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

Good morning, everyone. I'm Chris Merwin. I cover Bill.com here at Goldman Sachs. And I'm very pleased to be joined this morning by Rene Lacerte, CEO of Bill.com; and John Rettig, CFO of Bill.com. Thank you both so much for being here. We appreciate it.

Thanks for having us, Chris. Looking forward to the conversation.

Great. And just to remind everybody on the line, to the extent that you want to ask a question, feel free to submit one via the webcast here.

So to kick things off, Bill.com has a very unique view into the economy given that you serve small businesses. So as we move through this pandemic and maybe, Rene, just to start off, can you talk a bit about how your SMB customers are doing? What sort of recovery we've seen to date?

Yes. One of the really positive things about the last 6 months is seeing how resilient SMBs are. They really are proving that their nature is optimism at its core and that they're very focused on how they get back to work. And so we did a recent survey, for example, of 1,000 SMBs where we asked them what they were focused on. And it wasn't government assistance. It was getting back to work in revenue, 75% of them. So when we look at it, what we're seeing is that they are adapting. We had this early issue in the pandemic, where we saw transaction counts go down, TPV go down. That kind of rebounded into the summer months. And I would say by now, we're just barely kind of at the pre-pandemic levels. And so we had 40% year-over-year growth in the TPV. So we definitely feel like we're at the pre-COVID levels. And it just shows how they were quickly able to adapt and really get their business back on track. And we've all seen it. The retail stores, have had found ways to adapt. The ones that aren't retail have definitely been able to do work-from-home and make things work. So I would say that, in addition to kind of the adaptation, we've also seen people moving into stronger retention for us historically. So we saw that in the last quarter, where the retention for new cohorts was actually stronger than what we've seen before. And again, we think this is part of the adapting. This is businesses realizing that they have to transform their processes from paper to digital. And something that's really making a difference in the economy are those that can take advantage of the digital transformation products like ours out there.

Great. And with the magnitude of the recovery we saw, I mean, you mentioned 40% TPV growth is very, very strong. I mean it seems like COVID as maybe almost turned into a tailwind for the business now. And you said that that's been the case. I mean how do we think about the sustainability of that tailwind as we get into a period of more normalcy this year and next?

Yes. I think the elimination of paper is kind of inevitable. It's something that's been in process for years. And what I see and what we see across our customer base is that COVID has been a strong reminder that paper doesn't work. It's not a good way to manage your business. It doesn't give you the information you need when you need it, especially in an environment when you can't get to the office. But that ball and chain of the filing candidate and the paper processes that business have, that's gone, right? People understand that they don't have to be chained to the desk anymore to run their business. And so what we've seen is that our partners, whether they're accounting firms, and we have 5,000 of the largest firms in the country, 80 of the top 100, whether it's our financial institutions with the top 3 financial institutions in the country, Bank of America, JPMorgan chase and Wells Fargo; or accounting software partners, they're all -- like Intuit, they're all starting to focus more on how do we make this happen for our customers. And so the tailwind that you're talking about, I think, is pretty broad-based, where people that serve SMBs are committed to solving the problem. They know that paper doesn't work. They know that they need to make a difference and that their job and responsibility to bring those solutions to the SMB. And so we're seeing this across all of our customer segments where the interest is strong. I think, in part, that's some of the retention that we saw -- that we referenced, the increased retention that we saw. And so I think the opportunity will continue to grow as we move through the pandemic, business gets back to normal. They're starting to think about expanding, how do they work in this new hybrid model, and all that's going to continue to be a tailwind for our platform and everything we do for businesses.

Great. So you mentioned some of your channel partners there. You've got financial institutions, accounting firms and some of the accounting partners as well. Maybe starting with the financial institution partners. Can you talk a bit -- I know you've added some recently in terms of more -- some of the regional banks. Can you talk a bit about how we should expect to see the benefit of those partnerships phasing in to benefiting your net adds growth, which has been very stable for the last few quarters?

Yes. I think it's one of the key competitive advantages that we have on our platform. We have the ability to serve small businesses through our accounting channel directly. The mid-market companies and then through the financial institution and our other partners were able to do the white-label solution that enables them to serve their customers. And so what we've seen is that these institutions are trusted. Accountants, financial institutions, they're trusted by SMBs. And the opportunity to be consulted and work with a trusted adviser means that there's an opportunity to extend our awareness into their customer bases. And so we believe that it's an important part of our platform. It's an important part of what differentiates us. But we also know from experience that it takes time for each partner to develop the right go-to-market approach for their particular assets that they use with their sales and marketing. And so we think it's a 12- to 18-month ramp typically with our partners is what we see. And we've started those processes with the KeyBank and the Wells Fargo. Obviously, our existing banks have those processes and motion. And so we continue to see lots and lots of good adoption and process change on their side to create more adoption. So it is -- it's a long game, and it's something that we are committed to serving our partners with the best tools, the best knowledge, the best messaging that we know from all of our other learnings. And we believe that we're just getting started with these guys, and we're excited about the progress we'll see in the coming quarters.

Great. So one of the highlights from last quarter, obviously, you saw really, really strong transaction revenue growth. Part of that was a TPV direct you called out before, but part of that also was the increase in take rate. And I know that you've been working on supplier enablement for virtual cards. And for the last 2 quarters, we've seen a much more significant ramp in take rate than we had seen prior to that. So can you talk a little bit more about what you're doing with supplier enablement? And also how sustainable is that tailwind, given it's been 2 quarters now where you've seen really, really strong sequential improvements in take rate?

Yes. Chris, so just a point on take rate. We had strong growth in the last quarter. We're very -- 41% year-over-year. Take rate for us is transaction revenues divided by total payment volume. And that growth was largely driven by some of the new payments that we've introduced recently that have ad valorem pricing. So the cost or the revenue per transaction is driven by the size of the transactions. So virtual cards and cross-border payments, whether it's FX, kind of fall into that category. And together, the increasing shift to those types of payments led to very strong TPV growth and 98% year-over-year transaction fee growth. And you're right, as it relates to virtual cards and somewhat international payments as well, we've been investing behind supplier enablement to allow us to be -- sort of have a direct line of communication with suppliers. It's a combination of technology and people. So we invest in AI and machine learning to make sure that we can match suppliers and buyers and create automatic connections. And where that's not possible, we have a team that is reaching out to suppliers and driving growth. The progress we've made in the last couple of quarters is very good, but we have a long way to go. We have a supplier network of 2.5 million members. And we're really just in our second full quarter as of Q2 of doing that supplier enablement 100% in-house. So we feel good about the results to date and feel like there's still a long runway ahead to continue to connect suppliers and drive that, really the right payment type for the buyer and supplier for each transaction. And so we're at a little bit under 1% of TPV for virtual cards as of our June quarter. Our target is kind of 5% to 10% over the long term. And same with the cross-border payments, we think that can be 10% to 20%, and we're a 2.5%, 3% as of June. So we're really in the early stages of this transition and changing revenue composition for the business.

Actually, maybe diving into that point a bit, under 1% penetration for virtual cards. I think you've talked -- as you said, talked about 5% to 10% over the long term. Why is that the right percentage? I think there's some competitors out there that have a much higher percentage of their TPV in virtual card. Why is 5% to 10% kind of the right range for Bill.com?

Yes. I mean it goes back to our goal in payments innovation and rolling out products for customers. We want to find the right payment method between buyer and supplier to ensure as much as possible that it becomes a repeat transaction as opposed to a one-off transaction. Our goal with any given transaction is not necessarily to immediately optimize revenue. So we have a menu of choices for customers. When we first built our business case to launch the virtual card product, we did data matching of all the suppliers in our network with Mastercard and other companies and found that there were billions of dollars of payments annually going to suppliers who are merchants of record. And so it was based on sort of that understanding of the suppliers in the network that led to our target range of 5% to 10%. There's certainly a scenario where it could be higher. But we think because we're going to have a breadth in our payment offerings that that's probably the right range for our business and our focus on SMBs.

Great. And then one other payment type that's newer than both cross-border, virtual card is your real-time payments product, Instant Transfer. So I know it's -- I think it's still in test mode, but can you talk a bit about how that's going so far? Which types of customers, which type of transactions are best suited for Instant Transfer? As well [ ]to say we can think about maybe the long-term opportunity there as well.

Sure. I think it really goes back to what John just stated that our goal in our platform is to make it simple to connect and do business. And when we talk about suppliers, we want to make sure that we create the best experience for suppliers so that they come back and want to continue to use the platform. So it's not necessarily focused on anything other than having a great experience. And what we know with our network of 2.5 million entities on our network, we know that some of them don't necessarily take cards, and yet they might need to have cash instantly to run their business. And so I think what we realized was, as we had the ability to pay ACH and check, there was one thing missing, which is the time. And so we wanted to extend the platform to be able to say, if you need your cash today, we have a way to get you cash. And so the way we started and the way we're in test and pilot mode is with the real-time clearing house -- the payments from The Clearing House. And that, unfortunately, only reaches around 50% of U.S. bank accounts. And so what we are doing in conjunction with the real-time payment network is also partnering with the debit rails through an integration with Stripe that we announced that we're working on. That will allow us to get much closer to that 100%. And the opportunity then is to be able to say to suppliers, and you asked the question about who is this for, how many? It's for all the nodes in the network that don't necessarily take cards that they need payment right now. The next time they may not need payment right now. But every now and then, they're going to need an instant payment, and we want to have that capability to make sure that we can serve them. And so we feel really good about what we're learning in the process. We do see customers come back and do repeat, not every transaction, of course. And so I think we're learning about how to make sure that, that product is easy for them to understand, easy for them to use and affordable for them for -- to take advantage of it. And we look forward to rolling that out in the next couple of quarters.

Great. And as it relates to cross-border, I know you have an effort there to get more of your suppliers paid in their local currency. Is it possible just to give us a sense of what percent are being paid in local currency today, where that can get to? And roughly speaking, any differences in monetization, just so we can think about the benefit of that initiative you have in place?

Yes. I think the -- I mean the first thing around getting suppliers to be paid local currency is actually getting our buyers to actually get them signed up, right? And so one of the things that -- we have a 2-part effort here. One is to contact the customers in our platform that are using us for international payments and get them on the international payment plan, so to speak. And part of that is also then going out to suppliers and getting them to say they would prefer to have it in local currency. Many suppliers might submit the invoice to the buyer on our platform, and it might have the payment information in the currency they want. So we're also using AI to kind of drive that adoption. So I'm kind of giving you some of the different ways that we can do this. We have to get the buyer on board, then we need to somehow get the transaction and understand the preference of the supplier. We can reach out to the supplier directly, which we started doing over the last summer and the fall. And we can also use AI to take the information off of the invoice that's been submitted to identify and enter that information. So those are activities we have. We, I think, announced last June or the annual numbers were just around 25%, maybe a little bit lower than that, of the cross-border payments for FX. We believe over time that we should be able to get into the north of 40%-ish range.

Very helpful. So I guess if we tie all this together and we look at all the different types of variable monetization payment types between cross-border, real-time payments, virtual card, I mean, roughly speaking, what percent of TPV do you think that could be as those payment types mature?

Yes. I mean we haven't established specific targets by payment type. Like I said earlier, it's really about just a menu of choices. And at the end of the day, we're on a mission to help eliminate checks from the system. And we're doing a pretty good job of that. We're at about -- a little above 60% electronic payment adoption. And what we see is once a customer has been on the platform for a number of months, you see that electronic payment adoption going up. At this point, the vast majority of payments are still ACH payments in terms of electronic adoption. But I think that can certainly change over time with the opportunity around virtual card penetration, increasing cross-border payments. Rene talked about Instant Transfer, which we're going to be expanding our capabilities there to open up that to the whole supplier network versus just the portion today. Around 50% of bank accounts that are -- can be reached via the real-time payment network. And so I think there's certainly a case to be made that the increases that we've seen in revenue per transaction were above $3 for the first time in the last quarter. That's driven in large part by the shift mix, and we think that will continue for some time to come.

Great. So I guess to shift gears a bit, I wanted to touch on go-to-market. Recently, you hired Tom Clayton as our Chief Revenue Officer. So can you talk a bit more about what he's working on in particular? And anything that he's working on to help you all move upmarket?

Yes. So Tom has got a great background of working with SMBs and mid-market companies across many different companies that he's worked at. And so our focus and his focus has been to really look at the broad channel distribution play that we have. So we've got the direct. We have the accountant. We have the financial institution and partners. We serve different segments in each of those customer channels that we have. And so his first goal is to kind of create the unifying messaging across all of them. So we do share all that learning to help each channel do better. But he is focused on really the go-to-market and sales practices across all of them to drive adoption and using the capabilities that we have on the platform to do that. Part of the tool set that he uses, that we use as a company is to listen to our customers. And so one of the things that we have learned from our customers is that they're pulling us upmarket. So we've been serving these customers for a long time. And as we get bigger -- 109,000 customers on the platform today. There is a number of them that are larger businesses, and they start being more clear about articulating what they need to be able to do more with us. And so one of those things, which we mentioned, is that we have launched an integration with Microsoft ERP, so the Business Central and Great Plains, Dynamics. And so that capability is going to then be part of the go-to-market toolkit that Tom's team can go out and sell and market to the mid-market customers. And so I think thinking about how we package and how we market and message, those are all things that Tom's very focused on and leveraging the capabilities that we have, but then also working with the product team to add the right functionality to kind of make it more appealing and to drive more adoption there in the channels that we serve. So one example is that we will continue to hire and be judicious on our hiring, but we'll continue to hire around the BDRs and sales teams to be able to drive more adoption. The mid-market teams do involve more outbound sales efforts than what we would do in our other channels. And so we're getting more skill and capacity at that, and that's something that I expect will continue to grow and leverage as we refine our go-to-market approach.

Great. And so of the mid-market customers you do have on the platform today, can you give us a sense of what they look like relative to your traditional SMB customer, either in terms of magnitude of TPV that they have? Or are there any major differences in the types of payments that they're electing to use such that there's a different take rate for them? Just curious, any differences that you can call out there?

Yes. I mean qualitatively, the typical mid-market customer for us is in the revenue range of $10 million to $100 million. We don't have exact figures on that, but they generally fall there. They have many more users and transactions than the average SMB, and they tend to have a higher percentage of TPV for cross-border payments, a slightly more global footprint in terms of their supplier relationships than the smallest of businesses. What I can say in terms of revenue per customer or average contract value, something like that, is it's many times the average of our small SMB customers. And it's part of why we're serving them more and offering features that are applicable to all customers, which is how we build out the platform to serve the large base of businesses. But as companies get larger, they have more control needs and other things. And so we're starting to help them with that in order to take advantage of some of the demand we're seeing. And obviously, the economics are good. We have an efficient model, as Rene mentioned. And that's true with these larger businesses as well.

So another growth area for you all is international. And can you talk a bit about what you're doing there to continue to grow internationally? Who do you need to add in terms of new partnerships? What are some of the challenges of expanding into international markets as well?

Yes. The -- I mean the most important thing we can do right now is to take advantage of the opportunity in the U.S., right? So there's 6 million businesses that are in the U.S. that have employees. We consider those our target customers. We have 109,000. And many of those businesses do business internationally. So our strategy with going international is to build a great footprint in the U.S. and then to use the interactions that our customers have with their suppliers internationally to understand how to support a customer locally in an international basis, right? So the first foray was to add international payments. The next was to give our suppliers the choice to say, "I want to be paid in my local currency." And so as we develop that capability and continue to roll that out through our customer base and into the supplier network that we have of 2.5 million, as we do that, we will continue to get data in learning around which countries are the ones that are most interesting? How do we best serve them? We'll even have a seed set of customers to go talk to or prospects to go talk to about the offerings that we have. And so our focus right now is developing that out so we can enter in the international market with a good sound strategy. And I think it's something that the insight that we get from all of this is going to make for a better strategy over time. And we do think it's a super big opportunity when you look at the 20 million SMBs compared to the 6 million in the U.S., but we also think that our connective tissue around our networks can allow us to enter that at the right time with the right product.