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

BILL to the conference here. We're very fortunate to have CFO, John Rettig here. Thank you, John, for joining us.

You bet. It's great to be here.

Absolutely. I have some questions we'll go through and look forward to the discussion. Thanks again, John.

Yes.

I think most folks in the room are familiar with BILL. So why don't we just start with -- you could -- maybe just a high level. What is the -- where is the opportunity from here for BILL? And how do you see that?

Sure. So just a quick recap. We have a platform, all-in-one solution for small businesses to manage the messy back office associated with financial operations. So things like accounts payable, accounts receivable, expense reporting, spend and expense management, things like that. Our business model is a hybrid approach, as you know, subscriptions and transaction fees. It's a huge market that we're going after. Our sweet spot is small businesses that are just big enough to have a little bit of complexity, but not too big such that they need customized solutions like enterprises. So it's those -- that middle of the market. There's millions of businesses who still haven't adopted solutions like this. So it's a very early-stage market as opposed to a mature market that's in a rip-and-replace cycle. And in addition to the foundation of the platform, which is around subscriptions, we've also been innovating with payments. We have a broad set of diversified payment offerings. And that's really important as businesses figure out how to remove friction from how they do business with their suppliers. And I think we've been a pretty integral part of that over the last few years as we've been building out the platform. And I'd say the other piece of differentiation is really our go-to-market ecosystem. Small businesses, reaching them, acquiring them, keeping them, it's really hard. It's hard to make the economics work. And so our distribution ecosystem means that we go to small businesses wherever they are. So if they're at a bank, if they're working with an accounting firm, if they're working with their accounting software provider, we want to be wherever they are and make it really easy to adopt our solution.

Great. Great. And coming off of Q3 results about a month ago, what are some of the key highlights from the earnings report that you'd like to point out? And what's been the investor feedback?

Feedback's been very positive, $273 million or so in revenue in the quarter, north of 60% year-over-year growth, 87% non-GAAP gross margins and order of magnitude, over 20% non-GAAP net income. So from a financial performance standpoint, we were well ahead of our expectations. We also delivered our highest quarter of net new customer adds in the history of the company. And that was a bit of a testament to that diversified distribution ecosystem that I mentioned. And the other thing that I think was a good indicator is how resilient SMBs were in the March quarter. I think heading into the quarter, we had some concerns about the macro impact and how that might flow through to behavior of small businesses. And we learned once again that they know how to adapt, and we were certainly there to help them through the early stage of the cycle.

Great. And one of the metrics that stood out was the stand-alone TPV growth, 11%, last quarter, better than your outlook. Maybe if you could just comment on where was the delta to your expectations heading into the quarter? I know that you saw some drop off in December, and that was kind of how you based your Q3 fiscal guide, and things came in better than that. So maybe if you could just talk a little bit about where that came from.

Sure. That was probably the biggest influence is what we saw in the December quarter. But we started to experience a change in spend patterns from our small business customers back in June of last year, really with the larger mid-market customers, then it progressed to really across the base and all types of spending. In a typical December quarter pre-pandemic, we would see sequential TPV growth rates of something like 10%, 10% to 13%. And in this last December quarter, we saw a 3% quarter-to-quarter growth rate. It was obviously much higher during the pandemic. And the rate of contraction in spend in, say, the second half of the December quarter was pretty sharp. And so our assumption was that, that type of contraction was going to continue into the March quarter, combined with March is typically a seasonally soft spend quarter versus December. It's normally flat or something like that. And so that's what led to our estimates heading into the March quarter. And obviously, we did much better than that. Our businesses, our customers spent at a much healthier rate. And in hindsight, our estimates prove to be conservative, but I think it's really on the back of our small business customers adjusting quickly to the new environment that they're operating in.

Wonderful. And for the Q4 guidance, I think you're looking for stand-alone TPV to be flat. Could you elaborate on what are the assumptions backing that? And -- yes.

Yes. I think the main thing going into the June quarter is that the environment seems a little bit more stable. So we're expecting kind of much of the same that we experienced in March as opposed to a significant pullback or a return to expansion, like we didn't see either of those things really in the cards. There just seems to be more sort of stabilization in spend. And one thing is we haven't really seen signs that our customers are returning to expansion mode. So they're still definitely contracting. Most categories of spend of small business expenses are declining slightly. There's a few exceptions to that where we're seeing growth. T&E has been strong, for example. I think there's a lot of third-party data points that support that as well. So we sort of expected a somewhat normalized spend environment, but it's still slightly contracting versus being in expansion mode. That feels like it's probably a little ways out.

Got it. Got it. And before the macro, we were seeing TPV per customer for core BILL in that kind of mid-teens level. Maybe you could elaborate on what was driving that growth at that time? And is there a path back to that type of growth on that metric, TPV per customer for core BILL?

Yes. There's been lots of tailwinds in that up until the last few quarters. So just a rapid increase in spend by small businesses through the pandemic. Inflation had a positive impact on our TPV as well. Some of the demand that our small business customers were seeing and spending against had everything to do with stimulus and low interest rates and things like that. But one of the variables that's in our control that increases our spend per customer is how much our share of wallet is of their spend. And we see a direct correlation to the number of payment products we have, the number of choices that are available to both buyers and suppliers. And as we roll out new payment products, we see an increase in TPV per customer. So we know that we're not at 100% share of wallet yet, and that's one of the most important variables we have as it relates to the uncertain macro environment we're in now. Maybe TPV overall spend is sideways, but we should have opportunities between increasing our share of wallet and, obviously, some of the monetization levers we have to continue to grow.

Wonderful. Great. And one of the standouts this quarter was the TPV take rate had a nice ramp this quarter, the monetization, a full basis point. Before the macro slowdown, you were tracking to that 5/10 to 6/10 of a basis point. I think you're back to that target level now. I guess, 2 things. What drove that upside this quarter to such a strong level? And what are the keys to generating that kind of steady 5/10 to 6/10 of a bp TPV monetization quarterly?

Yes, the March quarter was much stronger than we normally see. And I think it's a good indicator of just how far we can go with expanding monetization. The last quarter was a full basis points. The quarter before that, in December, we were at actually 0.2. So it was well below our typical averages. And I think it was 1.1 a quarter prior to that. So there's some -- always some puts and takes. It's not perfectly linear quarter-to-quarter. But as we continue to drive adoption of some of our ad valorem payment products, that's one of the biggest supporters of expanding the take rate, things like virtual cards and cross-border payments with FX. Real-time payments is receiving a lot of interest and growing demand as well. Those are some of the levers that we're pulling to continue to present more choices to buyers and suppliers, drive more adoption and see that take rate expansion. The other thing that happened in the December quarter was that we had a little bit of a headwind with FX that sort of artificially reduced our take rate expansion. That was mostly eliminated in the March quarter. So we had a little bit of a pickup related to that as well. And we think that's more of a neutral item going forward, not something that should produce puts or takes. So we feel really good about the ongoing receptivity from both buyers and suppliers about some of our newer products. And we think, though, it's not going to be perfect quarter-to-quarter in terms of the expansion rate. And there is some probably macro potential headwinds and tailwinds. On the headwind side, we are watching out for buyers or suppliers maybe trying to lower cost, given whatever is happening in their particular business, so lower the cost of the payment methods. That could be a little bit of a headwind in the near term. The tailwind could be if a small supplier, let's say, is in a more challenged environment and they're trying to optimize access to cash and speed of payments, we could see more demand for things like real-time payments. So time will tell how all of that nets out, but we feel like we're in a good position.

Great. Great. And maybe if you could put in perspective kind of where we are with these ad valorem products in terms of the adoption cycle in your TPV base. I think, in the past, you said cross-border could be 10% to 20% of TPV; virtual card, 5% to 10%. Maybe you could just provide some perspective on where you are today on those metrics? And where do those targets come from? And what are the keys to kind of expansion towards those levels?

Yes. So those targets are exactly right. On international payments, 10% to 20% of total TPV; and up to perhaps 40% to 50% of that being FX, which, from a monetization standpoint is much more important than the U.S. dollar transactions; and on virtual cards, 5% to 10%. We derive those targets from a deep understanding of how our customers spend money. So we could see that there's a number of suppliers that we're receiving payments from BILL customers who are outside the U.S., and we're able to quantify that. Not all of that payment volume is in our platform yet. So we know we have a ways to go to continue to drive adoption. And the same is true with virtual card payments, where we're able to look at all the suppliers in the network. We can match those suppliers with Visa and Mastercard and other providers to see which ones are merchants who accept cards, and we can digitally engage with them to present different options for card payments. And I think we've made a lot of progress in driving initial adoption. But I still think we have a long way to go. And then you layer on top of that some of the newer products like real-time payments, where we haven't established specific penetration targets there yet, but I think it can be pretty significant for the overall business. In this last quarter, one of the benefits we had in terms of monetization expansion was an uptick in a product called Pay By Card, which is a funding mechanism. So instead of paying from your bank account, you pay from your credit card. There's obviously a fee associated with that. It's very early. And then also, recently, we went into beta testing mode on an invoice financing product and working capital umbrella. So if you just fast forward a few years and think of the breadth of the ad valorem payment products that we have in the portfolio, there's significant growth ahead to continue to drive adoption.

That's great. That's great. And maybe we could -- if we could put it into perspective kind of where you are in your penetration of the end market here, 134,000 customers for core BILL. And you mentioned your sweet spot are those small businesses that are just big enough to need something for automation, but not big enough that they need some customization. So that kind of sweet spot for you is in that, I guess, middle end of the SMB. How should we think about how many of those businesses are out there to go get? What is the profile? And how do you think about that -- the size of that market in terms of number of customers?

Yes, if you look at the overall sort of census of businesses in the U.S., there's 6 million companies with employees, there's only about 100,000 businesses that have more than $50 million in revenue. So by definition, most businesses are small and medium size. There's another 25 million businesses that are just 1 person, either a sole prop or -- and something. And then you would add to that freelancers and gig economy workers and whatnot. Our sweet spot is really in the middle businesses that are, say, 10 to 100 employees, something like that. They have, on average, dozens of transactions per quarter. In some cases, if they're a mid-market business, it would be much larger than that. And what that means is they're working with lots of suppliers, and they have that many transactions that's complicated. There's probably multiple employees inside the business who have to collaborate and coordinate in order to manage these transactions, manage cash flow and things like that. So our tools around driving digital transformation, moving from paper invoices to our technology that automatically extracts data, initiates routing for approvals and drives an automated process is really important to those customers, and that becomes super sticky. So we become the primary platform that our small business customers use for financial operations. And obviously, we complement things like accounting systems or payroll systems or other tools that small businesses, we complement those really well. But the market is very early in its evolution. I think we're probably low double digits penetration across all of the digital financial operation solutions for small businesses. And obviously, there's a long way to go. We haven't yet -- aside from doing international payments in our Invoice2go acquisition, which brought us lots of small customers spread around globally, we haven't taken big steps yet towards international expansion. But that's something that's on our multiyear set of priorities, so we're excited about that opportunity as well.

Wonderful. And maybe if you could help us understand what are the go-to-market efforts here. You have a multichannel approach. So maybe we could just touch on the channel, the different channels for acquiring customers, and where is the focus on go-to-market.

Yes, it's super diversified along the lines of finding businesses wherever they are as opposed to 1 method. And so we acquire many of our customers through referrals. They come to us. It's an inbound motion. We also do outbound digital demand gen marketing. Our biggest source of customers is actually the accountant channel. So we partner with 6,000 accounting firms in the U.S. And we have tools for the accountants to run better practices. And they obviously help us distribute the product and sell into their client bases. And where penetration is still pretty low, even though we have 6,000 firms, we're not fully penetrated into their client bases. And then we have a number of relationships with large financial institutions as well, where they white label our product, embed it inside of their online banking environment, and we reach customers that way. So we're basically wherever a small business is going to be. We want to be there for them so they can adopt the platform with as little friction as possible.

Wonderful. Great. Let's shift gears to the financial institution channel. It's a newer channel for you. If you could just elaborate on some of the partnerships there and then any color on where you're seeing traction.

Yes. Most of our partnerships are with -- we have 6 of the top 10 banks and then a number of smaller banks. And most of the partnerships are focused on the larger business segments. So commercial customers or mid-market customers. We have a couple of recent examples where we're working with large banks to serve the small business segment. And that segment is interesting because it opens up millions of customers as opposed to tens of thousands or hundreds of thousands in the case of the commercial segment. And one of the requirements to do that is that our product be really simple, and it can be adopted on a self-service basis without salespeople from the bank having to drive adoption and without consultants and lots of sales efforts. So in driving that simplification to support the small business segment, we're able to bring back a lot of that learning to the BILL stand-alone platform and use that to support the smaller businesses out in the market as well that haven't been as much of our sweet spot historically. So making sure that the product is really easy to use, we can onboard customers in a self-service basis and really drive efficiency in acquiring those customers.

Sure. Great. Why don't we shift gears to Divvy, maybe just to level set a little bit on the offering and kind of where it is in terms of penetration. I think it's 5% of TPV this past quarter. In the past, you've said that corporate card spend is about 25% of SMB spend, which is the metric that was surprising to me. Should we think about that as the target for where the Divvy TPV penetration could get to over time? And what are the keys to driving that adoption?

Yes. Well, just first on where we're at. So the whole spend and expense category is really in its infancy still. Divvy is a leader in the space, and we acquired the business with the understanding that the market is just beginning to develop. Like the total number of customers who adopted a software solution to help them with visibility and control and transparency and all those things around card spend, it's really small. So the magic of Divvy is really in the software, to make it really easy to use, distribute cards across the organization, do fine grain budgeting for card spend, lots of controls and things like that. It's obviously an interchange-based monetization model. The average spend-and-expense customer that we have for Divvy is larger than BILL. They're more like a mid-market customer. And that comes from the fact that there's a credit component to the offering. So they need to be underwritten. So the focus initially was the larger businesses. But we've determined that about 50% of the BILL customer base is a candidate, a good candidate, for the Divvy card with the credit component. There could be other Divvy solutions like expense reporting, expense reimbursement and things like that, that don't involve the card, where the smaller businesses in the BILL base could be candidates for that. So to the stats that you mentioned, the 5% today and maybe 25% over time, where we have a joint customer, a BILL customer that's also using Divvy, I think there's an opportunity for us to capture near 100% of their B2B spend with the spend-and-expense component being 15%, 20%, 25% over time. So we should see the overall Divvy spend as a percentage of TPV per BILL increase as we continue to drive adoption. Most of the customers, the new customers that we're acquiring for spend and expense today, are still net new to the company, right? So they're not from the BILL base, from the upsell or cross-sell effort. That's still down the road as we bring the product platforms together and we do more integration and create a unified experience. That's later this calendar year, and that's when we'll start to see, I think, more an elevated level of effort associated with cross-sell and driving those results.

Got it. Got it. So the integration effort is underway. I think you said end of this calendar year will be completed. I mean, what could that do in terms of representing potentially a catalyst for the business? I mean is it, at that point, you have -- you'll be ready with go-to-market? Or is there some go-to-market learning that will be involved once the integration level is completed, the technology level?

Yes. First, just on what it means. It's really -- we get feedback from customers that say, if they can do more of their operation in 1 place, if they can get fewer tools versus more tools, it's really valuable. It reduces training. There's all sorts of productivity benefits and whatnot. So one of the things that is true right now is that we have a BILL platform that's separate from Divvy. That means there's 2 landing pages. There's 2 dashboards. There's kind of 2 different ways that customers need to look at their financial operations. So as we bring those together, all of a sudden, all of the spend that the business has, regardless of how they're spending it or what payment method is used, can be managed in 1 place. That's really important for accountants who are managing many clients through the same dashboard. So I think we've already started to prepare for the point later in the fall where we bring the platforms together. We've already done some automated underwriting on tens of thousands of BILL customers, for example, who are approved for credit lines on Divvy. Now we haven't gone to those customers with offers yet. We're really going to follow the product integration to do that. So we think it can be a catalyst for improving momentum with Divvy. It will take time, though. It's not an overnight thing. Obviously, there's a behavioral change. There's a swapping out of cards and programs potentially with existing solutions that small businesses are using. But we're really excited about the multiyear opportunity to drive growth, just from the BILL base, let alone the continued penetration associated with market adoption on a product like this.

That's great. That's great. Excellent. Invoice2go, why don't we shift gears to that business, another acquisition that was made. If you could perhaps provide some perspective on what that brings to the BILL platform? And where is the integration effort there? And how does that add to the value proposition?

Sure. BILL has -- we've historically been maybe even over-indexed to AP. We had an AR product. It was still relatively small. And we faced a little bit of a buy, build or partner decision because we knew -- we believe that AR is a big opportunity. And so we picked Invoice2go because it's an advanced mobile-first AR solution that works really well for service businesses. So think of your contractor or your plumber or companies like that, that are in the field doing business, that all happens via the mobile phone. And so our goal is to have the Invoice2go features and functionality essentially replace the legacy BILL AR solution. And over time, we want to create more balance between AP and AR, especially as it relates to the network. So we're realizing now a pretty significant percentage of our core revenue from suppliers in the network. It's about 30% of core revenues coming from suppliers. They're still mostly passive receivers of payments in the network. They're not really leveraging our tools to manage their business and create automation and whatnot. And that's where Invoice2go comes in, is we can deliver more tools, more capabilities to suppliers in the network. We not only get monetization, that's important, but we get them more engaged with the platform. We have the opportunity then to upsell and cross-sell them to other solutions and potentially subscription offerings from BILL. So it's a very interesting product, and we're still excited about the opportunity for it to influence, in particular, the network growth and monetization over time.

Great. Wonderful. We're seeing a nice margin ramp this year. I think, in our model, we're at 9.4% margin, which is up nicely from a loss of 2.3% last year. A lot of that has to do with float, but would love to get your perspective on how you think about balancing growth and margin and driving profitability.

Yes. I think that's the keyword. It's definitely a balancing act. It's not a trade-off. We're going after a huge market opportunity that's early in its evolution. So our mindset is around growth, but we try to do that in a disciplined way with a sharp focus on unit economics. And so we're continuing to improve our financial results. We're not building the business to be necessarily reliant upon float income to increase margins. We -- the last couple of quarters, we've been operating income-positive, excluding float. So we're starting to make progress there. And we feel like as we scale, there's going to be lots of opportunity to drive margin expansion in the years ahead.

Great. On the Q3 earnings call, you talked about gross margin peaking at the current level. I think we're at 87% last quarter. Why is that the case? If you could just provide some color on that commentary.

Yes, a couple of things. One, the positive impact in non-GAAP gross margin associated with float, that's about 100 to 150 basis points of the expansion over the last year in non-GAAP gross margins. Our sense is that we're probably near peak float revenue days. As interest rates start to top out here and maybe start declining, the benefit associated with float revenue will start to wane as it relates to gross margins. We also have a very favorable payment mix right now. So we have some of our newer ad valorem products that are at scale or starting to get to scale are very high margin. As we build out the portfolio of payment products, not all of the products are going to be at the same margin. So in the intermediate -- the short term, we've said maybe it's mid-80s, low to mid-80s. Over the intermediate term, it could come down a little bit from there. But it's still really, really high margins, and we feel like we're in a good position with the portfolio of payment offerings to continue that.

Great. Wonderful. And I wanted to switch gears here in the remaining couple of minutes on AI. Rene alluded to some real opportunities here to enhance the customer experience. Maybe you could just elaborate just more broadly how you see AI manifesting in the platform here? And where is the opportunity?

Yes, for sure. We've been a bit of an early adopter of AI and machine learning and related technologies to help drive risk management and credit and underwriting for our own internal purposes. As well as for customers, we have a product called IVA, which is the inbox virtual assistant. And that's technology that we've developed that extracts data from documents, contracts, invoices, things like that, and automatically routes through prediction models, who should approve them based on who the vendor is, dollar amounts and things like that. If you think about it, IVA is sort of a -- it pushes results to customers. It's not truly interactive at the moment. There could be opportunities to apply some of the new AI capabilities to that. We also have a significant asset as it relates to the chat experiences that we execute with customers. Most of our customer support operation is actually via chat. So all of that is stored. It's data that we can access to produce better, more automated real-time solutions for customers. Neither of these things are maybe transformational in the near term for our business, but we think there's certainly opportunities, including things like delivering financial insights in an automated way through our Finmark financial planning tool, leveraging some capabilities there. So our new CTO, Ken Moss, has a deep AI background. He's bringing some of that, including his experience in gaming. It involves simplified UIs and things like that. And he's actually taking the torch on our AI initiatives from here, and we're really excited about the promise there, even though there's maybe not a near-term huge catalyst for us.

Wonderful. Well, John, that's it. That's all we have time for. This is great. Thank you so much for joining us.

You bet.

Great discussion.

Thank you.

Yes.