BILL - NYSE

Good afternoon, and welcome to BILL’s First Quarter Fiscal 2024 Earnings Conference Call. Joining us today for today’s call are BILL’s CEO, René Lacerte; CFO and President, John Rettig; and VP of Investor Relations, Karen Sansot. With that, I would like to turn the call over to Karen Sansot for introductory remarks. Karen?

Thanks, René. Before discussing our updated outlook and what we are seeing in the business climate, I will provide an overview of our fiscal first quarter results. In a challenging economic environment that is creating uncertainty for small businesses, we delivered strong financial results. Total revenue for Q1 was $305 million, up 33% year-over-year. Non-GAAP gross margin was 86.1%. Non-GAAP net income was $64 million or 21% of revenue and increased approximately 280% year-over-year. Core revenue, which includes subscription and transaction revenue was $265 million, representing growth of 24% year-over-year. Subscription revenue was $62 million, up 7% year-over-year. As previously discussed, subscription revenue growth was impacted by the restructuring of an agreement with a financial institution partner. The Q1 increase in subscription revenue was driven mainly by our expanding customer base and a price increase implemented in our BILL stand-alone direct and accounting channels over the course of fiscal 2023. Transaction revenue increased to $203 million, up 30% year-over-year, driven by payment volume growth and adoption of ad valorem payments, including our Spend and Expense corporate card as well as our AP and AR payment solutions. Total payment volume, or TPV, for BILL consolidated, which also includes card processing volume was $70 billion, reflecting 8% year-over-year growth. BILL’s stand-alone transaction revenue totaled $95 million, reflecting growth of 25% year-over-year. Total payment volume for BILL stand-alone was $66 billion and increased 7% year-over-year. TPP growth continued to be muted as SMBs carefully control their spend. For example, TPV per BILL stand-alone customer, excluding the FI channel, declined 4% year-over-year and 1% quarter-over-quarter. BILL Spend and Expense transaction revenue, which was formerly called Divvy, totaled $106 million, reflecting growth of 36% year-over-year. Card payment volume totaled $4 billion and increased 35% year-over-year. Interchange fees were approximately 262 basis points, consistent with prior periods. While card payment volume growth was strong overall, it was slightly lower than we anticipated due to downward adjustments to credit line limits we made during the quarter as we continue to mitigate increasing credit exposure created by macro conditions. In addition, we observed businesses decreasing transaction sizes, which led to an 11% decline in average payment size per transaction on a year-over-year basis in the quarter. Turning to customers. Net customer adds remained strong during the quarter. BILL’s standalone customers increased 22% year-over-year. Net new adds for the quarter were 9,300, including 4,700 net adds in the direct and accounting channels and 4,600 in the FI channel. This excludes attrition related to the sunset of Intuit’s Simple Bill Pay solution, which totaled approximately 1,000 in Q1. The number of BILL’s Spend and Expense spending businesses increased 35% year-over-year and net new adds for the quarter 1,600. This was slightly lower than prior quarters as we move to the BILL brand from Divvy, which involved a pause to some of our customer acquisition initiatives. Float revenue was $40 million, an increase of 160% year-over-year. Our yield on FBO funds was 484 basis points in the quarter. Float revenue was $40 million, an increase of 160% year-over-year our yield on FBO funds was 484 basis points in the quarter. Float revenue is an important part of our business model that serves as a counterweight to macro headwinds and enables us to continue investing in long-term opportunities through economic cycles. Now turning to a discussion of our Q1 profitability performance. Non-GAAP gross margin was 86.1%, above our target range due to favorable float revenue. As discussed previously, within the next few quarters, we expect our non-GAAP gross margin to moderate to the low to mid-80s percent as our payment mix matures and float revenue tailwinds subside. Non-GAAP operating expenses were $229 million. R&D increased $3 million from Q4 as we continue investing in our platform’s workflow and payment capabilities. Sales and marketing increased $1 million from Q4 primarily due to increased go-to-market expenses from our cross-sell efforts. Rewards expenses, which are included in sales and marketing represented 49% of Spend and Expense card revenue. G&A expenses increased by $10 million from last quarter, due in large part to nonrecurring consulting fees. Non-GAAP operating income was $33 million or 11% of revenue, an increase of more than 260% year-over-year. Non-GAAP net income was $64 million or 21% of revenue, up approximately 280% year-over-year. Non-GAAP net income per diluted share was $0.54 compared to $0.14 a year ago. Free cash flow grew 4x year-over-year to $48 million or 16% of revenue. To sum up the quarter, we delivered strong growth and expanded our non-GAAP profitability and free cash flow while continuing to support SMBs during a challenging economic cycle. With our durable business model and strong balance sheet, we are well positioned to navigate the challenging macro environment and support our small business customers while continuing to invest in opportunities to expand our platform depth and market reach. Now turning to our outlook. As previously discussed, over the last several quarters, the external economic environment has created challenges for SMBs, and this has resulted in declining B2B spending trends. Beginning in late fiscal Q1 and continuing into Q2, we have seen further tightening by our customers and suppliers. With higher interest rates, tighter credit conditions and cost increases for businesses, SMBs are focused on finding ways to lower expenses. This is most pronounced with larger SMBs and mid-market companies. In addition, larger suppliers in our network have started to increasingly choose lower-cost payment methods, sometimes at the expense of payment speed. We expect that this trend will continue as economic conditions influence businesses and this could have a negative impact on overall transaction monetization in the near term. Taking these trends into account, for Q2, we expect BILL’ standalone total payment volume to be flat year-over-year and for Spend and Expense card payment volume to increase approximately 20% to 25% from last year. For fiscal 2024, we expect BILL’ standalone total payment volume to increase approximately 5% year-over-year and for Spend and Expense card payment volume to increase approximately 20% to 25% year-over-year. While the economic environment has led many small businesses to take longer to prioritize digital initiatives, customer acquisition has remained strong in recent quarters. Over the next couple of quarters, we expect BILL’ standalone net adds to be approximately $4,000 per quarter, excluding the FI channel and the sunset of the Intuit Simple Bill Pay solution. Now turning to our financial outlook. For fiscal Q2, we expect total revenue to be in the range of $293 million to $303 million, which reflects 13% to 17% year-over-year growth. We expect float revenue to be $38 million in Q2, which assumes our yield on FBO funds will be approximately 460 basis points. On the bottom line, for Q2, we expect to report non-GAAP net income in the range of $42 million to $52 million and non-GAAP net income per diluted share in the range of $0.35 to $0.44, and based on a share count of 118.8 million diluted weighted average shares outstanding. For Q2, we expect other income, net of other expenses, or OIE to be $26 million. We expect stock-based compensation expenses to be approximately $68 million in Q2, and we expect capital expenditures of approximately $8 million to $10 million. Moving on to full year guidance. Given the factors I discussed earlier regarding economic environment and changing customer and supplier behavior, we have adjusted our full year total revenue outlook to reflect incremental payment volume and monetization headwinds. We will continue to be vigilant with operating expenses. For fiscal 2024, we expect total revenue to be in the range of $1.205 billion to $1.245 billion which represents approximately 14% to 18% year-over-year growth. We expect float revenue to be approximately $145 million in fiscal 2024, which assumes a yield on FBO funds of approximately 455 basis points for the year. We expect to report non-GAAP net income for fiscal year 2024 in the range of $195 million to $235 million. We expect non-GAAP net income per diluted share to be $1.64 to $1.97 based on a share count of 119 million diluted weighted average shares outstanding. In addition, for fiscal 2024, we expect other income, net of other expenses, to be approximately $96 million. We expect stock-based compensation expenses of approximately $275 million for fiscal 2024 and we expect capital expenditures to be approximately $35 million to $40 million for the full year. In closing, we are operating in an environment of increasing economic choppiness and small businesses are under increasing pressure to adjust to the current realities. We set out to build for the SMB market because they have historically been the most underserved, and our commitment to the success of SMBs is unwavering. Our diversified business model, which includes subscription, transaction and float revenue and our strong balance sheet helps build mitigate macro headwinds and enables us to continue investing in our platform and ecosystem while delivering balanced growth and profitability. We are carefully navigating through this economic cycle and when macro conditions improve, we will be well positioned to benefit from its tailwinds. We created this category, and we are much closer to the beginning than a mature market. We believe we are the best positioned company to become the de facto solution for SMBs to automate their financial operations. Operator, we are now ready to take questions.

Thank you. [Operator Instructions]. Our first question today comes from Bryan Keane at Deutsche Bank. Bryan, your line is open. Please go ahead.

Sure. I would just add, Bryan, we see some really good trends associated with customer retention, customer engagement, other related measures that tell us the platform is continuing to deliver value for customers, but we are sensitive to a couple of things. One is the overall spend environment that small businesses are operating in. And we’ve talked for a number of quarters now about that environment being very soft. We continue to see signs of that in the most recent quarter in our forward estimates assume that we’re going to see a soft spend environment going forward. There are some pockets of strength around travel and entertainment, as an example, and some areas of weakness around advertising on card spend and facilities and office rents and things like that around core AP spend. So in total, it feels like this is influenced significantly by the macro environment, which to us feels more cyclical than structural or related to competition or things of that nature and we’re obviously gearing up to adapt to the current situation and do as much as we can to optimize results within the envelope of the spend environment and customer and supplier behaviors that we’re seeing today.

Got it. And just as a quick follow-up. I know last year, we cut numbers and you turned out to be a little bit ahead this year, you’re cutting numbers. I guess just on visibility, now given some of the macro headwinds, do you have any sense of if there’s another shoot [ph] to drop in volumes? Or do you feel like you’ve cut the numbers enough here and this should be to the bone of where businesses spend up? Thank you.

Thanks, Bryan. It’s obviously a dynamic environment, and we’ve seen some evolving behaviors from both customers and suppliers, particularly large suppliers in our network who are starting to exert more influence over payment-type choices and things like that. All things considered, we’ve taken these variables into consideration as we updated our estimates for the rest of the year, and we think it reflects the environment that we’re operating in, plus the assumption that there’s some continuation of headwinds associated with both payment volume and adoption of certain payment types. So we’ve tried to take into account as best we can, all of the variables that we’re seeing.

Thank you. Our next question today comes from Brad Sills from Bank of America. Brad, your line is open. Please proceed with your question.

Yes. We’ve seen a couple of emerging trends. The first is around just payment composition and the choices that both buyers and suppliers are making as it relates to payment types. A couple of examples there. On international payments, we’ve seen an increase in U.S. dollar transactions versus FX transactions, and we think that has everything to do with the business that our customers and their suppliers are doing and the impact of overall macro and cost pressures that may exist on their businesses. At the same time, on our Vendor Direct product, virtual card payments, we’ve seen more sensitivity on the part of large suppliers to acceptance costs, and that’s led to some opt outs for larger dollar virtual card payments and things of that nature. The second component that we mentioned earlier on the call was just around the credit environment and how we’ve become increasingly proactive in managing credit lines for our Spend and Expense card program to make sure that we’re not taking on significant incremental credit risk associated with that product. That has the effect of creating somewhat of a headwind on card spend associated with our Spend and Expense product, but we think that’s the right trade-off in this environment.

Thank you. Our next question comes from Taylor McGinnis from UBS. Taylor, your line is open. Please go ahead.

Yes, hi, thanks so much for asking my question or answer my question. So your TPV guide implies down 3% sequentially. So can you maybe talk about how that compares to what you’ve seen so far at the start of the quarter in October? And if the guide assumes things can get worse, I’m just trying to understand the assumptions there. And then as a follow-up, if the TPV – it looks like the TPV guide for the second half of the year appears unchanged and assumes an acceleration quarter-over-quarter, which is greater than we saw last year. So can you just talk through some of the puts and takes there as well? Thank you.

Sure. Thanks for the question, Taylor. On the TPV estimates going forward, we are looking at quarter-to-quarter down low single digits, as you suggested. And I think that reflects some of the trends that we’ve experienced across the business over the last several quarters. We haven’t seen any significant deterioration or changes. But there have been, frankly, some pockets of strength around the core TPV for BILL. On the card payment volume, we’re looking at kind of flat quarter-to-quarter, up 20%, 25% year-over-year, something in that range. So we think that we’re still doing a good job at increasing our penetration of customers and increasing our share of wallet. That’s one of the components that leads to stronger TPV performance even in a lower spend environment. And so that’s something that we’re seeing good success with. We’re assuming we’ll be able to continue doing that throughout the year. And we feel pretty good about the stability of the spend environment that we’re operating in right now versus some of the other moving parts of the business that we talked about earlier.

Thanks so much for answering my question.

Thank you.

Thank you. Our next question today comes from Darrin Peller from Wolfe Research. Darrin, your line is open. Please go ahead.

Hey guys. Thanks. I mean, I have to go back to the questions on cyclical versus structural, because the market is acting like something with your stock down the magnitude is after market right now. It’s acting like something that’s more than cyclical. And reality is the KPIs don’t look like it’s more than cyclical. So again, I mean, if we look at the KPIs, you have customer adds that look pretty strong. You had take rate expansion that was strong this quarter sequentially, your volume beat. But I guess you’re suggesting that the trends you’re seeing is all about the spend trends that’s really indicating your guide for the next quarter. Is there any other inputs on the KPIs that is informing the guidance that we should keep in mind? Or is it really just spend and maybe the side effect of ad valorem payment payments?

Thank you. Our next question comes from Tien-tsin Huang from JPMorgan. Please go ahead. Your line is open.

Hi, thanks. Thanks so much. And John congrats on the new President title. On the outlook, maybe can you elaborate how much of the guidance revision is tied to the weakness on spend that we’ve been talking a lot about versus the adverse selection of the payment choices. And does it make sense to maybe talk about that the penetration of some of the ad valorem products so that we better understand the impact.

Yes, great question. Thanks for that. I’d say if you step back and look at our overall estimates for the year, the majority of the adjustment that we’ve made is actually related to the Spend and Expense product, which has mostly to do with slightly lower spend per ticket per transaction by customers. That’s directly related to macro. And then indirectly, proactive adjustments that we’re making to line sizes and things like that in an attempt to mitigate any increased exposure as a result of worsening credit conditions in our customer base. The average size customer, as you know, for our Spend and Expense product is much larger, mid-market type customers versus the core BILL product. In the quarter – this last quarter, we did see increased penetration across all of our products, better usage, although we saw lower actual volume growth on some of our higher monetizing products like virtual cards and FX, as I mentioned. And some of these trends are directly related to the choices that larger suppliers or customers are making. And those are the trends that we’re expecting to persist throughout the year. We do have levers at our disposal, including with the launch of our unified platform many more opportunities to drive customer behavior and create awareness and things like that as we think about a more modular approach to pricing and packaging that we think we can make progress with this fiscal year. So those are some of the puts and takes that we considered.

Okay. And quickly on myself on the Spend and Expense side, the ability to dial up and down the credit standards. When did that change for you? It sounds like maybe you might get a little bit tighter on the credit side before reversing them. I just want to make sure I understood the timing of that. Thank you for the question.

Yes, thanks for the clarifying question. We’ve actually been making adjustments and doing more frequent reviews of our customers’ financial position and more frequently engaging with them over the course of the last year. So this didn’t just start in the last quarter. However, we have made some more significant more aggressive adjustments to line sizes so that we minimize our exposure. Previously, we talked about doing things like reducing open to buy, where if a customer is using $50,000 a month consistently, and they have a line of $100,000, we will reduce the line to $50,000 and things like that. So we’ve been – I think, evolving some of these adjustments over the last year, but we’ve been more aggressive with them over the last quarter or so, and we expect for the remainder of the fiscal year to be a little bit tighter, if you will, on the credit limits because we’re really managing to avoid credit losses.

Makes sense. Thank you, John.

Thank you.

Thank you. Our next question comes from William Nance from Goldman Sachs. William, your line is open. Please go ahead.

Yes. So to that point about Ken, the trends that we’ve seen recently reversed or revert to or were back to a more linear increase in adoption. We think that’s absolutely the case. So we’ve seen numerous areas where product improvements can really help us drive adoption. Those are becoming more important in this macro environment than they were, say, a year ago or two years ago when adoption was increasing roughly. An example would be – we have a number of transactions for virtual cards that go unprocessed or even rejected and part of the reason for that is not actually cost. It’s that we’re not passing rich enough data in some instances to drive automated reconciliation. And so when René mentioned accelerating some of the product improvements, we are going to make enhancements to remove as much friction as possible from – and that was just one example from our ad valorem payment suite to make it easier for suppliers to adopt payments. We also have the ability just within the unified platform, and I mentioned pricing and packaging earlier. We can look at the whole relationship that we have with suppliers now offer them more tools and capabilities and increase the value proposition that we’re delivering for them. If that involves incentives, if that involves payment speed, other product enhancements, we’re going to be leaning into all of that. And we think within this fiscal year, we’ll start to see a change in increasing volumes on some of these payment products.

Got it. That’s super helpful. And then just maybe a question, maybe you could just put some numbers around sort of the exposure to more cyclical payment volume streams. It sounds like you guys have called out T&E is a strong – kind of a stronger area of spend, digital advertising, weaker, things like lease and rent weaker. So just maybe if you could put some numbers around kind of like the overall size and any other categories that we call out as we kind of try to separate out like more versus less cyclical streams of payment volume.

Yes. I mean we haven’t provided specific percentages or things on spend categories other than to say, just like we serve customers across all industries, we have a pretty diversified base of expenses across customers as well because we generally have, call it, 70 or 80 or more percent share of wallet. So we’re seeing all types of spend. In the case of T&E, that’s what I called out specifically around card spend. That’s still small relative to the total base of spend, which was $4 billion in the last quarter for our Spend and Expense product. But it’s large enough that like that movement, we’re seeing strength there. It stands out because most other categories are flat to slightly down. Now even T&E is still down on a per transaction basis. So the card spend per transaction. And I’d say the same is true with the example on the AP automation side with lease payments and rent and everything that is facilities related that’s like low single digits percent of a company’s overall spend on average, but we are seeing aggressive reductions in that category as companies rethink small businesses rethink their physical footprint in this environment.

Got it. Super helpful. Appreciate all the color, guys.

Thank you.

Thank you. Our next question comes from Andrew Schmidt from Citigroup. Andrew, your line is open. Please go ahead.

Thank you. Our next question comes from Keith Weiss from Morgan Stanley. Keith, your line is open. Please proceed with your question.

Thank you. Our next question comes from Kenneth Suchoski from Autonomous. Kenneth, your line is open. Please go ahead.

Hey, good afternoon, guys. Thanks for taking the question. I just wanted to better understand the assumptions in the guidance. Are you extrapolating the October trends, I guess both what you’re seeing on TPV and payment-type selection? Or are you assuming it gets worse in November and December and then sort of stabilizes from there?

Thanks for the question, Ken. So we’ve taken a look at the trends from late in the first quarter. Those have continued into the second quarter. Our assumption is that those trends persist through the quarter. We begin to see some stabilization in Q3 and throughout the rest of the fiscal year. It’s really – as I mentioned, overall, pretty stable spend environment, but some moving parts around payment type composition. And that’s the thing that we’ve tried to capture in our assumptions for the rest of the year that there is some adjustment that’s happening now. We’ll get ahead of that in the second half of the year and start to drive incremental adoption to overcome or mitigate some of those behavioral changes. So it’s not something that we expect to, for example, deteriorate throughout the year or anything like that. But we are assuming the trends we’ve seen early in the December quarter and late in the first quarter continue this calendar year.

Okay. And John, just on that point, I mean what transaction take rate is being assumed in the guidance for the rest of the year? Is it stable quarter-over-quarter? Or is it declining? And I guess, is there an opportunity to offer some other solutions like working capital or pay by card in this type of environment to sort of offset some of those headwinds.

Yes. So our assumption for the second quarter is for our monetization to be down slightly and then grow in the second half of the year such that we exit the fourth quarter above where we were in the first quarter. And to your – the second part of your question about other products, that’s 100% true. So we think – we have highlighted FX transactions and virtual card payments, just as examples because those have been large drivers of growth historically. But we have some really good trends happening with some of the newer products, including pay by card and working capital. That we think can be significant drivers of monetization expansion, not only later this year, but in years ahead. So we’ve talked in prior quarters about this portfolio approach that we take with ad valorem payments. And we expect some of these newer payment products to be able to at least partially mitigate some of the trends that we’ve seen recently.

Thank you very much. Our next question comes from Brent Bracelin from Piper Sandler. Brent, your line is open. Please go ahead.

Thank you. Good afternoon. I guess, René for you. We’re seeing a number of stress fractures in the SMB sector emerge. I think

Super helpful color there. And then just one quick follow-up for John. The implied guide for the second half does still look like you’re looking for 10% overall growth, does that assume increasing wallet in the soft landing? Or are you actually baking in a hard landing into those 10% growth rate? Thanks.

Yes. We have, I think, a long track record of increasing our penetration with customers, helping small businesses automate more of their processes with all the payment products that we have, our whole portfolio, that allows them to bring more payments onto the platform. We’re assuming that those trends continue, but that the overall payment volume and the payment volume per customer is very muted down slightly as we talked about in the second quarter, mid-single digits on a year-over-year basis on a TPV per customer. So we’re not trying to predict or forecast the overall sort of macroeconomic impact here other than projecting forward the behaviors that we’ve seen from our customers in this environment, which, as we said, have shifted a little bit. So we’re assuming those ships will continue and we’ll be able to partially offset or mitigate some of those through continued progress with share wallet and some of the product improvements and experience improvements that René mentioned earlier.

Got it. Thanks.

Thank you.

Thank you very much. Our next question comes from Samad Samana from Jefferies. Samad, your line is open. Please proceed.

Hi, good evening. Thanks for taking my questions. So maybe, John, just thinking through the commentary on ad valorem and payment type selection I know you addressed the type of both where – what payments are going towards in terms of end spend and then talking about payment types. But maybe if we could actually triangulate, if you think about the ad valorem transactions themselves, right? So you gave 3.2% of the mix in the fourth quarter was from virtual card and 1.7% was from cross-border in local currency what’s the concentration there look like, right? So if I isolate it to that 3.2%, how concentrated is that amongst a certain number of suppliers? Because if I annualize that, that’s like $8 billion, is it a handful of suppliers that are accepting that in terms of virtual card? Is it hundreds of suppliers? I’m just trying to get at the level of concentration within that spend?

Yes. Thanks for the question Samad. So I’d say on cross-border payments, it’s very diversified across a large number of suppliers without a significant concentration. On the virtual card or vendor direct side of things, it’s thousands and tens of thousands of suppliers, not tens or hundreds. With that said, we do have large suppliers who are – think of examples like national providers, whether its utilities or telecoms or things like that, which are used by many customers of BILL. So there’s a many to one relationship. But if we step back and look at the overall spend profile for any of our payment products, but that in particular, we don’t feel like there’s any sort of outsized concentration or anything like that of a very small number of suppliers.

Got you. And then maybe asking the question on the spend side. So if I think about the type of payments that are made using ACH versus the type of payment that a customer may choose to make virtual card in. I guess what I’m wondering is, is that are the payments that are typically selected for ad valorem more discretionary versus maybe something that is more recurring if it’s ACH. Once again, just trying to understand if there’s different concentrations at this specific higher fee level.

Yes. That’s a great clarifying question. I’d say there might be a higher percentage of discretionary spend that flows through our Spend and Expense card program because that involves individual cards, some of which are physical cards, not all virtual and therefore, more sensitive to things like T&E, which we mentioned before, that’s been strong. On the virtual card program, the Vendor Direct side, AP automation for BILL. We don’t see significant differences between, say, an ACH payment that might be set up for a one-off transaction or even one that’s an auto charge or an auto debit to a bank account versus a virtual card payment that’s delivered to a supplier. In some case, it’s the supplier who’s driving. Here’s how I want to get paid, and their buyer takes that action. In other cases, it’s the buyer. I don’t think there’s big differences other than transaction size, where most suppliers do have limits and various other variables that they want to manage when deciding whether to take a card payment.

Great. Appreciate the clarity. Thanks for letting me squeeze two in.

Thanks, Samad.