Earnings Call Transcript - BILL Q1 2026

Operator, Operator

Good afternoon. My name is Lydia, and I'll be your conference operator today. At this time, I'd like to welcome everyone to BILL's Fiscal First Quarter 2026 Conference Call. I'll now turn the call over to Jun Wang, Director of Investor Relations. You may begin your conference.

Jun Wang, Director, Investor Relations

Thank you. Good afternoon, everyone. Welcome to BILL's Fiscal First Quarter 2026 Earnings Conference Call. We issued our earnings press release a short time ago and filed the related Form 8-K with the SEC. The press release can be found on our Investor Relations website at investor.bill.com. Joining me on the call today are Rene Lacerte, Chairman, CEO and Founder; John Rettig, President and COO; and Rohini Jain, CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the future business, operations, targets, products and expectations of BILL that involve many assumptions, risks and uncertainties. Actual results could differ materially from those expressed or implied by our forward-looking statements. In addition to our prepared remarks, please refer to the information in the company's press release issued today. Our Q1 '26 investor deck and our periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. Please refer to today's press release for a reconciliation of GAAP to non-GAAP and additional information regarding these measures. With that, let me turn the call over to Rene.

Rene Lacerte, Chairman, CEO and Founder

Thanks, Jun. Good afternoon, everyone, and thank you for joining us today. We're off to a strong start in fiscal '26, delivering first quarter results at the top end of our guidance range for core revenue and achieving a substantial beat on profitability. Our focus on driving business results while expanding the value of our platform is working. The Fortune 5 million need BILL to help them operate more efficiently, manage cash with greater confidence and navigate an increasingly complex financial environment. Our focus on intelligent automation and efficient operations is driving real impact for customers and strengthening our business. We made significant progress on our strategic priorities since our last call. Here are a few key highlights. First, our strong execution and disciplined investment delivered solid financial results. Our core revenue grew to $358 million, up 14% year-over-year. Additionally, we posted a non-GAAP operating margin of 17%, a significant expansion as a result of our continued focus on profitability. Second, we signed 3 broad-reaching Embed partnerships with category-leading software providers, significantly extending BILL's reach and positioning our platform directly within the tools where millions of SMBs already work. Third, we advanced our AI leadership with BILL's new intelligent AI agents, which deliver automation capabilities that are transforming financial workflows from manual to touchless. We continue to enhance the value delivered through BILL's platform with features that simplify financial operations and deepen customer engagement. BILL exists to empower the Fortune 5 million. Our momentum is anchored in the trust of nearly 0.5 million businesses and over 9,000 accounting firms, trust that fuels growth unlocks opportunity and uniquely differentiates BILL in the market. In today's environment, where every dollar and hour matter, that trust enables us to reshape financial operations for SMBs, replacing friction and complexity with simplicity, speed, and confidence. Powered by our platform strength and the network we've built, BILL is transforming how SMBs manage their finances and move money, setting the standard for intelligent, scalable financial operations. As more and more software solutions become available, we think it is critical to meet the customer where they are. That is why we have always had a focus on developing our platform with partners in mind. Last year, we launched our Embed 2.0 strategy to remove friction for partners to quickly and easily leverage our unique size and capabilities for their customers. This focus allows us to accelerate our ability to efficiently and effectively expand BILL's reach and creates a compelling long-term growth opportunity. Since last quarter, we've taken a major step forward with 3 new embedded partnerships across top-seated software providers. These partners collectively serve almost 1 million small and midsized customers, representing an estimated $1 trillion in annual payment volume. In October, we announced a strategic partnership with NetSuite. The new BILL powered payment automation capability is embedded in NetSuite's intelligent payment automation, helping customers accelerate accounts payable processes, increase efficiency and reduce risk. It's available to all U.S. NetSuite customers, meaning that tens of thousands of businesses can access BILL's leading AP automation and payment solution directly inside NetSuite's #1 AI cloud ERP. Additionally, we're also excited to announce our new embedded partnership with Paychex, one of the largest payroll and HR providers in the U.S., paying 1 out of every 11 American private sector workers and serving hundreds of thousands of SMB customers. With unmatched distribution through a vast accountant network and dedicated sales force for SMBs, Paychex further extends BILL's ability to reach and support millions of small and midsized businesses nationwide. Our next and most recent embedded partner is Acumatica, one of the fastest-growing ERPs that serve a large and growing base of mid-market businesses across industries like construction, manufacturing, distribution, and professional services. By embedding BILL's AP capabilities natively into the Acumatica system, thousands of SMBs gain direct access to BILL when they need it most. Industry-leading software companies are choosing BILL to enhance the value they provide to their customers. These partners selected BILL to leverage our scale, data, and payment capabilities, enabling them to efficiently diversify their customer relationships, deliver greater efficiency, and drive more revenue. As a result, we're able to expand the market and accelerate BILL's reach to businesses large and small. In addition to scaling BILL's reach through our Embed 2.0 initiative, we're also expanding the delivery of strategic finance capabilities to SMBs, deepening the value we provide and helping businesses manage and move money more intelligently. In Q1, we launched BILL Cash account, which is a high-yield, fully integrated operating bank account that lets businesses do more than track their money. It helps them manage their money by optimizing their cash flow, enabling faster payments, earning interest, and providing seamless control and visibility across all of their transactions, all within the platform they already use for payables, receivables, and spend and expense. In addition, we continue to expand the capabilities across our core platform, adding advanced reporting in the account council, new self-service global payment tools, a more extensible API platform, and new third-party integrations. Our new Gmail and Lyft integrations for Spend and Expense are great examples of how we're embedding BILL into the tools businesses already use every day. Receipts now flow automatically, saving customers time and eliminating friction from expense management. This is another example of extending our reach to meet businesses where they work. BILL's platform is increasingly intelligent, increasingly autonomous, and increasingly essential to how BILL's customers manage their finances. As a leader in delivering predictive and generative AI, BILL is once again redefining our platform in the category with Agentic AI. Our new AI agents represent a paradigm shift in automation at the operational level, building the foundation for a new era of touchless B2B transactions. Our vision goes beyond simply speeding up existing workflows. We are eliminating unnecessary busy work and friction. While Fortune 500 companies have enjoyed automation for years, the Fortune 5 million still face paperwork, policy gaps, and costly trade-offs because no one has ever built the workflows they need. We are rapidly changing that. Through the BILL network, we've created one of the most comprehensive real-time financial maps of the SMB economy. Our network grows, our data advantage grows as well, increasing both the scale of our insights and the depth of our understanding we have into how SMBs operate and what they need most. We have the unique capability to see how SMBs move money across industries in real time, revealing patterns and connections that no one else can see. And this visibility is powered by the reach of our network. 1% of U.S. GDP flows through BILL, with more than half of that between members of our network. Having processed over $1 trillion in transaction volume and 1.3 billion documents, we built the richest verified financial data set in our category. As a highly trusted company, BILL holds the highest financial, regulatory, and privacy standards. We're now leveraging this combination of scale, data, and trust to power BILL's Agentic AI, purpose-built agents that go beyond traditional automation to deliver strategic finance capabilities and enable a future of truly touchless B2B transactions. Here are a few examples of how our new agents are already making it easier to connect and do business. One of the biggest pain points for SMBs during tax season is managing 1099s and collecting the required W-9s. Our new W-9 agent automatically requests, collects, and pre-validates W-9s on behalf of customers for all of their new suppliers throughout the year, making what no business wants to touch touchless. This agent eliminates over 80% of the manual steps and is now generally available for BILL's AP customers. By eliminating this workflow, we estimate that we can help save more than 80,000 days of unnecessary work that is collectively spent by BILL's AP customers annually on W-9s. This is a game changer and enables SMBs to focus on strategy and growing their business. Next, we believe expense processing should also be touchless. We've introduced a new agent that automatically codes transactions, eliminating the need for data entry and reconciliation. Initial results show this agent dramatically decreasing the need for manual work, saving our customers' time while increasing accuracy. Building on the same agentic foundation, we're simplifying user onboarding for spend and expense, automatically creating virtual cards and permissions so our customer employees can be enabled even more quickly and spend compliantly from day one. We've also introduced our new Agentic Bill Assistant to provide personalized instant answers to customer inquiries and troubleshoot common issues. This means customers spend less time managing the back office and more time growing their businesses. These new agents are just the beginning of our agentic journey. We're excited for customers to use them and to continue to leverage our scale and unparalleled expertise around SMB financial operations to develop more agents that eliminate workflows and the friction of doing business. The future for SMB finance is touchless and BILL is delivering it. As we look ahead, we have strong momentum and a clear path for creating value delivery for customers through AI, which positions BILL for durable growth. This quarter, we introduced important products to help small and midsized businesses operate more efficiently and unlock new opportunities. At the same time, we are building a more efficient and agile organization. The steps we've taken to align our cost structure, streamline operations and invest in high-impact areas are positioning BILL for sustainable success and long-term profitability expansion. We're strengthening our foundation for the future with the addition of 2 new independent directors. We recently appointed Peter Feld, Managing Member, Portfolio Manager, and Head of Research at Starboard Value and Lee Kirkpatrick, former Chief Financial Officer of Twilio, to our Board. Their combined and deep expertise in finance, digital transformation, fintech, and operational excellence will help BILL as we execute our strategy, accelerate innovation, and drive long-term value creation. We'd also like to thank Steve Fisher for his service and invaluable contributions to BILL's growth and success. We're focused on executing our strategy and continuing to build on the strong and differentiated foundation we've established. In the quarters ahead, we'll share a deeper view of BILL's long-term vision and financial framework, highlighting how our scale, data, and platform innovation position us to redefine intelligent finance for SMBs, drive sustained growth, and create lasting value for our shareholders. I'll now turn it over to John to share more on our Q1 fiscal '26 performance and key initiatives.

John Rettig, President and COO

Thanks, Rene. Our Q1 results exceeded our expectations as a result of focused execution and strong operational rigor. As you heard from Rene, we made great progress on our strategic priorities. To start, we expanded our ad valorem payment portfolio to deliver increased value for both buyers and suppliers. In Q1, we introduced BILL Cash account, the first step of a broader treasury capability. It serves as an operating bank account that enables fast payment speed, integrates seamlessly with BILL and accounting software, and generates revenue for both customers and for BILL. Early feedback from customers is very positive. Steve Chaney, CEO of accounting firm, Chaney & Associates, has scaled his firm to serve more than 1,300 clients on BILL since 2019. Steve said and I quote, 'The BILL Cash Account makes the platform we rely on even more powerful. Now I have a one-stop shop to manage payables, card spend, and cash all in one place. Many of our clients are churches and nonprofits, and this integration simplifies how money moves in and out of their organizations, helping them manage cash flow more efficiently and maximize their funds in a single trusted place.' The combination of BILL Cash Account and our broader financial operations platform is a powerful flywheel that enables customers to manage more of their funds and transactions within the BILL platform. This drives TPV per customer expansion and creates an opportunity for transaction monetization growth. Our Supplier Payments Plus solution, or SPP, is our newest advanced ad valorem payment product, and it entered the commercial scaling phase in the first quarter. SPP is designed for the largest suppliers in our diversified two-sided network and advances how we serve them by unifying payments, workflows, and dedicated account management into a comprehensive purpose-built offering. Suppliers today often navigate dozens of disconnected portals to submit invoices and track different types of payments, which consumes time and increases the cost of payment acceptance. We are solving this pain point with an integrated software and payment offering that serves as a single destination for suppliers to track and manage receivables and access rich remittance data. The strong value proposition of this solution is resonating with large suppliers in our network. While it's early in the commercial phase, suppliers are leveraging this new capability to complement virtual card payments with enhanced ACH, and some are leaning in with annual or multiyear agreements. We see an opportunity to engage suppliers at a broader payment portfolio level by providing them with tools to optimize receivables for convenience, flexibility, and control. As with many enterprise solutions, the sales cycle is longer than our historical SMB trials, and we are building out our enterprise go-to-market capabilities to accelerate prospect conversion. Shifting to our progress in mid-market. Our Spend & Expense solution continued strong traction with higher spend businesses who typically have a large volume of transactions and complex business rules. In Q1, card spend per customer reached a record high of $145,000. In support of these larger businesses, we recently introduced a set of new functionality that enable businesses to integrate with their vendors and automatically collect, match, and categorize receipts. We also rolled out upgraded budget workflows that allow businesses to configure and customize based on their business policies, increasing the depth of our solution and driving stronger engagement. As we move upmarket, we're adapting our approach on balancing customer unit economics with market penetration. We are shifting more direct go-to-market resources towards larger AP/AR and Spend & Expense prospects where we see strong unit economics and greater monetization opportunities. On Spend & Expense specifically, we are prioritizing customer segments where we can improve rewards efficiency over time, aligning our sales and marketing objectives with incentive structures that support higher quality, more durable revenue. Our accounting channel is a key foundation of our distribution strategy, a durable advantage that enables us to expand our ecosystem, acquire customers efficiently, and drive multiproduct adoption. Accountants rely on BILL as a core technology component of their past practices, and we are making progress extending our distribution reach. In Q1, we added more than 250 accounting firms, bringing our total to over 9,300 firms. We're now replicating our playbook with the new Embed 2.0 partnerships. As Rene mentioned, we recently signed 3 important partners, NetSuite, Paychex, and Acumatica. These partnerships will accelerate our ability to drive adoption of the BILL platform among small and midsized businesses. Importantly, we will roll out the full portfolio of our payment solutions to these partners over time, enabling them to deliver more value to their customers while deepening the value we realize in return. In October, NetSuite Intelligent Payment automation powered by BILL was announced and customers are already using it, representing a significant proof point of our Embed 2.0 strategy in action. We're now working closely with our other partners as they progress towards general availability in the coming quarters. Turning to our progress on AI innovation. We introduced new AI agents in onboarding, support, and workflows such as vendor management, payments and receipt management. These new agents allow SMBs to bypass step-by-step processes and complete tedious tasks instantly. Furthermore, we're also scaling the use of AI internally to drive meaningful productivity gains across all BILL internal teams. For example, within our front-end modernization work stream, our engineering teams are leveraging AI to automate code generation, testing, and refactoring. In the areas where AI was applied, we're seeing significant improvement in developer productivity, empowering our engineers to accelerate delivery while maintaining quality. In summary, in Q1, we executed well on our fiscal '26 priorities with a simultaneous focus on profitability expansion. In October, we made progress on further aligning our organization with our strategic priorities and increasing operational efficiency, which Rohini will cover in more detail. We are executing with clarity and speed, positioning us to continue leading the financial operations category while delivering greater shareholder value over time. I'll now hand the call over to Rohini to provide more details on our financial performance.

Rohini Jain, CFO

Thank you, John. We started the year with significant momentum and continued our track record of delivering on our commitments. As we shared on the last earnings call, our focus continues to be on scaling BILL into a much larger and more profitable business. Our Q1 results underscore that focus with strong revenue growth and profitability expansion. In Q1, we delivered $358 million in core revenue, growing at 14% year-over-year, hitting the top end of our guidance range. Non-GAAP operating income was $68 million, $10 million ahead of the high end of our guidance, driven by disciplined expense management and some deferred investment timing. Let me share some key highlights of our Q1 performance. Within our integrated platform, BILL AP/AR revenue grew 10% year-over-year. Subscription revenue grew 6%. We added 4,000 net new customers during the quarter. This level of net adds is lower sequentially and reflects our enhanced focus on higher ROI customer acquisition and ARPU expansion. BILL AP/AR transaction revenue was $123 million, up 12% year-over-year. TPV per customer saw a slight decrease, which was in line with our expectations. AP/AR transaction monetization increased 0.3 basis points year-over-year. BILL Spend & Expense card payment volume increased 21% year-over-year, driven by strength in retail spend. Spend & expense revenue totaled $157 million in Q1, reflecting a 19% growth year-over-year. Rewards increased to 132 basis points as a percentage of payment volume, up 10 basis points compared to Q1 '25. We are now scrutinizing and actively adjusting our reward structure. We expect this will result in rewards flattening and over time declining as a percentage of TPV. Moving on to profitability. Non-GAAP operating margin expanded over 250 basis points sequentially or approximately 300 basis points, excluding the benefit of float revenue. These strong profitability results reflect our ongoing focus on operating efficiency, a temporary pause in hiring, and a deferral of certain investments. Shifting to our business update. As you heard from John, we began the year with strong momentum driven by focused investment and execution approach. We are carrying this principle forward and applying a strong profitability lens across operational and investment decisions. On our last earnings call, we noted that our fiscal '26 profitability guidance reflected this disciplined approach, one that emphasized continued expense management and further structural efficiencies. As a part of this initiative, over the last 2 months, we have finalized and executed a reduction in force of approximately 6%. In connection with this action, we incurred $9 million of restructuring charges in Q1. These charges, which are excluded from our non-GAAP results, consisted primarily of cash expenditures of severance payments, employee benefits, and related costs. As we pursue more meaningful operating income expansion over the next few years, we are undertaking additional initiatives across our revenue profile and expense base, including the following: on the top line, we are taking actions to enhance the quality of revenue, for example, prioritizing higher-value customers and ARPU expansion over net adds growth, ROI-based approach to rewards, and evolving our pricing to better reflect the value we deliver. On the expense side, we plan to expand our talent footprint strategically in low-cost geographies. In addition, we have partnered with a third party to perform a comprehensive outside-in assessment of our cost structure. This work, combined with the internal efficiency actions already underway, will support continued improvement in profitability. Before we get into the detailed guidance, here are a few key assumptions. First, I want to reiterate our fiscal '26 AP/AR volume and take rate expectations. We are assuming flat volume per customer and a similar level of take rate expansion as we did in fiscal '25. On Spend & Expense, we expect card payment volume to grow in the high teens year-over-year in fiscal '26 and the take rate for fiscal '26 to be slightly above 250 basis points. Second, we updated our float yield assumption to be in line with the current consensus. That now includes one additional rate cut anticipated in calendar '25. The updated float yield assumption reflects the Fed funds rate exiting fiscal '26 at approximately 325 basis points. Third, on the cost side, as I mentioned last quarter, our full-year guidance reflected structural changes aimed at driving efficiencies. The recent 6% reduction in force was a direct outcome of these initiatives and was already incorporated into our prior fiscal '26 guide. Now turning to guidance. For fiscal Q2 '26, we expect total revenue to be in the range of $395 million to $405 million and core revenue to be in the range of $359 million to $369 million, reflecting 12% to 15% year-over-year growth. On the bottom line, for Q2, we expect to report non-GAAP operating income in the range of $63 million to $68 million. We expect non-GAAP net income in the range of $63 million to $67 million and non-GAAP EPS to be between $0.54 and $0.57. Shifting to full-year guidance. For fiscal '26, we expect core revenue to be in the range of $1.46 billion to $1.49 billion. We expect float revenue of $134 million, $5 million lower than the prior guidance, bringing total revenue to the range of $1.6 billion to $1.63 billion. Turning to the bottom line. We expect non-GAAP operating income in the range of $257 million to $277 million or 16% to 17% in non-GAAP operating margin. Our updated operating income guidance implies an ex float margin expansion of more than 290 basis points compared to fiscal '25. Relative to our prior guidance, the updated outlook reflects a $16 million increase in ex float profitability or 106 basis points of additional margin improvement. We expect non-GAAP net income in the range of $249 million to $265 million and non-GAAP EPS to be between $2.11 and $2.25. For fiscal '26, we expect stock-based compensation expenses to be approximately $260 million, which is $30 million or 10% lower than we previously communicated. This implies SEC at approximately 16% of revenue. In closing, we executed with rigor and discipline and delivered a strong Q1. We made significant progress executing our strategic priorities and driving greater efficiency across the organization. Looking ahead, we see tremendous opportunity to deepen the value we deliver for SMBs, extend our market leadership, and position the company for sustainable, best-in-class financial performance. And now we'll open up the call for Q&A.

Operator, Operator

Our first question comes from Andrew Schmidt with KeyBanc.

Andrew Schmidt, Analyst

It's great to see the product advancements and integrations you've rolled out. Good job on that. Could you discuss the move up market? Are you seeing it reflected in your customer numbers yet, or is that something we can expect in the future? It could be a significant driver once it gains momentum. Also, could we discuss the payback period, unit economics, and sales and marketing intensity as you transition up market? I know you've already been making progress in that area, but it seems like there’s now a more focused shift.

John Rettig, President and COO

Yes. Thanks for the question, Andrew. Our focus on mid-market has been a bit of an evolution where it started as an organic pull where we saw increased demand in the market from larger businesses. And that's now become a deliberate strategy where we're proactively investing in our go-to-market resources and capabilities and tactics as well as product capabilities where we're rolling out new features for procurement, multi-entity, bulk pay, supplier payments, and things like that. So demand has been good. And I think we're making steady progress at evolving the composition of the new customers that we acquire, and we continue to see good results with acquiring mid-market businesses. To move the needle on the business overall, it is going to still take a little bit of time, just given the size of the installed base that we have in terms of customers and revenue. But as we've said previously, a typical mid-market customer is probably twice the size in terms of TPV than the average SMB, and they're much more likely to adopt multiple products. This translates into much higher ARPU, TPV, and payments, which will improve our unit economics. And that's really one of the main drivers of this area of focus for us.

Andrew Schmidt, Analyst

Got it. And then maybe I could ask about AI, obviously, on everyone's mind these days. It's great to see the agent rollout. Maybe you could just discuss the pipeline when you think about just the role that agentic plays for BILL. And then also just anything on how the monetization might evolve. There's a lot of questions about how you monetize or if this is just a retention factor. Anything there would be great.

René Lacerte, Chairman, CEO and Founder

Thank you, Andrew. We are very excited about the potential of AI and the impact it can have on our customers. When we examine the assets we've developed at BILL, we see a unique data set that comprises 1% of GDP, with half of that traversing the network nodes on our platform. We possess significant expertise in small and medium-sized business financial operations, particularly in understanding the workflows that matter most to them. Our focus has always been on saving them time, which ultimately saves them money. By combining this data and expertise, we can leverage it to create agents that make a tangible difference. One example I'd like to highlight is the W-9 agent. The process of handling W-9s is often painful for our clients. However, we've spoken to various customers, and one accounting firm, Highline, has already reported that our solution can save them a quarter of the time during their fiscal year for processing W-9s. They need to manage over 1,500 W-9s, and this requires a back-and-forth effort with suppliers. This early feedback demonstrates the significant impact we are capable of achieving at BILL. Our mission is to simplify business connections, and this is a great illustration of how we can enhance efficiency in business processes. This will also create opportunities for us to deliver additional value to our customers. We are in the initial stages of rolling out these agents, and we have a broader pricing strategy that John can elaborate on. The monetization aspect is indeed part of our wider strategy.

John Rettig, President and COO

Yes. It's actually a really interesting time in the evolution of our platform and our capabilities and the value that we're able to deliver to our small business customers and how that influences our pricing strategy. We've obviously added a ton of capabilities lately. And we have made a couple of near-term pricing changes, things like adjusting some transaction pricing last quarter and some pricing tier changes more recently. And these are really just short-term actions we've taken, but they're in the context of a much broader pricing optimization effort that we have. And that's where we think AI actually becomes an additional tailwind as we think about optimization over time. And what we're trying to accomplish is creating strong alignment between the value we're delivering and the value that BILL also generates from these customer relationships, and that should have a positive impact on customer ARPUs and revenue per customer over time. We don't have a specific timeline for the impact of these pricing initiatives, but I can say that it is an important priority and initiative at BILL in fiscal '26.

Darrin Peller, Analyst

Good start to the fiscal year. Can we begin by discussing the investor involvement and Board changes that you mentioned, as well as the Rule of 40 that you referenced? Please provide your definition of the Rule of 40 in terms of whether it pertains to core revenue growth and whether it includes or excludes any items. Is it based on operating income? More details would be appreciated. Additionally, I would like to hear your thoughts on what it takes from a cost and investment standpoint to achieve this.

René Lacerte, Chairman, CEO and Founder

Thank you, Darren, for the question. I'll start, and then I'll let Rohini kind of get into some of the details there. I mean, the first thing I would say that I just want to make sure folks understand that profitability is a part of the DNA of our company. It's kind of who we are. It's how we built the company from day one. It's being an accountant at heart. My grandmothers were accountants; it's just who we are. So like this focus on profitability, while we've shifted from kind of focusing on the growth to also add the profitability focus in these conversations with investors, it's not a new thing for us. And so we've been steadily increasing profitability over the past few years. We have a lot of opportunity to continue to do that. And that's why we are comfortable and believe that the Rule of 40 is the right target for us. I'll let Rohini start to talk about kind of the timeline for us sharing more on that.

Rohini Jain, CFO

Yes, absolutely. There are so many ways of calculating the Rule of 40, but the spirit of all of those is largely the same. We are being very thoughtful about how we define it for our business because the goal is not just to choose a formula, but really to ensure that we're truly reflecting how we create the durable value for the business, right? And the idea is to be able to balance growth and margin. We look forward to sharing our framework and the rationale that we adopted for the Rule of 40 during the Investor Day in the first half of the calendar year '26. So this is still a work in progress, and you'll see it soon. Yes, definitely. Let me begin by discussing the positive surprise in operating income, excluding float. Float involves some different assumptions that I can explain later. Excluding float, we surpassed expectations by about $11 million. I would attribute around $5 million of that to timing as we were considering a reduction in workforce and chose to pause hiring and limit other investments while we reorganized. This decision provided some short-term benefits that we plan to utilize throughout the year. The remaining $5 to $6 million flow-through came from a small one-time gain related to losses, which can fluctuate from quarter to quarter, along with approximately $4 to $5 million resulting from the efficiency initiatives we've been implementing throughout the year. This led to a $16 million boost in our operating income guidance when excluding float. When looking at the total operating income, including float, we continue to adhere to consensus guidance. An additional rate cut was factored into the consensus, which we've now included in our guidance. This adjustment reduced our operating income by around $5 million, counterbalancing the $16 million increase, while the remainder continued to flow through. I hope this clarifies your question.

Keith Weiss, Analyst

This is Keith Weiss from Morgan Stanley on for Chris Quintero. Congratulations on a solid start to the fiscal year. I was hoping to dig into the embedded 2.0 initiative a little bit further. And maybe particularly like when it comes to a vendor like NetSuite, three kind of parts of the relationship I'd love to get more detail on: one, product functionality, like what's the incremental functionality that BILL is bringing? And is there overlap? Because I know NetSuite has an AP module and they do payments. Is there overlap? And how does that get resolved, number one? Number two, on the go-to-market side of the equation, is this just a technical integration? Or is there a go-to-market component from the NetSuite or the embedded sellers, if you will? Like are they helping to sell the solution? And then number three would be on the monetization. Should we think of this as more as like an OEM relationship where the customer is NetSuite and they're selling the solution to the customer? Or is this just a way for you guys to address existing NetSuite customers directly with a solution that's already embedded into something that they're using already? That would be amazing.

René Lacerte, Chairman, CEO and Founder

Thank you, Keith, for your question. It's great to hear from you. I will address your question regarding Embed, as it plays a crucial role in our strategy and sets us apart. To start with, the Embed 2.0 platform allows us to integrate APIs into the experiences that our partners are developing. If you're a NetSuite customer, you will have a comprehensive ERP to manage your P&L, and now you can make payments through BILL right within that system. Initially, this will include traditional payment options like check and ACH, with virtual cards and other payment types to follow. From a go-to-market perspective, we've gained valuable insights from our partnerships with various financial institutions. We are collaborating with NetSuite to enhance their go-to-market strategies. The product integration will be a crucial aspect of the user experience, and there are numerous opportunities. Following the announcement made at SuiteWorld, where Evan and I spoke, we plan to leverage our knowledge of our products and collaborate closely with NetSuite's team. Regarding monetization, these partnerships will operate on a revenue-sharing model, providing incentives for both parties to maximize transaction volume on the platform. This alignment is key for a successful partnership. Looking at what differentiates us in the market, we have always aimed to connect with customers where they are. We recognize the challenges in reaching SMBs and mid-market companies amid a busy landscape, so we strive to be present where customers seek improvements. Our partnerships, such as the one established with CPA.com in 2008, have enabled us to serve over 9,300 firms and learn from them. We have built a two-sided network that helps us connect with customers effectively. Our recent partnerships have opened doors to nearly 1 million SMBs, with over $1 trillion in spending potential, offering us significant opportunities. Why do these partners choose us? It's mainly due to the advantages of our platform developed over the years, which highlight five key aspects. First, our platform is user-friendly. The Embed 2.0 platform allows partners to easily incorporate APIs and features, making it accessible from day one. Second, our data scale is unmatched, enhancing our ability to provide better experiences for customers by managing risks effectively. Third, we offer a comprehensive range of payment products, which keeps customers within their applications for all payment needs. Fourth, we possess substantial knowledge of financial operations for SMBs and mid-market companies, enabling us to tailor experiences that suit their requirements. Lastly, our company culture emphasizes partnership, ensuring that our partners succeed. When these factors combine, we offer a unique serving approach that few in the market can match. I appreciate the initial question and want to emphasize how valuable this is for BILL, and we are very excited about it.

Keith Weiss, Analyst

It definitely sounds exciting. As a quick follow-up, how expansive could Embed 2.0 be? Should we expect to see dozens of partnerships like this, or will it be a more narrow focus on a group of key partners?

René Lacerte, Chairman, CEO and Founder

The capability of the platform can support numerous partners. Our focus will be on ensuring that the partners we choose can truly drive value for BILL and our shareholders. Therefore, we are prioritizing partnerships that make sense strategically. There will be opportunities, including for some of our existing customers, to utilize the APIs we offer as part of Embed 2.0. I view the platform as scalable and capable of supporting whatever the market demands, but we will remain focused on generating value for our business and our shareholders.

Spencer Anson, Analyst

I was just hoping to get an update on your invoice financing initiative. How has the program been scaling? And what are the key levers you have for driving expansion there?

René Lacerte, Chairman, CEO and Founder

Thank you for the question. So we are super excited about the full portfolio of products we have. This one, invoice financing is great for suppliers, especially smaller suppliers that are on the network. We continue to see strong growth. I think one of the ways that we define our growth is in the emerging payment portfolio of products, and this would be a part of that. I'll let Rohini kind of give some of the specifics on that category as a whole, but we continue to see strong growth, and we think it's an important part of the overall product suite we offer.

Rohini Jain, CFO

Yes. I can add a couple of things on invoice financing. As Rene mentioned, it is a really important part of what we call our emerging ad valorem portfolio, which is now becoming a material part of our AP/AR transaction overall offering from a revenue perspective. So we discussed last quarter as well that we're not going to discuss individual pieces of the portfolio and each of the products. But overall, this emerging portfolio nearly grew at 40% last quarter in Q1 year-over-year. So very exciting growth in that portfolio as the rest of the ad valorem portfolio continues to stabilize. The other thing that we are keeping in mind is the profitability balance with the growth. So we want to continue to be thoughtful of which risk tiers we take on with the invoicing portfolio, and we are pricing them appropriately to cover for the risk and the cost that comes with it, and that's going to be a real focus. So there may be some places we do trade-offs and just not follow rapid growth but balance it with the profitability outcomes. Congrats on the strong start to the year.

Bryan Keane, Analyst

Congrats on the solid results. I'm going to ask on the AR/AP kind of that take rate. Looked kind of flattish sequentially, but you guys are kind of reiterating kind of expect kind of the same kind of improvement that you saw last year. Can you just talk about some of the initiatives that are going to drive that take rate forward and how you feel about it after the first quarter going into the second, what we can expect?

Rohini Jain, CFO

Yes, I can take that, absolutely. So we had said last quarter that the AP/AR take rate will be similar expansion to last year, which was roughly 0.4 basis points of expansion. So we continue to reiterate that guide. In Q1, you saw very similar expansion as well. In Q4 last year, we had mentioned that AP/AR take rate was strong, and some of that was driven by the increased activity in international FX, where we saw some initial volume from pull-ins due to tariffs that were expected to happen. So we saw that normalize as we came into Q1. The numbers were very close to where we expected. And going into Q2, the only part of seasonality that I want to point out is that we see additional TPV coming into Q2 in the AP/AR portfolio, and that's largely as people are closing the December year. We see an increase in TPV largely driven by the ACH volume and checks in some cases, which is lower monetization. So the take rate in Q2 goes down sequentially. But overall, it doesn't have an impact on the revenue, increased TPV and lowered math of the take rate. And as I look forward, we are seeing some green shoots. Our emerging portfolio, as I mentioned, continued strong momentum. The revenue there grew nearly at 40%, and that will continue to drive the take rate expansion. In addition, we are in early stages of SPP, which is an important strategic addition to our portfolio as well. And as we are seeing, the value is resonating with the large suppliers. So as we exit this fiscal year, we expect it to start contributing to the take rate expansion as well.

Tien-Tsin Huang, Analyst

Just thinking about the shift to larger clients, it feels like maybe you're leaning a little bit harder into that. Correct me if I'm wrong there. Just overall, how might that impact the P&L and some of the KPIs? And also for the smaller clients that you're previously going after, are you going to assume that the partner channel will pick up some of the slack there? I'm just curious how those will be addressed looking ahead.

John Rettig, President and COO

Yes. Thanks for the question. Yes, our mid-market focus, ultimately, we think has the impact of driving stronger engagement, retention, and growth from clients who adopt more of our solutions. So we're increasingly rolling out products in support of larger businesses. And I think we had several comments in prepared remarks that talked about quality of revenue and how we're making investment prioritization decisions based on improving the quality of revenue and where there are trade-offs that we need to consider, we're going to prioritize revenue growth, quality revenue growth over just pure customer acquisition, number of customers. So that shift to increasing investment in this mid-market segment ultimately supports ARPU expansion and other areas of revenue growth. And the economics typically work out for us very good. We have strong unit economics. We have very good lifetime values because of multiproduct adoption and higher TPV per customer from this mid-market segment. So we think, as Rohini mentioned, our focus on balancing profitability and growth, it's additive to that priority that we have.

Tien-Tsin Huang, Analyst

Got it. Yes, I just wanted to clarify so that helps. As a quick follow-up, regarding the agent question, I know it was asked a few times differently concerning monetization and other aspects. If there's a significant amount of savings that you're offering to clients, including the W-9s, it seems like you could benefit from some of those savings. Is that how you're considering the pricing around that, or is it more about just reducing delivery costs? Also, is there a pipeline of more agents that we can expect this fiscal year or possibly even sooner?

René Lacerte, Chairman, CEO and Founder

Yes. At the highest level, the agentic approach is essentially what we've been doing all along, which is to simplify processes for businesses, saving them both time and money because time is money for them. Our primary goal is to ensure we create a great experience, as this not only allows us to reach more customers but also enables us to charge appropriately for the value we're providing. So, Tien-Tsin, I believe you will observe both of these aspects in action. We anticipate these agents will assist us. One such agent is the onboarding process for SME customers, allowing them to automatically receive cards and virtual cards for their suppliers just by uploading and reviewing prior expenses to drive real-time volume for those customers in the early stages. Therefore, you should see that the agents will stimulate activity on the platform and present opportunities for us to appropriately charge for the value we create. We are still in the early stages of this, and John is leading a broader pricing strategy that will integrate these developments as we move forward. As for the pipeline of agents, I want to take a step back. In the May quarter, we mentioned - actually in August - the capabilities of the AI platform that we developed last year to enable our teams to act quickly on ideas and opportunities they identify. We expect a significant number of agents to emerge, and we will ensure they are organized into the right areas of the product to avoid overwhelming anyone thinking about our plans. However, there is tremendous potential for us to leverage our expertise built over decades in payments and volume to drive even greater efficiency for SMEs. We are very excited about this, our teams share that excitement, and we look forward to launching these initiatives as we continue to utilize our data and capabilities.

Rohini Jain, CFO

Yes. Can I add some more color here? Tien-Tsin, we are also thinking about a two-pronged approach here, right? There are some agents that are very key to our products and are essential agents to what we do, and they will be included and it's sort of given to all of the users of the product. But that will provide us opportunities to create more pricing on the same subscription plans because we're now adding more value. Additionally, we also will have higher-value agents that will be priced based on access and how much you use it. So this will be a two-pronged approach that we are pursuing right now.

Christopher Svensson, Analyst

I was hoping to get a little more detail on the BILL Cash account. It sounds super, super interesting. John, I think you had that one quote from a customer, but would love to hear a little bit more about the earlier feedback that you've gotten. And then you also mentioned revenue benefits both to customers and to BILL. So I would love to hear about both sides of those coins, especially with regards to how your revenue generation might benefit from this.

René Lacerte, Chairman, CEO and Founder

Thank you, Nate, for the question. I'll start and then I'll let John cover anything I missed. To remind everyone who may not have followed BILL for as long, our original name was Cash View. The reason for that name was the pain point I experienced while running my previous start-up; I needed help managing cash flow, which included payables, receivables, spending, expenses, and the treasury services associated with cash accounts. This is a strategic part of our mission to simplify connections and transactions for businesses. We've been working on regulatory and product perspectives to get the product moving, and we're thrilled about it, as it will save our customers a significant amount of time and offer them clearer insights into their operations. When we think about this as the first step towards world-class treasury services, having an operating account where all transaction details are visible is something that businesses currently lack. With the BILL Cash Account, customers will have visibility into who they paid, when they paid them, the amounts, and the supporting information for each transaction. This feature provides a unique advantage for understanding cash flow. Additionally, having cash in the BILL Cash Account allows us to facilitate faster payments, which is crucial for small to medium-sized businesses. This capability enhances our potential to incorporate offline payments into the BILL ecosystem, which is essential since we recognize that transactions occur outside of BILL. We want these transactions to utilize our platform due to the advantages we offer in tracking, managing, and gaining workflow efficiency. Having the cash account also means customers can use the BILL platform to make payments across ten different payment methods almost anywhere in the world, often with next-day or real-time processing, depending on the service used. This is a significant benefit for our customers. As highlighted by Steve Chaney, a customer who started six years ago without any users on the platform has now grown to 1,300 clients. This reflects his commitment to supporting nonprofits and churches across the country, which speaks to the impact of our product development. Now, regarding the business aspect, the revenue opportunity is significant for both BILL and our customers, as it allows them to earn interest on their operating accounts, which is typically not available. This presents a chance for businesses to gain from their working capital. For us, typically, funds on our platform are held for 2 to 3 days, but with the BILL Cash Account, those funds can remain in the account for however long customers choose to manage them, whether it be 2 weeks, a month, or longer. This experience will provide us with a different revenue opportunity compared to the float revenue we currently generate. We're excited to bring this to market, and we're looking forward to expanding it to more customers, with updates to come as we progress. John, over to you.

John Rettig, President and COO

Yes. And just one thing to add on the economics, the monetization associated with the product. One of the things that we're seeing with the early adoption of the rollout here is that having an integrated cash account is likely to bring more TPV onto the platform. And as Rene said, it stays within our ecosystem for longer. So that additional TPV from offline to online in the BILL platform creates an opportunity for incremental ad valorem adoption. So that's the primary monetization method. And the secondary one that Rene mentioned is by having balances in our system for longer, that creates an incremental float revenue or transaction revenue stream for us as well.

Rohini Jain, CFO

Yes. So I'll make this quick. We have demonstrated a strong track record of expanding profitability, and we're looking at all the levers at our disposal right now. And this is one of the critical pieces of our overall spend portfolio. So what we're thinking of doing is evolving the reward structure to tie in more directly to the revenue and the overall economics that we get from the customer and not just spend. So we're being very selective in how we will, going forward, use the rewards as an acquisition tool for high-quality and high monetization customers. And if we have to, we will make disciplined trade-offs to drive that profitability growth. So we believe that this will result in rewards flattening out over time and then declining as a percentage of TPV as we exit the year.

René Lacerte, Chairman, CEO and Founder

Thank you, Nate. I think we're out of time, so I want to thank Lydia and everyone for joining us today. I appreciate our teams for their strong execution and discipline while continuing to innovate. The initiatives we are pursuing are leading to significant profitability improvements and positioning us well for sustained, profitable growth in the coming years. Have a great evening. Thank you.

Operator, Operator

This concludes today's call. Thank you very much for joining. You may now disconnect your lines.