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

All right. Well, good morning, everybody, and welcome to day 1 of the Morgan Stanley Technology Conference. My name is Stan Zlotsky from the Morgan Stanley software research team. And with us today, we have the pleasure of hosting the BigCommerce team, Brent and R.A. Good morning, guys, how are you?

Great. How are you, Stan?

Awesome, awesome. Well, thank you so much for hopping on. Before we begin, just very quickly, for important disclosures, please read the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. With that out of the way, gentlemen, so thank you so much again for joining us. So you guys really -- you've been out for public for quite some time. And you posted a really fantastic Q4 last week. When you think about the kind of the finish that you had to 2020, what are some of the highlights that you had in 2020? And which of these -- which portion of this momentum are you looking to carry forward into 2021?

Yes. I mean, for me, the 2 main takeaways to the finish of 2020 are around growth acceleration and industry recognition. If you go back a year ago in time, right, when the pandemic was starting to be a rumor but not yet a declared thing, we were already at a point of late stage of an IPO process. We were still confidentially filed, but close to a plan to go out in April. And doing what was relatively unusual, we're in our third straight year of growth acceleration so we had done an awful lot of things right in the prior couple of years to become the world's second biggest SaaS e-commerce platform, and last year would have been our third straight year of accelerating growth rate, which is not easy to do when you're a recurring revenue business. But then what happened as a result of the pandemic and the IPO and the change and shift to global e-commerce, instead of growing in the mid-20% range, which is what might have happened, we exited the year with ARR growth rate near 40%. So really fantastic. And how much of that was our own accomplishment versus the pandemic tailwinds versus IPO tailwinds, we can't disaggregate it all. But the point is we exited the year with a -- not just a third straight year of accelerating growth, but radically accelerated growth which we love. In terms of industry recognition, 2 things I'd highlight there. #1 is the IPO was an opportunity for us to really evangelize this notion of open SaaS. And open SaaS is how we characterize how we're different than our really only 2 or so top SaaS competitors in Salesforce and Shopify, who are both conglomerates. They're both closed SaaS in that their -- both their technology is far less open in terms of its API's breadth and depth and scalability as well as they both try to basically sell a package of solutions together, 4, 5, 6 things, rather than be partner-centric and best of breed, which is what we do. And so by evangelizing open SaaS, what we've done is we've evangelized how we're the first platform to be a viable alternative to the prior leading solution, which is open source in Magento and something that allows companies who want to optimize e-commerce for their businesses. The other thing, and this is really important. In very quick succession, all of the leading industry analysts have come out and rated us either a leader or a strong performer in every report. So if you go with the enterprise B2C reports, IDC has us as a leader now, not Shopify. Forrester has a strong performer, and they don't even list Shopify because they're not regarded as enterprise-capable. Gartner is a strong performer, that's for B2C. Then for headless commerce, also a leader with IDC. And for B2B, we are recognized as a really strong performer by Forrester, by IDC and by Paradigm. So widespread industry recognition of how far we have come as an enterprise-leading platform that really didn't exist a year ago, and that's getting us into a lot of consideration sets that, if we can convert this year, will be great for growth.

That's awesome. Yes. I mean, obviously, the acceleration part is very impressive coming out of 2020 in the multiple quarters of acceleration you guys have been putting up. So the interesting thing that really kind of stands out to me is, if you look at the -- just the pace of customer acquisition that you guys have had through 2020, maybe who are these customers who are still coming on board to adopt BigCommerce product today? And frankly, how do these entities survive through the the first kind of the early onset of the pandemic? And how do they even make it to 2021 without having a much stronger e-commerce offering?

Well, the businesses who got caught flat-footed and off-line-only at the start of the pandemic really scrambled. And we saw an absolute explosion of sign-ups. Ironically, for us, the fastest-growing part of our business became at the beginning, in terms of new sales, small business. People were rushing in, self-serving, buying the best plan that they could to get live as fast as they could. A month or 2 into the pandemic, mid-market and large enterprise came back. And in many cases, these weren't businesses who are brand-new to e-commerce. In many cases, they were ones who maybe were selling B2C but now wanted to do B2B or vice versa, or brands who had -- companies who have 1 brand live, but not multiple brands; 1 geography live, but not multiple geographies. We are a long way as an economy and as a society that has fully evolved in e-commerce. Just last week, the Census Bureau in the U.S. said that for 2020, 14%, only 14% of consumer spending was online. Now that was up massively from 11% the year before. I mean it took 26 years of the Internet to go from 0% to 11%, and then we went from 11% to 14% in just 1. But 14% is still only 14%. And if you think about as an investor and people around you, how you shifted your own purchasing habits, even with grocery and DIY and categories that maybe historically you thought you wouldn't buy online. But if only 14% of the average today is there, you got to think it's going to go to 20%, 30%, 40% over time before it ultimately plateaus. When you consider all the scenarios like buy online and have delivered; buy online, pick up in store, et cetera. So we've got a long way to go, and it's both business adoption and consumer full behavioral change.

Got it. That makes a lot of sense. And when you look at the more recent merchants that are coming on board today, very similarly, did these sales cycles start -- is it relatively recent? Or is it just that they've been in the pipeline and they're finally coming to a close? And maybe just like an overarching question, it certainly feels like your sales cycles have been shortening as you've been going through the year. Maybe just try to talk about just how your sales cycles have been trending? And who are the merchants that are coming on board? How recent are they in the pipeline so to speak?

Do you want to take that, R.A.?

Yes, happy to. I mean, generally speaking, Stan, I'd say that over the last 12 months, we're seeing just much larger merchants on both B2B and B2C. What we're also seeing is a lot of them are coming in the pipeline at the beginning of the quarter and closing in quarter, right? And so the mix shift in our business has been going on for multiple years. Last quarter, we had a 51% increase in enterprise accounts, and that was an acceleration in -- when we were growing in the 40s. And I'll just say that the average merchant size a couple of years ago, if we sign a $100 million merchant, that would be a really big win. And now we're seeing those a lot more often. And I think our agency partners are playing a big role in that. Our go-to-market motions are playing a big role in that. And all the points that Brent mentioned just validating us as a real enterprise solution, we're starting to see more and more of those and closing them at a nice clip.

Got it. That makes sense. Well, maybe R.A., since you brought up the partnership component, maybe just let's dig into that, right? The -- what is the role of partners, whether they be technology partners or actual go-to-market integration partners? What is their role in your growth trajectory? What has been? And what is it going forward?

Yes, I'll take that one. In the small business segment, the majority of companies self-serve. Any one of us on this call could go in, buy a plan and have it -- potentially have a site live in a few hours using nothing other than the tools resonant within BigCommerce. Mid-market and large enterprise, though, about 80% of those customers will use a digital agency for some combination of strategy, design, systems integration or implementation. And so we have to work very closely with the agencies who help these more complex businesses succeeded at e-commerce. We've shared historically that about 1/3 of our final enterprise sales actually originate with a digital agency. Meaning the customer goes to the agency first and then the agency registers the opportunity with us. And then the other 67% of the time, we first source that customer. And oftentimes, the digital agency will end up being referred by us later. And so the partnership with the world's best digital agencies is super important, and we're very proud that the agency ecosystem we have built up is very, very, very similar to an overlapping with the agency network that 5 years ago was overwhelmingly Magento. Magento was the 800-pound gorilla, open source on-premise 5, 6 years ago. And now as the world has shifted to SaaS, the types of agencies who do establish complex, best-of-breed implementations have realized we're the best SaaS platform in the world for that. Salesforce, too complex, too expensive, too cumbersome. Shopify, not flexible enough. And so that really is the -- really the heart of our agency ecosystem. But partners are not just agencies, they are also technology companies. And so the other half of our open SaaS strategy is the partner side of it, where the world's best payments, companies, shipping and fulfillment, point of sale, lending, fraud, e-mail marketing, ERP and accounting, we partner with those companies. And unlike our conglomerate competitors, we don't compete with them. That partnership orientation means that we oftentimes will go in much deeper and more strategically, both in terms of integration, but also go-to-market 2-way with the technology partners in all those various categories. And that's become a pretty meaningful source of our sourcing new leads as well in addition to the partners giving us that significant portion of our revenue that is rev share from them.

Got it. Got it. And the interesting thing, maybe just trying to understand would be when you were brought into merchants, right, how much of it is greenfield where somebody doesn't have anything in there? How often is it that they're just really building something from scratch with you guys versus when you are being brought in and to replace something? And I'll presume that the portion when you are being brought in to replace something, the partners, especially the agency partners, probably play a pretty important decision-making point and a partner in helping you to actually win those types of replacement deals. So where -- when you look at the merchants you're winning and the ratios you're winning between those merchants, how much of it is truly greenfield and how much of it is you're replacing something with the help of a partner?

I think it's roughly 50-50, that's true both for SMB and for enterprise, where about half the time, it's a migration from a legacy platform to us as modern SaaS and about half the time, it is a brand-new site. It doesn't mean the company is new to e-commerce, it means the site itself is new and unencumbered.

Got it. And maybe just sticking with the partner theme for a second. The international part of your business is doing really well. Maybe just walk us through how you think about your international expansion moving forward? And similarly, what role do partners play as you continue to explore international as one of your important avenues for growth?

Yes. International is the fastest-growing part of our business, will be, I'm sure, for a very long period of time. I apologize. I see a delivery about to come to my door. Dogs may bark, and I may have to just let the person know. I think it's alcohol. It's wine. So I may have to let them see a 21-year old in the window.

That's perfect. R.A. will fill in.

Yes. So for example, we shared that Europe grew -- one second, 97% year-on-year.

I'll step in, Stan. Yes. So EMEA is a region we invested in a couple of years ago. Great to see the growth, 97% last quarter. What I'll say about our international expansion efforts is our go-to-market teams there started out as enterprise-focused. So these folks are enterprise, e-commerce, SaaS veterans, they know the landscape. They know the competitive environment. They know the partner and agency network really well. And so they, out of the gates, came strong. And some of the things that are resonating in Europe, for example, is headless. There is a lot of established retailers there. They're not D2C first. They're not digital first. They're established businesses. And so they love the flexibility of the platform. They love the ability to customize the platform. Headless is resonating really well because remember, with headless, they can leverage BigCommerce as the e-commerce platform. They can replace the systems that they want to upgrade. And it works really, really well. So we're seeing great traction there. We're going to continue to invest there. It's mostly been Northern Europe. We want to expand to Continental Europe and a lot of geographies beyond that. So I'll let Brent talk to you in terms of what we're thinking next.

Yes. And sorry for that distraction. They wanted photo and date of birth and all sorts of things, but it's worth it, right, for good wine? In terms of international expansion, we really do believe that we are early innings of being able to compete effectively in really every country just about around the world, small, medium, large. As R.A. said, our strengths are historically the developed English-speaking countries with explosive growth in Northern Europe right now, continental Europe. We have sites out and are marketing France, Italy, Netherlands, Germany, Spain. We're now in Mexico. But we have our sights set over time on the rest of Latin America, on the major countries in Africa, Middle East, and of course, Asia will be a big opportunity, too. There is product-led enablement across all of this expansion. The neat thing about the fact that we are an SMB originally focused company is that we can basically, once we have done the right amount of localization, the platform is usable in a country, whether or not we have sales and marketing investments in that country. In fact, in Europe, we had, I don't know, 3,000 or 4,000 customers before we put our first person into the continent. And major milestones, like just this last week, we released a significantly upgraded version of all of our e-mailing templates that make it a lot easier for companies to localize the messaging and design, local language, local templates, whatever you want for merchants anywhere around the world. So it's a little tweaks like that will unblock our geographic expansion far faster than putting people and investment in countries does.

Got it. Got it. And just on that localization point, is there still a lot of languages that you think you need to localize your platform into?

Over time, yes. And we now have the most populous languages in terms of GDP and population, right, with Spanish and English and German and Chinese. But for Asia, getting the various Southeast Asian and Northeast Asian languages, that's very important. We have Portuguese for Brazil in addition to both South American Spanish and Spanish Spanish. So languages in the control panel are not the big deal. But I would say, translate -- easy translatability when setting up a store is still something that we have a few more steps to make easy in a lot of languages. Customer-facing websites, sometimes you may have 1 in the right language, but it's not in the right country, like having 1 for Mexico and 1 for Spain doesn't mean that's going to index and be seen by the various Spanish South American -- speaking South American countries. So there's more to do there. And one of the big bump on blocks as well is payments, where our strategy is with our Payments SDK, which is we've released in Phase 1. We have a second phase coming out soon. It lets payments partners do 90% of the work of integrating into us rather than place all the burden on us to integrate into them. That will greatly speed up our ability to integrate and have great local solutions for all the various countries across the regions I've talked about. There are just too many for us to do all that work ourselves and maintain it.

Got it. Got it. Well, I mean, look, as somebody who is born in [ Kyiv ] of Ukraine. Obviously, Ukrainian is the most important localization that you guys have.

So -- and you know we have that, right, Stan?

Yes. I do, I do. And you guys have a big R&D center there as well.

[ Other people and counting. ]

For sure. So that's extremely important component of the story. I'm being facetious but only slightly. So look, the open SaaS component is obviously an extremely important part of your go-to-market as well as just, obviously, the product strategy. Does the open component, does it really span the entire spectrum of is it applicable to something like the maybe upper end of the SMBs, mid-market and all the way up into the enterprise? Or is there something that you need to build on top of the open SaaS in order to really attract like the largest e-commerce players that are out there.

It's been an evolution of both adding API end points to what was once a relatively closed and monolithic platform. And I would say we're 90% of the way open today, maybe 95%. And in addition, adding enterprise functionality where required, an example of which that will be a big deal when fully released this year is native multi-store capabilities. That's a very complex capability that affects every area of the code base to be multi-store aware, and we're in a closed beta now with that functionality. But this evolution of starting at the low end going into mid-market and then extending all the way up into large enterprise is classic disruptive innovation. I mean this is what Clayton Christensen wrote his book about, the definition of disruptive tech in all his case studies is something that starts at the low end of the market and gives the underserved low end something cheaper, faster, simpler, easier than what the overpriced and overbuilt industry incumbents did. And then over time, if you choose to do what we have done, if this is your strategy, you add performance and you add functionality to go ever upmarket. And that doesn't mean we will ever have 100% of what Magento has. But if we have the 80% to 90% that a merchant wants in the mid-market or large enterprise, and we cost half as much or 1/3 as much with built-in performance, built-in updates and evolutions and bug fixes, which you can't get with on-premise software, then that's how we disrupt. So I would say to everybody, it is very fully our intent and has been from day 1 when I came into the company that there's no stopping us in extending upmarket. And the further upmarket we extend, will not compromise our ability to continue competing as the second biggest SaaS platform serving SMBs. It's all 1 platform.

Right. That makes sense. And when you think about, hey, you get into an initial customer and you land with your subscription product. And then obviously, as the GMV machine starts to spin up, you'd start generating this PSR. When you think about it from a more bigger holistic standpoint, one of the goals that you that you guys have been talking about is getting to almost like a 50-50 mix between your PSR revenue, like the PSR payments revenue and subscription revenue. When you think about what's going to be -- what are going to be the drivers of really driving -- taking that PSR component bigger as a percentage of mix, what other services do you envision going into that beyond just maybe the payments, the majority of which is payments today?

Yes, Stan. So I think if you think about BigCommerce as the hub, as the platform in our best-of-breed partners that we bring to the table, I think we've done a really good job of getting that hub in place. I think the next step for us is, if you think about the Apple App Store, have an easy way for consumers or merchants to take advantage of apps and the App Store being able to bill on behalf of those partners and included in 1 bill, control the flow of money. That's really the next step. That's why I feel pretty confident that today, still majority of payments. Over time, I think it's going to get to 50-50. There's a lot of monetization opportunities for us as being that hub. And if you just think about the major categories where we can monetize even further, omnichannel is high on the list, shipping fulfillment is high on the list, e-mail marketing, tax accounting. You kind of look at the ecosystem of partners that we have. And the way to think about it is as they monetize our merchants, the vast majority of them owe us rev share. And our ability to kind of have complete visibility into those transactions, bill on behalf of those partners and merchants, it's a real win-win, right? It's a win for our merchants, they get to take advantage of all the great partners we have in the ecosystem. It's a win for our partners because attach rates will go up. And it's a big win for BigCommerce because we're not going to leave any money on the table. There's -- the revenue capture will go up, and our take rates will go up, right? And so we're still early days in that journey, but couldn't be more excited about it.

Got it. Got it. This one actually -- you actually made a really nice transition. Just on the take rates component, right? You guys don't really talk about it, but people have done various mathematical [ maths ] to try to get into them. But maybe just more holistically, right? As you think about kind of take rate as a very simplistic amount that you get from a relationship with a particular merchant, whether that take rate is based on the subscription components and then all the different PSR revenue components that that's the money that you generate from that relationship with that merchant based on the GMV that flows through their platform. What are going to be the drivers of increasing that take rate?

Yes. A big driver is what I just mentioned. And if you think about take rates based on size of merchant, the smaller merchants are maybe going to pay a higher take rate on the subscription, but they're not going to drive as many transactions. The larger merchants are going to pay less of a take rate on the subscription. But remember, 90-plus percent of the GMV flowing through BigCommerce is our larger merchants, right? It's our pro and enterprise accounts. So if you look at the accounts greater than [ 2,000 ], it's 82% of our ARR, that's driving 90-plus percent of our GMV. The subscription take rate may be smaller on a transactional basis. But since they're driving so many transactions, there's ways for us to double and triple that take rate, the better we get at monetizing all the things beyond payments, right? Payments we've got it pretty dialed in, all the other things that I think we can further monetize is in front of us, right? And so when we talk about streamlining that partner experience, that merchant experience, expanding that take rate, those are the things that we're working on right now. We're investing in this year, along with international. It's a big investment growth area for us. And so those are the things that I think are really going to start to move the needle in terms of monetizing beyond payments and increasing take rate over time.

Maybe just one more question on the payments component. As you think about how you guys grow more broadly, right? And obviously, investors are very familiar with Shopify and Shopify Payments. Do you ever imagine a situation where you actually almost build out a similar type of functionality to what Shopify did with Shopify Payments where you're maybe white labeling some other offering, and you've come to market with a BigCommerce payment solution?

I'll take that. The answer is no. And I ran PayPal for -- a big part of PayPal for 8 years. So I would know how to do it. It's not that it's a bad idea if you're Shopify focused on small businesses and want to create an all-in-one package, that's very easy for them. It's antithetical to our strategy. Our strategy is to be the best and most flexible, most open SaaS e-commerce platform in the world that is suited to merchants who are optimizing their payments choice and their every other choice they make for their business. It is not in their best interest or our agency partners or anyone else's to try to shove a single proprietary solution down our merchants' throats. If you are on Shopify, for example, you don't even have the choice of Adyen in Europe or many of the leading payment solution providers in the world. They're not integrated. They cannot even be used. And for the ones that are integrated, they're suboptimal integrations often and you get surcharged up to 2% on top of what they charge you to use those alternatives. That is not merchant-centric. Anybody who thinks that a single provider is the end all, be all best solution for every merchant is living in an alternate reality. And so if your goal is to be the best of breed, most flexible, most merchant-centric e-commerce platform in the world, instead of competing against this critical component of e-commerce, which is payments. Instead, you do what we're doing, which is trying to be the best strategic partner. And by best strategic partner, I mean, it starts with the best possible integration. And I guarantee you that if you were to go ask a whole bunch of our partners, the ones that are some of the largest and most important, which platform in the world do you most want to see your merchants go to? They'll say BigCommerce not only because of the commercial and strategic alignment, but because they have invested in a better integration into us that a merchant can get on any other platform. And this stuff matters, like if you're trying to compete around the world in alternative payments, you want the best possible integration and availability of those alternative payments, and you're not going to get that. [ You don't want another ] company that tries to shove 1 solution down your throat.

Right. Now that makes sense, it makes a lot of sense and that strategy certainly is, in my opinion, a very important aspect fitting into your broader concept of open SaaS and everything is very easy to integrate and really build what you, as the merchant, makes the most sense to you how you're approaching your entire growth strategy. So I think that really resonates with a lot of customers, at least from our work that we've done. And I know we're coming to the end of our session. But R.A., maybe a quick question for you. You guys have definitely taken a very prudent approach of setting your 2021 guidance which makes sense. There's pretty tough comps that you guys are growing over in 2020. But nevertheless, there's a lot of momentum within the broader e-commerce space as we head into 2021. When investors look at the guidance that you provided, where are the areas -- the biggest areas of upside they are likely to come from? Is it going to be the subscription side? Or is it going to be more on the PSR side?

Yes. I mean the reality is, I think it could come from both. I mean we've got the ability to forecast subscriptions. I mean the retention profiles of our merchants are quite strong, and we can see how they're pacing. But if we sign some really large deals, and we have some deals that are hundreds of millions of dollars of GMV annually, those can really move the needle on subscription, right? And so I think that's 1 area. And then PSR, I think there's a ton of upside that we can realize once we get better and better at monetizing the ecosystem. What I'll say about this year is we're going to double down on the things that we think are working really well. International, clearly, open SaaS, both on the platform and partner equation. And then monetizing the partner ecosystem is one that I think can generate some upside. And what I'll say is this is a year for investment for BigCommerce. We had a -- we've proven -- we're a high gross margin business, approaching 80% gross margins. We showed a lot of leverage last year. This year, we decided we're going to keep leverage relatively flat, and any overperformance, we're going to continue to double down. We just think that the opportunities in front of us are significant. We know it's working well, and we kind of want to just go after the things that we think that are real, and with some investment, we can really grow the business in a really smart way. We still want to commit to getting to breakeven by the end of 2022, and we have a path to get there. But this year, we're going to go after it based on a really great 2020.

Awesome. Well, I think that's a great place for us to stop. Gentlemen, certainly, a lot of really exciting growth opportunities for you on the horizon, and we look forward to sticking around and watching all that unfold. Brent, R.A., thank you so much for your time. Really appreciate it.

Thanks, Stan.

Thanks, Stan. Thanks, everyone.

Have a good one.

Bye.