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

Hello, everyone, and thanks so much for attending the UBS Tech Conference. If you don't know me, my name is Taylor McGinnis, and I'm on the UBS software team here. And we also have Nik from the payments team as well. So Nik?

Hey, everyone. I'm Nik Cremo. I help lead the payments and fintech team here at UBS.

Awesome. Perfect. And we also have John here from BILL, and John's the CFO and President. So John, thanks so much for coming.

Great. Thanks for having me. It's great to be here.

Yes, of course. Perfect. So let's dive in. So John, I think a good place to start would be on the macro and what you're seeing in terms of SMB health. That's very topical amongst investors, just given that I think we saw a bunch of different prints and mixed sentiment amongst different SMB-exposed software companies. So I think you talked about seeing a little bit more of an incremental deterioration at the end of the quarter and into 4Q. So can you maybe just elaborate in terms of what you guys saw versus more of the stable commentary last quarter? And then in terms of what we see that's embedded in the guide, maybe you can give a little bit more color in terms of what the assumptions are there?

Sure. It's a great place to start. We've actually been experiencing some macro-related spend headwinds for a number of quarters now. It didn't start just this last quarter. And I'd say the overall trends have been pretty consistent with our expectations on a -- both a per customer and overall TPV basis. They're soft, they're down slightly, sequentially and on a year-over-year basis. And I think there's been some emerging changes in behavior, driven by macro influences on both small and mid-market businesses that are starting to appear in the model. I'd say we feel pretty good about the health of small businesses overall. We're seeing good stability in spend from the smallest of customers. I'd say the mid-market segment that we serve though, is still pulling back. We see lower spend on a per customer basis and pockets of weakness across multiple categories. I don't have any intra-quarter updates on the trends, but our expectation going into the updated numbers that we provided for the rest of '24 is that some of these trends, friction, higher cost sensitivity, muted spend trends, slightly lower spend on a per customer basis year-over-year, these are the things that we expect to persist throughout fiscal '24.

Perfect. And then diving into that a little bit deeper. So when you mentioned some of the weakness that you're seeing in the mid-market segment, any visibility you can provide to the audience on what are the areas that you're seeing incremental softness in terms of vertical or areas of spend? And then would love to get color, if you can, in terms of your exposure maybe to some of those headwinds that you're seeing.

Yes. On an industry vertical basis, we're obviously a horizontal go-to-market SMB platform. So we don't have oversized concentration in any given industry vertical. I'd say the key differences that we see are really by size of business across all industries. And as I mentioned, larger businesses appear to be still pulling back. They probably have a larger discretionary spend budgets with which they can adjust in response to the macro environment that they're seeing now. There are some categories of spend increases. Health care and related spending, advertising has been reasonably strong as well. But those are offset by real estate, office footprints, tech spending, professional services. Those are all categories that are still declining on a year-over-year basis and fit the example of small businesses adjusting to the macro environment.

Perfect. And then another topic of -- a big topic of conversation amongst investors is just as we look at the guide, the guide implies -- if you look at average TPV per customer, excluding the FI channel, it seems that it implies a bit of an acceleration in sequential growth in the second half. So some of the pushback has been if you're seeing a little bit of a deterioration, what gives you comfort that you could start to see that trend up in the second half? So maybe you could just talk through the puts and takes there.

Yes. We have seen some challenges that we noted going into this quarter and in September and October. We're assuming some of those challenges and sensitivity around payment acceptance costs and things like that persist through the quarter. We've also made a number of product improvements, changes to our go-to-market support. We're working directly with suppliers and small businesses, and we've seen some initial results from that. So all things considered, we feel good about the setup that we have, with the adjusted numbers in the back half of the year. If you step back and look at the progression that we're making in terms of monetization or penetration of ad valorem payments for the year, it's a lot lower expansion than we've seen in prior years. So the changes between the second and the fourth quarter are slight compared to the overall trend that we're seeing, which is a little bit more in the way of headwinds in terms of expansion this year.

Yes. And maybe just to follow-up on that because it's an important point. Can you maybe talk about some of the products, the innovation that you guys are looking to introduce in the second half? And maybe what some of those tailwinds could be potentially to that metric?

Yes. The first thing is we are certainly takers as it relates to the overall spend that the business has. But we still have a lever to increase our share of their spend, so increasing share of wallet by having more payment products, faster payment products, better tools and process automation to eliminate some of the exception payments that might happen outside of our platform. So we typically see a customer who's been on the platform for a while, we have 70% to 80% of their overall B2B spend. With the addition of our Spend & Expense card into the integrated BILL platform, we think we can approach 100%. So that's one lever that we use. And then on the product side, as it relates to card acceptance or international payments, FX transactions, we're making improvements around payment speed, ease of reconciliation, more automation, passing more data to suppliers to reduce the overall effort and costs associated with payment acceptance. And we think those will have a positive impact, certainly, as we exit the second half of this year and into the future years. So some of the, I'd say, challenges and slower monetization expansion that we're experiencing in the current fiscal year doesn't take away from what we think is still a multiyear opportunity to grow penetration of ad valorem products and drive monetization much higher.

Perfect. Well, enough with the near term. Let's talk about some of the momentum longer term. So when you look out, where do you think we could see average TPV per customer start to normalize? You have some tailwinds as it relates to moving a little bit more upmarket. And then there might be some headwinds as it relates to the FI channel or maybe not being able to get back up to the levels that we saw in the pandemic. But how do you think about that trajectory in a more normal environment?

Yes, we're certainly way past the rapid increase in spend that we saw during the pandemic, where businesses were adapting to a crazy demand environment. The demand environment is low. Interest rates are high. Other costs are higher, including labor, and we're seeing spend be adjusted. I mentioned the integrated platform where we've got all of our AR, AP and spend and expense management products together. That opens up the opportunity for us to capture a big portion of B2B spend that has traditionally not been served by the BILL platform, and that's card-based spend. That could be anywhere from 10% to 20% of a business, a small business' overall spend. Mid-market customers and the success and the demand, we're seeing there. There are just -- there are many multiples of the size of the average BILL customers. So that's an opportunity to scale spend as well. And just generally, focusing on the payment experience such that the recurring spend happens on the platform. We have about an 80% repeat transaction rate, meaning as a small business completes a transaction, 80% of those are between the same buyer and supplier that we've seen in the prior few months. And that tells us that the platform is still mission critical. It's central to how businesses are running their financial operations. And so we're well positioned if and when the macro environment changes and businesses pivot to being an expansion mode.

Makes sense. Let's shift gears to the virtual card opportunity, and then I'll hand it over to Nik to dive a little bit deeper there.

Yes. So just going back to some of the trends that you called out on the last earnings call with some of the larger suppliers being more sensitive to payment acceptance cost and virtual cards kind of being at the top of that list. So first, I mean, what gives you comfort that some of these trends are a little more cyclical in nature? And do you still see the 5% to 10% TPV penetration target as being achievable?

Yes, it's a good question. I'd say that first, cost sensitivity amongst, say, suppliers around the price of acceptance -- that's not a new phenomenon. They didn't, like in this macro environment, realize that virtual card payments or some other payment method is expensive. But I think it's more a focus now, like this environment. Everything is under scrutiny in terms of business spend. And like the timing is interesting. In the time that we've been public, we've seen like the fastest reduction in interest rates from something to 0 that we've ever seen. We've seen the fastest increase in interest rates since then. And all of this is still being worked through by businesses. So I'd say there's certainly more sensitivity around nominal costs right now. We see that not only in payment volume flows but in the inbound requests that we have for product changes, increasing automation, creating more efficiency and reducing friction. And those are some of the things that we've reacted to that build or lead to some of our confidence in the new product capabilities can lead to higher adoption rates from existing suppliers, who have even expressed a cost sensitivity in the current environment.

Can we take a deeper dive into some of those initiatives that you're working on right now to kind of work with those suppliers, such as incentives and supplier enablement investments?

Yes. The first thing to realize is that it's not like we're at full penetration across the billions of dollars in spend on the BILL platform in the case of, say, virtual cards or international payments. Like we're still a very small percentage of the addressable payment flows that are being monetized in ad valorem payments in our products. So as we think about driving additional penetration, the biggest thing in our mind is about payment speed and automation. Like how do we just make it simple, set it and forget it for suppliers, because that reduces the back-end human costs associated with reconciliation and lowers the overall total cost of payment acceptance. And we think reducing that friction unlocks significant volume and allows us to further penetrate towards some of those longer-term targets that we previously talked about, the 5% to 10% on virtual cards or 10% to 20% on IP. And so we feel good about that. Incentives could play a role in this as well in terms of unlocking volume, but we don't think about that as a stand-alone initiative. It's a complement to improving the product experience, creating an experience that leads to a high percentage of repeat transactions and annuity stream around payments. But it's definitely something that we've looked at. We have not historically provided any incentives to suppliers around the BILL network or to AP customers outside of testing. But it's something that could make more sense in this environment combined with product improvements.

And when you think about potentially deploying some of these incentives, should we think of that as being more of like a case-by-case basis for maybe some suppliers with a bunch of volume that are much larger than some of your other suppliers and maybe -- somewhat maybe some larger ticket sizes that might be more sensitive?

I would say definitely case by case as opposed to across the board. And large suppliers, we're increasingly, as you've heard us say, treat them as customers who are -- we're generating revenue from and they are receiving some value from our platform. How do we make sure that, that value proposition is there? And to the extent that incentives combined with product experience is one way to do that, we think that could make sense. But we don't really view across-the-board pricing or incentive changes as being necessary at this point.

Got it. And then on a similar note, I know that there was also some headwinds to your non-USD cross-border transactions during the quarter. So can you just walk us through, again, like what you were seeing there and if there's anything that you guys can do on your end to help move through some of those headwinds?

Yes. For international payments, we've done a good job over the last, say, 4 or 5 quarters at increasing the percentage of FX transactions. And that's by working more closely with suppliers and driving awareness about their ability to influence transactions, regardless of the way in which they're invoicing their buyer. And more recently in the last quarter or so, we've seen an increase in the percentage of U.S. dollar transactions. And we think that has a lot to do with the strength of the dollar and the equation between buyer and supplier and who's bearing the cost of that currency translation. We have examples where suppliers have actually switched invoice terms to where repeat transactions that we've seen over the prior, say, few quarters were invoiced in local currency, and now they've moved to U.S. dollar. And where we have the ability in certain markets to work directly with suppliers, this is -- the examples would be Canada and the U.K. where we're licensed. And so we can treat these suppliers -- international suppliers as customers, we see a much higher percentage of cross-border FX transactions versus U.S. dollars. So we're going to -- as we build out our license portfolio, we work in more markets, we make offers directly to suppliers. We think that can have a significant influence on the percentage of FX. The other thing I'd say is we haven't historically played in the wholesale part of the FX market to where, for larger businesses, we have buying power and sophistication in FX lines and things like that. They've traditionally fallen outside of our international payment product, and we think it is a market that we can address.

Got it. And just a brief follow-up there. I know you mentioned the licenses that you guys achieved in the U.K. and Canada. Are there any other large international markets where you guys are working to get those licenses that you can have similar success there?

Most of Europe, Australia, New Zealand, places like that, where we have a track record of regulatory success, compliance programs, our proprietary money movement capabilities as well as potentially a partner footprint with which to leverage some of the regulatory opportunities.

Thanks, John. Back to you, Taylor.

Yes. So you spent a lot of time talking about the drivers, so let's translate it to the model. So when we look at take rates, that's been expanding consistently since the IPO. And now in terms of some of the headwinds that you're talking about, I think the guide implies maybe like a slight deterioration in that metric. So when we think about like the drivers there, I know we've spoken with some investors who have a harder time reconciling that math. So maybe you can walk us through the puts and takes there. And then as we look throughout the rest of the year, I think you've talked about seeing take rate expand as we get into 4Q. So can you provide more color in terms of what maybe you're seeing in the business or early data points that's giving you that level of comfort?

Yes. For Q2, we indicated that we expect the take rate to be soft relative to Q1, driven primarily by FX transactions and virtual card payments where we're seeing some volume shift to other payment types, whether it's U.S. dollar or ACH or check payments. And we've also made a number of product improvements and changes in our go-to-market and working more closely with buyers and suppliers and virtual card recipients that gives us confidence that while it is going to be a lower-growth expansion year, given some of the friction that we've seen driven by the macro environment, that we do have the levers to improve monetization throughout this fiscal year. So we don't see it as a structural change or something like that as much as a transitional set of activities and product improvements that we can make in order to get back on track to expansion mode. But nevertheless, for the full fiscal year, we are looking at lower expansion than we've seen in the last couple of years.

Got it. And then maybe turning to Divvy and the potential virtual card headwinds that you could be seeing in that business. So I know you took the guide from mid-30s to mid-20s for this year. So can you talk through the biggest drivers of that? You mentioned you implemented more credit limits. We talked about some of the headwinds to virtual cards. So what are like the biggest components of that?

So for the Spend & Expense product, there's 2, I'd say, material moving parts. The first is how we assess the credit environment and the line sizes that we're approving for customers. And then the second is the spend trends from the underlying customer base. On the credit lines, we think this macro environment leads to incremental credit exposure, and we want to get ahead of that. So we've been proactive in adjusting down line sizes for large businesses and effectively reducing our credit exposure. That brings down spend from those large customers and creates a little bit of a headwind to revenue growth in the second half of the year. That's, call it, half of the adjustment that we made. The other half that we're seeing is lower card spend per transaction. And so the spend trends for the overall card spend trends for this product have been stronger than the core BILL AP product, and we're starting to see lower spend per transaction. Those 2 things combined led to the adjustments that we made. On the credit side, I'd say it's more proactive than it is reactive to things that we're seeing in the environment or losses things like that. We're just -- we're monitoring the situation much more closely. We've made a series of changes over the last year or so to make sure that we're positioned for success with our customers and not seeing a spike in losses. And so this is a part of that effort, managing to a contribution margin target rather than just a gross revenue margin target.

Perfect. Now I'll turn it over to Nik to dive deeper on some of the Divvy growth drivers.

Yes. And just to comment on that briefly, we see that in a lot of our other companies too, that have charge card programs that have been implementing similar changes. Some of them even a little bit earlier as well, so we weren't too surprised to see that. But the other side of the Divvy growth guidance relates to net adds. So your net adds dipped down a smidge this quarter. They were trending around like 2,000 a quarter, and they dipped to like 1,500 this quarter. I know some of that related to changes in the branding and the marketing initiatives. But looking across the rest of FY 2024, do you think that we could potentially see an acceleration in Divvy net adds maybe exiting the year as you guys completed the unified platform and the cross-sell efforts could start to materialize?

Yes. First, I'd just say we feel really good about the positioning that we have with the Spend & Expense product in the BILL platform as a part of our integrated solution that's now launched. The growth algorithm is a combination of spend from existing customers and new customers. And I'd say in the short term, the last quarter, you're right, it reflected a pullback in some of our go-to-market spending in anticipation of the brand switch over from Divvy to BILL, which did happen in the quarter. And I'd say we'll grow through that in the second half of the year. But I'd say just as big, probably from a customer add standpoint, bigger part of the opportunity in the near term is the cross-sell into the BILL customer base, which is an important opportunity. And we feel much better positioned there, given the credit environment comments that I had a minute ago, because we know so much more about the BILL customer base. We see their transaction history. We know who they do business with. We're able to underwrite them with much better data. So it's a completely different dynamic reaching a new customer that is also an existing BILL customer versus a brand-new customer coming from the market. We do, do automated underwriting for some of the net new adds that come outside of the BILL platform to the Spend & Expense solution. We have been a little bit tighter there as it relates to the underwriting standards and what it takes to get in the door. And we would expect some of that to persist through this cycle. But nevertheless, I think we're positioned well.

Thanks for all the color there. So just pivoting to gross margins. You guys have continued to outperform there. Really strong result in Q1. Just thinking about you guys are guiding it to be low to mid-80s, which you guys have generally guided that line to. But just thinking about the puts and takes of headwinds to virtual cards and the FX cross-border transactions and then maybe introducing some incentives, how should we think about the impacts for those various factors to gross margins?

Yes. I mean we obviously have expanded non-GAAP gross margins a lot in the last few years. That's a combination of payment mix and the tailwind associated with float. Our expectations going forward of low to mid-80s, which is below where we are now, is both a combination of lower tailwinds from float as interest rates plateau and maybe start to decline down the road and a shift in payment mix. And so I think we have, in the near term, addressed any economic changes or incentives or other initiatives that we might have to drive adoption around ad valorem payments. We feel like that is reflected in our margin assumptions. And we're -- again I think we're -- our payment mix is super favorable now. And as we continue to drive more volume, that should still be additive to margins.

Understood. Back to you, Taylor.

Perfect. So with $2.6 billion of cash and cash equivalents on the balance sheet, maybe we can talk a little bit about your current thoughts on capital allocation, how you guys are thinking about your M&A strategy, and then maybe you could provide a little bit of color. Are there any natural adjacencies maybe to the business areas that you aren't in today that as you guys think about your longer-term goals, pockets that could be interesting areas to innovate on in the future?

Yes. Well, we feel good about the platform and the product lead that we have over others in the industry broadly defined. Our core value proposition is around workflow and automation and approvals and things like that with payments attached. Those same capabilities apply to other areas of the back office, whether that's payroll or procurement or cash flow solutions, working capital, all of those things are areas that are on our product road map. Whether we partner or build or buy, that's open. We're certainly capitalized for M&A, but we're also very focused on the core business today, the core health of the BILL platform and the customer, serving them through this economic cycle. So we're not necessarily preoccupied with needing to bolt on capabilities. But where we see opportunities to bring things to market faster, that's certainly something that we'll look at. But we tend to take a build first, and then is there a better alternative second, is kind of our primary approach. We do have an existing share repurchase authorization that is currently being executed. It's not an accelerated share purchase plan. But we are still in market with that. I think we announced it in March of last year, February or March, and that was a 12-month authorization. So that is something that we're in the market with today as well. And like I said, we're capitalized to invest in the growth of the business. We are also focused on just balancing our rate of investment, the growth profile, profitability of the company.

Perfect. And you told [ Sean ] this, but I think it would be helpful for the audience to talk about how BILL differentiates relative to some of the competitors, just given some of the increasing competition that we're seeing in the industry. So could you elaborate in terms of what are the areas that BILL is more advanced in? The pockets that you see as being bigger gaps relative to your peers? Love to get a little bit more color there.

I think the 2 big areas are the product lead and then our distribution ecosystem. Those are where we are very different than most others in the space. In terms of the product, like I said, we start with an automation, a digital on-ramp mindset, data as it relates to transactions, whether that's extracting from invoices, driving automated account coding, approvals, collaboration and things like that. We're very much built for slightly larger businesses that have some complexity and need for collaboration, both inside the company and with their trading partners. We're investing a lot to extend those capabilities to even smaller businesses who might have simpler needs. We have also seen, as you've heard us talk about before, a lot of demand from larger mid-market companies. So we're meeting that demand with more advanced features as well. Our distribution ecosystem, the center of that is accounting firms who are trusted partners of small businesses. We both work with accounting firms to distribute our platform to -- and small businesses, but we also offer tools and solutions to accounting firms to run a better practice, more easily integrate and work with their clients, drive automation and efficiency and productivity, such that a person in the client advisory service practice of an accounting firm can serve more clients using our platform than they could without that. And then we partner with -- the other part of our distribution ecosystem, aside from going direct to customers in our large network, is partnering with FIs. And we have a successful track record of deploying our white-label solution, embedding and integrating that within financial institutions. And we think that opens up -- the experience from that opens up many more opportunities to take that embedded approach or white-label solution beyond the financial institution channel into the broader software ecosystem as well.

Perfect. Turn it over to you, Nik.

I wanted to dig a little deeper on the invoice financing product that you mentioned on the last earnings call. Just saying that you were seeing good trends and expected that it could potentially contribute to monetization later this year. We were excited and a little surprised to hear that comment just given you guys were only piloting that product, I think, at the beginning of this year. So any color that you can give us on the rollout and kind of what gives you confidence that this product could maybe scale into the back part of this year?

Yes. I'd say the scaling part is probably more next year. But we have a great advantage as it relates to the data asset with which to figure out how to target suppliers in the network or buyers. But our working capital product to date is an invoice financing solution offered to suppliers who might have an invoice outstanding with a BILL AP customer. And maybe they'll get paid in 30 days or 45 or 60 days, and they can get paid immediately through BILL. And then BILL gets paid when their buyer pays that invoice. So we've seen really good repeat usage. We've seen good repayment rates, meaning our estimates around who to target, which transactions to potentially finance, is proving out well. So the credit underwriting part of things, the customer experience, we're getting really good feedback around that. I'd say the next phase is the operational scaling associated with working capital. We are being somewhat cautious in this macro environment to not move too fast with this product. And then there's a bunch of follow-on products that could make sense here just in this umbrella of working capital, things like more time to pay for buyers. So not just on the supplier side, but on the buyer side, and other cash flow-related solutions. So I think it's an interesting product category where there's clear needs. And integrated with a solution like BILL, where we're at the center of transactional decision-making inflows, is the right spot to be able to scale a product like this.

Understood. So what do you think about what investors should think about, like the loss rates of that product being like? I know you guys have a data advantage, but just given the macro environment.

I think it's early to quantify that yet as we get to a full product launch. This is a very controlled beta testing that we're doing right now, and we're very comfortable with the economics. But we'll roll out expectations around targets and net economics on that as we go to full launch.

Got it. Well, it looks like we are unfortunately out of time. But John, thank you so much for being here. We always really appreciate your insights.

You bet. Good to connect. Thank you.

Thanks, everyone.