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

Hi. Good afternoon, everyone. Thanks for joining us today at the Needhams' 23rd Annual Growth Conference. My name is Scott Berg. For those that are less familiar with myself, I lead our enterprise software and SaaS research efforts here at Needham. Today, we have BigCommerce with us. We have the company's CEO, Brent Bellm, thanks for joining us; and the company's CFO, Robert Alvarez, I might refer to him as him -- as RA today, pardon me, I got choked up, I guess, trying to say that, as the company's CFO. But we're going to get started here. And Brent or RA, I don't know who wants to take it, but how about a brief overview of the company for those that are less familiar?

Yes. Hi, everybody. BigCommerce is a SaaS e-commerce platform. We enable more than 60,000 businesses around the world to create and run their e-commerce stores, whether those are B2C or B2B. We're the second largest SaaS e-commerce platform in the world. We IPO-ed back in August. Two things that are distinctive about what we do. One is that we -- we're what we call open SaaS, not closed SaaS. By open SaaS, what I mean is that we excel at serving businesses that are complex and that who want to optimize their e-commerce strategy for all components of their operations, the systems they want to use, the design they want to do. And in a lot of ways, you can think of BigCommerce as the SaaS successor to the leading platform in the on-premise era, which was Magento. Magento was open source. We're the SaaS platform that excels at flexibility and adaptability for companies. And then the second thing about us is that we are intentionally textbook disruptive. Meaning, when originally founded 11 years ago, we focused only at the low end of the market, SMBs. When I took over for the founders almost 6 years ago, we then extended our #2 position to go into the mid-market and now large enterprise. According to all of the tech analysts, IDC, Forrester, Gartner, Paradigm, we're now a leading or very strong performer even at the highest end of the market. And so whether it's a start-up just getting going or it is the world's largest companies, we serve them up and down the size ladder, all from one very scalable and disruptive platform.

Great. Before we get started on the questions, just one piece of housekeeping. We will be taking Q&A at the end of this -- pardon me, at the end of the session here. [Operator Instructions] I guess let's start off with talking a little bit about the pandemic and taking a look back at it. I believe BigCommerce was a big massive beneficiary of the pandemic as e-commerce skyrocketed. I assume this is nothing that most of us here don't understand that are on the call today. But I guess as you look back at some of the nuances of the business over the last 10 months or so, were there any learnings you would call out that would have meaningful impact to how you run the business going forward? Whether it's a small competitive dynamic, maybe something on a product use -- usage, maybe it's your free 90-day marketing campaign, anything there would be interesting.

Yes. I'll pull out three things quickly. But the big picture is that our strategy was validated by the pandemic, it didn't have to be modified. The two key components I talked about a second ago, being open SaaS and being intentionally disruptive were exactly what the world needed in this time of disruption. And so I'll go highlight 3 things. One, which was a very favorable surprise. When we came into this year, we were entering our third straight year of accelerating growth rate, which is rare for recurring revenue businesses of our size. But the way a lot of outsiders looked at us is they said, "Well, you've got a high-growth component, which is your enterprise business. It's growing north of 40% and is now about half of your business; and then you've got a slow-growing part, which is SMB, that's your legacy, right, where you're having to compete head-to-head with Shopify." The nice thing about the pandemic is it reaccelerated the low end of our business. And now that's become a strong grower as well and has helped, along with the continued strength of enterprise, to lift the total business to growth rates that are even a lot higher than anything we've seen in many years. So that was a good thing for us. A second characteristic that came as, I would say, an area where the strategy was really validated is our strategy of being cross-channel and enabling businesses to sell not just on their branded website, but through third-party ad channels, third-party marketplaces. We're really a leader in those connections from a branded kind of core site into, whether it's Google Shopping and Facebook or it's Amazon and eBay and other marketplaces. But I'd highlight the point-of-sale component of it. We don't have our own point-of-sale platform. We partner with many of the leading ones. And in the time of pandemic, companies are seeing off-line stores shut down or the business greatly reduced or needed to do buy online, pick up in store. And so those connections into so many point-of-sale platforms was really important to us. But at the same time, we realized we've got to double down, triple down on the functionality that we enable for that. And then a place where we were caught a little flatfooted is, in particular, in Continental Europe where at the beginning of the pandemic, of course, it hit hardest the countries of France, Italy and Spain. And to my deep frustration, we had done already control panel translations, meaning of the back end into French and Italian, soon Spanish, but we didn't have marketing websites up. And so we weren't actually telling these lockdown countries, "Hey, if you're desperate to get live and selling as quickly as possible, you can use BigCommerce to do that." So that was one of these areas where if I could go back in time, I would have launched our marketing presence in Continental Europe earlier in the year.

Got it. Very helpful. I guess we all assume the economy is going to reopen at some point, at least. I hope like heck it's going to. I'm sure several on this call do as well. But what's your current viewpoint on where the level of e-commerce adoption will kind of shake out kind of as this occurs? And the question really revolves around kind of GMV levels. Do we kind of hold the levels that we've seen knowing that e-commerce demand trends have been accelerated by several years or because it's easy to buy while sitting in my La-Z-Boy, maybe I end up buying more or maybe because we're out in the "wild," maybe it comes in a little less. Would love to hear kind of how you guys think about maybe the next 1 to 2 years kind of around that dynamic.

Yes. I'll jump in here, Scott. Can you hear me okay? I hope so. Okay. Great.

Yes. Just go ahead.

Yes. I think at a macro level, longer term, I'll start with just saying e-commerce as a percentage of retail is still in its early days. I think no one questions that over time, e-commerce as a percentage of retail will get to 30%, 40%, 50% or more. When you look at -- apply the lens of what about 2021 and you're just looking at comp in 2020, that's where we've got to monitor GMV levels on a monthly, quarterly basis. We published our GMV levels over the Cyber Week and the holiday season, and it was really, really strong. We recognize going into next year, there's a lot of uncertainty in terms of the vaccine rollout and what will be kind of a permanent shift. But there's no question, I think that there is a change in behavior. We've seen a great sense of urgency from our merchants, both big and small, in terms of their really recognizing that their digital platform is no longer nice to have. It's a must-have because they know it's such a big component of their future growth as a business. So GMV next year is a little bit TBD. We're monitoring it, obviously, very frequently. But long term, very, very confident in the continued acceleration of e-commerce as a percentage of retail. And given our approach to the market and the segment of the market that we focus on, we believe we're going to benefit from that.

Yes. I think we all agree that there's a new level out there. I was just trying to understand exactly where that shakes out. But I guess moving past GMV, the actual customer adoption because that's what really drives your overall long-term economics. The company ran a promotion for a free 90-day trial early in the pandemic. And lo and behold, that customer addition has really jumped in the third quarter. Can you talk about the success of this promotion? And Brent, you can touch on it a little bit. It really helped the downmarket motion within the business. But maybe help us qualify that -- the quality of the customer that you brought in. Are these -- do they change from what you've seen before? Do you think they'll stick with the platform a little bit more? I don't know if that 90-day trial kind of brought you into something different or new with the customer segment.

Yes. Just to be clear, that 90-day promo was for retail clients only, so targeting SMBs. And I would describe that cohort as one that got up and running a lot faster and also transact -- started transacting a lot faster. So when we look at the cohort of sign-ups starting in March, again, it just validated the sense of urgency that a lot of merchants had to get up and running in online. I think the mix of those stores were established businesses. So that was great to see. And we're going to continue to test promos and promotions. That was the first 90-day site-wide promo. So that was kind of why we called that out. But I would characterize those merchants as one that, again, transacted faster, transacted more and have all the characteristics of merchants that we're going to be able to serve and support long term.

All right. I guess lastly, on the enterprise -- lastly, on the pandemic. Within your enterprise business, I believe you've all discussed the deal flow certainly slowed around the start of the pandemic. It probably not a surprise. Almost every software company I cover outside of someone like a Zoom had some initial slowdowns and partially in e-commerce because companies were stuck at that point using whatever they were using. But ARR growth in that segment after March has been 48% in each of the last 2 quarters, which is a very good number for you guys, and it's higher than pre-pandemic levels. Is there something the pandemic caused to drive modestly better ARR growth in these areas? Or is it really just a positive extension to what you're seeing just in general in e-commerce?

I think we've got 4 things happening, and the pandemic certainly was one. It maybe was a month, 4 weeks, 5 weeks, 6 weeks of pause on enterprise deals. Meaning, ones in pipeline closed more slowly and then they came back. But the pandemic certainly helped with large enterprise sales. Three other things did, too. One is in quick succession, the industry analysts, Forrester, Gartner, IDC, Paradigm, all started coming out with their annual reports. And for the first time ever, BigCommerce started appearing in leader quadrants and in strong performer quadrants, including nonreports like the B2B ones where Shopify and Salesforce don't appear because they don't do -- at least Salesforce Commerce Cloud because they don't do proper B2B or in ones like Forrester for B2C or IDC for headless. Shopify doesn't appear because they say, "You can't do headless, you can't do enterprise B2C e-commerce." And so going from not having all those stamps to approval to suddenly having really strong stamps from everybody who has one to give out helps us a lot. And that matters. There are a lot of companies who start their search whittle down only to the ones that have those strong seals of approval, and we have them all now. So that was great validation, I think overdue, of just how far our platform has come and the strength and presence it has even at the upper end of the market. The third thing is the IPO itself. Remember, a company is betting its digital transformation, its digital future on a platform. And that is a far, far, far safer bet when placed on a well-known, well-capitalized public company whose strength and momentum is transparent to you. And up until our August IPO, we were the opposite. We were a private company competing against larger market cap publics, not just Shopify; but Adobe who owns Magento; Salesforce; Oracle; SAP. And the neat thing is that not only did we level the playing field against them, we created advantage against the 500 long-tail platforms around the world who are losing share. And the transparency even lets people see that we have more momentum behind our platform really than anybody in the world other than Shopify with 2 very different strategies and very different models. The other thing that the IPO helps is there's now a lot of information in the public domain that goes at great length to describe this difference between open SaaS, which is what we are; closed SaaS, which is what they are; and when a particular type of company will be better off of one rather than the other. Final thing is that -- and this is the difference between us and our conglomerate competitors, we only have 1 product. It's our core platform. And because all of our mindshare and product and engineering and innovation goes into that 1 platform, I think we are developing it and innovating it and progressing it faster than any of our competition. And with every passing quarter, the capabilities get that much better and especially at the upper end of the market, we're able to tackle more use cases, more geographies, more industries than ever before. And that advantage keeps hopefully accumulating and propelling additional growth.

Now, Brent, you actually touched on what my next question was going to be, which is, first of all, getting off the COVID theme because that was all last year. Let's talk about something else, obviously. Is -- I know the company in our discussions, at least, is you guys have made a big deal about some of the new innovations that came out in early 2020 that brought the platform to full parity versus these more established enterprise vendors. You kind of talked about some of the reviews, positive reviews that you've had recently that highlight that. But can you recap maybe what some of these important innovations were? And now that you're there, how do you keep the innovation engine moving forward and actually pass them?

Yes. I mean this is one of the things that I'm most fired up about in the new year. But as a recap last year, some of the highlights that we released are Page Builder powered by widget technology is a big leapfrog in the interactive way that businesses can design their user experience. It's -- it kind of introduces a Squarespace- or Wix-like interactive user experience, the design of a store, but on an enterprise platform where the underlying technology of widgets powered by [ Grass-L ] API is super, super powerful and flexible. It's something that is loved by both our smallest merchants and our largest. We rolled out our channels -- our channel manager, which is a new framework by which merchants can see and connect into third-party channels. I talked about this a little bit earlier. Whether it's marketplaces like Wish and Amazon and eBay or ad channels where we're a leader like Google Shopping and Facebook or point-of-sale channels, even things like progressive web apps or third-party content management, a lot of new APIs around open came out. In particular, our leadership position in headless e-commerce and being able to enable that was extended. I'll stop with those 3. I'll stop with those 3. Going forward, in terms of innovation, this is a thing that I am talking about most with my leadership team because this is the third time -- actually the fourth time I've been part of a pre-, post-IPO company, eBay, PayPal, HomeAway and now BigCommerce. And so I have observed in those various circumstances how some companies react post-IPO. Do they become overly fixated on short-term revenue and EBITDA goals? Or instead, do they use their newfound balance sheet and currency to really explore the limits of what different parts of the company can do to innovate and disrupt their industry? And I can assure everybody that I am massively wired to try to get the most out of innovation and disruption from my company. And in particular, if you want to know whether or not we can out-innovate, this is going to be I think quite simple for the very clear reason that all of our top competitors are software conglomerates where their core e-commerce platform is an afterthought in terms of total company revenue. And that's even true of Shopify, which is maybe getting 30% or less of their revenue from their core platform and the rest is coming from payments and shipping and fulfillment and point of sale and an ever-expanding list of verticals they get into. But think about what Magento represents to Adobe. Nothing. It's an afterthought. What does Commerce Cloud represent to Salesforce? Nothing. It's an afterthought. What does Commerce represent to SAP? Nothing. It's an afterthought. All these other companies started somewhere else belatedly bought a commerce platform in the service of their other more lucrative and larger businesses. And so are they investing and innovating in their technology in the same way we are where we have only one? No, they're not. All of our mindshare is going into this. All of our development is going into this. And by nature, our open platform means that we are really focused on our partner ecosystem, technology partners, agency partners, and what they can do and want to do in conjunction with us. And so we're leaning massively into shared innovation, getting ideas from them. And I think the next 5, 10 years, there's no other platform in the world in this position that we are in. It's a 1-product company with a very explicitly open and disruptive strategy. And I really do want to be the platform that out innovates everybody else for the next 10 years of e-commerce. Sorry, that was a long answer, but this is -- of all things that I have really fired myself up post-IPO and especially coming into this new year, it's getting the whole company jazzed around what we can do.

Well, the best part about that is, I didn't know that was the area that you're most jazzed about. So a lot went through that question. So that's perfect. I guess staying on the product platform theme here is, I've been writing about headless commerce for several years because of how it impacts another company that I cover, not Shopify, but a different company there because I don't cover Shopify. And in fact, RA probably got tired of all the questions early on when we first met about headless. I guess there's a 2-part question here. First, can you help us understand what headless commerce is? Because I think many investors on this call here probably still don't truly understand what it is and how it's different. And then second, I would say the core areas for BigCommerce over the intermediate term, maybe in the next 3 to 5 years, is really well rooted in enterprise B2C and B2B segments, which I think really emphasize the requirement for headless commerce infrastructure. I guess why is that so important then to them at the end of the day?

Yes. So headless is anytime a company has an approach to commerce that decouples the technology used for the front-end user experience from the back-end commerce engine. So the back-end commerce engine in a headless environment is going to power things like the catalog into the store, the checkout process, payment processing and all the integration into shipping and fulfillment and tax and accounting or ERP and other legacy systems. But the company instead of designing the front-end consumer experience using themes or theme development provided by the commerce platform instead is going outside that. Now going outside that could be a commercial content management system. What's the most popular in the world? WordPress. WordPress, by the way, as a CMS, has no commerce engine. If you create and design a website in WordPress and you want a store to be part of that, you have to go headless. And the most popular headless extension is BigCommerce. I think we're the most popular SaaS extension for WordPress. At the high end, why did Adobe buy Magento? Well, Adobe Experience Manager as their large enterprise content management system, like WordPress, has no commerce back end and they needed one. So they bought Magento to be that, although it's, I would argue, not a very good fit. But it doesn't have to be a commercial content management system. You might be coding your front end in Drupal or you might be doing it in React, you might be using a framework like Next.js, you might be doing progressive web app using Gatsby or [ View ] or DEITY. And all of these require, if you want that, a headless back end. So which companies might pursue headless? They're ones who typically are going to have either the most innovative user experience desires on the front end. They want to do something really unusual, not just a boring, hierarchical category structure, but something that's very interactive, something that's very image- or configuration-rich or something that's very complex. Let's say you're trying to combine in 1 site -- or sorry, in 1 platform a bunch of different countries and geographies with languages and currencies. Maybe you're trying to sell both B2B and B2C from the same front end. They're all these different use cases where this can happen. But the complexity of headless makes it such that very few e-commerce platforms can actually support it. For example, in IDC's report that just came out, the platforms that can do headless are, in many cases, not the platforms that are on their B2C report because it's a very specialist set of open APIs and capabilities. You won't see Shopify there, but you will see BigCommerce because we're that 1 SaaS platform that has taken an API-first micro-services-like approach to the presentation. And you can really take almost any area of our platform. And if you want to extend it, modify it or integrate something from the outside, you can do that because we have the APIs and SDKs.

All right. And then, RA, I promise I'll ask less questions about it going forward. Maybe not. It's super important. Two more questions from me and then happy to open it up to audience Q&A. I guess the first is on the go-to-market side. Agency partners have been an important lead-gen source to the company historically. Have you seen any changes to the volume size or maybe velocity of the deals that you get from these agency partners here in this kind of post-pandemic environment?

What I'd contribute there is that historically, on the large -- on the enterprise side of things, agencies have sourced about 35% of our MRR. And for much of this past year, that went down because in a pandemic world, some of the things agencies do the most stuff, which is local to their geography, local interactions and get togethers and conferences and events, those got shut down. And so much so that in some places like Australia, which is a small market, heavily reliant on in-person, face-to-face interactions, the agencies, in a lot of cases, didn't have models that easily adapted to a primarily virtual world. But of course, that's a big part of what we do. And as companies were panicking, where do I go, they go online, they do web searches, and we have to excel at that. So I think there has been a disproportionate increase in the volume of deals that we source ourselves and, of course, also help by the coverage of us as we IPO, that has assisted as well. It's our expectation, though, that agencies have worked to adapt, and they'll get back to that probably 35% trend line for us on the enterprise side.

Yes. The only thing I'd add on that front, Scott, is we actually get leads from both our agency partners as well as our tech partners. When we say our open SaaS approach, it's not just from our platform, but it's also how we approach the ecosystem and how we go to market with our tech partners. So as we've talked a lot about, we offer our merchants the best-of-breed solution. And we oftentimes natively integrate with best-of-breed solutions in -- across the ecosystem. And now we're going to market with them. They don't have an e-commerce platform. They want to offer an e-commerce platform. They want to make sure they keep and retain their merchants. And so we're also starting to get a lot of an increase in leads from our tech partners that we go to market with. And on the agency side, the IPO as well as the validation from the third-party research firms now have a lot of the big agency partners, the Tier 1 of Tier 1s, the Deloittes, the Accentures, the big guys knocking on our door. And we're excited about what we can do with them on the enterprise side -- enterprise segment.

Now all the marketing and publicity that you've had off the IPO, the things that Brent had spoken about early, combined with some of those new agency or SI opportunities, should certainly be worth following here going forward in the short term, for sure. Last question from me is on PSR revenues, even though I got lots of questions there. The one I've been getting probably most frequently is actually around the mix of PSR revenues going forward is, obviously, payments is a very large chunk of that today, especially with how GMVs have grown in such a short time frame over the last 9, 10 months. But as you look at the business longer term, will payments be the largest portion of PSR revenues? Or is there something else under the covers there that you guys have been working on or currently have out there today that might suggest the payments maybe isn't the majority at some point?

Yes. Historically, payments is definitely driven most of the PSR, but a lot of the partnerships we've put in place in the last 12 to 24 months are starting to bear fruit. And one thing that we like to point out for investors is it's still early days in our ability to monetize beyond payments, but we're already starting to see revenue contributions from nonpayments. I think long term, it's reasonable to suspect that as those partnerships mature, that we can get to a 50-50 split, payments and nonpayments. There's a lot of different services in the ecosystem that as we bring those solutions to market and we get revenue share from those solutions, and I'm talking across shipping, fulfillment, e-mail marketing, tax, accounting, those revenue contributions I think are in front of us or a majority of it is in front of us, which is really exciting.

I think that is an exciting driver because payments probably grow faster or the revenues tied to them faster than subscription over the long-term of the business, not short term with all the pandemic dynamics just because of the share shift in e-commerce, it suggests probably something a little bit faster. But if your nonpayments revenues can get to a 50% range, they've got a chance to grow super fast here over whatever the time frame is. So...

Yes. We believe -- so, Scott, and just for all of the investors on the call, I just want to emphasize that it will be net revenue. So when we capture revenue share from payments and nonpayments, it will continue to be on a net revenue basis. So the increase in PSR from nonpayments will be at a really strong gross margin.

Even better qualifier. All right. A couple of questions from the audience here because we just have a few minutes left here. First, can you break down churn rate by customer segment, whether it's SMBs, enterprise or industry? Any color you have there would be helpful.

Yes. We don't break out churn rates by segment. But what I can share is, if you look at our enterprise accounts, they look very, very much like an enterprise SaaS business in terms of unit retention. And if you think about our land and expand model, our land and expand model starts with signing 1 account and then growing that account with multiple stores over time. So 1 account, an enterprise account, will likely launch more stores. So they'll likely upgrade not only their -- based on their first store, but they'll add stores over time. And when you think about net revenue retention, we get really excited because as these merchants, these larger merchants transact on our platform, spin up new stores on our platform and as we monetize that GMV, that level of GMV that large enterprises generate off of BigCommerce, that net revenue retention will only improve over time. But on a unit retention basis, I would characterize our enterprise accounts as really strong in terms of churn. And then even our small business, keep in mind, we focus on small business retailers that are established businesses. So if you look at even our small business segment, the unit retention profile I think is even better than most SMB platforms out there because the mix of our merchants are established businesses that transact and are very sticky.

All right. Next question is on the renegotiated ad partnership in the quarter. Can you talk about why you renegotiated this contract? Maybe what the impact is to the business short term and why it will be beneficial longer term?

Yes. It's a good example of nonpayments revenue contributions, right? So I think that is a relationship that we had with an ad partner. It went extremely well. It was a variable-based agreement. Basically, if we refer a merchant and they spend a certain level of ad dollars with this partner, we would get a rev share. I think we knocked it out of the park and that teed up a new agreement, longer-term agreement, where we're looking to do more and more with them. We're really excited about that. I think they're really excited about us. But the components of the new agreement are more fixed in nature versus the first agreement was variable in nature. So that fixed component, we had to amortize out over the length of the contract, which makes a little apples and oranges when you compare the 2. But I would just say, we're super bullish in terms of what we continue to do with them. And again, a great example of new ways that we're monetizing PSR across nonpayment partners.

All right. Next question is on kind of an extension with your third-party PSR revenues here is why would a customer choose up to sign with a third-party provider, example is like Avalara, through BigCommerce versus signing up with that vendor directly?

I'll take that. So it really is a different use case, depending on which partner you're talking about. The interesting thing with Avalara is they were our original tax partner, the first one we ever integrated and sort of what you've got out of the box. But today, there are 2 use cases. One is if you want to use someone other than Avalara, we also have competitors of theirs like TaxJar and Vertex and Thomson Reuters integrated, in which case, you would go -- you use the pre-existing integration into BigCommerce that they have created, but you'd sign up for them via their services. But even with Avalara, there are customers of a certain size where they need their own direct account with Avalara, which they're going to want to follow up and configure and negotiate. So they're still using the same integration, but they're going to go straight to establish their enterprise relationship.

All right. With that, we are effectively out of time at the moment. So we're going to wrap it up. Brent, RA, I wanted to thank you guys so much for your time today. Highly appreciate it. Good luck with the closing out the quarter here. And I'm sure we all look forward to speaking with you guys in just -- in a few short weeks, excuse me.

And for those who don't know, Scott not only stood all through this one, but apparently has stood for all of his presentation today, and he has many more to go. So if he is still standing and you get to see it at the end of the day, have a drink in his honor. I'm sure you're going to need one later this evening, Scott.

Just making through. It's going to be a great day. Thanks, Brent.

Thanks. So far, so good. Well done.

Appreciate you, man.

See you guys. Take care.