BILL - NYSE

Good afternoon. My name is Lydia, and I'll be your conference operator today. At this time, I'd like to welcome everyone to BILL's Fiscal First Quarter 2026 Conference Call [Operator Instructions] I'll now turn the call over to Jun Wang, Director, Investor Relations. You may begin your conference.

Thanks, Rene. Our Q1 results exceeded our expectations as a result of focused execution and strong operational rigor. As you heard from Rene, we made great progress on our strategic priorities. To start, we expanded our ad valorem payment portfolio to deliver increased value for both buyers and suppliers. In Q1, we introduced BILL Cash account, the first step of a broader treasury capability. It serves as an operating bank account that enables fast payment speed, integrates seamlessly with BILL and accounting software and generates revenue for both customers and for BILL. Early feedback from customers is very positive. Steve Chaney, CEO of accounting firm, Chaney & Associates, has scaled his firm to serve more than 1,300 clients on BILL since 2019. Steve said and I quote, "The BILL Cash Account makes the platform we rely on even more powerful. Now I have a one-stop shop to manage payables, card spend and cash all in one place. Many of our clients are churches and nonprofits, and this integration simplifies how money moves in and out of their organizations, helping them manage cash flow more efficiently and maximize their funds in a single trusted place." The combination of BILL Cash Account and our broader financial operations platform is a powerful flywheel that enables customers to manage more of their funds and transactions within the BILL platform. This drives TPV per customer expansion and creates an opportunity for transaction monetization growth. Our Supplier Payments Plus solution, or SPP, is our newest advanced ad valorem payment product, and it entered the commercial scaling phase in the first quarter. SPP is designed for the largest suppliers in our diversified 2-sided network and advances how we serve them by unifying payments, workflows and dedicated account management into a comprehensive purpose-built offering. Suppliers today often navigate dozens of disconnected portals to submit invoices and track different types of payments, which consumes time and increases the cost of payment acceptance. We are solving this pain point with an integrated software and payment offering that serves as a single destination for suppliers to track and manage receivables and access rich remittance data. The strong value proposition of this solution is resonating with large suppliers in our network. While it's early in the commercial phase, suppliers are leveraging this new capability to complement virtual card payments with enhanced ACH and some are leaning in with annual or multiyear agreements. We see an opportunity to engage suppliers at a broader payment portfolio level by providing them with tools to optimize receivables for convenience, flexibility and control. As with many enterprise solutions, the sales cycle is longer than our historical SMB trials, and we are building out our enterprise go-to-market capabilities to accelerate prospect conversion. Shifting to our progress in mid-market. Our Spend & Expense solution continued strong traction with higher spend businesses who typically have a large volume of transactions and complex business rules. In Q1, card spend per customer reached a record high of $145,000. In support of these larger businesses, we recently introduced a set of new functionality that enable businesses to integrate with their vendors and automatically collect, match and categorize receipts. We also rolled out upgraded budget workflows that allow businesses to configure and customize based on their business policies, increasing the depth of our solution and driving stronger engagement. As we move upmarket, we're adapting our approach on balancing customer unit economics with market penetration. We are shifting more direct go-to-market resources towards larger AP/AR and Spend & Expense prospects where we see strong unit economics and greater monetization opportunities. On Spend & Expense specifically, we are prioritizing customer segments where we can improve rewards efficiency over time, aligning our sales and marketing objectives with incentive structures that support higher quality, more durable revenue. Our accounting channel is a key foundation of our distribution strategy, a durable advantage that enables us to expand our ecosystem, acquire customers efficiently and drive multiproduct adoption. Accountants rely on BILL as a core technology component of their past practices, and we are making progress extending our distribution reach. In Q1, we added more than 250 accounting firms, bringing our total to over 9,300 firms. We're now replicating our playbook with the new Embed 2.0 partnerships. As Rene mentioned, we recently signed 3 important partners, NetSuite, Paychex and Acumatica. These partnerships will accelerate our ability to drive adoption of the BILL platform among small and midsized businesses. Importantly, we will roll out the full portfolio of our payment solutions to these partners over time, enabling them to deliver more value to their customers while deepening the value we realize in return. In October, NetSuite Intelligent Payment automation powered by BILL was announced and customers are already using it, representing a significant proof point of our Embed 2.0 strategy in action. We're now working closely with our other partners as they progress towards general availability in the coming quarters. Turning to our progress on AI innovation. We introduced new AI agents in onboarding, support and workflows such as vendor management, payments and receipt management. These new agents allow SMBs to bypass step-by-step processes and complete tedious tasks instantly. Furthermore, we're also scaling the use of AI internally to drive meaningful productivity gains across all BILL internal teams. For example, within our front-end modernization work stream, our engineering teams are leveraging AI to automate code generation, testing and refactoring. In the areas where AI was applied, we're seeing significant improvement in developer productivity, empowering our engineers to accelerate delivery while maintaining quality. In summary, in Q1, we executed well on our fiscal '26 priorities with a simultaneous focus on profitability expansion. In October, we made progress on further aligning our organization with our strategic priorities and increasing operational efficiency, which Rohini will cover in more detail. We are executing with clarity and speed, positioning us to continue leading the financial operations category while delivering greater shareholder value over time. I'll now hand the call over to Rohini to provide more details on our financial performance.

Thank you, John. We started the year with significant momentum and continued our track record of delivering on our commitments. As we shared on the last earnings call, our focus continues to be on scaling BILL into a much larger and a more profitable business. Our Q1 results underscores that focus with strong revenue growth and profitability expansion. In Q1, we delivered $358 million in core revenue, growing at 14% year-over-year, hitting the top end of our guidance range. Non-GAAP operating income was $68 million, $10 million ahead of the high end of our guidance, driven by disciplined expense management and some deferred investment timing. Let me share some key highlights of our Q1 performance. Within our integrated platform, BILL AP/AR revenue grew 10% year-over-year. Subscription revenue grew 6%. We added 4,000 net new customers during the quarter. This level of net adds is lower sequentially and reflects our enhanced focus on higher ROI customer acquisition and ARPU expansion. BILL AP/AR transaction revenue was $123 million, up 12% year-over-year. TPV per customer saw a slight decrease, which was in line with our expectations. AP/AR transaction monetization increased 0.3 basis points year-over-year. BILL Spend & Expense card payment volume increased 21% year-over-year, driven by strength in retail spend. Spend & expense revenue totaled $157 million in Q1, reflecting a 19% growth year-over-year. Rewards increased to 132 basis points as a percentage of payment volume, up 10 basis points compared to Q1 '25. We are now scrutinizing and actively adjusting our reward structure. We expect this will result in rewards flattening and over time declining as a percentage of TPV. Moving on to profitability. Non-GAAP operating margin expanded over 250 basis points sequentially or approximately 300 basis points, excluding the benefit of float revenue. These strong profitability results reflect our ongoing focus on operating efficiency, a temporary pause in hiring and a deferral of certain investments. Shifting to our business update. As you heard from John, we began the year with strong momentum driven by focused investment and execution approach. We are carrying this principle forward and applying a strong profitability lens across operational and investment decisions. On our last earnings call, we noted that our fiscal '26 profitability guidance reflected this disciplined approach, one that emphasized continued expense management and further structural efficiencies. As a part of this initiative, over the last 2 months, we have finalized and executed a reduction in force of approximately 6%. In connection with this action, we incurred $9 million of restructuring charges in Q1. These charges, which are excluded from our non-GAAP results, consisted primarily of cash expenditures of severance payments, employee benefits and related costs. As we pursue more meaningful operating income expansion over the next few years, we are undertaking additional initiatives across our revenue profile and expense base, including the following: on the top line, we are taking actions to enhance the quality of revenue, for example, prioritizing higher-value customers and ARPU expansion over net adds growth, ROI-based approach to rewards and evolving our pricing to better reflect the value we deliver. On the expense side, we plan to expand our talent footprint strategically in low-cost geographies. In addition, we have partnered with a third party to perform a comprehensive outside-in assessment of our cost structure. This work, combined with the internal efficiency actions already underway, will support continued improvement in profitability. Before we get into the detailed guidance, here are a few key assumptions. First, I want to reiterate our fiscal '26 AP/AR volume and take rate expectations. We are assuming flat volume per customer and a similar level of take rate expansion as we did in fiscal '25. On Spend & Expense, we expect card payment volume to grow in the high teens year-over-year in fiscal '26 and the take rate for fiscal '26 to be slightly above 250 basis points. Second, we updated our float yield assumption to be in line with the current consensus. That now includes one additional rate cut anticipated in calendar '25. The updated float yield assumption reflects the Fed funds rate exiting fiscal '26 at approximately 325 basis points. Third, on the cost side, as I mentioned last quarter, our full year guidance reflected structural changes aimed at driving efficiencies. The recent 6% reduction in force was a direct outcome of these initiatives and was already incorporated into our prior fiscal '26 guide. Now turning to guidance. For fiscal Q2 '26, we expect total revenue to be in the range of $395 million to $405 million and core revenue to be in the range of $359 million to $369 million, reflecting 12% to 15% year-over-year growth. On the bottom line, for Q2, we expect to report non-GAAP operating income in the range of $63 million to $68 million. We expect non-GAAP net income in the range of $63 million to $67 million and non-GAAP EPS to be between $0.54 and $0.57. Shifting to full year guidance. For fiscal '26, we expect core revenue to be in the range of $1.46 billion to $1.49 billion. We expect float revenue of $134 million, $5 million lower than the prior guidance, bringing total revenue to the range of $1.6 billion to $1.63 billion. Turning to the bottom line. We expect non-GAAP operating income in the range of $257 million to $277 million or 16% to 17% in non-GAAP operating margin. Our updated operating income guidance implies an ex float margin expansion of more than 290 basis points compared to fiscal '25. Relative to our prior guidance, the updated outlook reflects a $16 million increase in ex float profitability or 106 basis points of additional margin improvement. We expect non-GAAP net income in the range of $249 million to $265 million and non-GAAP EPS to be between $2.11 and $2.25. For fiscal '26, we expect stock-based compensation expenses to be approximately $260 million, which is $30 million or 10% lower than we previously communicated. This implies SEC at approximately 16% of revenue. In closing, we executed with rigor and discipline and delivered a strong Q1. We made significant progress executing our strategic priorities and driving greater efficiency across the organization. Looking ahead, we see tremendous opportunity to deepen the value we deliver for SMBs, extend our market leadership and position the company for sustainable, best-in-class financial performance. And now we'll open up the call for Q&A.

[Operator Instructions] Our first question comes from Andrew Schmidt with KeyBanc.

It's great to see the product advancements and all the integrations that you guys have rolled out. So good job on that. If I could ask about the move up market. If you could talk about whether you're seeing that in your customer numbers yet or if that's to come? Obviously, it's a nice needle mover once you get that going. But -- and then if we could also, as a corollary to that, talk about the payback period, unit economics, sales and marketing intensity as you kind of shift up market that you should expect. I know you've already kind of been moving up already, but it seems to obviously be a little bit more of a concerted shift now.

Yes. Thanks for the question, Andrew. Our focus on mid-market has been a bit of a -- an evolution where it started as an organic pull where we saw increased demand in the market from larger businesses. And that's now become a deliberate strategy where we're proactively investing in our go-to-market resources and capabilities and tactics as well as product capabilities where we're rolling out new features for procurement, multi-entity, bulk pay, supplier payments and things like that. So demand has been good. And I think we're making steady progress at evolving the composition of the new customers that we acquire, and we continue to see good results with acquiring mid-market businesses. To move the needle on the business overall, it is going to still take a little bit of time, just given the size of the installed base that we have in terms of customers and revenue. But as we've said previously, a typical mid-market customer is probably 2x the size in terms of TPV than the average SMB, and they're much more likely to adopt multiple products. This translates into much higher ARPU, TPV, [ Aval ] payments, all of which will improve our unit economics. And that's really one of the main drivers of this area of focus for us.

Yes. It's actually a really interesting time in the evolution of our platform and our capabilities and the value that we're able to deliver to our small business customers and how that influences our pricing strategy. We've obviously added a ton of capabilities lately. And we have made a couple of near-term pricing changes, things like adjusting some transaction pricing last quarter, some pricing tier changes more recently. And these are really just short-term actions we've taken, but they're in the context of a much broader pricing optimization effort that we have. And that's where we think AI actually becomes an additional tailwind as we think about optimization over time. And what we're trying to accomplish is creating strong alignment between the value we're delivering and the value that BILL also generates from these customer relationships, and that should have a positive impact on customer ARPUs and revenue per customer over time. We don't have a specific time line for the impact of these pricing initiatives, but I can say that it is an important priority and initiative at BILL in fiscal '26.

Our next question comes from Darrin Peller with Wolfe Research.

Yes, absolutely. There are so many ways of calculating the Rule of 40, but the spirit of all of those is largely the same. We are being very thoughtful about how we define it for our business because the goal is not just to choose a formula, but really to ensure that we're truly reflecting how we create the durable value for the business, right? And the idea is to be able to balance growth and margin. We look forward to sharing our framework and the rationale that we adopted for the Rule of 40 during the Investor Day in the first half of the calendar year '26. So this is still a work in progress, and you'll see it soon.

Okay. All right. Guys, a quick follow-up. You beat the quarter in terms of beating your own guidance on top line. And so maybe just help us understand what was the -- it looked like some spend trends on some of the SME side, but perhaps a little more color on what you thought was the driving force of the upside and sustainability of that as we see going forward.

Yes, absolutely. So let me start with the beat on operating income, excluding float. Float has some other assumptions that I can talk through later. So on the -- excluding float OI, we had a beat of roughly $11 million. I would categorize $5 million of that as what I would call timing as we were contemplating a reduction in force we decided to pause and slow down not only hiring, but also the other investment spend as we settled the organization a little bit. So that drove a little bit of in-quarter benefit that we expect to spend into the rest of the year. The rest of, I would say, $5 million or $6 million of flow-through is a combination of -- we had a small onetime goodness that came in through losses, which quarter-to-quarter fluctuates and we had a bit of a goodness there. But about, I would say, $4 million to $5 million were still good flow-through of the efficiency efforts that we've been executing on as we go through the year. So that is the part that will flow through, which resulted in a $16 million increase in the operating income ex float guidance. If you look at the OI at a total level, including float, there was -- we always follow the guidance of the consensus. So there was one more rate cut that was added to the consensus, which we have incorporated into our guidance now. This impacted our OI by about $5 million, as I think stated in my script. So that is offsetting impact to the $16 million and the rest was flowing through. So I hope that helps answer your question.

Our next question comes from Keith Weiss with Morgan Stanley.

Our next question comes from Spencer Anson with SIG.

Yes. I can add a couple of things on invoice financing. As Rene mentioned, it is a really important part of what we call our emerging ad valorem portfolio, which is now becoming a material part of our AP/AR transaction overall offering from a revenue perspective. So we discussed last quarter as well that we're not going to discuss individual pieces of the portfolio and each one of the products. But overall, this emerging portfolio nearly grew at 40% last quarter in Q1 year-over-year. So very exciting growth in that portfolio as the rest of the ad valorem portfolio continues to stabilize. The other thing that we are keeping in mind is the profitability balance with the growth. So we want to continue to be thoughtful of which risk tiers we take on with the invoicing portfolio, and we are pricing them appropriately to cover for the risk and the cost that comes with it, and that's going to be a real focus. So there may be some places we do trade-offs and just not follow rapid growth, but balance it with the profitability outcomes. Congrats on the strong start to the year.

Our next question comes from Bryan Keane with Citigroup.

Congrats on the solid results. I'm going to ask on the AR/AP kind of that take rate. Looked kind of flattish sequentially, but you guys are kind of reiterating kind of expect kind of the same kind of improvement that you saw last year. Can you just talk about some of the initiatives that are going to drive that take rate forward and how you feel about it after the first quarter going into the second, what we can expect?

Yes, I can take that, absolutely. So we had said last quarter that the AP/AR take rate will be similar expansion to last year, which was roughly 0.4 basis points of expansion. So we continue to reiterate that guide. In Q1, you saw very similar expansion as well. In Q4 last year, we had mentioned that AP/AR take rate was strong, and some of that was driven by the increased activity in international FX, where we saw some initial volume from pull-ins due to tariffs that were expected to happen. So we saw that normalize as we came into Q1. The numbers were very close to where we expected. And going into Q2, the only part of seasonality that I want to point out is that we see additional TPV coming into Q2 in the AP/AR portfolio, and that's largely as people are closing the December year. We see increase in TPV largely driven by the ACH volume and checks in some cases, which is lower monetization. So the take rate in Q2 goes down sequentially. But overall, it doesn't have an impact on the revenue, increase in TPV and lowered math of the take rate. And as I look forward, we are seeing some green shoots. Our emerging portfolio, as I mentioned, continued strong momentum. The revenue there grew nearly at 40%, and that will continue to drive the take rate expansion. In addition, we are in early stages of SPP, which is an important strategic addition to our portfolio as well. And as we are seeing, the value is resonating with the large suppliers. So as we exit this fiscal year, we expect it to start contributing to the take rate expansion as well.

Our next question comes from Tien-Tsin Huang with JPMorgan.

Just thinking about the shift to larger clients, it feels like maybe you're leaning a little bit harder into that. Correct me if I'm wrong there. Just overall, how might that impact the P&L and some of the KPIs? And also for the smaller clients that you're previously going after, are you going to assume that the partner channel will pick up some of the slack there? I'm just curious how those will be addressed looking ahead.

Yes. Thanks for the question. Yes, our mid-market focus, ultimately, we think, has the impact of driving stronger engagement, retention and growth from clients who adopt more of our solutions. So we're increasingly rolling out products in support of larger businesses. And I think we had several comments in prepared remarks that talked about quality of revenue and how we're making investment prioritization decisions based on improving the quality of revenue and where there are trade-offs that we need to consider, we're going to prioritize revenue growth, quality revenue growth over just pure customer acquisition, number of customers. So that shift to increasing investment in this mid-market segment ultimately supports ARPU expansion and other areas of revenue growth. And the economics typically work out for us very good. We have strong unit economics. We have very good lifetime values because of multiproduct adoption and higher TPV per customer from this mid-market segment. So we think, as Rohini mentioned, our focus on balancing profitability and growth, it's additive to that priority that we have.

Yes. Can I add some more color here? Tien-Tsin, we are also thinking about a two-pronged approach here, right? There are some agents that are very key to our products and are essential agents to what we do, and they will be included and it's sort of given to all of the users of the product. But that will provide us opportunity to create more pricing on the same subscription plans because we're now adding more value. Additionally, we also will have higher-value agents that will be priced based on access and how much you use it. So this will be a two-pronged approach that we are pursuing right now.

The next question is from Nate Svensson with Deutsche Bank.

Yes. And just one thing to add on the economics, the monetization associated with the product. One of the things that we're seeing with the early adoption of the rollout here is that having an integrated cash account is likely to bring more TPV onto the platform. And as Rene said, it stays within our ecosystem for longer. So that additional TPV from offline to online in the BILL platform creates an opportunity for incremental ad valorem adoption. So that's the primary monetization method. And the secondary one that Rene mentioned is by having balances in our system for longer, that creates an incremental float revenue or transaction revenue stream for us as well.

That's super interesting stuff. I appreciate the detailed answer. I guess for a quick follow-up, just on the spend and expense rewards continues to tick up a little bit. Rohini, I think you talked about scrutinizing the structure there and then that eventually flattening out. So maybe would love to hear some specifics on what you're doing in terms of that scrutiny. Is it specific client contract? Is it more broad-based changes to the reward structure, maybe it's the front book? Just any details there? And then how long it takes for us to kind of level out with where we're at on rewards?