BIGC - BigCommerce: Making The Right Move To Invest In Enterprise Segment

Summary

• BIGC's enterprise segment has been growing steadily and accounts for a significant portion of the company's revenue, and management is focusing on it to capture market share in the long run.
• However, the non-enterprise segment has slowed down due to macro instability and poses a risk to the company's growth.
• The company aims to achieve break-even by 4Q23 using an adjusted EBITDA basis.

Description

I still recommend buying BigCommerce ( BIGC ). The overarching bull thesis is that ecommerce still has a long runway to grow, and within it, BIGC still has plenty of opportunities to capture market share.

Macro instability and the slowdown of non-enterprise activity continue to be my main concerns. The good news is that the Enterprise segment has been growing steadily, accounting for 72% of total ARR and increasing by 30% year over year. This has helped to support the business in the face of a weak macroeconomic backdrop and to offset the decreased focus on the Non-Enterprise segment. Importantly, I believe BIGC Enterprise segment has a differentiated offering, as such I agree for management to allocate more resources to it to keep up with the rapid growth, which has superior unit economics. This is a positive sign that management is prioritizing spending money where they can expect a high return on investment and can easily see an outcome that favors them. That said, ARPA fell steadily over time in Enterprise. Management has blamed the lengthening sales cycles for larger deals and the increased mix of smaller deals in the mid-market for the decline in ARPA. Some of these larger deals, however, are expected to be finalized in the coming quarters, according to management. This may sound like good news at first, but I'm not convinced that investors can put their faith in the conservative guidance when it's made alongside the assumption that non-enterprise contraction will continue while enterprise bookings improve. However, the bottomline impact seems to be in favour of BIGC stock as management has reiterated its operating margin breakeven timeline of 4Q23, which has been brought forward from 2024.

Overall, I think BIGC is still in a strong competitive position in the enterprise, and the combined company growth should improve as the non-enterprise share of sales decreases. The current valuation of 2.3x forward revenue for BIGC makes it a highly desirable acquisition target. The path to breakeven has also been accelerated to 4Q23, from the previous fourth quarter of 2024.

4Q22 results review

While 4Q22 total revenue fell short of expectations, the operating loss was less severe than anticipated thanks to late 2022 cost reduction efforts. The bleak forecast for 2023 revenue growth can be partly attributed to the harsh macro environment. Importantly, BIGC's management has restated their goal of reaching EBITDA breakeven by 4Q23.

Macro headwinds and non-Enterprise segment slowdown

Management does not expect the longer sales cycles and smaller pipeline of leads caused by the challenging macro environment to improve in FY23 (as seen from the guidance). In light of mounting headwinds to consumer spending, management factored in a slowing of same-store GMV and order growth y/y in FY23 guidance. BIGC is refocusing its sales and marketing efforts on its enterprise customers, which has caused a decline of 8% in retail ARR year over year and a 2% sequential decline. I think this is a good idea, as I explained above. It has, however, led to lower gross adds and higher churn for Retail customers, trends that management anticipates will persist and contribute to a contraction of Retail ARR in the mid- to high-single digits in FY23.

Enterprise segment

Management's outlook is more optimistic for 2H23 due to the stabilization of contraction in Non-Enterprise and the payoff in Enterprise from the shift in focus and resources, but they do not assume an improvement in the macro. Given the uncertainty of the target market's evolution during a time of organizational upheaval and tense macroeconomic conditions, I do recognize some level of risk to shift resources to Enterprise segment in this volatile period (but I still think it’s the right move).

Pricing

BIGC has announced a price increase of 33% for its Standard, Plus, and Pro plans. However, customers who opt for annual billing in advance will be able to keep their current rates. Based on market reactions to comparable price changes and the fact that prices haven't been raised significantly in almost a decade, I expect a positive reception to the increase. The price hike is factored into BIGC's forecast for FY23. In general, I think it's a good idea, and it shows how BIGC can influence the model through a variety of channels.

Guidance

In the FY23 revenue guidance, management has stated that the midpoint is $307 million, which indicates a growth rate of 10%. However, this falls below the consensus of $319 million, which is a growth rate of 14%. Despite not being ideal in the short-term, I believe that BIGC is being wise by reducing the risk associated with their revenue guidance. On the other hand, the FY23 EBIT guidance is better than expected at ($19.2) million compared to the consensus of ($26.9) million. To reiterate, BIGC aims to achieve break-even by the fourth quarter of 2023 using an adjusted EBITDA basis.

Summary

In sum, I still admire the company's vision and think it's on the right track as it deals with a tough environment and allocates resources to higher return on investment opportunities in the upmarket. Small, steady stock accumulation in BIGC as it continues to execute is, in my opinion, the best strategy.

For further details see: