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

Hello, and welcome to the DB Tech Conference fireside chat with Bill.com. And John Rettig, CFO, will be with us to do a fireside chat. My name is Bryan Keane. I cover the payments, processors and IT services here at Deutsche Bank. And so John and I are both out in the West Coast, probably maybe 20 minutes away. So we'll do this virtually anyways. But thanks, John. Thanks for joining us.

You bet. Thanks a lot, Bryan.

So maybe you could just start and give us a quick overview of Bill's business model in TAM, including the size and type of business Bill serves to kind of level set it for some of the people that might be a little bit more new to the story.

Sure. Sounds great. That's a good place to start. And Bill.com, we have a cloud-based platform that makes it easy for businesses to automate their financial processes and payments, really related to accounts payable, accounts receivable and corporate cards. Customers save time, basically, and money. And being better sort of real-time insights into their cash flow and their spending. And ultimately, our plan is to have a one-stop shop for businesses to be able to manage all of their financial activities in 1 place. In terms of our business model, our core revenue consists of both subscription and transaction fees. We charge subscription fees on a per user per month basis, and transaction fees either a fixed fee per transaction or a variable fee tied to the size of the transaction. On an organic basis, in the last quarter, we saw core revenue growth of about 73% year-over-year, which was really strong, and we're seeing accelerating transaction revenue growth based on adoption of payments on our platform. In terms of the customer segments that we serve, we're primarily focused on small businesses, small and medium-size businesses. We have about 121,000 customers on the Bill.com platform and about [ 23 million ] network members. These are businesses or individuals that are involved in payment transactions on our network. We've done a couple of recent acquisitions, first of Divvy in the spend management space. They have about 11,000 spending businesses on the platform. And then just recently, Invoice2go is a leading mobile-first AR -- accounts receivable provider who has about 225,000 customers. So there's a really large market opportunity around automating financial operations for small businesses. There's 6 million businesses with employees in the U.S. and another 20 million globally, plus north of 20 million sole props or sole proprietors and freelancers in the U.S. alone. So the other unique thing about our business that's important to understand is we have a very interesting go-to-market ecosystem that we've built, that allows us to acquire, serve and grow our relationships with SMBs over time by leveraging direct sales, partnerships with accounting firms as well as integrations with financial institutions. And so there's a really large market opportunity, and I think we're in a very interesting position to serve SMBs.

How has the pandemic impacted the shift to electronic bill pay and automated AP/AR for SMBs? And how sustainable are those trends? I know I recall there was obviously a dip in volume for you guys, and then now this big recovery. Just trying to think about the go forward, how that looks.

Sure. It's a great question, Bryan. I mean the pandemic was sort of a shock to the system, I think, for many businesses. And we saw sort of a slight increase in attrition and had a pretty immediate bounce back to prepandemic levels. And interestingly, our small business customer base actually not only remained healthy throughout the pandemic, but our retention rates increased, and we're able to expand our penetration of the market and drive adoption of our products through the pandemic. So in some level, the pandemic is sort of a wake-up call for particularly small businesses who, frankly, most of them still rely on manual paper-based legacy processes in the back-office as it relates to their financial operations. And so the market overall is still early in its development. Most new customers who come to Bill.com, they're not replacing an existing solution. They're doing something for the very first time. And the pandemic was a bit of a, okay, now is the time to go digital is what many businesses said. So we've seen that. We've seen increased demand. It has sustained. We've seen increased intent to get up and running faster, add more users, do more transactions more quickly. And so we think ultimately, the pandemic likely means that this market that's early in its evolution is likely to evolve faster as more and more businesses decide now is the right time to go digital.

And so how fast is the SMB market growing for AR/AP automation? And how do you measure share? Obviously, you guys are taking a lot of share, but who are you taking it from? And how do you quantify that?

Yes, it's a great question. And we really think, if you look at the landscape of how small businesses do business with their financial operations, it's largely manual today. And so we're displacing the mailing of invoices and the cutting of paper checks and manually signing contracts and things of that nature. And so we typically are seeing customers adopt these solutions for the first time as opposed to replacing an existing solution. Most of the small businesses that we work with, they have some investment in cloud technology, maybe their accounting system, maybe a front-end CRM or marketing automation tool. But beyond that, they don't have many other tools in the back-office around this automation. So it's really -- there's a lot of white space in the market here, which means, by definition, it's growing rapidly because we're seeing increasing adoption of these cloud solutions.

Got it. And when we think about the demand in the mid-market, I know you guys have seen a little bit more strength there through the pandemic. Can you talk about the trends there and how that positively impacts ARPU and the revenue growth?

Yes. For sure. So I mean we have a purpose-built solution for SMBs, and that includes slightly larger businesses, as you mentioned, the mid-market segment, which we define as companies who generate between $10 million and $100 million in revenue and obviously have many employees. And we've seen a noticeable increase in demand from these larger firms who typically rely on ERP systems like Microsoft Dynamics or NetSuite or Intacct and are looking for simpler ways to automate their operations. So we recently have been investing behind this demand and some new features that are somewhat unique to larger businesses like better security, single sign-on, dual controls, batch payments. These are all capabilities that can be used by small businesses as well, but there's more need for them by the larger businesses. And in terms of the impact on ARPU, the mid-market companies tend to have many more users, so more seats, which drives subscription revenue expansion, as well as more like OpEx, just operating expenses, and therefore, spend, which on our platform translates into higher total payment volume or TPV. So at the same time, I'd say that the mid-market companies also tend to have a bit more in terms of cross-border payment activity as well. And you put these things together, combined with a higher retention rate, because most mid-market companies sign annual contracts and pay in advance and things like that. So the attrition rate of those customers is a little bit lower than what you would see for SMBs. And all told, that means that we see a significantly higher ARPU from this mid-market segment. But we're continuing our primary focus on serving the small end of the market while also capturing some of the demand that we see from mid-market.

Great. And when we think about the international opportunity, how do you guys think about expanding in there? And you mentioned cross-border in particular. Is that -- is cross-border activity and the driving of that also part of the business model that can generate more revenue and profits?

Yes. Definitely. When we went public in 2019, we outlined kind of our 5 growth drivers. And the fifth one was actually international expansion. And at the time, we described that as an intermediate to longer-term opportunity. I think our first step towards that expansion was the launch of our cross-border payment product, which allowed us to support our U.S. customers in sending international payment transactions, either U.S. dollar or local currency, to their international suppliers. So we got to learn about where do our U.S. customers do business. And that's been very helpful. And then the second step of our international expansion was the transaction with Invoice2go. So we acquired -- it just closed recently. And they have a very large customer base. About 60% of their 200,000-plus customers are outside of North America, actually spread across 150 countries with concentration in places that you would expect, like Canada and U.K. and Europe, Australia and New Zealand. So we think those become interesting near-term or shorter-term targets for us to consider our expansion strategy as we take Bill.com outside of the U.S. to support global small businesses.

And you mentioned core revenue growth was up, I think, organically 73% in the quarter, and the company guided a strong fiscal year '22 organic growth of 45% year-over-year. Such a big TAM, John. Help us understand, what should be the normalized growth rate for your business coming out of the pandemic?

Yes. It's -- we obviously have had really strong momentum recently. That 73% organic growth rate was a combination of really solid growth in subscription revenue, I think about 32% year-over-year growth. And then on transaction fees, 137% growth, and that's a reflection of continuing to drive adoption of our platform and a mix shift to ad valorem payment products. And so we feel really good about how we're entering our new fiscal year. And I think that's reflected in our guidance of strong total growth, which includes the acquisition of Divvy, as well as organic growth, the stand-alone Bill.com business. Given the size of the market opportunity, while we can't provide like a long-term growth rate target, we're very confident that we have a long runway of very strong growth ahead given that the market is still early in its maturing and customers adopting digital solutions, and we think we're in sort of the right place at the right time.

You talked a little bit about Invoice2go. And then I wanted to ask about Divvy in particular, just the synergies you expect from that deal. And what adjacencies do you think you can get into and expand into from this deal?

Sure. One of the interesting things of having a large customer base, north of 120,000 customers, is that we collect a ton of feedback. And we're constantly engaged with customers hearing about their needs and gaps and improvements that they'd like to see in the platform. And one of the things that we heard frequently was that they want to be able to do more of their payment operations, their financial activities in 1 place. And one of the things that our platform hasn't historically supported is card payments. And most businesses rely on card payments for some subset of their accounts payable activity. Oftentimes for a smaller business, it's the owner's personal card or in other cases, it's a corporate card program. So we knew that there was a need there and demand from customers to have 1 place versus multiple point solutions. And that's where the combination with Divvy made a ton of sense. They have a great software solution that's combined with the corporate card, that helps businesses have visibility and control around their card spend. It starts with the concept of a budget. So the days of overspending or having surprises in card spend because cards are distributed throughout the company without proper software control, those days are gone with the Divvy solution. So we know that there's a significant cross-sell and upsell opportunity into the Bill.com customer base with the Divvy product. I think the opposite is true also. There is demand on the Divvy spending business side for additional capabilities like bill pay and expense reporting and other things that together, we're really excited about our opportunity to serve customers more holistically with that 1-platform mentality. We've already started to address the cross-sell opportunity through sales activities. And then over time, as we integrate our products, the Divvy and Bill.com platform, we think that only enhances our ability to drive adoption of the product from the existing Bill.com customer base as well as new customers.

One of the things that stuck out to us in the recent release was the strong retention numbers. I think net revenue retention was up 124%, which we found impressive, especially a lot of payment players saw a retention decrease because of some of the year ago period with some people just joining just to try something out. And we saw your guys' numbers actually increase. Can you just talk about what drove that? And how do you see net revenue retention going forward?

Sure. I mean one of the things to remember about our platform is once a customer finishes a trial, and they start to transition to using the platform, they add users across their organization to collaborate on approvals and they start to manage all their payment flows, it becomes mission-critical. It's not a nice to have anymore. And so once a company has transitioned to operating with our platform at the center of their financial operations, it's really sticky. And we saw that before the pandemic and throughout the pandemic as it became even more critical in managing in a hybrid sort of remote work environment. So some of the key drivers of our net revenue expansion -- retention rate expansion to 124% was just better retention. We're retaining more customers, which, as you know, is most challenging with the small business segment that we serve. I think we have world-class numbers there. Two, we've been driving adoption of new payment products that carry higher price points, better monetization for us. That results in growing transaction revenues that supports an expanding revenue retention rate as well.

I can't imagine that if you lose a client, they go to a competitor at this point. If you lose a client, is it typically that they go bankrupt or they change businesses or how to think about that?

Yes. That's -- one thing that we look at is our sort of gross annual retention rate relative to the rate of companies going out of business. And I think in this last fourth quarter, we reported 85% annual retention rate. It was actually up from 82% in the prior year. So through the pandemic, we were able to increase our customer count or retention of customers. And we think that the normalized -- forget about the pandemic or a recession for a minute. A normalized going out of business rate is like 10% to 12% a year. So it means that the platform is really sticky and the majority of attrition that we would see would be to business failures as opposed to a change in their technology stack.

John, I was hoping you'd talk about some of the key drivers of the acceleration in monetization. And also, take rate is always a big deal in our business here, thinking about payments. Can you talk about those drivers?

Yes. I think historically, as you look at our payment volumes, most of the transactional activity and TPV has been on fixed price payment products. So these are things like an ACH payment at $0.50 or a check payment at $1.50 or $1.65. And increasingly, what we've seen is continued success in driving adoption of electronic payments, moving away from check payments, and then success at driving adoption of like virtual card payments and cross-border payments as well as real-time payments, which come with a variable price product -- variable price mechanism tied to the amount of the payment. It just means a much higher revenue per transaction. In fact, in the last quarter, we were at north of $4, $4.40 per transaction, which is up significantly on both a sequential and year-over-year basis. And some of the metrics that we've talked about, to demonstrate the progress we're making, is on the virtual card front. About 2.2% of our total payment volume now is on virtual cards. And we grew TPV about 300% year-over-year on the virtual card product. Over time, we think we can be in that north of 5% range, 5% to 10% of TPV. So there's still lots of room for growth. In addition, in -- cross-border payments in this last quarter was about 4.1% of our TPV. And so for the full year, we did north of $5 billion in cross-border TPV, up from about $2 billion last year. So we're being -- we're having success at driving adoption of these types of payments. And that's leading to an expansion in our take rate, as you mentioned. We're at 8.7 basis points in Q4, up 44% year-over-year. So you can see it's still a very low overall take rate with lots of room for growth as we continue to drive adoption of some of the existing products that are new as well as we roll out new [indiscernible] products.

How do you convince more users to take the virtual card and to increase that penetration even faster?

Yes. I mean our methodology in managing the portfolio of payment products is really try to find the right electronic payment for a particular transaction between a buyer and supplier. So we're not trying to force or optimize for any particular payment type because we want to make sure that the payment recurs on the platform. We want it to be a recurring transaction, a repeat transaction opposed to if we create too much friction, then it could increase the chances that the transaction moves off the platform. So the way we drive adoption is just identifying merchants in the network who are card accepting, who are candidates for a virtual card payment. We connect with them either electronically, in an automated way or with a supplier enablement team to get them set up to accept virtual card payments. If it's not the right payment method for them, we have other choices that they can elect to receive an electronic payment. So it's a process that takes time. There's millions of -- as I mentioned, 3.2 million members in our network. And while we're making really good progress at enabling them, and you're seeing that in the increases in adoption and penetration of virtual cards, there's still a long way to go just to enable suppliers.

Thinking about Bill's pricing power, and I know you guys continue to add new solutions to the platform and increase your SaaS-based pricing gradually over time, how do you think about that? And are you pricing at the right point? It seems like the value you provide is higher maybe than even where you're pricing. So could you raise price across the board?

Yes. I mean we have a -- if you step back, a low-priced product relative to how companies leverage the platform and how they're able to drive efficiency and cost savings, on average, our annualized ARPU covering both subscriptions and transactions is about $2,200 a year. And we haven't raised subscription pricing, I think, in a couple of years now as our fiscal '20 was the last time. And our main goal is to not let price be a barrier to adoption. And so we're happy that we're at a relatively low price point. And we now have levers. We've demonstrated that we can increase monetization over time. But in the near term, I think we're comfortable with our subscription pricing levels. And with the changing composition of our variable price payment products, we think that will be the main driver of the increasing ARPUs, at least in the near term. As we add other use cases and, say, capabilities to the platform, that could result in incremental opportunities for subscription pricing -- additional subscription pricing and ultimately expanding ARPUs as well.

Yes. I was going to ask, does it make sense to have special modular pricing tailored to different customer segments or verticals?

Yes. It's a really good question. We haven't historically done that. We've -- it's sort of in a one size fits all. Yes, there's a little bit of variation. Some customers use just AP. Some use just AR. Some use both. But as we add more use cases to the platform, it may be that a modular pricing approach makes sense because we are starting to serve a pretty diverse range of small businesses from the smallest, which just 1 person, no employees, to mid-market customers. And so where there's an opportunity to tailor their pricing to the segment and improve ARPUs and monetization within that segment, that's definitely something that we'll look at.

John, can you give us an update on new products such as the RTP Instant Transfer product that you're partnering with Stripe?

Yes. Sure. I mean the real-time payments product, we call it, inside of our platform, Instant Transfer, and it's the combination of we leverage the real-time payment network from The Clearing House. And then we did an integration with Stripe to access debit rails, Visa Direct and Mastercard Send. And that allows us to essentially reach all of the bank accounts in the U.S. And the product, the value that we create for suppliers in the network is giving them an option when there's a pending payment. They've submitted an invoice, and there's a Bill.com customer who is somewhere in the approval process of that invoice and ready to schedule a payment, we can present the opportunity to a supplier to get paid instantly. It's within the next minute, not the next week or 2 weeks or whatever. We're very early in the rollout of this product. It is now available to all suppliers. We're seeing good initial traction and repeat usage of the product. So we know the value proposition is there. But it will take some time for us to finalize pricing on that and scale it throughout the network and drive adoption. But we're pretty excited about it. Today, I'd say it's not contributing in any material way to our growth or our TPV or monetization, but I think there's lots of opportunity ahead.

Great. I have to ask about the competitive landscape inside of your sector, the bill pay, the automation and transfer business. And then in particular, I see there was a question already in the portal asking about global payments in MineralTree. I know MineralTree is small, but does that mean there's going to be more bigger competitors coming into this space and trying to get larger and capture some of the share?

Yes. I mean given the size of the market opportunity and the status of most smaller businesses where they rely on legacy pen and paper and manual processes and things, it makes sense that there's many companies trying to serve the market. And so we still think the primary competition that we have is inertia and companies continuing to do what they're doing versus adopting a digital solution and cloud technology to automate their financial operations. And we see that because most customers, when they come to us, they're not replacing a solution. They're doing something for the very first time. So I think there's a long way to go before the competitive dynamics change such that businesses have now gone digital for their financial operations and are looking to make improvements. On the acquisition that you referred to, I think they are a smaller sort of mid-market-focused company. And that's certainly a segment that we serve, and we're definitely aware of them. But our core -- what we try to do every day is really focus on the smaller end of mid-market and small businesses. And I think we're one of the few companies that actually is squarely focused in that space. So I think we have a significant advantage in the market. And I think our recent transactions with both Divvy and Invoice2go only strengthen the value proposition of how we can serve SMBs.

I have a e-mail question just asking about, is it possible that you guys should be even investing more in sales and more in marketing at this point to penetrate the SMB?

Yes. I mean we're very happy with our sort of plans. Obviously, we outlined our [indiscernible] last call, we are accelerating our investments. We're increasing our investment level in fiscal '22, in part because of the traction that we have in serving SMBs. And that includes increasing our investments in sales and marketing. So you'll see that in the numbers. We've had really great results recently and net new customer adds. They, for a few quarters, have been above our expectations, and I think there's lots of room still to go. So we're believers that our strong unit economics sort of uniquely position us to increase and accelerate investments in our go-to-market activities, and we're definitely doing that.

A question from the portal that you guys report virtual card take rates on a net basis versus others reporting on a gross basis. What is the difference? If it's rebates, what is the trend in rebates? And what are the moving pieces around higher or lower rebates?

Yes. So our virtual card product is we are the receiver. Bill.com is the receiver of net economics. So we -- it's, by definition, a net revenue item for us. There are other companies in the space who leverage rebates for customer acquisition or incentives to suppliers and whatnot. We've certainly tested that a bit. But the small business segment that we serve, these are very small companies. They don't have big teams and accounts payable departments and overhead that they're trying to potentially monetize through rebates. They're just trying to create efficiency and save time so that they can spend more time on acquiring customers or delivering products or services versus the back-office. So rebates is not something that's been material in our business or related to our virtual card product. That's not to say there isn't a potential down the road that it could be a lever that we could use for acquisition or for retention. But historically, that hasn't been the case.

Got it. You talked about Divvy and Invoice2go. There seems to be more and more smaller players. It's a pretty fragmented space. Where does Bill go going forward for M&A activity? What are you looking at? Is it customer bases, verticals, new solutions?

Yes. I mean I'd first say that we are very focused on driving a successful integration of Divvy and Invoice2go, that's sort of priority 1, and continuing the great organic momentum that we have Invoice2go and Divvy has while achieving the synergy growth opportunities that we see. With that said, we have tons of ideas about how to better serve customers. We tend to start with customer needs. What is the value proposition of certain products? And what is the best way to add capabilities to our platform, either by building, partnering with other companies or acquiring? And for almost everything we do, we evaluate it on that basis. How should we bring it to market? So I think we are building an M&A capability of the company that we expect to be lasting. It's an ongoing strategy of ours, not a one-off. And I think there's lots of segments -- product segments that will make a ton of sense to be a part of our platform when you think of our 1-platform strategy, one stock stop and serving more of our customers' needs in one place. So there's categories like working capital, payroll, human capital management, procurement. There's just lots of opportunities for us to expand the platform.

Got it. Another question came in on the portal. When a large bank starts offering Bill.com to its SMB customers, where were they previously offering -- what was the bank previously offering those clients? Was it an in-house solution? Nothing? And then how do the economics work this year between the bank partnership and Bill.com?

Sure. Most banks have leveraged consumer bill pay offerings for their business segments, both commercial and small business. So they are likely using that, either third parties or their own homegrown solution. And so when a customer adopts the white label platform at their bank, our partner, the financial institution determines the pricing to the end customer, we sell to our bank partners on a wholesale basis. So we offer both subscription and transaction fee on a discounted basis in return for significant volume commitments. So we have minimum revenue commitments over multiyear agreements. That's evidenced in our remaining performance obligations that you can see in our financial disclosures. It's about $150 million. At this point, a little bit less than that at the end of the last quarter. And that represents the combined contractual minimum commitments that we have from our bank partners over the life of those contracts. And we think there's obviously upside opportunity over and above the RPO to the extent we can work with our partners and drive better customer adoption and higher levels of transactional activity.

Okay. With that, John, I think we're going to keep it there. Congratulations on all the success, and we'll continue to monitor you guys going forward.

Sounds good. Thanks very much.

All right. Thanks, John.