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

Thank you, everybody, for joining us. I appreciate the time today. So with us, we have John Rettig, the CFO of Bill.com. So John, I know that we've known each other for years now, but just for those in the audience that may be a little bit less familiar with BILL, if you could give us a quick overview of the company, especially its changed a lot since the IPO. I think that would be really helpful.

Sure. Good place to start for those that might be new to BILL. So we're a leading financial operations platform for SMBs. That means we help automate things like the really exciting sexy stuff in businesses, accounts payable, accounts receivable, more recently, spend and expense management. So -- and basically, we help businesses go digital. Most SMBs today are still analog. They use legacy manual paper-based systems. It's hard to believe because so much in consumer financial, operations, payments and things like that have gone digital. That's not the case for SMBs. And we started with one of the hardest problems, which is to take manual processes and digitize them. So it's not so much about a transaction, but all the things that go into a transaction. So our tools help small businesses go from paper invoices to digital. We have AI and machine learning capabilities that extract data from all of the documents that a business uses when doing business with buyers and suppliers. And we take that data and we intelligently route it for approval. We code it so that it can sync with the accounting system. And then ultimately, by automating the processes involved in these transactions, we get to do payments for businesses as well. And so both buyers, payment transactions to suppliers and suppliers also elect different payment methods. And so the foundation of our business is really subscriptions to this platform that we've built. And along the way, we've done a ton of innovation around payments. We've launched a bunch of new products. We help remove friction between buyers and suppliers. And that's led to a significant monetization growth for us and transaction revenues. And today, where actually more of our revenue comes from the transaction side of things than the subscription side, but the core of what we do is really around process automation and helping businesses go digital. And then payments, they come along with that as opposed to the payments being the thing that we do.

Great. I think that's really helpful. And I want to touch on some more big picture strategic elements, but just given what's going on in the world right now, I want to touch maybe on the short term ahead of that. So the [ F 3Q ] numbers were much better than what you guided for, I think than what investors anticipated. On the other hand, you call that -- that's still a tough environment. Can you maybe talk through where you're seeing strength and weakness in your end markets? And what are areas where you're still seeing really good growth?

Yes. One of the unique parts about having a really large customer base, over 400,000 businesses use 1 or more of our solutions, and we have 4.7 million network members. So there's a many-to-many situation going on with transactions that produces this great data set. This data asset that gives us visibility into what's happening with our small business customers. And starting probably last June, we began to see a change in spend patterns, primarily with larger businesses back then, but then through the second half of the calendar year, it kind of touched all size businesses, including small companies and across all spend categories. And we saw some pretty significant abnormal seasonal patterns in the December quarter, where you normally see a big spike in spending driven by e-commerce, advertising, other things that are typical for that December season, and we didn't really see that. We saw a very small sequential growth in TPV. And so we were expecting that, that was really a sharp beginning to the macro cycle impacting small businesses, and it would continue for some period of time. And so our estimates for the March quarter suggested a pretty significant sequential downturn, and the results are much better than we thought. And I think it was another indication of how resilient SMBs are. They adjusted quickly, and now they're getting to whatever the new normal for them is going to be, we think that's still a fairly muted spend environment, though. We're seeing some improvement, some growth in spend across categories where there's also third-party data that supports this, like travel and entertainment is a category that small businesses are still spending there. But most of the other categories, they're still adjusting to the external environment. And for us, going into the quarter -- the current quarter, we said that probably means flat TPV for the quarter, and it may be, on a per customer basis down slightly. And so that's still our visibility. Maybe it's roughly flat, maybe it's up slightly. But that reflects in an ongoing adjustment cycle that small businesses are doing. They're not back to the expansion mode yet where spend is going to start to increase. And I think that's probably here to stay for a little while. So we're not calling the trough, if you will, in spend behaviors, but it seems like a more stable environment, and we're seeing the beginnings of that with small businesses.

Great. And I think one of the things that maybe is not as appreciated is the remarkable recurring nature of the transactions and the frequency, but the dollar amount, but also the type. And I think just maybe thinking about that and just the general KPIs, just stabilization was key last quarter. Can you just remind maybe everybody how that -- what the recurring nature is, and what you see generally and what you've seen maybe more recently as well?

Yes. So the thing to remember is that most customers, once they've been on our platform for, say, 2 quarters or 3 quarters, they're running the vast majority of their transactions through our solution. And that means that they're leveraging our tools to create automation and workflow and collaboration in the platform, and then we're getting the transactions that come with that. So it's not like a solution where they pick and choose how to use it with certain transactions. And the stat that is super interesting is that 80% of the transactions in our platform are repeat transactions between the same buyer and supplier in the prior 3 months. So it's the things that happen when you run a business. You have lease payments, Internet connections, utilities, advertising, however it is you're generating demand. Those things continue to happen in our platform. We've seen certainly through the March quarter, we gave an update, really good engagement with the platform. Even though spend is down on a dollar per transaction basis, and that's leading to some of the softness in TPV engagement is really high. We see that in number of transactions per customer being really healthy. It's down slightly from like the peak during the pandemic. But if you look at it on a seasonal basis and year-over-year, it's pretty consistent with what we've seen. So that tells us that the value proposition is still there for customers, even in an environment where they're adjusting some of their expenses and things like that.

You spoke to engagement remaining really healthy. The company, last quarter, saw good net adds. So I want to maybe zoom out and just -- and we've talked about stabilization for SMBs. So how would you describe maybe the appetite right now for those that haven't maybe moved over to BILL? Or what are you hearing from SMBs about adopting back-office applications now versus maybe a year ago? And just how do you think about that?

Yes. For a long time, one of the biggest obstacles to unlocking the SMB market and having it mature much faster is really inertia. Businesses continuing to operate the way they did with manual legacy systems and awareness that there's a different way of doing things. And the pandemic really changed all that. Like it was an overnight awareness creator such that businesses now know, at some point, they need to adopt solutions to help them not get stuck with anything that might happen in the economy or with their particular business. And so that was a structural change in the market that I think means the market will mature faster than it was otherwise going to. It doesn't mean that all businesses have adopted these solutions yet. During the pandemic, we saw elevated demand and more importantly, elevated like intent, where businesses wanted to get up and running really fast. And now what we're seeing is significant demand. In fact, in the last quarter, we had our highest quarterly net new customer adds in the history of the company. And I'll talk a little bit about why that is in a second with our distribution ecosystem. But what we're seeing is, small businesses are taking longer to decide. So the conversion rates are lower than we saw during the pandemic, and it's because businesses are, in large part, distracted with other things, other pressures, other challenges that are happening in their business. It's not a price thing. It's not a number of people who need to decide like you might have in the enterprise markets. It's really about the distraction factor and businesses being preoccupied with here and now things happening in their business versus wanting to make a change. So we're adapting to that. We're increasing the size of the funnel. We're making sure we're targeting the right kinds of customers who are predisposed to adopt now versus later. But overall, we feel really good about the demand environment for solutions like ours.

Great. I want to transition a little bit to one of the top questions we get from investors. You've addressed the Intuit [ Bogeyman ] already, you get asked about it. So I wanted to ask maybe a slightly different version of the question, which is, can you just remind us in the many different ways that you're partnering with Intuit? And then what's up for renewal in late June where investors are focused maybe?

We've had a distribution or a referral relationship with Intuit for I think, north of 6 years now. We've had an integration via the App Store and API with the platform for much longer than that as have -- as do lots of other companies. And we started working with them on the really small businesses, almost micro customers with a simple bill pay product. Then we transitioned about 3 years ago to supporting the larger businesses, which are -- they look more like the average business that uses the BILL platform, QuickBooks Online Advanced customers. And I'd say the partnership, while strong and healthy, hasn't really produced material results for either company. Like it's not moving the needle for BILL. It's less than 1% of our customers or revenue or any other measure you want, which means it's not moving the needle for Intuit or those customers either. So we're continuing to rely on sort of the unique nature of our go-to-market ecosystem to reach, not just QBO customers, but customers with any accounting system and bringing the sort of power of our platform and our ability to complement the accounting system to those customers. So our arrangement with Intuit expires, I think, in June of this quarter. And I think there's ways certainly that we could both work together to create more value for both companies while continuing to serve small businesses. But this is where things stand now, and we're superconfident in our ability to continue to penetrate the market through our diverse distribution ecosystem regardless of the relationship with any one accounting system provider.

I think I want to follow up on that because a lot of investors end up talking about Intuit, but you work with several different key financial accounting software partners. So maybe just help us understand, when we think about QuickBooks as part of the base versus some of your other notable partners like NetSuite, Microsoft and so on.

Yes, we -- our strategy for the business is a horizontal approach. So we don't necessarily target specific industry verticals when trying to reach SMBs. We might have tailored go-to-market plans, but our product is built for the horizontal market. The needs of 80% of businesses are about the same, and that's what we build for as opposed to the unique needs of 1 vertical. And in doing so, we integrate with the accounting systems that 90% of small businesses use, whether that's a version of QuickBooks or Xero or Sage Intacct, NetSuite from Oracle or Microsoft Dynamics. And so this is where most of the market is. We have other ways of working well with -- there's hundreds, thousands of other accounting systems, and we can work with those also, but we have deeper syncs and integrations. And so we tend to go find customers wherever they are, whether that's through banks, accounting system, accounting firms or whatnot. And then we sit alongside the accounting system and customers leverage our platform regardless of the other tools that they're using.

You mentioned banks. It's definitely been, I think, interesting year for the financial services sector. There's a lot of concerns, especially around regional banks and some of their struggles, and you work with some regionals, you work with some of the really big, notable, large global banks. Can you maybe just help us understand what you're seeing in that financial institution partner channel right now for the business?

Yes, there's strong interest from financial institutions to get closer to their customers, not just a deposit relationship, not just a credit relationship with the larger businesses they work with, but actually be integrated into how they're operating their business. And that's where BILL comes in. So we connect banks much closer to their businesses because they're leveraging essentially the same tools that BILL stand-alone platform offers, but they're doing it through their bank. So we're reaching them where they are, and we've seen really good traction. We're now starting to work with banks across the whole spectrum of size businesses where when we first started, it was mostly the larger commercial customers. And now we're seeing good success with small businesses as well. And that requires actually us to innovate in ways beyond payments. It's making the product simpler to use and easier to adopt and much more self-service, and we're seeing good traction there with banks. We do have numerous relationships, commercial relationships where our platform is integrated with smaller banks. Silicon Valley Bank and First Republic were 2 of those, but we have lots of other banks we work with. And I'd say 6 of the top 10 banks are partners of BILL for our platform. So we've made -- done a good job at penetrating the market, and I feel like there's a long way to go to now achieve adoption within these banks.

And just quickly, have you seen any change in the priorities that what you're offering sits in with banks, right? Again, if they are -- are they distracted? Or is it just business as usual from your perspective?