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

All right. Thank you, everyone. This is the BILL Holdings session. Thanks, everyone, for joining. My name is Tien-Tsin Huang, I follow the payment sector. And I couldn't be more delighted to have Rene Lacerte, Founder, CEO, Chairman of BILL with us. We'll go through a list of questions that I put together, thanks to the help of all the investors and all the feedback that we get. But Rene, thank you for being with us and spending a few minutes.

Well, thank you, Tien-Tsin. And it's great to be here. It's always great to come to your conference and really kind of benefit from the experience you have across the entire payer ecosystem. So thank you.

No, and we're grateful because there's so much we learn from talking to you and your peers from different parts of the ecosystem. There's a lot of changes going on. And the good news is there's a lot of interest and there's a lot of growth available in your core business, around AP/AR, especially in SMBs. So let's talk about that. But I think what I wanted to start with, Rene, is something that's really important to me, and it might be a silly question. But I've heard you say that BILL is in a category by itself. So when investors ask me, what is BILL? Is it a software company? Is it a network company? Is it a platform company? Payments company? How would you frame it? I mean, is it something else? Are we missing the beat entirely? I'd love to hear the founder's view on this. What is BILL?

Yes, it's a great question, and I have the good fortune that we've been doing this 18 years. So I can answer briefly with we are all of the above, but I'll be a little bit more specific. We started with software. We are a software company at the core. We automate workflows. We save our customers' time. Customers tell us they save 50% to 75% of the time. That's significant savings that comes because of the software. But the software capabilities we have give us the right to do payments. From day one, having been in the payments field for close to over 32 years now, we have built payments into the core of the capabilities of the software experience that we provide customers. And so when you look at BILL today, 1% of GDP goes through BILL. In the last 5 years, it's been $1 trillion of B2B payments. We do all of this on ACH rails essentially with some card spend. Vast majority is ACH rails. And that makes us a payments company, right? And it's when you combine the two of them together that you get a platform. And what we're seeing more and more from our customers is the relationship that they have with their suppliers and their customers is real. And as an operating company, and we're kind of unique in this, when something -- when we interact for our customers, execute a transaction for them to a buyer or a supplier or a customer of theirs, if anything goes wrong in that ecosystem, it comes back to us. And this is what, again, kind of tells us we're kind of a platform and we're a combination of the software and a payments company. And it is why we say we're kind of in the category of our own because we define this category of automating financial operations, and we just don't see other people doing that. Even the way we reach customers, which we'll talk about, is unique. We don't go through one channel, we go through multiple channels. We have a network of 5.8 million entities that use us to receive payments. That's a significantly large population of the business world, and we're unique in that we have that we've built out over the last 18 years. So I would say, definitely a software company, definitely a payments company and definitely a platform.

Got it. No, that helps. That helps to frame it that way, Rene. But look, I mean, in this 18 years, you have scaled it quickly. You have, whatever, 0.5 million-plus SMBs. Got still single-digit penetrated, I say, but you are the industry leader. But when we look at SMBs and think about the problem you're trying to solve, right, how these SMBs want to pay their bills and interface with third parties or not, it varies. It's not one solution. So how do you solve for that? I mean, you have an ecosystem of cores and a lot of partners that help you get there. But what's the broader solution to help all these SMBs that have different views and personalities?

Well, the most important thing about serving SMBs is that you meet them where they're at. And I learned that from my parents, my grandparents, they had lots of businesses that served SMBs and accountants; and I've learned that working at Pricewaterhouse; I learned that working at Intuit; I learned that with PayCycle, my first company, that you just have to meet SMBs where they're at. And so we have an approach that is unique because we go direct, where we get customers because they've heard about us either through Google Adwords or whatnot, or referrals, or we go to the accountants. And I think one of the things that's very unique about BILL is that the accountant channel is such an important part of the business community as a whole, and 8,000 accountants across the country use BILL to actually build their practice. There's probably 100,000 that do some form of bill payment -- or financial operations, I should say. And we're in a position to continue to grow that as well as continue to grow the extent of the clients that are on the platform inside of accountants. And then we have partnerships with financial institutions and now Xero and soon others. And so I think the important thing that I take away is that, if you want to serve SMBs, and I think enterprise companies don't want to serve SMBs, consumer companies don't want to serve SMBs, it's a really hard thing to do. And it has to start with an intense passion for the SMB, and not so much as caring to where you get them as much as to serving them and changing their lives and making them more productive and more successful. And that's what everybody at BILL has. And so we have developed this unique ecosystem, again, that drives all the opportunities that we see for SMBs across the country.

Got it. So given that ecosystem, Rene, how different is the experience for an SMB when they consume it either direct or through an ISV or through a bank? How do you control for that?

Yes. At the core, there is a payments experience that is consistent. What changes depending on some of the partnerships we have, is the level of advanced capabilities that the partner might bring. So some of our banks, for example, just want us to execute a payment. And one of the things you've heard us talk about is, more and more, we are asking and getting partnerships where it's the whole suite of payment products and services that we have. We don't get the chance to offer the payment products and services without having all the workflow capabilities that we have. And we know that because there have been consumer-based bill payment products out there for well over 30 years. Those products were not adopted by businesses because it didn't have all the capabilities that a business need. I know this personally because I was building consumer-based bill payment products for them to -- and then I started my first company and I didn't have any of those capabilities. So we know the advanced capability is super important. So at the core, making a payment, that's the same thing. But some of the partnerships do not use the advanced capabilities, others do. What we control is the experience, what our partners control is go-to-market. When we think about accountants, we are creating actually two experiences for them, one is for the SMB and one is for the accountant. So I was talking with an accountant last week, had 750 clients on the platform. They have 10 different teams that actually work with -- obviously, 75 clients each, work with BILL. Each of those teams might have a different focus. So it might be a vertical, it might be the accounting and GL package they use. It might be something completely different. But those teams now have a tool that help unify their experience in how they go serve their clients and be more strategic with their clients. So that's different. And then in the partnerships, everything, like I said, depends on what's the core functionality that the partner wants. More and more of what we're getting is the full suite because we know that, that's what drives the payment adoption and the value for the customer experience.

Got it. So on the earnings call, you talked about strong inbound interest from ISVs. Can you elaborate on what that means? I know you announced this Xero win on the accounting SMBs side, which is important. How is that going to be different than maybe what you experienced from Intuit?

Yes. The -- what we're seeing, and this maybe goes back to the first question. We've defined a category. And people see the value that financial operations can bring to a business in sheer part because of the economic success that BILL has had, the ability to drive the revenue and the profitability. So people see that and they kind of want to be a part of that. That has led to, the fact that we defined the category, businesses saying, well, maybe they want to do that. And so as businesses decide, well, maybe they want to have a part of that and have that for their customers, what we're seeing is that people are starting to realize how hard it is. There is a regulatory compliance piece that is vast, right? You think about being in money transfer license in all of these states, auditors constantly coming through the shop, having federal regulations, managing the risk profile across all the customers, that's all something that our partners don't have to do. And so when we referenced kind of the ISVs and just in general software partners wanting to have more capabilities, they've looked at everything that it would take for them to go do this. It is not a small investment. In fact, it's a large investment, and it's not even a onetime investment. That's why I talked about the operational complexities. It's an ongoing investment they would have to make. And when we go to them, we can say, "Look, day one, you can have the benefit of 18 years of development. You can have the benefit of 18 years of refining operations and risk profiles. And you can get started earning revenue for your customers day one, and providing value to your customers." And so what we're seeing, and Xero is the first example, but there are many others in the ecosystem that we are in conversations with that we see strong opportunity to create real meaningful value for their customers, and as a result, meaningful value for them. In addition, we're seeing that, even from the existing channels we have, whether that's the banks or the accountants, there's lots of opportunity to continue to enhance those channels as well to drive growth.

Yes. And then on the Intuit side, Rene? Because I know I get that question a lot. Why would Xero be different? I'm sure you learn from the Intuit experience, which is also different.

Yes. Well, the first thing that we're doing, and it's a great question, is that we've taken all the learning over the partnerships over the last dozen or so years, and we've made the APIs more modern and more consumable. Financial institutions, when we started this, wanted APIs, but then they mostly wanted them customized. And so their ability to grow with us was limited. And so what we're seeing from software -- which is not a surprise, software providers, is that they don't want to build this at all. They want to build it once, the interconnection once, and then take advantage of anything that we continue to enhance in the experience. So that's the first thing, is like it's different from Intuit and the banks because of that. The other thing that I would say is simply different is that the full suite of payment products is going to be available from day 1, except for the invoice financing that we have and the card payments that we have with respect to Spend & Expense. But all the other payment products are going to be in there day 1: International payments, virtual card, instant transfer, real-time payments, pay by card. These are all going to be part of the experience that the customers get from day 1, and that should help drive value for the customer and obviously business for the -- both parties.

Yes. Okay. Good. And I know, Rene, you've referenced a lot of your past companies and even what you've learned from your parents. And I mean, we always like the repeat founders, if you want to call it that. I think I said this on stage with you last year. But from all the learnings, whether it's the cyclicality and some of the changes with some of the partnerships, now you're talking about on the ISV side working with there. Is it fair to say that you can now think bigger? I mean, how big do you think BILL can ultimately be, given some of the learnings that you have and this ecosystem that you're building? Do you feel that there are any limitations? Or has it actually opened up in your mind?

I think the -- one of the ways I think about this is, as I continue to talk to customers and talk to accountants and talk to partners and talk to employees, more opportunity seems clearer today than it was yesterday. And that is just because the vision of serving businesses with an automation tool for their financial operations, everyone has their own version of that, and we're executing on that. So everyone in the company has ideas about how to make that happen, everyone that we partner with has ideas how they want that to happen with their customers, and that's part of our platform. So when I step back and look at where we're at, we have roughly on the core BILL platform a couple of hundred thousand customers, there's 6 million that of suppliers across the country. All of them should be doing something like this. And so our opportunity is to continue to drive that efficiency, the onboarding process, the ability to kind of extend and do all the different things that we do. And so I guess one learning would be that we have this opportunity that, when you continue to invest and you stay focused on the customer and always have a customer intentionality around what you're building for them, not just today, but for the future, when you continue to invest, when you use and leverage the grit that you have, the passion you have, the will to succeed, that takes time. And I've seen this over and over again, and all too often, people kind of want to think just in terms of quarters, but I'm always focused on not just the short term, but thinking about decades as well. And I think that is a constant learning, is that you have to have that deep, deep, deep passion for your customer to be able to actually think that far out and to deal with all the things that come up in the many...

Yes, and to earn that trust. Okay. So how would you characterize the demand environment for BILL solutions today? I know we've been going through the cycle in all this question, has the sales pitch changed?

I would not say that -- maybe the sales pitch changed a little bit during the pandemic because that was just an immediate need to kind of get online. The sales pitch for core BILL hasn't changed as much as -- or for Divvy, Spend & Expense. But what is changing is us understanding how to sell both those together and understanding how to sell a unified platform that has cash flow insights and forecasting. And what we're seeing is, I'd probably say a year ago, we had very separate, distinct funnels. We then tried to push it all into one funnel. And now we have separate distinct funnels as well as a combo funnel, if you will. And so our sales teams, our go-to-market teams, they're very clear about understanding the pain points customers have so they can -- that we can offer the right products and service to them. What we -- I would say the message that we give to customers is we can save you a ton of time. That's the 50% to 75% of time. We can help you be more strategic around your business, whether that's thinking about the spend that you've had on the AP side or managing the spend on the virtual card side with the Spend & Expense. We can help you manage the expenses across the business. And we can help you have strategic insights. Now that would be for the direct. For the accountant. It would be all those things for your customers, and then you get this massive scalability from a tool perspective to see all of your customer information in one place. That hasn't changed since we've added more products. The other thing we've been able to do for customers is add more capabilities on the payment product. So having FX, having international payments, having instant transfer, having pay by card, it just -- choice matters. And I think sometimes people kind of forget that it's when you have all the choices that you become the de facto place for businesses to operate. And we have choices. You can use BILL from your phone, from any bank account to pay any bill any which way. And that's because we have 12 payment rails and 8 different payment modalities. And so our pitch has -- maybe that's a little bit complicated, would be save time and obviously be more strategic about your business. And consistently, we see that resonating with customers.

Yes. I think you've talked about -- you and John have talked about sustainable client additions. Is there a silver bullet that can change that growth algorithm in your mind? Or is it just all of it coming together and it's a long way to get these SMBs up?

Yes. I mean, our Lead Director is somebody that you know well, Pete Kight, Founder of CheckFree and CEO there for all the years that it was independent. He has said to me many times, you can never predict tipping points until they're in the rear view mirror. So I'm not going to try to predict the tipping point. What I can tell you is that the demand is increasing when we talk about the ISV partners. When you see more competitive entrants saying, "We like what BILL is doing. So we're going to try to do that, too". That tells you that there is demand and awareness that's growing. And that's good. Like that's super important because, guess what? We're in front. We've been building this 18 years. Nobody else has the scale and the platform that we have. Nobody else has the innovation behind it that we have. Everybody else is trying to catch up. And so when they're trying to see how do you get a faster horse, we're actually reinventing and building more onto the platform. And so I think it's a super important point for us, that the market is starting to mature, and we're -- I'm super excited about every asset that we have to help us capture as much of that as possible.

Yes. No, I'm excited to see the ISV and what kind of pull-through that comes with that and we've seen that in the merchant acquiring side. So I'm curious to see how this plays out here. Just to stay with demand environment, I know spend matters a lot, so I have to ask you about that. You've discussed towards -- or talked about spend neutrality. How healthy is the SMB today?

I would say SMB is -- one thing I've learned over the years is that they're just resilient. They're super resilient. They find ways to make things work. This is their life, right? It's their livelihood. It's what their family depends on, it's what their passion is. And they will find a way to do it. Now we help them be resilient because we give them tools and capabilities to manage their spend in a way that they can't do without us, if you think about just the paper and all that. So the resilience allows them to have what I call the spend neutrality. And what we've seen on the spending patterns across our business is that when, for lack of a better term, I think a year ago, I would have said it was a wait-and-see economy. I think I misnamed that. I think now we're in the wait-and-see economy. I think a year ago was the wait-and-fear economy. I think there was a tremendous amount of fear around a pending recession and how strong that was going to be. And people were just really contracting and constricting their spend across the platform. We saw that start to change for SMBs in the fall. We've seen that change for larger businesses where now the year-over-year spend is roughly flat. So the opportunity, I think, is businesses are not investing and they're not investing for growth. They're kind of managing where they're at. And I think what's necessary is just more clarity around the macro. And the macro is going to get more clear as the Fed gets a few more quarters of inflation under its belt, as the political environment, whatever it is, these things will create more clarity in the coming quarters. And we're positioned to have that be a tailwind just given the sheer scale of the products that we have across our payment platform.

Sure. I think TPV grew right in line with what you and John were forecasting in the third quarter. I think you expected some muted growth in the fourth. Anything to call out to get there?