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

Welcome back, and thanks for tuning in here to P.S. It's Friday. The theme this week is really around cloud automation. And we're very pleased to have Bill.com. René, CEO; John, welcome, and thanks for spending time with us on a Friday.

You bet. Thank you, Brent, for having us.

Great. Let's start out with your background. Obviously, as a new company, René, maybe walk us through kind of your background, and then John as well.

Sure. So I'm a fourth-generation entrepreneur. I learned a ton from my parents and grandparents. They each had about half a dozen businesses. And after going off to college, ended up working in accounting with Pricewaterhouse, learned a ton there. Landed at -- did some work at my parents' payroll company. Then landed at Intuit, where I was product manager for both payments and payroll products at Intuit. And then started my first company, which is a company called PayCycle, did online payroll. We were the first online payroll company out there. We built that to about 100,000 businesses, and then sold that to Intuit in 2009. And left the day-to-day in 2006 of PayCycle and started Bill.com. So been doing payments and software for pretty much my whole life now.

Interesting. John?

Yes. So my experience is really around scaling technology companies across both Internet software and e-commerce spaces. And one of the most interesting things when I first met René back about 6 years ago was that the problems that he was solving with the Bill.com platform were things that I'd experienced as a CFO throughout my career, obstacles that I was trying to figure out how to solve. But typically, I was with larger companies with more resources and technical skills than the typical small business. So the opportunity to work at Bill.com and help small businesses with a platform like ours is really exciting and the reason I joined.

Cool. So taking a page from kind of how you built this podcast; great podcast, love that. But as you think about, René, the business, right? What was the idea, as you thought about kind of moving beyond kind of Intuit, what was the idea of why you kind of built Bill.com?

Well, I think every business, every small business, every large business, everybody knows that cash is king. And as a kid, I grew up at the dinner table hearing that it is king, and the way you manage it is you stretch out the payables and you pull in the receivables. So I'd go in on the weekends with my dad, I'd help him find bills to figure out the source contracts about what he was stretching out or what invoice he was going to collect on. And so I kind of saw that up close and personal. And then when I started PayCycle, I thought, well, I'd launch consumer bill payment solutions. So I'll just be able to use that to run my business. And I wasn't. And I started thinking about it after a year or 2. I started to ask myself why is it that I'm not using -- as the business got bigger, it'd have to be more of a hassle. I'm like, why am I not using the automation that I help consumers get, why aren't those solutions working for me? So as I thought about it, it really came down to kind of one basic word is that connection. Businesses need to connect to be able to make decisions about who they're going to pay and who they're going to collect from. And you might need to connect with source documents. So a contract or a prior payment or a prior bill or the current bill. You might need to connect with your employees to find out, hey, how do you think about the work that got done? Is there an opportunity for us to invoice that customer again? You might need to connect with the supplier, the customer, and really understand what are the opportunities there. You might need to actually connect with the data in your accounting system. You're going to have to connect with the banks to be able to make the payments. And so that all boiled down to a mission statement for Bill.com, which is, to make it simple to connect and do business. Because it wasn't simple. I was running around the office on Friday, because typically, it's a Friday. I'd spent a couple of hours trying to find people, looking at filing cabinets for documents, signing checks, getting them mailed, looking for the cleared checks that hadn't cleared yet. And just the whole mess of running a back office, it wasn't what I wanted to be in business to do. I'd start a payroll company. I wanted to go work with the product managers on new features, not on trying to figure out how to manage the back office. And so for me, the mission of making it simple to connect and do business was real for me. I started talking with a few other small businesses that I knew, it resonated with them. And then I just -- once I started thinking about the idea, I couldn't stop thinking about it. So it's been 14 years. So...

That went well. 63% growth last quarter on the core side of the business suggests that something is resonating out there. So nice work. As we think about kind of looking at this business, and one of the reasons why we were so attracted to this business model is that it's really the best of really 2 models, right? SaaS, we love SaaS models, reoccurring revenue streams. But this is different. It's SaaS plus digital payments. And we call this kind of a new class of SaaS. And so you're seeing a whole new wave of companies now that are kind of building digital payments on top of SaaS business models. Ultimately, it ends up being a bigger business and growing faster. My question for you, René, did you start out with this model? Did you start out with this idea that I'm going to do both SaaS and digital payments? Did you really start out on the SaaS side? And as you kind of started solving those automation connectivity pain points that you'd layer this on, walk me through the background around the combination of SaaS and digital payments.

Yes. I mean, in general, I grew up in software. I mean the businesses my parents had since the '60s were all software-based. And so my dad actually built the first online payroll company. It was not Internet, but it was modem transferring of data back in the '80s, right? So I grew up with soft --

Modem days. Wow. That's --

Modem days. I remember writing code for a 96K modem. And I'm like, woohoo, we're out of the 20. Anyway. So I grew up in software. And for me, what was really amazing is when I left Intuit to start PayCycle, it was all about the Internet, it was 1999. And everybody just thought about the Internet is just about being able to be anywhere and do anything, which I think it is. But as a software developer, as I started working on the platform, I'm like, oh, no, no, this is so much bigger than that, to be able to do software where you have a central database, which you've never had in software before, right? Not with PC software. Essential database with essential UI, which you'd never had before, the ability to kind of create a custom new experience for anybody who's coming in, that's different, and that's what's made the cloud so powerful. And it also is what enables us to do payments. And when you think about having all that data in one place and having a user experience to be able to drive the activities that end up leading to a payment transaction, but now, we can take that same central database and connect it to other databases to help the payment rails go. So that was always part of the vision because that was the pain point. I didn't like writing checks. I didn't like having paper filing cabinets. I've had employees joke about how I always tell them to use 2-sided printing because I don't like wasting paper. So I -- for me, it was just -- it was definitely something that had to happen, and the transaction side of the business was really important. And I think John can probably talk to some of the transaction growth that we've been able to add because he's been kind of leading some of that, and that's a huge part of what we've been doing.

Yes. I would just add that the subscription part of our revenue stream is really the foundation of our business model, always has been. But we've had integrated payments from the beginning. So unlike a lot of the software companies these days who are bolting on payments, it's really been a part of what we do. And one of the important things about that is it helps align our success with the success of our customers. So as they leverage the platform more and create more activity and use it, they pay more, and we generate more revenue. So we've seen accelerating growth across both subscriptions and transactions in the last quarter. And it's really, it's -- whether it's subscriptions or transactions, together, we call those core revenue. And that's super high visibility, predictable revenue stream. So it's an important part of our growth formula historically, and we think there's a long way to go.

I have to ask you, John, do you miss writing checks?

I do not miss writing checks. And every now and then, when there's perhaps a local government or someone who will only take a check and somebody has to come to me to sign a check, it's just a -- it's an interesting event in the office.

Great. So René, back to you. As you think about the opportunity, 91,000 customers today, subscription software, you're helping automate kind of the back office for these small businesses and helping kind of digitize the payment process. What is the vision long term? What do you want to build here?

You go back to the mission statement: To make it simple to connect and do business. We define the market as every business that has an employee is where we're starting today, just because we know there's enough complexity. And there's millions of those, right? There's 6 million in the U.S. There's tens of millions more outside of the U.S. And so the opportunity for us is how do we take the stat you have here or the fact that 64% of payments in the U.S. are still going out via check. What we see is that 80 -- north of 80% of businesses are relying on paper as the primary form of payment in the office, right? And that's just crazy. And you think about the waste of time. Our customers tell us that they save 50% -- at least 50% of the time it takes to manage the back office. So if you just think about that cost on society, so when you ask me, my vision, it's like, let's get -- eliminate that cost. Let's get people doing other things, because other things are more valuable for society than worrying about the paper and signing a check and putting it in the mail system and all that. So that's just kind of the example of all the back-office nature that businesses have, but it is the filing cabinet. It is everything that we've seen that is hard, when you think about what COVID's done to the business, right? So when you have to work remote and you don't have your filing cabinet with you, and you don't have the checks stocked with you, and you don't have the ability to kind of connect with the employees, like, all of that is a hassle. But once you actually break through that, now, you can actually work anywhere, that's pretty powerful. And so I think -- when I think about the vision, there's just a lot of opportunity to help businesses change the way they do business, and that's what gives me jazz every day is changing the way they do business and making them more successful and happy with what they chose to do.

John, as you think about just the compare/contrast kind of B2B, the fact that a lot of -- there's still a lot of CFOs writing checks, why is that the case? Like on the consumer side, we've kind of transitioned. Is it the business process hasn't been digitized? And so there's not a means to go digital? Why do you think the B2B world is still stuck in the '80s?

Yes, you're so right. It's so far behind what's happened in the consumer world. And I think a lot of that has to do with just legacy processes. So businesses are mired in paper processes. And the check is just one example of it, whether it's invoicing or contracts and all of that. So many small businesses haven't yet embraced cloud technology. And at some level, a check is historically a control process that companies leverage to manage their financial operations, and there hasn't been easy tools to be able to replace that, really, until the cloud, until some of the capabilities that we're introducing and that other companies are bolting on to their platform. So I think it's -- the time is right for us to see the B2B world start to catch up with the consumer world.

And the process, the control process is an interesting point that was part of the process. And then -- so something you have to change. Let's do a little deeper dive into money transmitter because I'm sure there's -- this was a decision you guys made kind of early on. And just walk us through -- it is different, right, than other models that we've seen. So walk us through why go to the hassle of becoming a licensed money transmitter? And what value does this bring to the business?

I'll start and let John kind of talk more to it. But ultimately, we wanted the flexibility to be able to offer our customer products and not have the restrictions of regulations be a problem for us. And so if you think about what we've done in the last few years, we've launched international payments, we've launched virtual card. The way that we're doing both of those is unique to the way that we do business, and we think it's unique for our customers and creates more value. And we wouldn't be able to do that if we weren't regulated and licensed as a money transfer. So I think, John, I think you can kind of talk to some of the other benefits and some of the challenges about why we can -- and why we think it's a competitive advantage, but it's real. So...

Yes, for sure. I mean, to say it's a hassle is probably an understatement from a regulatory standpoint. But we invested in this strategy starting a long time ago, and this enables us to move dollars for payment transactions through our bank accounts. And by doing that, we're able to offer SMBs more services and more products than they would otherwise get if they were dealing with their bank directly. We can give fraud protection, security, other capabilities by leveraging our bank accounts. The other thing it does is it actually raises the bar for us. And it's enabled us to focus on the success required to move billions of dollars. And so we've built a world-class risk capability. We moved over $70 billion in our last fiscal year, and had losses related to fraud or credit incidents of less than $1 million. So we've been tremendously successful in building this capability. And what's enabled that is this regulatory strategy of money transfer licenses.

I mean, how hard is it to do if one of your competitors were trying to do this? If they didn't have today, they were like -- or is this -- I just have no idea how hard this is to do.

It's hard, right? So it probably took us more years than we thought and definitely more money than we thought to do. It is an ongoing process. One way of demonstrating how the challenge and the rigor and how it makes us better, which is what John -- the phrase that John uses, we have regulators in our operations on a monthly, if not weekly basis, checking out, making sure that we have procedures and controls to protect their consumers in their states. Now what's interesting about that is there's 50 states, and obviously, there's the Feds, they all have different things that they care about. They've all been burned by this form of fraud or this form of phishing or whatever, and all the different things they care about, we get the benefit of that. That's kind of to John's point as to why we're better because they all come in and say, "Well, did you do this?" And so we learn, and if we didn't, then we fix it and we do it. And so I think it's a commitment. I mean, we have a significant team. If you look at our G&A numbers, it's one of the reasons we would say that the G&A is higher for us, is because it takes capital and resources to have a team to manage all the compliance needs and requirements and all the others that are coming in. But it does make us better. And it does give better service for our customers. We don't report this number, but the amount of fraud that we detect that happens that prevents -- that would have happened to our customers if we weren't detecting it, it's significant, and that's a great benefit that we're able to provide, and it's because of the way we've built the risk platform with this in mind that we're a money transfer.

Just spend a little bit of time on kind of the TAM. Obviously, you guys did a pretty good job articulating kind of USD 9 billion. Maybe as you kind of compare/contrast what you're doing here versus, let's say, a Coupa in the mid-market or enterprise, like what's different? That was one of the questions that an investor asked. And then is your technology kind of limited? Or is this a market focus? Walk us through why you're focused on those less than 100 employees opportunity?

Yes. Our focus, I'd probably say that maybe we're focused on less than $100 million in revenue versus less than 100 employees. But still, the vast majority is going to be less than $100 million -- 100 employees. That's just the way the demographics in the U.S. works, is going to be 95% of all business is less than 100 employees and 99% is less than $100 million in revenue, right? So it is, for me, what I -- the problems I like solving are ones that are broad and can be applicable to the most number of people. And I've said this with other folks recently, for some reason, somebody was asking, "Why do you start the companies?" Well, every entrepreneur, whether you're a baker or a gardener or whatever, you want to help people. You want to give back to society with that -- that's the soul of you that you want to give back, right? And so I wanted to -- I found out I've learned something about managing a business. I found out that I knew something about finance. I wanted to kind of put those 2 together and give back so that SMBs everywhere could have the benefit of that learning as we bring the platform together. And we get more learning for more people, the platform kind of gets more mature and has more capabilities. And so when I look at the market that we're serving, there is a product set that is broad, it's horizontal, that can serve a vast, vast number of businesses. And our product set allows us to serve businesses of all segments in all categories. And that is exciting for the employees. It actually creates benefits for the customers because we're solving the pain point that is common in all of them. How do you manage the documents? How do you manage workflow? How do you manage collaboration? How do you manage payments? And how do you manage the integration with your accounting system? And how do you manage all the risk that sits on top of that? And we can do all of that consistently across businesses of less than $100 million in revenue and businesses in any category with one platform. And so for us, for me, it was building a platform that can be broad and horizontal, so you could help the most number of people.

Makes sense. So as you think about the competitive landscape, how often do you kind of run into a competitor? I.e., kind of these new crop of automation enablers versus, really, it's just the status quo that is the alternative and the main competitor? But just walk us through, has that changed in the last 1 or 2 years, or not much?

It really hasn't changed. I mean, the status quo paper filing cabinet, that is the competitor. That is the #1 thing that we hear that people just end up doing what they were doing before. What we do see and what we do think is an opportunity is that there's more and more awareness around, hey, I could do something different. So I expect over time, we might see more competitors. But in the market segments that we serve, when you think about -- in the last quarter, we said that we acquired 5,400 net new customers. There's nobody, in the new crop of automation enablers that you have here, there's nobody that's acquiring that many customers in a quarter, let alone in their existence, right? And so -- and the reason I point that out, it just points to a different size customer, right? We're just -- we don't see each other. We don't overlap. And they're good businesses, but we just don't really overlap, right? And we think that's to our advantage. We think it's to our opportunity to build a broader platform that serves more businesses. And ultimately, it leads to a network, right? I think we -- I don't know if we have any slides in here on the network, but we have 1.8 million entities that are paying customers to connect with, do business with. So it's a broad network. That number keeps growing. And my belief and my vision around this making it simple to connect and do business is make it so more and more people can connect, because the more and more people that can connect, the more value there is for everybody who's connected, right, just like with any network. And you need a broad solution to be able to make that happen.

Totally makes sense. So let's shift gears into the go-to-market distribution, which I think, again, it's a bit of a testament to kind of the approach and how you go after the 99% of these SMBs that they can be costly. So you need kind of some unique go-to-market routes. Let's start with direct sales. So as you think about the direct sales business, obviously, these are inside, mostly inside sales, maybe walk us through how the direct selling motion has changed in an environment where we're all kind of working from home. And kind of some of the pivots you guys have made here since we live now in a new world order?

I think we were pretty fortunate because our business model has always been a 100% digital demand gen and 100% inside sales. So when we made the decision to shift to a work-from-home environment a week ahead of any of the shelter-in-place orders, we were able to do that shift and didn't miss any day of selling. That was like people were in the office one day, and the next day, they work from home. And everybody -- I mean, I think they were a little less efficient in the first couple of days, but by the next week, they were actually more efficient. They didn't have that commute. They actually have more productivity during the day. And so we have a completely full stack platform for everybody in the company that is cloud-based, so people can work from anywhere, right, as long as they have Internet connection. So for us, the motion is we drive demand in a couple of ways. Digital demand gen is the primary marketing effort in addition to word of mouth. So we have a survey from last year where 50% of customers came to us, had heard of us before or used us before. So pretty significant word of mouth. Combine that with the digital demand gen we do, that leads to a lead that an inside sales team, 100% inside sales, calls and supports and gets them onboarded. Now our customers are able to get started in as low as 15 minutes, and around 30% of them don't even need to talk to a sales team or a CS professional to get started. So people just gets started and get going. And I think that is another proof point of our overall model and approach, is to make it easy for people to get on and to get going. So yes, I can talk to a few other points, but I'll let you ask the question.

Sure. No, just as you think about the trends, you talked about kind of the free trial. Love to see any sort of views or updates on how the trials, free trial's going? And have you seen any sort of change so far in May around the kind of the churn side? Or is it kind of consistent?

Yes. And so what we said in the call in the beginning of May was that we noticed kind of in the middle of March, things started slowing down. But then towards the end of March, customers started signing back up, and we actually had -- March was our best month, and April was better than March, right? And that was, there's -- the promotions that you're talking about was in a separate offer. So that was just kind of referencing our normal go-to-market approach. We had very strong results. And we believe that, that was, in part, just the acute need that business has had from shelter-in-place orders across the country. There are businesses that were already researching us, and all of a sudden, they had to do this and it kind of accelerated maybe their thinking about this. We know it helped all of our channels, financial institutions, banks, accountants and direct. They all did better in March and April. But we do think there's kind of a one -- there was definitely a onetime need that was happening from that. And we don't know how much of that will carry forward into the coming months, right? So we also saw -- as part of the increased sign up, we also saw better conversion. And we hope that also continues. And at the same time, balancing all of that is we did see an increase in churn, right? So what we saw between March and April was the monthly churn rate went up about 15%. So nothing that is -- I mean, it's definitely manageable. It was nothing -- it wasn't the worst nightmares that everybody probably had. But it is something that we're watching and paying attention to. And at this point, I'd say that we feel good about where the business is at and what we're able to do for customers.

Shift gears to accounting partners, because it's kind of a unique distribution channel for you guys. But what's happened with the accounting kind of channel as you think kind of post pandemic is? And why would an accountant partner with you guys? Obviously, it's 45% of the subscription business. Walk us through the -- what are you seeing with accounting partners? And why do they really want to work with you?

Yes. So the reason I focused on accountants early on was because businesses trust accountants. So I learned that from my parents because that's how they reached their customers. But businesses trust accountants. And I wanted to be able to have something that helped accountants manage their relationships with their clients. And so building a cloud platform, this is kind of the point I made earlier, we have the ability to serve clients, but then we have the ability on top of that one database to create a separate user experience for our accountants, right? So they get to manage the tools, and they get to actually manage multi-clients easily. And so if you were to ask accountants that weren't on our platform, "Do you want to make a business out of managing the back office?" They'd be like, "God, no. I just do it because I have to," right? When they're on our platform, they shift, and they actually say, "I'm going to be a virtual CFO. I'm going to go out there, and I'm going to start adding services. And I'm going to take care of all the back office. And I'm going to let the business go do whatever they need to go do from anywhere. And I'll just make sure they have the Bill.com mobile app, so they can actually approve the bills, they can pay the bills, they can see the invoices, they can invoice the customer. They can do all that from the road. And I can see everything back in my office, and I can help support them and give them advice and counsel on that." And so what we saw with the pandemic with COVID was that accounting firms were able -- they were the first place that many businesses turned to, and they were able to help those businesses quickly, because they knew our platform. They already have lots of clients on our platform. And now, they're able to add these new clients that came in. And so we think it's been great for them. We also think, I think on both -- on any of the channels that we serve that the shelter-in-place, the work-from-home changed everybody's experience, is going to make it a different marketing message, a different sales pitch going forward that people will always be able to relate to and understand.

We're running out of time here, but I did want to squeeze one more question in, if I could, just around Wells Fargo. It's a new relationship. This is the third channel you have. John, maybe you can weigh in on Wells Fargo? How long you've been kind of courting the company? And as you think about kind of the opportunity on board, a lot of SMB customers, how long does that kind of process take to start to onboard some of those Wells Fargo customers?

Yes. We talked a little bit about this on the call. I mean, we're really excited to be partnered with Wells Fargo. As you can imagine, developing these partnerships is a long-term effort. We've been in the market and have had success with lots of other leading financial institutions, including JPMorgan, Bank of America, AmEx. And so Wells Fargo is a continuation of that success that we've had. And the launch timing has yet to be determined. It will be later in 2020. So as we get closer to that, I think we'll provide more specifics on how we think that opportunity positions us and impacts our model.

Great. Well, I just want to thank you both for joining us for the coffee chat this morning, and it's been very insightful. Great little business you've built here, and I look forward to hearing more about the progress going forward. Thank you so much.

Thank you, Brent.

Great. Thanks, Brent.