BILL Holdings, Inc. (BILL) Earnings Call Transcript & Summary

Hi. Good morning, everyone. Thanks for joining us today. My name is Scott Berg. I lead the enterprise software and SaaS research efforts here at Needham. Today with us, we have Bill.com. We have the company's Founder and CEO, René Lacerte; and John Rettig, the company's CFO, with us. Welcome, gentlemen. Hopefully, everything's going well out on the West Coast.

Good morning. Thanks for having us, Scott.

Yes. Hey, René, for those probably less familiar, because Bill.com only went public about 6 months ago, how about giving a brief overview of the company.

Sure. Yes. I think whenever I do this, I always do kind of go back to the history and the chronology of it all for me. So my parents and grandparents had half a dozen businesses each, and I learned at the dinner table how important managing cash flow was, stretch out the payables and pull in the receivables. And so as I progress in my career from accounting to being a product manager and to -- for bill payment products and payroll products there, just starting my first company, which was a payroll company. And as I was trying to manage the day-to-day of the payroll company, the back office, the payables, the receivables, I found that it was quite difficult to do what I have learned at the dinner table. There were no tools available to really help, and so I became very focused on understanding why the consumer tools I'd had didn't work for me. And it really got down to the fact that businesses need to connect with information. They need to connect with their suppliers, with their clients. They need to connect with their employees. There's just a lot more connecting that needs to happen to be able to manage your business when you have more than just a few transactions, and that led to a mission statement for our company to make it simple to connect and do business. And so that is the mission. Our platform is financial operations and cloud. We automate payables. We automate receivables. We do this by going to market in 3 different channels. We go to market directly through our talents, through businesses trust and through financial institutions of businesses trust. And we've been able to scale the business to 91,000 businesses that use us to move just under $100 billion on an annual basis. And that's because they're able to connect and manage all of the operations, the automation of their payables and the receivables processes, all the document management, the collaboration, the stickiness, if you will, into one platform.

Got it. So I guess first question that I have for you both is -- congrats on the recent IPO. I always consider this to be a fairly complex process because it's not that super simple to pull off always. But is there anything that you've learned since you've become public that maybe would have helped the company out sooner?

Yes. I think there's one word -- maybe there's 2 words that describe any of the things that I've learned from, and then I'll let John add his own if it's different, but execution rigor. You don't go public without being rigorous around the execution of the business, and that helps all the business to actually get better at doing what it needs to do, whatever the function is. An example of this might be messaging and how we're thinking about what it is that we do and how do we talk to customers and prospects and strategic partners about it. An example might be the close and accounting process. And just having the ability to close at a faster pace means that we have a better handle on the data and the analytics across the business. So to me, execution rigor is something that going public forces a management team to decide how they're going to get there and be able to support the needs that the public market has with respect to data and messaging and so on and so forth. And that's probably been the biggest learning that if you could have bottled that up and gotten that earlier as great as the company was 5 years ago, it would have been great for the company if we'd had the level of performance that we have now. So...

All right. Starting on the macro side. Payments has been a hot space in general, digital payments, especially B2B payments. I always look at payments on kind of, last 5- to 10-year continuum, starting to square on the B2C side in terms of how customers were able to pay more in a more electronic nature, but it's evolved over the last several years to doing more B2B payments. But if you look at your platform, adoption and usage of transaction volumes is certainly growing faster in general than customer additions, which suggests you just have more customers leveraging more of the payment platform today. But can you help us think about what in the market has customers flocking to payment models like Bill at such a fast rate today?

Yes. I think the general thing is that people are trying to do business the old way. And when you -- like it's the pain that I felt running my business being tied to the desk, the bottling chain of a filing cabinet, having to go into filing cabinet to find a customer contract, having to walk around the ops and hope the person you want to talk to is there, having to obviously reconcile the checks that you were clearing. Having all that information be paper-based and manual kind of really made it difficult for me to have flexibility in my business. And I think we're seeing the tailwind that we've talked about with respect to COVID is that it is a catalyst, a reminder for everybody that they have an old-fashioned way of doing business. They've moved everything else in their business to be as digital as possible. They're using the Internet to do lots of things, but they're still using paper checks. 80% of businesses rely on paper and paper checks as the primary form of payment. So I think what the flocking is it's an opportunity to say how can I actually manage my business better. They're hearing about it more from people they know. In the survey that we did last year with new customers, 50% of them said that they had heard about us before where they'd used us before. So the word of mouth is very high, and that's because our network is 1.8 million and growing. And so the opportunity that people get to hear us like, you know what, there is a better way of doing this. As a consumer -- the other thing I would say, Scott, as the consumer does more of their payments electronically, when they go to work, they started asking, "Why am I still writing a paper check?" And so just -- there's that, I think, that contagious factor. This doesn't make sense in part of my life. Why does it make sense in the other part? And so there is that natural growth because people are asking the question, and people at Bill.com are building solutions to address the differences between a consumer payment mechanism and a business payment mechanism. The other thing I would say that businesses are quite interested in is just understanding how to manage the timing of their payments. And so ACH is a better payment instrument obviously than a check. When we look internationally, people want to be able to have one place to do all their payments and not have to go to place X and then place Y and place Z. And so having one platform that enables us to execute international payment, whether it's a U.S. dollar going out or an FX going out, that's important. So I think the consolidation and ease of payments is what's creating the flocking, but it starts upstream with what drives the payment, and that's why I went into the old fashion of what people do.

Now, René, you talked about awareness there a moment ago, and that surveyed 50% of respondents were familiar with the company. I always look at an IPO as a way to promote the awareness of the company, almost like a marketing event and all the kind of publicity that goes along with it. Are you seeing that benefit at all today six months later?

We are seeing -- we definitely feel like we're seeing some of that, especially, it's easiest to see, I would say, in our strategic partner channel just because there's more one-off conversations. As a reminder, our go-to market for our direct channel is, yes, they come into sales team, but it's all driven by demand gen. And the March quarter end was our best quarter, so I'm assuming some of that is from the IPO awareness that we got. But where we do get a little closer is when we are talking to partners. When we talk to prospective financial institutions and partners, the awareness that we got from being -- from the IPO process, from the success that we've had just as we've grown the business in the last 6 months, and people can see the numbers, gets people saying, "Huh, maybe I need to think about that for my clients and my customers." So yes, we think it's been an add for the business.

Got it. Now as you look at payments kind of broadly across your platform, the Bill.com platform has multiple different types of payments, and you listed off several of them. I think investors and customers always look at kind of the invoice payments as kind of the first step in terms of functionality to use. But you've added several other areas, including payment cards. I guess can you talk about some of the trends in using payments cards on the Bill.com platform? And why would a customer use a Bill.com payment card versus maybe using something else on the market?

Yes, I think the -- I mean the first thing that we've been trying to understand is really it's the ecosystem at -- on both sides of the transaction, right? And so as we have grown our network to the 1.8 million notes that we have, we have been thinking about what are the products and services that they need. And not just the 1.8 million, there's others -- million of other businesses that we pay via paper check that aren't in that number. And so for us, it's looking at what is the payment products that those entities need. The people that our customers are interacting with, what do they need? And so when we looked at that and when we did the research, there are plenty of suppliers that accept card payments, and they prefer card payments. It's easier for them to reconcile. There's fewer exceptions. The payment timing is better. And so when we understood that, we said, "Well, are there payments in our network that could easily go to card that would help those suppliers have a better experience?" And so the reality was we matched the data file that we had across multiple RFP vendor responses, and we saw that there was a good match. We -- I think we pegged this at the 5% to 10% ultimate penetration. That was -- what we're saying there is that the number of suppliers in our network that accept a card payment someplace else in their business is somewhere in the 5% to 10%, and that they would like to receive that payment from us. That way, we need to make it happen. And so what we've started with is looking at the check payments that are going out because we all -- we just want to get people off a check first, right? That's kind of a slow, painful process with lots of exceptions. So we looked at the checks first and matched those check vendors, if you will, suppliers with the Comdata network. Comdata is our partner. And if there was a match, then we send the virtual card transaction. And the suppliers are happier because now they have fewer payment instruments to kind of manage. They've got a card instrument that they already know how to reconcile. There's fewer exceptions. The payment timing is better, and we have all the data to support that. So that is how we think about, is that it's the suppliers' experience that we're trying to optimize here.

Got it. Then on the product side, the first question I always seem to get when talking about the company is, why isn't this functionality a part of your typical ERP or financial system today? If you think of vendors, especially cloud vendors like a NetSuite or maybe QuickBooks or even Sage's platform in terms of how they migrated, none of them offer this type of functionality around AP automation and then into payments like some of the larger vendors do. Why is that?

We -- I think it goes back to just how hard this is. We've been building going to company for 14 years, and we've got a platform that manages documents, that manages collaboration, that manages workflow, that manages payments and all the exceptions that payments has and manages the integration of the accounting platform. So as part of all that, there's a layer that manages all the risks associated with payments. And so you combine all those things, and we think all those things are necessary for somebody to be comfortable in making a payment decision. So the ERPs, they already have the accounting sync integration. So they have one of those 5 things I just mentioned. [Audio Gap] Management. Do they have the workflow? Do they have the collaboration with entity's external and internal? Do they... [Audio Gap] the -- can you guys hear me? Just Internet connection?

You've cut off twice for... [Technical Difficulty] I guess I'm back. Maybe.

Yes. Were we all out? [Technical Difficulty]

Can everyone hear me?

Yes, I can hear you.

So we were all frozen a little there. Technology doesn't -- okay.

Yes.

We were talking about the ERPs. I don't know how much was caught necessarily on that question.

I think I can... [Technical Difficulty] I can hear somebody, but none of the video is moving. Should I keep talking?

Yes. As long as we can hear the audio, I guess that's a good start.

Okay. And -- if -- maybe, John, you can always Slack me if you can't hear... [Technical Difficulty] Scott, should we just dial in via phone and skip the video?

Ah, we could certainly do that. That's fine. Except for -- I don't -- now it seems to be working.

If it happens again, maybe we should do that.

Yes, I don't have a phone number for the -- I just have the web link.

Maybe we just pause the video. That might help.

Okay. Yes, let's stop video then.

Yes. I'll stop my video. Maybe that'll help.

Okay.

All right.

And we'll go with the same thing, John, if you can't hear me, just let me know, and then we'll figure something else then.

So far, I can hear you well.

So yes, the complexity of being able to have the workflow, the collaboration, the document management and the payments, that would be all new for any of the ERPs to go get. You'd have to be licensed in all 50 states to move the money, and you'd have to have the ability to kind of manage the risk around the amount of money movement and flow that we have, and that's not a simple thing to do. And so we think that it's not an easy thing for anybody to build on. That's why we've been at this for 14 years, and we think it's why the financial institutions have selected us as a partner to go to market for their best customers, their mid-market customers. And we think it's really a competitive advantage having built a platform that does the digital transformation and has been doing it at scale for a number of years.

Got it. By the way, one point I did not make at the beginning, for the audience, feel free to ask questions in the question window. They'll pop up here. We will leave 5 to 10 minutes at the end for Q&A. Happy to take questions from the crowd as well. René, on the financial institution line that you were just mentioning is the company announced a new partnership with Wells Fargo in the quarter. That's one of several that you have now with some of the largest financial institutions out there. But can you help us understand how they're helping go to market, maybe what the product looks like? Is it a reseller agreement, maybe a white label type of agreement? And structurally, do all these partnerships kind of generally look the same? Or is there something that you maybe call out on, I don't know, JPMorgan Chase's relationship that you have with them or Wells Fargo?

So the -- what I'm really proud, excited about is that the 3 largest banks in the country have selected us and our platform as a white label solution for their best customers. So this is the mid-market customers, the $5 million of revenue to $100 million of revenue. And it is integrated -- our solution is integrated into their go-to-market strategies with respect to how the treasury teams sell services to those businesses, those mid-market businesses that support, obviously, the business' growth as well as the payment needs and financial needs that a business has. And so for JPMorgan Chase, the name of the product is called Cashflow360. For Bank of America, the name of the product is called CashPro. And for Wells Fargo, it will be the CEO portal that they have. And so we will be in -- with Wells Fargo, it is not too dissimilar than the others, but we will be integrated into that go-to-market solution that they have with the product. And then as -- because of that, we end up being integrated into the go-to-market sales and marketing approach as well. And so we feel very good about being the selected partner in these three, and we feel like it's an opportunity to continue to extend our relationships to other parts of the business at each of those institutions as well as other financial institutions.

So obviously, we think that they can be good distribution channels over time. But they predominantly will be leveraging your accounts payable automation, I believe. But the one portion of the suite, I think, that does not -- of your platform that doesn't get a lot of attention of is the accounts receivable. Does this partnership allow you to sell the accounts receivable portion to them? Or how do -- how does that part kind of fare just in general relative to what you see adoption probably across the AP automation?

Yes. So the Wells Fargo partnership of the top 3 will actually include receivables, and that will be an opportunity for us to continue to expand our go-to-market approach for the receivables customers. I think JPMorgan also supports receivables. What we have seen with some of our middle market banks, maybe the top 10 banks, is that when they have receivables and they make it part of their go-to-market strategy, they do get kind of a 50-50 split on the transactions between the 2, which is the way you would expect if you were serving both sides of the business. And so I think the opportunity for us is to continue to learn what those customers need and how we can support them and to continue to enhance the platform that we have for them and especially on this topic with respect to receivables.

Got it. Broadly speaking on the AR theme is as customers want to leverage that functionality, do they have to pay more for that? Or is that just kind of bundled in with the overall platform?

Yes. The pricing structure -- the lowest entry point only gives you one of the solutions AP and AR. But the most common solution gives you access to both, and then you just pay transaction fees depending on what transactions you're doing. So we try to make it easy for folks to try it. And what we've seen in area that we've been focused on with AR is not so much the traditional AR capacity that we were thinking about, but it's the look that the network knows, the 1.8 million, those are all -- many of those are AR customers that aren't paying us. They're receiving money, and that's an AR in need. And so what are the products and services we can do to support them? And so they get a free invoicing tool that they can use back with the clients in Bill.com, and there's other things that I think you'll see us do with respect to thinking about them as a customer. The example here would be the real-time payments capability that we talked about that once we get that to market, that would allow a receiver to decide that they want to get paid today versus 3 days from now with a normal ACH or 5 days from now, 7 days from now with a check.

On to kind of COVID, it's on top of mind for lots of people obviously right now, is if you look at the AR module in particular, just kind of continuing with that stream in collecting money today, has that module seen a bump of interest or an interest from some of your customers? Because I would think with all the cash collection concerns, that incremental visibility would be quite positive.

We've not seen a particular bump there. We definitely have seen a bump in payment timing, which we did reference on the earnings calls, where customers are using the platform to think about stretching out their payables. So we definitely have seen that. Receivables has been maybe a little bit more constant, so it could just be the customer segments that we have that are using the product.

Got it. And then overall, can you talk about how the COVID macros maybe altered your go-to-market plans in terms of how you add capacity going forward for the rest of the year?

Well, so I think the first thing that we did before the shelter-in-place orders kind of took hold was we changed some of our lending-based messaging to be more around working from home. And I suspect that the messaging in general will change as a result of COVID as we continue to kind of -- all this is through and understand what the critical points are that need to be solved, and I think we will use that both in the marketing side and in the sales' go-to-market. With respect to adding capacity, we have a very, very efficient sales and marketing team. So we felt right now that we could kind of be pretty constant with the resources we have and we could kind of grow the team and add as we would see market changes, more adoption, if not, more partners or something. But in general, we haven't really had to change and haven't changed our capacity as much as we haven't increased some of the spending that we might have done otherwise.

Now your bookings commentary was really good in the month of March. And in April, your commentary, especially from the kind of the interest that was brought by your accounting channel, was positive. Does COVID drive a kind of an acceleration in this market going forward? As you'd mentioned earlier, individuals are just trying to figure out, "Hey, I've got some old legacy processes, and now I need to modernize." Is that theme kind of resonating right now? And do you think that continues to resonate as we get through some of these COVID challenges over the next couple of months to a couple of quarters?

I think we -- I think -- so there's one thing that we did see, and we're referencing that on the call, was that there was an immediate need that became very acute for some businesses as they needed help immediately. And so we did see a good bump in customer acquisition on the gross new adds. And we saw, not just from a site perspective, but we saw increased conversion as well in April. And so it's too early for us to tell how much of that sticks with us. We did know from talking to customers that for some people, this was like, oh, my God, I just have to be able to run the business today. And if you figure it out after 6 or 8 weeks without us, I think it changes the messaging, but we won't have necessarily that same bump, if you will. We don't know, but that's kind of what we're trying to understand around where the market is going, is how much of that bump is going to stay with us. And what we do know is that the marketing and the sales teams believe that the messaging will change, and I know in our conversations with our strategic partners that this desire to get off of the old and on to the new is much more acute than it has been. People are much more interested and thoughtful around I just -- I need to get down with this paper. It's holding me back. And I think the other thing that we're going to see is -- which I think is interesting is, if you had asked any of us in February, "Hey, can everybody work from home and keep doing stuff?" I think most people would have felt like the reality was it would have been really difficult. And obviously, the service businesses had a harder time figuring up that a lot of my favorite restaurants up here and how do you take out. And they have less people employed, of course. But they are still in business, and they are making the food that they want to make for people, and people are doing takeout. So I guess the point is that people are going to enjoy being able to work from home. So I think there's a catalyst of I'm stuck in paper and I want the flexibility to be able to run my business from anywhere. And I think COVID has taught everybody that, that's an important flexibility.

True. I think one of the concerns over the last, I guess we'll call it, 60 to 90 days or so, at least with your business and other businesses that have -- or other vendors that have exposure to smaller businesses, whether it's the mid-market or the SMB is around churn. Have you guys seen any discernible changes around churn since all the stay-at-home orders have come up and put pressure at least on some companies in those segments?

We've seen some. I'll let John kind of talk to that. But yes, we have seen some.

Yes. We noted on the call that the trends that we were seeing in April versus March reflected an increase in attrition on a month-over-month basis. Stepping back, looking at the business, we had reported an 82% customer retention rate as of June of 2019. We actually saw some expansion, some improvement in that number through March of '20. And then in April, that increased attrition brought the retention rate back down to about 82%. So what we saw in the month of April was about a 15% sequential increase in customer attrition on a month-over-month basis. We're expecting some pressure on attrition to continue throughout the quarter, and that's obviously reflected in our guidance. But at the same time, we've seen good activity, good payment volume. And I think the value proposition is still very strong. And one of the things that we've noticed along those lines is with new customers, they seem to be converting at a higher rate than we'd seen previously, and they seem to be doing more activity sooner in the relationship once they're on the platform. So the need is definitely there, notwithstanding the increase in attrition.

Last question for me, and I'll turn it over to the public Q&A. And once again, anyone that wants to ask questions, feel free to put it into the question area of your presentation window. They'll all pop up here, and I'll facilitate those. The last question for me is around your different channels, is we spoke about them a little bit earlier before. You have your direct, your accounting channels and your financial institutions that you're working with. But do the customers that those 3 different angles attract, is there any differences between them? Or is it essentially kind of targeting a similar type of customer base at the end of the day?

I mean definitely with the banks, the 3 large banks, it's the mid-market customers, the accountants, they can attract customers from all segments. Direct is all segments, but probably tends to be a little bit bigger than what we might see with Intuit, which is the very, very small business. And so I think we see businesses of all different segments. So they do attract different folks, but there's a common thread through all of it.

All right. First question from the audience is, can you talk about the competitive dynamics, whether it's with a Coupa or an AvidXchange or others that are out there today? And who do you directly compete with do you think for AP automation and payments? Or are a lot of these vendors operating in kind of different customer service?

It's definitely the latter, right? The point that I would provide here just to kind of help folks understand that is we acquired 5,400 customers in the last quarter. I think when you look at either of those companies, their customer bases are significantly -- well, one of them might be about that after 20-plus years, and the other one is significantly less than that. So it just points to the size customer. And so when we look at U.S. businesses, there's about 20,000 businesses north of $100 million in revenue, and we focus on the other $5.9 million that are less than $100 million revenue. So I think the segment really does matter. I think our platform was built from the ground up to be a platform that managed everything from document management to workflow to collaboration to payments and accounting integration, all with the risk engine on top. It was designed from day 1 to do that to -- and to -- as part of that process to make it simple to connect and do business. Nothing that we're doing is new to what the design was in day 1. And so when I look at others, the organic growth versus the acquired growth, that's an indicator of how strong is the platform. And so our platform is 100% organic. We have 91,000 businesses over the last 14 years, and we are moving just under $100 billion annually on one platform that was designed to do that, and I think that creates a different go-to-market motion. I think that gives us a lot more control and flexibility in the size customer that we support. And the example here is our customers get up and running and -- can get up and running in less than 15 minutes. They don't need an implementation specialist. They don't need to schedule this out for months. They sign up, and they log in, and they get an e-mail account immediately with us. They give us their log-in credentials at their bank, and they're ready in their accounting system, and they can be ready to do all the business they need with Bill.com in 15 minutes. And that's unique, and we designed it from day 1 to be something simple for customers to be able to get going with. And part of the proof in that is the pricing model we have. We have a risk-free trial that says the customers come and try it and do that for 30 days. You don't like it, cancel it. Otherwise, we're going to start charging you. And that confidence is because we know that customers are going to try it and they're going to love it and they're going to want to keep doing it. And that's kind of, I think, a different approach than what others have. And one of the other things that we see is that somewhere in the neighborhood of 30% of the customers get started without talking to support, without talking to sales. They just -- they get -- they need it, and they make it happen. So I think definitely different segments, and I just try to provide some proof points as to why we were different and why what we're doing is unique and has a competitive advantage for the market -- segment markets that we're targeting.

The next 2 questions both are of an international flavor. So I ask them jointly, and you can talk about how you want to answer them. But the first one is, internationally, do customers outside of the U.S. have similar needs? And I think the question is likely yes. But how do you approach international longer term? And then second of all is on cross-border is, what is the blue sky view on what cross-border payments could look like for the company because it's a small part of the revenues today?

Yes. So I think every business everywhere has a need for document management, workflow, collaboration and accounting integration. So they all need that. Wherever you are, you need that. What's different in other countries is the payment need. So the U.S. is 80% to 90% of the businesses rely on paper checks. It's the primary form of payment. That's not true in many countries. So that payment need is different. It doesn't mean they don't have a payment need. It's just different. And so I think when we looked at international expansion, the first thing that we wanted to do was to understand more about businesses in the different countries that we might wanted to set up shop, so to speak. And so we launched the international payment capabilities. So we could see where U.S. businesses are doing business, where the trade is happening, and we could start learning about how to support businesses in those countries with our payment capabilities. And so what we are starting with is how do we support an FX transaction going into one of 150-plus countries, how do we support that. And when we have those entities using us for those payments, that gives us an opportunity to, one, develop relationship; two, ask them what else we could do; three, have a foothold when we decide to go to market in that country. So there's a number of things that I think referred in on the pipe for us, but the first thing is to help those businesses pay the international ones. Now what I would say on the second part of the question is that when we've looked at the data, and we have a ton of data from our customers because the accounting software sync that we do is complete, and we can kind of see vendor names and addresses and locations, when we look at that capability, what we think is out there, and it's a bit of a range, but we think it's anywhere from 10% to 20% of the total payment volume that a business has goes international. And so we would say the ultimate penetration level would be that we don't expect to get all of that, but that's what we're working against. That's our metric to really move the needle on.

Well, that is all that we have time for today. I apologize for the technical difficulties. This is the first conversation I've had that's had any sort of technical issues. So hopefully, they're worked out here, at least going forward. But René and John, thank you so much for the time. I look forward to catching up with you both in California soon.

That's great, Scott. Thank you, everybody.

Thank you, everyone.