How you doing?
I'm doing great. Thanks, for having me. It's good to be here.
Awesome. So look, I wanna dive right in. There's a lot of questions, as we've joked about, and, you know, if I think about the last few quarters, you had some contraction, and then most recently, you saw stabilization, some encouraging signs. So why don't we maybe start there and talk about what trends you're seeing with SMBs and your expectations for the rest of the year?
Yeah, we have a good read on, like, the broader SMB environment, given the scale of the customer base, nearly 500,000 small businesses or medium-sized businesses using one or more of our solutions, and they cut across all industries.
And it's clear, over the last year or so, they have been negatively impacted, at least from a sentiment standpoint, by inflation and interest rates and things like that, and that it's translated into much lower payment volume growth and overall B2B spending than we've seen previously. It's been pretty stable the last couple of quarters, spend on the BILL side. A little bit ahead of estimates. Q3 was definitely ahead of our estimates, so it feels like we're coming out of the significant declines that we saw previously, and things are kinda flattening out.
That's our expectations, you know, from here, is that small businesses are gonna figure out how to survive and keep going through this cycle, and then at some point, maybe as interest rates fall or, you know, labor costs start to moderate, they'll turn to expansion mode. But we're not expecting that anytime in the near future. For the year, for fiscal 2024, we're expecting overall TPV growth of about 8%-9%, which is- that's up a little bit from what we said, I think in the maybe December quarter or earlier in the year. That just reflects a little bit more positive sentiment from what we're seeing.
Great, and look, you guys serve a fairly diverse base of SMBs in several different verticals and by size. Anything that you would wanna call out by either customer size or geo or vertical that's worth discussing as you think about that overall base that you're serving?
Well, I think the smaller end of our customer base adjusted fastest because they had to. It's out of necessity. They tend to operate at cash flow break-even or slightly better. They don't go into loss cycles. The larger businesses are still in some adjustment mode, but generally speaking, we see similar trends across the board. It feels like the larger segment, the mid-market companies, say, north of 100 employees, something like that, will be the first to emerge quickly and move to expansion mode to grow their businesses when they think the timing is right.
Understood. So I think one of the positive surprises coming out of the March quarter was the take rate. It ended up being much better than expected. I was wondering if you could maybe help us unpack and contextualize the one-time benefit that we had there, and then versus what you expect for near-term expansion.
Yeah, in Q2, we had a slight decline in monetization, as we had indicated, and then in Q3, we had significant expansion, and that was well ahead of our expectations when earlier we said we would make progress throughout the year.
We made it really fast, in part because we had a basically a one-time step up in AR monetization associated with moving volume between processors for existing BILL AR customers. And while that's something that will continue, it's not- we're not expecting any growth on that volume. And then in the quarter, we also saw virtual card volume and international payment FX volume stabilize, so it wasn't a headwind, if you will. We're not out of the woods on those products yet.
There's still some probably net, net headwinds there that will reduce the range of possibilities, but we feel good about our setup heading into FY 2025. Now, it might not be till the second half of the year, but I think we see a path based on some of the product improvements we're making and, and other dialogue we're having with large suppliers to get back to a more consistent expansion across the payment portfolios.
So, you know, there's parts that you can't control, but I wanna focus on what you can and some of the levers that you're pulling as an organization to drive ad valorem payment adoption. I know it's a key priority for Bill.com.
Yeah, basically, it's about expanding the portfolio of products, so making sure whatever a supplier's needs are or a buyer's needs, we have a product that, that works for them. That's different price points, different speeds, different payment modalities. We've talked recently at conferences on earnings. We have a pretty broad portfolio now, but there's still some, you know, improvements that, that we can make.
In terms of some of those improvements, it always comes down to speed and reconciliation and the data that we're passing with transactions. That's where the vast majority of BILL volume is on ACH payments, which monetize at zero and are the most difficult to reconcile. So anything we do that makes it easier for companies to, you know, get business done in terms of reconciliation, you know, the better.
And so for virtual cards, we've already made a bunch of improvements around passing more data. We're working on some direct, straight-through processing opportunities for international payments. The number one criteria for most buyers in this case is payment speed.
We recently announced a partnership to drive much faster payments, and we think these are things that we're pulling the levers that we have in our control to get back to consistent volume growth, which then leads to monetization expansion. And then when we turn the corner to a more growth-oriented macro environment, that's just gonna amplify what we've already done from a payment experience and volume growth perspective.
Great. Maybe let's switch gears away from the take rate and get to, to net adds. Obviously, BILL has added a lot of customers since the IPO. I think more recently, there's been some un- movement in the underlying parts. So how should we think about organic Bill.com net adds, if we exclude the impact of the FI channel and any Intuit-related churn?
Yeah, there's still a huge market opportunity. It's early in its development. Most small businesses still need a digital solution for the areas of the back office that we play. They don't-- It's not like we're in a rip-and-replace market yet, an upgrade cycle. It's still an adoption cycle.
We've had pretty consistent customer acquisition results, particularly with our direct and accountant channels. I think in the last quarter, Q3, our March quarter, customers were up 15%. We had 4,100 net new adds on the BILL side, which is pretty consistent with our recent historical averages, and we feel like that's a good baseline for the level of investment and our current traction in the market. Our aspiration is to do much more than that, given the size of the market opportunity, but in the near term, that's the likely trajectory that we're on.
I know that the company recently rolled out the Unified Platform, so I'm curious, how is that impacting both net adds and maybe your overall go-to-market strategy?
Yeah, the Unified Platform, we launched it initially in the fall, and it basically brought together most of the solutions that we have and enables small businesses to create bills, send invoices, make payments, workflow approvals, budgets, things like that. And essentially, we adapted our go-to-market in two ways.
One, we retired our Divvy brand for the most part, went to BILL, and we started to promote the Unified Platform as the one-stop shop solution for prospects as they came into the funnel. And we pretty quickly found that there was a context that most small business prospects came to us with, whether it was looking for a corporate card or an AR solution to receive payments or some sort of AP automation solution.
So, we found that we had a decrease in conversion rates and just generally less efficient go-to-market capabilities. So we've adapted very quickly to that. You saw that in our results across both Spend & Expense and BILL in the March quarter. And now we're starting to scale, to deliver prospects whatever they want. Like, if they're looking for a card solution, we'll give them that first, and then over time, work with them to drive more adoption of other products, and we're seeing good traction with that.
Is there any work that's left to do, whether it's on the back-end integration or making the go-to-market part more seamless? Just how should we think about the go-forward motion there?
There's a little more work that remains to be done on the Unified Platform. I'd say creating a holistic experience across Spend & Expense and BILL, and two examples would be BILL has great approval workflows, like customizable, easy to use, and whatnot. Our Spend & Expense product doesn't have that. Conversely, the Spend & Expense product has great budgeting capabilities that doesn't exist inside the core AP product, so bringing those things together so there's a seamless experience. We've also recently added Cash Flow Insights to the BILL platform. That extends across all parts of the solution.
It also allows us to tap into other data sources that a small business has, like an e-commerce system or payroll or other, and just deliver a much more holistic view of the finances and insights and trends associated with their business, and we'll keep making improvements like that as well.
You know, you've mentioned the Spend & Expense product a couple of times. Just for the audience, in case, that's the Divvy product. It was a crown jewel when you acquired it, still growing nicely. How should we think about maybe the Spend & Expense product specifically and how growth there looks?
Yeah, it's a great product. We generally lead with the software experience for that, even though the monetization for that product is card-based, so it's based on a corporate charge card, not a revolving credit card. And it just, it's, it allows companies to have lots of control and visibility over what they're doing.
Right after we acquired Divvy, we first applied some of the BILL capabilities around credit and risk management, our data asset, our ability to drive automation and improve underwriting, reduce losses, and things like that. We've also enhanced the expense reimbursement capabilities. So in some cases, employees pay for purchases not on the corporate card, and making that one solution that can address all of those needs.
And obviously, now with the integration, for BILL with BILL, that opens up a whole nother set of opportunities to deliver value to the Divvy, you know, customer base. In terms of go-to-market, we have mostly addressed the cross-sell opportunity so far as it relates to the direct part of BILL. The accountant channel is still to come. Our Spend & Expense solution is, we have an arrangement and agreement with CPA.com. We're a preferred provider there, and I'd say the accountant channel and helping them bring that type of solution to their clients is the next greenfield opportunity that we're working towards.
Great, and maybe just one more on Spend & Expense. I know the company took some steps to limit credit risk in 2023, and, you know, what do you think it'll take from a macro perspective to start to expand credit again, maybe loosen up some of the self-imposed restrictions that you guys put into place?
... Yeah, good question. We've been pretty proactive on the credit side, just given the external environment. We reduced line sizes, we reduced unused lines. In some cases, we moved away from certain customers where we felt like we had more concentration. And we've favored more established businesses. They've been in business longer, they're slightly larger, they have more predictable spend, and things like that.
And then, as I mentioned on cross-sell, we have a pretty unique data advantage there, so I wouldn't say that the external environment is holding us back, and it's not as much self-imposed restraint on the BILL target customers. But I think we'd wanna see interest rates come down and the sentiment across the small business segment start to turn positive into expansion mode and have that flow through their financial performance.
But for the most part, our Spend & Expense customers go through a mostly traditional underwriting process, where we're creating, based on, you know, multiple data sources and review of financials, our own credit scores and a risk rating. And we wanna see those sort of uptick before we would probably change our position from today.
Great. Maybe switching gears to a different, a newer addition to the portfolio, Finmark. I know it's part of the Unified Platform now. It doesn't maybe get discussed as much, but I, I think it serves an important role. How does that fit in the product portfolio, and how should we think about the cross-sell opportunity there?
Yeah. Finmark, is an FP&A tool, planning, budgeting, forecasting tool that was originally, as a standalone company, sold to mid-market companies and accounting firms. And that's how it got on our, our radar, because there's huge value that can be created by an accounting firm able to apply insights very efficiently and effectively across, like, say, hundreds of clients. And so, we've now rolled the, the basics of Finmark insights and cash flow capabilities as a standard, free feature inside of the BILL platform.
I think over time, there is an opportunity to take more of the advanced capabilities and have that be, you know, perhaps a separate SKU that is monetized differently by going deeper with the features and functionality than we're doing for the core Cash Flow Insights part of BILL, but that would be down the road. The feedback has been, you know, really good on the product, and there's certainly, you know, improvements we can make there. I'd say the first area of focus for us is leveraging our relationships in the accounting channel to deliver more value to them through that product.
Let's maybe switch gears, and you know, an important part of the growth algorithm has been channel partners and working with different parts of the channel. So just, you know, putting aside maybe one of your larger partners in the FI space, how should we think about the evolution of the FI channel going forward and its contribution to the key drivers of the business, like net adds, TPV, and ad valorem adoption?
Yeah. Just a little bit about where we are today. It's, I think, just over 2% of revenue. We've been partnering with large banks, other financial institutions, for more than a decade now, and it's been an important sort of proving ground for how we enable third parties to serve their customers with some of our core capabilities.
Most of our relationships with banks were initiated before we had Ad Valorem payments, and so you see a pretty significant monetization difference between the customers and TPV and volume associated with our FI channel customers and what you see on the BILL, or, you know, BILL accountant and direct platform. And so that's something that we are working with our FI partners to address, bring more of our solutions to their customers.
Increasingly, we're also taking the learnings from how we've worked with, with FIs, and building that into our embedded strategy that is more directed at software companies versus financial institutions. The key learning there is that we have unique capabilities around, you know, risk and compliance and regulatory and, and payments that are really hard for companies to replicate. Banks have that also, but they're less likely to, you know, take their solutions to the, the long tail of other software companies.
Great. Now, one of, you know, one of the keys has been for you adding more and more accountants that ultimately serve end customers. You've continued to build up that base. Can you talk about the go-to-market economics and, or what the opportunity is to expand that channel? How much room is left there?
Yeah, 8,000 accounting firms, we've grown that consistently. There is still a huge market opportunity to go get more firms, and just as big is expanding our presence within the existing firms. So we tend to have still a small percentage of the addressable markets inside of a firm, and often that has to do with how prevalent their client advisory service practice is in serving their, you know, their small businesses. The accounting channel has been the foundation of our go-to-market.
We have a very efficient customer acquisition model there, working directly with accountants, and the value proposition beyond what we do for their end customers is that we have a lot of tools for accounting firms that make it really efficient for them to support their clients and basically be able to manage more clients with fewer people across their portfolio of CAS, Client Advisory Services, customers.
And we have a dedicated team, and so it remains our number-one go-to-market opportunity, and continuing to support accountants. And I think over time you'll see that will be one of the main avenues that we use to further penetrate the market.
I know you mentioned the embedded side earlier. I made a mental note to come back to it. Can you talk about what some of those opportunities look like, and, like how should we... What steps are you taking to pursue those?
Yeah. I mean, historically, we've talked a lot about the convergence between—you know, software and payments, and it's been sort of emerging on the B2B side, but not as prevalent as on the C2B side of things. And our goal is not just to be at the center of it, but to actually help drive the creation of that market.
And so we've taken, as I mentioned, a lot of the learnings we've had in working with financial institutions, the hurdles we've had to overcome in being a provider to companies that spend, you know, billions of dollars a year on technology, and we're starting to package that in ways that allow us to deliver self-service APIs to third parties, as well as widgets that they can consume. We're doing less, probably none, of custom solutions for software companies, which is always a big challenge with large financial institutions, who have, you know, unique custom needs that you need to meet.
And so, one of the unique value propositions beyond the regulatory and risk and compliance that I mentioned is the network that we have of 5.8 million network members is a hard asset to replicate, and by working with a third-party software company who's gonna embed some of our capabilities, their customers get immediate access to our network. So it creates a value proposition over and above just what the software solution they're using is, and we're finding there's lots of interest and demand in, you know, in that market.
So, I wanna maybe get to the numbers section of this, and, you know, there's been a lot of debate about what the Fed's gonna do with rates. It matters for your business just because of float, and I wanted to maybe ask, like, how are you thinking about managing the float balance? And it's been an important source of, of revenue, and it's, it's very profitable. So how do you think about the investment portfolio, and are you thinking about changing the duration there?
Yeah, we are. I think it's a little bit of a balancing act to get the timing just right. So the yield curve is currently inverted. We have a relatively short-term average duration, less than a year. But at some point here, it'll make sense to extend our durations and lock in more yield for longer.
Our primary goals with our FBO balances, which are around $3 billion, plus or minus on any given quarter, is just liquidity, access to that capital, safety of principal. So we don't try to optimize yield, but in this environment, it feels like there will be an opportunity to extend, you know, float revenue at a higher rate for a longer period of time. Don't know when those interest rate declines will start.
Doesn't feel like we're in an environment where you go from 5 to 0, at least that's not in our base case. So we should have, you know, a pretty good runway of strong float revenue and profitability, even if less than today.
Understood. Maybe sticking on the kind of margin side or thinking through the numbers, I know the company took some cost actions last year as you thought about the expense structure. How should we think about, you know, operating margins going forward, and steps that you're taking to both maintain and drive incremental efficiency?
Our current approach of balancing, we've talked about this balancing growth and profitability, is about, kind of trying to make improvements where we can drive leverage in the business over time. This last quarter, we had a 68% increase in non-GAAP operating income. We continue to have strong float margins.
And we wanna make sure that, we're balancing the overall business. We're not at a point where, given the market opportunity and how much further we think we can penetrate the market, where we're thinking about maximizing profitability. We wanna be positioned for the turn in the macro environment, be positioned for further penetration of the market, higher payment volume growth, which should amplify some of the things we're already doing to drive adoption.
And to the extent that, you know, we adapt that over time, we feel like we are well-positioned. We've demonstrated operating leverage as we grow. We've gotten bigger. We're non-GAAP operating income profitable without the benefit of float in the last quarter. So we're doing the things that we think make sense to put us on a trajectory to optimize over the longer term.
Great. With just the last couple of minutes that we have, I wanna end on more of a big-picture question. When I first met you, Bill.com did AP automation for SMBs, and in that several years that have passed since, you guys have expanded into many new areas, and it's a much bigger business than when we first met. So just looking beyond the current cycle and not trying to predict that, how should we think about BILL over the next three to five years?
I think there will be more of a lot of things. So more surface area that we can address within small businesses, like the things that we can help them with beyond AP and AR and spend and expense. What will come with that is more wallet share. Like, they're gonna be more reliant on us. We're gonna have more of an opportunity to drive economics and, and growth from those relationships.
More customers who are using our whole suite of solutions than exist today, which is primarily, you know, just, just one of the solutions. I think with our embedded strategy, we have the opportunity to cover more of the market, in terms of penetration and being a leading provider there.
And then, as the business model evolves, alongside of these other things I've mentioned, probably more balance in our business model between subscriptions and transactions versus where we've been, you know, the last couple of years.
Great. Well, John, we'll leave it there because we're out of time, but appreciate you joining us as always, and great to dig into the story with you.