Bill.com Holdings, Inc. (NYSE:BILL) Q2 2023 Earnings Call Transcript

Bill.com Holdings, Inc. (NYSE:BILL) Q2 2023 Earnings Call Transcript February 2, 2023

Operator: Good afternoon. Thank you for attending today's BILL's Fiscal Second Quarter 2023 Earnings Conference Call. My name is Megan, and I'll be your moderator for today's call. I would now like to pass the conference over to Karen Sansot, Vice President of Investor Relations at Bill.com. Please go ahead.

Karen Sansot: Thank you, operator. Welcome to BILL's fiscal second quarter 2023 earnings conference call. We issued our earnings 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 is Rene Lacerte, Chairman, CEO and Founder of BILL; and John Rettig, 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 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 a 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 nonrevenue 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.

Additionally, please note that the appendix for quarterly investor deck, which is posted on our Investor Relations website, contains a supplemental table of revenue and metrics information. At times during this call, we will discuss BILL's standalone results, which exclude our Divvy spend management, invoice to-go accounts receivable and Finmark financial planning solutions. Now I'll turn the call over to Rene. Rene?

Rene Lacerte: Thank you, Karen. Good afternoon, everyone. Thank you for joining us today. BILL delivered strong second quarter results and achieved another quarter of profitable growth as we executed on our strategy to be the essential financial operations platform for SMBs. Revenue in Q2 grew 66% year-over-year, and we made exceptional progress growing non-GAAP net income, which was $49 million for the quarter. Our non-GAAP net income margin was 19% in Q2, and we also delivered another quarter of positive free cash flow. Our results demonstrate the commitment we have to execution rigor and investing for profitable growth. The power of our scale, technology and business model enabled us to create significant float revenue tailwinds in this higher interest rate environment.

We are leveraging our float revenue to invest in long-term strategic opportunities, while also delivering non-GAAP profitability. Given the strength of our financial position, conviction in our growth prospects and our proven ability to execute, today, we announced Board authorization for a $300 million share buyback program, which we believe will further enhance shareholder value and minimize dilution without compromising our ability to invest in future growth. Before talking about our business, I'd like to comment on the health of SMBs. Businesses today are faced with a challenging economy that includes inflation and rising interest rates. Time and time again, SMBs proved to be resilient and agile, and we're seeing them adjust to the current conditions.

With our solutions, SMBs are empowered to better manage their business and cash flow. We are energized by the opportunity to help our customers succeed. As we discussed on our Q4 and Q1 calls, macro conditions are impacting small businesses, and they are taking action to moderate expenses. As we anticipated, these trends continued in fiscal Q2, and we experienced lower growth in total payment volume compared to prior periods. Our proven business model and track record of execution position us well to navigate this economy while pursuing our long-term aspirations to serve millions of businesses and capture billions of dollars in revenue. As champions of SMBs, we're proud that more than 400,000 SMBs use our solutions to better run their businesses.

A great example of how we help companies streamline their financial operations is Ditch Witch UnderCon, a commercial and industrial equipment distributor that first use Divvy's spend management solution and then adopted BILL's accounts payable solution. Ditch Witch UnderCon started as a family-owned company in 1972 and currently has six dealership locations throughout the Midwest and South. Eid Aldosari, CFO, said and I quote, €œDivvy and BILL have been a game changer by giving us more visibility and control of our cash flow. The ease of use in automating our finances is really important in running our day-to-day operations. The combination of BILL and Divvy has removed the hassle of a paper-based process and given us time back to focus on growing our business and providing our customers the equipment and service they need to get the job done.€ Our large and growing partner and network ecosystem enables us to efficiently reach new businesses and gives us a competitive edge.

We partner with an SMB's most trusted advisers, including their accounting firms and financial institutions with the shared goal to create more value for SMBs. Our diverse distribution channels are a key advantage and represent a competitive moat. Our proprietary network of 4.7 million members transact with BILL customers. This network enables us to offer a strong value proposition to both parties in every transaction, while creating a network effect for new customer acquisition. Our network members benefit from fast, efficient electronic payments, the ability to choose their payment types and easy access to data for streamlined reconciliation. We make it easy for businesses to connect, pay and get paid. Behind the scenes of our network, our platform is a complex scale operation with sophisticated capabilities, including risk management, multiple payment rails and a robust regulatory and compliance foundation.

These capabilities enable us to innovate fast and to deliver efficient payment experiences at scale. We are now processing $250 billion in payment volume annually. The breadth of our platform positions us to be the financial nervous system for millions of SMBs. Another core foundation of our strategy is our go-to-market partnership with accounting firms. Our solutions enable more than 6,000 accounting firms to automate their bookkeeping operations, create insights for clients, grow their practices and provide strategic advisory services. Accounting firms often drive technology adoption and usage as key collaborators and strategic advisers to SMBs. Recognizing this, we build tools that are embedded into the operational day-to-day activity of their firms.

Because of BILL, accountants are able to engage more efficiently with their clients. Our solution enables them to better support their existing accounts as well as take on additional clients. BILL is an integral part of their business. With the addition of Divvy, we have strengthened our ability to serve accountants needs. During the quarter, we streamlined the Divvy sign-up and client onboarding process. Looking ahead, one of the earliest customer-facing aspects of our unified platform experience will be a more powerful tool for accounts to help them manage and support their clients. An example of the power that BILL and Divvy bringing to account is RKL, a top 100 firm in the U.S. Gretchen Naso, President of RKL Virtual Management Solutions, said and I quote, "RKL Virtual is focused on optimizing and managing our clients' accounting and finance functions.

Our best-in-class tech stack featuring BILL and Divvy enables us to streamline clients, operations, deliver better insights and help our clients grow. RKL Virtual's rapid growth over the past 18 months would not have been possible without BILL and Divvy. We leverage BILL and Divvy's functionality, ease of use and end-to-end automation to triple our practices transaction volume." Financial institutions represent another important component of our distribution strategy, and we partnered with six of the top 10 banks in the U.S. On the last earnings call, we discussed being selected to provide an SMB-focused solution for a new bank partner. Today, I'm happy to share that we have recently launched with BMO, our white label solution will offer a variety of our payment solutions, including virtual cards to BMO's customers, giving them a broad range of payment capabilities within one solution that automates bill pay and digitizes invoicing to help manage cash flow.

Core to our success has been constantly driving innovation that creates more value for members of our ecosystem. With our diverse product portfolio and payment scale, we are able to quickly identify areas of opportunity and turn these learnings into new offerings. Increasingly, we are exercising our innovation muscle to provide more features and payment choices for the supplier side of our network. An example of this is our instant transfer product, which has seen strong demand and good repeat usage among smaller suppliers in our network. Instant Transfer enables us to pay suppliers faster and help shape our road map for future innovation. With these learnings, we are developing a working capital solution for existing known suppliers in our network to help them improve their cash flow by getting paid much faster.

With our large data asset of existing customer and supplier relationships and transaction history as well as strong risk management capabilities, we are uniquely positioned to provide working capital solutions to existing customers and network members to enable payment advances. We believe there is significant demand for solutions like this in the marketplace today, and we are excited about the potential here. In closing, we delivered another strong quarter with high revenue growth and significant improvement in profitability while making progress toward our goal of being the essential financial operations platform for SMBs. We have built our business to create value for our customers, while also driving gross margin expansion and profitability.

Our powerful business model positions us well to navigate the macro environment while pursuing our long-term aspirations to serve millions of businesses and capture billions of dollars in revenue. I'd like to thank our customers and partners for the trust they place in us. I'd also like to thank the BILL team for their commitment to serving SMBs, which enabled us to deliver strong financial results. I'll now turn the call over to John to talk in more detail about our quarter.

John Rettig: Thanks, Rene. Today, I'll provide an overview of our fiscal second quarter 2023 financial results and discuss our outlook for the fiscal third 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 a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. We've also included a table of metrics in the supplemental materials on our Investor Relations website. Please also note that when I refer to BILL's standalone results, they exclude our Divvy spend management, invoice to-go accounts receivable and Finmark Financial Planning Solutions. In Q2, we delivered strong financial results that exceeded our expectations.

Total revenue grew 66% year-over-year and non-GAAP gross margin was 86.7%, our highest margin on record. In addition, non-GAAP net income was $49 million or 19% of revenue, and we generated $48 million in free cash flow. Our Q2 performance was driven by growth in core revenue, which was up 49% year-over-year and significant sequential growth in Float revenue where we benefited from rising interest rates and active management focused on higher-yielding investments. Our performance highlights the strength of our diversified business model and our commitment to deliver balanced growth and profitability. Our diverse distribution channels are a key competitive advantage with no partner generating more than 3% of core revenue in the last 12 months.

Online, Payment, Bank

Photo by Firmbee.com on Unsplash

We're pleased with our Q2 performance considering the macroeconomic backdrop. In Q2, we saw customer spend levels for BILL and Divvy deviate from typical seasonal patterns in this challenging environment. Spending trends weakened throughout Q2 and notably in December, when we typically see a seasonal spike in payment volume. The lower payment volume growth was visible across most spend categories. Given the mission-critical nature of our platform, however, customer engagement remained healthy in Q2. For example, on our BILL standalone platform excluding financial institution channel customers the average number of transactions per customer was 77%, consistent with the prior quarter. Now moving on to our metrics and results in Q2; I'll provide a few highlights since we included a metrics and revenue table in the appendix of our quarterly investor deck.

We ended the second quarter with 435,800 businesses using our solutions. BILL standalone customers grew to 182,700, up 35% year-over-year. Net new customer ads on our BILL standalone platform were 10,700, this included 7,200 net adds from our financial institution channel and 3,500 net adds from the direct and accounting channels. We attribute the lower net adds compared to recent quarters to smaller-sized businesses pushing out transformation decisions in this macro environment. Customer retention rates continue to be strong. For our Divvy spend management solution we ended the quarter with 24,700 spending businesses, an increase of 1,900 from last quarter and growth of 59% year-over-year. Moving on to payment volume, during the quarter we processed $67.3 billion in TPV.

This included BILL standalone total payment volume of $63.7 billion in Q2, reflecting 13% growth from Q2 of last year and $3.3 billion in card payment volume from Divvy spending businesses, representing 76% year-over-year growth. Moving on to transaction volumes we processed 20.8 million payments in Q2. This includes 11 million payments on the BILL standalone platform and 9.4 million Divvy card transactions. Total transaction revenue per transaction was $8.17, growth of 19% year-over-year. For card payments processed through our spend management solution, in Q2 we generated a gross take rate of approximately 262 basis points. Now I'll review our reported Q2 results. Total revenue was $260 million, an increase of 66% from a year ago. Core revenue, which includes subscription and transaction fees was $231.1 million, representing growth of 49% year-over-year.

Subscription revenue increased to $61.5 million, up 25% year-over-year driven by our expanding customer base. BILL standalone subscription revenue was $52.7 million, reflecting growth of 31% year-over-year, driven by our expanding customer base and a small effective price increase for customers in our direct channel. Transaction revenue increased to $169.6 million, up 59% year-over-year. As a result of increased card spend volume on Divvy, TPV growth and ad valorem payment adoption. BILL standalone transaction revenue totaled $80.4 million, reflecting growth of 42% year-over-year. And Divvy transaction revenue totaled $86.6 million, reflecting growth of 78% year-over-year. Float revenue was $28.9 million, significantly exceeding our expectations due to the magnitude of recent fed funds rate increases.

Our yield was 341 basis points in the quarter, demonstrating that our scale, combined with our proprietary payment technology is proving to be an important differentiator that enables us to create tailwinds during this period of higher interest rates. Turning to gross margin and our operating results for Q2, non-GAAP gross margin was 86.7%, up 140 basis points year-over-year as a result of higher float revenue and increasing variable transaction fee revenue. Non-GAAP operating expenses were $194.6 million, an increase of 4% from Q1 due to proactive expense management, including moderating our pace of hiring and managing our variable spend. The work costs, which are included in sales and marketing expenses, were 50% of Divvy revenue consistent with prior quarters.

Non-GAAP operating income was $30.8 million, an increase of $27.4 million year-over-year. Non-GAAP operating margin was 11.8% an improvement of 9.7 percentage points from 2.2% in Q2 of last year. Non-GAAP other income, net of other expenses, was $18.8 million and benefited from higher yields on corporate cash balances. Our non-GAAP net income was $49.4 million or 19% of revenue resulting in non-GAAP net income per diluted share of $0.42 based on $117.3 million diluted weighted average shares outstanding. Our non-GAAP net income was significantly better than our expectations due to our revenue outperformance combined with our disciplined approach to managing expenses as we grow. Moving on to the balance sheet. Cash, cash equivalents and short-term investments at the end of Q2, were $2.7 billion.

Our capital position is an important advantage and provides flexibility for us to invest in scaling our business. Our number one priority for capital allocation continues to be investing in organic and inorganic growth opportunities that we believe will enhance long-term value creation. With our positive free cash flow results and the confidence we have in the durable strength of our business, we believe investing in a share buyback program to offset dilution is also a great use of capital. To this end, as Rene mentioned, our Board of Directors has authorized a $300 million share repurchase program. Before shifting to our financial outlook for the fiscal third quarter and full fiscal year 2023, I will provide insight about the impact we expect the macro environment to have on SMBs and our business.

We anticipate the trends we've experienced in recent quarters will continue in the second half fiscal 2023. This will impact our business, most notably on near-term payment volume growth. We estimate that BILL's standalone TPV growth in Q3 will be approximately flat on a year-over-year basis, reflecting both the continuation of macro trends and our expectations for typical seasonally softer payment volume in the March quarter compared to the December quarter. For Divvy card spend, we anticipate growth of approximately 50% on a year-over-year basis in fiscal Q3. We're excited about our market opportunity and ability to extend our leadership position through this economic cycle, but we also believe that near-term trends warrant a conservative financial outlook.

As a result, we've adjusted our core revenue estimates to account for the risks that SMBs continue to adjust their spending levels. We will be disciplined in managing our operating expenses going forward and have proactively reduced plan hiring. We are also continuing to focus on investing in the highest impact initiatives for customers. Thus, we are taking a balanced approach to investing for growth over the longer term while addressing short-term challenges and delivering increased profitability. Now turning to our outlook. For fiscal Q3, we expect our total revenue to be in the range of $245 million to $248 million, which reflects 47% to 49% year-over-year growth. We expect float revenue to be approximately $27 million in Q3, which assumes our yield on FBO funds will be approximately 350 basis points.

On the bottom line, for Q3, we expect to report non-GAAP net income in the range of $26.5 million to $29.5 million and non-GAAP net income per diluted share in the range of $0.22 to $0.25 based on a share count of $119 million diluted weighted average shares outstanding. For Q3, we expect other income net of other expenses, or OIE to be $17.5 million. We expect stock-based compensation expenses of approximately $73 million in Q3, and we expect capital expenditures were approximately $9 million to $10 million in Q3. Moving on to full year guidance for fiscal 2023, we expect total revenue to be in the range of $999 million to $1.007 billion. We expect float revenue to be approximately $100 million in fiscal 2023, which assumes a yield on FBO funds of approximately 320 basis points for the year.

In summary, we've adjusted the composition of our core and float revenue estimates to reflect external economic conditions. We've also increased our outlook for total revenue at the low end of our range while holding the top end of our prior total revenue guidance. At the same time, we are significantly increasing our profitability through diligent expense management. We expect to report non-GAAP net income for fiscal year 2023 in the range of $117.5 million to $125.5 million. We expect non-GAAP net income for a diluted share to be $0.99 to $1.05 based on a share count of $119 million diluted weighted average shares outstanding. In addition for fiscal 2023, we expect OIE to be $60 million, net of other expenses. For fiscal 2023, we expect total stock-based compensation expense of $340 million and capital expenditures were approximately $35 million for the year.

In closing, we are confident that we are well positioned to successfully navigate the prevailing uncertain economic environment. We are committed to driving innovation and value creation for our customers while delivering revenue growth, operating leverage, and non-GAAP profitability for our investors. Operator, we're now ready to take questions.

See also 10 Hot Insurance Stocks To Buy Now and Michael Burry Stock Portfolio: 10 Stocks He Sold .

To continue reading the Q&A session, please click here.