BILL Holdings - Q3 2023
May 4, 2023
Transcript
Moderator (participant)
Good afternoon. Thank you for attending today's BILL's Fiscal Third Quarter 2023 Earnings Conference Call. My name is Brika. I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the conference over to Karen Sansot, Vice President Investor Relations at BILL. Please go ahead.
Karen Sansot (VP in Investor Relations)
Thank you, operator. Welcome to BILL's Fiscal Third 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 reports on Form 10-Q filed with the SEC and available on the Investor Relations section of our website.
We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The non-revenue financial figures discussed today are non-GAAP unless stated that the measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures.
Additionally, please note that the appendix of our quarterly investor deck, which is posted on our investor relations website, contains a supplemental table of revenue and metrics information. At times during this call, we will discuss BILL standalone results, which exclude our Divvy spend management, Invoice2go accounts receivable, and Finmark Financial Planning Solutions. 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, profitable growth to the third quarter as we executed on our strategy to be the essential financial operations platform for SMBs. Revenue in Q3 grew 63% year-over-year, driven by broad strength across our diversified revenue streams. We also made significant progress growing non-GAAP net income, which was $59 million for the quarter, reflecting a margin of 22%.
At the end of Q3, more than 450,000 businesses used BILL to automate their financial operations and generate $65 billion in payment volume during the quarter. We are pleased with our Q3 results amidst an external environment that included significant macro uncertainty and a banking crisis. Our financial performance and scale are a testament to the value of our platform and ecosystem.
Consistent with earlier indicators from the last two quarters, SMBs are moderating their expenditures in this tough macro environment and continuing to focus on doing more with less. In Q3, customers were highly engaged with our platform and made a similar number of transactions on a year-over-year basis, yet reduced their expenditures per transaction as belt-tightening continued. We know that BILL is the center of our customers' day-to-day financial operations.
Our platform enables process automation from the moment a bill is received all the way through to syncing completed transaction with the accounting system. Customers leverage our solutions to operate more efficiently and gain increased visibility into their cash flows. A great example of how we help companies transform their financial operations and gain efficiency is Anchored Tiny Homes, a family-owned home building business in Fair Oaks, California, that leverages our accounts payable and spend management solutions.
Cindy Morton, Financial Controller, said, and I quote, "We never knew managing our finances could be this easy. We went from having no understanding of which checks were outstanding to having a real-time view of our cash position. With 35 Divvy cards in use, we know exactly who has made each purchase and have an accurate picture of costs associated with individual home building projects. With BILL, we are able to take on more clients.
In the past year, we went from 60 active construction projects to 140 at any time. BILL and Divvy completely renovated our financial operations." End quote. Our platform enables customers like Anchored Tiny Homes to connect with millions of network members, regardless of which accounting system or bank they use.
We have built a large-scale, two-sided network that simplifies operations and offers automation and multiple payment choices for both sides of a transaction within a secure and frictionless experience. Today, roughly 1/3 of BILL's standalone platform core revenue is generated by suppliers in our network who choose to accept virtual card, Instant Transfer, international payments, and now in beta, Invoice Financing. Leveraging the breadth of our platform, we believe there is significant long-term growth ahead to drive further network member acquisition and ad valorem payment adoption.
Every new member that we add to our network increases platform engagement, thereby enabling additional value creation across the platform. Our platform is the central hub that facilitates millions of transactions each month for billions of dollars. We have built an always-on platform with 24/7 availability in order to deliver the financial peace 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. The day of 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 SVB-bound transactions to another financial institution partner so that transactions continued uninterrupted. We also helped impacted businesses stay operational by utilizing our suite of products. We offered a new way for customers to access capital by pre-approving lines of credit through Divvy, provided a solution for debit card users to connect their cards to our Pay By Card offering, and expanded access to BILL Balance, a secure and convenient place to store funds and make fast payments.
Recognizing that businesses want to manage all their spend in one place, we continue to work on creating an integrated customer experience, blending the best of BILL and our acquired solutions. Recently, we unified the look and feel of our Divvy and BILL 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 tasks all in one place. The consolidated view will enable businesses to gain a more complete picture of their finances and further control their financial operations. By offering enhanced in-product discovery and simplified self-service product adoption, we believe that we will further unlock our sizable cross-sell opportunity.
We are enhancing our accountant dashboard, making it easier for our 6,000-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 predictive. We were an early adopter of AI, applying it to our large data asset for reading invoices, enabling suppliers, detecting risks, and managing documents. 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 8 years as CTO at Electronic Arts, where he led the company through a cloud-based transition and pioneered broad uses of data and AI to improve the game creator and player experience. He also led technology strategies at eBay, connecting millions of buyers with sellers to enable online commerce. At Microsoft, he oversaw development and engineering with key teams. Ken will be taking over from Vinay Pai, who is retiring. In closing, we delivered another great quarter with strong revenue growth and expanding profitability while creating value for hundreds of thousands of SMBs. With our robust platform that automates financial operations and offers a variety of payment and funding choices, BILL serves as the financial nervous system for SMBs and connects them with millions of network members.
I'd like to thank our customers and partners for the trust they place in us, and I'd also like to thank the BILL team for their strong commitment to serving SMBs. 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 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 2.5 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 a 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 B2B 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 derive value from our solutions throughout any business cycle. For example, on our BILL standalone platform, excluding financial institution channel customers or FIs, the average number of transactions per customer was 74, consistent with the March quarter a year ago. Of these payments, approximately 80% were repeat transactions, consistent with prior periods. Repeat transactions are defined as payments initiated between the same subscriber 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 455,300 businesses using our solutions. BILL standalone customers grew to 197,900, up 35% year-over-year. Net new customer adds on our BILL standalone platform were 15,200, which set a new record. This includes 3,700 net adds from our direct and accountant channels, which was up slightly from last quarter. Net adds in the FI channel were 11,500. 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 ACH and check bill pay solution used by their commercial customer segment.
We have transitioned many of the most active Bank of America 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, and this transition does not impact our partnership with Bank of America focused on their small business segment. For our Divvy spend management solution, we ended the quarter with 27,100 spending businesses, an increase of 2,400 from last quarter. Moving on to payment volume, during the quarter, we processed $64.7 billion in TPV, well ahead of our expectations, which assumed the TPV trends we saw late in the December quarter would continue in the seasonally soft March quarter.
BILL standalone 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 in 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 $8.09, reflecting growth of 12% year-over-year. For card payments processed through our spend management solution in Q3, we generated a gross take rate of approximately 262 basis points. Now I'll review our reported Q3 results.
Total 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 TPV growth.
BILL standalone transaction revenue totaled $83.2 million, reflecting growth of 41% year-over-year, and Divvy 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 2.4 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 $40.5 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 $0.50 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 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 is 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 359,000 shares for $27 million at an average price of $75.22 per share. As of March 31st, 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 years.
For the BILL standalone platform, we expect Q4 TPV 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're 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 million-$280 million, which reflects 38%-40% year-over-year growth.
As a reminder, our recent subscription price increase is now in our run rate numbers, 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 FBO funds will be approximately 410 basis points. On the bottom line, for Q4, we expect to report non-GAAP net income in the range of $45.4 million-$48.4 million and non-GAAP net income per diluted share in the range of $0.39-$0.41, 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 OIE, to be $24 million.
We expect stock-based compensation expenses of approximately $64 million in Q4. We expect capital expenditures of approximately $11 million-$12 million. Moving on to full year guidance. For fiscal 2023, we expect total revenue to be in the range of $1.0395 billion-$1.0425 billion, which represents 62% year-over-year growth. We expect float revenue to be $109 million in fiscal 2023, which assumes a yield on FBO 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 $170.4 million-$173.4 million.
We expect non-GAAP net income per diluted share to be $1.46-$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.
Operator (participant)
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you change your mind, please press star two. We have the first question from Andrew Schmidt of Citigroup.
Andrew Schmidt (Director and Senior Equity Research Analyst)
Hey, Rene. Hey, John. good afternoon. Thanks for taking the questions. Good to see the results in the quarter. I wanted to ask about just the spend trends in terms of just the stabilization comment. It's good to hear about just the comment about stabilization, but it does sound like you're expecting kind of more moderation. Maybe you could kind of reconcile what you're seeing currently versus how you're setting up kind of the outlook. Any comments about just what you're seeing in the environment would be helpful. Thanks a lot.
John Rettig (EVP and CFO)
Okay. Thank you, Andrew. Super happy with the quarter, and in part because, you know, the deterioration that we had seen at the end of the last quarter, did not continue as strongly into this quarter. That's the comment around stabilization. What we saw, what that really tells us is that once again, we have proven and seen in the proven capability that SMBs have to be resilient. They've really worked hard to be able to manage their business. They use our platform to be able to do that. 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, you know, across the platform.
You know, in addition, we continue to see great execution across our business, and that enabled us to, you know, drive opportunities to support our customers in multiple ways, to be able to drive monetization across the platform, to be able to drive, you know, customer growth. One of the strongest, you know, quarters ever for us for total net new ads around 15,200. All of that, you know, in this macro environment, I would say, you know, bodes well for our future. I don't know if, John, if you have anything else to say on this? No, I think that was good.
We did expect heading into the quarter that some of the trends we saw materialize late in the December quarter, which was a pretty sizable drop off in spend as businesses were reacting to the macro environment and reducing expenses. We had assumed that those trends would continue in the quarter. It proved to be conservative, frankly. We ended up with TPV 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. We feel really good about the strength of the SMB customer base we have and the utility that the platform is providing for our customers.
Andrew Schmidt (Director and Senior Equity Research Analyst)
Super helpful. Thank you for that. René, maybe I could sneak one more in. Just since you mentioned the sort of the better kind of net new ad profile. I remember last quarter there were some delicious delays in decision making, kind of SMBs pushing software decisions out. It seems like xFI BILL net ads got a little bit better, but still under that kind of 4,000-5,000 mark. Are you seeing improvement in terms of the cycles there, and how should we think about sort of normalization over the next few quarters? Thanks a lot.
René Lacerte (Chairman, CEO, and Founder)
Yeah. Thank you, Andrew. You know, one of the great things about our business is our go-to-market strategy. We have a very robust multi-channel distribution approach, which allows us to support businesses and small businesses wherever they may be and whatever they're looking for solutions to help them really automate their financial operations. You know, that's how we become the financial nervous system for SMBs. What we continue to see is in our direct channel, we continue to see kind of the macro play out in that the smallest businesses continue to kinda be in this wait-and-see mode versus a growth mode. They have, you know, waited to make decisions to add on different expenses to their business.
When it comes to, you know, the, you know, 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. They're, you know, not as busy adding new customers as we would like to see. Ultimately, this is kinda the macro condition that we talked about that, you know, when it impacts the net new adds, it's because, you know, they're focused on using our platform to manage their business today. We believe the opportunity that we see across channels, you know, hence what we saw with the financial institution channel, shows the robustness of our capabilities here that, you know, SMBs, when they need something, when it comes to financial operations, they're gonna come to Bill.
Andrew Schmidt (Director and Senior Equity Research Analyst)
Got it. Very helpful. Thank you very much, René.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Andrew.
Moderator (participant)
The next question comes from Josh Beck of KeyCorp.
Josh Beck (Managing Director and Senior Equity Research Analyst)
Thank you for taking the question. I wanted to ask a little bit about Divvy. Certainly, you've started to unify the experience with BILL. I think you were talking really across the web and mobile apps, but certainly you seem to have more plans. Maybe just help us understand, you know, what maybe some of the early learnings have been, and really just, you know, how we should think about the cross-sell potential in the coming years.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Josh. You know, from the beginning, we have taken the time and placed 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. With the acquisition of Divvy, the focus has been on how do we continue to extend that platform. We have defined this as our unified platform. It's something that we're very focused on. To begin that, you know, integration, we first started with unifying the data lake, if you will, being able to have the ability to see customer data across, you know, both platforms and have a single view of that.
That led us into, you know, also having a unified brand approach, which you saw that in the fall where we kind of, you know, released and shared kind of how we're thinking about branding. What we announced this quarter is that the look and feel that customers see is actually one experience now. It's 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 talked about. Which is to have the platforms, you know, integrated from an experience perspective, a more unified experience, not just from a color perspective, which is the first step, the look and feel, but now integrating different software features and capabilities across that unified experience.
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 and that execution of that requirement for the business. We're excited about what that's gonna 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 Divvy, the value they get out of it. We also see the increased usage and spend across both platforms when they work 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.
Josh Beck (Managing Director and Senior Equity Research Analyst)
Great. Then maybe a FI related question. It sounds like Bank of America is really zeroing in on the SMB segment for the white label option and looking to maybe port the commercial over to more of a direct relationship. That's certainly interesting to hear. How applicable, you know, do you think this is across your broader swath of FI customers and really finding the strong product market fit within SMB in particular?
René Lacerte (Chairman, CEO, and Founder)
Yeah. I think the, you know, the thing that we've always focused on is creating value for our partners and really being there to serve them. You know, we do have multiple relationships with Bank of America. We have the small business relationship, and we have the commercial relationship. When we did the commercial relationship 10 years ago, we were integrating already into what I would call a legacy platform that the bank had. You know, we're at a point now where, you know, this platform now, 10 years later, the bank has, you know, made a decision to go in a different direction and to sunset that legacy platform that supported really just the ACH and check capabilities from a bill pay product perspective.
From our perspective, this is kind of, you know, a one-off, you know, situation. When you look at, you know, the financial institution partners across, we continue to do more and more with all of our partners, including Bank of America. We think this channel is gonna be super important, you know, as financial operations becomes part of the fabric of every SMB, and we're gonna continue to focus on serving those FIs. We have 6 of the top 10. We're gonna continue to focus on serving them with more and more products and more capabilities.
Josh Beck (Managing Director and Senior Equity Research Analyst)
Thanks, René.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Josh.
Moderator (participant)
Thank you. We now have Darrin Peller of Wolfe Research.
Darrin Peller (Managing Director and Senior Analyst)
Hey guys, thank you. You know, I guess we could just start with the take rate expansion, I know that's not... You know, it's more of an output than it is a direct focus necessarily. However, I know after last quarter it didn't expand sequentially as much as you had seen before. We talked about it, and you guys said there may be some areas of being more proactive on that front, whether that's supplier enablement or other categories. We did see a material expansion this quarter, I think roughly three times or two times more than it had been before, sequentially. Can you just comment on what drove some of that strength and, you know, if there are some proactive moves you're making and what can... If there's any sustainability we can count on? Thanks, guys.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Darrin. I'll start and then let John add some more color. First and foremost, you know, we've built a very strong platform that allows us to use multiple levers across the business to drive monetization and more uses of our payment products. In any given quarter, we're doing different things, experimenting, testing, and driving that capability. We've always said that it's not gonna be a linear approach to get to the ultimate expansion of monetization with our customers. This is a good example. We had a lot of great experiments that worked well for us this quarter. I'll let John kind of talk more to that.
John Rettig (EVP and CFO)
Yeah. Thanks, Darrin. We saw really strong ad valorem adoption during the quarter, and that's tied into the suite of payment offerings that we have, and those are resonating with both buyers and suppliers. Specifically, we saw really good 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 US dollar transactions and a lower, smaller, you know, headwind around FX losses that we called out last quarter. Looking ahead, I mean, I think it's fair to assume, you know, typical average quarterly expansion rates. Obviously, subject to there is some quarterly fluctuation here that René mentioned, plus any sort of macro-induced behavioral changes.
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.
Darrin Peller (Managing Director and Senior Analyst)
That's really encouraging, guys. Thanks. I mean, very quick follow-up, just the comments you made on TPV into the next quarter. Is there an element of just macro conservatism? Are you seeing a real change in behavior on customers? Just a quick update. Thanks again, guys.
John Rettig (EVP and CFO)
I'd say looking ahead, you know, to this June quarter, we're assuming that the environment is gonna be, you know, relatively stable, the external macro environment, and that small businesses are continuing to adjust their spend patterns and what ultimately flows through our platform as TPV in light of, you know, inflation, interest rates, credit. All of those things are continuing to force SMBs and our customers to react. We're assuming that continues, but no significant worsening of the environment where we would see major changes from SMBs. It's kind of a continuation of the trends that we feel like we experienced in the March quarter.
Darrin Peller (Managing Director and Senior Analyst)
Thanks, John. Nice job, guys.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Darrin.
Moderator (participant)
Thank you. We now have Brent Bracelin of Piper Sandler.
Brent Bracelin (Senior Research Analyst)
Thank you. Good afternoon. Maybe I'll start with John. Core TPV clearly was stronger than expected three months ago. It sounds like that was partially tied to SMB stabilization. Can you talk a little about linearity of the core TPV trends there on a monthly basis? Did that trend off at all in March, just given some of the regional banking issues? Just any color on linearity would be helpful. Thanks.
John Rettig (EVP and CFO)
Thank you, Brent. First, I just remind everyone that the March quarter is typically seasonally softer from a spend standpoint than the December quarter. We didn't experience in the December quarter the normal, like, seasonal uptick. We had assumed 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 I mentioned before, SMBs are scaling back their spending, but the patterns throughout the quarter seem to be pretty consistent, and that's what led to our commentary about some initial signs of, you know, of stabilization in spend trends.
Brent Bracelin (Senior Research Analyst)
Helpful. Thanks, John.
René Lacerte (Chairman, CEO, and Founder)
Just, you know, one thing I'd add, just you asked about, you know, kind of the regional bank. One of the beautiful things about our platform is that our customers can, you know, switch and add multiple bank accounts. For them, this was a non-event because we stood up, and we took care of our customers.
Brent Bracelin (Senior Research Analyst)
Helpful color. René, one of the biggest questions I get from investors on Intuit, 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 an Intuit? Thanks.
René Lacerte (Chairman, CEO, and Founder)
Thanks, Brent. You know, first off, I would just say that, you know, the current contract is approximately, you know, 1% of the revenue of the business, so it's not material to the business. The opportunity that, you know, we have, you know, with larger businesses, which is where we're focused, continues to prove out with our direct and our financial institution channels. We see lots of large businesses coming on the platform, so we believe in that. I guess what I would just say more broadly is that, you know, 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, on the team in the company that has decades of experience doing this.
That knowledge, that expertise, that ability to execute allows us to take the complex complexities of financial operations and payments and all the things that are involved with, you know, bill pay and spend management 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, you know, one platform. We are not just the system of record for our customers, we're also the system of engagement for our customers. Behind all of that, we have a regulatory compliance and redundancy capabilities that we showed and proved out this quarter with the March challenges in the financial regional bank world.
you know, from our perspective, the money movement that we have at $250 billion-plus on an annual basis really speaks to the complexity we have, the leadership we have. ultimately, you know, I would say that, you know, we're busy taking all the learnings from the customers we have, the experiences, the data, and really, you know, setting the innovation agenda for the 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 2 or 3 years ago and modeling their, you know, entry into the go-to-market of, you know, financial operations with what we were doing in the past. We're gonna continue to focus on the future. We're gonna continue to innovate, continue to add payment capabilities, continue to add working capital capabilities.
We're gonna continue to do more and more so the SMBs have less and less to worry about. We're gonna take that mess off their plate and really make it go away.
Brent Bracelin (Senior Research Analyst)
Very clear and helpful explanation. Thank you.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Brent.
Moderator (participant)
We now have Kenneth Suchoski from Autonomous Research.
Kenneth Suchoski (US Payments and FinTech Analyst)
Hi. Good afternoon, René and John. Thanks for taking the questions. I think you mentioned that, you know, 3,500 net adds xFI channel is kind of the right number going forward. You know, we saw a little bit of an acceleration this quarter versus last. I'm just curious, like, why is 3,500 the right number or should this accelerate back to that kind of 5,000 type of net adds type of range? And then just any thoughts on kind of the visibility you have into this number?
René Lacerte (Chairman, CEO, and Founder)
Yeah. Thanks, Ken, for the question. You know, first and foremost, I've said this many times, this is a massive opportunity. Like, we have been, you know, creating and defining this category of financial operations, automating, you know, payable spend, expense, and AR capabilities for our customers, for a number of years. What we see in the future is that there's 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. That means that some businesses are waiting to take on additional expense, before they actually, you know, move forward with the opportunities to create more efficiency.
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 of this wait and see. We, you know, we really believe that the multi-channel distribution approach we have will continue to serve us well, that we can continue to build our customer base across all channels. What that means is that, you know, just as a reminder, that allows us to continue building our network. You know, the network customers really do provide value for every customer experience and allows us to continue to grow our direct experience as well.
I think the thing that, you know, 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. We believe there's a, you know, a bigger opportunity that we're gonna continue to grow and work on and, you know, leverage the simplicity capabilities that we're learning every day to make this more available to more customers.
Kenneth Suchoski (US Payments and FinTech Analyst)
Okay. Great. Thanks, René. 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 xFI, you know, the TPV per customer was down just 5% year-over-year. It was down 7% year-over-year last quarter. It sounds like you're feeling better about the macro. You know, do you think that year-over-year change in TPV per customer xFI has troughed? Can you talk about how we should think about the normalized growth of this metric over the medium term and just the building blocks of that?
John Rettig (EVP and CFO)
Thanks, Ken. Good question. You're right on the stats there. We felt pretty good about the trends in the quarter in TPV and starting to see what looked like a little more normal patterns. I think it's early to call a trough or a reversion to growth mode, as René mentioned. Businesses seem to be still scaling back, so we would expect, and 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 the credit situation out there. We'll certainly have more visibility into some of these patterns by the time we get to our August FY24 call and definitely update everyone then.
Kenneth Suchoski (US Payments and FinTech Analyst)
Okay. Great. Thanks, John. Nice working.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Ken.
Moderator (participant)
Thank you. We now have Taylor McGinnis from UBS.
Taylor McGinnis (Equity Research Analyst)
Yeah. Hi. Thanks so much for taking my question. Maybe just to piggyback off the last question. When we think about the stabilization that you're seeing, you know, with SMBs reacting to the macro post-December, anything you can share on the mix of that spend in terms of what might be more discretionary versus fixed? Is the stabilization that you guys are seeing at all a reflection of that mix maybe being more at a more favorable level potentially today?
René Lacerte (Chairman, CEO, and Founder)
Yeah, I think this really is, thank you, Taylor, for the question. This really is, you know, the macro, this wait and see is something that, you know, businesses are tightening. Just one perspective maybe to think about is that, you know, we serve a broad swath of the economy, right? We have businesses of all sizes, all segments. We see and have insights into spend across businesses and across industries that we think is unique. One of the things that is consistent is no matter what the industry is that larger businesses have more discretionary spend, and they tighten more of their belt than smaller businesses.
What that means is that the impact on our overall TPV, even though all businesses are tightening, is impacted more by the larger businesses on the platform, which would make sense. 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, you know, say any more about it. That's really, what we think is the platform enables businesses to manage their spend, be thoughtful about it, and they're in a better position when they're on BILL than when they're not.
Taylor McGinnis (Equity Research Analyst)
Great. Thanks so much for taking the question.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Taylor.
Moderator (participant)
We now have Will Nance of Goldman Sachs.
Will Nance (VP and Senior Equity Research Analyst)
Hey, guys. Thanks for taking the questions. Oh, I wanted to kind of follow up on the point that you made on the Bank of America partnership. With those customers moving from the Bank of America channel to the direct channel, I guess could you put some parameters around just, you know, how large of a move in customers we're talking about here? You know, we generally think about the monetization in the direct channel as being significantly higher than the FI channel. Is that something that we're going to see in the near term as these customers come over? Could you kind of talk about, you know, how that might differ between, you know, upfront movements and subscription versus transaction revenue? Thanks.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Will, and great question. Yeah, I think the first thing I would kind of call out is that we have a very strong partnership with the bank, and it's 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. Already we've seen, you know, many of the customers that are active migrate to our platform. It's only been, you know, May 1st was the effective date that the bank set out. It's very, you know, early for us, but we feel good that many of the active customers are coming over. To your point, you know, those customers, when they come over, they have the ability to leverage all of our payment capabilities.
That could be anything from virtual card, which is kind of built into the direct experience to Instant Transfer to cross-border payments to working capital Invoice Financing. These are all things that we know will drive the ARPU up on those customers, and we expect it will be, you know, an important contributor for us in the future relative to, you know, the relationship overall. It's something that, you know, we, you know, we're happy to serve the customers and make sure that we're delivering for them.
Will Nance (VP and Senior Equity Research Analyst)
Got it. Appreciate that. Maybe just a question on working capital. You know, I think you guys have been, you know, rolling that out. Could you talk about just kind of where we are and any initial thoughts around, you know, how you think about attach rates in that product and what that might look like over time?
René Lacerte (Chairman, CEO, and Founder)
Thanks. 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 gonna be robust, stand the test of time, deliver for customers, deliver for shareholders. As we roll this out, you know, into our beta program, we are learning about what it is that customers want, how to actually manage the capabilities that we have. What we see so far has us encouraged about the opportunity in the future. You know, gonna continue to work on rolling that out and making sure that contributes in a way to the customer's experience as well as our financial experience. John, anything else?
John Rettig (EVP and CFO)
Yeah, 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 B2B spend with our customers on our platform, we think it's a perfect spot to offer alternatives that help improve cash flow and liquidity for customers. That was our thesis in rolling out this product initially, we've been, you know, testing and learning. It's still very small. I wouldn't say we're at, you know, full launch yet. The feedback has been very positive, we're starting to be able to validate many of the initial assumptions that we had about product adoption and repeat usage and things of that nature.
I'd say we're a ways away from the scaling phase 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 it'll be a really nice addition to our ad valorem portfolio.
Will Nance (VP and Senior Equity Research Analyst)
Got it. Appreciate taking the questions. Nice results today.
John Rettig (EVP and CFO)
Thank you.
René Lacerte (Chairman, CEO, and Founder)
Thanks, Will.
Moderator (participant)
The next question comes from Keith Weiss with Morgan Stanley.
Speaker 15
Hey, René. Hey, John. It's Jonathan on for Keith. Thanks for taking our question. Can you help unpack where across your customer base you're seeing strength in ad hoc adoption? Does it resonate more with larger SMBs, smaller SMBs, perhaps middle market?
René Lacerte (Chairman, CEO, and Founder)
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, there's definitely strength there. You think about our working capital invoice acceleration and our Instant Transfers, that'd be more across the supplier network that we built. One of the things we, you know, shared in the script is that around 30% of the revenue is driven by those connections in our network that allow suppliers to choose how they wanna get paid and when they wanna get paid.
You know, we see the virtual card product as something that goes across all of our direct customers. We see strength across all customer segments there. 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. Something we've worked hard to build. It's not something that happens overnight. It's something that it takes many years to build, to do it properly, and we're very happy and proud of the results we had today.
Speaker 15
That's helpful, Color. Thanks. To follow up.
René Lacerte (Chairman, CEO, and Founder)
Thank you.
Speaker 15
Yeah, you briefly touched on this before, but can you talk through the traction you're seeing in the go-to-market motion, especially in this environment, and whether the three-month free trials that were offered had any impact there?
René Lacerte (Chairman, CEO, and Founder)
At a, you know, holistic, you know, perspective, we definitely believe that the macro environment is a headwind for customer adoption right now. That's really because smaller businesses are not looking to increase any of their expenses now while they wait and see what's gonna happen with the economy. 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. Accountants also have a challenge with labor. They, they need more people to be able to add more clients and serve their more businesses. That's also a factor out there.
What we're seeing at play for us is that the multi-channel distribution means that we get more awareness and more opportunities to, you know, interact with more businesses because of the financial institution strategy, because of the accountant strategy, because of our direct strategy. That's what's playing out, you know, really well for us, the fact that we have multiple ways to serve customers. That allows us to build a stronger and stronger network, which allows us to create a stronger experience for customers across the platform.
Speaker 15
Helpful context. Thank you.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Jonathan.
Moderator (participant)
We now have Bryan Keane of Deutsche Bank. Bryan, could you please ensure your line is unmuted locally?
Bryan Keane (Managing Director and Senior Equity Research Analyst)
Hello, can you hear me?
René Lacerte (Chairman, CEO, and Founder)
Yes, we can. Hi, Bryan.
Bryan Keane (Managing Director and Senior Equity Research Analyst)
Hey, guys. Sorry, I'm not sure what happened there. Just a clarification on TPV. You know, seasonal patterns held in third quarter 2023. The guidance for 4Q TPV growth now suggests that seasonally it'll be materially different than last year. I know there was some conservatism, I guess, baked into flat growth of TPV on the core BILL and we did 11% year-over-year in the quarter. Just trying to think about, you know, is it finally the slowdown, how conservative it is versus, you know, are we really seeing the slowdown seasonally to kinda guide to those levels?
John Rettig (EVP and CFO)
Yeah. Thanks for the question, Bryan. I'd say the December quarter, the way spend patterns played out was it was a clear deviation from historical seasonality. The March quarter looked a lot closer to normal seasonal trends. Now, our TPV performance on a quarter-to-quarter basis down, you know, 5% or so on a per customer was a little bit larger of a decline than we would typically see. We've assumed that the Q4 time period is gonna be similar performance, where we're gonna see some trends that are still not quite back to normal seasonal patterns.
At some point, you know, when we get to a true trough or businesses start to expand again, is when I think we'll get back to, you know, these historical seasonal trends, even if it's at a lower overall level of spend. I think that's still probably a few quarters out. You know, 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 the March and, to a lesser extent, December quarters.
Bryan Keane (Managing Director and Senior Equity Research Analyst)
Yeah, I was gonna ask that question about visibility. You know, when will that turn take place to get back to what you think will be seasonal trends? Is that, you know, the first half of fiscal year 2024, or is that probably not till the second half?
John Rettig (EVP and CFO)
It's a good question. I'd 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. What we have seen is, I'd say you could characterize it as a healthier set of patterns from businesses. They are adjusting. They're obviously the small business segment is super resilient, and we continue to see very high engagement with the platform. That tells us there's good things ahead, but when that starts to turn, I think is still open.
Bryan Keane (Managing Director and Senior Equity Research Analyst)
Okay. Thanks so much, and congrats on the execution.
John Rettig (EVP and CFO)
Thank you.
Moderator (participant)
We now have Brad Zelnick of Bank of America Merrill Lynch.
Brad Zelnick (Managing Director and Senior US Software Analyst)
Oh, 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, you know, with the macro you could see some pressure, a little bit more price sensitivity on from suppliers in particular, but, you know, taking on, you know, virtual card, it doesn't appear to be the case. We saw a nice ramp this quarter. It looks like a full basis point. Just curious, you know, what were you expecting heading into the quarter with regard to the macro impact on, you know, the uptake on ad valorem services, and then how did the quarter shape out, you know, relative to your expectations?
John Rettig (EVP and CFO)
Yeah. Thanks, Brad. We 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 the part of suppliers around access to cash and speed of payments, and many of our products establish that value proposition. I think that's gone really well. We see it with virtual card adoption on the part of larger suppliers. Our Pay By Card solution, while still small in the overall universe of payment offerings that we have, is increasingly seeing adoption. We continue to see very healthy levels of international transactions, international payments, which includes the FX transactions as well. All of those things seem to be, you know, going in the right direction this quarter.
As, 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. We would expect, looking ahead, that our normal average quarterly growth rates and monetization are probably a good proxy for what we expect going forward, subject to, you know, any quarter-to-quarter variation that might exist.
Brad Zelnick (Managing Director and Senior US Software Analyst)
That's great to hear. Thanks, John. One more if I may please. We're hearing real positive feedback from the channel on the potential for, you know, Divvy integration with core of BILL. Curious, you know, any thoughts on the progress there and what that might do for the potential cross sell of Divvy into BILL and BILL into Divvy? Thank you.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Brad. We are definitely, you know, hearing the same thing, when we talk with all of our joint customers that use both, you know, the spend and expense platform that we have from Divvy and the BILL, core BILL platform. They definitely talk to the value that it is to have all the spend in one place. It's actually one of the things that allows us to, you know, think more confidently about how things are moving for businesses across America. From our perspective, the, the sizable cross sell opportunity is really gonna unlock once we have this fully integrated experience. We're, you know, a good part of the way there.
We've done all the heavy lifting, you know, underneath the covers to kind of, you know, make the platforms talk to each other, to look like one platform. Now we just got to, you know, create that execution. Your, your checks are the same as ours, that, you know, customers love the value of both, and we're going to continue to make sure that that's true, and then, you know, obviously execute when we get in the cross-selling motion.
Brad Zelnick (Managing Director and Senior US Software Analyst)
That's great. Thanks, René.
René Lacerte (Chairman, CEO, and Founder)
Thank you, Brad.
Moderator (participant)
Thank you. We now have Tien-Tsin Huang of JPMorgan.
Tien-Tsin Huang (Managing Director and Senior Equity Research Analyst)
Hey, thanks. Good afternoon. I know you've covered a lot already, a lot of good answers. Just wanted to ask a couple clarifications. On the gross margin was very, very strong. John, you mentioned moderate. I think I heard a lot about, you know, monetization, et cetera. Can you to explain again the factors or rank the factors that would drive that moderation? Are there any call-outs in the third quarter that maybe we missed with gross margin?
John Rettig (EVP and CFO)
Great. Thanks for the question. I'd say we obviously have had a tailwind, a benefit associated with the increasing yields and float revenue associated with our FBO balances, as interest rates start to peak, you know, potentially here in the near term, we'll see that float revenue begin to flatten versus the curve that it's been on throughout FY23. That's been a positive benefit of call it, you know, 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 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 kinda 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 is probably a bit higher than will be in the near term as our payment mix starts to shift and as we start to realize a smaller benefit associated with float revenue expansion.
Tien-Tsin Huang (Managing Director and Senior Equity Research Analyst)
No, that's fair. Thanks for going through that. Just if you don't mind clarifying just the Bank of America. That commercial piece is just going to roll off. That's going to drive some of the difference in the user count on that basis. Somewhat related, why is the average transaction per customer on the FI side so different than the direct?
René Lacerte (Chairman, CEO, and Founder)
You know, thank you for the question. I'll take the second one first. The average, you know, transaction per customer is different in part because each of our financial institution partners has different segments that they serve, right? If we just take Bank of America, we have both the small business side and we have the commercial side. The commercial side would have a much, you know, larger transaction per customer than the small business side. You know, when you look across the channel, the reason it's different is because I think of the success that we're seeing, you know, with the banks, the financial institutions that serve the smaller businesses, there's more units there, and that drives the overall average down.
I think it also goes to point that, you know, we provide a ton of value for our customers no matter the size, and that's why the banks work with us. When, you know, the bank decided to make this decision to sunset the legacy ACH and check Bill Pay product that they had, they worked with us and are working with us to migrate those customers to our platform, should the customers wanna do that. We so far had good success doing that. Okay. Well, with that, I'd just like... Oh, did you have one more question? Sorry. Follow-up?
Tien-Tsin Huang (Managing Director and Senior Equity Research Analyst)
No. No, I think. I didn't know if you already clarified the Bank of America. If not, I can go back to the transcript. Thanks for the education on that, René. It was helpful for me.
René Lacerte (Chairman, CEO, and Founder)
Okay.
Tien-Tsin Huang (Managing Director and Senior Equity Research Analyst)
Sorry for the simple question.
René Lacerte (Chairman, CEO, and Founder)
Okay. No problem. Thank you. I'd just like to say thanks to everyone for joining us today. We look forward to communicating our progress as we execute against our strategy to be the essential financial operations platform for SMBs. Thank you. Have a great evening.
Moderator (participant)
Thank you. I can confirm this does conclude today's call. Please have a lovely day, and you may now disconnect your line.