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

Excellent. Well, good afternoon, everybody. Thank you so much for joining us today. I'm delighted to welcome Bill.com to the conference. We're lucky to have CEO, René Lacerte; CFO, John Rettig, join us today to talk about the business. Thank you, René and John, for joining us.

Thank you for having us, very much appreciate it.

Brad, our pleasure.

Absolutely. No, good, good. And yes, what I've got is the standard kind of format here. I've got some questions we'll go through. We'll ask René to kind of start high level on Bill.com and the opportunity that they're addressing. I've got some questions to ask. If you have any questions you'd like to pose, please do so via the chat window that you should have on your webcast, and we'll try to get to some of those at the end of the session. We've got 35 minutes. And yes, why don't we get started?

So René, again, high level, I think most folks on this call are somewhat familiar with Bill.com but relatively new issue here. So I think it would be helpful just to kind of talk about little company background, your background and the opportunity that Bill.com is addressing.

Sure. That sounds great. Well, the company wouldn't have happened without just growing up in the family I did. I grew up in a family of auctioneers. Parents and grandparents had a lot of businesses, small businesses amongst themselves, and so I learned firsthand that the importance of cash was king. And then when I started my first company, which is a company called PayCycle, online payroll in 1999, I realized that it wasn't easy to manage our cash flow. And that was, in part, influenced by the fact that, at Intuit, where I'd worked from '94 to '99, one of the responsibilities I had was to help build their consumer payments platform. So when I started PayCycle, I wanted to kind of use those consumer payment platforms, and they just didn't work for me. They didn't work because when you're making decisions around who to pay, who not to pay, who to collect it from, who not to collect it from, here and that, it all resolves around information, and you need information to kind of connect the dots. And so I felt that I was tied to my desk. I didn't have -- had impertinent information, and it was just something that I started thinking about how do you solve this problem. And I became really focused on the mission of making it simple to connect and do business. And that is essentially what cash is, managing cash is all about, is connecting and doing business. And so I set out to solve this problem, to really figure out a solution that would address why businesses were using checks instead of electronic payments. So there's 6 million businesses in the U.S. that have a payroll, and over 60% of them use some type of payroll solution, yet over 80% rely on checks for AP and AR. And so that was kind of the problem statement that I saw, and it's what we've been solving. Today, we have 91,000 businesses on the platform. With those businesses, we manage just under $100 billion on an annual basis in total payment volume. That -- those payments go out to over 1.8 million entities across the U.S. and globe, and 59% of our payments are electronic. So kind of gives you a sense of the scale that we're at, and our opportunity to grow is strong. The last quarter we had, our core growth was over 60% year-over-year. And so lots of opportunity to take the 91,000 customers on the platform today to the 6 million businesses that have a payroll, which means they have enough complexity to need automation around their payables, receivables, their financial operations. So that's kind of the core overview. We built a platform from the ground up to really address all the needs when it comes to financial operations and to help this transformation of digital across the digital divide. And ultimately, we've also built a very strong distribution strategy, which I imagine we'll talk about.

Absolutely. No, that's a great overview, René. Maybe just to start, what is the typical catalyst for a new customer signing up for Bill.com? What are they running for payables and payments before? And where is the pain point when they come to Bill.com and say "Enough, I've got to do some automation. I need to do this differently", if you could describe that, please.

Yes. It's really not that different than the pain that I felt in 2000 -- about 1999, 2000, 2001, '02 when I was building the early days of PayCycle. And it -- my process was, I would come into the office on a Friday, the office manager would print out checks that needed to get signed, and then she would hand a stack of invoices that were attached to them. And based on that, I would make a decision about whether to walk around the office and try to find the people that I needed to be able to make decisions around this or I would leave sticky notes on people's desks, ask them for more information or else time the check and get it out the door. And so that process is manual. It's paper based. And what we see in the market that's consistent with data that's in the market is that 80% of businesses rely on paper as the primary form of payment for them in their business. 65% of B2B transactions are paper. And so the process is walking around, sticky notes, filing cabinets, paper checks, clear paper checks, reconciliation nightmares, exceptions. I mean that's the process, and it's something that we know we do better and can really help customers save time. Our customers will tell us that they save over 50% of the time it takes to manage that back office. Their financial operations get far more efficient when they're on the Bill.com platform.

Excellent. That makes a ton of sense. And electronic payment, ACH is still pretty low in terms of penetration or usage in the SMB and even large enterprise. I think you've said in SMB, 90% of the payments are still done via manual check. Large enterprise, I think it's around 70%. Why is that? Why is it taking the industry to -- so long to move towards electronic payment away from check, just given some natural advantages on the economics to electronic payment?

I think paper is a control mechanism. And if I go back to what I learned from my parents and grandparents around how you stretch out the payables, cash is the best form of working capital that you have, right? It's the cheapest. So managing your working capital so that you can produce more goods and then obviously pay for whatever raw material goes into that is a really important part of the business. And so consumers -- if we just maybe contrast with consumers for a second. Consumers, their bills are relatively the same every month. You're paying for Internet. You're paying for electricity. You're paying a credit card company. You're paying for a mortgage, so there's not a lot of differentiation in the bills. The amounts actually don't change that much, and so the consumer can kind of keep track of all those things relatively easily, but the business pretty quickly gets to 10 to 20 -- our customer, on average, is north of 20 payments a month. And so when you have a lot of content that needs review in order for you to make a decision, you would use a manual process. You might want to go to the filing cabinet. You might want to, like I said earlier, talk to an employee. You might want to e-mail somebody and ask them a question, and so all of that slows things down. And ultimately, the signing of the check was the simplest thing I had to do when I wasn't on Bill.com. And the execution of the payment was the simplest thing. It was everything leading up to it that was difficult, and that's why I think businesses have stayed behind because they haven't had a choice. They haven't had a solution that would enable them to take everything leading up to the payment and making that electronic. And that's what we do, right? We help customers get onboarded. In less than 30 minutes, they can be up and running on the platform, storing documents, having us do data entry, executing payments. That's a relatively short amount of time to have your entire process. And then ultimately, we execute the payment. When customers start with us, a vast majority of their payments are paper check. We then help them convert their suppliers into electronic, so they want to go electronic. It's not that hard, but it's everything leading up to it that makes a difference. And that's where our focus has been on building our platform. It's just the simplicity around all of that.

Absolutely. I normally don't start out with competitive advantages, but I think it's worth touching on where you guys view that competitive moat? What does that stem from in the platform and kind of your go to market?

Yes. I think the -- we would say the platform is a real competitive advantage. That platform includes document management, data entry, collaboration tools, workflow tools, integration with the accounting systems, payment technology, obviously, rails and execution, and ultimately, a risk management platform there that allows us to move just under $100 billion on an annual basis. So what makes the platform unique is that it does all those things. And all those things in one platform that was purpose-built, I think that's kind of what's unique about what we've built. And it's taken 14 years to actually build that platform from the ground up to do all those things. In addition to the platform, we also have tremendous distribution advantage. We had a portfolio approach for acquiring customers. We go direct to the SMB, and that's digital demand gen, in addition to inside sales that helps close customers. We go to accountants because businesses trust accountants, and that means that we get the accounting on. And then they add 1 client and 2 clients and, over time, they can add many more. And we go to financial institutions because they're trusted by the businesses out there as well. And so having the ability to white label our solution to a financial institution that's serving their best customers, the commercial customers are what we have with 3 of the top 5 banks and being able to white label that solution and have that be the same solution that allows somebody in our network to receive a payment or an accountant to be able to manage multiple clients for a direct customer, that's a real competitive advantage. Ultimately, like I mentioned earlier, all of that leads to data, which leads to a significant opportunity to create more simplicity in the product like the data entry that we did as well as better risk management tools for the money that we move. So ultimately, I would say those are kind of the key competitive advantages that we have.

Got you. And you touched on the channels a little bit here, but could you drill into that a little bit? You've got 3 different channels. What are they? And what -- roughly what percent of your revenue goes through these channels? And is the gross margin or the economics different in each of these?

Yes. So the 3 segments that we break out the channels into are direct, accountants and financial institutions. On the direct side, those are the highest paying revenue per month customers that we have, and then the accountants would be next and then the banks. The accountants and banks, since they are kind of a one to many or a many to many allows us to discount the product to allow them to, obviously, carry the marketing and sales costs to get those customers onboard. So when we look at the channel, we target each of the channels the same target gross margin across the business, and we've been able to deliver that. And the result, to date, is that the financial institutions to date represent around 10% of revenue, and the rest is split between the direct and accounting firms. So accounting firms have more customers, a little bit north of 50% of the customers come from the accounting firms. The difference there is just the revenue is higher on the direct side.

Got it. Got it. And while we're on this topic, maybe we could drill into the financial institution partnerships. Who are some of these partners? How are you partnering with them from a product standpoint and a go to market? Just a little bit of detail on that would be helpful, I think, please.

Sure. Well, in market today, we have Bank of America, JPMorgan Chase and PNC. Those would be our largest institutions. There are some others in addition to that. Bank of America is -- we are integrated into their CashPro offering, which is a payable solution that BofA promotes out and markets and sells to their commercial customers. This is the $5 million to $100 million in revenue range. JPMorgan Chase has a product offering called Cashflow360, again, which they promote and sell into their commercial customers across the base. That is both AP and AR. PNC is probably in the midsized -- the small to midsized business, and they promote AP and AR across their customer footprint. These are large institutions. They take time to obviously sell, and then they take time to really develop a relationship and the marketing and sales tools that they need to be able to support the growth of their business, and so it requires a lot of forethought and patience. And we've been working with these institutions for many years, and we know that they get better and better every day. And so, for us, this also becomes part of the competitive advantage is that we've been working with financial institutions for a long time. They've chosen to white label our solution into their customer base, and we are doing payments for them. And that allows us to really continue to bring more customers into the fold and eventually, like we've announced, bring new bank partners into the fold as well.

That's great. And recently, you issued an 8-K, I think it was late May, where you disclosed a new expanded relationship with one of your -- one of the top 3 small business banks. Is it possible to elaborate on that one?

There's a little bit that I can say on that, right? So they -- it is an existing partner. It's one of the top 3 banks in the country. And what we were excited about is that this -- and I think we've been talking about the deals that we currently have and including the one that we just announced on the last earnings call, Wells Fargo. Those are all targeted at the commercial customers. This is the $5 million to $100 million revenue range. And this deal, this extension allows us to open up the SMB segment for the first time with a financial institution partner. We will become the default solution for new SMBs for both AP and AR, and this partner has millions of SMB customers. So it's going to take time, obviously, to roll that out, but we're very excited about the partnership and what that's going to enable us to do. Now it's a long-term commitment for both parties, 5-year term, and it is larger than any existing FI deal that we have [Technical Difficulty]

Got it. No, that's great. Excellent. Since you've touched on the accounts receivable business, I think most folks would associate it with payables and payments, but you also have accounts receivable. It's kind of a newer business for you. What is the offering? And what's the go to market there? And this is a little unique on the pricing and what it does for the business. So maybe if you can just elaborate a little bit on kind of the AR opportunity. Did we lose René?

Yes. Brad, I think we might have lost René momentarily.

Okay.

I can get him back online here, but we can -- I don't know. We lost him. Technology, huh?

Yes. The perils of a live virtual conference. Well, while we're waiting for René, yes , if you want to address that, John, feel free to. Otherwise, I can pose some other questions.

Sure. Why don't you go on with other questions, and we'll get back...

I am back now.

Oh, good.

Can you guys hear me now?

Okay.

Yes, we can hear you. You're back.

How much did I state -- where did I drop? Because all of a sudden, I finished, and I looked and there was nobody on. So where did I drop so I don't repeat?

I think we got the financial institutions question answered, and I was asking more about the accounts receivable business since you had mentioned that as part of the offering with that partner. Wanted to just elaborate on what that offering is, if it's unique in your go to market and what it does for the business, so I thought it'd be worthwhile to kind of dive into that a little bit.

Sure. Yes. And when -- we've, since the beginning, had a receivable solution that allows customers to create invoices, bill their customers and then obviously track and manage the payments as a result of that. So what we think is really important with receivables is probably around the payments and helping the payments get accelerated. There are a number of tools on the invoicing front, and so we have a network that is part of the platform where we enable customers to obviously pay and get paid that way. And so that allows customers, the 1.8 million entities that are on the platform, to sample, if you will, the other side of the business that we can help them with. So on the AR side, we have a number of AP customers that are paying their customers their -- sorry, their suppliers. And the suppliers, once they're paid electronically have a chance to say, "Hey, do I want to receive more payments electronically? Or do I want to even pay my suppliers electronically?" And so there's a natural network effect. And so when we look to the opportunity with any of our partnerships, we look to how do we help that network effect to take hold and how do we support the needs of our partners. And so in this case, we think the opportunity to offer both AP and AR is important and will allow the small businesses on their -- in their footprint to really have the benefit of financial operations in the cloud and take advantage of digital transformation that's happening.

Excellent. That sounds interesting. And why don't we shift gears to the transaction business? Maybe a good question for you, John. Can you talk about the mix of transaction types that are in your transaction line item? And how has that changed over time?

Yes, sure. I mean we've successfully enabled customers to transition to electronic payments by making it super simple on our platform. As of Q2, approximately 59% of our payments are electronic, even though most customers actually start on our platform with primarily check payments. So this is kind of significant progress we've made over the last couple of years. The vast majority of our electronic payments are ACH. So at 59% electronic, most of those are ACH. The rest are check payments. We also have virtual card payments and cross-border wire payments. Both of those are still pretty early, early innings in terms of adoption, penetration of our existing customer base. So their contribution in terms of transaction mix is still pretty small.

Got it. Got it. And we've seen the overall take rate, just taking transaction revenue over your total payment volume expand nicely over the last couple of quarters. I think it was 4 basis points about a year ago by our math, and we're getting to about 6 basis points in the recent Q3. What has driven this? I assume this is uptake on these variable-priced offerings. You mentioned cross-border and virtual card. Is that what's going on here? And any color on kind of what's been driving that, please?

Yes, sure. I mean that's one -- definitely one of the major drivers. We've increased transaction revenue per transaction consistently in recent quarters. And the biggest driver has been that mix shift to the variable-priced product. So both cross-border and virtual card payments are priced on a variable basis. So it's -- the actual cost of the transaction and our revenue is based on the size of the transaction, so the dollars. And that's versus an ACH or a check payment that are flat fee, irrespective of the dollar size of the transaction. We delivered about $2.29 per transaction in transaction revenue in Q3, so it was up about 68% year-over-year. And because it's still somewhat early, as I mentioned, in the adoption cycle on cross-border and virtual card, we think there's clearly room to expand there. For cross-border payments, we have both U.S. dollar and FX -- kind of tiered pricing for FX depending upon volume and currency. So the mix of USD versus FX certainly has an influence on our yield as well. And then for virtual cards, we're the receiver of net economics from our partner. We work with Comdata to issue those virtual cards. We haven't gotten into the detailed economics on those, but I can tell you, just directionally, that virtual card transactions as well as cross-border FX transactions represent a much higher revenue per transaction opportunity than the typical ACH or check payment.

Great. And René, I think on the last earnings call, you talked about a couple of new transaction offerings, same-day ACH, real-time payments. What are these? If you could explain a bit what these are. And when should we expect these out? And then anything you can share at this point on pricing economics, I think, would be very helpful.

Sure. Yes. So when we think about payments, we've started -- maybe I should say more broadly, when we think about customers, we started expanding our definition of a customer. So it's not just customers that sign up for a subscription fee and obviously pay us for subscription and transactions that result from that. It's also the suppliers in the network that are taking advantage of being paid electronically. And so whether that's an international payment or a virtual card payment, or in the future, a real-time payment, those customers, if you will, are paying us, like you and John just talked about, kind of on the -- as a percentage of the transaction. So what we've been trying to do is really think about what is it that we can do to help people pay how they want to pay and get paid how they want to pay -- get paid. And so the first thing that we announced in the call was same-day ACH, and that's really for the buyers because they need to make a payment right now. And I would think of that similar to a wire but a lot simpler and a lot more affordable. It will be built into the platform, and so somebody will be able to enable any of their suppliers to receive a payment right now if they want to make that happen. And that's rolling out. It's something that's going to GA this quarter. And then on the real-time payments, that's probably a little bit further out. It's in the pilot phase right now, but that would really be for the receiver to say, "Hey, I want that money now, and I'm willing to pay to get that money now." And so it's similar to how you would think about the kind of the payment offering -- instant payment offerings that are out there across a number of payment companies, but there is a percentage that is probably capped on the total payment volume that goes through on that transaction. So the RTP payments will probably be percentage-based the same day, think of it as a wire but cheaper than a wire.

Got it. Got it. Well, that's an impressive list. Just in the last year, you've got 4 of these new services in the transaction side. Is this enough for now? I mean what are you -- how are you guys thinking about kind of the road map for other premium services like this? I mean are there other categories that we could see you guys run on the platform?

I think the primary thing is obviously just focusing on the 91,000 customers growing into the 6 million businesses that are out there. And then there's this -- as part of that growth path, we are shifting the definition of our customer and looking and understanding, working with those customers, what they need. And so one -- we've had a couple of examples that we talked about. But one additional example to kind of explore is, as we do more on the AR front for our customers, we already do have merchant processing available for our customers, but can we do more with that? And so I think there's an opportunity to look at the merchant processing that our customers are doing and how do we support them across that platform need that they have.

Got you. Got you. Okay, good. And John, on the last earnings call, you took down your guidance for float revenue due to the low interest rates, the move in interest rates that we've seen. Can you talk about the float revenue, the business there? How do you expect this to trend in the near term? And then longer term, what would this line item look like?

Yes. Sure. We're a licensed money transmitter in all states in the U.S., and this allows us to move money through our bank accounts. And as a result, we can offer additional services and protection for customers. It also means that we earn float revenue on the funds in transit. And with the significant reduction in the fed funds rate that we've seen recently, that will obviously lower our yield on the funds in transit. We expect the fed funds rate to be in that 0 to 25 basis points range over the near term. And that means, for us, in terms of Q4, the short term, a yield of 95 to 100 basis points versus the 150 basis points we earned in Q3. There's a lag in yields coming down because our average maturity on securities that we invest excess funds in is, call it, 4 months, something like that. So we would expect that over the intermediate term, our yields will start to converge with the fed funds rate. We haven't provided any guidance yet beyond the fourth quarter of this year. We haven't provided guidance for FY '21 yet, but those are the sort of the dynamics of the returns. And obviously, we're growing payment volume. We're growing our FDO balance, and those things will help offset the decline in yields.

Got it. Got it. And then maybe another one for you. On the Q2 earnings call back in February, you all talked about a procurement offering, which is interesting. It seems like a whole other market opportunity for you guys to go after. Can you talk about that? What is the road map? And what does the offering look like today? And how are you kind of thinking about development of procurement?

Well, at a high level, we delivered the capability for customers who use mid-tier ERP systems like Sage Intacct or Oracle NetSuite to sync purchase order details from their ERP system with the Bill.com platform. And I mean what we've learned is that, just like the payment approval process is manual and cumbersome for many small businesses, the processes around purchasing are equally challenging, more so for mid-market companies, but -- so we've been working to leverage some of the capabilities that we have in our platform around document management, workflow and approvals in order to streamline purchasing. It's always a headache for CFOs and other people involved in the procurement process, so there's a lot more to do in the future, I think, to call this a full-fledged kind of procurement module but -- including things like offering enhanced controls and other capabilities. But we certainly made a start down this path, and it's something that our mid-market customers have been -- have actually been asking for a while. So we feel good about having sort of launched the first step here.

Got it. And René, with this new extension, I mean, you've gone in from initially payments to payables and then receivables and now procurement. Are there other categories, subscription categories, that you could go into long term? I mean could you kind of view this as a system of record, a platform for other systems that you think are logical to kind of expand into over time?

Yes. We -- I mean we do feel the platform, given the document management, the AI capabilities, the payment capabilities, collaboration workflow capabilities, that it's well suited for things -- more things in procurement. So you just talked about kind of the initial steps there. But spend management, expense reporting, working capital, those are kind of all areas that we think are interesting and ones that we think are kind of fit nicely in with the platform that we've built.

Great. Excellent. And since you mentioned AI, I think you guys are applying AI in some interesting ways. The invoice recognition technology is one. But can you talk about kind of how you're using AI to automate this category and what the road map looks like there?

The -- one of the first things that anybody has to do when they receive a bill is to enter the data around it. And so we have millions of documents a month that come in, and the data obviously is entered around those, but we're able to use our AI to now eliminate the need for the customer to enter some, if not all, of that data. It's getting better all the time. But we think that having a first initial experience for a customer to say, "You don't have to do data entry, and we make the payment electronic, and you get to do workflow, view all these other things." So we think that's important, which is why we've invested behind that. But in addition, the AI is critical when we think about the risk management platform that we have. So we moved just under $100 billion, last year, fiscal year was $70 billion. The year-end, we lost less than $1 million due to credit or fraud issues. And so when you look at the payment volume that we do, we've definitely built a strong risk management platform, and AI is helping us continue to extend the capabilities on that front. So I'm sure there'll be lots of other ways that we can use that in the process of the platform extending into other services, but those are the 2 focus areas right now.

Got it. Got it. And then, John, on the Q3 earnings call, you did talk about the impact that COVID pandemic is having on the business, namely on total payment volume per customer and some attrition. Could you just elaborate on that? And any update since then, this is, I'm sure, kind of a week-to-week situation. So any update on what impact you're seeing and maybe potentially some improvement?

Yes. Sure. So we did see sort of an increased demand profile from customers as companies were scrambling to figure out what a work remote environment looks like, and we also had the customer promotion for free subscriptions where those were negatively impacted. And then for volumes in the business, we saw a transaction volume softness in March that continued into April. Our transaction volume per customer was down about 15%. And then total payment volume, though, declined much less actually. So we saw an increase in payment volume per customer. So our total payment volume was down about 1.4%, and we think that's largely driven by the fact that customers continue to leverage our platform for the large dollar repeat payments that they really need to make to run their business, things like rent and benefits and Internet connections and all that kind of stuff. So we're not providing any interim updates on the quarter, but those were some of the early signs that we saw in March and through preliminary results in April.

Got it. Got it. And then we -- I think we've just got time here for one more. You've provided a long-term margin target of 20%. If you could just touch quickly on the key sources of leveraging your business over the longer term, please.

Yes. I mean we're obviously committed to building a profitable business over the long term. We've demonstrated consistent expansion of gross margins through efficiency and scale in terms of operating expenses. It's driven primarily by people and headcount. So we know that, over time, as we continue to scale, we'll create efficiency as we grow. So we're confident in the progress we're making to date and feel that, over the long term, we'll continue to create efficiency.

Excellent. Well, that's it for our time. René and John, thank you so much for presenting here today. It's a great conversation, great view into the business. Glad to hear you guys are doing well, and everyone's safe. So thanks again.

Thank you, Brad.

You bet. Thanks, Brad.

Thanks to those in the audience. Thanks again. Bye-bye.