Thanks, everyone, for joining. I'm Alex Markgraf. I lead our Fintech and Financial Software Research team. Really excited to have John Rettig from BILL here with us, for a 25-minute conversation. Just jump right in. I mean, thanks for being here. I think, you know, something that's been top of mind for everyone and it's kind of the obligatory topic to talk about is the sort of macro situation, and so would love to just start off with a quick check-in on the health of the SMB, if I could call it that. You know, what are you seeing across the spectrum? And then I think most recently you've, you know, you've seen some improving metrics in the model, but not quite ready to call sort of a trough, so maybe get into that a little bit as well.
Yeah, sure. It's a good place to start. We're pretty uniquely positioned to have somewhat of a, of a pulse, some insights into small businesses and the health of that, that part of the economy. We have, you know, 450,000 customers, approaching 200,000 on our BILL platform. And so they don't tell us what they're going to spend. We don't have that kind of insight, but we do, by just looking at patterns and what they do, we're able to, to kind of understand what's happening.
I'd say the trends in Q2 were encouraging, a little bit better than we expected, and if you segment the customer base a little bit by size, I'd say the, you know, the core of what BILL does is around employees that are kind of 10 companies that are at 10 to 100 employees. They seem pretty stable. They're, they've adjusted however they need to to the current macro environment, and things are pretty consistent. With the larger segment, mid-market or, or even mid-market above, call it 100 to 1,000 employees, that's where there's still a little bit of a pullback going on. We see some more, you know, adjustments happening to spend. There's not increases across the board, some, some differences, deviations from, from past patterns, and so we're, you know, we're watching that closely.
We're really looking for across-the-board expansion before we feel like, "Okay, that's a trough, and now we're gonna go back to an accelerating TPV growth environment." The other thing that we see is that engagement with the platform is really good. Measured by number of users or transactions per customer, things like that, very consistent with what we've seen over the last few quarters. So that's a good sign that it's really, you know, ticket size and the amount of spend that's being executed by SMBs, that is the biggest factor being influenced by the macro environment.
Just to take that one small step further, that's sort of the transaction and payment volume piece of it, but from a churn standpoint, been pretty stable, right? There's no sort of notable increase in involuntary churn that would suggest there's, you know, some sort of challenges with SMBs that's causing them to fail, right?
Yeah, I think that's right. We, we've done a really good job on, I mean, our platform is sort of mission-critical and very sticky for the financial operations part of what small businesses do, and so our gross retention, our last reported number, is at 86%, which in the small business segment is really good. And we've seen that maintained, so it's very consistent, which is why we get to those engagement metrics and things that are still quite positive.
Yeah. So why don't we talk about some of the sort of knock-on effects of this more dynamic macro environment, if I can call it that. How did we get to talking about payment modality choice headwinds?
Yeah. So I think, there's a lot more cost sensitivity on the part of both small businesses and the trading partners that they do business with. We've talked a little bit about larger suppliers that maybe many BILL customers interact with and pay. And at some level, there's more proactive measures being taken to lower the cost of acceptance for payments. We see that show up in different ways, like, maybe some volume shifts with virtual card payments or some movement between FX and USD in the case of international payments, and all within the spirit of companies probably having some form of pressure-
On their business, and they're taking actions in ways to compensate for that. There's more to the cost story around payment acceptance in particular. It's not just the nominal cost, but sometimes that's the thing that's most obvious 'cause it shows up on a spreadsheet, or it- it shows up on a P&L, if you will. What we're trying to work really hard on is improving the product experience such that we can lower some of the indirect costs-
Yeah
for customers. It's, it's a little bit more difficult to measure, you know, the back office AR department or the people, the manual activities that go into in the case of large suppliers, payment acceptance. And so that's our. You hear us talk a lot about driving automation and efficiency and removing friction. That's because there are these more hidden costs that have a significant influence on the cost that suppliers bear.
Yeah, it sounds like it's, it's sort of a total cost of ownership versus base pricing conversation, and maybe there's some education on the sort of total cost of ownership piece of it to, to help SMBs understand a bit. Just when you think about-
Yeah
T he speed of payment, reconciliation, ease, and things like that, that come with some of those payment modalities that have seen headwinds just purely on sort of a price.
That, that's absolutely true, and so there's an education component. There's also... I think we're entering the cycle where investing behind improving the payment acceptance experience is becoming equally important as the progress that we've made on, say, the AP automation side, which we're known as a go-to platform for small businesses as it relates to workflow and automation and those sorts of things. We wanna become the equivalent destination for receivers of payments, demand that comes to us from suppliers or vendors who work with small businesses to aggregate all of their payments through our solution. We have a ways to go to get there, but it's some of the investments that we're making now.
And if I could ask just a couple more on this dynamic of pricing and payment choice. I mean, in your view, how much of the recent changes that you've seen are, you know, strictly or purely macro-induced versus structural in nature? Just as a starting point.
To us, it seems very like there's a combination of seasonal, cyclical. We're in a transition period as it relates-
Yeah
to our product on the receiver side. So there's a fair number of moving parts, but we have good visibility into the payment volumes and habits of our customers and suppliers, and know that we have a long way to go to tap into the demand that we help, you know, process right now. So our progress in driving more adoption and creating a stickier product and more continuity and payment volume across maybe higher monetizing transactions, it's not really dependent upon the macro changing dramatically or seeing new behaviors and things like that. It's really tapping into a volume that exists.
Okay. So maybe I don't want to put words in your mouth, but to kind of describe it in a different way, it's the take rate improvement that you all have alluded to towards the end of the fiscal year. Is it more sort of adoption related and driving incremental ad valorem payments, or is there some sort of recapture element with the volume that has migrated away from ad valorem payments?
Yeah, good, good question. So we're not assuming any recapture. We think that is an opportunity down the road, but the reality is there's, there's enough payment volume in the system that we've made a series of product improvements. That's an ongoing process, and, and we see behavior. So we have more, I guess, line of sight-
Yeah
... to the near term, which, as we've said, is pretty range-bound in terms of expansion, but nevertheless, it sets us up much better for fiscal 25 and beyond, where I think we can drive more accelerated adoption of some of our highest monetizing products.
Okay. I promise this is the last pricing-related question, but is there a scenario in your mind or in discussion, where pricing of certain payment modalities is up for discussion, and there's maybe some changes that are made from a base pricing standpoint versus kind of pushing on that education and total cost of ownership type sale?
Yeah, I think there are some scenarios where whether it's pricing or incentives or rebates, things like that can complement what we're doing on the product side and our efforts around driving automation for both buyers and suppliers. We haven't done much of that historically. But I think particularly, I'll use an example, international payments is a place where I think we do fit in well between, you know, like retail rates at banks and wholesale rates that maybe large enterprises might be able to command, but we haven't necessarily competed on the basis of price. So we're working hard to improve the payment speed of our product. That lowers BILL's costs associated with FX volatility and things like that.
That allows us to actually lean in in terms of pricing, and we think there's a direct correlation between price and demand for products like that, particularly for those segments of customers that might be more sophisticated, more used to, you know, real-time shopping around pricing and things like that. We don't endeavor to be like the low price or low-cost leader in the market. We're still focused on the small and medium-sized business segment, but I think there are opportunities for us.
Okay. And, and just kind of reading through your, your comments there, you mentioned some sort of improvement in the cost structure. So it sounds like, I mean, that if there are pricing changes, maybe just talk about how you think about maintaining margins and not, you know, giving up margin just from lower prices and, and kind of balancing that.
Yeah, that's why we talk mostly about product improvements and experience first-
Yeah
-as opposed to incentives first, because we want to make sure that any incentives or, or things like that, pricing changes, result in incremental demand, stickier demand, more visibility into to payment volumes. The example that I gave around international payments, we're going to lower our cost structure.
Right.
That allows us to lower our absolute prices in certain corridors, currencies, for customers, and still maintain a really healthy margin. So we're less likely to lean in where it's simply a price change-
Okay
as opposed to a package of other improvements that we're making.
Yeah. Okay, that's great. Let's move on to Spend and Expense if we could. Could you just recap for all of us the shift in go-to-market with Spend and Expense , some of the things that have happened there, and then, just in relation to that sort of near-term net add expectations around Spend and Expense ?
Yeah. We saw a reduction in net adds over the last couple of quarters on Spend and Expense product. That's really coming from the smallest of customers who use that product. It's an entry point for small businesses. The reality is, our results, whether it's card volume or revenue or whatever measure you want to use, is really driven by larger businesses. That was true before we acquired Divvy. It's still true today. It's a mid-market product, and the reason for that is, you really need to look to the financial stability of the customer in order to be able to underwrite the credit risk and that side of things. And so we have seen some friction in terms of customer acquisition in our go-to-market efforts when we consolidated brands on BILL, when we launched our new unified platform .
We changed a bunch of landing pages and things like that, and that really impacted the smallest businesses. We've seen really stable, in fact, growing demand from larger businesses between Q1 and Q2, and that's where we really derive the majority of our results. So in the very near term, we expect a lower number of net new adds versus our historical averages. But in terms of the value and the revenue-generating potential of those adds, we would expect it to be consistent or even higher than what we've done previously, and that's really just 'cause we're going to where we're most comfortable directing our discretionary dollars, underwriting customers, and looking for, you know, growth over time.
Okay. So I think in the past, around the time of the Divvy deal, the metric that was kind of thrown out there as like, you know, potential core customers that could also be Divvy customers was, I think, 50%.
Yep.
Is that one, is that still the right number? Two, it sounds like maybe no. Two, is that a relevant metric today as you see it, or is that sort of less of an input in the kind of mid- to long-term model for Spend and Expense?
No, I think it's relevant. It is a very large growth driver. It'll take a little bit of time for that to evolve. We've directed most of our cross-sell efforts, if you call it, selling the Spend and Expense product to an established BILL customer. That's been mostly in our direct channel, so where customers come to us directly or they're from a referral or our demand gen efforts. We've done less on the accountant channel so far, and that's because we've been investing behind this unified platform that we launched in the fall and improving our console experience for accountants so that they could see all of the activity of their customers, not just on the BILL AP side, but on the Spend and Expense side as well.
The next phase of our cross-sell efforts and driving adoption will really be targeted around the accountant channel. That 50% target, I think, is still a good number. It's the largest half of the BILL customer base, though. There could be an opportunity to drive adoption and usage of a Spend and Expense product that doesn't include the card element, the charge card element. Maybe if you're using debit cards, it's employee reimbursement from an expense reporting standpoint, things like that. So it's a big addressable base, and I think over time, one of the metrics that we'll be looking at is for the BILL customer base, what is our attach rate or the number of feature or modules or products that we see them using?
I think Spend and Expense will be an important part of that.
Okay. Just last one on Spend and Expense . When you think about the reward component of that and sort of the sort of like natural concentration in larger Bill customers, is there a scenario where you have to get more competitive with rewards to maybe compete with alternatives that those slightly larger businesses do have, versus the smallest of the Bill customers that maybe don't have those alternatives and kind of have to, for better or worse, take what they can get?
Yeah. Well, in the time that we've owned the Divvy business, we've actually grown monetization pretty significantly. It's at a stable point now, 260 or so, you know, basis points. And as we've expanded monetization, we've expanded rewards as well. It's about 50% of interchange revenue today. Where we try to, you know, optimize customer acquisition and retention is where the software element of sSpend and Expense matters to the end customer. It's not just the rewards. Now, that's not always the case, but where we can differentiate the product by the software experience, that's about fine-grained control, you know, mobile user administration, making it really easy to modify limits of card spend across the employee base and things like that. That will continue to be part of the value proposition.
Over time, as we get bigger, I think we can likely bring down rewards on average, but in the short term, we're very comfortable with where we are. And where there's upward pressure on incentives, it's likely to come from much larger businesses who value the software component less, and it's more of a financial arbitrage opportunity. Those are probably less likely to be our target customers going forward anyway.
Sure. Okay. You touched on the unified platform efforts a little bit. Why don't you just maybe recap for us what was done, and then speak to some of the challenges that came up, some of the friction that came up in the selling process as you went through that? Just sort of how you've changed the go-to-market motion, temporarily expected timeline to reverting to the kind of full platform sale. Just maybe dive into that a little bit for us.
Yeah, we launched the unified platform in the fall. That brought together kind of the best of the experiences of Spend and Expense , the core BILL AP platform, and our AR product. And I'd say the initial feedback has been very positive, but there's also some enhancements we need to make to just remove some of the friction, make it easier for customers to adopt multiple parts of the platform, make it easier to do user administration across the products, one seamless experience. And then, as it relates to taking that product to new prospects, new potential small businesses who are in a trial, we did shift, as we consolidated brands to BILL, we launched the product. We shifted to the platform first entry point-
For new customers, and we found that depending upon what context they came to to start a trial with BILL for, there was maybe too much overhead. So if they were interested in a Spend and Expense product primarily, and we also had them make a decision about AP automation at the same time, there was, you know, just lower conversion rates, lower success with the marketing spend. We anticipated some of that, and that's why we talked about it in our... After our Q1 , we pulled back on some of the marketing spend proactively. We continued that in December as we saw some of those inefficiencies exist.
And I'd say in the second half of the fiscal year, we're fine-tuning some of this, and I think we'll get back to where we're expanding our marketing spend again and growing, you know, net new ads. And just, we wanna make sure we're driving efficiency in customer acquisition, which is obviously really important for the small business space.
So, maybe just to go a little bit deeper on that, that go-to-market motion, the sort of platform-led sale versus individual solutions. When you think about where you are today, kind of focusing on some of the customers with the highest propensity to spend, which tend to be the larger ones, how do you think about that platform sale in the context of those smaller customers that maybe at this point you're not willing to underwrite or have challenges in underwriting and kind of getting there on the Spend and Expense side? How do you kind of correct for that challenge when you think about the platform sale, or is it, is the solution sale more so the way forward for that smaller segment of customers?
Well, I think our priority is to direct the things that we control, our discretionary spend, our sales resources, our account management resources, to larger businesses who are gonna benefit from some of our advanced features, which are really about automation and workflows and things like that. Over time, I think we'll also improve the entry point for really small businesses who are self-directed. They don't talk to a salesperson. They don't talk to an account manager. There's not a lot of direct assistance to get up and running. And so if they're a smaller business, they're less likely to benefit from our advanced features anyway.
So we'll make a home for them in a way that is a stickier experience, and if they grow as a business, we can grow with them, and we can incrementally roll out more features and capabilities to them. But making sure that there is a spot for them to leverage the product if they come to us. We're just gonna direct less of our discretionary dollars and scarce, you know, go-to-market resources on attracting the small businesses. And that ties in a little bit to the strategy we've talked about, going to market indirectly and taking what we've learned from our, you know, bank channel FI customers, and leveraging that, with our newer embedded solutions to software companies and whatnot.
So it may be that we end up embedding some of the simpler experiences that BILL offers today to lots of other software companies, and that's where we attract those really small businesses.
Okay. And I think you answered this question, but I, I just want to ask it and, and kind of have the, the direct answer. But in the past, in, in a lot of your materials, you've shown this pyramid, this SMB pyramid, and sort of highlighted the, the bottom two pillars of that pyramid as the, the core kind of targeted segment. So with the focus today on sort of larger customers, it's not you're not forgetting that, that base of the pyramid, is that-- that's a fair assumption?
That's exactly right.
Okay.
We're still in the SMB segment-
Yeah.
Right? We're not talking about enterprise. We're not talking about, you know, global businesses who have very different needs than the average small business. But at the same time, we've learned that for bigger businesses, they have slightly different needs than small businesses. They don't perform transactions, you know, one at a time. They do it in batch. They often have multiple entities and multiple currencies that they're doing business in. So making sure that we just support those businesses is gonna make sense, but it's not really a move away from SMB. If anything, it's different ways of attracting the smallest, the lowest end of the pyramid, the foundation, if you will, which is where most businesses are, of the 6 million employers in the US today.
Maybe doing that a little bit differently, working through partners more, and where we apply, as I mentioned, our discretionary efforts towards the slightly larger businesses, but still in the SMB segment.
Okay. Let's talk about some of the channel opportunities ahead of you today. I think, you know, there's been a lot of development in the FI channel. Can you help us sort of just unpack some of the recent dynamics that you've observed in that channel?
Yeah. We've been investing in the FI channel, working with banks for, you know, more than a decade now. We've made good progress. The price of entry is really high there around regulatory and compliance and some of those things. So we've done a good job. We've expanded our footprint with many banks. We've moved from largely commercial customers, is where we started, to some of the small business segment. Recently, we've had some changes with one of our large partners, where we're having to adjust the strategy to figure out how we plug in to support moving to a larger percentage of their installed customers. We still think it's a big opportunity. Banks are going to be a part of the B2B payment ecosystem for sure.
They're not abandoning that, just like they are in the consumer space. One of the things we've been focused on is trying to close the gap a little bit between the monetization opportunity that exists between our direct business and the financial institution channel. One of the things we've done is introduce some of our ad valorem payments into the banks. I think we last reported we had six banks leveraging our ad valorem payments. It's still small. It'll take a while before that influences the number in any material way, but it's a step in the right direction towards figuring out how to not just tap into the large numbers of customers that financial institutions have, but also create an interesting monetization opportunity along the way.
I wanna maybe make sure we have time to talk about the, the embedded opportunity. Give the, the sort of high level what the opportunity is, and then when you think about partners in that, that distribution channel, you know, what are you looking for, right? Like, what's the profile of the, the appropriate partner for the, the embedded opportunity? If you could, just very high level, time to revenue, sort of contract structures. Does it look similar to the FI channel?
Yeah.
Is it kinda reminiscent of the Intuit relationship? Maybe give us a little bit of that, and then if we could, just touch on Xero announcement as well.
Sure. So, what we're essentially doing is helping enable the convergence of software and payments. So it's been talked about a lot. You've seen some movement with procurement companies getting into payments, other businesses, and the demand, the desire to do that is real. Like, we have lots of conversations going on, and what we've realized is that most software companies are not gonna become payment companies because they build proprietary capabilities. It's hard.
I think you might upset some VCs by saying that.
It's really hard, though, to get into the first-party, you know, payment business.
Yeah.
But that's where we come in. Like, bringing KYC and KYB, and risk and regulatory and compliance to bear as a solution that's available and exposed inside of an embedded product. Oh, and we also then enable payments and additional monetization opportunity. That's, I think, gonna be a really big opportunity for us. It's gonna take time for that to evolve. The market is not there yet, even though there's demand and priorities. And I'd say what that looks like over time, it depends on the size of the customers that the software companies are using. In the case of Xero, that's why they obviously have a pretty small size average customer. You can look at their monetization as it relates to the US customer base.
They're a subset of how Bill monetizes today, but we can be an enabler of helping improve the experience inside of Xero and other software companies and, at the end of the day, have our full suite of payment products exposed inside of those solutions. That'll mean it looks a little bit closer to Bill-
than it does, say, our current, financial institution monetization of those products because they're missing a large part of what we do on the payment side.
Yeah. Okay. That's great. We have about 10 seconds left. I feel like I have to ask about generative AI. Do you feel like BILL has a responsibility to, to offer these types of features and functionality to SMBs, who are kind of perpetually short-staffed from a resource standpoint and are always looking for efficiencies to, to eke out of operations?
Yeah, I'd say we have been investing around that for a while. We've leveraged it to create automation around data extraction and auto-coding and auto-routing of transactions for customers. I think there's more to do there. I'd say there's definitely things we can do to apply some of the newer AI technology to the customer experience. And then, over time, if we can create more ways of automating routine back-office tasks inside of our platform, that's how we can bring it to life for small businesses.
Okay. It's a great place to end. Thanks, everyone, for joining, and, John, thanks for joining us.
Yep. Thank you.