BILL - NYSE

Hello, everybody, and welcome to the Bill.com First Quarter Full Year 2023 Earnings Conference Call. My name is Sam, and I will be coordinating your call today. [Operator Instructions]. I will now hand you over to your host, Karen Sansot, Vice President of Investor Relations, to begin. Karen, please go ahead.

Thank you, operator. Welcome to Bill's Fiscal First Quarter 2023 Earnings Conference Call. We issued our earnings press release a short time ago and furnished the related Form 8-K to the SEC. The press release can be found on the Investor Relations section of our website at investor.bill.com. With me on the call today is Rene Lacerte, Chairman, CEO and Founder of Bill, and John Rettig, Executive Vice President and CFO. 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 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 SEC including our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. 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 nonrevenue financial figures discussed today are non-GAAP and 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. At times during this call, we will discuss Bill's stand-alone results, which exclude our Divvy spend management and Invoice2go accounts receivable solutions. Now I'll turn the call over to Rene. Rene?

Thank you, Karen. Good afternoon, everyone. Thank you for joining us today. Bill delivered strong financial results in Q1 with revenue growth of more than 90% year-over-year in our first quarter of non-GAAP profitability. From the beginning, we have created a durable business model and have been steadily building towards profitability while investing in more ways to create value for small and midsized businesses. Q1 was another quarter where disciplined execution led to us achieving several significant performance milestones. We acquired a record number of net new customers, achieved our highest ever non-GAAP gross margin and expanded transaction monetization on the Bill stand-alone platform. We delivered these results in an increasingly dynamic macro environment. In today's climate, businesses are looking for ways to do more with less. While these trends may lead to moderated payment volume growth near term, our platform has never been more relevant. As we've heard from many satisfied customers by digitizing their back offices, Bill increases visibility into cash flow and delivers operational efficiencies, giving businesses back time which they can use to focus on their most pressing priorities. In an inflationary world choosing our platform acts as a deflationary force. We are proud that our platform helps businesses operate more efficiently in both up and down economic cycles. Today, more than 400,000 businesses use our solutions to transform their back offices. We aspire to serve millions of businesses and are making investments to capture this large opportunity. There are 30 million small businesses in the U.S. and 70 million globally, and many of them still use manual paper-based processes to manage their financial back offices. With our platform ecosystem and scale, we believe we are uniquely positioned to be the essential initial operations solution for SMBs. A great example of how we help businesses succeed is Repurpose Inc., a plant-based compostable home goods company that uses both our Bill software and Divvy spend management solutions. Repurpose's tableware, trash bags and other home products are available at more than 17,000 retailers nationwide. Since their founding, Repurpose has kept more than 3.5 million pounds of waste out of landfills. Sarah Sanders, Senior Controller, said and I quote, "Bill and Divvy have saved the finance team 2 days out of every work read and take care of expense management for employees. Additionally, having so many of our vendors on the Bill network helps us reduce payment transit time and gain more control of our cash flow. Bill is helping to make us even greener and more efficient." Customers like Repurpose that are using both Bill and our Divvy solutions have been fantastic sources of inspiration as our product and engineering teams work together to deliver a unified platform experience, our #1 priority for fiscal 2023. We are making great progress on the project road map to this unified platform. And just a few weeks ago, we announced that we have become Bill, leaving the dot-com behind. Leveraging the strong design expertise for our combined teams, we are modernizing our brand identity. In addition to our organic efforts to enhance our platform, today, we announced that we signed a definitive agreement to acquire Finmark, a leading cloud-based financial planning tool for start-ups and SMBs. Finmark aggregates data from [indiscernible] systems such as payroll, sales and accounting to help businesses build budgets, forecast future earnings and gain real-time insights through easy-to-customized dashboards. When combined with our data, we will further empower businesses to better manage their cash flow and financial operations. We believe this new financial planning solution will be especially useful to accountants, enabling them to add another valuable offering to their strategic advisory practices. These capabilities will increase the value proposition of our platform for this important channel. Our second priority in fiscal 2023 is to further scale our go-to-market ecosystem by offering more of our platform solutions to our current partners as well as acquiring new relationships. In Q1, we expanded our relationships with our financial institution partners, driving platform adoption among their SMBs as well as driving overall ad valorem payment adoption in the FI channel. Recently, we entered into a new agreement with a bank partner to bring our spend and expense management solution to its customers. This deployment of net new functionality to an existing bank partner is an important milestone we are optimistic about the opportunity to extend our reach into the FI channel through spend management. Continuing on the theme of going deeper into existing bank relationships, for the first time, we are now issuing virtual cards on behalf of an existing FI partner. This partner adopted the Bill solution because of our supplier enablement momentum and processing expertise. Finally, we continue to expand our reach in the financial institution channel. We recently signed 2 new bank partners that we'll talk more about on future calls as implementation progresses. Accounting firms are another major component of our go-to-market ecosystem. Today, more than 6,000 firms leverage our platform to grow their practice and automate their bookkeeping operations. Through our partnership with CPA.com, we have already begun to see good interest in our Divvy solution and have enabled hundreds of our accounting firm partners to begin offering it to their clients. A great example of how accounts use our suite of solutions as BergenKDV, a top 100 accounting firm in the U.S. BergenKDV leverages Bill and Divvy for their growing business advisory practice. Chris Gallo, Solution Leader of BergenKDV's Financial Accounting Advisory Services team said and I quote, "The powerful combination of Bill and Divvy drives speed and efficiency. These are key tech stack tools, enabling the successful growth of our financial accounting and advisory services team practice. We now have a substantial number of clients using Bill and Divvy, and they've loved both." Our third priority is to drive ongoing payment adoption and innovation across all channels. Recently, we made it simpler for Canadian and U.K. suppliers to choose to receive payments in their preferred currency via our network, driving higher FX adoption and more engagement. In the near term, we plan to offer this option to suppliers in other countries that receive cross-border payments for us, further expanding our reach. As we enhance the capabilities of our multi-facet platform, we continue to strengthen our competitive moat. Our proprietary payment technology and the end-to-end payment visibility afforded us by our network gives our team the tools to be able to quickly and creatively solve SMB pain points. Our risk management expertise, money transmitter licenses and data assets enable us to drive efficiencies that smaller players can't replicate. We go to market with partners that SMBs trust to help them manage their businesses. Our culture acts as a magnet to attract world-class experts in software, payments and small businesses. On the people front, we recently added another seasoned executive with experience developing global multibillion-dollar businesses. In Q1, we welcomed Loren Padelford as our Chief Commercial Officer. Loren brings a wealth of sales and leadership experience, including 7 years at Shopify, where his team brought Shopify's products and services to more than 2 million merchants in over 175 countries, generating over $4 billion in annual revenue. We also recently welcomed Alison Wagonfeld, the Chief Marketing Officer of Google Cloud to our Board of Directors. Alison joined Google in 2016 as the first global marketing leader for Google Cloud, contributing to the division's rapid growth over the last 6 years. Prior to Google Cloud, Alison was an operating partner at Emergence Capital, where she worked with over 30 SaaS companies, helping with their strategy and go-to-market plans. Her experience scaling fast-growing businesses on a global level will be invaluable to Bill. In closing, we kicked off fiscal 2023 with excellent results. We are laser-focused on executing against our strategic priorities while also managing our business to deliver non-GAAP profitability in fiscal 2023 and investing for the long run. All of us at Bill are dedicated to helping SMB succeed. We are excited about the many opportunities ahead, and I would like to thank our employees, customers and partners for their trust they continue to place in us. I'll now turn the call over to John to talk in more detail about our quarter.

Thanks, Rene. Today, I'll provide an overview of our fiscal first quarter 2023 financial results and discuss our outlook for the fiscal second quarter and full fiscal year 2023. As a reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings press release for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. Please also note that when I refer to Bill's stand-alone results, they exclude our Divvy spend management and invoice to-go accounts receivable solutions. We delivered strong financial results in Q1 that significantly exceeded our expectations. Revenue increased more than 90% year-over-year, and we transitioned to non-GAAP profitability. Total revenue for Q1 was $230 million, reflecting 94% year-over-year growth. Core revenue, which includes subscription and transaction fees was $215 million, up 83% year-over-year. Float revenue was $15 million, an increase of nearly $10 million from last quarter as we began to transition customer funds to higher-yielding investments. Non-GAAP gross margin was 85.8% in Q1, well above our estimated range. Several factors had a positive impact on gross margin, including favorable payment mix with volume increases on ad valorem payments, payment optimization and significantly higher float revenue. Non-GAAP net income was $17 million, well above our earlier estimates as a result of strong revenue and gross margin performance, combined with our disciplined approach to investing for growth. We're pleased to have managed the transition to non-GAAP profitability out of the gate in fiscal 2023. During the quarter, we added a record number of net new customers to our Bill stand-alone platform totaling 14,200. Customer retention remained healthy and was consistent with last quarter. We continue to see strong engagement from customers on the Bill's stand-alone platform and direct and accounting channel customers transacted at a similar rate to Q4. Throughout Q1, we also made progress increasing our yield on ad valorem payments, which led to a very strong transaction revenue growth of 94% from Q1 of last year. Our average revenue per transaction grew 34% year-over-year to approximately $8. These results demonstrate the tools we have to deliver value to customers and expand monetization even in an environment where SMBs are increasingly reacting to macro influences by reducing their spending. During Q1, Bill stand-alone TPV per customer, excluding the FI channel, declined by 3% sequentially. In Q4, we saw mid-market businesses beginning to moderate their spending, and that trend is now visible with our micro and SMB customers as well. These trends are reflected in our outlook, which I will discuss later. Now turning to an update on our key metrics. We ended the fiscal first quarter with 419,800 businesses using our solutions. This includes 172,000 Bill stand-alone customers and 22,800 Divvy-spending businesses. Among our Bill stand-alone customers, 45,100 are from financial institution partners. Net new customer adds on our Bill stand-alone platform was strong across all of our go-to-market channels. In the direct and accounting channels, we had 5,100 net new customers, which was above our expected range of 4,000 to 5,000. In the FI channel, we had 9,100 net adds, driven by an increase in the number of small businesses signing up to use our white-label platform as well as the impact of a onetime migration of customers at an existing bank partner onto our white-label platform. As a reminder, customer net adds in our FI channel fluctuate quarter-to-quarter depending upon the timing of each institution's sales and marketing initiatives. Moving on to payment volume during the quarter, we processed $64.9 billion in total payment volume, representing 34% year-over-year growth. This includes Bill stand-alone total payment volume of $61.6 billion in Q1 and representing growth of 31% year-over-year and $3 billion in card payment volume from Divvy spending businesses, representing 103% growth year-over-year. TPV from Bill stand-alone customers, excluding our financial institution partners, was $55.7 billion. On a per customer basis, Bill stand-alone TPV, excluding customers from our financial institutions increased 8% year-over-year. Card payment volume per Divvy spending business increased 21% year-over-year. Moving on to transaction volumes. We processed 19.6 million payments in Q1, representing 45% year-over-year growth. This includes 10.8 million payments on the Bill stand-alone platform. Customer engagement with our solutions remains very strong. Excluding that FI channel, Bill stand-alone customers averaged 78 transactions in the quarter, similar to last quarter and a year ago. During the quarter, we also processed 8.5 million Divvy card transactions, reflecting 83% year-over-year growth. Now I'll review our reported Q1 results. Total revenue was $229.9 million, an increase of 94% from a year ago. Core revenue was $214.6 million, representing growth of 83% year-over-year. This includes $9.8 million of revenue from FI partners. Subscription revenue increased to $58.1 million, up 57% year-over-year, driven by our growing customer base and the inclusion of Invoice2go subscribers from the acquisition that closed on September 1, 2021. Bill stand-alone subscription revenue growth was 45% year-over-year. Transaction revenue increased to $156.5 million, up 94% year-over-year as a result of strong year-over-year TPV growth, increased ad valorem product monetization and increasing spend on Divvy. Bill stand-alone transaction revenue totaled $76.3 million, reflecting 75% year-over-year growth. And Divvy transaction revenue totaled $78 million in Q1, reflecting a 113% growth from Q1 of last year. Float revenue was $15.3 million, an increase of approximately $14.5 million from a year ago. Float revenue exceeded our expectations given the magnitude of the recent Fed funds rate increases and our proactive migration of customer funds into higher-yielding investments. Our yield was 192 basis points in the quarter, demonstrating that our scale, combined with our proprietary payment technology is proving to be an important differentiator that enables us to create tailwinds during this period of rising interest rates. Turning to our gross margin and our operating results for Q1. Non-GAAP gross margin was 85.8%, up 2 points year-over-year as a result of a higher mix of variable transaction fee revenue improving transaction economics and strong float revenue. As a reminder, we manage a portfolio of payment offerings with a range of margins that are in various stages of adoption, and we currently have a very favorable payment mix. For fiscal 2023, we have increased our expectation for non-GAAP gross margin to be in the range of 80% to 82%. Non-GAAP operating expenses were $188 million, an increase of $16 million from Q4. We continue to invest in R&D as we build our unified platform, introduce new products and enhance the customer experience. Sales and marketing expenses increased due to the expansion of our go-to-market initiatives and rewards expenses associated with our Divvy spend management solution. Non-GAAP operating income was $9.1 million, and our non-GAAP operating margin was 4%, an improvement of 12 percentage points from negative 7.8% last year. Non-GAAP other income, net of other expenses, was $7.7 million and benefited from higher yields on corporate cash balances. Our non-GAAP net income was $16.9 million for a non-GAAP net income per diluted share of $0.14 based on 117.2 million diluted weighted average shares outstanding. Our non-GAAP net income was significantly better than our expectations due to our revenue performance and our disciplined approach to managing growth. Moving on to the balance sheet. Cash, cash equivalents and short-term investments at the end of Q1 were $2.6 billion. We continue to be well capitalized, which we believe is an important advantage, enabling us to continue investing in market penetration during this economic cycle. Before shifting to our financial outlook for the second fiscal quarter and full fiscal year 2023, I'd like to cover how we see the macro environment impacting SMBs and our business. In the near term, the macro environment appears to be increasingly challenging for businesses. We anticipate the trends we've observed with businesses moderating their spend will continue throughout fiscal 2023. And we expect that this will translate into lower year-over-year payment volume growth in the quarters ahead. At the same time, in this environment, the value proposition of our platform is resonating more than ever with SMBs, and we have seen strong engagement from existing customers continued high retention and healthy new customer demand. Now more than ever, businesses need our solutions to navigate the uncertain environment, and we believe this is an opportune time for us to invest in our business. We believe we can accelerate the positive impact we're having for SMBs globally while monitoring the external environment and proactively balancing growth and non-GAAP profitability. Now turning to our outlook. A couple of notes upfront. First, our outlook does not assume a severe economic downturn. Second, we expect our acquisition of Finmark to close during the fiscal second quarter, and therefore, we have included the acquisition integration costs and incremental investments associated with continuing their product development in our guidance for Q2 and fiscal year 2023. Finmark is not expected to have a material impact on revenue results in fiscal 2023. For fiscal Q2, we expect our total revenue to be in the range of $241.5 million to $244.5 million, which reflects 54% to 56% year-over-year growth versus a very seasonally strong Q2 last year. We expect float revenue to be approximately $18 million in Q2, which assumes our yield on FBO funds will be approximately 225 basis points. On the bottom line, for Q2, we expect to report non-GAAP net income in the range of $14.5 million to $17 million and non-GAAP net income per diluted share in the range of $0.12 to $0.14, and based on a share count of 118.4 million diluted weighted average shares outstanding. For Q2, we expect other income for OIE to be $8.5 million, net of other expenses. We expect stock-based compensation expenses of approximately $130 million in Q2, which includes a $75 million run rate plus the impact of the GAAP accounting treatment related to the change in role of our Chief Revenue Officer to a strategic adviser. This accounting treatment requires us to pull forward the stock-based compensation expense related to this new role, although the vesting period remains unchanged. In Q2, we expect capital expenditures of approximately $8 million to $9 million. For fiscal 2023, we expect total revenue to be in the range of $994 million to $1.007 billion. At the high end of our revenue range, we reached the $1 billion revenue milestone which speaks to the value proposition of our solutions, the large market opportunity and the collective efforts of the talented employees at Bill. We expect float revenue to be approximately $73 million in fiscal 2023, which assumes a yield on FBO funds of approximately 235 basis points for the year. We expect to report non-GAAP net income for fiscal 2023 in the range of $57.5 million to $70 million and non-GAAP net income per diluted share of $0.48 to $0.59 based on a share count of 119.4 million diluted weighted average shares outstanding. In addition, for fiscal 2023, we expect other income for OIE to be $34.5 million, net of other expenses. For fiscal 2023, we expect total stock-based compensation expense of $355 million, and capital expenditures of approximately $35 million for the year. In closing, we have confidence that we're well positioned to successfully navigate the uncertain economic environment because of our multiple recurring revenue streams and diversified business model. We are continuing to invest for efficient growth given the large market opportunity and the increasing adoption of cloud-based solutions by SMBs. Operator, we are now ready to take questions.

[Operator Instructions]. And our first question comes from Will Nance from Goldman Sachs.

Nice results today. I wanted to maybe up a little bit on some of the commentary around the moderated payment volume among some of the smaller cohorts of your customer base. I was wondering if there's anything you could share to kind of dimensionalize the sort of slowdown you guys are seeing. And also what you guys are expecting incrementally to happen in future quarters as you embed that into your outlook? And just maybe compare and contrast the assumptions embedded in your outlook versus how payment volume growth and other metrics might fare if we did enter a deeper kind of economic downturn.

Thanks, Will. First of all, let me just say that we're very pleased with the work of all 2,400 employees. And not only did we grow 94% in the soft economy, if we flipped the meaningful non-GAAP profitability. And that's just because of the ability for our platform to actually meet the needs of businesses. And so the first thing I would say is that the demand is healthy, and you saw that with the net adds. And on the TPV spend, we started talking about this and seeing this in the Q4 call that it was being moderated. And so the difference between Q4 and now is that in Q4, we said we saw that in the mid-market, and now we're seeing that across all businesses of all sizes. It's not 1 thing to call out as the number of transactions per customer has remained consistent. So what this tells us is that people are pulling back the spend, but they are actively engaged in using the product and the platform and really managing their business.

Got it. Makes a ton of sense. And then you had a handful of announcements in the FI channel related new partnerships or new ad valorem payment methods issuing virtual cards. I'm just wondering if you could maybe talk about how your expectations about the payment opportunity within the FI channel have changed over time. It sounds like you made some meaningful progress. And then maybe just as a quick follow-up for John. Yes, I know the FI channel has major impacts on some of the KPIs that you could disclose, any color on how the handful of new deals that you signed could impact the numbers in future quarters?

Thanks, again. Well, I think there's a couple of things with the FI partner channel strategy that we're very happy with this quarter. So as we build our platform, one of the things that we work hard to do is to make it a unified platform across all channels across the entire ecosystem. And what we saw in this quarter were kind of 3 things with respect to the FIs, right? So we saw, first and foremost, that we managed to get 1 of our FI partners to start focusing on spend management, including that into their offering, that's work that we'll be announcing or rolling out, I should say, later in the year. And then the other thing that we also saw was the ability to drive our vendor card solution through our platform for FI. So instead of them using their own virtual card, they're using our virtual card program because of the strength of the supplier enablement that we have and the strength of the overall program that we have. And then the third thing we saw with the FIs is that we saw 2 more additional banks sign up for the platform, which we'll talk more about later as those roll out. But all in all, we'd say the ecosystem is super strong. We saw great growth in accounts. We saw great growth in the FIs and great growth in the direct.

And just adding to the second part of the question about the impact on our numbers in future quarters. We've made a lot of progress in the financial institution channel over the last 18 months or so. And I think some of the things that we announced this quarter, just a continuation of that momentum and helps us bring more of our products and more of our monetization model to these partners. With that said, I think that plays out over a longer period of time versus in the very short term where, as we talked last quarter, most of our revenue from our FI partners will be derived from what we've already booked in terms of remaining performance obligations versus incremental revenue from some of these new announcements, but we are confident that those will have a positive impact over the course of the, call it, intermediate term.

Our next question comes from Bob Napoli from William Blair.

Nice quarter. Very impressive. You added quite a few customers through really in core Bill, Divvy and Invoice2go. I mean, what is -- what drove that, I think, record quarter for new additions? Was there something on the marketing front that accelerated the number of new additions even in a more challenging environment?

Thanks, Bob. Good to hear your voice. A lot of things that I love about building a business is building momentum and kind of what I call the snowball effect of kind of the market and the product and the platform, the people, and I think we're just seeing that. We have an opportunity to really change the way business gets done, to really help businesses manage their financial operations in a way that they haven't done before. And ultimately, that means that it's not elective software. Customers can't choose not to do this. The digital transformation wave is happening. And what we're seeing is that we saw this in the beginning with hybrid that there was an opportunity for remote work to be done through your back office. And what we're also seeing in the soft economy with inflation being high is that the deflationary force that our platform provides the ability to do more with less, it's real. And so we see across the ecosystem that this is driving demand. That's -- the healthy demand is something that we're excited about, something that we believe is an opportunity for us to continue to drive through the unified platform and all the things that we're doing. But all in all, I would just say this is us building that momentum in that snowball.

And then with the 172,000 core Bill customers and the cross-sell, just an update, how many of those are currently using Divvy? What is the opportunity? And is the -- any color you can give on success in cross-sell and momentum there would be helpful.

Sure. We're very happy with the cross-sell success that we've had to date. We continue to obviously drive the unified experience. The one thing we did this past quarter, obviously, was on the brand announcement that is going to roll into the look and feel of the unified platform. But all of that means that we are getting more comfortable with ways that we can attract and drive the cross-selling of the platform. And so we continue to believe that we'll do more once we have the unified platform. And that is continuing to go well, the integration of the products and the solutions that we have. And we'll share more as that becomes available.

Our next question comes from Samad Samana from Jefferies.

Great. Maybe first question on the acquisition, it makes a ton of strategic sense. But Rene, I was hoping maybe you could help us understand how it's the glue that brings what the spend management and AP together? Or maybe how you're seeing this fit into your current portfolio? And maybe what other roads it opens for you as you look to the future as well?

Thanks, Samad. We said for a while that one of the things that we think is critical for financial operations is to have insights and dashboards that help businesses manage their back office, whether that's payables or receivables money in, money out and all the things that go with that. And if you go back to the roots of the company, the original name of the company was CashView. And actually, the original name was Cashboard, because I like the idea of a dashboard. So the goal here really is to create 1 place for the business to be able to manage their financial operations. To do that in a way that's different than they've ever done before that creates more value, more efficiency. And what we see with the tool and the platform from the team at Finmark, is a very elegant tech solution that really is driving innovation when it comes to pulling together disparate data systems across multiple different tools into one view so that you can actually manage your financial operations. So super excited about that. Super excited to have the team join our team and look forward to delivering those solutions in the future.

Great. And then maybe, John, just a follow-up for you. I appreciate the incremental disclosure around the TPV, ex the FI channel. I think if I heard you correctly, you said it's up 8% year-over-year. How should we think about maybe that trending? Are you expecting -- if you think about your forward forecast, is that embedding a further slowdown? Is that expecting maybe a decline? And actually same-store sales TPV, how we should we think about the Bill.com only ex FI?

Yes. Thanks, Samad. We are expecting some of the trends that we've observed over the last, call it, 4 months or so of moderating spend from customers ex FI channel to continue. What that means for us is really lower growth going forward is our current expectation. We factored that into our outlook for the year. There are, I think, a handful of opportunities for there to be upside to those growth profile numbers, but is really dependent upon the actual impact on the economic cycle and what's happening with our SMBs. We've assumed some of the trends that we've seen recently are going to continue.

Our next question comes from Darrin Peller from Wolfe Research.

It is good to see the customer acquisition trends continuing at this rate, particularly given all the headlines we've heard from competitors and competitive dynamics, whether it's Intuit or NetSuite or others. So I'd really love your thoughts on landscape for a moment. And really just break it down, if you don't mind, a little more in terms of the SMB, different tiers of SMB and what you're seeing. And if you actually think some of these competitors or partners competitors could make some real progress or not because it certainly doesn't look like it's showing up yet in your numbers.

Yes. Thanks, Darrin. Good to hear your voice, and really just kind of get to how we think about it. We spent the last 16 years defining this category. And it's very complex payments, the compliance, the -- all the things that go around it, financial operations, it's complex. And so as a result, we have a strong lead in a large untapped market. And so what's working for us is we have a broad horizontal approach across a diverse ecosystem. We can reach SMBs either direct or through our accounting channel. We have 6,000 accounting firms that are part of the solution for our customers. We have 6 of the top 10 banks, and we're doing more and more with accountants and with banks to deliver more services to those customers. And so it's the combination of the platform that was built from the beginning for SMBs and the ecosystem that's allowed us to continue to reach SMBs and to really help them in this time. I mean it's a soft economy and the ability for us to really drive value and be a deflationary force is something that we think is super valuable. So ultimately, I would say that the #1 competitor is pen and paper, and it has been for -- and it will be for a long time. And that's where we're going to focus is on these manual processes, how do you automate them, how do you actually take the pain out of the small business side and just stay focused on delivering value for them.

Okay. And just for John, maybe just one quick follow-up as a reminder. I mean the key sources of the sequential change in take rate has been strong. But you could just remind us on the opportunities there. And again, if you see that being resilient through any kind of macro scenarios, almost regardless of what -- how volume goes, is the potential to change the take rate and move the payments revenue up still strong?

Sure. Thanks, Darrin. We've made great progress expanding our monetization transaction monetization over the last couple of years. In fact, this Q1 was our best ever quarter-to-quarter growth in terms of transaction monetization driven in part by continued adoption of our ad valorem products, has we mentioned last quarter, we're at about 10% ad valorem as a percentage of TPV that continues to grow. In addition, in Q1, we had the benefit of an ongoing migration between card issuing providers and networks and that led to a step-up in our monetization. In the near term, we don't necessarily expect the same level of monetization expansion as our volume between issuers is going to be more stable in the forward quarters. And over the next few quarters, I'd say the near term, really, we're expecting lower expansion in that take rate, perhaps even lower than historical averages given the macro environment. But as we've said for a long time, we're very bullish about the long-term opportunity to continue to grow our take rate and our monetization over time. That remains perfectly intact. But in the near term, I would expect, just given the environment a lower expansion than we've seen historically.

Our next question comes from Ken Suchoski from Autonomous Research.

I just wanted to follow up on Darrin's question there. The increase in the transaction fee take rate, excluding Divvy, I mean, really accelerated this quarter versus prior quarters. And you kind of touched on it in the last answer. And I don't know if anyone expects you to provide specific penetration rates this quarter. But can you give us a sense of which payment types are seeing the most traction? I think you've added a few new payment types over the last year or so.

Thanks, Ken. It's really across the board with our ad valorem products. We are still in the earlier stages of adoption. We think there's a significant growth runway ahead by allowing suppliers and customers' choice in figuring out what the right payment method for their transactions is. We launched international payments in virtual cards more than a couple of years ago. So those are the largest dollar contributors to our growth. But some of the newer products around real-time payments and instant transfer as well as pay by card are doing nicely and that expanding adoption is having a positive impact on our overall consolidated level of monetization. On a dollar basis, though, those are still pretty small contributors.

Okay. Okay. That makes a lot of sense. And then I think we try to run some of the math on the Invoice2go revenue, specifically the transaction revenue. And it looks like that continues to step up nicely. And I was just wondering if you could talk about what's driving that and I guess, how sustainable that increase is.

Yes. We're pleased with the progress that we're making with Invoice2go. In terms of the profile of the product, first, it's predominantly subscription revenue, and we see a growing transaction revenue stream driven by some of the improvements and changes we've made to the product experience, integrating branded payments. And that's still in the, I'd say, earlier phases of development. It's not material to our overall business. But our monetization of those payments is significantly above where Invoice2go was on a stand-alone basis, but we still have a long way to go to continue to drive monetization of the existing invoice volume for invoice to go. And then secondly, the big opportunity, we think, longer term is as we apply the AR, accounts receivable, knowledge and product capabilities, not just to the Invoice2go customers, but to Bill subscribers and our network members. And together, we think that's going to be a big opportunity over the intermediate and longer term.

And our next question comes from Tien-Tsin Huang from JPMorgan.

Great results here. Just the SMB comments. I heard lower payment volume, stable transactions. Any thoughts on client growth or net adds given your views on adoption investing in sort of this uncertain environment, any change versus 90 days ago on that front?

Thanks for your question, Tien-Tsin. And I would say much of what we talked about in the script is just the -- this softening economy ends up meaning that business has turned to doing more with less. And we have a platform that enables businesses to do more with less, that really helps them manage their business with efficiency. And what we've seen across the entire ecosystem is that, that demand is healthy. In part is because we have a horizontal approach to the go-to-market, whether it's through any of our direct efforts our accountant partners or financial institution partners as well as that we serve businesses of all sizes up to the large mid-market customers. And so the demand is healthy. We think the opportunity to continue to drive more value for businesses and more customer growth in the untapped market that we have ahead is strong.

Okay. Great. If you don't mind, I have to ask you. You mentioned, Rene, you're issuing virtual cards on behalf of an existing FI partner. I'm curious, is that alongside of an incumbent solution they were using before and kind of speaks to the benefit of selling something integrated through Bill to their small business banking partners? Just trying to better understand that, if you don't mind me asking that detail.

Yes. No, it's a great question. It's one of the things that we are very proud of is that the broad capability of the platform creates value for our customers and our partners. And to your point, the financial institution partner did have a virtual card product that they were using before with their business customers. And they switched to using ours for their Bill.com customers. And that's because of the power that we have of driving transactions and driving value for suppliers that are on the network, the strength of our supplier enablement team, which we've been working on since we launched the strength of our ability to really help the customer suppliers connect. That's all something that we've been working on, and that's what the financial institution partners saw and wanted to take advantage of. So that's why we did it.

Our next question comes from Keith Weiss of Morgan Stanley.

It's Jonathan on for Keith. I want to start with TPV trends. Can you talk us through any differentiation you're seeing in Divvy and core Bill TPV trends and how you expect that to evolve going forward just given some of the macro commentary?

Thank you, Jonathan. We have generally seen businesses, all businesses moderate their spend in this economy. And so what you see in Divvy is that it is just growing much faster, it's a smaller base to start with -- and so we've continued to have strong growth in TPV year-over-year there. But we do see, I would say, softer spend across all of our customers.

Understood. Appreciate that color. And I want to dig into more of the opportunity to work with suppliers. Can you talk through that? And is there any opportunity to drive adoption of more monetize payment modalities through working closer with your suppliers? And how should we think about that opportunity amidst a softening macro?

Another good question here. We talked about enabling the suppliers in our network in Canada and now the U.K. to be able to decide how they want to be paid and what currency they want to be paid in. So we've made and activated both sides of the network so that this is, I would say, a movement for us treating and viewing, I should say, the suppliers as customers as well. And what that leads to is that when somebody who is in the U.K. or Canada is being paid by a U.S. business that's on Bill, that creates an FX transaction monetization opportunity for us. gives them a better monetization FX rate than what they could get from potentially their local bank, and that's the value that we create. So that's the first example. There will be other examples of how we think about adding value to both sides of the network, and we'll continue to invent and innovate on that front.

Our next question comes from Brad Sills from Bank of America.

I wanted to ask a question on the FI channel, another great quarter in net adds there. I'm curious, is there a different ramp time for those customers when they come -- when they onboard from -- versus your average customer coming in through direct or accounting from channel. I'm asking because I'm wondering if there might be some unseen potential ramp in spend coming from some of these net adds coming in through the FI channel in the coming quarters.

Thank you, Brad, for the question. And what we see is that consistent across all of our customers, we make it really easy for them to get on the platform. We target and actually build it into the business model that within 30 days, you're using the product or you're not. And so with our FI partners, we see that they're able to get up and going. Obviously, it probably does take 3 to 6 months to kind of get to a meaningful activity on the platform, but it doesn't really vary by channel. And the opportunity for us is to continue to drive adoption earlier in the experience with Bill, and we have teams that work on that every day.

Got it. Great. And then one on the macro, if I might. You mentioned, obviously, that you're expecting some continued moderation here in TPV. But TPV, I guess, transaction volumes per customer, you're mentioning has held in nicely. So where -- I mean where are you seeing the impact? Is it transaction size? How would you classify that headwind that you're referring to on the macro side with regard to TPV?

Yes. Thanks, Brad. As Rene mentioned, it's -- we're seeing some softness across most of the customer segments now. It still appears to be concentrated in some of the discretionary spend categories. We -- I think we pointed this out last quarter as well where we've started to observe this in the month of June. And I think that has continued. So things like advertising spend would be a good example. We looked at a lot of the top advertisers that small businesses -- or advertising channels that small businesses use to drive customer acquisition and other things. So we looked on a vendor-specific basis and found that across really the whole segment, spend is down. And that's something that is consistent with other data points that we've looked at externally. And so I think it just says that our small business customers across the size range are reacting to the external environment and being a bit more cautious about their operating expenses, and we're seeing that across the spend habits of our customers.

Our next question comes from Josh Beck from KeyBanc.

Thank you. I wanted to ask just a little bit about your risk management philosophy, obviously, that's something that you've really ingrained platform in the prior decades. Obviously, Divvy brings card receivables, it's probably a little bit of a different dynamic. So maybe just give us a sense of kind of your approach to risk management and maybe how that is evolving as you folded in Divvy as well.

Sure. Thanks, Josh, for the question. Yes, we've been building out proprietary capabilities around risk management, underwriting and all those things with the Bill platform for over a decade. And our goal with that is to simultaneously deliver a great customer experience that includes fast payments while appropriately managing the exposure associated with that payment volume. And we've taken the same approach with Divvy combining our risk teams from day 1 of the acquisition. It's the first integration thing we did. That allows us to leverage the combined consolidated data asset that we have around transactions and entities in order to make better, more informed risk decisions. And I think we've shown in the time since the acquisition that we've actually been able to improve the underwriting and the risk capabilities of the combined team and deliver a great experience for customers at the same time. So we feel really good about the progress we're making, and it's all about balancing, serving customers, but doing so in a way that everyone is able to be successful with the products that we offer.

Great. And then maybe a follow-up on Finmark and some of the synergies. It certainly sounds like it's an important tool for accountants. Do you envision maybe bringing in new accounting partners or having you work maybe with more of their customers? So it's kind of effectively like an indirect benefit from a revenue point of view. Just curious how some of the synergies may work there.

Thanks, Josh. I'll take this one. I think the -- you're right that one of the strategic values is with accountants. Accountants manage -- just as a reminder, manage multiple clients at tens, dozens of clients. And so what they're providing in the category that we've really helped define there is the client advisory services. And so what they account for those [indiscernible]. And so the ability to be a strategic adviser to your client requires that you actually digest data, understand it, look at the dashboards and provide insights that weren't necessarily easily attainable for the small business themselves. And so I do think that accounts are going to value this integration once we have it together, and it's something that we think will help us drive continued adoption for client adoption as well as for accountant adoption.

Our next question comes from Bryan Keane of Deutsche Bank.

Congrats on the results. I think it's an important point to talk about transactions holding in versus volume, which is moderating a little bit. John, can you just talk to us about the sensitivity of the model? If we see that moderation, but transactions hold, will it have a material impact to the P&L or will -- since transactions are holding in, it will only be a slight impact that we'll see?

Thanks for the question, Bryan. We do monitor engagement with our platform from customers very closely. And one of the metrics that's important, as you mentioned, is transactions per customer. And we've seen pretty consistent results there, excluding the FI channel, which has a slightly different customer profile, the core Bill customer is pretty consistent with last quarter and last year. And that tells us that customers continue to use our platform. They leverage it to run their financial operations even if they're spending less in terms of overall operating expenses in TPV through the platform. And as we showed with our results in Q1, even if spend is a little bit softer than in some other period, we still have the tools to both deliver value for customers as well as monetize that transaction volume. So we have both fixed and variable price transaction fees, and so both contribute to our revenue growth and obviously, the foundation of our model is in subscription fees, which continues to be healthy growth given the way in which customers use our platform.

Got it. And then just maybe the bigger picture, just thinking about a slowdown or even a recession, how has the model held up? Or how would you expect it to hold up for revenues in different kind of scenarios, maybe a shallow recession versus a deep one. You probably do some scenario analysis work. We're just trying to get a sense of the sensitivity of a potential downturn and what the impact could be to the model?

Yes. It's a fair question, Bryan, and we certainly have spent time on different scenarios. What I can say is that our outlook represents kind of all of the information that we have available around recent trends, and the health of our SMB customer base, which we think is quite strong. We have assumed that there's going to be some continuing softness or moderation of spend that, that persists throughout the fiscal year. In terms of our outlook set of assumptions, we're not assuming a severe economic downturn. So that's a scenario that's outside the scope of what we've looked at. And beyond that, as I think we mentioned in the prepared remarks, we're still monitoring the health of our customer base and the situation closely, and we think we're well positioned to adapt to serve customers and to continue to scale the business regardless of that external environment that we're operating in.

Our next question comes from Ken Wong of Oppenheimer.

Great. Fantastic. Just a quick question on Finmark. You mentioned that the revenue impact is likely negligible, but did call out some spend being baked in. Just wondering if there's any quantification in terms of margin earnings impact that you could call out.

Thanks for the question, Ken. Yes, we haven't explicitly quantified the numbers around Finmark. I can tell you it's a very small transaction, talented team, great product, we think fits strategically very nicely with where we're taking our platform over time, not only providing automation around financial operations, but shifting towards helping provide insights for customers to run a better business. And Finmark is going to be a core capability over time as we do that. So we're continuing the investment in the team and building out the product platform. They, as a stand-alone business, just got to the revenue-generating stage. But at our scale, obviously, it's very small. And over time, we'll provide more color once the transaction closes.

Okay. Perfect. Fair enough. And then another kind of margin expand question, given that this is kind of the first quarter you guys have broken into kind of non-GAAP profitability, should we assume the trajectory to be fairly linear? Or is there some lumpiness seasonality that we should be thinking about as we kind of work through our models?

Well, yes, we provided the color for Q2 and for the fiscal year. I'd say some of the historical seasonal patterns around the transition from December to March and what happens with spend during that period. We're expecting to continue. That usually has some impact on our bottom line results as well. But other than that, you can probably use some of the past patterns to get to Q3, Q4 numbers.

Our next question comes from Daniel Jester of BMO Capital Markets.

Great. Just a quick one and a clarification point. For the customers that you've noticed that are reducing some of the spend, you called out a couple of times in the call. If you look at their usage of ad valorem payment models, are they going backwards? Just wondering if that's the way that they may [indiscernible] cost for themselves. I'm just trying to take -- think about how that could evolve for the take rate going forward.

Thanks, Dan, for the question. No, we haven't really seen or witnessed that trend. The commentary around the softening spend is more businesses, particularly in discretionary categories spending less, but with a very high rate of repeat transactions with their suppliers. So we still see approximately 80% of the transactions on our platform are repeat recurring transactions between buyer and supplier. But they may be transacting in a slightly lower dollar value. It's not really something that we've seen influence of the payment types, so the distribution of payments or ad valorem across the platform. It's more just the absolute spend at this point.

We have time for only one more question. And our next question comes from Andrew Bauch of SMBC.

Rene, you've been talking about the unified platform underway in that Bill being able to go to market with all 3 of the assets and now Finmark really bundled in 1 product. I guess, how far away are we from that becoming a pure reality? And maybe if you can just give us an update on how you expect that to translate to an impact from the model one way or another?

Sure. Thank you, Andrew. The -- I think about it in kind of different phases and steps. I mean the first thing to build anything requires one team, and we started that process obviously, with the acquisitions and then integrating the organizations last winter. Then it takes kind of one brand look and feel, which we just announced. And then it obviously takes one platform. And where we're at right now is that we have that the back-ends, talking to each other and integrate it. And that allows us to start developing the customer experience. And obviously Finmark will be on top of this. But we really see that the importance of having one place for any customer to be able to get the value that we see, we see that as being really important. We see customers wanting to continue to save time, spend less time managing their financial operations and more time thinking about the insights. So we continue to develop and work on that mission to serve millions of businesses and to be their essential financial operations platform, and that's something that we'll continue to develop over the coming intermediate term.

Great. Sounds like a great progress. And I know it's been asked before, but maybe I'll ask it in a slightly different way. I mean Divvy delivering 6 straight quarters of triple-digit growth is just continues to impress. Is there something about Divvy or next-gen expense management solutions that are accelerating in the current environment? We've heard from your peers that are also seeing similar kinds of impressive results.

I'd say for us, we continue to work hard on honing the go-to-market and have prioritized the active and engaged customers. And as we do that, we get results like you're seeing. And so everybody on the team is really focused on how do we make sure customers are getting value using the product. And when they do that, they put spend on the cards that we have, and that drives obviously opportunities for them to manage their business better. And so the focus is always going to be on customers. And I think what we're seeing is that the solution is early in the market, earlier than you would say the core Bill experiences, but there is demand and there is plenty of opportunity for us to keep driving that demand across our platform and across the market in large.

And the core Bill platform being a great incubator for it well.