BILL Holdings - Q1 2023

Transcript

Operator (participant)

Hello, everybody, and welcome to the bill.com first quarter fiscal year 2023 earnings conference call. My name is Sam, and I'll be coordinating your call today. If you wish to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I'll now hand you over to your host, Karen Sansot, Vice President of Investor Relations, to begin. Karen, please go ahead.

Karen Sansot (VP of Investor Relations)

Thank you, operator. Welcome to BILL's fiscal first quarter 2023 earnings conference call. We issued our earnings press release a short time ago and furnished the related Form 8-K to the SEC. The press release can be found on the investor relations section of our website at investor.bill.com. With me on the call today is René Lacerte, Chairman, CEO, and founder of BILL, and John Rettig, Executive Vice President and CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the operations and future results of BILL that involve many assumptions, risks, and uncertainties. If any of these risks or uncertainties develop or if any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements.

For a discussion of the risk factors associated with our forward-looking statements, please refer to the text in the company's press release issued today and to our periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, filed with the SEC and available on the investor relations section of our website. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The non-revenue financial figures discussed today are non-GAAP, unless stated that the measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. At times during this call, we will discuss BILL standalone results, which exclude our Divvy spend management and Invoice2go accounts receivable solutions.

Now I'll turn the call over to René. René?

René Lacerte (Chairman, CEO and Founder)

Thank you, Karen. Good afternoon, everyone. Thank you for joining us today. BILL delivered strong financial results in Q1, with revenue growth of more than 90% year-over-year in our first quarter of non-GAAP profitability. From the beginning, we have created a durable business model and have been steadily building towards profitability while investing in more ways to create value for small and mid-sized businesses. Q1 was another quarter where disciplined execution led to us achieving several significant performance milestones. We acquired a record number of net new customers, achieved our highest ever non-GAAP gross margin, and expanded transaction monetization on the BILL standalone platform. We delivered these results in an increasingly dynamic macro environment. In today's climate, businesses are looking for ways to do more with less.

While these trends may lead to moderated payment volume growth near term, our platform has never been more relevant. As we've heard from many satisfied customers, by digitizing their back offices, BILL increases visibility into cash flow and delivers operational efficiencies, giving businesses back time which they can use to focus on their most pressing priorities. In an inflationary world, choosing our platform acts as a deflationary force. We are proud that our platform helps businesses operate more efficiently in both up and down economic cycles. Today, more than 400,000 businesses use our solutions to transform their back offices. We aspire to serve millions of businesses and are making investments to capture this large opportunity. There are 30 million small businesses in the U.S. and 70 million globally, and many of them still use manual paper-based processes to manage their financial back offices.

With our platform, ecosystem, and scale, we believe we are uniquely positioned to be the essential financial operations solution for SMBs. A great example of how we help businesses succeed is Repurpose Inc., a plant-based compostable home goods company that uses both our BILL software and Divvy spend management solutions. Repurpose's tableware, trash bags, and other home products are available at more than 17,000 retailers nationwide. Since their founding, Repurpose has kept more than 3.5 million pounds of waste out of landfills. Sarah Sanders, Senior Controller, said, and I quote, "BILL and Divvy have saved the finance team two days out of every workweek and take care of expense management for employees. Additionally, having so many of our vendors on the BILL network helps us reduce payment transit time and gain more control of our cash flow.

BILLis helping to make us even greener and more efficient." Customers like Repurpose that are using both BILL and our Divvy solutions have been fantastic sources of inspiration as our product and engineering teams work together to deliver a unified platform experience, our number one priority for fiscal 2023. We are making great progress on the project roadmap to this unified platform. Just a few weeks ago, we announced that we had become BILL, leaving the dot-com behind. Leveraging the strong design expertise for our combined teams, we are modernizing our brand identity. In addition to our organic efforts to enhance our platform, today we announced that we signed a definitive agreement to acquire Finmark, a leading cloud-based financial planning tool for startups and SMBs.

Finmark aggregates data from disparate systems such as payroll, sales, and accounting to help businesses build budgets, forecast future earnings, and gain real-time insights through easy to customize dashboards. When combined with our data, we will further empower businesses to better manage their cash flow and financial operations. We believe this new financial planning solution will be especially useful to accountants, enabling them to add another valuable offering to their strategic advisory practices. These capabilities will increase the value proposition of our platform for this important channel. Our second priority in fiscal 2023 is to further scale our go-to-market ecosystem by offering more of our platform solutions to our current partners, as well as acquiring new relationships. In Q1, we expanded our relationships with our financial institution partners, driving platform adoption among their SMBs, as well as driving overall ad valorem payment adoption in the FI channel.

Recently, we entered into a new agreement with a bank partner to bring our spend and expense management solution to its customers. This deployment of net new functionality to an existing bank partner is an important milestone, and we are optimistic about the opportunity to extend our reach into the FI channel through spend management. Continuing on the theme of going deeper into existing bank relationships, for the first time, we are now issuing virtual cards on behalf of an existing FI partner. This partner adopted the BILL solution because of our supplier enablement momentum and processing expertise. Finally, we continue to expand our reach in the financial institution channel. We recently signed two new bank partners that we'll talk more about on future calls as implementation progresses. Accounting firms are another major component of our go-to-market ecosystem.

Today, more than 6,000 firms leverage our platform to grow their practices and automate their bookkeeping operations. Through our partnership with CPA.com, we have already begun to see good interest in our Divvy solution and have enabled hundreds of our accounting firm partners to begin offering it to their clients. A great example of how accountants use our suite of solutions is BerganKDV, a top 100 accounting firm in the U.S. BerganKDV leverages BILL and Divvy for their growing business advisory practice. Chris Gallup, Solution Leader of BerganKDV's Financial Accounting Advisory Services team, said, and I quote, "The powerful combination of BILL and Divvy drives speed and efficiency. These are key tech stack tools enabling the successful growth of our financial accounting and advisory services team practice.

We now have a substantial number of clients using BILL and Divvy, and they love both. Our third priority is to drive ongoing payment adoption and innovation across all channels. Recently, we made it simpler for Canadian and U.K. suppliers to choose to receive payments in their preferred currency via our network, driving higher FX adoption and more engagement. In the near term, we plan to offer this option to suppliers in other countries that receive cross-border payments from us, further expanding our reach. As we enhance the capabilities of our multi-faceted platform, we continue to strengthen our competitive moat. Our proprietary payments technology and the end-to-end payment visibility afforded us by our network gives our team the tools to be able to quickly and creatively solve SMB pain points. Our risk management expertise, money transmitter licenses, and data assets enable us to drive efficiencies that smaller players can't replicate.

We go to market with partners that SMBs trust to help them manage their businesses. Our culture acts as a magnet to attract world-class experts in software, payments, and small businesses. On the people front, we recently added another seasoned executive with experience developing global multi-billion-dollar businesses. In Q1, we welcomed Loren Padelford as our Chief Commercial Officer. Loren brings a wealth of sales and leadership experience, including seven years at Shopify, where his team brought Shopify's products and services to more than 2 million merchants in over 175 countries, generating over $4 billion in annual revenue. We also recently welcomed Alison Wagonfeld, the Chief Marketing Officer of Google Cloud, to our board of directors. Alison joined Google in 2016 as the first global marketing leader for Google Cloud, contributing to the division's rapid growth over the last six years.

Prior to Google Cloud, Alison was an operating partner at Emergence Capital, where she worked with over 30 SaaS companies, helping with their strategy and go-to-market plans. Her experience scaling fast-growing businesses on a global level will be invaluable to BILL. In closing, we kicked off fiscal 2023 with excellent results. We are laser-focused on executing against our strategic priorities while also managing our business to deliver non-GAAP profitability in fiscal 2023 and investing for the long run. All of us at BILL are dedicated to helping SMBs succeed. We are excited about the many opportunities ahead, and I would like to thank our employees, customers, and partners for the trust they continue to place in us. I'll now turn the call over to John to talk in more detail about our quarter.

John Rettig (EVP and CFO)

Thanks, René. Today, I'll provide an overview of our fiscal first quarter 2023 financial results and discuss our outlook for the fiscal second quarter and full fiscal year 2023. As a reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings press release for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. Please also note that when I refer to BILL standalone results, they exclude our Divvy spend management and Invoice2go accounts receivable solutions. We delivered strong financial results in Q1 that significantly exceeded our expectations. Revenue increased more than 90% year-over-year, and we transitioned to non-GAAP profitability. Total revenue for Q1 was $230 million, reflecting 94% year-over-year growth. Core revenue, which includes subscription and transaction fees, was $215 million, up 83% year-over-year.

Float revenue was $15 million, an increase of nearly $10 million from last quarter as we began to transition customer funds to higher-yielding investments. Non-GAAP gross margin was 85.8% in Q1, well above our estimated range. Several factors had a positive impact on gross margin, including favorable payment mix with volume increases on ad valorem payments, payment optimization, and significantly higher float revenue. Non-GAAP net income was $17 million, well above our earlier estimates, as a result of strong revenue and gross margin performance, combined with our disciplined approach to investing for growth. We're pleased to have managed the transition to non-GAAP profitability out of the gate in fiscal 2023. During the quarter, we added a record number of net new customers to our BILL standalone platform, totaling 14,200. Customer retention remained healthy and was consistent with last quarter.

We continue to see strong engagement from customers on the BILL standalone platform and direct and accountant channel customers transacted at a similar rate to Q4. Throughout Q1, we also made progress increasing our yield on ad valorem payments, which led to a very strong transaction revenue growth of 94% from Q1 of last year. Our average revenue per transaction grew 34% year-over-year to approximately $8. These results demonstrate the tools we have to deliver value to customers and expand monetization, even in an environment where SMBs are increasingly reacting to macro influences by reducing their spending. During Q1, BILL standalone TPV per customer, excluding the FI channel, declined by 3% sequentially. In Q4, we saw mid-market businesses beginning to moderate their spending, and that trend is now visible with our micro and SMB customers as well.

These trends are reflected in our outlook, which I will discuss later. Now turning to an update on our key metrics. We ended the fiscal first quarter with 419,800 businesses using our solutions. This includes 172,000 BILL standalone customers and 22,800 Divvy spending businesses. Among our BILL standalone customers, 45,100 are from financial institution partners. Net new customer adds on our BILL standalone platform were strong across all of our go-to-market channels. In the direct and accountant channels, we had 5,100 net new customers, which was above our expected range of 4,000-5,000.

In the FI channel, we had 9,100 net adds, driven by an increase in the number of small businesses signing up to use our white label platform, as well as the impact of a one-time migration of customers at an existing bank partner onto our white label platform. As a reminder, customer net adds in our FI channel fluctuate quarter to quarter, depending upon the timing of each institution's sales and marketing initiatives. Moving on to payment volume during the quarter. We processed $64.9 billion in total payment volume, representing 34% year-over-year growth. This includes BILL standalone total payment volume of $61.6 billion in Q1, representing growth of 31% year-over-year, and $3 billion in card payment volume from Divvy spending businesses, representing 103% year-over-year growth.

TPV from BILL standalone customers, excluding our financial institution partners, was $55.7 billion. On a per customer basis, BILL standalone TPV, excluding customers from our financial institutions, increased 8% year-over-year. Card payment volume per Divvy spending business increased 21% year-over-year. Moving on to transaction volumes. We processed 19.6 million payments in Q1, representing 45% year-over-year growth. This includes 10.8 million payments on the BILL standalone platform. Customer engagement with our solutions remains very strong. Excluding the FI channel, BILL standalone customers averaged 78 transactions in the quarter, similar to last quarter and a year ago. During the quarter, we also processed 8.5 million Divvy card transactions, reflecting 83% year-over-year growth. Now I'll review our reported Q1 results.

Total revenue was $229.9 million, an increase of 94% from a year ago. Core revenue was $214.6 million, representing growth of 83% year-over-year. This includes $9.8 million of revenue from FI partners. Subscription revenue increased to $58.1 million, up 57% year-over-year, driven by our growing customer base and the inclusion of Invoice2go subscribers from the acquisition that closed on September 1st, 2021. BILL standalone subscription revenue growth was 45% year-over-year. Transaction revenue increased to $156.5 million, up 94% year-over-year, as a result of strong year-over-year TPV growth, increased ad valorem product monetization, and increasing spend on Divvy.

BILL standalone transaction revenue totaled $76.3 million, reflecting 75% year-over-year growth, and Divvy transaction revenue totaled $78 million in Q1, reflecting 113% growth from Q1 of last year. Float revenue was $15.3 million, an increase of approximately $14.5 million from a year ago. Float revenue exceeded our expectations, given the magnitude of the recent Fed funds rate increases and our proactive migration of customer funds into higher-yielding investments. Our yield was 192 basis points in the quarter, demonstrating that our scale, combined with our proprietary payment technology, is proving to be an important differentiator that enables us to create tailwinds during this period of rising interest rates. Turning to our gross margin and our operating results for Q1.

non-GAAP gross margin was 85.8%, up 2 points year-over-year as a result of a higher mix of variable transaction fee revenue, improving transaction economics, and strong float revenue. As a reminder, we manage a portfolio of payment offerings with a range of margins that are in various stages of adoption, and we currently have a very favorable payment mix. For fiscal 2023, we have increased our expectation for non-GAAP gross margin to be in the range of 80%-82%. non-GAAP operating expenses were $188 million, an increase of $16 million from Q4. We continue to invest in R&D as we build our unified platform, introduce new products, and enhance the customer experience. Sales and marketing expenses increased due to the expansion of our go-to-market initiatives and rewards expenses associated with our Divvy Spend Management solution.

Non-GAAP operating income was $9.1 million, and our non-GAAP operating margin was 4%, an improvement of 12 percentage points from -7.8% last year. Non-GAAP other income, net of other expenses, was $7.7 million and benefited from higher yields on corporate cash balances. Our non-GAAP net income was $16.9 million, or a non-GAAP net income per diluted share of $0.14 based on 117.2 million diluted weighted average shares outstanding. Our non-GAAP net income was significantly better than our expectations due to our revenue performance and our disciplined approach to managing growth. Moving on to the balance sheet. Cash, cash equivalents, and short-term investments at the end of Q1 were $2.6 billion.

We continue to be well capitalized, which we believe is an important advantage, enabling us to continue investing in market penetration during this economic cycle. Before shifting to our financial outlook for the second fiscal quarter and full fiscal year 2023, I'd like to cover how we see the macro environment impacting SMBs and our business. In the near term, the macro environment appears to be increasingly challenging for businesses. We anticipate the trends we've observed with businesses moderating their spend will continue throughout fiscal 2023, and we expect that this will translate into lower year-over-year payment volume growth in the quarters ahead. At the same time, in this environment, the value proposition of our platform is resonating more than ever with SMBs, and we have seen strong engagement from existing customers, continued high retention, and healthy new customer demand.

Now more than ever, businesses need our solutions to navigate the uncertain environment, and we believe this is an opportune time for us to invest in our business. We believe we can accelerate the positive impact we're having for SMBs globally while monitoring the external environment and proactively balancing growth and non-GAAP profitability. Now turning to our outlook. A couple of notes up front. First, our outlook does not assume a severe economic downturn. Second, we expect our acquisition of Finmark to close during the fiscal second quarter, and therefore, we have included the acquisition integration costs and incremental investments associated with continuing their product development in our guidance for Q2 and fiscal year 2023. Finmark is not expected to have a material impact on revenue results in fiscal 2023.

For fiscal Q2, we expect our total revenue to be in the range of $241.5 million-$244.5 million, which reflects 54%-56% year-over-year growth versus a very seasonally strong Q2 last year. We expect float revenue to be approximately $18 million in Q2, which assumes our yield on FBO funds will be approximately 225 basis points. On the bottom line, for Q2, we expect to report non-GAAP net income in the range of $14.5 million-$17 million and non-GAAP net income per diluted share in the range of $0.12-$0.14 based on a share count of 118.4 million diluted weighted average shares outstanding. For Q2, we expect other income, or OIE, to be $8.5 million, net of other expenses.

We expect stock-based compensation expenses of approximately $130 million in Q2, which includes a $75 million run rate plus the impact of the GAAP accounting treatment related to the change in role of our chief revenue officer to a strategic advisor. This accounting treatment requires us to pull forward the stock-based compensation expense related to this new role, although the vesting period remains unchanged. In Q2, we expect capital expenditures of approximately $8 million-$9 million. For fiscal 2023, we expect total revenue to be in the range of $994 million to $1.007 billion. At the high end of our revenue range, we reached a billion-dollar revenue milestone, which speaks to the value proposition of our solutions, the large market opportunity, and the collective efforts of the talented employees at BILL.

We expect float revenue to be approximately $73 million in fiscal 2023, which assumes a yield on FBO funds of approximately 235 basis points for the year. We expect to report non-GAAP net income for fiscal 2023 in the range of $57.5 million-$70 million and non-GAAP net income per diluted share of $0.48-$0.59 based on a share count of 119.4 million diluted weighted average shares outstanding. In addition, for fiscal 2023, we expect other income or OIE to be $34.5 million, net of other expenses. For fiscal 2023, we expect total stock-based compensation expense of $355 million and capital expenditures of approximately $35 million for the year.

In closing, we have confidence that we're well-positioned to successfully navigate the uncertain economic environment because of our multiple recurring revenue streams and diversified business model. We are continuing to invest for efficient growth given the large market opportunity and the increasing adoption of cloud-based solutions by SMBs. Operator, we are now ready to take questions.

Operator (participant)

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now, and if you change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted locally. Our first question comes from Will Nance from Goldman Sachs. Will, your line is now open. Please go ahead.

Will Nance (VP)

Hey, guys. Good afternoon. Nice results today. I wanted to maybe follow up a little bit on some of the commentary around the moderated payment volume among some of the smaller cohorts of your customer base. I was wondering if there's anything you could share to kinda dimensionalize the sort of slowdown you guys are seeing and also, you know, what you guys are expecting incrementally to happen in future quarters as you embed that into your outlook. Just maybe compare and contrast the assumptions embedded in your outlook versus, you know, how payment volume growth and other metrics might fare, you know, if we did enter a deeper kind of economic downturn. Thanks.

John Rettig (EVP and CFO)

Thanks, Will. First of all, let me just say that we're very pleased with the work of all 2,400 employees.

Really, you know, not only did we grow 94% in the soft economy, but we flipped to meaningful non-GAAP profitability. That's just because of the ability for our platform to actually meet the needs of businesses. The first thing I would say is that the demand is healthy, and you saw that with the net adds. On the TPV spend, we started, you know, talking about this and seeing this in the Q4 call.

That it was being moderated. The difference between Q4 and now is that in Q4, we said we saw that in the mid-market, and now we're seeing that across all businesses of all sizes. It's not, you know, one thing to call out is the number of transactions per customer has remained consistent. What this tells us is that people are pulling back the spend, but they are actively engaged in using the product and the platform and really managing their business.

Will Nance (VP)

Got it. Makes a ton of sense. You had a handful of announcements in the FI channel related to kind of new partnerships or you know new ad valorem payment methods issuing virtual cards. I'm just wondering if you could maybe talk about how your expectations about the payment opportunity within the FI channel have changed over time. Sounds like you've made some meaningful progress. Maybe just as a quick follow-up for John, you know I know the FI channel has you know major impacts on some of the KPIs that you disclose. You know any color on how the handful of new deals that you signed you know could impact the numbers in future quarters? Thanks.

René Lacerte (Chairman, CEO and Founder)

Yeah. Thanks again, Will. I think there's a couple of things with the FI partner channel strategy that we're very happy with this quarter. As we build our platform, one of the things that we work hard to do is to make it a unified platform across all channels, across the entire ecosystem. What we saw in this quarter were kind of, you know, three things with respect to the FIs, right? We saw first and foremost that we managed to get one of our FI partners to start, you know, focusing on spend management, including that into their offering. That's work that we'll be announcing or rolling out, I should say, later in the year.

The other thing that we also saw was the ability to drive our virtual card solution through our platform for FIs. Instead of them using their own virtual card, they're using our virtual card program because of the strength of the supplier enablement that we have and the strength of the overall program that we have. The third thing we saw with the FIs is that we saw two more additional banks sign up for the platform, which we'll talk more about later as those rolled out. You know, all in all, we'd say the ecosystem is super strong. We saw great growth in accounts, we saw great growth in the FIs and great growth in the direct.

John Rettig (EVP and CFO)

Just adding to the second part of the question about the impact on our numbers in future quarters. We've made a lot of progress in the financial institution channel over the last 18 months or so, and I think some of the things that we announced this quarter are just a continuation of that momentum and helps us bring more of our products and more of our monetization model to these partners. With that said, I think that plays out over a longer period of time versus in the very short term, where as we talked last quarter, most of our revenue from our FI partners will be derived from what we've already booked in terms of remaining performance obligations versus incremental revenue from some of these new announcements.

We are confident that those will have a positive impact over the course of the, let's call it, intermediate term.

Will Nance (VP)

That's great. I appreciate you guys taking all my questions.

René Lacerte (Chairman, CEO and Founder)

Thank you.

Operator (participant)

Our next question comes from Bob Napoli from William Blair. Bob, your line is now open. Please go ahead.

Bob Napoli (Partner and Senior Research Analyst)

Thank you. Good afternoon. Nice quarter. Very impressive. I mean, you added, you know, quite a few customers through, you know, core BILL, Divvy, and Invoice2go. I mean, what drove that, I think it's a record quarter for new additions. Was there something on the marketing front that accelerated the number of new additions, even in a, you know, more challenging environment?

René Lacerte (Chairman, CEO and Founder)

Thanks, Bob. Good to hear your voice. You know, a lot of things that I love about building a business is building momentum and kind of what I call the snowball effect of kind of the market and the product and the platform and the people, and I think we're just seeing that. We have an opportunity to really change the way business gets done, to really help businesses manage their financial operations in a way that they haven't done before. Ultimately, that means that it's not elective software. Customers, you know, can't choose not to do this. The digital transformation wave is happening. What we're seeing is that we saw this, you know, in the beginning with hybrid, that there was an opportunity for remote work to be done for your back office.

what we're also seeing in the soft economy with inflation being high is that the deflationary force that our platform provides, the ability to do more with less, it's real. We see across the ecosystem that this is driving demand. That's, you know, the healthy demand is something that we're excited about, something that we believe is an opportunity for us to continue to drive through the unified platform and all the things that we're doing. All in all, I would just say this is us building that momentum and that snowball.

Bob Napoli (Partner and Senior Research Analyst)

Thank you. With the 172,000 core BILL customers and the cross-sell, just an update, how many of those are currently using Divvy? What is the opportunity, and is there, you know, any color you can give on success in cross-sell and momentum there would be helpful.

René Lacerte (Chairman, CEO and Founder)

Sure. We're very happy with the cross-sell success that we've had to date. We continue to obviously drive the unified experience. The one thing we did this past quarter, obviously, was on the brand announcement. That is going to roll into the look and feel of the unified platform. But all of that means that we are getting more comfortable with ways that we can attract and drive the, you know, the cross-selling of the platform. We continue to believe that we'll do more once we have the unified platform, and, you know, that is continuing to go well, the integration of the products and the solutions that we have. We'll share more as that becomes available.

Bob Napoli (Partner and Senior Research Analyst)

Thank you. Appreciate it.

René Lacerte (Chairman, CEO and Founder)

Thank you, Bob.

Operator (participant)

Our next question comes from Samad Samana from Jefferies. Samad, your line is now open. Please go ahead.

Samad Samana (Managing Director)

Great. Thank you. Maybe first question. On the acquisition, it makes a ton of strategic sense, but René, I was hoping maybe you could help us understand how it's the glue that brings what the spend management and AP together, or maybe how you're seeing this fit into your current portfolio and maybe what other roads it opens for you, as you look to the future as well.

René Lacerte (Chairman, CEO and Founder)

Thanks. Thanks, Samad. We said for a while that one of the things that we think is critical for financial operations is to have insights and dashboards that help businesses manage their back office, whether that's payables or receivables, money in, money out, and all the things that go with that. If you go back to the roots of the company, the original name of the company was Cashboard, and actually, the original name was Cashboard because I like the idea of a dashboard. The goal here really is to create one place for the business to be able to manage their financial operations, to do that in a way that's different than they've ever done before, that creates more value, more efficiency.

What we see with the tool and the platform from the team at Finmark is a very elegant, tech solution that really is driving innovation when it comes to pulling together disparate data systems across multiple different tools into one view so that you can actually manage your financial operations. Super excited about that, super excited to have the team join our team and look forward to delivering those solutions in the future.

Samad Samana (Managing Director)

Great. Maybe, John, just a follow-up for you. Appreciate the incremental disclosure around the TPV ex-FI channel. I think if I heard you correctly, you said it's up 8% year-over-year. How should we think about maybe that trending? Are you expecting? If you think about your forward forecast, is that embedding a further slowdown? Is that expecting maybe a decline in actual SMB sales TPV? Actually, think about the bill.com only ex-FI.

John Rettig (EVP and CFO)

Yeah. Thanks, Samad. We are expecting some of the trends that we've observed over the last, call it, four months or so of moderating spend from customers ex-FI channel to continue. What that means for us is really lower growth going forward is our current expectation. We factor that into our outlook for the year. There are, I think, a handful of opportunities for there to be upside to those growth profile numbers, but that's really dependent upon the actual impact on the economic cycle and what's happening with our SMBs. We've assumed some of the trends that we've seen recently are gonna continue.

Samad Samana (Managing Director)

Great. Great to see the solid results. It's a tough backdrop, and these are great numbers.

John Rettig (EVP and CFO)

Thanks, Samad.

Operator (participant)

Our next question comes from Darrin Peller from Wolfe Research. Darrin, your line is now open. Please go ahead.

Darrin Peller (Managing Director)

Hey, thanks, guys. You know, it is good to see the customer acquisition trends continuing at this rate, particularly given all the headlines we've heard from competitors and competitive dynamics, whether it's Intuit or NetSuite or others. I'd really love your thoughts on just the landscape for a moment, and really just break it down, if you don't mind, a little more in terms of the SMB, different tiers of SMB and what you're seeing, and if you actually think some of these competitors or, you know, partner/competitors could make some real progress or not, 'cause certainly doesn't look like it's showing up yet in your numbers.

René Lacerte (Chairman, CEO and Founder)

Yeah. Thanks, Darrin. Good to hear your voice and to you know really just kind of get to how we think about it. We spent the last 16 years defining this category, and it's very complex. The payments, the compliance, all the things that go around it, financial operations, it's complex. You know what's working for us is we have a broad horizontal approach across a diverse ecosystem. We can reach SMBs either direct or through our account channel. We have 6,000 accounting firms that are part of the solution for our customers. You know we have six of the top 10 banks, and we're doing more and more with accountants and with banks to deliver more services to those customers.

It's the combination of the platform that was built from the beginning for SMBs and the ecosystem that's allowed us to continue to reach SMBs and to really help them in this time. I mean, it's a soft economy, and the ability for us to really drive value and be a deflationary force is something that we think is super valuable. You know, ultimately, I would say that the number one competitor is pen and paper, and it has been for and will be for a long time. That's where we're gonna focus is on these manual processes. How do you automate them? How do you actually take the pain out of the small business life and just stay focused on delivering value for them?

Darrin Peller (Managing Director)

Okay, thanks. Just for John, maybe just one quick follow-up as a reminder. I mean, the key sources of the sequential change in take rate's been strong, but if you could just remind us on the opportunities there and, you know, again, if you see that being resilient through any kind of macro, you know, scenarios, almost regardless of how volume goes, is the potential to change the take rate and move the payments revenue up still strong?

John Rettig (EVP and CFO)

Sure. Thanks, Darrin. We've made great progress expanding the our monetization transaction monetization over the last couple of years. In fact, this Q1 was our best ever quarter-to-quarter growth in terms of transaction monetization, driven in part by continued adoption of our ad valorem products. As we mentioned last quarter, we're at about 10% ad valorem as a percentage of TPV. That continues to grow. In addition, in Q1, we had the benefit of an ongoing migration between card issuing providers and networks, and that led to a step up in our monetization. In the near term, we don't necessarily expect the same level of monetization expansion as our volume between issuers is gonna be more stable in the forward quarters.

Over the next few quarters, I'd say the near term, really, we're expecting lower expansion in that take rate, perhaps even lower than historical averages given the macro environment. As we've said for a long time, we're very bullish about the long-term opportunity to continue to grow our take rate and our monetization over time. That remains perfectly intact. In the near term, I would expect, just given the environment, a lower expansion than we've seen historically.

Darrin Peller (Managing Director)

All right, got it. Thanks, John.

Operator (participant)

Our next question comes from Ken Suchoski from Autonomous Research. Ken, your line is now open. Please go ahead.

Ken Suchoski (Equity Research Analyst)

Hi, good morning, René and John Rettig. Nice quarter. Thanks for taking the questions. I just wanted to follow up on Darrin Peller's question there. The increase in the transaction fee take rate excluding Divvy, I mean, really accelerated this quarter versus prior quarters, and you kinda touched on it in the last answer. I don't know if anyone expects you to provide specific penetration rates this quarter, but can you give us a sense of, you know, of which payment types are seeing the most traction? I think you've added a few new payment types over the last year or so.

John Rettig (EVP and CFO)

Thanks, Ken. It's really across the board with our ad valorem products. We are still in the earlier stages of adoption. We think there's a significant growth runway ahead by allowing suppliers and customers choice in figuring out what the right payment method for their transactions is. We launched international payments and virtual cards more than a couple years ago. Those are the largest dollar contributors to our growth. Some of the newer products around real-time payments and instant transfer, as well as pay by card, are doing nicely and that expanding adoption is having a positive impact on our overall consolidated level of monetization. On a dollar basis, though, those are still pretty small contributors.

Ken Suchoski (Equity Research Analyst)

Okay. Okay, that makes a lot of sense. Then I think, you know, we try to run some of the math on the Invoice2go revenue, specifically the transaction revenue, and it looks like that continues to step up nicely. I was just wondering if you could talk about, you know, what's driving that and I guess how sustainable that increase is.

John Rettig (EVP and CFO)

Yeah. We're pleased with the progress that we're making with Invoice2go. In terms of the profile of the product, first, it's predominantly subscription revenue, and we see a growing transaction revenue stream driven by some of the improvements and changes we've made to the product experience integrating branded payments. That's still in the I'd say earlier phases of development. It's not material to our overall business, but our monetization of those payments is significantly above where Invoice2go was on a standalone basis. We still have a long way to go to continue to drive monetization of the existing invoice volume for Invoice2go.

Secondly, the big opportunity we think longer term is as we apply the AR accounts receivable, you know, knowledge and product capabilities, not just to the Invoice2go customers, but to BILL subscribers and our network members. Together, we think that's gonna be a big opportunity over the intermediate and longer term.

Ken Suchoski (Equity Research Analyst)

Okay, great. Thanks a lot. Appreciate it.

John Rettig (EVP and CFO)

Thanks, Ken.

Operator (participant)

Our next question comes from Tien-Tsin Huang from JPMorgan. Tsin, your line is now open. Tien-Tsin Huang, your line is now open. Please go ahead.

Tien-Tsin Huang (Managing Director and Senior Equity Analyst)

Oh, thank you so much. Great results here. Just the SMB comments, thank you for that. I heard the lower payment volume, stable transactions. Any thoughts on client growth or net adds given your views on adoption, investing in sort of this uncertain environment? Any change versus 90 days ago on that front?

René Lacerte (Chairman, CEO and Founder)

Thanks for the question, Tsin. I would say, you know, much of what we talked about in the script is just this, you know, softening economy ends up meaning that businesses turn to, you know, doing more with less. We have a platform that enables businesses to do more with less, that really helps them manage their business with efficiency. What we've seen across the entire ecosystem is that that demand is healthy, in part because we have a horizontal approach to the go-to-market, whether it's through any of our direct efforts or accountant partners or our financial institution partners, as well as that we serve businesses of all sizes up to the large mid-market customers. You know, the demand is healthy.

We think the opportunity to continue to drive more value for businesses and more customer growth in the you know the untapped market that we have ahead is strong.

Tien-Tsin Huang (Managing Director and Senior Equity Analyst)

Okay, great. If you don't mind, I have to ask you. You mentioned there, René, you're issuing virtual cards on behalf of an existing FI partner. I'm curious, is that alongside of an incumbent solution they were using before and kind of speaks to the benefit of selling something integrated through BILL to their small business banking partners? Just trying to better understand that. Thank you, if you don't mind me asking that detail.

René Lacerte (Chairman, CEO and Founder)

Yeah, no. It's a great question. It's one of the things that we are very proud of, is that the broad capability of the platform creates value for our customers and our partners. To your point, the financial institution partner did have a virtual card product that they were using before with their business customers, and they switched to using ours for their customers. That's because of the power that we have of driving transactions and driving value for suppliers that are on the network.

The strength of our supplier enablement team, which we've been working on since we launched, the strength of our ability to really, you know, help the customer suppliers connect, that's all something that we've been working on, and that's what the financial institution partners saw and wanted to take advantage of. That's why we did it.

Tien-Tsin Huang (Managing Director and Senior Equity Analyst)

Yep. Perfect. No, that's telling. Thank you.

René Lacerte (Chairman, CEO and Founder)

Thank you.

Operator (participant)

Our next question comes from Keith Weiss of Morgan Stanley. Keith, your line is now open. Please go ahead.

Speaker 16

Hey, it's Jonathan on for Keith. Thanks for taking our questions. I wanna start with TPV trends. Can you talk us through any differentiation you're seeing in Divvy and core BILL TPV trends and how you expect that to evolve going forward, just given some of the macro commentary?

René Lacerte (Chairman, CEO and Founder)

Thank you, Jonathan. We have, you know, generally seen businesses, all businesses, you know, moderate their spend in this economy. What you see in Divvy is that it is just growing much faster. It's a smaller base to start with. We've continued to have strong growth in TPV year over year there. We do see, you know, I would say softer spend across all of our customers.

Speaker 16

Understood. Appreciate that color, and wanna dig into more of the opportunity to work with suppliers. Can you talk through that? Is there any opportunity to drive adoption of more monetizable payment modalities through working closer with your suppliers? How should we think about that opportunity amidst a softening macro?

René Lacerte (Chairman, CEO and Founder)

Another good question here. We talked about enabling the suppliers in our network in Canada and now the U.K. to be able to decide how they wanna be paid and what currency they wanna be paid in. We've made and activated both sides of the network so that the... You know, this is, I would say, a movement for us, treating and viewing, I should say, the suppliers as customers as well. What that leads to is that when somebody who's in the U.K. or Canada is being paid by a U.S. business that's on BILL, that creates an FX transaction monetization opportunity for us, gives them a better monetization, FX rate than what they could get from, you know, potentially their local bank, and that's the value that we create. That's the first example.

There will be other examples of how we think about adding value to both sides of the network, and we'll continue to invent and innovate on that front.

Speaker 16

Appreciate the color, guys. Thank you.

René Lacerte (Chairman, CEO and Founder)

Thank you, Jonathan.

Operator (participant)

Our next question comes from Brad Sills from Bank of America. Brad, your line is now open. Please go ahead.

Brad Sills (Managing Director and Senior Research Analyst)

Oh, great. Thanks so much. I wanted to ask a question on the FI channel, another great quarter on net adds there. I'm curious, is there a different ramp time for those customers when they onboard versus your average customer coming in through direct or accounting firm channel? I'm asking 'cause I'm wondering if there might be some unseen potential ramp in spend coming from some of these net adds coming in through the FI channel in the coming quarters.

René Lacerte (Chairman, CEO and Founder)

Thank you, Brad, for the question. What we see is that consistent across all of our customers, we make it really easy for them to get on the platform. We target and actually build it into the business model that within 30 days you're using the product or you're not. You know, with our FI partners, we see that they're able to get up and going. Obviously, it probably does take, you know, three to six months to kinda get to meaningful activity on the platform, but it doesn't really vary by channel. The opportunity for us is to continue to, you know, drive adoption earlier in the experience with BILL. We have teams that work on that every day.

Brad Sills (Managing Director and Senior Research Analyst)

Got it. Great. On the macro, if I might. You mentioned obviously that you're expecting some continued moderation here in TPV, but TPV, I guess transaction volumes per customer you're mentioning has held up nicely. So, I mean, where are you seeing the impact? Is it transaction size? How would you classify that headwind that you're referring to on the macro side with regard to TPV?

John Rettig (EVP and CFO)

Yeah. Thanks, Brad. As René mentioned, we're seeing some softness across most of the customer segments now. It still appears to be concentrated in some of the discretionary spend categories. I think we pointed this out last quarter as well, where we started to observe this in the month of June, and I think that has continued. Things like advertising spend would be a good example. We looked at a lot of the top advertisers that small businesses or advertising channels that small businesses use to drive customer acquisition and other things. We looked on a vendor-specific basis and found that across really the whole segment, spend is down. That's something that is consistent with other, you know, data points that we've looked at externally.

I think it just says that our small business customers across the size range are reacting to the external environment and being a bit more cautious about their operating expenses, and we're seeing that across the spend habits of our customers.

Brad Sills (Managing Director and Senior Research Analyst)

Understood. Thanks, John. Thanks, René.

John Rettig (EVP and CFO)

Thanks, Brad.

René Lacerte (Chairman, CEO and Founder)

Thank you.

Operator (participant)

Our next question comes from Josh Beck from KeyBanc. Josh, your line is now open.

Josh Beck (Managing Director)

Thank you for taking the question. You know, I wanted to ask just a little bit about your risk management philosophy. Obviously, that's something that you've really ingrained in the platform in the prior decades. Obviously Divvy brings card receivables. It's probably a little bit of a different dynamic. Maybe just, you know, give us a sense of kind of your approach to risk management and maybe how that is evolving as you folded in Divvy as well.

John Rettig (EVP and CFO)

Sure. Thanks, Josh, for the question. Yeah, we've been building out proprietary capabilities around risk management, underwriting, and all those things with the BILL platform for over a decade. Our goal with that is to simultaneously deliver a great customer experience that includes fast payments while appropriately managing the exposure associated with that payment volume. We've taken the same approach with Divvy, combining our risk teams from day one of the acquisition. That's the first integration thing we did. That allows us to leverage the combined consolidated data asset that we have around transactions and entities in order to make better, more informed risk decisions.

I think we've shown in the time since the acquisition that we've actually been able to improve the underwriting and the risk capabilities of the combined team and deliver a great experience for customers at the same time. We feel really good about the progress we're making, and it's all about balancing, you know, serving customers, but doing so in a way that everyone's able to be successful with the products that we offer.

Josh Beck (Managing Director)

Great. Then maybe a follow-up on Finmark and some of the synergies. It certainly sounds like it's an important tool for accountants. Do you envision, you know, maybe bringing in new accounting partners or having you work maybe with more of their customers, so it's kind of effectively like an indirect benefit from a revenue point of view? Just curious how some of the synergies may work there.

René Lacerte (Chairman, CEO and Founder)

Thanks, Josh. I'll take this one. I think you know, you're right that one of the strategic values is with accountants. Accountants manage, just as a reminder, manage multiple clients that, you know, tens, dozens of clients. What they're providing in the category that we've really helped define there is the, you know, client advisory services. What they, you know, refer to as CAS. The ability to be a strategic advisor to your client requires that you actually digest data, understand it, look at the dashboards, and provide insights that weren't necessarily easily attainable for the small business themselves. I do think that accountants are going to value this integration once we have it together.

It's something that we think will help us drive continued adoption for client adoption as well as for accountant adoption.

Josh Beck (Managing Director)

That's been very helpful. Thanks, René and John.

René Lacerte (Chairman, CEO and Founder)

Thank you, Josh.

John Rettig (EVP and CFO)

Thank you.

Operator (participant)

Our next question comes from Bryan Keane of Deutsche Bank. Bryan, your line is now open. Please go ahead.

Bryan Keane (Managing Director and Senior Equity Analyst)

Hi, guys. Congrats on the results. I think it's an important point to talk about transactions holding in versus volume, which is moderating a little bit. John, can you just talk to us about the sensitivity of the model? If we see that moderation but transactions hold, will it have a material impact to the P&L, or will, since transactions are holding in, it'll only be a slight impact that we'll see?

John Rettig (EVP and CFO)

Thanks for the question, Bryan. We do monitor engagement with our platform from customers very closely, and one of the metrics that's important, as you mentioned, is transactions per customer. We've seen pretty consistent results there, excluding the FI channel, which has a slightly different customer profile. The core BILL customer is pretty consistent with last quarter and last year, and that tells us that customers continue to use our platform. They leverage it to run their financial operations, even if they're spending less in terms of overall operating expenses in the BILL through the platform. As we showed with our results in Q1, even if spend is a little bit softer than in some other period, we still have the tools to both deliver value for customers as well as monetize that transaction volume.

We have both fixed and variable price transaction fees, and so both contribute to our revenue growth, and obviously the foundation of our model is in subscription fees, which continues to be healthy growth given the way in which customers use our platform.

Bryan Keane (Managing Director and Senior Equity Analyst)

Got it. Just maybe the bigger picture, just thinking about a slowdown or even a recession. You know, how has the model held up, or how would you expect it to hold up, for revenues in different kind of scenarios, maybe a shallow recession versus a deep one? You probably do some scenario analysis work. We're just trying to get a sense of the sensitivity of a potential downturn and what the impacts could be to the model.

John Rettig (EVP and CFO)

Yeah. It's a fair question, Brian, and we certainly have spent time on different scenarios. What I can say is that our outlook represents kind of all of the information that we have available around recent trends and the health of our SMB customer base, which we think is quite strong. We have assumed that there's gonna be some continuing softness or moderation of spend that persists throughout the fiscal year. In terms of our outlook set of assumptions, we're not assuming a severe economic downturn, so that's a scenario that's outside the scope of what we've looked at.

Beyond that, as I think we mentioned in the prepared remarks, we're still monitoring the health of our customer base and the situation closely, and we think we're well positioned to adapt to serve customers and to continue to scale the business, regardless of that external environment that we're operating in.

Bryan Keane (Managing Director and Senior Equity Analyst)

Okay. Great. Thanks for the color.

John Rettig (EVP and CFO)

Thanks, Brian.

Operator (participant)

Our next question comes from Ken Wong of Oppenheimer. Ken, your line is now open. Please go ahead.

Ken Wong (Managing Director and Senior Analyst)

Great. Fantastic. Thanks for taking the question. Just a quick question on Finmark. You mentioned that the revenue impact is likely negligible, but did call out some spend being baked in. Just wondering if there's any quantification in terms of margin earnings impact that you could call out.

John Rettig (EVP and CFO)

Thanks for the question, Ken. Yeah, we haven't, you know, explicitly quantified the numbers around Finmark. I can tell you it's a very small transaction, talented team, great product, we think fits strategically very nicely with where we're taking our platform over time, not only providing, you know, automation around financial operations, but shifting towards helping provide insights for customers to run a better business. Finmark is gonna be a core capability over time as we do that. We're continuing the investment in the team and building out the product platform. They, as a standalone business, just got to the revenue generating stage, but at our scale, obviously it's very small and over time, we'll provide more, you know, more color once the transaction closes.

Ken Wong (Managing Director and Senior Analyst)

Okay. Perfect. Fair enough. Another kind of margin spend question. You know, given that this is kind of the first quarter you guys have broken into kind of non-GAAP profitability, should we assume the trajectory to be fairly linear, or is there some lumpiness seasonality that we should be thinking about, as we kind of work through our models?

John Rettig (EVP and CFO)

Well, yeah, we provided the color for Q2 and for the fiscal year. I'd say some of the historical seasonal patterns around the transition from December to March and what happens with spend during that period, we're expecting to continue. That usually has some impact on our bottom line results as well. Other than that, you know, you could probably, you know, use some of the past patterns to get to Q3, Q4 numbers.

Ken Wong (Managing Director and Senior Analyst)

Okay, fantastic. Thanks, John.

John Rettig (EVP and CFO)

Thanks, Ken.

Operator (participant)

Our next question comes from Daniel Jester of BMO Capital Markets. Daniel, your line is now open. Please go ahead.

Daniel Jester (Senior Equity Research Analyst)

Great. Thanks for squeezing me in. Just a quick one and a clarification point. For the customers that you've noticed that are reducing some of the spend, you called out a couple of times in the call. If you look at their usage of ad valorem payment models, are they going backwards? Just wondering if that's a way that they may cut costs for themselves. I'm just trying to think about how that could evolve for the take rate going forward. Thanks.

John Rettig (EVP and CFO)

Thanks, Dan, for the question. No, we haven't really seen or witnessed that trend. The commentary around the softening spend is more, you know, businesses, particularly in discretionary categories, spending less, but with a very high rate of repeat transactions with their suppliers. We still see approximately 80% of the transactions on our platform are repeat recurring transactions between buyer and supplier, but they may be transacting in a slightly lower dollar value. It's not really something that we've seen influence the payment types or the distribution of payments or ad valorem across the platform. It's more just the absolute spend at this point.

Daniel Jester (Senior Equity Research Analyst)

Great. Thanks very much.

John Rettig (EVP and CFO)

Sure.

Operator (participant)

We have one more time. We have time for only one more question, and our next question comes from Andrew Bauch of SMBC. Andrew, your line is now open. Please go ahead.

Andrew Bauch (Director and Senior Equity Analyst)

Hey, guys. Thanks for squeezing me in here. You know, René, you've been talking about the unified platform underway and that build being able to go to market with all three of the assets and now Finmark really bundled in one product. I guess how far away are we from that becoming a pure reality? Maybe if you can just give us an update on how you expect that to translate to an impact on the model one way or another.

René Lacerte (Chairman, CEO and Founder)

Sure. Thank you, Andrew. You know, I think about it in kind of different phases and steps. I mean, the first thing, you know, to build anything requires one team, and we started that process, obviously with the acquisitions and then integrating the organizations last winter. Then it takes kind of one brand look and feel, which we just announced. And then, you know, obviously it takes one platform. And, you know, where we're at right now is that we have the backends talking to each other, and they're integrated, and that allows us to start developing the customer experience. And obviously, Finmark will be on top of this. But we really see that the importance of having one place for any customer to be able to get the value that we see. We see that as being really important.

We see customers wanting to, you know, continue to save time, spend less time managing their financial operations, and more time thinking about the insights. You know, we continue to, you know, develop and work on that mission to serve millions of businesses and to be their essential financial operations platform. That's something that, you know, we'll continue to develop, you know, over the coming, you know, intermediate term.

Andrew Bauch (Director and Senior Equity Analyst)

Great. Sounds like great progress. I know it's been asked before, but maybe I'll ask it in slightly different way. I mean, Divvy delivering, you know, six straight quarters of triple-digit growth is just continues to impress. Is there something about Divvy or next-gen expense management solutions that are accelerating in the current environment? We've heard from your peers that are also seeing, you know, it's similar kinds of impressive results.

René Lacerte (Chairman, CEO and Founder)

You know, I'd say for us, you know, we continue to, you know, work hard on honing the go-to-market and have prioritized the active and engaged customers. As we do that, we get results like you're seeing. Everybody on the team is really focused on how do we make sure customers are getting value in using the product. When they do that, they put spend on the cards that we have, and that drives obviously opportunities for them to manage their business better. The focus is always gonna be on customers. I think what we're seeing is that the solution is, you know, early in the market, earlier than you would say the core BILL, experience is.

There is demand, and there is plenty of opportunity for us to keep driving that demand across our platform and across the market at large.

Andrew Bauch (Director and Senior Equity Analyst)

Yeah.

René Lacerte (Chairman, CEO and Founder)

Great.

Andrew Bauch (Director and Senior Equity Analyst)

The core BILL platform being a great incubator for it as well. Thank you, guys.

René Lacerte (Chairman, CEO and Founder)

Thank you. Well, I just wanted to say thanks everyone for joining us today. BILL kicked off fiscal 2023 with a great Q1, delivering high growth and non-GAAP profitability while making investments to position us for the long run. We're excited about the large opportunity we have to automate the future of finance for millions of businesses to help them succeed. Thanks again for joining us today. Thank you.