Q3 2023 Bill Holdings Inc Earnings Call
Once the transaction is each month for billions of dollars we.
We have built an always on platform with 24 by seven availability in order to deliver the financial piece of mind Smbs need.
This means we have created redundancy through integrations with multiple payment processors to ensure consistency and reliability.
Bill's World class infrastructure and operational capabilities were demonstrated during the recent banking crisis.
Today at the Silicon Valley Bank closure, we committed to our customers that we would stand behind all pending transactions, regardless of the ultimate resolution of the bank situation.
We seamlessly redirected SUV bound transactions to another financial institution partners, so that transactions continued uninterrupted.
We also help impacted businesses stay operational by utilizing our suite of products.
We offered a new way for customers to access capital by pre approving and lines of credit through Debbie provide a solution for debit card users to connect their cards to our pay by card offering and expanded access to bill balance of secure and convenient place to store funds and make fast payments.
Recognizing that businesses want to manage all of their spend in one place we continue to work on creating an integrated customer experience.
The best the Bill and our acquired solutions.
Recently, we unified the look and feel of our <unk> and build solutions across our web and mobile apps.
Later this year, our platform will power, a cohesive and consistent experience and customers will have a significantly enhanced view of cash inflows outflows and open task all in one place.
The consolidated view will enable businesses to gain a more complete picture of their finances and further control of their financial operations by.
By offering enhanced and product discovery and simplified self service product adoption, we believe that we will further unlock our sizable cross sell opportunity.
In addition, we are enhancing our accountant dashboard, making it easier for our 6000, plus accounting firm partners to offer more of our products and provide more strategic value added services to their clients.
We are also continuing to leverage our expertise in developing AI capabilities that make our solutions easier to use more automated and predicted.
We were an early adopter of AI applying it to our large data asset for reading invoices, enabling suppliers detecting risk and managing documents. In addition, we are working on ways that bill can leverage generative AI capabilities to enhance customer experiences.
Turning now to the people front, Ken Moss recently joined our executive team as Chief Technology Officer.
We're excited to have another seasoned executive on the team with experience, enabling breakthrough technology at speed and scale.
Ken brings decades of innovation and leadership experience to bill, including eight years as CTO at electronic Arts, where he led the company through a cloud based transition and pioneer broad uses of data and AI to improve the game creator and player experience.
He also led technology strategies that ebay connecting millions of buyers and sellers to enable online commerce and at Microsoft to you ever saw development engineering with key teams.
Ken will be taking over from Vinay Pi who is retiring.
In closing, we delivered another great quarter with strong revenue growth and expanding profitability.
<unk> value for hundreds of thousands of Smbs with our robust platform that automates finance operations and offers a variety of payment and funding choices Bill serves as the financial nervous system for F&B and connects them with millions of network members I'd.
I'd like to thank our customers and partners for the trust they place in Us and I would also like to thank the build team for their strong commitment to serving smbs.
Now I'll turn the call over to John to talk in more detail about our quarter.
Thanks, Renee today I'll provide an overview of our fiscal third quarter 2023 financial results and discuss our outlook for the fiscal fourth quarter and full fiscal year 2023.
In Q3, we delivered strong financial results that were well ahead of our estimates driven by strength across our multiple revenue streams.
Total revenue grew 63% year over year and non-GAAP gross margin was 87% our highest margin on record.
non-GAAP net income was $59 million or 22% of revenue, which expanded approximately two five percentage points quarter over quarter.
In addition, we delivered our third consecutive quarter of positive free cash flow, which totaled $84 million year to date through March.
Our strong performance highlights the strength of our diversified business model and our commitment to deliver balanced growth and profitability.
Our results were delivered amidst the backdrop of multiple challenges being faced by Smbs, most notably the ongoing macroeconomic headwinds and to a lesser extent the banking uncertainty that materialized in March.
Many of the changing BW spend patterns that we saw last year continued in Q3.
Even though customers continue to face challenging business conditions and are reducing their expenditures engagement with our platform remains strong and shows that smbs drive value from our solutions throughout any business cycle.
For example, on our Bill Standalone platform, excluding financial institution channel customers or <unk>. The average number of transactions per customer was 74, consistent with the March quarter a year ago.
These payments approximately 80% were repeat transactions consistent with prior periods.
Repeat transactions are defined as payments initiated between the same subscribers and vendor within the preceding three months.
Turning to an update on our key metrics and financial results in Q3, we ended the third quarter with 455300 businesses using our solutions.
Bill Standalone customers grew to $197900 up 35% year over year net.
Net new customer adds on our Bill Standalone platform, where 15200, which set a new record.
This includes 3700 net adds from our direct and account channels, which was up slightly from last quarter.
Net adds in the Fi channel were 11500.
Looking ahead to Q4, we expect fewer net customer adds in the Fi channel due to bank of America electing to Sunset. The Bill powered legacy ACTH and check Bill pay solution used by their commercial customer segment.
We have transitioned many of the most active bofa commercial customers to our direct bill platform, where we will be able to deliver an enhanced experience and many more payment choices, including our AD valorem payment and spend management offerings.
Note this will be a one time impact on our customer count in this transition does not impact our partnership with Bofa focused on their small business segment.
For our <unk> spend management solution, we ended the quarter with 27100 spending businesses, an increase of 2004 hundred from last quarter.
Moving on to payment volume during the quarter, we processed $64 7 billion in TPB, well ahead of our expectations, which assumed the TPB trends. We saw late in the December quarter will continue in the seasonally soft March quarter.
We will stand alone total payment volume was $61 billion in Q3, reflecting 11% growth from Q3 of last year and a decrease of 4% sequentially, which was slightly below historical trends.
In addition in Q3, we also had $3 4 billion and card payment volume from our spend and expense management product, representing 63% year over year growth.
Moving on to transaction volumes, we processed $21 4 million payments in Q3. This includes $10 9 million payments on the Bill Standalone platform and $10 2 million spend management card transactions.
Total transaction revenue per transaction was $8 nine.
Reflecting growth of 12% year over year.
For card payments processed through our spend management solution in Q3, we generated gross take rate of approximately 262 basis points.
Now I'll review, our reported Q3 results.
Revenue was $272 6 million, an increase of 63% from a year ago.
Core revenue, which includes subscription and transaction revenue was $239 5 million representing growth of 45% year over year.
Subscription revenue increased to $66 7 million up 28% year over year.
Bill Standalone subscription revenue was $57 6 million, reflecting growth of 33% year over year, driven by our expanding customer base and a price increase implemented in our direct and accounting channels over the last few quarters.
Transaction revenue increased to $172 8 million up 52% year over year as a result of increased spend management card volume strong AD valorem payment adoption and TPB growth.
<unk> Standalone transaction revenue totaled $83 2 million.
Reflecting growth of 41% year over year, and Debbie transaction revenue totaled $88 6 million, reflecting growth of 65% year over year.
Float revenue was $33 1 million.
Our yield was 429 basis points in the quarter.
Shifting to gross margin and our operating results for Q3, non-GAAP gross margin was 87%.
Up two four percentage points year over year as a result of higher float revenue and increasing variable transaction fee revenue.
The last few quarters, we've had a very favorable payment mix and a tailwind from high margin float revenue, which has resulted in peak non-GAAP gross margin, which we would expect to moderate in the next few quarters.
non-GAAP operating expenses were $202 3 million, an increase of just 4% from Q2 due to proactive expense management, including reducing our pace of hiring and closely managing our variable spend.
Rewards costs, which are included in sales and marketing expenses were 48% of spend management card revenue compared to 50% in the prior quarter.
non-GAAP operating income was $34 8 million, an increase of $45 million year over year.
non-GAAP operating margin was 12, 8% an improvement of 16 percentage points year over year.
non-GAAP other income net of other expenses was $25 4 million and benefited from higher yields on corporate cash and investment portfolios.
Our non-GAAP net income was $58 7 million or 22% of revenue, resulting in non-GAAP net income per diluted share of <unk> 50.
Based on $117 2 million diluted weighted average shares outstanding.
Our non-GAAP net income was significantly ahead of our estimates due to revenue outperformance combined with our disciplined approach to managing expenses as we scale.
Moving on to the balance sheet cash cash equivalents and short term investments at the end of Q3 were $2 7 billion.
We are well capitalized and focused on continuing to invest in our platform to serve more needs of smbs.
Our track record of investing in organic and inorganic opportunities and translating those investments into efficient growth as a playbook that we will continue to deploy.
With our strong balance sheet and free cash flow generation, we are in a position to allocate capital for both investing for growth and reducing dilution through our share buyback program.
In March we repurchased 359000 shares for $27 million at an average price of $75 22 per share.
As of March 31, we had approximately $273 million of share repurchase authority remaining.
Before shifting to our financial outlook for the fourth quarter and full fiscal year 2023, I'd like to share our view on how we see the macro environment impacting smbs and our business.
While we've seen initial signs of spend trends beginning to stabilize we anticipate that the challenging macro environment and tightening credit conditions in the near term will translate into customers continuing to reduce spend from the elevated levels of the pandemic yours.
For the Bill Standalone platform, we expect Q4 <unk> to be roughly flat to Q3 and down slightly on a per customer basis quarter over quarter.
While the cyclical headwinds will likely persist in the near term we are optimistic about the strong secular trends driving digital transformation and we are confident in our ability to achieve our long term aspiration to serve millions of businesses.
Through our platform and payment offerings, we are driving robust customer engagement and strong AD valorem adoption. We are innovating at a rapid pace to create more value for smbs and to further differentiate ourselves.
Now turning to our outlook.
For fiscal Q4, we expect total revenue to be in the range of 277% to $280 million, which reflects 38% to 40% year over year growth.
As a reminder, our recent subscription price increases now in our run rate numbers and as a result, we expect a smaller sequential subscription revenue increase compared to recent history.
We expect float revenue to be $32 million in Q4, which assumes our yield on <unk> funds will be approximately 410 basis points on.
On the bottom line for Q4, we expect to report non-GAAP net income in the range of 45, 4% to $48 4 million.
non-GAAP net income per diluted share in the range of 39 to 41.
Based on a share count of $117 3 million diluted weighted average shares outstanding.
For Q4, we expect other income net of other expenses or E to be $24 million we.
We expect stock based compensation expenses of approximately $64 million in Q4.
And we expect capital expenditures of approximately $11 million to $12 million.
Moving on to full year guidance for.
For fiscal 2023, we expect total revenue to be in the range of 1.0, $3 95 to 1.0 for two 5 billion, which represents 62% year over year growth.
We expect float revenue to be $109 million in fiscal 2023, which assumes a yield on FPL funds of approximately 350 basis points for the year.
We expect to report non-GAAP net income for fiscal year 2023 in the range of 174 to $173 $4 million.
We expect non-GAAP net income per diluted share to be $1 46 to $1 48.
Based on a share count of 117 million diluted weighted average shares outstanding.
In closing with our platform ecosystem and scale, we are well positioned to capture a large market opportunity to transform financial operations for millions of Smbs, we have an efficient multi revenue stream business that enables us to invest in driving innovation and value creation for our customers, while delivering significant revenue growth.
non-GAAP profitability and free cash flow for our investors.
Operator, we're now ready to take questions.
Thank you.
If you'd like to ask a question. Please press Star then one on your telephone keypad.
If you came to mind please.
Eight.
We have the first question from Andrew Schmidt.
Great.
Hey, John .
Good afternoon, and thanks for taking the questions.
Results in the quarter.
I wanted to ask about just the spend trends in terms of.
The stabilization comment.
You hear about is the the comment about stabilization, but it does sound like you are expecting kind of more of a moderation.
You kind of reconcile what youre seeing currently.
And how you're setting up kind of the outlook any comment to that.
What youre seeing in the environment would be helpful. Thanks, a lot.
Okay. Thank you Andrew Super happy with the quarter.
And in part because the deterioration that we had seen at the end of the last quarter did not continue strongly into this quarter and so that's the comment around stabilization.
And what we saw and what that really tells US is that once again, we have proven and seen in the proven capability to smbs have to be resilient, they've really worked hard to be able to manage our business that use our platform to be able to do that and that being able to manage through uncertainty is something that we feel very comfortable that we can help smbs do and we started to see that.
Across the platform.
In addition, we continue to see great execution across our business and that enabled us to drive opportunities to support our customers in multiple ways to be able to drive monetization across the platform to be able to drive customer growth one of the strongest quarters ever for us for a total net new adds around 15200, so all of that.
In this macro environment, I would say bodes well for our future I don't know if John if you have anything else to say on that.
No I think that was good we did expect heading into the quarter that some of the trends. We saw materialized late in the December quarter, which was a pretty sizable drop off in spend as businesses, we're reacting to the macro environment and and reducing expenses, we had assumed that that those trends would continue.
In the quarter and it proved to be Conservative frankly, we ended up with <unk> of 11% year over year growth versus our initial estimates of being flat and down slightly quarter to quarter, which is pretty consistent with normal seasonal trends. So we feel really good about the strength of the SMB customer base, we have in the Utah.
<unk> that the platform is providing for our customers.
Yeah.
Super helpful. Thank you for that and Renee maybe I can sneak one more in just since you mentioned the sort of the better kind of net you add a profile I remember last quarter. There were some delicious delays in decision, making kind of <unk>.
<unk> pushing.
Software savings out.
It seems like.
Bill that add Scott, a little bit better, but still under that kind of four to 5000, Mark are you seeing improvement in terms of the.
The cycles, there and how should we think about sort of normalization over the next few quarters. Thanks a lot.
Yes, Thank you Andrew.
The great things about our business is our go to market strategy, we have a very robust multichannel distribution approach, which allows us to support businesses and small businesses wherever they may be and whatever theyre looking for solutions to help them really automate their financial operations and that's how we become the financial nervous system for Smbs and so what we had.
To see is in our direct channel, we continue to see kind of the macro play out and that the smallest businesses.
To kind of be in this wait and see mode versus a growth mode.
And so they have waited to make decisions to add on different expenses to their business and then when it comes to the.
The accountants that we also serve we see accountants being very focused on how to help their customers from a strategic perspective really drive efficiency in their business and so they're not as busy adding new customers as we would like to see.
Ultimately this is kind of the macro condition that we talked about that.
Tax the net new adds it's because they are focused on using our platform to manage their business today and we believe the opportunity that we see across channels, hence what we saw with the Finnish petition channel shows the robustness of our our capabilities here that smbs when they need something when it comes to finish operations theyre going to come to bill.
Got it very helpful. Thank you very much for Nike.
Thank you Andrew.
Your next question comes from Josh Beck, that's key.
Yes.
Thank you for taking the question I wanted to ask a little bit.
About <unk> certainly you've started to unify.
Periods with Jill I think you were talking really across the web and mobile apps certainly you seem to have more plans. So maybe just.
Help us understand what maybe some of the early learnings have been and really just how we should think about the cross sell potential in the coming years.
Thank you Josh and from the beginning we have taken the time and place the effort around purposely building a robust interconnected platform that allows us to offer multiple types of payment products to our smbs to be able to serve them as they need and with the acquisition of <unk>.
<unk> the focus has been on how do we continue to extend that platform and so we define this as our unified platform is something that we're very focused on and to begin that integration. We first started with unifying the data Lake if you will being able to have the ability to see on our customer data across both platforms.
A single view of that and that led us into also having a unified brand approach, which you saw that in the fall, where we kind of released in share and kind of how we're thinking about branding and while we announced this quarter is that the look and feel that customers see is actually one experience now its one color system as an example, one sign on.
One unified identity that allows us to focus on the next phase, which we think is going to be an important phase to go after that sizable cross sell opportunity that we've talked about which is to have the platforms integrated from an experience perspective, a more unified experience not just from a color perspective, which is the first step the look and feel that now integrating different software.
<unk> features and capabilities across that unified experience and so we are committed to getting that done. This calendar year. It's been our plan all along to deliver that this calendar year and we feel very good about where we're at in that that execution that that requirement and for the business and we're excited about what that's going to mean for the cross sell opportunity like we said, we really believe.
It is a sizable opportunity we see from the customers that are already using both bill and Debbie the value they get out of it. We also see the increased usage and spend across both platforms. When they worked together it becomes very very sticky the application and the service that we provide and that's something that we're excited about and look forward.
To rolling that out later this year.
Okay, Great and then maybe related.
Question It sounds like Bofa is really.
Zero in.
The SMB segment for the White label option and look into maybe.
The commercial over to more of a direct relationship. So that's certainly interesting to hear how applicable do you think this is across your broader swath of customers and really finding the strong product market fit within F&B in particular.
Yes, I think.
The thing that we've always focus on is creating value for our partners and really being there to serve them and so we do have multiple races with bank of America, we have the small business relationship and we have the commercial risk relationship.
And when we did the commercialized set 10 years ago, we were integrating our already into what I would call a legacy platform that the bank had and so we're at a point now where this platform now 10 years later the bank as made a decision to go in a different direction and to sunset that legacy platform that supported.
Really just the H and tech capabilities from a bill pay product perspective, and so from our perspective. This is kind of a one off.
Situation when you look at the.
The financial institution partners across we continue to do more and more with all of our partners, including Bank of America and so we think this channel is going to be Super important as financial operations becomes part of the fabric of every SMB and we're going to continue to focus on serving those <unk>. We have six of the top 10 were going to continue to focus on serving them with.
More and more products and more capabilities.
Thanks Renee.
Thank you Josh.
Thank you.
Darrin Peller Wolfe research.
Hey, guys. Thank you.
I guess, if we could just start with a take rate expansion and I know that's not it's more of an output than it is.
Direct focus necessarily however, I know after last quarter it didn't expand sequentially as much as you would see before.
We talked about it and you guys said there may be some areas are being more proactive on that front, whether that supplier enablement or other categories that we did see a material expansion this quarter roughly.
Roughly three times or two times more than it had been before.
Sequentially. So can you just comment on what drove some of that strength and.
If there are some proactive moves you're making you're looking.
If there's any sustainability or we can count on.
Thanks, guys.
Thank you Darrin I'll start and then let John add some more color.
First and foremost we've built a very strong platform that allows us to use multiple levers across the business to drive monetization and.
And more usage of our payment products and in any given quarter, we're doing different things and extreme any testing in driving that capability and we've always said that it's not going to be a linear approach to get to the ultimate.
Spansion of monetization with our customers and this is a good example, we had a lot of great experiments that worked well for us this quarter ill, let John kind of talk more to that.
Yes, Thanks, Darren we saw really strong AD valorem adoption during the quarter and Thats tied into the suite of payment offerings debt that we have and those are resonating with both buyers and suppliers specifically, we saw really good adopt.
Adoption and penetration with both virtual card.
Payments and our pay by card solution as well as.
A continued mix shift.
With our international payment products, where we're seeing more.
Foreign currency transactions versus U S dollar transactions and a lower smaller headwind around FX losses that we called out last quarter. Looking ahead, I mean, I think it's fair to assume typical average quarterly expansion rates, obviously subject to there is some quarterly fluctuation here that.
Rene mentioned, plus any sort of macro induced behavioral changes, but we feel really good about the performance in the quarter and how the AD valorem products. We have are increasingly resonating with our small business customers.
Sure.
That's really encouraging guys. Thanks very quick follow up just the comments you made on the GP.
And to the next.
<unk>.
Is there an element of just macro conservatism or are you seeing a real change in behavior.
Customers just a quick update thanks again guys.
I'd say looking ahead to this.
June quarter.
Assuming that the environment is going to be relatively stable.
External macro environment in that small businesses are continuing to adjust their spend patterns and and what ultimately.
Ultimately flows through our platform as TPB in light of.
Inflation and interest rates credit all of those things are continuing to force.
<unk> and our customers to react so we're assuming that continues but no significant.
Worsening of the environment, where we would see major changes from SMB. So it's kind of a continuation of the trends that we feel like we experienced in <unk>.
In the March quarter.
Thanks, Tom Nice job guys.
Thank you Darren.
Thank you.
We now have from.
Piper Sandler.
Thank you good afternoon.
I'll start with Jon core TBD, clearly was stronger than you expected three months ago It sounds like.
That was partially tied to SMB stabilization can you talk a little about linearity of the core TBD trends there on a monthly basis and did that trend off at all and in March just given some of the regional banking issues just any color on linearity would be helpful. Thanks.
Yes, Thank you Brent.
First I'd just remind everyone that the March quarter is typically seasonally softer from a spend standpoint into December quarter, we didn't experience in the December quarter.
Normal historical like seasonal uptick and so we had assumed that that aberration would continue in the March quarter, and we really didn't see that we saw spend trends throughout the quarter that were pretty consistent with seasonal patterns that we've seen historically now the overall level of spend is reduced as we are.
As I mentioned before Smbs are scaling back their spending but the patterns throughout the quarter seem to be seem to be pretty consistent and that's what led to our commentary about some initial signs of stabilization in trend and spend trends.
Yes.
The thing I'd add.
Just one thing I'd add just you asked about kind of the regional bank one of the beautiful things about our platform is that our customers can switch and add multiple bank accounts and so for them. This was a non event because we stood up and we took care of our customers.
Helpful Color and then Renee one of the biggest questions I get from investors on Intuit and I was wondering if you could just talk about intuit as a partner.
And maybe potential competitor someday just given the co marketing agreement there could lapse here in June and how you view your differentiation versus into it. Thanks.
Thanks Brent.
First off I would just say that the current contract is approximately 1% of the revenue of the business. So it's not material to the business.
The opportunity that we have.
With larger businesses, which is where we're focused.
<unk> to prove out with our direct and our financial institution channels, we see lots of large businesses coming onto the platform. So we believe in that and so I guess, what I would just say more broadly is that what may look simple from the outside is really rather difficult to build I've been building payment solutions for smbs for over three decades, and I'm not the only.
Person on the team and the company that has decades of experience doing this so that knowledge that expertise that ability to execute and allows us to take the complex complexities financial operations and payments and all the things that are involved with.
Bill pay and spend management and receivables and make it simple.
Our ability to be able to do that is something because we've integrated all the process automation and workflow capabilities and payment capabilities into one platform. We are not just the system of record for our customers. We're also the system of engagement for our customers and behind all of that we have a regulatory compliance and redundancy.
The capabilities that we showed improved out this quarter with the March challenges in the financial regional Bank portal. So from our perspective, the money movement that we have at $250 billion plus on an annual basis really speaks to the complex that we have the leadership we have.
And ultimately.
I would say that.
We're busy taking all the learnings from the customers we have the experiences the data and really setting the innovation agenda for tomorrow and for the next year and the year after that and so on while others are really kind of looking at what we did two or three years ago and modeling their entry into the go to market.
Financial operations with what we're doing in the past so we're going to continue to focus on the future. We're going to continue to innovate continue to add payment capabilities continue to add working capital capabilities, we're going to continue to do more and more so the smbs have less and less to worry about we're going to take that nets off their plate and really make it go away.
Very clear and helpful explanation. Thank you.
Thank you Brian .
We now have Kenny please go ahead.
Keith.
Oh no no no no.
Yeah.
Hi, good afternoon, Rene and John Thanks for taking the questions.
You mentioned that 3500 net adds EFI channel is kind of the right number going forward.
Still a little bit of an acceleration this quarter versus last so I'm. Just curious like why is 3500, the right number or should this accelerate back to that kind of 5000.
Type of net adds type of range and then just any thoughts on kind of the visibility you have into this number.
Yes, Thanks, Ken for the question first and foremost.
<unk> said this many times this is a massive opportunity like we have been creating in defining this category of financial operations automating payables spend expense NAR capabilities for our customers for a number of years and what we see in the future is that there is so much more opportunity in front of us what we've talked about is that the macro environment.
Means that businesses in general are in this wait and see not grow mode and that means that some businesses are waiting to take on additional expense before they actually move forward with the opportunities to create more efficiency. So we do think that that will change as we see the other side of this economy. When we can see the light at the end of the tunnel this wait and see and.
We really believe that the multichannel distribution approach, we have will continue to serve us well that we can continue to build our customer base across all channels and what that means is that just as a reminder, that allows us to continue building our network and the network.
Customers really do provide value for every customer experience and allows us to continue to grow our direct experience as well.
<unk>.
Saying that we continue to be most excited about is just the satisfaction, we see with customers and how they use the product and the time savings that they have and all the things that we do so we believe there is a bigger opportunity that we're going to continue to grow and work on and leverage the simplicity capabilities that we're learning every day to make this more available to more customer.
<unk>.
Okay, great. Thanks for that.
And I guess just as my follow up question, if we put the Fi channel to the side for a second we look at the business ex sat Fi the.
TPB per customer was down just 5% year over year, it was down 7% year over year last quarter. It sounds like you are feeling better about the macro so do you think that year over year change in <unk> per customer except by as trough.
And can you talk about how we should think about the normalized growth of this metric over the medium term in just the building blocks of that.
Yes, Thanks, Ken good question.
Youre right on the stats there we feel pretty good about.
The trends in the quarter and TPB.
Starting to see what looks like a little more normal patterns, but I think it's early to call.
Trough or reversion to growth mode, as Rene mentioned businesses seem to be still scaling back. So we would expect in our estimates for Q4 reflect this we expect.
Softer spend in the near term over the intermediate term I think there's still a lot of dependencies on the macro environment and what's happening with interest rates and.
And the credit situations out there. So we'll certainly have more visibility into some of these patterns by the time, we get to our August FY 'twenty for call and definitely update everyone. Then.
Okay, great. Thanks, John .
Thank you again.
Thank you, we now have Kayla Mckinney <unk>.
Yes, hi, thanks.
Thanks for taking my question, maybe just to piggyback off the last question. When we think about the stabilization that you are seeing.
With F&B is reacting to the macro.
Bert.
Maybe you can share on the mix of that spend in terms of what might be more discretionary versus back then is the stabilization that you guys are seeing at all a reflection of that mix may be being more.
At a more favorable level potentially today.
Yes, I think this really is.
Thank you Tyler for the question just really is.
The macro this wait and see as something that businesses are tightening just one perspective, maybe to think about is that we serve abroad.
Swath of the economy right, we have businesses of all sizes, all segments and so we see and have insights into spend across businesses and across industries that we think is unique and one of the things that is consistent is no matter. What the industry is is that larger businesses have more discretionary spend and they tightened their belt and smaller businesses.
And so what that means is that the the impact on our overall TBD.
Even though all businesses there timing is impacted more by the larger businesses on the platform, which would make sense and so what we're starting to see is that we are the early signs of it stabilizing I think we need a little bit more data before we.
Say anymore about it but thats really what we think is the platform enables businesses to manage their spend and be thoughtful about it and they are in a better position when they are on build them and then when they're not.
Great. Thanks for taking the question.
Thank you Taylor.
We now have William Mann with Goldman Sachs.
Hey, guys. Thanks for taking the questions.
I wanted to kind of follow up on the point that you made on the Bofa partnership with those customers moving from the Bofa channel to the direct channel.
I guess could you put some parameters around how large of a move in customers. We're talking about here and then.
We generally think about the monetization and the direct channel as being significantly higher than the EFI channel is that something that we're going to see in the near term as these customers come over and could you kind of talk about how that might differ between upfront and movements in subscription versus transaction revenue.
Thank you will and great question I think the.
The first thing I would kind of call out is that we have a very strong partnership with the bank and its because of the strength of that partnership that we've been able to work with them on helping those customers make a decision about migrating and migrating over an already we've seen many of the customers that are active migrate to our platform and it's only been maybe first was the effective date.
<unk>.
The bank set out so it's very very.
Early for us, but we feel good that many of the active customers are coming over and to your point those customers when they come over they have the ability to leverage all of our payment capabilities and so that could be anything from virtual card, which is kind of built into the direct experience too.
And <unk> to cross border payments working capital invoice financing. These are all things that we know will drive the <unk> up on those customers and we expect that will be an important.
Contributor for us in the future relative to the relationship overall and it's something that we.
We're happy to serve the customers to make sure that we're delivering for them.
Got it I appreciate that and then maybe just a question on working capital.
I think you guys have been rolling that out.
Could you talk about just kind of where we are and any initial thoughts around how you think about attach rates in that product and what that might look like over time.
Thanks, So let me start and then I'll, let John add some additional color.
The way, we think about things is to always build something that's going to be robust stand the test of time deliver for customers deliver for shareholders and so as we roll this out into our beta program. We are learning about what it is that customers want how to actually manage the capabilities that we have and what we see so far.
<unk> has us encouraged about the opportunity in the future.
We continue to work on rolling that out and making sure that contributes in a way to the customers experience as well as our financial experience. So so John anything else, Yes, just a quick follow up to that.
One of the things that we previously mentioned is that we're in the middle of transaction flow with our platform. We see the vast majority of <unk> spend with our customers on our platform and we think it's a perfect spot to offer alternatives that help improve cash flow and liquidity for customers that was our thesis in.
And rolling out this product initially and we've been testing and learning it's still very small I wouldn't say, we're at full launch yet the feedback has been very positive and we're starting to be able to validate many of the initial assumptions that we had about <unk>.
Product adoption and repeat usage and things of that nature. So I'd say, we're a ways away from the scaling phase on that on that product.
But we believe it can be.
A really interesting product, perhaps in the near term not something that moves the needle overall for our business, but over the longer term, we think that will be really nice addition to our AD valorem portfolio.
Got it I appreciate taking the questions nice results today.
Thank you thanks well.
Your next question comes from Keith <unk> with Morgan Stanley .
Hey, John it's Jonathan on for Keith Thanks for taking our question.
Can you help unpack where across your customer base youre seeing strength in AD valorem adoption does it resonate more with larger SMB smaller smbs, perhaps middle market.
Thank you Jonathan for the question, we see really kind of depends probably on the product right larger businesses. For example have more cross border payments Theres definitely strength there.
But then you think about our working capital invoice acceleration in our instant transfers that'd be more across the supplier network that we've built one of the things we shared in the script is that around 30% of their revenue is driven by those connections on our network that allow suppliers to choose how they want to get paid and when they want to get paid so we see.
The virtual card product is something that goes across all of our direct customers and so we see strength across all customer segments. There and I think it's again, just a testament and a proof point across the durability of our business and the strength across the business that we have these levers to pull depending on what the customer needs and when they need it and I think thats something we have.
Worked hard to build it's not something that happens overnight as something that it takes many years to build to do it thoughtfully and we're very happy and proud of the results that we have today.
Yeah.
That's helpful color, Thanks follow up briefly.
Touch on this before but can you talk through the traction youre seeing in the go to market pressure, especially in this environment and whether the three month free trials that were offered had any impact there.
Yes.
At a holistic.
Perspective, we definitely believe that the macro environment is a headwind for customer adoption right now and Thats really because.
Smaller businesses are not looking to increase any of their expenses now while they wait and see what's going to happen with the economy and we see that across the direct business. We see that in the accountant channel where accountants are very focused on supporting the existing customers managing the uncertainty in the macro environment accounts also have a challenge with <unk>.
<unk> they need more people to be able to add more clients and serve them more businesses. So so thats also a factor out there what we're seeing at play for US is that the multichannel distribution means that we get more awareness and more opportunities.
Interact with more businesses because of the financial institution strategy because of the account strategy because of our direct strategy and that's what's playing out really well for us. The fact that we have multiple ways to serve customers and that allows us to build a stronger and stronger network, which allows us to create a stronger experience for our customers across the platform.
Helpful context, thank you.
Thank you Jonathan.
We now have Bryan Keane of Deutsche Bank.
Okay.
Brian could you. Please <unk> your line is Amit lately.
Okay.
Hello can you hear me.
Yes, we can hi, Brian .
Hey, guys, sorry, I'm not sure what happened there.
Just a clarification on PPV seasonal patterns held in third quarter, 'twenty, three but the guidance for <unk>.
TPG growth now suggests that seasonally it will be materially different than last year and I know there was some conservatism I guess baked into flat growth of TPB.
On the core Bill and we did 11% year over year in the quarter. So just trying to think about.
Is it finally, the slowdown how conservative it is versus.
Are we really seeing the slowdown seasonally to kind of guide to those levels.
Yes, thanks for the question, Brian I would say.
The December quarter, the way spend patterns played out was it was a clear deviation from historical sees.
Seasonality the March quarter looked a lot closer to normal seasonal trends now our TPB performance.
On a quarter to quarter basis down.
5% or so on a per customer was a little bit.
The larger of a decline than we would typically see and so we've assumed that the Q4 <unk>.
<unk> period is going to be similar performance, where we're going to see.
Some trends that are still not quite back to normal seasonal patterns at some point.
When we get to a true trough or or businesses start to expand again is when I think we will get back to.
These historical seasonal trends, even if it's at a lower overall level of spend and I think thats still probably a few quarters out but for Q4.
We feel like the trends that we've outlined with our estimates are sort of a continuation of the trends we've seen in March and to a lesser extent December quarters.
Yes, I was going to ask that question about visibility.
When will that turn take place to get back to what you think will be seasonal trends as that.
The first half of fiscal year 'twenty four is that probably not until the second half.
It's a good question I would say it's difficult for us to estimate with precision from here given some of the dependencies on the external environment, including interest rates and the credit environment for small businesses, but what we have seen is.
Say you could characterize it as a healthier.
Set of patterns from from businesses. They are adjusting their obviously the small business segment is super resilient and we continue to see very high engagement with the platform. So that that tells US. There's good things ahead, but when that starts to turn I think it's still open.
Okay. Thanks, so much and congrats on the execution.
Thank you.
We now have that.
<unk> America Merrill Lynch.
Wonderful thank you.
Wanted to ask a question around the take rate this quarter, obviously real strong here I think John in the past you said, perhaps with the macro you could see some pressure a little bit more price sensitivity on from suppliers in particular, but taking on.
Virtual card it doesn't appear to be the case.
We saw a nice ramp this quarter it looks like a full basis point. So just curious what were you expecting heading into the quarter with regard to the macro impact on.
The uptake on that alarm services, and then how did the quarter shape out relative to your expectations.
Yes, Thanks, Brad.
Feel really good about the performance in the quarter and the adoption of our AD valorem products. The value proposition continues to resonate there's more of an emphasis on.
On the part of suppliers around access to cash and speed of payments in many of our products <unk>.
Establish that value proposition and so I think thats gone really well, we see it with <unk>.
Virtual card adoption on the part of larger suppliers are pay by card solution, while it's still small in the overall universe of payment offerings that we have is increasingly seeing adoption and then we continue to see very healthy levels of international transactions International payments, which includes.
The FX transaction as well so all of those things seem to be.
In the right direction this quarter and as we've said on prior calls.
There is definitely some quarter to quarter fluctuation that happens so it's not perfectly linear our expansion and so we would expect looking ahead that our normal average quarterly growth rates and monetization of probably a good proxy for what we expect going forward subject to any quarter to quarter variation that might exist.
That's great to hear thanks, Shannon and one more if I may. Please we're hearing real positive feedback from the channel on the potential for Davey integration with core Bill curious.
Any any thoughts on the progress there and what that might do for the potential cross selling <unk> into bill and bill into Debbie. Thank you.
Thank you Brad we are definitely.
Hearing the same thing when we talked with.
All of our joint customers that use both.
Spend and expense platform that we have from Debbie and the Bill <unk> platform.
They definitely talk to the value that is to have all of the spend in one place. It's actually one of the things that allows us to think more confidently about how things are moving for businesses across America, and so from our perspective.
<unk>.
<unk>.
The sizable cross sell opportunity is really going to unlock once we have this fully integrated experience.
A good part of the way there we've done all the heavy lifting underneath the covers to kind of make the platforms talk each other to it looks like one platform and now we've just got to create that execution. So.
<unk> are the same as ours that customers love the value of both and we're going to continue to make sure that that is true and then obviously execute when we get into cross selling motion.
That's great. Thanks Renee.
Thank you Brad.
Thank you.
<unk> of.
With J P. Morgan.
Hey, Thanks, Good afternoon, I know you've covered a lot already.
A lot of good answers just wanted to ask a couple of clarifications on the gross margin was very very strong.
John You mentioned moderate I think I heard a lot about.
No.
An addition, et cetera, but can you just.
Explain again the factories a rank the factors that would drive that that moderation or is there any callouts in the third quarter that maybe we missed.
With the gross margin, yes, great.
Yes. Thanks for the question I'd say, we obviously, you've had a tailwind or benefit associated with the increasing yields and float revenue associated with our <unk> balances.
As interest rates start to.
Pete.
Essentially here in the near term, we will see that float revenue begin to flatten versus the curve that it's been on.
Throughout FY2023.
That's that's been a positive benefit of call it.
75 to 100 basis points on our non-GAAP gross margin. Historically, we've also had a very favorable payment mix, meaning some of the adoption gains that we've had on on the high monetizing AD valorem products have supported the higher gross margins as well.
If you go back a few quarters I think our visibility was kind of 80%, 81% non-GAAP gross margins, we've been operating well above that we just wanted to call out that the peak margins of 87% that we had this last quarter, it's probably a bit higher than will be in the near term as our payment mix starts to shift and as we start to really.
Lies a smaller benefit associated with float revenue expansion.
No that's fair thanks for going through that and then just if you don't mind clarifying.
The bank of America that commercial piece is just is this.
It's going to roll off.
And so thats going to drive some of the difference in the user count on that basis, and then somewhat related.
Average transaction per customer on the F&I side, so different than the direct.
Thank you for the question.
I'll take the second one first the average.
Transaction per customer is different in part because each of our financial institution partners has different segments that they serve right. So if we just take bank of America.
Both the small business side, and we have the commercial side the commercial side would have a much larger transaction per customer than the small business side and so when you look across the channel.
The reason, it's different because I think of the success that we're seeing with the banks to finish positions that serve the smaller businesses theres more units there and that drives the overall average down I think it also goes to the point that we provide a ton of value for our customers in a matter of the size and that's why the banks work with us and so when.
The bank decided to make this decision to sunset the legacy AC H and check Bill pay product that they had they worked with US and are working with us to migrate those customers to our platform to the customers wanted to do that and we have so far had good success doing that.
Yeah.
Okay.
With that.
Did you have one more question sorry.
No no I think I didn't know if you want already clarified the bank of America, if not I can go back to the transcript, but thanks for the education on that is helpful for me.
The question again.
No problem. Thank you.
I'd just like to say, thanks to everyone for joining us today, and we look forward to communicating our progress as we execute against our strategy to be the essential financial operations platform for Smbs. Thank you and have a great evening.
Thank you I can confirm this does conclude today's crew.
Could you have a lovely day and you may now disconnect your lines.
Okay.
Sure.
Yes.
Sure.