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

My name is Josh Beck. I cover the software and fintech space here at KeyBanc Capital Markets. We're thrilled to have CFO from Bill.com, John Rettig join us for a fireside presentation. I have a few questions to run through. If others have questions during the presentation, just raise your hand, and we'll try to work those in as well.

So maybe just to start off, high level, obviously, you've been a public company for a few years now. Maybe just help us understand a little bit the evolution of the company and maybe a little bit of the evolution of kind of where you're spending your time, just in terms of operational or strategic focus as well.

Yes, that's a great place to start. So since we've been public, we've really expanded the capabilities of the platform to help small businesses succeed. So we've added features and functionality and simplified the interface. We've added capabilities around spend management and advanced AR. We've created a bunch of automation. We've grown our footprint in the market. We've doubled the number of accountants that we work with, significantly expanded our customer base. We've also scaled the business a lot. We're north of $250 billion in payment volume now. So we've been able to take advantage of some of that scale to create great margin expansion and things like that. We've rolled out a bunch of products, particularly on the payment side, Ad-valorem products that were driving adoption for SMBs on. That's led to a pretty significant expansion in our transaction monetization from south of 5 basis points to almost 13 now. And all that's led to great transaction revenue growth. We've also obviously, transitioned the business to be non-GAAP profitable. We're generating positive free cash flow now. And all of this is, I think, set us up well to continue to innovate for SMBs and further penetrate the market. As we think about what's next, it has a lot to do with continuing to manage the business in a disciplined way, focusing on unit economics, expanding our go-to-market ecosystem. So how we reach SMBs through partners, whether that's financial institutions or accountants continuing to double down there to really help everyone serve SMBs better. And we're excited about that journey given how early it is in the evolution of this market. We're still single digits, low single digits in terms of penetration on a market that's still evolving rapidly. So there's an exciting few years ahead.

Yes. So a lot to impact there. One of the areas you mentioned was doubling the accounting channel. I think that's always been really a bedrock of the go-to-market motion of Bill. I don't think it's necessarily something that's probably on the tip of tongue with investors because it's a little bit uncommon. So just maybe help us understand from the point of view of your accountant partners, maybe how Bill is viewed strategically versus maybe, say, a pure accounting software ledger system and really just help us understand how much more room there is to grow with the account channel.

Yes, our strategy, as we thought about the go-to-market years ago was to try to reach SMBs through their trusted partners, like who do SMBs rely on when they're thinking about building their business, managing their finances and things like that and accountants are in a very important relationship for SMBs. And so we partner closely with them to create more value for SMBs and also drive really good unit economics for us. It allows us to efficiently reach SMBs because accountants serve a large part of the market. And so our platform, we often talk about the use cases and features and functionality for end customers, but we also have a bunch of tools that accountants use to efficiently manage their relationship with their small business clients. And so they can create their own leverage and efficiency and ROI by using our tools to interact with and manage the relationship between their clients. And so we've proven this model out that we really complement accounting systems and other tools that SMBs use and accountants are driving value for their own practice by leveraging our Bill platform in addition to obviously helping their SMB clients run a better business, be more informed, have more visibility into their financial operations.

And discussing maybe one of the other channels you mentioned, FI partners. Obviously, you've had really good momentum. I think you've added almost 30,000 customers in the trailing 12 months. You have 6 of the top 10 banks. Help us understand a little bit about just the conversation that you're having with your banking partners. The way I understood it was a lot of the early relationships were a little bit more commercial bank oriented, and you've seen some of your large partners really extend that to the SMB segment. So just help us understand how that conversation has evolved and maybe how meaningful the SMB opportunity could be on top of some of the commercial success you've had?

Yes. I think we've created a lot of momentum working directly with SMBs, which has opened up opportunities for us to work with these large banks. First, with their mid-market or commercial customers, where they just have more complex needs for automation and workflow and things like that. And that played to our strengths. We've done those kinds of process automation and digital on ramps and things like that really well for businesses. And then the success that we've had with some of the commercial segments at banks has opened up the opportunity to serve more of the small business long tail segment. Now it's early in that journey for us. Some of the increases in financial institution customer acquisition that we've had in the last few quarters has actually been the small business progress that we've made. And we've now got a couple of banks who are focused exclusively on the small business segment. That's helping us create a simpler, lower overhead solution for businesses to get up and running really fast while also having an upgrade path for them to leverage the full feature set of Bill as they grow and their needs evolve and become more complex. So we're really excited about these kind of new set of capabilities that we're able to sell through our bank partners to reach those smaller businesses.

And help us maybe put the unit economic framework on the FI channel, right? I imagine there's a pretty significant CAC efficiency and gain. I would assume, right, there's also probably a little bit lower ARPU because of revenue sharing arrangements or whatever they may be. But just help us understand how you think about the unit economics, which, obviously, we can't really see all of that externally, but just how you manage it. And then metrics that we do look at things like ARPU, how we should think about that versus maybe the kind of core non-FI segment over a longer time period?

Yes. First, we manage unit economics associated with our financial institution partners at the bank level and then at the portfolio across all of the banks. It's less an individual customer. And so we sell to the financial institutions on a wholesale basis, multiyear contractual commitments with minimum guarantees, and that helps align our incentives. Like we're both incented to drive adoption and ensure customer success on the platform. And one of the things we started to do recently is introduce more of our payment products into the white label solution with banks. That will, over time, have the effect of increasing our transactional ARPUs, will generate higher revenue per customer, while the bank is also able to deliver a broader set of products to their customers. It will still be lower revenue per transaction than in our nonfinancial institution channels, but we're really excited about how that is evolving and over time, our ability to have really all of our products enabled across all of our partners. That's really the promise that we're shooting for.

And how would you position that maybe with, say, larger banks versus maybe more mid and small size. I would imagine there's some larger banks that are probably going to have some of their own payment capabilities that they might want to bring to bear. So how would you segment that within the bank?

Yes. That's exactly right. I mean banks are payment companies. And so depending upon the products that they have in the market today to the customer segments that we're serving, we might leverage one of their payment capabilities but enable it inside of our platform. An example might be a virtual card product that we enable inside of the white label solution, but it could be the bank's virtual card product, not our stand-alone product. And then the flip side of that is with smaller banks, and we've had some success recently with a couple of new banks that we've signed, they're taking our whole platform and all of the payment products and rolling that out to customers. So that means our virtual card product, our spend management solution, our FX capabilities. Now it really depends on the size of the bank and the existing products that they have in market. But we think there's a path to enable all of the products, sometimes it's going to be ours, sometimes it's going to be the banks, and we work out the economics of it, it's a win-win for both us, the banks and small businesses.

Okay. And one of the other metrics that I think investors look at, obviously, is RPO for your traditional enterprise software company with really well-defined commitments. I think it could be a very good leading indicator when there's more of a minimum component to it. It really tells you, obviously, a lot less and it obviously is amortizing in the last few quarters. How should we think about that? Is that something that's just going to be lumpy and if you bring in a significant new customer? Or if you hit some new threshold and you exceed minimums, it could move up. Just how should we think about that number down the road?

Well, the RPO, think of it as a floor for the contractual commitments that we have with the existing portfolio of bank partners and our opportunity to deliver higher revenue than that will be based on, first customer adoption, driving more success more penetration in the customer base. And second is increasing transaction monetization. Any amounts over the RPO don't necessarily increase the RPO except when we get to the stage where success with some of the current banks opens up more market opportunity and then we bring on new bank partners, and that's how we'll grow the RPO over time.

Okay. And going back to some of your earlier comments, Certainly, one of the focus areas has been really adding more capabilities to the platform. Obviously, your roots were in AP, but it's much broader than that. It's AR, it's expense management, it's financial planning. So when you think about unifying the experience, there's obviously back-end components, architecturally, there's the way that you present to customers -- just help us understand how you're bringing it together in a unified fashion. And as you do that, what type of benefits do you expect across the business?

Yes, we've made a lot of progress with some of the back-end less visible parts of the technology integration. And this year, this calendar year, we'll start to see the first customer-facing experiences, probably starting with our accountant channel where there is a need to have a consolidated dashboard and set of tools to help their clients manage spend no matter what the type of spend is for the product or things like that. So bringing Bill and Divvy transparency and visibility together in 1 place is something that we're working on. And then over time, it's really just creating more of a one-stop shop for businesses to be able to manage all of their process automation across a simple UI and super efficiently. So it will come out in stages. It's not a binary onetime thing, but we're looking forward to some of the customer-facing milestones happening later this year.

And how many other elements could you foresee adding to this kind of financial operations experience? Do you feel like you've obviously added a number of capabilities, you're working on rolling out the platform. Do you feel like there's many more that you need to add? Do you feel like from this point, it's more of just really refining the go-to-market and the uptake strategically? How do you think about that?

Yes. Well, I think go-to-market evolution is an ongoing thing given the size of the market opportunity. There's tens of millions of businesses, 6 million businesses with employees. So we know there's always work to do there and including adapting to the current environment that we're in, this is a little bit different than during the pandemic. But in terms of the platform, we got a huge lead as it relates to AP and AR automation, and we really nailed that combined with payments, but there's many more aspects to the transaction life cycle, including the front end of what we do around procurement and sourcing and supplier directories, there's access to cash and cash flow insights. We did a small acquisition of a company called Finmark, which is really around planning and budgeting and consolidated insights. We're working on things like working capital for faster access to cash for customers that we know well or suppliers that we know well. And then eventually, we think there's a lot of other core back-office workflows that SMBs have, including people and HCM and things like that. It probably makes sense to be present in our platform somewhere. How that works, whether those are partnerships or build or buy, we don't have that part of the strategy figured out yet. But we really think about expanding the surface area of our platform to touch most every back office process that small businesses are using.

And I wanted to also go back to another comment that you made around ad valorem payments. Obviously, you've introduced a lot of new products. The take rate has gone up meaningfully, as you mentioned, almost 13 bps. How do you think about, I guess, the cadence of uptake of new products. When you launch a new product, do you generally get a pretty good feel for the attach rate within a few months, within a few quarters. What can you do to drive adoption of some of these newer payment types higher in the future?

Yes. It's -- I mean, it's normally measured over quarters and years, frankly. Our goal is to drive electronic payments first. That's the #1 priority. We want to reduce reliance on manual processes, paper-based legacy processes and check payments. And so when we do that, we're -- that's what presents us an opportunity to drive ad valorem products. We've had great success with a recent product introduction called Instant Transfer, which is real-time payments. But it's still early in the overall evolution of that. And we think as we improve our ability to surface these new products, create awareness inside the product and through other electronic means less reliant on maybe sales touches and things like that. That's what will ultimately help drive adoption of the products. But we're on a cycle of continuing to improve the products, make them easier to use and make both buyers and suppliers much more aware of the portfolio of products we have. And at the same time, we're starting to treat suppliers a lot more like customers where we're engaging with them directly and making sure that they also have choice in electing how they want to manage payment transactions.

Okay. Any questions from the audience? I just want to pause and see like you want me go.

Can you just maybe address a little bit on some of the weakness that I think maybe [even quite use it] by surprise last quarter. If we -- where -- what is the sort of confidence versus risk levels, we think about the transaction revenue 2 pieces, et cetera in that. In terms of average revenue per user or the number of users that are used today or the number of transactions. Where could you be -- where are you more confident or less confident in terms of the model going forward?

Well, let me describe how it works. There's 3 big moving parts. There's the overall spend level of SMBs. And because the standard use case for our platform is, businesses run almost all of their volume through our platform manager. What we see is a proxy for what's going on with businesses and how they're reacting to the environment. The second component is our share of wallet of our customer spend. We're not at 100%. We know as we roll out more products, we can address more of their processes that brings on more volume. The third variable is our monetization, our take rate. And I think we are in much more control of the second 2 of the our share of wallet that we can drive with customers and our monetization, our take rate. And those are levers that we can continue to exert over this uncertain period that we're entering now with overall business spend levels perhaps coming down as many small businesses are sort of getting smaller, they're contracting before we get to some expansion stage. So -- we have a good feel for how our platform is being used. We see continued strong engagement on the platform. So the number of transactions, the number of users, how they're engaging with the platform, which tells us the value proposition for the platform is intact, even though in this macro environment, there's going to be some uncertainty about how businesses are going to react.

Another one here.

Yes. You partially answered your question, but improvement in take rates, can you just talk about what's been driving that trend? And is there a ceiling? Are there diminishing returns? Address that?

Yes. As of the June quarter last year, about 10% of our payment volume was on ad valorem payments. So a payment type, where the amount of revenue we generate is variable, tied to the size of the transaction and obviously, the product that is used. It's a good start, but we have a long way to go. What that means is the vast majority of our volume is still on check and ACH payments, which are fixed fee. And so because most of the suppliers in our network have an account, we can engage with them, we can market to them. We know that there's many years ahead of continuing to expand ad valorem payment adoption with that expansion comes an increase in take rate and monetization. I think it's long term, a huge expansion opportunity. Maybe near term, there's less linear growth quarter-to-quarter given some of the uncertainties in the external environment, but we feel like we're still fairly early in the overall sort of game, if you will, of expanding monetization.

Back here.

Maybe just if you could talk about the [indiscernible] over time a longer term the trajectory of that. I think it's [indiscernible] little bit maybe over the last 6 quarters. But if you kind of look at the environment, is this something we should continue to expect to kind of tick up a little bit? Would you maybe even drive that up little to be aggressive on the customer acquisition side? Or is this something that could kind of decline maybe over time?

Well, rewards has been stable the last couple of quarters. It's a present part of card spend for businesses. It's in the market. Our goal is to differentiate with software like how can we get businesses to leverage our tools to improve the way they operate to create automation and visibility and control. And as long as we feel like there's a good match between the software use case and the customer use of our card product, which would then trigger rewards, then that's something we're interested in. If somebody is just interested in access to credit, and optimizing rewards, but they're not interested in the software. That's probably not a good fit for us. So over time, longer term, I actually expect we'll be able to create some efficiency in rewards because it will be more of a software value proposition that is supported by rewards and incentives with card spend as opposed to the other way around, you get high rewards and there's some software you may or may not use. I think there are others in the market who might approach market penetration that way. Our view is it's an integrated solution. It's the software that's going to help really change the way companies operate.

Yes. How do you -- sorry, how do you think about the cross-border and international opportunity? And in particular, beyond sort of facilitating the payment flow and get in deeper into FX or other related solutions around that.

Yes. Today, we're obviously -- we've done a good job at growing our usage and penetration on cross-border payments. The majority of that is still U.S. dollar. So we think there's more that we can do by having a direct relationship with suppliers as opposed to just being on the buyer side, which is where we started with that product. And then I think there's some regulatory considerations there, being licensed in various places allows us to have a direct relationship. We've made progress in Canada and U.K. And I think over time, you'll hear some other locations where we're going to do a lot more and working directly with suppliers. Longer term, we do have an aspiration to have a more global operation. So beyond just facilitating cross-border transaction is being able to help businesses in other regions as well, but that's a little bit further out.

Going back to the macro topic, trying to hold that for later in the presentation, I think you all were probably a little bit on the earlier end of the spectrum about just trends that you're seeing with SMB and B2B spend. I think others have kind of echoed comments. But I've also seen a wide range of macro scenarios embedded for the year because it's really hard to know. I mean I think even today, there's some different signals from the Fed. But I have seen some companies assume soft landing, hard landing, maybe even no landing. Just kind of curious on what type of macro stance that you embedded into your outlook?

It's a good question. And obviously, there's a lot that's unknown right now. But as I mentioned before, like we feel like the spend that's on our platform is a proxy for actions that SMBs are taking in response to the impact on their business that they're seeing. And so in the December quarter, we started to see a softer spend across all customer sizes, so from mid-market to really small customers and most spend categories actually. So still concentrated in the variable or more discretionary spend categories like advertising and tech purchases and contractors and outsourcing and things like that. But nevertheless, it's really across most categories. So as we thought about what does that mean for updated outlook for '23 and even beyond, we know that there's 2 big things happening. One is uncertainty with the macro that's causing businesses to react. And we built in some assumptions about a continuation of the softening trends that we've seen. And then we have seasonality that normally happens between the March and December quarter, where on a per customer basis spend is normally down about [ 7% ] quarter-to-quarter. That has nothing to do with the macro. That's just typical seasonal patterns. And so we feel like by considering those 2 factors, we've been fairly conservative in how we think about our estimates for Q3, the outlook for spend, which was flat on a year-over-year basis and that would mean down kind of mid-teens on a quarter-to-quarter basis. And what I can say, like so far, what we've experienced in the March quarter is spend is holding up kind of better than we expected. The trends are consistent, like spend is still being reduced by small businesses, but we're feeling better about the level of activity and what our customers are doing in terms of engaging with the platform.

Okay. Great. Well, I think that's exactly on time, exactly 25 minutes. So thank you so much for joining us today, John, and thank you for all the questions and engagement from the audience.

Thanks.