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

All right. Good morning, everybody, and thanks again for joining us on the second day of the Wolfe Fintech Forum of the 3 days of the conference. Again, I'm Darrin Peller, covering payments and processors and IT services. And really happy to have John and Bill.com with us here today, which is a name that we continuously get inbound interest on, specifically from longer-term investors that see the really big addressable market and the success that Bill.com has been having. So first of all, thank you again for joining us, John. Really happy to have you.

You bet. Thanks, Darrin. It's great to be with you and look forward to the conversation.

So John, I mean, why don't we just start off, just given how much inbound interest we've had, but still, I think a lot of folks that are getting to know this story given it's still only been maybe a year since the IPO, right? If you could just get us up to speed a little on a background on the company and maybe what you've seen over the past year with Bill.com as a whole?

Yes. Sure. Happy to. So I mean, one of the interesting things about the market that we're going after is there's a lot of pain points for small businesses trying to run their back-office financial operations. And as much as we've had advances in cloud technology and other systems for the enterprise, most small businesses still rely on legacy, manual, paper-based processes to kind of run their financial operations related to accounts payable and accounts receivable. Things haven't changed that much since when I first got into finance 20, 30 years ago. So what we try to do for businesses is we offer a cloud platform that helps them clean up that back-office mess, enables them to move to digital with all of their documents and really automates financial operations for them. That brings efficiency. They get time savings. They get to really pay more attention to do the things that they care about with their business. So we make the mess of the back office organized and efficient and digital. And over time, customers sort of view our platform as mission-critical to run their business. And so they spend more time in our platform than they do, say, in their accounting system, in some instances, when they're trying to manage working capital, cash flow, connecting with buyers and suppliers and things like that. We've been doing this a long time. We have a purpose-built platform for SMBs. We're north of 100,000 customers now. We have a network of 2.5 million members, annual payment volume run rate of about $140 billion. So we've got scale. And we get a lot of feedback from customers about the pain points that we solve, the value proposition that we bring. And that gives us a lot of confidence in continuing to penetrate the market through what I think is a pretty novel go-to-market strategy, which leverages direct-to-small businesses, partnering with accounting firms who are trusted advisers of small businesses and partnering with financial institutions. So we have a very interesting go-to-market system that allows us to create efficient economics, efficient use of capital in acquiring and retaining and growing customers. And ultimately, we're a high-growth business. Core revenue, which is subscriptions and transactions, grew 59% in the last quarter. And it's that hybrid model where customers pay us per user per month for access to the platform. And then they pay us on a transaction basis for usage of the platform. And that creates really great alignment between the usage and value that our customers get from the platform and the amount of revenue that we generate from those customers. So we're really excited about the progress we've made to date and know that we have a long way to go in a huge market opportunity that includes over 6 million businesses in the U.S.

I want to go into the addressable market, but I realize just given the questions we're constantly getting day-to-day in the framework of a pretty crazy macro environment, any just quick update? I mean, I know you just -- you didn't report too long ago, but trends year-to-date perhaps versus last year. Talk a little bit about what you're seeing in the market in terms of demand. And still, it was obviously stronger than expected last quarter for some in terms of new customer adds and even just overall transaction payment volumes. But curious what you're seeing overall year-to-date and even maybe a little high-level sense.

Sure. Yes. We -- in our December quarter, we are really pleased with the results. And we noted a pretty significant uptick in payment activity from our customers in addition to the strong net new customer adds that you mentioned. And it's a good sign. Even though we're still in the middle of the pandemic, we think there's some pent-up demand. So not only our -- is our small business customer base kind of getting back to normal business activity, in some cases, we think they're actually in expansion mode, which is really interesting. We saw 40% year-over-year growth in total payment volume. And that -- if you go back a few quarters at the early stages of the pandemic, we saw a slight uptick in customer attrition. That rebounded within a quarter, and now we're actually -- we have higher customer retention today than we had pre-pandemic. And then same thing with payment activity and transaction volumes. We're, on a total payment volume basis, kind of back to pre-pandemic levels. And so it's -- we'll see what happens from here. But it looks like because of our, I guess, horizontal go-to-market strategy where we don't really have any significant concentration in one industry vertical or another, we're kind of seeing that broad-based expansion happening in the customer base.

Okay. That's good to hear. When we take a step back, I mean, yes, sure, the pandemic probably pulled forward some demand. But at the end of the day, you're at such an early stage of such a big addressable market that it's almost like, all right, it pulled forward a little, but maybe you're still in inning one. And it doesn't change perhaps the rate of growth opportunity. And so if you could just talk a little bit about that. I remember when you did your IPO, you framed out an addressable market that seems like it's only grown since, but what, $9 billion-or-so potential revenue opportunity and also in customer base numbers. I think you've said anywhere from 6 million to 9 million customers, depending on how you fragment it.

Yes. So the way we define the market was based on -- in the U.S., the number of businesses with employees, that's about 6 million. And of those, there's only 50,000 companies that have more than $50 million a year in revenue. So if you think about it, it's a long tail. Most businesses in the U.S. are small. And using our average annualized revenue per customer times the 6 million, we got to a $9 billion U.S. market. And in addition, about a $30 billion international market, assuming another 20 million small- and medium-sized enterprises. And given how the business has evolved, we're sub-2% penetrated in the U.S. We've continued to add products that allow us to have more use cases and higher share of wallet with our customers. That's only increased the overall size of the market opportunity for us. And while the pandemic has obviously done a lot to raise awareness for small businesses about the critical need to operate differently, to be able to be digital, work from anywhere, work from your mobile phone and not have any disruption to your business, it's still a huge market opportunity, and we're early. If anything, the pandemic probably helps the market mature faster than it otherwise would have, but it's -- we're still in the early stages. Most small businesses and surveys that we've done report that they still rely on paper checks as a primary form of payment. It's hard to believe from a consumer mindset standpoint that that's the case, but it is. And when that's true, it usually means that everything else involved in their financial operations is also paper-based, paper invoice, paper contracts, all that stuff. So we know we have a long way to go in creating awareness and driving adoption in the market. And we're encouraged by the fact that as we roll out new products and create new use cases, we're able to actually increase the size of our market opportunity.

All right. That's helpful. I want to go to some of the KPIs for a minute. I mean you guys have been giving some -- a little bit more cautious guidance on the near-term trajectory of new customer adds. Just given the dynamics with some of your partners and the like. But when we think about last quarter, again, you came in at, I think it was 5,600 net adds, obviously outperforming what a lot of the market expected. So if you could just remind us on the dynamics on new customer adds and what you've guided to the market with regard to the potential opportunity and acceleration on that?

Yes. Sure. So we -- you're right, we had 5,600 net new customer adds in the quarter. That was above our expectations, 27% year-over-year growth. We had expected a slight decline in that new customer adds as our go-to-market emphasis has been shifting towards slightly larger businesses, still in the small- and medium-sized business category, but we've seen a lot of inbound demand from slightly larger companies leveraging the platform. They're obviously fewer in number. And at the same time, we're in the kind of early phase of investing in some new financial institution partnership integrations that haven't resulted in any new customer -- material new customer adds as of yet. So the commentary about slightly lower expectations, so it's really about the near term, the next few quarters, as we continue to work through the pandemic, and sort of rush of spike in demand from the early days of the pandemic is past us. And then as we start to bring on these new financial institution partnerships, we are expecting stronger adds going forward. So it's not really a commentary about the market opportunity as a whole as much as the near-term focus that we have on slightly larger businesses and investing in some of the newer go-to-market partnerships that we have.

Has anything changed in terms of your views on the trajectory when we think about the cadence over the next several quarters? Or are you still expecting that nuance because of the larger customer base or some of the partnership weaved into it?

Yes. That continues to be our expectation. Again, it's more about near term as opposed to longer term. We think it's a huge market opportunity, as we talked about. And we're well positioned to accelerate customer growth over the intermediate and longer term. And the other thing is just with our business model, most of our revenue in any given period comes from existing customers, right? So customers get on the platform. They do a 30-day trial. And then over time, they migrate all of their financial operations to the platform, let's say, for AP or AR or both. And what that means is they add more users over time. They do more transactions. We get a higher share of wallet. So it takes a number of quarters before new customers actually start to contribute to -- in a material way to revenue growth. So while we're very focused on continuing to penetrate the market and drive customer growth, it's less connected to the near-term financial results of the company as serving the existing customer base.

Understood. Well, can you just remind us when you expect the contribution from the 3 large bank partners that you've announced recently or alluded to recently in terms of contributing to new customer adds?

Sure. 2 of the 3 are in the beginning of the market launch phase, and the third will go live later this calendar year. So I would expect towards the end of this calendar year, which would be mid-next fiscal year for us, we'd start to see the impact of increased customer adds from those newer partnerships.

Okay. And is that -- I mean just thinking about the approach there. I mean, a, is that something that you could see replicating and expanding in terms of incremental bank partners from here? Are you already in dialogue with any? Or -- and then just touch on the magnitude of the opportunity.

Yes. So I mean, one of the things that we've been focused on with the financial institution partnerships is to sell into the largest financial institutions because they have the biggest reach amongst business customers, right? So we're working with all of the top 3 banks at this point across either their commercial customer segments or their small business segments. And as you mentioned earlier, we announced 3 agreements almost in succession. And so working on those integrations at the same time has been a big priority for us and part of how we've been investing our R&D resources, if you look at it that way. So we're more focused in driving the initial results, go-to-market and ramp from some of the newer agreements plus our existing FIs than we are continuing to build out the platform and reaching more FIs. We will in the future. And part of the -- what we've seen in the dynamics in the market is an increasing interest by these financial institutions to make larger commitments to us. And I think that's a vote of confidence about how they think our platform can help them serve customers. In the June quarter, we reported, I think, a significant increase in our RPO or remaining performance obligation. Most recently, we reported against above $150 million. And that's just the minimum commitments that we have from these financial institution partners. So you can think of that as the floor for revenue going forward over the next several years with a much larger upside opportunity, to the extent we're successful in driving better adoption and transaction volumes.

That's helpful. That's helpful. We get a lot of questions on competitive dynamics in the industry. You've done well, obviously, in your area. And you can see that on the stuff. But obviously, that could draw more interest from competitors as well. Just touch on what you think is the moat around what you guys have built and if that's sustainable at all.

Sure. So there's, I think, a few factors that make our position in the market differentiated from others. One, serving SMBs is hard, right? It's hard to acquire them efficiently, retain them, grow over time. It's a more nuanced customer base. Most software is built for mid-market and enterprise customers. Our platform from the beginning was purpose-built for a small business to be able to get up and running in predominantly a self-service way, automate their own financial operations and those sorts of things. So it's not like a trimmed-down version of an enterprise software platform. It's built from the ground up for SMBs. And then there's obviously been increasing trend in the last few years about the integration of software and payments. We've been doing that from day 1. It's actually a part of our, as I mentioned, our business model earlier. We also have invested in a regulatory strategy and money transmitter licenses in order to have our own proprietary payment technology. So that integration of software and payments is really critical. And then finally, I'd say the scale that we have, not just from the customer base, north of 100,000 business customers, but from the network that we built using a premium model, 2.5 million network members that means they're engaged with the platform. They have an account. They're either making or receiving payments and completing transactions with our customers. And over the longer term, we think that's an interesting source of potential new customer prospects for us as we continue to increase the features and functionality and value proposition available to network members.

That makes a lot of sense. What about the larger enterprise type ERP companies or expense management companies? We get the question also as to whether or not some of these might just continue to grow into that space of accounts payable software. And I think some of them have some very almost minimalist versions of it. But I'm curious if you think that's a real threat or not.

Yes. Well, I think every software company has a core mission, right? And the ERP systems certainly are really good at certain things. In fact, to give you an example, we are a customer of NetSuite -- Oracle NetSuite. It's what we run for our ERP system and -- as do many of our mid-market customers. And NetSuite has had payments and workflow and approvals and things like that in their ERP system for years. The reality is it wasn't built for that, though. And that's purpose -- the purpose of our platform is to help automate some of those things, and we feel like we do it better actually than some of the ERP systems. So our positioning is that we can make the accounting and ERP system better by integrating with them and having it easier to use, lower-cost solution for some of the capabilities that we have. So we're not -- we're partners with obviously a lot of the accounting and ERP systems as well. So we don't view it as much as a threat as an opportunity to continue to help businesses by making their accounting and ERP systems better.

Okay. That's helpful. Let's shift gears to just price increment, and let's start with the software model and the pricing from software, which still is obviously a big percentage of your revenue stream. You really acquire customers over the differentiation around your software more so than anything around payments, I'd say, right? And when you think about your -- what you charge, still perceived by many as underpriced versus what you could do for the value you're offering for clients. And so can you give us a sense on how you think about that model and pricing on software? How much of a percentage of revenue it is now? What it can get to?

Yes. You bet. And you're right about our -- sort of how we lead, how we sell and the value proposition. We're about automating financial operations, and we also do payments. But payments is the last mile, right? It's the digital document management, workflow approvals, collaboration, transforming the operation to create efficiency. That's what we do. And that's why we're a slightly better match for larger businesses than, say, the sole prop market, where there's just one person and what they might care about is the last-mile payment. And so the foundation of our business model is subscription revenues. On an annualized basis, we're about $1,800 a year as of the December quarter, order of magnitude, 25% growth year-over-year. And it's a per user per month subscription fee basically for the whole platform. There's some nuances and different pricing packages and things like that. But ultimately, it's the foundation of what we do. Some of our growth recently has been driven by the transaction side of our business. But as we continue to add use cases, so you mentioned earlier some of the other products, whether it's expense management or reporting and those kinds of things, there's some obvious things that would make sense to be inside of our platform over time. And as we do that, we not only have the opportunity to increase our share of wallet on transactions and transactional revenues and payment volume, but it also opens up additional subscription opportunities. Our strategy around pricing has been to increase the value of the platform for the entire customer base, and then over time, increase subscription fees. Typically, every 18 to 24 months. Our last subscription fee increase was just about a year ago now. So we're lapping that. And we'll continue to look at increasing yield and pricing over time. But because of the large market opportunity and where we are in the stage of maturity of the market, we're still focused on minimizing barriers to adoption, having a low price point and expanding with our customers over time to drive additional monetization.

To your point on lapping a price increase now basically, in fact, I think it's already been a couple of months or so since it started lapping. When you think about the value-add you offer, I mean, are there enhancements that have been made between the last time and what could be another price increase that you could justify to your clients and say, "Look, aside from just being maybe underpriced, we've offered you this much more value now than we did even last time. And so we're going to adjust here and there." I mean, has there been enough made in terms of changes? And are there more to come in terms of enhancements from a software standpoint?

Yes. There's always more to come. And we're -- every day -- it's one of the benefits of having a large customer base. We get feedback every day. We're continually improving the product. We've added many features in the last year, some of which are in support of the larger customers that we talked about, more security, more control, approvals, things like that. So we haven't stated any specific plans to increase prices, but it's something we'll continually look at. And we're a-ware that there is an opportunity. We had a recent customer feedback that said -- this is from an accounting firm partner of ours who was doing some research and said, "Look, Bill.com could increase their prices 5x. It wouldn't make any difference because of the value that it helps." And that's just not our approach to the market, though, right? We want to continue to do it measured over a period of time. And I think there will be opportunities ahead. But at this point, I don't have any specifics or timing expectation on when we might increase prices.

Okay. Let's shift to the payment monetization story, at least just in interest of time. I mean, again, it's still one of our favorite aspects given we do think there's a good runway there, monetization potential for the company overall. Can you set the stage in terms of what percentage of your transaction mix is now, whether it's virtual card or real-time payments, which is still a never cross-border or other categories?

Sure. The vast majority of our transactions today are ACH. We're a little bit above 60% electronic payments, with the next biggest product being check payments. And that's because small businesses, when they get on the platform, they're like predominantly check payments. They don't have remittance information. They don't have tools with which to do electronic payments. And we help them make that migration over time to the point where we're over 60%. Now that means some of the customers who've been on the platform, say, more than a year, they're much closer to 100% electronic payments. And ACH is the most popular. We're newer earlier on in, say, virtual cards and cross-border payments. It was about -- the last reported number was approximately 1% of TPV for virtual cards and a little above 2% for cross-border payments. Those are in the early innings. We have a long way to go to continue to drive adoption there. You mentioned Instant Transfer, which is an interesting product, that is still in the pilot phase. It's available to a portion of our supplier base, leveraging the real-time payment network. And we're going to be introducing debit rails to make that available to the entire supplier base. That's similar to an FX payment or a virtual card payment, in that it's an ad valorem pricing model. So our revenue is tied to the size of the transaction. And it's the dynamics of the shifting composition of payments to these variable-price products that has led to the significant transaction growth that we've seen in recent quarters. I think it was 98% transaction revenue growth in the last quarter. And I think we're expecting to continue to be able to drive adoption of these newer products with the goal of finding the right payment type between buyer and supplier in order to ensure it's a repeat transaction. And as we do that, we see monetization expansion and take rate increases, and ultimately, revenue growth.

I mean when we think about the ability for you to have some say over it -- I mean I know you try to leave it up to your customer. But I guess, first of all, the economic difference between a check that comes to you versus the economic difference of a virtual card, real-time payments, I actually -- the debit rails is interesting. I mean, is that using like a Visa Direct-type rails or real-time, yes? When we think about the economic models of each one of them, and I know it's more attractive on the virtual card side, but can you give us a sense on the models between what you get paid for ACH versus checks versus the others?

Yes. ACH and checks is how we've built the business, and those are flat rate transaction pricing, as is a U.S. dollar international wire. So it's $0.50 for an ACH payment, $1.69 for check payment, $10 for international wire. Virtual cards, we are the receiver of net economics from our partner, which is Comdata, who is the issuer of the cards. And because we're bringing the merchant and the transaction to the table, we receive the lion's share of economics. We haven't disclosed specifics on that, but you can think of that as many, many multiples over those flat rate prices that I just mentioned. And then an FX transaction is very similar in that -- to the extent there's currency translation involved, we obviously have a fee for that. And we try to be price-competitive, beat the prices of sort of the retail rates that a typical small business is going to get from their bank. And that's part of how we're driving adoption is making it more cost-effective for small businesses to do business with their international suppliers. On the Instant Transfer product, it's still early. But we're testing pricing in the 75 to 100 basis points range, which is not dissimilar from other products in other parts of the market, whether that's Square or Venmo, PayPal that are serving more C2B side.

Yes. Yes, that's fair. Actually, a little lower than even what they're doing, to be honest. So you have some room. When we think about the virtual card penetration along with some of these others, again, you mentioned 1% now, you guys are proactively trying to enhance the adoption of it, right? I mean, whether it's supplier enablement, some of the AI initiatives you guys have to try to see who has what ability now and what you can go after, it seems like it's been progressing well, but can you give us more color on how that's still progressing even into this quarter?

Yes. I mean we haven't provided any interim penetration rate numbers. But you're right. The biggest thing that we've invested in is the combination of technology, which is AI, the ability to read a document and understand if a merchant -- if a supplier is a merchant and accepts credit cards; and then that supplier enablement capability, where we're in our second quarter of doing that 100% in-house, which means we're dealing with suppliers. We're getting them set up for the right payment type. And that's led to an acceleration of the number of suppliers that are enabled. We're able to do it faster. And then two, that results in higher TPV going through the virtual card product, which obviously drives increases in monetization. It's still early. We think, over time, long-term, 5% to 10% of our payment volume could be on a virtual card. And as you said, our last reported number was about 1%. We continue to make progress. It's not a hockey stick thing, though, because it involves -- the big leverage point is getting suppliers enabled. And with our large network of 2.5 million members, it takes time, but I think we're making sort of steady linear progress.

And cross-border, you mentioned a couple of percent penetration now. But I think you talked about there being opportunities to get that to, what, 10% or 20% even?

Yes. That's exactly right. It's amazing how global small businesses are. You would think it's just big businesses. It's not. Many of our customers have international suppliers. So we're -- we think the range eventually is 10% to 20% of TPV for cross-border payments. And that's a combination of U.S. dollar and FX. Today, the vast majority of our international payments are U.S. dollars: 75% U.S. dollar, 25% FX. We think that FX actually increases over time as we get our product out there, drive awareness of international suppliers of our competitive rates versus their banks and things like that. We think the majority will still be U.S. dollar long-term. But as we increase that FX component, that's obviously a big revenue opportunity.

All right. We're only 5 minutes left, and I have some questions from the audience. But very quickly, M&A. You still have a strong balance sheet, obviously. In fact, recently raised some money. When you think about what's on the horizon and how imminent something could be for you guys, what kind of assets are you looking for? And talk a little bit about timing. It would be helpful for investors to think about.

Yes. It's all tied into our growth strategy, which is about continued payments innovation, rolling out new payment products; second, adding new use cases to the platform. So whether it's -- right now, we do AP and AR automation. We know we can make improvements on the AR side. We believe it will make sense to have things like expense reimbursement and expense management, spend management, procurement, maybe down the road, payroll. These are things that all leverage some of the capabilities we already have with slightly new use cases, new features, and it involves payments. And then there's a geography layer on top of that, right? We -- at the time of the IPO, we talked about our longer-term strategy. One of the components was international expansion. That's the furthest out right now, but I think we're actively looking at opportunities to increase the breadth of the platform. And as we evaluate this opportunity, it's always with the lens of does it make sense for us to build it, to partner with third-parties or to potentially acquire now that, as you mentioned, we're positioned with capital resources to be able to do that. Nothing to announce or anything like that in the near-term, but these are some of the categories that we're looking at.

Okay. John, just in interest of time, let's take some from the audience now. One is, your competitors mentioned on an earlier session that companies tend to stay in their market segment swim lanes. Do you agree with that? Do you plan to go up market over time?

Yes. I'd say, our focus, our mission is to make it simple to connect and do business with an emphasis on small businesses. That's where we started. That's what we do today, and we're going to continue on that mission. At the same time, we've seen more demand from larger businesses, what we call mid-market, which is companies in the $10 million to $100 million range. And to the extent that we can serve their needs without making customizations to our platform that are unique to a particular industry -- we sell to the financial back office, right, across all industries. It doesn't matter to us. I think we can serve larger businesses. But it's -- for us, it's not a move up-market. It's more -- we're getting slightly pulled up-market. We're going to continue to focus on the small business with -- and meet the needs of the larger businesses as it comes to us.

Next question, what are the company's ambitions outside the U.S.? Will you be offering a foreign language version in the next few years?

Yes. It's a great question. And we do believe that the opportunity outside the U.S. is significant and we're -- it's part of our strategy. With that said, there's different value propositions in different regions. And one -- the way we've started is with our international payment product today, that's allowed us to see what the supplier network of our U.S. customers looks like and is an indicator of where we might want to go first. There's not a lot of surprises there. It's English-speaking countries: Canada, Australia, New Zealand, U.K., parts of Europe. But at the same time, there's a different value proposition. So in the U.S., we've talked a lot about the pain point being paper checks, and then there's all these other pain points associated with it. That's not as true in Europe, right? They've done a great job at getting to electronic payment adoption. But there's still challenges with invoicing and other financial automation and workflows. So no specific timing on that, but we do think it's going to be an important part of our longer-term growth strategy.

Okay. Another question is a quick update on how rising rate environment impacts the model, albeit we know it's not strategic?

Yes. So we're at near 0 interest rates now, and you've seen with our results what that does to float revenue. We're at $140 billion a year, $35 billion a quarter in TPV, north of $2 billion in customer funds on our balance sheet. Every 1%, 100 basis points increase is probably north of $20 million in annual revenue at very high margins. So we've always considered float to be sort of a nice-to-have in a rising interest rate or a normalized interest rate environment. It will certainly add high-margin revenue. But at the same time, we don't manage the business or make any decisions in terms of our investments or whatever with sort of float in mind. But it is something that we're monitoring given the recent uptick in rates and expectations. And longer term, I think it obviously presents an opportunity.

All right. Let's take one last one. Is -- are the RPOs just from a SaaS revenue perspective or are transaction revenues baked into them as well?

Yes. Good question. And the RPO is the combination of subscriptions and transactions. So it's based on an agreed-upon customer penetration rate and transaction activity levels. So in some sense, it's the floor of the revenue that our financial institution partners are going to pay us over the next, call it, 5-plus years. And then the opportunity above that is additional customer penetration or adoption and increased transactional activities.

That's really helpful. All right, John. We're going to wrap it up there. It's 5 minutes to -- for everyone still listening in, Visa's CFO is up next at 12 p.m. Eastern Time. But John, thank you very much. Really great avenue. It's a story we're excited to be covering and spending a lot of time with our clients on. So anyway, be safe, be well. We'll talk again soon.

Thanks, Darrin. Take care.

Take care.