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

Well, good morning, everyone, and welcome to day 2 of the conference. I'm thrilled to invite and welcome Bill.com CFO, John Rettig to the conference. We're very fortunate to have John. It's John's second year at the conference. And welcome, John.

Thanks, Brad. Great to be with you. Looking forward to the discussion.

Absolutely, absolutely. And so I have some questions that I'll go through. If anyone in the audience wants to pose a question, you have the chat window that you can send a question through that. We'll save some time at the end if there are any questions from the audience. And we'll try to get to your questions as best we can. But with that, John, again, welcome. Thanks for being here. Delighted to have you at the conference again. Why don't we just start high level? I know most folks on the call are familiar with Bill.com, but just a little bit of background on the company, the opportunity you're addressing, how is Bill positioned to capitalize on this? Maybe just a high-level kind of level set on company background and how you think about the opportunity.

Sure. Happy to start there. Yes, Bill.com was founded to help SMBs really simplify their financial operations kind of team, the back office mess as we call it. Our mission is to really try to make it simple to connect and do business for the SMB market. So businesses that are smaller and have less sophistication, less technical capabilities and, frankly, smaller teams with which to try to figure out financial operations. We have a cloud-based platform that makes it easy to automate financial processes and payments related to AP and AR and, now with the acquisition of Divvy recently, corporate cards. And our software really enables businesses to save time and money and gain better sort of real-time insight and control over their finances. It's different than accounting systems and other tools that businesses might use. And it really helps them run a better business, frankly. We have a large customer base, over 100,000 customers in a large network, 2.5 million members. It's a combination of businesses, small businesses and individuals who are either paying or getting paid with our platform. We're starting to scale as well, $140 billion in annualized payment volume run rate and a huge market opportunity that's actually really in the early stages of developing. If you think about the adoption cycle, most SMBs, small businesses, today still rely on manual processes to run their financial operations and most of them report that paper checks is still their primary form of payment. It's kind of amazing to think with how everything has changed in the consumer world with electronic payments, it hasn't made its way to most small businesses yet. And so we're less than 2% penetrated, a huge market where there's 6 million businesses with employees. And it's exciting to think the kind of growth runway and opportunity that we have ahead.

That's great, John. And I think that's a good segue into the next question, which is what is the typical catalyst for a SMB signing on to Bill.com? What's broken? What's not working? Digital transformation is a broad term around here. And I'm sure that's a big part of it. But how would you characterize it? What is the typical catalyst if you will?

Yes. Normally, we say that one of the biggest challenges that we face is inertia from businesses. Like they just keep doing what they're doing. And most of that is, as I mentioned, manual legacy processes. And so typically, something breaks, and we've seen that with pandemic. A lot of businesses realize they can't do business the same way that they've done for years or decades as the case may be or they get introduced and they become aware of a different way of doing business, sometimes through their accountant or through their bank or through online marketing. And they start to explore what it could mean for them. And one of our main competitive advantages is that we have this really easy-to-use platform. So this, call it, the digital on-ramp for financial operations that is really simple for SMBs to use. They can get up and running the first day they sign up for the platform. And once they start to realize that they can do things completely differently, it kind of transforms how they operate. All of a sudden, they have a lot more time to devote to other parts of their business, whether it's customers or products or services. And their finance team, which is typically really small, just a few people as opposed to like an enterprise finance team, they can help the business scale by doing more valuable things. And so the catalyst is often really when something breaks or they get made aware of there's a different way of doing things. And our go-to-market ecosystem is one of the ways that companies, businesses get made aware of the platform. And we reach a lot of customers through our go-to-market partners.

Absolutely. And I'm always surprised to hear that the majority of SMBs are still executing payment via manual check given that there are better economics for ACH. How does that play into it? I mean, why is that? I guess why does the landscape look like that? And then is that a catalyst as well for SMBs coming to Bill.com? Is there something about the platform that enables better ease of adoption for ACH and wire transfer?

Yes, absolutely. And it's really "if it's not broken don't fix it" is the way a lot of businesses look at the back office. But increasingly, they have experience with adopting cloud solutions in other parts of their business. So call it maybe the front office with CRM or e-mail marketing and e-commerce. And so they've had some exposure to how they can do things differently. And then with the platform like ours, from the moment they sign on it becomes a digital experience. So even if they haven't fully adopted electronic payments, maybe they don't have all of the remittance information from their suppliers, it doesn't matter. Actually, our platform takes care of that. And there's no more paper, no more manual processes, so that the digital experience is really from day 1. And that's when they realize the great benefits.

Absolutely. That's great. And we're hearing it, you guys are seeing it. We talked to some of your accounting partners. And what we're hearing about the company moving into that next tier kind of lower end of the mid-market, however you want to define it, from the SMB, and you guys are seeing it as well, and you've talked about it. What's happening there? This is an intentional move, I know. How are you targeting the mid-market? How are the requirements different? Is there a different go-to-market there? Just any background on that.

Sure. I mean our -- we've seen a lot of demand from larger businesses. We call it mid-market. Our definition is if the company has between $10 million and $100 million in revenue, they're kind of in the mid-market category versus the small business. And typically, they're a little bit more sophisticated. They obviously have more resources. They've made bigger investments in things like accounting systems and ERP systems and integration amongst all of their different tools. And we've really been kind of hold that market by demand versus kind of moving. Our core mission is still around small businesses. But because our platform is easy to use, mid-market companies also find that they can automate financial operations with our platform in ways they can't do with some of the ERP systems they've implemented. So it's a large market opportunity. Obviously, those customers, those mid-market businesses are -- they have more users, they do more transactions, more payment volume. And we have listened to the needs of some of those larger businesses. Our approach is horizontal. So we try to build out the platform to serve the needs of most businesses, and we take the same approach with mid-market. We have added some features like single sign-on for better security, batch payments, dual approvals because these larger, more sophisticated businesses require those features. But if you think about it, those same features can be leveraged by a smaller business as well. So we don't do things necessarily uniquely for the big businesses, but we try to make sure that we can serve them alongside of our small business customers. At the same time, we started to integrate with some of the mid-market ERP systems. We've been integrated with NetSuite and Intacct for a long time and more recently, Microsoft Dynamics, which is one of the largest market share players in the mid-market ERP system. And we've had a lot of demand from customers for that as well. So it's also a big opportunity, and we're seeing good success in and taking advantage of some of the demand that we see.

That's great. And on the last earnings call, you announced the intent to acquire Divvy. Maybe just high level, what is Divvy? What does it bring to the platform? What's the strategic rationale there for this combination?

Sure. I mean if you go back, say, a year or so, we've been talking about some areas of interest in expanding our platform where we might invest, whether it's organically or through partnerships or acquisitions. And spend management has kind of been at the top of the list based on feedback we get from customers and the opportunities that we see. So Divvy is really the leader in spend management with an elegant software solution to help companies gain control, visibility and transparency over their B2B spend that's on a card. And they do that not just with software but also by issuing corporate cards. So the acquisition really enhances our platform to add these capabilities for SMBs to be able to manage all of their B2B spend in one place. They have -- Divvy has expense management expertise around cards. Bill.com has expertise around invoice-based spend. And if you put those 2 things together, it really is a one-stop shop, if you will, for the AP side of the financial operations for businesses. At the same time, we think that the transaction significantly expands our market opportunity given with the card-based spend, there's much higher monetization that's possible. So we can see not only a larger share of our customer spend, but also higher monetization opportunities. And as a stand-alone business, Divvy has an attractive financial profile. It's a high-growth business, recurring revenue model based on transaction monetization. And many of the other aspects of the business are really synergistic with Bill.com. The customer focus is on SMBs. The go-to-market is high velocity inside sales, very consistent with Bill.com. And it's a software-first business even though they monetize through card-based interchange fees.

That's great. So that one-stop shop is a key part of it. What percentage of spend goes through card versus the invoice-based spend that you referred to? And is that different in the mid-market versus SMB? I assume this is more of a mid-market play. Maybe I'm wrong. I'm sure there are cards in both SMB and mid-market. But I guess, 2-part question. One, overall, what type of spend volumes are going through a card versus an invoice? And then will this bring you guys upmarket more?

Yes. So in terms of card spend versus invoices, first, most businesses have some sort of card spend or a slightly bigger business that has gotten into a corporate card program. When we see looking at our customer base and the transactions that we facilitate is that we have about a 70% to 80% share of wallet of the B2B spend for our customers. And as a part of that, we see customers paying their card balance every month. So we see 1 transaction. And that transaction is captured in our TPV, and it's the sum of all of their card spend. What Divvy does is those individual transactions. And so we think that it potentially opens up an additional 20% to 30% of spend. It's not an increase to our TPV, but it's an increase in how we can monetize that spend because we're not doing it today. And I'd say you're probably right, there's slightly more card spend with larger businesses than the smallest of the SMB segment. But it's really a solution, both the software and the smart corporate card that's applicable to our entire customer base.

Got it. Great. We're looking forward to seeing the acquisition closed and unfold. It sounds exciting. So great. And why don't we shift gears to the question that we've all been asking, which is COVID impact on the business. Curious to get your perspective. You guys talked about some impact. But overall, I didn't see much at all in the business. But what did you see maybe we could just -- at the bottom of -- at the beginning of the pandemic and then how things progressed since then? And now that we're looking towards reopening, how do you feel that's going to have an impact on the business?

Sure. When COVID -- when the pandemic first unfolded, call it, March, April of 2020, we saw kind of a fairly quick increase in attrition in the customer base, not material relative to our overall business and a slight decrease in the number of transactions and payment volume happening across our customers. And the amazing thing to me is that, that rebounded within a quarter. We saw not only increased demand happening from new customers, but existing customers leveraging our platform even more. So we've seen sequential improvements in both payment volume and number of transactions across the platform really since that June quarter in 2020. And it seems as if there's going to be the sustained acceleration based on the need for digital transformation. And that's really -- it's almost like customers have been aware that they might need to adapt to how they operate. But then through the pandemic, they were kind of forced to take action right away. And the impact of that for our business has been we've seen companies ramp faster during the pandemic than pre-pandemic, meaning they add users more quickly. They ramp their number of transactions and spend on our platform more quickly. We have slightly higher conversion rates when we look at new customer acquisitions. And all of that is a sort of positive impact on the business. As we look forward towards the reopening, the post-pandemic, we think there's -- this can be a positive catalyst as well. Companies getting back to business, we've seen some of that in our most recent quarters with elevated transaction activities. But we expect transactions and volume to continue to increase as our customers increase, office-related spending, T&E. The types of spend categories that have actually been depressed throughout the pandemic are probably on the verge of starting to expand now for the first time in over a year. So on top of sort of the healthy base that we've seen and the activity from our customers leveraging the platform through the pandemic, we think the reopening is probably positive as well.

That's great. Excellent to hear. So go-to-market channels that you guys are unique in that you've got this multi-pronged go-to-market. If you could talk about those, please, and roughly what percentage of this is going through each channel. You don't need to get into a lot of details, but how do the economics differ from channel to channel there as well?

Sure. It's one of the most unique parts of our business is our go-to-market ecosystem, if you will. Serving SMBs is hard. Really, it's hard to make the economics work. And our go-to-market strategy has allowed us to do that. Across all of our channels, we have -- we go direct to businesses through online digital demand gen marketing. We partner with accounting firms, 5,000 of -- 5,000 accounting firms in the U.S., 80 of the top 100 financial institution partners. We have many of the top 10 banks in the U.S. And then we also partner with accounting software companies, NetSuite, Intacct, Intuit, many of the network which ultimately provides fuel for customer acquisition as well. We tend to operate across all of these channels with very similar economics. There's puts and takes and different components. But overall, our contribution margins are very similar. One channel, in particular -- the accountant channel accounts for about half of our customers. And if you think about the relationship that a small business has with their accountant, they're kind of the trusted adviser. They help them with bookkeeping, with tax, with technology selection. So they tend to have very long-term relationships. You don't try to -- businesses aren't looking to change their accounting relationship every year. And we work very closely with accounting firms. It's kind of an annuity business. We partner with a firm, and then they add clients to our platform over time. And we work very closely to help the accounting firm be able to better serve their clients also. So in addition to customers -- small business customers creating value from our platform, accounting firms leverage our platform to communicate with their clients, share documents, do approvals, things like that. So they can actually serve more clients with fewer people, which is a great ROI for the accounting firms. And then finally, on the financial institutions, these large banks each have access to millions of businesses in their small and commercial business segments. And so we use that under a white label basis with our platform to really drive awareness and help banks innovate for small business customers and get more connected to their financial operations, where if you think about it, often, the bank's the last to know what's happening with their customers' money, right? A transaction is presented to be clear. By integrating our platform, they get a lot closer to their customers.

That's great. And then accounting channel, that's a vast channel, so strategic to have that. How did you guys achieve that flywheel effect and really capturing the mind share and really the accounting base that you have, the 5,000 that you have today? Any background there, any history on how that evolved?

Yes. We've been working with accountants since the inception of the business. In fact, when we first launched, it was the sole sort of distribution channel, if you want to think of it like that. And it really goes back to Rene's prior experience with his first company, PayCycle, in the payroll space where they also sold to accountants and financial institutions. And if you actually think about Rene's legacy as an entrepreneur and his family, they also sold to accounting firms. In fact, Lacerte Tax is a product that's still used today by many accountants to perform -- help customers do tax return. So we just have a long legacy. We've been doing it for a long time. And we always think of ways to help accountants succeed with their customers in addition to building out the platform for our end customers and their clients to succeed.

Great. And then on the FI channel, 8 of the top 10 banks, you said, where are you in terms of development of these partnerships? Are -- is there an awareness campaign within their merchant base that needs -- that you guys will drive together to drive more customers under the Bill.com solution via these white label offerings that they have? Is that the focus? Is the focus on recruiting more partners? I guess where are you in that channel? I mean you've got some pretty impressive banks already as partners. So I guess is it just execution on ramping the big partnerships from here?

I'd say our short-term focus is on integration and execution on -- with large financial institutions that we already partner with. In the last year, we announced 3 new agreements. Two of which, Wells Fargo and KeyBanc, are in the early stages of launching now. The third, which is an SMB-focused agreement with 1 of the top 3 banks in the U.S., hasn't launched yet. That's later in 2021. And we're really investing behind these relationships to help our partners be successful. They're typically long-term agreements, on average about 5 years. The banks have made significant financial commitments to Bill.com. We have RPO, or remaining performance obligations, near $150 million, a significant increase in the last year. And that's just sort of a testament to the value that our partners believe we can bring to them in helping them serve SMBs. And so our focus has really been on the largest of banks because they have the biggest footprint in reaching small businesses. And we really act as a consultant to our bank partners for them to drive adoption of the platform. We try to make the platform really easy, so that it can happen self-service by the bank's customers. But in cases where there's a sales-assisted motion or other advisory programs, we help the banks implement those and, as I said earlier, ultimately helps our bank partners get more connected to their customers. We saw a recent example where our bank partners are seeing sustained inbound demand for digital solutions from their customers, very likely pandemic-driven as well. And one of those partners who has been with us for many years implemented a new program in the last quarter, a virtual adviser program to make all of their new customers aware of their digital solutions, including the Bill.com white label solution. And they saw some great success right out of the gate with, I think, over 1,000 incremental new customers from this program in the quarter. I think we called that out on our last call. So it's an example of how we're really closely partnered with the banks to help them drive success. Over the intermediate and longer term, I think there is an opportunity for us to work with banks of all sizes. But for the immediate future, we're focused on our existing partners in helping them be successful.

That's great. And what do these banks offer today that they -- what do you -- what does Bill.com have that they don't have such that the partnership makes sense as opposed to going after it in-house, building it in-house and then they have existing solutions already to go after the merchant base?

Sure. I mean most of the banks in the U.S. have a bill pay solution. So I would distinguish that from, say, an accounts payable solution, where you're doing more than just executing a transaction, say, via ACH or check. And that's where our software platform, the investments we've made for over a decade in building out this automated AP and automated AR capability can help the banks differentiate. There hasn't been nearly as much innovation on the business banking side on the part of financial institutions over the last, say, 10 years or so as there has been on the consumer side. And so the opportunity for us is to really become the default or the solution of choice for business transactions. And it's not just the payment. It's document management, moving digital, some of the same things that we talked about, that end direct customers at Bill.com. Our financial institution partners and their customers can leverage the platform in the same way. And that really helps the bank differentiate their solutions from the traditional simple sort of bill pay capabilities.

Great. Excellent. And we think of Bill.com as a payables and payments company, but you also have a receivables business, and it's strategic to both. So maybe if we could -- if you could just describe what is the offering? How is it -- how are you landing these accounts? Is this -- and how does that play into that kind of viral adoption trend that you guys have seen over the years between payables and payments?

Sure. Great question. And the accounts receivable or AR product within our platform is actually really important -- a really important part of our strategy as we think about the long-term growth of the business. We're one of the only companies to offer both an AP and AR solution, and we think this is a big advantage over the longer term. Our cloud-based AR solution includes invoicing, document management, automated reminders for collections and, of course, payments, being able to receive and collect payments against outstanding invoices. And we think there's value in providing both AP and AR because it gives businesses a more complete view of the flow of funds, cash flow and controls over their business. And if you think about our demographics today, 115,000 customers, 2.5 million network members, many of which are getting paid, well, getting paid is actually an AR persona. All of them are not using our platform to actually submit invoices and gain visibility into payment timing and whatnot. But we think that's actually a really big opportunity over the longer term. And we're actively investing in enhancing our AR solution. And over time, we think the opportunity is to create more balance in our business between in AR, whereas today, as you mentioned, we index much higher, much more of our volume is AP related. As our AR solution improves and we enhance functionality and go direct to network members and customers, we think we can create more balance and more of a network effect over time.

Absolutely. Great. And why don't we shift gears to the transaction business? Obviously, a lot's changed over the last couple of years. In terms of the mix that you're seeing from different transaction types, and that's testament to the broadening of the offering that you have now. Can you talk about what that mix looks like today? What are some of the transaction types that are in there? And how does that compare to, say, a year ago or 2 years ago?

Yes. Great question. And our goal with payments has always been about driving electronic payment adoption. We've been really successful at doing that. The last reported number, I think, was a little bit above 60% electronic payments. And that's even though most new customers who come to us are like 90% check payments. They haven't moved digital yet. We enable them to move digital. And so our business overall is north of 60%. And we think there's a long way to go there. The vast majority of our electronic transactions are ACH. The next biggest category is check. And then some of the newer products that we've launched in the last couple of years like virtual cards, cross-border payments, more recently, instant transfer, instant payments are also contributing to the growth of electronic payments. And that's part of the power of the platform. The more we can get electronic payments for customers, the more efficiency everybody has in the process in eliminating paper checks.

Great. Great. And obviously, the take rate on total payment volume has seen significant expansion particularly over the last couple of quarters. And I think you would attribute some of that to some of the AI capabilities, the in-product promotion that you -- that the company is getting smarter and more effective. And could you describe those efforts? How are you driving awareness of the variable solutions like V card and cross-border in the installed base, some interesting things you guys are applying AI to enable that?

Yes, you're exactly right. We've made great progress driving adoption on some of our newer payment products within the customer base, and that sort of speaks to a value proposition. With virtual cards and, in some respects, cross-border payments, we've been investing in the supplier enablement capability. I think we're 3 quarters in now to doing that 100% in-house. And that really is just able to leverage our technology, our AI and machine learning to match suppliers and buyers and payment types and make sure we get the right payment method for the transaction so that it becomes a repeat transaction on the platform, which is our main goal. We don't run the business to offer a particular payment type. But as we're driving more adoption of virtual cards and, say, cross-border payments and instant transfer, those are all priced on an ad valorem basis. So the monetization is tied to the size of the transaction. So as the composition of payments changes, that's the main reason we're seeing an increase in that take rate that you mentioned is we're able to realize more revenue per transaction, or TPV, depending upon how you want to think about that. And we're really in the early stages of doing that. We're -- our last reported number as of last June was about 1% of TPV on virtual cards versus a target of 5% to 10% and 2% to 3% in international payments versus a target of 10% to 20%. So we feel really good about the growth that we've been able to drive recently, and we're optimistic about what's ahead.

That's great. And those target penetration rates that you just described, the 5% to 10% for V card, 10% to 20% for cross-border, how are you determining that? Is that based on some work you've done, I assume, in the install -- looking at transaction volumes in the installed base as a determination? As you move upmarket, could it potentially go higher over time?

Yes, you're exactly right. We matched all of our suppliers with data from Mastercard and Visa, and we identified which ones were merchants and could see that transaction volume. And either they're billions of dollars in payments in our supplier -- going to suppliers in our network who are merchants of record and could be a candidate for accepting a virtual card. That's how we got to the 5% to 10%. And on cross-border, customers were using our platform to manage the process of international payments. So capturing an invoice, routing it for approval, collaborating with their international supplier on timing and things like that, then going outside of our platform to their bank online to make the payment. So we actually saw exactly what the payment volume was to international suppliers. And so we feel really good about that target of 5% to 10% because, frankly, customers have been using our platform for a long time to manage those payments even though the payment part was outside of the platform.

And do you maintain targets on an annual basis? You disclosed the 1% last time and the 2% to 3% for cross-border. Is there -- annually, do you have targets? How do you manage that business from a KPI standpoint, the transaction business with some of these newer transaction types?

Yes. It goes back to really wanting to identify the right transaction type for buyer and supplier so that we don't introduce friction, but we make it easier and cost-effective for customers to use the platform. So we're comfortable with the longer-term targets, but we tend not to try to optimize quarter-to-quarter or year-to-year, other than just driving more adoption, which we know will increase penetration over time.

Great. And I guess we have time for one more here. Thanks so much, John. This has been great. One thing that we don't talk often about is float revenue because interest rates are -- the Fed funds rate is close to 0. Can you just talk a little bit about that business -- or that line item, that revenue line item? And how do you generate float revenue?

Yes. So we have customer funds for benefit of customers on our balance sheet based on the payment volume that we process. And it's transactions that are in transit, if you will. They haven't cleared yet. And so we earn interest in short-term investments on those funds, order of magnitude $2 billion on our balance sheet. And obviously, we've been in a declining or actually a very low interest rate environment. And we've kind of reached the bottom of yields for now barring negative rates and should see small expansion from here. But as interest rates rise over, call it, the intermediate term, it does provide a pretty attractive revenue opportunity that comes at really high margins. The order of magnitude is kind of $20 million annually for every 100 basis points increase in interest rates. And we don't manage the business again to optimize floater. We don't make specific investments or change the flow of funds. But it's one of those things that over the longer term could be a tailwind as well.

Absolutely. Well, John, thank you so much. Great to have you here at the conference again, second year in a row. Let's keep this going. Next year, hopefully, we can do this in person. Really insightful commentary here. I learned a lot.

Sounds good. Thanks, Brad.

Thanks, John.

Take care. Bye-bye.