Good morning, everyone. Welcome to the 29th Annual Oppenheimer TMT Conference. Happy to have with us Commerce.com. Joining us is CFO, COO Daniel Lentz. Sorry for the delay, had some technical difficulties. Daniel, welcome aboard.
Hey, glad to be here. Sorry about the delay. For everybody on the call, to be clear, my delay is not Oppenheimer's. Sorry about that this morning.
Look, I think most people are aware of Commerce, but perhaps to start, just some quick background on the company, and then we can dive straight into some Q&A.
Yeah. Commerce.com plays within the e-commerce space. We have two major assets. BigCommerce, which is our platform that actually processes orders and payments and allows customers to build websites to transact online. We describe that as our transaction layer. The second major part of the business is called Feedonomics. This is the data orchestration layer. This is a business that helps customers take their product catalog and optimize all of its data attributes for discovery and transaction in all of the surfaces where customers are shopping online today, which is becoming increasingly important as the LLMs are really starting to take primary share in actual shopping discovery, which has changed tremendously over the course of the last even just six to nine months. Which we believe is a really good thing and a tailwind in the long run for our business.
And then finally, the third area of the business is called Makeswift, which is a very small part of the business. Think about that almost as kind of like the page builder, front-end storefront builder layer of the solution as a whole. It is not a material part of the revenue of the business today, but we are actually in the process of building out that solution as the core storefront design in the core BigCommerce product, which is going to end up really doing great things for our existing customers and new customers alike when it launches here by the end of the year.
Fantastic. Thank you for that, Daniel. A lot of changes over the past year. You touched on some of it during the intro. You guys revamped the go-to-market, leadership changes, some pricing tweaks, some corporate rebranding. Can you just level set the audience with a status report here? Kind of where are we on those initiatives? How do some of those changes potentially position you guys going forward?
Yeah. I would say Travis Hess is our CEO. He took over about two years ago, give or take. And there were kind of four main objectives that Travis called out that he wanted to do when he took over as CEO. Number one, he wanted to make some pretty significant changes to the management team, which is now complete. Second, he wanted to really pivot the focus of the business towards net revenue retention, where historically in the past, like a lot of other SaaS businesses, I would say we over-indexed on new account acquisition as a primary means of driving growth.
The third thing that he wanted to do was really unify the brands under one overall brand architecture, and as a part of that, integrate Makeswift and Feedonomics, which were acquisitions that were made in the last three to five years, which were never really fully integrated, either in operations or in technical architecture. And then finally, and perhaps most importantly, he felt when he took over that commerce was going to be shifting much more towards the battleground being discovery and the data orchestration part of the business. And that very much has proven the case. I think it has gone a little faster than what we expected maybe two years ago. And what I mean by that is really if you think about commerce historically, e-commerce in particular, it has really been about a very kind of set funnel that leads to transactions.
Customers go through and do discovery through search, SEO search, typically through Google. That traffic then leads a browsing experience direct to the front door of a customer's website, their branded website, and from there, it leads to product pages, which leads to shopping carts and leads to checkouts and transactions. That's really been changing over the course of the last few years. I think that started with a lot of discovery being on different surfaces outside of the core branded website. We talked about this a few years back. You'd hear this term thrown around all the time, called omnichannel within e-commerce. That was really just a way of saying, look, we need to get your product catalog so that it may be discovered in either social channels or marketplaces as well as digital ad channels.
It's even changing further now with how much AI is really starting to take over product discovery, where the surfaces in which products are being discovered in browsing experience is becoming increasingly disparate, and that funnel now looks quite different. The customer's branded website is still a very important channel, but the top of funnel aspect of that, it's one of many channels. You may go to OpenAI or you may go to Perplexity or Gemini, any number of LLM-based search tools. You may go through and say, "Look, I'm taking a hiking trip in three weeks.
I need a new pair of boots." You give it the criteria and you say, "Based on what you know about me, what would you recommend?" That LLM needs to be able to access the product data in a way that works for the algorithm itself, and it's best if it has direct access to that catalog. It'll recommend two or three different sets of boots. Then in most cases, the customer will then out-click from that semantic search result directly to the product page on that customer website and then go to cart and transaction and go from there. But in what I just described, it actually in many cases bypasses the front door of that merchant website.
E-commerce is moving much more towards a notion of where what we really are doing is running Empowering discovery and transaction of product catalogs and the branded website is one channel of many, and increasingly more and more, we think this is where e-commerce is going to shift. Now, it's primarily, I would say, a discovery path today. I think the amount of transactions going through agentic discovery is, quite frankly, fairly overblown. The volumes are fairly immaterial across the industry, but I don't think that'll be the case probably three or four years ago. But right now, it's very much taking over discovery in a material way.
Got it. That is a perfect segue into my next question. With this shifting battleground, and you guys have obviously reoriented your business to hopefully attack the battleground in a way that best serves you guys, how has this transition weighed on your different business lines, and how does that have you guys reprioritize where you put your resources? When we think across the BigCommerce, the Feedonomics, and the Makeswift pieces, where have you seen some negative disruption? Where have you maybe seen some positive disruption?
That is a great question. Let me break it into two pieces. Piece 1, let me just address changes that we needed to make in the core business apart from this trend towards agentic, and then secondly, let me discuss what agentic means in particular. The changes within the core business, we really needed to focus more on existing customers, existing customer retention, and creating more monetization paths to expand existing customers, which is why we started disclosing total business net revenue retention starting in Q1 and overall platform GMV as well. When you look at where our business is moving, we continue to grow in strength, particularly with B2B and B2C hybrid customers on the platform side of things under BigCommerce.
What I mean by that is you have traditional manufacturers and distributors within the B2B space, and then you also have B2C customers, where we do very well, that have B2B-like complexity in how they have to approach their business. That can be regulated industries, it can be multilevel marketing businesses and things like that. That is really where the business is trending and where we have particular strength. Today, B2B and hybrid customers represent the majority of platform ARR. They are greater than 50% of GMV. They have higher win rates, higher gross retention rates, higher net retention rates. The business is definitely moving in that direction. The only headwind that comes in that mix change is simply the fact that those customers tend to have fewer credit card transactions on a like-for-like basis than a B2C customer.
We have got a little bit of a mixed headwind that you see in the spread between underlying platform GMV growth and revenue growth. In order to attack that problem, obviously, we need to have more ways of monetizing those types of customers outside of not just the core subscription, but also on the credit card transaction side of things. Within the platform area, that is really where that trend is moving. On the agentic side of things, this really plays to an area of strength for us already with Feedonomics, where we have been optimizing catalogs for ad and social and marketplace channels for a long time. In the next quarter, we are actually going to be launching new data enrichment capabilities specifically targeted towards LLMs, both in Feedonomics—not only for Feedonomics customers, but also for BigCommerce platform customers as well.
If you go to the second bucket, then you say, "All right, well, take a step back and look at this move towards agentic. Where has it been a help to the business? Where has it caused a reprioritization?" I would say we've really had to focus on the opportunity that's in front of us, particularly in data enrichment, where an area of strength for us for a long time has been helping catalogs be discoverable and transactable in all of these different surfaces. That's now more important for customers than it was before, and it's important for customers of all sizes.
We've needed to look at the business and say, "Okay, how can we get this capability into the hands of smaller customers?" So, for example, we launched Feedonomics Surface, which is an app that we launched in Q4 of last year that extends some of that catalog optimization capability that Feedonomics traditionally offered to lower end of enterprise and true gigantic retailer and B2C customers within Feedonomics. We needed to extend that capability to a price point that small businesses could pay, and that's what Surface was. That's one example of where we've needed to really direct our R&D dollars towards capabilities in that area to lower price points so that we could extend those benefits towards BigCommerce customers, which tend to be more mid-market size and kind of an average than Feedonomics customers, which tend to be a little bit bigger.
We've seen that across the business. That's true on Feedonomics. Within B2B, we've redirected and refocused the development towards agentic operational capabilities for B2B customers. So for example, for those merchants, it's less of a change in how their product is discovered, but it creates a huge opportunity in how they run their business. So we have in beta today a purchase order agent as an example, that's going to be GA'd, I think hopefully by the end of the year, where B2B customers can take a PDF purchase order, drop it into a tool that we provide that allows that PDF purchase order to be auto-written into ERP systems so that they don't have to have people doing manual data entry, as an example. We're developing a whole suite of B2B operational agents that our merchants can take advantage of as well.
That doesn't sound like rocket science, but B2B merchants spend hundreds of thousands of USD a year on people doing manual data entry still, copying over from fax machine inbound purchase orders, and getting it into ERP systems. So it looks a little different whether you're talking about a B2B customer versus a B2C customer, but the opportunity is huge for both.
Got it. So perhaps that B2B end market, not as attractive from a credit card monetization perspective, but considering they're a little behind the technological curve, hopefully Commerce.com will be able to provide some hand-holding support with agents that you could monetize down the line.
Yeah, I think it's a great way of putting it. I think we are thinking about B2B expansion of revenue a little different than B2C, simply due to the credit card difference, the credit card mix difference. But there's ways to make better spreads on credit card transactions if you want to continue to go down the fintech path towards becoming a PSP, which is something we're evaluating. But there's also, to your point, a lot of other ways that you can monetize B2B customers once they are on the platform outside of credit cards, that we are looking to build and develop. Ultimately, B2B customers and hybrid customers are outstanding customers. They're sticky. There's fewer competitors that have products that can really work for their level of complexity, and we have outsized right to win there, and competitively, we do very well in that area.
That's not going to be the exclusive focus of the business going forward, but I think two to two years from now, our business, the substantial majority, is going to look like customers that fit that description.
Understood. And perhaps shifting gears a little bit to the more near term. You guys just reported earnings last week. You had called out a more cautious new bookings landscape out there. Can you just refresh us on what you guys saw in the quarter? What are some potential dynamics that you guys are looking to rectify in the back half?
Yeah. Specifically what we were talking about there is new account B2C bookings were weaker in the front half than where we wanted them to be. I do not think that is particularly surprising. I know a lot of folks within the industry are facing the same dynamic. We are not seeing that same softness on the B2B side of things necessarily as much, but B2C in particular. If you want to think about the most important thing right now for a B2C customer heading into holiday is how can they get their top of funnel under control, where they understand how they can drive volume to their product pages and checkout when the front door going through SEO to their main websites and going through that browse and discovery experience. That is changing really rapidly.
For a lot of those customers, they are less concerned about re-platforming right now, and they are much more concerned about shopping discovery when SEO volumes are dropping like they are. I just think in general, there is just a weaker demand environment for B2C customers in particular, and we wanted to see better ramp, in the front half of the year with that type of customer from a re-platforming point of view than what we did. Ultimately, we felt we needed to reflect that softness in the guide going forward.
Got it. On that dynamic, one question we are getting asked is how much of that is just, as you mentioned, maybe a little bit of a pullback on the new? How much of it is lengthening sales cycles versus maybe changing win rates, competitive dynamics? What are you seeing in that B2C pipeline to help us get some comfort that that could potentially rebound down the line?
Yeah. Good question. We are not seeing a change in win rates. What we are seeing is fewer at bats in general, which we hear the same thing also from our partner ecosystem, by the way, right now as well. There is just not as much B2C re-platforming activity as where there was a year ago. Now, when and how that rebounds is hard to say. I would be more worried, I guess I would say, if we saw a degradation in win rates, but we are not seeing that. That said, we are going to continue to push resources towards the area where we are seeing the most growth in the short term and really good long-term retention, which is on the B2B and the hybrid side of things. We are not going to neglect the B2C side of things necessarily.
But we don't need that to rebound tremendously for us to feel like we can get our growth rate into a better place. The sourcing and composition of that, I think, is going to look more like hybrids and B2Bs than B2C. But if I just think about how I approach this myself within the business, I don't want to be buying a whole lot of software right now. I want to be consolidating and trying to simplify as much as possible, and the amount of scrutiny that I'm Anytime we buy software, I'm ultimately the one that has to approve it for all of our internal decisions, and I'm agreeing to far less of it than I was 2 years ago because I'm wanting to understand how we can consolidate and simplify. Not necessarily because I feel like we can buy code our own versions of everything.
I think that's a little bit overblown, to be frank. I don't think that really affects us in a lot of ways in our business because we're really infrastructure software. We're not middleware that's easily disintermediated. I think just in general, there's just a lot more scrutiny on capital decisions going towards software. Re-platforming in particular, it's not an ideal time to do it heading into holiday and certainly not at a time where merchants are trying to get their top of funnel under control first and foremost.
Understood. Lastly on just the more near-term makeup of the business. You guys provided a revised revenue growth range, - 2% + 1%. Probably the number one question I was getting asked after the earnings event is how de-risked is that guidance range now that you've lowered it again, and what has to happen, good or bad, to be on one end or the other of the spectrum?
I feel really good about the guide for the back half of the year and what that means going into next year on the revenue side of things. I feel like it's very prudently de-risked We put that in the prepared remarks, and we're pretty careful with our wording for that reason. For it to fall below that, I think we would need to see a little bit of a degradation from what we've seen over the last 12 months in terms of what new account bookings would look like. Also, we'd need to see a fairly weak holiday period. I don't anticipate either of those things. I think the guidance reflects a pretty good, steady view of what we've seen so far this year, and I think it's a prudent representation of the outlook going forward.
To get above it, I think we'd need to see a little bit better acceleration in bookings. We have a lot of product that we're shipping in the back half of the year. I want to see that really start to turn the needle further in net revenue retention and also in ARR as a whole, but I think that's more of an exit rate benefit. If the bookings are coming late in the quarter, you don't get a ton of revenue benefit if you're signing the deal late in the quarter. I guess, for me, the main signals I'm looking at is three things. One, continued health in GMV. Number two, I want to see that we're shipping all the product that we have lined up to go out the door. Then I want to see a good holiday period.
Some of that's somewhat out of our control from a macro point of view, but so far so good in that respect, I think, in the year. There's been a lot of noise, to say the least, on the geopolitical front and from a lot of disruption, but we don't need to see that turn around dramatically or anything like that for us to feel good about the prudent guidance adjustment we made for the back half of the year.
Got it. Okay, perfect. Shifting back over to the payments side. I think you touched on the broader payment categories, but you guys also recently launched BigCommerce Payments kind of underneath the BigCommerce brand. I think on the surface, you guys aren't getting the gross revenue uplift, which are generally empty calories anyways. But we do get asked from time to time, what's the strategic rationale here for Commerce.com? What is the potential benefit from a monetization perspective longer term, if not the accounting impact?
Yeah. Let's talk about where we are today and then where we are considering moving. Where we are today, from an accounting point of view, it's recognized on a net basis, not a gross basis. If you move further in the integration path of a full payment service provider set up, you're not doing it for accounting reasons. You do it because you think that you can capture additional stickiness with those customers and that you think you can ultimately capture incremental spreads out of interchange. If you're just doing it for accounting reasons, that's silly. I think you said low calorie. I think that's a fair way of putting it.
Our current branded solution has incrementally better margins and revenue and spreads essentially, or Bps that we are capturing than where we were before because it is effectively still a referral model, but with a buy and a sell rate. We are operating as a reseller. We are evaluating whether or not we go more fully down the PSP route. If we do that, I think the main reason why we would do it, though, would be because we think we can make more money off of it and that it is ultimately stickier. I think the strategic rationale, I do not think should really be that surprising to anyone because I think a lot of competitors in our space have demonstrated this quite well.
The more you are involved in the transaction flows, including the movement of payments for those merchants, if you can differentiate that, I think it leads to stickier outcomes and stickier customers. We have seen really good adoption so far of BigCommerce Payments. It is still a small portion of the mix because it is geared towards small and medium-sized customers and it is not focusing on really large customers, at least not in the near term.
I am not expecting this to take over our GMV mix anytime soon, but I do think it can become a substantial contributor over time, and then we can capture gradually better economics over time. But I do think we will continue to evaluate how we can have a more fulsome offering in that area. Whether it ends up being a full PSP offering, we have not made any decisions on that just yet.
Understood. There was maybe some recent noise around the payment product. You guys also streamlined some of your partners from the offering. Any customer pushback and, I guess, any potential impact to your business just broadly as you, again, streamlined off some of the long tail partners here?
Very little. That is because by design, it. So what we did is we said that we named a list of, call it 20 core payments providers that merchants could use freely without any sort of additional charge, of which our branded solution was one of the roughly 20. So what we said was if you are going outside of that core list of 20, then there is a small fee that is an additional fee that helps cover the cost that we face by integrating with all of those partners. But the really important thing to understand is only customers on our self-service plans, core growth and scale plans are even subject to that.
The majority of our GMV and the majority of our ARR on the BigCommerce side of things is actually on a negotiated, what we call a performance plan, which does not face any of that type of fee structure at all. When we made those changes by design, it affected a large number of customers, but not a large percent of the business. For those customers that were impacted, even if they are small, we are going to them essentially saying, "Look, you can use any one of these 20. The reason why you should pick one of these 20 is because it actually leads to better conversion, better GMV growth. We have better integrations." We have had some pockets where we have had some customers that maybe are using someone outside of that are having to maybe make a migration and change to somebody within the list.
That is okay, but by and large, I think it has been very well received.
Got it. Understood. Maybe one area where you guys have been performing exceptionally well is on the profitability side.
Maybe touch on some of the progress you have made there getting the gap profitability. The natural follow-on that I typically get from folks is, have we picked all the low-hanging fruit? Do you still have capacity to potentially expand margins going forward, especially with some of the pressures on top line?
Yes, we do have further room. I feel differently depending on the part of the business or the P&L that we're talking about. R&D is going to continue to be a focus area for us and not an area where we would look to make any substantial cuts. There's a lot that we're pushing out the door this year, so it may not look exactly the same next year from an investment size or rate point of view, but I think it would be substantially the same. On the cost of revenue side of things, we had a little bit of a decline sequentially this quarter due to some hosting cost stuff that I already talked about on the earnings call last week.
I think we can offset a lot of that over time, though, just in changes and improvements to how we manage our hosting costs and also some cost savings projects, some automation work that we're doing that I think can take further cost out there. So I feel okay about that. I do think over time, we can continue to get G&A down further than where it is right now. We are still having to spend quite a bit on the back end, not just cost of being a publicly traded company, but also what we're doing on the audit side of things with SOX. There's a lot of work that we're doing just in kind of the back end design and cleanup that we're doing that I think we need a few more months to finish up, and then I think we can get further costs out there.
The big area for me continues to be on the sales and marketing expense line item in particular. I expect us to be down sequentially in sales and marketing expense, about $25 million this year. I think that a lot of that is just right-sizing what we're doing and what we're spending based on the growth that we are putting out the door. I think there's further efficiencies that we can see in that area for sure, but in some ways, what I would like to do would be to move dollars around if we have efficiencies, if we can see positive ROI in different areas. I'd like to reinvest because more than anything, I'd like to drive up the growth rate.
What I would say is that if we're not going to be growing faster than where we are, most definitely we would have further costs that we would take out. In the short run, though, I think Travis and I's point of view on this as well as the board is that we really, really want to get the business back growing at a more sustainable and healthy rate, and we want to put dollars to work where we think we can do that. The primary area where we've increased investment this year has been in R&D because we have a lot of product investments and innovations that are coming out the door that come with new monetization paths, particularly in the back half of the year.
I want to see how those play out in market and how those do over the course of the next three or four quarters. If the growth is not accelerating better than where it is right now, then I definitely think we would take a further look at the cost structure to look at other ways to get better profitability to shareholders outside of further revenue growth. I think the key unlock to rerate the stock to a place where I think it should be is through growth, and that's our number one focus.
Got it. That makes a ton of sense. As a tech company, I think investors will always prioritize growth over everything else. Lastly, look, this is a lot of stuff in terms of headlines, but you've had some external interest in the company. I think investors generally would like to know how do you, how does the management team, how does the board think about that external interest, whether it's Rezolve or others? Any thoughts there before we wrap up?
Yeah, I would just say, and I don't mean this as a throwaway line, I mean this sincerely, we take our fiduciary responsibility to the shareholder as our number one and only concern. We believe that the internal operating plans that we have can unlock better growth rates. I think we've shown that we can drive healthy. We have a healthy balance sheet. We're driving better profitability. We're driving good cash flows. We've really, in the last three years, made a ton of progress in that area, and we've done it without enough revenue growth to make that as easy as it could've been. It's a whole lot easier to drive better cash flow and profitability when you're growing substantially. We've kind of done it the hard way.
From the management team and the board's point of view, we're going to do whatever we think is the best from a shareholder outcome point of view, whether that's continuing to be on our existing plan or if there's other opportunities that would make sense. Certainly open to those things. Whatever we think is best for the shareholder is the route that we would take.
Understood. Daniel, thank you for your time. Audience, sorry for the technical difficulties earlier, but we are right up at the end of the time slot.