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

Okay. Good morning, everyone, and welcome. I'm Mark Murphy, software analyst with JPMorgan. And it is a great pleasure to be here with Robert Alvarez, CFO of BigCommerce RA. First off, thank you so much for joining us.

Yes. Thanks for having me. Appreciate it.

Yes, pleasure is all mine. Welcome to the conference. Wondering if you could maybe spend a moment or 2 just briefly introducing yourself and the BigCommerce for the benefit of anyone who might not be familiar.

Sure. BigCommerce is an e-commerce platform -- gosh, it's launched in 2009. I joined in 2011. So going on 12 years, man, it's been a.

Time flies.

Yes. But over the last 7 years, we really focused on kind of the mid-market enterprise segments where we really took the product upmarket. We've got -- if you think about the e-commerce landscape as kind of a pit, the bigger, the more complicated the merchant, the less fragmented the market is. I went through a pretty long process, or we opened up the product. We made it composable. We built out great APIs. We built out great best-of-breed integrations and the merchant we serve best today are merchants that are fairly complicated, both B2C, B2B. BigCommerce does really well is when merchants need flexibility, customization, integrations and run pretty nicely since. Today, about 72% of our revenue is tied to enterprise accounts. It's by far the fastest-growing part of our business. It's been growing pretty consistently over the last 7 years. And as we kind of think where the market is going, it's funny to think about e-commerce is still only 20% of total sale. Enterprise e-commerce in the beginning was licensed software. You remember that. And then there was the first round of SaaS enterprise software. We feel like we're the kind of the next wave where this wave, we feel will be open, will be composable, will be best of breed. So enterprise merchants aren't subject to a full stack built by one company. Instead, they get to take advantage of all the technologies that the entire ecosystem can offer them.

That's a great overview. Perhaps we can spend a moment just double clicking into some of those points on the evolution of e-commerce. You mentioned the shift from SMB to enterprise. You mentioned ahead of this commerce, perhaps some people in the audience aren't familiar with that term. We could go into that. You've also been expanding partnerships. You've been growing internationally. Can you maybe double-click on some of those items and help us just connect the dots? And maybe help us understand how that underlying strategy is flowing through into the business model as well.

Sure. Yes. Years ago, we just learned that merchants really wanted to customize certain parts of their platform and didn't care so much about others. And it started with what we called headless commerce back then, which was a well-known term, but it's essentially splitting apart the front end of your platform with the back end. There's a lot of cool technologies today to make that front-end user experience very unique. I mean the last thing you want as a merchant is for your site and your -- for your site to look like everybody else's, you want it to be unique, just like an off-line shopping experience. We've taken that even further and that not only can you split up your front and the back end, but pretty much every component of your e-commerce platform you can customize, you can integrate with best-of-breed and that's why we call it composable commerce. When I think about kind of just the last 5 years, we went public 3 years ago. We went public really with the premise of, look, we want to be the leading SaaS platform in the enterprise space. It wasn't as clear 5 years ago as it is today. As we kind of think about our path forward, it really is around that second wave of merchants who maybe implemented a legacy platform 5, 7 years ago, maybe are tired of running their e-commerce offering on licensed software, it's hard. It's complicated. When you're running your own e-commerce platform, you've got a lot of developers, a lot of architecture. We feel like they can benefit from our SaaS model, but also get the level of customization that they need for the parts of the platform that matter the most to them. And they're able to sell them faster, they're able to drive more traffic obviously grow top line, but they're also able to expand further faster. We have merchants that in the past, they wanted to launch into a new country. maybe take them 9 to 12 months on a legacy platform, they were doing that on BigCommerce in 2 to 3 weeks. So speed to market, time launch, driving more sales, I mean, that's the promise.

So you have some great logos. What happens and what is going down in these selling situations when you win a piece of business might be beneath or might be something like Skullcandy or Camelback is one of them. When they end up selecting BigCommerce over some of the others because that would include anyone from Shopify, it could be Adobe with Adobe Magento, could be Salesforce with Demandware. Can you maybe walk us through some of that and what is it to get some of that business over the finish line?

Yes, it's definitely not a one-size-fits-all market. And it's important to understand, we go to market with our partners. So we work with agency partners, system integrators. These folks work on a lot of different platforms. So they kind of understand a use case to understand an RFP and they understand which platform is going to be best suited for the needs of that merchant. About half of our leads are coming from a combination of our agency partners or our tech partners. The difference is that agencies will help you implement your e-commerce platform. I mentioned earlier our best-of-breed approach with all of our technology solution partners, so think payments, shipping, fulfillment, tax, ERP, all of those solution providers not only make our platform more robust, but oftentimes refer merchants to us. When we compete against Magento, which was the primary -- or the first kind of leader in the mid-market in enterprise segment, it's because they're on-premise license software. They're not multi-tenant SaaS. When we compete against Salesforce and Demandware, Demandware is a stack and it's written on a pretty old code base. It's not considered I wouldn't consider it modern with modern code languages and robust APIs. And so we went against them on speed, flexibility, customization and TCL. We oftentimes can save merchants from those legacy platforms, a lot of money because it's not just the cost of the software. It's the cost of the developers and the infrastructure oftentimes. If you're a merchant running on an older platform, you may need 10 to 12 engineers. We're on BigCommerce, it's to -- just to give you a sense of the difference.

Yes. Those other costs probably outweigh the software license by credit a bit, the subscription. So in addition, RA, to some of these differentiators that you just walked us through, you might have touched on a couple of these, but we would hear in our diligence, right? We would hear about BigCommerce, we would hear about the openness. We would hear about it being API-based. Sometimes we would hear about the actual speed of the website that it was best-in-class website speed and performance. The merchants would feel that they could create these very upscale websites, they would use that word as well. You took us through the concept of headless. Is this -- is your combination of differentiated capabilities being increasingly prioritized when you look at the larger enterprises that you're out there addressing? In other words, do you feel like these e-commerce preferences are shifting kind of favorably in your direction to drive that enterprise piece?

Especially the enterprise space, right? I think that if you're in a large merchant selling worldwide globally, you've got a lot of products, you have a ton of products, complex product catalog, all of those things that I mentioned in terms of our value prop resonate a lot. There's a segment of the market as well that's B2B. If you think about e-commerce platform spend for the next 5 years, a good chunk of that is B2B or hybrid B2B, B2C. In the past, you would have 2 different platforms, one running your B2C, one running your B2B. BigCommerce can handle both on one platform. And so we get a lot of merchants, especially large merchants who are on old homegrown custom in-house solutions that want to look and feel like more like B2C. They want to do business like B2C. They want to be modern like B2C. And this wave of B2B is -- we're seeing it in our numbers, we're seeing it in our bookings and we're really excited because if you think about what we offer, flexibility, composability, best-of-breed, fits really nicely into the B2B merchant.

If you take all those ingredients and you try to roll that forward and look at a very longer-term vision of the future state of BigCommerce, you have this -- you have the power, you have the speed, you have the flexibility built into the product. On the one hand, so you are kind of absorbing -- the whole market is absorbing this period where there's this post-pandemic type of a low type of a headwind, being toward profitability very rapidly. Your enterprise mix is increasing, and that's a favorable trend. When we get to a better economy, we don't know when that is, when we get to a better economy, what type of a growth rate and what type of margin profile would you see as achievable for BigCommerce.

Yes. I should have pointed out; it wasn't until last year where we felt like we were a full-featured enterprise. We delivered some functionality that took us a long time to build. It was really -- wasn't an easy process, but it was multi-store, multi-location inventory, which means if you're a merchant, big brand and you've got sub-brands and you want to manage all of those brands on one control panel, you can now do that on BigCommerce. That enterprise table takes -- we were not getting all the opportunities we wanted because we didn't have that functionality. So last year was the year where we offered that. We delivered that. We got our agencies, and everyone lined up on selling that. And -- but when it came towards the end of the year, when we decided, you know what, we're going to pull in our profitability time line, we're going to focus on our best customers, we're going to focus on our best segments and for us, it was quite easy to see what that would be. Our enterprise accounts carry an LTV to CAC of 8:1 and our non-enterprise accounts had a 2:1 LTV-CAC. Now that the product was enterprise ready, we wanted to make sure that our go-to-market resources were fully dedicated and aligned around signing up more enterprise accounts. And we signed up a lot of enterprise accounts to mid-market, which is $1 million to $50 million of annualized GMV and large enterprises north of $50 million. Up until this point, the majority of our enterprise accounts are mid-market. Now that the product is full-featured enterprise, we want to start to win more and more large enterprise business. As we think about what that looks like going forward, it's been a high-growth part of our business for a long time. We think it's going to continue to be a pretty solid growth segment of the business. As that mix shifts even further to enterprise going to 80% to 90%, I suspect our gross margins will be 80%. I suspect that as we scale the business, there's no reason we won't get to operating at 20% or higher.

Okay. So a very nice gross margin, 20% plus operating margin. Do you -- we're taking a stand but, I mean, I guess the top line growth rate will converge on whatever enterprise is growing, right?

And hopefully showing we're continuing to take share.

Yes. Is there any quick 1 or 2 sentences on just what you've seen so far because you mentioned towards last year, launching multi-store and multi-inventory location that we think of it as multi-warehouse, but we thought of those as kind of breakthroughs for the company, right? I think even going back several years, we've been anticipating and waiting for that. Is there anything to comment on just in terms of response?

Yes. Feedback has been great. We're definitely -- we were hoping to get those RFPs and those at bats. We're getting those. It's just taking longer to close them. I mean if you think about, we have merchants, we have retail plans for small businesses, we have mid-market accounts and we've got enterprise accounts. Mid-market accounts in terms of sales cycles have been pretty consistent, where we see elongation is on that larger enterprise segment. We're not losing them. They're just taking a longer time to close. There's a handful of deals that I thought we were going to close in Q1, for sure. And we're still trying to close them. And I suspect that who knows, hopefully, it gets better. But we haven't seen anything get worse over the last 2 or 3 months.

Good, good, good. These difficulties with sales cycles are not unique, right? That is evasive across the entire software industry right now. Let's go to a favorite topic, which is, of course, artificial intelligence. We've been huge in the potential impact of generative AI. We've hosted a whole series of investor calls on the topic. When we step back and we think about BigCommerce because of the volume, the volume you're dealing with -- of the value transactions and then the number of product SKUs that all these -- all your merchants would have and everything that goes into the catalogs, it can be so large. Are there scenarios you can think that you could kind of dream up where you'd say, generative AI would be applying to us as well as a business and something where we could benefit?

For sure. I mean, internally, I think it's going to touch every group of BigCommerce. We're challenging all of our teams to figure out ways to leverage it monthly, quarterly. We're trying to prioritize all the great ways we can get more efficient using that technology. It's a super exciting time, not just for the product side, but for just the business side. I think it's just going to be super impactful across our business. In terms of the product, absolutely. When you think about listing, when you think about product catalog, when you think about user experiences, I think it's going to be fascinating to see how fast the innovation comes. We're working with partners who obviously focused on this. We're very close with Google as an example, working with them and thinking through ways we can leverage all the great things that they're building. That open strategy that we have allows us to get really close to partners. And we're going to continue to get close to partners that can bring all those advancements to our merchants.

Is there -- are there discrete functionalities you can build like next best offer, right, showing the most optimal set of products to give customers things that are happening in real time on the website, like creating kind of chat bots for the -- when you're shopping on a merchant site, right, to have better, quicker, faster answers. Is all that in play for BigCommerce?

Parts of the -- that experience. And I think that experience is going to change rapidly in terms of the outcome of all the different advancements there. Yes, it's going to be fun.

Have you thought about it in terms of what you can do internally at BigCommerce? For instance, in other words, not what you're building into the product that gets exposed to customers, but just your own internal operations using ChatGPT being -- some of the Google large language models? But the -- you could omit certain tasks, maybe there's processes that you could be streamlined, may even thinking across your engineering teams, your development teams, your finance teams, procurement using it some companies are experimenting with developing marketing copy, developing blogs. Are those all BigCommerce?

Yes, I was mentioning the internal versus the product internal, Obviously, it's going to touch the selling motion, the go-to-market motion, going to touch everyone of my departments in G&A. When we think about marketing content is the thing that takes a long time to produce. We can produce a lot more content a lot faster. But the -- I can't think of a department at BigCommerce that won't be impacted, and we're not asking for them to leverage this.

Okay. Wonderful. Maybe we can shift gears for a moment RA and think through the broader competitive landscape. Just touching on a few of these sort of quickly. Shopify indicated some plans to move up market itself earlier this year. I think they might have announced it back in January, February time frame. What have you experienced in the following months? And I'm wondering if you found to any extent that it kind of validates your own strategy or somehow is helping you as a tail end.

Yes. I mean we've seen Shopify Plus in the market even before this year. Components that they talked a lot about, we have not seen a lot of implementations on that quite yet. Whether or not it validated what we're doing to us, we've been composable and headless for a long time. We believed in the -- been part of the MacAlliance, Brent's on the Board of the MacAlliance. This openness approach is one that we think is the future of enterprise e-commerce. So not surprising that they would try to split out some components around that. But obviously, Shopify is an amazing company. We've got competitors that we can compete with. But it goes back to what I said earlier, I don't think it's a size fits all. And I think that the more flexible we are, the more open we are, the more best of breed we can be I think it's going to position the company to continue to grow for a long time. And I think this wave of commerce is going to be much more weighted to SaaS. I think that the Chetoon-prem license is probably behind us. And this future wave is definitely going to be SaaS.

Do you have our encounter the e-commerce products that are out there from some of the website builder platforms. And I'm thinking of platforms like Wix has e-commerce. There's a Square spaces square space commerce that.

It goes back to that pyramid; I was talking about. If you're a smaller merchant, it's -- there's a lot of different platforms that can offer kind of basic e-commerce functionality. So we tend to focus, obviously, further upmarket, but we don't typically see them. We do see a lot of the legacy kind of version ones, platforms out of the web spheres, the ATGs, the -- if you're thinking B2B maybe Hybris is out there. Those are the platforms that we're trying to move merchants away from.