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

Hi, everybody. Thank you for joining us. For this segment, I have the CFO and President of Bill.com, John Rettig with me. John, it's great to see you here, and we appreciate you attending as always.

I want to maybe just jump right in from the top, given the amount of questions that investors have and that we have. Just with the world kind of changing every day, you guys have seen TPV fluctuate over the last year. You've now seen some stabilization, some quarters where there's been more pressure. Can you talk about what trends you're seeing at SMBs and what your expectations are for the rest of this year?

Sure. It's a great place to start, Samad. So just at the highest level, we've seen some clear signs that small businesses are reacting to the environment that they're operating in. There's uncertainty. And that's starting to translate into some form of spend pause. So it doesn't feel like expansion mode. There are some impacts from trade uncertainties, policies, executive orders, interest rates. There's just enough uncertainty that small businesses are in a little bit of a wait-and-see mode. We see that show up in 2 ways. One is slight reductions in discretionary spend. So where they have an option to lower spend per transaction or pause on some transactions, they're doing that. Some industries are more challenged than others. An example would be the nonprofit sector is pulling back a little bit more, just given some of the uncertainties that exist there and wanting to preserve cash runways. On the AP side, for us, we saw a slight reduction in the number of transactions per customer in the last quarter, in the March quarter. So 70 versus 73 a year ago, down from 76 in the December quarter. And there were similar trends at the beginning of the pandemic, obviously, not as significant or severe, but that's an indication that small businesses are adjusting to the environment they're in. Wholesale trade, real estate, payroll, PEO, these are all categories with slight reductions in spend. Our expectations for Q4 was that we'd have low single-digit declines year-over-year in TPV per customer, up slightly quarter-to-quarter just given the seasonal effect for June. And overall, we're just a little bit cautious given what we're seeing from small businesses.

I think that's a great starting point. I appreciate that color. I know you mentioned some specific verticals where you're seeing different trends. But I wanted to maybe double-click on customer size and geo, respectively, right? So if I start with maybe customer size, I know that Bill accounts for, I think Rene has quoted usually 1% of GDP. So you see a lot of economic activity. If you think about the spectrum of SMBs, not all SMBs are created equally. So if you maybe look into your installed base, anything by customer size that you can stratify and how they're performing? Or are you seeing this pretty consistently regardless of size?

Yes. So we have 500,000 customers, roughly about half of which are with our AR product, Invoice2go. They're really small. Those are small businesses, some of them freelancers, not even multiple employees in the organization, and they're continuing to operate at low volumes. The rest of the bill and spend expense base skews a little bit larger, particularly on the spend and expense side. And we're seeing probably a little bit more pull back in discretionary or variable spend categories for those larger businesses. I think they have more discretionary budgets and they're quicker to react, and we're seeing that play through. Beyond that, it's pretty consistent across the board. And we don't see any alarming trends or anything like that. It's just moderated spend and a lack of growth across pretty much all industries and spend categories.

Great. Maybe let's switch gears and get into the core of the businesses, I think about like the take rate side, right? And I think that, that's viewed as probably the biggest opportunity is that ongoing monetization of that payments velocity inside of the ecosystem. And can you maybe walk us through some of the factors influencing the take rate and the recent trends there? And how that maybe has evolved over the course of this fiscal year?

Yes. So stepping back for a second, take rate is the combination of 2 variables. One is the mix of our ad valorem products as a percentage of overall TPV versus fixed fee products. And then the second is the individual pricing or the yield that we get on those products. And I'd say to the latter point, the yield is very consistent across our ad val and our fixed fee products. So we don't see significant price changes in those products. It's very stable. About 80% of the bill payment volume is across ACH and check payments. So by definition, that's monetizing at a very low rate, let's call it, roughly 3 basis points. The much smaller percentage of payment volume is on these ad val products, much higher monetization and much higher growth rates. So we're seeing individual products within that ad val portfolio perform very well. In the most recent quarter, we obviously saw an expansion in take rate and that was driven by these ad val products.

And I know you mentioned expansion in the most recent quarter. I think it's been a little bit choppy, the take rate, right? And I think that you guys are expecting kind of flat for the fiscal fourth quarter. Maybe help us think about what is driving that. What would be normal seasonality? What's driving maybe your current assumptions on it being flat? And if I just step back, actually, I'll stop there. I don't want to make this a 10-part question. Classic sell side mistake. I apologize. We will stop at the -- just what's embedded in that flat expectations for 4Q?

Okay. So just rewinding a little bit in the second quarter, December quarter, we were at 15.6 basis points down 0.5. We had indicated throughout the year that we expected expansion in the second half of the fiscal year. The March quarter, we saw that 0.6 increase to 16.2 on the back of strength with the emerging ad val products with lower FX losses for our international payment products. And then ultimately, less of a seasonal impact in the March quarter than we see in the December quarter. As we looked at the fourth quarter, we've dialed back those expectations to be similar to Q3 in terms of monetization. So not expansion as we were originally planning. The main driver of that is the uncertainty that is existing around international payments for certain customer segments and certain corridors. So there's a shift in volume. We saw some pull forward in a couple of quarters -- in a couple of corridors in the December and March period. And so we're not expecting expansion in monetization or volume for international payments in the June quarter. At the same time, we're expecting a slightly lower level of TPV per customer, and that also translates into a softer take rate environment. At the end of the day, we do have many levers at our disposal to expand monetization over time. And so we still think the opportunities are significant there. But in the very short term, I think we're taking a little bit more of a cautious point of view on that take rate expansion.

Just on the international, I want to follow up on that. I wasn't originally going to ask this, but since you mentioned it kind of triggered in my brain. We've seen a lot of FX volatility. The U.S. dollar has obviously gotten a lot weaker this year, which stinks because I'm going to Europe in a few weeks. It's bad for my own personal wallet. How does that impact how a customer may think about their decisions on the international payment side? Does volatility or the direction of the currency impact to your business? and help us think about that.

Yes. So the strength or weakness of the dollar does tend to have an impact on the demand for FX versus U.S. dollar payments. The rate of change and how quickly FX prices change also impacts the exposure that we have to currencies. And you've seen in times of rapidly increasing dollar strength more FX losses that we've had, which flows through revenue for us. And then we've been making a lot of proactive investments to reduce cycle time, reduce exposure, hedging, moving money faster and things like that. It's a better customer experience, number one. But two, it reduces the exposures that we have associated with FX volatility, and we were very successful in that in the March quarter. We reduced losses on a quarter-to-quarter basis by over 60%. And so we haven't necessarily seen any recent changes with the decline in the U.S. dollar, but there is normally some change in demand that comes from that currency fluctuation.

Understood. Maybe kind of zooming out, if we think about ad valorem. I know we're spending a lot of time on it, but it has such an important impact on your business. What are the steps the company is taking? Or what are the levers you're pulling to drive more adoption of the ad valorem offerings that you have in the portfolio?

Well, I think it's twofold. First, we are continuing to iterate and drive penetration on the emerging set of products that we have. So I think, Pay By Card, Instant Transfer, working capital solutions all of which address both sides of a transaction, buyers and suppliers. We're just making these products easier, faster and creating more value on both sides of the equation. And then the working capital portfolio, we think, is a really big opportunity. We're not currently pointing to that as a huge growth driver in the near term because we're still relatively early in proving out adoption, demand, risk models, things of that nature. And then the other big thing that we're doing is enhancing our solutions for the supplier side of the equation. So we've done a lot to create value for small businesses through automation of the AP cycle from a buyer perspective. And now we're making investments in iterating on our product portfolio to increase the value for our suppliers. We think that over time leads to more demand for faster payments for ad val products and creates the 2 sides of the network that I think will help us expand monetization over time.

And then maybe on the other side of that question, what are -- where have SMBs expressed the most interest, right? Like what -- where in the ad valorem portfolio are they showing that? And then where do you think that the opportunities for expansion are within that?

So from an SMB perspective, there's always demand for cash flow solutions. So where they can create more liquidity, that means either getting paid faster or taking more time to pay either from insights or using a product like a Pay By Card, where they're extending their float by 3 or 4 weeks and things like that. So generally, there's demand for cash flow solutions, which is either getting paid fast or stretching out payments through working capital solutions. On the supplier side, the same is true. So our real-time payments products Instant Transfer, there's more demand for a product like that in an environment like this. For largest suppliers, it's all about automation and speed of reconciliation and removing human intervention and manual activities.

Maybe just last on the payments take rate side. Just -- you recently increased the price on ACH and check, which you set accounts for a pretty significant portion of volume. Why now? And what's the uplift on the take rate that you're expecting?

It's been north of 2 years since we've made price adjustments. So it was more of a timing thing. This is, I'd say, a tactical shift in pricing. If you look at the actual rate changes, it's between 15% and 20% stated price change. We typically yield less than that effective price increases. And so we're not expecting that kind of change. These are low monetizing products to begin with. So there shouldn't be an impact in the current quarter. The price changes went into effect for new customers in March, existing customers in May. I'd say, in FY '26, there's a small positive benefit from that. But the rationale for increasing prices regardless of the timing, is that as we evolve the platform, we create more value, we move money faster. We're creating a better payment experience and feel like there should be periodic price adjustments to account for that.

Great. Maybe as I think about the earlier, you mentioned 0.5 million customers across the different parts of the business. How should we think about growing that base? How should we think about net adds and what are the key factors that you think could drive acceleration of net add growth?

Yes. So we've been pretty consistent at delivering between 4,000 and 5,000 net new adds in the recent history. That's a good near-term range. That's on the Bill APAR side, roughly 1,500 for the spend and expense business. And the most important levers that we have are, first and foremost, the accounting channel is one of our big investment priorities in this current fiscal 2025, where we're doubling down on creating value for accountants and we're seeing a really good return on that increased focus in Q3. We had a 60% increase in adds from our accountant channel versus a year ago. And we believe there's a lot more to do, both in terms of penetrating that market and driving higher attach from the existing accountants that we're working with. On the SME side, we're probably more focused on volume and size of customer than we are the absolute number of customers. How they use the product, their overall level of spend, their utilization of the lines is a much important -- more important driver of our business than the absolute number of customers. And so that's a big focus for us. And I think on the embedded side, we've obviously had success over years with the financial institution channel. We're now working to extend that into the software world. And that's where our strategy has shifted to attract the smallest businesses by working through partners versus our direct resources demand gen and salespeople, those are very much more focused on larger businesses now.

I want to pull on those threads. But if I just step back for a second, Bill has evolved a lot since the IPO, right, where you've gone to -- you're a platform now for, let's call it, the CFO's office. Where are we on multiproduct adoption across the business? And how do you think about continuing to build multiproduct adoption? And how do you see that opportunity?

Yes. The best example is with our SME product, the Divvy charge card, our last update -- we reported 11,000 joint customers. So customers using both our Bill AP solution and the Divvy charge card. And that was up from about 7,000 joint customers in Q4 of '23. So we think there's a long way to go given the upper half of the bill customer base by size are really good candidates for the SME card, which means there's tens of thousands of customers that are still possible. Beyond SME though, as we continue to build out the surface area of the platform, we're doing more in the financial back office such as a recent announcement around procurement and purchase orders. We think this motion is something that will ultimately lead to much stronger multiproduct adoption, not just for our subscribers, but also for our network members. And that's sort of an untapped area where most network members are receivers of payments. They may be paying for those payments, but they're not necessarily leveraging tools. And we think by introducing more value creation opportunities and products into the network, that will drive more multiproduct adoption across the entire base. That obviously translates into a stickier customer base, higher retention and ARPU expansion over time.

Understood. Earlier, you mentioned the embedded channel opportunity. I've seen it. I cover a lot of companies that are using some embedded solutions. And so can you tell us what you're doing there and what steps you're taking to drive adoption? And maybe what are some of your key partnerships in embedded?

Yes. So we're -- our embedded kind of 1.0 era was when we work closely with financial institutions, large banks to embed our solutions, which are really around automating processes. Yes, we have payments as well, but it's really helping banks get closer to the day-to-day financial operations of their customers versus being the last to know. We've now invested in a new embed 2.0 platform, which is API-based widgets, other white label capabilities to really drive the convergence of software and payments. So there's many companies across all categories, as you know, who are interested in extending the value creation opportunities in their platforms by attaching payments. Most of them aren't going to do that by building their own payment capability. So that's where the partnership opportunity comes up. We recently announced going GA, going live with Xero, and this is for their U.S. customers to be able to do AP payments inside of their platform, leveraging Bill tools. One of the main points of differentiation between what we do for software companies and what we've historically done for financial institutions is that all of our payment products are available. So we sell in a portfolio of solutions, and we enable partners to drive adoption within their customer base. And we think over time, that's going to create a much stickier solution, much higher monetizing versus what we've historically done with financial institutions and allow us to tap into the market.

I want to switch gears and talk about the spend and expense part of the business. You'd mentioned it briefly earlier. Are you seeing different trends in that customer cohort in terms of either TPV or spending versus what you're seeing in maybe the traditional Bill.com base?

In the March quarter, I'd say we saw strength in both T&E and retail, and we have a little bit higher exposure to those categories with the charge card versus the core Bill AP business. And so that was an area of strength that we weren't necessarily expecting. We're also a little bit cautious on both those categories as we look ahead, airlines being an example of potential weakness, so that whole T&E category. But generally speaking, as you know, the overall SME card spend is still growing rapidly and well above what we see on the Bill side.

This is -- I hope this is not a curveball, but I saw actually a headline earlier that you guys -- I think there was a factoring deal that was announced on the SME side of the business, if I'm misspeaking, tell me, but I'm just curious if you think that, that's an opportunity in that part of the business as well and maybe how we should think about that?

So it's the credit facility you're referring to?

Yes.

So we announced this week a new warehouse facility, which is in direct support of our SME products. So our capital strategy for that product is to leverage warehouse facilities, balance sheet cash and then eventually other tools like forward flow purchase agreements and securitization as we get bigger. So think of that as a capital diversification strategy. It increases our capacity to continue to grow that business without consuming more of our balance sheet cash. So it's, I think, an important next step in support of future growth for SME.

Great. Maybe jumping ahead, just as I think about the margins have really shined in the business over the last couple of years. I think it's been a focus of the company. How are you thinking about maybe balancing growth investments and continue to give margin expansion. How are we thinking about maybe going forward how are you driving efficiency while balancing growth?

Yes. So we've taken a balanced approach to growth and profitability historically. As you know, at the same time, we've created significant operating leverage as we've grown in Q3 of '22. Our non-GAAP operating income was a loss of about 3%. In Q3 of '25, just the quarter we just ended, we had a margin of about 15%. So significant expansion over a couple of years combined with a free cash flow margin of 25%. So we've done a good job at identifying areas of potential leverage as we've grown the business. There's more to do there for sure. Our bias is to invest for multiyear growth that continues to be something you saw us do in fiscal '25 as we announced some incremental investments in payments and supplier experience and accountants and those things. And we think the market is still evolving. It's not mature yet, and that bias makes sense. But at the same time, we'll monitor the external environment closely. And to the extent there are more challenges to reaccelerating growth, we'll obviously lean in more on the margin and profitability side. But over time, focus on strong ROI, short payback period and an annuity stream from the products that we're rolling out to customers. AI is a good example of this. We've talked, I think, on our earnings call and Q&A around that about a lot of customer-facing tools and products, but we're also investing for internal efficiency and capabilities. We're already seeing that show up in operating leverage around customer support. We'll see it in other parts of the business, and that will be an important element to our multiyear journey to expand margins.

I'll put you on the spot. Your CFO efficiency, I'm sure matters a lot to you and you mentioned AI for internal use. Is there a tool you don't have to name the vendor, if you don't want, that you found particularly impactful as a CFO of a public company, that's an AI tool as a user?

So we have tested a lot of tools within the finance function, and I think there's been tremendous progress over the last year, 18 months about leveraging AI and technology to replace manual activities. We have some success stories around internal controls, process walk-throughs, documentation that we're really excited about. And those are small-scale projects at the moment, but they have the potential to really help us grow our capabilities through leveraging AI.

Great. Maybe we'll end it at this. I'd like to ask you this question. When you look beyond the current cycle that we're in, how should we think about Bill over maybe a 3- to 5-year horizon?

Well, we've obviously grown up in the AP automation space. We've added AR over time. We have a large network. We added spend and expense and other insights, capabilities all still centered around the financial operations and transaction layer for small businesses. So as you look ahead 3 to 5 years, imagine a much broader set of capabilities and much more of an intelligent platform that enables SMBs to do financial management. So beyond the transaction, beyond the financial operations, how do they have much better insights, much better control and levers around managing their cash flow. We think the products that we have now will be a part of that. We think additional products, including contractors and payroll and procurement and working capital will play into that as well. And then this is obviously an area that AI will have a big influence on. There's a lot of jobs that small businesses need to do, whether they like it or not. Our platform over time has helped small businesses automate those processes, those jobs, but it's still a human operating those levers. Over time, we're going to see agents operating those levers and free up even more time for small business owners and their finance teams to invest in scaling their business.

Great. Well, John, we'll leave it there. We appreciate you joining us as always, and wish you guys the best of luck.

Thanks, Samad.