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

Again, I'm today the last day of our bus tour. I'm thrilled that we have Bill.com here with us. And we've got the CFO, John Rettig, to kick it off. Just as a heads up, happy to -- I'm going to go through a group of questions here, try to -- socking John up for a little bit. And then happy to make this interactive. So if you have questions, please send them through the Q&A function. I'm happy to ask John that you can also e-mail them [ back ] to me at my work e-mail. So with that, why don't we kick it off. John, thank you very much for being here today, and I look forward to next year when, hopefully, we can do the -- so back in person and on a bus instead of the virtual bus tour. So.

Yes, thanks for having me, Brian. I'm looking forward to the discussion and looking forward to doing this in person at some point.

Terrific. Well, why don't we just kick it off with an overview and help us set the stage from a 20,000 feet view. Can you just give us a little background on the company from those of us listening that aren't as familiar with Bill.com? And what your role is?

Sure. Yes, Bill.com was founded 16 years ago or so by Rene Lacerte with a focus on helping SMBs really transform their financial lives, if you will, really kind of tame the back office mess is what we say. I joined 7 years ago as CFO. I lead our finance, business operations, analytics and risk activities at the company, in addition to more recently, building out our corporate development capabilities, which, obviously, we're starting down that inorganic growth path with the acquisition of Divvy. Our mission as a company is really about making it simple to connect and do business for small and medium-sized companies. And our cloud-based platform makes that process really automated. And it's around AP and AR, accounts payable and accounts receivable, payments, processes, helping companies move digital, so sort of that digital on ramp, where there's been a lot of investment in kind of front office automation and cloud tools and maybe in the back office by small businesses and accounting system or an ERP system. But not much else as it relates to running financial operations. And that's where our platform comes into play. We delivered very strong growth recently. And as I sort of step back and look at the incredible opportunity ahead, there's a few things that are top of mind for me. First, we're going after a huge market. There's 6 million businesses in the U.S. that have employees. And that opportunity just got a lot bigger with the addition of Divvy to our platform. Second, we're seeing really strong trends in payment product adoption. And as a result, transaction monetization. Though it's amazing, we're still very early in the evolution of that opportunity, and we could actually see expanding monetization many multiples over where we are today over the longer term. And then kind of third top of mind thing for me is, the pandemic has really changed awareness about the need and the benefits for automating the financial back office. And we think like this digital wave and awareness and higher intent of companies doing things differently versus legacy manual systems is here to stay.

Thanks, John, for that background. Just wanted to ask you one look-back question here. Certainly, the last 12 months living under a pandemic with COVID is something like none of us ever experienced before. What can you share with us about lessons that maybe you learned about overseeing the finance at a large software company like Bill.com?

Sure. Yes. It certainly was a learning and growing and evolving year for sure, no shortage of challenges. The things that come to mind are really technology and related tools, data and communications. I mean as a company and as a finance organization, we transitioned kind of overnight to virtual. We were uniquely positioned to do that given some of the investments that we've made in technology infrastructure, obviously, leveraging our own platform. And we've done nothing but continue to invest and improve that technology layer ever since. One of the challenges out of the gate was certainly around data, making sure the whole company, the finance team, in particular, but the whole company, had the same sort of access and visibility of the data even though we were all remote and virtual in many cases, relying on our own home technology, yet had to deal with InfoSec and VPN and other issues. And some of that presented challenges, but it also was an opportunity for us to kind of strengthen and improve our operations to be able to handle sort of any environment. And then beyond the technology and data access and all those sorts of things, I think the biggest learning is that you've got to have a great strategy around communications and keeping people connected. Because it's very different and hard to do when you're not all in one place, and whether it's just technology or processes or timing, trying to build that same kind of teamwork and culture in a very different world was certainly a challenge that we had to overcome.

Okay. Thank you very much for sharing that, John. How about the look forward here? COVID-19 has certainly changed the future here. And I'd set it up this way: We already knew that software was becoming a bigger part of the corporate strategy before the pandemic shifted. Everyone seems very excited about the opportunities of cloud companies like Bill.com here for the next couple of years as that shift gets accelerated. But maybe you can share with us something from a personal perspective. Any -- what are the new initiatives or technology that -- investments that you're most excited about here over the next 12 months?

Sure. I mean I think the top of the list for us is really driving successful integration with the Divvy transaction. Obviously, a large -- a large deal, and we're really excited about the combination and what that holds for what we can offer to customers through an enhanced platform. But it's really investing and continuing to maintain our momentum as a business -- Divvy's independent momentum and realizing some of those synergies that we think are likely. Beyond that, I think we're always investing in the simplicity of our platform, making it easier to use, creating more automation and sort of touchless payment experiences for customers. As we further penetrate the market, we start to reach SMBs who are less mature, less sophisticated in terms of their technology. They don't have internal expertise. So the easier we can make the platform, the better we'll be able to penetrate the market. And then as you've seen recently, we've made a lot of progress with bringing new payment products to market, driving adoption of those and growth. And so we're always investing in new payment capabilities and payment innovations, so that customers can do more and more inside of our platform and eliminate some of the other point solutions or manual activities that they need to do today.

True fact. John, you talked about last year with the pandemic about working remotely and the importance of communication, collaboration. What about the reverse of this? What about when your employees, the build-out employees start coming back to the offices, are there certain efficiency benefits that the company could see from operations? Maybe if I asked you specifically, are there certain sales or development, deployment, operational processes that could see improvement or benefit as employees return to work?

Yes, there could be. Though, I think across our entire company, especially in the sales organization, we adapted quickly to working in a remote and a hybrid environment. As a reminder, our sales motion, our go-to-market is high velocity inside sales. So we don't have salespeople on the street and whatnot. And so it's very dependent upon technology to make that work, whether it's CRM tools, marketing automation and things like that. And so we've been able to do that successfully in a remote environment. And I think our future hybrid environment, it probably presents an opportunity for improved productivity and efficiency as we get more people together, and there's a little bit more sort of learning from being in the same place. But I don't expect any dramatic changes from moving to the office. Part of what we do with our go-to-market is also work with large financial institutions. So we partner with banks on a white label basis to offer our platform. That's much more of a business development, long-term sales cycle that could be positively impacted by a return to the office and more in-person meetings and things like that.

And then just the one follow-up, maybe specifically with Bill.com. Do you -- when do you anticipate your employees or a greater percentage of your employees starting to come back to the office on a more routine basis?

Yes. I mean we opened our office here in the Bay Area, our headquarters on a limited basis a few weeks ago. As the environment improves, and employees are more comfortable, we'll see, I think, more people in the office. We have sort of an official opening next week, and it's likely to be a hybrid model for the immediate future. I would expect kind of going forward, once we get to the ball, kids getting back-to-school and other things, we'll see a greater population in the office. But I think the hybrid approach is probably one that's here to stay. And that has certain benefits, both for employees and the cost structure for the company in terms of real estate footprint. So -- but yes, it's great. I'm in the office today. There's a handful of people here, and it's a great first step.

Terrific. Okay. Let's go through the business, the different segments and the opportunity that is out there for Bill.com. So I guess the first question is just on the secular opportunity, and the shift that we've been talking about of the back office, specifically your end market, which is a small business market, the shift of the back office to cloud software and cloud services. What is your outlook on that digital trend, the pace of that digital transformation over a 3- to 5-year period?

Yes. I mean we've seen really great momentum lately. Obviously, our business is performing well across all the important metrics. And it's really a unique time in history, if you think about it, like we've been doing this for a long time. We didn't just start the business. Yet, there's been -- with the pandemic this increased need, like almost this immediacy with which businesses have had to adapt how they do financial operations. And I think it's potentially longer term, a really good thing for small businesses, and certainly, for Bill.com's business. COVID accelerated the need. Many businesses had already made -- small businesses had already made some cloud investments. But they weren't directed at the back office. Most small businesses still operate with manual legacy paper-based processes. That means they sign a contract on paper, not digitally. They submit an invoice on paper, not digitally. They make payments with paper checks. It's amazing, but that's what most businesses still do, most small businesses. So the pandemic definitely changed the awareness and created some immediate need to do things differently. And that's kind of where we come in. And we think there's a huge market opportunity ahead, and we see the demand for doing things differently in cloud solutions around automating AP and AR. I mean maybe the market is not bigger than it was a year ago, but it's developing a lot faster because of the situation. And we've been really impressed actually with the resilience of SMBs throughout this pandemic. It's amazing how they've been able to adapt. And we think that's actually a good leading indicator of the demand environment ahead as we start to see the economy and offices and whatnot reopening. And for many sectors in our customer base, getting back to more normalized business activity. That should lead to good things, I think, for the demand environment for Bill.com.

Terrific. John, one question I didn't ask you. Just so everyone can understand here about the customer acquisition, the deployment, the implementations. Can you just talk about, on average, how long it takes for these customers to get up and live and starting to get value from Bill.com?

Yes. It's a -- one of the unique parts about our platform is we built it with SMBs in mind, which is there's not a lot of purpose-built SMB cloud solutions out there. And that means it's really simple to get up and running. And most businesses can transform their entire financial operation around AP and AR in a matter of days. It's not weeks or months or anything like that. It doesn't involve long consulting engagements and implementation fees and whatnot. It's sign up for a trial, log in, connect to your accounting system, we do all that automatically, and you're kind of up and running. So for the smallest of businesses who rely on perhaps low-end accounting software, they're up and running in hours. For bigger businesses, like mid-market companies who might be invested already in an ERP system like a NetSuite or Intacct or Microsoft Dynamics, then you're talking about a little bit lengthier process, but it's still days, not weeks and months.

Terrific. John won't say it, but I'll say it: it's the preferred way of buying software these days; fast, low-risk and quick time to value. So John, you brought up Divvy Pay. I think it's probably 80% to 90% of the questions that I've been getting over the last month on Bill.com. So I know our listeners are going to be interested here. And please send your questions. I've already got 3 questions on Divvy Pay. So why don't we spend a moment? Clearly, it sounds like this is a big part of the story ahead for Bill.com. So maybe just a level set from our listeners here. So I'd say you recently acquired and closed Divvy Pay. It's the biggest M&A deal in the company's history. So that denotes the strategic-ness of the deal. So can you share with us what the company acquired with Divvy Pay from a technology, depot and distribution perspective?

Sure. Yes, it's -- actually Divvy's our first and only M&A transaction in the history of the company. But if you think back over the last year, we've been talking about starting to build a muscle for inorganic growth. So we've been working on this, on the M&A capabilities for a while now. And Divvy is obviously a great company and the first opportunity we've had to exercise that muscle. And the company is the leader in spend management, which is an adjacent category to what we do, what our Bill.com platform does. And the reason we think so highly of the company is that they take a software-first mentality. So they're all about helping SMBs create more control, visibility, transparency in their accounts payable and spend processes that involve cards. Bill.com focuses on AP automation and AR automation, where there's invoices. Divvy focuses on those transactions that are executed with a card. Most small businesses have some form of credit card that they're using in their accounts payable processes. Sometimes it's the owner's personal credit card. In other cases, it's a brand from a bank or something like that. And so there's a big market opportunity there that we see just in looking at our own customer base. The second thing is, I mentioned the focus on SMB. So there's overlap synergies that are on the target market. And the go-to-market is very similar between Divvy and Bill.com, high velocity, inside sales and quick ramp times, things like that. And then the third component, which maybe I should have mentioned this one first but, they have a great team. So the leadership team with Blake Murray and others, they're really innovators in the space. They've been far ahead, even though they monetize through interchange, and I'm sure we'll talk more about that. They've really developed an elegant software solution to help companies change the way they operate. And when you kind of put that together with Bill.com, what it means is customers can do more inside of our platform, right? They can manage more of their business. They can eliminate other point solutions and we've learned, as we rolled out new payment products at our own, the customers get a lot of value by being able to consolidate their activities in one place. So that's one of the reasons we're really excited about this transaction.

Terrific. A couple of questions have come in from the field here through the Q&A chat. The first question is how should we think about the cross-selling opportunities, not the new customer opportunity with Divvy Pay, but the cross-selling opportunity? And it's a general question on how the integration is going and how that -- how -- have you started heading towards achieving the growth synergies? So I guess it's a general overview, how the integration is going from a sales perspective and operational perspective.

Sure. Yes, great questions. So in terms of the cross-sell opportunity, one of the benefits of having a large customer base -- we have more than 100,000 customers, and we have a network of 2.5 million members -- is that we collect data constantly. It's all day, every day, and we talk to customers about what their pain points are, what technology tools they're using and what their needs are that we could potentially serve by expanding the capabilities of our platform. And this is where with Divvy, we had a small number of joint customers. I think we said about 1,000. So we're able to talk to those customers about why they're using Divvy, what their experience with other programs are and other software tools. And that helped us confirm that there's a huge up-sell opportunity within our customer base. It's not going to be all of our customers for sure, but we think there's a big opportunity there. We've already started to address that opportunity. The Divvy product is even today already exposed inside of Bill.com, both marketing landing pages inside the product when you log in. And there's much more to come around outbound marketing campaigns and sales programs and things like that. So I'd say we're confident in the big opportunity, and we've already started on trying to realize that. As it relates to the integration question, we feel great about the progress we're making but would also point out, it's only been 1.5 weeks since the transaction closed. So there's a lot of things you can't do until the transaction actually closes, right? Sharing customer data, details of product road maps and IP and all those sorts of things. But I think we've gotten out of the gate strong. The teams are working well together. And we're developing integration plans and strategy. For the time being, our strategy is to mostly have Divvy run as a stand-alone business, right? Continue their momentum. But over the intermediate and longer term, we do have kind of a one platform mentality because we think that's the best way to serve small businesses. So you'll see technology integration certainly happen in a more unified platform, but it's not something that happens right away. And I think we'll probably have more to say on kind of the discrete milestones and time lines as we get a couple of quarters into the integration.

A couple more questions on Divvy, operational here. The first question is, I guess it's a general question on, what is the underwriting process for Bill.com and Divvy Pay? And then the follow-up question on that is, can you use the transaction visibility to eventually preapproved bill customers or use that credit scores and knowledge for other services and cards that Bill could offer in the future?

Yes. Great questions. And on the underwriting process, one of the things we're really impressed by with the Divvy team and their capabilities is that they've already created really good processes to underwrite small businesses across all industry segments. And so they're a horizontal approach, just like Bill.com. There's no significant industry concentration. And they've created great capabilities, leveraging third-party tools and data to understand their prospective customers and underwrite them successfully. By combining with Bill.com, we think we can do it better together, actually, because of the second part of the question. We sit in the middle of millions of transactions between buyers and suppliers on our proprietary technology, right? So we're moving all of the money, we have access to all of the data. And we use that today for our own risk underwriting. In the case of Bill.com, we've been really successful over our history at managing risk. But we're managing kind of 2 to 3 days of credit risk. That's the nature of ACH payments. Divvy is obviously -- it's a little bit longer period. We're talking about 30 days or so, in some cases, less. And so we think combining the data assets will allow us to improve on what's already a really good underwriting capability. And to the earlier question about integration, and we've already started to do some automated underwriting of Bill.com customers in order to facilitate this cross-sell and upsell process. So that has begun. Again, it's very early, and it will take some time to have the potential translated into customer adoption and transaction volumes and those things, but we're really encouraged by the opportunity.

Last question on Divvy, John. It's an accounting question. So it's right -- actually, it's a reporting and accounting reporting question. So right up your alley here. So I guess you have different revenue reporting that Bill.com reports net revenue where Divvy reports gross revenue before the rev shares on the payments. So have you discussed or started to work on -- Divvy accountants started to work on how you're going to align the reporting of the 2 companies?

Yes. I mean we're in the early stages of that now that the transaction is closed. We're working on a financial consolidation. We've got to align accounting policies, as the question suggests, and then go from there. We're going to -- I think at our next earnings call would be the appropriate time to not only talk about what the combined financials look like for the company in addition to our go-forward outlook for fiscal '22 that begins in July. But regardless of the financial statement presentation, we'll kind of lay out the apples-to-apples comparison on the economics and revenue between Divvy and Bill.com so that there's clarity around how that works.

Terrific. Thank you for answering those. I want to move on and talk about the flexible payment, the variable-based payments segment. Maybe some investors at the call aren't familiar that the business makes a number of different payment rails from virtual cards, cross-border, et cetera. So can you help explain how the business is able to leverage the different payment rails to help offer customers better services, such as flexible payment options, et cetera? So -- and then how does the opportunity look in that market?

Yes. So it's interesting, there's been convergence of software and payments in recent years. You've seen that across many different platforms. And Bill.com actually invested in payment capabilities from day 1. So we were always a software platform that had payments. And as a result of that, we are way ahead in being able to innovate and deliver a great payment experience to our customers. We started the business with fixed fee payments, right? So low cost, low barrier to adoption, low friction, and those were like check and ACH payments that regardless of the size of the transaction, it was one fixed fee, call it, $0.50 or $1.50, depending upon the type of transaction. Over the last several years, we've started to add new capabilities, as we've learned from customers the other types of transactions that they want to do. So we -- as I mentioned before, we're constantly collecting feedback from customers. And so the few of the things that we've done is virtual card payments, which are a fast, certain electronic payment to suppliers who are already a merchant of record, meaning they accept credit cards. And so there's a huge market opportunity for that. We've seen it in our data, looking at our supplier base and understanding who accepts card payments. And there's a benefit to both the supplier for a fast electronic payment and the buyer, in our case, because they lower their transaction costs. It's actually a free transaction for them. We're just getting started. Our last update as of June last year said we were about 1% penetrated. TPV is about 1% on virtual cards. And we think over time, that can get to 5% to 10% over the longer term, and we're making good progress towards that. Another one was cross-border payments. So payments to international suppliers. We saw that our customers were using our platform to capture invoices, route them for approval and collaborate, but then they were going online to their bank to execute a wire or do an FX transaction. So by adding that capability, we made it really simple for businesses to do more inside of our platform. We think that can be 10% to 20% of our TPV over the longer term, cross-border transactions. And I think our last update as of last June, we were about 2.4% percent of TPV. So good progress, but a long way to go. And I'd say the last one is probably instant transfers or real-time payments. We've just launched that. We've just done an integration with Stripe to add debit rails. That means that, that product can now be available to our entire network of 2.5 million members. And it's another example of how we can use new forms of payment to drive expansion of transaction monetization because a real-time payment is more in the 75 to 100 basis points monetization versus those flat fees that I mentioned of $0.50 or $1.50. So those are some of the payment innovations we've had recently that are seeing good traction with customers.

I want to hit on 2 other segments of the business or part of the story. But first here, the large financial institutions segment, maybe there's 2 parts there. And maybe, John, you can just give an overview to the listeners here. One, about what you do and how you're expanding the relationship with Intuit as a long-term partner? So that's one area. And then another area is the relationships with the mega commercial banks here in the U.S. I guess the question on the mega commercial banks is, those are certainly larger, more -- you would think more complexity is involved in delivering services to those type of customers. Can you share with us on that aspect, number one, are there -- is the platform -- how is the platform reacting and as it morphs and extends to serve larger customers? Are there -- how is the capabilities going? And are there any learnings? Are you able to speed up the enablement as you're onboarding more of these banks? And then the second question on this is just the unit economics. Is there anything that's different in the unit economics of these customers than other customers on the platform?

Yes, just a quick recap on the go to market. So we sell directly to small businesses through digital demand gen. We partner with accounting firms. As you mentioned, we partnered with large FIs. And then we have relationships with software providers, such as Intuit, NetSuite, Intacct. And that's important because we want to be everywhere small businesses are, right? We want to drive awareness and eventually reach customers across any channel. It doesn't -- we're sort of indifferent as to the distribution channel or the partner that we capture a customer from. We just want to be where they are. With the large FIs, if you think about a JPMorgan Chase, a Bank of America, Wells Fargo, they reach millions of businesses. And our platform is integrated on a white label basis into their business banking environment. In some cases, it's the commercial bank. Wells Fargo and JPMorgan would be examples of that, where they're selling our platform into their larger commercial businesses, call that companies with $10 million to $100 million in revenue, consistent with the mid-market definition that Bill.com has. In other cases, our platform is starting to exposed to small businesses. KeyBank would be an example of that, where they're making the platform available across their entire business base. So we've seen really good demand from financial institutions who realize that our platform can help them better serve customers, and they can have a more profitable relationship and a longer-term relationship with customers, the more integrated they become with their small business clients. In fact, you've seen significant growth in our remaining performance obligations over the last year. I think order of magnitude, we're at $150 million as we most recently reported. And that's up like $100 million from the prior year because these large financial institutions are making much bigger bets on our platform. So we're really optimistic about being able to help them penetrate the customer base. With each new agreement and integration that we have, we learn more about how to do it faster, how to do it better and how to help our bank partners drive adoption. And so that's improving as well. And then finally, on the unit economic question, we're -- we tend to drive to similar contribution margins regardless of the channel and where a customer comes from. On the financial institution specifically, we sell to them on a wholesale basis, so it's discounted subscription and transaction fees. And then they set the price to their end customers. But in exchange for that, they're making minimum revenue commitments to us. And we're sort of assured of a certain growth trajectory in terms of revenue. And they handle things like selling of the product and driving adoption. So we don't have sales and marketing expenses. They handle customer support. So we remove that expense. So even though we sell at prices that are lower than you would find on our website, we end up in kind of the same place from a margin standpoint, and that's ultimately what we're focused on longer-term as we continue to drive leverage in the business as we scale.

Terrific. John, you got them all. You got all my questions. Sorry, I snuck like 3 of them, and you got them all. I'm really impressed. And see why this is one of the top CFOs here in my universe. So last area I want to hit upon is the network opportunity. People on the call may be surprised, John, that Bill.com also provides a marketplace, has a network here. So one question I just wanted to ask, and maybe you can just give us an overview here on the opportunity, what the network is for Bill.com? And then what are the opportunities to introduce new services to monetize on all the members that you're going to tell us are part of the network?

Sure. It's one of the most unique parts of our business that I think, over time, will prove to be a competitive advantage for us. So we have a network of 2.5 million members built with a freemium model. So somebody can sign up to be a network member. They don't pay -- they don't necessarily have to pay anything. They don't need to be a subscriber. And that's how we've sort of built this large network. It's a combination of businesses -- bigger businesses, small business, mid-market and sole proprietors like freelancers and things like that. All of that exists in the network. They're either paying or getting paid from a Bill.com paying customer. And we've seen great progress lately, both growing the network and being able to monetize the network through delivering options and choices to network members about how they want to be paid. Virtual cards is an example of that, that I mentioned earlier. But there's other examples like FX payments. If there's an international supplier who's a part of our network, we give them choice about how to get paid. So over the longer term, we actually think the network can be a big source of new customer acquisition for us. Today, it's very small, right? We do get upgrades, and we drive offers and things like that, and we see paying customers coming out of the network. But if you think about our business, we are mostly AP today, like the vast majority of our volume, whether it's TPV or transactions and even paying customers on the AP side. And those AP transactions are being executed, and there's a member in the network who's receiving that payment. Well, if they're receiving a payment, that's actually an accounts receivable persona. But they're probably -- most of them are not yet leveraging our platform for accounts receivable. For example, they're not submitting an invoice in the platform or leveraging some of our tools. So we actually think there's a really big AR opportunity that exists both with the network and with the broader SMB market that we're really excited about and definitely making investments i,n, in order to better serve those network members.

Terrific. We ran out of time, John. I want to thank you very much for your time today and sharing with us the Bill.com story. It's really good to see you.

You bet. Thanks a lot, Brian.

Thanks.