for Citi's 13th annual Fintech conference. I'm Andrew Schmidt, on Citi's Fintech research team with a focus on fintech software. It's my pleasure today to host BILL. From BILL, we have John Rettig, who is our President and CFO. John, thanks for joining me. Appreciate it.
Thank you, Andrew. Great to be here.
So I think, you know, we usually do a level set here, but I think most people are familiar with BILL. We can jump right in. I think the question in people's minds is, so much has transpired over the last year, whether it's changes in, you know, product, distribution, macro. Maybe just briefly re-review what's changed and what hasn't, 'cause I think people are still trying to work out cyclical versus structural debate.
Sure, it's a good place to start.
Yeah.
I mean, maybe just level setting for context, we've been public for four years now, and over time we've evolved what we do to be more of a platform solution versus a point solution for small businesses, and we're now kind of at the center of the action, if you will, for financial operations and everything about, you know, finances for small businesses. In the four years since we've been public, we've grown at, like, a 69% revenue CAGR rate. We transitioned to be non-GAAP profitable. We're positive free cash flow. So the business has evolved a lot, and along those lines, we've expanded the platform across a bunch of dimensions: AP, accounts receivable, Spend & Expense. More recently, even cash flow and insights and reporting and things like that. So we've developed more solutions for small businesses.
We've figured out how to create value for them, and we're increasingly finding more ways to help with their financial needs. At the same time, our business model has shifted. We used to be 70% subscription revenue, I think around that time we went public. Now we're as of the last quarter, 77% transaction revenue. So because of that, we're very tethered to the overall spend levels of businesses, and that drives some of the near-term opportunities that we have. We've been investing in expanding the breadth of our payment offerings so that we can create value and drive monetization and growth in sort of any spend environment. Part of the way we do that is by further penetrating the market. We've significantly expanded our distribution ecosystem over time.
We've added 3,000 accounting firms. We work with 7,000, more than 7,000 now over the last two years, seven of the 10 largest banks. And we're really just getting started, if you think about the overall market opportunity.
Got it. Thank you very much. I think, you know, I do wanna focus on long-term opportunity, but I think a lot of people are focused on near term, so we can kinda get that out of the way, meaning FY 2024 and maybe a little bit beyond. But maybe we can dig into macro. So I think, you know, a pleasant surprise last quarter was for BILL, ex-FI TPV increasing last quarter. So maybe you could talk a little bit about, you know, what you're seeing in 2024 to date in terms of SMB health and spend trends, and then we can dig in from there.
Yeah. I mean, we're not gonna provide any formal intra-quarter update, but I'd say the typical seasonal patterns that we have come to expect, based on what we saw pre-pandemic and things like that, and even through the pandemic, those patterns are holding. We did see TPV in Q2, our December quarter, be a little bit stronger than we were expecting. That was a good sign. It probably also represents a little bit of a pull forward in spend from the March quarter, which is very typical for what we see. So that's continuing. We see most customer segments, whether it's size or industry or things like that, holding up pretty well. The spend is stable.
Some of the larger businesses are still in a slight contraction mode, but, you know, generally speaking, there's resilience in the SMB base, and we're seeing just better signs of consistency than we've seen, say, over the last year or so, and I think we've started to see that in December, in the December quarter. It's a little bit early for us to say that we, you know, the overall health as it is translated into B2B spend is now in expansion mode, but we're seeing at least some good early signs of that.
Got it. That's great to hear. And then maybe we could just think about the FY 2024 outlook. I think, on the last earnings call, you seemed to take a little bit more of a prudent approach, especially as it relates to the fiscal fourth quarter, sort of spend outlook. Can you talk a little bit about what's assumed in the outlook versus kind of what you're seeing and what the philosophy is?
Yeah, and it goes back to, you know, how many data points do we have, around, you know, more positive trends, versus the challenges and uncertainty that not only we're facing, but small businesses face, in their markets. So standalone TPV estimates, so not TPV per customer, but just overall standalone BILL TPV, I'd refer you obviously to our earnings script, but for Q3, we expected that to be up approximately 10% year-over-year, which would be sequentially down about 5%. And then for the full year, up about 7%-8% year-over-year. So that reflects a continuation of the trends that we've experienced throughout this fiscal year, not a snap back to a significant expansion mode.
Now, we're hopeful that could be what we see in the next couple of quarters, but just given the lack of consistency over the last few quarters, we think that made the most sense in terms of setting expectations.
That makes a lot of sense. I agree. And then maybe just one more macro question before we move on to payments monetization. In terms of involuntary attrition, what you've seen in the base in terms of business closures and things like that. Has that been relatively steady, just the involuntary attrition piece of the puzzle?
Yeah, we formally report that on an annual basis. We were at 86% customer retention as of the end of our last fiscal year, and I'd say the retention or attrition, however you wanna think about that, has held up well. Small businesses are resilient, and most of the attrition that we see is actually very early in the life cycle of a customer working with our platform, and normally it's related to not really getting fully up and running. But once a small business is fully invested in having made some of the operational changes, moving to digital, eliminating some of their manual, you know, processes around payments and workflow and things like that, the platform is really sticky.
Got it. Super helpful, thank you. And then I think moving on to payments monetization, which obviously has been a, you know, big topic of discussion with investors. So maybe just to rewind a little bit, fiscal first quarter saw a little bit of a, you know, expected, or should say, projected aberration in the take rate. Maybe walk us through. I know there are two pieces, mostly on the one on the virtual card side, one on the cross-border side. But you know, the question I get most often is why this occurred most often in one quarter, and I think there are some macro signals that give you some clues, but maybe you could just review why that impact would sort of accumulate in one quarter. 'Cause I think a lot of this is sort of...
Some of this is business as usual in terms of, virtual card acceptance, but it seemed to be a little more exacerbated.
Well-
If you could walk through that a little bit.
Yeah, it's a good question. So I think it's a slight evolution around some trends in the market and behaviors from suppliers. It's not unusual to see suppliers shift payment acceptance preferences over time, and if that is, say, you know, wanting fewer virtual card payments in favor of something else, normally the way it works is that we have new volume that's coming into the system at all times, from existing suppliers, from new suppliers coming on board. And that more than mitigates any sort of churn or attrition that happens in spend. But what we've started to see over the last nine months or so, and began to materialize more significantly in the December quarter, is that larger suppliers were changing their behaviors and looking for lower-cost payment types.
Just because they're larger, they've had more of an impact lately. We saw a slight decline in monetization as a result of that. This is primarily related to virtual card payments. We've seen some other trends that are probably more directly macro-related, tied to the strength of the U.S. dollar for international payments. And so these things combined, I think it's evolved to where now we've seen a consistent set of behaviors, and we have some obviously action plans to create more value for larger suppliers, more automation, less friction in the payment processes. At the end of the day, that will help the cost equation associated with some of these payments and help us drive, you know, more penetration.
Can we dig into that last point a little bit? You know, you have talked about things like, straight-through processing, providing more data, of incentives. I guess, you know, where are you at in terms of these initiatives, and what's the timeline for efficacy?
Yeah. First, if you step back, and think about the supplier experience, so a vendor that one of our small business customers is working with, they receive, you know, benefits from using our platform. It's a centralized location and set of tools to receive payments. They have choices to get paid fast. They have control over their data. They're not sharing bank account information and other info with their customers. It's all centralized in BILL. And so that's a big thing, being in control. And what we've been focused on is really driving automation. That is, like, the most important thing to improve the payment experience. That experience improvement translates into higher value payments.
That gives us a larger share of wallet over time of the supplier activities, and we notice that when that happens, they start to invite more of their customers to actually use BILL to pay them. So it's the beginnings of kind of a network effect when we increase value. So we're passing more data, we're removing friction, we're creating automation, we're starting to test things like sharing economics where it makes sense. So there's a handful of initiatives that are in the works. These aren't things that are all planned for the future. And the other important thing is that with the volume that we operate at, we obviously have tens of billions of dollars every quarter of TPV, we're not tapped out in any way.
We still have a relatively small penetration rate on ad valorem payments relative to our overall level of TPV. So some of these activities aren't waiting on new volume to come in the system, or new customers, or new suppliers, or things that we can turn on for existing suppliers as well.
Yeah, I think it's important to emphasize in terms of the penetration, it's still a very low penetration. Even that increasing penetration can help drive take rate also, in addition to what you're doing.
Yeah, that's right.
Yeah.
I mean, an example would be, if you look at our last quarter of the, the June quarter of fiscal 2023, we did a little over $2 billion in virtual card volume, and that ties back to the penetration rates that we previously disclosed-
Sure
... publicly. But that's just the amount of processed, cleared virtual card transactions. There's a whole another set of transactions that initiated to suppliers, but didn't get processed for one reason or another. They got voided. And that has a lot to do with maybe not passing enough data, some of the improvements that we've talked about. So we have the ability to grow just with the existing volume and payment choices that have been selected by both buyers and suppliers. And that, in addition to that, we have a lot of volume that we see on ACH and check payments that we know the supplier because they're accepting, say, virtual cards or Instant Transfer real-time payments from other buyers, but from some subset of customers, they're primarily using check and ACH payments.
So understanding that value equation and how we can work closer with suppliers, treating them as a customer to really optimize their payment acceptance preferences over time, we think that gives us lots of opportunity to grow monetization.
On that last point, you know, you talked to various players in the industry, and I know you have an active effort in this regards, but I think this ties into the supplier enablement effort. So has, you know, that connectivity with suppliers stepped up, meaning instead of maybe having someone being auto-enrolled, having someone a little bit more tightly integrated with the supplier, sort of a more official supplier enablement process? Maybe you could talk about that process of onboarding a supplier, supplier enablement, a little more granular level.
Yeah. Well, we've been working on-
Mm
... what we call supplier enablement for a number of years now. I'd say the first phase was about-
Mm
creating automation for BILL. So being able to, you know, automatically identify suppliers, match them, know you know, how to predict which payment types they'll accept. The second phase, which started, you know, maybe in the last year or two, is more about driving automation for the supplier. So how do we reduce this manual activities that they might have to do once a payment's already been received? This is a lot to do with reconciliation-
Sure
... and that's where we started talking about just wanting to drive a much higher percentage of straight-through processing transactions to where there's no human, you know, touch involved in those. And then, you know, down the road, there's other initiatives that we'll have to create more automation, including over time, enabling suppliers to become card-accepting merchants. We haven't done any of that historically, but we know there's a value proposition, and we can make it easy for smaller suppliers through that automated onboarding and that initial payment experience when they reach the BILL platform. We know there's lots of opportunities there.
Got it. And then we think about... So you talked about kind of the existing Ad Valorem payments, or at least a subset of them. There's additional ones that are great opportunity out over time, whether it's Pay By Card, whether it's Invoice Financing, things like that. Maybe talk about a little bit about the incremental opportunities with additional products to sort of help drive the, well, the value to on both sides of the network, but also the payments monetization.
Yeah, I'd say the first set of products is really around speed, so real-time payments, Instant Transfer. It's a little bit of a form of solving cash flow needs or working capital requirements for businesses. It doesn't involve lending, but nevertheless, that's, I think the last reported numbers we had, it was about 1% of our payment volume, typically to-
Yeah
... to small suppliers. We've added Pay By Card again, which from a buyer perspective, it's using a credit card instead of a bank account to fund transactions. That provides another 30 days of float, so improving the cash flow needs. We've obviously done a lot around Spend & E xpense with the corporate card payments, which monetizes it at a higher rate. And over time, we're, I think you'll see us do much more with which is formal working capital financing program. So right now we're in the testing phase on what we call Invoice Financing. That allows a supplier to get paid upfront for invoices that their buyer is gonna pay over the ensuing 30-60 days.
I'd say we're, you know, successfully executing on the initial launch of that, and we're feeling pretty good about how that could, you know, scale, not necessarily in fiscal 2024. It's not a big driver, but it's a good setup. And success there in building that foundation opens up other forms of that, like more time to pay for a buyer. So potentially supporting both sides of a B2B transaction between buyer and supplier. And if you think about where we are in terms of overall Ad Valorem penetration, it's very low, right? It's low double digits-
Sure
... as of the end of the last fiscal year. And so if you take this whole portfolio of Ad Valorem products and think just small penetration gains on those over the next few years, results in significant monetization expansion.
Yeah. Actually, to tag onto that, you know, that was kind of where I wanted to go in terms of your visibility. Maybe we take it, you know, near-term thought process and then longer-term. I guess near-term, you talk about the visibility in terms of FY 2024, 'cause that's a big question we get in terms of the confidence, in terms of the stability, and then, of course, the return of sort of take rate to where it was in the fiscal first quarter. And then I think longer term, maybe you could also talk about, you know, what, if based on everything you've discussed, if we can, you know, return to that sort of more normalized rate of take rate expansion.
Yeah. I mean, historically, over time, we've said that the take rate isn't gonna be perfectly linear quarter to quarter.
Sure.
At the same time, we're anchored on most of the transactions on our platform are repeat transactions, so we've seen them before. 80% or so was our last reported number, where the same buyer and supplier had executed a transaction within the prior 90 days on the platform, and that provides good visibility into what to expect about future transactions and payment volume. I think the thing that's moving a little bit now is the dollar value per transaction. So we still have a very high repeat rate, but the ticket size in some cases is lower-
Sure
... as B2B spend is being, you know, pared back. So we're, as I mentioned before, we're taking a lot of steps to improve the product experience and create value for these Ad Valorem products, and I think that gives us confidence around the longer-term penetration opportunities. We don't really have an updated view. We think there's a huge opportunity to drive Ad Valorem much higher, including virtual cards and AP, and things like that. For fiscal 2024, I think we're working hard to get back to higher levels of monetization where we started, right? It's relatively range-bound in terms of the levers that we have for this fiscal year.
We're not expecting significant growth, but we do feel good about the setup for the second half of the year and getting back to a more normal cadence of expansion. That probably won't occur until fiscal 2025, but that's what we're working towards.
Got it. I think you answered my question that I was gonna ask, but it doesn't sound like... In the past, you've put out sort of broad targets for Ad Valorem penetration. It doesn't sound like the thought process there has changed. Is that correct in terms of potential?
That's right. No, these are big opportunities across all of our products. I think one thing that has changed is our progress with Spend & E xpense with card payments has opened up more opportunities to drive card transactions across the portfolio. So when you put all of the Ad Valorem products together, we probably are slightly more confident in the ability of that to... for that to consume a higher percentage of TPV over time.
Got it. Very helpful, thank you. Maybe let's switch gears to bank distribution. Obviously, on the last earnings call and subsequently, you know, we get a lot of questions on the Bank of America relationship. Maybe you could talk about just it. I don't know if there's anything else you can provide, but, you know, what transpired there? You know, what are the potential outcomes for serving the backbook, and then are there implications for sort of where we're at right now in serving the new customers? If we could talk through that, that'd be helpful.
Sure. Just stepping back in August, we talked about, you know, working with the bank jointly on executing a plan to make some product enhancements on both sides, to enable us to move from serving new customers to the bank to the existing installed base. In January, the bank shared an evolution of their strategy to wanna create more consistency across the payment experiences at the bank, and now that's a work in process for us. It's an evolution in the product requirements and the go-to-market to serve the existing installed base, and we'll have more to share on that as those details become clear.
But I think you know, the important thing about the FI channel is that it's been a really big proving ground for us about how we serve small businesses through others, as opposed to going direct-to-market, bringing them to our platform, opening up pieces of our platform, in this case, to large banks, and enabling partners to develop very sticky relationships with small businesses. So we've also made progress with other financial institution partners. We renewed, extended, and expanded our relationship with JP Morgan. We're bringing more products to bear in that solution. We've been working with them for a long time.
We've started to make progress with our initiative around adding more Ad Valorem payments to our solutions with banks, which is when we started working with banks, we had just the flat rate transaction payments, like check and ACH. We didn't have the Ad Valorem payments, and so now we've got six banks who are using some of, some of which are using our full suite of Ad Valorem products. Now, it will take some time for that to translate into material financial results, but it's a good sign. And then we take, you know, all of these learnings into how we're thinking about extending our capabilities beyond the financial institution channel and to other partners that SMBs work with.
Hey, you know, I wanna get into that embedded opportunity in a second, but, but I think you're with, correct me if I'm wrong, seven, seven out of the top 10 banks currently?
Yep, that's right.
How do you think about expansion beyond that? Is there an expansion opportunity, let's call it top 20, top 30, or, I mean, at some point, there's probably diminishing returns, but how do you think about just the opportunity within the bank space for distribution?
Yeah, I think over time, there certainly can be. I'd say our focus near term is more about adoption and penetration within the bank partners that we have, because the installed base of customers is obviously quite large, when you consider both the small business base and the commercial banking segments of the banks we're working with. So there's a big opportunity that we already have in front of us with the existing bank partners. Success there could lead to more penetration across the top, you know, 20 or 25, but that's not the current focus.
Got it. So focus on current... success with the current, partners, penetration, et cetera.
That's right.
Got it. Makes a lot of sense. And then since you touched on it, I do, I do wanna bring up the embedded opportunity, and I know René mentioned this on the last call. Maybe you could talk a little bit more about what that looks like in terms of embedded distribution. Is this something where you're sort of embedding a third-party software platforms, or what's the strategy in terms of embedded distribution?
Yeah, it comes back to the convergence, really, of software and payments, which has been in the works for years, I think, but it's really starting to, to play out. What we've done for financial institutions is give them more tools, more products and features to build sticky relationships with their customers, get closer to how their customers operate their business-
Sure
... as opposed to being a clearing house or a clearing mechanism for payment transactions, and we've seen really good, you know, progress doing that. At the same time, there's really a lot of inbound interest across the entire software ecosystem. So if you think of almost any software solutions that a small business might use, if they touch, you know, sort of the commerce activity or the payment flows of small businesses, they're interested in finding a way to expand the breadth of their solutions to help serve those needs of small businesses. So, I don't think that means that every software company's gonna become an AP automation provider or an AR automation provider, but there can be much tighter links.
That's where we're exploring, you know, those opportunities to take our solutions and replicate components of that across the whole ecosystem of software that small businesses use.
Got it. Thank you for that. And then maybe we could switch gears to competition. You know, our view is that the product and distribution accounting channel is a pretty significant moat, but, you know, competition does remain a pretty significant discussion topic. So maybe talk about, you know, how whether or how competitive intensity has changed across core BILL or Divvy. Obviously, you know, Intuit comes up a lot, a lot in the context in terms of what they're doing, but maybe at a high level, we can talk about what you're seeing, 'cause it's top of funnel, and then, of course, conversion, and then we can maybe dig in from there.
Yeah, I mean, we're going after a big market opportunity. More attention in the market and more competition market, I think, validates the fact that there's a lot to do here, and small businesses have needs that haven't historically been served well by the solutions that have been available. At the same time, we haven't seen, you know, material or significant impacts on the ground, if you will, as we're working with small businesses. If you think of the BILL standalone KPIs that might suggest this, our customer retention rate-
Sure
... has, has held up really well, when you sort of take out or adjust for the simple bill pay Intuit solutions. The other thing that's really important is the engagement level for small businesses, so we're operating in the low 70s or so, low to high 70s in transactions per customer, which tells you that the usage of the platform, it's still as important to small businesses as it has been before. Maybe the dollar amount, the payment volume-
Yep
... dollars per transaction is being adjusted, but not the overall usage. And we continue to make progress, penetrating the market and adding new customers across all of our distribution partners. That's on the BILL side. For Divvy, I'd say we've seen pretty consistent, growing, larger customer demand and adoption of the platform. At the same time, we've been very proactive in tightly managing credit and probably doing less with the smaller segment of customers, which makes up a big part of the overall customer base demand that comes into our Spend & Expense product on a monthly or quarterly basis. So we're also going through some changes, as we've talked about previously, in adapting our go-to-market to some of the new product launches that we've had, consolidating our brand, adjusting, and optimizing.
Back to your comment about the accountant channel, it continues to be the biggest source of leverage that we have in the market. So we work very closely with accountants, and it allows us to penetrate their customer bases over time. So when we start working with an accountant, we don't, the next quarter, end up with all of their customers who are a candidate. We penetrate those customer bases over time. So that continues to be very healthy.
That's helpful. And you actually went where I was gonna go next, which is sort of the go-to-market evolution. I think it was late last year, you rolled out the new unified platform, and now that it's in market, and you mentioned that there were some sort of some mixed marketing messages associated with unified platform versus sort of individual products. Maybe talk a little about what transpired, and, you know, maybe the new- maybe not a new go-to-market strategy, or the, let's call it the revised go-to-market strategy, and how sort of, you know, we should expect correspondingly net new asset trend as a result.
Sure. So we have a thesis that small businesses value being able to run their business with fewer solutions versus more. And it's how we've expanded our solution set over time to add more capabilities in order to serve that need that exists in the market. It's really one place to manage all of their spend, to manage their workflow, to drive collaboration across you know, across a small business footprint. And you heard on earnings calls and things like that customer testimonials and things about the value of bringing together card spend and AP automation and whatnot. And one of the learnings that we've had since the fall when we launched the unified platform is that in some cases, a prospect, a small business, you know, potential customer, has one thing in mind.
They have a certain context or a pain point or a need that they're trying to solve, and we need to make sure they can solve that thing. And so over time, we think the platform sale, the selling all of our solutions from day one, will ultimately succeed and will be the big value driver. But in the meantime, we wanna make sure whichever on-ramp is appropriate for the pain point or the solution that a small business prospect is looking for, that that's available to them. So, get them in the platform using whatever makes the most sense, and then expand over time by driving adoption and attach of multiple products.
So that's probably our biggest learning as we think about the journey of a customer with the new integrated solution, is if they're looking for that, we're ready, and if they're looking for more of a point solution, we've got that available too.
That makes a lot of sense. You know, you sort of, you're disaggregating kind of causality between kind of the marketing and sort of the external environment. How confident are you that it's marketing and not sort of external environment related, let's call it, less software adoption, you know, things like that.
Yeah, it feels very much in our control versus, say, a market structural force or a landscape shift or a demand change.
Yeah.
It's especially on the Spend & Expense side, I'd say shifting brands is always tricky.
Yeah.
Moving-
For sure.
Consolidating to the BILL brand, and we've had a very optimized go-to-market strategy over a number of years. It's a critical thing when thinking about the economics of small businesses, how to attract them-
Right
... serve them, retain them, grow, all those things. And we saw efficiency, you know, decline pretty significantly in the December quarter, and now we're back to adapting the go-to-market to create that same level of optimization. But we'll do it a little bit differently than we did previously.
Does it take a long time for the new marketing, or I should say, you know, reverting to the old marketing message to resonate? Or is it, you know, is there a short time horizon to that? Like, once you put a new message in market, how long does it take to kind of filter through, I guess, is the question?
There's... I'd say it's not necessarily real-time feedback, but it's very short duration.
Mm-hmm.
So, we're constantly iterating now. We've got new programs in place. We're measuring our progress in months and quarters. This isn't years, right? This is near-term to regain the momentum, and I think we're very confident that over the next few quarters we'll be back to and potentially above where we've been in terms of, you know, customer acquisition previously. I'd say, though, we'll end up in a place where the net new adds that we have are gonna be more valuable.
Yeah
... than we have before. So we have more focus on customers with a propensity to spend, to be sticky, that suggests slightly larger customers versus smaller. And we'll address that smaller end of the market through third parties and things like that.
Got it. Very helpful. And maybe one last question to wrap up. So, it, I guess the question is sort of, you know, and this sort of ties back to the opening question, but does the experience over the last year or so affect how you think about longer term growth or margins? Obviously, you know, there's more emphasis on profitability, and maybe that's a component. But what's the right way to think about intermediate to longer term growth and margins in this context?
Yeah, we've been very proactive at managing operating expenses, reducing growth and expenses, then taking a change in the workforce to reduce overall level of OpEx. That's allowed us to increase profitability. We've improved, you know, free cash flow, and it's with an eye towards creating a different balance between growth and profitability at a time when we've seen revenue growth, decelerate. That's not to say we've completely pivoted to where profit optimization is the near-term goal-
Sure
... 'cause we believe operating in this big market that we do, with some of the noise that we've had and, and headwinds around the macro environment, we'll work through that, and we'll wanna continue to, to balance profitability and, and growth. And so, just given the size of the market opportunity, we're obviously capitalized to, to invest, both organically and, and otherwise. We're, we're gonna keep doing that, but we'll have an eye towards creating operating leverage as we grow. That's both sales and marketing, and, and G&A and, and things like that. So we do have the opportunity as we scale to continue to, to increase profitability. We are planning for, at some point in the future, a reduction in interest rates.
That'll obviously have an impact on how we think about float revenue and some of that, but we'll manage through that process as well.
Got it. Well, thanks for spending time with us today, John. Really appreciate it. Great conversation!
Great. Thank you.
Thank you very much.