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

Outstanding. Thank you, Maxim. I'm Tom Roderick, software analyst here at Stifel and Co-Director of U.S. Research. And most importantly here in the moment, we've got, all the way from Austin, Texas, BigCommerce. I think most of you out there in the audience have probably met Brent Bellm, CEO; Robert Alvarez. I think many of you know Robert as R.A. So it's a great opportunity to have you both with us, and Daniel Lentz from the Investor Relations team is on as well. Gentlemen, thank you for being here. Great to have you. Brent and R.A., I'm going to let you both sort of take the floor here at the beginning and perhaps give an overview of what BigCommerce does. But I'll throw you the loaded question to kind of kick off the floor here. And I think the loaded question is for investors that 5 years ago would have known the guys at the high end of the e-commerce scale, whether it's Demandware or Magento or they followed Shopify in the SMB world, tell us where an opportunity has been carved out for BigCommerce to drive the success that you've seen over the last several years and where that goes in the future.

Right on. So thanks, Tom, for having us and everybody for listening in. BigCommerce has been around since 2009, but it was really starting 6 years ago where we embarked on a strategy to do, in the SaaS era, what Magento did in the on-premise era. What do I mean by that? Magento is an on-premise open source software platform that went from nonexistent around 2008 to #1 around the world for businesses, small, medium and large, B2C and B2B, in only about 5 years. And its fatal flaw was that it was on-premise software, which is not what most businesses want to have to manage, secure, version, upgrade, customize, integrate, et cetera. And we, at the time, were a SaaS SMB-centric platform, which did classic disruptive innovation, meaning we took a very strong base. We were the second largest in the world behind Shopify and said, "Okay. Shopify has a head start on us of 5 years. They've already IPO-ed. We're not going to overtake them in our initial target of SMBs." It's about time the mid-market and large enterprise had a SaaS alternative to Magento. And so we adopted what we call open SaaS to compete with open source. And what is open SaaS? It's taking a typical monolithic SaaS offering and decomposing it into microservices with all of its own API and SDK layers for each subcomponent, and there are a lot of subcomponents in e-commerce: payment, shipping, tax, catalog, price, everything can be a microservice, and we opened it all up. And so we, today, are the only platform in the world, we've been doing this for 6 years, and nobody else has yet tried to copy us and I don't think anybody could catch up if they tried, of being the most open, flexible and enterprise-ready SaaS platform despite the fact that you can start at $30 a month and create a store yourself with no outside assistance and be operating on the exact same software that the world's largest companies like P&G are running all of their brands and e-commerce stores on. So in a nutshell, what makes us different than the competitors you name and what we're the best in the world at is open SaaS, open SaaS that lets businesses who want to configure their approach to digital transformation around their business and not be restricted to a playbook or a proprietary infrastructure from one provider, but be the most open, flexible, powerful and high-performing. Now that's what we do better than anybody else. And we think that our platform for those businesses will be a winner for the next 10 years-plus.

Outstanding. Great intro. R.A., I'm going to ask you to weigh in here on the moment in time we've just gone through and what we're happening into in the year 2021, which is to say e-commerce took off like a rocket ship last year, given the pandemic. Now you came public, BigCommerce came public in the midst of this with a tremendous tailwind at your back. And I think a lot of investors are asking the question of a lot of companies that had great success last year that was partially related to pandemic challenges and drivers. What happens now, the year 2021? Is the horse out of the barn and never coming back? And what does that mean for the business model for BigCommerce?

Yes. I'm going to start with kind of the long-term view. I mean, we're playing the long game here, and there's no better wave that we feel than e-commerce and the trends around e-commerce, the percentage of retail that will be on e-commerce. And it's still less than 20% this year. I don't think anyone questions that it's going to get to 30%, 40%, maybe 50% or higher. And 4 out of 5 folks making a decision around it are going to choose SaaS and the benefits of SaaS. And as Brent mentioned, we are the open SaaS option for those folks who want to kind of future-proof their digital transformation, their big bet around e-commerce coming out of last year. And if you're caught flat-footed around e-commerce, you're taking it pretty seriously now. The sense of urgency around how do we figure out what's the future platform we're going to run our online business on, that sense of urgency is felt across B2C merchants, B2B merchants. So I'm going to answer your question in 2 ways. If you look at the underlying growth in our business, subscription revenue is accelerating our enterprise accounts, our retail accounts. Our enterprise accounts grew 51% in Q4. They grew 58% in Q1. That's now 57% of our ARR. And a lot of the driving forces behind the growth in our subscriptions: international expansion, B2B opportunities, headless opportunities. And there's also a flywheel effect building around us and it's really our tech partner ecosystem. If you think about our differentiation, we don't compete with our tech partner, major vertical tech partners. We go to market with them. So not only do they give us rev share when they make money from our merchants, but we're now going to market with them because they need an e-commerce solution, e-commerce partner for their base and for their opportunities. So in terms of subscription growth and trends, couldn't be more excited across the board for our enterprise plan as well as our retail plans. Where we have to be careful is around forecasting GMV. I mean, to your point, last year was a surge of GMV across BigCommerce's platform really across the board in almost every category. So when we think about this year and comping last year, we just have to be careful around forecasting the GMV this year versus last year and the rev share that we'll get. But I'd split apart subscriptions because you'll see a really nice growing trend in our subscription revenue, subscription ARR. Our ARR is at 43% year-over-year. We're seeing great growth, by the way, internationally. EMEA in Q1 grew north of 80%. APAC grew north -- around 46%. So we're seeing some really good growth drivers around the initiatives that Brent and I are really focused on. Our team is really focused on 5 really key initiatives that I think are going to drive great growth for us not just this, year but for many years to come.

And R.A., I'm just going to ask you to kind of click on that one point you talked about with GMV. Maybe you can help educate investors just as to how the contracts are structured in terms of the subscription is built upon X? Is it bands of GMV? Does it fluctuate? How often in real time can that variability in GMV impact your subscription model?

Oh, sure, yes. Our retail plans, it's simple. It's -- there's GMV thresholds built within our retail plans, so as you exceed those GMV thresholds, you're automatically upgraded. Our enterprise accounts are different. They're negotiated based on order tiers. And so as you exceed your initial set of orders for our enterprise plans on a trailing 12-month basis, you'll get upgraded or paid growth adjustments. That's important to note that as we build out a lot of our omnichannel integration, so we want to be the very best at making sure that our merchants' products can be found across whatever marketplace, social channel, ad channel, every one of those integrations. If you go through our channel manager, one click, your products can be found across those channels. All of them drive orders to our merchants. So it really is a kind of a win-win model. The more orders we drive for them, the more likelihood we're going to see growth adjustments over time. And that's really the built-in kind of expansion pricing model that we have. And a lot of what we do is really to drive success, drive orders for our merchants.

So Brent, I'll bring back one of the numbers that R.A. just kind of mentioned. 57% of ARR is driven by enterprise at this point. That's been going up pretty steadily. What does it mean to be able to support an enterprise with your product and platform as opposed to sort of supporting a broader mid-market or SMB type of player? And I guess the question is, how much harder is it to support multiple languages, currencies, different stores in different regions? And what have you done with the platform and product to get it there?

I mean, it's all a continuous scale. So the big leap for us was SMB to mid-market, which again, we began really 6-plus years ago. The mid-market needs enterprise functionality and the functionality required by large enterprise is not different than by mid-market. But you can't snap your fingers and say, okay, we're going out for mid-market and large enterprise and suddenly have everything built out and ready and open, and it's a continuous process. I would say that we're 90% of the way there today, to being a completely full feature large enterprise solution. And we're capable of serving a lot of businesses. There are 2 use cases that we are working on now that kind of finish the puzzle and arguably not the last leg out of the stools of Magento and Salesforce, and that is native multi-store capability. We can already serve businesses doing multi-store in either of 2 ways, either if you've got a headless front end and we do that a lot better than anybody else, or if you're creating unique stores for each one of your brands or geographies. But if you want multiple stores all created within BigCommerce, including the user experience from a single account, that's native multi-store. And that, for us, has been in closed beta for non-transacting stores, and we're eager to get that out to transacting stores soon. It's the hardest product we've ever built because as you can imagine, we're multi-tenant SaaS. We've got 60,000-plus stores running on us. And to take an entire platform that's built for one account, one store and make every area of the product now compatible with multiple stores. And when I say every area of the product, I mean, languages and cart and checkout and payments and everything else, that's a lot of work. And most of that work is in the rearview mirror and it's now just about scaling it. How many stores, how many transactions can we pump through at one time? Because you can create the multiple stores today in our closed beta. So that's number one. And then the other is multi-location inventory APIs, which today, you can do that via workarounds. But once we have those APIs, we really natively support super well the use cases of companies that are either shipping from a lot of different warehouses or have a lot of different point-of-sale stores. They want to enable for buy online, pick up in store or local delivery. Again, we go from workarounds to supporting that natively. But my point with all of this is we're already winning left, right and center in the mid-market, and we're really starting to gain momentum in large enterprise. With these additions, there'll be that many more deals, that many more RFPs that we can compete for and win. So those are real needle-movers still to come.

Okay. So let's talk a little bit about -- R.A., you did a nice job sort of laying out the long tail of the opportunity. If we think about what that long tail looks like, it's a lot of brick-and-mortar stores that are in need of embracing digital, in need of embracing e-commerce. Some -- likely all have some sort of technology in place to support it but a lot of that is legacy. So I'll hand it to either of you guys can decide to get this question. What does it mean to be able to move a larger brand off of a legacy technological footprint, an on-premise piece of technology, a Magento, if you will? How hard is that for them? And where are we in that long tail of evolution of brands being able to or retailers being able to make that shift?

Well, I'll start with this. It's hard for sure. However, it's been going on for 25 years. Like every single time that Internet retailer or someone else has ever surveyed merchants and asked, are you planning to replatform in the next 12 months? The answer always, every report I've ever seen, has been in the 20% to 25% range said yes, which basically means there's this sort of ironclad rule that on average, if you stick yourself on a legacy platform, especially on-premise, that in a span of 4 to 5 years, it becomes so outdated, so low performing, so much of a sort of burden around your neck, that you decide, "Hey, it's better off for us to scrap it and start over on something new than it is to keep working with the burden we have." And occasionally, those cycles get accelerated because Magento says, "Hey, all of you merchants on Magento 1, we're going to stop supporting Magento 1 as of a certain date, right?" And then they've got an extra incentive. They got to get off it if they want to be on a platform that's actually served by the company. Or Oracle says, "We're no longer selling ATG." It doesn't mean merchants have to get off them. It's a lot of work. And there's also all of those that are on custom coated platforms, which most of the companies on custom coated platforms wish they weren't, right, which -- and they make those moves. I would argue that the only way to be safe and somewhat future-proof is to be on a market-leading multi-tenant SaaS platform that's doing all the types of innovations that you need around omnichannel integrations and geographic expansion, B2B and B2C. And at most, there are 3 of those that are safe choices, us, Shopify and Salesforce. Salesforce, of course, comes with a far higher price tag and a much older and more sort of archaic version of SaaS technology. And if you're on anything else, which most of the world's merchants are, I think most of them inevitably are going to replatform because those other platforms are -- can't keep up, especially if it's on-premise because now it doesn't even matter what the platform's doing. You're stuck on your own software once you buy on-premise. And even if the software from new gets upgraded, that's not the version you're on.

Yes, Tom. The only thing I'd add to that is, I mean, based on the openness and flexibility of our platform and our modern stack, our merchants can migrate and launch on us faster than any other platform. I think average implementation launch times at less than 2 months. Skullcandy had 4 sites, one main site, 3 other sites. They launched all of them on BigCommerce in roughly 3 months. They wanted to expand geographically around the world. It was going to take them 6 to 9 months to spin up a site in a different geography on Salesforce. They do that on BigCommerce in 3 weeks. If you look at their site, all the geos that they're in, they spun those up on us in 3 weeks. HMD Global, largest distributor of Nokia headphones, believe it or not, there's a ton of Nokia phones still out there. They're selling a bunch of them. They launched on BigCommerce in 10 weeks with a native integration to SAP as their ERP system. And then they launched in 14 other countries in less than 3 months. Just to show you the pace in which merchants can migrate over to us and then grow their digital footprint faster and farther based on our platform.

You're telling me my dream of getting my old Nokia flip phone is alive and well?

Yes.

Outstanding. All right. All right. I want to dive in on the partner services revenue stream. So it wasn't that long ago in software, let's call it 5, 6 years ago, that the term payments was kind of a dirty word. And now the question you undoubtedly get every day is, "Hey, why don't I get more of this?" So there's the X factor component of PSR that I think investors have really leaned into. It's about 30% of your revenue stream. Help everyone on this call understand a little bit more about what partner and services revenue and payments means to BigCommerce today? And where can you take that?

Yes. I mean, if you think about BigCommerce as the hub and you think about all the ancillary services or verticals that we use a best-of-breed partner approach to solve, whether it's payments, shipping fulfillment, e-mail marketing, MarTech, tax accounting, ERP, you name it. Those different systems and services, we have lined up who we believe are the very best and the most innovative and the experts around those categories because actually, that's what it takes to meet the needs of larger enterprise merchants. You can't have an out-of-the-box solution that meets those needs. And so how that model evolves over time is that a lot of them give us rev share. When they monetize one of our merchants, we get revenue share. When you split apart kind of that share of wallet across those different services, payments is the one that's the most mature for us. We've had long-standing payment relationships. We get rev share for most of the GMV flowing through our platform from Payments. Roughly 2/3 of our PSR is still Payments-related. We recognize that revenue on a net basis, not a gross basis, which is really helping us really ramp up our gross margins last quarter. We posted 81% gross margins because we're only recognizing our revenue on a net basis. Now if you think about where we go from here, you can think about all those other services as ways for us to increase our PSR revenue. It's still -- when are we starting to see it? We're starting to see it in omnichannel. We're starting to see it in shipping in fulfillment. There will be a time when -- if today, 70% or so is Payments, I have high confidence that we're being gifted 50-50. One thing we're also working on is we want an Apple App Store-like experience for our App Marketplace. We want to make it really easy for our merchants to attach to all the great apps in our marketplace. We want to control that flow. We want to make it super seamless. We want to collect the money, keep our rev share, remit back their rev share. So there are things that we're doing to make sure that as those other revenue streams evolve, we're going to make it automated. We're going to make it seamless. And so there's plenty of opportunities to increase PSR revenue from here.

So R.A., can you just go one level deeper because I think to the uninitiated, it sounds like, hey, payments, great. You take your little cut, you open it up to partners, the transaction goes through and away you go. And sort of understanding this world a little bit better in following BigCommerce and following some of your peers, it's quite obvious that the level of functionality, the level and responsibility you take on in that transaction can really change across time and it can impact the take rate. What else can you do? How much deeper can you go to up that take rate? I know you've got the question, should you just buy a payments company? Can you partner with more people? Can you take on more responsibility? Take us through that journey of -- you probably don't want to get into the take rate itself, but how you up that take rate over time? And what additional items you can take on as part of that responsibility?

Brent, you want to take it or you want me to...

Yes. I'm going to jump in here for a sec since I was 8 years at PayPal and ran all sorts of what they do around the world product, Europe strategy. The really simple reality is that payments is not one-size-fits-all. What PayPal and Braintree, Braintree as a gateway, PayPal as a wallet, do super well is not the same as what Adyen does super well. It's not the same as what Stripe does super well or Digital River or Chase or Barclaycard or any of our other partners, big, medium and small around the world. There's a lot of nuance in the pricing, the payments capabilities, the fraud capabilities, the micro functionality the different merchants need. And the notion that an e-comm platform is doing what's in its merchant's best interest by having a proprietary offering created by them or white-labeled from someone else is hogwash. I mean, just take the simplest example of Shopify Payments. And you can look it up at the top of your screen, pricing for Shopify Payments and see that it's a lot more expensive for medium and large merchants than what our top partners like PayPal are offering out of the box, right? And we negotiate better pricing with PayPal. The others follow and compete with them. But you don't have to pick PayPal. You can pick Adyen. You can't do Adyen. You can't do the best version of checkout.com, and actually revealing all of the best capabilities of each of these players takes a fair amount of investment. We form strategic partnerships to get these companies to invest in revealing their best capabilities, their best integration in the world through our platform and which most merchants can't get these same integrations on any other platform. You won't get them at all on Shopify because Shopify competes with these companies. So Payments is really important. It's something that we are the best, I think, in the world at partnering with the best players, small, medium and large, revealing their best capabilities, getting them to bring competitive advantage to merchants. And Shopify is trying to shovel one-size-fits-all down its customers' throats. Now it's a great way for them to make a ton of money. And if I were starting all over again from them, would I copy what they're doing? Yes. But if they're going to do it that way, we're going to do it the open way. And our customers, I guarantee you, get choice and get huge competitive advantage and economic advantage from what we're doing in payments relative to what they're doing. We also get a lot of merchant flow. We win a lot of deals because merchants get the payments that are best suited for their business with us and they can't get it on those other platforms. And so a final thing I will say is R.A. is right. The net economics to us because you asked the question, "Like, how far can you push it?" Well, the bigger we get, over time, we keep renegotiating as our volumes and our merchant base gets bigger with each partner, partners have to compete against each other. There's only so much margin in Payments, which is the difference between what the payment providers can charge and their interchange or other cost of goods sold fees and that spread between the 2, the gross margin is, in essence, what can be split between us. And let's just say that the amount we get in rev share is a very healthy percentage of the net but can keep moving up, but there's a limit to how far it can move up. But it's all profit for us have to unfold on payment rev share.

R.A., we'll just bring it home to the numbers on that. I mean, this is a business that grew -- PSR grew 65% for you last year, grew 52% in the first quarter. I think the way you've laid out guidance for the next quarter is saying, if your subscription growth rate kind of holds the same rates that it grew at in Q1, it would sort of imply a PSR growth rate that goes down into the mid-teens if we just take the high end of your guidance. That's a big discrepancy relative to 50%, 60% growth that we've seen. How much of that is just being sort of conservative and cautious against that what you don't know, which the Street appreciates? And how much of that is, hey, look, just a reminder, now you're lapping the toughest comps. We had some elements of PSR that were a little bit fixed and higher that aren't going to repeat. Can you just separate how much is conservatism and caution versus the reality of the world changing a little bit?

Yes. I mean, we get great visibility on subscriptions. We see great underlying trends around gross new upgrades, our retention, it only keeps getting better. The retention profiles of our merchants are stronger today than ever. But when we think about PSR and the GMV impact of PSR, to your point, Tom, I mean, last year was a great year for us in terms of GMV and the amount of transactions. We feel great around same-store sales and the success our merchants are seeing. But if I'm having to provide guidance and forecast around GMV, given the fact that the world is opening back up, and there is some kind of TBD aspects to what impact that's going to have in terms of online transactions, then yes, we got to be careful. We don't want to get ahead of our skis, and we'll also recognize we're 3 quarters in of being a public company. I'm going to provide good visibility in subscriptions, and we all need to be careful around being too aggressive in forecasting GMV, but we'll be pleasantly surprised if the levels that we're seeing continue. I mean, it's been obviously a big benefit to us as an e-commerce platform and e-commerce in general. I think there's definitely some long-lasting changes. There's definitely been some trends that have been pulled in. I think consumer behavior has definitely changed. I think my 81-year-old dad buying stuff online, I never thought I'd see that, and I'm sure that applies to a lot of folks on this call. And I think even buy online, pick up in store, buy online curbside consumer, that's all going to keep going. I mean, no matter if the world opens or not, I think the convenience that technology is providing and what consumers now trust and can expect with that online buying experience, I mean, we just couldn't be more excited about where the future holds for us. But for this year, yes, we just got to be careful about lapping some great, great growth numbers from last year.

The number of Amazon boxes showing up on my doorstep every day suggests that horse is not going back into the barn, so I'll agree with you on that one. Hey Brent, so we're kind of running low on time, but I did want to touch one last topic here, another growth lever that's important. You touched earlier that international is growing -- was growing 80% last year. I think it grew 65% in the first quarter. Where are you in that international journey? And R.A., I'll ask you to kind of bring it home, which is to say, how further -- how much further do you need to step on the accelerator with respect to spending to get there?

International growth is a giant component of our story for the next 10 years. My aspiration is to make BigCommerce fully competitive in all of the major countries and regions around the world. There's absolutely nothing stopping us from doing that. The local platforms in countries around the world are not even remotely competitive in terms of functionality and performance to us. We just have to localize the product first. The big emphasis for calendar year 2021 is Continental Europe, where we now are in local languages, France, Italy, Spain, Netherlands, German-speaking countries. We have our first sales reps in Continental Europe in 3 different countries, and this is all building off a business. It's absolutely booming out of the U.K. and in Northern Europe. So we're hugely successful right now out of the U.K., and we're looking to replicate that in Continental Europe. But we're also laying all the foundations for expansion into the Middle East and in Africa and Latin America and Asia. Over time, it's product-led first with localizations, languages and payment and other partners. And then in time, we'll see if self-serve and agency partners can help businesses pick up traction well in advance of when we ever have to spend incremental dollars for sales and marketing in various countries. And in some cases, we'll follow the opportunities and a lot of others we'll be strategic about it and invest ahead of the curve. This is one of these things where, in fact, we do invest ahead of the curve and the initial ROI is maybe negative, but if we get any kind of the same results that we have in Australia and New Zealand or out of the U.K. in these other markets, then wow, this horse is going to ride really fast for a long time.

Yes. Tom, and when I think about the 5 growth drivers for this business for the next decade, right, it's international expansion, B2B, headless omnichannel, and we're going to disrupt that large end of enterprise. We execute across those 5 things really well. Everyone is going to be really happy. But I'd say top of the list is international. When we have a big beat like we did in Q1 to EBITDA, we look for ways to pull in and accelerate our international expansion plans. As investors on this call, everyone should know, we've got a great framework around this. We've got -- we're very disciplined around this and we know how to do it. You're seeing it in our team out of Sydney covering APAC. You're seeing it out of our team in London covering really just Northern Europe right now. We're going to expand across Continental Europe. We have a test and learn framework. We've got a go-to-market framework And we just -- yes, we're going to pedal to the metal. I'd say all gas, no brakes on international expansion for a long time.

Yes, there's nothing I'd love more. I was an international relations major in college. I've lived in 4 European countries. I ran PayPal Europe and turned it into the business it is today. I've done this global expansion at PayPal. I did this at HomeAway. We're early innings here at BigCommerce. But if anybody questions whether we can do it well, just look at the EMEA number, which is all U.K. Northern Europe and imagine great. Now can you replicate that in the other regions around the world? That's our goal and aspiration over the next 10 years.

All of your investors on this call look forward to meeting up at the BigCommerce User Conference International in Sydney, Australia, when the world opens back up. We'll meet there. Gentlemen, fantastic conversation. Thank you for joining us today. I really appreciate your time. Brent, R.A., Daniel, thanks so much. It was great.

Thanks, Tom.

Thanks, Tom. See you, everyone.