BILL Holdings, Inc.

Good afternoon, and welcome to Bill.com's Fiscal Second Quarter 2021 Earnings Conference Call. Joining us today for today's call are Bill.com CEO, Renee Lassert, and CFO, John Reddick. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. With that, I would like to turn the call over to Karen Sansot for introductory remarks. Karen?

Thank you, operator. Welcome to Bill.com's fiscal second quarter 2021 earnings conference call. We issued our earnings press release a short time ago and furnished the related form 8K 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 Renee Lissert, chairman, CEO, and founder of Bill.com, and John Reddick, 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.com 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 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 non-revenue financial figures discussed today are non-GAAP 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. Now I'll turn the call over to Rene. Rene?

Thanks, Karen, and good afternoon, everyone. Thank you for joining us today. I hope that all of you and your families are in good health and doing well. In this uncertain time, we are inspired by the resilience we have seen among small and mid-sized businesses as they rebound and adapt to this pandemic-induced environment. Bill.com has always been a champion for SMBs. They are responsible for generating approximately half of the U.S. GDP. They create jobs, drive innovation, and act at the heart of their local communities. Our mission is to make it simple for businesses to connect and do business so that they can focus on what they do best. Our platform simplifies a very complex process, financial operations and payments. We've created an easy-to-use platform that automates financial processes and makes B2B payments simple, fast, and secure. With more than 100,000 customers and 2.5 million network members, We believe we are the leading digital B2B payments platform for SMBs and operate one of the largest B2B networks in the United States. We take seriously the trust that customers and network members have placed in our platform, allowing us to be a significant part of their digital transformation. Demand for our platform continues to be strong as evidenced by our Q2 results across all our key financial and operating metrics. We delivered very high growth in Q2, including core revenue growth of 59% year-over-year, transaction fee growth of 98% year-over-year, and total payment volume growth of 40% year-over-year. In addition, we exceeded $50 million in core revenue in the quarter for the first time and had an annual TPV run rate of $140 billion. These results demonstrate the strong adoption and scale of our platform, as well as our successful execution against our initiatives that expand our platform and extend our reach to many more customers. Such initiatives, including expanding our payment offerings, building direct relationships with network members, increasing our reach through strategic partnerships, and continuing our investments in platform and people. Because of these initiatives and our solid execution, we delivered record total payment volume and accelerated TPP growth in Q2. We had a great pace of new customer additions and higher customer retention rates. And in addition, we continued to drive strong adoption of our newer payment types, especially virtual card and cross-border payments. These factors contributed to our doubling of transaction revenue over the last 12 months. And we're just beginning. There's a significant market opportunity of 6 million businesses with employees in the U.S., and more than 20 million worldwide. And we believe the vast majority of them are still using manual processes. We are in the beginning stages of a digital wave and are proud about the role we are playing to help small and mid-sized businesses accelerate their digital transformations. Our platform has helped businesses and organizations such as United Fire and Mongo Bay digitally transform their businesses. United Fire is a family-owned business that provides maintenance, testing, and inspection for fire equipment at commercial businesses. When their longtime accountant left the company, their trusted VAR partner recommended that United Fire implement Bill.com. Using Bill.com and Sage Intact, United Fire's employees have been more efficient working from home than in the office. Bill.com was simple for them to implement and use, and that's provided crucial insight for running a business during all the recent uncertainty and shutdowns. United Fire saw immediate success with Bill.com and was able to cut their time spent on AP in half and reduce time spent on approvals by at least 50%. With Bill.com, they can now approve 20 payments in less than 30 seconds. Another example is Mongo Bay, a U.S.-based nonprofit conservation and environmental news platform that produces original reporting in multiple languages by leveraging over 500 correspondents in approximately 70 countries. Before Bill.com, Mongo Bay spent a lot of time dispersing payments through a number of online payment systems and banks. In addition to the time-consuming management of these diverse platforms, they were incurring significant wire fees. Using Bill.com's cross-border service, Mongo Bay has achieved cost savings of approximately 50% on international wire transfers. With access to timely and complete transaction information through the Bill.com platform, they have reduced their audit time by at least half. Mongo Bay estimates they have saved up to 25 hours per month due to automation and having instant access to their payment information, providing them more time to focus on their missions. We are working on a number of initiatives to further strengthen our platform and expand our market reach. These investment initiatives reflect our continuous effort to enhance our customers' experience and satisfaction and to attract new customers. Our work to provide increasing value for the small business community is never done. One of our top investment initiatives is expanding the payment offerings on our platform. We offer a broad array of payment methods so we can provide the best service, convenience, and speed for our customers and network members. Over the last few years, we launched several faster payment offerings, including virtual card, cross-border payments, and instant transfer, which is our real-time payment product. We're investing in these offerings to offer more choice for customers, increase simplicity, and drive adoption. For example, due to the strong demand we've had for cross-border payments, we recently added Citibank's WorldLink as a second partner for processing transactions. Having multiple partners provides us with a more resilient service, faster delivery speed, and competitive pricing for larger transactions. In addition, we are expanding our capabilities in the real-time payment space through additional partnerships for our instant transfer products, and we'll have more to talk about over the next few quarters. Our recent initiatives that bring supplier enablement in-house are going well and have driven increased adoption of electronic payments. These initiatives help drive our Q2 transaction peak growth of 98% year-over-year and continue to gain momentum. Given our success with driving virtual card adoption and cross-border payments through our AI, sales, marketing, and customer support initiatives, we're now leveraging that playbook to promote real-time payments to network members. These actions also enable us to build direct relationships with network members and provide us a source of new customer prospects. We are also continuing to expand our market reach to mid-market customers by adding new integration with mid-market accounting software. We currently serve mid-market customers with the integrations to Sage Intacct, Oracle NetSuite, and Intuit's QuickBooks Enterprise. I'm happy to announce that we are building integrations with both Microsoft Dynamics Business Central and Great Plains. Tens of thousands of mid-market companies rely on Microsoft Dynamics ERP systems, so we expect these integrations to allow us to better serve these companies. We plan to launch this product integration in the second half of calendar 2021. We're also investing to expand our strategic partnerships with financial institutions. These partnerships reduce our customer acquisition and support costs and significantly extend our reach to small and mid-sized businesses. In Q2, Wells Fargo launched our integrated offering, Build Manager, through their commercial electronic office digital banking portal. We're beginning our go-to-market strategy with Wells Fargo and look forward to serving these customers. We currently have white-label offerings with the top three banks in the U.S., JPMorgan Chase, Bank of America, and Wells Fargo. During the quarter, we also continue to make good progress on the design, development, and integration of an SMB offering with one of the largest financial institutions in America, as previously discussed. We look forward to launching this later in calendar 2021. Another important part of extending our reach is our ability to enable accounting firms to manage their multiple clients with an accountant branded experience. Accountants are core to our distribution strategy. As trusted advisors, accountants are uniquely positioned to guide businesses on the digital transformation path. Customers acquired through this channel have very high retention rates since their accountant is one of their most trusted long-term advisors. We continue to see strong, increasing adoption by our existing firms while we continually add to our base of over 5,000 accounting firms, including 80 of the top 100 firms. Through our product development, sales, marketing, and customer success initiatives, we are partnering with more firms, acquiring more clients at firms, and driving higher transaction volumes. In Q2, we extended our account and channel offering with a bill payment solution, specifically packaged for wealth management firms and family offices. This new offering was driven by demand from wealth managers and accounting firms who wanted to use Bill.com to better serve this unique client base. This extension into wealth management demonstrates the power and flexibility of our platform. We're pleased with the early traction we are seeing with this new offering, which expands our addressable market beyond businesses to wealth management firms and family offices. I'd like to provide an example. Cornerstone Family Office was an early adopter of our platform within the wealth management segment. Cornerstone provides comprehensive wealth administration services to its high net worth families. Prior to Bill.com, for a number of their families, invoices and checks would be couriered back and forth between families and their office. Cornerstone adopted Bill.com to achieve their goal of creating a more efficient process with the added benefit of providing critical security controls and robust audit trails. With Bill.com, Cornerstone has been able to cut their time spent on AP by at least 40%, provide a better overall experience to their clients, and add more new clients without adding staff. Turning to our own operations for a moment, we continue to invest in our team. Even in this remote environment, we've been able to recruit and onboard great talent. In the second quarter, we hired 78 new people, bringing our team size to more than 700 full-time employees. We also added a new member to our board of directors, Steve Fisher. As the former CTO of eBay and EVP of technology at Salesforce.com, Steve has built some of the world's largest technology and payments platforms and developed multi-billion dollar businesses. I'm excited to work with Steve and to add his deep engineering and product development experience to our board. We have an incredibly talented and diverse board, and we are delighted to have them on our journey to make it easy for businesses to connect and do business. In closing, I'd like to call out the breadth of our platform. It powers financial operations for organizations ranging from very small businesses to mid-market companies and serves as branded offerings for financial, accounting, and wealth management partners, large and small. We have a very large market opportunity and the right platform, strategy, partnerships, and team to capitalize on it. I'd like to thank all of our Build.com employees for their dedication in serving our customers and each other. Together, we've enabled our customers to adapt quickly to the pandemic and accelerate the digital transformations. Bill.com has an exciting future as we help businesses simplify their financial operations so they can focus on their core business. Now, I'll turn the call over to John to review our financial results.

John? Thanks, Rene. Today, I'll provide a brief overview of our fiscal second quarter 2021 financial results and discuss our financial outlook for the fiscal third quarter of 2021. As a quick 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. With that background, let me turn to our financial results. Q2 results exceeded our expectations across all areas of the business, driven by strong execution from all teams and improving trends with our SMB customer base. Our platform is helping many businesses start their digital transformation and adapt to the new realities of a remote working environment. The initiatives we have to expand our platform's payment offerings, extend our reach with strategic partners, and build direct connections with network members are paying off, and we experience strong growth in Q2 across all of our key financial and operating metrics. Total revenue for Q2 was $54 million, up 38% year-over-year, as new and existing customers leveraged our platform for their financial operations. Core revenue, which represents subscription and transaction fees, was $52.3 million in Q2, up 59% year over year. This significant growth acceleration compared to the 53% year over year growth in core revenue last quarter was ahead of our expectations. To provide additional color on core revenue, subscription revenue in Q2 increased to $26.6 million, up 33% year over year. This growth was driven primarily by the increase in the number of customers on our platform. Transaction revenue increased to 25.7 million in Q2, up 98% year-over-year, driven primarily by higher average revenue per transaction, which increased 71% year-over-year, as well as an increase in the number of transactions we processed in the quarter. Transaction revenue now represents 49% of our core revenue, up from 40% a year ago. Transaction revenue growth is being driven by increasing payment activity by our customers, leading to total payment volume growth and strong adoption of virtual cards and cross-border payments, both of which carry higher revenue per transaction than fixed fee payment methods like checks and ACH. We also experienced a stronger than usual seasonal increase in payment activity in December. We believe in part due to pent-up transactional activity from earlier macro-related payment delays, and this resulted in both TPV and transaction fee revenue that were well ahead of our estimates. we believe the increased payment activity is an encouraging signal that our customers are rebounding. Moving to float revenue, we generated $1.7 million in float revenue in Q2. Our annualized rate of return on customer funds held in Q2 was approximately 35 basis points, slightly above our estimated range for the quarter and down from 62 basis points last quarter. Float revenue was above our expectations, mainly due to the increased customer fund balances we experienced throughout the quarter as a result of the strong TPP growth we experienced. The reduced yield reflects the low current interest rate environment and maturing investments being reinvested at lower rate levels. We expect further quarter-over-quarter yield declines in the next two quarters. Turning to an update on our key business metrics, we ended the quarter with 109,200 customers, up 27% year-over-year. During the quarter, we added 5,600 net new customers, which was well above our expectations as we experienced broad-based demand and higher retention rates across all channels. We are pleased with the breadth and diversity of our distribution channels, where our horizontal go-to-market approach is a strategic advantage and results in no significant customer or channel concentration. Over the next few quarters, we continue to expect net customer ads to be lower than in recent quarters, given we're past the initial pandemic tailwind and we've been shifting our customer acquisition focus away from the smallest of businesses. Moving on to total payment volume, we processed $34.8 billion in TPV on our platform in Q2, up 40% year-over-year and 21% quarter-over-quarter. Our strong sequential TPV growth indicates that SMBs are getting back to more normalized business activity, despite the macroeconomic backdrop, and this is leading to strong payment activity. Looking ahead to Q3, we expect TPV in the March quarter to be down slightly from the December quarter due to seasonality. We processed 7.2 million payment transactions during Q2, which was up 16% year over year. We experienced an 11% sequential increase in transactions, which is very encouraging as we've seen the number of transactions per customer increase for the last two quarters, although it's still about 10% below pre-pandemic levels. Moving on to gross margin and our operating results, our non-GAAP gross margin for the quarter was 77.3%, slightly ahead of our expectations as a result of the strong transaction revenues from variable price products, which generally carry higher margins. We continue to expect gross margin in the range of 75% to 77% in the near term, primarily as a result of infrastructure investments we are making to support our financial institution partners, as well as reduced float revenue from the low interest rate environment. R&D expense was 17.8 million for the quarter, or 33% of revenue, compared to 31% of revenue in the second quarter of fiscal 2020. We continued to invest in additional hiring in R&D to support our product roadmap for payments innovation, improvements in the user experience and simplicity, and product development work relating to our new financial institution partnerships. Sales and marketing expenses were 12.6 million for the quarter, or 23% of revenue, compared to 30% of revenue in Q2 of fiscal 2020. As we discussed previously, we're being vigilant on our sales and marketing spend. G&A expenses were $14 million for the quarter, or 26% of revenue, compared to 29% in Q2 of fiscal 2020. The prior year quarter was the first quarter that reflected public company expenses, and since then, we've started to realize some economies of scale in G&A. As a reminder, unlike many other software companies, our G&A expenses reflect our investments in risk management and regulatory compliance, which are a core part of our competitive advantage related to our payments business. Looking ahead, we will continue to invest in our risk and compliance capabilities, but expect to achieve economies of scale over the longer term. In Q2, our non-GAAP operating loss was $2.7 million versus $4.5 million in Q2 of last year, and our non-GAAP net loss was $2.1 million, or a loss of $0.03 per share, based on 81.5 million basic weighted shares outstanding. Because we had a net loss on a GAAP basis, our diluted share count was the same as our basic share count for both GAAP and non-GAAP EPS calculations. Turning to the balance sheet, we ended the quarter with over $1.7 billion in cash and cash equivalents in short-term investments, which includes $1 billion of proceeds from our convertible note issuance during the quarter, net of issuance costs, and the cap call transaction. As of December 31, 2020, we had $2.2 billion in customer funds on our balance sheet, which was up almost $550 million, or 33%, from the end of Q1. Now let's move to our financial outlook. Based on our solid execution in Q2 and the strong trends we're seeing in our business, we're entering Q3 with momentum. Our expanded payment offerings, go-to-market initiatives, and strategic partnerships are driving high core revenue growth through customer acquisition, increased platform adoption, and a mixed shift to higher revenue payments. I'll now provide an outlook for our fiscal third quarter of 2021. For fiscal Q3, total revenue is expected to be in the range of $53.7 to $54.7 million. We expect core revenue in the range of $52.9 to $53.8 million, representing our view that the momentum from Q2 will continue in the current quarter. We expect float revenue in the range of $800,000 to $900,000, which compares to $5.1 million a year ago. Float revenue assumes that the Fed Fund's target rate will continue to be 0 to 25 basis points during the March quarter, and that our yield will be in the range of 15 to 20 basis points. Regarding our planned operating expenses, we will continue to develop our platform's capabilities and invest in R&D to support product development work relating to our new financial institution partnerships. We will continue our disciplined approach with regards to sales and marketing investment and will increase our investment as opportunities and unit economics dictate. On the bottom line, we expect to report a non-GAAP net loss in the range of $6.9 to $5.9 million and non-GAAP EPS loss of $0.08 to $0.07 on a per-share basis, based on a share count of approximately 82.5 million basic weighted average shares for Q3. In addition, in Q3, we expect stock-based compensation expenses of approximately $11 to $12 million and capital expenditures for our new headquarters and other requirements to be approximately $5 to $6 million. In closing, we're pleased with our increasing momentum and the growth opportunity fueled by the need for businesses to transform their financial operations. We're in a strong position with a leading platform that simplifies financial operations, and customers trust us to facilitate more than $10 billion of payment volume a month. We're also delivering very strong core revenue growth and accelerating transaction revenue growth. There continues to be macroeconomic uncertainty ahead, and it remains to be seen the impact this will have on SMBs. But we are committed to investing strategically to expand our reach and our platform's capabilities, which we believe will create a durable long-term growth runway. Now Renee and I will open up the call for your questions. Operator?

If you'd like to ask a question, please press star 1 on your keypad. In the interest of time, we ask that each person ask one question along with one short follow-up question. If we have more time after all questions, we'll open it up for additional questions. Your first question is from the line of Darren Peller from Wolf Research.

Hey, thanks guys. Nice job. Look, I just want to start off with, when I look at the actual transaction revenue, and I know you mentioned, you know, obviously trends were strong on the volume side, but actual yield also came in well, which, as you mentioned, underscored the success you're having in supplier enablement, as well as cross-border. So if you can just give us a little more color on what's happening there and what kind of progress has been made, even over the last few months, and what you expect in the next few to keep that going, that'd be great to hear.

Thanks, Darren. We've made great progress on understanding the go-to-market with respect to the suppliers, both for the virtual card product we have as well as international payments and helping suppliers internationally, for example, choose to be paid in the local currency. But we're still learning, and there's lots of opportunity there. So what we've said in the long term is that we believe virtual card penetration will be in the 5% to 10% range and that international payments will be in the 10% to 20% range. And we have no reason to say it's any different. We believe in the focus that we have.

No, that makes sense. But I mean, in terms of specifically, well, let's just hone in on cross border. I mean, you know, what kind of tools are you taking to enable that? If you can just give us a little more of an idea, what steps are being taken and how the response is from the end market, from the actual suppliers internationally. Thanks again, guys. I'll turn it back to you.

Yeah, there's a couple of components right there is first getting our customers to know and use our product for their cross-border payments. So we've done things inside the product. We've done marketing and product messaging. We've done sales techniques. All of these things combined with some AI to kind of look at the most likely customers to do activity is something that we're focused on. When we look at the FX penetration, which is also an important part of that part of our business, We are also using similar capabilities across the company to drive adoption of local currency payment, you know, by the suppliers. So taking the control, so to speak, away from the payer and putting it in the supplier's hands. So, you know, lots for us to continue to do and to grow, but we feel like we have a good handle on all the things that are kind of the variables there and we'll make progress as we move forward.

All right. That's great. Thanks a lot, guys.

Thank you.

Your next question comes from the line of Samad Samani from Jefferies.

Good afternoon. Thanks for taking my questions. Just an absolutely great quarter. So maybe the first one for you, Renee, you know, you talked about the different types of payment methods and maybe just a follow-up. I'm curious if you're