Earnings Call: Q3 2020

May 7, 2020

Good afternoon, and welcome to bill.com's Fiscal Third Quarter 2020 Earnings Conference Call. Joining us for today's call are bill.com's CEO, Rene Lasert and CFO, John Redig. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Thank you. With that, I would like to turn the call over to John Redick for introductory remarks. John? Thank you, Jacqueline. Welcome to bill.com's fiscal Q3 2020 earnings conference call. We issued our earnings press release a short time ago and furnished a related Form 8 ks to the SEC. The press release can be found on the Investor Relations section of our website. With me on the call today is Rene Lasert, Chairman, CEO and Founder of bill.com. Before we begin, please remember that during the course of this call, we may make forward looking statements about the operations and future results of bill.com that involve many assumptions, risks and uncertainties. If any of these risks or uncertainties develop or if any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward looking statements. For a discussion of the risk factors associated with our forward looking statements, please refer to the text in the company's press release issued today and to our periodic reports filed with the Securities and Exchange Commission, including our Form 10 Q dated February 11, 2020. We disclaim any obligation to update any forward looking statements. On today's call, we will refer to both GAAP and non GAAP financial measures. The non revenue financial figures discussed today are non GAAP unless stated that the measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non GAAP financial performance and additional disclosures regarding these measures. Now, I'll turn the call over to Renee. Thanks, John, and good afternoon, everyone. Thank you for joining us today. Speaking on behalf of everyone here at bill.com, we want to send our best wishes to all of you and we want to share our appreciation to all of those on the frontline from the healthcare to the service workers that have kept us going. After a brief comment about bill.com's response to COVID-nineteen, I'll provide an overview of our fiscal Q3 results and discuss a few highlights and then later I'll turn the call over to John to cover our financial results in greater detail. He'll also be providing you with our fiscal Q4 outlook before opening the call up for Q and A. Our world has changed dramatically since our first earnings call in early February. COVID-nineteen has been a catalyst for change. To give you an idea of how we've adapted to this new environment, let me give you some examples of changes we have made for our employees and customers. We proactively switched our entire workforce to be 100% remote in less than a week, because we had a comprehensive business continuity plan in place and because our tech stack is completely cloud based. Our employees have done a phenomenal job working from home and have not missed a beat. Bill.com's success is driven by their passion and dedication and I am grateful for their commitment to each other and to our customers. Our mission is rooted in being champions of small and midsized businesses and we knew they needed help. We've taken the following actions to assist them. We waived subscription fees for 3 months for new customers financially impacted by COVID-nineteen. For existing customers in distress, we've also offered short term suspensions and other forms of assistance. We extended our customer support hours to help people who are balancing work and family life within the confines of a remote working environment. We joined Stand For Small, a coalition of more than 40 companies that have banded together to provide support to small businesses as they navigate the impacts of COVID-nineteen. Led by our strategic partner American Express, the Stand For Small Coalition will provide millions of SMBs access to valuable services, offers, tools and expertise. And finally, along with our strategic partner Intuit, bill.com contributed funding to the small business release initiative, which was started by GoFundMe to help small businesses that have been affected with the goal of empowering their communities to rally behind them. COVID-nineteen has created uncertainty that could not have been foreseen. Our focus along with many of our partners is to make sure SMBs know they are cared for and supported by all of us. That is the one certainty we can provide at this time. Now let me turn to our Q3 financial performance. Core revenue, which we define as subscription plus transaction revenue, grew by 63% year over year to $36,100,000 Total revenue in the quarter grew by 46% year over year to $41,200,000 We also delivered strong non GAAP gross margins of 78.8% in the quarter. At the end of the quarter, we had over 91,000 customers representing 28% year over year growth. Our platform also reaches a large number of SMBs through our 1,800,000 plus network members. In fiscal Q3, we processed 6,000,000 payment transactions, representing an increase of 23% over the year ago period. During the quarter, we processed $24,200,000,000 in total payment volume or TPV on our platform, an increase of 35% over Q3 of the prior year. We've worked hard over the last year to extend our payment rails capture more of our customers' transactions and are pleased to see this strong growth in TPV. John will discuss our financial results in greater detail in a few minutes. But first, let me share with you how we think about COVID-nineteen's impact on our overall business. Similar to an SMBs accounting system, we believe our platform is a foundational mission critical solution for business. We expect SMBs to spend less in a downturn and we provide the visibility they need to confidently stretch out their payables and accelerate their receivables. Without bill.com, doing all of this from home is even more challenging. Our platform provides our customers the ability to monitor their finances closely and react quickly. Remote work requirements have exposed the degree to which SMB still rely on paper based manual processes. We believe that this crisis could accelerate the move to digital financial operations for companies of all sizes. The inefficiencies inherent in the old way of doing business will not work going forward and this is not lost on businesses nor their accountants or financial institutions. Turning now to our resiliency. We believe that bill.com's business model is particularly durable for the following reasons. First, our demand generation is not reliant on in person events like annual user conferences. We market our platform directly to SMBs through online digital marketing referral programs and strategic partnerships. In fact, in the 2019 customer survey we conducted, half of new customer respondents indicated they first heard about us because they used our platform at a prior company or heard about us through a colleague. Next, our go to market model is not relying upon feet on the street. Our direct sales motion is 100% inside sales. These first two points lead to a short sales cycle of less than 30 days, which combined with our risk free trial makes it easy for customers to get on the platform quickly. They self onboard They self onboard without complicated or time consuming implementation cycles. With subscription starting as low as $39 per month, our price points are affordable for SMBs. Finally, bill.com has a strong balance sheet with over $382,000,000 in cash, cash equivalents and short term investments at March 31, 2020. In summary, we have a unique position in the market and a solid financial foundation in place. We believe that bill.com is well positioned to support small businesses through and as they come out of COVID-nineteen. That being said, we want to be transparent and share the recent trends we are seeing. In terms of customer acquisition and retention, we have experienced some COVID related churn. However, we have also seen some increased inflow from prospective customers looking for solutions that enable continuity for financial operations. Looking at the transaction side of the business, we started to see some impact on both TPV and the number of transactions being processed by our customers during the second half of March. And lastly, Floats. Obviously, the reduction in the federal funds rate adversely impacts our float revenue. John will discuss these topics in more detail later on. Let me discuss some of the changes we've initiated to address COVID-nineteen impact on our business. As a SaaS company, the majority of our OpEx spend is related to headcount. In the near term, we have paused new hiring for the quarter except for critical positions. We've also refined our payment risk management policies to mitigate potential increases in credit losses associated with payment flows on our platform. Shifting gears, last quarter we featured use cases from our direct customers. This quarter, I want to showcase how we're helping our accounting partners. Over the past 12 years, we've developed relationships with over 4,000 accounting firms in the U. S. The accounting firm channel is a valuable part of our ecosystem because accountants are trusted advisors SMBs. Our accountant specific tools help firms grow their client advisory practice, establish a competitive advantage and satisfy their SMB clients' needs. With our platform, the same accounting firm staff can serve more clients more strategically and more profitably. With COVID-nineteen, we have seen increased traction in this channel. Let me give you just one example of how our accounting firm partners have leveraged bill.com's digital payments platform, ease their clients' transition to the new normal. BookMinder's, a Pittsburgh based firm providing outsourced accounting and bookkeeping services for small businesses has praised the value of our digital workload capabilities. BookMinder's Chief Operating Officer, Jessica Minkus, stated that and I quote, still dotcom is allowing BookMinder to rapidly transform our outsourced bookkeeping service to meet the challenges of working remotely. BookMinder's and our clients believe bill.com is a necessity to safely and securely operate in this new environment. The ability to process, approve, transmit and deposit payments electronically is imperative in a world where you can't rely on being able to meet with clients, go to the bank or receive snail mail. In addition to trusting accounts, businesses trust their financial institutions. SMBs look to their banking partners for digital solutions that provide end to end cash flow management. And many of those financial institutions turn to us to meet their customers' needs. By working with us, our financial institution partners can provide their customers with many of the benefits realized by our directly acquired customers. Bill.com is currently integrated with several of the largest financial institutions in the United States, including Bank of America, JPMorgan Chase and American Express. These partners embed our platform typically on a white label basis into their online banking solution. We continue to have many great conversations with our existing partners about doing more together and we continue to see opportunities to partner with additional institutions. Today, I'm excited to let you know that we've reached agreement with our newest partner Wells Fargo. Wells Fargo will power a new digital AP and AR solution for its treasury management clients by integrating bill.com into its commercial electronic office online portal. Wells Fargo shares in our mission of helping small and midsized businesses save time and improve their cash flows from anywhere at any time. We expect to launch the service later in 2020 and we will update you with additional information on our next earnings call. This relationship reinforces bill.com's market position as a leading provider of small and midsized business AP and AR workflow solutions for major financial institutions. Next, I want to update you on a few of our latest enhancements to the bill.com platform. Innovation and payments is core to who we are. Over the past few years, we have launched cross border and virtual card payment. For the past several months, we've been rolling out same day ACH payments. Our customers have been making good use of this expedited payment capability, especially now that the transaction limits have been increased to $100,000 We have also begun testing real time payments with the RTP network from the clearinghouse. More to come on this later, but using this new payments trail, we foresee being able to offer our customers, independent contractors and vendors the ability to get paid 20 fourseven. As I mentioned a moment ago, our relationships with our existing partners continue to evolve and grow. Last month, in support of our partner, JPMorgan Chase, we integrated Chase's virtual card offering into Cash Flow 360. Cash Flow 360 is Chase's digital platform for businesses that includes bill.com. This integration will allow Chase customers another way to pay bills with faster delivery of payment, enhanced spending controls and simplified reconciliation. We look forward to helping Chase drive more payment volume to its virtual card through this seamless integration. Looking ahead, we will continue to focus on capturing more of the overall business to business payments flows of existing and new customers for both our direct and financial institution partners. The expansion of our payment rails and growth in our virtual card program demonstrates our progress against the strategic goal. In conclusion, I want to reinforce our commitment to our mission. We make it simple to connect and do business. We are optimistic that our purpose built platform will resonate even more with SMBs who are now coping with the reality that the old way of managing back office financial operations just doesn't work anymore. Now, I'll turn the call over to John to discuss our financials in more detail. John? Thanks, Renee. Today, I will provide a brief overview of our fiscal Q3 2020 financial results and discuss our outlook for our fiscal Q4. As a quick reminder, today's discussion includes non GAAP financial measures. Please refer to the tables in our earnings release for a reconciliation from non GAAP to the most directly comparable GAAP financial measure. With that background, let me turn to our Q3 key metrics. Given the COVID situation, I'll also be disclosing additional details, including monthly data. We hope the information will be helpful to investors. On an ongoing basis, we don't plan to provide the same level of disclosure. We ended the quarter with 91,300 customers, representing year over year growth of 28% and more than 5,400 net customer adds in the quarter. As we experienced broad based demand across our accounting firm, direct and financial institution partner channels. In addition to new customers, we also experienced an increase in new trial sign ups during March April as COVID-nineteen began to impact businesses and prospects looked for solutions that would enable continuity for financial operations in a remote working environment. At the same time, it was clear that COVID-nineteen presented some challenges for both prospective and existing customers, and we've taken a number of steps to assist those who've been negatively impacted. As Renee outlined earlier, on an as needed basis, we offered 90 day free subscriptions for new customers and provided subscription fee waivers for existing customers. I'd like to provide transparency into the impact we're seeing from these actions. Regarding support for prospective customers who were impacted by COVID-nineteen, we've had over 1,000 trial customers who joined under our new 90 day free subscription offer through April 30. We introduced this new offer on March 30, so we'll be in a position to assess the conversion rate of these customers towards the end of the current quarter. For existing customers who were negatively impacted by COVID-nineteen, less than 2% of our 91,000 customers had a portion of their subscription fees waived, representing a reduction in subscription revenue of less than $100,000 through April. The majority of our customers are on subscription plan and auto pay their fees monthly in arrears and we haven't experienced any changes in aging receivables or customers requesting payment deferrals outside of the subscription fee relief I mentioned earlier. The trends we are observing with customers requesting fee accommodation are still early, given the COVID-nineteen impact rolling through our customers' businesses. While we haven't experienced any material negative impact to date, we will be monitoring the underlying trends carefully looking forward. Moving on to payment volume. During the quarter, we processed $24,200,000,000 in total payment volume or TPV on our platform, an increase of 35% over Q3 of the prior year, and we processed over 6,000,000 payment transactions, representing an increase of 23% year over year. On a sequential basis, both TPV and transactions were down slightly versus the typical seasonal pattern where fiscal Q3 is usually relatively flat with Q2. During the second half of March, we started to see an impact from COVID-nineteen on both the number of transactions and TPV being processed by our customers, and this trend continued into April. To give you an idea of the impact, in April, the number of payment transactions per customer was down approximately 14% from March and total TPB decreased 1.4 percent between March April. As you know, we plan to update you on additional metrics such as our net dollar based revenue retention rate and customer retention rate at the end of each fiscal year. But given the COVID-nineteen situation, I want to provide visibility into the current trends we're seeing on these two important metrics. As macro conditions normalize on a go forward basis, we will revert to an annual cadence for updates on these metrics. Through March, our dollar based net revenue retention rate was 120%, an increase from the last reported number of 110% as of June 30, 2019. In April, we experienced a decline in revenue retention to 118%, reflecting the transaction trends that I mentioned earlier. We began to see increased attrition from existing customers in April, where our monthly attrition rate increased by approximately 15% versus March, excluding customers from our financial institution partners. The additional attrition came mainly from customers in industry segments that were materially impacted by quarantine orders, especially restaurants and other retail consumer facing businesses. I'd also like to update you on our annual customer retention rate. Excluding customers from our financial institution partners, 82% of our customers as of April 30, 2019 were still customers as of April 30, 2020. This is consistent with the 82% retention rate we reported as of the end of fiscal 2019. Turning to our financial results. We delivered strong financial performance in Q3 with solid year over year growth in total and core revenue as well as strong non GAAP gross margins. Total revenue for Q3 was $41,200,000 representing growth of 46% from Q3 2019. During Q3, our total revenue growth was driven mainly by the strength of our core revenue, which represents subscription and transaction fees and excludes float revenue. Core revenue in Q3 accelerated to $36,100,000 or 63% year over year growth. The strength in core revenue is driven by the increase in the number of customers we serve and growth in revenue per customer from both subscriptions and transactions. To break down our core revenue, subscription revenue increased to $22,300,000 up from $15,400,000 in Q3 of last year, representing an increase of 44% year over year. This growth was driven by the increase in customers on the platform and the growth in average subscription revenue per customer. Transaction revenue increased to $13,800,000 in Q3, up from $6,700,000 in Q3 of last year, an increase of 106% year over year. Growth was driven by adoption of new product offerings, an increase in the number of transactions processed from our growing customer base and the mix of transaction revenue shifting to variable priced products. The strong transaction revenue growth in the 1st 3 quarters of this fiscal year benefited from continued cross border and virtual card payment adoption. Moving on to float revenue, we delivered $5,100,000 in float revenue in Q3 compared to $6,100,000 in Q3 2019, a decrease of 16% year over year. Our annualized rate of return on customer funds held in Q3 was approximately 1.5%, representing a decrease of 74 basis points over Q3 2019. The decrease in yield was due primarily to the Federal Reserve's action to significantly cut the federal funds rate. While we expected a decline in the fed funds rate during the quarter, the move to lower the fed funds rate to near 0 was much more significant than we planned, this will impact our float revenue going forward. Our non GAAP gross margin for the quarter was 78.8%, an increase of 280 basis points over Q3 2019's non GAAP gross margin of 76% and an increase of 80 basis points from last quarter. The margin improvement year over year was driven primarily by the adoption of our new product offerings and partially offset by the decline in float revenue. Note that our non GAAP gross margin results in Q3 should be viewed as the peak for margins for the foreseeable future, given the negative impact on float due to the Fed funds rate being in the 0 to 25 basis points range for what's likely to be an extended period of time. Turning to operating expenses. R and D expense was $12,800,000 for the quarter or 31% of revenue, up from 29% in Q3 'nineteen. The increase was due primarily to the hiring of additional engineering and product management talent. R and D continues to be an important investment area as we add new features and functionality in support of our growing customer base, including accounting firms and financial institutions strategic partners. We believe these investments will set us up for long term growth and competitive differentiation, and I'll discuss this in more detail as it relates to our outlook for Q4. Sales and marketing expenses were $11,500,000 or 28 percent of revenue in Q3, an increase from 26% of revenue in the prior year's quarter. During the quarter, we continued to invest in our go to market capabilities, including expanding our sales team to meet the increased demand we've experienced from mid market customers, as well as increasing spend on demand generation, including SEM, social and brand awareness programs. As you know, we've historically experienced efficient customer acquisition economics and we continue to be vigilant in driving capital efficiency in sales and marketing. G and A expenses were $12,500,000 or 30 percent of revenue, up from 25% in Q3 of fiscal 2019. This reflects the 1st full quarter of public company expenses, including D and O insurance, regulatory and compliance costs, as well as the regulatory costs associated with our payment capabilities and money transmitter licenses. This results in our G and A as a percentage of revenue being higher than some of our SaaS software peers. We believe these investments help us create competitive differentiation and we expect to achieve operating leverage in the G and A area over the long term. Our Q3 non GAAP operating loss was $4,300,000 versus $1,100,000 in the year ago quarter as we continue to make investments in our platform and go to market capabilities combined with new expenses associated with being a public company. Our non GAAP net loss was $2,900,000 or a loss of $0.04 per share based on 72,400,000 basic weighted shares outstanding. Because we had a loss on a GAAP basis, our diluted share count was the same as the basic share count for both GAAP and non GAAP EPS calculations. Moving on to the balance sheet, Ending cash, cash equivalents and short term investments were $382,400,000 down from $383,000,000 at the end of Q2. As of March 31, 2020, we had $1,350,000,000 in customer funds on our balance sheet, which was down slightly from the end of Q2 due to lower total payment volume in March. We ended the quarter with 6 17 employees, up from 568 as of the end of Q2. Now let's move on to our fiscal Q4 2020 outlook. The economic impact from COVID-nineteen is unprecedented and the world is a different place than just 3 months ago when we had our last earnings call. We do not have a crystal ball and we are really at the beginning stages of the economic impact playing out. While we didn't see any material direct impact in our Q3 financial results pertaining to COVID-nineteen, it is challenging to accurately assess the future impact. The most immediate impact on our business from COVID-nineteen is a decline in interest rates to near 0. This will impact our float revenue looking ahead as yields come down. For purposes of Q4 guidance, we've made a number of assumptions about our business based on the data available to us today, including the assumption that the trends we've seen in our business through April continued throughout Q4, but not materially deteriorate. For the Q4 of fiscal 2020, total revenue is expected to be in the range of $37,400,000 to $38,400,000 comprised of core revenue in the range of 34.8 $1,000,000 to $35,600,000 and float revenue in the range of $2,600,000 to $2,800,000 Float revenue assumes that the average Fed funds rate will continue to be approximately 25 basis points during the June quarter and that our yield will be approximately 95 basis points to 100 basis points. In terms of operating expenses, we plan to continue investing in R and D where we are focused on building new platform capabilities, including features to support larger mid market customers and our financial institution partners. We will remain diligent with sales and marketing investments, aligning investment levels with market conditions. In addition, we expect our G and A spending to continue to reflect the ongoing overhead associated with being a public company. On the bottom line, we expect to report a non GAAP net loss in the range of $9,000,000 to $8,000,000 and a non GAAP EPS loss of $0.12 to $0.11 on a per share basis based on a share count of approximately 72,600,000 basic weighted average shares for Q4. We expect stock based compensation expense of approximately $6,000,000 in Q4. Moving on to an update on our new headquarters facility and capital expenditure plans. As a reminder, we were at maximum capacity in our existing headquarters in Palo Alto. At the end of December, we signed an 11 year lease agreement for new space in a building in a more cost effective location in the Bay Area. Construction on the tenant improvements was paused due to the shelter in place orders. The delay will shift the completion of the project to early calendar 2021 and will result in incremental operating expenses over the next few quarters for the additional office space we had to secure in the interim. We expect capital expenditures to be approximately $6,000,000 to $7,000,000 in Q4. Looking ahead, given the COVID-nineteen circumstances, we will plan to provide guidance on a quarterly cadence until increased visibility allows for a longer term outlook. To close out on the guidance topic, we believe we're well positioned to navigate this uncertain period. We are prepared to adjust our operating plans as circumstances change and we remain committed to building a profitable business over the long term. Now, Renee and I will open up the call for your questions. Operator? Thank you. Your first question comes from Brad Sills from BofA Securities. Your line is open. Hey, guys. Thanks for taking my question and glad to hear everybody is safe and doing well. I wanted to ask about the comments you made on attrition being stable. I think that's on a lot of folks' minds given the SMB environment. It sounds like within some of the most affected industries, you saw some attrition. But overall, I think you're kind of your renewal rate was consistent in April. So could you just elaborate on those two data points, please? Sure. Good to talk to you, Brad. So the just step back and think about the overall market. This is a massive market that we're going after, 6,000,000 businesses. And we have 90 1,000 plus, 91,000 customers that we are supporting today. And many of them have a need for our type of service. And so what we did see and what we shared in the script here was that we saw additional inflows. We can say that the inflows that we saw in March April were some of our strongest months ever. But we also saw additional attrition. And so the comments, I'll let John speak specifically on the attrition, but the comments around attrition were we did see an uptick. And I think we're still waiting to see how that plays out in the rest of the quarter as COVID-nineteen impact rolls out. But John, do you have anything you want to add to that comment? Yes. I would just say that the increase in attrition that we saw, I would describe as concentrated in industries that you would expect to be most severely impacted on short notice when the COVID situation started having an impact. It wasn't necessarily a broad based attrition across our entire customer base. And as you know from earlier calls and discussions, we do focus on our net revenue retention as the primary way of measuring sort of the health of our customer relationships and how well we're serving those customers. And so we continue to have success at expanding that revenue retention rate, notwithstanding we did see based on our preliminary numbers for April, a slight decline to 118%. So we feel pretty good about the progress so far in this early COVID period. But as Renee mentioned, there's obviously a large market opportunity we're going after and at the same time, it's early in this situation. That's very helpful. Thanks guys. And then one more if I may please. Your take rate it looks like on transaction on TPV, transaction revenue as a percentage of TPV has been going up and you mentioned some progress with cross border and vCard. Are there any customer segments where you're seeing that success or any transaction types? Any color on kind of how the uptake has been on those 2? Thank you so much. The cross border payments rely on us letting our customers know that we have the capability to manage their international payments form. So there is in product messaging they're doing that we are doing, there's sales efforts, there's marketing efforts. And so that is part of the progress that we're making is that we're just getting better at understanding how to market those services to our existing customers. Of course, cross border payments in general took a hit with COVID just because there was less trade around the world in the latter part of March beginning of April. So, but we do know that there's opportunity for us to continue to impact and help grow that part of the business for us. As a reminder on the virtual card product offering, the way we have gone to market with that is we are matching the suppliers that our customers pay with the suppliers that are in the Comdata network. So Comdata is our partner and we find a way to match those suppliers. And if we can pay that supplier with the card payment, they accept a card payment, then we're able to actually be a part of the transaction as a card transaction. So what we've been working hard at doing is understanding and matching those suppliers with that particular network so that we can enable more virtual card payments, so customers can pay their suppliers faster, suppliers have better reconciliation and all those things. So we feel really good about those businesses and both have lots of opportunity for us to continue to work hard at. And I would just add that we did about a little bit under $2.30 per transaction in the quarter, which was up about 10% sequentially and 68% year over year. And that comes mainly on the heels of, as Renee mentioned, just continued adoption of our newer products by the customer base and we think that will continue. That's great. Thanks so much, guys. Thank you. Your next question comes from Josh Beck. Your line is open. Thanks, Renee and John. Glad to hear everyone is doing well. I just wanted to ask about this increased inbound activity that you are seeing. Are there certain maybe verticals where it seems to be gaining traction or is it more of the same that you would typically get from that channel? I'm just trying to understand if it's in some ways maybe expanding the awareness and audience that might think about this type of solution? I think it really is an awareness effect that we're seeing, right. If you think about mid March or whenever, I think probably in the Bay Area was the end of February, the beginning of March when the larger companies were actually all saying work from home. And so that cascaded to the economy. And what we started to see was in mid to late March that businesses that now had shelter in place or work from home guidelines, they now needed to find a way to manage their back office, their financial operations. And so with that, we were able to have it be across pretty much the entire base. We did not see any vertical attraction. We did comment and highlight our accounting channel, because accountants, the reason we highlighted that is accountants do are the place that businesses trust when they need help. And so when a business is saying, oh my gosh, I have to shelter in place, I don't know how to be able to pay bills anymore, they reach out to their account and they reach out to their bank. So we were able to kind of take our platform and our messaging and support our partners, both accounts and banks as well to be able to help them serve their customers. So we didn't see any Okay. Okay, really helpful. And then I also wanted to ask about PPP. Obviously, it's a bit more of a indirect benefit. And I realize where you sit, it might be a bit tough to discern. But I'm just wondering if you think over the last month, do you feel like your customers have been recipients of some of those funds? And in some ways, could that be something that maybe helps effectively buffer the attrition rate? I think the immediate impact of shelter in place and just I mean, we saw in the unemployment numbers across the country how quickly folks made changes to their business to be able to manage it. I think the good news is that PPE mitigated that continued decline, right? So I think you can see it in the unemployment numbers and I'm not probably at the speed as others on the call are, but the unemployment numbers have been the rate of decline or unemployment numbers has been declining over the last 3 or 4 weeks, right? So I think that is a result of PPP. I don't have any data to prove that point, but I think PPP was a really helpful program to keep businesses, give them a lifeline and given the data that we're seeing, I have no reason not to believe that it didn't help. Really helpful. Thanks Renee. Thank you. Your next question comes from Chris Merwin from Goldman Sachs. Thanks so much for taking the question. Yes, I first wanted to ask about customer adds in the quarter. It looks like you had a really healthy quarter for net adds. And just curious if there is any particular strength in any of your channels, whether financial institutions, accounting firms or direct. I know direct had been an area where I think you were investing a bit more. So just curious which if any of those channels were particularly strong in the quarter? We think that the one of the powerful things about our model is the fact that we have this broad distribution capability and we did not see any one channel dominate compared to others. We did see success across all channels. And so I think the platform, the messaging that we did start messaging in February, I believe it was late February that we started saying, we help you work from home, we help you work remotely. We think that that matter for any business as they were thinking about what was coming. And so nothing specific to any channel, it was just good strong demand across the base. And then maybe just another one on virtual card. Is there anything in particular you're doing to incentivize supplier acceptance? I think in the past you talked about an opportunity for virtual card that'd be maybe 10% to 20% of the mix for payments. So just curious how so far anyway virtual card has been trending relative to your own expectations? We do not incentivize supplier payments with our customers. Our payments are our customers initiate a payment. They say they want to make a payment and we decide how to pay the supplier and we work hard to find the fastest, most efficient and acceptable way for the supplier to receive that payment. Our partner, JPMorgan Chase does incentivize their suppliers with their payments. So, and our supplier partner with American Express, which has a virtual card program, they incentivize. So there we have different opportunities to learn and see the impact on that model and feel good about the approach that we've taken today. Great. Thank you. You're welcome. Your next question comes from Samad Samana from Jefferies. Your line is open. Hi, good afternoon and glad to hear everybody is doing well. Great quarter to start calendar 2020. A couple of questions. Renee, on the bank's partner side, do you think that with their customers feeling overwhelmed in this environment that your existing financial institution partners are accelerating their focus on marketing bill.com's embedded features to their end customers? And are you seeing new inbound interest from financial institutions you don't currently partner with? COVID-nineteen has definitely changed the way everyone thinks about how they manage their financial operations, right? You can't escape it. I mean, it changes how we think about washing our hands and conferences we go to and how we pay our bills. And so what we have seen from our financial institution partners is that they are keen to help their customers through this. That helped primarily in the last month or so has been all about PPP. They have lots of opportunity to help SMBs with the PPP programs they have. But we've also had discussions and understand that they want to help them be able to operate their business from anywhere. It's why the firms that we have has really looked to us to help them automate and digitize the processes of their businesses. And I think that this has just been a great reminder for our existing partners, how important the opportunity is to help their businesses. And I hope it's been a wake up call for other partners that there is something they can do to help their businesses migrate and be more digital. We have seen and continue to see since the IPO increased interest from partners about opportunities to do stuff together. So it's hard to kind of understand where all that comes together, but we believe that the market is clear for folks. And I think this has been a reminder for everybody that it's just a little bit kind of data to be using checks and filing cabinets and paper to kind of manage your back office. That's helpful. And then John, maybe just one on the guidance, still very healthy growth. Is it fair to assume that if not for the small percentage of the base that accepted the wave payments and the new trials that the sub rep or that the core rep growth would have been even higher for the June quarter? Good question, Samad. I think it's reasonable. Let me just back on and say, we factored into our guidance up to sort of the day trends on churn as well as new customer acquisition and some assumptions about how the promotion offer that we have for new customers may convert to paying customers. So those things are a bit of a headwind in the quarter. We're assuming that. And so absent those, yes, we probably would have had a higher guide. But we're taking all things into consideration. And we think we've taken a pretty balanced view of all the factors that we're able to look at. Great. And I apologize for asking a third one, but just any idea what your vertical exposure looks like? Thanks for letting me squeeze that one in. Yes. So we have looked at our vertical exposure. It is self reported across our customer base. So it's hard to be 100% accurate about it. And what we can say and what we will share is that at 91,000 plus customers, we have we kind of represent the U. S. Economy. We kind of just look like you would expect if you just went to census data. And what that means is there's not a lot of vertical risk in any one vertical. And we feel good about that and we think that's kind of helping our churn numbers. And that's the thing that we don't know is how businesses are going to do 2 months from now or 3 months from now. Great. Really helpful guys and congrats on the strong quarter. Thanks. Thanks, Ahmad. Your next question comes from Scott Berg from Needham. Your line is open. Hi, Renee and John, congrats on a good quarter. And John, thanks for the additional disclosures, quite helpful. I guess two questions for me. We'll start off with number 1, Renee. The announced Wells partnership today, Obviously, they're a large institution with a large customer base. But as you look at the structure of that contract, does it differ at all from what you have with either other financial institutions, maybe BofA or JPMorgan Chase? One of the things I'm really happy, proud, excited, you picked the particular adverb there is that all of the largest banks, the top 3 large banks in the country have chosen bill.com to support their bigger customers, their mid market customers. So the deal with JPMorgan Chase with Bank of America and Wells Fargo is supporting their really their mid sized businesses. And structurally, there can be differences between them. We don't disclose those types of differences. But from a financial perspective, it wouldn't be material. So it's a good partnership and we're excited about having all three of them. Got it. Helpful. And then from a follow-up question with regards to the kind of the free trial that you've been giving away in the month of April and it sounds like it continues today. Those 1,000 plus leads that you've been able to kind of gain from that or signings, how does that compare to a typical kind of 1st month in the quarter, whether it's compared against April or January from another quarter? Just trying to get a sense on that increase in kind of leads or customer base if it's material from what you typically see? Let me just give a little more color on that offering just to make sure it's clear. So that offering is for businesses that are impacted by COVID-nineteen, significant financial impact. It is self reported, self kind of select in. But what that the reason I'm giving that clarity is most businesses aren't they're coming, they're saying, hey, I need something to manage my back office. So we have kind of 2 sign up flows, if we will. We have the sign up flow from our what we were doing before COVID and then we had this offer. And so I just want to be clear that that offer is more of an additive offer than what we're seeing across our normal flows. Does that help clarify? It does. Thanks Renee. Congrats again on the good quarter. Thank you. Your next question comes from Bhavan Suri from William Blair. Your line is open. Hey, guys. Nice job and thanks for taking my question. I've got a question on Bob Napoli, we will follow-up with 1. And my question is probably a little more forward looking here. But if we were to compare this to 2,008, 2,009, and you saw tremendous small business formation coming out 2,008, 2,009, but it took a while for them to ramp. And you think about maybe Q4, maybe Q1 next year, you think about the same sort of small business formation, that'll obviously newer companies, more tech savvy, they're not going to do file cabinets, as you said. There's also an under penetration in the market. How do you think the business looks or do you see the growth return to normal very quickly? Do you think it's time around new business formation that gets you there? Do you think there's enough sort of at the top of the funnel and the top of the funnel is big enough that we actually get there faster than say once things stabilize in 12 months. I'm just trying to understand what that recovery path might look like for you guys given the focus on the SMB market. Yes. The market is just a really big market, right? This is the 6,000,000 businesses. And what we saw in March and in April, this is the reason I gave the comment that it was March was the strongest month in the quarter that we just reported on and April is the strongest month that we had. So we there is plenty there are plenty of businesses out of the $6,000,000 that are saying, I've got to change. I've had this on my list. I've got to change. And so there is that opportunity for us to go make sure that they're aware of us that we can actually bring those customers in. And then there's the opportunity like you said of new businesses. So it's hard for me to predict on what's going to happen with new businesses and the rate that that's going to happen. It is something that does happen in every recession is that people start up and there are more businesses that come out of it after you get through that churn part and that's the stuff that is unknown right now and what's the duration of that cycle. Got it. I'll give it over to Bob. Thank you. Your next question comes from David Hynes from Canaccord Genuity. Your line is open. Hey, thanks guys. Congrats on the quarter, Renee and John. So Renee, maybe you could just kind of double click on the accounting channel and what gives that channel more resiliency and why you've seen kind of increased traction there in this environment? Is it just that they tend to serve a little bit of a larger customer or help me understand what's happening there? The strategy from day 1 was to support businesses wherever they wanted to turn for help. And by help, I meant just, hey, I don't know how to manage my financial operations. I want to be more efficient. I want to do it better. And we've worked for 12 years to build a relationship with over 4,000 plus accountants across the U. S. And the benefit of that, having that track record and having that experience is those 4,000 accounts all do some business with us today. We know that all 4,000, one have more clients that they can add that aren't necessarily on our platform today, but are doing something else with that accounting firm. And 2, those 4,000 accountants have a network of their own accounting friends that they do business with and talk with. And so what we have seen is that with COVID-nineteen, there is a significant need that becomes very acute when somebody is saying, how am I going to run my business if I can't go to the office, I can't get my employees to go to the office to pick up the mail, to do this, to do that. How am I going to run my business if I don't have a digital solution? And so accounts that already knew, hey, I've already got this other client that's running their business. And this was the example with BookMinder's, they were already a customer, but they were able to use this as a I wouldn't say, I mean, it has become a catalyst for their business, but use this to help their clients that are saying, I'm lost, I'm stuck, how am I going to run this business in a week from now if I don't know how to do it remotely. And so that's the reason that channel has been very powerful for us and it's something that we believe will continue just as the market unfolds is that accountants, they have awareness, they have reach and we have tools for them to make their life easier. So that's why it all comes together and why we were able to see some additional traction this past few weeks here. Yes. That's helpful. And then maybe a follow-up for John, just in terms of thinking about gross margins into fiscal Q4. I mean, is it as simple as we should take the kind of the sequential delta in float revenue that you guided for and kind of pull that out on a near 100% margin basis to gross profit? Is that kind of the right way to think about it? Directionally, I think that's the right way to look at it. Our float revenue isn't quite 100% margin. We do have some costs such as asset management fees and things of that nature. But there are no other sort of disruptions or obstacles or issues that we're seeing within cost of sales that would translate into sort of immediate margin pressure. It is mainly that float line item. Yes. Okay. Very good. Thanks guys. Thank you. Your next question comes from Bob Napoli from William Blair. Your line is open. Thank you. Good afternoon, Renee and John. A question on the platform, the R and D, the investment and your move up market, if you would, and building out of maybe invoices or other items that can build that the revenue per customer. Maybe as you move up market, I'm not sure if it would apply to the smallest customers or not, but I'd love a little color on the AP, AR and invoices, other items that you might be adding over time? Yes. The R and D around mid market, just to be clear and give a little more history on it is, we've been pulled into mid market, right? So we have a product and a platform that's been serving businesses for a long time. And we looked out and looked at some data and saw that we had many midsized companies that were using the application. Our partners have pulled us there because they had a need. And those are the examples I gave of JPMorgan, BofA and now Wells Fargo. So we've seen that need. And so the features that we've been adding, I would say are really rounding out the capabilities that we have. I think one of the things we've talked about in the past on the platform is the transition that we've had for a new user experience that allows us to more quickly respond to demand that we want to do, functionality that we want to add. And that has been part of the R and D over the past year and that's almost complete. And then I think we talked about payment innovation, right? We've been investing a fair bit on our payment rails, whether that was virtual card, international or the payment timing with same day ACH and now the real time payments platform from the clearinghouse. So lots of ways for us to innovate and we will continue to do that. But I think we're going to always look to what our customers are doing and seeing what they want and then understand how we can effectively improve their lives and do that as quickly as possible. Thanks. A follow-up question and we get this question a lot and the virtual card penetration rate and as we check around the industry, there's very wide differences in penetration rates by other B2B payments companies that may be in the mid market. I just wondered if you could give any color because it seems to us like it's early days and you have a lot of room in that revenue per transaction. But any color on the virtual card penetration rate, what you think it could become and maybe the pushback that you have in driving that further? Yes. I mean, I think the where we are focused is on creating a solution and a platform that works well for our customers and works well for who they pay or who they get paid by. And so in this case, it's the suppliers that are getting paid. And so our focus, like I said on the call, on the prepared remarks is really focused on matching our suppliers with a known network. We believe given the size of our customers that we think it's somewhere in the neighborhood of 5% to 10% penetration over time. But we're like you said, we're early days And we're very focused on making sure that the experience that we provide for our customers and for the supplier is actually a win win. And so we don't have a need to do anything crazy here. We're doing it right so that everybody wins. Great. Thank you. Nice job. Great to see and glad to see you guys are all doing well. Thank you very much, Bob. Thanks. Your next question comes from Tim Willi from Wells Fargo. Your line is open. Hey, thanks and good afternoon, John and Renee. Two questions. First one, just regarding the new contract with Wells. John, is there any way that we should think about in terms of, I guess, costs associated with getting ready for that launch or whether it be support or just the standard stuff to stand up a large relationship? I guess typically we see some expense in front of the revenue. I'm just curious as we think about our models over the next couple of quarters, if there's that's something we should just keep in mind? Yes. Good question, Tim. There is an element of integration that happens in advance of launching with a large financial institution such as Wells. We've got lots of experience with this given our other partnerships with AmEx and BofA and JPMorgan. So we've developed a pretty streamlined process and I wouldn't view the cost from now to launch as a material incremental expense that would change the trajectory of our numbers. We've got it backed into our Q4 guidance and ultimately we will provide some additional color on the relationship in the future likely on our next call as we get closer to the launch timing. Great. And then my follow-up was just going back to your comments in your prepared remarks, I believe around the real time payment testing and the same day ACH, I think you referenced as well. Curious, if you think about the transaction revenue side of core revenue and those two products, do they open up, in your opinion, the funnel in terms of transaction count and customers, as I believe they'd probably be viewed as lower cost ways of making payments. And so we may see some play around the revenue per transaction, but there would probably be more than an offset around customer acquisition or just transaction growth per customer as those products sort of find their way into the mainstream? Yes. The reason we included that in the prepared remarks was just to give you color about the capabilities of the payment platform that we've built in our building. And we do think and with same day ACH that we will change our pricing model to increase the revenue per transaction. It will probably be cheaper than what the other options in the market are, but it will be different than what we price today. And we do think that with real time payments, there will be a different monetization than what we've done before. So I think there were 2 questions I heard, Tim, kind of one really around, is this going to get you more transactions and then what's kind of the revenue per transaction, is that going to be different? So I just answered the revenue. I think we'll find a way to monetize and just like we have with card and international payments, we'll work on making sure that it's good for our customers and we'll work on making sure that it's good for us as a business. On the number of transactions like we have seen with other payment types that we've introduced, particularly international, it does allow us to bring in more transaction volume, different TPV potentially. And so we don't know. This is early days. We in the call, we're just trying to give you a sense of the R and D. It's very early days. I would say it's too early to kind of predict what the business model impact will be, but we think it's going to be an important part of how businesses migrate their payments from paper to digital to have every vehicle available for them to be able to do that. Understood. Thanks very much for the insight. Thank you. This concludes today's conference call. I'll now turn the call over to Renee for final remarks. Thanks again everyone for joining the call today. We believe in our mission and despite the uncertain macroeconomic backdrop, we are committed to building a sustainable durable business for the long term opportunity ahead of us.