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

[Audio Gap] fireside chat. My name is Matt Stotler. This is my colleague, Bob Napoli, we co-cover Bill.com. We're the analysts here at co-cover Bill.com. I'll start by saying that for a list of disclosures or potential conflicts of interest, I encourage you to take a look at our website at williamblair.com. But more importantly, we have John Rettig here today, CFO of Bill.com. Thank you for being here.

Great. Thanks. Great to be here.

Yes. Maybe just to start off for some people who aren't as familiar with the story. We'd like to just get an overview of the company, the markets you serve and what the problem is that you're trying to solve?

Sure. So Bill.com, we have a platform for digital financial operations. Think of us as the on-ramp for small- and medium-sized businesses to automate their back office. So things like accounts payable, accounts receivable, payments, invoices, collaboration between employees in a company connecting with suppliers and customers to facilitate commerce. That's what we do. Most of the market that we're serving is the small- and medium-sized businesses who don't have an existing solution. So they're coming from analog paper legacy-based solutions. We have over 350,000 customers that we serve. Most of them are small, very small businesses. And we help them create efficiency in order to save time and money to devote to other areas of their business, drive customers, drive products, create services.

Right. Got you. So obviously, a high value add and I think probably part of the market has been historically underinvested in. How would you size that market opportunity? Obviously, SMB is where you're focused, what -- you're much broader than that. So how do you think about the size of the market there?

Well, we start with the number of businesses that there are. And in the U.S., there's 6 million businesses with employees. Only 50,000 of those businesses have more than $50 million in revenue. So most are really small. And these are businesses with employees. There's another 25 million businesses. They're just sole proprietors. There's just 1 person in the company. That's in the U.S. globally. Think of more than 70 million businesses who are candidates for creating automation and going digital in their financial back office. So the market is huge, think of it as an emerging market as opposed to a mature market. We get thousands of net new customers every quarter and most of them come to us doing something for the very first time, looking for that digital on-ramp to automate the financial back office.

Right. And there's a number of other companies out there that are trying to solve this problem or solve one component of this problem. How do you think about the differentiation that Bill.com provides and how that gives you a sustainable advantage in the market?

Well, our platform is all about enabling companies to automate their own operations. We don't do it for them. It's not an outsourcing business or anything like that. But we start with a process automation focus. We ingest invoices. We apply AI and other technology to extract data, serve that up in an automated way for businesses so that they have visibility into their cash flow and their spend, their working capital, and they can make better decisions. Our business model is around subscriptions and payments. So we start with process automation, and we charge subscription fees on a per user per month basis. And then as transactions are completed on the platform between buyers and suppliers, we monetize payments as well. Payments has been a growing part of our monetization over the last few years, and it creates alignment between the usage of our customers, the value they receive from our platform and ultimately the revenue outcomes that Bill.com received. So we're all about making it really easy and simple designed for small businesses from the beginning as opposed to an enterprise type solution that was slimmed down to try to serve the small business segment.

Right. And obviously, the last couple of years have been very eventful to say the least, right? And from COVID and through today with this reopening but also inflation concerns and geopolitical concerns and things like that. Maybe it would be helpful to start with just walking through the adoption trends and spending that you saw through COVID, how that's progressed as we started to kind of open back up? And then any thoughts on the current environment currently and with the things that people are kind of skeptical about from a macro level as we go through the year.

Sure. Going back to the beginning of the pandemic, it was a huge wake-up call for businesses. I don't think it made our market opportunity larger, but it certainly seems like it's going to mature faster than otherwise would have. There was a lot of businesses that were found themselves stock not being able to have continuity in their operations because they didn't have digital solutions. They relied on people being in an office interacting live principally around paper-based processes. There was certainly an impact to certain industry verticals when the pandemic first happened, we went into the lockdown, just think of hospitality and restaurants and things like that. Our go-to-market is all about horizontals. So we're across all industry segments. We don't have vertical concentration. And so while we saw some impact to our customer spend numbers, B2B spend on a vertical basis, it was immaterial to our overall business. And some of the initial uptick in demand that happened at the beginning of COVID has persisted. We've seen very strong new demand at the top of the funnel. We produced record net new adds the last couple of quarters. And I think it has a lot to do with the market and how it's becoming more acceptable, more aware, customers are looking for digital solutions to price point that we offer. We've seen really healthy trends from businesses and their B2B spend certainly through the March quarter. We haven't seen any signs really of stress that we do hear from customers that price increases, whether it be labor or goods and services or suppliers that they work with are certainly creating some pressures in their business that they'll have to deal with.

And so kind of taking this wake-up call or appreciation of the value of this type of solution, along with some of the pain points that your customers are seeing these days. What are you observing from a competitive standpoint in the market and specific to pricing trends, any changes in terms of fee structures or pricing strategies in the market?

Well, the market, I think, is fragmented, first of all. So it's a huge market where most businesses are doing something for the first time. It's not an upgrade cycle. There are certainly accounts payable players that are focused on mid-market with a vertical go-to-market approach and then the AR side of things is very fragmented with lots of point solutions, often vertically focused as well. Our main sort of competitive advantage in the market beyond our platform that I mentioned is designed for small businesses, and it's used in a self-service manner is really our go-to-market and our risk capabilities. So our go-to-market is all about partnering with trusted advisers of small businesses, so accounting firms, banks, financial institutions who use our platform to better serve their small business customers. And then from a risk management standpoint, I mentioned our business model is about subscriptions and payments, we've built our own proprietary payment capabilities from day 1. It's not something that we added to the platform after we saw an opportunity. It's in order to be able to deliver better services, more security, trust to customers in managing their payment flows. And we're seeing that play out in how we're able to move money fast, create a great payment experience, minimize fraud and other losses for customers. And I think it really sets us apart from a lot of other companies. In the case of the spend management segment, which is a newer part of the business for us, I think we'll talk about the Divvy acquisition in a minute. A lot of companies price those solutions on a transaction-only basis paid for by merchants. So it's a free offering. That's similar to how we price the Divvy product as well. But our overall approach is to create a platform with lots of different products. Think of it as a portfolio, where we can both add value to customers and create revenue growth and scale over time.

Right. And so like you mentioned this kind of core AP/AR plus payments and you've expanded into expanded management, expanded payment types, but trying to provide this broader kind of platform and set of solutions. Could you just get an update on what that development road map looks like? You've talked about things like purchase orders, maybe treasury services, data analytics. Any update there? And then as we think further out, I mean, how do you think about additional opportunities in payroll or elsewhere?

Yes. So we think of building out the platform, both horizontally and vertically, horizontally is by adding more use cases. We hear from customers, constant feedback. One of the benefits of having a large customer base is we can collect data all the time about what's working, what's not, what their needs are. And what we hear constantly is that they get more value being able to do more in one solution versus having 3 or 4 solutions to manage a process with. So we know that there's more we can do in the transaction life cycle between buyers and suppliers, things like procurement or working capital solutions to create better cash flow outcomes. In the case of other parts of the back office, we certainly think about things like payroll and on-demand workforce management and things like that, that are very complex and still manual and mostly legacy-based tools. In terms of the depth, it's about payment products, like find the right payment product between buyer and supplier to make it a recurring transaction and help customers go digital. Most of the transactions on our platform are repeat payments, meaning the same buyer and supplier completed a transaction in the last 3 months. So the platform is really used as a utility for their process flows and for their payments as opposed to for one-off transactions. And so the more payments that we can add to payment types that we can add to the platform, the higher share of wallet we get from customers and the stickier the platform is for them.

Right. And you mentioned the data piece, and there's obviously a ton of data that flows through your platform every day. How do you think about the ability to leverage that data, whether it's from a monetization standpoint or to add deeper value for the customers?

Yes, we have an interesting data asset. So we sit at the middle of millions of transactions across hundreds of thousands of business entities and billions of dollars of payment volume, combined with data that we collect from the accounting system of our customers because our platform syncs with the accounting system. Today, we leverage that data primarily for risk management and facilitating faster payments and credit underwriting and things like that. In the future, though, it's certainly something that we think gives us an advantage for working capital and additional financing opportunities. Not that we'll do that with our balance sheet, but it's really serving that up in our platform. At the same time, we think we can take this data asset and turn it around to create insights for customers to have better visibility into their business, make better purchase decisions, figure out how to get paid faster to improve their working capital solutions to make them less relying on outside capital to grow their business.

Right, right. So obviously, a lot of opportunity on the product expansion side, very early in terms of penetrating the market. So a lot of potential investment for growth here. But how do you think about the path of profitability? How do you think about that in this -- at this time, we have rising interest rates and inflation and things like that, what's the thought on the path to profitability here?

Yes. There's a lot of moving parts there. But I think the punchline for us is the path to profitability is sooner not later. The rising interest rate environment actually is a tailwind for Bill, in part going back to the proprietary payment capabilities that we've built that I mentioned. We've invested in, and that allows funds to flow through our bank accounts, our systems, our risk models. We generate float income on that. It's been near to 0 as interest rates were low, but in this rising interest rate environment, it's huge. The other thing is we focus on the small business market. So we've had defined a way to make that work. So we've run the business very -- from a very disciplined financial standpoint in order to have great unit economics, 124% net revenue retention, high gross retention, great payback periods. And so those things combined with what we're seeing from interest rates tells us that we can get their sooner than later. There's a lot of uncertainties in the geopolitical, inflation, recessionary concerns, supply chains, things like that. But assuming no big external impacts to us, we believe over the next 12 to 18 months, we'll be transitioning to profitability.

Got it. That's helpful. So one of the things that you kind of mentioned, obviously, is the core focus historically on the lower end of the market, the SMB segment of the market. But you have been kind of moving into larger customers over time. I mean I don't know if we should call it a move-up market as much as an organic expansion of the market, but would love to just get your thoughts on the opportunity there, what tracking you've seen with larger customers? And how you see that playing out as we go forward?

Yes, we think of it more as a pull-up market than a move. So larger businesses, mid-market companies that rely on higher-end ERP systems find that they can have a lower cost, more efficient, easier-to-manage solution by using Bill.com to complement their ERP system. Typically, larger businesses have many more users, more payment volume. They then have a higher percentage of international payments, all of which creates incremental monetization opportunities for us, which means it's a much higher ARPU, higher lifetime value customer. Our approach is still to try to serve the needs of most businesses with our platform and not customize the platform for any given segment or size of business. So we don't do special vertical or a global business adaptations to the platform. But if it works for them, we're going to continue to sell into that demand.

Right. And maybe just one more on that topic before I pass over to Bob. I guess as you think about the needs of the -- of larger businesses compared to the SMB segment of the market, how does that layer into your development road map going forward? What kind of capabilities do you feel you need to develop to keep pushing that market? And then how do you think about the competitive environment as you move upmarket? And how that's different from kind of the core SMB segment?

Yes. So bigger businesses are more sophisticated. They have higher level needs for security, for automation, for batch. We've done some of that stuff already. And I think there's more we can do to more effectively manage multi-entity organizations with international footprints, multicurrency operations and things like that. We'll continue to invest in some of those capabilities, knowing that a small business can use them also. It's not just about size. It's about complexity and what the type of business is. And I think our position is still likely best suited to the bottom half of the mid-market segment. So we have no aspirations to move upmarket to enterprise or things like that. And I think we have a pretty unique position that the value proposition is resonating based on the demand that we see from mid-market.

Right, absolutely.

John, [indiscernible]

Yes, sure. So there's a bunch of dimensions to the integration, especially having done 2 transactions very close to each other. They were just a few months apart. And it really is about people, product, technology and then the go-to market. The people integration has already happened. We are 1 company. We're organized functionally, so we have a product team, a marketing team, a sales team, a finance team, that's gone great. The underlying technology, very compatible tech stacks between the companies and architecture. So we're in the process of integrating that but it doesn't require a major changes. We will be operating 1 tech stack going forward, not independent tech stacks. The products, we've done the low-hanging fruit integration, meaning connect the products. They're not integrated yet. It's not 1 experience, but when you log on to Divvy or Bill or Invoice2go, we authenticate you through MFA. You can get to the other solution through a link in the product, but they're -- it's not one experience yet. That's the next phase throughout FY '23. And the go-to-market, we've already made progress in introducing primarily Divvy to the Bill.com customer base, Invoice2go will come a little bit later and then Bill to Divvy, will come a little bit later. But we're seeing good initial demand. We've focus that sort of education process and cross-sell activity, primarily with our direct customers. And we recently announced signing an exclusive arrangement with CPA.com, where Divvy is the exclusive provider of spend management, expense management and corporate cards, and we're going to market with CPA.com, focused on the accounting channel. And it's the first tangible example of where that unique Bill.com go-to-market motion can actually benefit us in an acquisition scenario. Now we don't have the material financial results to show yet. When we did both those deals, we said look for those in FY '23. So we'll have more to say about that at coming August.

[indiscernible]

Yes. It's a great product. They're a software-first company that has a horizontal go-to-market, which is exactly who Bill.com is. Change the way you operate through great software by applying it to financial back office, it opens up the payment opportunity. So we really love where Divvy is positioned. The other thing that they, I think, are way ahead of others in the space is in underwriting and being able to identify customers that are good candidates for credit, it's horizontal across all industry segments. It's not a vertical approach. They don't index with VC-backed companies or anything like that. And from day 1, we consolidated that credit and risk organization with Bill.com, and I think that's something we're evolving as well. So it's a great product. It's only getting better. We're starting to do more employer reimbursement, expense reporting-type capabilities, and I think it will fit nicely combined with Bill to allow us to address nearly 100% of B2B spend from small businesses.

[indiscernible]

Yes. We could do that. So just a reminder, Invoice2go is a mobile-first AR solution that's principally directed at small or micro businesses today. They have 200,000 -- more than 200,000 customers across 150 countries, 40% of which is North America, U.S. and in Canada. So it's a great population. They have on-the-ground operations in Australia. So the business is isn't distributed globally yet. But we think it's kind of our second tangible step towards international expansion. The first was launching our cross-border payment product where we could see where the international suppliers are of our U.S. customers and now with Invoice2go. So it will be -- I think we're ready for the next phase. When we went public in 2019, our 5 growth levers included international expansion as the fifth leverage that was the furthest out. And I think we're now entering that phase. And over the next few years, we'll start to roll out that strategy.

[indiscernible]

Yes. I mean our strategy is to own the pieces that are closest to the core of what we do, where we can create the most value for customers. So that means either building or buying for commodity pieces like connections to certain payment rails and things like that, partnership is going to be a great route to go there. I think we are well positioned to do M&A. We have north of $1 billion in net cash. We've learned a lot from the first 2 transactions. We're starting to get past the bulk of the integration activities there. So we'll be opportunistic, but we're not in a rush. I mean, at the same time, we're always going to look for how can we increase the customer value proposition by adding products potentially through M&A, how does it add to our growth profile and how does it contribute to our sort of maturing as a business on that path to profitability?

[indiscernible]

Yes. So today, it's about 9% of revenue, which is up significantly over a few years ago, and that's due to the success we've had selling into large banks. We've announced 3 new partnerships in the last 18 months, Bank of America, KeyBank, Wells Fargo, and we're starting to see the result in terms of the go-to-market and the new customer additions happening. So we're really excited about continuing to invest behind a partnership. We have the majority of the top 10 financial institutions in the U.S. now. And our focus is really helping our bank partners drive adoption of the platform. More than it is, more banks at the moment. I think that will come in time, but continuing to drive adoption and success with our existing partners and adding more of our products that exist when we go direct to customers into the white label platform with the banks will be key to us driving that adoption.

[indiscernible]

Yes. So our last reported number is a little bit above 2% of TPV was on virtual cards. That was last June. We'll be updating that at this year end. And our target is 5% to 10% of TPV could be on virtual cards. And that's based on our understanding of the supplier network, 3.2 million network members, many of which are card-accepting merchants. And they have built processes, automation and accounts receivable and reconciliation processes to around the merchant account, and they want to accept virtual card payments. So I think we have a long way to go at the same time we're building out complementary products to be able to do more. But we -- one of the things we've done in the last 18 months or so to bring the supplier enablement side of things, which is connecting with suppliers through technology and in some cases, people to identify the right payment solution for them. That's helped us get off the off the ground fast with virtual cards, but the important part about that capability is it helps us with any new product that we might want to offer to a supplier. And so that's part of why we invested in bringing that in house.

[indiscernible]

Yes. Sure, if you look at the growth in our revenue per transaction -- transaction revenue per transaction or take rate if we want to look at like that over the last couple of years, it's up dramatically. And the 2 biggest drivers of that have been virtual card payments and cross-border payments. The majority of our cross-border payments today are still U.S. dollars. And that's driven by the fact that U.S. buyers, for the most part, small businesses who have international suppliers, don't want to be subject to currency fluctuations and exposures that could create uncertainty in their financial plans. But it's surprising how many small businesses do have international service or product relationships. So we're -- the last reported number is a little above 4% of TPV, with the majority of that still being U.S. dollar payments. We think that could be 10% to 20% over time. And part of how we get there is by going back to supplier enablement, which I mentioned with virtual cards is, we're starting to have direct dialogue with suppliers. So even that U.S. buyer who wants to pay in U.S. dollars, it doesn't mean that international supplier wants to accept U.S. dollars. They might want a local currency payment. So by having tools for them to elect different payment methods, we're able to satisfy both the buyer and supplier and increase the chances that, that becomes a recurring transaction on the platform. So I think we're still relatively early in driving the adoption of that product, but we're really excited about how far we can take that.

[indiscernible]

Yes. At the end of the day, most of the customers that Bill has that we know, have international payments because we can see the network of their suppliers. If they're not using us, they're probably using their bank. And they probably don't have an FX line or a dedicated treasury salesperson, so likely paying like the highest margin of retail rates. So provided that we -- what we try to do is make a more cost-effective solution. That's one way of delivering value and the other is enabling them to do more in one platform rather than have to go online to their banks and then they have to get that data into our system and then into their accounting system. So it's the combination of cost as well as efficiency that we try to do for customers.

[indiscernible]

Yes. It's an interesting product. The experience is get paid in seconds, not minutes, weeks, days, whatever the case is. And for us, with our network, we found that it's actually complementary to virtual cards or say, enhanced ACH, both of which appeal to a much larger supplier who -- they manage their business monthly and quarterly and have cash flow insights and things like that, a really small supplier who's a contractor, maybe they're doing a project for graphic design or something like that. They manage their cash flow transaction by transaction. So it's really meaningful if they get paid today versus as they get Page 7 or 8 days from now. And there's lots of analogies outside of Bill for products like this for the demand, if you think of Square Cash or Venmo, PayPal. And so what we're doing is serving up choices to these small suppliers, and we're really encouraged by the initial signs. It's not material to our overall business yet. It's not moving the needle for us. But one thing that we noticed is that many suppliers are electing it as the default payment method. So whatever payments they're getting from Bill.com buyers, they want to happen through real-time payments, which is a really good sign, that repeat usage is an important indicator of the product, the payment type is going to be more material to our results going forward.

[indiscernible]

I think what we do really well is understand the needs of small businesses, the limitations they have in terms of technical depth in resources and breadth of capabilities. So we've built a platform that's easy for them to use, and we reach customers where they are. So whether it's through their accountant, through their bank, online, digital demand gen, we go to them. And ultimately, that creates awareness and a flywheel effect. As we get more customers, it helps build our network, and our network over time, I think, becomes one of the largest sources of a customer acquisition that we'll have, and that's a pretty unique asset.

[indiscernible]

For sure.

Thank you very much.

Yes. Thank you.

[indiscernible]

Yes. Great. Thanks.