I think we can get started. Happy Friday afternoon, everyone. Welcome to our last session of our virtual San Francisco financials trip. My name is Ken Suchoski, and I cover the U.S. payments and FinTech sector at Autonomous Research. And we're really excited to have John Rettig, BILL's President and CFO, joining us today to discuss some of the latest trends in the business. John, welcome. It's great to see you again. Thanks for doing this.
Yeah, you bet. Thanks, Ken. It's great to join you.
Great. And we'd like to make this session interactive, as well. So if you'd like to ask the question, you know, feel free to use the Q&A box on the right side of your screen, or you can email those to me at ksuchoski@autonomous.com, and we'll do our best to get those answered. John, maybe we'll just get right into it, and I wanted to start on take rate and transaction revenue, just because, you know, that appears to be the most incremental part of the story, and where we're getting the most questions. You know, you talked about certain suppliers pushing back on the cost of acceptance and using certain payment types. So were there specific cohorts or verticals that were impacted?
And of the suppliers that are accepting virtual cards today, you know, do you have any numbers around how many suppliers push back on that cost of acceptance?
Yeah, there's definitely been an increasing trend around more sensitivity to payment acceptance cost, and we've seen that emerge over the last few months. We've taken a hard look at industry verticals and demographics across suppliers to identify where some of these trends have been emerging and what the implications are for our priorities around both the product and how we increase the value proposition associated with, in this case, virtual card payments, but it applies to ad valorem payments overall as well. I'd say the main variable that is pretty consistent is size of supplier and volume associated with larger dollar transactions. That's where the most sensitivity seems to exist.
For large, you know, say, national footprint suppliers that are in the BILL network, there's very often a many to one relationship between BILL AP customers and those suppliers. So we could have, you know, hundreds of AP customers who are paying the same company, things like utilities or telecom companies or things like that. And we've seen this increase in price related to card payments, you know, generally. It's not necessarily concentrated in a few suppliers, nor is it across the board, the entire, you know, network of card-accepting suppliers. But we're definitely seeing more changes in behaviors in larger suppliers versus the long tail. And with the long tail, we're actually seeing really good progress still with adoption of some of the other ad valorem payment products that we have.
So we think it's a fairly focused set of trends on these larger suppliers. You know, at the end of the day, some AR departments at these big suppliers might be making wholesale changes to where they're moving away from card payments overall, not a BILL-specific item, but more often it's about decreasing the dollar volume associated with large ticket transactions. So, you know, leveraging virtual cards to cover a big volume of transactions where there's efficiency to be gained, but maybe cutting back on the dollar value of transactions for cost purposes.
Okay, great. John, I guess one thing investors are trying to better understand is whether this take rate dynamic is cyclical or a structural issue. I guess to help better understand that, I wanted to ask, you know, why did suppliers decide to push back on payment acceptance costs now? And I guess what was the reason they accepted card payments in the past? Meaning like, what was the ROI to them before, and why do you think the ROI has changed to the point that it's not worth paying the cost of card acceptance today?
Yeah, interesting. The timing of behavioral changes is an interesting question. Since BILL's been, you know, public, we've been through the fastest decrease in interest rates ever, and now the fastest increase in interest rates ever. It's very likely that this higher for longer interest rate environment is having a cumulative effect on businesses that's forcing adjustments to how they operate. And the value proposition for cards has always been around speed of payment, certainty, ease of reconciliation, and those things. So the cost associated with card payments, I don't think by itself is a new phenomenon or something that didn't exist before, but maybe more in focus now, given, you know, macro-induced sensitivities and things of that nature.
The thing that gives us confidence that this is a cycle that, you know, we will be able to grow through, is that we're processing a small percentage of the addressable payment volume via virtual cards today. Like, we see transaction volumes across all of our, you know, AP customers and all of the supplier network, and we know which ones are merchants and accept cards versus not. And there's a significant billions of dollars that we haven't touched. We have not enabled a significant part of that volume, so it tells us that we're nowhere near a ceiling, you know, in adoption or anything like that. Even though, you know, additional adoption or penetration among suppliers might be less linear in the short term, we think there continues to be a huge longer term opportunity.
Yeah, that makes sense. And can you talk... I think you guys talked about some of the things that you're doing to address some of the issues that you, you've seen. So can you just talk about the initiatives that you have put in place or plan to put in place to deliver more value to suppliers... that are accepting virtual cards? And I guess, are these solutions in market today? I think, you know, I think investors just want to get a better sense of, you know, what gives you the confidence in take rate, sort of hitting a floor and then returning to expansion mode in the back half of the year.
Yeah, I'd say at the highest level, for most suppliers who accept virtual cards today, certainly in the BILL network, it's a pretty antiquated process that involves a fair amount of manual activities, even though it is a digital payment. And the opportunity for much more adoption, you know, longer term, comes in part from just modernizing the process, creating more automation, less human involvement. That speeds the reconciliation process. It creates back office efficiency for AR departments, which lowers the overall, you know, total cost of the AR process, not just the acceptance cost. So our primary focus is around improving the product experience. So pass more data, create more straight-through processing, drive more automation and things of that nature.
We can also complement some of the product improvements with making sure that, you know, pricing and incentives are aligned between buyers and suppliers and BILL. Historically, as you know, we've been pretty agnostic as to, you know, payment types, payment modalities. As long as it's an electronic payment, we work very hard to minimize check payments. But we can certainly exert more influence over payment choices and drive more ad valorem adoption to the extent that that payment type makes sense, uh, for buyer and supplier. We're still very focused on payment volume continuity, so making sure that we're maintaining, you know, payments in the system regardless of the type.
So I think some of the product enhancements around improving reconciliation by passing more data are in market today, things that we're either testing or have launched, and we'll work towards additional capabilities that help the product experience be better, which will remove friction, and I think help us with driving that incremental adoption and penetration, which is what gives us confidence in the second half of the year that we'll be, you more on track to expansion versus not.
Yeah. And John, just a follow-up question on that, because you mentioned straight-through processing. You know, does, I guess, what percentage of the virtual card transactions are straight-through processing today versus some manual process? I guess, is it, you know, still early days on that front? And I guess, you know, how can you actually get more straight-through processing to drive that efficiency?
Yeah. Today, it's a small, small percentage. We have a number of partnerships in place that we're leveraging to expand that. I think over time, you'll see us have more partnerships as well. And that's really, I think, one of the big unlocks as we think about even the longer term, you know, penetration rates beyond this fiscal year. The more that we can automate, you know, through straight-through processing, I think the less friction that exists and the more unlock and volume that we'll see.
Yeah. And I guess just one, one other question, just to round out this discussion, John. Just the, the speed of payment. Were, were you talking about, like, the settlement time, like, versus the check? Or were you talking about, like, instead of paying in T plus 30, you would pay in like a T plus 10 type of scenario, so that, you know, if the supplier is eating that, 2.5% , 3% fee, you know, maybe they can get their payment 20 days earlier. Is that- was that what you were referring to?
Yeah, that's always been a dynamic. I mean, just-
Yeah
... the principles, and how, you know, finance teams operate, you know, getting money faster has always been a priority. We have seen some changes where, you know, slower payment types that are nominal or no cost have been selected. I don't think that's a universal behavior or anything like that, but one of the, you know, value propositions associated with card payments is speed. Yes, the nominal cost is higher, but getting paid, you know, weeks earlier or even, you know, more is certainly important. So, it's not a good fit to have an expensive payment type that also, you know, takes a long time to clear.
Would you guys take on that risk? Because I guess, you know, basically, you know, I think the way it works is that those funds are coming out of the customer's account when that payment is made. And so I guess if you're paying the supplier earlier, the BILL customer would actually have to release the funds earlier. So, you know, what's the incentive for them to do that, I guess? Or would you take on that, you know, that balance sheet risk, I guess, of fronting the capital? It would be like an invoice financing type of flow of funds, basically.
Yeah. We have other products where there is an advance component. We've talked about this before, around working capital, so delivering payment on an invoice in advance of the buyer paying. And this is for, you know, known customer-supplier relationships. It's not for new entities in the network, and that's a totally separate product. The card payments is less about risk and more about just aligning incentives. There's benefits to the buyer as well, for card payments. That's a free transaction. They're not paying anything for that type of payment on the BILL network. So this discussion around virtual cards and payment timing and whatnot doesn't necessarily lead to any incremental payment timing or credit risk per BILL.
And then, as I said, we have other products that we're really excited about, over the intermediate and longer term, that would address some of the other cash flow needs.
Yeah. Okay. That's helpful, John. I guess, you know, based off of these recent trends that you're seeing in terms of virtual card acceptance, you know, do you guys still have the same level of confidence of hitting, you know, that long-term target for virtual card penetration in that 5%-10%? Or, you know, do the recent trends make you question that target a little bit more?
... Yeah, not at all. We continue to be confident we can unlock volume to achieve those targets longer term. We have, you know, maybe an upside bias, but maybe it's going to take longer, given a slowdown in the next, you know, few quarters. But as we look beyond the sort of near and immediate terms, we focus primarily on existing payment volume and existing suppliers so far in our efforts around virtual card in particular. We haven't done much in the way of enabling vendors to become merchants, converting how they do, you know, some of their payment acceptance and whatnot. Those are things that are on our roadmap, you know, down the road.
So we step back and look at the volume in our network of recurring transactions and those that are potentially, you know, cardable. That's part of how we got to those targets to begin with. We still have confidence that those are achievable over the longer term.
Yeah. Okay. And that, I guess that would tie into, I guess, driving virtual card penetration higher as well, right? Because I guess you need—like, if you wanted to do straight-through processing, you would need essentially the merchant ID, you know, to help process those transactions and make it super seamless. So is that like... I guess that's potentially on the roadmap longer term?
Yeah, we're looking at a whole bunch of options to eliminate, you know, this friction and create automation for sure.
Yeah. Okay. And I think, I think on the public call, I forget if it was you or René, I think one of you mentioned that there are tens of thousands of suppliers within the 5 million-plus vendor network that are accepting virtual card payments. So, you know, it seems that penetration is still quite low, right? Around 1% or so. So is the thinking to get virtual card penetration moving in the right direction again, that you just need to enable more suppliers to accept card? And I'm assuming the company started with the low-hanging fruit, meaning the suppliers that are most likely to accept card, you already signed those up. So does it get incrementally harder to add that next supplier?
I think that's generally right around low-hanging fruit and a small percentage of suppliers who have been enabled so far. I think there is a long way to go. Our focus initially, like the first phase, if you will, as we've rolled out that virtual card product, has been on larger vendors, where our customer base is like, there's repeat transactions, and we can see the volume. And we've learned how to enable those suppliers. We're still working on, as I said, creating automation, enhancing the data that we pass to them to drive automation and things like that.
The next phase, I mean, we're going to deliver more sort of solutions to, to suppliers, enable them, across a longer tail of customers, and I think that's going to unlock, you know, more of the volume, going forward. So that's, you know, part of the, the confidence that, that we have in the longer term penetration rates is just the, not, not just the low percentage of suppliers, but the low percentage of volume that we see to, to merchants of, of record that are in our network, and, and we know there's a, a lot we can do there to, you know, to drive adoption.
Yeah. Okay. And I guess, John, maybe we could—I guess we're about halfway through. I wanted to pivot just to the cross-border transaction trends that you were seeing. Can you just walk us through what you're seeing on cross-border payments and local currency? It seems like some of these suppliers are choosing to receive U.S. dollar payments, not the local currency. So I guess, like, why would they do that? And I guess, what are they doing with the U.S. dollars? Like, wouldn't the bank that they're working with automatically convert that transaction into the local currency anyway, once that U.S. dollar payment hits their account?
Yeah. On that last point, it kind of depends what kind of account they have, if they have a multicurrency account. But we, we've seen, you know, obviously good adoption of international payments. The volume continues to grow, although we've seen some headwinds recently in the mix of FX versus U.S. dollar, particularly in Q4, and we've seen that, you know, continue. Over the last, like, three, four quarters, we've made a lot of progress driving an increase in the percentage of FX. We think, the strength of the U.S. dollar, we've seen some invoices where we have a history of recurring transactions between a buyer and an international supplier that, you know, we can see the last six or eight have been in local currency, and now the invoice has flipped to U.S. dollars.
That's dialogue between buyers and suppliers, deciding who's going to bear the cost of currency translation. So one of our challenges is just to make sure that choices are obvious and buyers and suppliers are aware of the controls and tools that they have with the BILL platform in order to make the right choices. There's always more we can do, I think, to, I guess, incent that volume moving to FX payments for BILL. We haven't traditionally been, like, a price leader. We've tried to be competitive, better than prices, say, retail prices at banks, but we haven't necessarily leaned into wholesale pricing or things like that.
The larger the business, the more sophisticated they likely are in terms of FX transactions and real-time pricing, comparisons and things like that. So all things considered, we certainly can deliver more tools and, you know, be priced appropriately, such that if somebody wants an FX transaction and they're running a bunch of other volume through BILL, that it becomes an obvious place to do that FX transaction. To the extent that they have moved, you know, to U.S. dollars, then that's obviously a different thing, and maybe that evolves over time as the macro, you know, changes, given the strength of the U.S. dollar.
... Yeah. Okay, great. And John, I guess by our estimates, you know, around 70% of the core BILL transaction revenue comes from virtual cards and cross-border payments in local currency. So I was curious, like, how does the company think about diversifying away from these two payment types? It just seems like the model is very concentrated across those payments. So you know, how quickly can the company ramp some of the newer variable rate offerings to diversify the transaction revenue stream? And I guess, how should we think about the timing of that?
Yeah. So, I mean, I think that's the right way to think about it. It's not diversifying away; it's a portfolio approach across all of our payment products. And as the newer products scale, we bring diversification of payment volume across more products. We're seeing really good progress with real-time payments, and, and what we call Instant Transfer. Working Capital, I mentioned, is in the early stages, as is, you know, Pay By Card and other products that are really good cash flow solutions for businesses. So it's about driving awareness, getting, you know, some of these products to scale. And then over time, there's probably additional diversification opportunities as you think about our business model.
With the rapid growth in payment volume during the pandemic, at a time when we were also scaling very quickly monetization, that led to a transition in our business model, where we're, you know, much higher in transaction revenues than subscription revenues, you know, today. This diversification of payment types will help, I think, as we also add use cases to our platform, more things that, small businesses can use to automate their operations. That also, and we, we launched our unified platform earlier, last quarter, if you, if you recall. That opens up more opportunities for us around, modular adoption, creating attach rate with specific products within the platform, probably more subscription opportunities as well. So I think the whole business model over time, as we scale, probably becomes a little more diversified than, than what we're seeing today.
Okay, great. John, I got a question from the audience, just asking, "Why would suppliers that have changed their behavior revert back to virtual cards?" I guess, they're thinking, like, clearly, they've made their decision to move, you know, in the other direction. So is the ROI that obvious to those folks?
Well, I think it all depends. But at the end of the day, it comes down to the value proposition, how automated, you know, payments are, how easy or not it is to reconcile outstanding AR, and every supplier is gonna make their own decisions on that. But if somebody's moved away in favor of some, you know, other process, which is not a behavior we're necessarily seeing across the board or anything like that, then that's different than cost optimization associated with large dollar transactions or a preference for, you know, a whole bunch of different payment types.
At the end of the day, it does come down to the relationship between the buyer and supplier and where the leverage exists in that relationship, to determine who's gonna bear the cost of those, you know, transactions. So I think it all depends on the specific supplier, you know, circumstances. Where we're focused is improving the product experience to drive as much automation as possible, which is how we think the most value gets created from that particular, you know, virtual card payment method.
Yeah. Okay. Maybe we can pivot, John, to the Spend and Expense management business, so formerly known as Divvy. I just wanted to ask about how quickly you think BILL customers will adopt the spend management solution. And I guess what we find interesting is that when you did the acquisition, you had about 1,000 BILL customers also using Divvy. You hit the 5,000 customer mark recently, which is a nice pace of adoption for not really having pushed that cross-sell. So I guess I'm curious, how do you think about the pace of adoption of that cross-sell over the next couple of years, and what gives you the confidence that you'll see that adoption?
Yeah, just one additional data point. In addition to the 5,000, going from 1,000 to 5,000 BILL customers adopting Divvy, we also had a couple thousand Divvy or Spend and Expense customers adopting BILL. So we've seen some early success at the value proposition driving cross-sell adoption in both directions. And I think the unlock that we were investing towards was really the integrated, unified platform that we launched earlier, you know, this year. And we have good go-to-market motions behind that. It's driving awareness inside the product, which is a very efficient way to drive attach. And we saw a good initial progress in the partial quarter. And I think the second half of fiscal 2024, we should start to see additional adoption.
I think the financial benefits, like revenue growth and spend moving over and things like that, there's always a lag effect. That will take a little bit longer and probably has a more pronounced effect on our fiscal 2025 than fiscal 2024. But, this is a big opportunity for BILL. As we said, probably the upper 50% of the BILL customer base, at some level, is a candidate for the Spend and Expense product, and now we're actively addressing that cross-sell opportunity.
Okay, great. I guess maybe just sticking with spend management for a second, can you just talk about what you and the team saw in the data, John, that led to your decision to pull back on the credit lines in the business?
It's an ongoing process, so we did have some incremental activities in the most recent quarter. But going back about a year, we've been making proactive adjustments to credit lines and making sure line sizes are appropriately matched to the current financial condition of businesses. And most recently, what we did is reduce some line sizes proactively or preemptively on some of the large spenders, as we feel like there's incremental economic, you know, potential credit exposure. We've done a significant increase in the frequency with which we underwrite customers. We evaluate their financial condition and whatnot, and we're not in the business of driving revenue growth and seeing, you know, an increase losses on the back end of that. We managed a contribution margin, and so we've been proactive.
This is not in response to any sort of material spike in losses or anything like that. It's more, a proactive approach, and we think it's prudent given the economic cycle that we're in right now. We're trying to be proactive in managing credit exposure.
... Okay. Yeah, that makes sense, because, yeah, the, the delinquency rates actually look pretty, it looked okay. I think the loss rate ticked up a little bit more, but okay, so it's more, it's less Divvy health kind of, or I guess, Divvy customer health deteriorating in the quarter. It was more, "Hey, we're, we're seeing some softening of trends on the AP side. Macro is tough. So let's just get ahead of some of the trends that might be coming in the coming quarters.
Yeah. Plus, I would say that on average, as you know, the Spend and Expense customers are much larger than average BILL, and so there's more, there's large line sizes on some of those customers. And so we intentionally, as we've continued to underwrite and review, you know, financial strength, we develop our own credit ratings. Where we've seen softness there, we've reduced line sizes appropriately.
Okay. And I guess when thinking about the lower spend management guidance versus prior, and even the lower net adds in the business this quarter, I mean, how much of that was driven by this, you know, self-inflicted pain of pulling back on credit lines, you know, tighter underwriting versus other factors?
Well, directionally, there's two big factors. One is just, some softening trends in card spend per transaction, that overall, influences our estimates about, lower card spend growth going forward. You saw in the last quarter, about an 11% decline in card spend per transaction, year-over-year, 5% sequentially. So that's, that's one factor. And then the other is this, reduction in, in line sizes. It has the effect of reducing growth from the existing portfolio and card spend. Those two things combined, I think, are the, the bulk of the changes.
The net adds, I'd say, we have done some tightening of, of the smaller customers, increasing our underwriting standards, but more of that is related to the transition that we've made to our integrated platform, where that also involves branding and landing pages and, and those things that are now obviously under the BILL Spend and Expense brand umbrella. I think over, over time, we'll obviously continue to scale, you know, net adds.
Yeah. And John, does the... I guess, how much does the tightening of credit lines impact the cross-selling efforts? Like, is that a big deal, or is there enough low-hanging fruit to, to drive net adds?
It's probably one of our biggest advantages, actually, is that we have such a rich data set on existing BILL customers, given the history and transaction flows and whatnot, that we feel like we can create very differentiated outcomes from a credit exposure standpoint. And so in the near term, we don't expect that has much impact at all in terms of a headwind. It's more the new customers coming in and/or concentration or larger dollar spend from existing Spend and Expense customers who were not previously BILL customers.
Yeah. Okay, great. And, maybe just one other one from the audience, and they're asking: How much can you lower the Divvy rewards, and when can we expect this to happen? So I think they're just asking. I think the Divvy rewards are actually, like, pretty stable the last four or five quarters.
That's right.
Yeah. So when does that come down?
We're at about 50% of interchange revenue now. Interchange has been stable at about 260 basis points, a little bit more. We're comfortable with the rewards level at the moment. As that product line scales and we see more penetration on the BILL base, we do think there's some efficiency to be gained there, but, you know, that's over the next year or two. It's not over the next quarter or two.
Yeah. Okay, great. John, last few minutes, I wanted to pivot to, to capital allocation. I guess, you know, we're, we're getting a few questions on the, on the webinar about this, but I just wanted to give you an opportunity to sort of set the, record straight on the article stating that BILL was in talks to acquire Melio. You know, we received a lot of questions around, why BILL would do the deal, how it makes sense, why it doesn't make sense, the purchase price of $1.95 billion, you know, the stock and cash deal. So I just wanted to give you the opportunity to sort of set the record straight, as, you know, there were a lot of investors that were questioning the capital allocation decision, to do the deal. So any, any thoughts on that?
Well, in terms of the actual record, we responded publicly with, there is no transaction, and there's not much more I can say about that. But stepping back, we're very aware of our current situation and the stock price. We would not do a $2 billion whatever, you know, deal at our current valuation. That's not how we think about capital allocation. We're focused primarily on our core business, and obviously, delivering on value, the value proposition for customers, scaling, improving margins, you know, all of those things that we previously talked about. At the same time, we have a fully built out corp dev program that looks at partnerships and M&A opportunities. I'd say, present, you know, present circumstances, we'd be focused more on, like, tuck-in technology type things that help us bring products to market faster.
And with that, we're obviously would want to focus on minimizing dilution. Our balance sheet is obviously built in order to do acquisitions, but even on a cash basis, we want to see quick payback and strong ROI, and ultimately drive, you know, accretive results sooner than later. So we're not preoccupied with, you know, with M&A, and we're certainly not in the market for transformational, you know, things. We have a history of doing M&A, and we've driven strong results there. We did a north of $2 billion deal, you know, for the Spend and Expense product with Divvy, but those aren't the kinds of transactions that, you know, we'd be interested in doing in this environment.
Yeah, that makes sense. John, I got one from the audience. I just wanna weave it in here, and it reads: Were they engaged with Melio at all over the last several months? Saying BILL is not pursuing an acquisition at this time does not mean, you know, that you weren't pursuing an acquisition the day before. Yeah, I don't know if you can comment on that, but just one question from the client.
Well, that's a new one. We're on record on both the status of the rumor being not true and our current priorities.
Okay. All right. I guess, maybe just one question, 'cause, you know, the release said, you know, you're not pursuing a transaction at this time, I guess, which still leaves the, you know, the acquisition potentially on the table down the road. You know, Melio is further down market than Bill, and I think Bill has talked about getting more into that middle market. I f a deal like this was done, does it represent a change in the strategy at all? Meaning now you'd be going further down market rather than focusing on larger businesses.
If I could remove the deal part of your question, because there, like, there is no deal, and just talk about market. Like, our value proposition resonates most with larger SMBs. Like, we've seen that. You see it in our data. We have an average TPV per customer of, you know, north of $1.5 million a year, which means they're a decent-sized small business. Our aspiration has been, and continues to be, to serve millions of businesses over the long term. So this comes down to how do we reach them over time? Our current, you know, go-to-market motion brings larger SMBs directly to our platform, and then we partner to reach smaller businesses, both through accounting firms and our bank strategy.
We think that ultimately will be the methodology that we use to reach the, you know, smaller end of the SMB market.
Okay, great. John, maybe just a last question. I know we're a couple of minutes over here, but maybe to close out, obviously, there's been a lot of volatility in the stock and the market. I guess, you know, what are the few things you really want investors to take away from this call?
Well, we're focused on the core business and navigating successfully this choppy external environment that we're in. There are some changing, you know, trends and behaviors between buyers and suppliers that we're working our way through with an emphasis on, you know, increasing the value proposition. We have very strong, you know, demand for the platform. You can see that through our customer acquisition numbers. Retention and engagement continue to be super strong. So we're confident, you know, in our ability to build a big business in a huge market, and we think we're well positioned to return to accelerating growth as the macro improves.
Okay, great. All right, John, we're out of time. I think, I think we'll have to leave it there. Thanks so much for, for taking the time. It's always great to hear your insights, and look forward to doing this again soon.
You bet. Thank you.
All right. Thanks, everyone. Have a good weekend.