Bill.com Holdings, Inc. (NYSE:BILL) Q1 2024 Earnings Call Transcript

Bill.com Holdings, Inc. (NYSE:BILL) Q1 2024 Earnings Call Transcript November 2, 2023

Bill.com Holdings, Inc. beats earnings expectations. Reported EPS is $0.54, expectations were $0.5.

Operator: 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?

Karen Sansot: Thank you, operator. Welcome to BILL’s fiscal first quarter 2024 earnings conference call. We issued our 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 are René Lacerte, Chairman, CEO and Founder of BILL; and John Rettig, President and CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the future operations and 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.

A successful businessman shaking hands with a client in a modern office building, celebrating a successful financial transaction.

For additional discussion, 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 reports on Form 10-Q. 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. Please refer to today’s press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. Note that at times during this call, we will discuss BILL’s stand-alone results, which exclude our BILL’s Spend and Expense management formerly called Divvy, Invoice2go accounts receivable and Finmark Financial Planning Solutions.

Now I’ll turn the call over to René. René?

René Lacerte: Thank you, Karen. Good afternoon, everyone. Thank you for joining us today. During the quarter, BILL delivered strong profitable growth and continue to redefine the category with the launch of our integrated financial operations platform. Revenue in Q1 exceeded $300 million for the first time and grew 33% year-over-year. Non-GAAP net income was also strong at a 21% margin. While our performance exceeded our outlook and strong customer adoption continued, we started to see more intense macro pressure on our business related to spend late in the quarter, and that has continued through October. As a result of higher interest rates and tighter credit markets, capital and cash have become less affordable and available for SMBs. Some of our larger businesses have scaled back their spend while both customers and their suppliers became more selective with their payment choices.

Business behaviors changed rapidly in this respect. This has impacted our fiscal year outlook, which John will talk about more in a few minutes. We are taking actions to adjust to this new environment and are confident in our ability to navigate the short-term macro challenges while continuing to invest behind the long-term opportunity at hand. SMBs are often forgone when things are most challenging for them, serving SMBs is our North Star, and we will not forget them as we work to create more value for them and their suppliers in this market. We know these headwinds are only temporary and that our long-term focus on innovation, combined with the strength of our business model will help millions of businesses transform their financial operations while building an exceptional business.

I’m confident in our ability to execute given our history of responding to the dynamic environments in the past, and we will continue to get stronger. We have built a category to help SMBs automate their financial operations, so they can better manage their business and cash flow. Today, more than 470,000 businesses use our solutions and transact more than $280 billion in annualized payment volume. SMB’s trust and rely on BILL to be their central hub of finish operations. BILL’s platform also serves and empowers an ecosystem of thousands of accountants, leading financial institutions and millions of network members. As we continue to innovate and develop the SMB financial operations category, we see the value customers receive from our offerings and are working hard to bring more SMBs into the future with game-changing solutions.

This quarter, we rolled out our unified platform to customers. We have now integrated our portfolio of solutions into one platform for SMBs. We believe this will begin to unlock both the opportunity to serve many more businesses and meet more of their needs. Our integrated financial operations platform empowers SMBs to manage accounts payable, accounts receivable and Spend and Expense management all in one place. Businesses now have access to a cohesive experience across desktop and mobile that is unified, easy-to-use and consistent across solutions with integrated and intelligent workflow and consolidated insight, the new platform breaks down operational silos and increases visibility and control. A great example of the value of our integrated platform provides for SMBs is RenewalMD, the medical group practice specializing in reconstructive and cosmetic surgery.

Scott Regan, CEO said, and I quote, "BILL has transformed our AP process. The integrated platform gives us even better control. All of our full-time employees have a BILL Spend and Expense card. We now have visibility on who is spending and what they are buying. It’s the best thing we’ve ever done. The amount of hours we now save by having everything in one place, I can just click pay and sync is unbelievable". This integrated experience helps businesses large or small and will continue to further position BILL as the essential and central financial operations platform for SMBs. In addition to our integrated platform initiative, we also rolled out an enhanced Bill Accountant Console, a centralized home base for accounting professionals to simplify workflows and serve their clients more efficiently.

Based on the learning from our 7,000 accounting partners, the new console enables firms to prioritize tasks across the client base, manage their clients and assign staff support. It also allows accountants to easily add and select the right products across AP, AR and Spend and Expense on behalf of their clients. Many of our accounting partners have started to leverage the new console to provide greater value to their clients. We are excited to see these new capabilities in action and to continue helping accounting firms reinvent their practice while strengthening their client advisory services. The Bonadio Group, a top 50 accounting firm, is a great example of how accounting firms use our platform to create more value for their customers and more efficiently run their practices.

Thomas Tortora, Director of Accounting Implementation said and I quote, "Our professional services team at the Bonadio Group has found tremendous value in the unified platform created by BILL. Seamlessly integrating access to both BILL Spend and Expense and to BILL AP and AR platforms. This solution has streamlined our workflow, making it easier than ever for our team to interact with the platform. With this unified approach, we’ve gained greater efficiency, improved collaboration and gained a more comprehensive view of our clients’ financial operations, ultimately enabling us to better serve our clients and achieve our business goals. In addition to delivering best-in-class solutions for accounts, our white label solutions are deeply integrated in the experience of many of the largest banks in the U.S. Through this embedded approach, we are now making more of our payment capabilities available inside of the nation’s leading financial institutions.

Today, I’m happy to share that we’ve reached an agreement with our newest partner, Regions Bank, which is one of the 10 largest SMB banks in the U.S. Regions Bank will power a new digital AP and AR solution for its commercial segment customers and will leverage a host of our payment modalities, such as virtual card, pay by card and international payments. This is a great example of BILL bringing more and more of our payment solutions to the broad financial institutions market. BILL’s collaborative approach with all of our bank partners, combined with our platform expertise has enabled us to efficiently reach and better serve SMBs. Together with partners, we are executing to help millions of SMBs use our platform to automate their operations and transact trillions of dollars of B2B payments.

As the business continues to grow and we move from one phase of the company to the next, I’ve asked John to take on more responsibility for the day-to-day operations as President and CFO. I’ve worked with John for over nine years, and his understanding of our business is exceptional. I look forward to seeing his impact as we continue to scale and grow the company. In closing, we are excited about the launch of our integrated financial operations platform and its potential to provide significant value for SMBs and partners. We continue to drive meaningful innovation to lead SMBs into a simpler world. We aim to be at every touch point where SMBs want to do business, whether that’s at their banks, with their accounts or in the future within their payroll, commerce, marketplace or other software systems.

Our objective is to be the essential operations software for businesses and partners to thrive. All of us at BILL are energized by this potential. We want to thank our customers and partners who are on this journey with us to help SMBs change the way they do business. Now, I’ll turn the call over to John.

John Rettig: 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.

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