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

Good afternoon. Welcome to the next session for our Digital Awakening Day here. We've had 6 speakers talk a little bit about kind of what they're seeing. Really pleased to have John Rettig, the CFO of Bill.com with us. John, welcome. Good afternoon, and welcome to our Digital Awakening Day.

Thanks, Brent. Great to be with you.

Great. So listen, we just kind of wrapped up a session with ServiceTitan, which is another kind of vertical SaaS company servicing the SMBs. We talked to Shopify, which is really kind of going after that entrepreneurial customer. But the common theme here is there seems to be an appetite for smaller businesses that historically have been underserved to start to automate their businesses -- automate these back-office processes and really start to kind of embrace digital. And maybe we'll start here around this idea of the digital awakening happening now in small businesses.

Last quarter, I think, transactional volumes for you also reaccelerated, I think, 31% versus 26% in the prior quarter. Maybe walk us through what are you seeing? What drove that acceleration in volumes? And what's your view of the appetite to kind of digitize for smaller businesses?

Sure. Sounds good. Yes, we're very pleased with the uptick in our total payment volume, or TPV, in the most recent quarter. We reached nearly $29 billion in the quarter. And our observation is that customers appear to be getting back to more normalized business activity, though perhaps not to the pre-COVID levels yet, but compared to pre-COVID, what we've experienced is that total transactions, which is one of the measures in our platform of activity and engagement by our customers, hasn't quite returned to those normalized level, though we did see strong sequential growth. And it's, I think, a testament as much as anything to the resilience of the small business market. We have lots of examples of customers taking advantage of the ability to pivot their businesses and do different things to not only survive but thrive during the pandemic period. There's obviously customer segments, certain industries that are still negatively impacted by the lower levels of economic activity. But we're pretty pleased seeing that volume. And most customers use our platform as their primary tool for running their financial operations. So to the extent that their activity is increasing in the platform, as measured by this payment volume or number of transactions, it says that their business is healthier.

Good to hear, and great to see the recovery there. I guess for me, as you take a step back, 100,000 businesses, you have visibility into. As you think about the rebound, how diverse is it? Is it a small cohort that is really benefiting from these trends that are driving the recovery and an outsized recovery? Or are you just seeing kind of more of a broad-based improvement across the whole cohort?

Yes. We have a very broad customer base. It cuts across really almost all industry verticals. We don't have any significant concentration in any one industry. So it's a horizontal strategy that we use to serve customers. And to us, it looked like a fairly broad-based recovery. I mean there's the possible exception of some of the consumer storefront businesses like restaurants, where those folks saw the most immediate impact while the pandemic unfolded. But beyond some of those segments, it's pretty broad-based. The lack of sort of concentration in our business is that we see sort of the entire base of customers beginning to return to normal activity.

Got it. As you think about we're, what, 2 days now away from -- 2 days into the promise of a vaccine. Obviously, we're talking about this digital awakening in part driven by a pandemic. But what's your view on -- as we kind of go back to an environment where things could be more normal, how does that impact your customer base? Is there -- do things slow down? Or do you think structurally, this is a little different in that the shift to digital can be more sustainable, whether we have a vaccine or not have a vaccine?

Yes. It's a great question. And part of why we built the business to focus on small and medium-sized businesses as to your earlier point, they're the most underserved, right? They're not the best fit for big ERP systems or other solutions. So it's a huge market opportunity. During our fourth quarter that ended in June, we definitely saw a COVID bump as businesses of all types looked for solutions to support the new work-from-home requirements. We also rolled out a free subscription promotion, really to assist those businesses who were financially impacted by COVID, and that led to incremental customers associated with that offer as well. We continue to see good demand across all of our channels. It's a pretty diversified go-to-market strategy. But it has leveled off from that early pandemic period. We noticed that we continue to have higher close rates for new customers versus pre-COVID levels. So that tells us there remains like this sense of conviction about getting up and running on a new platform and a new way of doing business. Longer term, we think there will be a lasting positive impact associated with companies leaning into digital transformation. I mean the way we think about it is the market is likely to mature faster than it was going to pre-COVID just because the experience that people have had going through this particular difficult period, frankly, means that they're more open to different ways of doing business. So our business wasn't about this extreme change in customer demand and now going to some different level. It's more of a gradual continued improvement in demand for the business.

Great. It's interesting you mentioned higher close rates. Are you also -- what about the sales cycle? I mean -- and so higher close rates would certainly be one proof point of a stronger appetite. But what about the sales cycle? Has that changed at all? Or is it always kind of a shorter sales cycle and walk me through what you're seeing on the sales cycle?

Yes. It's a very short sales cycle for us. Our business is predominantly self-service supported by high velocity inside sales. So the sales motion is sort of low touch, and it's a product-oriented sell. So it's typically a 30-day process that involves a trial. We do serve some larger businesses, what we call mid-market or mid-sized companies, who -- they typically take a little bit longer to decide when making platform investments in part because they are working with larger ERP systems. They have bigger investments and they integrate with more systems. We haven't even seen a significant change in that sales cycle for those larger businesses, though, either. So to the extent that somebody is in the market and open to making a change to their back office infrastructure, they're moving ahead as they have been even in the pre-COVID era.

Great. And I'll remind the audience here, we're going to be taking live questions as well too. There should be a chat box. We'll get to as many of those questions as possible. I wanted to shift a little bit and focus on customers. If I think about like the net new customer adds, it did downtick a little bit as we think about the benefit that initial sugar rush of folks having to deal with remote office. But I do think -- what I'm hearing from you guys is more of a focus on slightly larger customers, so not the large enterprise but mid-market. And that stems back to that new Quickbooks Online Advanced relationship where maybe you won't get as many new customer leads, top of funnel, but those leads that coming in are more -- are larger and do have higher revenue opportunities. So walk us through that refocus on mid-market, how should we think about that in the context of net customer adds?

Yes. It's a good question. So in the fourth quarter, we had about 6,800 net new customers. In our most recent quarter that ended in September, we added about 5,500 net new customers. So after that, that pandemic bump, if you will, in the early days of COVID. And as we outlined on our Q4 call and just last week on earnings, we are expecting lower net quarterly adds going forward. The biggest part of that is there's a huge long tail of small businesses. There's 6 million businesses in the U.S. with employees. Only 20,000 of them have more than $100 million in revenue. And what we found is a sweet spot sort of with the vast middle of that SMB market, the employer market. And with our relationship with Intuit, we've had a long-term relationship. We supported their Simple Bill Pay customer as well. We still have many of them. But increasingly, we found that a better fit for our product that has features for workflow and approvals and collaboration, a slightly larger business versus a micro business, as we called it in the Simple Bill Pay segment is a better fit. It's a better fit in terms of economics. It's better fit in terms of retention of those customers and ultimately, growth over time. So as we're making improvements in monetizing our existing customer base, increasingly through transactions, that net new customer metric, though important, will be sort of less meaningful to our financial results as we scale. To give you an idea of the magnitude, as we look ahead over the next few quarters, we're anticipating total customer count to grow roughly in that 25% year-over-year range. And then in -- as we look out past that, we are expecting our new financial institution partners to begin to ramp, and that will have a positive impact on our rate of customer adds as well.

Got it. So you have one or kind of new focus around mid-market that's kind of impair some of the growth profiles on net new customer adds, but shouldn't really impact revenue as much given you're onboarding larger customers. I guess the question is, once you do see some of the large financial partners, you talked, I think, Wells Fargo is new, KeyBanc is new, how long does it take before those OEM private label relationships start to drive customers? Can it be in 30 days, 90 days? What is that process of when you really start to get a benefit to net adds from those new financial partners?

Yes. It definitely takes a little bit of time. Just to recap, we've signed 3 new agreements with large FI partners, financial institution partners, in the last 6 months, including Wells Fargo and KeyBanc, as you mentioned. In last quarter, we disclosed a significant increase in our remaining performance obligations, now totaling over $150 million. And the size of the commitments that our financial institution partners have made to Bill.com is really a reflection of how they think about the potential for their customer base to adopt to our platform within their business banking environment. So the integration and development work takes time with large banks. We're in the pilot phase with Wells Fargo. We are in the launch phase -- early launch phase with KeyBanc and the other top 3 bank that we mentioned is in the integration phase. So it has a ways to go. Because 2 of the 3 new deals that we're talking about include access to the small business customer segment within the banks, not just the larger commercial or mid-market companies, we're expecting greater adoption numbers than we've seen from other FI partners. We haven't provided any specific timing because, frankly, some of that is subject to the financial institution partners' marketing programs and ultimately things that activities that they control, though we certainly consult and help with that. I would expect to see the impact of customer adoption ramping in the second half of calendar 2021. Potentially, we'll start to see that in our fourth quarter to end in June, but certainly, second half of 2021, I think, is when those things start to come together and we see a more material impact on our customer numbers.

And you saw this before, right? It takes about a year as you think about the prior partner relationships as you launch those financial institutions kind of private label partnerships. Did it take about a year before you kind of really started to ramp, and that's the same expectation this go around?

Yes, that's right. It's kind of 12 to 18 months. It depends on the partner and their goals, what type of testing program and rollout program they put into place. Often, they take a market, a single geography and test there, and then we make some refinements before they do, say, a national launch or something like that. But it definitely -- it's one of the things that we've had to learn to do successfully and working with financial institutions is be able to support their pace of execution, which is obviously a little bit slower than ours.

Great. I think that answered one of the investor questions. I'm going to ask a different investor question that maybe wasn't asked and answered, and that's really around some of the free offerings. So as you think about the free promotional activity around kind of post COVID, what percent of those premium discounted offerings actually became paying customers? Was there a high conversion rate?

Yes. I don't think we disclosed specific numbers, but order of magnitude, I think it's around 50% of the cohort of promotional customers that we talked about on prior calls from that April time frame, like when the pandemic was first rolling out, and you could see that there was a significant impact to businesses. And we still have promotional customers in our customer base today, who are paying discounted subscription fees. Again, it's not material, but it does have a slight influence on our overall subscription revenue per customer. We think there's probably a place for similar promotional offerings in our longer-term marketing and go-to-market campaigns, though we haven't implemented anything like that on a large-scale yet. It's more -- we'll continue to test and look at that opportunity.

Yes. I mean I think Hubspot, they pivoted to this kind of freemium type model, and they've had really good success in it. Initially, hurt some of the average revenue per growth metrics for a couple of years, but then obviously, they got the benefit of now a great pipeline of visibility. So it sounds like you're thinking about freemium and trials as a top of funnel kind of lead gen thing, but it sounds like no decision has been made yet.

Yes. I would just add that we do, as a -- just a course of business with our direct channel and accounting firm partner customers, we do offer a risk-free trial. That is the entry point for the vast majority of our customers. And then on the freemium side, we have a large network, 2.5 million members in the network. And these are companies and individuals, who might be freelancers or consultants, who are paying or getting paid. And almost all of them are using a free version of the product. So they're receiving value through electronic payments and other capabilities, connecting with their buyers and suppliers. And they are a pool of potential entities to be upgraded. So it is a freemium model at work. It doesn't drive material results for us yet, but we think it's an interesting longer-term opportunity.

Got it. That's helpful color. Another investor question here, and it's a little nuanced, but I think it's a good one around how you -- everyone slices SMB, mid-market, micro SMB differently. And so the question really is around the mid-market customer identified in that $10 million to $100 million revenue range. Is that incremental to the 6 million SMB kind of TAM that you talk about or not? And just walk through how you think about your definition of SMB and then kind of now a new mid-market opportunity?

Yes. It's definitely included in that 6 million definition. That's kind of all businesses in the U.S. that have employees of which, call it, 20,000 of them are above $100 million in revenue, 50,000 are above $50 million in revenue. So our definitions are small businesses are kind of less than $10 million a year in revenue. And then mid-market businesses are $10 million to $100 million. The vast majority of our customer base today is still in that small business segment, the less than $10 million. In some cases, through partners, such as what we talked about regarding Intuit and others, we might reach micro businesses, which they might not even fall into that 6 million businesses that have employees. They might be a sole proprietor or a freelancer. And that's where, I think, there is a market opportunity there for us. But now the way our platform is configured and the features and functionality we have, we think it's really suitable to the larger small businesses who are in that either $10 million segment or $10 million to $100 million.

Got it. Very clear. Let's shift gears a little bit here and talk about the scope of the opportunity. And I bring that up in the context of ServiceTitan and that they have now have a complete back office system. They have front office now. They've added over time. They've added VoIP now for a small business. They're adding marketing automation. They've added a lot of things for a tiny vertical field service business, right? The HVAC, plumber, electrician. What's your scope as you think about the opportunity, you're squarely in kind of AP Automation, AR Automation today. As you think out the next decade, what is Bill.com's kind of ambition for that small business user?

Yes. I mean it's our goal to really continue to be a mission-critical platform for small businesses. Today, the typical customer runs their financial operations on our platform. They also have an accounting system or an ERP system, and they leverage that for bookkeeping and other financial reporting. But in terms of the operations, the process management and automation, that's really done on our platform. And we've applied those capabilities to AP and AR, as you said. But there's other things that we can do. There's lots of, what I call, fill in product capabilities that we could add that create a more holistic offering, whether that's around AP and AR or whether that's in adjacencies to AP and AR. And I'm happy to talk about some of those potential areas that we could expand. I think our 5-year vision, if you will, or set of goals is to really continue to expand the utility that we can bring to the back office. Beyond that, I think it opens up more possibilities, and maybe there's an even broader platform play. But we have so many opportunities to continue to create value for companies in sort of the back office. I think that's where we're going to be focused.

Got it. Totally makes sense. You got to have the focus, especially when you have 100,000 customers and 6 million TAM just in the U.S. So let's talk a little bit about back office and back office adjacencies. Where is the line of demarcation where you'd like to go? And talk to me a little bit about fill in. What's the fill-in strategy?

Yes. So as it relates to our customer base, we think are kind of 2 segments, where we can add incremental features and functionality to do more for our customers, allow them to create even more efficiency. As I think about AP and examples there, the most likely extension would be in areas around expense management or spend management, where we can help companies, not just with their process flows and automation and efficiency, but we can help them optimize their spending, track it, report it, have it consolidated, have it synced really easily with their accounting system. And being in that, say, spend management or expense management space, it could also open up the potential for opportunities like corporate cards to not only deliver the software solution but also another payment solution. As you know, we've been doing more with card-based payments lately. I think another obvious extension would be improvements around our AR offering, where we could make it easier to do electronic invoicing, get paid faster, make it much more efficient to reconcile payments and capabilities like that. We've -- since really the beginning of the business, we've had both AR and AP capabilities. But I'd say on the AP Automation side, we're further ahead, and there's certainly opportunities to add capabilities in the AR area. As I think of adjacencies, so not directly related to AP and AR, there's things like payroll and possibly HR. Much of what we've built in our platform involves digital documentation management, workflow, collaboration and features like that are really applicable to other parts of the back office like payroll. The other area, I'd say, is probably working capital solutions. We're not necessarily interested in being a financial services provider, but we certainly work with lots of banks and other companies who are. But given where we sit in the middle of payment transactions, we have a really incredible data asset because we're managing the payment flows. All of the funds, the $29 billion in TPV we did in the last quarter, all of that flows through our bank accounts, our systems, our risk management and credit underwriting. And so we see payment flows and timing and exceptions. And I think we're in a unique position to help both buyers and suppliers with access to working capital to better run their businesses. We're not doing anything really in that area today, but it's something that's an interesting opportunity.

So I mean factoring receivables or something like that, it's more kind of financing things to think about in that realm?

That's right, getting paid faster or credit opportunities to -- for more time to pay. If you're on the buyer side, there's -- if you think about facilitating the types of transactions that we do, there's actually a working capital opportunity on both sides of the transaction.

Great. Very interesting. One investor question as we kind of talked about this dialogue of fill in and adjacencies that popped up was around the partner into it. And is it a partner? Does it become kind of a coopetition environment over time? Like how do you think about Intuit and that tug and pull of being a partner and potentially having some overlap?