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

Good afternoon, and welcome. My name is Ken Suchoski. I'm an analyst on the payments and fintech team at Autonomous. We're excited to have Bill.com here at our first ever Operational Decisions Conference. We're excited to have John Rettig joining us today. John is the CFO of Bill.com. John, great to see you again. Welcome, and thanks for joining us.

Thanks, Ken. Great to see you, and happy to be with you guys.

I'd like to thank all the investors for joining us today as well. Just a few logistical items before we get started. First, for the format of today's conversation, we're going to do a fireside chat. So I'll start it off with a few questions, and we'll also be taking questions from the audience as we go. And we want to make this as interactive as possible. So as a friendly reminder, you could submit questions using the Pigeonhole link available on the left side of your viewing screen. And you can also vote on questions already submitted by pressing up triangle next to any question. So we'll be checking those questions throughout the presentation, and we'll pass this along to John as they come in. Second, we are working with our partner, Procensus to do live polling of investor views at our conference. And so there's a link to access the Procensus poll on the right side of your screen once you complete the poll, you'll have immediate access to the poll results. And then lastly, if you have any questions or you experience technical difficulties, please reach out to your sales contact or corporate marketing at Bernstein or Autonomous.

So with that, let's get started, John. I wanted to get right into it. Monetizing the platform is a key part of the story for Bill.com. And virtual cards are an important piece of that monetization strategy. So when you talk to suppliers and customers, what are the main reasons a supplier accepts virtual card as a form of payment?

Sure. I mean, the first reason is speed, right? They get paid faster. Virtual card payments typically shorten that payment cycle and allow the supplier to get cash in hand sooner than they otherwise would with other payment methods, especially compared to like a check payment that could take days or longer to receive payments. Suppliers who accept virtual cards already have a merchant account and a defined process for reconciling transactions. So there's an efficiency element by not having to have multiple different payment streams to reconcile. The virtual cards come in with good data to match AR and suppliers are able to follow a process that they've already created. The other element I'd say is that virtual cards are a secure payment method. There's parameters that could be configured by suppliers to make sure only the specific type or dollar amount or other variables are what gets paid via virtual cards, and they're not having to give out bank account information to their buyers. And then ultimately, vendors, suppliers, they want to continue to do business with their buyers and have payment methods that makes sense for buyer and supplier. And that's part of our mission as well. Just find that right payment method. And increasingly, for merchants that already accept cards, they're finding that virtual cards work well.

Yes, that's really helpful. Yes, we often hear a lot of times that the suppliers don't want to pay the merchant discount rate. And so they don't want to accept virtual cards, but it seems like there are a lot of benefits that you just mentioned. I guess I wanted to ask you about the real-time payments and the impact it might have on virtual cards because with real-time payments, there's often an ability to send rich remittance data along with the transaction, right? And so -- and that's one of the benefits of virtual card. And so can you talk about the extent to which real-time payments and the ability to send rich data along with that payment could cannibalize virtual cards and what's Bill's response if that happens?

Yes. So first, I'd say that there are different use cases for virtual cards and real-time payments or instant transfers, as we call them. And it has to do primarily with the size and complexity of the business that's receiving the payment or the payee. With virtual cards, remittance information is actually provided via e-mail to the supplier, and it can include as much or as little data as you want passed with the transaction, things like invoice number or contract number, other variables. That's really important for larger businesses who need to apply the cash correctly and reconcile and so on and so forth. They want the data to come with the payment. On the real-time payment side or instant transfers, the use case that we see more typically is that the supplier is smaller, and often cases, a freelancer or an independent contractor. So the reconciliation process isn't as much of a barrier, it's more about the speed of the payment that is driving the decision whether to accept an instant payment over a virtual card payment or a regular ACH or a check payment. We don't really worry about cannibalization amongst our products too much. Our focus is really on trying to provide sort of the best, most convenient payment method between buyer and supplier so that it becomes a repeat transaction on our platform as opposed to some companies might want to force, say, a virtual card payment or a real-time payment because of the monetization or economics there. That's not our model because that could mean it's only a one-off transaction. So if you look at our take rate in the last quarter, transaction revenue divided by total payment volume, we were at about 6.7 basis points. So when we're talking about real-time payments or virtual card payments that might monetize in the range of 50 to 150 basis points, cannibalization isn't really something that we need to optimize.

That makes a lot of sense. And I think you mentioned earlier that the supplier, when they accept virtual cards, they're kind of using it as a working capital solution, right? They get that payment faster. So I guess that's a question. Are suppliers getting paid faster on your network when a virtual card is used, right, relative to an ACH payment or a check payment? And then secondly, if the supplier is getting paid faster, are the funds being taken out of the AP customers account earlier than usual? Because I'm just trying to understand that dynamic because on one hand, the AP customer might save the cost of a check, right, was $1.69, but they lose the working capital benefit because they're paying the supplier earlier. So just trying to understand how the timing of that payment works.

Yes. Sure. Good question. So suppliers get paid faster with a virtual card compared to an ACH payment, which could take up to 3 days to clear or a check payment, which obviously can take much longer. The speed of payment to cash for the supplier is sort of in their control as it relates to a virtual card payment. So if they're processing these transactions on a daily basis, they're able to turn that into cash on a daily basis. And like I said before, our goal is just really about driving electronic payment adoption. We want to make sure that we're giving as much choice sort of and convenience to buyer and supplier as possible. On the AP customer side, which is the funding side of the transaction. So our AP customer schedules payments, and then they fund those transactions and then we initiate the outbound payments. There's actually no difference. So if we're delivering the money faster, it doesn't mean that we're collecting money faster or sooner from the AP customer. So they don't actually have any negative benefit associated with the loss of working capital, as you mentioned. If anything, they're getting a benefit because of lower overall transaction fees.

Okay. So that -- so if you're making a payment with virtual card, it doesn't necessarily go from T plus 40 to down to T plus 20. It would stay at T plus 40 essentially. Okay. That's helpful. John, I wanted to switch gears a little bit. Well, shift to a topic that's close to virtual card which is the supplier enablement process. And so you spoke a little bit about that on your recent earnings call. But Bill.com brought that supplier enablement in-house. So can you discuss in more detail what changed in that process? I mean what was being outsourced previously? And what exactly was brought in-house?

Sure. So we -- when we started with virtual cards and we launched the product, we partnered with Comdata. They're an industry leader in the virtual card business, including with enablement, and they have a large network of about 1 million suppliers. They also provide virtual card numbers for us in partnership with their banks. So they're the ones who deliver the VCN. Comdata has been a great partner and one of the reasons we chose to work with them is their expertise in supplier enablement. This was something that was new for us. We hadn't really done before. And we decided after being in the market for several quarters with the virtual card product that it would be beneficial for us to have kind of more a direct dialogue with suppliers from a relationship standpoint as we sort of grow. And so we learned that we could also leverage our AI and machine learning capabilities to compare the Comdata virtual card network with the large amount of data that we have on our supplier network. We could couple that with sort of in-house reps who can reach out to suppliers and offer virtual card as a payment option. So ultimately, we just decided that it's kind of better for us to have that direct line to our suppliers and our -- and it helps in our goal of just making sure they get the right type of payment. It might not even end up being a virtual card payment from this supplier enablement capability, but it will be the right payment that they've elected.

Maybe you can give us a sense for how far along Bill.com is in matching suppliers in its network with the suppliers in the Comdata network.

Sure. I mean we were able to match data a lot faster than we expected. Like this last quarter was the first full quarter of us doing supplier enablement in-house. And this actually contributed to accelerated transaction fees and TPV growth. We thought it might take 2 or 3 quarters to deliver the number of enabled suppliers that we were able to do this last quarter. It's not necessarily something that's going to repeat every quarter. It was a little bit more of a pull forward where we brought into Q1 some TPV and transaction revenue that might have otherwise been in Q2 or Q3. So I mean, while we've made good progress out of the gate with this matching, there's a long way to go to connect suppliers and find the right payment method. We have 2.5 million members in the network now. And so we're really at the beginning stages of that enablement.

So if you had to characterize it, you're sort of first, second, third type of inning in terms of doing that matching?

Yes, that's right. We're just 1 quarter in doing the enablement ourselves. We've been able to get on the board, and it will be a sustained effort now as we go forward to drive increased enablement, and then in many cases, adoption of virtual cards. But with a portfolio of products, whether it's real-time payments, maybe enhanced ACH payments, you could think of new payment offerings like a digital wallet or things like that, that could conceivably be launched down the road. Having that direct dialogue with the supplier will be increasingly important for us to drive adoption of electronic payments.

Makes a lot of sense. John, we got a question from the audience that is related to this topic. So I wanted to ask it now. It reads, of the roughly 2.5 million suppliers accepting payments on your network, how many do you think are accepting cards in other parts of their business, a.k.a. on the Comdata network? And how many of those suppliers are accepting card from Bill.com customers today? So I think it would be similar to the last question, trying to get a sense of how far along Bill is in that supplier mapping exercise?

Yes. We don't have perfect data on the number of suppliers out of our 2.5 million network numbers are card accepting. Although when we did our sort of business case and modeling that led up to launching the virtual card product, we felt like there were billions of dollars in spend that were possible by the suppliers. And this is through matching work that Comdata, Mastercard and others did with us. So in our fourth quarter, we disclosed that TPV was about 1% of total TPV, so virtual card payment volume. And we think the opportunity is in the 5% to 10% range over time. We still think those are the right kind of targets. And so it suggests that we're still sort of very early. As far as the specific number of suppliers that have been enabled and how far we have to go, we haven't disclosed any specific metrics on that yet.

Okay. We'll have to wait for that then. John, what about the remaining suppliers on your network? I mean has Bill started to approach those suppliers who aren't in the Comdata network and haven't accepted card in their business to date? Or is that sort of the second step once you do the matching with the Comdata network?

Yes. To date, our efforts have mostly been focused on leveraging our relationship with Comdata and their large network. We're building our experience in reaching out to suppliers to offer them different payment solutions. And over time, I think you're right, this will extend beyond the Comdata network. But we're still learning in its early stages. But our focus so far has been on those suppliers that are already merchants and accept card payments. But over time, it could -- we could become an enabler of suppliers to become merchants to accept virtual card payments, but that hasn't been an activity that we performed yet. The growth that we've seen in enablement and virtual card, TPV as an example, has been driven by those suppliers that are -- they already made a decision to be a merchant and accept credit cards.

And when do you think that process might start just as a follow-up, because I mean is that like 12 months out? Or is that like 3 years out? Just trying to get a sense of when you might start tapping into that opportunity.

Yes. It's a good question. We don't have specific timing. I wouldn't expect any material uplift in our results over the next several quarters as a result of something like that, it would be further out.

That's helpful. I guess sticking on the supplier enablement, what sort of AI and machine learning techniques is Bill using? Because I think it would be helpful for everyone just to get a couple of examples of the data points that Bill is gathering to match suppliers in its network to suppliers in the Comdata network.

Sure. I mean we use AI and ML and algorithms to match our existing large network of check and ACH vendors to the Comdata Mastercard accepting network. I mean I can't get into specifics about exactly how and what we do. But if you think about it, we have a very large data asset related to the 2.5 million network members and the millions of transactions that we process on a monthly and quarterly basis. And so we're able to mine that data and identify suppliers that are candidates for virtual cards. And one of the complexities in managing a large network and a data asset like this is our customers make their own decisions about things like naming convention and a form of address and ZIP codes. All of that can be a little bit different for every single customer. And so we have to sort of invest in identifying all of the different AT&Ts, and just using them as an example, who are in our network and create kind of master vendor records in order to optimize reaching out to those suppliers. And it's part of what we're investing in the technology to do rather than sort of a human-powered effort around the network.

That's helpful. And then how much does the AI initiative accelerate Bill's ability to find suppliers who accept card in other parts of their business? I mean how much can this really move the needle? Because if you can accelerate the supplier enablement, that should allow you to increase virtual card penetration a lot more quickly.

Yes. It can be something that accelerates that. I think we've been working on our AI capabilities for a few years now. So it's not a brand-new effort. In fact, we've made great progress at creating automation for customers in managing invoices and documents and extracting data from documents automatically entering that in our platform to make it super efficient to record transactions. And more recently, we've been leveraging those AI capabilities around the network and the suppliers for this enablement activity. So it's kind of the next-generation of AI that we're leveraging. And that can accelerate. And I would say it's not just about virtual cards only, it's about better intelligence and data on our suppliers in order to find the optimal payment method for them and their buyer relationship. And we're super happy if it's a virtual card, but we're also happy if it's some other form of electronic payment.

Great. John, maybe just to round out the supplier enablement conversation. I mean, when there is a successful supplier match, I mean, what happens at that point? Are the ACH and check payments automatically being converted over to virtual card payments? Or does that supplier have to opt in for those transactions?

Yes. So you can think of it as a supplier opts in once to receiving virtual card payments. They can also establish whatever parameters they want. For example, they want a virtual card payment instead of a check payment for amounts less than $5,000, or from even certain buyers. Whatever parameters make sense to them. And then we execute on those. Most of the volume that we have enabled on virtual cards to date has been displacing check volume. There is some ACH, but that's a very small part of what we're doing so far. I think there is an opportunity there because we can deliver a faster payment. But so far, we have a long way to go just on the check side.

And is that -- I guess, a follow-up question to that is you're getting less volume shifting from ACH to virtual cards. Is that just because the supplier is used to receiving an electronic payment, and so it's like why switch over to another electronic form of payment, if you're just going to pay 2.5% acceptance costs, right? It's already electronic, it's already ACH. Is that sort of the reason behind that?

Well, it's a little bit less about that than it is our efforts to date have been focused on the check payments. We've just recently started enabling ACH payments to be transitioned to a virtual card. And in many cases or some cases, there will be a decision about cost versus speed versus reconciliation data. And at the end of the day, I mean, a virtual card payment is going to be more expensive than an ACH payment, all other things being equal. And so it will have to make sense for the supplier.

Okay. That makes a lot of sense. As a friendly reminder to our audience, if you'd like to ask John a question, you did submit a question using the Pigeonhole link on the left side of your screen that we can get those answered. John, I wanted to switch gears and discuss other ways you can monetize your platform. And so maybe you could touch on some of the other monetization opportunities over the next, call it, 1 to 3 years. And which ones do you think will be the biggest contributors to transaction revenue growth?

Sure. I mean, as you know, we have a hybrid business model, where we drive revenue both subscriptions and transactions. And we think this is sort of key to aligning with our customers. The more they use the platform, the more transactions they do, the more they pay and the more revenue we generate. So there's good sort of alignment there. And so they use it more and they pay more. I mean, we think there are several opportunities to create growth in both subscriptions and transactions if you think of the longer term. And we tend to focus on like what are the needs of most SMBs. So if you think about automating financial processes, there's other processes that need innovation and automation, just like AP and AR, which is where we've started. And some of the areas that we think might make sense are expense management. Keeping track of spending or spend management may optimize spending as opposed to just creating efficiency and workflow, help companies with intelligence, spend money better, if you will. An adjacency that has a lot of the same characteristics would be like payroll and HR. AR is another area where, although we have a product today, we have this huge network of 2.5 million members, and many of them use us for some or all of their AR activities. But there not even full-fledged subscribers yet. So we know there's an opportunity there. And then as I mentioned earlier around the data asset that we have because we sit in the middle of this transaction flow. I think that could open up an opportunity to provide working capital solutions to both buyers and suppliers. We're not necessarily focused on becoming a financial institution or a lender per se, but we certainly could partner. And I think we're at kind of our platform where it sits and how companies leverage it to run their financial operations to the extent they could also improve payment timing through advances or getting more time to pay with credit lines or things like that. I think we're pretty uniquely positioned for that. And all of these opportunities, these are just examples of things that we could do and could help us monetize either through subscriptions or transactions or both. But either way, I think it suggests that we have a long-term opportunity to continue to expand revenue per customer.

That's helpful. I wanted to ask about the monetization opportunity for cross-border payments because that's been rolled out for, I think, a couple of years now. And I know Bill's piloting a new product for international suppliers, right? So they could choose, they could stick their hand up and say, I want to receive the payment in local currency, even though the invoice is issued in U.S. dollars. So can you talk about who's paying that variable rate fee in the case where the supplier chooses to receive in local currency? And then what percentage fee do you earn on that transaction?

Sure. So it really depends on how the supplier invoices their buyer and then who makes the decision about the currency that's going to be used, whether it's USD or a local currency. In many cases, suppliers invoice in U.S. dollars and the invoices are paid that way. This is -- it's usually the case that this is good for a U.S. buyer, if they want to minimize their foreign exchange risk, right? They just don't want to be involved in local currencies. They want to drive everything in U.S. dollars. For us, it means those are flat rate transactions, more like a wire fee that you might get from your bank for sending a wire. In the use case example that you mentioned, we're giving suppliers the option to receive FX. So even if they've invoiced in U.S. dollars, if they want to be paid in a local currency, then the supplier is paying that fee, not the AP customer or the buyer. And so it just really depends on who's going to make that decision, and therefore, who will pay the fee. It's not both sides paying a fee. It's really only one side. That's how we monetize these. And if you think about -- the second part of your question was on the penetration rate.