BILL Holdings, Inc. Q2 FY2020 Earnings Call

Good afternoon, and welcome to Bill.com's Fiscal Second Quarter 2020 Earnings Conference Call. Joining us today are Bill.com CEO, René Lacerte, and CFO, John Rettig. I would like to turn the call over to John Rettig for introductory remarks. John?

Thank you, Mike. Welcome to Bill.com's Fiscal Second Quarter 2020 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. With me on the call today is René Lacerte, Chairman, CEO, and Founder of Bill.com. 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 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 Securities and Exchange Commission, including our prospectus filed with the SEC on December 12, 2019. We disclaim any obligations to update forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The revenue and financial figures discussed today are non-GAAP unless stated that the measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. Now I'll turn the call over to René.

Thanks, John, and good afternoon, everyone. Thank you for joining us today for our first earnings call as a public company. We are excited to share our fiscal second quarter results as well as an overview of our business. I would like to start by thanking our customers, strategic partners, long-term and new shareholders for supporting our mission, and I want to extend a special thank you to all Bill.com employees who work hard delivering value for customers every day. Our success is dependent on their passion and dedication. Since this is our first quarter as a public company, and many of you may be new to our story, I will spend a few minutes introducing Bill.com, then I will provide an overview of our fiscal second quarter results, discuss a few highlights for the quarter, and finally, I'll turn the call over to John to cover our financial results in greater detail. He'll also be providing you with our fiscal third quarter and full year outlook before opening the call for Q&A. As a fourth generation entrepreneur, I have a deep appreciation for the challenges associated with running a small business. I vividly remember the pain of managing the back-office of PayCycle, the first company I founded. I was drowning in paper, handling bills and invoices, digging through filing cabinets to locate contracts and looking for answers by leaving sticky notes all over the place. I realized that I was managing the back-office no differently than my grandfather had 60 years earlier. I hadn't started my own business to spend my time chasing people and paper. This was the early 2000s, and I saw that the web was going to change everything. I sensed that the web could solve the mess I and many other small and midsized businesses, SMBs, were experiencing. That's why I started Bill.com, to clean up the back-office mess and give back valuable time to SMBs, so they can focus on what matters most to them. Customers use our cloud platform to generate and process invoices, streamline approvals, send and receive payments, sync to their accounting system, and manage their cash. Bill.com weaves software and payments together, and the result is a more efficient and reliable financial operation. We have built sophisticated integrations with popular accounting software solutions, financial institutions, and payment processors, enabling our customers to connect these mission-critical services seamlessly. As a result, we become central to an SMB's accounts payable and accounts receivable operation, as evidenced by our customers electronically exchanging more than 8,000 messages per day, approving more than 2.4 million bills per month, and storing almost 45 million documents per year, as of June 30, 2019. Today, tens of thousands of customers trust our platform to manage their financial workflows and process their payments, which totaled billions of dollars annually. And our platform extends well beyond our customers. In fact, as of the end of our last fiscal year, we had over 1.8 million network members. Members consist of our customers as well as their suppliers and clients that collaborate on our platform in exchange for electronic payments. Hence, our mission, we make it simple to connect and do business. Now that I provided a short overview of who we are, I'd like to spend a few minutes talking about our opportunity. SMBs represent a significant and critical component of the U.S. economy. SMBs are businesses with fewer than 500 total employees, as defined by the small business administration. In 2018, there were approximately 30 million SMBs in the United States, which provided employment for over 47% of all U.S. workers. This group was responsible for one-third of goods traded by value. While 24 million of these SMBs are sole providers, we focus on serving the over 6 million firms with employees. SMBs large enough to have employees tend to have a greater need for more advanced accounts payable and accounts receivable processes. Importantly, these SMBs remain largely underserved by current software solutions. According to IDC, in 2019, small and midsized businesses are planning to spend approximately $65 billion on software in the U.S. alone. We believe that we are well positioned to capture some of that spend. We estimate the annual addressable market for services we offer today to be $9 billion domestically and $30 billion globally. We derived these estimates by multiplying our average fiscal 2019 revenue per customer of $1,500 by each of the 6 million domestic employer firms and the 20 million small and medium-sized businesses worldwide. In addition to the software opportunity, our platform enables us to pursue a large and growing payments opportunity. According to the 2018 Mastercard report, North American companies make approximately $25 trillion of business-to-business payments annually. And according to Deloitte, the U.S. market for SMB payments is expected to exceed $9 trillion in 2020. And finally, over 90% of SMBs still rely on paper checks, according to a survey by the SMB Technology Adoption Index. As more SMBs move to digital payments, we believe Bill.com is well positioned to capitalize on this evolution. SMBs span all industries and geographies. We've developed a powerful go-to-market strategy that enables us to reach them wherever they are in a cost-effective manner. Our direct-to-SMB strategy leverages digital customer acquisition tools and is supported by an efficient inside sales team. We build awareness through industry trade shows and word of mouth. In 2019 customer survey, half of new customer responses indicated they first became aware of us because they used our platform at a prior company or heard about us through a colleague. In addition, new SMBs are continually being introduced to our platform's value proposition as they pay and get paid. We also reach prospective customers through partners that SMBs trust the most: accounting firms, financial institutions, and accounting software companies. Let's start with accounting firms. Since our inception, we have focused on helping accounting firms better manage and support their clients. Our accountant-specific tools help firms generate revenue within their consulting practice, establish a competitive advantage, and better retain their SMB clients. With our platform, the same accounting firm staff can serve more clients more strategically and serve them more profitably. We partner with more than 70 of the top 100 accounting firms in the U.S., and enable an additional 4,000 firms across the country to deliver more value to their customers every day. Second, we partner with financial institutions. We are integrated with several of the largest financial institutions in the U.S., including Bank of America, JP Morgan Chase, and American Express. By working with Bill.com, our financial institution partners can provide their customers with many of the benefits realized by our directly acquired customers. These partners embed our platform, typically on a white-label basis, into their online banking solutions. Finally, SMBs trust their accounting software providers. Bill.com partners with the leading accounting software providers for SMBs, including QuickBooks and QuickBooks Online from Intuit, Oracle NetSuite, Sage Intacct, and Xero. Our partnership with Intuit is unique because it includes not only our 2-way sync functionality but also a fully embedded experience inside of QuickBooks Online, which was recently enhanced to include cross-border payments. In summary, we are pleased with the breadth and diversity of our distribution channel strategy. No partner is overrepresented within our business. In fact, in FY '19, no single partner constituted over 2.5% of total revenue. With that background on the business, I would like to briefly cover our fiscal second quarter financial results. We delivered another quarter of solid performance, ending with approximately 86,000 customers. Core revenue, which we define as subscription plus transaction revenue, grew by 61% in the quarter versus the same period in the prior year. The total revenue in the quarter grew by 50% year-over-year to $39.1 million. We also delivered non-GAAP gross margins of 78% in the quarter. We generated a non-GAAP operating loss of $4.5 million, reflecting the investments we are making to build out our platform and in our go-to-market distribution channels. John will discuss our financial results for the quarter in greater detail in a few minutes. But first, I'd like to give you a sense of the types of customers we serve. One of my favorite examples is Niche, a modern lighting company founded by Jeremy Pyles. When I talked to Jeremy about why he uses Bill.com, he summarized by saying, 'I'd like to pay people on time. I'd like to treat my vendors fairly. This requires knowing answers to questions like, what bills are due? Are they approved? Who ordered this stuff? Did I know about this? Did we even receive it?' You may have heard what Bill.com did for Jeremy from our previous presentations. Our platform added a level of process and control that was missing. He was able to offload routine tasks while still being confident that no one could make payments without him giving final approval. Bill.com gave him the ability to delegate with confidence, solving the biggest challenge a small business owner has: relinquishing control over the back-office details so that he could focus on the reason he started his business, to design and make unique and beautiful glass light fixtures. Jeremy's experience was exactly the same as mine at PayCycle. Everything was great in the front office, but the back-office needed reinvention. Niche is just one example of how our platform changes the way an SMB operates. We are committed to continually improving our customers' experience on our platform. As an example, during the quarter, we extended the reach of our cross-border offering. We now support payments to over 130 countries in over 100 currencies. With Bill.com, customers benefit from using the same workflow and system of record for both domestic and international payments, including syncing with leading accounting software. Here is what one of our customers, Jurie Victor, Director of Finance and Accounting at Spikeball said about the impact of our new cross-border service on his organization. 'In 2018, we paid 1,800 bills to Bill.com, a 63% increase over the previous year. Without Bill.com, we would have had to hire at least one more full-time accounts payable person to print out all of those invoices and manually cut checks. Bill.com also enables us to pay international suppliers. Given the number of bills we pay as well as the currency amount, it took a lot of administrative time for the complex tax required when paying through banks. With Bill.com, it's a one-click solution; it's a lifesaver.' A second example of the expansion of our platform that I'd like to showcase is how we continue to leverage our AI capabilities to improve the customer experience. In addition to automatically reading incoming bills to pull out critical invoice information and eliminate manual data entry, we are now able to detect international bank account details and currency denominations automatically. We use this information within the AP workflow to speed the processing of the bill and make an electronic payment in the vendor's preferred local currency. This enables us to make the processing and payment of an international invoice as easy as a domestic one. I'd now like to focus on recapping our growth strategy. We see five major opportunities to drive continued growth. First, we will focus on acquiring new customers. We believe there is an opportunity to further invest in sales and marketing activities to drive awareness and adoption of our platform by new customers. Our expanding ecosystem of strategic partners and accounting firms also provides us with a strong pipeline of SMB sign-ups. Second, we will seek to increase adoption by existing customers. As we become more integral to SMB's back office, we increase the number of our customers' employees who become regular users. Over time, we also typically increase the number of payments processed per customer as well as adoption of new products. Third, we will continue to focus on growing the number of network members. As customers connect with their suppliers and clients through our platform, our network member expands. As companies are added to our network, we leverage our data algorithms to present more targeted network recommendations to our customers. With a single click, our customers can then accept these recommendations and instantly do business with these network members. This creates an organic flywheel effect that improves the reach and visibility of our platform and powers our customer acquisition efforts. Fourth, we will expand our platform capabilities. We continue to invest in R&D to enhance the breadth and depth of our platform. As an example, to better serve larger SMBs, those with policies that require a more formal procurement process prior to a purchase, we have enabled purchase order support that seamlessly syncs with the customers' accounting software. In addition, we continue to improve our AI engine, which enables us to help our customers manage end-to-end financial workflows, better predict cash flow needs, and deliver better network recommendations. Fifth, we plan to expand internationally. I've already mentioned our cross-border payment service expansion. Looking ahead, over the longer term, we will seek to further extend our network and engage with customers worldwide. According to Mastercard's Business Payments 2022 white paper, global business-to-business non-cash payments are expected to increase at a compound average growth rate of 6.5% through 2020, reaching 122.4 billion transactions. This is a significant opportunity that we believe Bill.com's platform is well-suited to serve. This is the beginning of our life as a public company, and we believe the opportunity ahead grows every day. We are still in the early stages of enabling SMBs to automate their financial operations, and we look forward to continuing our mission to make it simple to connect and do business. Now I'll turn the call over to John to discuss our financials in more detail. John?

Thanks, René. Today, I will provide a brief overview of our fiscal second quarter 2020 financial results and discuss guidance for our fiscal third quarter and full year fiscal 2020. As a quick reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings release for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. Before I discuss quarterly financials, let me remind you of our financial model and drivers. We drive revenue from three areas: subscription fees, transaction fees, and float. Subscription and transaction fees are what we call core revenue. The majority of our core revenue is derived from subscriptions, which are based on a fixed monthly or annual rate per user, with pricing based primarily on the features and functionalities a user needs access to. Transaction revenue is comprised of transaction fees that are charged on a fixed or variable rate per transaction basis. Most of our transaction revenue comes from repeat payments, where customers are paying or being paid by the same suppliers or clients as in the preceding three months. This really illustrates the stickiness of our platform. Both subscriptions and transactions are highly recurring, providing us with strong visibility into revenue, and we believe core revenue is the best indicator of our revenue performance as a company. Our third revenue stream is float, which appears in our income statement as interest on funds held for customers. Float is an attractive high-margin revenue stream derived from the payment volume on our platform. When we process payment transactions, the funds flow through our bank accounts. Float is earned from interest-bearing deposit accounts, certificates of deposit, money market funds, commercial paper, and U.S. treasury securities. We earn interest from the time customers initiate transactions on our platform until they clear our bank accounts and are received by the payee. We are authorized to process payments through our bank accounts because we are a licensed money transmitter in all U.S. states that require licenses. By leveraging our bank accounts, we can utilize treasury management services, such as Positive Pay, to protect our customers from fraud. Our sophisticated payment capabilities and well-established regulatory compliance programs are a major part of our differentiation from other software companies. Float revenue fluctuates depending upon the amount and duration of customer funds held as well as our yield on customer funds invested, which is, in turn, influenced by market interest rates and our investment strategies. With that backdrop, let me turn to our second quarter key metrics. We ended the quarter with 85,900 customers, representing year-over-year growth of 20%. Our customers leverage our platform to connect with our 1.8 million network members. As René mentioned earlier, we view this network as a valuable asset to target prospects for paid services in the future. During the quarter, we processed $24.8 billion in total payment volume on our platform, an increase of 41% over Q2 of the prior year and over 6.2 million payment transactions, representing an increase of 29% year-over-year. In terms of additional metrics that we disclosed in our S-1, such as net dollar-based retention rate and customer churn, we plan on updating you with these metrics on an annual cadence at the end of each fiscal year. We delivered strong financial results in Q2 with solid year-over-year growth in total and core revenue as well as strong non-GAAP gross margins. Total revenue for Q2 was $39.1 million, representing growth of 50% from Q2 '19. Our total revenue growth was driven mainly by the strength of our core revenue, which accelerated in Q2 to $33 million, or 61% year-over-year growth. The strength in core revenue was driven by increases in the number of customers we serve and growth in revenue per customer. To break down our core revenue, subscription revenue increased to $19.9 million, up from $14.4 million in Q2 of last year, representing an increase of 39% year-over-year. This growth was driven by the increase in customers and the average subscription revenue per customer. Transaction revenue increased to $13.1 million, up from $6 million in Q2 of last year, an increase of 114% year-over-year, driven by increased adoption of new product offerings and an increase in the number of transactions processed from our growing customer base and the mix of transactions shifting to variable price products. The acceleration in transaction revenue growth in Q1 and Q2 of this fiscal year was bolstered by the launch of our new variable price transaction offerings, namely cross-border and virtual card payments, which we rolled out in the prior year. As we pass the anniversary of the early launch days of these new solutions, we expect more challenging comparisons ahead and lower growth rates going forward. Moving on to float revenue. We delivered $6.1 million in float revenue in Q2 compared to $5.6 million in the second quarter of last year, growth of 10% year-over-year. Float revenue growth was a result of the increase in customer funds in transit while payment transactions were clearing but was partially offset by the cumulative 75 basis points reduction in the Fed funds rate since June 2019 that lowered our yield from the year-ago quarter. Our non-GAAP gross margin for the quarter was 78%, an increase of 220 basis points over Q2 '19's non-GAAP gross margin of 75.8%. The increase was driven primarily by the adoption of new product offerings and growth in float revenue on a year-over-year basis. Over the long term, we expect non-GAAP gross margins to be in the 75% to 78% range, subject to the prevailing interest rate environment. In the near term, we anticipate gross margins towards the upper end of our range. Turning to operating expenses. R&D expense was $12 million for the quarter or 31% of revenue, up from 25% in Q2 of last year. The increase was due primarily to the hiring of additional engineering and product management talent. R&D is an important investment area as we extend the capabilities of our platform to leverage the growth opportunities that René covered, and we believe these investments will create a longer runway of growth and competitive differentiation. Sales and marketing expenses were $11.7 million or 30% of revenue in Q2, an increase from 28% of revenue in the prior year's quarter. Given our large TAM and efficient customer acquisition economics, you can expect us to continue to invest in sales and marketing initiatives to support fiscal 2020 and beyond to drive continued market momentum. G&A expenses were $11.3 million or 29% of revenue, up from 23% in Q2 of fiscal 2019. Our G&A as a percentage of revenue is higher than some of our SaaS software peers because we incur expenses related to risk management and the regulatory requirements associated with our proprietary payments capabilities, including costs to maintain money transmitter licenses. As I mentioned earlier, we believe that these investments differentiate Bill.com and create a competitive advantage for us. During Q2, we also incurred additional expenses related to our preparation to operate as a public company, and some of these expenses will be ongoing. We expect to achieve operating leverage in the G&A as we scale the company over the long term. Our Q2 non-GAAP operating loss was $4.5 million as we continue to make investments in our platform and go-to-market capabilities. Our non-GAAP net loss was $3.6 million, or a loss of $0.06 per share based on 62.8 million basic weighted shares outstanding. Because we had a net loss on a GAAP basis, our diluted share count was the same as the basic share count for both GAAP and non-GAAP EPS calculations. Moving on to the balance sheet. Ending cash, cash equivalents, and short-term investments were $383 million, up from $157.6 million at the end of September 2019, reflecting the capital raised on our initial public offering in December, which netted $225.5 million. As of December 31, 2019, we had approximately $1.5 billion in client funds on our balance sheet, which was up slightly from the end of Q1, due in part to total payment volume of $24.8 billion in the quarter. We ended the quarter with 568 employees, up from 544 on September 30, 2019. Now let's move to our fiscal third quarter and full fiscal year 2020 outlook. For the third quarter of 2020, total revenue is expected to be in the range of $38 million to $38.7 million, comprised of core revenue in the range of $33.2 million to $33.7 million and float revenue in the range of $4.8 million to $5 million. We plan to increase our spending on go-to-market initiatives and R&D investments, including expanding the capabilities of our AI engine, developing new payment products and building out the platform to support larger customers. In addition, we expect our G&A spending to reflect the ongoing overhead associated with being a public company. On the bottom line, we expect to report a non-GAAP net loss in the range of $7.4 million to $6.7 million and a non-GAAP EPS loss of $0.10 to $0.09 on a per-share basis, based on a share count of approximately 72.1 million basic weighted average shares for Q3. For the full fiscal year 2020, total revenue is expected to be in the range of $150.3 million to $151.7 million. Core revenue is expected to be in the range of $129 million to $130 million and float revenue is expected to be in the range of $21.3 million to $21.7 million, based in part on an assumption that the average Fed funds rate will decline by 25 basis points in March 2020. We expect a non-GAAP net loss for fiscal 2020 in the range of $21.7 million to $20.3 million, or on a per-share basis, a loss of $0.32 to $0.30, assuming basic weighted averages shares outstanding of 66.9 million for the full fiscal year. We expect stock-based compensation expense of approximately $5 million and $5.5 million in Q3 and Q4 of fiscal 2020, respectively. Moving on to our capital expenditure plans. We filed an 8-K in early January after entering into an 11-year lease agreement at the end of December for a new headquarters in the Bay Area. This brand-new building will give us much-needed expansion space to accommodate our new hires. Our preliminary estimate is that the net spend will be approximately $20 million for the facility build-out over the next four quarters. We also expect to spend an additional $2 million per quarter on other capital needs, primarily related to our technology infrastructure to support our continued business expansion. This equates to a total CapEx spend of $28 million over the next four quarters. As it relates to timing, we expect to spend roughly $7 million in Q3, $13 million in Q4, and the balance in the first half of fiscal 2021. To close out on the guidance topic, I'd like to reiterate our financial management philosophy. We are committed to building a profitable business over the long term, but for the foreseeable future, we will continue to prioritize revenue growth, acquiring customers, and platform enhancements over improving operating margins because we believe this gives us the most sustainable growth and competitive advantages as a business. We will obviously monitor our performance closely and adjust our priorities as necessary if circumstances change. Now René and I will open the call for your questions. Operator?

Your first question comes from Chris Merwin from Goldman Sachs.

Congrats to both on a phenomenal first quarter out of the gate. In terms of my question, I just wanted to ask you about the acceleration that you saw in core revenue in the quarter. You've got subscription revenue contributing to that as well as transaction revenue. And I guess, in particular, on the transaction piece, I'm just wondering if you could comment on any uptake in adoption for some of those newer higher monetizing payment types like virtual card and cross-border? And how much of a driver those were in the acceleration we saw.

So thank you, Chris, for the question, and congratulations, I appreciate that. I think the success in the quarter really goes back to the overall platform that we built. The platform is meant to serve, obviously, SMBs of all sizes as well as to provide new services for them. So we did see good adoption with international payments. The addition of having more countries and currencies available helped us continue to drive adoption within our customer base. We did see good adoption with the virtual card program that we're doing. And we're just in the early days. I mean the virtual card program has not even hit its first anniversary. The international payment program is about 15 months old. So we're really in the early days of understanding how to drive the adoption within our customer base. But it really goes back to the stickiness of our platform, the quality of the service that we provide, being that one-stop shop for our customers to manage all of their financial operations, and that's what drives everything home for us.

That's great. And maybe just a follow-up on TPV growth. It looks like that was also really strong in the quarter in the low 40s, and that was consistent with the growth we saw in the prior quarter. It looks like the growth of customer funds held on balance sheet decelerated a little bit relative to that very strong TPV growth. So can you just talk about the dynamic there? Are you seeing any same mix shift away from check, again, to those higher monetizing products? And is that a dynamic that we should expect to persist going forward just in terms of the divergence and growth of those metrics?

Yes. This is John. Good question, Chris. We continue to see progress growing TPV, in part because of our success in enabling customers to seamlessly transition from paper to electronic payments. And we see that the more electronic payments that a customer does on our platform versus the legacy check payments, the higher share of wallet we get from those customers and the more TPV growth that we see. So we're continuing to make progress there. In terms of the number of transactions on our platform, we're up to about 59% electronic payments from 55% a year ago. So that's continued progress. We see pretty steady growth there. In terms of the customer funds balance on our balance sheet, we've increased only slightly from the prior quarter, and we believe that's mainly due to seasonality. When we look at our internal numbers, our average daily balances, we actually had double-digit growth. But when you look at the ending balances that appear on our balance sheet, it's really subject to the business stage, year-end activity with customers, by trying to get payments completed and cleared and not really a reflection of any other underlying trend in the business.

Your next question comes from Brad Sills from BofA Securities.

Congratulations on a nice quarter. I wanted to ask about the extension of the platform, you mentioned, I think, getting into more procurement-type functionality. Can you remind us kind of where the payables functionality leaves off and where you're beginning now with some of this new functionality, extending the AI platform into procurement?

Great. Thank you, Brad, for the question. Always good to hear your voice. So the platform from the beginning, when I first came up with the kind of the vision of what I wanted to do was to be able to help businesses manage that back-office. And so that back office includes a lot of paper, includes document management, includes workflow, it includes collaboration internally and externally. And building that platform enabled us to reach lots of SMBs across the country. That's the 86,000 approximately that we have. What we found in the last couple of years is that a lot of those SMBs happen to be good-sized companies, mid-market companies. And we define mid-market as $10 million to $100 million in revenue. And so what we've started doing is just because we like to listen to our customers, and they're really important for us, we've been listening to their request for how to actually improve their experience. And so one of the things they've asked for is support on the purchase order opportunity. So they have all the workflow to manage the payables side. But when you're a larger company, you're going to have a purchase order process. And so we're just enabling them to be able to track those POs inside of Bill.com just like they track the payable and all the collaboration and the workflow they do across their teams. So for us, the extension is, it's an important one. But it's really not that much of a shift of what we've been doing. We listen to what our customers need every day, and we add that functionality as we can.

That's great. And then obviously, a nice quarter, it sounds like in some of the variable-priced offerings. You mentioned cross-border. Any commentary on virtual card? And then my follow-up question is on the investments you're talking about in payments, what does the roadmap look like, I guess, to the extent you can share on some of the things you're investing in for your payments offering.

The platform allows us to streamline the entire process for businesses. We aim to be the one-stop shop, making it easy for customers to manage payments with just one click. In terms of international payments, we have opportunities to raise awareness about our features and enhance user experience, especially with our recent AI improvements for reading currency and bank information from invoices. Our primary goal with the virtual card has been to assist in the transition from paper to electronic payments. We understand that faster electronic payments lead to quicker recognition by suppliers. Initially, we concentrated on converting check payments and are pleased with the early progress we've made. We believe there is significant potential to further increase this conversion, and the virtual card will be a crucial element in that effort.

Your next question comes from Samad Samana from Jefferies.

Congrats on a great start to your track record as a public company. John, maybe first for you. Subscription revenue accelerated very nicely, and it looked like both customer growth was strong and ARPU. I'm curious, just maybe on the customer side, how the composition looked between the traditional audience you have and maybe larger and smaller customers, and just how the quality of the customer at this quarter looked. And then I have a follow-up.

Yes. Thanks, Samad. We see really, progress in customer growth and activity on our platform from customers across all segments. As we've talked about previously, we see a lot of demand from larger customers. René mentioned a minute ago, we've started to enhance our platform to serve some of the larger customers and their unique needs as well as we have a great track record with small customers and making it really simple for them to make the transition from paper to digital. So we didn't see any new trends there. Historically, the way our model works is that a customer starts with us, and then over time, they add more users as we further penetrate their organization, and we get a larger share of their transactions and share of wallet. That expansion within the organization happens organically. It's something that customers do on a self-service basis. It's not driven by incremental sales and marketing expense that we have. And what that leads to is increased subscription revenue growth from existing customers, obviously, in addition to new customers who are bringing new users on the platform.

That's helpful. And then maybe just as a follow-up. René, when I think about the financial institution partners, I know that's a key part of the strategy, any updates on maybe progress with some of the newer relationships and some of the expansions that you've had there recently?

Thank you, Samad. Yes. I think going back to our multifaceted distribution approach of serving customers where we find them, and that's important and integral for the massive market that's in front of us. So the financial institution partners that we have, JP Morgan Chase, Bank of America, American Express, these are all critical. These are white-label solutions. These are financial institutions that spend billions of dollars on R&D, and they've chosen our platform to help their business customers move from the paper world to the digital world. So the progress we see is that we continue to have lots of great conversations with our existing partners about doing more together, and we continue to get plenty of opportunities to partner with more institutions. So our focus is really on how do we extend the reach of our platform? How do we make sure we do that so that customers get the benefit and having partners that are aligned strategically? It's something that's important for us. And that's how we focus on building out the network that we have with financial institution partners.

Your next question comes from Josh Beck from KeyBanc.

I wanted just to ask, high level, were there some other areas of positive surprise versus your plan? Certainly, you had some really good momentum, it sounds like, with the quality of customers that you're bringing on and certainly some new transactional products. Anything else, just to call out high level, there was area of positive surprise versus your plan?

It's great to hear from you, Josh. Entrepreneurs are naturally optimistic, and there are many positive developments to highlight. Across the business, the results reflect our commitment to creating a platform that simplifies connections and transactions. One notable surprise has been our transition from the old platform to a new integrated user experience over the past year, which has been well-received, and we are making steady progress in migrating our customers to this new system. This shift allows for greater future advancements and successes. Specifically, we've now separated the engineering work for the front end from the back end, enabling us to enhance the user experience more rapidly as we onboard customers onto this platform. Looking ahead, this capability will be crucial for launching cross-border payments, virtual cards, and other future products. Overall, I'm pleased with our progress and where we stand.

It's still early, just a couple of months after going public, but have you noticed any changes in brand awareness across your channels? I know you recently launched a rebranding campaign alongside that. While it's early, are there any initial signs regarding awareness and marketing efficiency?

One of the reasons that we wanted to take the step to being public was to increase the overall awareness of the pain that we're solving for customers. And of course, Bill.com's solution is part of that. And so like you said, it is early days in helping that awareness increase. But we did see an uptick in visits to the website during December. And we've seen increased interest, not just from existing partners saying, 'Hey, how can we do more together?' but from potentially from new partners that now understand the financial strength of our business and the strength of the balance sheet, the strength of the P&L that they can get more comfortable thinking about how they can invest behind us and our platform to do more with their customers when it comes to the paper to digital transition. So we are seeing early signs of that. It's hard to quantify, but we feel good about it and are glad, obviously, that we took that step to be public.

Your next question comes from Bhavan Suri from William Blair.

Can you hear me okay?

We can. Thank you, Bhavan.

Congratulations. I want to briefly address the move toward slightly larger customers. I'm trying to understand how you define that transition, as there have been some unusual developments. We have a different set of competitors and more complex requirements to consider. My question has two parts: how is this progress unfolding, and how are partners contributing to this shift? As you target larger customers, the role of accounting firms becomes increasingly critical as a strategic asset. I would like to know how you plan to leverage this to stimulate growth within a larger customer base.

Yes. I believe that my background and experience have significantly contributed to our focus on creating straightforward solutions that address customer pain points across various segments of the economy, rather than concentrating solely on enterprise clients. At Bill.com, we have developed a versatile platform that caters to a wide range of customers. While we don’t focus on the enterprise sector, our solution addresses common processes across different sizes of businesses, including document management, workflow, and payment processes. This makes it challenging to delineate strict customer size boundaries since we serve clients of all sizes. Our partnerships reflect this diversity as well; we work with both large firms like NetSuite and Intacct, as well as smaller companies such as Intuit and Xero. We prioritize addressing customers' pain points and automating those processes, which makes them suitable targets for us. Notably, 90% of businesses still rely on paper for payment processing, including larger companies. Therefore, our go-to-market strategy is centered on resolving these pain points rather than defining strict lines, and this approach has proven successful for us.

Your next question comes from Scott Berg from Needham.

Congrats on a good quarter. Great start after the IPO. I guess, two for me. First of all, René, I wanted to chat about some of your customer acquisitions. Obviously, very strong trends there. But you have a nice viral nature to the model as you add on different partners in that ecosystem. But as you look at your customer acquisitions or the net new customers in the quarter, is there a discernible change on how many customers come from your traditional kind of more digital selling methods versus ones that might come through just being part of the network and another function?

One of the strengths of our platform is its consistent growth and the numerous opportunities for expansion. We have not seen any noticeable changes, and we continue to grow stronger across all the channels we serve. Our main focus remains on this growth. An important aspect of our distribution strategy is educating customers about better alternatives to traditional payment methods, such as paper checks. The more partners we engage in promoting this idea, whether they are banks or accounting software providers, the more it enhances our direct model. This increased awareness of better solutions benefits everyone involved. I believe this aspect contributes to making our viral strategy more robust than others.

Great. And then a follow-up for you, John. Your gross margins in the quarter were very strong at 78%, non-GAAP gross margins. But that's in the face of, obviously, a weaker Fed funds interest rate on the book for customer revenues. What's kind of pulling the margins up as those revenues from float come down, is it purely the gross margin on subscription? Or is there just a proportionate pull maybe from some of the transactions, whether it's card payments or cross-borders, et cetera, that's giving you the nice uplift?

Yes. Thanks, Scott. So as you saw with the results, we had strong subscription revenue growth, which is sort of the anchor of the foundation to our revenue model. And like other SaaS companies, we have very high margins on subscription revenues. And the other thing that happened in the quarter is, notwithstanding the decline on a year-over-year basis in our yield on float, it actually came in ahead of our expectations. That helped margins. And then finally, with transaction revenue growth that we delivered 114% year-over-year, driven really by the activity of our customers, the number of transactions increasing 29% year-over-year, and then the revenue per transaction growing significantly really from the adoption of some of our new products. René mentioned it's still early in the rollout. We're not fully penetrated in our base yet, but we're seeing early signs of that. And generally speaking, just directionally, the newer products that are priced on a variable basis tend to have a higher margin than the fixed price products that we sort of built the business with over the last 10 years or so around check and ACH. So it's really just the progress that we're making in driving adoption, and in particular, with electronic payments that's been the short-term boost to gross margins.

Your last question comes from Robert Napoli from William Blair.

Congratulations again, René and John. René, it's wonderful to see the success you both have achieved after following your journey for so many years. I have a follow-up question regarding the earlier discussion. You mentioned that it's early days for cross-border and virtual cards. What do you see as the penetration rate for virtual cards or cross-border transactions, and what potential do you think exists? Additionally, it was frequently mentioned during the roadshow that small businesses aren’t heavily involved in cross-border transactions, which I believe is inaccurate. Could you provide insight into the penetration rate and the size of the opportunity, as well as your thoughts on what the penetration rates could be?

Okay. Great. Thanks, Bob, and thanks for all the support over the years and all the conversations. So when we look at cross-border payments and virtual card payments, the way we decided to get into the market was to kind of look at the potential. And what we saw was that for both, we thought there was billions of dollars of TPV within our existing base. And so our focus is on how do we get that TPV onto those programs, whether it's virtual card or cross-border. And so we are in the early days, but nothing has changed our assumption to tell us that it's not the billions of dollars that we felt was out there.

Your R&D spending has increased significantly compared to last year, nearly doubling. Can you provide more details on how those R&D funds are being allocated? You've mentioned international expansion, particularly in signing up international customers. Is that something you are planning to focus on? Additionally, there seems to be a substantial opportunity for a working capital product, possibly in collaboration with partners like American Express or JPMorgan. Could you share your thoughts on the R&D expenditure, the international shift, and the potential for a working capital solution?

The increase in R&D spending is driven by the growing opportunity to reach more customers. It's essential to consider how we engage these customers as we move into the early and late majority stages. Our solution needs to be simpler and focused on simplicity. While our solution was straightforward two years ago, we identified a chance to enhance the user experience and make it even easier for customers to interact with our offerings. The transition to our new platform is a major aspect of our R&D investment. For example, we now have the capability to process invoices with the help of our AI team, which is essential for managing the 45 million documents we handle annually. We are working to transform unstructured data into actionable insights for businesses, allowing them to manage their payables and receivables more efficiently without manual data entry. Additionally, our AI efforts also focus on risk management, especially since we manage $100 billion annually. This necessitates our investment in the platform to keep pace with our growth. While some developments may not be immediately visible to customers, they are critical for our future success. Our international and virtual card programs represent avenues where we can capitalize on our platform investments, ultimately enhancing value for our customers. We are confident in our investments and will continue to pursue this strategy as opportunities arise.

Your last question comes from Lucas Morison from Canaccord.

This is Luke on for Richard. So in the private markets today, we have interesting up-and-comers such as Brex, SoHo, ScaleFactor and then you have more tenured guys like Sage Intacct, who is, of course, a partner of yours. Just taking a broader perspective on this landscape, could you remind us how you think about and view the partner and competitor ecosystem evolving over the next few years?

Thank you for the question, Luke. When we examine the market and consider the complexity of what we’ve developed over the past 13 years, it's considerable. We have the capability to manage all documents, handle workloads, and process payments, whether they are international, checks, ACH transactions, or virtual card payments. We can integrate with various accounting systems and offer white-label solutions for customers who require them, as well as branding opportunities for accountants. This level of depth in our platform is something we believe is not being built or designed by others from the ground up. When we observe our competitors, they often focus on specific components of our offerings. We are confident that our broad platform strategy is essential for achieving our mission of simplifying business connections. This focus will remain unchanged, and that's all I can say regarding that question.

And that was our last question. I will turn the call back over to the presenters.

Thanks again, everyone, for joining the call today. We believe in our mission and are very excited about the opportunity ahead of us, and thank you for your participation.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.