BILL Holdings, Inc.

Q4 2022 Earnings Conference Call

8/18/2022

spk12: Good afternoon. Thank you for attending the bill.com fourth quarter fiscal year 2022 earnings conference call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Karen Sansot with bill.com. Thank you. You may proceed.
spk10: Thank you, operator. Welcome to bill.com fiscal fourth quarter and full year 2022 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. At times during this call, we will discuss organic or standalone results, which exclude DIVI and Invoice2Go, which we acquired on June 1, 2021, and September 1, 2021, respectively. to help listeners understand our organic performance. Now I'll turn the call over to Rene. Rene?
spk15: Thank you, Karen. Good afternoon, everyone. Thank you for joining us today, and I hope your summer is going well. Cisco 2022 was a transformative year for build.com. We significantly expanded our platform solution and extended our reach, serving customers ranging from sole proprietors to mid-market companies. We entered new strategic partnerships and began building a global customer base serving customers in more than 150 countries. We are well positioned to capitalize on the tremendous market opportunity in front of us. In fiscal 2022, 400,000 businesses used our solutions to automate their financial operations, get paid faster, and better manage their cash flow, more than three times the number of businesses that used us in the prior fiscal year. We managed more than $225 billion in payments and our network grew to 4.7 million members that have originated or received an electronic payment through our platform. Our growth was driven by our organic initiatives as well as the strategic acquisitions of Divi and Invoice2Go. For the full fiscal year, we significantly exceeded our financial expectations. Total revenue was $642 million, an increase of 169% year-over-year. Bill.com's organic core revenue grew 77% year-over-year, and revenue from our spend and expense management solution increased more than 160% from a year ago. In addition to top line growth, we expanded our non-GAAP gross margin to 84%, up seven percentage points year over year. Our non-GAAP net loss of $24 million for the year was 70% lower than our estimate at the start of the fiscal year, as a result of our disciplined approach to growth and solid execution. The momentum that we created in fiscal 2022 positions us to be profitable on a non-GAAP basis in fiscal 2023. This is a testament to the value our platform provides and the efficiency of our go-to-market ecosystem. We experienced very healthy demand throughout the year. Our OrganicBill.com customer base saw record growth, and our customer retention and net dollar base retention rates both expanded meaningfully. Toward the end of the fourth quarter, we started to see signals of the macro environment impacting spend patterns, especially in discretionary categories like advertising. As businesses react to the macro environment, we believe that our platform becomes more valuable by enabling SMBs to do more with less while increasing visibility and control. There are more than 30 million small businesses in the U.S. and 70 million globally, and the majority still use manual paper-based processes, With our platform, ecosystem, and scale, we are particularly well positioned to help these millions of businesses transform their financial operations. A great example of how we help companies succeed is about golf. A developer of premium golf simulators, Ashley Flores, Director of Finance and Accounting, said, and I quote, we pay hundreds of bills each month. Prior to Bill.com, our AP process was manual and time-consuming. With Bill.com, instead of taking 10 hours a week to write checks, attach stamps, and seal envelopes, our accounting staff is able to analyze our financials, assess risk, and build forecasts. The powerful combination of Bill.com's AP and spend management solutions enable us to have more visibility into our cash flow, which really gives me more confidence as we navigate continuing supply chain constraints, end quote. Our unique go-to-market ecosystem enables us to efficiently bring the value of our platform to many more businesses and provides us with a strong competitive advantage. We work with the small businesses' most trusted partners, accountants and financial institutions, and share an aligned goal to better serve SMBs. More than 6,000 accounting firms use Bill.com to automate their clients' financial operations. Leveraging our platform, accounting firms spend less time on routine bookkeeping activities freeing up time to focus on more value-added services and enabling them to add more clients. An example of how accountants use our platform is Armanino, a top 20 accounting firm in the U.S. David Miller, consulting partner, said, and I quote, Bill.com got our clients out of paper-based processes and enables our internal distributed teams to collaborate seamlessly. We now have a center of excellence team dedicated to building best practices around Bill.com. Now we can help businesses better face macro challenges. In an inflationary environment, Bill.com serves as a deflationary tool that simplifies workflow and provides better insights, end quote. Businesses have always turned to their banks to help them with their financial needs. And our white label solution powers bill payment and invoicing solutions for six of the top 10 financial institutions in the US. The partnerships we have developed with these financial institutions enable cost-efficient customer adoption that expands our network at a faster rate and creates opportunities for incremental monetization. This is a part of our organic flywheel. More subscribers drive more transactions, delivering more network members, which in turn grows our data asset. With our expanding data set, we continue to evolve our AI and machine learning capabilities, driving better platform experiences and more time savings, which encourages further platform adoption. Before I lay out our fiscal 2023 priorities, I want to talk about our fiscal 2022 accomplishments. At the start of the year, we said our priorities were to integrate Divi and Invoice2Go, expand our payment offerings and monetization, enhance the user experience on our platform, and extend our reach through strategic partners. We take our commitment seriously and have accomplished all of these objectives. We completed our initial integration of our AP and spend management solution, building a connected but separate platform experience, and fully integrated the employees of all three companies into a single organization. We launched instant transfer, pay by card, and build.com balance. Using our continually evolving AI capabilities, we automated more workflows, giving our customers more time savings. We also enhanced our mobile experience, making it easier for users on the move to approve bills, add vendors, and initiate and receive payments. We added new partners and increased our wallet share with existing financial institution partners. Most significantly, we launched a white label platform with Bank of America to serve their new SMB customers. And we entered an agreement with CPA.com to be their exclusive partner for spend and expense management and corporate card solutions. Now turning to fiscal 2023 objectives, Our first priority is to develop a unified platform experience with a consistent look and feel, seamless navigation, and consolidated business insights delivered through a single comprehensive dashboard. Our second priority is to further scale our ecosystem by offering more of our platform solutions to our current partners as well as acquiring new ones. Our third priority is to continue to drive innovation and adoption of our payment solutions We will leverage our ecosystem, which includes direct sales, accountants, and financial institutions to advance our enablement initiatives to drive further adoption of our ad valorem payment suite. Underpinning all of these priorities, we have an overarching focus on managing the business to deliver non-gap profitability for fiscal 2023. All of us at Build.com, now 2,300 people strong, are focused on building the essential financial operations platform for millions of SMBs. Our success is driven by an excellent team with a shared passion for helping SMBs. I'm excited to share with you that we expanded the executive leadership team with the addition of Arana Wassey as chief product officer and Sophia Pogrev as chief operating officer. Arana has extensive experience leading product teams, having built global platforms for SMBs at GoDaddy and Typeform. Prior to that, she was a product leader at Intuit. Sophia brings extensive experience leading operations at fintech companies, including as chief operating officer of both Next Insurance and True Accord. Prior to that, she was a senior executive at PayPal with responsibility for risk management strategy and policy across the Americas. I couldn't be happier to have these accomplished executives join our mission to make it simple for SMBs to connect and do business. Irana will be taking over from Bora Chung, who is retiring. Bora has led our customer experience and product management teams through a time of tremendous growth. She will continue at Bill.com through a transition period, ensuring a smooth handoff to Irana. All of us at Bill.com are deeply appreciative of Bora's many contributions during her four-year tenure. We also recently welcomed a new board member, Tina Chan-Reich. Having held executive roles, we're advised that American Express, Citibank, Chase, and FinTech startups Tina brings over 20 years of global financial services industry expertise to her board, and we are excited about being able to tap into her unique expertise in payments and risk management. In closing, we had a great transformational year. Our TAM is significant, and we plan to continue to invest in creating value for SMBs for the long haul, driving both multi-year revenue growth and profitability. We are laser focused on automating the future of finance so that all businesses can flourish. We are grateful to our employees, customers, and partners on this journey, and we thank them for the trust they continue to place in us. Now, I'll turn the call over to John to talk in more detail about our quarter.
spk01: Thanks, Rene. Today, I'll provide an overview of our fiscal fourth quarter 2022 financial results and discuss our outlook for the fiscal first quarter and full fiscal year 2023. As a reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings press release for reconciliation from non-GAAP to the most directly comparable GAAP financial measure. We delivered strong Q4 financial results, with revenue, non-GAAP gross margin, and non-GAAP net loss per share all significantly exceeding our expectations. Total revenue for Q4 was $200 million, reflecting 156% year-over-year growth and 20% sequential growth. Core revenue, which includes subscription and transaction fees, increased 151% year-over-year. Organic core revenue grew 71% year-over-year. Float revenue was $5.4 million during the quarter, reflecting recent Fed funds rate increases. Non-GAAP gross margin was 84.2% for the quarter, well above our estimated range, driven by the payment mix and transaction cost optimization strategies we've employed. Non-GAAP net loss per share was $0.03, showing our strong revenue and gross margin performance and our vigilant approach to managing operating expenses. In fiscal 2022, we delivered non-GAAP gross margin and non-GAAP net margin improvements while also making significant investments in our platform, go-to-market ecosystem, and the integration of our two acquisitions. We continue to operate an efficient business model with strong customer acquisition and retention expanding net dollar-based revenue retention, and a short customer acquisition cost payback period. As you'll hear when I discuss our outlook, we're pleased to show the progress of our scaling and the strength of our business as we plan to become non-GAAP profitable in fiscal 2023. Now turning to an update on our key metrics. As this is our year-end earnings call, I'll provide additional disclosures on certain metrics beyond our regular quarterly updates. We ended the fiscal fourth quarter with 400,000 businesses using our solutions. This includes 157,800 bill.com organic customers, 20,700 Divi spending businesses, and 221,600 invoice to go subscribers. Of these customers, 36,100 are from financial institution or FI partners. We added 11,200 net new customers on the bill.com platform in the quarter. Net customer ads in the direct and accountant channels showed continued momentum, and we delivered another quarter of elevated net ads from our FI partners. We've significantly scaled new customer acquisition in the last year while also improving our acquisition economics. For Bill.com organic customers acquired during fiscal 2021, our payback period averaged four quarters, an improvement from five quarters at the time of our IPO. The value of our platform is resonating with customers. And this has resulted in improving retention and expansion trends. Our annual organic customer retention rate, which as always excludes customers from our FI channel, increased to 86% as of the end of Q4 2022, up from 85% at the end of Q4 2021. Our annual net dollar-based revenue retention rate expanded to 131% as of Q4 2022, An increase from 124% as of fiscal Q4 2021. This improvement was driven in large part by our success driving adoption of variable price payments and the stickiness of our mission critical platform. As of the end of fiscal 2022, our network grew to more than 4.7 million members, an increase of 47% compared to the 3.2 million members we reported a year ago. The size of our network is an important indicator of the opportunity we have to eliminate friction between subscribers and their clients and suppliers, as well as to create a funnel for future customer acquisition. Moving on to payment volume during the quarter, we managed $63.4 billion in payments. This includes Bill.com organic total payment volume of $60.7 billion in Q4, representing 46% year-over-year growth. and $2.7 billion in card transaction volume from Divi spending businesses, which is an increase of 115% year-over-year. TPP from customers excluding our FI partners represented approximately 91% of Bill.com TPP, and on a per-customer basis, increased 21% year-over-year and 5% sequentially in Q4. As Renee mentioned, starting in June, we began to see TPP growth rates moderate, and this trend continued into July and early August. While it appears that the macro environment is influencing business spend, we continue to see very strong customer acquisition, engagement, and retention as evidence of the value our platform provides for SMBs. We have made substantial progress driving adoption of variable price payment products. In Q4, virtual cards were 2.7% of organic bill.com TPV, and cross-border payments totaled 4.5% of organic bill.com TPV. Foreign currency payments represented 32% of total cross-border volume in the fourth quarter. For Q4, total variable price payments made up 10% of Bill.com consolidated payment volume, excluding TPV from the FI channel. This includes virtual card payments, foreign currency transactions, instant transfer, pay-by-card, and Divi card payment volumes. As we've shared previously, we offer our customers a variety of payment solutions and our overall focus is on driving electronic payment adoption versus optimizing for any given payment type. Regarding card payments processed through our spend management solution, in Q4, we generated a gross take rate of approximately 260 basis points and margins were slightly higher exiting fiscal 2022 than they were a year ago. We're pleased with the margin improvements for card payments which has been driven by faster than anticipated take rate expansion and lower credit losses. As a reminder, the Divi spend management solution leverages a charge card that requires the balance to be paid each month, as opposed to a revolving credit program where customers carry balances. And the average payment cycle is approximately 10 days. Moving on to transaction volumes, we processed 18.2 million payments in Q4. This includes 10.5 million payments on the bill.com organic platform, reflecting 28% year-over-year growth. Of these organic payments, approximately 80% were repeat transactions, which we define as payments initiated between the same subscriber and vendor within the preceding three months. Excluding the financial institution channel, Bill.com customers averaged 79 transactions in the quarter, up from 75 last year and last quarter. During the quarter, we also processed 7.3 million Divi card transactions, Before discussing our Q4 financial results, I want to provide some additional insight about the financial institution channel, since the dynamics differ from our other channels. We earn revenue from FI partners under long-term contractual minimums, based in part on expected customer adoption over the term of the contract, as reflected in our remaining performance obligations, or RPOs. In the near term, our FI revenue is tied to these RPOs rather than to new customer ads. The other key difference between this channel and our other go-to-market motions is that we offer these partners wholesale rates on our subscription and transaction fees. In return, the FIs are responsible for sales and marketing, as well as customer support for the businesses who adopt our white label platform at the banks. Net-net, FIs generate a contribution margin consistent with our other channels. In fiscal 2022, our FI channel represented approximately 5% of core revenue, with the vast majority of this revenue being subscription fees. Now we'll review our reported Q4 results. Total revenue was $200.2 million, up 156% from a year ago. Core revenue, which consists of subscription and transaction fees, was $194.8 million, representing growth of 151% year-over-year. OrganicBill.com core revenue was $114.9 million, an increase of 71% year-over-year due to strong demand across channels and increased customer adoption of our ad valorem payment products. In addition to our organic core revenue strength, revenue from our spend and expense management solution grew 140% year-over-year. Organic core revenue ARPU, excluding FI customers, increased 38% year-over-year. Subscription revenue increased to $55.2 million, up 77% year-over-year. driven by our growing customer base and the inclusion of Invoice2Go subscribers. Bill.com organic subscription revenue growth was 49% year-over-year. Transaction revenue increased to $139.6 million, up 201% year-over-year, due to Bill.com organic TPB strength, increased adoption of our ad valorem products, and increasing spend on Divi, which totaled $69.5 million in transaction revenue per Q4. Bill.com organic transaction revenue growth was 90% year-over-year. Float revenue was $5.4 million, an increase of more than 600% year-over-year. Float revenue exceeded our expectations given the magnitude of the recent Fed funds rate increases. Our yield was 68 basis points in the quarter. Turning to gross margin and our operating results for Q4, non-GAAP gross margin was 84.2%, up four points year-over-year. driven by a higher mix of variable transaction fee revenue and improving transaction economics. As a reminder, we manage a portfolio of payment offerings with a range of margins that are in various stages of adoption, and we currently have a very favorable payment mix. In the short term, we expect non-GAAP gross margin to be slightly above the 79% to 81% range that we have previously discussed. Non-GAAP operating expenses were $171.7 million, an increase of 25 million from Q3. We expanded R&D investments related to integrating our recent acquisitions in addition to enhancing our product innovation and platform capabilities. Sales and marketing expenses increased primarily due to expanding our go-to-market initiatives and rewards expenses associated with our spend and expense management solution. Non-GAAP operating loss was 3.2 million. Our non-GAAP operating margin was negative 2% an improvement from negative 8% last year. Our non-GAAP net loss was 3.3 million, or a net loss per share of 3 cents, based on 104.4 million basic weighted shares outstanding. Our non-GAAP net loss was significantly better than our expectations, given our revenue performance and our rigorous approach to managing expenses. Moving on to the balance sheet, cash, cash equivalents, and short-term investments at the end of Q4 were 2.7 billion. flat quarter over quarter. We continue to be well capitalized, enabling us to invest in our platform, expand our go-to-market capabilities, and extend our market leadership. As of June 30, 2022, we had $3.1 billion in customer funds on our balance sheet, up $99 million from the end of Q3, driven by strong TPV. Before shifting to our financial outlook for the first fiscal quarter and full fiscal year 2023, I'd like to address our current views on the macro environment as it relates to our business. Looking ahead, we are excited about the large global opportunity we're pursuing to help businesses transform their financial operations and better manage their spend and cash flow. Our platform, go-to-market ecosystem, and scale continue to drive strong customer acquisition and engagement with our solutions. Entering a challenging economic environment, businesses need solutions to help them automate and create efficiency while increasing visibility and control. Our bias is to invest to capture the large market opportunity ahead of us while exercising our disciplined investment approach that will allow us to drive operating leverage as we grow. The current macro environment presents numerous near-term uncertainties, and our fiscal 2023 outlook anticipates customers will continue to react to the external factors and temper spend throughout the year, similar to the trends we saw emerging in late Q4 and early this quarter. Our outlook assumes no material changes in customer retention, which is the largest driver of near-term revenue, customer acquisition trends, or credit losses. We believe we are very well positioned to succeed in an uncertain environment given the multiple tailwinds we have. These include the revenue and margin contribution from the rising interest rate environment, the significant payment monetization expansion opportunity that exists, and the growing awareness by SMBs about the potential to transform their financial operations by adopting cloud solutions. Our value proposition resonates with SMBs regardless of the macro situation. Turning to our outlook for fiscal Q1, we expect our total revenue to be in the range of $208 to $211 million, which reflects 76% to 78% year-over-year growth. We expect float revenue to be approximately $12 million in Q1, which assumes our yield on FBO funds will be approximately 145 basis points. the bottom line for q1 we expect to report non-gap net income in the range of 5.5 to 8 million and non-gap net income per diluted share in the range of five to seven cents based on a share count of 117.5 million diluted weighted average shares outstanding in addition for q1 we expect other income to be 4.9 million net of other expenses for fiscal 2023 We expect total revenue to be in the range of $955.5 to $973.5 million. We expect float revenue to be approximately $55 million in fiscal 2023, which assumes a yield on FBO funds of approximately 2% for the year and is based on a mix of funds invested in higher yielding securities and funds held in demand deposit accounts in support of payment transactions clearing. We expect to report non-GAAP net income for fiscal 2023 in the range of $27.5 to $45.5 million and non-GAAP net income per share of $0.23 to $0.38, based on a share count of 119 million diluted weighted average shares outstanding. In addition, for fiscal 2023, we expect other income to be $22 million net of other expenses. We expect stock-based compensation expenses of approximately $75 million per quarter and capital expenditures to be approximately $6 to $7 million per quarter. In closing, I want to reiterate that we believe there is a significant greenfield opportunity ahead of us to help millions of businesses manage their cash flows and transform their financial operations. Our broad platform capabilities, diverse distribution ecosystem, and increasing scale uniquely position us to be the de facto financial operations platform for companies ranging from sole proprietors to mid-market firms. This opportunity, together with our efficient business model and execution rigor, positions us to transition to be a non-GAAP profitable company in fiscal 2023. Operator, we're now ready to take questions.
spk12: We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. We will pause here briefly to allow questions to generate in queue. The first question is from the line of Brian Keene with Deutsche Bank. You may proceed.
spk13: Hi, guys. Congrats on the quarter and outlook. I'll ask my two questions up front. You know, you talked a little bit about seeing some softness in spend, especially in advertising. Is there a way to break out maybe discretionary spend of clients versus non-discretionary spend or maybe a breakout of clients by services? And then secondly, now that we are turning non-GAAP profitable for the year, has there been any thought about any long-term margin trajectory that we should think about for adjusted margin or for EBITDA margins? Thanks.
spk15: Thank you, Brian. This is Always, you know, kind of the nuance of the macro environment is something always hard to read. But what we would say is that we have a broad base of customers. And the broad base of customers is across SMBs all the way up to mid-market companies. And what we called out in particular was the TPV growth moderating at the end of the quarter through the beginning of this quarter. And it really is around larger customers. And so... When we think about discretionary spend, it's kind of nuanced in a business environment because they have so many business activities that they do on a daily basis. And so I would say for us, we see the growth continuing to grow strong and going forward from there.
spk01: Maybe I'll take the long-term margin question, Brian. We haven't explicitly laid out longer-term targets yet. We're very happy with the progress we've made scaling the business and nearing a billion dollars in revenue and expecting non-gap profitability this year. And with that momentum, we're expecting a lot of good news ahead. We'll roll out longer term targets, you know, in the not too distant future, but haven't done so yet.
spk17: Great. Thanks for taking the questions.
spk01: Thank you.
spk12: Thank you. The next question is from the line of Brad Filz with Bank of America. You may proceed.
spk14: Oh, great. Hey, thanks, guys, and congratulations on a real nice end of the year and outlook here. I'll ask the macro question in a slightly different way. Obviously, you've been very specific on the impact there on TPV. Outside of advertising, are there any other categories you're noticing, some softening, and what gives you the the rationale, I guess, for assuming that that doesn't change in the near term.
spk15: Yeah. Hey, Brad. Good to hear your voice. We saw healthy demand throughout the quarter. Year over year, the customer growth was 30%. We've had great TPV growth across the quarter. The core bill of TPV growth was 10% quarter to quarter. The DV TPV growth was stronger than that. And so when we look at the overall macro environment, we really do see a number of tailwinds that are supporting the business. And those tailwinds really get to things we've talked about before. So the first that we kind of talked about would have been the pandemic and the desire and need for remote capabilities and the ability to have the financial back office in your back pocket, which we've delivered for our customers. The other thing we've talked about is just the pure need for digital transformation that businesses have, the desire to be able to be anywhere and manage their businesses. And the third one, which is kind of new in this kind of macro environment that we're in, is that in inflationary times, the only deflationary impact that you can have on your business is to take advantage of software and create more efficiencies across your financial operations. And so we've been built from day one to really serve our SMB customers with the ability to be more efficient, to really drive more technology usage and more engagement across their customers and their employees and their vendors. And that's something that we feel good about. So from a high-level macro perspective, really, we just wanted to call out that we did see the larger customer, the TPV spend starting to moderate from a growth rate perspective.
spk14: Thanks for that, Rene. One more, if I may, please. With the combination of the growth you're seeing in the network and the progress you've made integrating Invoice2Go, Should we expect that flywheel effect to start to really take hold here, receivables customers bringing in more payables customers? Are we at that point now where we might see momentum there? Thank you so much.
spk15: Thank you, Brad. We have been, I think, with the Q3 call we talked about, Al, in the February-March timeframe, we fully integrated the companies across one organizational structure to drive a unified platform. It's one of the priorities, key priorities for the year is to really integrate continue to develop that unified platform so customers have, you know, one common dashboard to manage all of their financial operations. And so we are in the, you know, I would say the beginning stages of building that. And, you know, throughout the fiscal year, we'll make more progress and update you as that happens.
spk14: Great to hear. Thanks, Rene.
spk12: Thank you, Brad. Thank you. The next question is from the line of Darren Peller with Wolf Research. You may proceed.
spk04: Hey, thanks, guys, and great job on these results. Let me just try to understand a little bit more. When we think of the guidance and the outlet, given how many moving parts there are in the business, there's obviously a ton of assumptions that could swing the output and guidance. So I'd really love to hear what kind of assumptions you made around some of the main variables, bill.com versus perhaps Divi. Maybe you can help us understand how the Divi cross-sell with Bill is going and if you've made any assumptions of progress around that also. I guess I'll stop there. We can probably go on and on. Maybe get voice to go, but is there any more color on the input to be read?
spk01: Sure. Thanks, Darren. Good question. You're right. There are a lot of moving parts. One of the benefits that we have of a very large customer base and our scale is that we do have a lot of visibility into know spend patterns and activities and repeat behaviors uh we talked about on on the uh earlier in the call the you know repeat transaction rates continue to be very very high so that visibility is helpful as we as we pin down our our assumptions uh we have uh the main variable i'd say that we're focused on is the spend patterns uh amongst customers across both the bill and the the divi uh spending businesses um and we're assuming that some of the softness or moderation, as we called it, in the last couple of months continues throughout the year, given the external environment. And with Divi, it's a slightly larger customer base. They have good visibility as well. And it's not, I would point out that like Bill, the Divi spend management solution is a tool to manage spend. It's not just a card. And so it's integrated into the way companies operate and regardless of the absolute spend number, it creates high visibility for us. So we feel good about that. We have made progress in FY22, probably faster than we would have anticipated with some of the cross-sell activities. I think we had about 2,000 Bill.com customers who adopted the Divi spend management solution. And so that's good momentum going into FY23. And as we focus on integrating the platforms even tighter. We think that'll help with our additional efforts in cross-selling Bill and Divi customers in both directions.
spk04: That's really helpful, John. Thanks. I mean, if I can just quickly fit in a mechanical question. The new ads in the quarter, I just wasn't sure if I heard how much of that was FI versus the core Bill ads this time around.
spk01: Yeah, we had 11,200 in the quarter. It's our second highest net new ads ever. Last quarter was 11.6. We had about 5,000 net new ads in the, what I would describe the bill core business, excluding the FI channel. So excluding all of the ads from the FI channel. And as we sort of look out over FY23, we think that $4,000 to $5,000 range for Bill excluding the financial institution contribution is probably a good placeholder.
spk04: Okay. Very good.
spk01: Thanks, guys.
spk12: Thank you. Thank you. The next question is from the line of Josh Beck with KeyBank. You may proceed.
spk03: Yeah, thank you for taking the question. Yeah, I wanted to kind of also layer on some of the macro impact. So, you know, one of the comments that you made was certainly an improvement in the payback period, and Renee had made some comments about really bill being deflationary, and obviously that's very critical to SMBs right now. So, you know, when you look at the payback that you're seeing in the recent months, you know, has it held steady? Are there any notable changes kind of with respect to that variable?
spk15: Yeah, thank you, Josh. We have, as you know, we have a very broad distribution channel ecosystem that we've tapped into that allows us to reach SMBs wherever they are, whether it's directly or through the businesses and partners they trust most, whether it's an accountant or a financial institution. And that actually does help our ability to drive that payback number the way we've talked about it. The opportunity that we continue to see is the combination of that ecosystem with our ability to drive better usage of our payment products that really drive value for our customers, which end up increasing our net dollar-based retention numbers. All of that goes together to really help improve our ability to attract and bring more customers onto the platform. No specific trends right now. It's everything we've been building for years has been working for us.
spk03: Okay. Very helpful. And then maybe a follow-up on really the adoption of cross-border and virtual. Certainly the staff there were very helpful. And when we think about the pace of that adoption curve, obviously we have a pretty good sense of how that's trended from last year to this year you know how should we think about that that shape moving forward are there factors that could you know steepen that adoption curve level it out any um framework just to think about uh the pace of adoption in future years yeah thank you for that the i would say from the very beginning we've had a strategy to invest in our proprietary payment platform
spk15: so that we could create better customer experiences for our customers and for their suppliers. And that's been the backbone of how we've been able to drive virtual card, international payments, FX transactions within international payments, instant transfer, all the things that we've done. And as we look at the success that we've had, growing virtual card from 2.2% to 2.7% of TPV, international payments from 4.1% to 4.5%, Really happy that we were able to grow the FX rate from 25% to 32%. All that's because of this proprietary payment platform that we've been building over the years and will continue to build. We know this is a multi-year effort to drive the adoption and the original commitments that we've made around the penetration that we expect. It just takes time, and we're happy with where we're at, and we'll continue to do the work that we need to drive that adoption. Excellent. Thanks for that. Thanks, Josh.
spk12: Thank you. The next question is from the line of Andrew Bouch with SMBC NACO. You may proceed.
spk16: Hey, guys. Thanks for taking my question and another nice set of results here. I wanted to touch upon the remaining performance obligations. This is one that we get a question from investors fairly often trying to understand on how that revenue comes on, and I appreciate the color that you provided in the presentation. prepare remarks, but it's remained fairly steady at this 150 million level over the last couple of years. And just, so what are you kind of thinking about with regards to that bucket within two years, as far as what's kind of layered in, in 20 fiscal 23. And you mentioned the minimums, I guess, are we, could we anticipate that you're going to have a lot of those customers at those minimums in the next several quarters?
spk01: Thanks for the question, Andrew. So the RPO number of $150 million approximately reflects the minimum contractual commitment. So the way to think about that is the floor, not the ceiling, to the extent that over a multi-year period of time, we work with our financial institution partners to drive better adoption than initially targeted, then we have revenue upside in both subscription and transaction fees. I think our disclosures spell out both the total RPO and the expectation for how much revenue we'll earn from that over the next two years. We haven't provided more granular disclosure than that, but the RPO number moves in two ways. As we sign new financial institutions, those minimums get added to the RPO, and then obviously as we earn revenue in the near term that comes out of the RPO balance. It's been pretty stable over, as you said, the last 18 months or so. And so it's a fairly steady revenue stream that's contractually guaranteed and not subject to any significant movement quarter to quarter.
spk16: Got it. Helpful. And then as we think about the progression of margins throughout this year, I mean, obviously you're starting at a lower point in the first quarter and obviously the business has a ton of operating leverage in it. And so I guess where the guide is implying it's like you're exiting the year in kind of this mid single digit range or high single digits. Is that the way we should be thinking about like the sequential steps in the margin throughout the year? Are there any one-off variables we need to consider?
spk01: Well, there is, first of all, obviously we've laid out the first quarter and the full year. We haven't given the quarterly details. There is some seasonality in the business, particularly as it relates to payment volumes. We've talked about the third quarter or the March quarter being a little bit softer payment volume than the December quarter. That does in some way influence the you know, the margins, but, but looking, stepping back and looking at how we're starting the year and the full year, we're, we're obviously comfortable with the, with the ranges that we provided and they reflect our, you know, our best estimates at this point about how the business will evolve.
spk16: Got it. Congrats on another nice set of results.
spk12: Thank you. Thank you. The next question is from the line of Brent Braceland with Piper Sandler. You may proceed.
spk09: Good afternoon. The magnitude of upside here in Q4 and midpoint guide of another 50% growth year suggests that automating finance operations is clearly resonating with SMBs. What stood out to me was the second straight quarter of 11,000 net new core ads. We're seeing other SMB companies see a slowdown on the macro. Could you just double click down on visibility into SMBs? adding new customers? What's resonating here? What's giving you confidence in your ability to continue to kind of land new customers in this challenging environment?
spk15: Hey, Brent. Great to hear your voice. We have been building this platform for 16 years now to really drive adoption amongst SMBs of all industries and all really sizes from the smallest to the mid-market companies across multiple partners and ecosystems. And so The success that we have is our ability to continue to drive partnerships. During the fiscal year, we obviously announced the partnership with Bank of America to serve their SMBs that were new to the bank. We also announced the partnership with CPA.com to be their exclusive provider across bill payment and expense management, spend management. These types of partnerships, in combination with the 6,000 accountants that are on the platform today, definitely give us visibility into what's happening for them. I would say the tailwinds I mentioned, the need to be able to manage work remotely, the need to be able to really drive efficiency in an inflationary environment, the need to be able to have the technical tools to be able to run your financial operations from anywhere. These are all tailwinds that are helping drive demand and awareness. And you combine that with the increased capabilities of innovation we've done on the payment front. So all of that continues to create that healthy demand. So we feel good about the demand and we have plenty more to go do and it's a massive market in front of us and we're going to keep working hard to serve as many SMBs as we can.
spk09: Super helpful color there. And then John just wanted to ask on Divi specifically, it looks like the volumes there jumped meaningfully on a sequential basis, more than doubling from last quarter. What drove that? Is there some additional cross-sell benefits? Was that all just kind of Divi adoption increasing? What drove the acceleration there, and how should we think about the momentum you're seeing in Divi going into next year?
spk01: Yeah, thanks, Brent. You're right. The momentum is quite strong with Divi. As we mentioned before, the average customer – or spending business that the Divi Spend Management Solution is serving is slightly larger than Bill. And they've done a really good job at offering both the platform and spend solutions that help large customers automate their spend capabilities and have visibility and control. And they're seeing the result of those efforts come through and increase spend from businesses. So we feel really good about the you know, the progress that's being made there. And then I'd say that the bill contribution, so bill customers who've adopted the Divvy Spending Management Solution, it's still relatively small, you know, versus the base Divvy Spending businesses. So we're really excited about the continued opportunity we have in fiscal 23 and beyond to continue to drive that cross-sell adoption.
spk09: Helpful color. Great to see. Thank you.
spk12: Thank you. The next question is from the line of Samad Samana with Jefferies. You may proceed.
spk11: Samad Samana Hi. Good evening. Thanks for taking my questions. John, maybe one to start with you on the guidance. In terms of the assumptions, from a high level, what are you thinking for core bill.com revenue versus DIVI? I know in the past you've given that and just I figure on the fiscal year, maybe we could see what the assumptions are for fiscal 23. especially as Divi kind of fully ends up wrapping around the Visa comps.
spk01: Yeah, thanks, Samad. So in terms of core revenue growth, so the combination of our subscription and transaction fees, excluding float, for Divi direction, I can tell you we're planning for above 50% year-over-year growth. And for organic bill, excluding Divi, we're planning for above 40% organic growth. Beyond that, obviously our our formal guidance is around the combined businesses as we're operating them now, but hopefully that additional color helps.
spk11: Very helpful. And then, Rene, I wanted to ask you a question. I think you guys have really been helpful about explaining the macro. I would say that some of your smaller competitors, I think, have had different sets of struggles, yet you guys are doing great, right, in terms of net ads. The KPIs are strong. Even if TPV volume slowed later in the quarter, you're still doing well in terms of attracting customers more customers to bill. I'm curious if there's something you can do to be opportunistic and accelerate that while some of your competitors may be struggling, whether if they're private or with their own business decisions and maybe what you're seeing and if there's something you can do to capitalize on that.
spk15: Yeah, thanks Samad. You know, pursuing and serving the SMB markets, tricky business. Uh, the SMBs are hard to reach and hard to find. That's why we have the ecosystem we have. our investment philosophy since day one has been grounded in our long-term aspirations to be a profitable company that serves millions of SMBs. And so from that perspective, I think the focus and attention that we've had around execution and rigor over the years is what's paying off. And that's what's able to create the opportunities that we have with the SMB market, whether it's in our direct channel, our partner channel, or our accountant channel. So I think it really comes back to just being committed and really being focused and executing in a way that we are able to create solutions that resonate, that delight customers, and really make a difference. Great. Congrats on all the success, guys.
spk12: Thank you. Thank you. The next question is from the line of Tianxin Huang with J.P. Morgan. You may proceed.
spk02: Hey, great. Great to be on the call here. Impressive results. I have to jump off for a second, but I wanted to ask, I think you covered some of this, But just thinking about the growth drivers in fiscal 23 and how it's going to be different than what we saw last year across volume growth, client growth, pricing. For example, I heard the commentary on volume in July and August. It sounds like client growth you're assuming will be relatively consistent. What about some of the other big drivers that might be uniquely different this coming year versus last year?
spk15: Thank you, Dean. So I think the... When we look at this, it's all about kind of driving the continued operational execution rigor that we've had. And so the success we've had with virtual card, with international payments, there's a lot more opportunity there. We continue to have a multi-year strategy and execution plan around that, and we will continue to do that. I think on the customer acquisition, we've talked about the ecosystem we have. So it's all of these things and the levers working together that create the results that we had today and the results that we've had really since being public. So I think the long-term opportunity and how we see that translate into this year is to continue executing at the level that we're executing.
spk02: Understood. So thinking about the profitability here and what you're showing, is there anything you're doing differently? Just thinking about maybe expenses, some things that you're pushing out. What's non-negotiable? What are you still focusing on? For example, I would imagine merging the Divi and the Build.com tech stacks are still high priority. So Just trying to understand what maybe changed or what maybe is being deferred versus prioritized on the investing side. Thank you.
spk01: Sure. Great question. We, I guess, start with a multi-year view from an investment strategy standpoint. We're obviously investing to drive results this year, but we're always thinking out several years given the large market opportunity that we're that we're pursuing. As Renee mentioned earlier on the call, our number one priority is in driving tighter integration and a great user experience across all of the solutions to help customers automate their financial operations. We're investing in the platform, our go-to-market capabilities, as well as our partner ecosystem, which is important in driving awareness of our solutions. We also... you know, have for a long time invested in our own proprietary payment capabilities. In fact, we were one of the first companies to have payments integrated with the SaaS platform. And those strategic choices, you know, frankly, many years ago also positions us today to benefit from this rising interest rate environment and generate, you know, pretty significant float revenue on the funds that we manage through, you know, through our technology. And so that's one of the tailwinds that we have in addition to, being fairly early in our journey of expanding monetization on payments. We've made great progress. We're north of $6 per transaction in terms of monetization, and we feel like we have a long way to go. Yep.
spk02: Good stuff. Thank you all.
spk12: Thank you. Thank you. The next question is from the line of Matt Stotler with William Blair. You may proceed.
spk05: Hey there. Thank you for taking the questions. Maybe just to start, you know, one on maybe as it relates to gross margin. I mean, you talked about better transaction economics being a factor there. You know, we'd love to just kind of dig into, you know, some more color on this dynamic, you know, what kind of leverage that's provided so far and then any further levers here or leverage that could impact gross margin going forward from, you know, better economics in the transaction front.
spk01: Sure. Thanks, Matt. We've indicated that the we expect to be above the range that we've talked about recently, which is that 79% to 81%. We're expecting to be a bit above that, in part because some of the variable price products that we're seeing good adoption from customers and suppliers have not only a higher revenue per transaction profile, but much higher margins than some of the fixed price products like an ACH or a check payment. So we have good Good mix happening there. We've also had a couple of initiatives to optimize our transaction costs. So the fulfillment costs associated with delivering payment transactions, that's contributed to margin expansion as well. And then, as I mentioned a moment ago, the tailwinds associated with rapidly rising float revenue is a positive for margins at the end of the day also.
spk05: Right, got you. That's very helpful. And then maybe just to follow up on the financial institution channel, you know, obviously, you know, some very strong relationships there, very positive commentary and, you know, kind of, you know, data points in terms of, you know, customer ads and new relationships. But as you kind of pointed out a few questions ago, you know, it's been kind of around $150 million in terms of RPO pretty consistently. And so, I mean, should we be thinking about this as kind of a stable kind of dollar contributor to revenue going forward and the expectation being that we should continue to see it kind of compress as a percentage of revenue? Or is there a point in time when you kind of get to a point of critical mass where you expect that you would see financial institution partners start to actually expand and be creative in terms of revenue growth?
spk01: Sure. I think in the short term, it's fair to look at our RPO as sort of a stable number. We're going to obviously earn revenue against that over the next couple of years. And that likely leads to a slightly declining percentage of revenue, given the rapid growth in some of our payment revenues outside of the financial institution channel. But long term, we're actually very bullish in working with our financial institution partners and think there's a big opportunity to such that the channel can be a larger component of our overall business as we think out intermediate and and longer term and that has to do with uh you know the potential to drive adoption of some of our additional products inside the white label solution that our banks are using the opportunity to partner with uh new banks who are not currently uh working with us um and and so forth so In the short term, I'd say directionally, it's probably a slightly lower percentage, but intermediate to longer term, we think it's a really big opportunity.
spk05: Got it. Thanks again.
spk12: You bet. Thank you. The next question is from the line of Scott Berg with Needham. You may proceed.
spk06: Hi, everyone. This is Michael Rackers, and I'm on for Scott Berg today. Thanks for taking my question, and congrats on the quarter. You touched on it a bit earlier, but I'm curious on kind of what the core bill sales motion looks like today versus maybe a year ago. Have you made any notable adjustments based on the macro or the strong demand environment you're seeing? And then how should we think about this moving forward? Thank you.
spk15: Thank you, Michael. The core go-to-market motion has not changed. We continue to enhance the go-to-market approach. One of the areas that we've enhanced it is we've had larger businesses have more interest, so we've continued to build the sales team that works with those customers. And I would say that we continue to see these other tailwinds I've talked about driving more awareness and more demand across the ecosystem. And so we're kept busy kind of really making sure that we're responding to customers and delivering what they need for them to be successful and to be delighted. No changes, really, to get a market motion.
spk06: Great. Thank you.
spk12: Thank you. Thank you. The next question is from the line of Ken Suchoski with Autonomous Research. You may proceed.
spk07: Hey, Rene and John. Good afternoon, and thanks for taking the questions. Really nice job here, and appreciate a lot of the incremental data points, excluding the DFI channel, so thank you for that. I wanted to ask about the traction you're seeing with some of the new payment products because the virtual card and cross-border penetration figures came in a little bit lower than we were expecting. So of the new payment types, instant transfer, enhanced ACH, pay-by-card, which payment methods across these three are seeing the most traction and which ones drove the upside on take rate in the quarter? And I guess what's the appetite on your end to get those into the market quickly and have them start contributing more in TPV?
spk15: Yeah, I think, Ken, good to hear your voice. We've always been building a platform to really deliver delight and success for customers. And one of the things that they need is multiple ways to pay and get paid. And it's been part of our mission statement, obviously, is to make it simple for business to, you know, connecting and do businesses. And so I think, you know, what we are seeing is continued adoption of Avalor and payment products across the platform. So If you were to add up all the Appalarm capabilities that we have now, it's just at 10% of their overall TPV. We know there's a lot more opportunity going forward, and it's going to be on some of the products that you mentioned, instant transfer. It's going to be on potentially balance. It's going to be on all the different things that we've rolled out in the last few years, international, virtual card, and others yet to come. So part of the focus that I have is to continue to to really, you know, drive and develop the team to be able to go to where we think we can get to, the multiple billions and profitable company. And I think part of that's going to be to really drive those priorities across the team.
spk07: Okay, great. And then just a quick follow-up. I wanted to ask about some of the price increases that were recently put in place. I believe those changes were made in the direct channel process. Are you guys planning on introducing similar increases into the accounting firm channel? And I guess when should we expect those higher prices to flow through your results?
spk01: Thanks, Ken. At this point, we have announced to customers the direct channel price increase is effective actually this month in August. We notified them I think a couple of months ago. We haven't made any other announcements to customers in other channels or anything like that at this point. We would expect by the third fiscal quarter, by the end of that quarter, any price actions that we're taking in the year would be fully reflected in our model. We have made some assumptions about slightly higher subscription prices throughout the year. But at this point, it's just the direct channel that we have informed customers of. Okay.
spk07: All right. Thanks a lot. Appreciate it.
spk12: Thank you. Thank you. The next question is from the line of Nick Cremo with Credit Suisse. You may proceed.
spk17: Hey, thanks for taking my question, and congrats on the strong results. I just wanted to touch on Divi really quick. At what point in FY23 do you expect to complete the unified platform experience, and when should we start to see benefits from the CPA partnership expansion?
spk15: Thank you, Nick. We have started that integration, obviously. I think in last fall, we announced that we had connected a separate integration, and then we pulled teams together in February, and that work started. We will share more as that happens, but we are working as fast as we can to make that integration. We think it's going to be important for customers and from a go-to-market approach to be able to have one unified approach, and we definitely hear that from the customers that we talk with. So feel good about that. And then I'm not sure. Was there another question there? Sorry.
spk17: Oh, just when we could see benefits from the CPA partnership expansion.
spk15: Oh, great. Yeah. So the CPA.com expansion of the partnership, the teams are working on that today. Obviously, the unified platform will help that approach as well. But we're making good progress on the go-to-market muscle that we need to develop there. And it's something that we will continue to make progress on throughout the year.
spk17: Thanks. And if I could just squeeze in a quick follow-up, I just wanted to see if we can get an update on the payment monetization efforts for Invoice2Go and what that could look like in 2023.
spk01: Yeah, thanks, Nick. So, we're in the very early stages of transitioning from Invoice2Go's outsourced payment provider to um to a combination of bill and and other you know third parties and i'd say it's very early and not contributing materially to our results yet we'll have more updates on that as we progress throughout the fiscal year great thank you sure thank you we have time for one more question the question is from the line of jeff cantwell with wells fargo you may proceed
spk08: Hey, thanks. Congrats on the results, and thanks for squeezing me in. I wanted to ask you a longer-term question about your operating expenses. And the key question is, you know, how are you thinking, what is your updated thinking on rightsizing that space relative to your revenue? And just to give you some context on this, you know, if we go back a couple of years, I seem to remember – there was a period where, you know, you were being very thoughtful on the R&D lines and the sales and marketing lines in order to scale the business. And so it's interesting to me at this point to see, you know, profitability being reached in fiscal year 23, you know, and clearly the revenue piece of it is there. So I just wanted to get your updated thoughts on longer-term, you know, operating expenses and what your thoughts are on flexibility, you know, in R&D and sales and marketing to the extent that you're able to kind of share that with us.
spk01: Thank you. Thanks for the question, Jeff. We're obviously, as I think I mentioned before, really happy with the progress we've made scaling the business with moving NFY 23 to non-GAAP profitability while delivering very strong growth and strong margins. And we think it's still early in the evolution of the market that we're going after. There's tens of millions of businesses globally who could benefit from our solutions. And I think we're going to continue to take a disciplined approach to investing, to build out our product platform to serve customers while leveraging very efficient unit economics in acquiring, retaining, and growing our relationship with customers over time.
spk08: Okay, great. And just to follow up on the net ads number, I think what you were saying was you got about 5,000 from corebill.com and the remainder were from from the FI channel. Is that correct? I just want to make sure I got that correct. And then what was the commentary for this year as far as bill.com versus, you know, FI? Thanks.
spk01: Yeah, that's correct. 11.2 thousand net new ads in the quarter of which approximately 5,000 were core organic bill excluding the financial institution channel. And our expectation throughout fiscal 23 is that we'd be in that 4,000 to 5,000 net new ad per quarter range, again, excluding the financial institution channel. The total net new ads would obviously be higher than that.
spk15: Okay. Thank you, everybody. Just wanted to say thanks for joining us today. Bill.com delivered another great quarter. We're excited about the large opportunity we have to digitally transform millions of SMBs. Thanks again for joining.
spk12: That concludes today's conference call. Thank you for your participation and enjoy the rest of your day.
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