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

I'll get kicked off here. Apologies for being a little late. Got stuck in traffic on the way into the room, but for good reason. Here to see a very exciting company, Bill.com. We have both CEO, Rene Lacerte; and CFO, John Rettig, so thank you both for joining us. Before we get started, brief research disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

So maybe to get started, a question for you, Rene. And it's really around sort of the foundation of BILL. And I think it's an important time to sort of come back to the foundation of BILL and what you guys were looking to build with this company and this distribution strategy. So you can start with sort of that big picture of what's the kind of central value proposition that you're trying to solve here? And why this distribution strategy to get at it? And why do you think this is going to be a durable mode for the company, going forward?

Great. Well, thank you, Keith, for having us. When I started thinking about the problems out there, I realized that SMBs were painfully unaware of the inefficiencies and the operations that they used to run the business. And that was 16, 18 years ago, I started thinking about that. But as I started getting enamored with the capabilities that software would be able to deliver and actually automate the financial operations, which is what we've done, I also realized that in order for us to extend into SMBs broadly, we would need to actually go partner with people and companies that the small SMB is trusted. And so that's the focus on the distribution ecosystem, was we were going to go direct and we're going to go to accountants. We're going to go to financial institutions. We're going to go to other partners that actually could help, essentially be a possible, to kind of help businesses understand that, "Hey, they were doing something terribly inefficient, and we actually made it better." So that became kind of the cornerstone, and it became a cornerstone of our platform strategy, which was we're going to be accounting software agnostic. We're going to make sure that we have as many payment choices as possible. We're going to make sure that we drive process automation through every part of the financial operations that a business has, and we're going to focus on the operational processes more than anything else. And so that all comes together into the ecosystem. And then part of the ecosystem that we've built and part of why I think it is a durable competitive advantage is we've designed all this from day one to actually think about accountants as an example. And we give accountants tools that help them manage many, many clients across all different types of platforms that they might interact with. The accounting software, for example, does not matter to the accountant if they're on BILL. At the same time for our financial institutions, we made a platform that was able to be white labeled into that particular distribution strategy. And all of the distribution strategies lead to our network. And that's the 4.7 million entities that uses us to pay and get paid. So all of this was by design in building a platform from day one. First, I got enamored with the problem and then I got enamored with the distribution system, and they worked very well together.

Got it. I feel like the story has progressed significantly over the past 2 years. There's been multiple acquisitions, new distribution partners, new product launches. With all those changes in place, can you talk to us about sort of the focus on a go-forward basis? What's your top 1, 2, 3 priorities on a go-forward basis with the perspective of all the change that's taken place over the past 2 to 3 years?

Yes. The first thing I would say is we've defined and created this category, financial operation automation. And we've been focused on that for -- since the beginning of the company. And one of the ways we've done that is we continue to redefine our category. And so if you think about what BILL was prior to the acquisitions, we now have spend management. We said that was something that needed to be part of our category and something that we needed to include and provide for our customers and our partners. And so when we get to the top priorities right now, it is a significant priority and important priority for us to make sure that the user's experience, the customer when they come, that they have a unified experience. If they have a chance to see both kind of the core BILL platform and the spend management capabilities that we now have and the AR capabilities that we have across our network. These are all things that we think of as being job one, is kind of creating that unified experience. And it's not something that we expect overnight. It's something that we're going to continue to make progress on and continue to redefine as we do that. The second would be then bringing that overall platform strategy of continuing to add to the capabilities and bringing that to our ecosystem and our partners. So you've seen us continue to say, "Hey, with our partners, how do we do more with you?" So it's not just the check and ACH. Can we do card payments? Can we do international? These are things that we will continue to leverage. And the third is going to be to continue to add innovative payment products. So the example that we talked about last time, which is in the early stages of what we would call a pilot, is our invoice acceleration working capital capabilities. And so we're early in understanding how to make that important for our business, but we know the data we have is unique. And so those would be the top 3 priorities. It's always going to be around doing that. And ultimately, it comes back to our long-term vision, right? Our long-term vision is, I guess, the way we think about it is that accounting software and the systems behind that, that's not the center of the universe for the way SMBs operate. The center of the universe is financial operations. How do you do things day in and day out? How do you -- what are the inefficiencies you have? And how do you automate those processes? And so we believe having the capabilities on processes, that insight around those processes is what is going to be critical for SMBs, going forward. We're just kind of in the early stages of adoption, if you will, like 180,000 core BILL customers, 400,000 across the platform against the market of tens of millions, right? So lots of opportunities in front of us.

Got it. So in terms of priorities, it's unifying the solution set into one sort of platform for your customers to getting the partners to pick up a broader set of that platform. And three, it's further innovation and continue to innovate the platform on a go-forward basis. And just to dig in on one point that you made, because I think it's a debate within software. In software, oftentimes, we talk about data gravity and data being sort of a core foundation. And I think a lot of investors think that means it's got to be the accounting software. The accounting software is where is your sort of core chart of accounts. This is where sort of your financial data resides. But you're making the arguments more about the process. It's more about the workflow that the SMBs are really worried about.

Yes. I think I was at a conference in San Francisco, I don't know, probably 8 years ago with accountants. And the accountants kept saying in that conference, pick BILL first, then pick the accounting software, right? And so that's the thing I keep coming back is that the processes we've automated, how we enable our firms to be able to do this across all the different needs that they have, they have small clients, they have large clients, they have midsized clients, our abilities and our [ counsel], if you will, that we give to accountants to be able to manage all their clients and all the things they're doing is that their core process automation for financial operations, it starts with BILL.

Because there's going to be more potential to differentiate and improve your processes than there is to differentiate on your core accounting system?

Yes. I just spent a lot of time thinking about inefficient things in life, and there's just so much inefficiency in operational processes because they haven't been touched with technology yet. And that's where we're going to -- that's where we've gone, and that's where we're going to keep to go.

Got it. Got it. I think it's a fascinating conversation. But unfortunately, I don't think these investors are going to let us go much further without talking about take rate. So John, I'm going to bring you into the conversation. And talk about last quarter. So in December quarter, you talked about -- where you saw a lower take rate expansion than we've seen historically. And understand it's not going to be linear on a quarter-by-quarter basis, but can you talk to us about sort of the evolution of what you've seen in spending patterns and what you guys have seen in take rate? And does that change the way you're thinking about the trajectory on a go-forward basis, particularly when it comes to take rate?

Yes, it's a good point. So as Rene mentioned, we are embedded in set of SMBs. They run their financial operations on our platform. So when we talk about spend and payment volume trends, we're talking about really the health of the SMBs overall, not just a piece of what they do or what they're recording in the accounting system in the December quarter. We saw about a 13% year-over-year growth. Overall, TPV, it was about 3% sequentially. Seasonally, those are lower than we've typically seen even pre-pandemic, and it reflects the impact of the macro environment and what it's having on SMBs. They're adjusting to the environment that they're operating in. And we saw the most acute changes in what you would normally think of as more variable spend categories, things like contractors, IT outsourcing, tech purchases, both hardware and software, advertising is one we've talked about for a couple of quarters now. And they're pulling back in those areas. So we've kind of taken those trends into consideration, the continued uncertainty in the macro environment. We provided some estimates for the current quarter in TPV that suggested seasonal patterns that we normally see will continue, which is on a quarter-to-quarter basis, in the March quarter. TPV per customer is down about 7%. That's what we normally see even in a strong macro environment. And so we've added an additional layer of uncertainty, where we think businesses will continue to adjust their spend. In terms of the actual monetization associated with TPV, we saw a little bit lower expansion in the December quarter, really driven by a small headwind associated with FX and international payments and slightly higher ACH payments versus check payments, which, at the end of the day, is actually a good thing for us as we're driving more electronic payment adoption. It means that the suppliers are creating accounts with BILL. We have an electronic relationship with them. We can engage, we can market, we can upsell. So we think the opportunity to continue to expand take rate is really years ahead. We're driving adoption of new products. That has actually continued mostly unabated, even though there's a little bit of uncertainty with the macro environment. We're seeing really good engagement and adoption trends, even though slightly lower expansion in terms of monetization. But these things that we're doing to give customers choice, suppliers choice, drive engagement and adoption, we think that's when dollars per transaction, revenue per transaction will follow over time.

Got it. I mean, do you think it's fair to say that the macro environment had a larger impact on the customer's decision to adopt [ ad valorem ] products than what you had been expecting?

I think it's something we're watching for. We think there could be an impact over the next few quarters, given this macro environment, but we haven't seen any direct impact associated with macro on [ ad valorem ] payments at the moment.

Got it. Got it. And then just remind me and the audience, the take rate isn't something that you're managing to directly right? Like in following the company for a while, it seems like primarily, you're looking to get more payments into an electronic payment and a recurring payment type process. And then the take rate will come after. Is that still the right way to think about it?

That's exactly right. We try to drive electronic payments first. We try to give suppliers and buyers choice so that they can elect the right payment method so as to ensure that's going to be a repeat transaction on the platform, like recurring payment streams. That's why we handle the vast majority of our customer spend volume, happens on our platform. 80% of transactions are actually repeat transactions between buyers and suppliers. So we try to minimize friction essentially and drive electronic payments. And with electronic payments, monetization comes over time.

Got it. And talking about sort of that over time, over the longer term, you guys have talked about adoption targets of about 5% to 10% from virtual cards, 10% to 20% for cross-border. What do you need to get there? Is it supplier education is key? Or are there other levers that you could start pulling that you haven't necessarily pulled in the past?

Yes. I mean we're extremely confident in our ability to be able to get to those targets. And it's because we know that the value we provide suppliers and buyers is actually real. The number of things that we need to do is really centered around kind of 2 categories. One is, I would say, awareness, driving awareness that the products are available, whether it's the buyer and the supplier; and then engagement, which both of those kind of lead to lots of different programs and activities. So when we think about awareness, a lot of it's the early days, we're just matching suppliers that were kind of known suppliers. Now we have to drive a little bit more awareness about unknown suppliers and just really kind of helping them understand the benefits, if you will. Identifying and being able to kind of drive the iterative process and the product to create value in that experience, that's part of the engagement side. And so we're always doing both. And when we look at what do we need to do to get to the targets that we've set, it's just to keep iterating on those different things. So the first thing is offering more choice, we think, actually drives more awareness and more engagement. So you've heard us and seen us launch multiple different payment products to drive choice. Sometimes maybe that might be counter to some of the targets we're talking about. But overall, it increases the TPV take rate. And then the next thing I would say is that this iterative product development cycle really is about understanding what are the benefits that customers and buyers need right now and entering that into the product cycle and the product roadmap. And -- so that's all happening. And the third example would be, like we talked about recently with the working capital, invoice acceleration, again, creating more opportunity for us to have choice for our suppliers about how they want to get paid, when they want to get paid.

Got it. Got it. That makes a ton of sense. John, the other part of Q2 that investors have been sort of poking at, if you will, is the net new customer adds came in a little bit lighter than what had been previously signaled. Do you see this as an indication small businesses are pushing out these digital transformations? Was there any potential it could be more of a competitive impact? Intuit's been talking to us a lot more about their payment products. Like how do you see that net customer add impacts in the quarter?

Yes. It feels like it's more macro-induced than any sort of competitive dynamic that's existing in the short term. We saw huge expansion in demand, a big wake-up call from the pandemic over the last couple of years, our net new adds have been really strong. They almost doubled. And in the December quarter, what we saw is healthy demand environment, but a lower conversion environment to where small businesses are taking a little bit longer to decide whether now it's the right time for that digital adoption journey. It's not so much a purchase decision based on cost. We're a very low-cost solution, high ROI, instant payback. But what we have seen is that there's a lot of distractions for SMBs right now. And we're seeing that beginning in the December quarter, and we expect over the next couple of quarters to have an impact on the overall rate of new customer adds. We think that ultimately is a short-term temporary transition, we'll adapt to the current environment and do what we can to help now be the right time for small businesses to start that digital journey.

Got it. So it sounds like top of funnel is still very healthy, getting sort of customers engaged with the overall story, conversions taking a little bit longer than historical, but you don't think it's competitive. You think those conversions over time will come back and will happen.

That's exactly right.

So you take the salesperson's view of it as just a bigger pipeline for -- on a go-forward basis. Got it. Rene, I wanted to switch gears and talk a little bit about distribution and particularly on the FI side of the equation. And talk about the potential opportunity in some of the partners like [ BofA ], right, where you're addressing only the net new customers that are coming in the door. What needs to be done? So how does that relationship evolve that you could start to address the broader sort of existing base of customers than those financial institutions that are onboard.

Yes. And every partnership that I've ever done, the first thing you have to do is deliver value for the partnership, right? You have to deliver value. Customers have to be satisfied and happy and engaged. And as you do that, you have opportunities to do more. I think to your point is that in general, when you think about how businesses are managing their payments at banks, it's ripe for disruption. This technology that they're on is decades old, and it's right for something that's different. The old technology didn't work for me, which is why I started the company, I did 16 years ago, right? So I think the first thing we have to do is deliver value, which we're doing. And then obviously, continue to expand the platform to create more value and hear what their needs and capabilities are and then you match that together. And so we believe the opportunity and what we hear from our partners is that there's significant interest in this ripe for disruption to kind of new more on. But it's also one of these things where they want more -- they want to see -- they want to focus on their new customers first as a way to kind of make sure that it's working to the level that they want to work.

So they garner the proof points with the new customers and then give you entree to the rest of the portfolio once the product market fits there.

Yes. And we've seen that with a number of different partners that we've already had.

Got it. How should investors think about the white space for additional partnerships? You already count some of the largest accounting firms out there. You've done really good on the FI channel as well. Where is the incremental white space? Where does the partnership activity go on a go-forward basis?

Well, I mean, the first thing you've heard us talk about is to continue to extend the capabilities that we have with our existing partners. So that's the first area of white space. Just keep adding more payment products, keep adding more services into the partnerships that we have today. And there's a lot of interest across our partners to do that. And so the next area, I would say, if you see what we've done with accountants as an example, just starting to really help them have this tool set to be able to manage all sorts of payment products that we have across their customers, right? And so I think that's part of the equation. And ultimately, that leads us because what we do here, in general, there's a lot of businesses that serve SMBs. What we've done by creating and defining this category has shown everybody that this is a real business, that is a meaningful business, that it's a meaningful pain point the business is at. And so there's more interest and more opportunity for us to extend into other types of partnerships to your point, the white space that's out there. So all of these activities are things that we process in parallel, and we'll make progress on all of them. We have a very high bar for what we think a partnership needs to be successful. And so that's something that we want to see as the partners are going to be committed and focused on driving the success and not just checking the box.

Got it. Got it. So if we think about the equation for sort of expanding kind of partner activity, is it more so getting existing partners to do more with the portfolio? Or is it more of like just still bringing new partners on?

Well, we have 6 of the top 10 banks, and we've announced others. But as the others come on, we do set a high bar for what it is that we're expecting. So at this point, given the number of different -- the breadth of the platform and the payment products we offer, we've asked our partners to engage with more than just a check in the ACH payment. We want them to do more with us. We think our existing partners want -- we know they want to do more, and now it's just kind of matching the roadmap and getting more on there, right? So the opportunity for us is to continue to enhance and show everybody the value that we're able to bring to their customers, and that will extend into other platforms that maybe aren't on in financial operations the way we are.

Got it. Got it. One partnership that I definitely want to drill in on, I'd probably get more investor questions about this, anything else. I think part of it comes from the fact that there's not very many analysts on my side of equation that cover both Intuit and BILL. They're on different sides of the equation. But a lot of questions about sort of the health of that partnership on a go-forward basis. You guys have a close relationship with Intuit, and they partner with you to the high-end SMBs within their customer base. How do you view the partnership on a go-forward basis, especially as they look to roll out more and more kind of B2B payment functionality?

Yes. I mean I'd say the first thing, it has been a long-standing partnership. We were one of the first on their app store. And if you look at the app store itself, we're one of the most popular apps out there. And because of our approach, we've been able to drive lots of customers that use Intuit products onto the platform outside of the partnership, right? And so the vast majority, obviously, of our customers come from that type of engagement. But the reason the partnership is there is because there's a lot of appreciation for each other for the complementary nature of what it is that we do, right? So our focus and our ability to kind of automate financial operations that are complex, that's, I think, unique. And we have defined and kind of made a difference in how businesses do that. I think the area that we see others starting to focus on is more like a very small subset of what we do, which is some of the bill payment capability but not all of the workflow process automation, not all of the payment capabilities that we have. It's a very focused approach that we think won't necessarily win. Like I was responsible for bill payment actually add into it. I left the company, started another company. And as I continue to kind of focus on trying to do things electronically, I found that, that narrow-focused approach didn't work, which is why BILL came out of this brain, was to kind of solve the broad problem that was out there. And ultimately, the capabilities and the competencies we have do provide, I think, a very distinct advantage for us. So the scale that we have, the amount of money we move and the amount of money that we facilitate and enable across our customers, it's every dollar that goes through our platform, is because we're facilitating, enabling. So when we talk about TPV at the highest level, we're actively engaged in all of the transactions and the processes to facilitate those funds flow. That's unique. And that has created, I think, an opportunity for learning that allows us to continue to differentiate and be valuable. And so we think there's opportunities to do more together, but we also know that our focus is going to be to continue to drive excellence for our customers and the financial operations has so much more to it than just executing a payment transaction. And that -- we know that because we've obviously built it.

Got it. Yes. That's a great answer. I have a margin question I'm going to ask for John, and then I'm going to open up for questions from the audience. There'll be some mic runners running around. So if you have any questions, get them prepped now. So John, a lot of companies over the past year and a lot of companies here at this conference are talking about more of a balance between growth and profitability. Two questions for you in that. Like, one, how are you guys looking to sort of balance that in the near term? Any changes in sort of your near-term philosophy on growth versus profitability? And then on a long-term basis, I think you guys have spoken about long-term margins in the 20% range. Is that still the appropriate target? Or do we need to sort of adjust those, given sort of the M&A that's taken place over the past couple of years?

Yes. Let me start with the second part, the 20%. I would view that as a floor. Like that's a starting point. I don't -- we don't see structural reasons why this business can operate at above 30% margins long term. But to the first part of your question, it's a progression. And I think we are fundamentally in the business of balancing investments to deliver both growth and profitability. We start with a unit economic view of the world, both customer acquisition and retention as well as transaction economics and balancing our portfolio of payments. That leads to being able to manage gross margin expansion, which we've done exceptionally well. And then over time, it's about growing the business in order to achieve higher levels of profitability. We operated with low losses for the first couple of years as a public company. We've transitioned to non-GAAP profitability and generating positive free cash flow. And the next phase for us, over time, is obviously GAAP profitability. But it's all with an eye towards capturing a big market opportunity, but doing it in a way that produces an annuity effect for us and allows us to expand profitability, including at a time when interest rates start declining, and we have less of a tailwind from the float interest and margin that we're achieving today. So these are all things that we're balancing on an ongoing basis.

Got it. Any questions from the audience? I do get a lot of questions [ than you get ]. So Rene, a question for you in terms of M&A and sort of what investors should be expecting on a go-forward basis. It's been a big part of the strategy in sort of building out those capabilities around spend management and AR. Is there still capacity or appetite maybe for future M&A? And if so, how should we think about sort of size, scale and what you guys would be looking at?

Yes. We're always looking to -- into the future to see what makes sense for how we continue to redefine the category and extend the platform. And so that doesn't stop in this environment. We went public to have the capital and the currency to be able to make acquisitions happen. And ultimately, what's the motivating factors? Again, how does that extend the platform? How does that give us something that we didn't have before. And so there's plenty of appetite for us to do the transactions that will actually drive growth for the future of the business and really kind of extend the capabilities to be able to reach SMBs everywhere because ultimately, when you are close to the inefficiency that businesses have, you don't want them to have that and you -- all of us at BILL are very focused on making those inefficiencies go away, we want to reach as many customers as possible to do that.

Got it. A lot of investors think about M&A kind of capacity and the idea that you take on sort of big acquisitions and you have to digest them for a while, there's a digestion period. Does that resonate with you? Is there a digestion period that we're thinking about with sort of acquisitions like Divvy that would sort of sort of limit the capacity for future or are we further along with the...

Yes. I mean I think the concept is a sound framework, and [ kind of ] the question is, how fast do you digest food? Like, I mean everybody is different, right? So from our perspective, I feel really good about what we've been able to do by bringing the teams together, having a unified roadmap across the company, understanding and actually making the culture of work across all the different entities that we've acquired. That's all hard work and I feel really good about where we're at. And so I think, for me, like I wouldn't ever limit myself based on the capabilities of the past because we've learned so much, right? And we feel good about our ability to do more.

Got it. That makes sense. I think I have time to sneak one last one in here. I guess I'll ask a question about sort of the [ ability ] to go up market. You definitely described the company as very SMB-focused and that, that's been your core. We're often surprised when we talk to channel partners about sort of the scale of companies that they think take BILL into. And it's not unusual to hear about over $500 million in revenue companies using BILL. What's the opportunity, from your perspective, with these larger customers? Is there any technical or go-to-market roadblocks that would keep you from addressing sort of a larger customer on a go-forward basis?

I mean I think the first thing I would just comment on is it shows you how inept financial operations automation has been in the past that large companies that have $0.5 billion in revenue that have resources to go actually solve some of these pain points and pay other people are like, "No, no. What BILL has is better." And I knew that when I started the company, and the focus has always been a broad horizontal approach so that we can get the most people, the most businesses on the platform serving them. We didn't take a segment approach. We didn't take a size approach. We kind of said, "No, we have a [ core ] solid approach." And that has worked well for us. And what that means is, when you do your channel checks, that we do get pulled up market. And so as we get pulled up market, as we hear what is working for customers, and they might say, "Hey, we want this type of sync with NetSuite or this type of sync with Intact." And so then we create a [ PO ] sync or whatever because that's what they've asked for, and we have enough knowledge to know that, that's worth doing for them. The broad horizontal strategy, I think, is kind of the power of what you're saying. And it also shows that this problem of financial operations and the lack of automation is real and it's systemic, and we're there to fix it.

Outstanding. Unfortunately, that takes us to the end of our line of time slot. But gentlemen, thank you so much for joining us. Thank you for a great conversation.

Thank you.