Yahoo Finance Bill.com Holdings, Inc. (NYSE:BILL) Q3 2024 Earnings Call Transcript
Bill.com Holdings, Inc. (NYSE:BILL) Q3 2024 Earnings Call Transcript May 2, 2024
Bill.com Holdings, Inc. misses on earnings expectations. Reported EPS is $0.2861 EPS, expectations were $0.53. Bill.com Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to BILL's Third Quarter Fiscal 2024 Earnings Conference Call. Joining us for today's call are BILL's CEO, Rene Lacerte; President and CFO; John Rettig; and VP of Investor Relations, Karen Sansot. With that, I would like to turn the call over to Karen Sansot for introductory remarks. Karen?
Karen Sansot: Thank you, operator. Welcome to BILL's fiscal third quarter 2024 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 are Rene Lacerte, Chairman, CEO and Founder of BILL; and John Rettig, President and CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the future operations and results of BILL that involve many assumptions, risks and uncertainties. If any of these risks or uncertainties develop or if any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements.
For additional discussion, please refer to the text in the company's press release issued today and to our periodic reports filed with the SEC including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. Note that at times during this call, we will discuss those standalone results, which exclude our BILL's Spend and Expense management, which was formerly called Divvy, Invoice2go 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. Thanks for joining us today. In Q3, we delivered very strong financial results, continued our rapid pace of innovation and executed with persistent rigor and effectiveness. Across the company, we delivered on the key initiatives to strengthen our core. We enhanced our platform, enriched our payment experiences and expanded our ecosystem. Both the market opportunity and our ability to shape that opportunity grows each and every day. There is a significant growth runway ahead for BILL, and we continue to position ourselves to be the essential financial operations platform for SMBs. In Q3, we delivered strong revenue growth and exceptional non-GAAP profit growth that were ahead of our expectations.
Total revenue grew 19% year-over-year, and non-GAAP operating income increased 68% year-over-year. At BILL, we are energized by the fact that during the quarter, we helped more than 450,000 small businesses automate their financial operations so they could spend more time focused on their mission. With our platform and broad set of solutions, these businesses made more than 25 million transactions during the quarter, totaling more than $70 billion in payment volume. Our performance and scale demonstrate the mission-critical nature of our platform, the strength of our ecosystem and outstanding execution. This is the foundation for our growth and penetration of the large market opportunity. BILL is a leader in innovative financial solutions for SMBs. We created a category and continue to define it as we serve a vast greenfield opportunity to automate and transform financial operations for millions of small and midsized businesses.
There are more than 6 million SMBs in the US who have employees and more than 33 million in small businesses in total, including sole proprietors. These businesses make trillions of dollars of B2B payments each year. The vast majority of these businesses are still burdened by paper checks and manual processes. Our track record of innovating and delivering value puts us at the forefront to help millions of small businesses, digitize their operations for the first time and drive adoption of e-payments. At BILL, we have a passion for serving SMBs and are dedicated to helping them thrive. SMBs create jobs, drive innovation and are at the heart of their local communities. They deserve dedicated attention, care and technology designed specifically for their needs.
BILL paved the way for SMBs to move their financial operations from the analog to the digital world. Our platform offers an integrated suite of solutions that automates and digitizes the financial back office, including accounts payable, accounts receivable, spend and expense management and a variety of payment offerings. Our robust workflows take care of mundane, error-prone tasks and are built to handle exceptions. Our suite of payment solutions give businesses choice based on both their needs and their supplier needs, while accelerating payments and simplifying data reconciliation. We've removed the friction in doing business by weaving together a proprietary two-sided network that enables buyers and suppliers to share bank information securely with the ability to collaborate across invoices.
The reach and value of our networks has attracted more than 5.8 million members and drives more than one-third of our BILL stand-alone core revenue. Our Artificial Intelligence engine and large scale help us deliver significant value to our customers. AI is deeply embedded across our platform to connect businesses, automate their operations and accelerate their ability to make payments. Our AI engine has been uniquely trained on our proprietary data assets, including more than 300 million transactions across an array of payment modalities and over 0.5 billion documents. Our large and increasing scale naturally drives faster product development and ecosystem expansion as scale begets scale. The virtuous cycle enables us to learn quickly, move fast and accelerate speed to value our SMBs. With our platform, businesses can save more than 50% of their time on national processes and gain better insight, visibility and control for running their business.
This is why our platform serves as a central nervous system of their daily financial operations. And this is what positions BILL, as the category leader with a wide moat and an engaged sticky customer base. A great example of how our platform empowers SMBs, is Joe, a marketing automation solution for Buddy [ph] coffee shops. Joe uses our platform and payment offerings to digitize their manual payables drive and pay suppliers overseas. Brendan Martin, Co-CEO and Co-founder said and I quote, "We chose BILL because of their best-in-industry solutions and our shared commitment to level the playing field for small businesses." Joe has a team of 15 employees supporting users of 1,500 small coffee shops. It would not be possible to have this scale without BILL modernizing our finish operations.
More importantly, we can concentrate more time and mind share on brewing strategies and products to empower more the coffee shops." Enabling Joe and all SMBs to achieve their goals is what journey especially rewarding. We bring together and serve hundreds of thousands of customers and millions of network members and simplify their lives. With our platform and ecosystem, we consistently drive strong customer adoption and deeper penetration of the market. Each month, we acquire thousands of customers and tens of thousands of new network members. We simplify and centralize money movement for SMBs at a tremendous magnitude. Since fiscal 2018, our platform has enabled more than $1 trillion of SMB payments. This is only possible because of the combination of our payment engine, money transmitter capabilities and strong risk management expertise.
And our scale is increasing. Over the past 12 months, we processed nearly 100 million transactions that represented approximately 1% of U.S. GDP. Underpinning this accomplishment is our demonstrated track record in creating value for SMBs. A great example of how our platform empowers businesses to scale is Tower 28, a fast-growing company that creates beauty and skin care products, utilizing clean ingredients to support sensitive skin. Tower 28 uses our accounts payable, accounts receivable and spend and expense solutions, utilizing the power of our integrated platform. Victor Leu, CFO of Tower 28, said and I quote, "A fresh approach to beauty deserves a fresh approach to business financial operations. Our company has been scaling fast. In less than two years, our business basically tripled.
Being able to scale with all the tools, solutions and services that BILL provides has been phenomenal. BILL saves us 40 hours a week and an entire full-time employee by automating our financial back office. It provides us real-time updates and strong control on card spend. It also enables us to work on the go. We've approved payments from everywhere. With BILL taking care of our financial operations, our team can focus more time and resources on company growth and skin share product development." Every day, we are dedicated to creating more value for our customers, partners and network members. Being a category leader requires an exceptionally strong innovation road map that constantly extends our value to SMBs and their accountant partners.
Innovation is in our DNA and is foundational to our platform, payments and ecosystem. We've shared with you our key investment areas for growth, and these include driving adoption of our integrated financial operations platform, expanding our ecosystem by bringing more innovation to our partners and attracting new partners, and enriching our payment experiences and driving penetration of our ad valorem solutions. Our team continues to make very strong progress against these initiatives, which lay the foundation for our next phase of growth. This past quarter, we significantly enriched our integrated platform capabilities. Our platform now includes cash flow insight and forecasting, leveraging the best-of-breed FP&A capability from our acquisition of Finmark.
This powerful tool empowers SMBs to predict future cash flow, easily analyze trends and opportunities and make better data-driven decisions faster. They can now optimize, manage and forecast cash flow with a single platform. BILL is uniquely positioned to provide this rich insight as our comprehensive platform can serve all B2B spend and integrates with accounting systems. Given our entrenched role in their day-to-day routine, the analytics and forecasting layer unlocks outsized and unique value for SMBs and accounts. We recently extended our platform's capabilities into a brand-new mobile app for BILL AP and AR that further empowers businesses to manage their operations from anywhere. This new app provides enhanced automation workflows, payment solutions and leverages our mobile-first approach to provide a fresh look and easy navigation.
This experience meets customers where they are and is another extension of driving speed and simplicity in financial operations. The new experience is already driving growth in mobile engagement from both our customers and network members, including more bills created and approved and more demand from our network members for Instant Transfer and invoice financing. We are continuing to enhance our payment experiences to drive more convenience for SMBs. We have a sophisticated payment infrastructure fueled by continuous enhancements. Our platform has connectivities to 12 payment rails, offers eight payment modalities, reaches over 130 countries. This level of payment flexibility is extremely complex because the compliance, regulatory and risk management needs differ by payment type and source of the customer.
We hide all these complexities to deliver SMBs a simple and fast payment experience. By making the complex look simple, our customers accelerate their transition to digital payments. Speed and choice of payments are critical to SMBs, and this is particularly true when it comes to commerce with international suppliers. Over the years, we have grown the scale and the sophistication of our international payment offering, and now we are unlocking greater value by leveraging local clearing capabilities to provide faster payment speed. Our enhanced offering will reduce delivery times from days to near real time. We introduced this experience in our first country last month, and we will roll out these capabilities more broadly throughout 2024. We knew from day one that an ecosystem was required to make financial operations for SMBs mainstream.
We build our platform with a sensibility in mind, allowing multiple models to integrate embed with our partners. We partner with nearly 8,000 accounting channels in some of the largest banks in the country who trust us to manage their clients' operations and payments. We have nearly 2 decades of experience in integrated and embedding functionalities into our partners' services. We understand the profound intricacies in creating a cohesive product and go-to-market experience that works for our partners. Our differentiated set of expertise and competencies is enabling our platform to ripple across our ecosystem. Software and payments are converging, and we are leading the charge. A decade ago, the financial operations automation journey for an SMB would start almost exclusively with consumer-based online banking.
That's why we were pioneers in partnering with banks to enable them to do more beyond payments. Fast forward to today, and the front door to an SMB's financial journey can start in many different places. It can and does start with all sorts of different software providers. Our focused dedication to SMBs means that we meet customers where they are regardless of the entry point. The industry recognizes our leadership, and inbound interest from software companies is strong. Many software companies are looking to us to help address their customers' payment needs. Consistent themes we hear from partners are that they value BILL for our workflows, payment expertise, risk and regulatory practices, broad network, vast data set and dedication to SMBs. We are moving fast to capitalize on this emerging trend.
We are rapidly evolving our technology and making it easy for software companies to plug and play. Our embed strategy is resonating. Most recently, Xero, a leading global small business platform, announced they will embed our onboarding workflows and a suite of ad valorem offerings into their platform. Once available, Xero's US-based customers can pay bills efficiently and connect with our large member network. We are excited about this partnership and are working closely with Xero to bring this offering to market. In closing, we drove great financial results while executing against our innovation road map to provide businesses more automation, control and insights. Achieving our leadership and scale did not happen overnight. We will continue to extend our leadership position with careful strategic planning, sustained investments in building capabilities and consistent execution.
We are building an enduring company, and we aspire to help millions of SMBs automate their operations and more easily make trillions of dollars of e-payments. At BILL, we have an inspired team that is dedicated to serving SMBs and each other. And this, together with our values and mission, will continue to strengthen our unique competitive advantage that positions us well to serve the large market opportunity we are pursuing. I'll now turn the call over to John.
John Rettig: Thanks, Renee. Today, I'll provide an overview of our fiscal third quarter financial and operating results and discuss our outlook for the fiscal fourth quarter and full year 2024. We delivered strong results for the quarter that reinforce our conviction in the strength of our business, our execution capabilities, and the market opportunity we are pursuing. We are building to strengthen our core while investing with discipline to pave the way for the next phase of accelerated growth. Rigorous execution against our top priorities showed early positive signals in Q3. Net new customer adds for both our Spend & Expense and BILL stand-alone XFi solutions returned to historical levels. The B2B spend environment showed signs of stabilization.
And our focus on businesses with a higher propensity to spend drove upside in our Spend & Expense business. BILL stand-alone payment monetization expanded sequentially. All these factors translated into profitable growth in Q3. Total revenue for Q3 was $323 million, an increase of 19% year-over-year. Core revenue, which includes subscription and transaction revenue, was $281 million, up 17% from a year ago. Non-GAAP gross profit in Q3 was $281 million, up 19% year-over-year, and non-GAAP gross margin was 87%. Our gross profit results in the quarter included approximately $6 million in onetime benefits. Our strong business model enables us to consistently deliver a gross margin that is among the best-in-class for software and fintech companies.
We also significantly expanded profitability in Q3, reflecting our ongoing commitment to investing with discipline. Non-GAAP operating income for Q3 was $59 million, up 68% year-over-year. Non-GAAP operating margin was 18% and expanded more than five percentage points from Q3 last year. Once again, we were non-GAAP operating income-profitable, excluding the benefit of float revenue. In Q3, we expanded Expo profitability by $10 million sequentially, excluding the one-time benefits mentioned earlier, and demonstrating our ability to drive operating leverage as we scale. Moving on to key business highlights. I'll touch on our Spend & Expense solution and BILL stand-alone solutions. The strong growth trends we delivered throughout this fiscal year with our Spend & Expense solution continued in Q3, and our results in the quarter exceeded our expectations.
Spend & Expense revenue grew 29% year-over-year, and we added 1,800 net new spending businesses. We are prioritizing our sales and marketing resources towards spending businesses with greater financial strength and the opportunity to capture larger wallet share. Spend & Expense card payment volume was $4.4 billion for the quarter, an increase of 29% year-over-year. Interchange fees were 261 basis points and rewards expense was 47% of Spend & Expense revenue. As expected with the choppy macro environment, we have seen an increase in credit and fraud loss rates, particularly among our smaller customer cohorts. Our proactive efforts over the last year to diligently manage credit exposure have enabled us to maintain strong margins. For our BILL stand-alone solutions, we delivered solid performance in the quarter.
BILL stand-alone transaction revenue increased 20% year-over-year driven by our diverse suite of payment solutions and continued enhancements to our payment products and supplier initiatives. BILL stand-alone payment volume was $67 billion, an increase of 9% year-over-year. BILL stand-alone payment monetization in the quarter extended from Q2 driven mainly by increased adoption of our newer ad valorem products as well as a non-recurring increase in transaction fees from migrating TPV between processing providers in the quarter. BILL stand-alone subscription revenue, excluding financial institution partners, increased 9% year-over-year. Overall, BILL stand-alone subscription revenue declined 2% from last year, which reflects changes in our FI channel, as previously discussed.
Our solutions continue to drive value for small businesses and accounting firms, and our customer acquisition and retention results are strong. BILL stand-alone net new customer adds in the direct and accounting channel were 4,100 in Q3, excluding attrition related to the sunset of Intuit's Simple Bill Pay solution. BILL stand-alone customer count and the financial institution or FI channel declined quarter-over-quarter. Across our partner portfolio, new enrollments continued at a consistent pace but were offset by the removal of inactive customers, which occurs periodically. A word on float revenue, which increased 26% year-over-year to $42 million in Q3. Float is enabled by our proprietary payment infrastructure and regulatory licenses and serves as a counterbalance to economic trends.
Turning to capital allocation. We generate significant free cash flow and have a strong balance sheet. This enables us to fund long-term opportunities while delivering profitable growth. We invest with purpose and discipline and are proactive in optimizing our capital structure. In Q3, we repurchased $748 million in aggregate principal amount of our 2025 convertible notes, resulting in cash usage of $711 million and a reduction in non-GAAP diluted share count of 0.9 million weighted shares. In addition, we unwound a portion of the cap call instrument due to the repurchase. We repurchased these notes to minimize potential future dilution associated with the conversion event and made the purchases at attractive economics. The repurchase of these notes and the unwind of the cap calls resulted in a $34 million net benefit to other income and expense, which is reflected in our GAAP results and excluded from our non-GAAP results.
Now turning to a quick update on our non-GAAP net income presentation. Given the significant non-GAAP net income we generated in the past several quarters, we transitioned to include a new non-GAAP income tax adjustment beginning in Q3. Previously, non-GAAP net income included GAAP taxes, which were minimal. In Q3, our non-GAAP provision for income taxes was calculated using a blended tax rate of 20%. Note that this change has no impact on actual cash tax payments. You can refer to our press release and quarterly investor presentation for additional information, including a look back of our prior periods to reflect the adoption of the 20% blended tax rate. Comparing our results on an apples-to-apples basis by incorporating the non-GAAP provision for income tax.
Non-GAAP net income in Q3 was $68.6 million. It increased 42% year-over-year. Non-GAAP net income margin was 21%, an expansion of 4 percentage points year-over-year. Please note that our previously provided guidance did not include the non-GAAP tax presentation. Shifting to our outlook. We are raising our fiscal 2024 outlook to reflect our progress in strengthening our core while continuing to be prudent regarding ongoing macro crosswinds that could negatively impact SMB spending. While there have been signs of the B2B spend environment stabilizing, SMBs continue to be pressured by high inflation and interest rates. For fiscal Q4, we expect total revenue to be in the range of $320 million to $330 million, which reflects 8% to 11% year-over-year growth.
We expect float revenue to be $40 million in Q4, which assumes a yield on FBO funds to be approximately 480 basis points. We expect non-GAAP gross margin to be approximately 84% in Q4, which reflects a slight shift in payment volume mix and the onetime gross margin benefits we recognized in Q3. As previously discussed, we expect our non-GAAP gross margin to moderate in the low to mid-80s as our payment mix evolves and our float revenue declines with lower interest rates later in this economic cycle. Given our change to apply a non-GAAP tax rate to non-GAAP net income, we are providing guidance for non-GAAP operating income, which we expect to be $40 million to $50 million in Q4. We expect non-GAAP income for Q4 in the range of $46.4 million to $54.4 million, which includes an assumed 20% tax rate for non-GAAP purposes.
We expect our actual cash tax payments to continue to be fairly minimal in the near-term. Non-GAAP net income per diluted share is expected to be in the range of $0.41 to $0.49 and based on a share count of 112 million diluted weighted average shares outstanding. Moving on to full year guidance. For fiscal 2024, we expect total revenue to be in the range of $1.267 billion to $1.277 billion, which represents 20% to 21% year-over-year growth. We expect float revenue to be $165 million in fiscal 2024, assuming a yield on FBO funds of 490 basis points. We expect non-GAAP operating income for fiscal 2024 to be $176 million to $186 million, which reflects 51% to 59% year-over-year growth. We expect non-GAAP net income for fiscal 2024 in the range of $227 million to $235 million, which includes an assumed 20% tax rate, and non-GAAP net income per diluted share to be $1.96 to $2.03 based on a share count of 115.5 million diluted weighted average shares outstanding.
We expect stock-based compensation expenses of approximately $255 million for fiscal 2024, which is approximately $45 million lower than the guidance we provided at the start of the fiscal year. In addition, we expect capital expenditures to be approximately $23 million for fiscal 2024. In closing, we delivered a strong quarter with balanced growth and profitability, and we executed vigilantly against our key business initiatives to build the foundation for sustained long-term growth. At BILL, we are all in to help SMBs succeed and thrive. We lead the financial operations category. With our distinct moat, rigorous execution and innovation momentum, we stand poised to expand this category and be the de facto financial operations platform for millions of SMBs. Operator, we're now ready to take questions.
Operator: Thank you. [Operator Instructions] Our first question comes from Tien-Tsin Huang of JPMorgan. Please go ahead, your line is open.
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