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

Good morning, everyone, and welcome. I'm Ken Suchoski. I work on the payments and fintech team at Autonomous Research. We're excited to have Bill.com here at our 37th Annual Strategic Decisions Conference. This is Bill's first time here. So we're really looking forward to the discussion today. We're excited to have Rene Lacerte and John Rettig joining us today. Rene is the founder and CEO of Bill.com, and John is the CFO. Rene and John, great to see you again. Welcome, and thanks for joining us.

Thank you. Thanks, Ken.

Thanks, Ken.

I'd like to thank the investors for joining us today as well. And before we get started, just a few logistical items. For the format of today's conversation, we're going to be doing a fireside chat. So I'll start off with a few questions, and we'll also be taking questions from the audience. And we want to make this as interactive as possible. So feel free to go to the live Q&A box on the right side of your screen, and you could submit your questions there, and we'll pass those along to Rene and John and get those answered. And then lastly, if you have any difficulties with your connection or you have questions about the webinar, feel free to reach out to your Autonomous or Bernstein sales contact or investor access at Bernstein or Autonomous. So with that, let's get started.

And let's get right into it, and maybe we'll start with you, Rene. When we do our analysis and add up the 10 largest AP automation players combined, we find that they've penetrated just 2% of all U.S. businesses. And so some people find that number surprising just because it's so low. But so I was wondering if you could explain why that number isn't higher? And why haven't businesses already adopted a solution like Bill.com?

It's a great question, Ken, and it's something that obviously gets me excited about every day, right? We are at such a massive market in front of us. We have 115,000 businesses. There's 6 million employers in the U.S., and that's just the U.S., right? Obviously, there's a lot more businesses outside the U.S. And the reason I believe that businesses haven't adopted us is just inertia and not having the right technology available. The inertia is that they have a process that works. They have something that -- which is paper check, 70% of B2B payments are made via paper checks, right? So this lack of having technology means that they have less security in their transactions. That's the paper check. They have less access to the information to make their decisions. And that's the pain point that we see is that people aren't making the decisions that they want to be making and the speed of time that they want to be making them. And so when you're in SMB, you end up running and doing business all the time. There's 24 hours in a day, and you're working it all the time. So having this technology to be able to simplify your life on some of these decisions, which are not critical decisions, the critical decision was the supplier you hired to help build your business. That was critical. When you pay them and how you pay them, it's important. But it's not the same, and you want to be able to go back to driving that. You don't want to be saddled with it. And so paper, I think we learned with COVID. It was a ball and chain, kept people tied to the office, cannot run their business with COVID, people realized they needed more digital tools. We're seeing that across our customers. We're seeing that across our partners. Where this inertia, it's time to break through. It's time to have a one-stop shop. And part of the reason, I know we'll talk about it, but part of the reason for the acquisition of Divvy was to help our customers have that experience, which is a one-stop shop to manage all the B2B spend. We do everything when it comes to the AP, and the invoicing that comes in. And now with Divvy, we'll be able to handle the card spending that's going out as well. And so that opportunity to kind of have one-stop, we think that's going to break the inertia. That's why we had success to date. That's why we have 115,000 customers and are the leader and -- among AP automation solution providers, and that's going to be the opportunity going onward.

Absolutely. That's exciting. The accounting channel is a big distribution channel for the company. I think it's over 50% of your customer base. So could you talk about how much room there is to grow in that channel? I was wondering just maybe you can give us a sense for how penetrated Bill is across that accounting firm channel and just how much room there is to grow?

Accountants are super important to our economy, right? And I know that just from my parents and my grandparents having a lot of businesses that serve accountants. And so when I started PayCycle, we focused on serving accountants. And when I started Bill, it was also the same thing. It's because accountants are of one of, if not the most, trusted adviser that a business possess. The other might be a financial institution, which by the way, we have partnerships with them as well. And so when we think about how do you go after that market, this massive market environments that we just talked about, the 2% into the 100%, we know that we are bringing a new solution that has to break through the inertia. And we know that you need to find trusted partners of the business to help create that inertia. And so accountants are one of those trusted advisers for us that we're working with. So we have 5,000 firms across the country, and there's well over 100,000 bookkeeping firms in the country. And we have about 80 of the top 100 firms using us to manage the back office for their clients. So there's 2 ways to increase penetration with accountants. One is to get more firms, which we do every month. And the other is the increased penetration of the firms we have. And so adding more clients, making it simpler for them to add clients, making it simpler for them to manage the clients, those are all things that we're doing. And we've talked about features that we've enabled recently to make that happen. And so we know there's a lot more that accountants can bring, and we're going to continue to focus on that.

Okay. Okay. That's great. And John, maybe I'll bring you into the discussion here. And Rene is obviously familiar with payroll businesses, just given the founding of PayCycle. But Paychex is a company that we follow from a distance, a payroll provider focused on small businesses. They have 700,000 customers today. Bill is at 120,000 customers. So it seems like Bill's customer count will continue to grind higher over time. I mean I guess the question is, how confident are you that you can get to a number that's closer to 700,000?

Yes. I mean one of the reasons that we've focused on SMBs is that it's a massive market opportunity. There's millions of businesses. And they're really underserved, mainly because it's difficult to build software for the SMB segment with low price points and make the unit economics work. And that's something that we've really figured out. So we've been delivering really strong customer growth, 27% year-over-year in the last quarter. And as we scale the platform to add more payment types and more solutions such as the spend management capabilities that we get with the Divvy merger, I think it makes our value proposition even more compelling for SMBs. And we also continue to expand our go-to-market ecosystem. You just talked with Rene about the accounting firms, but we also have the financial institutions, software providers and direct sales. And that whole ecosystem is helping us sort of continue to make progress with this vision of being the leading platform for SMBs. And I think we have a long way to go. Businesses have -- historically small businesses made some progress at implementing cloud solutions for the front office, whether it's CRM or marketing automation or customer service. And I think the pandemic has really shifted the mentality about what it takes to run a successful business in the back office. And we're seeing really good traction. And we're confident that with the big market opportunity ahead, we have a long way to go to continue to scale our customer base.

Yes. No, absolutely. Yes. It's pretty amazing that you have this Amazon- and Uber-like experience when you're at home on the weekends, and then you go into the office and you're filing invoices and cutting paper checks. I find that amazing. John, maybe sticking with you. The net adds continue to come in better. They've been pretty impressive in recent quarters. Can you talk about what's driving that outperformance? And should we expect that to continue?

Yes. We've been delivering, I think, really good performance across all of our go-to-market distribution channels, the accounting firms, the financial institutions and direct to small businesses. I'd call out a couple of things. One, our accounting channel has sort of consistently outperformed through the entire pandemic. And I think it's a reflection of how closely they work with their clients to help them succeed, right? Accountants are trusted partners. And they not only do bookkeeping and tax and things like that for small businesses, but they also help and modify how they work, implement technology and help them succeed. And so our close partnerships with the accounting firms has translated into strong retention and strong growth in new customers. Also in Q3, we called out a new program with one of our long-term financial institution partners who implemented a new capability that resulted in an incremental 1,000 customers in the quarter, which we thought was really interesting. And it really came from the fact that through the pandemic, they saw an increase in sustained inbound demand from SMBs for digital solutions. And so they developed a new program, to -- virtual advisor program to -- the moment an SMB contacts them, make sure that they see all of the digital solution offerings that the bank has, and they had really immediate results from that. So that was quite encouraging as well. And like we've said, I think, on our last call that we expect net new customer adds to be in the 4,000- to 5000-a-quarter range in the near term. But over the longer term, we're actually really optimistic that we continue to scale and can expand that, particularly as some of our newer financial institution partners start to come online and get to that scaling phase versus the launch and prelaunch phase that we've been at over the last few quarters.

Yes. That's really interesting. I guess maybe just a couple of follow-up questions. Now that I think through your response, that 1,000 -- that customer -- or that partner that you called out, the extra 1,000 adds in the quarter, which partner was that? Was that one of the new FIs that came on? Or was that a partner that spend with Bill.com for some time?

Well, it's a partner that's been with Bill.com for some time. So we've talked about 3 new agreements with FIs over the last, call it, 9 months. It's not one of those agreement. So that's what actually, I think, is most encouraging about this is that we have a long-term relationship that's working really well for us and our FI partner. And they've taken sort of a new look and invested more in making the partnership successful and in driving results and value for their SMB customer bases, and we benefit from that.

Right. Absolutely. And then maybe just one more follow-up question for you, John. Just the new FIs that are coming on, those 3 that you mentioned, can you just remind us when those are really going to start contributing in terms of net adds? And then the -- one of the most common questions I get is how many net adds they are going to contribute. Because when we look at JPMorgan's filings, they say they have over 4 million small business customers. BofA, I think, has 3 million. Wells, I think another 3 million. Now most of those are sole proprietors, and that's not your target customer. But If you can give us a sense for, I guess, when and how many? I mean are we talking 200 extra customers a quarter? Or is it like 1,000 extra customers a quarter?

Yes. First, I'd just say that's -- you've highlighted the reason that we focus on the large financial institutions, their coverage of businesses is massive, right, millions of potential customers. Of the 3 new agreements that we mentioned, 2 are in the beginning stages of launch and being rolled out to customers. Typically, that's a kind of 12-month process to drive adoption. The third, which is actually focused on the SMB segment, which is where you pick up the millions of customers on the consumer side of the bank, that we're expecting to launch later this calendar year, in the fall, and we're still on track for that timing. We haven't provided any specific guidance about our expectations on new customers. But as all of those agreements get to the scaling phase. When we start to drive adoption, we'll have more visibility and be able to update investors on our new expectations.

Right. Okay. So basically, it's about 12 -- 9 to 12 months after a launch for those to be fully contributing from a net adds perspective?

Yes, that's typically the time frame. It can be a little bit shorter or longer, depending upon the particular partner.

Okay. All right. Great. That's really helpful. Maybe just maybe swinging it back to Rene here. One thing we're trying to better understand is how effective of a growth tool Bill's vendor network has been. For example, Bill has the ability for customers to invite vendors to join the Bill.com network and then for those vendors to then convert to full paying customers. So I guess, how much traction are you gaining there? And how much of an opportunity is there to accelerate net adds from that channel?

It's one of the things that was core to the vision of the company was the 2 sides of AP and AR. And that's hence the name of the company, Bill, right, because it does work for that. And so the network is mostly generated by the AP customers adding suppliers into receive payment. And the opportunity for us is to continue with those 2.5 million members that are in the network, is to continue offering more services to them, like you said, to upsell them. And so we do have good success in driving some of our direct demand gen into -- from the network, and there's opportunity for us to do more. And part of this is going to be around the simplicity of just adding the network altogether, right? So in the early days of the network, the work that had to get done was, our customer would have to have the right e-mail address in, then the network member would then have to sign up and fill a bunch of information. Now what we're starting to do with the AI is like, can we identify the e-mail because it's on the invoice? Can we identify the information from other sources in the data that we have? And can we make it much easier for the network member to just add themselves and sign up for the ability to not just receive a payment, but to also invoice into Bill.com? And that becomes a more natural path for an upsell and the cross-sell. So lots of -- I would say there's -- with the network as big as it is, we definitely get strong demand opportunities from the network. But I think there's more we can do. And that's, again, just the power scale and the power of the platform, the technology that we're able to apply.

Absolutely. And maybe sticking with the steam, Rene. Why not push the AR offering a little bit harder? It just seems like there's a lot to do on the AR side, whether it's creating electronic invoicing or getting paid faster. I mean most of your customers are on the AP side, but why not go aggressively on the AR side and push that offering a little bit more?

I think that's a great question. It's something that we are doing, right? We are starting to invest more in understanding what are the things that our AR customers would need. One of the things that we know that definitely is one-stop shop, like the ability to manage their financial operations in one place. We know that they need better payments, and we know that we have strong payment rails. But we also know they need other things, and I can give you an example of converting an estimate into an invoice. There are things like that in the feature set that we have not had a chance to build yet, and we are starting to really invest some understanding about how we could have the right features to attract more customers into that part of the platform.

Okay. Great. I wanted to switch maybe a little bit to the payments opportunity and monetization of the volume that's going through your network. So maybe sticking with Rene. I wanted to ask about supplier enablement and you brought that in-house. I guess how far along are you in terms of reaching out to your suppliers to accept card?

Yes. I mean we've been doing that a little bit less than a year, and we're very happy with the success we've seen. It's been driving some of the results that we've seen in the last year. We have also continued to be learning about how to do more, right? So our long-term target that we stated is to really focus on the 5% to 10% of suppliers that accept cards that are in the Bill.com vendor payment stream already. And so -- and where we're at is, I think a year ago, we said we're at 1%. We're clearly higher than that given the success we've had. But we think there's more opportunity. We think there is more opportunity to, one, get the existing vendors that accept cards to get onto our card program. But we also think there's opportunity for us to really create a stronger relationship and opportunity with suppliers and give them options. And that's part of the real-time payments that we've talked about that's in pilot and rolling out over the next few months or quarter here. And really having the opportunity to let suppliers choose how they get paid, we think that's super important. We said for a long time, that our goal is to just make it simple to connect, to do business. And what that means is we're not going to really be forcing any type of payment. We're going to do what's the right payment for the supplier, what's the right payment for the customer. And so I think the opportunity is still -- we're still in early days on understanding suppliers. It's only been a year that we've been working with them directly, not even a year. And I think the opportunity for us to enhance that relationship and enhance the monetization, enhance the adoption is all real.

Yes. That's a good segue into the next question, Rene. But I guess how important is it for Bill to develop a direct relationship with that supplier? I mean what's the real reason you're doing that longer term?

Yes. We think it's really important. I mean the suppliers at every touch point we have, we're helping somebody with part of their business, right? So when you think about the AP customer, clearly, we have all the workflow around all their invoices. We have all the documents around all their invoices, and we manage all their payments. And that's 70% of their B2B spending, right? So we know that's super important there. But on the supplier side, if we're helping them receive a payment, well, maybe versus from one of their customers, but over time, it will be from multiple customers because the network continues to grow. And there's going to be opportunities for us to serve them better. And we've already seen that with the virtual card offerings and the cross-border payment offerings that customer/suppliers want the ability to actually have a better payment stream. And so the reason it's important is, there are other products that we could imagine helping those suppliers with. And it could be the AR product we just talked about. It could be our AP product. It could be cross-border payments for them. It could be understanding more about working capital needs that they might have. And so that relationship with the supplier is going to be important for us and something that we feel well positioned to continue to strengthen and really make a difference in the ecosystem.

Yes, absolutely. And just that comment on working capital, maybe this is a question for John, but I mean, I guess how close are you guys to launching a working capital solution? I mean is that on the immediate product roadmap? And do you guys have plans of rolling something out for your suppliers on that front?

Yes. We haven't talked about the timing of that. But just stepping back, we do feel like we're pretty uniquely positioned given that we're in the middle of the transaction flow with 100,000-plus customers, millions of suppliers, millions of transactions. We have a very interesting data asset as a result of that transaction flow that we think can contribute to great underwriting and risk management capabilities, continuing our track record there. And so we're very interested in that space, and it's an area that, frankly, is a ubiquitous need for SMBs, right? Access to credit and capital to continue to run and grow their business is an important need, and we hear about demand from that from customers. So it's an area that we're looking at, but no sort of immediate or imminent plans on the product side. We'll certainly circle back on timing as that burns up.

Right. And then just, I guess, the revenue model on that. I guess, would you just be charging -- you would be charging some kind of take rate or variable rate type of fee on that transaction? Is that how you guys kind of think about them? I know it's not launched or anything like that, but just conceptually, how would that work? Or how are you thinking about that?

Yes. I'd say it's early to talk specifics. But in general, we would expect to have some sort of variable fee associated with the extension of credit in whatever form that takes. I mean there's lots of different opportunities within the umbrella of working capital, and we obviously will be likely to partner with maybe some of the financial institutions we already work with or others. But the actual product, business model pricing is still to be determined.

Okay. Okay. I wanted to switch -- we got a couple of questions from the audience here. Actually, more than a couple, so I'll try to weave these in. But the first one is just on -- I'll just read it. It says, what percentage of your customers' cross-border transactions go through your platform versus going through a bank? They're trying to figure out Bill share of wallet within cross-border payments.

Yes. So I think what we've shared in the past is we believe that cross-border payments are 10% to 20% of the TPV. So it kind of depends on the customer segment, but if we just use that as the target. And what we've also shared, I think, last fiscal year, was that we had around, I think, 2% to 3%, John, is that right?

Yes.

So 2% to 3%. So there's a lot more room to go on the overall cross-border payment. The area that we are especially focused on is really helping suppliers get the money that they're getting in the currency of their choice, right? So sending U.S. dollars to some smaller business in the middle of Europe, who doesn't have the ability to negotiate rates with their bank. That's not a great experience. It helps the U.S. customer because they're done with their obligation. But if we can actually enable that, to that customer who's in the middle, let's say, in Germany, be able to get that in the currency of their choice, that's going to be super important. So anyway, those are the 2 components, and we think there's lots of opportunity on the cross-border business.

Yes, absolutely. That's a great point, Rene. And how do you do that? How do you work with that supplier that's receiving that cross-border payment? What are you guys actually doing on the ground to make that a more convenient transaction?

Yes. Today, it's really product driven, right? It's -- the e-mail notification goes out saying you've been paid. Would you like to receive it in your currency? Maybe when they sign in to do that, there's an opportunity to kind of, again, change the currency choice. So -- but we do think the work that we're doing with supplier enablement on the virtual card, which is using all the data, we're starting to use the data on the cross-border payments as well, understanding which suppliers might prefer local currency because they might say on their invoice even, this currency would be preferred. But using the AI, using sometimes people for larger suppliers, potentially they've talked to them. These are all things that we're learning with the virtual card business, and we'll continue to apply that across the business.

Okay. Great. Rene, maybe you could touch on some of the other monetization opportunities over the next, call it, 1 to 3 years? And I guess which ones do you think are going to be the biggest contributors in terms of transaction revenue growth?