Summary
- ChannelAdvisor reported its Q2 2022 financial results on August 9.
- The firm provides companies with multichannel management software and services.
- ECOM has reduced the top end of its growth guidance, operating income is flat, and management sees headwinds from a strong dollar and macroeconomic conditions.
- I'm on Hold for ECOM for the near term.
A Quick Take On ChannelAdvisor
ChannelAdvisor ( ECOM ) reported its Q2 2022 financial results on August 9, 2022, beating expected revenue and EPS estimates.
The company provides a platform that assists retailers and other brands to better manage their ecommerce operations.
With a slowing economy, higher U.S. dollar and tepid forward growth guidance, my outlook on ECOM is on Hold for the near term.
ChannelAdvisor Overview And market
Morrisville, North Carolina-based ChannelAdvisor was founded in 2001 to provide multichannel commerce solutions for brands and retailers to streamline their operations and grow sales.
The firm is headed by Chief Executive Officer, David Spitz, who is also Chairman of Adwerx, a senior advisor to Susquehanna Growth Equity and founder of Avesair and Netstation.
The company's primary offerings include:
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Marketplaces and first-party channels
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Digital marketing and retail media
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Product content and feed management
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Shoppable media
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Brand analytics
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Managed services
The firm acquires customers, which are frequently middle market or larger in size, through its inside and direct sales and marketing teams.
According to a 2020 market research report by Grand View Research, the global market for e-commerce software was valued at $6.2 billion in 2019 and is expected to reach $18 billion by 2027.
This represents a forecast very strong CAGR of 16.3% from 2020 to 2027.
The main drivers for this expected growth are an increase in e-commerce capabilities to assist enterprises in automating core business functions while increasing the leverage firms have as consumers increasingly adopt online shopping for goods and services.
Also, firms that utilize APIs (Application Programming Interface) enable companies to employ low code solutions to quickly modernize their existing systems.
ChannelAdvisor's Recent Financial Performance
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Total revenue by quarter has largely plateaued in recent quarters:
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Gross profit by quarter has also flatlined recently:
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Selling, G&A expenses as a percentage of total revenue by quarter have varied within a narrow range:
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Operating income by quarter has remained positive in recent quarters:
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Earnings per share (Diluted) have produced the following results:
(All data in above charts is GAAP)
In the past 12 months, ECOM's stock price has dropped 43.8% vs. the U.S. S&P 500 Index's fall of around 13.1%, as the chart below indicates:
Valuation And Other Metrics For ChannelAdvisor
Below is a table of relevant capitalization and valuation figures for the company:
Measure ((TTM)) | Amount |
Enterprise Value/Sales | 2.07 |
Revenue Growth Rate | 10.1% |
Net Income Margin | 23.7% |
GAAP EBITDA % | 12.0% |
Market Capitalization | $433,520,000 |
Enterprise Value | $357,040,000 |
Operating Cash Flow | $30,390,000 |
Earnings Per Share (Fully Diluted) | $1.29 |
(Source - Seeking Alpha)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:
Assuming generous DCF parameters, the firm's shares would be valued at approximately $14.40 versus the current price of $14.66, indicating they are potentially currently fully valued, with the given earnings, growth and discount rate assumptions of the DCF.
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
ECOM's most recent GAAP Rule of 40 calculation was 22.1% as of Q2 2022, so the firm needs some improvement in this regard, per the table below:
Rule of 40 - GAAP | Calculation |
Recent Rev. Growth % | 10.1% |
GAAP EBITDA % | 12.0% |
Total | 22.1% |
(Source - Seeking Alpha)
Commentary On ChannelAdvisor
In its last earnings call (Source - Seeking Alpha ), covering Q2 2022's results, management highlighted its resilient results in the face of 'slower e-commerce growth, high consumer inflation and macro uncertainty.'
The company retired 6% of outstanding shares from a previously authorized share purchase, to which it will add another $25 million in possible future share repurchases.
Management expects revenue to improve starting in Q3 as subscription growth helped the company achieve revenue above the midpoint of its previous guidance range, although foreign exchange headwinds will challenge its future prospects somewhat.
The company's fastest growing cohort of customers is those purchasing more than $100,000 in ARR which also accounts for a majority of ARR.
As to its financial results, total revenue grew only 3% year-over-year after the effect of a stronger US dollar.
Management did not disclose the company's net dollar retention rate, an important metric to determine product/market fit and sales & marketing efficiency.
The company's focus on brands is producing positive results, with this customer segment accounting for 49% of total subscription revenue, up from 44% year-over-year.
Operating income remained flat as the firm added to sales headcount.
For the balance sheet, the firm finished the quarter with $84 million in cash and no debt. The company generated free cash flow of $24 million in the past twelve-month period.
Looking ahead, management expects $178 million for full year 2022, with a reduction in the top end of the range due to foreign exchange headwinds and 'uncertain macro conditions.'
Regarding valuation, my discounted cash flow analysis indicates the stock may be fully valued at around $14.40.
The primary risk to the company's outlook is a global slowdown leading to reduced spend and longer sales cycles, although such a slowdown may reduce wage inflation pressures.
With a slowing economy, higher U.S. dollar and tepid forward growth guidance, my outlook on ECOM is on Hold for the near term.
For further details see:
ChannelAdvisor Aims For Mild Growth As A Macro Slowdown Beckons