Chit Chat Stocks - BigCommerce (Ticker: BIGC) Not So Deep Dive

Episode Date: December 27, 2022

BigCommerce Holdings (Ticker: BIGC) operates a software-as-a-service platform for small businesses, mid-markets, and large enterprises. The company was founded in Sydney, Australia in 2009. At the end of the month, we will publish an Arch Capital episode that will cover the company: Wix. Listen closely as Brett and Ryan go through the history, financials, and future prospects of BigCommerce. Enjoy the show! ****************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ****************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (4:08) Industry | (14:11) Management & Ownership | (16:50) Earnings | (23:54) Balance Sheet | (29:48) Valuation | (32:06) Our Analysis | (33:30) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chit Chat Money. My name is Brett Schaefer, and I'm here with Ryan Henderson. As always, we are finishing up

our eCommerce Software Month, Website Software Month with BigCommerce, a competitor to Shopify. I think a lot of people have heard of it because it was a hot IPO in 2020, but since then, it is down 90%. We're going to investigate why, how the business looks. And I can tell you why it's down. It's because it's very, very unprofitable, but that's a little bit of a spoiler for the later discussion. Other shows that we've done for the eCommerce software and website software month are MercadoLibre, Squarespace, GoDaddy, and then we're going to finish things up with Wix.com, a company that we own in the Arch Capital Limited Partnership. We're going to do one of those Why We Own episodes and go through more of a bold pitch,

but also go through the risk and some of the standard stuff as well. Housekeeping items before we kick things off. One, subscribe to the newsletter. It's free, and it's just associated with this podcast. And with each Not So Deep Dive episode, you're going to get their show notes, charts and metrics, and anything else important for further reading that we found, say the Investor Day presentation for them, some good reviews for their products. All that good stuff is going to be free in the newsletter delivered to your inbox. If you sign up, it's perfect to have this associated with each episode. Second thing, give us a review on Spotify or Apple Podcasts if you enjoy the show.

The podcast is free. So the best way to support us- Everything's free. Yeah, the podcast is free. Everything is free with the show now. The best way to support us besides listening, if you enjoy the show, is to give us a good review on either Apple or Spotify. All right, let's get into this, Ryan. Why don't you talk about our presenting sponsor for the month of December, and that is 7investing, who just released a comprehensive year in review. Why don't you talk about the free trial they're doing as well? Yeah, the year in review is cool. Basically, for anyone that doesn't know what it is, it's all their recommendations today. So some of them are no longer active for context. They recommend stuff. And then if they think it's not worthy of a recommendation anymore, they'll give you a sell recommendation kind of thing on it. So all their active recommendations, they went in, and even all their old recommendations, they went in and said, what's changed? What's happened? What's our updated thesis? So it was literally, and it was like three paragraphs on each one. So it's like 200 plus companies of everything we've ever recommended in 7investing, our updated thesis, whether or not we still believe in it, whether we think it's a strong buy, wherever it ranks. Um, and so they just went through, went through the entire seven investing universe of companies and kind of gave one comprehensive overview. And then it's free to go look at, um, if you use our code money for a week, so you get

a free week trial using our code money. And then that, that trial or that money code still carries over. So you get your a hundred dollars off or $99 off, um, on the annual, if you decide to keep going with it. So really recommend checking it out. it's a perfect time to do it. I mean, it is free right now. And I think it's at least worth checking out the 7investing universe and seeing if any stocks kind of pique your interest. All right, let's move on to BigCommerce. Ryan, this is a Shopify competitor,

but a little bit different. So why don't you tell everyone what they do? It is really sort of, it has a lot of similarities to Shopify. It's a, in one And since it's a software as a service website building and hosting platform, I know that sounds like everything we've talked about this month. But similar to other CMS businesses we've looked at, anyone can go to BigCommerce and instantly set up a website and begin selling online. I checked out a couple of tutorials. It's very similar. I think in terms of the website design and building process, it's fairly similar to the Wix and the Squarespace as well as Shopify, where you say your name, say how much you're doing in revenue, so they have a grasp on your size. And then you insert pictures of the different kinds of things you want to sell, and they'll

give you sort of a template built on a lot of the input or a lot of the data that you input, and then you can kind of adjust it how you want. And then BigCommerce is a little more catered to bigger companies, so enterprises, and I'll talk about some of the functionality that's involved in that. But this is really, this isn't for, well, it has a lot of use cases, but it's really for companies that are trying to sell online. And it's very similar to Shopify in that way. Yes, Brett. One thing to add, and this is possibly more of what they market to investors versus how different they are.

But they talk about how instead of Shopify, who has a plug and play solution for small businesses where you don't have much customization, and you may be about to hit on this, Ryan. But they offer tons of customization and they try to not compete with anyone that might be doing payments. So again, they don't do their own payment system because they want to offer a robust solution for checkout and all that stuff to any of the enterprise customers they have who might want more flexibility, who might have more IT professionals on hand who can customize stuff. They really want to be a place where you can, again, customize with, say, Amazon shipping, all that stuff, instead of Shopify, who they might talk about it a little bit too much, but they maybe force some of their own products onto the small business customers instead of giving them that flexibility. So that's how, as someone who's been behind in the brand value of Shopify, is clearly the number one player here. This is how they're trying to establish their own separate little niche. Yeah, and they pride themselves on that partner ecosystem. It's almost similar to WordPress. And it's almost like a blend of WordPress and Shopify, where they have that open source kind of model of a whole bunch of different partners that you can integrate onto your website. And a lot of those partners actually co-market and co-sell BigCommerce's solution. So because they have sort of that amicable relationship, if you're a, I'm trying to think of a good example, if you're a tech partner. It was Clover was one they talk about a lot. Clover.

Yeah. They'll kind of recommend you to BigCommerce's platform if you're trying to set up a website or establish one that way. Whereas, yeah, as you mentioned, Shopify is more of a closed ecosystem. But about 71% of, at least in the most recent corner, 71% of their annual recurring revenue comes from enterprise accounts. So BigCommerce really does kind of cater to those. It hasn't always been that way. That's kind of not how they started, but they've morphed into that sort of target demographic over the years. And in terms of leaning into the enterprise focus, BigCommerce offers a lot of solutions that are purpose-built to meet the needs of customers that are selling a lot.

So things like multi-language displays for companies who sell internationally, the extensive partner integrations that we talked about. They don't have a payments processor. They integrate really well with companies. I think they just added, they talked about Affirm on the last conference call. PayPal is a big partner for them. They added some cryptocurrency checkout solutions, if that's the route people want to go. But basically, they are trying to provide as many possible solutions and integrations as a customer could possibly need. So that's another one. They plug into a lot of other sales channels. So this is probably where it differentiates itself as well is they have really seamless plugins with Amazon and eBay and then like a point of sale system. So you kind of do the omni-channel thing.

A lot of other companies, I'm keeping Shopify in mind here, want it. And I know there are plugins, but I think they generally try to keep it closed ecosystem. Well, they force people to use their own payment stuff a lot of the time. And then you have that fee. And that's a huge moneymaker for Shopify. For BigCommerce, they've sacrificed maybe that payments revenue, but they're hopefully trying as best they can to have a better relationship with their enterprise customers who might complain if they have to pay 2%, 3% and have no flexibility. Right. Right. And then other, I mean, other things there are, if you want to go check it out,

just go to BigCommerce Enterprise, look up that, and then you'll see all the purpose-built solutions they have for enterprises. But 24-7 technical support is a big one as well. It's really the focus here, and I guess this is probably the big differentiator here, is it's that they are really, it's custom relationships. So big relationships with customers where they're long sales cycles. You have to maintain support for them. And it's not quite as much of a do-it-yourself process. It's a lot of outbound sales. So trying to get existing customers that are already selling online to migrate their online shop to a big commerce site. And they talk about that. A lot of it is migrations from existing sites.

Other things worth noting, enterprise customers are classified as any business with more than $50 million in annual online sales for reference. Some big commerce customers include Skullcandy, which is I think pretty much like audio headphones, stuff like that. SC Johnson, Ben & Jerry's. It's a really long list. I think Dippin' Dots is now a customer as well. Yeah. And anyone that's confused about Ben & Jerry's because of the online selling with ice cream, they do B2B sales as well. So Ben & Jerry's is looking for distribution across the globe for a lot of their stuff. They're focusing, again, compared to maybe some of the other providers out there for these enterprises that are looking for business-to-business transactions as well.

So that's probably why Ben & Jerry's uses them. Yeah. And I think 20% of their sales are business-to-business. So yeah, that's another, I guess, differentiator between them and the likes of a Shopify. Just in terms of revenue, BigCommerce has four pricing tiers. So they've got Standard, Plus, Pro, and then Enterprise. The Standard is $29.95 a month. Plus is basically $80 a month. And then Pro is $300 a month. That's very similar. And then Enterprise is basically custom contracts. The average revenue per enterprise contract, I think, was like $35,000. So those are the really, really big contracts. It's very similar pricing to Shopify. They don't charge anything on a per transaction basis. So really, you're paying for the website, the hosting, the functionality, the security as well. But they are not the facilitator. That is their partners, basically.

So that's just, it's pretty straightforward monetization method. They're purely pretty much, aside from referrals for partners where they get sort of commissions and kickbacks, it's a pure straightforward subscription business. In terms of history, BigCommerce was founded by two Australian gentlemen named Eddie Macalani and Mitchell Harper. They met in some online chat room in 2003. It was kind of apparently some chance meeting that they ended up getting to know each other. And then the two of them ended up starting an email marketing software business together called Interspire. The Interspire seemed to go run pretty successfully. And eventually they made a part of the company. They realized that building an e-commerce website was pretty difficult for non-technical business owners. And so they wanted to build a solution that was more just easy for business owners to get up and running. And so that was a part of Interspire. This eventually became big commerce. And in 2009, it was spun out and actually relocated from Sydney, Australia to

Austin, Texas. So that's kind of when they came into, I mean, they were doing business internationally, but that's when they refocused their headquarters to the US. Shortly after, they raised $15 million in venture funding. They used that money to invest heavily in sales staff. They have done, And I believe it was six, I believe they did six private funding rounds before they came public. Other things worth noting, 2015, the business began to kind of shift towards enterprise customers. They also, the founders kind of relinquished leadership and brought in a new CEO named Brett Helm, I believe, Belm, Brett Belm, Brent Belm. And he's still the CEO today.

And Brett will talk about that here in a second. but they came public in 2020, August of 2020, I believe. And since then, the stock is down 63% versus their initial listing price. But most shareholders did not get at the initial listing price. This was at the time when companies would IPO and they would double the day of. And so it was really hard to buy shares at that listing price. It's down almost 90%, I think, versus the price that shareholders were able to get it at. So it's been a rough run in the public markets, but it's fairly well capitalized.

And we'll talk about that in a little bit. But do you want to touch on the industry and landscape? Yeah, this one will be simple. It's similar to the companies we've looked at, but they outline and they love in their investor presentations looking at consultant reports and all that good stuff, which is fine. but maybe just a one instead of 10 for your investor presentations. It can get a little

boring, but they gave us some good numbers there. So the SaaS e-commerce market, which is just the SaaS, say the software companies, applications market like Shopify or BigCommerce or even Wix and Squarespace now, that market is expected to be $7.9 billion in 2025, up from $3.2 billion in 2020. And that is 20% annual growth. So there's a very strong tailwind for these sort of products that has started over the last, say, 10 years and should continue over the next 10 as well. There's still a ton of different companies that are transitioning off of these legacy solutions, which that leads into the competition where we have two different competitors. There's the competitors in SaaS, which are Shopify, Wix, and Squarespace.

Now, Wix and Squarespace would probably rarely overlap with a big commerce customer, especially the enterprise ones. They're really going for those small business customers that are already using their website building software. Shopify also will rarely compete with BigCommerce, but with their Shopify Plus, they're definitely overlapping with customers as well. That's just a smaller portion of Shopify's business. Now, if we're looking at the competitors in enterprise, there are a ton of legacy solutions that were more on-premise, non-SaaS, and that's Magento, which is owned by Adobe, Oracle, SAP, and then a big list of legacy software companies. I think a lot of people connect, or not a lot of people, a lot of companies would connect these solutions to their ERP software, very old and clunky stuff, which I think now the IRT markets themselves this way.

But it seems like big commerce can steal a lot of customers from these legacy clunky solutions as these enterprises are looking for something more flexible, more modern, and something that is just better as a software, as a service. Because the way they described how these on-premise solutions worked, it really sounded terrible for the IT people. And this is why they talk about that migration pipeline. A lot of those customers are already running on those legacy systems, and it's more just convincing them that it's worth the cost of switching. So that's really where a lot of their leads come from. Exactly. All right. Let me hit management and ownership.

I think this is an important one here because there's some concerning things I found in the proxy statement. First off, we had Brent Belm, who is the CEO, took over in 2015, as Ryan mentioned. He was basically made in a lab as, and I say this as sort of a compliment, as the prototypical mercenary CEO that comes over to take over a founder. He was Stanford business, or no, Stanford, I think, undergrad. And go look at his profile on their investor relations page and confirm this or on the proxy statement. He went to Harvard Business School, then seven years at McKinsey, then VP at PayPal, then I think president of HomeAway, which is Vrbo now. now he's the CEO of a publicly traded company, BigCommerce. So they write this in the textbook

of that. But yeah, that influences definitely the standard MBA stuff. I think you can see that across this company. If we look at their board of directors, they have a lot of VCs on the board, probably because they just became public. None of them take a salary, which I think is nice. And then the director compensation is negligible as a percentage of gross profit. it. So any of the investors, I forget the names, we have like GGV Capital and some others that I didn't have on the list here that are smaller that probably sold out their stakes. They actually don't take a salary, which is great. I haven't seen that very much. They also have 12 executive officers listed on their leadership page. I saw that as a bit of a concern because for a company

that's doing just a few hundred million in revenue and one that is struggling to generate a profit, when you look at their SG&A expenses as a percentage of gross profit, which we'll look at later when we probably check out the charts and stuff during the financials and what we like and don't like, I think the concern is there that they maybe have a little... Either they're being very smart in investing for the future as they become a much larger business and go after this pretty big addressable market, or they are just a little bit overemployed. If we look at total executive compensation. This also confirms my thesis, I guess, or the concern I had looking at this at first glance. They had $18.3 million in total executive compensation in 2021, or 10.7%

of gross profit. We kind of look at a 5% hurdle as something that is more reasonable. So doubling that is a bit of a concern. And I wrote down, I wonder why SG&A's expenses are not scaling, and that's because they're paying their executives a lot. If we look at executive compensation, you'll also never guess how it's structured. They have three different categories. And anyone that listens to All or Not So Deep Dives will know that this is on every single proxy statement. They have base salary, annual cash bonuses, and long-term equity awards. Their annual cash bonuses are based on revenue, annual recurring revenue, so basically just two revenue targets, and then adjusted EBITDA. The adjusted EBITDA is a concern because it incentivizes stock-based

compensation while pretending they have achieved profitability. And I think this is a funny part I saw and maybe also a concern that they're not focused on generating cash for shareholders is the hurdles for these bonuses were, I don't want to call them a joke, but a little bit discouraging. For example, the adjusted EBITDA margin hurdle, which again is already an adjusted EBITDA number was negative 13.7% to hit the bonus in 2021. So the thing that I find, I guess it's adjusted EBITDA, but the thing that I find sort of ironic about this is by giving themselves horrible hurdles, it makes it more, I would say it makes it more difficult to hit the hurdles next year, but since they can adjust

it out. It just makes it more unlikely that shareholders will ever touch the cash that they generate, if they ever do. Yeah. So it doesn't mean big commerce is not going to ever become profitable, but this is a concern where if I was looking at the company three, four years from now, I think this problem could still be there. One last note before we get to earnings is that their equity compensation has no performance metrics, which is not a big deal, I don't think, but they just moved to 70% RSUs and RSUs are not going to have that, um, stock price. You know, it's not, it's, you get the RSUs, no matter what the stock price is, you don't have to clear a stock price on those, you know, like how a stock option works for it to vest. And it's not a surprise they did that because the stock is in the gutter, but it is a bit scummy.

Yeah. Because at least they didn't readjust the old options, but yeah, you know, I would like basically the same. In this case, we sometimes complain about those long-term... There's never perfect compensation structures, but I would much rather have had one of those long-term ones where you have the different tranches of the price ones, the performance-based stock units or whatever they call them, instead of these pure RSUs where they can gift out the RSUs. They can hit, maybe adjust it even to profitability eventually, but they're still not generating true cash for shareholders, and share count goes way up. We don't need to harp on that forever, though. Let's move to earnings, Ryan. What did you find for BigCommerce? Am I thinking about that wrong, or is that not really scummy to transition your equity compensation from performance-based options to just give them out regardless of if it hits the price or not?

Well, they weren't performance-based before. It was 50-50 stock options and RSUs, and now it's 70-30. It's not that big of a deal because the stock options were the standard ones, but I think they're gifting out RSUs in case so people can still earn them. It's fine, but it still doesn't get you as... Maybe I'm not as concerned about it because I don't think the equity compensation plans in general align, and I'm using quotes here, air quotes, align the executive team with shareholders as much as people think.

So I'm not really concerned because it's all kind of just hogwash to me. Yeah, I mean, that's a horrible proxy. Yeah. I wouldn't say horrible, but littered with yellow flags because there was nothing here where I was like... The stock declined 90%

and they made out like bandits with 11% of the company's gross profit. That's true. Maybe that is a red flag. It borders on a red flag, but yeah, we'll see. I mean, it's hard to, I don't know, it's hard to kind of support excess compensation in a year like that, but there were definitely some yellow flags there. Let's talk earnings. Last 12 months, they've generated just under $300 million in revenue, and it was growing 37% year over year.

Their gross margin line is about 75%. however, they are unprofitable. They invest a ton in operating expenses. So minus or negative a hundred million in free cashflow for the last 12 months, which equates to about a negative 37% free cashflow margin. You can pick which profitability metric you want to use. They aren't profitable. You can get as lenient as you want to be. You could go adjust at EBITDA, which there's a lot to adjust and they're still not going to get there. They are investing heavily. Now they raised some money from the IPO, so they're able to do that. They also have some convertible notes, which we'll talk about.

So they have some cash to invest, but plain and simple, they are burning through a lot of cash. Most recent quarter though, the metric here to really pay attention to, in my opinion, is total ARR, so total annual recurring revenue, which is just extrapolating out your current quarter revenue for a year. That was $305.3 million growing 20% year over year. Our enterprise is growing much quicker, and that's partly because – well, it's almost all because they have started to allocate resources solely to the enterprise side. They're trying to find ways to save costs, and one way to do that is to stop going after small market customers, and there's a couple of reasons for that.

But basically, the lifetime value is shorter. There's much higher churn with those smaller customers, and so they're trying to focus on the enterprise. And so enterprise ARR grew 35%. The smaller or non-enterprise was dragging down the total ARR growth. They reported just over 5,000 enterprise customers this quarter, which is up 16% year over year. And then their average revenue per enterprise account was 38,000 or just under 39,000, which was also up 17% year over year. So if you look at it purely on the enterprise business, it's doing pretty well. They're growing revenue per enterprise account and they're growing enterprise accounts at a pretty healthy rate. Keep in mind, you're not going to get explosive growth on the

enterprise side because it's not like people are just coming to you like Shopify had during COVID or Zoom had during COVID. It's more going to be these, as I mentioned, long sales cycles. So you know what your pipeline looks like, and you know what customers are about to join. So it's probably going to be steady growth, but nothing too exciting, I should say. Operating margin for the quarter was negative 42%. I accidentally put positive. Don't want to get that wrong. Just in terms of spending, BigCommerce spends 156% of its gross profit on operating expenses.

Sales and marketing is the biggest line item for them by far. 63% of gross profit is spent on sales and marketing. I believe they have... I'm blanking on the number, but they have a lot of sales-related employees, general and administrative. They also have a lot of general and administrative employees, but they are taking steps to cut costs. If you read the conference call, basically the commentary is that 2022 was an investment year. I'm doing air quotes here because I swear every company that's unprofitable has said that. Um, then 20, they expect 2023 to be an operating leverage year. And by 2024, they think they will be able to hit breakeven adjusted EBITDA.

Actually that let, they just revised that, uh, a week ago to 2023. They laid off 15% of their employees, 13%. Uh, so they revised it to yeah, 2023. So they just did that a week ago. Um, that's a good step in the right direction as well. Frankly, they're going to have to lay off some people. if they want to get profitable quicker. All right.

Go ahead, Ryan. Never mind. I'll save it for later because it's kind of a part of my bare thesis. But just in terms of, do you have anything earnings related? You want me to share on the video some of the charts here?

We can look at how the executive, or not executive, the operating expenses. There's some good charts and there's some bad charts. So let me just share a quick, gosh, this always, It's annoying with that thing that pops up, but I think we have it here.

So if we look at their enterprise revenue per employee, and if we look at their enterprise ARR, annual recurring revenue, highly impressive. So in 2018, enterprise ARR was only $35 million, and now it's up to $216 million over the trailing 12 months. That's compounded at 63% a year. And that's come from the steady growth enterprise accounts and the steady growth enterprise revenue per enterprise account. I don't know why I said enterprise twice there, but the big concern is, let me find the chart. So you look at SG&A as a percentage of gross profit. It's hovered at around 100% every year since 2018. And you would just like to see, that's this chart here.

is just the big concern, I think, for both of us, where we're not seeing any leverage there whatsoever. And if I was interested in the company, that's one thing you'd really want to see, say, trend down to 50% over time, or probably would have to go lower because they're also spending money on R&D and they have, what, 75%? Well, it doesn't matter. 50% of gross profit. That's why I like to use gross profit instead of revenue. You need to see that trending a aggressively in the right direction over the next couple of years. And it's just a huge concern. It is probably the biggest disappointment. All right, I'll stop sharing the screen and we can move back to balance sheet, right? Yeah, pretty straightforward balance sheet.

They have just over $300 million in cash and short-term marketable securities. And then they have $337 million in long-term debt. That is all convertible notes, basically. So in 2021, One, BigCommerce issued $345 million worth of convertible senior notes. Those converts are due in 2026. The notes accrue interest at 0.25%, so really cheap. And they have an initial conversion price of $73. That's a 700% premium to today's price. So they raised it at an opportune time.

However- Pretty darn smart. Pretty darn good. the likelihood that these end up converting into stock is pretty low so they are going to have to pay that debt down and or refinance but yeah or refinance

but I mean frankly they are not they certainly are not generating enough cash now to to pay that down no and they would not be getting low cost debts it would be that's what I mean

yeah for sure on top of rates rising it And this is not that they've shown no ability to be regularly profitable. So whoever would be lending to them would be taking quite a risk. Yeah, for sure. Although the notes themselves are very smart and they have four years out. So it's not a big deal, I don't think, but it's something to watch out for. It could bite them in the butt.

I say the convertible notes are smart because they raise it. It's really a perfect time. However, if you're structural, and I'm not saying they are, but if you are structurally unprofitable, it's never a good time, right? I mean, if the market will give you free money and you can always refinance, I think it's smart. But the big question is the refinancing now. I guess there is.

I mean, a lot of the, they have taken a lot of that money and invested in short-term marketable securities. So they, they bought it pretty cheap and are probably earning interest at a fairly healthy rate. So I guess kudos to the finance team there. You want to talk valuation? Yeah, this one will be simple. The only two ones I'm going to use are enterprise value to gross profit and enterprise value to free cashflow. Although all of their profitability metrics are negative. So I don't know how important that free cashflow number is. you really are just going to have to look at margins over time and if they're trending in the right direction. Again, that SG&A as a percentage of gross profit is vital as there's

not really any CapEx here. So all the really capital investments, everything is going to be included in the R&D, really the operating expense line. But if we look at it, the market cap, since it's a bombed out stock, is down a lot and it's not very high. It's only $637 million. dollars. Enterprise value after a slightly positive net debt is $678 million. And if we look at EV to gross profit, which I think is the most important here, at least for looking at how expensive it might be versus the earnings they potentially could do, which is a long... Given there are really bad margins right now, we're a long ways away from that, but they do outline 20% adjusted operating income margins as their long-term goal.

Even to gross profit is only 3.3, which is actually below the market average. So if they continue growing and hit those margins, we'll talk about that. Things could look great, but the market is discounting that. They are entirely unprofitable right now. Even to free cash flow is negative 6.7, not too relevant. All right, let's move on to the second half of the show. Anecdotal evidence. I'm sure we haven't used it because we're not enterprises trying to go through here,

but I think the big question is if you're a business have you heard of this or have you heard of Shopify but Ryan what's your what's your thinking here yeah it's just the tutorials that I've watched in terms of interfacing with the product and it it seems fine

but the tutorials are going to be with non-enterprise so that's not even right so that's the stuff they're kind of just letting go to go away now yeah yeah Yeah. I mean, the migrations for an enterprise, I imagine, take a long time and it's probably a pretty handheld process. The thing I like about most CMS businesses, the SaaS CMS, so like the Wix, the Shopify's, you build the software and people come to you and they do the legwork in terms of building the shop and then they pay you for the hosting. It seems like with the big enterprise accounts, it's not just the customers doing the legwork.

Big commerce has to do a lot of the heavy lifting in terms of they got to go out there, they got to get them, they got to find them. They got to try to convince them to migrate over, probably show them what the website could look like if they converted. So maybe it's just a little more costly in that sense. But on the flip side, higher lifetime value. for sure. Going to have way higher way higher lifetime value with very low churn.

Yeah. The other just I guess anecdotal evidence I think it lacks maybe notoriety compared to Shopify. I think they realized that though

and that's why they gave up with that core SMB smaller seller that Shopify dominates. Because you don't need if you're selling as a If you have a direct sales team, I don't think you need the notoriety on, say, a survey that people are aware of your product. So yeah, I do think they pivoted because of that.

But at the same time, Shopify is bigger with enterprises. So it's maybe not as big of a part of their business, but its enterprise line item at Shopify Plus is bigger than BigCommerce's business. So it's not like enterprises just neglect Shopify. Yeah, I think the definitions might be different. What's Shopify's definition of an enterprise if BigCommerce included all of the, you know, if BigCommerce, and again, I guess, you know, Shopify is earning that revenue, but BigCommerce is trying to not do the payment stuff, which might be an earlier or quicker way to earn money from them. again you know i wonder what the definitions might be a little bit different but shopify is not they are there in enterprise uh yeah it's not like they're completely different products they are competing for customers yeah i mean what do you think anecdote like anything you saw i was

reading a comprehensive product review which i linked in the sources and further reading on the newsletter um customers say what the customer or what this person said about the product seems to be in sync with what management pitches its capabilities as. I think that's a good thing. But this is no... It's fine. That's kind of table stakes. The competitors

aren't talking out of their... Completely different of what they actually offer. Wix defines what they do properly. Squarespace defines what they do properly. Shopify does what they do properly. Although they talk about the open ecosystem a little bit more than they might actually have

because I didn't know about that payments lock-in. that big commerce has tried to differentiate themselves as but seems fine like i don't know if i was an enterprise you're not or you if you're on one of those legacy systems i could easily see if you had a salesperson come in from big commerce i could easily see myself saying all right we have some money this old system is awful and if we switch it could be It could be nice. I could definitely see myself switching. But again, we're not VPs of whatever

over at some enterprise that sells tires or something like that. Yeah, and the other thing is the other competitor that we didn't talk about is custom-built solutions. When you're targeting enterprises, a lot of these are... They build their own.

It's custom HTML. They're building the websites from scratch. Yeah, which... very few, I think, customers would benefit from that. I'm not saying you have to be very large, like a McDonald's maybe or that large of a company to really make it work. But let's move on.

I don't think we need to talk about anecdotal evidence all day. Let's talk about future growth opportunities. Ryan, what do you have for us? Yeah, you stole the big one that I was going to talk about. Got to get to the document first. Got to get to that first round. Yeah, it's on me. So I guess this is like the clear focus of management right now, which is shifting away from smaller accounts or non-enterprise and clearly investing and spending around attracting enterprise accounts.

They talked about this nonstop on the conference call. According to their investor day, the lifetime value to customer acquisition costs on enterprise accounts is eight to one versus two to one for non-enterprise. it kind of makes me think like why weren't you doing this to begin with because they even mentioned I think for Shopify it's probably a lot higher just because Shopify has the word of mouth for that non-enterprise

and BigCommerce was just in a really tough spot yeah yeah potentially I mean they were saying it like those self-serve customers were not cheap to get And so they're going to refocus a lot of those investments towards enterprise.

I mean, it's the right thing to do. It's going to hurt new bookings in the short term because these sales cycles take a long time and it's not going to have as many just new customers popping up. But they have to start generating cash eventually here. And this is probably the way to go, especially if they've kind of lost the market share and notoriety battle against Shopify. I guess that kind of touched on what I mentioned, which is the lifetime value, the customer acquisition cost is substantially higher when you're not the name brand in do-it-yourself content management system, software, SaaS, website builder. So for them, it's the right thing to do to go after enterprise accounts, but it's also the only thing they can do. Yeah, and it's also going to be more expensive in the short run. So you kind of have the two ideas and you're like, okay, are they structurally unprofitable or are they actually reinvesting for growth? If enterprise ARR continues to grow at a 62% rate, which again, it's not going to grow at 62%, but let's say it slows down to 30 to 40% a year.

if it continues to grow at that level, they would be right in saying that the lifetime value is that high and they are getting that net revenue retention over time with these existing enterprise accounts. And it requires a lot of upfront spend now, but they're going to continually get profitable each and every year. That would be the thesis, I think. And that's the big opportunity there because the growth on the enterprise ARR has been highly impressive. I think that was the most impressed, at least metric I saw that them give out. All right, let's move on to anything else. Sorry, I was on mute there. Yeah, I 100% agree. You want to talk about the Feedonomics acquisition? Yeah. So I think the Feedonomics one, it has some promise. This was a $145 million

deal done in 2021. Feedonomics allows merchants to add inventory to third-party marketplaces like Amazon, Google, and eBay. On the investor presentation, I have a chart that shows how it works because I think it'll be a little bit confusing and I'll share my screen and add that in here. We'll screen it. So if you look at it, you basically have, if you're a merchant, you have all these software programs that you're trying to work around and you have all this inventory that you're trying to get out to all the places that customers are looking at things. So you have Google, Amazon, eBay, Walmart, and now social media platforms. And it helps you...

When they talk about this feed AI stuff, whatever. But it really lets you easily distribute your inventory across all these different places. I don't know if it's at a click of a button, but without doing each one manually, I think that it could have a lot of value. And again, these marketplaces are only growing in their complexity. And the different ones, it seems like you have a TikTok that gets added onto there, you have a Snap, you have an Instagram, and it just gets more and more diversified in where you want to sell. So the value that feedonomics can offer an enterprise merchant seems extremely high. And if I was an enterprise,

This would possibly be something or the type of tool, if you bundled it with BigCommerce, that would bring me over to BigCommerce if they're trying to pitch me on a sales pitch compared to a Shopify Plus. All right. Let's go highlights and lowlights. I'll go first. The highlights for me, it does seem like they've carved out sort of a solid solution for certain types of enterprise customers. and I'd like that they had the like awareness to say like we're an enterprise business now that's what we're going after and they want 80 percent of their ARR to be enterprise customers that seems certainly achievable it seems like the direction they're heading and then obviously those

are much higher retention customers and it's you know it's difficult for them to get the customers in the door because they're enterprise and they they've been on those legacy systems for so long But once they're in there, it's also difficult to switch. So I like that. The other thing, and then I think this gets lost in a lot of the noise around the last year, but they still benefit from the overall shift and e-commerce tailwind. And there are still a lot of legacy retailers that are in the process of migrating their offering to a solution like BigCommerce. So I do think there's plenty of customers for them to continue going after. It's not like the market is completely saturated. Lowlights for me, though, and I didn't even put this one down here. But now that we talked about the proxy, the proxy is a big lowlight for me.

feels like they, 10% of gross profits a lot, especially given some of those incentives. Like if you ever see negative adjust, is that not like a huge red flag? Negative adjusted EBITDA as a goal? Yeah. To be fair, it was, the revenue was the bigger percentage of the target.

I think revenue was over 50% of that, the target thing of how they do this blended thing that every single compensation consultant makes them do. But yeah, it's still a big concern. And the fact that it's revenue and adjusted EBITDA are just not, those are not metrics that drive shareholder value. So you can get in this feedback loop

where they just issue a ton of stock-based compensation. If we look at the, I won't share the screen because it's just quick, but if we look at SBC as a percentage of revenue, if I can find that one, it is, yeah, it went from, well, pre-IPO, it was less,

But startups still issue a lot of SBC. It went from around 2% in 2018 to the trailing 12 months, we're approaching 15%, 15.15% of revenue. And they're going to adjust that out on the adjusted EBITDA and they'll be able to hit their targets. If they want to, they can just issue more stock and it's not actually providing shareholder value. So yes, big concern. But continue, Ryan. Yeah. The other thing for me is I find it tough. I think it's going to be difficult for them to get to profitability. On the third quarter conference call, and we already talked about this and it's been revised slightly, but the management said, we remain committed to hitting breakeven on an adjusted EBITDA basis in the second half of 2024 and 2023 will therefore be an operating leverage year. They're going to have to jump through some serious hoops to get even to just breakeven on adjusted EBITDA, which is not cashflow. So that to me, I mean, they're having to fire some people. We've seen that the 13% of the employee base has been laid off. And that kind of leads me to my next thing is that But with the, with the enterprise contracts, it is, it's a more like just intensive sales cycle. Like you, you are kind of holding their hand. As I mentioned, if you're, if you're laying off a lot of people, I think that would hurt the top line because it's, it's a very like you need, I don't know how much of them are sales staff, but you need, that's going to hurt the pipeline because you're doing so much outbound sales.

It's not like everyone's just coming to you and you're laying people off. I mean, that'd be directly margin accretive, but if it hurts the top line or at least new billings, that's kind of a double-edged sword there. I would think that if they tried to accelerate to profitability quicker, growth will slow quicker. Yeah. And we, I guess TBD, TBD,

we'll see if they can keep up that growth in 2023 and maybe they just had some wasted expenses. but yeah, it's entirely unknown right now. All right. My highlights is again, the transition to enterprise smart, that CAGR of 63% really stood out to me. And enterprises, like we talked about, have higher ARPUs, higher net revenue retention rates, and you can invest maybe at a break even or a loss with more confidence that the revenue is going to show up. They may have taken that too far, but we'll see. One thing we didn't note on, and we don't like to talk about this because every company tends to tout it, is the international expansion,

I think, gives them an easy opportunity to grow with their existing enterprise clients. I think they've been a bit late to the game. They're mainly just in the US for many, many years. And now they said over the next three to four years, they're going to expand into Latin America, Europe, and APAC, which is Asia Pacific. And they do have some, given that it's retail and stuff like that, they have some presence in China as well, which is a very important market for shipping and all that stuff. Many of their enterprise clients are likely clamoring to start selling in as many countries as possible with their multi-product solutions where you can have all this customization for languages, different websites for each markets. I think that can really

help if they grow internationally, that can help with any sort of moat that they're trying to build and separate themselves slowly but surely if it's possible from someone like Shopify for these core enterprise clients. It's going to be expensive to do this at first, right? But they should be able to drive solid returns on invested capital. Invested capital in this case means the employees. They showed a nice chart of the United Kingdom saying that they grew extremely quickly once they started investing internationally. I worry that they're a bit late to the game on this. Why don't you start this three, four years ago? But hey, it seems like there's a lot of potential there. low lights. We already talked about expenses. And yeah, we already talked about the proxy concerns

and the management not focusing on allocating dollars to focus on long-term growth in cashflow. So there's just concerns there and we don't need to harp on those again. Let's finish things off with the bull case and bear case. Bull case, what is yours, Ryan? A lot of numbers here, huh? I think that's frustrating. Yeah. So I'm going to put some numbers on it. But the thing that frustrates me is we talk about how much better it is to be with enterprise customers. The lifetime value to CAC is so much higher. But this is the one business, the one CMS business we've looked at that has the highest enterprise penetration as a percentage of their ARR, yet it's probably the furthest away from profitability. Well, I think they would argue their

unit economics are just as good, but it just takes a lot more upfront spending and they're a lot less mature. But that adds more risk because TBD of whether they actually have that operating leverage in them yeah yeah maybe i mean are they that much less mature i think so yeah they only made the transition what the enterprise revenue as a percentage of overall revenue was like 30 a couple years ago and now it's 70 and as they you know what enterprise revenue is eventually going to hit 90 given the way the dynamics of this business works if they hit there and they're not seeing any operating leverage over the next couple of years then yeah they were just misleading us and the business is way more structurally unprofitable. And you'd

probably be right in your concerns. All right. Let's put some numbers on it. BigCommerce is currently on a $305 million annual revenue run rate. Management said in their investor deck that they think they can reach 10% to 15% non-gap operating margins by 2026 and 20% plus long-term. I know. 15% SBC. That's going to be... Every business is a good business on management's projections. Yes. But let's just make some assumption just for purposes of putting numbers down. If we assume that they grow total customer count by 5%, I know that's pretty low, but

keep in mind what I said earlier. I think if they get to profitability, the quicker they get to profitability, I think the faster growth would slow because they wouldn't have as much employees to kind of serve all the, all the new customers coming in. So let's say the total customer count increased by 5%, average revenue per account increased by 5% and they convert 75% of that non-gap operating income to free cashflow, which yeah, it could maybe even be a hundred percent. It doesn't really matter.

I would do a hundred percent. Then big commerce would be generating around 40 to $50 million if you go a hundred percent, $50 million in free cash flow annually by 2026. At 20 times, you'd have basically 800 to a billion dollar market cap, 800 million to a billion. Today, the market cap is right around 700 million. You can kind of play with those numbers how you want, but I think that- Well, that seems very conservative on growth. do you think they'll get to

those margins though that's the bigger question yeah so I mean maybe it's conservative on

growth but then it's aggressive on profitability yeah all right let's say okay if it's

10% on customer growth 10% on average revenue per growth or per customer and then they get

a 15% free cash flow margins this will be a good investment yeah yeah but yeah

that's super aggressive yeah it's hard to know whether they it's hard it's hard to value because you look at that the enter the sales cycle on some of these there's gonna until they really really mature they're always going to be a little bit unprofitable but the the the hope is that they lock in these customers for many many years and perhaps a decade plus but like if you're managing these big customer accounts like you know you've got you've got a sales rep ahead of you you're you're meant to go generate leads, you're passing them on. And then they have like, you know, customer success management, you know,

there's all these people on the chain that are meant to help that customer become a big commerce customer. If you just lay off 13% or even more potentially we'll see of your staff, like doesn't that slow your, your customer account growth or at least lengthen the sales cycles. I think we already had this conversation, but TBD. And one thing that I think is also important is the average revenue per enterprise account. Because if you're going to have that account manager from your company, you're going to need to see scale from the existing enterprise accounts.

And I think that's a strong... They went from 2019, they had just under 25K of average revenue per enterprise account. And now it's closing on a 40K a year. I think it's a year. It might be a quarter. It's got to be. It's probably a year. I would really look at that metric as well.

Do you think that can keep growing at that rate? Yeah, why not? It grows along with the customers. Their net revenue retention has been consistently above 100%. Why not? 15% a year? Oh, I mean, that might be high. But I say it can continue to grow.

They're adding all these things. They're adding feedonomics. They're adding all these things on top of it. They're expanding internationally. I think, yeah, I think for sure. But again, if it doesn't, then that operating leverage might not show up. All right, let's hit my bull case. look, the enterprise value to gross profit is 3.3. That's below the market average and

enterprise revenue is growing at a solid double digit rate year over year. So I just look at those two numbers. And if you're confident that the company is going to get any sign of operating leverage, the stock's going to do well. And I think if they hit the numbers like they're outlining in their investor day that they think revenue can grow on a consolidated basis at a 25% to 30% CAGR through 2026, there's a chance this is a 10-bagger over 10 years. But again, we'll head to the bear case here. Given those margins today, given some of the concerns we talked about, there's also a lot of risk with this company as well. So let's move on to the bear case. Ryan, what do you have? Yeah, they can't hit their target margins

in time. I keep coming back to this, but they said in their yesterday or on their conference call that second half of 2024, they'll get to break even adjusted EBITDA. And then they fired a bunch of people and said,

actually, it'll be in 2023. There's no way you'd have to adjust growth unless all their other employees became 10 times more efficient. Yeah. If they continue growing at the same rate, I think that would be a great sign

for this business. But it's hard to see why there's a lot of uncertainty. There's so much uncertainty because if it doesn't happen well then maybe the margins might never show up. That's my... Go ahead, Brian. The other two things

that we haven't really discussed, they're going to have to pay back their debt, which is pretty sizable. Assuming they're doing $50 million in annual free cash flow, like that's it's going to read six years of cash flow and they're going to have to read yeah they'll have to refinance that's to pay back or add on something else like a standard note or something like that yeah and um dilution like we're not we haven't talked about that but i think i think if they get to i think 10 to 15 operating margins is is or non-gap operating margins is a little

closer to like 0% true earnings. Yeah, they could be growing their free cash flow at 5% to 10% a year, but share crowns growing at 5% to 10% a year. Yeah, free cash flow per share could not be growing. Yeah, exactly. Exactly. And especially the RSUs now are not going to be at risk of not vesting. But my bear case, yeah, it's simple. I think I would come at it with another direction here. So big commerce, to get to the profitability numbers that we outlined in the bull case, they're going to either fire a lot of people or grow revenue at a fast clip to start generating profit and getting either that operating leverage either through growth of revenue or losses and expenses. It's a pretty easy equation. The big question is, can they do either both of these

at the same time or one of these in tandem with all the initiatives they laid out during their investor day? Because they have laid out a ton of product initiatives. I think there's just a lot of uncertainty there so yeah let's move on to the last question more or less interested ryan i'm less interested i think i'd like i like companies in the cms space because if you're very notable and you're one of the first brands that people think to go to for building a website so for e-commerce you think shopify or for um pretty much any other website you think wix or Squarespace. They're really good. There's a lot of operating leverage. I just don't think there's quite as much operating leverage with big commerce and they lack sort of the reputation. So

I don't know. I'm just a little less interested. Evaluation, I can't even make sense of the valuation because I don't know what the economics look like. Yeah. We've talked about before about how when looking at a company that is unprofitable, something that we're trying to focus on in the future is if we like the business to make sure there's a big enough discount here, if you're confident in the future profitability. And I think there probably is with big commerce, if you're confident in the future profitability, but I'm not really confident in that. I think there's a lot of hurdles to come over. One, there's concerns about the proxy statement, the management, the expense structure, how's firing going to look? The list goes on and on.

There's probably five or six things that I would need to get past or need to see turn the corner over the next couple of years before I invest. So that's why I'm less interested today. Okay. Next week, or I think we'll be the same week as this. Either way, before the end of the year, the last episodes we're going to be doing are the Arch Capital episode for e-commerce and websites. And that is Wix.com. Going forward, actually, though, we're going to just make it not a double week. We're just going to make it one per week. So the last not so deep dive of the month is just going to be turning into an Arch Capital type episode along with the theme of that month. And we'll explore from there. It can change. We make up all the rules.

And secondly, we're going to do our 2022 year in review and 2023 predictions that are most likely or that are likely to not be right for the last investing power hour of the year. Okay. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time. We'll be right back.