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

Yes. We have approximately 5 million, 4.7 million network members. So these are businesses, in some cases, individuals, independent contractors who have created an account with Bill. So we are managing and facilitating and directing payments between 4.7 million entities. We have bank account credentials. We have stored preferences about what payment types they want to use and maybe that varies by size of transaction or by the type of buyer or supplier or any number of other variables. And so the network is all about making it simpler to do business without having to track payment credentials and addresses and other customer information, it all resides in our platform. And so there's a one-to-many relationship. We have a buyer, an AP customer who is connected with, in some cases, hundreds of other network members, and we have a network member who might be receiving payments from and using some of our AR tools to receive payments from dozens of Bill AP customers. And so there is a like a network effect component, the more that we attract new customers and they add their suppliers, that grows the network. As the network grows, it just creates more opportunities for us to facilitate different payment types, increase adoption of ad valorem payments. And ultimately, I think over the intermediate term, upgrade many of our network members to use more of our solutions on a subscription basis as opposed to just transaction, monetization. So it's an important advantage that we have that I think proves out and we get a lot of feedback from both small businesses and partners that we work with, for example, financial institutions about the value of the network and how that helps serve small businesses.

One of the questions I get frequently within your product portfolio is trying to talk about the changes since you all went public. You talked about the automation platform that you have really started off in AP, a little bit of AR. You acquired Divvy and Invoice2go. Have those acquisitions played out as you envisioned, and both in terms of net new, but also your cross-sell opportunities within your existing base because I think the questions come from the customers that those solutions targeted before were a little bit different than what the core Bill customer might have looked like pre-acquisition?

Yes. So I think our deal thesis across a number of transactions, M&A transactions that we've executed is really playing out. So we're working to provide that central hub for small businesses to manage really all of their non-payroll B2B spend. In the case of spend and expense management both pre-acquisition and today, it's a slightly larger customer base than Bill on average. There's strong interest in the market for this type of solution that marries access to a charge card with great tools to actually increase visibility, control, reporting and whatnot around spend similar to what Bill does on the AP side. We've seen not only interest from businesses, but from partners and financial institution partners that we're working with to bring that product to more of the market. On the Invoice2go side, which is the AR solution that we acquired, those businesses are actually much smaller on average than the core Bill customer base. And it's important because we want to be there for these micro businesses as they grow, and maybe graduate, if you want to think of it like that, to a more advanced solution across Bill and spend and expense. And then we also think there's a really interesting opportunity to bring some of the tools and capabilities that we have around AR for micro businesses to our network to drive more engagement with different parts of our solution to create more value for network members, which then reinforces the opportunity to have that network effect and create more demand for our products from the network. So I think the solutions and the platform that we have are evolving to serve a broad set of customers across really all sizes and industries. And that's one of the keys to unlocking the big market opportunity that we're going after.

So if you look at what you've done, I guess, let's talk about where the company is going. You've added credit card spend, accounts receivable, P&A planning. Those all seem logical extensions for a platform that a CFO or accounting manager would certainly use. One of the areas I think I've heard you talk about or discuss at least briefly is supplier financing. But what does that look like? Or maybe other opportunities look like for you at some point?

Yes. I mean our strategy is simple around expanding the surface area of the platform to cover more and more of the processes and therefore, payment types and payment flows from small businesses. To give you some examples, on the AP automation side, most of what we do starts with an invoice, like an AP customers receiving an invoice from a supplier. There are a lot of activities that happen for small businesses before you ever get an invoice. You have to identify which supplier to use, you have to negotiate a contract, sometimes there's a purchase order and things like that. So we think there's a lot that we can do in the front end of AP around procurement and managing and creating automation around the process of doing business, not just the processes around an invoice transaction. So lots of opportunities there around -- you mentioned the FP&A and planning and [ finmark ] or acquisition. That's really a strategy about moving from operational automation to creating more insights and visibility around the spend and the expenses that a business has. So making more information available for better and faster decision-making so that SMBs can just run a better business. So taking all of the capabilities we have around process automation and transforming that into insights. As it relates to invoice financing, specifically or more broadly working capital solutions, we have a significant data asset by virtue of the millions of transactions that we process between buyers and suppliers, tens of billions of dollars of payment volume. And we think that's an important advantage in targeting and underwriting which customers and suppliers to offer working capital solutions to. Today, we're in the, I guess, beta phase of an invoice financing product, which enables a supplier to get paid before their buyer, their AP customer actually pays them up to 60 days in advance. And so this is something that's an often very frequently requested products. Small businesses want to marry like cash flow solutions with the process automation solutions. And so we're in the process of validating the demand and targeting repeat usage and things like that. And so far, we're seeing really good signals with the product -- with this product in the market, even though it's super small. It's not moving the needle on our results at all yet. I think that will be many quarters down the road. And then over time, I'd say there are other similar solutions that will make a lot of sense, things like more time to pay for buyers, possibly term loans for both sides of a transaction. And then obviously, that will intersect with third-party capital providers as well to the extent that these products start to scale for Bill.

So I know we touched on the international opportunity earlier. But last question on product here. Is there anything else you need on the product side to help achieve some of the international goals? I think basically language localization and applications is pretty easy to do. But I'm kind of probably more thinking about the banking industry, whether it's in Europe or Australia or maybe Asia Pac, there's certainly some differences there versus what's here in the United States. Would there be anything there that you'd have to consider during your international opportunities?

Yes. I think you're right. It's mainly around the regulatory and compliance and banking payment regulations. We have, obviously, over the years, invested a lot in the U.S. to be a licensed money transmitter or money services business. We've done the same in Canada and the U.K. And I'd say there are other compliance and regulatory regimes across Europe and elsewhere that we would also need to either have licenses if we do it on an organic basis, or partner with other companies or there's a potential that in some markets, the international expansion opportunity might also intersect with our M&A strategy as it relates to moving faster to address the needs of certain market opportunities. But Invoice2go was kind of our first tangible step towards international expansion after launching our international payment products. That brought us operations in Australia and customers in, obviously, lots of countries, north of 100 countries. And so it's something where we have like a demonstrated track record of building out the compliance and regulatory capabilities to operate in different markets, and it's something that I'd say we're in the early stages of evaluating now.

All right. Let's move to go to market a little bit. Normally, I think there's 100 questions on your FI channel initiatives, and we'll certainly get to those. But I wanted to start with your accounting channel efforts. As I feel a scenario that investors don't always give as much love to relative to the financial channels. But first, how does Bill make an accountant's jobs more efficient? And what specifically in your platform has created a differentiation versus any of the competitors that are out there that's actually helpful to accountants?

Yes. First, as context. Accountants are a very important trusted partner of small businesses. It's not the type of relationship that changes every quarter, every year. They're typically very long-term relationships. Bill has partnerships with more than 6,000 accounting firms. We have an exclusive arrangement with CPA.com, which is a kind of a trusted adviser of accounting firms. And what we do is help accountants, the accounting firms better engage with their clients. So often, we talk about the end small business customer benefits of our platform around automation and going digital and whatnot. Some of those benefits are also delivered to accountants. We make it simpler for them to connect with their clients and manage those client relationships, all of the communication, all the workflow, all the approvals. So we enable accountants to serve many more clients with fewer people than they would without our platform. So there's an ROI to accounting firms just like there's an ROI to [ end ] small businesses. And it's sometimes an overlooked part of our platform. So we view our relationships with accountants. We treat them as customers as we're delivering a value proposition for them as well. And that's part of why we have very long-term relationships and strong retention of our client -- of our -- and SMB customers and our relationships with accountants.

So if we look at your core customers, you've historically added 4,000 to maybe 5,000 roughly on a quarterly basis before the macro starting to exert a little bit of pressure there. But does this 3,000 range that you've kind of fallen into the last quarter or 2, does that feel like the rate/range that we should all think about maybe over the next several quarters in terms of new customer acquisition, or do you see anything that might cause that number to either go up or down from where it's settled into recently?

Yes. I think it's a good short-term range, if you will. It's interesting because in the last quarter, the March quarter, we actually had our highest quarter ever of net adds with obviously more of those coming from our financial institution channel and a little bit lower than historical averages on our direct and accounting channel, as you mentioned. But part of what is exciting about that from our perspective is that it kind of shows that our multichannel distribution ecosystem is working, notwithstanding there's some changes in composition. And so we're able to add thousands of customers a month and start to drive more awareness and more engagement with the platform. So I think near term, that's probably a good range longer term. I don't think we really view any structural obstacles to being able to not only get back to where we were, which is more order of magnitude 5,000 a quarter, but potentially multiples of that as we start to see the market evolve, our product gets simpler to use and we create more automation and things like that in the onboarding process as we reach more customers.

You just touched on the strong quarter you had in March with the financial institution customers. Those additions have certainly ramped well over the last 1.5 years as you brought on new partners like Bank of America. We know the dynamic that's going on here in June with that number with them falling off on the legacy solution there. But as you think about your FI channel kind of going forward, how should we all think about the opportunity to move some of these contracts maybe above their minimums, which maybe not all, but most have certainly kind of flowed around over the last couple of years?

Yes. We feel really good about the progress we're making, working with our financial institution partners, rolling out the SMB, the smaller business-focused solution, which is newer. Most of our, if you think of it legacy or historical relationships with financial institutions have been focused on the -- like the commercial customer segment, larger businesses, which are very valuable, and it's a part of who Bill serves on a stand-alone basis also, but it's just much smaller in number. When you think about the small business segment, across many of the large banks in the U.S., we're talking millions and millions of businesses. And so we've created a very simplified experience for smaller businesses with an upgrade path to the full capabilities of Bill. And we're in the early stages of starting to roll that out. We've launched, I think, about 18 months ago with the Bank of America small business. And we don't have a specific timeline laid out for when we would achieve the level of penetration and adoption that would have us pass minimums. But we feel really good about the opportunity to continue scaling from here. And we think that some of the success we're having with the larger banks and as we continue to scale and drive adoption there, that obviously helps open up more of the large bank market opportunity. We're not actively pursuing that at the moment, but we certainly think that's an opportunity as well.

All right. We've got about 5 minutes left here. Let's take a couple of financial questions. We have the company's CFO. So might as well tackle a couple on that vein. I want to start with a question that has a little bit seem comical to me, but I think actually requires a little bit of explanation, which I think is important in your model. The question I feel that a lot recently is actually why is Bill not profitable, excluding the flow of revenues? Let's set aside the fact that you're still growing quite fast. I believe your growth rate had a [ 60 ] and a lot in the last quarter. Usually, SaaS companies aren't profitable when you're growing that fast. But you're growing fast in a large market with generally high trends today, which means the company has to invest to capture the demand there. I mean that's how the model works, my SaaS models. But I remember talking both pre-IPO and during our analyst teach-in, you had really talked about Bill likely having a lower terminal margin structure which many investors, I don't think are necessarily familiar with. But can you talk about some of the incremental costs or compliance-related items that Bill requires that a typical SaaS company does not? And has that you changed at all as you've made acquisitions like around Divvy and Invoice2go?

Yes, sure. It's a good question. I don't think that our commentary around time of the IPO necessarily reflected on terminal margin structure, but we laid out an operating margin target that we described as long term, but still for a growth business, not a at-maturity business. And I'd say we have many of the components that a typical SaaS business has in terms of margin structure and operating expenses and things like that. There's one additional element to our model that is both an expense and part of our competitive differentiation from the market. And that is all of the things that go into risk management and payments and regulatory compliance associated with the payments part of what we do. That impacts G&A expenses for us. So it makes our G&A percentage of revenue a little bit higher than a SaaS-only business. But that's something that we're very comfortable. That we -- over time, as we scale in the business doesn't present an obstacle for us to achieve great profitability down the road. I think we've obviously produced significant non-GAAP profitability in the near term, including being positive the last couple of quarters, excluding the benefit of float and interest rates, and we think that's a good indicator of the operating leverage that we should be in a position to generate as we continue to scale the business.

It actually follows up is good to lead into my last question is, because I agree. If you're growing at roughly 60%, you can show some non-GAAP profitability [indiscernible]. I think that's speaking volumes about the opportunity in the model long term. I don't have very many Rule of 60 companies like that, that's for sure. But how do we think about growth versus profitability over maybe the next 3 to 5 or 10 years? I know you and Rene have, I guess, made no bones about it. You want to grow. You want to invest. You want to capture a market while it's ripe. Is that still the right way to think about it? Or has something in the recent economic kind of swings maybe change that view?

Well, I'd say the market opportunity is as big as ever for sure. As we add more products to our platform, we actually unlock more of the market. So our opportunity, our addressable opportunity in fact, grows. But given where we are in the economic cycle and some of the changing behaviors on the part of small businesses, I think it places emphasis on taking a balanced approach between growth, profitability, margins and how we're scaling the business. We have never been a growth-at-all-cost company. By virtue of serving small businesses, we focused from the beginning on really good unit economics, making sure that we are building an annuity as we acquire customers. We're growing our retention of customers. We're scaling revenue over time. We've done a really nice job, I think, of expanding gross margins. And all of these things are a part of a recipe of us continuing to penetrate the market and grow the business, but in a balanced way. We do think there's probably a decade of growth, significant growth ahead for the markets that we're going after, and we're going to continue to take a balanced approach to continuing to penetrate the market and also produce increasing operating leverage and profitability over time.

We publish a quarterly SaaS metrics industry note across 70 different companies, and Bill's unit economics here, how we calculate CAC ratios are the most efficient for anyone growing over 30%, and certainly most efficient for anyone operating in kind of a smaller customer unit. So I think that is historically all that out there. So with that, we're up against clock. John, I wanted to thank you so much for your time. I wish you and the company, obviously, a lot of luck here and the rest of the quarter, and we'll catch up, I guess, in August. Good luck with year-end.

Sounds good. Thanks a lot, Scott.

Thanks, John.