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

All right. Welcome, everybody. Thank you for being here. We've got John Rettig from Bill, CFO. My name is Matt Stotler. My colleague and I, Bob Napoli are the analysts who cover Bill here at William Blair. Start by saying that for our full the disclosures, I encourage you to visit our website, williamblair.com. We're going to hand it over to John for a couple of minutes for a quick intro. Just a little overview on the history of Bill, what the company does, what customers you serve and what problem you're trying to solve, and then we can break in some questions.

Sounds good. That's a great place to start. So Bill, we're the go-to solution for small businesses to try to get a handle on their back-office financial operations. They don't really talk in those terms, but it's the messy process around getting paid, sending invoices, receiving invoices, making payments, figuring out how to manage cash flow, how to optimize getting AR collected faster, taking longer to pay AP, you just optimizing cash flow. And the interesting thing is unlike the consumer space or large enterprises that have largely gone digital for payments and everything related to that, small businesses, the market we serve really hasn't. The vast majority of new customers that we acquire on a quarterly basis come to us with no solution to automate their financial back office. They might have cloud solutions for payroll or accounting or other things in their business, but the messiness of financial operations is still largely analog, and that's where we come in. So we have great tools to help them go digital. Obviously, that became front and center during the pandemic when a lot of businesses had to disperse and they realized they didn't have the capabilities to do that. And so awareness was created during that. And our, I think, secret sauce is all around process management and automation. That's what we do because we apply that to accounts payable, accounts receivables, spend and expense management, we also get the right to do payments, and that's been a big driver of revenue growth and monetization over the last couple of years. And one of the things that's hard about the small business market that we serve, which you can think of that as kind of less than 100 employees is our sweet spot is the economics associated with finding them, acquiring the customers, keeping them, growing the relationship, servicing them. And that's where we've developed a pretty interesting and diverse distribution ecosystem to really reach SMBs wherever they are. So if they're at their bank, if they're working with an accounting firm, if they're a software provider, we want to be there and make it easy for them to adopt our platform. And so our ecosystem covers 6 of the top 10 banks, 6,000 accounting firms, lots of direct go-to-market capabilities, and we have a very large network of 4.7 million members that is increasingly becoming an important referral source of growth in the business. So I'll pause there.

Yes. That's very helpful. Maybe we'll start with just a little bit of an overview of the recent experience from Marqeta. Obviously, the company has seen substantial growth in recent years. There's been some volatility given macro uncertainty, specifically with total payment volumes from the transaction business. Can you just recap what you've seen through March in terms of trends and then the relative rate of change over the past couple of months?

Yes. So just stepping back a little bit, I think the last couple of years have seen unprecedented growth by small businesses. They've just expanded in response to increasing demand that they saw through the pandemic. And there's lots of other factors that contributed to that as well, inflation, low interest rates, stimulus, things like that. So we were the beneficiary from a payment volume growth perspective, along with our small business clients. And we've seen that start to contract. It was most notable in this last December quarter, but it really started last June or so, where some of the larger businesses, mid-market customers, which represents a relatively small part of our customer base, they started to get pretty proactive at anticipating more difficult macroeconomic times ahead and scaling back on their spending, and we saw that become more acute in the December quarter. And we were anticipating that kind of pullback -- sharp pullback to continue for several quarters. I think it normalized a little bit in the March quarter. Our results from a payment volume perspective and TPV per customer were a lot better than we anticipated. And I think that more than anything is a testament to the resiliency of SMBs and how quickly they're able to adapt to the environment that they're operating in. And so the environment seems a bit healthier now, and we're going to continue to do the things that we do well around adding payment products and increasing our share of wallet with customers so that we can help automate more and more of their payment activities and their processes. That gives us a bigger share of their payment volume. So even in a low growth or no growth payment volume or spend environment for small businesses, we still have levers with which to continue to scale our business.

Right. And given what you're seeing in the near term, are you making any changes based on what you're hearing from your customers or your partners in terms of how you're running the business on a go-forward basis in the near term?

Not as it relates to the platform and building out products and driving adoption to support the transaction side of the business. We -- our emphasis has always been and continues to be on having many choices, finding the right solutions between buyers and suppliers, such that we keep the volume on the platform. We have a very high repeat transaction rate is about 80%, which means most of the transactions between buyers and suppliers on our platform, they recur over time. And that's part of the annuity that we're building as we think about supporting small businesses. We're shifting a little bit as it relates to the go-to-market side of things. In this environment, I think small businesses have more things to worry about and more things to prioritize than they did perhaps during the pandemic. And so maybe they're less prone to adopting new technology right now if they're distracted with other priorities. So we're increasing the size of our funnel. We're making it easier through promotions and reaching businesses where they are and improve targeting to find those businesses, those prospects that are most prone to adopting now versus later. So these are adjustments that you make through different cycles, and we're in the process of doing that now.

Right. Got it. And so from a higher level, obviously, the B2B payments opportunity, the core opportunity there is massive in itself, right? You've continued to add functionality, add capabilities and kind of expand the value proposition for customers. You touched on some of the recent acquisitions, right, Divvy, Invoice2god, and then most recently, Finmark, how those expand your value add for customers and ultimately your TAM?

Absolutely. So our heritage is really in AP automation. That's where we started because it's the most complex set of processes that a business has to manage in the back office because it's so manual involves a bunch of different pockets of data and documents and internal and external entities, parties that need to be collaborated with. So we solve the really hard problems first, including building a bunch of payment technology and proprietary infrastructure that allows us to innovate with payments. So to complement those sets of capabilities, we acquired Divvy, which is the leader in the spend management space. So it's a category of spend and process management that the Bill platform didn't previously address. It's the card-based spend. We typically see for a mature customer on our platform, about 70% to 80% of their payment volume. The biggest piece that we didn't help with pre-Divvy is the card spend. And that's where that comes in. It's a modern tool to help businesses gain visibility, control, transparency in all of their card spend across the organization, growing very fast, very, very early in that market. There's not many businesses. If you add up all of the players in the spend management space who actually have a modern tool. So it's a great complement to our platform to help bring as much automation and control to the card spend as with the core AP spend. And then kind of the flip side of that is Invoice2go, which is a mobile-first advanced AR solution. The Bill platform has indexed very high towards the AP side of things historically. And we're investing more now in the AR side, in part to help our network members use more of our tools. So we have 4.7 million network members who are the receivers of payments from our AP buyers, and we want to get them more engaged and offer more value to them so that they can start to leverage our capabilities to get paid faster, to create process automation, to send invoices and things like that. So the big promise for invoice to go with the mobile-first platform is really around our network and then upselling across the rest of the Bill platform. And finally, Finmark was our most recent acquisition, a very small company, but very interesting technology around financial planning and analysis and budgeting and forecasting. And you don't traditionally think of those things as super important for small businesses, normally mid-market, and while that's true. We think it's -- there's a great opportunity to bring sort of the insights associated with planning tools to the small business segment by integrating with Bill and then connecting with a bunch of the other software that small businesses use. So Bill, obviously, integrates real-time with accounting systems. Finmark actually connects with payroll systems, point-of-sale, e-commerce, a bunch of other tools, CRM systems that small businesses use to present a really broad, comprehensive view of what's happening in the business. And and it's part of our mission to not just do transactional processing and automation for SMBs, but actually be a platform that helps businesses run better by delivering insights and information about what's happening in the business.

Right. And so how is that shaping your forward innovation priorities? I think you mentioned working capital financing as being in beta. You talked about a number of other places that you could expand over time. Maybe just give an overview of what you're thinking about what's next?

Yes, we're continuing to innovate with payments. So there's lots of product opportunities we have, including financing-related activities you mentioned working capital. We think that's an interesting area. There's a lot of demand from small business, particularly because where we sit is right in the middle of transaction flow between buyers and suppliers. So we can help with access to cash and cash flow faster than might otherwise be the case between buyer and supplier. We're in, what I would call, a very controlled beta part of this product where we're offering invoice advancements to a select number of suppliers as we prove out this product. There's probably other forms of this that could roll out over time. But we're pretty excited about it mainly because we have a tremendous data advantage. We work with hundreds of thousands of businesses, millions of network members across tens of billions of dollars of spend and millions of transactions. So we have a lot of history with which to really understand propensity to pay, payment timing, changes in velocity and all that feeds a really interesting underwriting capability from a credit standpoint. So we don't view these types of products as we're going to go acquire new customers with them. It's more an add-on to the existing customer base. I think there's some other use cases beyond payments in the platform that could come over time, including some automation around the procurement process, like the front-end part of where Bill starts today, which is invoices. Well, what about all the activities that happened before that, I think we can bring a lot of automation to that. And then there's some other back-office areas around people management, human capital and things like that, that I think could be applicable over time as well.

Right. And you touched on the data asset, right, especially with -- that you guys are privy to and have been for some time. Is that something you think you can monetize in different ways over time? Is that something that you're just focused on kind of augmenting different parts of the existing platform? Or how are you thinking about the potential for that going forward?

Yes. We've leveraged our data asset primarily for things like underwriting, risk management, credit and things like that. We have a very strong track record of minimal losses associated with payments. And so we continue to leverage the data for that. I think it can also inform how we deliver insights back to customers. So right now, we leverage data for our purposes. And we do have reporting and other capabilities to deliver to customers. But this is where Finmark comes in. So sitting on top of our data plus collecting via APIs, data from other platforms, I think, is how we'll start to productize the data asset that we have. So it's really for the benefit of Bill, scale and growth around risk management as well as delivering more insights for customers over time.

Right. Got it. And so when you look at the recently acquired businesses, you touched on the value proposition there. How do we think about the integration time line for those products? And when those are going to be available within the core Bill platform? And then what that means about kind of the trajectory of those businesses going forward?

Yes. Our time line on Invoice2go and Divvy is this calendar year, we expect to have the bulk of the integration efforts. Now we've already done a lot of things that aren't visible to customers. So underlying data assets and data lake and understanding identity, single sign-on. We've done some branding work as well, where we've launched a new brand, new look and feel. We've adopted a lot of Divvy design philosophy in the Bill platform. Some of that is becoming visible to customers already. And the final sort of big milestone we won't be 100% done this year, this calendar year, but it's really bringing the solutions together and having consolidated ways of managing through dashboards and reporting and things like that. It's one of the main benefits that we hear from our small business customers and accounting partners, accounting firm partners is being able to have a consolidated dashboard to manage all of the activity in the case of accountants, it's managing all the activity across many clients. And so today, there's 2 separate interfaces with which to manage, whether it's Bill or Divvy. And bringing those together, I think, is what unlocks some of the opportunity to drive additional adoption within the bill base in the case of Divvy or frankly, Divvy customers adopting bill, particularly for things like international payments, cross-border transactions where the average Divvy customer is quite a bit larger than Bill. So we now have a higher percentage of cross-border transactions. So I think as it relates to moving the needle for our business after these integration milestones are reached later this year, that's probably more of a calendar '24 thing, but we're pretty excited about seeing the progress and being pretty close to initial big milestones on the fully integrated products.

Right. Got it. So shifting to go to market a little bit. You have relationships with most of the top small business banks in the U.S. You talked about the financial institution channel being a large opportunity in the past, still relatively small in terms of contribution to revenue. Could you just talk about -- maybe start with the character of those relationships, the structure of those partnerships and then expectations for how those went into the model over time?

Yes, we work with 6 of the top 10 banks in the U.S., a bunch of smaller banks. And it's interesting if you think of JPMorgan, Bank of America, Wells Fargo, American Express, these companies spend collectively tens of billions of dollars a year on technology, and they've chosen to partner with Bill. So I think we have a unique value proposition to help financial institutions get closer to their customers. I actually be a part of the planning and managing of operations, not just the receiver of instructions about what happens with payments or things like that. And we've seen that play out with several banks where we're seeing good traction, good adoption. And I think there's a ways to go. But one of our main goals is to increase the number of products within the white label solution that our bank partners are using. We started in this channel back almost 10 years ago now when we only had a couple of different payment products. And now the platform has expanded dramatically. And so we're coming back to some of our bank partners and adding more capabilities, things like virtual cards and cross-border payments and things like that. I think the most recent quarter, the financial unseated channel is about 5% of revenue. Longer term, as we see more products being added to the solutions, maybe more banks are more penetration we would expect our revenue per customer ARPU to expand pretty significantly. And we see a time this is not short term, but the FI channel could be 10% to 20% of revenue as Bill continues to grow. So it's an important segment for us. We have a hypothesis that banks are going to be critical in the B2B payment ecosystem over time. And we want to be there to help power them serve -- their help them power their solutions for SMB customers as well.

Got it. And maybe one more before I hand it over to Bob. The accounting firm channel is a very significant contributor for Bill. We'll love to touch on that, both near term, how those businesses are doing in this environment? And how do you think about the opportunity to maybe expand those relationships going forward?

Yes. When we started, the business was founded in 2006, launched in 2008. Our go-to-market strategy was 100% accounting firms. And like that's how we acquired customers. So we've been supporting and investing in and working with accounting firms for a long time. So we understand how they work. And our solution actually delivers a whole set of capabilities that allows the accounting firms to be more efficient, run better practices, serve more customers with fewer people. So we mostly talk about the ROI for and small businesses with our platform, but there's also an ROI with accounting firms. And so that's part of what has driven our success. We have 6,000 accounting firm partners. Now there's still a long way to go with penetrating those firms as the client advisory services practice, the consulting arm that helps with technology and financial operations of these firms, it's still growing, and there's a long way to go. So we're excited to continue to penetrate the market, partner with accounting firms and help them serve their clients. And we -- about 50% of our customers that we acquire in any given period come from these accounting firm relationships. So it's an important source of growth for us down the road as well.

Yes. Very helpful.

Okay. All right. Thanks, Matt. John, thank you for being here. You joined Bill in 2014, right? I mean I met you shortly thereafter. I can't believe it's been almost a decade.

Like a lifetime ago.

But thank you for being here. I really appreciate it. Maybe digging a little bit further into Divvy. I mean Divvy is about 40% of your revenue today, and you've owned it for almost 2 years now. How do you feel about Divvy as far as the profit model for Divvy? And how does that compare to the core bill business?

Yes. We're super excited about Divvy. There were some things that differentiated their solution. When we looked at the whole market back in 2021: one was that they lead with software. The software is the differentiating part of the solution. It's not necessarily the credit or incentives or rewards and things like that that are present in the corporate card market. And the second is, you have a horizontal approach. So they serve all types of businesses, which is how Bill operates as well. And then they've done a good job at the initial stages of credit underwriting as opposed to just cash-based underwriting or looking at a bank balance and adjusting lines like that. We've taken that a lot further under our ownership, and we're excited about how the business has grown. We've expanded gross monetization, interchange revenue significantly under our ownership. We've reduced credit losses significantly. That's allowed us to actually increase incentives and rewards, while at the same time, increasing contribution margin for the business. I think the next big leg of growth beyond the market continuing to mature, most of the customers that we acquire with Divvy on a quarterly basis are still net new customers to the platform. They're not the Bill cross-sell yet, that's, I think, a 2024 thing where we'll start to see more material cross-sell and upsell of the Divvy solution within Bill. And I think that also presents opportunities for us to scale margins and transactional economics over time as we have more customers using more of our solutions.

Thank you. Two things that Bill did early on, I think that are really serving it well today is: one, controlling the customer funds, so you earn interest income for those bonds and then developing your own payment capabilities. And as it relates to payments, the transaction revenue, I guess, is about 70% of core revenue now. The revenue per transaction from the IPO has gone from $1.30 to $8 per transaction because of the development of these payments. Can you talk a little bit about the core payment technology asset that you've been able to monetize?

Yes. It's -- we didn't build it to monetize it necessarily. We built it because we can offer more solutions for businesses. So we are a big buyer of treasury services around the bank accounts that we have. And so we're able to offer fraud protection, faster payments, other features that would be difficult for a small business on their own to offer. The opportunity to earn revenue associated with the float, that's just a side benefit of having this technology because it puts us in control of being able to deliver innovations on top of our money transmitter licenses. We have regulatory programs. We have compliance programs and so forth. We built the business primarily on fixed fee payment types. So for a long time, we had check in ACH payments, those monetized at a few basis points if you think of that. And now we've, over the last, say, 4 years, we've added several forms of virtual card payments, credit card payments, cross-border payments with FX, real-time payments, pay by card, and all those things, as we drive adoption of those within the customer base are leading to the significant growth in transaction revenues, as you mentioned on a per transaction basis, around $8 from -- up from $1 not that long ago. Our goal is really to have as many choices as possible. It's not so much to optimize the transaction per revenue. But we know that we're still early in the adoption cycle of some of these new payment types. So as adoption continues to increase, we have a long runway, measured in years, I think, to be able to continue to significantly expand our monetization. But we try to do it in a way that ensures it's the right type of transaction for buyer and supplier so that we keep that volume on the platform.

You've talked about developing new payment types or additional payment types. Is there anything you can share in that regard? Or...

There's not -- nothing really new that we're prepared to talk about yet. We did talk a little bit about adding some financing type solutions. I think there's a lot of innovation happening with real-time payments that we're going to continue to push. There's a lot of demand for faster payments within the supplier base. And so we're serving that as well. So we just think there's a ton of innovation yet to come.

You've improved profitability pretty dramatically this year, double-digit operating margins, I believe, is you're right around there. Any thoughts on just like the long-term trajectory of profitability for the company?

Yes. We haven't rolled out long-term targets yet. When we went public in late 2019, I think we indicated that our long-term operating margin would be around 20% or north of 20%. I think as the business has evolved, we significantly have grown revenue. We've increased non-GAAP gross margins way above our initial targets. Some of that comes from the benefit of float revenue, the near-term tailwind from that, call that 100 to 150 basis points, which still puts us above 85% non-GAAP gross margins. And then as we scale, we're creating efficiency in both our go-to-market operations and R&D, we are a product company going after a market that is still very early in its evolution. So we have a bias to invest to further serve customers and penetrate the market. But we don't see like structural obstacles in our business model to where longer term, we couldn't operate at 30% or above in operating margin. We'll lay out specific targets and time line towards that as we get to an Analyst Day or something like that. But we feel really good about the leverage that we have in the model. And you've seen that play out. Even in the near term, excluding the benefit of float revenue, we've been operating income profitable the last couple of quarters. And so that's the beginning signs of leverage in the model, even though we still have that bias of continuing to invest for longer-term growth.

Yes. You probably have one of the biggest TAM opportunities in our universe maybe. But what's the competitive environment going after that TAM? Have you seen any material changes in the competitive environment?

Well, I think the convergence of software and payments is happening. There's a lot of different companies who are involved in commerce who want to attach payments. Most of those companies are not going to build their own technology. They're going to partner. I think that positions us well. We see competition in the upper end of the market, where there's bigger customers, mid-market, obviously, much higher revenue per customer and things like that. But the core of what we do is businesses between 10 and 100 employees. And that's really hard to make the economics work. We've been investing behind that market for a long time. And I think the primary challenge is still just inertia from small businesses. If the vast majority of them are doing something for the first time, 95% or more of the new customers who come to us are implementing a digital solution like this for the very first time. It tells us we have a long way to go and the market is big enough. If you think of the payment volumes, we're talking about trillions of dollars, probably tens of billions of dollars in the software side of things that we're in control of our own destiny.

Thank you. So when I first met with the company or we first none with the company years ago, it was like Rene was, I'm building this for the long term. And now you've been public for a couple of years, what is your view on the long term? What does the Bill want to become as it want to stay independent long term? I think that's the goal here, and as we've been building. But just any thoughts on the -- what does Bill look like 10 years from now?

Yes. If you go back to like our mission statement to make it simple to connect a new business, that doesn't say anything about payments. It doesn't say anything about AP automation. It's really about removing friction and making it easier for SMBs to operate. There's 6 million businesses with employees in the U.S., another 25 million that are sole proprietors. And then if you add freelancers and gig economy workers and international markets, there are tens of millions of businesses. The vast majority of which still have some manual processes that can be improved and automated through the application of cloud technology. So we are still building for the long term. We're further along than we were we went public for sure, but the market opportunity is huge. And our goal over time is to serve millions of businesses in a way that we are the central operating tool that they use to manage their company. So much broader than what we're doing today. And I think over the next few years, you'll see some of the evolution of our platform.

Thank you. What are the biggest risks? We're almost out of time. We have a couple of minutes, but what do you see as the biggest challenges in front of you, what's most misunderstood by investors today?

Let me start with the second part first. I think we have intentionally built a really large network. It's nearly 5 million network members that today, it does contribute revenue. suppliers do pay us for certain payment types if they want to get paid fast or something like that or a certain method. But the vast majority of the network are still not subscribers. They're not actually a paying customer from a subscriber standpoint. So I think we have a huge opportunity over time to create more engagement from the network, help that network, create more network effects, become more viral and have more balance between AP and AR. And I'd say the biggest thing that we're constantly looking at and managing the business is making we were focused, doing what we do best, investing in the right sort of priorities going forward and moving fast. And that's the whole thing about being a control of our own destiny. We've got capital to deploy. We're trying to do that in a rigorous, disciplined way, and we're just excited about the number of growth opportunities ahead.

Just sneak in one last one. On the balance sheet, the M&A, and you have a great balance sheet with lots of cash couple of billion dollars worth and you've made some acquisitions. Are you -- should we expect to see any transformational type acquisitions or tuck-in acquisitions? What are you focused on from that perspective?

Well, no comment as it relates to size because the reality is we think of everything through the lens of our product portfolio, what is it that we're trying to do to enhance the platform to better serve small businesses. And so we're constantly looking at Bill partner or acquire. And it depends a lot on the time to market, how close to our core payment capabilities that are versus a little bit further adjacent. And I do expect that we're going to be deploying capital for M&A. We're disciplined about that as well. We're not in a rush. The public markets have adjusted much faster than the private markets. And so there's -- while there's lots of opportunities out there, we're being patient and selective about how we deploy capital.

Thank you. Matt and I appreciate your being here, and we'll have the breakout room upstairs.

Yes. We have a breakout immediately after this in Meyer upstairs for anyone with additional questions.

Thank you.

Thank you.