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

For Citi's 13th Annual Fintech Conference, I'm Andrew Schmidt, Citi's fintech research team with a focus on fintech software. It's my pleasure today to host BILL. From BILL, we have John Rettig, who is President and CFO. John, thanks for joining me. Appreciate it.

Thanks, Andrew. Great to be here.

So I think we usually do a level-set here, but I think most people are familiar with BILL, we can jump right in. And I think the question in people's mind is, so much has transpired over the last year, whether it's changes in product, distribution, macro, maybe just briefly review what's changed and what hasn't, because I think people are still trying to work out cyclical versus structural debate.

Sure. It's a good place to start. I mean maybe just level setting for context, we've been public for 4 years now. And over time, we've evolved what we do to be more of a platform solution versus a point solution for small businesses. And we're now kind of at the center of the action, if you will, for financial operations and everything about finances for small businesses. In the 4 years since we've been public, we've grown at like a 69% revenue CAGR rate. We transitioned to be non-GAAP profitable. We're positive free cash flow. So the business has evolved a lot. And along those lines, we've expanded the platform across a bunch of dimensions, AP, accounts receivables, spend and expense, more recently even cash flow and insights and reporting and things like that. So we're -- we've developed more solutions for small businesses. We've figured out how to create value for them. And we're increasingly finding more ways to help with their financial needs. At the same time, our business model has shifted. We used to be 70% subscription revenue, I think, around that time we went public. Now we're, as of the last quarter, 77% transaction revenue. So because of that, we're very tethered to the overall spend levels of businesses, and that drives some of the near-term opportunities that we have. And we've been investing in expanding the breadth of our payment offering so that we can create value and drive monetization and growth in sort of any spend environment. And part of the way we do that is by further penetrating the market. We've significantly expanded our distribution ecosystem over time. We've added 3,000 accounting firms. We work with 7,000 -- more than 7,000 now over the last few years, 7 of the 10 largest banks, and we're really just getting started if you think about the overall market opportunity.

Got it. And I think I do want to focus on the long-term opportunity, but I think a lot of people are focused on near term, so we can kind of get that out of the way, meaning FY '24 and maybe a little bit beyond. But maybe we can dig into macro. So I think a pleasant surprise last quarter was core BILL ex FI TPV increasing last quarter. So maybe you can talk a little bit about what you're seeing in 2024 to date in terms of SMB health and spend trends, and then we can dig in from there?

Yes. I mean, we're not going to provide any formal intra-quarter update, but I'd say the typical seasonal patterns that we have come to expect, based on what we saw pre-pandemic and things like that and even through the pandemic, those patterns are holding. We did see TPV in Q2, our December quarter, be a little bit stronger than we were expecting. That was a good sign. It probably also represents a little bit of a pull forward in spend from the March quarter, which is very typical for what we see, so that's continuing. We see most customer segments, whether it's size or industry or things like that, holding up pretty well. The spend is stable. Some of the larger businesses are still in a slight contraction mode. But generally speaking, there's resilience in the SMB base and we're seeing better signs of consistency than we've seen, say, over the last year or so, and I think we started to see that in the December. It's a little bit early for us to say that the overall health as it is translated into B2B spend is now in expansion mode, but we're seeing at least some good early signs of that.

Got it. That's great to hear. And then maybe we could just think about the FY '24 outlook. I think on the last earnings call, you seemed to take a little bit more of a prudent approach, especially as it relates to the fiscal fourth quarter sort of spend outlook. Can you talk a little bit about what's assumed in the outlook versus kind of what you're seeing and what the philosophy is?

Yes. And it goes back to how many data points do we have around more positive trends versus the challenges and uncertainty that not only we're facing but small businesses face in their market. So stand-alone TPV estimate, so not TPV per customer, but just overall stand-alone BILL TPV -- I'd refer you, obviously, to our earnings script -- but for Q3, we expected that to be up approximately 10% year-over-year, which would be sequentially down about 5%, and then for the full year, up about 7% to 8% year-over-year. So that reflects a continuation of the trends that we've experienced throughout this fiscal year, not a snap back to a significant expansion mode. Now we're hopeful that that could be what we see in the next couple of quarters. But just given the lack of consistency over the last few quarters, we think that made the most sense in terms of setting expectations.

That makes a lot of sense, I agree. And then maybe just one more macro question before we move on to payments monetization. In terms of involuntary attrition, what you've seen in the base in terms of business closures and things like that, has that been relatively steady, just the involuntary attrition piece of the puzzle?

Yes. We formally report that on an annual basis. We were at 86% customer retention as of the end of our last fiscal year. And I'd say the retention or attrition, however you want to think about that, has held up well. Small businesses are resilient. And most of the attrition that we see is actually very early in the life cycle of a customer working with our platform, and normally it's related to not really getting fully up and running. But once a small business is fully invested in having made some of the operational changes, moving to digital, eliminating some of their manual processes around payments and workflow and things like that, the platform is really sticky.

Got it. Super helpful. And then I think moving on to payments monetization, which obviously has been a big topic of discussion with investors. So maybe just to rewind a little bit, fiscal first quarter saw a little bit of an expected -- or should say, projected aberration in the take rate. Maybe walk us through -- I know there are 2 pieces mostly, one on the virtual card side, one on the cross-border side. But the question I get most often is why this occurred most often in one quarter. I think there are some macro signals that give you some clues, but maybe you could just review why that impact would sort of accumulate in one quarter. Because I think a lot of this is sort of -- some of this is business as usual in terms of virtual card acceptance, but it seemed to be a little more exacerbated. [ Maybe ] we could walk through that a little bit?

Yes, it's a good question. So I think it's a slight evolution around some trends in the market and behaviors from suppliers. It's not unusual to see suppliers shift payment acceptance preferences over time. And if that is, say, wanting fewer virtual card payments in favor of something else, normally the way it works is that we have new volume that's coming into the system at all times, from existing suppliers, from new suppliers coming on board, and that more than mitigates any sort of churn or attrition that happens in spend. But what we've started to see over the last 9 months or so and began to materialize more significantly in the December quarter is that larger suppliers were changing their behaviors and looking for lower-cost payment types. Just because they're larger, they've had more of an impact lately. We saw a slight decline in monetization as a result of that. This is primarily related to virtual card payments. We've seen some other trends that are probably more macro -- directly macro related tied to the strength of the U.S. dollar for international payments. And so these things combined, I think it's evolved to where now we've seen a consistent set of behaviors, and we have some, obviously, action plans to create more value for larger suppliers, more automation, less friction in the payment processes. At the end of the day, that will help the cost equation associated with some of these payments and help us drive more penetration.

Let me dig into that last point a little bit. You have talked about things like straight-through processing, providing more data of incentives. I guess, where are you at in terms of these initiatives, and what's the time line for efficacy?

Yes. Firstly, if you step back and think about the supplier experience, so a vendor that one of our small business customers is working with, they receive benefits from using our platform. It's a centralized location and set of tools to receive payments. They have choices to get paid fast. They have control over their data. They're not sharing bank account information and other info with their customers. It's all centralized in BILL. And so that's a big thing, being in control. And what we've been focused on is really driving automation. That is like the most important thing to improve the payment experience. That experience improvement translates into higher-value payments. That gives us a larger share of wallet over time of the supplier activities, and we noticed that when that happens, they start to invite more of their customers to actually use BILL to pay them. So it's the beginnings of kind of a network effect when we increase value. So we're passing more data. We're removing friction. We're creating automation. We're starting to test things like sharing economics where it makes sense. So there's a handful of initiatives that are in the works. These aren't things that are all planned for the future. And the other important thing is that with the volume that we operate at, we, obviously, have tens of billions of dollars every quarter of TPV. We're not tapped out in any way. We still have a relatively small penetration rate on ad valorem payments relative to our overall level of TPV. So some of these activities aren't waiting on new volume to come in the system or new customers or new suppliers, they're things that we can turn on for existing suppliers as well.

Yes, I think it's important to emphasize in terms of the penetration, there's still a very low penetration even -- that increasing penetration can help drive take rate also, in addition to what you're doing.

Yes, that's right. I mean an example would be, if you look at our last quarter of -- the June quarter of fiscal '23, we did a little over $2 billion in virtual card volume, and that ties back to the penetration rates that we previously disclosed publicly. But that's just the amount of processed cleared virtual card transactions. There's a whole another set of transactions that were initiated to suppliers, but didn't get processed for one reason or another. They got voided. And that's a lot to do with maybe not passing enough data, some of the improvements that we talked about. So we have the ability to grow just with the existing volume and payment choices that have been selected by both buyers and suppliers. And that -- in addition to that, we have a lot of volume that we see on ACH and check payments that we know the supplier because they're accepting, say, virtual cards or instant transfer real-time payments from other buyers, but from some subset of customers they're primarily using check and ACH payments. So understanding that value equation and how we can work closer with suppliers, treating them as a customer to really optimize their payment acceptance preferences, over time, we think that gives us lots of opportunity to grow monetization.

On that last point, you talked to various players in the industry, and I know you have an active effort in this regards, but I think this ties into the supplier enablement effort. So has that connectivity with suppliers stepped up, meaning instead of maybe having someone being auto enrolled, having someone a little bit more tightly integrated with a supplier, sort of a more official supplier enablement process? Maybe you could talk about that process of onboarding a supplier enablement at a little more granular level.

Yes. Well, we've been working on what we call supplier enablement for a number of years now. I'd say the first phase was about creating automation for BILL, so being able to automatically identify suppliers, match them, know how to predict which payment types they'll accept. The second phase, which started maybe in the last year or 2, is more about driving automation for the supplier, so how do we reduce the manual activities that they might have to do once the payment has already been received. This has a lot to do with reconciliation, and that's where we started talking about just wanting to drive a much higher percentage of straight-through processing transactions to where there's no human touch involved in those. And then down the road, there's other initiatives that we'll have to create more automation, including over time enabling suppliers to become card-accepting merchants. We haven't done any of that historically, but we know there's a value proposition, and we can make it easy for smaller suppliers through that automated onboarding and that initial payment experience when they reach the BILL platform. We know there's lots of opportunities there.

Got it. And then when we think about -- so you talked about kind of the existing ad valorem payments, or at least a subset of them. There's additional ones that are great opportunity over time, whether it's Pay By Card, whether it's invoice financing, things like that. Maybe talk about -- a little bit about the incremental opportunities with additional products to sort of help drive the -- well, the value on both sides of the network, but also payments monetization.

Yes. I'd say the first set of products is really around speed. So real-time payments, instant transfer. It's a little bit of a form of solving cash flow needs or working capital requirements for businesses. It doesn't involve lending, but nevertheless. That's -- I think the last reported numbers we had, it's about 1% of our payment volume, typically to small suppliers. We've added Pay By Card, again, which from a buyer perspective, it's using a credit card instead of a bank account to fund transactions. That provides another 30 days of float, so improving the cash flow needs. We've obviously done a lot around spend and expense with the corporate card payments, which monetizes at a higher rate. And over time, where I think you'll see us do much more with, which is formal working capital financing program. So right now, we're in the testing phase on what we call invoice financing. That allows a supplier to get paid upfront for invoices that their buyer is going to pay over the ensuing 30 to 60 days. I'd say we're successfully executing on the initial launch of that, and we're feeling pretty good about how that could scale, not necessarily in fiscal '24, it's not a big driver, but it's a good setup. And success there in building that foundation opens up other forms of that, like more time to pay for a buyer, so potentially supporting both sides of a B2B transaction between buyer and supplier. And if you think about where we are in terms of overall ad valorem penetration, it's very low, right? It's low double digits as of the end of last fiscal year. And so if you take this whole portfolio of ad valorem products and think just small penetration gains on those over the next few years results in significant monetization expansion.

Yes. Actually, to tap on to that, that was kind of where I wanted to go in terms of your visibility. Maybe we can take it near-term thought process and then longer term. I guess, near term, maybe talk about the visibility in terms of FY '24, because that's a big question we get in terms of the confidence, in terms of stability, and then of course the return of sort of take rate to where it was in the fiscal first quarter. And then I think, longer term, maybe you could also talk about if, based on everything you've discussed, if we can return to that sort of more normalized rate of take rate expansion.

Yes. I mean historically over time we've said that the take rate isn't going to be perfectly linear quarter-to-quarter. At the same time, we're anchored on most of the transactions on our platform are repeat transactions. So we've seen them before. 80% or so was our last reported number, where the same buyer and supplier had executed a transaction within the prior 90 days on the platform. And that provides good visibility into what to expect about future transactions and payment volume. I think the thing that's moving a little bit now is the dollar value per transaction. So we still have a very high repeat rate, but the ticket size in some cases is lower as B2B spend is being pared back. So we're -- as I mentioned before, we're taking a lot of steps to improve the product experience and create value for these ad valorem products. And I think that gives us confidence around the longer-term penetration opportunities. We don't really have an updated view. We think there's a huge opportunity to drive ad valorem much higher, including virtual cards and IP and things like that. For fiscal '24, I think we're working hard to get back to higher levels of monetization. It's relatively range bound in terms of the levers that we have for this fiscal year. We're not expecting significant growth, but we do feel good about the setup for the second half of the year and getting back to a more normal cadence of expansion. That probably won't occur until fiscal '25, but that's what we're working towards.

Got it. And I think you answered my question I was going to ask, but it doesn't sound like -- in the past, you've put out sort of broad targets for ad valorem penetration. It doesn't sound like the thought process there has changed. Is that correct in terms of potential?

That's right. No, these are big opportunities across all of our products. I think one thing that has changed is our progress with Spend & Expense with card payments has opened up more opportunities to drive card transactions across the portfolio. So when you put all of the ad valorem products together, we probably are slightly more confident in the ability of that -- for that to consume a higher percentage of TPV over time.

Got it. Very helpful. Maybe to switch gears to bank distribution. Obviously, in the last earnings call and subsequently, we get a lot of questions on the Bank of America relationship. Maybe you could talk about just -- I don't know if there's anything else you can provide, but what transpired there? What are the potential outcomes for serving the back book and then other implications for sort of where we're at right now in terms of serving the new customers? If you could talk through that, that would be helpful.

Sure. Just stepping back in August, we talked about working with the bank jointly on executing a plan to make some product enhancements on both sides to enable us to move from serving new customers to the bank to the existing installed base. In January, the bank shared their -- an evolution of their strategy to want to create more consistency across the payment experiences at the bank. And now that's a work in process for us. It's an evolution in the product requirements and the go to market to serve the existing installed base. And we'll have more to share on that as those details become clear. But I think the important thing about the FI channel is that it's been a really big proving ground for us about how we serve small businesses through others, as opposed to going direct to market, bringing them to our platform, opening up pieces of our platform, in this case to large banks, and enabling partners to develop very sticky relationships with small businesses. So we've also made progress with other financial institution partners. We renewed, extended and expanded our relationship with JPMorgan. We're bringing more products to bear in that solution. We've been working with them for a long time. We've started to make progress with our initiative around adding more ad valorem payments to our solutions with banks, which is -- when we started working with banks, we had just the flat rate transaction payments like check and ACH. We didn't have the ad valorem payments. And so now we've got 6 banks who are using -- some of which are using our full suite of ad valorem products. Now it will take some time for that to translate into material financial results, but it's a good sign. And then we take all of these learnings into how we're thinking about extending our capabilities beyond the financial institution channel and to other partners that SMBs work with.

I want to get into that embedded opportunity in a second, but I think you're with, correct if I'm wrong, 7 out of the top 10 banks currently?

Yes, that's correct.

So how do you think about expansion beyond that? Is there an expansion opportunity, let's call it, top 20, top 30? Or I mean, at some point, there's probably diminishing returns, but how do you think about just the opportunity within the bank space for distribution?

Yes. I think over time, there certainly can be. I'd say our focus near term is more about adoption and penetration within the bank partners that we have, because the installed base of customers is obviously quite large when you consider both the small business space and the commercial banking segments of the banks we're working with. So there's a big opportunity that we already have in front of us with the existing bank partners. Success there could lead to more penetration across the top 20 or 25, but that's not the current focus.

Got it. So focus on current -- success with the current partners, penetration, et cetera.

That's right.

Got it. Makes a lot of sense. And then since you touched on it, I do want to bring up the embedded opportunity. And I know Rene mentioned this on the last call. Maybe you can talk a little bit more about what that looks like in terms of embedded distribution. Is this something where you're sort of embedding third-party software platforms? Or what's the strategy in terms of embedded distribution?

Yes. It comes back to the convergence really of software and payments, which has been in the works for years, I think, but it's really starting to play out. What we've done for financial institutions is give them more tools, more products and features to build sticky relationships with their customers, get closer to how their customers operate their business, as opposed to being a clearinghouse or a clearing mechanism for payment transactions. And we've seen really good progress doing that. At the same time, there's really a lot of inbound interest across the entire software ecosystem. So if you think of almost any software solutions that a small business might use, if they touch sort of the commerce activity or the payment flows of small businesses, they're interested in finding a way to expand the breadth of their solutions to help serve those needs of small businesses. So I don't think that means that every software company is going to become an AP automation provider or an AR automation provider, but there can be much tighter links. And that's where we're exploring those opportunities, to take our solutions and replicate components of that across the whole ecosystem of software that small businesses use.

Got it. And then maybe we could switch gears to competition. Our view is that the product and distribution accounting channel is a pretty significant moat, but competition does remain a pretty significant discussion topic. So maybe talk about how -- whether or how competitive intensity has changed across core BILL or Divvy? Obviously, Intuit comes up a lot in the context in terms of what they're doing. But maybe at a high level, we can talk about what you're seeing, because it's top of funnel, and then of course conversion, and then we can maybe dig in from there.

Yes. I mean we're going after a big market opportunity. More attention in the market and more competition in the market, I think, validates the fact that there's a lot to do here and small businesses have needs that haven't historically been served well by the solutions that have been available. At the same time, we haven't seen material or significant impacts on the ground, if you will, as we're working with small businesses. If you think of the BILL stand-alone KPIs that might suggest this, our customer retention rate has held up really well when you sort of take out or adjust for the Simple Bill Pay Intuit solutions. The other thing that's really important is the engagement level for small businesses. So we're operating in the low 70s or so, low to high 70s in transactions per customer, which tells you that the usage of the platform, it's still as important to small businesses as it has been before. Maybe the dollar amount, the payment volume, dollars per transaction is being adjusted, but not the overall usage. And we continue to make progress penetrating the market and adding new customers across all of our distribution partners. That's on the BILL side. For Divvy, I'd say we've seen pretty consistent growing larger customer demand and adoption of the platform. At the same time, we've been very proactive in tightly managing credit and probably doing less with [ the ] smaller segment of customers, which makes up a big part of the overall customer base demand that comes into our Spend & Expense product on a monthly or quarterly basis. So we're also going through some changes, as we talked about previously, in adapting our go-to-market to some of the new product launches that we've had, consolidating our brand, adjusting and optimizing. And back to your comment about the accountant channel, it continues to be the biggest source of leverage that we have in the market. So we work very closely with accountants, and it allows us to penetrate their customer bases over time. So when we start working with an accountant, we don't the next quarter end up with all of their customers who are a candidate, we penetrate those customer bases over time. So that continues to be very healthy.

That's helpful. And you actually went where I was going to go next, which is sort of the go-to-market evolution. I think it was late last year, you rolled out the new unified platform. And now this end market, you mentioned that there were some sort of -- some mixed marketing messages associated with unified platform versus sort of individual products. Maybe talk a little bit about what transpired and maybe the new -- maybe not a new go-to-market strategy -- or the, let's call it, the revised go-to-market strategy and how sort of we should expect correspondingly net new asset trend as a result?

Sure. So we have a thesis that small businesses value being able to run their business with fewer solutions versus more. And it's how we've expanded our solution set over time to add more capabilities in order to serve that need that exists in the market. It's really one place to manage all of their spend, to manage their workflow, to drive collaboration across a small business footprint. And you heard on earnings calls and things like that, customer testimonials and things about the value of bringing together card spend and AP automation and whatnot. And one of the learnings that we've had since the fall when we launched the unified platform is that, in some cases, a prospect, a small business, potential customer has one thing in mind. They have a certain context or a pain point or a need that they're trying to solve. And we need to make sure they can solve that thing. And so over time, we think the platform sale, the selling all of our solutions from day 1, will ultimately succeed and will be the big value driver. But in the meantime, we want to make sure whichever on-ramp is appropriate for the pain point or the solution that a small business prospect is looking for, that that's available to them. So get them in the platform using whatever makes the most sense and then expand over time by driving adoption and attach of multiple products. So that's probably our biggest learning as we think about the journey of a customer with a new integrated solution is if they're looking for that, we're ready. And if they're looking for a more of a point solution, we've got that available, too.

That makes a lot of sense. And sort of you're disaggregating kind of causality between kind of the marketing and sort of the external environment. How confident are you that it's marketing and not sort of external environment related, less -- less software adoption, things like that?

Yes. It feels very much in our control, versus, say, a market structural force or a landscape shift or a demand change. And it's -- especially on the spend and expense side, I'd say shifting brands is always tricky, moving consolidated to the BILL brand. And we've had a very optimized go-to-market strategy over a number of years. It's a critical thing when thinking about the economics of small businesses, how to attract them, serve them, retain them, grow, all those things. And we saw efficiency decline pretty significantly in the December quarter, and now we're back to adapting the go-to-market to create that same level of optimization, but we'll do it a little bit differently than we did previously.

Does it take a long time for the new marketing to -- to marketing message, I should say, reverting to the old marketing message, to resonate? Or is it -- is there a short time horizon to that? Like once you put a new message in market, how long does it take to kind of filter through, I guess is the question.

There's -- I'd say it's not necessarily real-time feedback, but it's very short duration. So we're constantly iterating now. We've got new programs in place. We're measuring our progress in months and quarters -- this isn't years, right, this is near term -- to regain the momentum. And I think we're very confident that over the next few quarters we'll be back to and potentially above where we've been in terms of customer acquisition previously. I'd say though, we'll end up in a place where the net new adds that we have are going to be more valuable than we had before. So we have more focus on customers with a propensity to spend, to be sticky, that suggests slightly larger customers versus smaller, and we'll address that smaller end of the market through third parties and things like that.

Got it. Very helpful. And maybe one last question to wrap up. So I guess the question is sort of -- and this sort of ties back to the opening question, but does the experience over the last year or so affect how you think about longer-term growth or margins? Obviously there's more emphasis on profitability, maybe that's a component. But what's the right way to think about intermediate to longer-term growth and margins in this context?

Yes. We've been very proactive at managing operating expenses, reducing growth in expenses, then taking a change in the workforce to reduce overall level of OpEx. That's allowed us to increase profitability. We've improved free cash flow. And it's with an eye towards creating a different balance between growth and profitability at a time when we've seen revenue growth decelerate. That's not to say we've completely pivoted to where profit optimization is the near-term goal, because we believe operating in this big market that we do, with some of the noise that we've had and headwinds around the macro environment, we'll work through that, and we'll want to continue to balance profitability and growth. And so just given the size of the market opportunity, we're obviously capitalized to invest both organically and otherwise. We're going to keep doing that. But we'll have an eye towards creating operating leverage as we grow, that's both sales and marketing and G&A and things like that. So we do have the opportunity as we scale to continue to increase profitability. We are planning for, at some point in the future, a reduction in interest rates. That will obviously have an impact on how we think about float revenue and some of that, but we'll manage through that process as well.

Got it. Well, thanks for spending time with us today, John. Really appreciate it. A great conversation.

Great. Thank you.

Thank you very much.