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

Good morning. Next up is Bill.com. My name is Brent Bracelin. I'm Co-Head of Tech Research here at Piper Sandler. Joining us on stage here is John Rettig, the CFO of Bill.com. John, welcome to Nashville.

Thanks, Brent. Great to be here.

Absolutely. So 3 main takeaways. We hope the audience comes from this 25-minute discussion with, one, a better understanding for the 3- to 5-year vision strategy here. Two, [ rolling ] Automation 2.0. We've talked about automation a lot over the last 2 days. We'll dig in a little bit to how -- understand how Bill.com has a role here and how they see automation as an incremental driver of spending priority. And then obviously, there's a lot of discussion on what could go wrong, 40-year inflation high here, but I'd love to pivot and talk a little bit about what can go right as well. So let's start with the 3- to 5-year vision. As you think about -- what does Bill.com want to build? Do you -- envisioning this business being, you bought a couple of businesses, walk us through the endgame as you think about where you're going?

Yes, it's a great place to start. So we've been on a great growth trajectory recently, and it's sort of just the beginning, though. I think there's a ton of momentum in the business this last quarter. We had 156% total revenue growth, 77% organic revenue growth. And we are kind of leading the charge for small businesses to automate their financial operations. And we have a big lead in this space. We've focused on that small business market where there's millions and millions of businesses who are using mostly analog solutions. And we've done a bunch of innovation with payments. And what that has helped us do is become really entrenched with our customers. And in doing that, we listen to what the pain points are. And that's what drives our vision, our strategy going forward. And what we hear is that companies want to move money faster. They want access to -- instant access to capital. They want to have fewer point solutions do more in one place. And so we take all of those things, and we've built out a product strategy that is guiding us towards doing more and more for small businesses beyond just the lead that we have now, which is in accounts payable, accounts receivable, and more recently, spend management. And our goal, our vision, if you will, over the next 3 to 5 years is to really be the global leader for SMBs to automate their financial operations and touch more of the commerce that happens between B2B companies.

You've made -- to that end, you have acquired Divvy, acquired Invoice2go. As you think about further building out that with that stack and what some of those customer pain points are, what are other areas are you thinking about? And maybe if you can't talk about those, maybe talk about where you wouldn't go. Obviously, you're in that back-office space, would you ever consider front office? Is there a line in the sand that you wouldn't try to go solve?

Well, I mean if you take a long enough time horizon, I think there's a ton of opportunities. We are clearly a leader in AP and AR automation. We've invested a lot behind AR side, recently with the Invoice2go acquisition. And we're starting to integrate that product, and we'll turn it on to our network of 4.7 million members. That eventually drives a lot of growth. We acquired Divvy in the spend management space. That's just the beginning. It's a huge market, the corporate card opportunity along with expense management and spend management. So I think our primary product strategy is anchored on expanding our payment offerings. So again, by doing more for customers, touching more of their transaction flows, they leverage our platform, we become stickier for them. Two is increasing our share of wallet with customers, just more use cases in the platform to manage more of that commerce. We think of things like the transactional activities involved in buying and selling between businesses. Right now, we kind of start when there's an invoice or a payment to be made. But there's a ton of activities that happen before that, that we think we can help enable and create some automation for. We're not necessarily highlighting the -- like the front office or the e-commerce space as a growth strategy, but we do think there's a ton of opportunities in B2B commerce for service businesses that we can address with the platform. If you think about it, 70%, according to U.S. Census, businesses are service businesses. And so that's really where we're doubling down.

Interesting. International, you guys largely started in the U.S., Invoice2go kind of gives you some tentacles internationally. How important is international as a strategic growth factor here over the next 3 to 5 years?

Well, fast forwarding, it's a big opportunity. But I mean we've been building, if you think about it, a category, this whole category of financial operations automation in a huge U.S. market. There's 6 million businesses with employees in the U.S., another 25 million that are sole proprietors don't even [ hit ]. So that market is huge. We're going to continue to focus there. It's only 3% penetrated in terms of companies that actually have a solution. But along the way, we've also built a foundation for international expansion. We started by launching cross-border payments. That showed us where the international suppliers of our U.S. customers are. Then we started working with those suppliers directly to give them more choice about how to receive payments. And the most recent step was acquiring Invoice2go, which brought us 200,000 customers across 150 countries. And so we're now at the stage where planning our priority markets, how we enter, whether we partner, build or acquire. Those are -- it's now in scope over the next few years for us to expand beyond the U.S. But our focus is still making sure that we own the U.S. market.

You have an interesting and unique and differentiated distribution channel as I think about like your financial institutions, as you think about the top 100 accountants, largely consuming and engaging on the AP product. That's the core platform. Are there broader opportunities to continue to kind of cross-sell all of the platforms via those distribution partners, why or why not?

I think there is stepping back, we are definitely a trusted partner across this ecosystem that we build. If you think about financial institutions, we work with 6 of the 10 largest U.S. financial institutions. And if you look at their technology spending, it's billions, tens of billions of dollars a year they spend, yet they're trusting Bill to serve their customers. So we have a very interesting head start in that segment. We work with 80 -- more than 80 of the top 100 accounting firms, 6,000 overall. Also accounting firms and financial institutions are trusted partners for small businesses, which is kind of why we target those segments. And our near-term priority is really to bring more of our solutions to these partners. So examples would be having our AR product or a spend management product exposed inside the white label solution that we have with banks, bringing our Divvy spend management solution to the accountant channel, which is not something that started until recently and really driving more adoption. We do have a track record, a history of leveraging success with partners to drive more growth. We've done it with CPA.com, we've done it with JPMorgan, done it with Bank of America. And that's kind of a strategy that we're going to continue to double down on. And we think it provides this annuity effect of additional growth for the business from relationships that we already have.

Felt like there's some great cross-sell opportunities across the broader portfolio with some of those FI partners. What about just adoption in FIs, are there things you can do to accelerate broader adoption? Is it marketing spend? Or is it just converting their existing large small business customer base into paying customers? Just trying to think through the levers inside of the existing FI partners.

Well, most of our history with FI partners has been in the commercial segment, so a little bit larger businesses, call it, $5 million to $10 million to maybe up to $100 million of revenue. And our success there has opened up opportunities to serve the small business segment at some of the same banks. And those are typically -- you're not talking about tens of thousands of customers, [ there is ] millions of customers there at play. So one of the key things that we're doing is creating an easier, simpler product experience that can be adopted on a self-service basis by customers of our financial institution partners. So it doesn't require, isn't dependent upon treasury sales, for example, or other resources at the bank. And over time, we think that is one of the strategies that will lead to greater adoption across the financial institutions.

And that self-serve version of the product, is that something that would be out in the next couple of years, in the next year?

It's out now. We've launched a small business focused product with Bank of America just recently last fall. That product does have an upgrade path to our full solution. So for more advanced or sophisticated customers, they have a path to the core Bill experience that exists with those larger commercial customers. But making sure there's an easy entry point that's more consumer-like is going to be important to unlocking like mass adoption across financial institutions. It doesn't happen fast. As you know, banks tend to move quite a bit slower than, say, we do. But it's an investment that we've been making for a number of years, and I think we're still excited about the size of the opportunity.

BofA, it sounds like they're having some success with the self-serve. Other FI partners in recent -- is there a gating factor why that couldn't be more broadly adopted by other FI partners? Or is there kind of an upgrade path you have to invest in to get there?

Yes. It's kind of a means to an end. So our focus is on scaling with existing partners as a first step. And we think that success with these partners opens up more financial institutions down the road. So as opposed to getting spread too thin with new implementations, we're really focused on driving success. It's part of how we -- as I mentioned, how we got to the BofA small business, is success with commercial. So that's our current strategy. But we think it opens up other businesses. We are focused on the large banks, though. So I think top 10, top 20, 25, not the 4,000 banks that are out there. That's a different strategy for -- I think, for another time potentially.

Great. I'm going to open up to the audience, if there's any questions around product or strategy, before I pivot to this narrative around Automation 2.0. Any audience questions here for Bill and product strategy that we didn't cover? Okay. Let's pivot to Automation. 2.0. It's a big theme that we're obviously highlighting over the last 2 days here, this idea that labor costs, wage inflation is real. It's in every industry. And that, coupled with basically a maturing [indiscernible] cloud data, machine learning, has created an opportunity where I think automation is going to be an area where we see increased spending priority. And so as you think about the challenges facing some of these small businesses, inflation, macro headwinds, how important is automation and your role in automation for some of these small businesses -- and how is it resonating with users?

Yes. So the average small business is closer to the survival stage than the optimization stage. And so I don't think they wake up and think about an automation strategy. But the reality is they have pain points that make it difficult for them to succeed. And most small businesses today continue to rely on legacy manual analog methods as it relates to financial operations. They probably have technology for accounting. They probably have it for payroll, maybe some other areas. But all of the process in between is largely analog. And that pain point manifests itself as a distraction. They've got to devote time and people to manage a cumbersome, time-consuming process that ultimately just distracts from whatever their real business passion is. And so that's the kind of the pain point where automation and going digital really resonates with small businesses because they get to free up time to do something that's more valuable.

[indiscernible] sense of urgency is less about kind of trying to sell an optimization. It's really around like, hey, you're struggling, you're underwater, here's a solution to help.

Operate differently, yes. And if we go back a few years, if you would have asked, hey, what's the #1 obstacle to growing faster, further penetrating the market or something like that, 2018, 2019, we would have said inertia by small business. They just keep doing what they're doing. There's not a catalyst. And then the pandemic came, and it changed awareness almost overnight. It doesn't mean all businesses have changed their operations yet, but they become aware of tools that they can leverage to run their business differently. And that's a lasting sort of impact on the market.

On one hand, there are a lot of pressures on small businesses and in a tough economic environment, they could actually fail more. You can see higher churn. On the other hand, we could see an increased need for automation software. What are the signals you see in the last 6 months relative to either top of funnel? Or just any sort of metrics that you see there is either slowing of maybe some of the appetite to kind of invest in this area? Or have you seen any sort of signal that there's stress in the ecosystem you're selling in?

If anything, I think we see increasing demand, maybe even accelerating demand. And it comes from the place that -- like if you look at the market that we're going after with small businesses, it's not a mature market where we're in an upgrade cycle. It's a market where people are doing things for the first time. They're not replacing a solution with something that's better or lower cost or whatever. And so over the last, say, 12 to 18 months, we've seen some very interesting trends around changing intent by small businesses. And what I mean is they close at higher rates, meaning they become customers and they start paying us at much higher rates than they used to. They start to get up to speed on the platform, adding users, doing transactions, leveraging the system much faster. We retain them at higher rates. Pre-pandemic, we were at 82% gross retention, as of this last June, we're at 86%. And they adopt more products faster. Our revenue retention has grown to 131% in the most recent quarter from call it 110% when we went public just a few years ago. So that's on the small business side. And then there's some interesting trends that are happening with larger mid-market businesses, too, where we see signs of increasing demand, which if you think about it, most mid-market businesses have made big investments in technology already. They have an ERP system, some other forms of automation, yet they're finding value in a low-cost, easy-to-use solution that they can manage and configure themselves without consultants and whatnot. So even more sophisticated businesses are trying to find ways to change the way they operate.

And remind us, is mid-market a big part of the business, smaller part of the business? What is it today? And what could it be in that company?

Yes. We wake up thinking about small businesses. They're the most underserved, but we see demand from larger businesses, and we certainly support that. What we don't do is customize our platform for big customers. We're not doing enterprise sales. It's all high velocity inside sales. And we partner with like the accounting and ERP systems that most businesses use whether that's NetSuite, Dynamics, Intact, things like that, not the Workdays and the Oracles of the world. So it's a growing part of the business. I'm careful to always say we're not moving upmarket, though, or pivoting. What we're doing is capturing demand that's coming our way while we continue to focus on the small business core of what we do.

Interesting. Divvy is an area, talk a little bit about some acceleration in the signals that you're seeing relative to kind of [ buying ] behavior, how they're consuming your product. We were surprised by Divvy last quarter. Divvy had a pretty sharp acceleration in sequential growth, I think 30% sequential growth, north of 30% sequential growth in that business. Maybe let's double-click into Divvy. What are some of the drivers of adoption? And what kind of drove that acceleration in that business sequentially last quarter?

Yes. The demand environment is good for spend management. We've been working on AP automation for more than a decade. And it's still 3% penetrated. We have a long way to go. If you add up all of the businesses that have a, let's call it, a modern spend management tool. So there's some software combined with a card, it rounds to 0 relative to the millions of businesses that there are. So it's a nascent market. And as companies become aware of the benefits of having better visibility and control, real-time decision-making around their corporate card spend, expense reporting, expense management, they're adopting it faster and faster. And there's -- it takes time because it also involves a behavioral change. It's not just a software tool that you plug in, you got to change the way you operate. And I think Divvy's done so good organically at seeding the market, at being a leader in the software solution combined with the card. We're starting to see great reception to that.

And is it still largely net new customers? Are you starting to see some adoption in cross-sell to the installed base?

Yes. We're really happy with the progress on the cross-sell. We did about 2,000 new Divvy customers from the Bill customer base in fiscal '22. That's actually way ahead of what we thought. And that represents kind of customer self-selecting the tool. We do have a small dedicated cross-sell team. But our focus really is around driving product unification, like really getting tight integration between the Bill, Invoice2go and Divvy Solutions before we really start to double down on that cross-sell motion. So the early indications are good. But to your question, most of the -- whether it's customer additions, spend or revenue growth from Divvy is organic. It's their tremendous progress in the market.

Walk us through the trajectory for Divvy.com as you think about like adoption catalyst. You talked about tight integration. Is that 6 months out? Is that evolution over the next 3 years? Like walk us through the -- maybe the step function changes in Divvy, particularly as you think about the opportunity around cross-sell and sustaining the organic growth that they have, which is very high.

It's our #1 priority for this fiscal year is that product unification, the unified customer experience. We won't get 100% there this year, but we'll get substantially there. And that will start to unlock additional investment in that cross-sell activity. At the same time, we think there's an opportunity to seed some of our distribution partners with the Divvy Solution. So whether that's through the accountant channel, as we -- as I mentioned before, or even bringing the spend management tool to our white label solution that our financial institution partners use. Now that will be a different economic arrangement than we have with Divvy directly. But we're seeing a recognition or an acknowledgment on the part of companies in our go-to-market ecosystem that the software is a real difference maker. It's not just about the corporate card.

Great. Let's pivot to the last topic here, which is what could go right. We talked a lot about what could go wrong, we talk a lot about the risk of the business. Let's flip the script here. As you think about next year, for you, it's this fiscal year, what could go right? What can continue to go right?

Well, we saw some softness in spend in the last quarter starting in June, that continued in July and early August. We had some commentary at our last earnings about that. We're assuming a lower gross spend environment going forward. But we have very compelling levers to help mitigate an uncertain environment that small businesses are operating in. First is we are very early in the monetization journey that we're on. We've grown significantly over the last few years, transaction revenues and monetization, but we have a long way to go to continue to drive adoption of some of the new products. The second piece is we're still expanding our share of wallet with customers, which means we're touching more of their transactions. They're leveraging our platform more. As they do that, they become stickier, we become more entrenched in their operations. And so we think that those are important indicators of sort of engagement and growth opportunities even in an uncertain environment.

From a product standpoint, is there a product catalyst that you see as being particularly compelling in the next year that we should pay attention to?

We continue to focus on moving money faster, innovating with payments that touches more of the product flows. We think there's an interesting opportunity to provide access to working capital at the moment of transactional decision-making inside of the platform. In some cases, that might be third-party capital, not necessarily Bill's balance sheet, but having more activities around the commerce that is happening between buyers and suppliers occur inside of the platform.

Inflation, on top of mind with investors this week. Given the take rate model, do you see some of the inflation out there and you capture some of the inflationary kind of -- you hate to say benefit, but there is some incremental opportunity there? Or is it offset by the demand equation?

Inevitably, there's some positive impact from inflation that flows through the spend the businesses have. Obviously, most service businesses feel it first with wages, with employee-related costs and inflation there. We don't necessarily have a benefit associated with that. But to the extent that there are price increases, that does flow through. And obviously, there's a whole equation around what the Fed is doing to fight inflation and rising interest rates, and we have some direct tailwinds associated with that given our position in the flow of funds and the way we manage money and that drives significant float revenue increases.

Well, John, we're out of time here. But thank you so much for sharing your thoughts around the business. And hopefully, you enjoy your time in Nashville. Thank you.

That's good. Thanks.