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

Good afternoon to everyone in the East Coast, and good, I guess, maybe late morning, where John is in the West Coast. My name is Josh Beck. I'm from KeyBanc Capital Markets, in the equity research division. I cover vertical software and fintech. And we're thrilled to have John join us, the CFO, from Bill.com, to get into a fireside chat. It will last about 30 minutes. If you have questions throughout the presentation, please just enter them in the box below, and I can relay those along to John. So I'll maybe pass it over to you, John, for a quick intro, and then I can dig into Q&A from there.

Sure. Sounds good. Thanks, Josh. It's great to be with you. Looking forward to talking about the Bill.com platform. I know you have a number of questions, but we're excited about the opportunity. We've made a lot of progress in helping SMBs automate their financial operations and lots of growth opportunities in a huge market. So looking forward to chatting about that.

Excellent. It's -- the words excitement and back-office don't always run together, but I actually just had another private company presentation, and the back-office for restaurants. And it's an area he was really excited about. He joked that this is something customers love to speak to me about. So it's something that I don't think is terribly well understood, to be honest, versus maybe horizontal software or other areas of vertical software that have received a lot of airplay this year, like collaboration software, commerce software, et cetera.

So's maybe let's just start really high level, in terms of within the back-office and your focus market, what are the real problems that your customers face? And what does the tech stack look like for them?

Yes. It's a great place to start. And it's actually one of the reasons way back when, or 6 years ago, that I joined Bill.com is personal experience dealing with the headaches of a small or medium-sized business. And having to put together a patchwork of solutions to help drive efficiency and automation, and only which I had known about Bill.com sooner would have implemented at other companies. But the majority of SMBs still rely on manual processes and paper checks as a primary form of payment. They -- in terms of tech stack, very likely to have an accounting system, some or many of which would be in the cloud, like QuickBooks or Intacct or NetSuite. And the emphasis with these systems is really to capture and record transactions. It's about the accounting life cycle. And then many of these companies will have some payroll capability. And in some cases, that's a system where it's an outsourced professional service provider. Most, though, they really don't have any technology to speak of to automate financial operations, around things like AP and AR, which is where we come in, it's where we're focused today, accounts payable and accounts receivable. And with absent a cloud solution, the typical process is very manual, kind of complex and inefficient from a workflow standpoint. It's about receiving paper invoices, routing them for approval, initiating payments, getting payments approved, reconciling after the fact, and that's where kind of the accounting system comes in as well. So there's lots of opportunities for air, lack of visibility, access to data, for decision-making and things like that. And so it's a -- there's 6 million businesses in the U.S. with employees, and many of them face these same challenges. And that's kind of where a platform like Bill.com comes in to make it easier for businesses to automate those financial processes. And in some cases, we become what we call the digital on-ramp for the financial back-office to really do things differently for the first time, which is, obviously, very relevant in the environment that we're operating in today.

Great. I want to follow up on the market size. So you mentioned there's 6 million of these small businesses in the U.S. So that's a very large number. How do you go-to-market and really transition them to customers of Bill.com?

Yes. It's a huge market. We're focused on that 6 million. This is the companies with employees. So there's another 25 million that are sold props, and then there's even gig economy and freelancers above that. And if you look at the market, there's only 20,000 companies out of that 6 million that have more than $100 million in revenue. So by definition, the vast majority of companies are small. And the hardest part is: a, driving awareness and attracting them; and then b, serving them cost effectively and efficiently. And so we have a pretty unique go-to-market strategy that leverages multiple touch points to reach SMBs, starting with going direct digital marketing campaigns and things like that, partnering with accounting firms who are very close advisers to SMBs. And so we work with about 5,000 accounting firms, 80 of the top 100, and we help enable them to not only sell our platform into their clients, but leverage tools in our platform to improve their ability to serve clients as well. And then we work with large financial institutions, who are also trusted advisers of SMBs. And we enable them to white label our platform inside of their business banking environment. There are some other touch points that we have as well inside of accounting software, in some cases. And then we have a large network of 2.5 million members, which is a combination of businesses and individuals who are contractors and things like that. So across all of these different strategies, we feel like we're positioned to help reach SMBs and ultimately, further penetrate the market.

Really helpful. You mentioned a little bit about the value prop is really resonating to paraphrase in the current environment. So maybe just walk us back a little bit through the early days of the pandemic, a little under 1 year ago, maybe what some of the initial impacts were? And then just help us think maybe how the customer mindset shifted through the year? And then really where we are as we enter calendar '21?

Yes. I mean, the initial months of the pandemic, I guess, going back to February, March, April of last year, many businesses just hit pause, right? There was -- certainly in the U.S., it was the need to work remotely because of requirements, counties and things like that, was pretty pervasive. And then there's obviously certain industries that were hard hit very early on, principally things like restaurants and catering and brick-and-mortar retail, that they were just completely disrupted. So as -- and we experienced in our business an increase -- a slight increase in customer attrition. Nothing material, but -- and it has to do with our horizontal go-to-market strategy. We kind of serve across all industries, right? We don't have any vertical concentration to speak of. And then we saw lower levels of activity from customers. So lower payment levels, fewer users and things like that. What's interesting, though, is within 1 quarter or 2, we started to see really encouraging signs of increasing activity levels and companies really starting to emerge, even though the pandemic is still ongoing. And so I guess the biggest kind of impact from a pandemic is just that companies, I mean, immediately realized the need to modernize, to do things differently, to have the ability to operate regardless of the environment. And a lot of companies, because we got inbound directly from companies, accounting firms that we work with, heard from their clients and even financial institutions, we had some of our banks reaching out to us asking how we could help their small business customers. So it really drove awareness of the need to do things differently. And that's certainly something that I think is going to help the market mature faster than it, otherwise, would have. I don't think it changes the size of the opportunity, but the rate at which customers are implementing new solutions. You've certainly seen that through our numbers with very strong net new customer adds, and we've even started to see higher retention of customers, a little bit more intent around getting up and running faster and things like that, that is, ultimately, I think, going to be a lasting effect of the pandemic. So good engagement and whatnot. So it's interesting. And then more recently, even though we're still in the middle of this, we started to see pretty good increases in activity -- payment activity, user engagement, leveraging of our platform. And in some metrics, it's really getting back to pre-pandemic levels, so payment volume and things like that. So it could be a sign of businesses just catching up as a result of disruption from the pandemic, or it could be even a better sign that business is starting to -- small businesses are starting to expand actually and invest more in their operations.

Okay. That is very helpful, just to provide your vantage point on what's happened in the last year. So one of the standouts to me, which you mentioned, has been the customer net adds? I think there are certain industries where it was just really obvious, e-commerce, telehealth. They just had really big surges in customer adoption. Back-office, I don't think is something that people woke up on whatever day it was in March, and said, "Well, this is time, we really need to modernize and automate our AP and AR." So I'm just curious if you've seen notable changes in where these customers are coming from? You obviously talked about your diverse channel strategy. If it's been something around conversion, awareness? I know there's a multitude of factors. And it's, quite frankly, probably a little tough to discern, but just what do you think has driven some of that underlying strength and customer additions?

Yes. First, I think you're right about different companies had different sorts of problems that they need to focus on immediately. And if you're a restaurant or a health provider or whatever, you've got to find a new way to reach customers, and that is like job one. At the same time, you might have back-office issues and complexities that you can't manage well remotely, but that's secondary. So what we've seen is an increase in now sort of the tailwinds associated with the pandemic as companies have figured out the front part of their business, right? How to maintain operations and reach customers and generate revenue? And now they're trying to figure out how do they actually do business more efficiently with the back-office. And we've seen it across all distribution channels, all customer segments in all industries, really. And it's sort of like if you need to implement a new way of communicating with a prospective customer, there's not a super -- it's not risky to decide whether you're going to use BlueJeans or Zoom or whatever. You can just make that decision. And if you're wrong, you can change it. People move more cautiously when it relates to financial operations and bank accounts and their money. And so it takes time. They're investigating. I think probably the biggest indicator of a higher level of intent that we see, it's just better conversion rates from customers. So prospective customers come into the funnel. They tend to convert at a higher rate. They tend to add more users and complete more transactions a little bit faster than they used to pre-pandemic. And I think that's an indicator to us that companies are now getting back to business and figuring out how they're going to solve some of the back-office complexities that broke, frankly, for most companies during COVID.

That makes sense. It seems, as you've said, there was an acceleration of this opportunity, and I think customers are maybe seeing the pain points much more directly, and it may have taken them some time and now they're seeing them and they're acting upon them, it sounds like more quickly, which is certainly a plus. I wanted to shift gears a little bit to some of your growth initiatives. You have a number of them. But mid-market is one that I feel like there's been a little more dialogue around as of late. You've had some new integration announcements with ERP systems like Microsoft Dynamics and Great Plains. So maybe just help us understand how you're thinking about that opportunity in the coming years?

Yes. We've had a lot of success serving businesses of all sizes, but we've seen an increase in demand, inbound interest from larger businesses over the last couple of years. So it's, in effect, we're kind of being hold upmarket by the demand from these larger businesses. And these mid-market companies, just like the small businesses, are able to better automate their financial operations with our platform because it's simpler, it's lower cost than some of the other systems that they have. But we have customers and prospects who use software like NetSuite, Intacct, increasingly, Microsoft Dynamics. And they have needs that are over and above what the smallest of businesses have. So they have a need for more security. They need to do things in bulk, not 1 transaction, but 100 transactions at a time. They need to integrate with other technology like single sign-on systems and things. And so we've, over the last few quarters, started to address some of those needs from the mid-market businesses. And these are all capabilities that, frankly, any company can use. It's just a case that mid-market businesses tend to want those things sooner. And then we've started to do more integrations. We've had a NetSuite and an Intacct integration for a while, and that's a real-time kind of two-way sync. But we've had a number of Microsoft Dynamics customers who use our platform, but they integrate with our accounting system through file import, export, which is inherently less efficient and less real-time than a sync -- a real-time sync. So that's why we've invested in a product integration with Microsoft. I think that opens up another segment of mid-market for us, meeting the demand that we're seeing. But our go-to-market motion to reach those customers hasn't really changed. I mean, we are all about an efficient inside sales operation. It's all virtual. It's over phone. It's over e-mail. It's over video. It's not a feet on the street type operation in any sense. So we have added like an outbound contact or calling capability, which we didn't have because the smallest of businesses those come to us inbound through either partners or marketing or whatever. Some of the mid-market, it's a combination of inbound and outbound. Other than that, our go-to-market motion is the same. We leverage accounting firms, financial institutions who serve mid-market customers, and we reach them directly. So there's no real change in our operational strategies to serve this segment, other than enhancing the product in some ways to help them and then ultimately serving them through an outbound capability.