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Wolfe Research FinTech Forum

Mar 13, 2024

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Really happy to have BILL with us, today. You know, it's a company that I honestly have been covering both private and public. I'd say I'd keep an eye out for years and years now at this point. We really picked it up a few years ago as a public company. And I think I was saying to John a second ago, it, you know, only went public in 2019, right?

John Rettig
CFO, BILL

Yep.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

But we've kept a close eye on this company since its private days and seen a lot of growth in what's an incredibly impressive addressable market. You know, I think the distribution channels have differentiated you guys. I think the software obviously has. And as we see, there's been a lot more from a consolidation standpoint, helping your offerings as well. But look, I should have said, I mean, we're happy to have John. John's the CFO of the company. We have Karen Sansot from IR with us as well. So thank you guys very much for being with us.

John Rettig
CFO, BILL

Great to be here.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Appreciate it. So maybe we'll just start off by recapping the most recent quarter, John. I mean, if you talk about the recent trends, TPV, take rate, customer adds, anything else you think it's worth highlighting for investors, we could start there.

John Rettig
CFO, BILL

Sure. We start with Q2. I'd sum it up by saying we had very strong financial performance, 22% year-over-year revenue growth, non-GAAP net income grew 48%, 23% margin, 23%, free cash flow margin, and ex-float operating income positive, which is an important, you know, milestone for us. We also had good customer acquisition. On the BILL side, 3,900 net new adds. On the Spend & Expense side, good demand from the larger businesses. We saw lower net adds due to the smaller customers that we've been intentionally deprioritizing, given the credit environment that we're operating in. Spend patterns and TPV came in in the December quarter, better than we expected.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Yep.

John Rettig
CFO, BILL

Still relatively muted versus, say, the pandemic era, when most businesses were expanding, like crazy. But the small business segment, the smaller businesses of the SMB tend to be, you know, holding up pretty well. Larger businesses, I think, are more cautious. The other big moving part is monetization, and for us, take rate was down slightly in the December quarter. It ended up a little bit better than we anticipated, but nevertheless reflects some of the recent trends that we've experienced around-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

... more cost sensitivity on the part of suppliers trying to lower the overall cost of payment acceptance. We're working through that with a number of initiatives, and feel really good about, you know, where we're starting for the rest of the fiscal year.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Good. Maybe, I mean, you mentioned it just a second ago, but I mean, you talked about spend, and it was a little bit better than we thought also in the last quarter in terms of TPV trends. Maybe if you could just provide us some insights into the SMB health spending trends you're observing into 2024 so far, how these trends inform your strategy moving forward.

John Rettig
CFO, BILL

Yeah. I mean, I don't have any specific commentary on 2024, you know, this calendar year or this quarter, but I can say that the trends we saw in Q2 were definitely encouraging. There's a little bit of Tale of Two Cities in the customer base, where smaller businesses seem to adjust pretty quickly. They have, you know, obviously lower discretionary spend, and over the last few quarters, we saw them pretty quickly adapt to lower their discretionary expenses and get to where they needed to be. Larger businesses are still in a slight contraction mode, maybe less so than previously, and that's what led to the better overall performance. Some of the other things that are important is engagement seems to be really good.

So while spend might change by customer segment, the way they use our platform, the number of transactions that they execute, the number of suppliers that they're interacting with, is all really stable. So that's a good sign that for BILL, we're continuing to deliver value for customers. They're continuing to engage with the platform, even though they're maybe running less spend through it, given the macro environment. So it's a sticky product. That engagement is a good sign, and I think suggests to us that we're pretty well positioned, you know, further down the road when we see the macro turn a little more positive, we get some clarity on interest rates and things like that, and spend expansion starts to occur.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right. So said another way, I mean, the spend side has been. It was decent last quarter, but still an uncertain macro environment from what a business decides to do on their own. On the other hand,-

John Rettig
CFO, BILL

Yep.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

...what you see them doing with your products is still resonating pretty well, and-

John Rettig
CFO, BILL

I think it is. It's once a customer gets up and running, it's less of an elective product that they use sometimes and don't use other times. It tends to be more, they've changed the way they operate, they've adapted processes, they've gone digital. Once you do that, you're not going back to-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

... to analog.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Can you just remind us on the topic of demand, just what you've said again about new customers and what kinds of trends you're seeing in demand from new customers for your offerings?

John Rettig
CFO, BILL

Yeah. Demand has been stable to growing, particularly for larger businesses. I'd say our sweet spot on the BILL platform is, call it, you know, 10-100 employees.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

We do really well above that, also, and on the Spend & Expense side, it's definitely larger businesses. Think hundreds of employees, and demand has been really strong there. On the smaller customer segments, we still see very good retention and stability and usage from smaller businesses. On the Spend & Expense side, we've been pretty cautious on the credit component of that, so we've actually scaled back our efforts to reach these smaller businesses, but we've seen very healthy demand trends from larger businesses.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay. Maybe we shift to the 2024 outlook. I mean, a couple of quarters ago, not this one you just reported, but two ago, you changed your guide a little bit, and I think there was a hope that it was, you know, building in conservatism on the macro front. So maybe just help us understand what assumptions are made in that outlook, and how does that compare to what your current observations are?

John Rettig
CFO, BILL

Yeah. I mean, I'd refer you to the script for the specifics on the outlook. And I'd say we don't really have any updates or changes to that, but it was grounded in a good signal in the December quarter around the health of SMBs and their spending patterns.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Yep.

John Rettig
CFO, BILL

But that was a very micro, almost isolated event, and what we're looking for is consistency in TPV growth, you know, potentially the beginning of declines in interest rates, and be able to match that pattern to say, "Look, businesses are in expansion mode now." For BILL, that creates incremental monetization opportunities, both in subscription fees, in higher retention, and higher monetization, more TPV. So we haven't seen all of those signals yet, so we're a bit cautious on the macro environment and the spend outlook, and therefore, that's reflected in our numbers as well. We've said we're likely to be very range-bound in terms of monetization this fiscal year-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Mm-hmm.

John Rettig
CFO, BILL

the rest of this fiscal year. We are expecting to recover from the slight decline in monetization we saw in the December quarter. But some of the product initiatives and improvements that we're making that will have a positive effect there will also play out over multiple quarters as we think about getting to more significant expansion mode, perhaps, you know, later in FY 2025.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay. So over the past few quarters, we've obviously seen, you know, some of it is the monetization where you just alluded to, but the cyclicality on the business playing out through a few different, some of the different KPIs. And at the same time, you guys have also been integrating and growing incremental opportunities, both organically and through M&A, right? In the last couple of years, especially. How do you think about these investments and how they impact your growth and profitability over the next year or two?

John Rettig
CFO, BILL

Yeah, it's a great point. So we are oriented towards growth. We're investing in payments, integrating and improving our solutions, and expanding our ecosystem. Those are all sort of unique capabilities that we have. We have a significant lead over others in the market. We sort of created a category that others are following, and so, our strengths in this area, plus bringing together AP, AR, Spend & Expense, more recently, cash flow and insights reporting for small businesses, gives us a huge head start here. We think continuing to expand the breadth of our payment capabilities is gonna be really important. More choices for buyers and suppliers is gonna be a good thing.

It also gives us more opportunity to drive incremental adoption on more of our ad valorem payments, which in the end is in the near term what drives revenue growth. You've seen our investments play out recently in expanding our ecosystem, both within financial institutions and also more recently, taking the learnings from what we've done with FIs and embedded solutions now to the software market. We can obviously talk more about that. And then the network that we have, 5.8 million network members, continues to be a significant differentiator for us and identifying ways to, beyond just monetization and driving adoption, create more value for suppliers-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Yeah, I would think so.

John Rettig
CFO, BILL

such that we become the go-to software platform, for them to drive payment acceptance, much like we are on the AP side. Small businesses come to us as the best, solution to drive automation in AP processes. We're looking to create more balance between, both sides of the network by investing more in, the network membership experience.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

I think it's important we put that in perspective. You have somewhere around 250, on the buyer side, 200,000- 250,000 customers when we combine Divvy with your direct.

John Rettig
CFO, BILL

Yep.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right? You have, like you just said, 5.8 million on the network, right?

John Rettig
CFO, BILL

Yeah.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

On the supplier side, effectively. That clearly shows there's an opportunity if you could actually offer the right value add to those suppliers. Is that the way you guys are thinking about it?

John Rettig
CFO, BILL

That's exactly right, and we grew the network using essentially a freemium model. So-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Yeah.

John Rettig
CFO, BILL

... we haven't gone and recruited, or tried to acquire any network members. Our buyers have brought those relationships to us. Over the last few years, we've started to offer payment choices to network members. That's what's driven some of our ad valorem adoption and increase in transaction monetization and yield. But over time, we're gonna deliver more software experiences to these members, and ultimately, they can bring buyers to us at the same time. That would be like a viral aspect of the network that doesn't yet exist-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

... because we're still relatively early in the journey of establishing deep relationships and improving the value proposition of the platform for network members.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

That's something I think is underappreciated. I mean, the long-term opportunity of that supplier side is probably pretty enormous if, if you can execute on it correctly, right? And so-

John Rettig
CFO, BILL

No problem

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

... is that something the company's been spending a lot of resources on, a lot of focus on right now?

John Rettig
CFO, BILL

Yeah, we've, by necessity, started to evolve how we work with suppliers. We now have a small, dedicated team who is proactively doing outreach to suppliers, identify product improvements that can help their overall level of automation, identify where we can create incremental value for them. So it's been an ongoing source of investment, and I think it's one that will, you know, pay off in the years ahead.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay. I mean, on the topic of new things, you, in the last few months, you announced expanded partnerships with Adyen and Xero. Maybe you could just help us understand what you do in each case and what changes.

John Rettig
CFO, BILL

Yeah. Adyen, most recently, we announced a new set of capabilities around virtual card issuing, so they become another partner for us. If you think about having a diversified base of partners that we rely on-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

... to deliver card experiences and payments. We've been working with Adyen for some time on accounts receivable. And then the relationship also opens up the opportunity, you know, down the road for us to also think about things like enabling network members to accept cards to become merchants. We haven't done this historically, but, you know, the interest and demand for creative, innovative card solutions is really high, particularly amongst network members. So, we're excited about the Adyen relationship and how it can help us bring more products to the market.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

You mentioned Xero?

John Rettig
CFO, BILL

On the Xero side, I think, I would view Xero as the first step towards taking the learnings that we've had in working with financial institutions and bringing those learnings to the software market. It's hard to get your foot in the door with large banks. There's a price of entry around regulatory and compliance, and those sorts of things, and we've done that. We've perfected, at some level, enabling third parties to deliver a great experience for their customers, and we've seen a significant amount of inbound demand from other software companies, not just in the accounting system world, but across all categories of software, to where they realize it's gonna be really difficult to build proprietary payment capabilities on their own.

Almost impossible to build a network like we've built, and we're also able to package some of the capabilities around know your customer, know your business, regulatory, and compliance as a service, alongside of these payment capabilities. So we're, we're excited about the partnership. Xero obviously has a large U.S. customer base. We're focused on the U.S. region for now and feel like there's gonna be more to come.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay. Maybe just switching to competition for a minute. I mean, you obviously have always had a great distribution network, whether it's your direct, but also obviously the accounting channel is, in our view, a differentiated go-to-market. With all, with all that said, we've heard a lot of questions on competition from investors, and obviously it's 'cause a lot of companies are saying they can do more, right, on the B2B space. So what are you seeing in the market in terms of competitive landscape around SMB and accounts payable in particular?

John Rettig
CFO, BILL

First, just stepping back, it's important to recognize that the market is large. Obviously, there's millions of businesses with employees, 6 million, and there's tens of millions that don't have employees, sole proprietors, but it's still early and evolving. It's not like the consumer payment space. It might be hard to believe, but we get thousands of new customers every month who are doing something for the first time. They're not moving, they're not upgrading, they're not trying to optimize for a better solution. They're literally doing some digital activity with payments for the first time.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

So that's super encouraging, and as a result of some of that, I think there's more capital, there's more companies, lots of interest in offering services in this category, and I think that's a good thing, actually. We have a big competitive advantage as it relates to a bunch of things that we do. We've touched on some of them already, but obviously, our platform was designed around process automation. It's not just about payments. Payments are kind of the shiny object because of monetization, but we get to those only because of the things that we do for small business. Nobody comes to us just for payments. You mentioned our ecosystem. It's hard to replicate. We have a trusted, known relationship with accounting firms. We've been working with them for years, with banks, and soon, you know, other software providers.

Then, obviously, our scale is really hard to replicate. So, I think it's true that there's more attention on the space, and there is gonna be a convergence of software and payments, but we feel like the investments that we're making are really important to maintain the product differentiation and lead that we have over other companies.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

I mean, it's still a big wide space, so when you're in the market competing, do you see more in the way of another accounts payable software provider trying for the business? Or are you still trying to win share versus most companies that are still manual or doing things in-house? Or, you know, what's it look like from a competitive standpoint when you're going to market?

John Rettig
CFO, BILL

There's a few different ways to look at it. On the core BILL side, it's mostly companies doing something for the first time.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay.

John Rettig
CFO, BILL

They're small enough that they're not doing, like, RFPs or competitive processes-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Sure.

John Rettig
CFO, BILL

... or things like that. On the Spend & Expense side, there's usually another card company involved.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

... either an existing player.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Amex or somebody like it.

John Rettig
CFO, BILL

Exactly.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Yeah.

John Rettig
CFO, BILL

Or there's, you know, one of the newer players that I'd say is a subset of the businesses that we look at. In the case of serving financial institutions and other partners, I think that's a more rigorous process, where we're often up against other companies, and we're competing on the basis of again, differentiation, things like the size of our network and, and-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

... compliance and regulatory and customer experience capabilities. But I'd say, day in and day out, we don't see named competitors as being, something that's changed dramatically in the business or an obstacle to, tapping into current demand or the trends that we're seeing.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

You mentioned before, you know, obviously, the supplier side and payment monetization, so let's just shift there, given it's been a hot topic. You talked about, you know, you guided to this. Your take rate would be down. I think it was down about 0.3 basis points in the second quarter, and then you talked about how it would stabilize and come back up in the end of the year, back to what it more or less was, right? And so if we could talk through, I guess just if that's still the stated, you know, goal. And then more importantly, what are the initiatives like straight-through processing or data incentives? Where does BILL currently stand regarding implementation and the effectiveness of these things? And maybe just a little more on the projected timeline for achieving some of your outcomes.

John Rettig
CFO, BILL

Yeah, we have a phased approach to this.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Sure.

John Rettig
CFO, BILL

It starts with improving the product experience that we have today. In the case of virtual cards or international payments and FX, those are the two largest drivers of monetization, expansion, for us. First is to focus on the total cost of ownership, if you will, total cost of acceptance, and we're driving more automation for suppliers in the things that we control today, and that is passing more data, doing more extraction of information from invoices and other documents in order to make the reconciliation side easier. We've already seen some success and progress with this is one example of an initiative where we're seeing higher payment success rates, as a result of giving suppliers more data with which to reconcile. Intermediate to longer term, we're gonna bring more relationships to bear.

There's a lot of companies that serve suppliers. It's a fragmented market. We work with a number of them today, but to the extent that the supplier, a large supplier, has a preferred relationship, and they've consolidated their technology and payment automation with that relationship, we should be able to connect with them and deliver a more seamless payment experience for suppliers. And there's obviously plenty of economics to go around to make that work. So I would put that in the kinda intermediate-term category as we bring more solutions to market. Assuming we've got an improved product experience with automation, we've got the ability to work with a preferred provider for straight-through processing that a supplier might want. Incentives probably play a small part in this as well.

To the extent that we can create alignment between buyer and supplier and BILL in executing on payments, that's something we're open to as well. To date, we've only really done small-scale testing in that regard, and we know that there are behaviors that can be influenced by making sure that we get the economics right. So we've got lots of tools and levers, and I'd say we're over the next year or so, these things ought to stack up, and we'll start to see expansion in monetization, driving more adoption of high-value payments, and obviously creating a better payment experience and more value for suppliers.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

That's great. So it sounds like you've seen some evidence of the data side, at least already, right?

John Rettig
CFO, BILL

That's right.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Resonating with the supplier side, and some of the initiative or early adoption of some of the straight-through processing could have made some progress, but it's gonna take some time for these to stack, maybe a year.

John Rettig
CFO, BILL

Yeah, those aren't-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

And then these things-

John Rettig
CFO, BILL

... gonna be super quick wins, but nevertheless, as we bring on more partners and we start to work with them, the ability to scale volume with them will happen a little bit faster-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Yeah.

John Rettig
CFO, BILL

... than, say, it does on our own.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

It's interesting, we had another B2B provider here mentioning how in their view, similar to what you're saying, it's not, it's not about pricing that much. I mean, it may be a bit-

John Rettig
CFO, BILL

Yeah.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

... but it's more around the experience on the supplier side to be low friction and have data to really get the ball rolling again and make sure for them also, it keeps moving.

John Rettig
CFO, BILL

Yeah, there's, there's lots of pieces to the payment acceptance puzzle that suppliers need to look at when they're optimizing costs. The easiest one is just the cost of the payment, right?

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Sure.

John Rettig
CFO, BILL

In the case of an ACH payment, it's close to zero. A virtual card payment, you know, it's much higher. The reality, though, is there's a big human cost associated with manual reconciliation processes, so we're trying to work directly with suppliers to take a more holistic view and optimize their product experience to create automation and ultimately lower the total cost of payment acceptance. And maybe the absolute nominal cost of the payment is one component, but it's not the only component.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right. Just while we're on the topic of payments, I mean, if you could just discuss incremental opportunities, additional payment products like card payments or invoice financing, and how these can potentially enhance your value within the network and improve payment monetization also.

John Rettig
CFO, BILL

Yeah, we've made a ton of progress scaling our card business. After the Divvy acquisition, we're making good progress with having BILL customers use that solution as well. That's provided lots of learnings about the credit side of the card business. Obviously, we're in the charge card space, not the revolving credit space. And so we're using these learnings, combined with what we've learned about real-time payments and how that might be of interest to smaller suppliers, and that's led us to launch our initial beta into working capital solutions. Which I'd say it's very small scale at this point, but we've done tens of thousands of loans, north of $100 million, and we're proving out the thesis that there is demand.

We are able to underwrite, target, identify, and predict propensity to pay with suppliers because we have a huge data advantage.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Yeah.

John Rettig
CFO, BILL

Right? We have history, we have transactions, we have documents, and so I think that opens up a whole nother segment of potential payment and cash flow solutions to both buyers and suppliers that we work with. Now, it'll take time for that to play out. Obviously, with a credit product, we're gonna approach that more cautiously than we would with other payment products, but we're pretty excited about the potential to add value. If you talk to small businesses and you hear their list of challenges in their business, cash flow and working capital is always high on the list, and so we know there's a real need there.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

I mean, I would think just given the data you have on the buyer side, you should be able to provide pretty good offerings and maybe even advantageous pricing to the supplier side in terms of invoicing or cap- you know, in terms of working capital.

John Rettig
CFO, BILL

I think that's right. We've started on the supplier side, small suppliers with invoicing advances. So it's where we have a supplier with history, they have a buyer and an invoice outstanding with-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Sure.

John Rettig
CFO, BILL

-with history. I think there's an equivalent product down the road, where we're providing buyers more time to pay. We're not trying to become a financial services company-

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Right.

John Rettig
CFO, BILL

in this regard, but we know that the moment where we sit, like in the middle of transactions, the moment of decision-making about access to capital, we play an important role there. And it may be over time, we bring more partners on, onto the platform to help us with scaling these types of offerings. But the initial learnings that we've had in validating the ability to underwrite and target and the potential size of the opportunity that we're looking at have been really encouraging.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

So we've said that about 70% of a business's spend is accounts payable spend, and about 30% is often T&E, just, you know, broad industry estimates. Your acquisition of Divvy made a lot of sense 'cause it gave you that other access to that other 30%, even for your own customers that potentially you weren't servicing before, not to mention new ones, right? And so when we think about the cross-sell now, and where we are on that journey between BILL and the Divvy side or, you know, the expense management side, help us understand what the path is gonna look like. It's been consolidated. You guys closed that, what, a year ago? A year and a half ago?

John Rettig
CFO, BILL

A couple of years ago.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Yeah. And so, you talked about, I think it was 8,000 or so customers that have cross-sold, but I forgot the exact number. More importantly, you still have a monster opportunity, I think, and help us understand where we are on that.

John Rettig
CFO, BILL

We do, and it's still early. We launched our integrated platform, which was bringing together all of our solutions, Divvy, BILL, the AR parts of Invoice2go, into one solution. We've since launched the cash flow product that I mentioned. And we basically had low-hanging fruit adoption of Divvy by BILL customers prior to this integrated platform. With the integrated platform, we're now positioned to be able to be much more proactive, in particular, with accounting firms, which we haven't done much there. We do have adoption from several hundred accounting firms who are using the Spend & Expense product and offering it to their clients, but we haven't worked very closely with the largest firms yet, in part because there was a few integration steps that we wanted to perfect before we brought it to them.

So we feel really good. We've had very, stable, consistent growth in sort of organic cross-sell of the Divvy solution by BILL customers, and I think from here, it's likely that we should be able to accelerate that, in part because we don't have the same level of credit, exposure concerns that we do when a new business comes to us than with BILL, and the product is now proving itself out.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay, that's great to hear. When we think about the, let's call it end of 2024, calendar 2024 and early 2025, I mean, is this gonna be something we'd expect to hear more from in terms of momentum and new cross-sell customers, or is this just becoming fluid as part of the business?

John Rettig
CFO, BILL

No, I think it'll be a bigger part of, of what we're doing. I mean, we're starting to think about card payments more holistically. So we talk about this discrete product, Spend & Expense, it's got a charge card. Maybe you can use a prepaid card or a debit card if you don't qualify for credit. Then we have the BILL business, and we've got virtual cards, and in some cases, Pay By Card. The reality is there are lots of options to deliver value to small businesses using cards. One small example would be that on the BILL customer base side, it may be that our charge card feature becomes a funding option for AP payments without even adoption of the Spend & Expense product.

So you're gonna see much more integration between our products and driving multiple different use cases than just the standalone products that we've had historically.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay. Okay. Let's talk about the FI space for a minute. I mean, the company obviously has made good progress over the years with a handful of FI partners, but when we think about the strategy going forward now, just talk to us about what you, what your vision is for that, that, that distribution channel, that partnership opportunity, and what it could mean for you.

John Rettig
CFO, BILL

Yeah. We're north of a decade into investing in supporting financial institution partners. It's a tough space to get into. As I mentioned, there's a high price of entry, a high bar. Today, it's a small percentage of revenue, less than 5% of revenue, but, we have still, I think, great potential in doing more with the financial institution partners. Given the size of the customer base, the small business, relationships that they have, they're one of the trusted partners, along with accounting firms, that small businesses rely on. It's obviously also been a really important proving ground for us to understand, how to better embed our solution in other, third-party software to create experiences for, for small businesses.

Now, I'd say for banks, we've done more of the heavy lifting in terms of that customer experience than we'll do in the future with other third parties. It'll be much more of a build your own on top of our capabilities, but we're still excited about the opportunity. There's a lot more we can do to increase adoption, working with our bank partners, as well as closing the ARPU gap that exists between a customer that we acquire through a financial institution and one that we acquire directly, which a very significant gap today. We've now launched, I think it's with six banks or so our ad valorem payments, so they're actually using our full suite of products, where many of the large banks haven't yet done that.

It's, you know, a step in the right direction towards being able to monetize these relationships in a bigger way in the future.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

And maybe you could just touch on—I mean, last quarter, we obviously heard about one of your larger bank partners, and there's been some changes observed. How's the dialogue been with them evolved, and how has it evolved over the recent quarters? What's the likelihood of BILL servicing customers in the back book?

John Rettig
CFO, BILL

Yeah, a shift in strategy from the bank to want to take more control over the customer-facing experience, the bringing together of different solutions. And I think we've had really encouraging discussions with them about how we plug into that. So it's a different model. Instead of taking our solution to an existing installed base, it's taking components of our solution and plugging into a standardized technology stack. So there's still some open questions about what that product experience will be. We're working very closely with the bank to resolve those questions, and out of that will come clarity on the economics and the contractual relationship, which we would expect actually sooner than later, but no specific, you know, updates at this point.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay. All right, thanks. Maybe we just kinda hone in then and wrap it up with the variety of different distribution channels you have. John, I mean, when you think about FIs, we just talked about, you think about accounting channel, direct, you know, where are you spending most of your time and putting most of your new capital and investment in terms of going forward?

John Rettig
CFO, BILL

I think there's two, two categories. One is the dollars and resources that we control directly. Think of that as people, sales, direct demand gen marketing. We are directing that at larger businesses. We're still in the small business segment. We're not pivoting to enterprise or mid-market, but customers who are gonna receive immediate benefit from the advanced solutions that we have. We still wanna serve millions of, of customers. There's, there's tens of millions of businesses out there. The second category is accelerating our investment in indirect capabilities to enable third parties to serve small businesses, and that's how we'll attack the low end of the market.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay.

John Rettig
CFO, BILL

Those are the two big areas of investment that we're really excited about.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

And then you also have been obviously, like everyone else, I mean, the whole industry, more focused on profitability, but we had a recent restructuring, what was it, three months ago or so?

John Rettig
CFO, BILL

December, yeah.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

And so, if you could just help us understand, if at all, the savings resulting from that restructuring? I don't know if we can help quantify it, and then how do you plan to reinvest or allocate these savings for the remainder of the year?

John Rettig
CFO, BILL

It's about a 15% reduction in force at the beginning of December. On an annualized basis, that was about $60 million in operating expense savings, impacted every area of the company. It wasn't targeted at one specific area. We had two, broad priorities for reinvesting a portion of, of that. So $30 million for the half fiscal year, we took about half of that, and we're reinvesting in, increasing our resources in our San Jose headquarters around R&D, in part because we closed our Sydney office, and we had some AR specialists there. And two, enhancing and growing our sales capacity in order to support both partners and our larger businesses that we're going after. We think both of those things ultimately, have a really good return profile and will allow us to continue to scale into FY 2025.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

All right, that's helpful. And just more broadly on you know, your focus on profitability or strategy around profitability going forward?

John Rettig
CFO, BILL

Yeah, we're profitable on a non-GAAP basis, excluding the impact of float. That's our goal to scale there. It's not a focus to optimizing profitability in the short term. We're still investing to return to higher levels of revenue growth, but as we mature, it's important to us that we scale on an annual basis profitability.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Okay. I think maybe we have time for just one question, if anyone has in the audience, one question to ask? Yeah, go ahead.

John Rettig
CFO, BILL

Please, yes.

Speaker 3

Hi, John. Thank you. So how has initial feedback been for the new Cash Flow Insights and management products launched this past week?

John Rettig
CFO, BILL

Great question. We just went into general availability. We've been beta testing for a number of months. This product was released based on the core of what Finmark built, which was the acquisition we did a little over a year ago. The feedback has been good. It's especially useful when it's tied into an accounting system, payroll system, all of the tools that a small business is using, and feedback has been really positive. It's kind of the next product category for us to do more than financial operations or management, but about helping a business make better decisions, have more visibility, more insights into what they're doing.

Speaker 3

Thank you.

John Rettig
CFO, BILL

Yep.

Darrin Peller
Managing Director and Senior Analyst in FinTech and Payments, Wolfe Research

Guys, I think we're gonna wrap it up there. John, thank you very much for joining us. Karen Sansot, great to have you guys. We have a break now until 3:15 P.M. Please come back and be back in your seats at 3:15 P.M. for the CEO of Nuvei. Once again, John, thank you very much.

John Rettig
CFO, BILL

Thank you.

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