BILL Holdings, Inc. Q4 FY2022 Earnings Call

Good afternoon. Thank you for attending the Bill.com's Fourth Quarter Fiscal Year 2022 Earnings Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Karen Sansot with Bill.com. Thank you. You may proceed.

Thank you, operator. Welcome to Bill.com's fiscal fourth quarter and full year 2022 earnings conference call. We issued our earnings press release a short time ago and furnished the related Form 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.com; 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.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 SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The non-revenue financial figures discussed today are non-GAAP unless stated that the measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. At times during this call, we will discuss organic or standalone results, which exclude Divvy and Invoice2go, which we acquired on June 1, 2021 and September 1, 2021, respectively, to help listeners understand our organic performance. Now, I'll turn the call over to Rene. Rene?

Thank you, Karen. Good afternoon, everyone. Thank you for joining us today, and I hope your summer is going well. Fiscal 2022 was a transformative year for Bill.com. We significantly expanded our platform solution and extended our reach serving customers ranging from sole proprietors to mid-market companies. We entered new strategic partnerships and began building a global customer base, serving customers in more than 150 countries. We are well-positioned to capitalize on the tremendous market opportunity in front of us. In fiscal 2022, 400,000 businesses used our solutions to automate their financial operations, get paid faster, and better manage their cash flow, more than three times the number of businesses that used us in the prior fiscal year. We managed more than $225 billion in payments, and our network grew to 4.7 million members that have originated or received an electronic payment through our platform. Our growth was driven by our organic initiatives, as well as the strategic acquisitions of Divvy and Invoice2go. For the full fiscal year, we significantly exceeded our financial expectations. Total revenue was $642 million, an increase of 169% year-over-year. Bill.com’s organic core revenue grew 77% year-over-year, and revenue from our spend and expense management solution increased more than 160% from a year ago. In addition to top-line growth, we expanded our non-GAAP gross margin to 84%, up 7 percentage points year-over-year. Our non-GAAP net loss of $24 million for the year was 70% lower than our estimate at the start of the fiscal year, as a result of our disciplined approach to growth and solid execution. The momentum that we created in fiscal 2022 positions us to be profitable on a non-GAAP basis in fiscal 2023. This is a testament to the value our platform provides and the efficiency of our go-to-market ecosystem. We experienced very healthy demand throughout the year. Our Organic Bill.com customer base saw record growth and our customer retention and net dollar-based retention rates both expanded meaningfully. Toward the end of the fourth quarter, we started to see signals of the macro environment impacting spend patterns, especially in discretionary categories like advertising. As businesses react to the macro environment, we believe that our platform becomes more valuable by enabling SMBs to do more with less while increasing visibility and control. There are more than 30 million small businesses in the U.S. and 70 million globally, and the majority still use manual paper-based processes. With our platform, ecosystem, and scale, we are particularly well-positioned to help these millions of businesses transform their financial operations. A great example of how we help companies succeed is aboutGOLF, a developer of premium golf simulators. Ashlee Flores, Director of Finance and Accounting, said, 'We pay hundreds of bills each month. Prior to Bill.com, our AP process was manual and time-consuming. With Bill.com, instead of taking 10 hours a week to write checks, attach stamps, and seal envelopes, our accounting staff is able to analyze our financials, assess risk, and build forecasts. The powerful combination of Bill.com’s AP and Spend Management solutions enables us to have more visibility into our cash flow, which really gives me more confidence as we navigate continuing supply chain constraints.' Our unique go-to-market ecosystem enables us to efficiently bring the value of our platform to many more businesses and provides us with a strong competitive advantage. We work with the small businesses' most trusted partners, accountants, and financial institutions, and share and align goals to better serve SMBs. More than 6,000 accounting firms use Bill.com to automate their clients' financial operations. Leveraging our platform, accounting firms spend less time on routine bookkeeping activities, freeing up time to focus on more value-added services, and enabling them to add more clients. An example of how accountants use our platform is Armanino, a Top 20 accounting firm in the U.S. David Miller, Consulting Partner said, 'Bill.com got our clients out of paper-based processes and enables our internal distributed teams to collaborate seamlessly. We now have a center of excellence team dedicated to building best practices around Bill.com. Now we can help businesses better face macro challenges. In an inflationary environment, Bill.com serves as a deflationary tool that simplifies workflow and provides better insights.' Businesses have always turned to their banks to help them with their financial needs and our white-label solution powers bill payment and invoicing solutions for six of the Top 10 financial institutions in the U.S. The partnerships we have developed with these financial institutions enable cost-efficient customer adoption that expands our network at a faster rate, increasing opportunities for incremental monetization. This is a part of our organic flywheel. More subscribers drive more transactions, delivering more network members, which in turn grows our data asset. With our expanding data set, we continue to evolve our AI and machine learning capabilities, driving better platform experiences and more time savings, which encourages further platform adoption. Before I lay out our fiscal 2023 priorities, I want to talk about our fiscal 2022 accomplishments. At the start of the year, our priorities were to integrate Divvy and Invoice2go, expand our payment offerings and monetization, enhance the user experience on our platform, and extend our reach through strategic partners. We take our commitment seriously and have accomplished all of these objectives. We completed our initial integration of our AP and spend management solution, building a connected, but separate platform experience, and fully integrated the employees of all three companies into a single organization. We launched instant transfer, payback card, and Bill.com balance using our continually evolving AI capabilities. We automated more workflows, giving our customers more time savings. We also enhanced our mobile experience, making it easier for users on the move to improve bills, add vendors, and initiate and receive payments. We added new partners and increased our wallet share with existing financial institution partners. Most significantly, we launched a white-label platform with Bank of America to serve their new SMB customers and we entered an agreement with CPA.com to be their exclusive partner for spend and expense management and corporate card solutions. Now turning to fiscal 2023 objectives, our first priority is to develop a unified platform experience with a consistent look and feel, seamless navigation, and consolidated business insights delivered through a single comprehensive dashboard. Our second priority is to further scale our ecosystem by offering more of our platform solutions to our current partners, as well as acquiring new ones. Our third priority is to continue to drive innovation and adoption of our payment solutions. We will leverage our ecosystem, which includes direct sales, accountants, and financial institutions, to advance our enablement initiatives to drive further adoption of our ad valorem payment suite. Underpinning all of these priorities, we have an overarching focus on managing the business to deliver non-GAAP profitability for fiscal 2023. All of us at Bill.com now 2,300 people strong are focused on building the essential financial operations platform for millions of SMBs. Our success is driven by an excellent team with a shared passion for helping SMBs. I'm excited to share with you that we expanded the executive leadership team with the addition of Irana Wasti as Chief Product Officer; and Sofya Pogreb as Chief Operating Officer. Irana has extensive experience leading product teams, having built global platforms for SMBs at GoDaddy and Typeform. Prior to that, she was a product leader at Intuit. Sofya brings extensive experience leading operations at fintech companies, including as Chief Operating Officer of both NEXT Insurance and TrueAccord. Prior to that, she was a Senior Executive at PayPal with responsibility for risk management strategy and policy across the Americas. I couldn't be happier to have these accomplished executives join our mission to make it simple for SMBs to connect and do business. Irana will be taking over from Bora Chung, who is retiring. Bora has led our customer experience and product management teams through a time of tremendous growth. She will continue at Bill.com through a transition period and share a smooth hand-off to Irana. All of us at Bill.com are deeply appreciative of Bora's many contributions during her four-year tenure. We also recently welcomed the new Board member, Tina Chan Reich, having held executive roles or advised at American Express, Citibank, Chase, and fintech startups. Tina brings over 20 years of global financial services industry expertise to our board, and we are excited about being able to tap into her unique expertise in payments and risk management. In closing, we had a great transformational year. Our total addressable market is significant, and we plan to continue to invest in creating value for SMBs for the long haul, driving both multi-year revenue growth and profitability. We are laser-focused on automating the future of finance so that all businesses can flourish. We are grateful to our employees, customers, and partners on this journey, and we thank them for the trust they continue to place in us. Now, I'll turn the call over to John to talk in more detail about our quarter.

Thanks, Rene. Today, I'll provide an overview of our fiscal fourth quarter 2022 financial results and discuss our outlook for the fiscal first quarter and full fiscal year 2023. As a reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings press release for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. We delivered strong Q4 financial results with revenue, non-GAAP gross margin, and non-GAAP net loss per share, all significantly exceeding our expectations. Total revenue for Q4 was $200 million, reflecting 156% year-over-year growth and 20% sequential growth. Core revenue, which includes subscription and transaction fees, increased 151% year-over-year. Organic core revenue grew 71% year-over-year. Total revenue was $5.4 million during the quarter, reflecting recent Fed funds rate increases. Non-GAAP gross margin was 84.2% for the quarter, well above our estimated range, driven by the payment mix and transaction cost optimization strategies we've employed. Non-GAAP net loss per share was $0.03, showing our strong revenue and gross margin performance and our vigilant approach to managing operating expenses. In fiscal 2022, we delivered non-GAAP gross margin and non-GAAP net margin improvements while also making significant investments in our platform, go-to-market ecosystem, and the integration of our two acquisitions. We continue to operate an efficient business model with strong customer acquisition and retention, expanding net dollar-based revenue retention, and a short customer acquisition cost payback period. And so, here when I discuss our outlook, we're pleased to show the progress of our scaling and the strength of our business as we plan to become non-GAAP profitable in fiscal 2023. Now turning to an update on our key metrics. As this is our year-end earnings call, I'll provide additional disclosures on certain metrics beyond our regular quarterly updates. We ended the fiscal fourth quarter with 400,000 businesses using our solutions. This includes 157,800 Bill.com organic customers, 20,700 Divvy spending businesses, and 221,600 Invoice2go subscribers. Of these customers, 36,100 are from financial institution or FI partners. We added 11,200 net new customers on the Bill.com platform in the quarter. Net customer adds in the direct and accounting channels showed continued momentum, and we delivered another quarter of elevated net adds from our FI partners. We've significantly scaled new customer acquisition in the last year while also improving our acquisition economics. For Bill.com organic customers acquired during fiscal 2021, our payback period averaged four quarters, an improvement from five quarters at the time of our IPO. The value of our platform is resonating with customers, and this has resulted in improving retention and expansion trends. Our annual organic customer retention rate, which as always excludes customers from our FI channel, increased to 86% as of the end of Q4 2022, up from 85% at the end of Q4 2021. Our annual net dollar-based revenue retention rate expanded to 131% as of Q4 2022, an increase from 124% as of fiscal Q4 2021. This improvement was driven in large part by our success driving adoption of variable price payments and the stickiness of our mission-critical platform. As of the end of fiscal 2022, our network grew to more than 4.7 million members, an increase of 47% compared to the 3.2 million members we reported a year ago. The size of our network is an important indicator of the opportunity we have to eliminate friction between subscribers and their clients and suppliers, as well as to create a funnel for future customer acquisition. Moving on to payment volume during the quarter, we managed $63.4 billion in payments. This includes Bill.com organic total payment volume of $60.7 billion in Q4, representing 46% year-over-year growth and $2.7 billion in card transaction volume from Divvy spending businesses, which is an increase of 115% year-over-year. Total payment volume from customers, excluding our FI partners represented approximately 91% of Bill.com total payment volume, and on a per customer basis increased 21% year-over-year and 5% sequentially in Q4. As Rene mentioned, starting in June, we began to see total payment volume growth rates moderate, and this trend continued into July and early August. While it appears that the macro environment is influencing business spend, we continue to see strong customer acquisition, engagement, and retention as evidence of the value our platform provides for SMBs. We have made substantial progress driving adoption of variable price payment products. In Q4, virtual cards were 2.7% of organic Bill.com total payment volume, and cross-border payments totaled 4.5% of organic Bill.com total payment volume. Foreign currency payments represented 32% of total cross-border volume in the fourth quarter. For Q4, total variable price payments made up 10% of Bill.com consolidated payment volume, excluding total payment volume from the FI channel. This includes virtual card payments, foreign currency transactions, instant transfer, pay by card, and Divvy card payment volume. As we've shared previously, we offer our customers a variety of payment solutions, and our overall focus is on driving electronic payment adoption versus optimizing for any given payment type. Regarding card payments processed through our spend management solution, in Q4, we generated a gross take rate of approximately 260 basis points, and margins were slightly higher exiting fiscal 2022 than they were a year ago. We're pleased with the margin improvements for card payments, which have been driven by faster than anticipated take rate expansion and lower credit losses. As a reminder, the Divvy spend management solution leverages a charge card that requires the balance to be paid each month as opposed to a revolving credit program where customers carry balances. The average payment cycle is approximately 10 days. Moving on to transaction volumes, we processed 18.2 million payments in Q4. This includes 10.5 million payments on the Bill.com organic platform, reflecting 28% year-over-year growth. Of these organic payments, approximately 80% were repeat transactions, which we define as payments initiated between the same subscriber and vendor within the preceding three months. Excluding the financial institution channel, Bill.com customers averaged 79 transactions in the quarter, up from 75 last year and last quarter. During the quarter, we also processed 7.3 million Divvy card transactions. Before discussing our Q4 financial results, I want to provide some additional insight about the financial institution channel since the dynamics differ from our other channels. We earn revenue from FI partners under long-term contractual minimums, based in part on expected customer adoption over the term of the contract as reflected in our remaining performance obligations or RPOs. In the near term, our FI revenue is tied to these RPOs rather than to new customer adds. The other key difference between this channel and our other go-to-market motions is that we offer these partners wholesale rates on our subscription and transaction fees. In return, the FIs are responsible for sales and marketing, as well as customer support for the businesses that adopt our white-label platform at the banks. Net-net, FIs generated contribution margin consistent with our other channels. In fiscal 2022, our FI channel represented approximately 5% of core revenue, with the vast majority of this revenue being subscription fees. Now, I'll review our reported Q4 results. Total revenue was $200.2 million, up 156% from a year ago. Core revenue, which consists of subscription and transaction fees, was $194.8 million, representing growth of 151% year-over-year. Organic Bill.com core revenue was $114.9 million, an increase of 71% year-over-year, due to strong demand across channels and increased customer adoption of our ad valorem payment products. In addition to our organic core revenue stream, revenue from our spend and expense management solution grew 140% year-over-year. Organic core revenue ARPU, excluding FI customers, increased 38% year-over-year. Subscription revenue increased to $55.2 million, up 77% year-over-year, driven by our growing customer base and the inclusion of Invoice2go subscribers. Bill.com organic subscription revenue growth was 49% year-over-year. Transaction revenue increased to $139.6 million, up 201% year-over-year, due to Bill.com organic total payment volume strength, increased adoption of our ad valorem products, and increasing spend on Divvy, which totaled $69.5 million in transaction revenue for Q4. Bill.com organic transaction revenue growth was 90% year-over-year. Float revenue was $5.4 million, an increase of more than 600% year-over-year. Float revenue exceeded our expectations given the magnitude of the recent Fed funds rate increases. Our yield was 68 basis points in the quarter. Turning to gross margin and our operating results for Q4, non-GAAP gross margin was 84.2%, up four points year-over-year, driven by a higher mix of variable transaction fee revenue and improving transaction economics. As a reminder, we manage a portfolio of payment offerings with a range of margins that are in various stages of adoption and we currently have a very favorable payment mix. In the short term, we expect non-GAAP gross margin to be slightly above the 79% to 81% range that we have previously discussed. Non-GAAP operating expenses were $171.7 million, an increase of $25 million from Q3. We expanded R&D investments related to integrating our recent acquisitions in addition to enhancing our product innovation and platform capabilities. Sales and marketing expenses increased primarily due to expanding our go-to-market initiatives and rewards expenses associated with our spend and expense management solution. Non-GAAP operating loss was $3.2 million. Our non-GAAP operating margin was negative 2%, an improvement from negative 8% last year. Our non-GAAP net loss was $3.3 million, or a net loss per share of $0.03 based on 104.4 million basic weighted shares outstanding. Our non-GAAP net loss was significantly better than our expectations given our revenue performance and our rigorous approach to managing expenses. Moving on to the balance sheet, cash, cash equivalents, and short-term investments at the end of Q4 were $2.7 billion, flat quarter-over-quarter. We continue to be well capitalized, enabling us to invest in our platform, expand our go-to-market capabilities, and extend our market leadership. As of June 30, 2022, we had $3.1 billion in customer funds on our balance sheet, up $99 million from the end of Q3, driven by strong total payment volume. Before shifting to our financial outlook for the first fiscal quarter and full fiscal year 2023, I'd like to address our current views on the macro environment as it relates to our business. Looking ahead, we are excited about the large global opportunity we're pursuing to help businesses transform their financial operations and better manage their spend and cash flow. Our platform go-to-market ecosystem and scale continue to drive strong customer acquisition and engagement with our solutions. Entering a challenging economic environment, businesses need solutions to help them automate and create efficiency while increasing visibility and control. Our bias is to invest to capture the large market opportunity ahead of us while exercising our disciplined investment approach that will allow us to drive operating leverage as we grow. The current macro environment presents numerous near-term uncertainties, and our fiscal 2023 outlook anticipates customers will continue to react to external factors and temper spending throughout the year, similar to the trends we saw emerging in late Q4 and early this quarter. Our outlook assumes no material changes in customer retention, which is the largest driver of near-term revenue, customer acquisition trends or credit losses. We believe we are very well positioned to succeed in an uncertain environment given the multiple tailwinds we have. These include the revenue and margin contribution from the rising interest rate environment, the significant payment monetization expansion opportunity that exists, and the growing awareness by SMBs about the potential to transform their financial operations by adopting cloud solutions. Our value proposition resonates with SMBs regardless of the macro situation. Turning to our outlook for fiscal Q1, we expect our total revenue to be in the range of $208 million to $211 million, which reflects 76% to 78% year-over-year growth. We expect float revenue to be approximately $12 million in Q1, which assumes our yield on FBO funds will be approximately 145 basis points. On the bottom line, for Q1, we expect to report non-GAAP net income in the range of $5.5 million to $8 million, and non-GAAP net income per diluted share in the range of $0.05 to $0.07 based on a share count of 117.5 million diluted weighted average shares outstanding. In addition, for Q1, we expect other income to be $4.9 million, net of other expenses. For fiscal 2023, we expect total revenue to be in the range of $955.5 million to $973.5 million. We expect float revenue to be approximately $55 million in fiscal 2023, which assumes a yield on FBO funds of approximately 2% for the year and is based on a mix of funds invested in higher yielding securities and funds held in demand deposit accounts in support of payment transactions clearing. We expect to report non-GAAP net income for fiscal 2023 in the range of $27.5 million to $45.5 million and non-GAAP net income per share of $0.23 to $0.38, based on a share count of 119 million diluted weighted average shares outstanding. In addition, for fiscal 2023, we expect other income to be $22 million, net of other expenses. We expect stock-based compensation expenses of approximately $75 million per quarter and capital expenditures to be approximately $6 million to $7 million per quarter. In closing, I want to reiterate that we believe there is a significant greenfield opportunity ahead of us to help millions of businesses manage their cash flows and transform their financial operations. Our broad platform capabilities, diverse distribution ecosystem, and increasing scale uniquely position us to be the de facto financial operations platform for companies ranging from sole proprietors to mid-market firms. This opportunity, together with our efficient business model and execution rigor, positions us to transition to be a non-GAAP profitable company in fiscal 2023.

The first question is from Bryan Keane with Deutsche Bank. You may proceed.

Hi, guys. Congrats on the quarter and outlook. I'll ask my two questions upfront. You talked a little bit about seeing some softness in spend, especially in advertising. Is there a way to break out maybe discretionary spend of clients versus non-discretionary spend or maybe a breakout of clients by services? And then secondly, now that we are turning non-GAAP profitable for the year, has there been any thought about any long-term margin trajectory that we should think about for adjusted margin or for EBITDA margins? Thanks.

Thank you, Bryan. This is always, kind of the nuance of the macro environment, something always hard to read, but what we would say is that we have a broad base of customers. And the broad base of customers is across SMBs all the way to mid-market companies. And what we called out in particular was the total payment volume growth moderating at the end of the quarter through the beginning of this quarter. And it really is around larger customers. And so, when we think about discretionary spend, it's kind of nuanced in the business environment because they have so many business activities that they do on a daily basis. And so, I would say for us, we see growth continuing to be strong going forward from there.

Maybe I'll take the long-term margin question, Bryan. We haven't explicitly laid out longer-term targets yet. We're very happy with the progress we've made scaling the business and nearing a billion dollars in revenue while expecting non-GAAP profitability this year. And with that momentum, we're expecting a lot of good news ahead. We'll roll out longer-term targets in the not-too-distant future, but haven't done so yet.

Great. Thanks for taking the questions.

Thank you.

Thank you. The next question is from the line of Brad Sills with Bank of America. You may proceed.

Great. Hey, thanks, guys, and congratulations on a real nice end of the year and outlook here. I'll ask the macro question in a slightly different way. Obviously, you've been very specific on the impact there on total payment volume. Outside of advertising, are there any other categories you're noticing some softening? What gives you the rationale, I guess for assuming that that doesn't change in the near-term?

Yes. Hey, Brad. Good to hear your voice. We saw healthy demand throughout the quarter year-over-year, the customer growth was 30%. We've had great total payment volume growth across the quarter. The core total payment volume growth was 10% quarter-to-quarter, and the Divvy total payment volume growth was stronger than that. And so, when we look at the overall macro environment, we really do see several tailwinds supporting the business. The first would have been the pandemic and the desire for remote capabilities and the ability to have the financial back office on-hand, which we've delivered for our customers. The other thing we've discussed is just the pure need for digital transformation that businesses have, the ability to manage their business from anywhere. The third aspect, which is a newer dynamic in the current macro environment, is that in inflationary times, the only deflationary impact that you're going to have on your business is to leverage software and create more efficiencies across your financial operations. We've built our solution to serve our SMB customers with the capacity to enhance efficiency, drive more technology usage, and engage customers, employees, and vendors, and that empowers us to feel optimistic about our trajectory. From a high-level macro perspective, we just wanted to note that we did see larger customer total payment volume spend beginning to moderate from a growth rate perspective.

Thanks for that, Rene. One more, if I may, please. With the combination of the growth you're seeing in the network and the progress you've made integrating Invoice2go, should we expect that channel to, kind of that flywheel effect to start to really take hold of your receivables customers, bringing in more payables customers? Are we at that point now where we might see momentum there? Thank you so much.

Thank you, Brad. We have been – I think with the Q3 call, we talked about out in the February, March timeframe. We fully integrated the company's across one organizational structure to drive a unified platform experience. It's one of the key priorities for the year to continue developing that unified platform. So, customers have one common dashboard to manage all of their financial operations. We are in the beginning stages of building that, and throughout the fiscal year, we will make more progress and update you as that happens.

Great to hear. Thanks, Rene.

Thank you, Brad.

Thank you. The next question is from the line of Darrin Peller with Wolfe Research. You may proceed.

Hey, thanks, guys, and great job on these results. Let me just try to understand a little bit more. When we think of the guidance and the outlook, there are obviously a ton of assumptions that could swing the output and guidance. So, I really love to hear what kind of assumptions you made around some of the main variables. Bill.com versus perhaps Divvy. Maybe you can help us understand how the Divvy cross-sell with Bill is going, and if you made any assumptions of progress around that also? And I guess I’ll stop there. We can probably go on and on, maybe Invoice2go, but just any more color on the inputs would be great?

Sure. Thanks, Darrin. Good question. And you're right, there are a lot of moving parts. One of the benefits we have of our very large customer base and our scale is that we do have a lot of visibility into spend patterns, activities, and repeat behaviors. We talked about earlier in the call, and the repeat transaction rates continued to be very, very high. So that visibility is helpful as we pin down our assumptions. The main variable, I'd say that we're focused on is the spend patterns amongst customers across both the Bill and the Divvy spending businesses. We're assuming that some of the softness or moderation, as we call that, in the last couple of months continues throughout the year given the external environment. With Divvy, it's a slightly larger customer base, and they have good visibility as well. And it's important to point out that, like Bill, the Divvy spend management solution is a tool to manage spend. It's not just a card, and so it's integrated into the way companies operate, which creates high visibility for us. We feel good about that. We have made progress in FY 2022, probably faster than we would have anticipated with some of the cross-sell activities. I think we had about 2,000 Bill.com customers who adopted the Divvy spend management solution, and so that's good momentum going into FY 2023. As we focus on integrating the platforms even tighter, we think that will help with our additional efforts in cross-selling Bill and Divvy customers in both directions.

That's really helpful, John. Thanks. I mean, if I can just quickly fit in a mechanical question, the new adds in the quarter, I just wasn't sure if I heard how much of that was FI versus the core Bill adds this time around?

Yes, we had 11,200 in the quarter. It's our second highest net new adds ever. Last quarter was 11.6. We had about 5,000 net new adds in the, what I would describe, the Bill core business, excluding the FI channel, so excluding all of the ads from the FI channel. As we look out over FY 2023, we think that the 4,000 to 5,000 range for Bill, excluding the financial institution contribution is probably a good placeholder.

Okay, very good. Thanks, guys.

Thank you.

Thank you. The next question is from the line of Josh Beck with KeyBanc. You may proceed.

Thank you for taking the question. Yes, I wanted to kind of also layer on the macro impact. One of the comments we made was certainly improvement in the payback period, and Rene had made some comments about really Bill being deflationary and that's very critical to SMBs right now. So, when you look at the payback that you're seeing in the recent months, has it held steady? Are there any notable changes, kind of with respect to that variable?

Yes. Thank you, Josh. As you know, we have a very broad distribution channel ecosystem that we've tapped into, allowing us to reach SMBs where they are, whether it's directly or through the businesses and partners they trust most, whether it's an accountant or a financial institution, and that actually does help our ability to drive that payback number the way we've talked about it. The opportunity that we continue to see is the combination of that ecosystem with our ability to drive better usage of our payment products that really drive value for our customers, which ultimately increases our net dollar-based retention numbers. All of that combines to improve our ability to attract and bring more customers onto the platform. No specific trends right now, just everything we've been building for years has been working for us.

Okay. That's very helpful. And then maybe follow-up on really the adoption of cross-border and virtual. Certainly, the stats there were very helpful. When we think about the pace of that adoption curve, we have a decent sense of how that's trended from last year to this year. How should we think about that shape moving forward? Are there factors that could steepen that adoption curve, level it out? Any framework just to think about the pace of adoption in future years?

Yes. Thank you for that. I would say from the very beginning, we've had a strategy to invest in our proprietary payment platform so that we could create better customer experiences for our customers and for their suppliers. That's the foundation of how we've been able to drive virtual card international payments and FX transactions within the international payments. As we look at the success we've had in growing virtual cards from 2.2% to 2.7% in total payment volume, and international payments from 4.1% to 4.5%, we're very happy that we were able to grow the FX rate from 25% to 32%. This all comes from building this proprietary payment platform over the years, and we'll continue to build on that. We know this is a multiyear effort to drive adoption in relation to the original commitments we've made regarding the penetration we expect. It just takes time, and we're pleased with where we are and will continue to do the necessary work to drive that adoption.

Excellent. Thanks for that.

Thanks, Josh.

Thank you. The next question is from the line of Andrew Bauch with SMBC Nikko. You may proceed.

Hey, guys. Thanks for taking my question and another nice set of results here. Wanted to touch on the remaining performance obligations. This is the one that we get questioned from investors fairly often trying to understand how that revenue comes on. I appreciate the color that you provided in the prepared remarks, but it remained fairly steady at this $150 million level over the last couple of years. What are you kind of thinking about with regards to that bucket within two years as far as what's laid in fiscal 2023? You mentioned the minimums. Could we anticipate that you're going to have a lot of those customers hit those minimums in the next several quarters?

Thanks for the question, Andrew. So, the RPO number of $150 million approximately reflects the minimum contractual commitments. The way to think about that is the floor, not the ceiling. To the extent that over a multi-year period of time, we work with our financial institution partners to drive better adoption than initially targeted, then we have revenue upside in both subscription and transaction fees. I think our disclosures spell out both the total RPO and the expectation for how much revenue we'll earn from that over the next two years. We haven't provided more granular disclosure than that, but the RPO number moves in two ways: as we signed new financial institutions, those minimums get added to the RPO, and then as we earn revenue in the near term that comes out of the RPO balance. It's been pretty stable over the last 18 months or so. So, it's a fairly steady revenue stream that's contractually guaranteed and not subject to any significant movement quarter-to-quarter.

Got it. It’s helpful. And then, as we think about the progression of margins throughout this year. You're starting at a lower point in the first quarter, obviously, and the business has a ton of operating leverage in it. Should we be thinking about this as kind of a stable, dollar contributor to revenue going forward and the expectation being we should continue to see it compress as a percentage of revenue, or is there a point in time where you kind of get to critical mass where you expect that you would see financial institution partners start to expand and be accretive in terms of revenue growth?

In the short-term, it's fair to view our RPO as a stable number. We're going to earn revenue against that over the next couple of years, leading to a slightly declining percentage of revenue due to the rapid growth in our payment revenues outside of the financial institution channel. However, we are highly optimistic about the opportunities available through our financial institution partners. Long-term, we believe there’s a significant opportunity such that the channel can become a larger portion of our overall business as we consider intermediate and long-term strategies, including driving product adoption with additional products in the white-label solution used by our banks and partnering with new banks who are not currently aligned with us. So, in the short-term, expect a slightly lower percentage, but intermediate to long-term, we think it is a substantial opportunity.

Hey there. Thank you for taking the questions. Maybe just to start, one on maybe as it relates to gross margin. I mean, you talked about better transaction economics being a factor there. I would love to just kind of dig into some more color on this dynamic. What kind of leverage has provided so far? Any further levers here or leverage that could impact gross margin going forward from better economics in the transaction front?

Sure. Thanks, Matt. We've indicated that we expect to be above the range we've discussed recently, which is that 79% to 81%. We expect to be a bit above that in part because some of the variable priced products we're seeing good adoption from customers and suppliers have not only higher revenue per transaction profile but also much higher margins than some of the fixed price products like an ACH or a check payment. We have good mixing happening there. We've also had several initiatives to optimize transaction costs, contributing to margin expansion as well. Additionally, as I mentioned earlier, the tailwinds associated with rapidly rising float revenue is a positive for margins at the end of the day also.

Right, got you. That's very helpful. Maybe just a follow-up on the financial institution channel; obviously, some very strong relationships there, very positive commentary and data points in terms of customer adds and new relationships. Should we be looking at this as a stable, kind of dollar contributor to revenue going forward and expecting it to compress as a percentage of revenue? Or do you see a point in time where you can get to critical mass and expect that the financial institution partners would actually expand and be accretive in terms of revenue growth?

In the short-term, yes, it's fair to estimate the RPO as a stable number. Our focus is on earning revenue against that over the coming years, and it may result in a slight decrease as a percentage of revenue due to our total payment volume being skewed to payment revenues outside of this channel. In the long term, however, we believe there is a significant opportunity available in working with financial institution partners that we can leverage to ensure their channels become larger contributors to our business over time as we drive product adoption and expand our partnerships.

Hi, everyone. This is Michael Rackers, and I'm on for Scott Berg today. Thanks for taking my question and congrats on the quarter. I'm curious about what the core bill sales motion looks like today versus maybe a year ago? Have you made any notable adjustments based on the macro or the strong demand environment you're seeing?

The core go-to-market motion has not changed. We continue to enhance the approach. One area that we've enhanced it is that larger businesses have more interest, so we've continued to build the sales team that works with those customers. We continue to see these tailwinds I've talked about driving more awareness and demand across the ecosystem. The work kept making sure that we're responsive to customer needs and delivering what they require to succeed. No changes really in the go-to-market motion.

Great. Thank you.

Thank you.

Hey, Rene and John. Good afternoon, and thanks for taking the questions. Really nice job here, and I appreciate a lot of the incremental data points, particularly excluding the FI channel. I wanted to ask about traction you're seeing with some of the new payment products, as the virtual card and cross-border penetration figures came in a little bit lower than we were expecting. In terms of instant transfer, enhanced ACH, pay by card, which payment methods across these three are seeing the most traction, and which drove the upside on the take rate in the quarter? What's your appetite on your end to get those into the market quickly and have them start contributing more in total payment volume?

Yes. Hey, Ken. Good to hear your voice. We've always been building a platform to deliver delight and success for customers. One of the things they need is multiple ways to pay and get paid. It's been part of our mission statement to make it simple for businesses to connect and do business. We are seeing continued adoption of ad valorem payment products across the platform. If you were to add up all the ad valorem capabilities we now have, it just accounts for 10% of the overall total payment volume, and we know there's significant opportunity ahead. It's going to include creating instant transfer and balance but also support more payment methods, international ones, virtual card, and others. So, I'll focus on driving development across the team to target our growth in this area.

Okay, great. A quick follow-up: I wanted to ask whether the price increases recently implemented in the direct channel will also be introduced into the accounting firm channel. When should we expect those higher prices to flow through your results?

At this point, we've announced the direct channel price increases effective this month in August. We notified customers a couple of months ago. There haven't been any announcements made to customers in other channels as of yet. By the end of the third fiscal quarter, we can probably expect that any price actions we take will be fully reflected in our model. We've assumed slightly higher subscription prices throughout the year, but it's just the direct channel that we've informed customers about right now.

Thanks for taking my question and congrats on the strong results. I wanted to touch on Divvy really quick. At what point in FY 2023 do you expect to complete the unified platform experience? When should we start to see benefits from the CPA partnership expansion?

Thank you, Nik. We started that integration, obviously; last fall, we connected a separate integration and then pulled teams together in February, and that work started. We will share more as that happens. However, we are working as quickly as possible to integrate, which we will prioritize for customers as we align our go-to-market approach. We will continue to make progress throughout the year.

Great. If I could just squeeze in a quick follow-up. I just wanted to see if we can get an update on the payments monetization efforts for Invoice2go and what that could look like in 2023.

Yes. Thanks, Nik. We're in the very early stages of transitioning from Invoice2go’s outsourced payment provider to a mixture of Bill and other third parties. It's early and not yet contributing materially to our results. We’ll provide more updates as we progress throughout the fiscal year.

Thank you. We have time for one more question. The question is from the line of Jeff Cantwell with Wells Fargo. You may proceed.

Hey, thanks. Congrats on the results, and thanks for squeezing me in. I wanted to ask you a longer-term question about your operating expenses. What's your updated thinking on rightsizing that relative to your revenue? Just to give you some context, there was a period where you were careful about the R&D lines and sales and marketing to scale the business. I'm curious about your updated thoughts on longer-term operating expenses, especially flexibility in R&D and sales and marketing.

Thanks for the question, Jeff. We're obviously very happy with progress in scaling the business, moving in FY 2023 to non-GAAP profitability while delivering strong growth and margins. We think it's still early in the evolution of the market we're pursuing. There are tens of millions of businesses globally that could benefit from our solutions, and I believe we will continue to take a disciplined approach to investing and developing our platform while leveraging effective unit economics to acquire, retain, and grow our customer relations over time.

Okay, great. Just to follow up on the net adds number, you mentioned about 5,000, which was core Bill.com, and the remainder were from the FI channel. Is that correct? What was the commentary for this year as far as Bill.com versus FI?

Yes, that's correct. We added 11,200 net new adds in the quarter, of which approximately 5,000 were core organic Bill, excluding the financial institution channel. Our expectation is to remain in that 4,000 to 5,000 net new ads per quarter range throughout FY 2023, again excluding the financial institution channel.

Okay. Thank you, everybody. Just wanted to say thanks for joining us today. Bill.com delivered another great quarter. We're excited about the opportunity we have to digitally transform millions of SMBs. Thanks again for joining.

That concludes today's conference call. Thank you for your participation, and enjoy the rest of your day.