ChannelAdvisor Corporation (ECOM) CEO David Spitz on Q1 2022 Results - Earnings Call Transcript - Seeking Alpha

ChannelAdvisor Corporation (NYSE:ECOM) Q1 2022 Earnings Conference Call May 6, 2022 8:00 AM ET
Company Participants
Raiford Garrabrant – Head of Investor Relations
David Spitz – Chief Executive Officer
Beth Segovia – Chief Operating Officer
Richard Cornetta – Chief Financial Officer
Conference Call Participants
Colin Sebastian – Baird
Zach Cummins – B. Riley Securities
Matt Pfau – William Blair
Tom Forte – DA Davidson
Josh Reilly – Needham
Operator
Good day and thank you for standing by. And welcome to the First Quarter 2022 ChannelAdvisor Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference over to your speaker for today, Raiford Garrabrant, Head of Investor Relations. Please go ahead.
Raiford Garrabrant
Thank you, Victor, and good morning, everyone. Welcome to ChannelAdvisor’s conference call for the first quarter of 2022. With me on the call today are David Spitz, ChannelAdvisor’s Chief Executive Officer; Beth Segovia, ChannelAdvisor’s Chief Operating Officer; and Rich Cornetta, ChannelAdvisor’s Chief Financial Officer.
This morning, we issued a press release with details on our first quarter 2022 performance as well as our outlook for the second quarter and full year 2022. 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 maybe 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 at sec.gov.
During the course of today’s call, we will refer to certain non-GAAP financial measures, all of which are reconciled in the press release that we issued today. We also provide a GAAP to non-GAAP reconciliation schedule in our supplemental financial presentation posted on the Investor Relations section of our website.
Finally, at times, in our prepared comments or responses to analyst 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.
David Spitz
Thank you, Raiford. We once again delivered strong financial results in the first quarter with revenue at the high end of our guidance range and adjusted EBITDA that exceeded the high end of our guidance range. Subscription revenue was particularly strong, increasing 17% year-on-year. This is a direct result of our brand’s focused strategy coupled with consistent solid execution.
I’d like to now share a few of the highlights that keep us bullish about our long-term prospects and confident that we can achieve our 2025 targets of 250 million in revenue and 50 million in adjusted EBITDA. First, our focus on brands continues to pay off with first quarter revenue from brands up 32% year-on-year to 45% of our total revenue, and an all time high of 49% of our subscription revenue. We’re fast approaching the tipping point where the majority of our revenues will come from brands. Because brands are generally stickier and offer greater potential for expansion, we believe the superior unit economics we’ve enjoyed with brands will continue to benefit our results, as they grow to represent a higher percentage of our business.
Second, our strong overall subscription revenue growth helped drive total revenue to the high end of our guidance range, despite slowing ecommerce growth and a more challenging macro environment, as we move beyond COVID. We view this as a testament to the durability of our revenue model. Importantly, we expect our year-on-year revenue growth to bottom out in Q2 as we finish lapping that was tough year-on-year comps in the quarter and expect stronger growth in the back half of the year, as the comps ease. In fact, but for the significant strengthening of the dollar in recent weeks, we would have expected to return to double-digit growth in the back half of the year and for the full year.
Third, we’ve continued to deliver strong value to our customers through ongoing investments in our platform. Our expanding breadth of supported channels has continued to differentiate us and that’s why we maintained our rapid pace of channel expansion in Q1, and we now support over 340 channels globally, including Saks, which I anticipate has the potential to be a significant channel for our customers. Long tailed GMV, in aggregate, was again larger than eBay and Walmart for us, second only to Amazon, and grew much faster than all three. Additionally, Zalando, the fast growing European marketplace you’ve heard as mention before, was our third largest channel for the first time, surpassing Walmart. In addition, Beth will speak to some of the many product innovations we’ve recently rolled out.
Fourth, cash generation remained strong in Q1 with cash up $6 million quarter-on-quarter to 107 million total. Our pristine and debt free balance sheet and attractive returns on invested capital have allowed us to make significant investments, while still delivering strong profitability and robust cash flows. Although we continue to evaluate opportunities to deploy our excess capital, we remain committed to a financially disciplined approach and focus on opportunities where we believe that potential returns align with our objectives.
In closing, even as ecommerce growth rates normalize, following a remarkable couple of years of pandemic driven growth, our outlook remains strong and we are well positioned to drive continued profitable growth. And with that, I’ll turn it over to Beth.
Beth Segovia
Thank you, David, and good morning, everyone. Enabling brands to accelerate digital transformation and achieve their ecommerce objectives remains our priority, and we kept the momentum going in Q1. Coming off of a strong holiday season in Q4, we hit the ground running in 2022. To start, our account managers worked with our clients to update their specific plans for expansion and growth this year. Also, we recently conducted our semi-annual employee engagement survey, 84% of our staff participated and we are so proud to say that employee satisfaction improved again, to a record high in our company history and well above industry benchmarks. Finally, we delivered significant advancements in terms of product capabilities, access to channels, and industry leadership, and now I’d like to walk you through this in a little more detail.
On the product innovation front, brands are actively seeking ways to streamline their e-commerce operations across the entire customer journey, whether it’s how they promote their products, drive traffic to preferred retailers, or even how they process orders across channels. ChannelAdvisor spring release gives them more ways to do that with an array of platform enhancements, partnerships, and integrations that will help brands scale and optimize their marketing, selling, and fulfillment operations all from a single interface. One of our top innovation priority is to make it easier for our customers to reach more consumers by expanding our breadth of supportive channels. Last year, we committed to adding at least 80 new integrations by mid-2022, compared to where we were at the end of 2020. As a result of terrific execution by the team, we exceeded that goal nearly six months early in January, and are planning to add channels at a similar rate again in 2022. We got off to a fast start in Q1 adding integrations for 21 new marketplaces including Walmart Mexico, Spartoo in 17 new European locales, Linio in Mexico and Chile, and another 5 locales for AliExpress, as well as to new first-party dropship connections with Douglas in Germany and Austria. With the addition of these new channels, ChannelAdvisor now provides our customers access to over 340 marketplaces and retail integration. We also made it easier for brands to automate the creation of high quality product content by adding support for Amazon vendor content in 12 new locales, bringing the total to 19 third-party and 21 first-party locales.
Success in multi-channel commerce relies on more than just having a listing on a given channel. Our strategy is to go deep on key channels and enable our clients to leverage native capabilities such as fulfillment and advertising. With our latest product release, ChannelAdvisor expands our fulfillment support by providing sellers the ability to manage and automate their fulfillment operations across additional channels including Bol.com and Wayfair. With these additional fulfillment integration, sellers can deliver the best on-channel consumer experience, while maintaining flexibility over fulfillment options based on product selection and inventory availability.
On the advertising front, we recently established an API partnership with Criteo to expand retail media advertising opportunities for our customers. These capabilities should be available mid-year. ChannelAdvisor also released managed services for advertising on TikTok. TikTok is increasingly used by brands and retailers to reach new audiences. Continuous product innovations like these have contributed to cementing our position as the leading multi-channel commerce platform for e-commerce.
Last quarter, we mentioned that we were named the number one channel management vendor by Digital Commerce 360 for the tenth consecutive year. And this quarter, I’m pleased to say we again achieved Premier Partner status for 2022 in the Google Partners program, under more exclusive criteria this year, joining a prestigious list that showcases the top 3% of Google partners in the US. As a premier partner, ChannelAdvisor has access to the training and insights needed to help brands drive long-term growth and stay ahead of the fast changing ecommerce landscape.
To see a case study that ties this all together, please visit our website to learn more about our customer AJ Tack, a leading provider of high-quality equestrian tack apparel and home decor. Until May of 2020, AJ Tack was using the ChannelAdvisor platform to reach marketplaces like Amazon, Walmart, and eBay, while another firm managed its Google ads. But when a new ownership team came on board, they recognized the advantage of consolidating on one platform by utilizing ChannelAdvisor for both marketplaces and digital marketing. By working closely with a client’s Strategy Manager, who focuses specifically on Google Ads, AJ Tack exceeded expectations with a 44% year-on-year increase in conversions for Q4 and an 85% revenue increase during the same quarter. They also leveraged ChannelAdvisor’s repricing solutions that automatically respond to shifts in demand. Noting that quote; once we put the repricer in place, we saw results from it almost immediately. By partnering with ChannelAdvisor, AJ Tack captured the Amazon BuyBox more frequently. In their words, if brands are selling on multiple platforms and need easy one-stop shop support, ChannelAdvisor is great.
Our momentum in landing new brand customers was evidenced through the addition of new customers such as Perry Ellis, Interparfums and Ste. Michelle Wine. And as David mentioned earlier, our strategic partner Saks. In terms of growing our business with existing customers, our account managers collaborated with our sales team to sign expansions with customers like the Lacoste, Epson and Wolverine Worldwide.
To summarize, our platform approach is resonating with brands. In Q1, we continue to build on the progress we made in 2021 and there are numerous initiatives underway to keep the momentum going. By empowering brands to reach new customers, promote their product offerings, and streamline operations globally, ChannelAdvisor continues to be well-positioned to capitalize on the positive long-term trends in our industry.
With that, I’ll pass it to Rich now to provide a more detailed update on our financial performance. Rich?
Richard Cornetta
Thanks, Beth, and good morning, everyone. We entered the first quarter of 2022 coming off a year of record top line results, robust subscription revenue growth, and strong adjusted EBITDA and cash generation, driven by the strategic investments we have made over the past 18 months. Our outlook for Q1 anticipated continued strong subscription revenue growth in the mid teens, and also acknowledged some challenging year-over-year variable revenue comps that we expect to continue into Q2. I’m pleased to report that our results for the first quarter of 2022 came in better than expected with revenue at the high-end of the guidance range, subscription revenue growth of 17%, and adjusted EBITDA that exceeded the high-end of the guidance range. At the same time, we continue to achieve strong cash generation and healthy margins, even with our growth investments.
So let’s get into the details for Q1. Total revenue reached $42.3 million in the first quarter, up 8% year-over-year, driven by subscription revenue performance, which reached another record at $35.5 million and matched the 17% year-over-year growth rate achieved last year. And variable revenue of 6.8 million was in line with what we factored into our Q1 outlook. Revenue results associated with our brands cohort remained solid during Q1. We achieved total revenue of $18.8 million, up 32% year-over-year. More importantly, we realized record brand subscription revenue of 17.3 million during Q1, growing 36% over last year, and representing 49% of our total subscription revenue, also a new record. This is up roughly 700 basis points from the prior year period.
Brand’s customer count and average revenue per brand’s customer continued to increase throughout the quarter. And our strong revenue retention is driven by the strategic cohort of customers. Our fastest growing revenue cohort continues to be customers with ARR greater than 100k and these customers represent the majority of our ARR. Given all of these factors, we continue to expect that a majority of our revenue will come from brands by the end of 2022.
Now moving on to adjusted EBITDA. We finished Q1 at $8.2 million, well ahead of the high end of our outlook of 7.2 million, generating an adjusted EBITDA margin of 19%. The adjusted EBITDA over performance was primarily driven by the pace of hiring, as well as the benefit from lease abandonment, which we will continue to assess across our global footprint throughout the year. While still maintaining healthy margins, we remain biased towards growth, and operating expenses have been building steadily over the last year, as we made strategic investments in our product and our services and sales organizations.
As mentioned earlier, we had another terrific quarter of cash generation during Q1 with cash and cash equivalents reaching approximately $107 million and representing an increase of more than $6 million sequentially and $25 million year-over-year. Operating and free cash flow remained very healthy again in Q1, coming in at 7.9 million and 6 million respectively. We also saw deferred revenue increase again during Q1 to record levels, up $6 million year-over-year.
Now onto our financial outlook. For the second quarter of 2022, we’re providing a revenue outlook range of between $42.5 million and $43 million and adjusted EBITDA range of between $7.2 million and $7.6 million. As David mentioned earlier, the strengthening of the dollar over the last few weeks has had a meaningful impact on our financial outlook, lowering our year-over-year growth rate for Q2 by over 3 percentage points. With respect to subscription revenue, we expect continued strength in Q2 and our outlook reflects anticipated subscription revenue growth in the low-to-mid teens. If not for the FX headwinds, our expected subscription revenue growth would be at least mid-teens. We anticipate variable revenue to decline year-over-year, similar to what we saw in the first quarter and primarily a result of the difficult comps due to stimulus aided tailwinds a year ago and because customers have been trading up to higher tiers over the past year, which benefits our subscription revenue. In addition, Amazon Prime Day was held in June of last year, driving higher variable revenue in Q2 ‘21.
So despite the recent volatility we’ve seen with respect to currency, we will provide a financial outlook for the remainder of the year. This is due to the good visibility we have with respect to subscription revenue, coupled with the normalization we expect to see, for variable revenue in the back half of the year. We believe Q2 revenue growth will be in the low point, even excluding the impact of FX, as we finally left the effects of COVID and stimulus tailwinds from last year. So for the full year, we target revenue to be in the range of $177 million to $180 million and adjusted EBITDA in the range of $37 million to $39 million. On a constant currency basis, our outlook would have resulted in a return to double-digit growth in the back half of the year, as well as for the full year. We anticipate full year subscription revenue growth to be in the low to mid teens, on top of the significant subscription revenue growth rates achieved in 2021. On a constant currency basis, our expected subscription revenue growth outlook would be at least in the mid teens.
So, in closing, our strategic focus remains with brands, and we are encouraged by the growth rate we have seen in subscription revenue. We will remain judicious with our cash on hand and we will only pursue investments that supports our brand strategy and that we believe has the potential to provide an ROI that exceeds our weighted average cost of capital. We appreciate the continued support of all of our stakeholders.
With that operator, we’d like to now open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Colin Sebastian from Baird. Your line is open.
Colin Sebastian
Great, thanks, and good morning, everybody. I have a couple of questions here. I guess, first, maybe David a little bit more on the macro environment. I think we’ve seen the spectrum from results, thus far Amazon has said there’s been really no impact on their business. We’ve seen certainly other companies indicate there has been a strong headwind in Europe, if not, globally. So I was hoping you could kind of drill down on that a little bit. Is what you’re seeing channels specific? What did you see from a linearity perspective during the quarter and through April, if you could provide a little more detail on that? And I have a follow up. Thanks.
David Spitz
Thanks, Colin. Yeah, so, obviously, we saw moderation in GMV compared to in the middle of the pandemic, and I’ll remind everybody that last March, we had, I think, the largest stimulus check in the US that was issued during the pandemic. And so I’ve referred to those previously as Amazon stimulus checks because we can sort of see and on our dashboards the day those things get sent out and deposited a spike in GMV. So we’re comping against that in particular in March. And so what we saw from a trend perspective is probably the low watermark in terms of GMV was right around mid March — mid to late March coinciding with last year stimulus check, making that a tough comp. But we saw it creep back up towards the end of March and saw that trend continue in April. So I think in large part, you’re looking at a stimulus comp that created a little bit of a bubble last year that obviously wasn’t repeated this year.
Beyond that, it’s — I’m speculating, of course, but I think that inflation, you’d have to be crazy to not think that that has some effect on consumer discretionary spending when gas is $4 or $5, $6 a gallon, depending on where you live. And so I expected that that probably has weighed a little bit on discretionary spending, as well. But I would say the patterns were fairly consistent, I would not say that they weren’t necessarily channel specifically, if you look at our charts, the things that I look at internally, all the lines sort of followed similar trajectories over the course of Q1 and into April.
Colin Sebastian
Great, that’s helpful. And I want to drill down a little bit on the brand subscription ARPU or ARPC, the sort of ongoing increase there. Can you kind of walk through the drivers of that increase and how high you think that could ultimately go sort of on an apples-to-apples basis?
David Spitz
I’ll give you some qualitative assessment and, Rich, if you’ve got something to add, feel free to join in. One of the nice things about brands is that they can really use the entirety of our platform, right. So we have — obviously, we’re best known for our marketplace integrations but we also first — we also offer first-party dropship, digital marketing, retail media, shelf analytics, shoppable media, right. We have a wide range of capabilities and 99 times out of 100 when we initiate a relationship with a brand, they are starting with one particular solution because they’re trying to solve an acute need. But over time, they see lots of opportunity to expand with us, they could be adding additional products, they could be expanding channels, they could be growing into other geographies. Many of the brand customers we work with actually have a multitude of brands, so we might start with one product line and then expand it to other product lines. So all of those things contribute to a pretty significant expansion opportunity with brands.
One of the things that we said at our Analyst Day is that we felt that just on our existing customer base alone, we could roughly quintuple our revenue, meaning at the time that we did our Analyst Day, I think we were at about 50 million in revenue from brands and we felt the addressable market or share of wallet within our brand customers that we already had was at least $250 million. So obviously, we’re also focused on adding additional logos as time progresses, but the expansion opportunity with brands is pretty significant and remains an important focus for us.
Richard Cornetta
Yeah, and the only thing I’ll add there, Colin, is, I mentioned in our prepared remarks that the fastest growing revenue cohort are our customers with ARR greater than 100K, and that’s driven by our brands focus. So just to put some numbers behind that site or how are brands are focused on brands — customers there. And also with regards to net revenue retention, we mentioned at the Analyst Day over 100%, again, driven by our brands focus there. So just to put some numbers for David’s statements.
Colin Sebastian
Thanks. And just to clarify, when you — beyond sort of the size of the brand, in terms of monetization growth or pricing is part of the expectation that you’ll be able to drive higher pricing, as brands are adopting more of these services?
David Spitz
Yeah, there’s a few different ways we can grow, right. So if they’re adding additional products from our platform or expanding to new geographies or additional product lines that they have, certainly we — those come at a price right, so we charge for those various services. And of course, I neglected to mention that just growth itself, so as brands join our platform and they sell more and they grow GMV, that’s also another growth factor for us. But yeah, in virtually all cases, there’s an opportunity to monetize that expansion, which is why you’re seeing that expansion in significant contributor to the expansion of subscription revenue we have with brands.
Colin Sebastian
Thank you.
Richard Cornetta
One other thing to add there also is that our brands customers tend to be more managed customers, so that also is a driver of higher average revenue per customer. They’re utilizing our e-commerce experts every day to advance their e-commerce objectives and they pay a premium for that.
Colin Sebastian
Thanks.
Operator
Our next question will come from line of Zach Cummins from B. Riley Securities. Your line is open.
Zach Cummins
Hi, good morning. Thanks for taking my question. First one for me, Rich, can you talk about some of the currency assumptions you’re making here in the Q2 guidance and kind of what’s being baked into that full year outlook as well?
Richard Cornetta
Yeah, it’s pretty remarkable. What we’ve seen just in the last two weeks, for that matter, we updated our forecast a couple of weeks ago, and then made a few adjustments more recently and it was really surprising to us how much of an impact it had on Q2, let alone the rest of the year. We mentioned in Q2, roughly a three point impact, which essentially, if not, for FX, we would be right in line with consensus — current consensus for Q2. For the remainder of the year, we could see anywhere between four to five point impact, as a result of FX and that’s what’s baked into our current model.
Zach Cummins
Understood. That’s helpful. And in terms of the investments I know, for the last probably a year plus, you’ve really been working to build out a bit of a sales force and in investing in new product innovation. Can you talk about where you’re at with the sales force at this juncture in terms of having enough, I guess, quota carrying capacity to be able to sufficiently meet the demand that’s in front of you?
David Spitz
Yeah, Zach. It is David. We are really pleased — so we came into the year, you may recall with a bit of a gap there on sales capacity and we’ve worked really hard over the course of the last four months to address that. And I would say we are very close to completely closing the gap. We’re actually trying to hire to our year-end target, and so we’re just a few headcount short of that. And I anticipate that by the end of Q2, we should have that fully resolved and, hopefully, with a little bit of luck, maybe actually over hire a little bit to create some bench but we made strong progress in the quarter and into April on that front.
Zach Cummins
Understood. That’s helpful. And final question geared towards that. Can you talk a little bit about, I guess, the marketplace expansion strategy, it seems to be pacing well ahead of expectations from the initial targets that were put out there? I mean, has there been any sort of key theme in terms of specific regions or specific marketplaces that majority of your brand’s customers have been interested in breaking into?
Beth Segovia
Thanks for the question. I think it’s a good one. I think you’re right on the money in that we focus on what our clients are looking to do in terms of expansion. There’s still quite a bit of opportunity across Europe, as well as a lot of emerging opportunity in Asia Pacific. So I would say the expansion efforts have certainly been weighted strongly in those regions. We’ve certainly added channels in the United States and continue to do so but the majority of our activity over the last year has been really focused on European and Asia Pacific marketplaces.
And integrations, we’ve also seen a lot of activity in the 1P space, which has driven a lot of connections. So, beyond that, we have a wide variety of customers, and they’re focused on a number of different things, and that’s what’s pretty cool actually about marketplaces, as they are focused on specific areas, or specific product categories. And so, as our customers focus on building out their footprint, we follow suit. So we just tend to focus on where the market is going in terms of new and emerging marketplaces and where customers are trying to reach more consumers.
Zach Cummins
Got it. That’s helpful, Beth. Thanks for taking my questions and the best of luck with the rest of the quarter.
David Spitz
Thanks, Zach.
Operator
Our next question comes line of Matt Pfau from William Blair. Your line is open.
Matt Pfau
Great. Thanks for taking my questions guys. Just wanted to ask you in terms of the demand environment, so, obviously, there’s some impact here on the variable revenue from the GMV front but in terms of what you’re seeing with bookings relative to either new customers or expansions with existing customers, is that impacted at all by some of the normalization of ecommerce or how has that continued the momentum that you guys have been seeing?
David Spitz
Hey, Matt. Yeah, I think the demand environment remains strong. Obviously, during COVID, there were a number of companies that went into high gear in terms of their digital transformation and that was helpful to us. But there are many, many companies that are finally getting to the point where they can address these things, right. They spent the last year or two kind of more in triage mode where they were dealing with either supply chain or fulfillment or staffing, all those kinds of things. And so I would say the demand environment remains strong.
Matt Pfau
Gotcha. And I think part of the some of the initiatives Beth has done with her team is sort of being more strategic with some of the enterprise clients that you have, and maybe sort of thinking about longer term roadmaps that they have is. Any change in, I guess, what you’re hearing from customers in terms of their longer-term plans relative to either marketplace expansion or e-commerce in general?
David Spitz
I’ll let Beth comment on that, but I would say, at a high level, I don’t really see any change. I think nobody expected e-commerce growth rates during COVID to continue indefinitely, entries don’t grow to the sky, per se, but everybody understands the continuously increasing importance of e-commerce, the probability that it’s got a lot of room to grow in terms of share of wallet. And it’s not just the growth of e-commerce for brands, it’s also about their transformation to get closer to the consumer. If we look at other instructive industries, like, just look at the media industry, right, nobody is placing bets on Blockbuster Video anymore, right, it’s all about content owners getting closer to the consumer, the Internet has a has a way of compressing the distance between producers and consumers and so, in e-commerce, it’s really not any different and brands who have proprietary product, recognize that the path to the consumer is shifting rapidly, and in many cases means they have to get closer to how they reach that consumer. So, that’s the long-term kind of fundamental secular dynamic that is changing a lot of behavior, on top of just the overall long-term growth of e-commerce. And, Beth, I don’t know, if you had anything you want to add just around sort of the customer commentary or the roadmap.
Beth Segovia
Yeah, I mean, I would say, steady as she goes, right. So we certainly saw an acceleration of interest and activity and commitment from brands, as they realized the digital transformation just needed to move more quickly. But I would say these efforts are tremendous and time consuming. So, as brands look to grow their direct-to-consumer businesses, expand on marketplaces, build out their fulfillment capabilities, these things take time. And depending on their global footprint, and how many countries they want to do that with, and how many brands, it takes a consistent and steady effort.
And so while significant progress was made last year, and we’ve expanded channels to meet and lead that demand, there’s much more progress that’s yet to be made. So we are continuing to invest in our enterprise level of service. We’re continuing to apply those new resources to enable those customers to execute those expansion plans. And as I mentioned, every year we go to an annual planning exercise, and we really focus on so what are we doing this year, and what’s the quarter-by-quarter plan, and how many new channels are we going to bring on board. And so we are in execution mode and I would expect that’s going to go on for multiple-years with our existing clients, and then as we acquire new logos, we’ll start the process again with them.
Matt Pfau
Great. And just one more for me on the commerce network, maybe just an update on those efforts and what you’re seeing there?
Beth Segovia
Sure, I’ll take that one. So the commerce network is going well. So we have — that’s our capability that brings both sides of our networks together. So it gives our partners an opportunity to log into our software on a regular basis to seek out and find new retail and brand sellers to bring to market, and it also enables our customers, obviously to find more channels to go to market on. And so this network creates a matchmaking opportunity and expansion opportunity for both sides of that network.
And I would say we’ve seen steady engagement and we’ve had some very nice engagement, as we went through Q1. As the heat of Q4 and execution sort of died down a little bit and our customers and our partners started focusing on the plans for the year, we got a lot of profile sharing and a lot of engagement happening. We’ve seen an uptick in our partner profile creation and sharing and so I think it’s a steady as she goes. We are nurturing the platform. We’re continuing to plan for and release new capabilities throughout this year, and the roadmap goes into next year as well. So you’ll hear us talk about it more, as we give you updates in the future, but it’s going as planned. Thank you.
Matt Pfau
Great, thanks, guys. Appreciate it.
David Spitz
Thanks, Matt.
Operator
[Operator Instructions] Our next question will come from the line of Tom Forte from DA Davidson. You may begin.
Tom Forte
Great. Thank you for taking my questions. I had three. So the first one, David, you talked about inflation at the e-commerce level. I’d like to know about inflation at the ChannelAdvisor level, how are you managing it, including labor inflation?
David Spitz
Hey, Tom. Thanks. Yeah, so we increased — our merit increase for the year for our employees was significantly higher than we would normally do in a year, I believe it was more than 2x kind of a normal annual increase, as we work to keep up with the market and make sure that we’re being thoughtful and standing by our employees. So, that’s been a part of it. We also kicked off our pricing increase at the beginning of Q2, and so we increased our price book and, obviously, that’ll take time to work through our entire customer base. But we view that as helping to offset — at least partially offset some of the increases in wages that we’ve seen.
Tom Forte
Great. Then my second question and I have one more after this one. So I wanted to get your thoughts on the e-commerce industry and the impact for two items. One, discretionary spending returning to travel, seen some companies talked about that, and then the second, Apple’s emphasis on privacy affecting the efficacy of digital advertising.
David Spitz
Yeah, I’ll start with the first or excuse me, the second around privacy. I think that’s a trend that’s just going to keep going right, whether it’s pressure from Apple, maybe from Google in some of their app policies, and also on the regulatory front, right. I don’t see an environment where privacy considerations don’t get more stringent over time. And so, for us, I think it’s actually been a bit of a tailwind, we don’t use cross channel cookies, we’re not trying to track users across channels. And what this has really done in my view is this has taken what has historically been kind of a duopoly between Facebook and Google and kind of cracked it open.
So retail media is one of the fastest growing segments for us. That’s things like Amazon advertising, or any of the advertising programs that exist across different retail sites. And our strategic partnership with Criteo is going to help us attach to a much broader set of those. So, privacy, I think, is actually driving an intense desire to have more first-party data and to and creating an opportunity for these sites to monetize more directly. So, I think, net-net, it’s a benefit for us and probably causes continue to have dollar shift from, again, some of the traditional behemoths to more dedicated sites.
To your first question about inflation and discretionary spending and travel, I’m not a macro economist, but I think — I do think the consumer remains healthy and we’re obviously in a uncertain environment as it relates to increases in interest rates, what that does to the economy sort of have a soft landing or does it slow down abruptly. I saw that the jobs report just came out and it was really pretty strong. That’s probably a lagging indicator. You’re starting to see unprofitable companies and startups contemplate layoffs, so maybe that’s the canary in the coal mine. But as I said, in response to an earlier question, I think it’s hard to imagine that with fuel prices the way they are, with food prices — when you look at the basics, right, the necessities food, fuel energy, those costs have gone up pretty substantially. And while I think the consumer is pretty strong, you have to believe that that has some impact on discretionary spending, travel.
I do you think that there’s a lot of pent up demand to sort of get out of the house and go somewhere. Whether that’s a meaningful impact on discretionary spending, I don’t know, but our view — the way we look at the rest of the year is that we think first quarter and at least the first part of second quarter are kind of the toughest comps, again, because of stimulus checks a year ago, we had the Child Tax credit that was going out on a monthly basis for a period of time, and that’s going away and you’d have inflation. But we expect the comps to ease and for GMV growth to be moderate and sort of normalized in the back half of the year. We have Prime Day and that’s another point, right. I think Rich mentioned in his comments, last year Prime Day was in Q2; this year, it’s scheduled for July, so that’s Q3, so that’ll be a pretty interesting moment to see how Prime Day compares year-over-year. But we think the back half of the year looks a little bit more normal compared to the first half of the year.
Richard Cornetta
[Multiple Speakers] Tom, sorry to interrupt. So just one thing to add, specific to financial modeling, when you mentioned travel, we are anticipating some increased travel in the back half of the year as well as in 2023, almost a return to previous levels. So there’s some additional expenses to be incurred, as more economies open up and then travel has become more acceptable to factor that into your financial models.
Tom Forte
Excellent. All right. So my third question is almost like a case study. David, you said something that I thought was remarkable on Zalando. That’s now the number three spot ahead of Walmart. So is that because we’ve hit some sort of inflection point for e-commerce penetration for apparel in European markets or is it because maybe Walmart’s emphasizing grocery? But if you were to step back, what’s enabled Zalando to achieve the three spot on your GMV list?
David Spitz
Yeah, I think it’s probably a couple of things. I think Walmart, during the course of the pandemic, brought — so all of these products, when you do — when you go to one of these sites, they’re typically showing up as a result of some kind of search. And I think Walmart shifted some of the emphasis towards first-party products, right, because if you think about what people were buying online, it tended to be consumer staples and stuff like that. So I think most of our exposure is to marketplace and I think there was a little bit of a shift towards one PE, and so that’s another thing that I think will lap against in Q1 and in Q2, that should dissipate from a year-on-year perspective.
But putting that aside for a moment, I think Zalando, probably the — so it’s for those who aren’t familiar, it’s a European — they’re based in Germany, it’s a European fashion retailer, or fashion marketplace. And I think one of the things that Zalando has done very well that other marketplaces haven’t necessarily done is they really work closely with the brands to help with storytelling.
And it’s not just like, everybody gets the sort of same format, one picture kind of transactional site, because it’s so focused on fashion, it really provides more of a storytelling type of environment and they’ve done a fantastic job rolling out fulfillment services, and continue to establish themselves as — and one of the things I’ve said in the past is that the way to compete in the space isn’t necessarily to go and be the next big general merchandise marketplace, it’s to go be a winner in a specific category, because every category has different shopping characteristics, if you think about how automotive is right. So Automotive is very geared towards make, model, year, which we call fitment and how to videos and community, fashion obviously, is much more image and video based.
And so you can build sort of category-specific experiences that are really compelling compared to sort of general merchandise marketplaces. So I think Zalando has just, frankly, executed really well. We’ve had a great partnership with them. I know they view ChannelAdvisor as a strategic partner, because we were able to bring those brands on, not only quickly build high quality integration that ultimately translates to a good consumer experience, which is important for everyone, and so we’ve enjoyed a very fruitful relationship with them, and I anticipate it will continue to grow nicely for us.
Tom Forte
Great. Thanks, David. Thanks, Rich. Thanks, Beth.
David Spitz
Thanks, Tom.
Operator
And final question will come from I know Josh Reilly from Needham. Your line is open.
Josh Reilly
Hey, guys. Thanks for taking my questions. Nice job on execution here in the quarter, in a challenging macro. I’m going to throw another macro question out here. How much of a divergence and trends are you seeing between the US and Europe and maybe the rest of the world since the war in Ukraine has started? Are you seeing Europe slow ecommerce trends significantly faster than the US or is it closer to parity?
David Spitz
Yeah, it’s an interesting question and I actually have to go back and rerun some of my analysis, because, frankly, the biggest impact right now is, as Rich said, currency, right. So we have the fairly meaningful exposure to the British pound and to the euro. And if you just look at a chart over the last couple of weeks, of April, or — excuse me, yeah, of April, you’ll see that unusually rapid strengthening of the dollar compared to what you would normally see during those two to three week periods, and so we’ve seen — that’s actually the biggest impact and so I need to go back and sort of reparse neutralizing the effects of currency. But I would say, just from a demand perspective, we continue to see strong demand in Europe. I think a lot of that is predicated on a lot of the work we’ve done around products, so Beth was alluding to some of the channel expansion opportunities that we’ve had and a good bit of that is based in Europe.
Europe is more fragmented from an e-commerce perspective, so the more we sort of cover that fragmented space, the more attractive we are to those who want to sell in Europe. So, thus far, I would not say that — I can tell you that we’ve seen a meaningful decline and I suspect that once we adjust for currency, I would say, it’s actually a pretty strong area for us at this point. And, we don’t have a significant exposure, at least directly to Eastern Europe at this point, so most of our exposure is UK, Germany, and then from there, probably France and Spain, Italy, maybe Netherlands. So I don’t think at least from a direct standpoint that we’re seeing a meaningful impact at this point anyway.
Josh Reilly
Got it. That’s helpful. And then maybe just one on gross margin, given the lower variable revenue here, how should we think about gross margin throughout the rest of the year? And with products like Shoppable Media and Brand Analytics, which, as we know, are not based on GMV offsetting the variable headwind to gross margin?
Richard Cornetta
Yeah, obviously, some of the success we saw with our margins over the last couple of years and continue to see even further now was driven by variable revenue. And, again, we said that most variable revenue falls right to the bottom line. We continued to focus on things we can control, which is subscription revenue. And again, as I mentioned, 17% growth in Q1. There is no — with regards to gross margin, we’ve made investments there in supportive our customer base, we should expect some normalization in our COGS line and gross profit in the back half of the year, as the investments start contributing to expansion opportunities with our brand’s customers base. But if you see over the last couple of quarters, there has been some deceleration in gross margin — I’m sorry, in the COGS line. And I just think that there’s a lot of opportunity there to expand our relationships with our customers through this investment and we’ll see some top line benefit in the future.
Josh Reilly
Got it. Thanks, guys.
David Spitz
Thanks, Josh.
Operator
Thank you. We are showing no further questions in the queue. I’d like to turn the call back over to Raiford for any closing remarks.
Raiford Garrabrant
Thanks, Victor, and thank you, everyone, for joining us today. We look forward to speaking with you again soon.
Operator
And this concludes today’s conference call. Thank you for participating. You may now disconnect and have a good day.

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