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

Welcome to the Piper Sandler fireside discussion with Bill.com. My name is Brent Bracelin. I spearhead our research efforts in application software and analytics, along with Clarke Jeffries, Hannah Rudoff and Mauro Molina. After this 25-minute discussion, we hope you'll have a better appreciation for Bill.com as an emerging enabler of our modernizing work thematic. Joining me is John Rettig, EVP and CFO of Bill.com. John, welcome.

Thanks, Brent. Great to be with you today and looking forward to the discussion.

You bet. Listen, Bill.com is on pace to scale revenue, I think nearly 5x just over the last 3 years. We were modeling this to be a $400 million run rate quarter -- business this quarter. That said, it's been a 15-year journey. And so obviously, you're just now starting to turn into a rocket ship, but maybe we'll start with the genesis of Bill.com and maybe how it's evolved since the IPO.

Yes. Great place to start. The mission for the company really over the last 15 years hasn't changed, and it's all about making it simple to connect and do business. Our Founder and CEO, Rene, grew up in a family of small business entrepreneurs. And in fact, his first startup, PayCycle, in the payroll space is where he also got his firsthand experience of how messy and manual things are in the back office and the complexities involved in managing payments that were coming and going. So we've really built a solution to automate financial operations for predominantly small businesses. We started with AP, accounts payable, which is the hardest problem to solve because of just process complexity and manual activities. We expanded into AR and more recently into the card spend management space. And along the way, we've developed an ecosystem, a go-to-market ecosystem of accounting firms, direct digital demand gen, financial institutions, inside direct sales, all of which help us with producing really good unit economics and efficient customer acquisition, which, as you know, is hard to do in the small business segment. And then we've also built a really large network of 3.2 million members who are either paying or getting paid. They're involved in transactions. And we think of this a little bit like a flywheel over time to drive customer engagement and acquisition. And you're right, we've actually -- we've evolved a lot since our IPO. It's only been 2 years since we went public, but we've broadened our platform capabilities to capture a larger share of the transactional wallet, if you want to think of it like that from our small business customers. We offer many more choices in terms of payments, all in support of our objective of, kind of, being that one-stop shop for financial operations. And if you think about just some of the metrics over the last couple of years at the time of our IPO, the prior year-end, we had 77,000 customers. We're at 121,000 today. We had a 110% net revenue retention rate. We're at 124% now. Our network is scaled for 1.8 million to 3.2 million. All of this are really just examples of the progress along some key metrics that we're making, serving small businesses. And we're really excited about where we are in the journey and the opportunities ahead.

Well, you continue to surprise us. And I think Wall Street likes surprises when they're good surprises. Let's just dial back a little bit to maybe a real-world example. How would Bill.com be part of that modernizing work for a small business, like what would be an example of what you'd replace how it's being used today? Just help the generalists understand really what you're doing.

Sure. It's a great question. And the first thing to remember is that we built our platform with small businesses in mind. Not large enterprises and then trimmed it down, but it's really understanding how a small business operates and what their needs and challenges are. As you think about the market, there's millions of businesses, both with employees and who are just sole proprietors. And the vast majority of them who come to our platform as new customers, they don't have an existing solution. It's not like they're -- they've already gone digital, and now they're looking to upgrade. It's they're doing -- they're using manual, paper-based processes to run their financial operation. And what that means is contracts that are being printed out and signed, invoices that are being mailed. And on the payment side, most businesses report they rely on paper check. So what we do is we enable this digital on-ramp, like to get off of paper from the beginning of the transaction with customers, whether that's at the purchase order stage or submitting an invoice or receiving an invoice electronically instead of on paper, enabling inside of our platform customers to route those documents, digital documents, for approvals and to collaborate with their partners, and then ultimately to drive a digital payment instead of a check payment. And it's taking this sort of manual messy, paper-based back office and enabling it to go digital either on the web or in your -- on your phone, on your mobile device, whatever the case may be. And so that's kind of what we do. And the impact for our customers and for small businesses in general, it's immediate, like they save a ton of time. They save 50% of time on AP activities by leveraging our platform. And what that does, remember, these are businesses that don't have large finance teams and departments that are managing AP and AR and things like that. It frees up owners and senior people's time at our customers to go do the things that they really care about, which is creating products, performing services, acquiring customers or what have you.

Well, that makes sense. I think one of the things we find interesting is just more recently, probably in the last couple of weeks, starting to hear some what I would describe as unusual descriptive words for accounting and finance: cool, sexy comes to mind. So as we think about AP automation, payments, these don't scream those words. But if I look at your Q2 numbers, organic growth accelerated sharply to 73% year-over-year, that's the highest since the 2019 IPO overall growth, exceeded 85%. You're approaching this $400 million revenue run rate. So help us -- what drove that sharp acceleration organic growth last quarter?

Sure. And it's interesting, Brent. I've always thought of finance as cool, so it's great to see broader acceptance of the opportunities in the space. But in all seriousness, we've really seen strength across the board in our organic business. Customer acquisition of 5,600 net new customers last quarter, strong engagement. That engagement drives accelerating transaction growth, 46% year-over-year and total payment volume growth of 64%. So acquiring a lot of customers, having a strong base and making a platform that's easy to use drives engagement. That engagement leads to transaction growth, together with our payment product composition, which is kind of shifting and changing to more variable priced products, that leads to strong revenue growth, and in part from our investments in supplier enablement and things like that. So core revenue growth of 73%, as you mentioned, and that's in part driven by transaction revenue growth of 137% from Q4 of last year. So as we have more payment offerings, we're seeing a larger share of wallet from our customers and we're increasingly driving expansion in monetization. An example would be in Q4, we saw revenue per transaction at about $4.40, which was up 62% year-over-year. And this is really based on ease of use of our platform and making it simple for customers to connect and do business and go digital. And I guess in some respects, probably there's a positive influence from the pandemic as well. It's sort of a, we think, maybe a lasting effect on the psychology of small businesses and prioritizing potentially changing the way they operate.

Pandemic certainly has changed everything. Would love to be at a conference somewhere, destination somewhere with you and hanging out, but the reality is we're doing this virtually. As you think about that sense of urgency within small businesses to modernize work, to move from paper to digital, has there been a change in that sense of urgency in the small businesses? Why now? Is it that kind of forced pandemic and for forced remote work? Just trying to understand -- we're starting to see some things in enterprise, but didn't know if that would correlate into small business as well, too. So what's the sense of urgency you see in small businesses now for some of the digital solutions you're offering?

Yes, it's a good question. I think we have seen a change, in intent and follow-through on the part of small businesses. It feels a little bit like we're at the beginning of this transformation wave. It's by no means played out. And COVID has been a wake-up call that I think has directly influenced that urgency to whether it's modernize or just do things in a more efficient way as it relates to the financial back office. And I think it comes from the fact that many businesses had some level of disruption to their financial operations during the pandemic. Even if their business wasn't disrupted, they still were driving revenue and things like that, they immediately -- if they were relying on paper contracts and invoices and checks, they were stuck. They needed to find a different way of doing things. So we see this urgency in our customer base, in part through customers ramping faster, like newer customer cohorts ramping faster than older cohorts. So they enter trial on the platform. But then we see them add users and start to do more transactions much sooner than historical norms. And we've also kind of seen this play out over the entire 121,000 customers that we have because we're seeing increasing level of activities. And that ends up manifesting itself in things like improvements in our net revenue retention rate or our gross retention and whatnot. So it feels like it really has impacted all businesses.

Super helpful color there just to think about the pace of the business. Let's take a well -- layer up and maybe talk about vision, I guess one-stop-shop vision. How would you frame maybe the market opportunity? And more importantly, the vision of where you're going. Obviously, Divvy acquisition, Invoice2Go acquisition, these certainly imply there's a much bigger game at stake here and what you're playing. So won't you paint for us what that long-term vision is for what you're trying to build here?

Sure. Just to start with the market a snapshot, there's 6 million businesses in the U.S. that have employees, 20 million globally. And then there's millions more that are freelancers or sole proprietors or whatever. So there's a huge market opportunity, both domestically and around the globe. And as I said before, most businesses don't have an existing solution to automate the financial back office. And our vision, from the beginning, for this platform has been to be the one-stop shop to automate all of the financial back office. Obviously, today, we have accounts payable and accounts receivable. More recently, spend management with Divvy and enhancements to AR with Invoice2Go. And that allows us to help businesses manage nearly all of their B2B spend. There are still some exceptions, but we really want this platform to be the place that they manage their money in a business context. And to make it as simple as some of the consumer experiences that we have, where there's so much mobile usage and digital payments and whatnot that's really easy, we're trying to do the same thing for businesses. So we've built foundational capabilities around digital document management, workflow collaboration and those things. And we think these capabilities can help us expand the use cases for our platform beyond the core of AP and AR and B2B spend. Things like -- we're going to continue to roll out new payment types. New payment types allow customers to do more activities in one place and not have as many point solutions, and we constantly hear feedback about how valuable that is. And then there's some use case opportunities to expand the capabilities of our platform. Think of things like procurement, expense reporting, payroll-related capabilities, maybe working capital solutions, all of which can complement our existing platform and leverage some of the unique capabilities that we have.

Doesn't sound like you're opportunity constrained at this point?

Lots of opportunities for sure.

Let's drill down a little bit more into Divvy. Get a lot of questions around Divvy. It's the -- clearly the largest acquisition the company has made, a very fast-growing business. What attracted you to Divvy versus some of the other privates in that same kind of category?

Sure. So we -- one of the benefits of having a large customer base, 121,000 customers, that we are constantly in the mode of collecting feedback, feedback on our solution and feedback on other challenges that businesses are having. And we heard from customers that they wanted a solution where they could do more of their payment activity, more of their transactional commerce activity in one place, one platform versus multiple solutions. And the Bill.com platform, we've enabled customers and we see their corporate card spend because they pay their statement balance every month, but we haven't supported those individual transactions. And that's where Divvy comes in. Our platform handled 70% to 80% of a small business spend, the Divvy platform handles almost all of the rest because it's card-based spend. And what we saw in Divvy, first and foremost, was an innovative team that has created a very sophisticated and elegant solution to help customers spend smarter by having great software provide with a credit product. And it brings visibility, control, transparency to spend the days of being surprised by card spend or being over budgeted, things like that are gone with the Divvy solution. So together, we really feel like Divvy was on a similar mission to Bill.com about automating that back office. They were applying their core competencies in a slightly different segment than we were. And together, we think we're really positioned well to continue to build out that one-stop shop approach.

Great. Cool. I think you mentioned that there was maybe less than 10% overlap between the Bill.com customers and some of the Divvy card spending base out there. Conversely, I think less than 1% of Bill.com customers use Divvy for cards. So walk through the cross-sell opportunity here into kind of maybe that Divvy card base initially and then conversely, the other way?

Sure. So just to start, we've been in the AP and AR automation space, as you mentioned earlier, for more than 15 years. And that market is still early in its evolution. When you think about the spend management space, we want to call it -- that broadly, it's even earlier in its evolution than the core AP market. So Divvy has done a great job penetrating that space. They focus on a customer demographic that's very similar to Bill.com. So it's SMBs across all segments, all geographies. It's not a vertical focus. It's really serving all businesses, which has been Bill.com's mission from the beginning. So we see actually a very large cross-sell opportunity. Starting first with bringing the Divvy solution to the Bill.com customer base because what most small businesses have some card spend. In many cases, for the smallest of businesses, it's the owner's personal card, right, with personal guarantees and other capabilities, or maybe it's a larger business that has graduated, if you will, to a corporate card program from one of the larger financial institutions. And normally, what's lacking with that card spend is software to actually manage your business financially. And that's where Divvy comes in, where I think there's a huge market opportunity. And we think obviously have...

Yes. Just on that, really important point, is the software demand has just been compelling enough for a small business to move away from my corporate -- or personal Amex card where I get all these points? Or kind of do you do a combination of both to motivate that business owner to move away from that personal card?

Yes, that's a great question. And there are incentives and rewards in the card business, whether it's consumer, in the case of an owner's personal card or a corporate card program, and Divvy offers rewards as well. But the value proposition, the ROI, if you want to think of it like that for small businesses is really in the power of the software. And the rewards is an incentive, it's an inducement, it's, I think, helpful for businesses. But if that's the only thing they're looking for, that's more of a financial arbitrage play and probably not the best fit. But if they're trying to automate how they run their business and drive better decision-making, better control and visibility, that's where the software is critical. And there's not a lot of it there. The larger financial institutions, I think, haven't obviously built the kind of software that Divvy and Bill.com have in part. That's why Bill.com has been successful in partnering with large financial institutions. Just back to your point on cross-sell for a minute. We have dedicated teams now that are starting on that process. It will take time to penetrate the base and to change customer behavior and drive adoption. But we think it's a big opportunity in part because of the market need that I mentioned. And then the other thing that's unique about Divvy and Bill.com is, on the one hand, we had a similar go-to-market motion with high velocity inside sales. But Bill.com also has this partner ecosystem. And we've had lots of discussions with partners about bringing the Divvy platform capabilities to the partnerships that we have. And again, those will take time for those discussions to evolve, but I think we have an interesting opportunity there.

On that point, intuitively, your financial services partners, they have corporate cards and stuff like that. So it seems like that's less compelling, interesting partner opportunities. Or if I'm wrong, correct me. And then on the accounting side, I guess it's not abundantly clear why accountants would need it. So walk me through what type of partners would be interested in Divvy-type software capabilities?

Sure. Starting with the accounting firms, they're trusted partners of SMBs, and they're helping them run their business better, both from an audit and tax standpoint, but then the financial management, financial operations. And so card spend fits into that. And our platform, as you know, has tools not just for the end customer small businesses, but for accountants to better manage those customer relationships. And I think by integrating card spend into the platform, that one-stop shop approach, it empowers accountants to better serve their customers. And as it relates to financial institutions, I think the power, as I mentioned before, is in the software. So it may be that there's a scenario where the software solution is paired with a financial institution partner's credit program instead of the Divvy/Bill.com credit program. Those are discussions that again have to evolve, but I think we can, together with Divvy, innovate in the financial institution space as well.

Fascinating. Let's talk a little bit about maybe futures around Divvy. And what we've seen at Shopify is, over time, Shopify has added a lot of software, but really monetize that software via take rate. As you think about Divvy, a lot of software functionality is tied to that take rate. Should we expect more monetization ideas around take rate versus kind of subscription? Or how are you thinking about that? What's that Divvy product road map look like?

Sure. So I mean we haven't talked about specific product road map for Divvy yet. We'll do that at some point in the future. But you're right, as it relates to monetization, Divvy's model is grounded in transaction monetization. That's the vast majority of their revenue. And we think that will have obviously an immediate impact on our overall combined company monetization. And over time, I think there's opportunity to expand that even further. I think we said on our last call that Divvy's interchange fee-based revenue model was in the 200 to 250 basis points range in terms of gross revenue. And then in the last quarter, they were about 230 basis points. You compare and contrast that to Bill.com at 8.7 basis points for our organic stand-alone business in the last quarter, and there's a lot of opportunity for growth, obviously.

Yes, that's a pretty big gap. So great opportunity. Let's shift gears a little bit to the latest acquisition, Invoice2Go. What was the strategy, logic behind acquiring Invoice2Go? One hand, it felt like a self-serve invoicing product, but it also brings a really big base of SMB. So what was the logic here on Invoice2Go?

Yes. We've been optimizing in the AP space for, as you said, 15 years. We do have an AR product, but our business overall is indexed more towards AP. So we were looking for ways to improve the AR side of our platform. And in Invoice2Go, we found a great team who's been working on the AR problem for small businesses for 20 years, actually longer than Bill.com has. And so they've got a great solution. And some of the things that we think are really interesting is predominantly self-serve. They have complementary distribution. They acquire customers mainly through the app stores. Because the primary use case for their solution is mobile, most customers use it in the field, service-based businesses. They have a customer base north of 200,000 customers distributed globally, about 40% in North America, 60% outside of North America, across 150 countries with concentration in places you would expect, like Canada, U.K., Europe, Australia and New Zealand. And those are also places where the Bill.com U.S. customers international suppliers are. So there's a great potential synergy as we think about international expansion to leverage the head start that Invoice2Go has in serving small businesses. And the other thing I'd say is they serve a smaller segment of small businesses, including freelancers and sole proprietors. And that's a really interesting large global opportunity that we think will be super helpful for us as we try to capture more of the market.

And market, you typically haven't kind of gone after, but it certainly could open up the doors there for sure. One question from the audience here just around the financial goals. As you think about making some of these investments near term, how do you think about the long-term financial goal, capital return, EBITDA margin, free cash flow margin? And then one last one for me.

Sure. Yes, we haven't laid out any longer-term financial targets or time line to profitability or things like that. As we continue to scale, we'll certainly do that. But our bias right now is for investing for growth. And we're driving growth. We're deploying capital, I think, in smart ways. We have great unit economics in acquiring, serving and expanding our relationship with customers. And given the size of the market opportunity that we're going after, that's going to be our bias for the near and intermediate term.

Helpful. Last question for you, as you think about next year, what are you most excited about?

We obviously have a lot of work to do to integrate Divvy and Invoice2Go and drive results, both for those businesses, the combined company and continuing momentum for each of us on an organic basis, and all of that is super exciting.

Great. John, thank you so much for joining us today. Look -- really appreciate your thoughts here and look forward to staying in touch.

Great. Thanks, Brent.