Q2 2021 Bill.com Holdings Inc Earnings Call
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Income.
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Good afternoon, and welcome to Bill Dot Coms fiscal second quarter 2021 earnings Conference call.
Joining us today for today's call are bill Dot Com CEO Rene on the third and CFO John Rettig.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session. You will meet the press star one on your telephone if you require any further assistance. Please press star zero with that I would like to turn the call over to Karen Samsung for introductory remarks.
Karen.
Thank you operator, welcome to build Dot com its fiscal second quarter 'twenty 'twenty One earnings conference call. We issued our earnings press release, a short time ago and furnished the related form 8-K to the SEC. The press release can be found on the Investor Relations section of our website at Investor Day, Bill Dot Com with me on the call today is for naval Sir.
<unk>, Chairman, CEO, and founder Phil Dot Com and John Rettig.
Decorative vice President and CFO before we begin please remember that during the course of this call. We may make forward looking statements about the operations and future results of Bill Dot com that involve many assumptions risks and uncertainties. If any of these risks or uncertainties develop or if any of the assumptions prove incorrect actual results could differ materially from those expressed or implied by our.
Forward looking statements for a discussion of the risk factors associated with our forward looking statements. Please refer to the text in the Companys press release issued today and to our periodic reports filed with the SEC, including our most recent annual report on form 10-K, and quarterly reports on form 10-Q filed with the SEC and available on the Investor Relations section of our website.
We disclaim any obligation to update any forward looking statements on today's call. We will refer to both GAAP and non-GAAP financial measures. The non revenue financial figures discussed today are non-GAAP unless stated that the measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures.
Now I'll turn the call over to Rene Rene Thanks, Darren and good afternoon, everyone. Thank you for joining US today I hope that all of you and your families are in good health and doing well.
In this uncertain time, we are inspired by the resilience, we have seen amongst small and mid size businesses, they rebound and adapt to this pandemic induced environment.
Good luck Com has always been the champion for Smbs.
Sponsor will for generating approximately half of the U S GDP and create jobs drive innovation and at the heart of their local communities are.
Our mission is to make it simple for businesses to connect and do business. So that they can focus on what they do best.
Our platform simplifies a very complex process financial operations and payments, we've created an easy to use platform that automates financial processes and make BW payments simple fast and secure.
With more than 100000 customers and $2 5 million network members. We believe we are the leading digital payments platform for Smbs and operate one of the largest <unk> networks in the United States.
We take seriously the trust the customers and network members have placed on our platform, allowing us to be a significant part of their digital transformation.
<unk> for our platform continues to be strong as evidenced by our Q2 results across all our key financial and operating metrics.
We delivered very high growth in Q2, including core revenue growth of 59% year over year.
Transaction fee growth of 98% year over year, and total payment volume growth of 40% year over year.
In addition, we exceeded $50 million on core revenue in the quarter for the first time and had an annual <unk> run rate of $140 billion.
These results demonstrate the strong adoption and scale of our platform as well as our successful execution against our initiatives to expand our platform and extend our reach to many more customers.
Such initiatives, including expanding our payment offerings building direct relationships with network members, increasing our reach through strategic partnerships and continuing our investments in platform and people.
Because of these initiatives and our solid execution, we delivered record total payment volume accelerated <unk> growth in Q2.
We had a great pace of new customer additions and higher customer retention rates and in addition, we continued to drive strong adoption of our newer payment types, especially virtual card and cross border payments. These factors contributed to our doubling of transaction revenue over the last 12 months.
And we're just beginning there is a significant market opportunity of 6 million businesses with employees in the U S and more than $20 million worldwide and we believe the vast majority of them are still using manual processes.
We're in the beginning stages of the digital wave in our proud about the role we are playing to help small and midsize businesses accelerate their digital transformations.
Our platform has helped businesses and organizations, such as United Fire and Mongo day digitally transform their businesses.
The fire as a family on business that provides maintenance testing and inspection for fire equipment at commercial businesses.
Theyre long time accounts left the company Theyre trusted var partner recommended that United fire implement <unk> Dot com.
Using dot com and sage intact, United Fire's employees have been more efficient working from home than in the office.
The dot com was simple for them to implement and use and thats provided crucial insight from running a business during all the recent uncertainty and shutdowns.
United Fire saw immediate success with Dot com and was able to cut their time spent on AP in half and reduce time spent on approvals by at least 50% with.
With dot com. They can now approved 20 payments in less than 30 seconds.
Another example is Mongo day, a U S based non profit conservation and environmental news platform that produces original reporting in multiple languages by leveraging over 500 correspondents and approximately 70 countries.
Before Bill Dot Com Mongo day spent a lot of time disbursing payments through a number of online payment systems and banks.
In addition to the time consuming management of these diverse platforms. They were incurring significant wire fees using bill Dotcoms Cross border service Mongo day has achieved cost savings of approximately 50% on international wire transfers.
With access to timely and complete transaction information through the Bill Dot com platform, they've reduced their audit time by at least half.
Bongo day estimates they have day that the 25 hours per month due to automation and having instant access to their payment information provided and more time to focus on their mission.
We are working on a number of initiatives to further strengthen our platform and expand our market reach.
These investment initiatives reflect our continuous effort to enhance our customers experience and satisfaction and to attract new customers.
Our work to provide increasing value from the small business community is never done.
One of our top investment initiatives is expanding the payment offerings on our platform.
We offer a broad array of payment methods. So we can provide the best service convenience and speed for our customers and network members.
Over the last few years, we launched several faster payment offerings, including virtual card cross border payments and instant transfer, which is our real time payment product we're.
We're investing in these offerings to offer more choice for customers increase simplicity and drive adoption.
For example, due to the strong demand we've had for cross border payments. We recently added Citibank worldly as a second partner for processing transactions I.
Having multiple partners provides us with a more resilient service faster delivery speeds and competitive pricing for larger transactions and.
In addition, we are expanding our capabilities in the real time payment space through additional partnerships for our instant transfer product that will have more to talk about over the next few quarters.
Our recent initiatives that bring supplier enablement in house are going well and have driven increased adoption of electronic payments.
These initiatives helped drive our Q2 transaction fee growth of 98% year over year and continue to gain momentum.
Given our success with driving virtual card adoption and cross border payments through our AI sales marketing and customer support initiatives. We're now leveraging that playbook from our real time payments to network members.
These actions also enable us to build direct relationships with network members and provide us a source of new customer prospects.
We are also continuing to expand our market reach to mid market customers by adding new integration with mid market accounting software.
We currently serve mid market customers with the integrations to stage intact, Oracle Netsuite and Intuit's Quickbooks enterprise on.
I'm happy to announce that we are building integrations with both Microsoft dynamics business Central and Great Plains.
Tens of thousands of mid market companies rely on Microsoft dynamics ERP systems. So we expect these integrations to allow us to better serve these companies we plan to launch this product integration in the second half of calendar 2021.
We're also investing to expand our strategic partnerships with financial institutions.
These partnerships reduce our customer acquisition and support costs and significantly extend our reach to small and midsize businesses.
In Q2 Wells Fargo launched our integrated offering bill manager through their commercial electronic office digital banking portal.
We're beginning our go to market strategy with Wells Fargo and look forward to serving these customers.
We currently have white label offerings with the top three banks in the U S. JP Morgan Chase Bank of America and Wells Fargo.
During the quarter. We also continued to make good progress on the design development and integration of an SMB offering with one of the largest financial institutions in America as previously discussed.
We look forward to launch on this later in calendar 2021.
Another important part of extending our reach is our ability to enable accounting firms to manage their multiple clients with an accountant branded experience.
<unk> are core to our distribution strategy as trusted advisers accounts are uniquely positioned to guide businesses on the digital transformation path.
Customers acquired through this channel has very high retention rates since they are accounted as one of their most trusted long term advisors.
We continue to see strong increasing adoption by our existing firms, while we continually add to our base of over 5000 accounting firms, including 80 on the top 100 firms.
Through our product development sales marketing and customer success initiatives, we are partnering with more firms acquiring more clients at firms in driving higher transaction volumes.
In Q2, we extended our accounts channel offering with the bill payment solution, specifically package per wealth management firms and family offices.
This new offering was driven by demand from wealth managers and accounting firms you wanted to use bill dot com to better serve this unique client base.
This extension into wealth management demonstrates the power and flexibility of our platform.
We're pleased with the early traction we're seeing with this new offering which expands our addressable market beyond businesses to wealth management firms and family offices.
I'd like to provide an example, cornerstone family office was an early adopter of our platform within the wealth management segment cornerstone provides comprehensive wealth administration services to high net worth families.
Prior to <unk> com for a number of their families invoices and checks would be carrier back and forth between families in their office.
Cornerstone adopted dotcom to achieve their goal of creating a more efficient process with the added benefit of providing critical security controls and robust auto trials with.
With Bill Dot Com cornerstone has been able to cut their time spent on AP by at least 40% provide a better overall experience for their clients and have more new clients without adding staff.
Turning to our own operations for a moment, we continue to invest on our team even in this remote environment, we have been able to recruit and onboard great talent in the second quarter, we hired 78, new people, bringing our team size to more than 700 full time employees.
We also added a new member to our board of Directors, Steve Fisher as the former CTO of ebay and EVP of technology as Salesforce Dot com.
<unk> has built some of the world's largest technology and payments platforms and develop multibillion dollar businesses.
I am excited to work with Steve and to add his deep engineering and product development experience to our board.
We have an incredibly talented and diverse board and we are delighted to have them on our journey to make it easy for businesses to connect and do business.
In closing I'd like to call out the breadth of our platform.
Power's financial operations for organizations, ranging from very small businesses to mid market companies and serves as branded offerings for financial accounting and wealth management partners large and small.
We have a very large market opportunity and the right platform strategy partnerships and team to capitalize on it.
I'd like to thank all of our Bill dotcom employees for their dedication in serving our customers and each other.
The other we've enabled our customers to adapt quickly to the pandemic and accelerate their digital transformations.
Dot com has an exciting future as we help businesses simplify their financial operations. So they can focus on their core business now.
Now I'll turn the call over to John to review our financial results John.
Thanks Renee.
Today I'll provide a brief overview of our fiscal second quarter 2021 financial results and discuss our financial outlook for the fiscal third quarter of 2021.
As a quick reminder, today's discussion includes non-GAAP financial measures.
Please refer to the tables in our earnings press release for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure.
With that background, let me turn to our financial results.
Q2 results exceeded our expectations across all areas of the business driven by strong execution from all teams and improving trends with our SMB customer base.
Our platform is helping many businesses start their digital transformation and adapt to the new realities of a remote working environment.
The initiatives, we have to expand our platforms payment offerings extend our reach with strategic partners and build direct connections with network members are paying off and we experienced strong growth in Q2 across all of our key financial and operating metrics.
Total revenue for Q2 was $54 million up 38% year over year, as new and existing customers leveraged our platform for their financial operations.
Core revenue, which represents subscription and transaction fees was $52 3 million in Q2 up 59% year over year.
This significant growth acceleration compared to the 53% year over year growth in core revenue last quarter was ahead of our expectations.
To provide additional color on core revenue subscription revenue in Q2 increased to $26 6 million up 33% year over year.
This growth was driven primarily by the increase in the number of customers on our platform.
Transaction revenue increased to $25 7 million in Q2 up 98% year over year, driven primarily by higher average revenue per transaction, which increased 71% year over year as well as an increase in the number of transactions, we processed in the quarter.
Transaction revenue now represents 49% of our core revenue up from 40% a year ago.
Transaction revenue growth is being driven by increasing payment activity by our customers leading to total payment volume growth and strong adoption of virtual cards in cross border payments, both of which carry higher revenue per transaction than fixed fee payment methods like checks in D. C. H.
We also experienced a stronger than usual seasonal increase in payment activity in December we believe in part due to pent up transactional activity from earlier macro related payment delays and this resulted in both TPP and transaction fee revenue that were well ahead of our estimates.
We believe the increased payment activity is an encouraging signal that our customers are rebounding.
Moving to float revenue, we generated $1 7 million in float revenue in Q2.
Our annualized rate of return on customer funds held in Q2 was approximately 35 basis points slot.
Slightly above our estimated range for the quarter and down from 62 basis points last quarter.
Float revenue was above our expectations, mainly due to the increased customer fund balances we experienced throughout the quarter as a result of the strong <unk> growth we experience.
The reduced yield reflects the low current interest rate environment, and maturing investments being reinvested at lower rate levels.
We expect further quarter over quarter yield declines in the next two quarters.
Turning to an update on our key business metrics, we ended the quarter with 109200 customers up 27% year over year.
During the quarter, we added 5600, net new customers, which was well above our expectations as we experienced broad based demand and higher retention rates across all channels.
We are pleased with the breadth and diversity of our distribution channels, where our horizontal go to market approach is a strategic advantage and results in no significant customer channel concentration.
Over the next few quarters, we continue to expect net customer adds to be lower than in recent quarters. Given we're past the initial pandemic tailwind and we've been shifting our customer acquisition focused away from the smallest of businesses.
Moving on to total payment volume, we processed $34 $8 billion from <unk> on our platform in Q2 up 40% year over year and 21% quarter over quarter.
Our strong sequential TPP growth indicates that smbs are getting back to more normalized business activity. Despite the macroeconomic backdrop and this is leading to strong payment activity.
Looking ahead to Q3, we expect <unk> in the March quarter to be down slightly from the December quarter due to seasonality.
We processed $7 2 million payment transactions during Q2, which was up 16% year over year.
We experienced an 11% sequential increase in transactions, which is very encouraging as we've seen the number of transactions per customer increase for the last two quarters, although it's still about 10% below pre pandemic levels.
Moving on to gross margin and our operating results our non-GAAP gross margin for the quarter was 77, 3%.
Slightly ahead of our expectations as a result of the strong transaction revenues from variable price products, which generally carry higher margins.
We continue to expect gross margin in the range of $75 to 77% in the near term primarily as a result of infrastructure investments, we are making to support our financial institution partners as well as reduce float revenue from the low interest rate environment.
R&D expense was $17 8 million for the quarter were 33% of revenue compared to 31% of revenue in the second quarter of fiscal 2020.
We continue to invest in additional hiring in R&D to support our product roadmap prepayments innovation improvements in the user experience and simplicity and product development work relating to our new financial institution partnerships.
Sales and marketing expenses were $12 6 million per the quarter or 23% of revenue compared to 30% of revenue in Q2 of fiscal 2020.
As we discussed previously we're being vigilant on our sales and marketing expense.
G&A expenses were $14 million for the quarter or 26% of revenue compared to 29% in Q2 of fiscal 2020.
The prior year quarter was the first quarter that reflected public company expenses and since then we have started to realize some economies of scale in G&A.
As a reminder, unlike many other software companies, our G&A expenses reflect our investments in risk management and regulatory compliance.
Which are a core part of our competitive advantage related to our payments business. Looking ahead, we will continue to invest in our risk and compliance capabilities, but expect to achieve economies of scale over the longer term.
In Q2, our non-GAAP operating loss was $2 7 million versus $4 5 million in Q2 of last year and our non-GAAP net loss was $2 1 million or a loss of <unk> <unk> per share based on $81 5 million basic weighted shares outstanding.
Because we had a net loss on a GAAP basis, our diluted share count was the same as our basic share count for both GAAP and non-GAAP EPS calculations.
Turning to the balance sheet, we ended the quarter with over $1 7 billion in cash and cash equivalents and short term investments, which includes $1 billion of proceeds from our convertible note issuance during the quarter net of issuance cost and the cap call transaction.
As of December 31, 2020, we had $2 2 billion in customer funds on our balance sheet, which was up almost $550 million or <unk>, 33% from the end of Q1.
Now, let's move to our financial outlook.
Based on our solid execution in Q2, and the strong trends, we're seeing in our business, we're entering Q3 with momentum.
Our expanded payment offerings and go to market initiatives and strategic partnerships are driving high core revenue growth through customer acquisition increased platform adoption and a mix shift to higher revenue payments.
I will now provide an outlook for our fiscal third quarter of 2021.
For fiscal Q3 total revenue is expected to be in the range of 53, 7% to $54 7 million. We expect core revenue in the range of $52 nine to $53 8 million, representing our views at the momentum from Q2 will continue in the current quarter.
We expect float revenue in the range of 800000 to 900000, which compares to $5 1 million a year ago.
Float revenue assumes that the fed funds target rate will continue to be zero to 25 basis points during the March quarter and that our yield will be in the range of 15 to 20 basis points.
Regarding our planned operating expenses, we will continue to develop our platforms capabilities and invest in R&D to support product development work relating to our new financial institution partnerships.
We will continue our disciplined approach with regards to sales and marketing investment and will increase our investment as opportunities and unit economics dictate.
On the bottom line, we expect to reported non-GAAP net loss in the range of six 9% to $5 9 million and non-GAAP EPS loss of eight to seven on a per share basis based on a share count of approximately $82 5 million basic weighted average shares for Q3.
In addition in Q3, we expect stock based compensation expenses of approximately $11 million to $12 million and capital expenditures for our new headquarters and other requirements to be approximately $5 million to $6 million.
In closing, we're pleased with our increasing momentum in the growth opportunity fueled by the need for businesses to transform their financial operations.
We're in a strong position with a leading platform that simplifies financial operations and customers Trust us to facilitate more than $10 billion of payment volume a month.
We're also delivering very strong core revenue growth and accelerating transaction revenue growth. There continues to be macroeconomic uncertainty ahead and it remains to be seen the impact. This will have on smbs, but we are committed to investing strategically to expand our reach and our platform's capabilities, which we believe will create a durable long term growth runway.
Now I will open up the call for your questions operator.
If you'd like to ask a question Inc.
Press Star one on your keypad in the interest of time, we ask that each person ask one question along with one short follow up question. If we have more time after all questions. We'll open it up for additional question.
Your first question is from the line of Darrin Peller from Wolfe Research.
Hey, Thanks, guys nice job.
Just wanted to start off with when I look at the actual transaction revenue and I know you mentioned.
Trends were strong on the on the <unk>.
<unk> side, but this will yield also came in well, which as you mentioned underscore the success youre, having in supplier enablement <unk> Cross border. So if you can just give us a little more color on what's happening there and what kind of progress has been made even over the last few months and what you expect in the next few to keep that going.
That would be great to hear.
Thanks Darrin.
Made great progress on understanding the go to market with respect to the suppliers both for the virtual card product, we have as well as international payments and helping.
Suppliers internationally for example, I choose to be paid in the local currency debt.
We're still learning and Theres lots of opportunity there. So what we've said in the long term is that we believe virtual card penetration will be in the 5% to 10% range and that international payments will be in the 10% to 20% range and we have no reason to say, it's any different we believe and the focus that we have.
No that makes sense, but I mean in terms of specifically well, let's just hone in on cross border.
What kind of tools are you taking to enable that if you can just give us a little more of an idea.
What steps are being taken and how the responses from the end market from national suppliers internationally. Thanks, again, guys I'll turn it back to Jay.
Yes, there's a couple of components right there as first getting our customers.
No and use our product for their cross border payments. So we've done things inside the product we've done marketing and product messaging. We've got on sales techniques. All of these things combined with some AI to kind of look at the most likely customers to do activity is something that we're focused on.
When we look at the FX penetration, which is also an important part of that part of our business. We are also using similar capabilities across the company to drive adoption of local currency payment by the suppliers. So taken the control so to speak away from the payer.
And putting in the suppliers and so lots for us to continue to do and to grow but we feel like we have a good handle on all the things that are kind of the variables there, but we'll make progress as we move forward.
Alright, that's great. Thanks, a lot guys.
Thank you your net.
Question comes from the line of Manny.
Manny from Jefferies.
Hey, good afternoon, Thanks for taking my questions just absolutely.
Absolutely great quarter, So maybe first one for you Renee.
You talked about the different types of payment methods and maybe just a follow up I'm curious if your if youre seeing a reaction to one versus the other being stronger it sounded like it was fairly strong across the board, but when you think about virtual card versus real time pay how are customers evaluating that option.
Great question Smart, we have one of the things that's really powerful about the businesses that we work hard to make it to the suppliers and customers get to pay and get paid how they want to get paid.
And while we've been able to learn across the rollout of our virtual card product is that suppliers that take credit cards. They are comfortable taking credit cards, because they have already made that decision. They want to take more payments that way to simplify the reconciliation to accelerate their payment timing. So those tend to be larger business.
And the supplier network when we look at the real time payments it tends to be smaller businesses that may not rely on card on an everyday basis for collections and we're able to kind of generate interest because if it was going to be a check it would be later and even in HVAC day later and so the opportunity to accelerate payments, we know is important.
I think timing, especially if you think about the pandemic over the last nine months timing as being critical for folks and I think it will always be critical so our ability to accelerate and help businesses pay and get paid.
Short amount of time as possible as I think a core competency and something we will continue to drive.
Great and then John one for you.
Net adds was quite strong and despite that you saw the average number of transactions actually continue to accelerate as far as growth guys is it fair to read through and that that youre seeing larger customer success as well just to maybe help partly explain that nice increase in the TPB per transaction, despite having more transactions in.
Painted.
Yes. So good question, yes, we were very pleased with the net adds for the quarter is ahead of our estimates given our dialogue last quarter in part driven by the strength from our accounting channel partnerships and interestingly just higher retention across the board customers are sticking with the platform.
And using it more so we think its par.
Partially due to slightly larger customers, having an impact we've talked in the last couple of calls a couple of quarters about.
Additional efforts that we're putting behind mid market customers, but at the same time, we just saw a much higher level of activity payment activity across the board and we think some of that is driven by <unk>.
Call. It pent up demand. We also saw a very strong exit rate in payment volume and payment activity in December we always have seasonal strength, but this is this was in space something we hadn't hadn't seen before so I think across the board.
We benefited from that.
Great, Yes, I'll turn it over the next asset that really nice to see the strong results through tough times.
Thank you.
Your next question is from the line of Brad Sills from Bofa Securities.
Oh, Great Hey, guys. Thanks for taking my question Congrats on a nice quarter.
Moving to ask about the comments on move up moving up market. Obviously some of these partnerships.
You'd be targeting net debt next year customer up in the mid market is there any limit on where you can go when you think about moving up market where is that next year for you and are there any limits to going even further north from there.
Thanks, Brad and that's a great question. So one of the things that we focused hard on is building a platform that scales from small businesses all the way up to mid market is how we define that.
We think about this segment from mid market.
Maybe just some data out there the bureau of Labor Statistics would have 20000 businesses north of $100 million in revenue. So that's not what we're targeting we're targeting business is smaller than that right. So.
When you ask a question around the limit we think we built a platform that really scales for.
Businesses across the spectrum no matter the industry no matter the size just not kind of those enterprise customers. If you will.
Got it great. Thank you so much and then.
Back to the AI.
Clickability, you've obviously seen some real success here with the supplier enablement driving adoption of the card can you elaborate a little bit on what that means for cross border. How are you applying.
AI to that business.
Driving adoption there. Thank you so much.
Yes, I think a lot of the AI capabilities, we have to go back to the source documents that we have on our platform and you think about what we do on our platform as we enable all the documents that come in for our business and invoice that purchase order all of that information is coming in and it's an opportunity to be able to scan that and understand it.
Formation. So for example, with international payments, if the address of the suppliers International well then maybe we have a different product marketing a program or whatever to enable that that supplier to be on our network and so there is opportunities us on people internationally do include.
Count information. So there is an opportunity for us to simplify the AD.
The bank accounts, our suppliers so lots of ways for us to use that source document. In addition to the other way we use AI is just looking at the connections across.
Our networks, so lots of opportunity we're glad we've been investing in that for a number of years and we'll continue to invest in AI platform.
Thanks, so much Renee.
Thank you Brad Youre on.
Next question comes from the line of Josh Beck from Keybanc.
Thanks for taking the question and glad to hear everyone's doing well I wanted to ask just a little bit about.
On the demand environment, obviously the work from home.
All sorts of teams and I think probably within the awareness of this category. So I don't know if you could maybe just qualitatively speak too thin.
Things like pipeline sales cycles, and close rates that youre seeing now maybe versus two six to nine months ago.
And maybe how you expect that to evolve as we go through the year.
I think one of the things that that we've seen with Covid is really just.
On the applicability of our platform does make a difference right. It makes it a lot easier to kind of manage your business from anywhere and so John already referenced and in part that we've seen better retention.
Especially in the early cohorts as a result of a number of things that we're working on but we also can't discount that the environment and the awareness is actually higher so and.
In general I would say that we expect the.
The awareness and the switch so to speak for people to actually ask the question kind of on.
On my business from anywhere like that is going to be there going forward for all time and it wasn't there a year ago and I think that's going to help us continue to create adoption opportunities in awareness opportunity across the SMB landscape.
Okay.
Very helpful and then on the supplier enablement front I know you've had a nice.
Partnership there with companies like Comdata.
Just kind of curious maybe have you been able to close the gap maybe on a lot of the potential overlap between your customer base.
And maybe there is.
Is that another area, where you may be looking to add partners kind of like what we've seen with with cross border.
Yes virtual cards.
Important part of.
The.
Business for us and so when we look at the ways to extend that one of the things. We have done for example, as we did virtual card first with comdata for our direct customers, but we do have virtual card with Jpmorgan Chase, we have virtual card with our American Express partnerships and I think as we move and scale the business over time.
And we will look to continue to add ways to leverage virtual card capabilities of our existing partners and theres opportunities with others as well. So I think theres just a lot of opportunity for us to continue to focus on what it is that suppliers want is they want a payment via the card networks, we wanted to be able to provide that.
Really helpful. Thanks from it.
Thanks, Josh.
Your next question comes from the line of Frank Barresi from Piper Sandler.
Thank you and good afternoon, guys Rene one for you and a follow up for John I wanted to go back to cross border payments I mean, clearly the the interest in this product is stronger than you anticipated youre, adding now Citibank a second partner My question is what's resonating.
What's the pain point is.
Is it is it just a lower cost is it more flexibility.
Drill down into what is resonating most around the cross border payment solution that you have today that that wasn't being addressed for those SMB customers today than quite a quick follow up for John.
Sure. Thank you Brett.
The breadth of the platform ultimately is what's resonating in that would be my high level answer is the ability to be able to track all of your payments the approvals and execute on payment all in one place makes it a lot easier and so if you werent using us for international payment.
Another system.
To find out from the supplier.
They are bank information is and if you haven't had a chance to enter a wire internationally. It is quite complicated a number of different accounts you have to do on the FERC knows that debt as the supplier probably not the debt.
Buyer and so I think the breadth of the platform. The fact that we have a network that lets people enter that information directly. The fact that we have a platform that lets businesses be able to pay from anywhere in the world. So if you're in the pandemic situation and you want to be able to pay your bills from anywhere you can do that from your phone now you don't have to go into a separate.
Experience to create that wire so.
I would go back to just the breadth of the platform on the simplicity and ease of use that we have connecting all of the pieces.
Is what makes it.
A real opportunity for SMB to simplify their lives and to get back to doing what they do best.
Got it.
Back to just the core value prop here of just reducing friction in the system and then John I guess for you on payment volume growth, we're back to kind of pre pandemic levels of 40% debt.
Talked about some day.
Remember seasonality my question is.
Or are we back to pre pandemic levels or again too early to tell given the seasonal lift you saw in December.
Thanks Brent.
Great question, because we saw activity levels that we're way ahead of what we had seen previously just from a seasonal uptick perspective, and it suggests to us debt.
Businesses are more than back to business, but it seems premature to declare.
On the impact of the pandemic over given how early we are with.
With the economic situation.
Vaccine rollout in all sorts of things so theres certainly some unknowns there, but we were really encouraged by the level of activity the level of retention and whatnot given the sort of elevated activity that we saw in the second quarter, particularly in December we would expect our typical seasonal patterns to continue where.
The third quarter is it's usually down a bit in terms of payment volume again seasonal reasons more than anything else, but we're watching it closely.
Hoping to see more signs of this level of activity going forward.
Good to hear thank you.
Your next your next question is from the line of Bob Napoli from William Blair.
Thank you good evening, Renee and John Great quarter.
C.
Question on the platform and <unk> talked a lot about the debt to the platform.
Adding bill payments.
Yes.
What else.
Obviously spending a lot on R&D, but what are you looking to add.
To the platform over the next few years are there other items in the Treasury area Youre looking to add I know you are.
Net supplier financing is something that you've talked about.
In the past.
And then with the Super strong balance sheet is there anything youre looking at to maybe.
Tuck in that you can cross sell that fits with your client base.
Good to talk to you about there's a number of things that when I think about financial operations.
And how much opportunity there is to simplify and automate the financial operations and process businesses. As there is a number of things and one example that we've been investing in recently.
Recently, as obviously the payment rails and for example.
Adding the real time payments capability into a product that we call instant payments and with that.
Using the clearinghouse for example that only gets us to around 50% of the bank accounts in this country that actually leverage or have access to the clearinghouse for real time payments. So one of the things that we're investing in right now is adding debit rails.
When we add debit rails that would get us to all business accounts will have the ability to accept your real time payment if they want that and we're going to do that with an integration through stripe. So that's an example of something that I would say over the coming quarters.
We're working on.
<unk> churn when you referenced kind of the.
Balance sheet.
There's just a number of areas that we think are interesting from financial operations like I said this has been my life's passion around.
The software companies as I've started is to really simplify those operations and so.
We would like to simplify anything from HR to payroll to expense management to spend management.
Ah.
There is lots of opportunities that are somewhat adjacent and then as you referenced there are things that are even.
Further afield from that that we would consider over time so.
Yes, I would expect us to continue to evaluate all of the best ways to integrate those types of products into our platform whether it's through partnerships.
Doing it ourselves or through potential M&A activity.
Thank you.
Quick follow up just on the bank channel.
The.
Three major banks.
I know it takes a while to get the integrations and partnerships rolling but how are you feeling about those partnerships.
Over what timeframe would you expect that to gain momentum.
One of the things from the pandemic.
<unk> has been I think I've referenced on the last call that our partners in particular are very committed to solving this pain point for their customers. They understand that it's not a good thing that their businesses have to operate in an office with filing cabinets and paper check that's 90% of Smbs still use paper taxes.
The primary form of payments, so they understand that and that that commitment that has come out of I would say the pandemic is real and so when we look at the partnerships across our platform whether it's the debt.
Financial platforms that we integrate with the banks that we integrate with our accounting software partners. We see a commitment there that is real and we expect it will continue to grow over time, so nothing to say per se on exactly right. Now just the strength is there and we expect that will continue to grow.
Thank you I appreciate it.
Thank you.
Your next question comes from the line of Scott Berg from Needham.
Hi, Rene and John Congrats on a great question quarter. Thanks for taking my questions I guess I got two quick ones.
On the wells partnership obviously, just started in the fourth quarter and sitting on ramp from here on out from what you've seen already to date is there any reason to believe that the ramp and maybe customer acquisition through that channel will be any different than what you're seeing there.
Partnerships with maybe taking on.
<unk> JP Morgan Chase.
So as a reminder.
The the partnership with as well as with the commercial customers and so when I look across our board at the commercial partnerships that we have with Jpmorgan Chase or bank of America.
We don't see any reason to think that anything is going to be different across all of them.
We're asking that question three years ago, the answer might be different but like I just mentioned.
The commitment that all of our partners have been making this a solution for their customers continues to grow on a day.
Daily might be a dramatic standard that continues to grow.
As we have the ability to serve their customers with better products and better solutions. So I would say, it's a great opportunity in front of us.
Got it and then last question from me is Jon you talked about the true.
Transaction revenue per customer, increasing and we're certainly seeing a shift to other products, but I think it's interesting at least the way I calculate the shift has been most notable.
Since the arrival of the pandemic I guess as you look at your customer base do you see them doing anything specifically different that's maybe in relation to I don't know if that work at home trend et cetera that might be driving some of that shift.
Yes, Thanks, Scott I mean, we do see.
Our sense of urgency from customers, we've talked in prior quarters that that's translated into.
On a slightly higher close rate and faster time to adding users and performing transactions on our platform compared to pre pandemic.
Pandemic times, and obviously as we continue to roll out more payment products, whether its cross border virtual cards or instant transfers or real time payments as Renee talked a minute ago, it's giving more choice to customers and they are taking advantage of that for us. Our business model is such that we have both fixed fee transactions, where we built the business checks in HCM.
And then these newer payment methods that are variable priced in and as customers increase adoption of those products because maybe they're managing cash flows a little bit more closely now in the pandemic than they were were earlier, it's having a positive impact tailwind on on our financial results as well so.
It's pretty amazing the resiliency of the small business customer base that we serve and it's pretty exciting because it's.
We're still so early in penetrating the market and there's a long way to go.
Excellent. Thank you for taking my questions.
Your next question comes from the line of match, the new right from day <unk>.
Alright, Thanks for taking my questions guys and congrats on the quarter.
I guess thinking about those bigger partnerships they seem to be ramping very well in your commentary is certainly positive around that as we think about kind of what the capabilities of our long term for both expansion.
The three major ones, you mentioned and as you look to extend out to other institutions how much opportunity do you feel like is in some new partnerships as well as kind of a wallet share perspective.
And at what you're currently kind of going after the bigger ones versus what you could potentially go after long term.
Thank you Matt.
One of the things I've worked hard on over the last now 15 years is building a broad distribution strategy approach and so having the ability to serve customers through a direct channel to accounts.
Two accounting software partners and through financial stations all of that is super important.
And they all help each other growth Theres awareness thats created by all of those channels that helps each of the other ones did a little bit better and so when I look at the potential of EFI channel.
The banks that we have on debt right now that are partnered with that have a tremendous amount of opportunity just with us focusing on on those and like we've mentioned.
One of the top three.
<unk> made a commitment and is in development.
With us to rollout in the second half of 'twenty, one something for their SMB customers and so that focus will again create more awareness because it's a broader customer base than what we've seen in the past with the commercial customers. So when asked like what's the potential we have a lot of hope and faith.
And belief across all the channels that we serve and all the distribution approaches that we address.
Great that's helpful and then.
Since then as a follow up thinking about how the tax season in general has shifted back towards normal.
Seasonality in April rather than last year's extended term do you expect there to be any major impact.
Over the next two quarters on kind of on individual basis or.
Given the debt.
Primarily in the in the fourth quarter, either way, but it shouldn't have too much on pipe.
Yes, I think the debt.
There is some seasonality that we have in general across the year and I would say last year's seasonality.
Impact of that I would turn to John kind of referenced that there is any seasonality. Once we go back to normal that's worth calling out just the.
The emphasis on the tax season, I think become somewhat distracting for accounting firms.
And who have a tax practice.
We certainly see some of that in the fiscal third quarter current quarter, and maybe a bit more in the fourth quarter. So it's spans kind of late February into early may.
Period, So there is certainly.
We haven't seen anything yet to suggest anything different than our typical seasonal patterns, but there is there is definitely some some impact for us. The fact that we have.
Broad distribution strategy in different channels to rely on.
Debt that impact is probably a little bit muted.
Alright, great. Thank you.
Your next question comes from the line of Chris Merwin from Goldman Sachs.
Alright, Thanks for taking my question I wanted to come back to real time payments and your instant transfer product.
Moving to dive a little bit further into how that's doing so far and I remember.
Actual cargo and that started to ramp it was almost maybe a year plus into the rollout of it that we saw more of the inflection there with all youre doing on supplier enablement now I'm curious, how we should think about a similar ramp in instant transfer should that magnetic will look a lot quicker, but if you could just put a finer point on it.
Much appreciate it thank you.
Thank you Chris Yes, the instant transfer product for US I would say is kind of still on the pilot phase as we understand what the right pricing the right go to market the right product placement all of those things we're still.
Determining and fine tuning and in addition, like I referenced.
Now only around 50% of the bank accounts out there except in instant transfer from the clearinghouse the real time payment network and so as we extend and half the day.
EBITDA rail capability will be able to invest more.
Into the marketing the sales the AI all of the approach that we've used for supplier enablement for cross border payments will be able to invest in that type of marketing and activity sales activities to grow that business. So.
We believe it's going to be Super important when it comes to.
The type of customer and the size of the customer so what I referenced before is that we expect instant transfer to be something that the smaller businesses that are on the network that are in the $2 5 million that may not use card every day for acceptance.
They want to have a faster payment. This is going to be the product for them. This is going to be better than a check and better than <unk> as well and so this is going to be a way for them to accelerate their cash flow and I think she is going to like all things. It takes time to learn how to execute on reached that that customer that segment, but we believe that we are building all the right tools and the.
Platform to make itself.
Okay, Great and then just a follow up for John are you able to update us on what percent of payments are digital now on the platform.
Yes, I think Chris the last number that we disclose was 60%.
Electronic payments and we continue to make progress on.
On that and it continues to move higher it's not materially different.
Our plan is to update that stat on an annual basis, we did some interim reporting as a result of the pandemic, but we have seen good adoption. It's obviously helped by the fact that we keep introducing more payment methods that are on electronics. So we have more choices.
To move away from check payments, so we're continuing to see positive trends there.
Great. Thanks very much.
Your next question comes from the line of Brian Schwartz from Oppenheimer.
Yes, hi, Thanks for taking my questions. This afternoon on just one for Renee and a follow up for John.
Rene just a question on the customer acquisition a lot a lot of commentary on that is it fair to assume that the business saw a meaningful change in the velocity of signing up just larger sized customers. This quarter then.
The business has been seeing in recent quarters.
Thanks, Brian we had fall like John referenced we saw really good adoption across all of our channels and all sizes of our customers.
Our focus and ability to understand how to reach the mid market customers continues to grow as a reminder, mid market customers came we started that folks because they are already coming to us on on the platform right. So when we look at the distribution across we definitely saw.
Strong retention.
That definitely helps the net customer adds.
When you don't have any.
I don't have as much of the attrition that we might have had in a year before so nothing specific to say other than it continues.
Continues to be strong and to build and we get better and better at understanding how to serve the customers on.
On a quarterly basis.
Thank you and then the follow up question for John just the comments about the retention.
Clearly you've done a really good job getting getting increased usage from the install base on that dollar retention is there anything that you can maybe just share either on just.
Qualitatively if not quantitatively on what you saw on the gross retention side is it fair to assume that you also saw improvement on that metric compared to recent quarters.
Yes, Thanks, Brian.
So.
My comments on on the prepared remarks were really directed at the gross retention and how we're seeing customer behavior. We continue to have strong dollar based net revenue retention. It's consists.
Consistent with recent quarters, but we have seen.
A slight increase in.
The annual customer retention rate that we referred to I think the.
The last number that we reported officially was 82% and we continue to see.
<unk>, there, which in this pandemic period when there's so much uncertainty I think for us that's really encouraging to see customers engaging with the platform and sticking with it and taking advantage of the fact that they can really run their business from anywhere at least their financial operations.
Thank you for that additional color, John and great job on the business performance this quarter.
Well go next year.
Next question comes from the line of Tim Mulrooney from Wells Fargo.
Thanks, Thanks, and good afternoon time in range.
One quick question to start thinking about wealth management.
You've talked about now for a couple of quarters.
Any.
I guess anything unique about the go to market there the product delivery.
The sort of the servicing on forwarding just out of curiosity.
And how you think about the ramp up of that channel. It obviously makes a lot of sense to sort of curious if there is nuances to that versus the other channels.
That you are sort of working through and trying to make sure you are ready to deliver on.
Thanks, Tim for the question.
Like many of the things that we've done it.
Sure.
Our entry into the wealth management market is because they were already on our platform.
Many of them on on the platform from the account focus that we have some gallons actually.
Obviously focus on the consumer side with taxes, and sometimes that leads into helping their clients manage their net worth and so.
This expansion into.
The wealth management space really is because the breadth of the platform and because we build something from the ground up to be able to serve the small businesses that we have all the way up to the larger businesses across multiple distribution channels and so.
Things that we had to do to kind of help bringing and make it so that we felt comfortable marketing and selling into the wealth management, where things around security on the auto capabilities that we already had but just kind of packaging that so they understood that they were going to get something that was going to meet the needs of their clients, which obviously is important.
I think from a go to market is going to be continue to do what we already know how to do which is to.
Leverage if you will aggregators like accounts people that are trusted held them at all of their clients. The fact that we have this ability for one console that we call it to be able to manage lots of different clients on your platform to divvy up that work across your employees at the wealth management firm, that's a significant opportunity.
For us to continue to sell those capabilities with the same types of programs that we've done per accounts.
I expect that we'll get better at that each quarter as well.
Great Thats, all I had all the other questions were answered farming. Thanks, so much.
Thank you Tim.
Your next question comes from the line of Jeff Cantwell from Guggenheim Securities.
Thanks, guys I appreciate you squeezing me on a nice results here congrats.
I had to.
Quick question.
To what extent is cross border supplier enablement precursor to international expansion.
Can I ask is because we are thinking about.
It would help to launch the product internationally, because the suppliers that will enable could eventually become customers Im just curious you talked about bolt on a little book. Thanks.
Yes, Thank you Jeff.
Definitely part of how we think about our.
Our strategy for going international there's a lot of things that would be important for us to understand before making that leap, but one of them would be understanding out customers, who use the platform that we have today, so getting suppliers that are being paid by U S companies to engage and choose their local currency as a payment.
Being able to manage that interaction. If you will that will allow us to learn which quarters are our important for U S businesses, where do we develop density.
Where do we see the activity, what's the payment volume life between the quarters all of those things will help us understand.
A good.
Foundation for building our go to market strategy for international.
Growth.
Great. Thanks very much.
Thank you Jeff.
We have time for one last question Ken.
Economists research your line is open.
Hi, John on Renee Good afternoon Hope you hope Youre well, thanks for squeezing me in here.
A lot of my questions were asked already but I wanted to ask about the subscription revenue per customer.
It improved quarter over quarter versus sort of the quarter over quarter decline for last couple of quarters.
So how should we think about that metric trending over time, you mean, how much of that increase is driven by going up market versus some of the simple bill pay customers dropping off.
Yes, Thanks, Ken I mean, there's a couple of dynamics at play there one you touched on with the slightly larger customers that we're having success with and seeing demand from they typically have more users and.
Are often in a higher price point in.
In terms of the cost per user based on the ERP system or accounting system that they use.
That's partially offset these days with slightly fewer users per customer.
Not significant but nevertheless, something that we've noted during the pandemic and so it's a little bit below pre pandemic times, so that softens that a little bit.
Subscription revenues.
Last year, we're certainly supported by.
Higher customer numbers end users and a price increase that we implemented and that's we don't have any price action. This year, so you've seen some.
Some slight.
<unk> deceleration in the growth associated with subscription revenues and we would expect that too to likely continue in the next few quarters and then I think the dynamics change.
A bit once our some of our newer financial institution partners start to come online over the next few quarters.
Really helpful. Thanks, John and if I can just ask.
Follow up I think you mentioned in the past debt most of the increase in virtual card penetration historically.
Historically has come from converting check payments over to virtual card.
So have you started converting each transactions over to virtual cards as well and if so.
How much is that additional ECH opportunity, adding to the increase in transaction revenue and take rate.
Yes.
Youre right. We have done both we certainly started with checks and that continues to be I think the.
The larger opportunity just given how inefficient inefficient checks are for everyone involved whether it's.
On the paying customer or the buyer of the supplier in the financial institution who's doing the clearing and so on and so forth. So I think that's where we see the most traction and Thats, where most of our effort has gone to date. We have started some initiatives to support transitioning ACTH payments to virtual card and we've seen some success there, but I'd say that's not the.
Big driver of our results currently over the longer term as we bring suppliers on board and give them more choices and more control about how theyre going to get paid as Renee referenced earlier, I think that presents an opportunity as well.
Makes sense, thanks, John Thanks for that.
Thank you.
Thank you I will now turn the call back over to Rene on for closing remarks.
Okay. Thank you thanks, everyone for joining today's call and we appreciate your support take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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