BILL.COM HOLDINGS, I

BILL
Temps Différé Nyse - 22:00:02 08/02/2023
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Transcript : Bill.com Holdings, Inc. Presents at Credit Suisse 26th Annual Technology Conference, Nov-30-2022 03:45 PM

30/11/2022 | 23:45

Presenter Speech
Nikolai Cremo (Analysts)

Okay. Good afternoon, everyone, and thank you all for joining us at Day 2 of the Credit Suisse Technology Conference. We're very pleased to have John Rettig, CFO of Bill with us today. So thank you very much for being here, John.

Presenter Speech
John Rettig (Executives)

Yes, you bet. It's great to join you.

Question
Nikolai Cremo (Analysts)

Yes. So just to kick things off, for those maybe a little less familiar with the Bill story, it would be helpful just to get a brief overview of the products and services that Bill provides to its customers and the large TAM that you're pursuing?

Answer
John Rettig (Executives)

Sure. Great place to start. So at Bill, we have a platform for small businesses to automate their financial back office, so things like accounts payable, accounts receivable, kind of the messy, legacy paper-based processes that most small businesses use today. And we created the platform from the ground up for small businesses. What that means is it's easy to use, it's self service, it's low cost. It's built specifically for them versus, say, an enterprise solution that's been stripped down to try to work for small businesses.

We recently added some other capabilities around spend management and corporate cards as well as advanced AR capabilities. So the market that we're going after is huge. In the U.S. alone, there are 6 million businesses with employees, 30 million overall, if you count, sole proprietors and companies like that. So it's a massive market opportunity.

And one of the key things that differentiates our company versus others in addition to the platform is just the scale that we have and our go-to-market ecosystem, which where small businesses are pretty hard to serve economically, and so part of our strategy has been to reach them wherever they are. So direct on the web through accounting software, through financial institutions and even accounting firms that support their clients. And that's allowed us to gain a lot of traction. We have 400,000 customers. We're approaching $1 billion in revenue, $250 billion or so in payment volume. So we're starting to scale.

Question
Nikolai Cremo (Analysts)

And the distribution side of Bill definitely seems to be like one of your key competitive advantages that really unlock the SMB, B2B payments market. So I think it would be helpful just to go a little deeper into each one of those distribution channels?

Answer
John Rettig (Executives)

Sure. When we started the business, the accountant channel, so working with accounting firms that support small businesses, was 100% of our distribution. And it's because accountants are trusted partners with small businesses. And in fact, those relationships between a small business and their accounting firm, it tends to last for years and years. It's not something that turns over.

And as a result of that, we developed a very sticky relationship with the firms and their clients. The accounting firms represent about 50% of our customers, a little bit less than that in revenue terms, and we work with about 6,000 accounting firms overall in the U.S., including most of the largest firms.

In addition to that, we go direct through digital demand gen channels, through referrals and through our network. We have a network of 4.7 million members, which means they're somehow being touched by a transaction, either from a Bill accounts receivable customer or an accounts payable customer who's sending them payments. And so we see a lot of upgrades and referral traffic that comes from the network and that's very cost effective.

And probably our newest channel is around financial institutions, where we work with 6 of the top 10 banks in the U.S. And we white-label our solution into their online business banking environment, and they make that available to either commercial customers or more recently, the small business segment as well. And that's a really interesting channel for us because there's so much reach.

They touch millions and millions of businesses, and we've created solutions that help the banks get closer to their customers. So they know through planning and scheduled payments and invoice approvals and things like that, what's coming from their customers versus just being the last to know because the transaction is presented to clear. So for banks, that means higher retention, higher opportunity to monetize those client relationships. And so we're really happy with the progress we've made there.

Question
Nikolai Cremo (Analysts)

Absolutely. And you have the FI channel, definitely, one of your more burgeoning channels as of late. I think with like 6 of the 10 largest banks in the U.S., white-labeling your platform just speaks to how under-penetrated the whole opportunity is, right?

Answer
John Rettig (Executives)

Yes, for sure.

Question
Nikolai Cremo (Analysts)

So the first topic I wanted to touch on is just your #1 strategic priority for FY '23, and that's a unified platform, bringing in the 2 acquisitions that you've done, Divvy and Invoice2go. So first, could you just give us an update as to where that is? And then how you're tracking along as finishing the front-end integration of that towards the end of this year?

Answer
John Rettig (Executives)

Yes, sure. I mean, we've been a product-first company from the beginning and it's partly because we serve that small business segment. You can't go acquire small businesses with feet on the street or through a typical enterprise sales model. The product has to be how you attract and retain and grow relationships with customers. So it's not surprising that creating a unified platform is our #1 priority for fiscal '23, given the 2 recent acquisitions that we did with Divvy and Invoice2go.

And we've made great progress at some of the back-end items and single sign-on and single identity and things like that. Some of those things customers don't actually see, and that's the next big phase for us is creating a unified experience where our solutions are all enabled within 1 common user experience. In August, I think we laid out it's 12 to 18 months to completely finish that experience, but we should make substantial progress in fiscal '23 and start to see the beginnings of that being exposed to customers, which is an important milestone for us because it unlocks some of the opportunities for us to cross-sell and upsell more of our solutions to customers because we know demand will be higher when they have access to those capabilities in 1 tool.

Question
Nikolai Cremo (Analysts)

Yes. I think that's a good place to take the conversation next, the Divvy and Invoice2go cross-sell opportunities. So in FY '22, you reached an incremental about 2,000 customers there, and you're targeting around 50% of your core Bill.com customers for this cross-sell opportunity. So I think it would be good just to get an overview of what steps have been taken on the cross-sell to date. I know there's like a small direct sales force focused on it, but most of the energy is going to come once you finish the unified platform?

Answer
John Rettig (Executives)

Yes. One of the exciting things about Divvy is that we've had really strong momentum, strong customer growth, strong spend growth and revenue, and most of that is actually their organic momentum, yet we have this really large opportunity for synergy creation with cross-selling Bill customers. It's probably the largest 50% of the customer base that's most likely.

And so we've started with some low-hanging fruit opportunities. We've introduced the product to our direct customers. We've partnered with, I think, a couple of hundred, now, accounting firms, and they're enabled to sell Divvy in to their customers. But I think we'll double down on some of these cross-sell opportunities once we reach that milestone of having the unified platform available.

That also allows us to begin attaching more of our products to the new customer funnel that we have. So at the moment that a prospect, a new small business is interested in making a change in how they operate, we'll be able to expose all of our solutions to them from day 1 versus over time needing to incrementally expose solutions to them. So we're pretty excited about that as well.

Question
Nikolai Cremo (Analysts)

Yes. Maybe it would be helpful if you can just go a little deeper into some of the things that you could do to accelerate the cross-sell notion once the unified platform is put in place over the next, call it, 12 to 18 months. And also, if you could just give us a sense of like what you think awareness of the Divvy solution is to your core Bill.com customers today?

Answer
John Rettig (Executives)

So starting with the second part, I think we've created a base amount of awareness across a good percentage of the customer base. But because today, the Divvy solution has a card -- a charge card attached to it, it's not actually applicable to all of our customers. We don't want to be in a situation where we're offering a solution that ultimately a customer can't use because they don't have a credit score or the ability to leverage the card product. So over time, that will change as we roll out the software to the customer base.

I think the biggest thing is being able to present a consolidated view of the financial operations and transactions and spend to customers regardless of the payment type, whether it's an ACH or a virtual card payment or a credit card payment in the case of Divvy, that will be one of the biggest draws for consolidated insights and reporting that will, I think, fuel success with the cross-sell efforts down the road.

Question
Nikolai Cremo (Analysts)

Got it. Very helpful. So another important topic for Bill.com is the tremendous progress you guys have been making on the payments monetization journey that began in FY 2019. Could you just walk us through the main parts of the strategy to enhance the payments monetization with the supplier enablement investments?

Answer
John Rettig (Executives)

Yes. We started increasing payment monetization a few years ago with the introduction of virtual cards and cross-border payments that involve FX transactions as a percentage of that. And in part, that's led to a really significant expansion in monetization, I think, 4x over the last 3 years or so. And that level of growth was driven by just a small percentage of our transaction volume being adopted on those payment types.

The vast majority of our volume today is still on ACH and check payments, which if you -- they round to 0 in terms of monetization. So that gives us confidence that there's still a really big opportunity ahead. As of the June quarter, all of our ad valorem products, which are priced as a percentage of the value of the transaction, all those products together is about 10% of TPV. And so we're in the early innings of being able to drive adoption of those products and think there's a long runway ahead to continue to expand monetization.

Question
Nikolai Cremo (Analysts)

Got it. Maybe it would be helpful if we could just get maybe a little deeper dive into supplier enablement, like maybe how big the team is and just kind of how you're thinking about how much room there is to go on enhancing those efforts?

Answer
John Rettig (Executives)

Sure. I mean, relative to the scale of the Bill employee base, it's a small team but a very strategic and important capability that we have. This -- the team and the process came out of our experience with launching virtual cards, which we did with a partner and we leveraged their supplier enablement capabilities. And what we pretty quickly learned was that we actually have a more robust data asset with which to do matching and create algorithms in order to identify suppliers who are good candidates for virtual cards.

We then extended that capability into cross-border payments where we're now able to offer suppliers choice about timing and currency and things like that. And so it's a capability that pays off not just for driving adoption of the products we have today, but it's something that we can leverage because we've created a direct line of communication with suppliers for all of our future product launches that may be applicable to suppliers. So it's an area where I think there's opportunities for us to create even more automation, which would allow us to create more leverage out of this capability that we have. But we've made really good progress to date.

Question
Nikolai Cremo (Analysts)

Got it. One of the comments from the last earnings call was just related to some of the enhancements, I think, on the supplier enablement side and more specifically, on making it easier for so many of your customers and -- or some of your suppliers in the U.K. and Canada to receive payments in the currency of their choice. Would it be possible just to get an overview of like what those changes are, so we have a sense of what kind of impact they could have over the medium term?

Answer
John Rettig (Executives)

Sure. So phase 1 of our international payments product meant that the control of the transaction was by the buyer. And so whether it was a U.S. dollar payment or an FX payment or whatever, those decisions were made by the buyer. If the supplier wanted to make a change to the terms, they negotiated directly with the buyer who would be Bill's AP customer in this example.

Over the last year or so, we've created capabilities, primarily through licensing and being able to move money and the U.K. and Canada are the examples that we've talked about, where we can now facilitate transactions directly on behalf of suppliers, which before that wasn't the case. It was only the U.S. entity that would be our customer. What that means is the supplier has choice that they can act on without having to go through the buyer in this case.

And what we've seen is a pretty significant increase in the percentage of transactions that end up being local currency. When we launched the international payment product, we said longer term, 10% to 20% of our TPV could be cross-border payments, of which 40% to 50% might be FX. As of our -- end of our last fiscal year, we were about 32%. And I think we're seeing with offering choice to suppliers, there's definitely an opportunity to expand that FX component. And it's really good repeat usage and I think a better supplier experience than what we had before.

Question
Nikolai Cremo (Analysts)

Yes, starting to treat those suppliers more as customers.

Answer
John Rettig (Executives)

Exactly.

Question
Nikolai Cremo (Analysts)

Yes. So digging a little deeper on the payments monetization opportunity. You guys have launched quite a few different payment methods over the last few years with Instant Transfer, Pay By Card and Enhanced ACH more recently. And based upon the disclosure in Q4, it looks like those are about 20% of your monetized ad valorem payments for the core Bill.com, excluding Divvy.

So first, it would just be good to get a sense of -- especially on the Enhanced ACH side, just given the vast majority of your volume today is still in check and ACH. And because you haven't provided any longer-term targets as to what those could represent in your TPV, but maybe starting with Enhanced ACH, like -- ballpark like what percentage of TPV could that represent over time?

Answer
John Rettig (Executives)

Yes. So we -- just stepping back, we take a portfolio approach to our payment products, and we try to find the right payment method for the transaction between buyer and supplier. So it's not a case where we're forcing 1 payment type over another. And Enhanced ACH is an example of a product that might be a good alternative to say a higher-cost virtual card payment for a large supplier. It's still super early for us in that particular product.

But we have other similar products like real-time payments that we call Instant Transfer inside of our platform, or another funding choice, Pay By Card. So an AP customer can bring their own credit card and fund their accounts payable with that instead of a debit to their bank account. And all told, most of our ad valorem products, the ones that you mentioned certainly are new and growing rapidly.

And I'd say what we try to do is just make sure that we're not creating friction in driving adoption. And a lot of that has to do with the speed of the payment and the size of the transaction in getting those things right. So for real-time payments, tends to be smaller dollar transactions to really small suppliers. If there's a larger supplier with $100,000 invoice that's being paid, it's probably not the right product for them. So that's where maybe an Enhanced ACH or another product might make more sense.

Question
Nikolai Cremo (Analysts)

Got it. So the FI channel has received a lot of investor focus more recently, just given the rapid growth. I think you guys almost doubled the customers from the FI channel within like 3/4 from like 25,000 to 45,000 over the last 3 quarters. So first, I mean, just given the monetization is different versus your other 2 channels, if you could just walk through how the unit economics for the FI channel differ versus the direct and accounting channel?

Answer
John Rettig (Executives)

Sure. We sell to financial institutions on a wholesale basis. They're typically long-term arrangements, 3 to 5 years. It covers both subscription and transaction fees. And we structure these sort of discounts or wholesale rates in exchange for volume commitments. So the banks make financial commitments, minimum revenue guarantees to us.

And the reason we do that is not so much for the near-term revenue but for the alignment it creates in incentives to drive adoption of the product at the banks. And that's where we're seeing good traction. Historically, with our portfolio of financial institution partners, we've served larger businesses like mid-market and commercial customers. More recently, we've started to serve the small business segment at certain banks. And you've seen that, that has had an impact on the net new customers we're acquiring from those channels.

Generally speaking, the revenue per customer or ARPU, if you will, from a financial institution, client is going to be lower than with the stand-alone Bill business or direct through our accountant channel. But at the same time, the banks are investing in the sales and marketing motion and the marketing programs. We're certainly collaborating and consulting with them on that. But they are the ones who are bearing the expense of driving adoption.

And so we're very comfortable with the economics because we end up at a similar place on a contribution margin basis. The absolute dollars might be different. But -- and that's part of why we've said historically that our go-to-market ecosystem, we're pretty ambivalent about where our customer comes from because the market is still so early in its evolution. Just driving awareness and gaining share and penetrating the market is more important than acquiring a customer from a specific channel or another.

Question
Nikolai Cremo (Analysts)

Absolutely. And feeding the network effects of the business and just getting this land grab initially definitely seems to be an important part of the strategy. So on the last earnings call, you mentioned that an existing FI partner plan to offer Divvy. And a lot of these FI partners may have an existing product like Divvy, might not have all of the expense management features. But what's your sense of the appetite for other FI channels -- or other FI partners to adopt Divvy?

Answer
John Rettig (Executives)

I'd start with the key hook for us in working with partners is the software experience. Like it helps financial institutions get closer to their customer. And a Divvy spend management expense reporting tool is a great example of that, where that's where we've seen a lot of attention from banks where integrating that capability helps them facilitate more of the transaction flows of their customers so they get close to their customer.

In the case of the actual card, it's more likely that certainly a large bank, they bring their own card program to the software experience versus use the Divvy program. And in that case, Bill would be the receiver of like a rev share net economics from the bank. But in the case of smaller banks, it might be a complete solution, the software experience and the card program. So I think it's -- that's a good example of where we've been able to take the early steps of expanding the number of products that are exposed inside of our white-label solution.

We've also talked about a couple of smaller banks where our virtual card product is now going to be enabled inside the white-label solution. That's another example of where we're able to bring more products to the solution, which I think over the longer term, helps us increase the monetization of the bank customers.

Question
Nikolai Cremo (Analysts)

I think it would be helpful just to kind of dive into what drove that particular FI partner to go with your virtual card solution versus the 1 that they were using?

Answer
John Rettig (Executives)

I think the key differentiation is really supplier enablement. We have a large network, 4.7 million members, as I mentioned. We have now a track record of being able to quickly identify suppliers, connect them, give them choices, where it makes sense, facilitate a virtual card transaction. And that's something that's difficult to do and hard to build. And so I think that's the key value proposition beyond the software and the actual money movement that we're bringing to the banks.

Question
Nikolai Cremo (Analysts)

Got it. So I have to touch on the macro, just given it's another key focus area for investors on Bill. So yes, on the last earnings call, you mentioned that you're seeing softness -- or some softness across most of your customer segments in reference to the customer size and more of the discretionary verticals. But first, it would be good to just talk to the differences that you saw between the volume per customer growth in Divvy versus the core Bill.com. I think Divvy was around 20% and the core Bill.com volume per customer growth was around 8% year-over-year. So is there anything that's driving that?

Answer
John Rettig (Executives)

Well, I think for Bill, we've seen some softness in the discretionary spend categories, as you mentioned. And for Divvy, we've really seen lower growth versus like declines in spend on a per customer transaction basis or anything like that. And part of that comes from the Divvy customer base is younger with the platform. We've added a lot of customers in the last year. They're now scaling so their spend is increasing.

It's probably the newer customers have a bigger impact on the overall Divvy results than, say, the new customers for Bill. I think the trends around the categories that we're seeing lower growth or lighter spend are consistent between the card program and the Bill platform. It really seems to be the discretionary item. So it's not across-the-board spending decreases or anything like that. So it's really the things that are controllable variable expenses that could be subject to scaling back if a business is running into more challenges.

Question
Nikolai Cremo (Analysts)

Yes, understood. So just on the volume per customer topic. Bill has historically seen a boost from just kind of getting pulled up market into larger mid-market customers. And I think that's something that investors are maybe losing sight of to an extent in the current environment and when thinking about the current trends that you're seeing. So is that a benefit that we should still expect to see over time? Maybe it's not linear but 1 that you would expect to continue?

Answer
John Rettig (Executives)

Yes. The average size of the Bill customer has increased pretty consistently over the last couple of years, in part from the impact of mid-market customers. They're larger than more users that support subscription revenue growth. They obviously have more transaction volume because they're larger businesses. They also tend to have a slightly higher percentage of cross-border payments. Just their network seems to be a little bit bigger than the typical surface area of a small business. And I think it's -- we continue to see demand in this area, so it's something that we would expect to continue and have a positive influence on the model.

Question
Nikolai Cremo (Analysts)

Got it. So another topic on the earnings call was you mentioned that there was a handful of opportunities that could provide upside to your FY '23 outlook. I think some might be related to some seasonality within TPV, perhaps float revenue interest rate assumptions, maybe Divvy customer growth, but it would be great just to kind of touch on those?

Answer
John Rettig (Executives)

Yes. I mean, our outlook assumes a more muted spend environment from small businesses because that's some of the trends that we've experienced from June through the September quarter, so we're assuming it's the beginning of a cycle, not a one-time event. But to the extent that there's a more pronounced seasonal positive impact on spend, either card spend or regular core B2B spend, there certainly would be some upside opportunities there.

We also have various kind of tools or levers in the business around expanding monetization. We're continuing to see increases in wallet share and growth in adoption across all of our payment products that I think help insulate us somewhat from a more muted spend environment.

Question
Nikolai Cremo (Analysts)

Absolutely, just increasing that payments monetization alone is a very powerful lever that we've seen over the last, call it, 10, 12 quarters since you began the payments monetization. So just touching on margins, you guys -- you're breaking even this year for the first time. It's just great to see. Just kind of looking forward, if you look at some of your expense lines and maybe excluding like Divvy Rewards, where would you expect to see the most operating leverage?

Answer
John Rettig (Executives)

Yes. But I mean, we've focused for a long time on creating an efficient business model in part because it's difficult to serve SMBs to get the economics right. We've operated the business historically kind of with minimal losses, near breakeven. We've crossed over to non-GAAP profitability this year in the first quarter, and our expectation is for the full year.

And the market is huge, like 14,000 net new customers last quarter, most of them doing something for the first time in terms of this type of digital solutions. So that leads to a bias to invest. It will look a little bit longer term. We'll definitely be able to experience some improvements in operating leverage associated with G&A, which for us is a little bit different than a normal software company because it includes regulatory and compliance and some other activities and investments associated with the payments part of what we do. We have our own proprietary payments capabilities. But those expenses don't scale with the business. And I do think ex rewards, we are starting to create some efficiency -- additional efficiency with the sales and marketing activities as well.

Question
Nikolai Cremo (Analysts)

Got it. One of the key growth pillars that you've laid out for the company at #5 is international expansion. So just given that this is a network effects business and it seems like that's something that would take time to develop, I'm just curious if there's any indication as to when you might start planting those seeds internationally?

Answer
John Rettig (Executives)

I think the Invoice2go acquisition was our first real tangible step towards international markets. We've obviously done some things before that with cross-border payments, learning what the international supplier network looks like from our U.S. customers. With Invoice2go, we acquired customers in 150 countries now, a base of operations in Australia. And that has prompted us to start to look at the market opportunity, which markets to go to is likely to be English-speaking countries first.

We've mentioned U.K. and Canada as obvious starting points, given the volume of transactions that exist. And I think the value proposition is something that we're still working out. Like we talked about the prevalence of check payments here in the U.S. That's not true in Europe, right? They're way ahead of us in terms of digital payment adoption. So we still think there's an opportunity to create efficiency in doing business in some of these international markets, but we'll come back with a more concrete time line in those countries.

Question
Nikolai Cremo (Analysts)

Got it. And then just taking stock up your international exposure, excluding Invoice2go, is there any way for us -- or for you to dimensionalize for us just what percentage of your supplier network resides with suppliers outside the U.S.?

Answer
John Rettig (Executives)

Most of it is still domestic. So if you look at the number of network members or the payment volume, it's predominantly a U.S. network today.

Question
Nikolai Cremo (Analysts)

Got it. So we're almost running out of time, but I think a good question to end on is looking ahead, you guys have expressed ambitions to continue to add solutions to your one-stop shop. So just what is top of mind for you? And like what makes sense for you guys to prioritize just in terms of sequencing new products, whether it's through a partner or an acquisition?

Answer
John Rettig (Executives)

A good example of that is our Finmark acquisition, which is in the planning space. Our goal with that is to start to move our platform from just financial operations to more financial management and delivering insights for businesses on all of their activities that impact their financials so that they can run a better business.

And eventually, we'll integrate those capabilities into the Bill platform, alongside of Divvy and our advanced AR capabilities. So I think there's other areas that we can expand into, including removing friction from the procurement process for small businesses, helping in other areas of the back office around human capital management and people and things like that.

And then there's a long list of payment-related opportunities that we see to move money faster, create more cash flow solutions for businesses. We've talked about working capital being something that we get inbound inquiries on all the time as businesses want flexibility inside of the platform to have access to cash as they're making decisions on transaction. So these are all things that we're considering as we look at investing organically, partnering or M&A.

Question
Nikolai Cremo (Analysts)

Got it. Well, fortunately, it looks like we are out of time. That 30 minutes went quick. But John, thank you so much for being here with us. We really appreciate it.

Answer
John Rettig (Executives)

You bet. Thank you. Appreciate it.

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