Commerce.com, Inc. (CMRC) Earnings Call Transcript & Summary

Good morning. Welcome to our next session. I'm really happy to be here with the management team from BigCommerce. We've just finished a very successful IPO for the company. So I'm really happy to host you here today at our event, I think first conference together for us. I'm looking forward to more in-person ones as well going forward.

Let's start, Brent, with you. When you joined BigCommerce like a good few years ago, there was already like a gorilla in town with Shopify. What was your thinking in terms of like, okay, this is the company that I see here. This is where we could go with this?

I was trying to -- I was waiting for the inflection in your voice. Was it -- was your thinking or what were you thinking in that? Because it was 2015 -- mid-2015, Shopify had already IPO-ed a few months before I accepted, but -- even before I started interviewing. They had a 5-year head start. Not only were they a clear #1 globally in SaaS above us, BigCommerce was #2 at that time, but they were probably 3x our size. Yet, as soon as they IPO-ed, we saw all of their metrics just skyrocket overnight. The IPO tailwind through them was extraordinary. And I was interviewing, knowing that the strategy of being SMB-centric only, just like them, was a great strategy if we had gotten there first or at the same time. But getting there starting 5 years after them. It was clear we weren't going to come from behind when they had this public company coverage credibility advantage over us and beat them. So the Board, the management team were all very transparent. They didn't try to hide me from the question that was on top of all of their minds: what do we do next, right? Do we go down market below them? Do we keep competing head-to-head with the same strategy? Or do we move upmarket? So complicating all of this was the fact that this was also the one thing in my career I had already failed at. Meaning 15 years before this, at the height of the bubble, at the end of '99-2000, I quit my e-commerce consulting position and bet my career in one of the first ever SaaS e-commerce platforms. The theory I had at that point in time was that few companies have the resources or ability to pull off e-commerce, buying all the individual software/hardware, cobbling it together, securing it, hosting it. And there were a couple of companies, including the one I joined called Escalate, who had this ASP model, now called cloud or SaaS, to serve it up over the web. And I'm like, "This is a much better concept, and you get the benefit of getting to serve lots of different retailers and brands all at once." So I went and joined them, great idea. That company didn't work for the long run. I mean it was Shopify and BigCommerce before Shopify and BigCommerce came along. And so I carried on in e-commerce but no longer in that. So I already failed at this once in my career. Long story short, though, I knew exactly what to do. And the -- exactly what to do was the playbook of disruptive innovation that I learned from Clay Christiansen in business school. I was a student of his when he was writing Innovator's Dilemma. All the case studies are of companies like BigCommerce who begin by targeting the underserved, low end of the market with something simpler, cheaper, faster, easier. That's what we did. That's what Shopify did. And you build scale there because the incumbents don't want to serve that part of the market. They don't make money there. You become disruptive, though, when you choose to move upmarket. When you add the performance and you add the functionality to go after the market leader and say, "We don't have everything you have, but we have the 80% that everybody wants at 20% the cost." And I looked at the market and it so happened that in the mid-market, the next segment we would go up into, upper SMB mid-market, the 800-pound gorilla was a company that I knew exceptionally well. It was Magento. Why did I know Magento? Because my boss was in the process of buying Magento at eBay PayPal when I was leaving there in 2010. Of course, PayPal worked with, served all of these different platforms. And I knew the fatal flaw of Magento, for all its excellence, it's open source on-premise. [indiscernible] again, means companies have to buy and manage their software, secure it, host it, bug fix it, version it, upgrade it, all this nightmare that most companies don't want to have to do. And I said the only reason that they're still the market leader is because 15 years after I first tried, still nobody has come in with a great SaaS platform that is sufficiently enterprise-capable and enterprise-flexible, meaning open. It's hard to make SaaS open. Nobody had really done that in e-commerce, but how to do it was obvious. It's break up the monolith in the microservices. You add APIs and SDKs so that each component can be modularized and extended, integrated, modified, subbed out as a business need. So we began that 5 years ago. Again, the target competitor is not Shopify, it is Magento. The target customer is an established business, a complex business or any company that simply needs the flexibility to optimize its approach to e-commerce and the many different solutions it uses, not just us as a platform. What do you use for accounting, ERP, shipping, tax, payments, point of sale, e-mail marketing, on-site apps, all this kind of stuff? We will be the open SaaS version. So that's where we began 5 years ago. And 5 years later, I think it's pretty clear that the market is really well served today by 2 world-class companies. You've got the closed version of SaaS, which is Shopify, closed in that not only does it not have the APIs and the flexibility to handle these really complex enterprise use cases, but they also have expanded into all of these other adjacent verticals: again, payment, shipping, fulfillment, e-mail marketing, point of sale, fraud lending. And rather than let a business pick best-of-breed for each of those or best for them, they tried to sell them an integrated closed stack. That's a very attractive proposition for a small business who doesn't want to be bothered with all these choices. Just give me a full infrastructure and a playbook to run. But for a complex business or a business that's really trying to optimize and become as good as it can be, you need openness and flexibility, open SaaS. That's what BigCommerce does. So long answer, but it kind of gets to the heart of where we are in the market and the half or more of all businesses in the world where we're the best solution.

Yes, yes, yes. Okay. No, that's really, really helpful because that's kind of frames it a lot better. So then let's talk about another driver now that was so important over the last few months and quarters now is like COVID and its impact on e-commerce. Like obviously, we saw an explosion of e-commerce. But to me, it was more -- the trend was already there. It was just an acceleration of the trend. Like how do you see this playing out in the long run though?

Let's look at the macro picture. So coming into this year, globally or in the U.S., consumer spending online was in the range of, let's call it, 16% to 18% of total consumer spending. And the other 80-plus percent was happening at point of sale or in the physical world. But the share gains on an annual basis for the last 5 years have really picked up. We -- e-commerce have been gaining about 2 points of global consumer spending every year. And so if you're at 18%, you're going to 20% to 22% to 24% to 26%. You're kind of gaining 10 points every 5 years. Any investor, even before the pandemic, should look at that and say, "Well, when in human history, has there been a global macro trend that large, that predictable?" Right? Going from 20% to 30% to 40%, where will we peak in terms of consumer spend online versus off-line? I don't know, but I predict it's in the 50%, 60% range when you include buy online, pick up in store; buy online, local delivery. It's in all the categories we never used to think. We would buy online like groceries. The pandemic then was a dislocation in society for both consumers and business that forced a lot of people, whether they liked it or not, to adopt this a lot faster and in ways they never thought they would. And this year, rather than e-commerce growing at the 14% annually it was predicted to grow at in the U.S. for B2C. Instead, they're predicting it will be like 32%. And remember, it was only 2.5 months in the year when this whole thing started. So the reality is that the growth rate increased by about 150%. So in other words, we pulled forward about 1.5 years in e-commerce. Now the question is next year when we have to lap this, do we drop down below the 14% growth trend line? Or do we kind of actually stay above that because there's been such a permanent change in behavior that it more than takes up for? We don't know. We can't predict it. We're being conservative. We have strong conviction that e-commerce is going to keep growing from this higher base. It's just a question of, on a relative basis, how does it lap things? But to some degree, there's no question. There's no question that this is a trend, and the long-term growth is so much more powerful even than the short-term acceleration. But there's no question in any consumer or businesses' minds any longer about whether e-commerce is a core part of your future.

Yes, yes, yes. And on that note, like, it's funny because like you get a lot of questions like, "Oh, what happens if you go back to normal?" And you go like, "Look, if something is like 6 months or 9 months normal, it is -- becomes the new normal." So if you think about like what are you seeing from maybe customers in Australia or something where you don't have these changes, like, do you see it going back to old ways? Or has the role changed fundamentally?

It's changed fundamentally. I'll let RA answer that from a standpoint of like how we plan our business and the dichotomy between we plan conservatively, but we're happy for upside surprises. RA?

Yes. Yes, Raimo, we've talked a lot about this in the past couple of quarters. In a year where we saw PSR growth rates in the 70%, 80% range, we've seen GMV growth rates this year touch 100% and more at some periods. It's just difficult to predict how we lap that next year. So what I encourage a lot of investors to do is actually take our ARR, take our trailing 12 months' PSR and actually back out to get to a subscription growth rate. And I think when you do that, you're going to see really strong growth in PSR this year, but also accelerated growth in our subscription bookings. Our enterprise ARR last quarter was 48% year-over-year. If you look at our non-enterprise ARR, that was in the high 20s. As we think about next year and lapping this year, we're splitting that out. We're looking at subscription growth, and we're looking at PSR growth. The only prudent thing for us to do is to really kind of start ramping down the growth assumptions for PSR. So as we talked about on our last call, by the end of Q1, what we're planning on is year-over-year growth rates closer to what they were pre-COVID. And if we can sustain where we are today, we had a great holiday season. We published a report. You saw GMV in the 75 -- around 75% year-over-year. If that sustains next year, everyone's going to be happy. But in terms of planning and setting guidance, then our plan is just to kind of ramp down those year-over-year growth assumptions by the end of Q1. And we'll see what happens. But we're going to be prudent about it for sure.

Okay. Perfect. Brent, I wanted to go back to a point you raised earlier about like the 2 big competitors in the space, but like more the Magentos of this world. Like one of the things that should change now for you going forward is you're now a public company. We had a successful IPO. Do you see already the halo effect coming in, in terms of feedback from your -- people from the field that it is getting easier, the name BigCommerce is kind of coming out more? And do you see that already starting to kind of impact your spending in the market a little bit?

Anecdotally, we sure do. And that was a prime reason for wanting to go public. We could have, of course, raised more money in private markets. But let's just anchor on the value being public gives to our customers and partners. Our customers and partners are making an entire platform decision, the platform that everything else connects into, for their digital future, their digital transformation. For some of them, it's their whole business, which is online. And when we were a private company, that's a much harder sell. Because even if you make a compelling argument about how great your product is and how good your customer references are, the problem is that, that business on the other side has to take a giant leap of faith. They don't know the -- behind the screen what our [indiscernible] growth rate strategy, momentum, financials are. And our competition would love to use that to our disadvantage because our competition were all large market cap software companies, not just Shopify, but Magento owned by Adobe, Salesforce, IBM, SAP. We have 500 other competitors, but those were our big competitors. And we were competing with an arm tied behind our back. Now that we're public, all of those things are out in the open: our size, our strategy, our market cap, our momentum, our balance sheet. And the way I think of it is we haven't just leveled the playing field against the large market cap competitors and created an advantage against the 500-plus other old and decaying platforms around the world. We've actually created competitive advantage against all of them except Shopify. Because any investor or any person following us can see our momentum right now. Growth rate, buzz, reviews coming in from IDC, Forrester, Gartner, Paradigm, we have more momentum than any platform other than Shopify. And Shopify is amazing. But for the most part, the companies for whom we are best are not the ones that Shopify is best for and vice versa. So we, I think, have a competitive advantage against all the others. And what we are seeing is we are seeing partners -- giant partners. Let's talk like the biggest of the big systems integrators, some very prominent tech companies who have said, "Yes, I've been following you guys for years. Now is the time to really integrate and partner." And we are seeing customers in our sales pipeline come back to us after delaying a decision, being hesitant, thinking, "Oh, you seem like the right solution, but we just weren't ready to pull the trigger." Now they see this and they have to come back to us and they told us, that was the catalyst that got us to really commit to you. So for sure, the data points are there, and we can draw a line through them. We just -- yes, the question would be how much. I will tell you, though, having watched Shopify, Shopify's momentum was multiples higher post-IPO than it was pre-IPO. They were a very good company growing well pre-IPO. That changed. And here they are, 5 years later, they went from whatever their market cap was at IPO, $1 billion to $2 billion, and now they're 100x that.

Yes. Yes, yes. Okay. Let me shift gear a little bit in the -- because I don't -- I realize I kind of need to get some -- through some other topics. Like you talked about the partner revenue and how that was really strong. Like some of the other guys internalized it or internalized part of it, like, I was just on with Lightspeed, and they just kind of started doing their own payment now because they thought maturity-wise, they are kind of ready to do that. How do you think about like certain aspects of what's today partner revenue? Is that -- does it make sense? Or does it kind of destroy your open message that you bring into the market? And what customers actually want in your part of the market because you're playing slightly higher up?

Well, concisely speaking, we are very, very focused on growing high profit partner revenue but in an open fashion, meaning we aren't going to go in and compete against these partners with an inferior solution. We're going to partner with the very best in each category, including payments, and use that partnership approach to give our customers the best pricing, the best products, the best choice relative to the software conglomerates who try to do it themselves and turn entire ecosystems into their enemies. So this open approach is what gives our customers, by far, the best choice and flexibility of any platform in the industry. We'll give up some of the top line gross revenue. But when we strike good deals with our partners, we'll get outstanding rev share at 100% profit margin. And our investors will get a, hopefully, close to similar bottom line impact but with a gross margin profile approaching 80%, that is much more like a SaaS company and not a hybrid between a transactional payment processor in a SaaS company.

Yes. And is that also -- if you think about where you want to go on your journey, it's going to be upmarket. And upmarket, like if you look there, people are more complex. They know what they want. They know their partners that they want to work with, the partners offering something very special. So is it also like the way you're going, like defines in a way that you want to stay open for as many areas as possible?

In the on-premise era, Magento went from nonexistent to, by far, the largest platform on the planet for merchants: small, medium and large, every major geography, B2C and B2B, as an independent open source platform conglomerate. They are now as part of Adobe, and they've lost their momentum. But when they were independent, they became the 800-pound gorilla. That model of openness and flexibility, which was by far the best in the world during the on-premise era, we want to do that now in the SaaS era. That's our goal. And no other platform has ever grown as big and strong in that era following the conglomerate approach.

Yes. That's clear. And then last question for me is like you talked about Magento, but like above Magento, you have like -- if I understand the market correctly, you have like then the demand where Salesforce, et cetera. With that, open API microservices strategy, your platform, in theory, shouldn't have any scaling issues. So in theory, you can walk a lot higher than where you're playing today. Is that -- or what would be natural boundaries to not go or ceilings to not go higher?

For sure, we have our sights set on businesses doing up to $1 billion online. And there are sizes of business that -- where even Demandware, Salesforce kind of run out of the steam to handle the flexibility. But that is exactly what disruptors do, right? They start at the low end of the market with SMBs; and they go to the mid-market, which we have done; then they go to large enterprise, which we have done. And we're now starting to win top ratings for pure enterprise platforms, from Gartner, from Forrester, from IDC, from Paradigm. Everybody is recognizing that our once SMB-oriented platform is now one of the very best on the planet, even for the largest of enterprises. And so we serve in extensive fashion a lot of very, very, very big companies, Procter & Gamble and Unilever and General Electric, GE Appliances, Sony, McKesson, I mean, it's a long list of some of the biggest businesses in the world. And absolutely, we can handle the sales volume. There are still capabilities, enterprise capabilities that we are adding and enterprise end points that we are adding on the flexibility side, the most important of which is native multi-store capabilities. This is the one really big advantage that Magento and Salesforce still have over us, and Shopify for that matter. We've been working on our native multi-store capability. It's in a closed beta for nontransacting stores, which actually is a pretty big milestone. It's quite far along. We're optimistic that we'll bring that to market this next year at some point, and that's going to be a game changer. I mean that's really when we should be considered by absolutely everybody a full-feature, upper-enterprise platform capable of serving the most complex use cases.

Yes. Perfect. Hey, Brent, I could talk for a very long time. They only give me 25 minutes, which is a bit annoying. The -- hey, that was really helpful. And it sounds really exciting, what's going on there. And congratulations again on the successful IPO. Looking forward to working with you.

Well, thank you, Raimo, and thank you to Barclays for all the great assistance along the way so far.

Thank you, Brent. Talk to you then. Thank you. Good to see you, again.

Thanks, Raimo.