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

Great. And maybe just 1 more on Spend & Expense. I know the company took some steps to limit credit risk in 2023? And what do you think it will take from a macro perspective to start to expand credit and maybe loosen up some of the self-imposed restrictions that you guys put into place?

Yes, good question. We've been pretty proactive on the credit side, just given the external environment. We reduced line sizes. We reduced unused lines. In some cases, we moved away from certain customers where we felt like we had more concentration. And we've favored more established businesses, they've been in business longer, they're slightly larger. They have more predictable spend and things like that. And then as I mentioned on cross-sell, we have a pretty unique data advantage there. So, I wouldn't say that the external environment is holding us back, and it's not as much self-imposed restraint on the BILL target customers. But I think we want to see interest rates come down and the sentiment across the small business segment start to turn positive into expansion mode and have that flow through their financial performance. But for the most part, our Spend & Expense customers go through a mostly traditional underwriting process, where we're creating a based on multiple data sources and review of financials of our own credit scores and risk rating, and we want to see those sort of uptick before we would probably change our position from today.

Great. Maybe switching gears to a different -- a newer addition to the portfolio. Finmark, I know it's part of Unified Platform now. It doesn't maybe get this as much, but I think it serves an important role. How does that fit in the product portfolio? And how should we think about the cross-sell opportunity there?

Yes. Finmark, it's an FP&A tool, planning, budgeting, forecasting tool that was originally as a stand-alone company sold to mid-market companies and accounting firms. And that's how it got on our radar because there is huge value that can be created by an accounting firm able to apply insights very efficiently and effectively across, like, say, hundreds of clients. And so we've now rolled the basics of Finmark insights and cash flow capabilities as a standard free feature inside of the BILL platform. I think over time, there is an opportunity to take more of the advanced capabilities and have that be perhaps a separate SKU that is monetized differently by going deeper with the features and functionality that we're doing for the core cash flow insights part of BILL, but that will be down the road. The feedback has been really good on the product, and there's certainly improvements we can make there. And I'd say the first area of focus for us is leveraging our relationships in the accountant channel to deliver more value to them through that product.

Let's maybe switch gears and an important part of the growth algorithm has been an partners and working with different parts of the channel. So just putting aside maybe 1 of your larger partners in the FI space, how should we think about the evolution of the FI channel growing forward and its contribution to the key drivers of the business, like net adds, Divvy and ad valorem adoption?

Yes. Just a little bit about where we are today. I think just over 2% revenue. We've been partnering with large banks, other financial institutions for more than a decade now. And it's been an important sort of proving ground for how we enable third parties to serve their customers with some of our core capabilities. Most of our relationships with banks were initiated before we had ad valorem payments. And so you see a pretty significant monetization difference between the customers and TPP and volume associated with our FI channel customers and what you see on the BILL or BILL accountant and direct platform. And so that's something that we are working with our FI partners to address bring more of our solutions to their customers. And Increasingly, we're also taking the learnings from how we worked with FIs in building that into our embedded strategy that is more directed at software companies versus financial institutions. And the key learning there is that we have unique capabilities around risk and compliance and regulatory and payments that are really hard for companies to replicate. Banks have that also, but they're less likely to take their solutions to the long tail of other software companies.

Great. One of the keys has been for you adding more and more accountants that ultimately serve end customers. You begin to build up that base. Can you talk about the go-to-market economics and what the duty is to expand that channel? How much room is left there?

Yes, 8,000 accounting firms. We've grown that consistently there is still a huge market opportunity to go get more firms. And just as big is expanding our presence within the existing firms. So we tend to have still a small percentage of the addressable markets inside of a firm. And often, that has to do with how prevalent their client advisory service practice in serving their small businesses. Their channel has been the foundation of our go-to-market. We have a very efficient customer acquisition model there, working directly with accountants. And the value proposition beyond what we do for their end customers is that we have a lot of tools for accounting firms that make it really efficient for them to support their clients and basically be able to manage more clients with fewer people across their portfolio of cash, client advisory service and customers. I mean we have a dedicated team. And so it remains our number 1 go-to-market opportunity and continuing to support accountants. And I think over time, you'll see that will be 1 of the main avenues that we use to further penetrate the market.

I know you mentioned the embedded side earlier. I made a mental note to come back to it. Can you talk about what some of those opportunities look like? And how should we -- what steps are you taking to pursue those?

Yes. I mean historically, we've talked a lot the convergence between software and payments, and it's been sort of emerging on the B2B side, but not as prevalent as on the C2B side of things. And our goal is not just to be at the center of it, but to actually help drive the creation of that market. And so we've taken, as I mentioned, a lot of the learnings we've had in working with financial institutions. The hurdles we've had to overcome and being a provider to companies that spend billions of dollars a year on technology. And we're starting to package that in ways that allow us to deliver self-service APIs to third parties as well as widgets that they can consume, we're doing less, probably none of custom solutions for software companies, which is always a big challenge with large financial institutions who have unique custom needs that you need to meet. And so 1 of the unique value propositions beyond the regulatory and risk and compliance that I mentioned is the network that we have of 5.8 million network members is a hard asset to replicate. And by working with a third-party software company who's going to embed some of the capabilities, their customers get immediate access to our work. So it creates a value proposition over and above just what the software solution they're using is, and we're finding there's lots of interest and demand in that market.

So I want to maybe get to the numbers section of this. And there's been a lot of debate about what the Fed is going to do with rates. It matters for your business just because of flow and I wanted to maybe ask, like how are you thinking about managing the float balance and it's been an important source of revenue, and it's very profitable. So how do you think about the investment portfolio? And are you thinking about changing the duration there?

Yes, we are. I think it's a little bit of a balancing act to get the timing just right. So the yield curve is currently inverted. We have a relatively short-term average duration, less than a year. But at some point here, it will make sense to extend our durations and lock in more yield for longer. Our primary goals with our FBO balances, which are around $3 billion, plus or minus on any given quarter is just liquidity, access to that capital, safety of principle. So we don't try to optimize yield. But in this environment, it feels like there will be an opportunity to extend -- float revenue at a higher rate for a longer period of time. I don't know when those interest rate declines will start doesn't feel like we're in an environment where we go from 5 to zero, at least that's not in our base case. So we should have a pretty good runway of strong float revenue and profitability even if less than today.

Understood. Maybe sticking on the margin side or do the numbers. I know the company took some cost actions last year as you thought about the expense structure. How should we think about operating margins going forward? And steps you're taking to both maintain and drive incremental efficiency?

Our current approach of balancing, we've talked about this balancing growth and profitability is about kind of trying to make improvements where we can drive leverage in the business over time. This last quarter, we had a 68% increase in non-GAAP operating income. We continue to have strong float margins. And we want to make sure that we're just -- we're balancing the overall business. We're not at a point where given the market opportunity and how much further we think we can penetrate the market where we're thinking about maximizing profitability. We want to be positioned for the turn in the macro environment, be positioned for further penetration in the market, higher payment volume growth, which should amplify some of the things we're already doing to drive adoption. And to the extent that we adapt that over time, we feel like we are well positioned. We've demonstrated operating leverage as we grow. We've gotten bigger. We're non-GAAP operating income profitable without the benefit of float in the last quarter. So we're doing the things that we think makes sense to put us on a trajectory to optimize over the longer term.

Great. Well, just the last couple of minutes that we have, I want to end on more of a big picture question. When I first met you, Bill.com did AP automation for SMBs. And in that several years that have passed since you guys have expanded to many new areas, and it's a much bigger business than when we first met. So just looking beyond the current cycle and not trying to predict that, how should we think about Bill over the next 3 to 5 years?

I think there will be more of a lot of things -- so more surface area that we can address within small businesses like the things that we can help them with beyond PAR and Spend & Expense. What will come with that is more wallet share, like they're going to be more reliant on us. We're going to have more of an opportunity to drive economics and growth from those relationships. More customers who are using our whole suite of solutions that exist today, which is primarily just 1 of the solutions. I think with our embedded strategy, we have the opportunity to cover more of the market in terms of penetration and being a leading provider there. And then as the business model evolves, alongside of these other things I've mentioned, probably more balance in our business model between subscriptions and transactions versus where we've been the last couple of years.

Great. Well, John, we'll leave it there because we're out of time, but I appreciate you joining us.