All right, we'll get kicked off here. Apologies for being a little late, got stuck in traffic on the way into the room. For good reason, here to see a very exciting company, bill.com. We have both CEO, René Lacerte, and CFO, John Rettig. Thank you both for joining us. Before we get started, brief research disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. Maybe to get started, a question for you, René. It's really around sort of the foundation of BILL.
I think it's an important time to sort of come back to the foundation of BILL and what you guys were looking to build with this company and this distribution strategy. You can start with sort of that big picture of what's the kind of central value proposition that you're trying to solve here, and why this distribution strategy to get at it, and why do you think this is going to be a durable moat for the company going forward?
Cool. Great. Well, thank you, Keith, for having us. Yeah, when I started thinking about the problems out there, I realized that SMBs were painfully unaware of the inefficiencies in the operations that they use to run the business. That was, you know, 16, 18 years ago, I started thinking about that. As I started getting enamored with the capabilities that software would be able to deliver and actually automate the financial operations, which is what we've done, I also realized that in order for us to extend into SMBs broadly, we would need to actually go partner with people and companies that, you know, the small SMBs trusted.
Okay.
That's the focus on the distribution ecosystem was we were gonna go direct, and we were gonna go to, you know, accountants, we were gonna go to financial institutions, we were gonna go to, you know, other partners that actually could help essentially be apostles to kind of help businesses understand that, hey, they were doing something terribly inefficient, and we actually made it better. That became kind of the cornerstone, and it became a cornerstone of our platform strategy, which was we're gonna be accounting software agnostic. We're gonna make sure that we have as many payment choices as possible. We're gonna make sure that we drive process automation through every part of the financial operations that a business has, and we're gonna focus on the operational processes more than anything else. That all comes together into the ecosystem.
You know, part of the ecosystem that we've built and part of why I think it is a durable competitive advantage is we've designed all this from day one to actually think about accountants, as an example. We give accountants tools to help them manage many clients across all different types of platforms that they might interact with. The accounting software, for example, does not matter to the accountant if they're on BILL. At the same time, for our financial institutions, we made a platform that was able to be white labeled into that particular distribution strategy. All of the distribution strategies lead to our network, and that's the 4.7 million entities that use us to pay and get paid. All of this was by design in building a platform from day one.
You know, first I got enamored with the problem, then I got enamored with the distribution system, and they worked very well together.
Got it. I feel like the story has progressed significantly over the past two years. There's been multiple acquisitions, new distribution partners, new product launches. With all those changes in place, can you talk to us about sort of the focus on a go-forward basis? What's your top one, two, three priorities on a go-forward basis, with the perspective of all the changes taking place over the past 2 - 3 years?
Yeah. The, the first thing I would say is, you know, we've defined and created this category of financial operation automation, and we've been focused on that for, you know, since the beginning of the company. One of the ways we've done that is we continue to redefine our category. If you think about what BILL was prior to the acquisitions, we now have spend management. We said that was something that needed to be part of our category and something that we needed to include and provide for our customers and our partners.
When we get to the top priorities right now, it is a significant priority and important priority for us to make sure that the user's experience, the customer when they come, that they have a unified experience, that they have a chance to see both the, you know, kind of the core BILL platform and the spend management capabilities that we now have and the AR capabilities that we have across our network. These are all things that we think of as being job one, is kind of creating that unified experience. It's not something that we expect overnight. It's something that we're gonna continue to make progress on and continue to redefine as we do that.
The second would be then bringing that, you know, that overall platform strategy of continuing to add to the capabilities and bringing that to our ecosystem and our partners. You've seen us continue to say, "Hey," with our partners, "how do we do more with you?" It's not just the check and ACH. Can we do card payments? Can we do, you know, International? These are things that we will continue to leverage. The third is gonna be to continue to add innovative payment products. The example that we talked about last time, which is in the early stages of, you know, what we would call a pilot, is our invoice acceleration working capital capabilities.
We're early in understanding, you know, how to make that important for our business, but we know the data we have is unique. Those would be the top three priorities. It's always gonna be around doing that. Ultimately, it comes back to our long-term vision, right?
Okay.
Our long-term vision is, you know, I guess the way we think about it is that accounting software and the systems behind that's not the center of the universe for the way SMBs operate. The center of the universe is financial operations. How do you do things day in and day out? What are the inefficiencies you have, and how do you automate those processes? We believe having the capabilities to automate processes, to have insight around those processes is what is going to be critical for SMBs going forward. You know, we're just kind of in the early stages of adoption, if you will, like 180,000 core BILL customers, 400,000 across the platform, against the market of, you know, tens of millions, right? Lots of opportunity in front of us.
Got it. In terms of priorities, it's unifying the solution set into one sort of platform for your customers to getting the partners to pick up a broader set of that platform. Three, it's further innovation.
Yeah.
... to innovate that platform on a go-forward basis. Just to dig in on one point that you made, 'cause I think it's a debate within software. In software, oftentimes we talk about data gravity and data being sort of a core foundation. I think a lot of investors think that means it's gotta be the accounting software. The accounting software is where your sort of core chart of accounts, this is where sort of your financial data resides. You're making the arguments more about the process. It's more about the workflow that the SMBs are really worried about.
Yeah. I think I was at a conference in San Francisco, you know, I don't know, probably eight years ago with accountants. The accountants kept saying in that conference, you know, "Pick BILL first, then pick the accounting software." Right? That's the thing I keep coming back, is that the processes we've automated or how we enable our firms to be able to do this across all the different needs that they have. They have small clients, they have large clients, they have mid-sized clients.
Yeah.
Our abilities and our, you know, counsel, if you will, that we give to the accountants to be able to manage all their clients and all the things they're doing, but their core process automation for financial operations, it starts with BILL.
Got it. 'Cause there's gonna be more potential to differentiate and improve your processes than there is to differentiate on your core accounting system.
Yeah. I just spend a lot of time thinking about inefficient things in life, and there's just so much inefficiency in operational processes because they haven't been touched with technology yet. That's where we've gone, and that's where we're gonna keep to go.
Got it. Got it. This is a fascinating conversation, René, unfortunately, I don't think these investors are gonna let us go much further without talking about take rate. John, gonna bring you into the conversation and talk about last quarter. In the December quarter, you talked about where you saw a lower take rate expansion than we've seen historically. Understanding it's not gonna be linear on a quarter-by-quarter basis, can you talk to us about sort of the evolution of what you've seen in spending patterns and what you guys have seen in take rate? Does that change the way you're thinking about the trajectory on a go-forward basis, particularly when it comes to take rates?
It's a good point. As René mentioned, we are embedded inside of SMBs. They run their financial operations on our platform. When we talk about spend and payment volume trends, we're talking about really the health of the SMBs overall, not just a piece of what they do or what they're recording in the accounting system. In the December quarter, we saw about a 13% year-over-year growth in overall TPV, and it was about 3% sequentially. Seasonally, those are lower than we've typically seen, even pre-pandemic, and it reflects the impact of the macro environment and what it's having on SMBs. They're adjusting to the environment that they're operating in.
We saw the most acute changes in what you would normally think of as more variable spend categories, things like contractors, IT outsourcing, tech purchases, both hardware and software. Advertising is one we've talked about for a couple of quarters now, and they're pulling back, you know, in those areas. We've kind of taken those trends into consideration, the continued uncertainty in the macro environment. We've provided some estimates for the current quarter in TPV that suggested seasonal patterns that we normally see will continue, which is on a quarter-to-quarter basis in the March quarter, TPV per customer is down about 7%. That's what we normally see even in a strong macro environment. We've added in an additional layer of uncertainty where we think businesses will continue to adjust their spend.
In terms of the actual monetization associated with TPV, we saw a little bit lower expansion in the December quarter, really driven by a small headwind associated with FX and International Payments and slightly higher ACH payments versus check payments, which at the end of the day is actually a good thing for us. As we're driving more electronic payment adoption, it means that the suppliers are creating accounts with BILL. We have an electronic relationship with them. We can engage, we can market, we can upsell. We think the opportunity to continue to expand take rate is really years ahead. We're driving adoption of new products. That has actually continued mostly unabated, even though there's a little bit of uncertainty with the macro environment. We're seeing really good engagement and adoption trends, even though slightly lower expansion in terms of monetization.
These things that we're doing to give customers choice, suppliers choice, drive engagement and adoption, we think that's when, you know, dollars per transaction, revenue per transaction will follow over time.
Got it. I mean, do you think it's fair to say that the macro environment had a larger impact on the customer's decision to adopt ad valorem products than what you had been expecting?
I think it's something we're watching for. We think there could be an impact over the next few quarters given this macro environment, but we haven't seen any direct impact associated with macro on ad valorem payments at the moment.
Got it. Got it. Then just, to remind me and the audience, the take rate isn't something that you're managing too directly, right? Like in following the company for a while, it seems like, primarily you're looking to get more payments into an electronic payment and a recurring payment type process, and then the take rate will come after. Is that still the right way to think about it?
That's exactly right. We try to drive electronic payments first. We try to give suppliers and buyers choice so that they can elect the right payment method so as to ensure that's gonna be a repeat transaction on the platform, like recurring payment streams. That's why we handle the vast majority of our customers' spend volume happens on our platform. 80% of transactions are actually repeat transactions between buyers and suppliers. We try to minimize friction, essentially, and drive electronic payments. With electronic payments, monetization comes over time.
Got it. In talking about sort of that over time, over the longer term, you guys have talked about adoption targets of about 5%-10% for virtual cards, 10%-20% for cross-border. What do you need to get there? Is it supplier education is key, or are there other levers that you could start pulling that you haven't necessarily pulled in the past?
Yeah, I mean, we're extremely confident in our ability to be able to get to those targets, and it's because we know that the value we provide suppliers and buyers is actually real. The number of things that we need to do really center around kind of two categories. One is, I would say, awareness, driving awareness that the products are available, whether it's the buyer or the supplier, and then engagement, which, you know, both of those kind of lead to lots of different programs and activities. You know, when we think about awareness, it's a lot of it, the early days were just matching suppliers that were kind of known suppliers. Now we have to drive a little bit more awareness about unknown suppliers and just really kind of helping them understand the benefits, if you will.
You know, identifying and being able to kind of drive the iterative process in the product to create value in that experience, that's part of the engagement side. We're always doing both, and when we look at, you know, what do we need to do to get to the targets that we've set, it's just to keep iterating on those different things. You know, the first thing is offering more choice, we think actually drives more awareness and more engagement. You've heard us and seen us launch multiple different payment products to drive choice. Sometimes maybe that might be counter to some of the targets we're talking about, but overall, it increases the TPV take rate.
You know, the next thing I would say is that this iterative product development cycle really is about understanding what are the benefits that customers and you know, buyers need right now, and iterating that into the product cycle and the product roadmap. That's all happening, and the third example would be, like we talked about, you know, recently with the working capital invoice acceleration, again, creating more opportunity for us to have choice for our suppliers about how they wanna get paid, when they wanna get paid.
Got it. Got it. Makes a ton of sense. John, the other part of Q2 that investors have been sort of poking at, if you will, is the net new customer adds, came in a little bit lighter than what had been previously signaled. Do you see this as an indication small businesses are pushing out these digital transformations? Was there any potential it could be more of a competitive impact? Intuit's been talking to us a lot more about their payment products. Like, how do you see that net customer add impacts in the quarter?
Yeah. It, it feels like it's more macro induced than any sort of competitive dynamic that's existing in the short term. We saw huge expansion in demand, a big wake-up call from the pandemic over the last couple of years. Our net new adds have been really strong. They almost doubled. In the December quarter, what we saw is healthy demand environment, but a lower conversion environment to where small businesses are taking a little bit longer to decide whether now is the right time for that digital adoption journey. It's not so much a purchase decision based on cost. We're a very low-cost solution, high ROI, instant payback.
What we have seen is that there's a lot of distractions for SMBs right now, and we're seeing that beginning in the December quarter, and we expect over the next couple of quarters to have an impact on the overall rate of new customer adds. We think that ultimately is a short-term temporary transition. We'll adapt to the current environment and do what we can to help now be the right time for small businesses to start that digital journey.
Got it. It sounds like top of funnel is still very healthy, getting sort of customers engaged with the overall story. Conversion is taking a little bit longer than historical, but you don't think it's competitive. You think those conversions over time will come back and will happen.
That's exactly right.
Okay. You can take the salesperson's view of it as just bigger pipeline for on a go-forward basis. Got it. René, I wanna switch gears and talk a little bit about distribution, and particularly on the FI side of the equation. And talk about the potential opportunity in some of the partners like Bank of America, right? Where you're addressing only the net new customers that are coming in the door. What needs to be done? How does that relationship evolve, that you could start to address the broader sort of existing base of customer that those financial institutions have on board?
Yeah. In every partnership that I've ever done, the first thing you have to do is deliver value for the partnership, right? You have to deliver value. Customers have to be satisfied and happy and engaged, and as you do that, you have opportunities to do more.
Okay.
I think to your point is that, you know, in general, you think about how businesses are managing their payments at banks, it's ripe for disruption. This technology that they're on is decades old, and it's ripe for something that's different. You know, the old technology didn't work for me, which is why I started the company I did 16 years ago, right? I think the first thing we have to do is deliver value, which we're doing, and then obviously, continue to expand the platform to create more value and hear what their needs and capabilities are, and then you match that together. We believe the opportunity and what we hear from our partners is that there's significant interest in this, you know, ripe for disruption to kind of move more on.
It's also one of these things where they want more, they wanna focus on their new customers first as a way to kind of make sure that it's working as to the level that they want it to work.
Got it. They garner the proof points with the new customer.
Yes.
Give you entree to the rest of the portfolio once the product market fits there.
Yeah, we've seen that with a number of different partners that we've already had, so.
Got it. How should investors think about the white space for additional partnerships? You already count some of the largest accounting firms out there. You've done really good on the FI channel as well. Where's the incremental white space? Where does the partnership activity go on a go-forward basis?
Well, I mean, the first thing you've heard us talk about is continue to extend the capabilities that we have with our existing partners. That's the first area of white space, is just keep adding more payment products, keep adding more services into the partnerships that we have today. There's a lot of interest across our partners to do that. You know, the next area, I would say, if you see what we've done with very high bar for what we think a partnership needs to be successful, and so that's something that we wanna see is that, you know, the partners are gonna be committed and focused on driving the success and not just, you know, checking a box.
Got it. Got it. If we think about the equation for sort of expanding kind of partner activity, is it more so getting existing partners to do more with the portfolio, or is it more of, like, just still bringing new partners on board?
Well, you know, we have six of the top 10 banks, we've announced others. As the others come on, we do set a high bar for what it is that we're expecting. At this point, given the number of different the breadth of the platform and the payment products we offer, we've asked our partners to engage with more than just the check and the ACH payment. We want them to do more with us.
Got it.
We think our existing partners, you know, we know they want to do more. Now it's just kind of matching the roadmap and getting more on there, right? The opportunity for us is to continue to enhance and show everybody the value that we're able to bring to their customers, and that will extend into other, you know, platforms that maybe aren't on in financial operations yet the way we are.
Got it. Got it. One partnership that I definitely want to drill in on, I probably get more investor questions about this than anything else. I think part of it comes from the fact that there's not very many analysts on my side of the equation that cover both Intuit and BILL. They're on different sides of the equation. A lot of questions about sort of the health of that partnership on a go-forward basis. You guys have a close relationship with Intuit, and they partner with you for the high-end SMBs within their customer base. How do you view the partnership on a go-forward basis, especially as they look to roll out more and more kind of B2B payment functionality?
I mean, I'd say the first thing, it has been a long-standing partnership. We were one of the first on their App Store. If you look at the, you know, the App Store itself, we're one of the most popular apps out there. Because of our approach, you know, we've been able to drive lots of customers that use Intuit products onto the platform outside of the partnership, right? The vast majority, obviously, of our customers come from that type of engagement. The reason the partnership is there is because there's a lot of appreciation for each other, for the complementary nature of what it is that we do, right? You know, our focus and our ability to kind of automate financial operations that are complex, that's, I think, unique.
We have defined and kind of made a difference in how businesses do that. I think the area that we see, others, you know, starting to focus on is more, you know, like a very small subset of what we do, which is not, you know, some of the bill payment capability. Not all of the workflow process automation, not all of the payment capabilities that we have. It's a very focused approach that we think won't necessarily win. Like, I was responsible for bill payment, you know, actually at Intuit.
You know, left the company, started another company, and as I continued to kind of focus on trying to do things electronically, I found that that narrow, focused approach didn't work, which is why BILL came out of, you know, this brain, was to kind of solve the broad problem that was out there. Ultimately, you know, the capabilities and the competencies we have do provide, I think, a very distinct advantage for us. The scale that we have, the amount of money we move and the amount of money that we facilitate and enable across our customers, it's every dollar that goes through our platform is because we're facilitating enabling. When we talk about TPV at the highest level, we're actively engaged in all of the transactions and the processes to facilitate those funds flow.
That's unique, and that has created, I think, an opportunity for learning that allows us to continue to differentiate and be valuable. You know, we think there's opportunities to do more together, but we also know that our focus is gonna be to continue to drive excellence for our customers. The financial operations has so much more to it than just executing a payment transaction. That we know that because we've obviously built it.
Got it. Got it. That's a great answer. I have a margin question I'm gonna ask for John, and then I'm gonna open up for questions from the audience. There'll be some mic runners running around, if you have any questions, get them prepped now. John, a lot of companies over the past year and a lot of companies here at this conference are talking about more of a balance between growth and profitability. Two questions for you in that. Like, one, how are you guys looking to sort of balance that in the near term? Any changes in sort of your near-term philosophy on growth versus profitability? On a long-term basis, I think you guys have spoken about long-term margin in the 20% range.
Is that still the appropriate target, or do we need to sort of adjust those, given sort of the M&A that's taken place over the past couple of years?
Let me start with the second part, the 20%. I would view that as a floor. Like that's a starting point. We don't see structural reasons why this business can't operate at above 30% margins long term. To the first part of your question, it's a progression, and I think we are fundamentally in the business of balancing investments to deliver both growth and profitability. We start with a unit economic view of the world, both customer acquisition and retention, as well as transaction economics and balancing our portfolio of payments. That leads to being able to manage gross margin expansion, which we've done exceptionally well.
Mm-hmm.
Over time, it's about growing the business in order to achieve higher levels of profitability. We operated with low losses for the first couple of years as a public company. We've transitioned to non-GAAP profitability and generating positive free cash flow. The next phase for us over time is obviously GAAP profitability, but it's all with an eye towards capturing a big market opportunity, but doing it in a way that produces an annuity effect for us and allows us to expand profitability, including at a time when interest rates start declining and we have less of a tailwind from the float interest and margin that we're achieving today. These are all things that we're balancing on an ongoing basis.
Got it. Any questions from the audience? All right, that one was outstanded by 'cause I do get a lot of questions on you guys. René, a question for you in terms of M&A, and in sort of what investors should be expecting on a go-forward basis. It's been a big part of the strategy in sort of building out those big capabilities around spend management and AR. Is there still capacity or appetite maybe for future M&A? If so, how should we think about sort of size, scale, and what you guys would be looking at?
Yeah. We're always looking to, you know, into the future to see what makes sense for how we continue to redefine the category and extend the platform. That doesn't stop in this environment. We went public to have the capital and the currency to be able to make acquisitions happen. Ultimately, what's the motivating factor is, again, how does that extend the platform? How does it give us something that we didn't have before? There's plenty of, you know, appetite for us to do the transactions that will actually drive growth, you know, for the future of the business and really kind of extend the capabilities to be able to reach, you know, SMBs everywhere. 'Cause ultimately, when you are close to the inefficiency that businesses have, you don't want them to have that.
You're, you know, all of us at BILL are very focused on making those inefficiencies go away, and we wanna reach as many customers as possible to do that.
Got it. A lot of investors think about M&A kind of capacity and the idea that you take on sort of big acquisitions and you have to digest them for a while, and there's a digestion period. Does that resonate with you? Is there a digestion period that we're thinking about with sort of acquisitions like Divvy that would sort of limit the capacity for future acquisitions? Or are we further along with those?
I mean, I think the concept is a sound framework and concept. The question is, you know, how fast do you digest food? Like, I mean, everybody's different, right? From our perspective, you know, I feel really good about what we've been able to do by, you know, bringing the teams together, having unified roadmap across the company, understanding and actually making the culture work across, you know, all the different entities that we've acquired. Like, that's all hard work, and I feel really good about where we're at. I think for me, like, I wouldn't ever limit myself based on, you know, the capabilities of the past 'cause we've learned so much, right? We feel good about our ability to do more.
Got it. That makes sense. I think I have time to sneak one last one in here. I guess I'll ask a question about sort of the ability to go up market. You definitely describe the company as very SMB-focused and that's been your core. We're often surprised when we talk to channel partners about sort of the scale of companies that they think they can take BILL into. It's not unusual to hear about over $500 million in revenue companies using BILL. What's the opportunity from your perspective with these larger customers? Is there any technical or go-to-market roadblock that would keep you from addressing sort of a larger customer on a go-forward basis?
I mean, I think the first thing I would just comment on is it shows you how inept financial operations automation has been in the past.
Right.
That large companies that have, you know, half a billion in revenue, that have resources to go actually solve some of these pain points and pay other people are like, "No, no. What BILL has is better.
Yeah.
I knew that when I started the company, and the focus has always been a broad horizontal approach so that we could get the most people, the most businesses on the platform serving them. We didn't take a segment approach. We didn't take a size approach. We kind of said, "No, we're gonna have a horizontal approach." That has worked well for us. What that means is, when you do your channel checks, that we do get pull up market.
Yeah.
As we get pull up market, as we hear what is working for customers, and they might say, "Hey, we want this type of sync with NetSuite or this type of sync with Intacct." Then we create a PO sync or whatever because that's what they've asked for, and we have enough knowledge to know that that's worth doing for them. The broad horizontal strategy, I think, is kind of the power of what you're saying. It also shows that this problem of financial operations and the lack of automation is real, and it's systemic, and we're there to fix it.
Outstanding. Unfortunately, that takes us to the end of our allotted time slot. Gentlemen, thank you so much for joining us.
Thank you.
Great conversation.
Thank you.