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

All right. Sorry, we're a little bit late. Really happy to have BILL here to do a fireside chat with us. So Rene Lacerte, Founder CEO; John Rettig, of course, CFO. I know you guys have always submitted great questions to me, so I'll do my best to get through them. But Rene, John, thank you for being here.

Thank you. Great to be here.

It means a lot for real for -- to have you both. And Rene, I think -- I don't think I've had you at a public conference before. I know we've had discussions as when you were a private company. And so going back to that, and it stands out to me quite a bit, and it's really helpful for me to think about your vision and whatnot. Just to go back to the beginning and the founding of the company, would you mind going through that story, including the PayCycle piece where you had a payroll solution that you ultimately sold to Intuit? What did you learn from that? And how did it ultimately come together to create Bill.com?

Sure. Great questions. So going way back, I come from a family of entrepreneurs. My parents and grandparents had half a dozen businesses each, all of them in accounting and finance related fields since the '60s. And I've been in the payments and SMB space for over 30 years now. So I'm in my fourth decade of serving these customers with payment products. And I think that what I've learned over time is the importance and the value of actually getting it right. SMBs, I guess, at the core of my mission is actually serve SMBs because I grew up in a family of SMBs, and my parent served SMBs. And what I saw with SMBs is that they're just kind of the glue of our communities, and that glue is something that I think makes society unique, and it's something that I want to make sure that we support because nobody else is doing something for them. So for me, I got my first taste 31 years ago. Then I ended up working at Intuit, worked on their Bill Pay product. I was the product manager lead on that, bill presentment. I was the leader on their payroll solution from a product perspective. The Bill Pay product got shut down, eventually, not when I was there, but got shut down eventually. And then payroll ended up being a backbone of what they have today. I left to start PayCycle because there was an opportunity seeing something online, right? So in the day, so to speak, in late '90s, Intuit was not anywhere close to being online. And so my focus was how do we do something innovative, how do we help at the time SMBs and accountants really have a solution that was going to change the way that they manage their payroll. I would have been remiss to say that when I started doing the day-to-day operations of running a business, I realized that nothing had changed for me on how I was processing compared to how my grandfather processed his transactions 60 years earlier. And so that's where the idea and the genesis came for BILL. It was constantly asking the question why -- on every transaction, why is it that this is manual, why is it that this is paper-based, why is it that I can't use electronic payment, why is it that I can't do this, why is it that it's hard. Just all those questions end up forming a hypothesis that the cloud was going to allow us to connect all these capabilities in a way that would solve that problem for SMBs, to take the mess off the desk, to take the shoebox away and throw it in the trash. All those things were something that was driving me. And so I left the day-to-day in 2006. Because I saw the opportunity being so big, I let the day-to-day PayCycle in 2006, stayed on as a Board member. We sold that to Intuit in 2009. So I've been doing this 17 years. And I think what I see every day is that aha moment was truly an aha moment. Like there is an opportunity to reinvent how financial operations is managed for businesses, and that's what we're pursuing. It's what we've achieved. We've defined this category that nobody else even knew existed, and that's something that we're proud of, and we're constantly redefining it. So from my perspective, it really is kind of the experience leading up to everything in my life has kind of led to this. So I'm happy about that.

Perfect. Now look, I always appreciate and love founder-led CEOs. I learn a lot covering different companies. I know you and I have talked about that quite a bit with some common friends in the network. But I think it's ironic, right, that you're familiar with the Intuit business, yet one of the most popular questions I get is what's going to happen with Intuit as a partner and the potential for them to get into the whole automated accounts payable business. So what's your response to that just to lead with this, Rene? And how does that impact the vision?

Yes. I mean, the first thing I would say is we define this category, and we're constantly redefining it. And so when I step back, I would say that others across the industry are looking to us to actually tell them what they could do. Now what you're seeing from us today is what we started building 2 or 3 years ago. We have a long roadmap of capabilities that we're building into the product. You have a roadmap that we've already executed on that connects the entire life cycle of a transaction from beginning to end, everything from document management to reading the invoice information to connecting with suppliers in the network automatically to then obviously having workflow capabilities and collaboration internal to your company, to executing a payment and then connecting that back to the supplier with that capability, and then having the ability to reconcile all of that all along the way. We can do this day in and day out and add any type of payment product that suppliers or customers need. And that capability takes foresight. It takes a purpose-built company from the day 1 on a platform that was designed to take advantage of the capabilities that the cloud enabled. And so when I look at it, I see, like, we've got a massive opportunity in front of us. We have been defining this category. We have -- I would say, every day, my team and myself, we are more excited about what we see in front of us, the opportunities we see. If you talk to customers, they save 50% to 75% of the time it takes to manage their back office. That's a lot of time. You do that day in and day out. You do that for accounts across hundreds of clients. That's a lot of time. That's a lot of value. Nobody else did this for them before us. So we've defined that category, and we're going to continue to do that through the diverse ecosystem that we have. I think one of the things that is unique about us is not just that we have this great product, but we have this massive ecosystem that we've built. We go to market direct, which actually allows us to learn and drive some great ARPU, great revenue per customer on that front. But then we also go to accountants, which allows us to reach the businesses that accountants are trusted by businesses more than any other entity, and that helps us. And then banks are also trusted, and we're able to go through that. And so being in this ecosystem, that we can get customers in any of those 3 different ways as well as through our network effect, where we have $4.7 million in the network, gives us a unique advantage, which I think I know from our experience and conversations that you and I have at least seen this before. But when you look at consumer bill payment and what actually drove adoption there, it was a multichannel approach. You had to have the multichannels. Now ultimately, financial institutions end up being the strongest channel for bill -- consumer bill payment, but it took all of that to actually drive the adoption, drive the awareness to actually make these things happen. So from my perspective, it's -- I look at the roadmap that we've built and that we're executing on. I look at the ecosystem that we've built, that we've kind of knitted together and created. And I just think it's really rather difficult to built -- to compete with that. I think that the opportunity to -- for us to continue to expand will mean that other people come into the space, but the parallel that I would provide or think about is like ADP defined the payroll space. And now -- then there was Paychex, and then there were other players. And now there's hundreds of billions of dollars in market cap associated with this category of payroll that ADP defined in the late '40s, early '50s. So we're building this for the long haul, and that's the way I think. I don't -- I'm just as excited about what's in front of me tomorrow as I have been for the last 17 years. This is just a moment in time, and we're going to continue to define.

Good. No, I always like drawing those parallels, and it feels like there's a pathway here for BILL, which is why we've liked it. But I'm curious to hear your thoughts on the demand environment and the cycle, right? I know we've come off the pandemic. You had a lot of nice client additions. It made a lot of sense during that period. You're still growing at a nice pace. But of course, the cycles, a big question on a lot of investors' mind. So what do you see on the ground?

Yes. I think, John, why don't you take that one?

Sure. I mean, part of the reason we're seeing capital and other players come in on this space is just the sheer size of the market opportunity. And if you go back a few years, we would have said one of the biggest challenges to accelerating growth is just inertia on the part of small businesses who keep doing things the way they've done for years and awareness. And then the pandemic came along, and that changed the awareness component of the decision-making for small business. They all haven't adopted yet. There's a long way to go. But the market in terms of its evolution of maturity is still very nascent. So demand is very strong. There are some externalities that are impacting small businesses today, things like high interest rates, inflation, tighter credit. Those are certainly going to weigh on businesses as they decide what their priorities are. With that said in the last quarter, we had our largest net new add quarter in the history of the company, and much of that was due to this multichannel distribution strategy, the ecosystem that Rene mentioned. We had a very strong quarter in terms of net adds from our financial institution channel and a little bit lighter net adds relative to recent history in our direct and accounting channel. So bringing all of these ways that we go to market together, I think, are really important to allow us to continue to grow through this near-term cycle that we're in. And I'd say as much as anything, businesses are facing a decision about when to go digital, when to automate, when to take this on. It's not if. And maybe there's a distraction factor right now over the next few quarters, the next year or so that force us to maybe build a bigger funnel, help businesses decide that now is the right time to make that change in the way they operate. And so we're really excited to be positioned where we are.

So what KPIs do you track or should we track to measure the health of SMBs? You're so close to it.

I mean, I think the -- one of the wins that we disclosed is the number of transactions they do, right? They use our platform to manage their transactions. That stayed consistent. The TPV per transaction has actually gone down. The spend per transaction has gone down because as they prepare and watch the economy, they're managing that. That shows the health that they're able to use our platform to manage their spend. I would say kind of the overall satisfaction that we see with the customers, our retention, we - all that maintains at the levels that we're accustomed to and are happy with. So everything that we see is SMBs are getting tremendous value from our platform and that there's more and more demand for it. People are just kind of waiting to see what's happening with the economy, right? So...

And I know your distribution matters. Having covered a lot of these different spaces, you talked about consumer bill pay, but distribution definitely matters. You've covered all of your bases, right, in terms of direct, indirect, through FIs and accountants. But tell us a little bit more about the economics of each? Do you see that evolving? And is there room for some change, so that maybe we can get into another gear on growth?

Yes. One of the things that we've worked hard to do, and this was by design from the beginning, was to make sure that as the -- as a central hub for SMBs that once we got the information into the platform that we'd be able to execute the transactions as required. And so the ability to be able to do international payments and FX transactions, to be able to do virtual card transactions, to have Instant Transfer for suppliers that need to be paid right now, to invoice acceleration that we're getting into, to having the ability to kind of just do a check on ACH, having that all in one place actually matters to customers. And what that means is that the success is driven by having all of this in one place. And our ability to kind of continue to drive that forward will be part of what drives success for it. And how I think about the value that we're creating for SMBs is that having the platform designed from day 1 to be able to support all of this is a key part of the success that we've had and what will be happening in the future.

So we probably focused too much on direct and FI is my view, but I know the accounting channel is very important. And again, learning from companies like Paychex, right, the accounting channel was huge. And so -- but you have a huge advantage on the accounting side. What -- can you describe that and tell us how much more you can maybe get out of that channel?

Yes. I mean, my commitment to the accountant channel goes back to the fact that both my grandmothers were accountants. I worked at Pricewaterhouse when I first got out of college. All the businesses that I've worked in have been around finance and it's because accounting is a language of business, right? That's something that I think maybe everybody in this room takes for granted, but that's something that most SMBs don't understand. And so if you can actually help and drive the success of the accountant to be able to support their clients, those businesses are going to be more successful. They're going to be happy or they're going to contribute more back to society. And so for accountants, what we focus on is creating a tool to actually enable them to put their gear into a higher gear, right, to put their practice into higher gear. And what we see is that when they're on our platform, they start with a handful of clients, but then they quickly grow to many more. And so we have firms that can easily be hundreds, if not thousands, of clients that are on the platform. And they all tell us that they're just getting started with this transformation. Like what we have done for accountants is we've been a part -- a core part of the platform that allows accountants to move to a client advisory services, which means you're not just selling tax or audit. You're now selling strategic advice. Some people call it CFO on a box. I don't think John would appreciate me ever thinking of calling him capable of being putting into a box. But the opportunity there is to give accountants a unique opportunity to change how they interact with their clients. And that allows for businesses to be more successful. So my passion around the business has been around each of the channels, but have a strong, strong commitment to make sure that we differentiate and provide value for every channel for what they need. We do the same type of thought analysis for financial institutions. What is it that they need to be a unique provider to their clients? What is it that our direct customers? We are so committed to actually each one of our channel partners that we have a platform. And we knew from beginning, like how often does this happen? I had a company before that was called PayCycle, right, where we had multiple channels. When I started BILL, we made sure to bill for all channels from day 1, right? We had a platform that we could do that. That doesn't happen often. People aren't always thinking about that with the experience. And so that's the value we have. It's why each of these channels work for us, and that's why we talk about them from an earnings perspective.

Good. So let's pivot a little bit and talk about spend. I know a big learning from a couple of quarters ago was cyclicality and spend, and we learned a lot around spend per user. I think you did 11% growth in TPV, if I remember correctly, and the expectation was flat. So tell us what drove some of the outperformance. And I think you're guiding similarly to a flat expectation. What's driving that thinking as well, John?

Yes. So going back to the December quarter, we saw that our small business customers' spending patterns deviated quite a bit from what we normally see in the December quarter. Pre-pandemic, we'd see quarter-to-quarter growth of between 10% and 13%, during the pandemic years 20% quarter-to-quarter growth, and we were up low single digits. And what it reflected was the adjustments that small businesses were making in their overall spending. We had assumed some of those trends would continue into the March quarter just given the rate of change and how far off the seasonal patterns we were. And what we learned is that, again, SMBs are resilient. And we started to see signs of stabilization in the March quarter, and the numbers came in much better than we anticipated. And I'd say we're still expecting this adjustment cycle, lower spend businesses to pare back. We think that's going to continue for a few quarters. In the current quarter, we are projecting TBV per customer growth, but it's very low. It's flat to up, which is below normal seasonal patterns, but better than the trend lines that we saw, say, in the December quarter. So I think early signs of stabilization, it's a little bit early to call the bottom and a return to expansion mode for SMBs, but seems like a healthier environment in terms of the spend levels than we were seeing in the fall.

Okay. How do you benchmark the spend? We make the mistake of just looking at some of the card data around SMB. And again, learning is a good thing. That doesn't capture a lot of the spend. Like as we start to talk to small businesses and very anecdotally, we realize, like, how much of your advertising spend is down. That's big. It's not in card spend or IT spend. CapEx down, we've missed a lot of that. So how do you benchmark performance on the spend side?

Yes. I mean, it's very interesting because we have probably one of the broadest views into the details of how SMBs spend. That's across all payment types. Our customer base is across all industry verticals. So it's horizontal, and we have obviously lots of different AP, automation payment types and card payments. And so we have really good insights. We try to look at macro trends around B2B spend, isolating things like T&E, which tend to be over-indexed for some of the card companies, even on the business side. And then we're obviously closely monitoring some of the factors that influence spend. We talked about some of the macro cyclical factors already. There's also some structural or secular trends that we pay attention to. So what share of wallet are we able to have with our customers? In other words, how much of their processes are we able to automate for them? And therefore, how much of their spend comes on to our platform as a percentage of their overall spend? So we know that there's a positive relationship between the number of payment products we have, the number of processes we help automate and the overall share of wallet that we have from customers. And so we're monitoring a bunch of third-party data. We see lots of consistency in normalized business-to-business non-T&E spend between our platform and third-party data points as well.

Okay. Good. So let's pivot a little bit to take rate spilling into the spend. The take rate did perform better than we had expected. So can you talk about the drivers of that?

Sure. We had a much lower monetization expansion or take rate expansion in the December quarter. And then in the March quarter, we actually had one of our largest quarter-to-quarter expansions on record at a full basis points. And I think it comes from 2 primary drivers: one being we had a reversal on some headwinds associated with FX from the December quarter, and these are product changes, improvements in payment execution and things we're doing with foreign currencies. And then two, ongoing progress they're making with supplier enablement, driving virtual card adoption and working directly with suppliers as really as customers, perhaps not subscribers, but as customers to deliver them the same level of choice that we deliver to AP buyers. And we're seeing that have positive results on FX penetration for international payments. As an example, when we give suppliers in Canada and the U.K., which are 2 places we've been doing this for a little while now, choice about how they receive payments, what currency timing for those transactions, we see a much higher percentage of FX. As that happens, obviously, it has a positive impact on take rate and monetization. And then there's some newer products that we have that are starting to scale. One example would be on the funding side as opposed to disbursements, Pay By Card, where we're giving small businesses choice of how to fund their payables transactions. And in this case, it would be with their own credit card. It's a high monetizing product. It supports take rate expansion. And if you look at what we've done over the last several years, significant growth in take rate. And we feel like we're still in the early innings of a multiyear expansion period.

Right. So has it cropped up or elevated your gross margin as well, right?