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

All right. I think we can get started. I'm Bryan Keane, for those of you who don't know by now. I cover the payments and IT services at Deutsche Bank. And we're excited about Bill.com and John Rettig, who's the CFO. So John, thanks for coming and taking on the heatwave here in Las Vegas.

You bet. Thanks, Bryan. I never pass up an opportunity to visit Vegas in August. So this is -- here we are.

Yes. Here we are.

So I think more and more people are getting familiar with the Bill.com model, but maybe you can just provide a little brief background on it and just what you think is the key investment thesis for Bill that people should think about.

Sure. So we have a platform that helps predominantly small businesses automate their financial operations, accounts payable, accounts receivable. Small businesses are an important part of the economy. It's north of 40% of GDP and private sector jobs, so it's a really big segment. And most of them do business using legacy manual methods. They don't have cloud solutions for managing their financial operations. So the market is really early in its development. And we've built tools kind of from the ground up to support SMBs as opposed to building tools for enterprises and then trying to scale it back. And so we're seeing really good adoption among small businesses. It's a really sticky product that we have. It helps them get better visibility, manage cash flow, have better controls over their finances. And so they stick with it. It becomes a little bit mission-critical as opposed to elective software that you might choose to turn on or off in any given period. We've been growing rapidly. Fiscal '22 was kind of a breakout year for us: $642 million in revenue, north of 70% organic growth, much higher than that, total growth, 400,000 businesses on the platform, just under 5 million network members. So we're starting to get to scale as our business grows. And our ambition is really to kind of bring the future of finance, all the digital tools that a business could want to small businesses today. So it's an exciting time. We're approaching $1 billion in revenue. We -- our expectation in fiscal '23, the current year, is for non-GAAP net income profitability. So we have lots of momentum going into the new year.

The B2B sector can be divided up in different places. Obviously, SMB is kind of the main focus, and you guys have moved up some to the mid-market. But how do you describe the TAM and the growth prospects just by market size for Bill?

Yes. The really short version is millions, billions and trillions, right? So there's millions of small businesses, 6 million employers in the U.S., 30 million if you count sole proprietors who don't have employees. And those businesses spend billions of dollars on software every year, and they have trillions of dollars in payment volume. And our business model is constructed as a hybrid model with both subscription and transaction fees. So we're tapping into the spend of businesses on software as well as monetizing their payments. So it's a huge market opportunity. That's just the U.S. There's an equivalent large opportunity outside the U.S. that we haven't really begun to tap yet but becomes a future growth lever for us.

What are the barriers of entry in this business? Because I'm always amazed that there's not a ton of SMB competitors, and it's just -- maybe it's a scale game. And if you don't have scale and you can't get both sides of the network, it becomes more difficult to actually grow. So just curious on when you think about barriers to entry and the lack of competition in SMB of any size.

Yes. Well, if you look at other software businesses, there's a kind of a beaten path towards serving enterprises and moving upmarket. And that's because it's really hard. It's really challenging to serve SMBs, how to acquire them, how to keep them, how to grow with them, how to deal with attrition, things like that. So we've constructed a business model and a go-to-market motion and ecosystem, if you will, around go-to-market that leverages both our ability to attract and retain customers directly and working with partners, such as accounting firms or financial institutions, big banks. And it's through this go-to-market ecosystem that we have, I think, done really well with managing unit economics. So we can acquire customers efficiently. We have a short payback period. They stick with us. We have very high gross retention rate. We have revenue retention above 130%. And so it's really, I think, that the challenge associated with the SMB segment, in particular, is what leads to a lot of companies actually serving larger businesses. We're supporting larger businesses to the mid-market segment, but our core focus is really small companies who we think are the most underserved and need the most help.

Obviously, a big concern around the macro environment, and you guys called out a little bit of a slowdown in TPV in June through August, I think it was in the advertising clients. Can you just talk about how much are we talking about, if we can quantify that? And how much did you bake into the fiscal year guidance of a little bit of a volume slowdown?

Yes. It's a great question. So on our last earnings call, we talked about seeing some moderation or tempering of spend beginning in June that carried through to July and early August. And it wasn't across the board. It was really concentrated in larger businesses, that mid-market segment that I mentioned. And then it seemed to be predominantly in some discretionary spend categories. The one that we called out was advertising spend. That was just an example. So not across the board and -- but we think, just given the uncertainty that exists in the external macro environment, seeing a little bit of softness in spend led us to assume that, that's the beginning of a trend that could exist for a while as opposed to a onetime event. So we've built some spend moderation into our expectations for fiscal '23. And to the extent that we don't see a significant recession or we don't see those trends continue, we'd expect to have upside. We've grown TPV really fast over the last few years, and so we're assuming that's probably not going to be the environment ahead.

What are some of the -- there's obviously some positives and negatives when the environment slows. What are some of the puts and takes in a recession or a slowdown?

Well, with our business, the hybrid business model around subscriptions and transactions, the amount of spend per company is a variable that matters to us, given our transaction monetization, which is about 2/3 of our core revenue, so excluding float for a second. And we think we have some tools at our disposal that can help us grow through an uncertain environment that might involve lower spend. These include the early stage that we're at with transaction monetization. We've grown, whether it's revenue per transaction or take rate, however you want to look at it, pretty dramatically over the last couple of years. But if you step back and look at where we're at, it's still really low. We have a long way to go. And that, combined with this rising interest rate environment that it sounds like now we're in a, I don't know, higher-for-longer rate situation. We have tailwinds associated with float revenue, given that we own and we built our own proprietary payment technology. All the flow of funds is through us. We did that in order to deliver a better customer payment experience, that we didn't do it for float, but we're the beneficiary of that in this environment. So I think there are some tools that we have to mitigate spend softness. The other side of, I think, the macro equation is the demand environment. What does it look like for businesses adopting new tools? And one thing is for sure that if small businesses are facing their own challenges with revenue or growth, they're going to need to do more with less. They're going to need to create efficiency and be able to sustain their business in an uncertain environment. And I think that actually suggests good things for us. We can -- if you want to think of it as our platform, it can be a deflationary force, if you will, in a rising rate and a higher price environment. Because it's super low cost, it creates efficiency. Customers can save about 50% of the time that they spend on AP, which means they can grow their business without investing more. And they can take those investments and put it into building products, customer acquisition, whatever the case is. And the trends that we saw in -- towards the end of the last quarter, really impacted spend on the core Bill platform. We didn't see any impact on demand, so top-of-the-funnel demand from SMBs, or in retention of customers that all those trends continue to look very strong.

You talked about just finishing up the fiscal year '22, and that was kind of a really banner year for you guys. As you turn to fiscal year '23 that we're in now, what are some of the key priorities that you guys want to develop this year?

Yes. So there's 3 that we have laid out. We're obviously working on a lot more, but 3 big picture things. The first is creating a unified platform experience. So we did 2 acquisitions in the last -- a little more than a year. And we're working hard to integrate those solutions to deliver a seamless customer experience as opposed to having solutions that sit alongside each other, which is actually where we are today. They're connected, the solutions, but we want to really create a seamless experience with consistent navigation and make it easier for customers to adopt all of our products. The second priority that we have is about scaling our ecosystem. So working with partners, driving adoption within our partners, whether it's accounting firms or financial institutions or new partners that we might acquire, delivering more of our solutions through those partners to help drive end client adoption. And then the final priority is consistent with fiscal '22 as well, and that is driving payment adoption. So we continue to innovate with payments. We're rolling out new products. We have a belief that choice matters, like having a variety of payment solutions, particularly digital payment solutions, helps increase the share of wallet for customers. The more we increase our share of wallet, the stickier our platform is. And increasingly, some of those new payment solutions offer more leverage with monetization, and therefore, revenue growth. And so that continues to be a really important priority for us.

Yes. Wanted to ask about the ad valorem payment penetration for fiscal '22. I think it was 10% of non-FI volumes are now in this virtual card and cross-border. I think -- virtual, I think, if I remember correctly, went up [ 40 to 50 ] bps on an aggregate basis, and cross-border, obviously, went up. So one of the feedback from investors was, oh, I thought it was going to be even higher penetration given that you've had pretty nice growth in transaction yields. Can you talk a little bit about as that third priority, what you can do, kind of where you are today and what you can do to increase payment adoption?

Yes. We're -- our focus is really in continuing to build out the number of choices that we have for customers. We're also working on driving adoption. We've talked about supplier enablement capabilities, and we have several additional steps there that we're going to invest in to drive more adoption. We're very early relative to the long-term targets that we laid out, I think, 18, 24 months ago around virtual cards and cross-border payments. But we're making good progress. So the 10% ad valorem is something we're happy with. That's the combination of virtual card payments, cross-border FX transactions, Instant Transfer, real-time payments and Divvy card payments. And as a -- that's as a percentage of nonfinancial institution TPV. So on the one hand, we've made really fast progress. On the other hand, there is a long growth runway ahead. And we think focusing on share-of-wallet gains over time versus optimizing any one payment method is going to be the best way to ensure sort of a longer-term growth trajectory in terms of transaction revenues.

The one that comes up a lot, I'm sure you hear this with investors, is Avid's penetration in the mid-market. They talk about a 40% electronic transaction penetration. And we had that at about a 22% on a volume estimate. How long does it take for SMBs to kind of adopt that kind of levels of penetration?

Yes. I think it's a little bit of a different lens. We're -- our focus, our strategy for the platform is all about self-service. It's driving tools and capabilities that allow businesses to adopt products and automate their own operations. That's true for both small businesses and mid-market. I think some of the other companies out there who have higher adoption rates have a slightly different model. They're doing more to optimize individual payment types than they are driving overall electronic adoption. So I'm not -- we said early on that we felt like there was an opportunity to drive virtual card penetration at the 5% to 10% of TPV level. Now that's a longer-term target. We have a long way to go. We still think that's probably the right way to think about our opportunity relative to the breadth of payment solutions we're going to have available.

And so when we look at the organic transaction yields, I think they've expanded something like 60 bps, I think, historically, on a sequential basis. Is that the right kind of path of growth to think about in fiscal year '23, that kind of a sequential growth in yield?

So we haven't given specific quarterly targets. We tend to step back and look over years versus quarters. It's not 100% in our control. And we are perfectly happy with incremental adoption across any of our electronic payment methods as opposed to needing to drive a specific quarterly step rate -- step-up function. But there's a long way to go. It won't be perfectly linear quarter-to-quarter. We'll be able to -- as we implement new solutions, particularly around working more closely with suppliers and things like that, we could see better results. But stepping back, a long way to go in terms of expanding monetization.

We're particularly excited about the Instant Transfer product and think we've seen, especially on the consumer side with Venmo and Square Cash, that they've been successful in creating some higher fees there. And SMB is not exactly the same, but it's a smaller group and it has a lot of kind of the same characteristics. Can you talk a little bit about how you think that the trajectory or adoption of that will be, along with some of the other areas like the balances and pay by credit card?

Yes. Instant Transfer is a great product. It's real-time payments. Instant Transfer is our terminology inside of the platform. We're pretty excited about it because it's a complementary payment method to some of the other things we do. So it normally appeals to a smaller supplier. Think of like an independent contractor or somebody you might use in your business for just a project. Many times, they're managing cash flow or their working capital, if you want to call it that. I'm not sure they do transaction by transaction, invoice by invoice. So having the flexibility to be able to be in control of when they receive cash is really valuable, and they're willing to pay for that. And there -- the analogies that you mentioned, whether it's Venmo or Square Cash, others, are completely appropriate. That's what we're seeing as well. And it complements some of the other payment methods that might be more suitable to larger suppliers, who maybe they have an automation built around their merchant account and accepting virtual card payments or other offerings that we might have. So we're excited. It's still sub-1%. It's a small part of our volume now, real-time payments, but we think it could be much larger. I don't think it becomes ubiquitous. Not all suppliers are going to go to that method. But it's one of the things that we're particularly excited about is the repeat usage rate that we're seeing, which a lot of suppliers who find that payment method of interest are setting it as a default method, which tells us that we're able to create value if they're taking that behavior. A couple of the other things you mentioned, Bill.com balance is very early, but think of it as a virtual wallet similar to a PayPal, where we can help customers drive instant payments without going outside of the ecosystem. So the funds stay in our platform and our ecosystem for longer. There's -- payments between 2 wallet or 2 Bill.com balance users are free. There's no cost for those transactions. So they tend to be higher dollar transactions. There's also no risk associated with that from Bill's perspective. So that's good. There are fees. If customers or suppliers, they want to move dollars to their bank account, like there are fees associated with that. So we think it's an interesting product. There's demand there. It could be a step towards more holistic Banking-as-a-Service solutions. We're not there yet. We are testing some of that with our Invoice2go tool. They have a product called Money, which includes embedded bank accounts. That's something that we could bring to Bill in the future. And then Pay By Card is a slightly different product. Think of that as a working capital solution on the funding side. So instead of driving funding via ACH from a bank account, some businesses want to have that float for longer, and so they'll want to pay with a credit card. There's fees associated with that. And customers who want that have figured out some combination of the float and the rewards or incentives they're getting on their own card to make those fees worthwhile. So there's definitely demand for that product. I wouldn't want to kind of build a business around that product. I think it's going to be a smaller use case in adoption than standard funding mechanisms like ACH.

Do you guys have a target in mind for Instant Transfer? Could it get to 5% to 10% of volume, like a longer-term target? Or...

Yes. We haven't laid out specific targets. We're probably moving away from individual product targets and more to, as we mentioned on our last earnings call, kind of ad valorem as a category, fixed fee as a category. And we're at 10% now in the ad valorem and we think that can be much, much higher than that. And Instant Transfer will be a part of what drives that adoption for sure.

Got it. Is there a target for the ad valorem? The 10% over time, does that get to 40% over a time period?