The software-as-a-service (SaaS) industry has exploded in growth over the last decade, and several companies have ridden the SaaS business model to success. One smaller entry looking to make a name for itself is ChannelAdvisor (ECOM +0.00%). With a focus on custom e-commerce solutions, the company services large brands and retailers and has done well despite fierce competition.
In an otherwise solid fourth-quarter earnings report, a problem started to become more apparent -- revenue growth has stalled. To combat this, ChannelAdvisor will continue to go after larger companies, but it is now also targeting efforts at attracting smaller companies to its services. In the February Q4 earnings report, ChannelAdvisor announced a stripped-down product offering called Starter Edition, which it hopes to quickly expand into the small business e-commerce market segment.
To help get Starter Edition going, ChannelAdvisor announced a partnership with Stamps.com (STMP +0.00%)-owned ShipStation. Let's find out a bit more about the deal, about Starter Edition, and where it could take ChannelAdvisor.
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What does Channel Advisor do and why does it need a Starter Edition?
Online marketplaces like Amazon and eBay have become incredibly popular places for consumers to shop. For brands and retailers, a presence on these sites is almost a necessity. But managing products across multiple marketplaces is a daunting task. ChannelAdvisor works with brands and retailers to create custom e-commerce and product management solutions. Many large names like Dell, Samsung, and Fossil Group use ChannelAdvisor to aggregate and manage their sales channels.
While custom e-commerce solutions are great for big brands and retailers, smaller businesses only need a simple way to sell and manage their products. ChannelAdvisor Starter Edition is meant to be that simple access point. It will feature an easy-to-use interface that allows subscribers to list, update, and manage products across multiple marketplaces. No fancy bells or whistles, just the essentials.
To reach these small businesses, ChannelAdvisor will take its Starter Edition live with some help from ShipStation. The announced partnership involves ShipStation integrating ChannelAdvisor Starter Edition into its current platform.
Under this deal, ShipStation users will have the option to subscribe to service directly through ShipStation's user interface. Since ShipStation is one of the largest third-party shipping services in the United States, it has access to many small businesses. This is precisely why ChannelAdvisor chose ShipStation as a partner on this project.
What does ChannelAdvisor hope to gain from these new initiatives?
ChannelAdvisor's performance, as outlined in its 2019 annual report, indicates a slowdown in revenue, year over year.
| Metric | 2019 Year-End Result | YOY Change |
|---|---|---|
|
Revenue |
$130 million |
(1%) |
|
Gross profit |
$101 million |
(0.69%) |
|
Gross profit margin |
77.7% |
0.26% |
|
Net income |
$3.5 million |
146% |
Data source: ChannelAdvisor. YOY = year-over-year.
A more encouraging figure is $3.5 million in net income for the year. This represents the first time that ChannelAdvisor has posted an annual profit since it went public in 2013. Investors have also been pleased with the huge gross profit margins, although companies that use a SaaS business model commonly have larger profit margins.
The stalled yearly revenue numbers are not new, as this was the second year of relatively flat growth. Starter Edition is ChannelAdvisor's response to the issue. Entering into an untapped market segment is a quick and easy way to boost revenue. Just don't expect immediate results.
ChannelAdvisor's average revenue per customer runs around $48,000 and supports the notion that large brands and retailers dominate its clientele list. No pricing details have been released for the new service, but it can be assumed that the reduced pricing will bring down that average. And because it will be offered at a discount, a significant number of new subscribers will be needed to move the marker noticeably on revenue growth.
This is where ChannelAdvisor's challenge lies. In the small to medium-sized e-commerce marketplace, competition is fierce. Companies like Shopify, BigCommerce, and Magento already have all-in-one focused products for smaller online businesses. ChannelAdvisor needs to be able to offer a better product than its competitors if it hopes to gain a meaningful market share and reignite revenue growth.
Investor takeaways
Since its earnings report and news of the new service came out, ChannelAdvisor stock has fallen about 21% to just above $9 per share. Some of that can be attributed to the overall market downturn in the past two weeks, but the steepest part of the decline came just after earnings were announced. Despite this fall, many analysts still see ChannelAdvisor outperforming in the sector. No analysts covering ChannelAdvisor have issued a sell rating.
The Starter Edition isn't expected to fully launch until the spring of 2020, and it's too soon to tell what effect Starter Edition will have on future earnings. Management is hoping it will help bring some growth back to ChannelAdvisor's top and bottom line. The stock is selling at a discount, so if you believe this is the start of a new cycle of growth, now might be a good time to get in. But if you are on the fence, it might be good to wait until the fall on any purchase decisions to see if Starter Edition has an appreciable effect.
