Okay. Hello, everyone, and welcome to UBS's Tech and AI Conference. To the extent that many of you in the audience know who I am, my name is Taylor McGinnis, and I cover the application SaaS space here at UBS, and in this session, we have BILL, so we have BILL CFO John Rettig. John, thanks so much for joining us.
It's great to be here. Thank you.
Perfect, and before I dive into questions, John, I know that there was a convertible recently. I think you have some remarks that you want to give beforehand, so I'll turn it over to you.
Yeah, I have a quick disclaimer on the convert. So yesterday, we issued a press release announcing the pricing of a private placement of convertible notes and related transactions involving the repurchase of existing converts and equity securities. And because those transactions are still pending under SEC rules, we're not able to discuss or have any comments on the convert process until later.
Perfect. Makes sense. So John, what a year makes. I think last time we were up on this stage, you had just started to see some of the headwinds from the change in the macro, some of the pressures to virtual card volume. I know there were a lot of company efforts over the last year, right, to help turn some of those parts of the business around. And I know we started to see some of the fruits of that this past quarter. So maybe it's a good place to start. It seems, at least from my perspective, that you guys have more visibility near-term than maybe you had a year ago. So when I think about evidence of that, this past quarter, you guys raised the full-year guide by more than the beat. You guided to 2026 more far out than you have in the past.
So is that the right read and messaging? I guess, what are you seeing that maybe might be giving you guys some of that comfort and visibility?
I'd say over the last year, we have maintained our conviction in the long-term growth opportunity. Notwithstanding, there's been uncertainty. There's been macro influences, trends in the business that have been challenging. But more recently, SMBs have continued to show stability, which by itself isn't growth mode for them, but it's a much better environment. The trends around their spending patterns, the demand that we're seeing from small businesses in the market to adopt new solutions, put new money to work, is really healthy. And so there's obviously some remaining uncertainty. The new administration opens up some questions about the implications for SMBs. But to net it all out right now, the market is healthy for SMBs. We're seeing some progress, some green shoots on some of the initiatives that we're investing in that are in our control, that aren't subject to macro trends or overall SMB market trends.
We're seeing progress there. We're launching new products. We're seeing adoption. We're seeing that flow through to improving metrics, including things like TPV per customer, which for four quarters in a row up until the last quarter was declining or flat. We saw that expand. It was just a 2% year-over-year growth, but it's a really good indicator, especially when you look under the covers at some of the categories that are driving improving spend expansion and things like that. I think it suggests that SMBs are at a minimum stable. Maybe they're starting to be optimistic and looking to expand their footprint, increase hiring, and things like that. We've also been investing a lot in the payment side of the business, in part to counteract headwinds that we've seen with payment acceptance, sensitivity, macro-related concerns. We're improving product experiences. We're driving automation.
We're working with more partners for straight-through processing, and we're seeing the early signs of those things paying off. They're not impacting our business overall in terms of revenue growth at the moment, but it's part of what drives our conviction around the opportunity to continue to scale and grow from here.
Perfect. And I think a key area for the investments that you just referred to, I think a key area where that could be the most needle-moving is take rate. So let's talk maybe about take rate to start. If we look at the guide for this year, it seems to imply that the first half is roughly flattish with core BILL take rate or the AP side. And then the second half seems to imply a bigger step function change. So I guess, one, could you maybe talk about what are the biggest drivers of that greater improvement in the second half? And why is it that instead of seeing more gradual improvement that you get maybe a little bit more of that bigger step function? Is there some component of it where you've been working with these suppliers?
Maybe it just takes time for them to ramp up volumes on virtual card. Can you just give us a little bit more color in terms of what that is?
Yeah. First, just a quick clarification. We've said that we expect modest expansion in the second half of the year. So I wouldn't describe it necessarily as a step function change, but I think the trend you're describing is right, that it'll be a stronger environment for monetization expansion in the second half than the first half. And it has to do with, again, the things that we control. There is a lag in the volume coming through on new product improvements. We're seeing that. We have two categories of products that we think about driving better ad valorem volume. First is things we've been doing for a long time but require some enhancements to improve the value proposition, whether that value proposition is centered around speed and automation or even cost and effectiveness of the solution. So things like virtual cards and IPFX, international payments, cross-border foreign currency payments.
We're making considerable investments there, and I think we'll start to see that pay off. And then there's some new products, both brand new launches for the second half of the year to fill in some of the gap that exists between fixed-price, low-monetizing payment products and higher-price, say, virtual card and products like that. So think of automated mass payouts associated with ACH. And then there's other products like Instant Transfer, which leverages several different real-time payment capabilities, and Pay By Card that, in the grand scheme of BILL's $300 billion a year in payment volume, they're pretty small. But we're seeing really good pickup in those solutions as well. So all of these things, I think, come together to give us high conviction that we have a significant opportunity from here. The last time we updated the metrics, we were at 14% ad valorem payment volume penetration.
We've said longer term, we see the floor of 20%. So there's just a long way to go, and we're feeling good about the setup from here.
Perfect. And we think about that 14% going to 20%. I think there are some investors that still harbor concerns on being able to continue to see that move up with virtual cards and some of the other ad valorem payments, with the concern being that there's higher fees associated with this. So what gives you comfort that what we just saw, right, and some of the pressures and headwinds that we saw at international, cross-border, and virtual card was just truly some cyclical dynamics and there's not something structural there? Can you comment on, I know you guys have made a lot of advancements on the product, working with suppliers. Maybe that gives you a little bit more confidence, but anything you can share there?
Yeah. First, just some context. We're still in the early innings of the payment monetization expansion phase of the company. We built the business predominantly on fixed-fee, low-monetizing payment transactions, and the first phase of expansion was really centered on virtual cards and IPFX, as you mentioned. Those have been very important growth drivers for BILL over the last, say, three-plus years. Increasingly, though, the second phase of monetization expansion is a portfolio approach, so we're not as dependent on a single product or two products in terms of creating value for both customers or suppliers and BILL. We're taking a portfolio approach to deliver more value, so the breadth of payment choices, including virtual card, that's going to continue to be a driver of growth in the future.
But we're going to surround that product with many more capabilities that allow both suppliers and buyers, their customers, to fit the right payment method for their types of transactions. We're increasingly focused on electronic payments and retention of volume in the platform. That's really important. And so as we offer more choices, we also drive better penetration, more share of wallet with our customers. The share of wallet tends to equate to higher retention of customers. The longer we have customers on the platform, the more we drive multi-product adoption. And as we have multi-product adoption, revenue per customer increases significantly.
Perfect. And then you also mentioned some of the newer products that you have. So I know we've heard a good amount from our conversations with your customers on Invoice Financing, and it seems like that's being received very well. I think you're almost getting to the point where it sounds like we could have an announcement around advanced ACH as well, too. So when you think about the rollout of some of these newer products and when those could start to become bigger contributors to revenue, what does that look like? Is this potentially we could see some of this this year? Is this more of a next-year growth driver? How do you think about that?
Yeah. Both of those product categories that you mentioned will contribute in FY25, but they won't be big growth drivers. First, on Invoice Financing, which is a part of our working capital solution, I think we've made really good progress at testing out a lot of our initial assumptions since we've launched that product. It was about a year ago. We've done just about 200,000 loans. And so we have a really good understanding of the repayment trends for suppliers, which suppliers that product resonates with. And we're making great progress in terms of monetization. That's obviously a very high-monetizing product at the moment. It's 300 basis points in terms of a fee for the loan. Over time, we actually want to create a more cost-effective solution.
In order to do that, we're investing a lot in underwriting and knowing more about suppliers and our customers, being able to actually drive down price to make it more of a use-everyday product as opposed to use when you have a cash crunch or something like that. It's crucial that we get that underwriting part right. That's the main thing that we're looking for before we start to scale that product, which is probably more FY26 and beyond. In terms of enhanced ACH, for lack of a better term, that's not a product term that we've rolled out. We've spent a lot of time in the last year engaged directly with large suppliers, understand their needs. We have examples where suppliers in our network have commented that Bill is the single largest SMB payment aggregator that they have.
It could be hundreds of millions of dollars that they're receiving from BILL. And in many cases, that's via ACH rails, and they paid xero for that. We know we're delivering more than xero in value. And so we've been identifying their needs, working with them to create product enhancements that allow us to do direct integration with ERP systems, feed reconciliation data, enhance payment experiences to drive automation, remove some of the manual activities. An example recently was we signed a new, or this was back a couple of quarters ago, we signed a new arrangement with a straight-through processing partner that went live this quarter. And we'll start to immediately see volume. And that's all about that automation journey and helping customers. So enhanced ACH fits into that same category of automation. And I think we're making good progress there.
We'll start to see revenue in the second half of the year, but scale in 2026 and beyond.
Perfect. Let's shift gears to another core part of the growth story, which is average TPV per customer and the trends that you were seeing there. So I know earlier you mentioned that you've seen a couple of quarters of stability, right? I think this past quarter on your earnings call, you talked about seeing some signs of green shoots. So could you just elaborate on that a little bit more? What areas of spend are you starting to see that unlock? And I know for the guide this year, you're assuming more flattish, like average TPV per customer growth. So is that just conservatism? Is there still parts that are challenging out there? Any comments you can provide there?
Yeah. The 2% growth TPV per customer was strong. Our assumptions that are built into our updated estimates for the year are flat from here. So we're not counting on the external environment to drive B2B spend expansion in order to get to the financial estimates that we've created. But I think we've seen strength now measured in lack of material headwinds, some green shoots, as you mentioned, across all customer segment sizes. For a while, we saw larger customers starting to pull back more. I think that has stabilized. And so it feels like that's in the positive direction. It's pretty broad-based as well. So there aren't certain industries that are picking up while others are still behind. And so it feels like businesses, small businesses, are confident and generally positive.
Perfect. And this is going to be a very hard question to answer, but I'd love to get color from you on the sensitivity of your model to a recovery in SMB spend. So if we go back and we look at the pandemic era, right, as maybe a proxy for this, there was a period of time where TPV per customer growth went from low single digits and accelerated to 30% plus. Now, I know part of that was driven by stimulus, so it's not going to be an apples-to-apples comparison. But anything, I guess, that we could draw from that, right, and any similarities or differences? And as a follow-up to that question, I think when we look at average TPV per customer, I think it peaked at around $1.6 million.
So when we look ahead, can you get back up to those levels given some of your initiatives on trying to find some of those larger customers because we actually see it go above that? Just anything that we can draw from that to help us think about what the future looks like?
Yeah. The model that we have is definitely sensitive to overall spend per customer, and it's true during the pandemic. I mean, interest rates were zero. There was a ton of stimulus. So I'd say those years are probably not good comparisons for what normal could look like from here if we get past the uncertainty that exists and the higher interest rate model that we're operating in now. Just switching from annual to quarterly for a second, the last quarter we were at 433K per customer. This is core BILL. That's up 44% from pre-pandemic spend levels. So even though spend has been down slightly and now flattish and up slightly in this last quarter, it's way better than pre-pandemic. So small businesses are larger. They're healthier. They're more financially stable.
And the two biggest variables that, beyond just the external economic environment that might lead to across-the-board spend increases for small businesses, are share of wallet and the customer-sized demographics that we're selling to. So as I mentioned a minute ago, when we launch more products, what we find is we get a larger share of wallet of customers. So they might have exception transactions that are going, they're using their bank online for wires or something like that. They bring those onto the platform as we create equivalent solutions because they find the value of managing these workflows and their financial operations in one place really resonates with them. The second key contributor is just the size of customers.
And as we've been focusing our discretionary resources on slightly larger businesses, they have more employees, they have more spend, more transactions, they tend to do more international payments as well. That is going to support higher growth in TPV per customer.
Yeah. Let's talk about those changes that you've made to go after some of those higher quality, larger customers with a greater propensity to spend. So if we look at your net adds this past quarter across Spend and Expense management and also the core BILL platform, it was really strong, right? So it's not only quality, but that quantity looks like it's coming back too. So one, I guess, how durable are those net add levels that we just saw going forward? And two, could you maybe comment on this new cohort of customers that you're going after? Probably not new, right, but the more focus there. And how do we think about those in terms of propensity to spend, maybe the appetite to adopt, right, different ad valorem payments? What is that so far looking like in the conversations that you guys are having with us?
Yeah. A few quarters ago, we talked about adapting our go-to-market approach to focus on slightly larger businesses. Some of that is driven from the fact that we have products with credit exposure. And so a larger business that's more financially stable is going to be a better match for credit products. But also, we just find that the advanced features of our platform that include workflow and approvals and collaboration resonate best and most quickly with businesses that have a little bit more complexity. So more employees, more trading partners, more transactions, things of that nature. And so we're taking our discretionary resources, whether it's go-to-market demand gen spending on the marketing side or sales resources around helping new customers convert or grow in the first few months that they're with us. And we're focusing exclusively on slightly larger businesses.
That comes at the same time when we've talked about our embed strategy to work with other companies around the smaller businesses. And last quarter, we had a couple of examples around the progress that we're seeing there. One is on the spend and expense side where we've seen about a 40% increase in the spend per customer for recent cohorts versus cohorts from, say, a year ago or a few quarters ago. And that's just simply a shift in emphasis. So it's a really good sign that the strategy is working. We've increased net adds each of the last three quarters on an absolute basis.
What's a little bit more difficult to see from the outside in is that the quality and the monetization of these customers has much more potential for growth than when we were, say, across a broader spectrum of customer sizes, including really small businesses.
Perfect. And you mentioned spend and expense. So let's pivot there. That part of the business, I think, has been growing very well. And when you think about how that cross-sell motion has evolved since when you first acquired Divvy, maybe you can opine on that. And then, two, when we look at the growth that we've seen and we've seen some stabilization in the mid-20s%, do you see that as being durable as we look ahead?
Yeah. Most of the customers that we acquire on the BILL side each quarter are still doing something for the first time. And the AP automation market is years ahead of the spend and expense market. And so it's really an early innings opportunity with spend and expense. We lead with software. The transformation opportunity that exists to manage card programs, spend, employee productivity controls, eliminating surprises is real. And that resonates with businesses increasingly. I think the cross-sell opportunity, we've made good progress, 11,000 customers as of the last update. And that's out of about 150,000 core BILL customers. We think about 50% of that 150,000 or 75,000 is addressable. And a large part of that will come from partnering with our accountant channel partners. So driving penetration and collaborating with them to help serve their customers. So the market is still early. We have a differentiated product.
As we bring our solutions together, the BILL and Spend and Expense side, we integrate things like budgeting and workflow and collaboration across all of the different payment types. We expect to see significant increases in cross-sell and growth in card volume in the years ahead.
Perfect. So we walk through take rate, we walk through spend and expense, we walk through net adds, TPV per customer. So we address all the big levers of growth. But when we look into 2020, your FY26 and your outlook for 20% plus growth, could you maybe unpack what the key drivers of that are? When we think about those four categories I mentioned, is there one that you're more optimistic over others that are going to be the bigger contributors of that?
Yeah. As we look ahead at the moment, we're not planning on TPV per customer expansion. I think that could be a significant tailwind, but it would be additive to our base assumptions around the progress that we expect to make with our focused go-to-market efforts leading to continued strong net adds and a slight shift in average composition or demographics of customers to be larger. That's going to help us drive multi-product adoption. It also ties into some of the initiatives we have in FY25 around improving our payment experiences, adapting our supplier experience to drive more acceptance. Our third priority for the year was going much deeper with accountants. We're seeing that to start to pay off. You've seen us increase the penetration of the accountant market. And then finally, our embedded solutions where we've announced one deal. It's in beta mode now with zero.
All of these things combined, I think, give us confidence in a multi-year growth opportunity from here. I know we talked a little bit about our early expectations for FY26. I'd say that's just the starting point. As we think about it, we're definitely focused on a multi-year revenue acceleration opportunity.
Perfect. And I think that's a good segue to marketing because you mentioned a bunch of the investments that you guys have been engaging in over the last several quarters. This year, there was a pull forward of $45 million of incremental investment. Do you mind offering some thoughts on what are those areas that are going to be leading to some of the stronger growth you're talking about going forward?
Yeah. They're really the things that I just mentioned. So enhancing our payment product portfolio, which includes both existing products around virtual cards, IPFX. We also talked recently about progress we're making there with, say, local transfers for IPFX, driving more volume, much higher growth in both revenue and IPFX volume in the last quarter versus the prior quarter, just simply from improving the payment experience. That's the type of thing that we're looking to do. And the reason that's important for us is when we make product investments, we roll them out. We do it mostly in an automated way. The return is very short, right? So we're able to get a very quick payback period on those investments. I talked about suppliers. I think we covered that previously.
In working with accountants, we've actually added to our leadership team recently to bring on dedicated senior leaders to focus on our accountant channel. We're doubling down there. We've been a leader in the accountant space. We're working with 9,000 accounting firms now, represent more than half of our customer base on the BILL standalone side, and there's just much more we can do to deepen the relationship and help them scale in their markets, and then the embedded solutions was the last thing, and I'd say for both the go-to-market improvements with accountants and the payment enhancements that we're making, these are fundamentally short-term, but long-life payoff opportunities. The embedded opportunity where we're going to take the learnings we've had from the financial institution channel, apply it to the software channel, and then increasingly come back to financial institutions with the embedded API-first platform, that's a multi-year bet, obviously.
That's going to pay off over a longer period of time.
Perfect. And if we look at this last quarter, your operating income margin ex float was 8%. And it was a big improvement from what we saw at the same time this last year. So, I guess, was there something one-time in that number? So I don't know if there were some expenses that got pushed out. And, I guess, how do we think about the upside potentially from that number as we look ahead?
Yeah. Nothing one-time in the number. And you're right to look at that. So up 10 percentage points on a year-over-year basis in the first quarter. And I'd say some of the incremental investments that we talked about in that $45 million are a little bit more backloaded than front-loaded. So there could be a benefit related to that. But even with the incremental investments in FY25, we're still expanding our ex float operating margin versus FY24. So we're not only investing to drive near-term and multi-year growth, but we're also increasing profitability at the same time.
Perfect. And could you talk about how do you see that operating income margin ex float evolving over the next two to three years? There's obviously lots of investment. You guys have a big TAM, big market opportunity. I know that there is some prioritization around growth. But what are, I guess, the additional areas of cost saving or operating efficiency that even though you are investing, you could still push margins higher?
Yeah. It's a great question. And there's an example from the first quarter that I want to start with. And that is our gross margin was 86%, which is above our expectation. And a big piece of that improvement is because we're driving more automation and more efficiency with our customer support operation. We're applying more technology. We're using AI to drive automation and self-service customer experiences. And that supports even stronger gross margins than we've delivered recently. We're taking some of those same tactics and applying them to G&A where we have a fixed installed cost space across regulatory and legal things related to the money movement business that we're in. And we think that scales over time. And then, obviously, we're going to continue to create go-to-market efficiency.
The more that we do with cross-sell and up-sell joint customers between all of our different solutions, the more efficiency we get out of things like rewards, expense, and incentives that are associated with card payments. And I think all of these things are ultimately additive. We haven't laid out any specific multi-year targets for the rate or magnitude of profitability expansion, but it's obviously a very important goal for the company.
Perfect. And then maybe in the last minute or so, so the FI Channel has historically been focused among investors. I know it's a very small portion of revenue today. But in terms of the recent resegmentation and why I guess pull that business out of core BILL, I guess, one, is there any messaging there that maybe this isn't as high of a priority as it has been in the past and you want the focus to be on that core BILL piece? And then two, I guess, just how do we think about that business longer term and growth opportunities there?
Yeah, so there's no signal in the new segmentation. It's more about creating clarity around the core significant revenue and profitability drivers for the business, and the embedded and other category includes Invoice2go, our FI channel, and will include our embedded software solutions as well, the example being Xero, so it's not as much de-emphasizing those as it is segregating the metrics. You're right. In total, the embedded and other is a small percentage of our overall business, but we're making significant investments in our new embedded platform, and we think that not only opens up the software market, but makes the financial institution opportunity even more addressable by changing the model to where financial institutions will increasingly leverage our new API embedded platform. That creates much more efficiency for us in serving these large organizations and supports margin expansion over time as well.
Perfect. Well, with that, we're just out of time. So we covered a lot, John. So thank you so much for your time today. And thanks to everyone listening in. Let's give John a round of applause.
Thank you.