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

Good morning, good afternoon, and thank you so much for joining us today for the Bill.com fireside chat. A couple of quick pieces of housekeeping. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I will also be monitoring the online Q&A if you want to submit questions at any time during the fireside chat. Please feel free to submit them, and I will bring them up in the context of our conversation. With that, I'm pleased to be joined by Rene and John from Bill.com. And we'll kick it off, Rene, with you and really appreciate you taking the time to join us today. And congratulations on surpassing the $50 million in the quarterly core revenue for the first time. Really impressive milestone for the company.

For those in the audience who are new to the Bill.com story, can you start by sharing what Bill.com comp does? What makes your platform different from others in the vast payment ecosystem?

Sure. Well, thank you for having us, Brittany. I look forward to the conversation. Ultimately, at the core, running a business is a hassle. There's a ton of stuff in the back office that's just a mass. It's paper here and stickiness there and checks here and everywhere. And that's what businesses are doing today. And what we do is we clean up that nest using our cloud-based platform. So our platform enables us to really digitize and automate the financial processes, things like entering the bill information, routing it for approval, storing that actual document on a platform, being able to execute payments anywhere in the world, being able to then reconcile all those payments with your accounting system. That's the mess that businesses would have to deal with without Bill.com. And what we do is we digitize and transform their financial processes in the back office. And by doing that, we've built a great platform. We've been able to build a platform with well over 100,000 businesses on the platform, moving on an annual basis, $140 billion. And being able to transact, like I said, anywhere in the world. That's the type of stuff that makes the business life a lot simpler. And when you're able to do that, you're able to continue to grow the business in the platform and to bring on more customers and more network members into the platform. So I would say that, ultimately, what makes us different is that we're not just focused on executing a payment. Yes, we do that, and we do that exceptionally well. But it's everything that leads up to that payment and everything that happens after that payment. That's what makes us unique, and that's the platform that we've built over the last dozen years or so.

Rene, you had experiences at Intuit and then at PayCycle. Can you tell us about the origins of Bill.com? And what made you recognize the problem and what your team is now working to solve?

Yes. I feel very fortunate that I come from the family of entrepreneurs. And so as a result, I've always been very connected to the SMB. My parents and grandparents had a lot of businesses, many of them served SMBs. And so I have this passion around them. I think they're an amazing part of our economy and not just the economy, just the community. They are the glue that kind of keeps us all together. And so when I started PayCycle and I started Bill.com, it was all about how do I help those businesses be more successful. That was kind of my passion was they need to be more successful. They need to be thinking about why they started their business, not the hassle of running a business. And so for me, the glue or, I should say, the aha moment really came together when I was running the first business PayCycle, which was an online payroll company. We were the first out there. But I was trying to manage that back office, manage that hassle, running that business. And I realized my processes were no different than my grandfather 6 years earlier when he started his first business. And that just seemed kind of weird. That technology had moved enough that I had a different process than him, filing cabinets, paper checks, asking people and collaborating in person versus doing something digitally. These were things that kind of stuck us. That seems weird. At the same time, I started this Internet payroll company that we have really realized it's not the Internet, it's the cloud, right? I mean, the Internet is kind of the uber definition. But ultimately, the cloud is a part of the Internet, which is really talking about a central database with the ability to customize different experiences off of that database. And that allows you to kind of digitize different processes at a much lower level. And so the 2 kind of clicked together for me sometime in mid-2003, and I just started thinking about this problem about, oh my God, like if you use this technology, you could get rid of all these painful steps. You could eliminate all these steps that have plagued me and plagued everybody since my grandfather's time before, that's what got me excited. And that's the genesis of the idea of the company was just feeling the pain and thinking about the technology. And being in the right place at the right time, understanding where the cloud was going and the capabilities that we would have as we continue to build on that platform.

Why is this so hard? And what are some of the key barriers to having this great sticky product in this space?

I think it's hard -- when you step back and you think about why is it that 90% of businesses still rely on paper to run their business. It's because it works. It's painful, it's slow, but it works. Like people can have a filing cabinet, they can write a check. And you just think about that and you have to actually create something that is much better for people to want to switch. But you have to go into all the processes. And so this isn't just putting a UI on a database. And if you think about -- and there's plenty of different ways of technology when it comes to software over the last 4, 5 decades. One of them, maybe the last 1 was really to putting a [ pretty UI ] on a database. And now I feel like the cloud is all about automating financial processes. Well, for us, it's financial processes. But for anybody, it's going to be processes that are further down the stack. It's not the UI on the database. It's the UI on experience using the data that you have. And so what makes it hard is you have to have a holistic view from beginning to end on the transaction life cycle that a business has. And you have to think about that from the beginning as you design your platform. So we designed our platform in 2006 when we started Bill, Inc. to think about all the things that we're doing today. And all the things that we are still going to do in the future that we haven't even disclosed or started on. And so having that holistic view to have a platform that can scale from the smallest of businesses to good-sized mid-market companies that we serve with hundreds, if not thousands, of employees, that takes a lot of, I think, design and persistence on building a platform so that you can actually serve those customers. And so I think what makes it hard is just that -- the complexity of the problem and looking at it holistically. And you can't just be thinking, "Oh, I want to go execute a payment." You have to think about everything before and everything after.

The explosive growth requires a really unique culture, which I know you have. Can you tell me a little bit about what makes Bill.com's culture so special and what you've been doing to maintain and grow it?

Yes. Thank you. Thank you, Brittany. It's, I think, the most important job that a founder has, right, and when you set up the company, you start the company is to think about, first of all, what gets you jazz, why are you doing this? And for me, it really was that I believe in the SMB. I believe that they're a critical part of our culture and our economy and that I wanted to serve and help them. But then the next part is, okay, well, I'm not going to do this alone. I have to be with a team that's going to make me better. And I think sometimes people forget that when you start, it's one, it's me. And I had to find a team that's going to make me better. And so I really focus on inputs, not outputs. And so -- and it's true the way I run the company in general. But I focus on what are the inputs, that values that are going to make me better, they're going to make me a better leader. And so we came up with -- it started probably writing down the values even before I started as a company. And then as we had employees, we modified some of my wording into values that I think words that kind of resonated with more employees, obviously. But we said, "Hey, we're going to be authentic about who we are. We're going to be humble, not have an ego. We're going to be passionate about our craft that we bring in to the company. We're going to be dedicated to each other and to our customers, and we're going to have fun the whole time that we're doing it." And focusing on those as being inputs and then focusing on the quality of the people that you hire along the way, that's the thing that actually helps the culture grow and get stronger because I'm not focused on outputs with them. Everybody gets to come to the company and do what they do best in their own way. It's not me to tell them how to work. It's not me to tell them how to be. It's me to say, you fit with us, now go be your best version of yourself. And that allows the culture to grow and get stronger and stronger. And so sometimes I get asked like, is it hard as you've gotten so big to have a culture be stronger. And in some ways, I would say it gets easier because you have more ambassadors that really believe in the values that you have as a founder. And so you have more people out there really spreading and being contagious with the experience that you think is going to make for a great input into building a great company. And so it's been fun to watch. It's something that -- it's part of the momentum that every founder used to be a part of and it's really fun to kind of see different reflections of how those values translate into a unique company culture.

Those are core tenets of success that we've seen play out time and time again. Switching gears a bit, John, to you. You have a really attractive business model with subscription, transaction, float revenue. Can you talk a little bit about this?

Sure. I mean, we've created a hybrid business model that results in high-growth recurring revenue and really great visibility. Core revenue is the key metric for us. It grew 59% in the most recent quarter and represents subscription and transaction fees. Customers pay us per user per month for access to the platform. It's a much lower cost solution than, say, a typical ERP system or something like that. And we enable customers to add users' self-service and ultimately simplify their financial operations by having more people involved in the processes. Transaction fees are tied to payments that customers execute on our platform. We've got a variety of choices. We help customers and their suppliers, buyers and suppliers find the right payment type for their transactions, and that helps create repeat transactions on the platform back to that visibility point. We have both fixed fee and variable or ad valorem transaction types, and we've seen good adoption of some of these variable price products in recent quarters. And this is where our transaction revenue is kind of tied to the value of the transaction, and that's led to a shift in transaction revenue composition, accelerating growth. And in fact, the most recent quarter, we had 98% year-over-year growth in transaction fees. And so our hybrid model kind of results in customers paying us more, the more they use and get value from the platform, which creates great alignment with our customers. And then because of our investments in payment technology and money transmitter licenses, all the money flows for transactions by our customers, which is $35 billion in the December quarter, flows through our bank accounts, and we're able to earn float revenue on those funds in transit. Obviously, in this low interest rate environment, it's not a material revenue line item for our business. But over the long term, if we get to a more normalized rate environment, every 100 basis points of yield is, in today's dollars, about $20 million in annual revenue. So there's certainly an opportunity down the road. And then finally, I'd say on our business model, Rene mentioned our unique go-to-market motion. By having multiple ways to reach SMBs, we've got really strong unit economics and can efficiently deploy capital with a short payback period. And the longer a customer is on our platform, the more users they tend to add, the more transactions they complete, our share of wallet grows over time and they adopt new products. And all of this happens, mostly on a self-service basis. Our customers do it. We don't have to apply additional sales and marketing investments to drive that growth over time. And that's one of the keys to the efficiency of our model and results in great dollar-based net retention of north of 120%, which for the SMB market is great.

Sticking with you, John, some of the things that COVID-19 would have disrupted your business, given the focus on SMBs, to what extent has this been the case? And how have you navigated the pandemic? And what could some of the core implications be for your customers?

Sure. I mean, we think the remote working environment caused by the pandemic has accelerated the need for SMBs to prioritize digital transformation and the pandemic certainly created much more awareness for businesses about the challenges associated with legacy paper-based systems, when everybody is dispersed, and it's hard to get business done using those legacy methods. In the early days, early months of the pandemic, we definitely saw an increase in customer attrition, not material to our overall business because of our horizontal go-to-market approach, where we don't have any significant concentration, say, in any 1 industry segment or anything like that. And then we also experienced deceleration in payment volume growth and transaction activity by our customers, as I think they were sort of contracting and dealing with the pandemic and disruption to their businesses. But what's really interesting across our SMB base, is we saw a very quick return to normalized attrition levels. In fact, it was just 1 quarter to get back to pre-pandemic customer retention rates. And then we saw over the last couple of quarters, increasing activity by our customer base. Accelerating growth in both payment volume and the number of transactions on our platform. And in this December quarter, we -- our payment volume growth was about 40% year-over-year, which is pretty close to pre-pandemic levels. Really encouraging sign about the sort of resilience of our customer base, even though we're still in the middle of the pandemic. So we feel really good about our ability to continue serving these customers and the level of activity that they're able to execute on our platform.

Rene, perhaps back over to you. How have you positioned the company, if at all, to take advantage of more opportunities upmarket in addition to your more traditional SMB segment?

Sure. It really starts kind of with the cornerstone of the strategy of the company, which was to build a broad-based platform that could serve businesses of all sizes. And so there are 6 million businesses in the U.S. 20,000 businesses have more than $100 million in revenue. So we're not focused on those. We might have some of those in our base. But if you look at that, the rest of the businesses are less than $100 million in revenue, and we built a platform from day 1 to be able to take advantage of that. Now because we've been successful, we now then have scale, which means we have data, which is also an important part of our platform and how we use that data is to understand what customers are doing with. And what we found is that as the platform got bigger, we had more customers that were mid-market just by nature because there's just more businesses. And so their voice ended up call listening on certain features that would be clear that could be helpful to acquire more mid-market customers. So we've added some features to help support them, such as PO integration with NetSuite and Intacct, dual approval, stuff like that to really help a larger company manage some of the processes that they have. And so to your point, they are pulling us upmarket. And the other part that's pulling us upmarket is we have partnerships, and we've talked about the go-to-market strategy, but the partnerships with the top financial institutions in the country, many of them are on the commercial side of the house. And so these are some of the bank's largest customers that are being served a white label solution from Bill.com. That's really changing the way the bank interacts with those customers. And so that's, again, another voice to kind of tell us how is it that these mid-market customers would be happier and could actually have more time to manage their business. And so all these things came together and over the last few years, we've been changing our go-to-market strategy to actually address the opportunity with the mid-market companies. And by changing, I'm saying, we have the existing capacity to have all the inbound generated from digital demand. But we've added the outbound capability to go out and reach out to some mid-market companies. And so these are all things that, I guess, lead to the conversation being pulled upmarket. But for us, it's just an execution of our business and our original plan using the broad distribution strategy that we have.

You have thousands of customers, Rene, across a variety of businesses already. Can you give the audience some specific examples of the value that Bill.com's platform creates for customers? What's 1 of the -- some of the manufacturing points for some of these customers adopting your platform?

Yes. The first thing is that they get freedom. It's an elimination of the mess. And they do tell us that, that they have a better understanding of their business. They're not tied to their desk to run their business. One of the things I've said for years is the back office in the back pocket and by back pocket, I mean your cellphone. Being able to manage your business from anywhere, but that gives you freedom to actually think differently. It also means that you have a lot more time. Our customers tell us that they save 50% or more of the time it takes to manage that back office. That is a lot of time that a business is able to then reinvest in growing their business. And that's something that I said when I started that I wanted to help businesses run their business better. And ultimately, it leads the customer examples like United Fire, which is a family-owned business that really focuses on helping people get their fire certifications, commercial companies get certified for fire prevention. Anyways, they switched to Bill.com during the pandemic, found out immediately that they were able to save 50% of the time in that back-office process and then save additional time just on the entire approval process, at least another 50%. And so when you look at that, being able to make 20 payments in less than 30 seconds, which is what they say, that shows you the savings and the freedom, the flexibility for them to be able to run their business from anywhere and to be able to go grow their business and react and respond to this pandemic that we're all going through. So ultimately, I think it's just giving people the flexibility to do what they do best and giving them the technology, so they don't have to worry about that back-office mess.

Rene, from a product perspective, where do you see your platform fitting into the financial workflow over the long term?

Yes. From the beginning, I've been very focused on how do we digitally transform the way business does business and with relation to financial services and processes that a business has. And it's -- as you think about building a platform on the cloud, what you realize, which I said earlier, is that you've got this immense amount of data that can help you understand how to automate processes that are much lower in the stack, so to speak. And so what I see happening over time is that we continue to get more data. We continue to get better at analyzing that data. That helps us understand what products and services to offer our customers. It also helps us understand how to automate more of the processes that customers have. And so if you just think about the AP process that we have today, when you started it with Bill.com, let's say, in 2007 or '08, when the product first became available, you had to do the data entry around whatever transactions were coming in. Now we have the capability with AI that we can do that data entry for you because we've got the data set, and we're getting better at analyzing that data that we can actually eliminate the entire process of entering a bill, and then eliminate the process of routing it because we can automatically route it and coding it through the GL. These are all things that the data enables. And so when I think about the AI capability, that leads to what products and services also that we can develop. And so when we think about the opportunity in front of us, it's looking at how do we do more in AP and AR, which we've just talked about some examples. But it's also around extensions that are very adjacent to what we do. Could that be in the HR space? Yes. Could it be spend management or expense management? Absolutely. Could it be payroll. Yes. It could be all those things that could rely on a platform that has document management, workflow collaboration and payments capabilities integrated with all the accounting systems and distributed through all the financial partners that we have. These are things that we think are pretty strong, and we get excited about the opportunity in front of us as we continue to build and scale the platform.

John, perhaps you can spend a minute diving into cross-border virtual card, instant transfer products for us, how do you see them becoming a valuable part of the product portfolio?

Sure. I mean, we've successfully brought new payment innovations to our customers, and adoption of these newer payments is contributing to our high growth in transaction fees, which, as I mentioned earlier, were up 98% in the most recent quarter. Part of our strategy is to offer kind of a menu of choices to help buyers and suppliers find the best payment options for the transactions they complete together. We focus really on trying to drive electronic payment adoption to eliminate checks, but we don't necessarily try to force any particular payment type. We leave that kind of up to buyers and suppliers. As it relates to cross-border, we saw that companies, our customers, were we're making payments to international suppliers outside of our platform, even though they were using our platform to store documents, route things for approval and ultimately reconcile transaction. So since launching that, we've seen good adoption from customers, which means an increasing share of wallet for us because we're now capturing that cross-border payment activity inside of the platform. And we're still in the kind of adoption ramp phase and working to drive awareness of our cross-border product by our customers and helping them connect with suppliers to make it easier to get those cross-border payments done at a lower cost than they're probably going to do with their bank online. And virtual card payments is similar, except for we're enabling suppliers to get paid faster with better data so that they can reconcile transactions. We recently took on supplier enablement in-house, and this has accelerated adoption and revenue associated with the product. And that supplier enablement activity kind of has a lasting effect, too. To the extent that we have a direct line of communication with suppliers as we roll out more products and more options for them, we can drive adoption faster than they otherwise would. And finally, with instant transfer, it's another option to get paid in seconds or minutes, 24/7 as opposed to days or weeks, and we're enabling suppliers to elect that option. We're working with the real-time payment network from the clearinghouse and also recently talked about integrating debit rails through Stripe to make that product offering available to our entire supplier base. So each of these newer products is an important part of our continued innovation in payments and driving transaction revenue growth.

Great. And, Rene, given the strength of SMBs in the U.S. and the fact that you have network members in over 130 countries, how have you thought about international expansion? What gets you most excited about that opportunity?

Yes, there's 20 million SMEs across the globe, right? So there's 6 million in the U.S., there's 20 million across the globe, and their pain points are very similar. So what gets me excited is being able to serve them, the way that we are thinking about that strategy is we have a product right now that lets customers in U.S. pay people anywhere in the world. And as we do some of the things that John just referenced, which is enabling suppliers to pick what currency that they want to receive payment in, and creating experience for those suppliers that they actually get to know, Bill.com a little bit, and we get to know them a little bit. We have more data, like I mentioned earlier, to really understand what products and services they might want from us. That's how we get to learn from our customers and the extension of our customers into their supplier network. And so what gets us excited is we've got this great foothold. We're expanding our capabilities with international payments. We're learning from these suppliers as they interact with the Bill.com platform. And that's going to allow us to build the right services and products over time. That will make a difference for that community as well.

Quickly, what does the mobile opportunity look like for your business, Rene? Is it something that your competitors are actively investing in?

I think mobile is super important, right? I think the pandemic has shown everybody the importance of having a strategy around remote work. But I think it's important because as we become more digitally native, so to speak, people are going to do business from anywhere. And that means you have more freedom. I think about my grandparents starting their first business, and they would get in the car and they would drive for 2 weeks selling all the clients doing data processing in the south. Well, with the mobile capability, my parents, grandparents could have been running their business from the road instead of coming in on the weekends and doing all that work all weekend long. So I think that is the way business gets started. I think mobile is super important. We've been enabling more capabilities such as the ability to take a picture of the invoice with your bill, but then have us do that data entry I talked about on the phone. So that you don't have to wait for it. And then have the ability to automatically add a vendor with the text the connect capabilities that we're rolling out. So there's a lot of things that we can do that can really drive more adoption, that can really create a better experience for customers, and that's the thing that gets us motivated.

You've also announced, Rene, some key partnerships with financial institutions over the last year. Wells Fargo, in particular, recently kicked in. What role will these partnerships play in your go-to-market strategy going forward?

Yes. When I first came up with the idea for Bill.com, I realized that this was a significant new category that was going to be defined, financial process automation. And that you just don't do that without actually having a way to reach the SMBs that you wanted to reach. And so we built great capabilities on the direct side. But we also knew that we needed to go to the places that businesses trust. Well, businesses trust their accountants. So that's an important partnership form for us. We have 5,000 accounting firms across the country, 80 of the top 100. They also trust their financial stations, which is the one you just referenced. And so to have the top 3 banks in the country saying, you know what, we want to white label the solution that Bill.com has built and expose that to our customer base, depending on the customer could be thousands, tens of thousands of customers for them up to millions of customers that we're able to be exposed to. That tells us that we're doing the right thing because that financial institution trusts us and their customers trust them. So that's a huge opportunity for us. And we also have a chance to continue to build out the financial services that we work with on those partnerships. So it's super important for us, and we have a lot of excitement around what we're doing in that capacity. All of our partnerships, including the accounting software partnerships, all of these partnerships are super important for us to be able to get right and make successful.

Great. And John, one final question with you. You raised $1.15 billion convertible last fall. Congratulations again. Could you talk a bit about the funding, how it's looking a few months later? Any thoughts on M&A going forward?

Yes. With the additional capital, we're really positioned to continue investing across all areas of the business to fulfill our mission to make it simple to connect and do business for SMBs. We believe there's many growth opportunities ahead, and the proceeds from the convert allow us to sort of have flexibility to opportunistically pursue initiatives. Some of the areas that we're looking at, Rene mentioned earlier, extensions to our platform, rolling out new payment products, getting into potential adjacent product areas, whether it's expense management or payroll or whatnot. One of the benefits of having a large customer base, we have over 100,000 customers, is that we collect feedback continuously. So we hear about our current product and what customers like and wish was improved. And we also hear about other needs that they have. And so we feed this into our product priorities and our product road map decisions, and this will also shape our investments as well as we think about M&A. So with the additional capital, we feel like we're well positioned to be both deliberate and opportunistic in pursuing M&A as opportunities arise, and we'll obviously keep everyone posted on our strategy as it evolves.

Thanks. Well, Rene, John, we're out of time now. Thank you both so much for joining us this morning and look forward to having you again. Have a great day, everyone.

Thank you.

Thank you.