify and execute on improved efficiencies across the organization. These efforts have allowed us to remain on track to achieve the annual cost reduction goals discussed on our last earnings call in August.

So let's talk about the highlights and trends of our third-quarter performance. Please bear in mind, consistent with our historical practices, my comments regarding expenses will be on a non-GAAP basis, and all comparisons are on a year-over-year basis, unless otherwise specified. As David mentioned, we posted solid quarterly results. Revenue was in line with the guidance range, while adjusted EBITDA well exceeded the high end of the guidance range, setting us on pace to double adjusted EBITDA margin in 2019 compared to 2018.

We also achieved another quarter of strong free cash flow and posted net income for the third quarter. Total revenue was $31.7 million, down 2% overall and less than 1% on a constant-currency basis. Fixed subscription fee revenue was $25.8 million or 82% of total revenue and variable revenue was $5.9 million, representing 18% of total revenue. Fixed revenue grew slightly for the quarter, or about 1% compared to the year-ago period and continues to increase as a percentage of total revenue.

This revenue mix shift toward higher recurring revenue in the quarter largely resulted from more customers moving to higher fixed rate tiers, and some of our strategic partner agreements evolving to incorporate more fixed fees instead of purely variable revenues. Variable revenue was down 12% compared to the third quarter last year, which was primarily driven by the fixed pricing trend, I just mentioned and to a lesser extent, declines in eBay GMV. Looking at revenue by products, our marketplaces platform revenue was $23.3 million for the quarter, down 3%, compared to the year-ago period and comprised 74% of total revenue. The decline in marketplaces was driven by variable revenue, particularly in the U.S.

and China. Digital marketing posted another quarter of growth with revenue of $4.8 million, up 4% from the prior-year period and represented about 15% of total revenue. Consistent with last quarter, EMEA was a primary driver for growth in the quarter as was Amazon advertising in the U.S. From a geographic perspective, revenue from the U.S.

declined 3% in the quarter for the reasons David discussed. However, revenue from outside the U.S. increased 4% to 26% of total revenue. As this growth has achieved -- this growth achieved despite declines in China, which was down 33% from the year-ago period, as well as foreign currency headwinds.

The strength of international revenue is driven by EMEA and Australia, which were up 20% on a combined constant currency basis for the quarter when compared to the prior corresponding period. Recall that EMEA and Australia benefit from a much higher concentration of brands customers, which typically a better unit economics and lower churn levels. In the quarter, about one-third of our customers in EMEA and Australia combined were brands, compared to about one-fifth in the U.S. As we enter 2020, expanding this key customer segment in the U.S.

is a focus of our growing U.S. sales organization. Now for some information on customer metrics. We ended the third quarter with 2,718 customers, stable compared to the customer count at the end of the second quarter.

We continue to see a mix shift toward brands from retailers in the quarter with our percentage of brands customers expanding to over 20% of our customer base as of the end of the third quarter. Also, total average revenue per customers continued, albeit modest improved -- improvement during the third quarter, eclipsing the 47,000 mark on a trailing 12-month basis. Adjusted EBITDA improved substantially to $5.2 million for the quarter, up $2.9 million in representing adjusted EBITDA margin expansion of 900 basis points from the prior-year period with improvements across all reported expense line items during the quarter. Please note that the results for the quarter do not include approximately $1 million of severance and related costs resulting from our reorganization in July.

This strong adjusted EBITDA performance was a direct result of our strict cost discipline and the reallocation of capital from our reorganization in July of this year, aimed at making investments in sales, services and support to enable a return to growth in the U.S. and further strengthen our international operations. For the third quarter, we generated net income of $1.7 million, compared to net loss of $2.3 million in the year-ago period. The improvement from last year was driven not only by significant cost reduction efforts, but also the strong success of our international operations.

Turning to the balance sheet. We finished the quarter with cash and cash equivalents of $48.2 million, representing a decrease of $800,000 during the quarter, but an increase of $1 million since the beginning of the year. It's important to note that it's not for the $1 million of severance and related payments during the quarter, we would have enjoyed another quarter of positive cash flow. We recorded another strong quarter of free cash flow of $1.8 million and expect to be cash flow positive for 2019, highlighting a significant improvement from the net use of cash of $6.2 million in the full-year 2018.

So now let's discuss guidance. We are narrowing our full-year 2019 revenue guidance range to $129 million to $130 million from $129 million to $131 million as issued on August 8th. Primarily in anticipation of continued GMV declines on eBay and potentially greater foreign currency headwinds. As a result, for the fourth quarter, we are issuing guidance in the range of $33.8 million as to $34.8 million.

For adjusted EBITDA, we are raising the lower end of our full-year 2019 guidance and narrowing the range to $18 million to $18.5 million from $17 million to $18.5 million range issued on August 8th. As a result, we are issuing fourth-quarter adjusted EBITDA guidance of $7.2 million to $7.7 million. At the midpoint of our full-year 2019 guidance, this represents an improvement in adjusted EBITDA margin of approximately 700 basis points compared to 2018, nearly doubling our adjusted EBITDA margin. We believe these improvements in profitability position us with a stronger, more efficient model to drive growth in the future.

This improved profitability combined with our focus on brands, the strong performance by international operations and the investments we are making within our U.S. sales organization, make us optimistic about our future. With that, operator, we'd like to now open the call to questions.

Questions & Answers:

Operator

[Operator instructions] And we have a question from the line of Matt Pfau with William Blair. Please go ahead.

Matt Pfau -- William Blair and Company -- Analyst

Hey, guys. Thanks for taking my question. First, I wanted to dig in a bit on the comment of returning to revenue growth in 2020? And maybe you can just give us some more details on what's the primary drivers there? Is that just the U.S. sales force is ramping up? Or are there other things involved there that's pushing you back to growth in 2020?

David Spitz -- Chief Executive Officer

Hey, Matt. This is Dave. Yes, I would say that's the primary driver. And I should also be clear that when we talk about incremental headcount, we're really just kind of getting our nominal sales capacity back to the levels that we had back in 2017.

So just kind of getting back to a level that's, I think, appropriate to cover the market opportunity. And importantly, offsetting that from savings in other areas. So that investment. And as I mentioned on the call, we've got that capacity largely on-boarded at this point.

There's probably going to be a few more incremental hires before the end of the year. And it does -- they don't become productive and continuously, obviously, so we expect a ramping time, but that would be the primary driver of improving our bookings performance in the U.S. with an eye toward improving revenue performance overall in the U.S.

Matt Pfau -- William Blair and Company -- Analyst

Got it. And I wanted to dig into the metrics that you gave on brands and the delta between the number of customers that our brands in the U.S. And then the number of customers that are brands in EMEA and Australia. Maybe just some more details on what's driving that? And if there's any big disconnect as to why there's a much higher percentage in outside of the U.S.

than in the U.S.?

Rich Cornetta -- Chief Financial Officer

Yeah. Hi, Matt. This is Rich. I think, we mentioned in the past that the large amount of the brand's concentration, especially in EMEA, was really started off with our acquisition of retail back in 2014, which were a by product, highly brand focused, and that really helped spearhead the growth that we've achieved within the brand's community.

We focused on a land and expand opportunity in EMEA, whereby we're signing these brands with potentially a few SKUs at the start and maybe a geography or two. And then realizing the strength of our platform, and we've seen a tremendous amount of opportunity and growth with regards to expansions with our brand's customers. So not lending to more sales -- more customer count but really providing an opportunity to grow the brands business.

David Spitz -- Chief Executive Officer

Yeah. Matt, one thing I'll add is that, in EMEA, in particular, our sales team began an initiative earlier this year to focus on platform messaging meeting instead of necessarily going to market with individual point solutions, we are really pitching the overall platform because brands, as you know, can essentially use every element of our platform, whether it's Amazon advertising or Where to Buy or marketplace selling or drop shipping. And so rather than focus on individual capabilities, kind of bringing together that holistic platform message. And I think early indications and returns on that initiative have been really good.

So if you're a brand, what you don't want to do is sign up for a point solution in one geography, find an alternative solution in another geography and then have to stitch these things together. So the fact that ChannelAdvisor has this holistic platform. And is global is a significant differentiator for us. And I think you'll start to see us adopt that approach in other regions, as well.

Matt Pfau -- William Blair and Company -- Analyst

Yes. OK. Last one for me. Just on your expectations for Amazon going into the fourth quarter.

I think in the past fourth quarter with Amazon has been somewhat difficult to predict for you guys in terms of what the mix of 1P and 3P is there on their platform impacting, your guys' results. So just sort of curious as to what approach or expectations you have there for Amazon going into the fourth quarter?

David Spitz -- Chief Executive Officer

Yeah, it's a great question. We've seen a sequential acceleration in Amazon GMV for each of the last three, at least, if not four quarters. And I think some of that is product capabilities that we've rolled out and driven adoption by our customers. So whether it's repricing, advertising, etc.

So I think we're reasonably well-positioned with Amazon. Now Amazon itself had a nice acceleration last year then kind of came down a bit and then has reaccelerated. So it's always a little bit hard to predict, honestly, what's -- what kind of dynamic we're going to see. It's also going to depend on what other retailers do in terms of trying to pull some of the holiday spending forward.

It is a shorter holiday season in terms of number of days this year. If you just look at the time between Thanksgiving and Christmas. So we don't necessarily anticipate that, that means, overall, less nominal spending, but it could pull some of that spending forward if people are -- if retailers are starting to try to drive more promotional activity. And so that dynamic is hard to predict.

And so I think we've been appropriately thoughtful about what we expect with brands on this quarter, but we'll have to see.

Matt Pfau -- William Blair and Company -- Analyst

Great. That's all I had, guys. Thanks a lot.

David Spitz -- Chief Executive Officer

Thanks, Matt.

Operator

Thank you. And our next question comes from Ryan MacDonald with Needham. Please go ahead.

Ryan MacDonald -- Needham and Company -- Analyst

God morning. Thanks for taking my question. I guess, David, first one for you. Can you go in a little more detail about the declines you saw in the U.S.

business and clarify, was that solely due to sort of the attrition you saw on the -- in terms of number of sales heads? Or was there something, I guess, broader from a macro perspective that was causing some of that weakness?

David Spitz -- Chief Executive Officer

No. I think the approximate issue has just been sales capacity, well, under driving lower bookings number, right? So as far as I mentioned on the call, we haven't seen real bookings growth in the U.S. over the last couple of years. And I think that to my view is that the primary driver of that has been a gradual erosion of sales capacity, which is something that we've rectified.

There has been a little bit of lumpiness in partner revenue over the last, probably I'd say 18 months or so. And some of that I would attribute to eBay GMV declines, and that's -- I worry a little bit less about that. Those kind of comments, they tend to go. But sales capacity, I think, is really important for us to drive sufficient business into ChannelAdvisor.

So that we return to revenue growth. So that's my view. That's the primary thing that we need to focus on.

Ryan MacDonald -- Needham and Company -- Analyst

Got it. And then in terms of sort of the physical exit from China. I think you mentioned it was down about 33% year over year in the quarter. How is that trending versus internal expectations for sort of the pace of the declines in that business? And what should we expect in terms of sort of that how long the tail is of the impact of that exit.

David Spitz -- Chief Executive Officer

Yes. So China for us is trending with expectations. So obviously, we anticipate that there'll be ongoing revenues as we go into 2020. I'm not going to get too specific on numbers and timing.

But our view is that it's not going to be a material part of our business in 2020. And having said that, I will continue to point out that we continue to service customers in China, we do continue to opportunistically sell into China from our team in Australia, which is what we did prior to having an office in China. So I don't view this as a complete exit from China. This is just removing the physical footprint there.

We continue -- I expect we'll continue to sign customers and we continue to service customers as we go into 2020, but we don't expect it to be a significant driver in 2020.

Beth Segovia -- Chief Operating Officer

Yeah, I would just add to that. It looks like that in China -- in Australia, and our operations there. We've been very specific about hiring resources that speak Mandarin, and so we are able to service our China clients in language, which is really helpful, particularly as they have technical support questions and require our health and so we've seen that really play a factor in retaining some of that client revenue. So again, as David said, we expect to continue to service clients from Australia and see, many of them stay with us as they take advantage and leverage the platform to drive their businesses.

Ryan MacDonald -- Needham and Company -- Analyst

Got it. And then just one last one for me. Beth for you, I guess, on the starter edition solution, can you talk about sort of how you're trying to position that to drive net new customer adoption? And I asked, based on the fact that, I think when we look back to 2017, 2018, we sort of saw a shift in strategy of moving sort of upmarket and to try to service the larger customers? Are we trying to go back down market again to win, I guess, customers earlier? Thanks.

Beth Segovia -- Chief Operating Officer

I think what we're really trying to do is allow more clients access to our capabilities that otherwise maybe can take that bite, depending on the states they are in their overall evolution as a business. And so we want to start with some of the most basic capabilities that are required to do business on multiple marketplaces. And then give them access to that. And then as they mature, have them be able to take advantage of larger portions of our platform.

So really, this good, better, best strategy, we think, allows us to bring more clients in earlier in their journey and then have them grow right along with us.

David Spitz -- Chief Executive Officer

Yeah. One thing I'll add, Ryan, is that the reason we moved away from smaller customers starting a few years ago was because the lifetime value, the durability of those customers was not particularly strong. And then you couple that with a direct sales force, the metrics were just upside down, right? So the difference with starter edition, is that this is not something that will be sold through our sales force. There's no cost of customer acquisition associated with it.

We're not even planning to market it directly from our own website. We tend to go to -- intend to go-to-market through partners. So that ultimately, we'll be driving customer adoption of this platform at what we hope to be close to a zero cost of acquisition. And so even though we would anticipate churn to be higher at that segment.

That's acceptable because the nominator of the LTV to cap ratio is close to zero. So we think there's a significant market opportunity down there. There are millions of sellers on Amazon and eBay and other platforms that are quite small. And if we can bring some of the power channel by -- to them at a very low-cost to us.

We think we can open up incremental market opportunity. But from a direct sales perspective, we continue to focus on larger, higher quality customers and brands in particular.

Ryan MacDonald -- Needham and Company -- Analyst

Very helpful. Thanks.

Operator

Thank you. And our next question comes from Thomas Forte with D.A. Davidson. Please go ahead.

Thomas Forte -- D. A. Davidson -- Analyst

Great. Thank you. So I had two industry questions and one company-specific question. So the industry question I wanted to kick off with is online sales tax.

If you look at eBay, they suggested that it was a 100-basis-point headwind to their U.S. GMV growth in the first half, that accelerated to 300 basis points in the September quarter, and it further accelerated to 400 basis points in the fourth quarter? And then Etsy first part is also talking more unfavorably about the headwind from online sales tax. So we'll start with that, and then I'll go to the next two?

David Spitz -- Chief Executive Officer

Yeah, Tom. This is David. I mean, I assume the question is, do we agree that there's a similar kind of impact out there. Is that what you're asking?

Thomas Forte -- D. A. Davidson -- Analyst

Absolutely. So yes, I do use a student of the industry and have an excellent understanding of the industry. So from your vantage point, are you seeing something similar? And then therefore, does that just make this, I guess, a one-year issue as we face these rollouts from the new states in enforcing the legislation? Or is it something perhaps longer term?

David Spitz -- Chief Executive Officer

Yeah, great question. So I think my -- I tend to think about this a little bit longer term. And I think that the benefits of e-commerce and the continuous reduction in the friction of purchasing process. And the improving speeds at which products are delivered.

If we look at Prime going to one day, as an example. I think all of those things are really, really strong value propositions for consumers, especially the convenience consumer. And so to me, the incremental headwind created by online sales tax, I don't think is a long-term kind of secular driver of a shift, for example, away from e-commerce. I just don't think that, that's the case.

So I think of it as more likely a speed bump along the long journey of e-commerce continuing to expand share of wallet. I can't speak for eBay or Etsy or other platforms and we don't necessarily have the same kind of visibility they do into things like card abandonment that would give them a little bit more of a sense of what that headwind is from a quantitative perspective, but as you know, Amazon has been collecting sales tax for quite some time, and they continue to accelerate -- and accelerate share gains. So my view is that on balance, in particular, the convenience customer or consumer is going to continue to shop online. And to the extent there's any headwinds from an online sales tax perspective.

My personal view is it's more temporary than permanent.

Thomas Forte -- D. A. Davidson -- Analyst

Good. All right. So my second question is, it sounds like you're making real progress on your new product initiatives as far as giving greater flexibility to your customers to pick and choose maybe select services versus having an end-to-end solution. How should we think about the potential sales and market margin impact, for example, is the gross margin of these new products similar to the legacy one's higher or lower?

David Spitz -- Chief Executive Officer

Yeah. It's super early to say, Tom, to be honest. I think if you look at Elevate, which is our repricing app that we've launched, I would say this is, for us, essentially still an experiment, right? We're learning about what it means to deliver a completely self-service, zero-touch app to the market and optimizing how we drive adoption, how we drive conversions and things like that. So I would say we're still very much in the learning phase.

Obviously, starter edition is a more substantial initiative. And as I responded to previously in the previous question, it's important for us to have partnerships to bring these to market. From a gross margin perspective, I don't want to get too far ahead of ourselves, but I think these are more pure-play kind of SaaS offerings, right, like monthly -- fixed monthly fees, fairly, fairly straightforward, and I would expect that the P&L efficiency of these apps at scale would be pretty attractive. But if you ask me, at this point to hazard, like as we think about 2020, obviously, we have some internal objectives for these products.

But as we think about 2020, from a public perspective, we're not contemplating any meaningful contribution from them at this point. We still have a lot to see.

Thomas Forte -- D. A. Davidson -- Analyst

OK. So third and final. And, David, you sort of teased on this one. So as one-day shipping from Amazon is or is not training the consumer to expect products on a one-day basis.

How do you think or what do you think the impact is on other marketplaces? Are they going to have to roll out similar services? Will they lose further share to Amazon? So basically, do you think other marketplaces are going to have to respond with their own one-day efforts? Or do you think that is Amazon or is Amazon not training the consumer to expect everything on a one-day basis?

David Spitz -- Chief Executive Officer

I think, absolutely, that's the case. Look, at the end of the day, people like instant gratification, people want to get the products that they're purchasing as quickly as possible. And I think this is just another page and the sort of relentless Amazon playbook of continuing to raise consumer expectations in terms of convenience, cost, efficiency, etc. You probably noticed that Amazon is rolling out essentially, I shouldn't say free, but including Whole Foods delivery now in Prime, Prime memberships, which is a reduction in cost compared to what it was previously, right? So obviously, that's a shot across the brand in the gross rewards.

So yes, I think one of the challenges in the space is that a lot of other people in e-commerce are still kind of spooling up how to match two-day delivery. And so now, the goalposts have basically moved. And now, I think one-day is going to become increasingly important as the same day. So how the advantage a lot of Amazon's competitors have is they have store footprints.

They have physical distribution networks already to some extent. And they're -- they can be hypothetically, at least, we told to start to match that promise. But in my view, absolutely, it's -- it continued to condition the consumer to expect that kind of instant gratification, and I think everybody's going to have to continue to play catch-up.

Thomas Forte -- D. A. Davidson -- Analyst

Great. Thank you for taking my questions. I appreciate it.

David Spitz -- Chief Executive Officer

Thanks, Tom.

Operator

Thank you. And our next question is from Zach Cummins with B. Riley FBR. Please go ahead.

Zach Cummins -- B. Riley FBR -- Analyst

Yeah. Hi, good morning. Thanks for taking my question. So I just had one question around your new Elevate solution.

I know it just launched a little over a month ago, but I'd be interested in any sort of early feedback you have in terms of customer feedback or potentially the conversion rates you're seeing on non free trials to actually paying subscriptions?

David Spitz -- Chief Executive Officer

Yeah, Zach. It's, like, super early, so we're offering a 30-day trial. And so for a lot of the folks that have signed up, we're not even at that 30-day, 30-day mark. So I think it's a little premature to comment on conversion rates and things like that.

But I think it's a strong offering. I think it's priced really, really attractively. And remember, there's potentially a dual benefit here. There's a stand-alone revenue opportunity with Elevate, but there's also an opportunity to drive leads into our sales team.

So for example, the moment you sign up for Elevate and attach it to your Amazon account, as you can expect, we attached that account and then we help drive repricing. But it also helps us identify customers that are driving sufficient volume that they may be candidates for our overall platform. And so it's got, I think, some dual benefits there. But at this point, I would very, very much characterize it as early stage.

We're still learning. We're still tweaking. I know that early on into the process. Through our instrumentation of our product, we were able to identify a couple of pickup points where customers coming in, got a little bit stuck, and we're able to improve that.

So that's part of what I like about this program as it's giving us much better visibility into some of the areas where customers can get stuck. And some of that learning goes back into our core product, as well. So I think it's got some good long-term benefits, but it's still very early to comment on any numbers.

Zach Cummins -- B. Riley FBR -- Analyst

Yes. Understood. Thanks for the commentary. And just my other question is that the company is appearing well-positioned to return to organic growth next year.

But with all the cash on the balance sheet and the expectations of being free cash flow positive. How are you thinking about M&A and your strategy potentially to move closer to brands by acquiring another capability?

David Spitz -- Chief Executive Officer

Yeah, Zach. As I touched on that a little bit on the last call. So I want to start by emphasizing and being really clear that our focus over the next few quarters. Is blocking and tackling.

It's making sure that we get our U.S. sales capacity, not only back to the levels that we think are appropriate, but then productive and really driving that organic growth. I think that to the extent that there's a concern that if we -- that we would somehow put a lot of leverage on the balance sheet and put the balance sheet at risk by trying to do really, really big transformative M&A. That's not in our wheelhouse.

That's not our intention. The fact that we've got a strong balance sheet and our cash generative, we view as strong assets for us and gives us the flexibility to make the kind of changes that we've been making. So for now, I think the focus really is on that blocking and tackling to get the U.S. back to performance.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. That's helpful. That's all the questions I had for now, but thanks again for taking my questions. And best of luck with the rest of the year.

David Spitz -- Chief Executive Officer

Thanks, Zach.

Operator

Thank you. [Operator instructions] And our next question is from David Gearhart with First Analysis. Please go ahead.

David Gearhart -- First Analysis -- Analyst

Hi, good morning. Thank you for taking my questions. My first question is you mentioned that brand customers represent 25% of trailing 12-month revenue. Can we get the comparable number from the prior-year period, just to get a sense of the trajectory?

David Spitz -- Chief Executive Officer

I don't think that we have provided that. So let's look at that and see what we can provide. I don't think, we've provided that historically. But what I would tell you is the trends are good.

We feel very good about our brands business.

David Gearhart -- First Analysis -- Analyst

And can you provide the growth rate? Because I know on past quarters, you provided the year-over-year growth rate. I think last quarter, you didn't provide it, but hopefully, we can get that metric this quarter?

David Spitz -- Chief Executive Officer

We haven't provided it continues to be strong. I think our view is that we're not necessarily intending for every metric that we talk about to be an ongoing quarterly metric. But what I can tell you is we continue to be really pleased with our brand's performance.

David Gearhart -- First Analysis -- Analyst

OK. And then lastly for me, it's more of a high-level question. With the focus on brands and that whole shift to marketplace selling. Your customer additions have been up and down over the last several quarters, and this quarter, three additions last quarter, you lost some customers.

And I know that in the past, you had a shift of focus from small to larger accounts. But by a nature of focusing on the brand strategy, do you inherently -- are you inherently at risk of losing customers in your base as brands clean up, clean up their reseller channel and kind of tighten up who's allowed to sell brand products on marketplaces as they themselves adopt marketplace strategies? Just wondering if there's some sort of effect and shift in your base that we need to better appreciate to understand your growth besides sales capacity that there's another issue or dynamic going on?

David Spitz -- Chief Executive Officer

Yeah. Great question, David. What I would say is that I think in the industry, that's been going on for a long time, and probably will continue, right, as more brands see digital and e-commerce as a critical area that they need to be involved in. I expect that, that dynamic continues.

And that would continue with or without ChannelAdvisor, right? So part of the reason that we have shifted to brands is an anticipation of the likelihood that if you fast forward five years or 10 years. It's very likely that share of wallet will be higher for brands going direct than through intermediaries. So -- but this was the whole reason for our hypothesis that brands will become an important customer segment. That's why did the acquisition of retail.

A few years ago, and that's why we continue to focus on that as a strategic customer segment. So I don't think that's a new phenomenon. I think that's something that's been happening. I expect it's something that will continue to happen.

But I feel like we are very well-positioned to serve that market. So hopefully, that answers your question.

David Gearhart -- First Analysis -- Analyst

Yeah. That's it for me. Thank you.

David Spitz -- Chief Executive Officer

Thank you, David.

Operator

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Traci Mangini for her final remarks.

Traci Mangini -- Director of Investor Relations

Well, thank you, everyone, for joining us this morning and for your continued support. We look forward to speaking with you again soon.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Traci Mangini -- Director of Investor Relations

David Spitz -- Chief Executive Officer

Beth Segovia -- Chief Operating Officer

Rich Cornetta -- Chief Financial Officer

Matt Pfau -- William Blair and Company -- Analyst

Ryan MacDonald -- Needham and Company -- Analyst

Thomas Forte -- D. A. Davidson -- Analyst

Zach Cummins -- B. Riley FBR -- Analyst

David Gearhart -- First Analysis -- Analyst

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