In this episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Brian Feroldi look at what the first quarter's data tell us about the recently public companies JFrog (FROG 1.28%), BigCommerce (BIGC 0.74%), and ZoomInfo (ZI -1.07%).
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This video was recorded on January 29, 2021.
Dylan Lewis: It's Friday, January 29th, and we are recapping some of the big IPOs from 2020. I'm your host Dylan Lewis, and I'm joined by fool.com's really recent routine reviewer of retrospective reflection, Brian Feroldi. Brian, how are you doing?
Brian Feroldi: Dylan, another week, another look back at the IPOs of 2020, how exciting.
Lewis: I love it. It's like past us, it's like, hey guys, here's an idea for an episode. It's nice when your past, future, and present versions of yourselves come together in a way that's helpful and not harmful, because sometimes you really feel like you can put yourself behind the eight ball.
Feroldi: As we talked about, there were some companies that we just couldn't get to last week from a time perspective. I'm glad we get to add them to this week's show.
Lewis: Yeah, that's right. Today we're going to be talking about BigCommerce, JFrog and then we're also going to be talking about ZoomInfo, which I think we at one time referred to as the other Zoom, because there were so many at that point. It was a 'zoom euphoria.' But first, we're going to talk about BigCommerce, and this might be a name that is familiar to folks, Brian, who have been following a longtime Fool favorite, and that is Shopify.
Feroldi: This is the No. 2 player, right behind Shopify. It's always in the exact same space, they are just in order of magnitude, smaller than Shopify is. The interesting thing about BigCommerce is when we did the S-1, this company came public and priced their stock at $24. Immediately, it was apparent that the bankers screwed that number up, because the opening price for the stock was $68 on the very first day of training, that was the absolute rock-bottom price that normal investors like us could have gotten in on. Even buying then seemed to be a good deal, because the company is currently at $93. This company left a lot of money on the table.
Lewis: Yes, I think there are a lot of executive teams, I would say. We'll like to see a small pop on the first day, because it shows that people are excited to buy shares. Yes, we left some money on the table, but that's OK. That's a lot of money left on the table.
Feroldi: It really is. They definitely could have used that money, because they are still losing money as we were going to get into. But just a quick reminder. This is a Software-as-a-Service platform that makes it easy for small and even enterprise-level businesses to sell their products online. You can use the BigCommerce platform to create a website. You can connect it to online marketplaces like eBay, Amazon. They have direct connections with social networks like Facebook and Instagram, and it also connects with point-of-sale systems like Square, Clover, and [...]. If you are a company of any size and you want to do business online, just like Shopify, BigCommerce lets you do just that in an easy way. This company's business is similar to Shopify, but its business model is slightly different. When we dug into the numbers on day one, they generate revenue in two ways. First of is through subscription revenue, which at the time of IPO was about 71% of the total. That's just platforms, subscription fees and recurring professional service fees, sales of online, SSL certificates, etc. They also have partners in service revenue, which is they have these revenue sharing arrangements with some of their clients that can help with marketing and promotion, and they also have non-recurring revenue opportunities with education, with launching or with products and things like that. A very similar business model but slightly different.
Lewis: Yeah, I'm sure that a lot of people's ears perk up when they hear they operate in the same space as Shopify. I mean, what a monster stock that has been for some folks. I am fortunate enough to have been a shareholder on that one myself. I know a lot of our listeners and a lot of our members are. The growth rates and the story are a little bit different. BigCommerce is a lot smaller and I don't think quite putting up the same growth that we're seeing from Shopify at similar revenue levels.
Feroldi: I wouldn't call this the Pepsi to Shopify's Coke. This is more of the RC Cola to Shopify's Coke, but in the most recent quarter, and since they came public, they've actually done a pretty good job. Obviously, COVID was a massive tailwind for them, just like it was for Shopify. They have reported earnings twice since coming public. Both of them, they beat expectations. That's always a good thing to see for any company. In the most recent quarter, the CEO called the quote unquote, the best quarter in BigCommerce's history. Revenue grew 41% to almost $40 million. That was an acceleration from 33% growth rate in the prior quarter. Of that total, subscription revenue was two-thirds. Partner and service revenue was one-third, and the company's gross margin actually expanded quite a bit. It's now at 78.3%. That's up from 76.2% in the year-ago period. Still losing money on a GAAP and non-GAAP basis, but the losses are very manageable, $8 million that was down year-over-year, and they have plenty of cash on the balance sheet. Overall, a pretty good quarter.
Lewis: Yeah. This could be one of those businesses that sees a step change in what their financials look like as a result of COVID and really everything being pushed to digital. We'll obviously have to wait a couple of quarters and see whether or not that plays out. But the idea that revenue is accelerating, almost never a bad thing, Brian.
Feroldi: Exactly. This company is actively trying to swim upstream and target more enterprise-level customers prior to the quarter. They actually announced that they signed a partnership deal with EPAM Systems to help them target larger and larger clients. I really like that move, because EPAM has relationships with lots of big companies. If EPAM is a partner that says, hey, you should give BigCommerce a try, that could be a revenue accelerator for this company.
Lewis: Yeah, it's always nice to have that social proof. Seeing folks that are quite good at what they do, trusting businesses that you are still waiting to see where they land in the landscape.
Feroldi: Totally. While it's definitely not growing as fast as Shopify, a pretty good start for this new company.
Lewis: Yeah, in an industry, in a space where you can't see growth accelerate quickly, I think if they can prove out that they are not such a distant second to Shopify in terms of what they offer, and that's hard. That's a really hard thing to do, because Shopify has so solidly nailed what they offer customers. But that market is big and there are a lot of people that can play in it. If they're able to capture a decent amount of it, there's a big business there. I would, just for my money, put it on Shopify personally.
Feroldi: I agree with you there. Again, estimates also backup in history and, say, Amazon said, we can't compete against Shopify, so that BigCommerce is doing this well, really speaks volumes. E-commerce is a fairly descriptive name.
Lewis: BigCommerce, I should say, is a pretty good descriptive name as I just flabbed it. Our second name, Brian, JFrog, is not as helpful really when it comes to telling you what the company does.
Feroldi: Not the best name, but hey, it's also done OK for itself. This is another company that underpriced its IPO. When they came public, they priced at $44. The opening price on day one was $71, so pop, not a 100% pop, but still they left some money on the table. As of right now, the time of this recording, it's been about flat since it came public. But as a reminder, this is a Software-as-a-Service company that's focused on "continuous software release management," or CSRM. Essentially, it's a platform that allows for the continual push out of software releases and it's designed to make that process seamless and easy. I think many people are just used to their phones automatically updating overnight and the most recent, stable, and secure version of the software being available to them at all times. That is what JFrog enables, so they call it a universal packaged repository. Essentially, if you are a software company that wants to make sure that your users are always up-to-date, JFrog helps you do it.
Lewis: In some ways, it reminds me a little bit of Twilio, Brian. It's a business where people that are really in the weeds probably appreciate this in a very profound way, and people who are not maybe have a hard time grasping how important and how helpful what they offer really is.
Feroldi: I think that that's probably a fair point. Really nailing down the technical aspects of this technology is a little bit tricky when it comes to things like that. I always like to say, this sounds great. Prove it with the numbers and we do have some more numbers to look at. In the first quarter, the company's first earnings report as a public company, our revenue grew 40% to just about $39 million. That is 91% SaaS-based. They do have a little bit that is still a licensing base, but pretty strong overall. As a SaaS company, really great gross margins, 82.5%. On a GAAP basis, they are spending aggressively, especially on stock-based compensation. They are reporting GAAP losses. However, they are reporting non-GAAP profits. They actually reported a non-GAAP profit of $0.05 per share. The market was expecting break-even and those profits are real, because they are generating free cash flow as well. Another company that had a really good start with his first earnings report.
Lewis: You mentioned it's flat, right now we're seeing it just under a $6.5 billion valuation. So, if you're just trying to stack exactly with that growth with that margin profile and everything turns into in terms of market valuation, there you have it, which for a SaaS company, with some of the growth rates that we've seen in the margin profile, that's a pretty interesting valuation there. There's a lot of room to grow from there if they'll keep this up.
Feroldi: Totally, and the company has, I think there's a lot to like about this business when you look in, their dollar-based net retention rate was 136%. Clearly, they are doing a good job of getting more revenue out of their existing customer base. It's hard to peg just how big of an opportunity this is. Management obviously sees billions of dollars in sales potential. I don't know if I necessarily buy that, but hey, a great early start.
Lewis: Management always sees billions of dollars in total addressable market, doesn't it?
Feroldi: They might be right, they certainly know this market better than me. It's something I have to dig into and learn more about.
Lewis: I'm waiting for the day where a management team is like, we see about $100 million in total addressable market. They're like, boy, the realist was in there.
Feroldi: That's it. We're done growing. This is the pinnacle right now.
Lewis: The third company that we're going to quickly recap is ZoomInfo or the 'other, other Zoom,' as some may call it. Similar to some of the other ones, this is a company that left money on the table priced at $21 in June, and retail investors like you and me probably got in somewhere in the low $30s if they were buying early, Brian. YCharts has them up about 45% since their IPO, which is a pretty solid start. For people unfamiliar, think of it as a way to get in touch with the people that you are trying to get in touch with, particularly if you are a salesperson. The company's mission is to unlock actionable business information and insights to make organizations more successful. You can think of it all as a SaaS platform that helps sales professionals and marketers reach the decision makers they are trying to reach. Brian, you in a past life, worked in sales. I think you firsthand can appreciate the value of a software provider like this.
Feroldi: Yes. Companies have a bazillion barriers between the salesperson and the actual decision-maker, and ZoomInfo's whole business is basically saying, we help you break down that barrier and reach the person that actually makes the decisions. It's pretty clear from their numbers that they're good at what they're doing and that customers are buying in.
Lewis: Yeah, basically getting a detailed look at organizations so that people know who to be reaching out to. They call it a 360-degree view. They basically said the platform helps you get the right message to the right person at the right time. Ideally, if you're looking at the business side of that, shortening up your sales cycles, increasing your win rates, and helping salespeople hit their numbers. I think what really stood out to me is, Brian, there's so much information out there. It's amazing what you can publicly grasp. Between LinkedIn and so many of the other professional networks, and just presences that companies and individuals have. But ZoomInfo says that at least 95% of the employment information they access or their customers access will be current, which is pretty darn impressive.
Feroldi: That really is, and you can see how value that would be if you were trying to sell something and you could get directly to the CTO of a company, wouldn't you be willing to pay for that direct access? It's clear that companies are.
Lewis: Yeah. So far it has been a pretty good performer both as a stock and as a business. What we have seen is this being a business that is in that up until the right phase with revenue growth, you just go back a couple of quarters and they were posting triple-digit year-over-year revenue growth. That has slowed as it often does, because the denominator starts getting bigger. But they're still putting up pretty big numbers. The two most recent quarters, 62% year-over-year growth and 56% year-over-year growth. They are solidly over $100 million in quarterly revenue for the past three quarters. Obviously, the gaudy growth rates, Brian, are not going to stick around forever. But I think if they are sticking somewhere in the 40% range, 30% range over the next couple of years, people are going to be pretty excited. Investors recently were quite excited because management wound up raising their full-year guidance, which is probably a big reason why we see the performance that we have since it's gone public.
Feroldi: That is one thing that we called out when we talked about this show, which is that one of their tag lines is, "Hit the numbers." In other words, if you partner with ZoomInfo, they help you to hit your sales numbers. If this company had struggled to hit its own sales numbers, Wall Street would likely be like, are you serious?
Lewis: It's like going into a barber that has a bad haircut, right? Nobody wants that. I think looking at this business, there's a lot to like, the growth is pretty strong. The gross margins are very similar to JFrog, the low 80% range for the past couple of quarters. It is richly valued. A big part of that is because of their margin profile and the growth rates. One thing that I realize, looking back on some of our notes, Brian, we didn't spend a lot of time talking about, was their net retention rate. This being primarily a subscription business, about 99% of their revenue comes from the subscription side. You go back to fiscal year 2018. Their net retention rate for customers was 102%. Fiscal 2019, 109%. We're seeing it climb. My hunch is, it's going to continue to get bigger as the business figures more out. I think this is a company that went public at a very intentional point in time when they started to see a lot of the numbers coming together for them. But this is going to be a huge part of the story going forward. I think it's probably one of the numbers that we're going to get an update on when we get their full-year numbers in February.
Feroldi: This is a number that's important for any SaaS company. So yeah, the numbers that they put up last year and the year before are not that impressive, especially when compared to other companies that are in the 120%-130% range. But you're right, if this number grows over time because the service gets more useful and the data gets more accurate, and they just eliminate people that are just high churn customers, that will be something that definitely the market takes notice of.
Lewis: Yeah. We talk about those big growth rates that they put up over the last couple of quarters and over the last couple of years. You realize with those net retention rates, what it means is they're acquiring a ton of customers. That's not a bad thing. But ultimately, particularly as you start to reach a really big scale, you want those customers to stick around, start spending more money with you. You don't want to have to go out there and keep bringing new people on. One, it's exhausting, but also it's much more expensive to go out and acquire customers than to keep them.
Feroldi: It's also worth pointing out that you have to keep in mind what type of customers these companies are targeting. In ZoomInfo's case, they do know that their dollar-based net retention rate for enterprise-level customers is actually really strong, 127% the last year. What that means is that they are picking up a lot of small customers and small businesses to have much higher churn rates. That's why, when you take a look at a company like HubSpot, its dollar-based net retention rate is never or very close to basically 100%. In absolute terms that sounds terrible, but once you dig in and realize, they service small businesses. That makes sense. So, you always have to keep that in mind when you're looking at that number.
Lewis: Yeah. I think more so with this company than with maybe the previous ones, the growth is a big part of the valuation right now. We're looking at an about $20 billion business, Brian, and it puts us somewhere in the 40-ish times sales. When you're priced that way, the expectation is that the growth continues. So, it's great that they're getting that on the enterprise side, I'd like to see it a little bit more with some of their smaller customers as well. But this obviously is a business that hasn't had any trouble attracting new customers because that's where a lot of the growth has been coming from.
Feroldi: Totally. So, hopefully they can keep that up, but Dylan, now that we've done this review BigCommerce, JFrog, and ZoomInfo, have any of these retickled your interest, or which one of these is at the top of your list?
Lewis: I think if I was going to rank order them, I think I would probably go JFrog, ZoomInfo, and then BigCommerce. I think that's my ranking, but I reserve the right to revisit that. Brian, what about you?
Feroldi: Mine would be pretty similar. I think I would put ZoomInfo slightly above that, because I'm pretty impressed with the numbers that we've seen thus far, but I think that JFrog is a pretty solid company top-to-bottom, and I do like that they've already reached profitability and that they're going to continue growing. I totally agree that BigCommerce is No.3 here. I just think that the valuation is really high and their growth rate is really expected to slow. I already own plenty of Shopify, so I'm not really interested in buying a player like that, but the other two, JFrog and the ZoomInfo, I'm definitely interested in.
Lewis: Yeah, I think the selling point for me, and what puts JFrog above the other two, is that net dollar retention rate. That's a really strong number at 136%. It's a $6 billion business. It's easy to see a business that size getting a lot bigger. I think ZoomInfo has a little bit more to live up to to sustain the valuation it has and really grow. But hey, we talk about it all the time, Brian, you don't have to pick just one.
Feroldi: That's right. You can invest in one, two, or all three of these if you like to. There are reasons to do just that.
Lewis: Yeah. There you have it, folks. We checked in on another three stocks, 2020 was just a banner year for IPOs in general. As evidenced by the first day pops for a lot of these businesses, there's a lot of interest in it. Brian, I think we still have a couple of names that we have to revisit at some point and we will soon. But of course, if people have any new names that they want us to tackle, they can always write into the show.
Feroldi: Don't forget we did a whole bunch of Wildcard Wednesday episodes together. We talked about lots of healthcare stocks. So, these are just the Friday tech stocks that we've caught up on.
Lewis: That's right. There's a good [inaudible] show in there that we need to revisit. I think we've got a question about that from a listener recently, and there are plenty more to come. We'll be doing this and it's fun. It's kind of nice to look back and do the short version of those extended S-1 shows because we can get a little long-winded sometimes, Brian.
Feroldi: The other nice thing is now these companies actually have a track record that we could look on. You just learn so much about a company when you see its first and second earnings reports. How are they reacting to being public? That is a culture changer for a company. So, it is nice to actually have data to look at.
Lewis: Brian, as always, thanks for joining me on today's show. I had fun doing this one, and I'm going to have fun doing all the future ones too.
Feroldi: Sounds good, Dylan. Thank you for having me.
Lewis: Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say "Hey," shoot us an email at IndustryFocus@fool.com or tweet us @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes or wherever you get your podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today, and thank you for listening. Until next time, Fool on!