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

Good afternoon, everyone. Thank you so much for joining us. My name is Andrew Schmidt on Citi's fintech research team with a focus on fintech software. It's my pleasure this afternoon to host John Rettig, who's the CFO of Bill.com or BILL. Thank you so much.

Now BILL, yes.

That's right.

Great. Good to be here. Thanks.

I think if we just start off to level set, BILL's North Star has been creating efficiencies for SMBs to be an expanding financial operating platform. Maybe just give a high-level overview of how the platform has evolved to further that objective in terms of serving SMBs, and we'll go from there.

Yes, sure. It's a good place to start. So from the beginning, we've been focused on SMBs. We typically have the fewest resources and the least amount of technology sophistication. And we've really focused on helping them digitize their operations, create automation in their financial flows and create efficiency as they grow as a business. We've applied these capabilities mainly from years ago to AP and AR, so the accounts payable and accounts receivable parts of a business. And we started with AP because it's the hardest thing. It's like this really complex process that involves lots of people, both inside the company and externally. It involves paper. And for most small businesses, these legacy -- like legacy processes. So we started with the hard thing. Over time, we've added capabilities. We've enhanced our AR capability to try to create more balance in our network. We've added spend management and expense management and corporate cards to the solution. And so now we're really starting to touch more and more of the financial flows of small businesses. And it becomes a really sticky product, where once they're -- once they go digital for the first time and they're fully invested in running their operation on the product, it's hard to move up.

Yes. Very sticky solution. Yes. And if I think about just your ability to inorganically expand over time, you've been very successful with that. And one of those, I think, is identifying -- first, identifying opportunity and then second of all, ranking, what you go after. Now talk us through that process in terms of identifying the opportunities and then to rank which one you go after first versus another one.

Yes. We start with customer feedback really. We collect data. We talk to customers. We have 400,000 businesses that are using one or more of our solutions now. So there's a ton of interaction. We have a lot of transaction flows and whatnot. So we really sort of listen to the pulse of where are the needs for small businesses. And whether it's building a new solution or innovating with payments, we've done a lot there over the years or acquiring a solution in the case of spend management with Divvy, it's really based on our understanding of where the biggest needs are and where we can create incremental value for small businesses. The more parts of their operation we can touch, the stickier the solution and the more value we can create and extract, like we can grow monetization over time. So that's been important for us. We think about becoming the -- like the central tool set that businesses use to run their business. Historically, we've been primarily around financial operations, and I think that is starting to evolve. As we look at priorities, we kind of think of breadth and depth. The breadth is let's touch more use cases and more parts of a business' operations. So maybe we move from the AP process to the procurement process as an example. There's a whole bunch of things that happen before an invoice shows up and a payment gets executed or further in the back office, maybe there's people solutions around HCM and payroll and things like that. And there's certainly more that we can do around insights and dashboards and whatnot. And we'll, I think, talk in a minute about Finmark, which is a step towards that. That's the breadth, like extend the breadth of the platform to do more for businesses. And in terms of depth, there's more that we can do with payments, right? So help automate more of the payment flows of our customers. Examples, there might be access to liquidity solutions and working capital at the moment of transactional decision-making, and we hear a lot of demand for that. So in our context, the example would be like invoice financing, like help suppliers get paid faster even if their buyer's on extended payment term. We obviously partner with other folks to do some of those things. But those are some of the categories that are of interest to us.

Got it. Very helpful. And then if we could touch on macro. Obviously, it's significant at the conference. Over the last year, we've been talking about that in terms of risks. And I think last quarter, you mentioned that volume per tran on the stand-alone BILL platform has been moderate, but engagement per transaction remains high. It means customers are still engaged. But maybe talk about your observations across just what you're seeing in terms of health of new SMBs across the platform.

It really seems like small businesses are starting to react to the external environment, either they're doing it proactively in advance of seeing some disruption to their business or they've already seen some negative implications in their own demand profile and are starting to adjust. For us, that translates into softer growth, lower growth in TPV or on a per transaction or per customer basis, slight decline. And that's what we noted last quarter. We had a slight sequential decline in TPV per customer when you look at the core BILL business, excluding the financial institution partners. And we're kind of assuming that this is the beginning of this cycle as opposed to a onetime event. So we've built that into our estimates and our assumptions going forward. At the same time, engagement is really high. We still see the same types of activities, usage, transactions on the platform. And then the demand overall, like top-of-the-funnel demand from prospective customers is really solid as well. So we're seeing some slight nuances in spend volume really probably driven by that macro environment.

And then if you could talk through maybe the levers should things deteriorate a little bit more just on the customer spend side, what levers you have in terms of just to sort of power through in the quarter if things do get worse?

Yes. So we're very early in the monetization life cycle given we've rolled out a bunch of new payment products in the last few years, some of which still have low single-digit penetration rates across our customer base. And we have expectations of much higher penetration. So monetization over the intermediate and longer term should still continue to expand. We know that with more payment products, we get a higher share of wallet of our -- the transaction volumes of our customers. So that should also help insulate us. And ultimately, it's a very sticky product. So we have very high gross customer retention as well as revenue retention. And I think these are some of the levers that we can lean on in a slightly lower spend environment.

That's helpful. And despite the environment, you still continue to add customers in a very, very healthy pace. I think 14,200, I think, in the current quarter versus something like 11,000 in the previous quarter. Was there anything unusual or lumpy that kind of drove that growth? And what's the right way to think about new customer adds going forward?

Yes. So I think it was our largest quarter ever of net new adds. So we feel really good about that. And in part, I think it's a reflection of the value proposition of the platform and the unique nature of our go-to-market ecosystem. We did 14,000 customers overall, about 5,100 from our direct and accounting channel, so excluding the financial institutions. And that was better than our initial estimates of 4,000 to 5,000 a quarter, and then we get another 9,000 from the financial institutions. And so it's a really good sign that the demand environment is healthy. And we're still investing behind this go-to-market ecosystem and working with partners, both accounting firms and financial institutions, to grow our footprint, create awareness and drive customer adoption. So I think we're making pretty good progress there.

And what's the right way to think about visibility when it comes to new customer additions? I know there's different dynamics when it comes to FI versus core. So maybe if you can just talk through kind of your visibility.

Yes. We have a lot of control over net new customer adds in the direct and accounting channels. It's our marketing programs, our sales initiatives, our inside sales and customer support capability. So we can see the investments we're making immediately translate into new customers. They end up on a landing page. They sign up for a trial. They decide within a few weeks whether they're going to be customers or not. And so that's why we provide some pretty specific estimates around what we expect in the coming quarters. That's that 4,000 to 5,000 number. For the financial institutions, it's a pretty interesting and I think compelling distribution model because just the reach of the banks that we work with, it's millions of customers that they touch. And they manage all of the adoption. So the sales and marketing activity, the customer support driving adoption. So we have less direct control over that. Therefore, I think a little bit lower visibility into the adds. But as you've seen over the last 3, 4 quarters from us, we're starting to gain momentum with the financial institutions and seeing really good success there.

That's helpful. And I think another question that comes up is cohort quality. So as you see these new customers come on board over the last 6 months, are there any differences in terms of quality relative to historical vintages? Are they transacting at a higher level? Any observations when it comes to new cohorts?

I think they're behaving pretty much the same as prior cohorts. I mean our product over time gets easier to use. There's less friction. Onboarding is simpler. They get up to speed faster. They're adding more users, getting more of their transaction flows to be digital and automated faster than, say, 2, 3 years ago. And that only continues to improve. So we feel pretty good about that. Other than that, I'd say given the price point of our product where we sit, price isn't like the most important consideration. It's more about is the time right to adopt a new solution? And the one thing that's happened, obviously, in the last couple of years is the pandemic was a wake-up call for small businesses. So overnight, that created a ton of awareness about the need to operate differently if you want to insulate your business from being disrupted. And so this move to digital solutions, to automation, to platforms that help eliminate point solutions, that trend is here to stay, like it's -- we see this playing out in the market. Not all businesses who became aware have adopted yet. We have a long way to go from that respect. But there's really high intent and interest in adopting solutions like ours in the market.

Yes. And it sounds like that tailwind continues.

I think it's -- I mean, the market might be the same size but it's maturing a lot faster than it may have without the pandemic.

That's helpful. And then you touched on this earlier, but if we could dig into it in a little deeper level, just the monetization expansion. I think last quarter, you mentioned you were 10%-ish of sort of TPV in terms of ad valorem payments, which drives sort of higher margin, higher economics. Just talk through kind of the levers that you have over time to increase the -- just to increase the monetization and drive that percentage higher.

Yes. In the June quarter, ad valorem was about 10% of TPV. That includes all of our variable price payment products. So Pay By Card if you want to fund your payments via credit card instead of an ACH from your bank account, virtual card payments, FX transactions for international payments. Divvy card spend is in that as well. And most all of those products monetize much higher with very high gross margins versus the fixed-price payment offerings that we have, which are like ACH payments and check payments and things like that. So the interesting thing is 90% of our volume is non-ad valorem, which means it's fixed price, very low monetization rates. And so as we add payment products and we drive adoption of these products by offering choice to both buyers and suppliers and funnel them to the right method for them, that creates a recurring transaction. That's our goal. It's like we want transactions to repeat on the platform. And over time, we know that we can drive expansion in that 10% of ad valorem. And that's what will support transaction revenue growth over a long period of time.

So to be clear, it's not about steering customers, it's more about giving them payment choice where it might be a little bit more convenient to do choice A over choice B, for example, and then they choose that choice A as a recurring payment method?

Yes, that's exactly right. So I can give you an example with what we call Instant Transfer, which is real-time payments. We offer that product to small suppliers in our network who have an invoice that's outstanding from a buyer, but maybe it's not going to be paid for a week or 10 days or something like that. We can offer them a choice of receiving cash today, like in minutes, seconds, not days or weeks. And a lot of small suppliers, they're independent contractors. They work on projects, and they manage their cash flow literally invoice by invoice. It's not a big portfolio of projects. So if it's the end of the month and a lease payment is coming due, getting paid on a Friday is really important versus Wednesday of the next week. And there's lots of analogies in -- with other companies with similar products for small businesses or consumer-like personas where whether it's Square Cash or Venmo or other products. And we're kind of following that card. It's a choice that is made by the supplier. And if they want a slower payment that cost less, we have that available to them also.

Got it. Very helpful. Let's switch gears to distribution. I feel like in addition to the platform, distribution has been kind of the secret sauce for BILL over time. Maybe you could just talk about the white space remaining across distribution channels. In terms of existing partner penetration, how are you thinking about that?

Yes. So to start with, serving SMBs is really hard. Like you got to get the economics right. You've got to find them. They have to become aware of you. You've got to acquire them for the right cost, grow the relationship over time, retain all those things. And so our distribution strategy is a bit of a reflection of understanding the challenges in serving SMBs. And so we partnered with companies that SMBs trust to do business, banks, accountants. We also go to them directly. We want to be wherever SMBs are and make our platform available to them, in some cases, on a white-label basis. They might not even off the top of their head know BILL, but in often cases, it's through a referral or something like that. So that's been working really well for us. It's allowed us to scale. We started with accountants. Like they are the most important financial partner for many small businesses to help them run their business. This is beyond audit and tax and things like that. It's for core operations on their business. And that continues to be, I think, our biggest moat because we have tools in our platform that actually help accountants run a better business. It's not just in service of the end client, although that's what we talk about most. And then more recently, we made a lot of progress with financial institutions. That's going really well. We're penetrating large banks. We have 6 of the top 10. And then we're also increasing our -- the number of products we have available inside these white-label platforms with the banks. Over time, that's more a choice. It's also more monetization opportunities for BILL. So it becomes a bit of a flywheel, what we're doing with our go-to-market ecosystem. With that said, I think there's more that we can do down the road. Our aspiration to be that central system that businesses use to run their financial operations and manage their financial flows means that we want to be connected to all the systems that businesses are using so that we are able to present a unified view of their data, provide insights, reporting, dashboards and things like that. So I think there's more that we can do around connecting to other parts of the ecosystem and our go-to-market. We haven't talked about specifics around that, but I think there's a lot of opportunities there.

That's helpful. That was my next question. I appreciate you addressing that in terms of channel opportunity. Has what you're displacing changed at all? Or is it mostly continue to be sort of Excel spreadsheets and things like that?

Yes. It's mostly that. I mean we acquired 14,000 customers last quarter. Almost all of them are doing something for the first time. It's kind of hard to believe because as consumers, we've all gotten digital, like the concept of writing out checks or reconciling or getting an approval on a piece of paper, it just doesn't exist. It's not true with most small businesses. They are many, many years behind. And so the biggest challenge has been awareness and inertia over time. And as I mentioned before, the pandemic has really changed that. So attitudes are different and businesses are much more open. But it's not -- the market is not in a replacement or upgrade cycle. It's in an adoption cycle. So things are happening for the first time. And I think we have many years left of that adoption cycle before the market starts to really mature.

Got it. That makes sense. And then I think a big theme you've touched on over the past 6 months [ or a year ] has been platform unification obviously, with the Divvy and Invoice2go acquisitions, bringing core BILL, Divvy and Invoice2go together. What's been done so far, and what remains to be done? And then when we get to the other side of platform unification, what are some of the benefits that we can envision?

Yes. So we've made a lot of progress with our integration efforts, starting with people. So we have a consolidated organization that's aligned functionally. We don't have 3 separate companies. We have connected our solutions via SSO to make it easier for joint customers to use the solutions. We've connected the back ends of these solutions to help do things like understand the identity of a user so they're not 3 different people across 3 different solutions. And then now the next big thing for fiscal '23 and perhaps beyond is that user interface, that customer experience to where they can have one solution and many products and features underneath that solution. We're working hard on that. And we expect that as these products get more integrated in that, that front-end customer experience evolves, that's where we'll have a much bigger like cross-sell and upsell opportunity, both for existing customers because they'll have a much easier way to discover the products that we have and then especially with new customers, where at the moment that they're open to making a change in how they operate, adopting a solution for the first time, they'll be exposed to all of our capabilities. And that will really help drive adoption of multiple products at the point of decision-making. So we're making really good progress with raising awareness and driving cross-sell, especially with the Divvy solution across all of our channels today. But we think that's just small steps relative to where we can go once we have a truly integrated platform.

So with the integrated platform, single SSO and such, does that make it easier for future acquisitions kind of bolt on? Meaning, are you going to a larger replatforming to where if you do another acquisition of an adjacent capability where you can just kind of integrate it and kind of bolt it on to the existing platform versus going through another replatforming?

Yes. I think it's fair to say that we have much more of the technology integration playbook now built out, having done a couple of larger transactions. We obviously announced a very small transaction recently, but we're going to be able to leverage work that we've done and get to market faster as we continue to do additional transactions.

Got it. Very helpful. And then I just want to jump to labor expense. Obviously, we've seen a number of private companies announced layoffs and things like that. How do you feel about the current status of the cost base? Do you feel like it's rightsized? Or are there opportunity -- obviously, there's always opportunity to be more efficient. But how would you characterize it? Is there more work to be done in rightsizing? Or do you feel like you're where you need to be from a cost base perspective?

I'd say that we tend to manage with a multiple year time horizon. So since we've been public, I think we've done a good job at expanding gross margins, reducing losses more recently, transitioning to non-GAAP profitability. And that didn't happen overnight. It's by the evolution of the business, creating scale and increasing transactional margins. And I'd say that comes from having to be efficient in serving small businesses. Like from the beginning, we've had to build some of these muscles. I think we'll create operating leverage as we get bigger. One thing that's really important to us is that we fully fund all of our top initiatives. And so that is sure. I'd say we're still expanding investment in the platform and research and development. We're probably on balance, hiring slower into this environment than we were, say, last year prior to the changes in the macro. And we're obviously monitoring the situation closely, and we'll adjust and adapt as needed. But we feel really good about the progression that we're making from a financial performance standpoint.

That makes sense. And it's a good segue into just talking about the profitability for -- congrats on the adjusted NI flip by the way. It's good to see. How should we think about the approach to growth versus profitability going forward? Should we expect reasonably steady profitability progression? Or are there going to be times where there's going to be more investment where it might pressure profitability? Just thinking about that sort of trajectory of profitability going forward. Any comments there?

Yes. I'd say, first, it's a balancing act. It's not really a trade-off at least at this stage of our development. One, we're going after a really big market opportunity. And we think that there's years of growth ahead. And so our bias to invest kind of makes sense in that context. Like there's a lot of white space or a greenfield opportunity in the market. So we're going to continue to invest. We have -- we are a beneficiary of the rising interest rate environment as it relates to float revenues. And that's providing a tailwind to both enhance our financial profile, our ability to generate positive free cash flow in the short term, non-GAAP profitability and invest for multiyear growth. So we take a multiyear view of this. And our strategy is to build the organic earnings power ex float of the business such that we grow through this economic cycle and end up at the other side not relying upon float for profitability. But in the short term, we'll use it to our advantage to both drive profitability and incremental investment, particularly in the platform.

Got it. That's helpful. And then when we think about capital allocation, obviously, you've made 2 -- well, 3 now, I guess, Divvy, Invoice2go and now Finmark, which we'll talk about in a second. But what's the appetite for more M&A? Do you -- if you see something that's interesting, can you be opportunistic? Do we need to wait for more integration to occur in terms of platform unification? What's the thought process there?

I'd say we're much more prepared now than, say, a year ago after we had just done a couple of acquisitions. We always start with the near-term priorities, which for fiscal '23 are around this unified platform experience, expanding our distribution ecosystem with partners and driving more adoption and optimization of payment products. So we're going to focus on those first. And then where we have other priorities to expand the use cases of the platform, we will be opportunistic as it relates to potentially doing some of those investments inorganically. And I think we're well positioned from a capital standpoint and now from an operating standpoint with playbooks and teams that are on the ground with experience to help us with these things.

Got it. Okay. It kind of ties back to what we were talking about earlier in terms of having a platform to pull things on to in terms of [ input ].

Exactly.

Yes. Yes. Makes a lot of sense. And then if you could touch on Finmark. When we think about B2B payments, treasury management is one that we think where there's a big opportunity in. Bringing it down to SMBs and democratizing it is super interesting. Maybe if you talk about kind of your vision in terms of Finmark, what that brings to the platform and then how integration and distribution can evolve?

Yes. We couldn't be more excited about like a small transaction like this. Ultimately, it's a product purchase. It's a planning tool for SMBs and where they started with the start-ups as well. And it helps companies with budgeting and forecasting and reporting and things like that. The foundation of it is an API strategy to ingest data, aggregate data from all the systems that a small business uses, so point-of-sale system, CRM, payroll, whatever data is important in the financial operations of the business and then have easy to configure and use dashboards to present insights. And so that's the most exciting part for BILL. We think we can take this type of tool to the masses, if you will, if you want to call it that, the SMB long tail. And BILL has traditionally integrated with accounting systems because we're -- we've been focused really on transactions and financial operations like automating that. With Finmark, it's maybe the first step towards a strategy of moving from financial operations to financial insights and financial management, over time helping SMBs run a better business, not just automate their operations. And so we could see the dashboard and insights capabilities of Finmark being integrated into BILL and maybe someday actually being the entry point, the starting point for the BILL experience being this insights capability.

Yes. It's super interesting because if you think about the base being like automation and expense efficiency and then building on top of that in terms of actual like revenue-generating opportunities and where you can actually create actual insights, that's a good place to go.

Yes.

When we think about -- I guess, just switching gears to your supplier network. Supplier acceptance, enablement connectivity, important part of the -- an efficient B2B payments processing monetization. What do you do in terms of -- or what's your approach to sort of supplier enablement? Because when we think about B2B payments networks, it seems to be what differentiates good B2B payments versus maybe some others in terms of efficiently doing that.

Yes. So I think the supplier network, we have 4.7 million network members as of June in our network. It's like a big data problem. So how do you see the signal through the noise? And what we've tried to do is cleanse the data and create connections between buyers and suppliers. We've leveraged that capability to drive adoption of some of our newer payment types of -- virtual card payments would be a good example, identify merchants in the network who accept card, identify what kind of payment that they want. International payments with suppliers outside of the U.S. would be another example, identify who they are, give them choices and then over time, have an active dialogue with them. So one of the reasons that we brought supplier enablement in-house from a third party that we were using when we launched virtual card payments is that it's not just to grow penetration of virtual cards or international payments, although those are near-term positive things for the business, it's to establish a connection with suppliers so that they become, over time, more like a customer. And that helps us with every new product launch, every new payment capability that we add to the platform, we now have a source of distribution to drive adoption and usage of those payment types. So it's -- I think it's a very important strategic capability. It's an asset of ours that over the longer term will create a lot of balance in the network. This concept of a 2-sided network really comes to life because of the supplier enablement capabilities.

And what else can you add to the platform? Obviously, there's some distinct synergies [ launching of the sale ], Invoice2go for certain customers, not all of them, but did have to fit some supply chain finance, for lack of better word, opportunities as well. What else -- how else can you sort of bring value to the vast network that you've created? What are some other opportunities?

I think the biggest one is automation. So there's a lot of friction in receiving payments. We've spent years and years focusing on eliminating friction in the payments out space like AP automation from the buyer side. And I think now creating automation and reducing friction on the receiver side is the next big thing. So we have millions of network members who are receiving payments, but in many cases, they're not using a BILL tool to create automation and efficiency there. There's still some manual intervention, whether that's with an ERP system or some other tools. So I think that's the next big frontier for us. We've started to talk a little bit about how we apply some of this automation capability in a self-service way to international cross-border payments where suppliers can elect whatever currency they want to be paid in and that sort of thing. That's a small example of where through the product, we can create automation for a supplier without any manual intervention.

Helpful. Before we go to maybe a wrap-up question and any closing remarks you might have, you do scale up towards the mid-market. Your sort of the assets today are more focused sort of on small businesses, but you can go up to kind of mid-market. What's the appetite in terms of moving up to the -- scaling up to be fully sort of operational mid-market, meaning integrations with mid-market ERPs and things like that versus just serving the small to mid, for example?

Yes. Our core focus is still small and medium businesses, but we're having good success with mid-market customers. We try to take a horizontal approach, what are the needs of most businesses. We apply that to mid-market as well, so we don't go vertical. It's not a vertical industry solution. And we're having success because our product, our platform is simpler. It's lower cost. It integrates with other tools. And that's where we'll continue to play with mid-market, I think. We're not going to customize our platform just for larger businesses, though we'll create features and solutions that any customer can use. Maybe the larger ones like security or batch payments or other forms of automation might be more applicable for them in the near term. But I think that's going to be our approach.

Very helpful. And then just a kind of a wrap-up question and then if you want to add any closing remarks. But obviously, you talked about earlier, there are many opportunities to expand the platform. What's the vision for the platform and the business over the longer term?

Yes. We're trying to define sort of the future of finance and financial management for SMBs. We started in a fairly narrow but complex area around AP and AR and workflow and things like that. And we think over time, we can expand that to encompass more of the operational and management needs of small businesses. And by doing so, we can be the go-to system when small businesses think about managing their money. We're not there yet, but that's, I think, the promise of how we're investing in the platform and the trust that we have from small businesses that we've developed over a long period of time.

Very helpful. Great. John, thank you for joining me.

Thank you.

Appreciate it. Thank you all for joining this conversation. Appreciate it.