Earnings Call Transcript - BILL Q3 2020

Operator, Operator

Good afternoon, and welcome to Bill.com's Fiscal Third Quarter 2020 Earnings Conference Call. Joining us today for today's call are Bill.com's CEO, Rene Lacerte; and CFO, John Rettig. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Thank you. With that, I would like to turn the call over to John Rettig for introductory remarks. John?

John Rettig, CFO

Thank you, Jacqueline. Welcome to Bill.com's fiscal third 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 Rene 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 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 Form 10-Q dated February 11, 2020. 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 as 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 Rene.

Rene Lacerte, CEO

Thanks, John, and good afternoon, everyone. Thank you for joining us today. Speaking on behalf of everyone here at Bill.com, we want to send our best wishes to all of you, and we want to share our appreciation to all of those on the frontline from healthcare to the service workers that have kept us going. After a brief comment about Bill.com's response to COVID-19, I'll provide an overview of our fiscal third quarter results and discuss a few highlights, and then later, I will turn the call over to John to cover our financial results in greater detail. He'll also be providing you with our fiscal fourth quarter outlook before opening the call up for Q&A. Our world has changed dramatically since our first earnings call in early February. COVID-19 has been a catalyst for change. To give you an idea of how we've adapted to this new environment, let me give you some examples of changes we have made for our employees and customers. We proactively switched our entire workforce to be 100% remote in less than a week, because we had a comprehensive business continuity plan in place, and because our tech stack is completely cloud-based. Our employees have done a phenomenal job working from home and have not missed a beat. Bill.com's success is driven by their passion and dedication, and I am grateful for their commitment to each other and to our customers. Our mission is rooted in being champions of small and mid-sized businesses, and we knew they needed help. We've taken the following actions to assist them. We waived subscription fees for three months for new customers financially impacted by COVID-19. For existing customers in distress, we've also offered short-term suspensions and other forms of assistance. We extended our customer support hours to help people who are balancing work and family life within the confines of a remote working environment. We joined Stand for Small, a coalition of more than 40 companies that have banded together to provide support to small businesses as they navigate the impact of COVID-19. Led by our strategic partner, American Express, the Stand for Small coalition will provide millions of SMBs access to valuable services, offers, tools, and expertise. And finally, along with our strategic partner into it, Bill.com contributed funding to the Small Business Relief Initiative, which was started by GoFundMe to help small businesses that have been affected, with the goal of empowering the communities to rally behind them. COVID-19 has created uncertainty that could not have been foreseen. Our focus, along with many of our partners, is to make sure SMBs know they're cared for and supported by all of us. That is the one certainty we can provide at this time. Now let me turn to our third quarter financial performance. Core revenue, which we define as subscription plus transaction revenue grew by 63% year-over-year to $36.1 million. Total revenue in the quarter grew by 46% year-over-year to $41.2 million. We also delivered strong non-GAAP gross margins of 78.8% in the quarter. At the end of the quarter, we had over 91,000 customers representing 28% year-over-year growth. Our platform also reaches a large number of SMBs through our 1.8 million-plus network members. In fiscal Q3, we processed 6 million payment transactions, representing an increase of 23% over the year-ago period. During the quarter, we processed $24.2 billion in total payment volume or TPV on our platform, an increase of 35% over Q3 of the prior year. We've worked hard over the last year to extend our payment rails and capture more of our customers' transactions, and we are pleased to see the strong growth in TPV. John will discuss our financial results in greater detail in a few minutes. But first, let me share with you how we think about COVID-19's impact on our overall business. Similar to an SMB's accounting system, we believe our platform is a foundational, mission-critical solution for businesses. We expect SMBs to spend less in a downturn, and we provide the visibility they need to confidently stretch out their payables and accelerate their receivables. Without Bill.com, doing all of this from home is even more challenging. Our platform provides our customers the ability to monitor their finances closely and react quickly. Remote work requirements have exposed the degree to which SMBs still rely on paper-based manual processes. We believe that this crisis could accelerate the move to digital financial operations for companies of all sizes. The inefficiencies inherent in the old way of doing business will not work going forward. This is not lost on businesses, nor their accounts, or financial institutions. Turning now to our resiliency. We believe that Bill.com's business model is particularly durable for the following reasons. First, our demand generation is not reliant on in-person events like annual user conferences. We market our platform directly to SMBs through online digital marketing referral programs and strategic partnerships. In fact, in the 2019 customer survey we conducted, half of new customer respondents indicated they first heard about us because they used our platform at a prior company and heard about us through a colleague. Next, our go-to-market model is not reliant upon feet on the street. Our direct sales motion is 100% inside sales. These first two points lead to a short sales cycle of less than 30 days, which combined with our risk-free trial makes it easy for customers to get on the platform quickly. Once signed up, new customers can start using Bill.com anytime, anywhere from any device. They self-onboard without complicated or time-consuming implementation cycles. With subscription starting as low as $39 per month, our price points are affordable for SMBs. Finally, Bill.com has a strong balance sheet with over $382 million in cash, cash equivalents, and short-term investments at March 31st, 2020. In summary, we have a unique position in the market and a solid financial foundation in place. We believe that Bill.com is well-positioned to support small businesses through and as they come out of COVID-19. That being said, we want to be transparent and share the recent trends we are seeing. In terms of customer acquisition and retention, we have experienced some COVID-related churn. However, we have also seen some increased inflow from prospective customers looking for solutions that enable continuity for financial operations. Looking at the transaction side of the business, we started to see some impact on both TPV and the number of transactions being processed by our customers during the second half of March. And lastly, float. Obviously, the reduction in the federal funds rate adversely impacts our float revenue. John will discuss these topics in more detail later on. Let me discuss some of the changes we have initiated to address the COVID-19 impact on our business. As a SaaS company, the majority of our OpEx spend is related to headcount. In the near term, we have paused new hiring for the quarter except for critical positions. We've also refined our payment risk management policies to mitigate potential increases in credit losses associated with payment flows on our platform. Shifting gears, last quarter, we featured use cases from our direct customers. This quarter, I want to showcase how we're helping our accounting partners. Over the past 12 years, we've developed relationships with over 4,000 accounting firms in the US. The accounting firm channel is a valuable part of our ecosystem because accountants are trusted advisors to SMBs. Our account-specific tools help firms grow their client advisory practices, establish a competitive advantage, and satisfy their SMB clients' needs. With our platform, the same accounting firms can serve more clients more strategically and more profitably. With COVID-19, we have seen increased traction in this channel. Let me give you just one example of how our accounting firm partners have leveraged Bill.com's digital payments platform to ease their clients' transition to the new normal. Bookminders, a Pittsburgh-based firm providing outsourced accounting and bookkeeping services for small businesses, has praised the value of our digital workflow capability. Bookminders' Chief Operating Officer, Jessica Minkus, stated that, "Bill.com is allowing Bookminders to rapidly transform our outsourced bookkeeping service to meet the challenges of working remotely. Bookminders and our clients believe Bill.com is a necessity to safely and securely operate in this new environment. The ability to process, approve, transmit, and deposit payments electronically is imperative in a world where you can't rely on being able to meet with clients, go to the bank or receive an email." In addition to trusting accountants, businesses trust their financial institutions. SMBs look to their banking partners for digital solutions that provide end-to-end cash flow management, and many of those financial institutions turned to us to meet their customers' needs. By working with us, our financial institution partners can provide their customers with many of the benefits realized by our directly acquired customers. Bill.com is currently integrated with several of the largest financial institutions in the United States, including Bank of America, JPMorgan Chase, and American Express. These partners embed our platform typically on a white-label basis into their online banking solution. We continue to have many great conversations with our existing partners about doing more together, and we continue to see opportunities to partner with additional institutions. Today, I'm excited to let you know that we've reached an agreement with our newest partner, Wells Fargo. Wells Fargo will power a new digital AP and AR solution for its treasury management clients by integrating Bill.com into its commercial electronic office online portal. Wells Fargo shares in our mission of helping small and mid-sized businesses save time and improve their cash flows from anywhere at any time. We expect to launch the service later in 2020 and we will update you with additional information on our next earnings call. This relationship reinforces Bill.com's market position as a leading provider of small and mid-sized business AP and AR workflow solutions for major financial institutions. Next, I want to update you on a few of our latest enhancements to the Bill.com platform. Innovation and payments is core to who we are. Over the past few years, we have launched cross-border and virtual card payment. For the past several months, we have been rolling out same-day ACH payments. Our customers have been making good use of this expedited payment capability, especially now that the transaction limits have been increased to $100,000. We have also begun testing real-time payments with the RTP network from The Clearing House. More to come on this later, but using this new payments rail, we foresee being able to offer our customers, independent contractors, and vendors the ability to get paid 24/7. As I mentioned a moment ago, our relationships with our existing partners continue to evolve and grow. Last month, in support of our partner JPMorgan Chase, we integrated Chase's virtual card offering into Cashflow360. Cashflow360 is Chase's digital platform for businesses that includes Bill.com. This integration will provide our Chase customers another way to pay bills with faster delivery of payment, enhanced spending controls, and simplified reconciliation. We look forward to helping Chase drive more payment volume to its virtual card through this seamless integration. Looking ahead, we will continue to focus on capturing more of the overall business-to-business payment flows of both existing and new customers for both our direct and financial institution partners. The expansion of our payment rails and growth in our virtual card program demonstrates our progress against this strategic goal. In conclusion, I want to reinforce our commitment to our mission. We make it simple to connect and do business. We are optimistic that our purpose-built platform will resonate even more with SMBs who are now coping with the reality that the old way of managing back-office financial operations just doesn't work anymore. Now, I'll turn the call over to John to discuss our financials in more detail. John?

John Rettig, CFO

Thanks, Rene. Today, I will provide a brief overview of our fiscal third quarter 2020 financial results and discuss our outlook for our fiscal fourth quarter. 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. With that background, let me turn to our third-quarter key metrics. Given the COVID situation, we'll also be disclosing additional details, including monthly data. We hope the information will be helpful to investors. On an ongoing basis, we don't plan to provide the same level of disclosure. We ended the quarter with 91,300 customers, representing year-over-year growth of 28% and more than 5,400 net customer adds in the quarter, as we experienced broad-based demand across our accounting firms, direct and financial institution partner channels. In addition to new customers, we also experienced an increase in new trial sign-ups during March and April as COVID-19 began to impact businesses and prospects look for solutions that would enable continuity for financial operations in a remote working environment. At the same time, it was clear that COVID-19 presented some challenges for both prospective and existing customers, and we've taken a number of steps to assist those who've been negatively impacted. As Rene outlined earlier, on an as-needed basis, we offered 90-day free subscriptions for new customers and provided subscription fee waivers for existing customers. I'd like to provide transparency into the impact we're seeing from these actions. Regarding support for prospective customers who were impacted by COVID-19, we've had over 1,000 trial customers who joined under our new 90-day free subscription offer through April 30th. We introduced this new offer on March 30th, so we will be in a position to assess the conversion rate of these customers towards the end of the current quarter. For existing customers who were negatively impacted by COVID-19, less than 2% of our 91,000 customers had a portion of their subscription fees waived, representing a reduction in subscription revenue of less than $100,000 through April. The majority of our customers are on a monthly subscription plan and auto-pay their fees monthly in arrears. We haven't experienced any changes in aging receivables or customers requesting payment deferrals outside of the subscription fee relief I mentioned earlier. The trends we are observing with customers requesting fee waivers are still early, given the COVID-19 impact rolling through our customers' businesses. While we haven't experienced any material negative impact to date, we will be monitoring the underlying trends carefully looking forward. Moving on to payment volume. During the quarter, we processed $24.2 billion in total payment volume or TPV on our platform, an increase of 35% over Q3 of the prior year, and we processed over 6 million payment transactions, representing an increase of 23% year-over-year. On a sequential basis, both TPV and transactions were down slightly versus the typical seasonal pattern where fiscal Q3 is usually relatively flat with Q2. During the second half of March, we started to see an impact from COVID-19 on both the number of transactions and TPV being processed by our customers, and this trend continued into April. To give you an idea of the impact, in April, the number of payment transactions per customer was down approximately 14% from March and total TPV decreased 1.4% between March and April. As you know, we plan to update you on additional metrics such as our net dollar-based revenue retention rate and customer retention rate at the end of each fiscal year. But given the COVID-19 situation, I want to provide visibility into the current trends we're seeing on these two important metrics. As macro conditions normalize on a go-forward basis, we will revert to an annual cadence for updates on these metrics. Through March, our dollar-based net revenue retention rate was 120%, an increase from the last reported number of 110% as of June 30, 2019. In April, we experienced a decline in revenue retention to 118%, reflecting the transaction trends that I mentioned earlier. We began to see increased attrition from existing customers in April, where our monthly attrition rate increased by approximately 15% versus March, excluding customers from our financial institution partners. The additional attrition came mainly from customers in industry segments that were materially impacted by quarantine orders, especially restaurants and other retail consumer-facing businesses. I'd like to update you on our annual customer retention rate. Excluding customers from our financial institution partners, 82% of our customers as of April 30, 2019, were still customers as of April 30, 2020. This is consistent with the 82% retention rate we reported as of the end of fiscal 2019. Turning to our financial results. We delivered a strong financial performance in Q3 with solid year-over-year growth in total and core revenue as well as strong non-GAAP gross margins. Total revenue for Q3 was $41.2 million, representing growth of 46% from Q3 '19. During Q3, our total revenue growth was driven mainly by the strength of our core revenue, which represents subscription and transaction fees and excludes float revenue. Core revenue in Q3 accelerated to $36.1 million or 63% year-over-year growth. The strength in core revenue was driven by the increase in the number of customers we serve and growth in revenue per customer from both subscriptions and transactions. To break down our core revenue, subscription revenue increased to $22.3 million, up from $15.4 million in Q3 of last year, representing an increase of 44% year-over-year. This growth was driven by the increasing customers on the platform and the growth in average subscription revenue per customer. Transaction revenue increased to $13.8 million in Q3, up from $6.7 million in Q3 of last year, an increase of 106% year-over-year. Growth was driven by the adoption of new product offerings and an increase in the number of transactions processed from our growing customer base, with the mix of transaction revenue shifting to variable-priced products. The strong transaction revenue growth in the first three quarters of this fiscal year benefited from continued cross-border and virtual card payment adoption. Moving on to float revenue. We delivered $5.1 million in float revenue in Q3 compared to $6.1 million in Q3 '19, a decrease of 16% year-over-year. Our annualized rate of return on customer funds held in Q3 was approximately 1.5%, representing a decrease of 74 basis points over Q3 '19. The decrease in yield was due primarily to the Federal Reserve's actions to significantly cut the federal funds rate. While we expected a decline in the Fed funds rate during the quarter, the move to lower the Fed funds rate to near-zero was much more significant than we planned, and this will impact our float revenue going forward. Our non-GAAP gross margin for the quarter was 78.8%, an increase of 280 basis points over Q3 '19's non-GAAP gross margin of 76% and an increase of 80 basis points from last quarter. The margin improvement year-over-year was driven primarily by the adoption of our new product offerings and partially offset by the decline in float revenue. Note that our non-GAAP gross margin results in Q3 should be viewed as the peak for margins for the foreseeable future, given the negative impact on float due to the Fed funds rate being in the 0 basis points to 25 basis points range, which is likely to be an extended period of time. Turning to operating expenses. R&D expense was $12.8 million for the quarter or 31% of revenue, up from 29% in Q3 '19. The increase was due primarily to the hiring of additional engineering and product management talent. R&D continues to be an important investment area as we add new features and functionality in support of our growing customer base, including accounting firms and financial institution strategic partners. We believe these investments will set us up for long-term growth and competitive differentiation. I'll discuss this in more detail as it relates to our outlook for Q4. Sales and marketing expenses were $11.5 million or 28% of revenue in Q3, an increase from 26% of revenue in the prior year's quarter. During the quarter, we continue to invest in our go-to-market capabilities, including expanding our sales team to meet the increased demand we've experienced from mid-market customers, as well as increasing spend on-demand generation including SEM, social, and brand awareness programs. As you know, we've historically experienced efficient customer acquisition economics, and we continue to be vigilant in driving capital efficiency in sales and marketing. G&A expenses were $12.5 million or 30% of revenue, up from 25% in Q3 of fiscal 2019. This reflects the first full quarter of public company expenses, including D&O insurance, regulatory and compliance costs, as well as the regulatory costs associated with our payment capabilities and money transmitter licenses. This results in our G&A as a percentage of revenue being higher than some of our SaaS software peers. We believe these investments help us create competitive differentiation, and we expect to achieve operating leverage in the G&A area over the long term. Our Q3 non-GAAP operating loss was $4.3 million versus $1.1 million in the year-ago quarter, as we continue to make investments in our platform and go-to-market capabilities, combined with new expenses associated with being a public company. Our non-GAAP net loss was $2.9 million or a loss of $0.04 per share based on $72.4 million basic weighted shares outstanding. Because we had a 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 $382.4 million, down from $383 million at the end of Q2. As of March 31, 2020, we had $1.35 billion in customer funds on our balance sheet, which was down slightly from the end of Q2 due to lower total payment volume in March. We ended the quarter with 617 employees, up from 568 as of the end of Q2. Now, let's move on to our fiscal fourth quarter 2020 outlook. The economic impact from COVID-19 is unprecedented, and the world is a different place than just three months ago, when we had our last earnings call. We do not have a crystal ball, and we are really at the beginning stages of the economic impact playing out. While we didn't see any material direct impact on our Q3 financial results pertaining to COVID-19, it is challenging to assess the future impact accurately. The most immediate impact on our business from COVID-19 is a decline in interest rates to near-zero. This will impact our float revenue looking ahead, as yields come down. For purposes of Q4 guidance, we've made a number of assumptions about our business based on the data available to us today, including the assumption that the trends we've seen in our business through April continue throughout Q4, but do not materially deteriorate. For the fourth quarter of fiscal 2020, total revenue is expected to be in the range of $37.4 to $38.4 million, comprised of core revenue in the range of $34.8 to $35.6 million and float revenue in the range of $2.6 million to $2.8 million. Float revenue assumes that the average Fed funds rate will continue to be approximately 25 basis points during the June quarter and that our yield will be approximately 95 basis points to 100 basis points. In terms of operating expenses, we plan to continue investing in R&D where we are focused on building new platform capabilities, including features to support larger mid-market customers and our financial institution partners. We will remain diligent with sales and marketing investments, aligning investment levels with market conditions. In addition, we expect our G&A spending to continue 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 $9 million to $8 million and a non-GAAP EPS loss of $0.12 to $0.11 on a per-share basis based on a share count of approximately $72.6 million basic weighted average shares for Q4. We expect stock-based compensation expense of approximately $6 million in Q4. Moving on to an update on our new headquarters facility and capital expenditure plans. As a reminder, we were at maximum capacity in our existing headquarters in Palo Alto. At the end of December, we signed an 11-year lease agreement for a new space in a building in a more cost-effective location in the Bay Area. Construction on the tenant improvements was paused due to shelter-in-place orders. The delay will shift the completion of the project to early calendar 2021 and will result in incremental operating expenses over the next few quarters for the additional office space we had to secure in the interim. We expect capital expenditures to be approximately $6 million to $7 million in Q4. Looking ahead, given the COVID-19 circumstances, we will plan to provide guidance on a quarterly cadence until increased visibility allows for a longer-term outlook. To close out on the guidance topic, we believe we're well-positioned to navigate this uncertain period. We are prepared to adjust our operating plans as circumstances change, and we remain committed to building a profitable business over the long term.

Rene Lacerte, CEO

Now, Rene and I will open up the call for your questions.

Operator, Operator

Your first question comes from Brad Sills from BofA Securities. Your line is open.

Brad Sills, Analyst

Thank you for taking my question. I'm glad to hear everyone is safe and doing well. I wanted to ask about your comments on attrition being stable. This is a concern for many given the SMB environment. It seems that some of the most affected industries experienced some attrition, but overall, your renewal rate was consistent in April. Could you elaborate on those two points?

Rene Lacerte, CEO

Sure. It's great to talk to you, Brad. If we take a step back and look at the broader market, we are targeting a significant opportunity with 6 million businesses, and we currently support over 91,000 customers, many of whom require our services. We did notice, as mentioned in our prepared remarks, that we experienced additional inflows, with March and April being among our strongest months ever; however, there was also a rise in attrition. I’ll let John provide more details on the attrition, but we did observe an increase, and we are still assessing how this will develop over the remainder of the quarter as the impacts of COVID-19 continue. John, do you have any additional insights on that?

John Rettig, CFO

Yes. I would just say that the increase in attrition that we saw I would describe as concentrated in industries that you would expect to be most severely impacted on short notice when the COVID situation started having an impact. It wasn't necessarily broad-based attrition across our entire customer base. And as you know, from earlier calls and discussions, we do focus on our net revenue retention as the primary way of measuring sort of the health of our customer relationships and how well we're serving those customers. So we continue to have success at expanding that revenue retention rate. Notwithstanding, we did see based on our preliminary numbers for April, a slight decline to 118%. So we feel pretty good about the progress so far in this early COVID period. But as Rene mentioned, there's obviously a large market opportunity we're going after, and at the same time, it's early in this situation.

Brad Sills, Analyst

That's very helpful. Thanks, guys. And then one more if I may, please. Your take rate, it looks like on transaction on TPV, transaction revenue as a percentage of TPV has been going up, and you've mentioned some progress with cross-border and virtual card. Are there any customer segments where you're seeing that success or any transaction types? Any color on kind of how the uptake has been on those two? Thank you so much.

Rene Lacerte, CEO

The cross-border payments rely on us letting our customers know that we have the capability to manage their international payments form. So there is in product messaging that we are doing, there is sales efforts as marketing efforts. So that is part of the progress that we're making is that we're just getting better at understanding how to market those services to our existing customers. Of course, cross-border payments in general took a hit with COVID just because there was less trade around the world in the latter part of March and beginning of April. But we do know that there is an opportunity for us to continue to impact and help grow that part of the business for us. As a reminder, on the virtual card product offering, the way we have gone to market with that is we are matching the suppliers that our customers pay with the suppliers that are in the Comdata network. So Comdata is our partner, and we find a way to match those suppliers. If we can pay that supplier with the card payment, and they accept the card payment, then we're able to actually be a part of the transaction as a card transaction. So what we've been working hard at is understanding and matching those suppliers with that particular network, so that we can enable more virtual card payments, so customers can pay their suppliers faster, suppliers have better reconciliation and all those things. So we feel really good about those businesses, and both have lots of opportunities for us to continue to work hard at that.

John Rettig, CFO

I would add that we processed just under $2.30 per transaction in the quarter, which represents an increase of about 10% sequentially and 68% year-over-year. This growth is primarily due to the ongoing adoption of our newer products by our customer base, and we believe this trend will persist.

Brad Sills, Analyst

That's great. Thanks so much, guys.

Rene Lacerte, CEO

Thank you.

Operator, Operator

Your next question comes from Josh Beck. Your line is open.

Josh Beck, Analyst

Thank you, Rene and John. It's great to hear everyone is doing well. I wanted to ask about the increased inbound activity you're experiencing. Are there specific verticals seeing more traction, or is it similar to what you typically receive from that channel? I'm trying to understand if this is helping to expand awareness among audiences that may consider this type of solution.

Rene Lacerte, CEO

I think it really is an awareness effect that we're seeing. Right. If you think about mid-March or whenever I think probably in the Bay Area was the end of February to the beginning of March when the larger companies were actually all saying work from home, and so that cascaded through the economy. What we started to see was in mid to late March, that businesses that now had shelter-in-place or work from home guidelines, they are now needed to find a way to manage their back office, their financial operations. And so with that, we were able to have the across pretty much the entire base. We did not see any vertical attraction. We did comment and highlight our accounting channel because accounts and the reason we highlighted that is accounts are the place businesses trust when they need help. So when the business is saying, oh my gosh, I have to shelter-in-place. I don't know how to be able to pay bills anymore, they reach out to their accountant and they reach out to their bank. So we were able to kind of take our platform and our messaging and support our partners, both accounts and banks as well to be able to help them serve their customers. We didn't see any concentration; it was just really broad awareness and need from the fact that people have a different situation.

Josh Beck, Analyst

Okay, really helpful. And then I also wanted to ask about PPP; obviously, it's a bit more of an indirect benefit, and I realize where you sit, it might be a bit tough to discern. But I'm just wondering if you think over the last month, do you feel like your customers have been recipients of some of those funds? In some ways, could that be something that maybe helps effectively buffer the attrition rate?

Rene Lacerte, CEO

I believe the immediate impact of shelter-in-place was evident in the unemployment figures across the country, highlighting how quickly businesses adapted to manage the situation. The good news is that the Paycheck Protection Program helped alleviate some of the ongoing challenges. While I may not match the speed of others on this call, I've noticed that the unemployment rate has been improving over the past three or four weeks, which I think can be attributed to the PPP. Although I don't have concrete data to support this, I believe that the PPP was an essential program that provided businesses with much-needed support. Based on the information we have, I see no reason to doubt its effectiveness.

Josh Beck, Analyst

Really helpful. Thanks, Rene.

Rene Lacerte, CEO

Thank you.

Operator, Operator

Your next question comes from Chris Merwin from Goldman Sachs. Your line is open.

Chris Merwin, Analyst

Yes. Thanks so much for taking the question. Yes. I first wanted to ask about customer adds in the quarter. It looks like you had a really healthy quarter for net adds, and just curious if there is any particular strength in any of your channels, whether it's financial institutions, accounting firms, or direct? I know direct had been an area where I think you're investing a bit more. So just curious which, if any of those channels were particularly strong in the quarter.

Rene Lacerte, CEO

We think that one of the powerful things about our model is the fact that we have this broad distribution capability, and we did not see any one channel dominate compared to others. We did see success across all channels. I think the platform, the messaging that we did start messaging in February, I believe it was late February that we started saying, we help you work from home, we help you work remotely. We think that that mattered for any business as they were thinking about what was coming, and so nothing specific to any channel; it was just good strong demand across the base.

Chris Merwin, Analyst

Okay, great. And then maybe just another one on virtual card. Is there anything in particular you're doing to incentivize supplier acceptance? I think in the past, you talked about an opportunity for virtual card to be maybe 10% to 20% of the mix repayments. So just curious how so far anyway virtual card has been trending relative to your own expectations?

Rene Lacerte, CEO

We do not influence when our customers make supplier payments. The customers tell us when they want to pay, and we determine how the supplier will be paid, striving to ensure the payment process is quick, efficient, and satisfactory for the supplier. Our partner, JPMorgan Chase, does provide incentives for their suppliers regarding payments. Additionally, our partner American Express, which has a virtual card program, also offers incentives. We have various opportunities to learn from and assess the effects of that model, and we are pleased with the approach we have taken so far.

Chris Merwin, Analyst

Great. Thank you.

Rene Lacerte, CEO

You're welcome.

Operator, Operator

Your next question comes from Samad Samana from Jefferies. Your line is open.

Samad Samana, Analyst

Hi, good afternoon and glad to hear everybody is doing well. Great quarter to start calendar '20. A couple of questions. Rene, on the bank's partner side, do you think that with their customers feeling overwhelmed in this environment that your existing financial institution partners are accelerating their focus on marketing Bill.com's embedded features to their end customers? And are you seeing new inbound interest from financial institutions you are currently partners with?

Rene Lacerte, CEO

COVID-19 has definitely changed the way everyone thinks about how they manage their financial operations. You can't escape it, I mean it changes how we think about washing our hands and conferences we go to, and how we pay our bills. So what we have seen from our financial institution partners is that they are keen to help their customers through this. That help primarily in the last month or so has been all about PPP. They have lots of opportunities to help SMBs with the PPP programs they have. But we've also had discussions and understand that they want to help them be able to operate their business from anywhere. It's why the firms that we have really looked to us to help them automate and digitize the processes of their businesses. I think this has been a great reminder for our existing partners how important the opportunity is to help their businesses. I hope it's been a wake-up call for other partners that there is something they can do to help their businesses migrate and be more digital. We have seen and continue to see since the IPO increased interest from partners about opportunities to do stuff together. It's hard to kind of understand where all that comes together, but we believe that the market is clear for folks, and I think this has been a reminder for everybody that's just a little bit kind of data to be using checks and filing cabinets and paper to kind of manage your back office.

Samad Samana, Analyst

That's helpful. And then, John, could you elaborate on the guidance? The growth is still very strong. Is it accurate to say that if it weren't for the small percentage of the base that opted for waived payments and the new trials, the subscription revenue or the core revenue growth could have been even higher for the June quarter?

John Rettig, CFO

Good question, Samad. I think it's reasonable. I can say we've factored into our guidance the current trends on churn, new customer acquisitions, and how the promotion offer for new customers may convert to paying customers. These factors are somewhat of a headwind this quarter, and we are aware of that. Without these factors, we likely would have provided higher guidance. However, we are considering everything, and we believe we've taken a well-rounded view of all the factors available to us.

Samad Samana, Analyst

Great. And I apologize for asking the third one. But just any idea what your vertical exposure looks like? Thanks for letting me squeeze that one in.

Rene Lacerte, CEO

We have analyzed our vertical exposure, which is based on self-reported information from our customer base, making it difficult to achieve complete accuracy. However, with over 91,000 customers, we believe our representation reflects the US economy. This suggests a low level of risk across any single vertical, which we think positively influences our churn rates. What remains uncertain is how businesses will perform in the coming two to three months.

Samad Samana, Analyst

Great. Really helpful, guys, and congrats on a strong quarter. Thanks.

Rene Lacerte, CEO

Thanks, Samad.

Operator, Operator

Your next question comes from Scott Berg from Needham. Your line is open.

Scott Berg, Analyst

Hi, Rene and John, congrats on a good quarter. And John, thanks for the additional disclosures, quite helpful. I guess two questions from me. We'll start off with, number one, Rene, the announced Wells partnership today, obviously, they're a large institution with a large customer base. But as you look at the structure of that contract, does it differ at all from what you have with either other financial institutions, maybe with JPMorgan Chase? I guess.

Rene Lacerte, CEO

I am really happy and proud that the top three largest banks in the country have chosen Bill.com to support their mid-market customers. The partnerships with JP Morgan Chase, Bank of America, and now Wells Fargo focus on their mid-sized businesses. While there can be structural differences between them, we do not disclose those differences, and from a financial perspective, they are not material. This is a strong partnership, and we are excited to have all three banks on board.

Scott Berg, Analyst

Got it, helpful. And then from a follow-up question with regards to the kind of the free trial that you've been giving away in the month of April, and it sounds like it continues today, those 1,000-plus leads that you've been able to kind of gain from that or signings, how does that compare to a typical kind of first month in a quarter, whether it's compared against April or January from another quarter? Just trying to get a sense on that increase in kind of leads or customer base if it's material from what you typically see?

Rene Lacerte, CEO

Let me provide some additional details about that offering to ensure it's clear. This offering is designed for businesses that have been significantly affected by COVID-19. It's self-reported, allowing businesses to identify their need, but most businesses are coming to us requesting something to help manage their back office. We have a sign-up process that we developed before COVID, and then we introduced this offer. I want to emphasize that this offer is intended to supplement what we see in our regular sign-up flows. Does that help clarify?

Scott Berg, Analyst

It does. Thanks, Rene. Congrats again on the good quarter.

Rene Lacerte, CEO

Thank you.

Operator, Operator

Your next question comes from Bhavan Suri from William Blair. Your line is open.

Bhavan Suri, Analyst

Hey, guys, nice job, and thanks for taking my question. I've got a question on COVID follow-up with one. And my question is probably a little more forward-looking here. But if we were to compare this to 2008-2009, and you saw tremendous small business formation coming out of 2008-2009, but it took a while for them to ramp, and you think about maybe Q4 or maybe Q1 next year, you think about the same sort of small business formation, that will obviously newer companies, more tech-savvy, they're not going to file cabinets, as you said; there is also an under-penetration in the market. How do you think the business looks? Or do you see the growth return to normal very quickly? Do you think it's time around new business formation that gets you there? Do you think there's enough sort of at the top of the funnel there is big enough that we actually get there faster than say once things stabilize in 12 months? I'm just trying to sense of what that recovery path may look like for you guys, given the focus on the SMB market?

Rene Lacerte, CEO

Yes, the market is very large, encompassing 6 million businesses. In March and April, we observed significant activity, which is why I noted that March was the strongest month in the quarter we've just reported, and April continued that trend. There are numerous businesses among those 6 million that recognize the need for change and are motivated to act. This presents us with an opportunity to ensure they are aware of our services and to attract those customers. Additionally, as you mentioned, there is the potential for new business formation. It's challenging to predict how this will unfold and the pace at which it will occur. Historically, during recessions, we see an increase in new businesses. However, right now, we are still navigating the period of churn, and the duration of this cycle remains uncertain. Thank you.

Operator, Operator

Your next question comes from David Hynes from Canaccord Genuity. Your line is open.

David Hynes, Analyst

Hey, thanks, guys, and congrats on the quarter, Rene and John. So Rene, maybe you just kind of double-click on the accounting channel and what's giving that channel more resiliency and why you've seen kind of increased traction there in this environment? Is it just that they tend to serve a little bit of a larger customer? Or help me understand what's happening there?

Rene Lacerte, CEO

The strategy from the beginning was to assist businesses in seeking help wherever they needed it. By help, I mean guidance for efficient financial operations. Over 12 years, we have built relationships with more than 4,000 accounts across the US. The advantage of our established track record and experience is that all 4,000 of these accounts currently do some business with us. We recognize that these accounts have additional clients not on our platform who might be using alternative solutions. Furthermore, they also have their own network of accounting professionals they collaborate with. The COVID-19 pandemic has heightened the urgency of businesses facing challenges, asking how they will operate without going to an office or getting employees to handle essential tasks. The need for digital solutions has become clear. Accounting firms that were already familiar with our services found themselves in a position to support their clients effectively. An example is Bookminders, which was already a user of our services but found that our solution became a crucial support tool for their clients who felt lost in managing their businesses remotely. This is why that channel has proven to be very impactful for us, and we believe it will continue to grow as the market evolves. They have the awareness, the reach, and we offer tools that simplify their operations. This synergy is why we have seen additional momentum in recent weeks.

David Hynes, Analyst

Yes, that's helpful. And then maybe a follow-up for John, just in terms of thinking about gross margins into fiscal Q4. I mean is it as simple as we should take the sequential delta in float revenue that you guided for and pull that out on a near 100% margin basis to gross profit? Is that kind of the right way to think about it?

John Rettig, CFO

Directionally, I think that's the right way to look at it. Our float revenue isn't quite a 100% margin. We do have some costs such as asset management fees and things of that nature. But there are no other sort of disruptions or obstacles or issues that we're seeing within cost of sales that would translate into immediate margin pressure. It is mainly that float line item.

David Hynes, Analyst

Yes. Okay, very good. Thanks, guys.

Rene Lacerte, CEO

Thank you.

Operator, Operator

That concludes today's conference call. I will now turn the call over to Rene for final remarks.

Rene Lacerte, CEO

Thanks again, everyone for joining the call today. We believe in our mission, and despite the uncertain macroeconomic backdrop, we are committed to building a sustainable, durable business for the long-term opportunity ahead of us. Thank you for your participation today. Goodbye.