Bill.com Holdings, Inc. (BILL) Q2 2021 Earnings Report, Transcript and Summary

Good afternoon and welcome to Bill.com's Fiscal Second Quarter 2021 Earnings Conference Call. Joining us today for today's call are Bill.com's CEO René Lacerte and CFO, John Rettig. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. With that, I would like to turn the call over to Karen Sansot for introductory remarks, Karen?

Thank you, operator. Welcome to Bill.com's fiscal second quarter 2021 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.com 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.com that involve many assumptions, risks and uncertainties. If any of these risks or uncertainties develop, or if any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements. For a discussion of the risk factors associated with our forward-looking statements, please refer to the text in the 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. Now I'll turn the call over to René. René? René Lacerte: Thanks, Karen, and good afternoon, everyone. Thank you for joining us today. I hope that all of you and your families are in good health and doing well. In this uncertain time, we are inspired by the resilience we have seen among small and mid-sized businesses as they rebound and adapt to this pandemic-induced environment. Bill.com has always been a champion for SMBs. They are responsible for generating approximately half of the US GDP. They create jobs, drive innovation and act at the heart of their local communities. Our mission is to make it simple for businesses to connect and do business so that they can focus on what they do best. Our platform simplifies a very complex process, financial operations and payments. We've created an easy-to-use platform that automates financial processes and makes B2B payments simple, fast and secure. With more than 100,000 customers and 2.5 million network members, we believe we are the leading digital B2B payments platform for SMBs and operate one of the largest B2B networks in the United States. We take seriously the trust that customers and network members have placed in our platform, allowing us to be a significant part of their digital transformation. Demand for our platform continues to be strong as evidenced by our Q2 results across all our key financial and operating metrics. We delivered very high-growth in Q2, including core revenue growth of 59% year-over-year, transaction fee growth of 98% year-over-year and total payment volume growth of 40% year-over-year. In addition, we exceeded $50 million in core revenue in the quarter for the first time and had an annual TPV run rate of $140 billion. These results demonstrate the strong adoption and scale of our platform as well as our successful execution against our initiatives that expand our platform and extend our reach to many more customers. Such initiatives, including expanding our payment offerings, building direct relationships with network members, increasing our reach through strategic partnerships and continuing our investments in platform and people. Because of these initiatives and our solid execution, we delivered record total payment volume and accelerated TPV growth in Q2. We had a great pace of new customer additions and higher customer retention rates. And in addition, we continue to drive strong adoption of our newer payment types, especially virtual card and cross-border payments. These factors contributed to our doubling of transaction revenue over the last 12 months, and we're just beginning. There is a significant market opportunity of 6 million businesses with employees in the US and more than 20 million worldwide, and we believe the vast majority of them are still using manual processes. We are in the beginning stages of a digital wave and are proud about the role we are playing to help small and mid-sized businesses accelerate their digital transformations. Our platform has helped businesses in organizations such as United Fire and Mongabay digitally transform their businesses. United Fire is a family-owned business that provides maintenance, testing and inspection for fire equipment at commercial businesses. When their long-time accountant left the company, their trusted and VAR partner recommended that United Fire implement Bill.com. Using Bill.com and Sage Intacct, United Fire's employees have been more efficient working from home than in the office. Bill.com was simple for them to implement and use and has provided crucial insight for running a business during all the recent uncertainty and shutdowns. United Fire saw immediate success with Bill.com and was able to cut their time spent on AP in half and reduced time spent on approvals by at least 50%. With Bill.com, they can now approve 20 payments in less than 30 seconds. Another example is Mongo Bay, a US-based non-profit conservation and environmental news platform that produces original reporting in multiple languages by leveraging over 500 correspondents in approximately 70 countries. Before Bill.com, Mongabay spent a lot of time dispersing payments through a number of online payment systems and banks. In addition to the time-consuming management of these diverse platforms, they were incurring significant wire views. Using Bill.com's cross-border service, Mongabay has achieved cost savings of approximately 50% on international wire transfers. With access to timely and complete transaction information through the Bill.com platform, they've reduced their audit time by at least half. Mongabay estimates they have saved up to 25 hours per month due to automation and having instant access to their payment information, providing them more time to focus on their mission. We are working on a number of initiatives to further strengthen our platform and expand our market reach. These investment initiatives reflect our continuous effort to enhance our customers' experience and satisfaction and to attract new customers. Our work to provide increasing value for the small business community is never done. One of our top investment initiatives is expanding the payment offerings on our platform. We offer a broad array of payment methods so we can provide the best service, convenience and speed for our customers and network members. Over the last few years, we launched several faster payment offerings, including virtual card, cross-border payments and Instant Transfer, which is our real-time payment product. We're investing in these offerings to offer more choice for customers, increase simplicity and drive adoption. For example, due to the strong demand we've had for cross-border payments, we recently added Citibank's WorldLink as a second partner for processing transactions. Having multiple partners provides us with a more resilient service, faster delivery speeds and competitive pricing for larger transactions. In addition, we are expanding our capabilities in the real-time payment space through additional partnerships for our Instant Transfer product, and we'll have more to talk about over the next few quarters. Our recent initiatives that brings supplier enablement in-house are going well and have driven increased adoption of electronic payments. These initiatives helped drive our Q2 transaction fee growth of 98% year-over-year and continue to gain momentum. Given our success with driving virtual card adoption and cross-border payments through our AI, sales, marketing and customer support initiatives, we're now leveraging that playbook to promote real-time payments to network members. These actions also enable us to build direct relationships with network members and provide us a source of new customer prospects. We are also continuing to expand our market reach to mid-market customers by adding new integration with mid-market accounting software. We currently serve mid-market customers with the integrations to Sage Intacct, Oracle NetSuite and Intuit's QuickBooks Enterprise. I'm happy to announce that we are building integrations with both Microsoft Dynamics' Business Central and Great Plains. Tens of thousands of mid-market companies rely on Microsoft Dynamics ERP systems. So we expect these integrations to allow us to better serve these companies. We plan to launch this product integration in the second half of calendar 2021. We're also investing to expand our strategic partnerships with financial institutions. These partnerships reduce our customer acquisition and support costs and significantly extend our reach to small and midsized businesses. In Q2, Wells Fargo launched our integrated offering, Bill Manager, through their commercial electronic office digital banking portal. We're beginning our go-to-market strategy with Wells Fargo and look forward to serving these customers. We currently have white label offerings with the top 3 banks in the US: JPMorgan Chase, Bank of America and Wells Fargo. During the quarter, we also continued to make good progress on the design, development and integration of an SMB offering with one of the largest financial institutions in America, as previously discussed. We look forward to launching this later in calendar 2021. Another important part of extending our reach is our ability to enable accounting firms to manage their multiple clients with an accountant-branded experience. Accountants are core to our distribution strategy. As trusted advisors accountants are uniquely positioned to guide businesses on the digital transformation path. Customers acquired through this channel have very high retention rates since their accountant is one of their most trusted long-term advisers. We continue to see strong increasing adoption by our existing firms, while we continually add to our base of over 5,000 accounting firms, including 80 of the top 100 firms. Through our product development, sales, marketing and customer success initiatives, we are partnering with more firms, acquiring more clients at firms and driving higher transaction volumes. In Q2, we extended our account and channel offering with the bill payment solutions, specifically packaged for wealth management firms and family offices. This new offering was driven by demand from wealth managers and accounting firms who wanted to use Bill.com to better serve this unique client base. This extension into wealth management demonstrates the power and flexibility of our platform. We're pleased with the early traction we are seeing with this new offering, which expands our addressable market beyond businesses to wealth management firms and family offices. I'd like to provide an example. Cornerstone Family Office was an early adopter of our platform within the Wealth Management segment. Cornerstone provides comprehensive wealth administration services to its high net worth families. Prior to Bill.com, for a number of their families, invoices and checks would be couriered back and forth between families and their office. Cornerstone adopted Bill.com to achieve their goal of creating a more efficient process with the added benefit of providing critical security controls and robust audit trails. With Bill.com, Cornerstone has been able to cut their time spent on AP by at least 40%, provide a better overall experience to their clients and add more new clients without adding staff. Turning to our own operations for a moment. We continue to invest in our team. Even in this remote environment, we've been able to recruit and onboard great talent. In the second quarter, we hired 78 new people, bringing our team size to more than 700 full-time employees. We also added a new member to our Board of Directors, Steve Fisher, as the former CTO of eBay and EVP of Technology at Salesforce.com, Steve has built some of the world's largest technology and payments platforms and developed multibillion-dollar businesses. I'm excited to work with Steve and to add his deep engineering and product development experience to our Board. We have an incredibly talented and diverse board, and we are delighted to have them on our journey to make it easy for businesses to connect and do business. In closing, I'd like to call out the breadth of our platform. It powers financial operations for organizations, ranging from very small businesses to mid-market companies and serves as branded offerings for financial, accounting and wealth management partners, large and small. We have a very large market opportunity and the right platform, strategy, partnerships and team to capitalize on it. I'd like to thank all of our Bill.com employees for their dedication in serving our customers and each other. Together, we've enabled our customers to adapt quickly to the pandemic and accelerate their digital transformations. Bill.com has an exciting future as we help businesses simplify their financial operations so they can focus on their core business. Now I'll turn the call over to John to review our financial results. John?

Thanks, René. Today, I'll provide a brief overview of our fiscal second quarter 2021 financial results and discuss our financial outlook for the fiscal third quarter of 2021. As a quick reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings press release for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. With that background, let me turn to our financial results. Q2 results exceeded our expectations across all areas of the business, driven by strong execution from all teams and improving trends with our SMB customer base. Our platform is helping many businesses start their digital transformation and adapt to the new realities of a remote working environment. The initiatives we have to expand our platform's payment offerings, extend our reach with strategic partners, and build direct connections with network members are paying off, and we experienced strong growth in Q2 across all of our key financial and operating metrics. Total revenue for Q2 was $54 million, up 38% year-over-year as new and existing customers leveraged our platform for their financial operations. Core revenue, which represents subscription and transaction fees, was $52.3 million in Q2, up 59% year-over-year. This significant growth acceleration compared to the 53% year-over-year growth in core revenue last quarter was ahead of our expectations. To provide additional color on core revenue, subscription revenue in Q2 increased to $26.6 million, up 33% year-over-year. This growth was driven primarily by the increase in the number of customers on our platform. Transaction revenue increased to $25.7 million in Q2, up 98% year-over-year, driven primarily by higher average revenue per transaction, which increased 71% year-over-year as well as an increase in the number of transactions we processed in the quarter. Transaction revenue now represents 49% of our core revenue, up from 40% a year ago. Transaction revenue growth is being driven by increasing payment activity by our customers, leading to total payment volume growth and strong adoption of virtual cards and cross-border payments, both of which carry higher revenue per transaction than fixed fee payment methods like checks and ACH. We also experienced a stronger than usual seasonal increase in payment activity in December. We believe in part due to pent-up transactional activity from earlier macro-related payment delays. And this resulted in both TPV and transaction fee revenue that were well ahead of our estimates. We believe the increased payment activity is an encouraging signal that our customers are rebounding. Moving to float revenue. We generated $1.7 million in float revenue in Q2. Our annualized rate of return on customer funds held in Q2 was approximately 35 basis points, slightly above our estimated range for the quarter and down from 62 basis points last quarter. Float revenue was above our expectations, mainly due to the increased customer fund balances we experienced throughout the quarter as a result of the strong TPV growth we experienced. The reduced yield reflects the low current interest rate environment and maturing investments being reinvested at lower rate levels. We expect further quarter-over-quarter yield declines in the next two quarters. Turning to an update on our key business metrics. We ended the quarter with 109,200 customers, up 27% year-over-year. During the quarter, we added 5,600 net new customers, which was well above our expectations as we experienced broad-based demand and higher retention rates across all channels. We are pleased with the breadth and diversity of our distribution channels, where our horizontal go-to-market approach is a strategic advantage and results in no significant customer or channel concentration. Over the next few quarters, we continue to expect net customer adds to be lower than in recent quarters, given we're past the initial pandemic tailwind, and we've been shifting our customer acquisition focus away from the smallest of businesses. Moving on to total payment volume. We processed $34.8 billion in TPV on our platform in Q2, up 40% year-over-year and 21% quarter-over-quarter. Our strong sequential TPV growth indicates that SMBs are getting back to more normalized business activity despite the macroeconomic backdrop, and this is leading to strong payment activity. Looking ahead to Q3, we expect TPV in the March quarter to be down slightly from the December quarter due to seasonality. We processed 7.2 million payment transactions during Q2, which was up 16% year-over-year. We experienced an 11% sequential increase in transactions, which is very encouraging as we've seen the number of transactions per customer increase for the last two quarters, although it's still about 10% below pre-pandemic levels. Moving on to gross margin and our operating results. Our non-GAAP gross margin for the quarter was 77.3%, slightly ahead of our expectations as a result of the strong transaction revenues from variable priced products, which generally carry higher margins. We continue to expect gross margin in the range of 75% to 77% in the near term, primarily as a result of infrastructure investments we are making to support our financial institution partners as well as reduced float revenue from the low interest rate environment. R&D expense was $17.8 million for the quarter or 33% of revenue compared to 31% of revenue in the second quarter of fiscal 2020. We continue to invest in additional hiring in R&D to support our product road map for payments innovation, improvements in the user experience and simplicity and product development work relating to our new financial institution partnerships. Sales and marketing expenses were $12.6 million for the quarter or 23% of revenue compared to 30% of revenue in Q2 of fiscal 2020. As we discussed previously, we're being vigilant on our sales and marketing spend. G&A expenses were $14 million for the quarter or 26% of revenue compared to 29% in Q2 of fiscal 2020. The prior year quarter was the first quarter that reflected public company expenses. And since then, we've started to realize some economies of scale in G&A. As a reminder, unlike many other software companies, our G&A expenses reflect our investments in risk management and regulatory compliance, which are a core part of our competitive advantage related to our payments business. Looking ahead, we will continue to invest in our risk and compliance capabilities, but expect to achieve economies of scale over the longer term. In Q2, our non-GAAP operating loss was $2.7 million versus $4.5 million in Q2 of last year, and our non-GAAP net loss was $2.1 million or a loss of $0.03 per share based on 81.5 million basic weighted shares outstanding. Because we had a net loss on a GAAP basis, our diluted share count was the same as our basic share count for both GAAP and non-GAAP EPS calculations. Turning to the balance sheet. We ended the quarter with over $1.7 billion in cash and cash equivalents and short-term investments, which includes $1 billion of proceeds from our convertible note issuance during the quarter, net of issuance costs and the cap call transaction. As of December 31, 2020, we had $2.2 billion in customer funds on our balance sheet, which was up almost $550 million or 33% from the end of Q1. Now let's move to our financial outlook. Based on our solid execution in Q2 and the strong trends we're seeing in our business, we're entering Q3 with momentum. Our expanded payment offerings, go-to-market initiatives and strategic partnerships are driving high core revenue growth through customer acquisition, increased platform adoption and a mix shift to higher revenue payments. I'll now provide an outlook for our fiscal third quarter of 2021. For fiscal Q3, total revenue is expected to be in the range of $53.7 million to $54.7 million. We expect core revenue in the range of $52.9 million to $53.8 million, representing our view that the momentum from Q2 will continue in the current quarter. We expect float revenue in the range of $800,000 to $900,000, which compares to $5.1 million a year ago. Float revenue assumes that the Fed fund's target rate will continue to be zero to 25 basis points during the March quarter and that our yield will be in the range of 15 to 20 basis points. Regarding our planned operating expenses, we will continue to develop our platforms capabilities and invest in R&D to support product development work relating to our new financial institution partnerships. We will continue our disciplined approach with regards to sales and marketing investment and will increase our investment as opportunities and unit economics dictate. On the bottom line, we expect to report a non-GAAP net loss in the range of $6.9 million to $5.9 million and non-GAAP EPS loss of $0.08 to $0.07 on a per share basis, based on a share count of approximately 82.5 million basic weighted average shares for Q3. In addition, in Q3, we expect stock-based compensation expenses of approximately $11 million to $12 million and capital expenditures for our new headquarters and other requirements to be approximately $5 million to $6 million. In closing, we're pleased with our increasing momentum and the growth opportunities fueled by the need for businesses to transform their financial operations. We're in a strong position with a leading platform that simplifies financial operations and customers trust us to facilitate more than $10 billion of payment volume a month. We're also delivering very strong core revenue growth and accelerating transaction revenue growth. There continues to be macroeconomic uncertainty ahead, and it remains to be seen the impact this will have on SMBs, but we are committed to investing strategically to expand our reach and our platform's capabilities, which we believe will create a durable long-term growth runway. Now René and I will open up the call for your questions. Operator?

[Operator Instructions] Your first question is from the line of Darrin Peller from Wolfe Research.

Hey, thanks guys. Nice job. Okay, I just want to start off with, when I look at the actual transaction revenue, and I know you mentioned, obviously trends were strong on the volume side, but potentially yield also came in well, which, as you mentioned, underscored the success you're having in supplier enablement, as well as cross-border. So, if you can just give us a little more color on what's happening there? And what kind of progress has been made even over the last few months and what you expect in the next few to keep that going? That'd be great to hear. René Lacerte: Thanks, Darrin. We've made great progress on understanding the go-to-market with respect to the suppliers, both for the virtual card product we have as well as international payments and helping suppliers internationally, for example, choose to be paid in the local currency, but we're still learning. And there's lots of opportunity there. So what we've said in the long-term is that we believe virtual card penetration will be in the 5% to 10% range and that international payments will be in the 10% to 20% range. And we have no reason to say it's any different, we believe in the focus that we have.

No, that makes sense. But I mean, in terms of specifically, well, let's just hone in on cross-border. I mean, what kind of tools are you taking to enable that? If you can just give us a little more of an idea what steps are being taken? And how the response is from the end market from national suppliers internationally? Thanks again guys, I'll turn back to the queue. René Lacerte: Yes. There's a couple of components, right. There's first, getting our customers to know and use our product for their cross-border payments. So, we've done things inside the product. We've done marketing and product messaging. We've done sales techniques. All of these things, combined with some AI to kind of look at the most likely customers to do activity is something that we're focused on. When we look at the FX penetration, which is also an important part of that part of our business, we are also using similar capabilities across the Company to drive adoption of local currency payment by the suppliers. So, taking the control, so to speak, away from the payer and putting in the supplier's end. So lots for us to continue to do and to grow, but we feel like we have a good handle on all the things that are kind of the variables there, and we'll make progress as we move forward.

That's great, thanks a lot guys. René Lacerte: Thank you.

Your next question comes from the line of Samad Samana from Jefferies.

Good afternoon, thanks for taking my questions. Just absolutely great quarter. So maybe the first one for you, René. You talked about the different types of payment methods. And maybe just a follow-up. I'm curious if you're seeing a reaction to one versus the other being stronger, it sounded like it was fairly strong across the board. But when you think about virtual card versus real-time pay, how are customers evaluating that option? René Lacerte: Great question, Samad. We have -- one of the things that's really powerful about the business is that we work hard to make it to the suppliers and customers get to pay and get paid how they want to get paid. And what we've been able to learn across the rollout of our virtual card product is that suppliers that take credit cards, they are comfortable taking credit cards because they have already made that decision, they want to take more payments that way to simplify their reconciliation to accelerate their payment timing. So, those tend to be larger businesses in the supplier network. When we look at the real-time payments, it tends to be smaller businesses that may not rely on card on an everyday basis for collections. And we're able to kind of generate interest because if it was going to be a check, it would be later and even an ACH might be later. And so the opportunity to accelerate payments, we know is important. I think timing, especially if you think about the pandemic over the last nine months, timing has been critical for folks. And I think it will always be critical. So our ability to accelerate and help businesses pay and get paid in a short amount of time as possible is, I think, a core competency and something we'll continue to drive.

Great. And then, John, one for you. Net adds was quite strong. And despite that, you saw the average number of transactions actually continue to accelerate as far as growth goes. Is it fair to read through in that, that you're seeing larger customer success as well, just to maybe help partly explain that nice increase in the TPV per transaction despite having more transactions than anticipated?

Yes, Samad, good question. Yes, we were very pleased with the net adds for the quarter, it's ahead of our estimates given our dialog last quarter, in part driven by the strength from our accounting channel partnerships and interestingly, just higher retention across the board. Customers are sticking with the platform and using it more. So we think it's partially due to slightly larger customers having an impact. We've talked in the last couple of calls, a couple of quarters about additional efforts that we're putting behind mid-market customers. But at the same time, we just saw a much higher level of activity, payment activity across the board. And we think some of that is driven by call it, pent-up demand. We also saw a very strong exit rate in payment volume and payment activity in December. We always have seasonal strength, but this was in spade, something we hadn't seen before. So I think across the board, we benefited from that.

Great. I'll turn it over [indiscernible], but really nice to see the strong results through tough times.

Thank you.

Your next question is from the line of Brad Sills from BoA Securities.

Okay, great. Hey guys, thanks for taking my question and congrats on the nice quarter. I wanted to ask about the comments on moving upmarket. Obviously, some of these partnerships you would be targeting that next year customer up in the mid-market. Is there any limit on where you can go when you think about moving-up market, where is that next tier for you? And are there any limits to going even further north from there? René Lacerte: Thanks, Brad. And it's a great question. So one of the things that we've focus hard on is building a platform that scales from small businesses all the way up to mid-market is how we define that. When we think about the segment for mid-market, maybe just some data out there, the -- their labor statistics would have 20,000 businesses north of $100 million in revenue. So that's not what we're targeting. We're targeting businesses smaller than that, right. So when you ask a question around the limit, we think we've built a platform that really scales for businesses across the spectrum, no matter the industry, no matter the size, just not kind of those enterprise customers, if you will.

Got it. Great, thank you so much. And then back to the AI applicability. You've obviously seen some real success here with the supplier enablement, driving adoption of VCard. Can you elaborate a little bit on what that means for cross border? How are you applying AI to that business and driving adoption there? Thank you so much. René Lacerte: Yes. I think a lot of the AI capabilities we have go back to the source documents that we have in our platform. And you think about what we do in our platform is we enable all the documents that come in for a business and invoice the purchase order, all that information is coming in, and it's an opportunity to be able to scan that and understand information. So for example, with international payments, if the address of the supplier is international, well, then maybe we have a different product marketing or program or whatever to enable that supplier to be on our network. And so there's opportunities as some people internationally do include account information. So there's an opportunity for us to simplify the add of the banking account for suppliers. There's lots of ways for us to use that source document. In addition to the other way we use AI is just looking at the connections across our network. So lots of opportunity. We're glad we've been investing in that for a number of years, and we'll continue to invest in the AI platform.

Thanks so much. René. René Lacerte: Thank you, Brad.

Our next question comes from the line of Josh Beck from KeyBanc.

Thanks team for taking the question and glad to hear everyone's doing well. I wanted to ask just a little bit about the demand environment. Obviously, the work-from-home has created all sorts of scenes. And I think probably risen the awareness of this category. So I don't know if you could maybe just qualitatively speak to things like pipeline, sales cycles and close rates that you're seeing now maybe versus, say, six to nine months ago? And maybe how you expect that to evolve as we go through the year? René Lacerte: I think one of the things that we've seen with COVID is really just -- the applicability of our platform does make a difference, right? It makes it a lot easier to kind of manage your business from anywhere. And so John already referenced in part that we've seen better retention, especially in the early cohorts as a result of a number of things that we're working on, but we also can't discount that the environment and the awareness is actually higher. So in general, I would say that we expect the awareness and the switch, so to speak, for people to actually ask the question, can I run my business from anywhere? Like that's going to be there going forward for all time, and it wasn't there a year ago. And I think that's going to help us continue to create adoption opportunities and awareness opportunities across the SMB landscape.

Okay. Really helpful. And then on the supplier enablement front, I know you've had a nice partnership there with companies like Comdata. I'm just kind of curious, maybe, have you been able to close the gap maybe on a lot of the potential overlap between your customer base and maybe theirs? And is that another area where you may be looking to add partners kind of like what we've seen with cross-border? René Lacerte: Yes. Virtual card is a really important part of the business for us. And so when we look at the ways to extend that, one of the things we have done, for example, is we did virtual card first with Comdata for our direct customers. But we do have virtual card with JPMorgan Chase. We have virtual card with our American Express partnerships. And I think as we move and scale the business over time, we will look to continue to add ways to leverage virtual card capabilities of our existing partners, and there's opportunities with others as well. So, I think there's just a lot of opportunity for us to continue to focus on what it is that suppliers want. And if they want a payment via the card networks, we want to be able to provide that.

Really helpful. thanks René. René Lacerte: Thanks Josh.

Your next question comes from the line of Brent Bracelin from Piper Sandler.

Thank you and good afternoon, guys. René, one for you and a follow-up for John. I wanted to go back to cross-border payments. I mean clearly, the interest in this product is stronger than you anticipated. You're adding now Citibank, a second partner. My question is, what's resonating? What's the pain point? Is it just a lower cost? Is it more flexibility? Just drill down into what is resonating most around the cross-border payment solution that you have today that wasn't being addressed for those SMB customers today. And then got a quick follow-up for John. René Lacerte: Sure. Thank you, Brent. So the breadth of the platform ultimately is what's resonating. That would be that -- my high-level answer is the ability to be able to track all of your payments, the approvals and execute a payment all in one place makes it a lot easier. And so if you weren't using us for international payment to go to another system, to find out from the supplier what their bank information is. And if you haven't had a chance to enter a wire internationally, it is quite complicated. A number of different accounts you have to do. And the person who knows that best is the supplier, probably, not the buyer. And so I think the breadth of the platform, the fact that we have a network that lets people enter that information directly, the fact that we have a platform that lets businesses be able to pay from anywhere in the world. So if you're in the pandemic situation and you want to be able to pay your bills from anywhere, you can do that from your phone now. You don't have to go into separate experience to create that wire. So, I would go back to just the breadth of the platform, the simplicity needs of use that we have connecting all the pieces, is what makes it a real opportunity for SMBs to simplify their lives and to get back to doing what they do best.

Got it. So it's back to just the core value prop here of just reducing friction in the system. And then, John, I guess, for you, on payment volume growth, we're back to kind of pre-pandemic levels of 40%. You did talk about some December seasonality. My question is, are we back to pre-pandemic levels, or again, too early to tell given the seasonal lift you saw in December?

Yes, thanks Brent. It's a great question because we saw activity levels that were way ahead of what we had seen previously, just from a seasonal uptick perspective. And it suggests to us that businesses are more than back to business. But it seems premature to declare the impact of the pandemic over, given how early we are with the economic situation, with vaccine rollout and all sorts of things. So, there's certainly some unknowns there. But we were really encouraged by the level of activity, the level of retention and whatnot, given the sort of elevated activity that we saw in the second quarter, particularly in December. We would expect our typical seasonal patterns to continue where the third quarter is usually down a bit in terms of payment volume, again, seasonal reasons more than anything else. But we're watching it closely and hoping to see more signs of this level of activity going forward.

Good to hear. Thank you.

Your next question is from the line of Bob Napoli from William Blair.

Thank you. Good evening. René and John. Great quarter, very great to see. A question on the platform, René. I mean you talked a lot about the breadth of the platform, you're adding bill payments. What else -- and obviously spending a lot in R&D. What are you looking to add to the platform over the next few years? Are there items in the treasury area you're looking to add? I know your supplier financing is something that you've talked about in the past. And then with the super strong balance sheet, is there anything you're looking at to maybe tuck-in that you can cross-sell that fits with your client base? René Lacerte: There's a -- good to talk to you, Bob. There's a number of things that, when I think about financial operations and how much opportunity there is to simplify and automate the financial operations and proxies that businesses have, there's a number of things. I mean one example that we've been investing in recently is obviously the payment rails. And for example, adding the real-time payments capability into a product that we call Instant Payments. And with that, using The Clearing House, for example, that only gets us to around 50% of the bank accounts in this country that actually leverage or have access to The Clearing House through real-time payments. So one of the things that we're investing in right now is adding debit rails. And when we add debit rails, that will get us to all business accounts will have the ability to accept the real-time payment if they want that. And we're going to do that with an integration through Stripe. So that's an example of something that I would say over the coming quarters that we're working on. In the long term, when you reference kind of the balance sheet, there's just a number of areas that we think are interesting from financial operations. Like I said, this has been my kind of life's passion around the software companies that I've started is to really simplify this operation. And so we would look to simplify anything from HR to payroll to expense management, to spend management to AR. There's lots of opportunities that are somewhat adjacent. And then as you referenced, there's things that are -- even further appeal from that, that we would consider over time. So I think I would expect us to continue to evaluate all the best ways to integrate those types of products into our platform whether it's through partnerships, doing it ourselves or through potential M&A activity.

Thank you. And then a quick follow-up just on the bank channel. With the three major banks that you've signed up or -- I know it takes a while to get the integrations and the partnerships rolling, but how are you feeling about those partnerships and over what time frame would you expect that to gain momentum? René Lacerte: One of the things from the pandemic has been, and I think I've referenced on the last call, that our partners, in particular, are very committed to solving this pain point for their customers. They understand that it's not a good thing that their businesses have to operate in an office with filing cabinets and paper checks. That's 90% of SMBs still use paper checks as a primary form of payment. So they understand that. And that commitment that has come out of, I would say, the pandemic is real. And so when we look at the partnerships, across our platform, whether it's the financial platforms that we integrate with, the banks that we integrate with or our accounting software partners, we see a commitment there that is real, and we expect it will continue to grow over time. So, nothing to say per se on exactly right now, just the strength is there, and we expect it will continue to grow.

Thank you. I appreciate it. René Lacerte: Thank you.

Your next question comes from the line of Scott Berg from Needham.

Hi René and John, congrats on a good question -- quarter and thanks for taking my questions. I guess I got two quick ones. René, on the Wells partnership, obviously, it just started in the fourth quarter, and it's going to ramp from here on out. But from what you've seen already to date, is there any reason to believe that the ramp and maybe customer acquisition through that channel will be any different than what you've seen in some of your other partnerships with maybe Bank of America or JPMorgan Chase? René Lacerte: The -- so as a reminder, the partnership with Wells is with the commercial customers. And so when I look across our Board at the commercial partnerships that we have with JPMorgan Chase or Bank of America, we don't see any reason to think that anything is going to be different across all of them. If you were to ask me that question three years ago, the answer might be different. But like I just mentioned, the commitment that all of our partners have to making this a solution for their customers continues to grow on a -- daily might be a dramatic statement, but it continues to grow and as we have the ability to serve their customers with better products and better solutions. So I would say it's a great opportunity in front of us.

Got it. And then last question for me is, John, you talked about the transaction revenue per customer increasing, and we're certainly seeing the shift to other products. But I think it's interesting, at least the way I calculate it, the shift has been most notable since the arrival of the pandemic. I guess as you look at your customer base, do you see them doing anything specifically different that's maybe in relation to, I don't know, the work-at-home trend, et cetera, that might be driving some of that shift?

Yes. Thanks, Scott. I mean we do see a sense of urgency from customers. We talked in prior quarters that, that's translated into a slightly higher close rate and faster time to adding users and performing transactions on the platform compared to pre-pandemic times. And obviously, as we continue to roll out more payment products, whether it's cross-border or virtual cards or Instant Transfers or real-time payments, as René talked a minute ago, it's giving more choice to customers, and they're taking advantage of that. For us, our business model is such that we have both fixed-fee transactions where we built the business, checks and ACH, and then these newer payment methods that are variable-priced. And as customers increase adoption of those products because maybe they're managing cash flows a little bit more closely now in the pandemic than they were earlier, it's having a positive sort of impact tailwind on our financial results as well. So I mean, it's pretty amazing, the resiliency of the small business customer base that we serve. And it's pretty exciting because it's -- we're still so early in penetrating the market, and there's a long way to go.

Thanks a lot and thanks for taking my questions.

Your next question comes from the line of Matt VanVliet from BTIG.

Hi, thanks for taking my questions, guys and congrats on the quarter. I guess thinking about those bigger partnerships, they seem to be ramping very well, and your commentary is certainly positive around that. As we think about kind of what the capabilities are long term for growth expansion at the three major ones you mentioned and as you look to extend out to other institutions, how much opportunity do you feel like is in some new partnerships as well as kind of a wallet share perspective? And what you're currently kind of going after at the bigger ones versus what you could potentially go after long term? René Lacerte: Yes. The -- thank you, Matt. The -- one of the things I've worked hard on over the last now 15 years is building a broad distribution strategy approach. And so having the ability to serve customers through a direct channel, through accountants, through accountant software partners and through financial institutions, all of that is super important, and they all help each other grow. There's awareness that's created by all of those channels that helps each of the other ones do a little bit better. And so when I look at the potential of the FI channel, the banks that we have on deck right now that are partnered with us have a tremendous amount of opportunity just with us focusing on those. And like we've mentioned, one of the top 3 has made a commitment and is in development with us to roll out in the second half of '21 something for their SMB customers. And so that focus will, again, create more awareness because it's a broader customer base than what we've seen in the past with the commercial customers. So when asked, like what's the potential? We have a lot of hope and faith and belief across all the channels that we serve and all the distribution approaches that we address.

Great. That's helpful. And then I guess just as a follow-up, thinking about how the tax season in general has shifted back to its normal seasonality in April rather than last year's extended term. Do you expect there to be any major impact over the next two quarters on kind of an individual basis? Or given that, that's primarily in the fourth quarter, either way, that it shouldn't have too much impact? René Lacerte: Yes. I think -- there is some seasonality that we have in general across the year. And I would say last year's seasonality, the pandemic impacted that. So, I would turn to John to kind of reference if there's any seasonality once we go back to normal that's worth calling out.

Yes. And just the emphasis on the tax season, I think, becomes somewhat distracting for accounting firms and -- who have a tax practice, and we certainly see some of that in the fiscal third quarter or current quarter, and maybe a bit more in the fourth quarter. So it spans kind of late February into early May, that time period. So there's certainly -- we haven't seen anything yet to suggest anything different than our typical seasonal patterns, but there's definitely some impact. For us, the fact that we have the broad distribution strategy in different channels to rely on if that impact is probably a little bit muted.

Great, thank you.

Your next question comes from the line of Chris Merwin from Goldman Sachs.

All right, thanks for taking my question. I wanted to come back to real-time payments and your Instant Transfer product. Just hoping to dive a little bit further into how that's doing so far. And I remember with virtual card, when that started to ramp, it was almost maybe a year plus into the rollout of it that we saw more of the inflection there. With all you're doing on supplier enablement now, curious how we should think about a similar ramp in Instant Transfer. Should that -- I imagine that would look a lot quicker. But if you could just put a finer point on it, it would be much appreciated. Thank you. René Lacerte: Thank you, Chris. Yes, the Instant Transfer product, for us, I would say, is kind of in the -- still in the pilot phase as we understand what the right pricing, what the right go-to-market, the right product placement. All those things, we're still determining and fine tuning. And in addition, like I referenced, right now, only around 50% of the bank accounts out there accept an Instant Transfer from The Clearing House, the real-time payment network. And so as we extend and have the debit rail capability, we'll be able to invest more into the marketing, the sales, the AI, all the approach that we've used for supplier enablement for cross-border payments, we'll be able to invest in that type of marketing and activities -- sales activities to grow that business. So we believe it's going to be super important when it comes to the type of customer and the size of customers. So what I referenced before is that we expect Instant Transfer to be something that the smaller businesses that are on the network, that are in the 2.5 million, that may not use card every day for acceptance but may want to have a faster payment. This is going to be the profit for them. This is going to be better than a check and better than an ACH as well. And so this is going to be a way for them to accelerate their cash flow. And I think it's just going to -- like all things, it takes time to learn how to execute and reach that customer, that segment. But we believe that we're building all the right tools in the platform to make it so.

Okay. Great. And then just a follow-up for John. Are you able to update us on what percent of payments are digital now in the platform?

Yes. I think Chris, the last number that we disclosed was 60% electronic payments. And we continue to make progress on that, and it continues to move higher. It's not materially different. And I think our plan is to update that stat on an annual basis. We did some interim reporting as a result of the pandemic. But we have seen good adoption. It's obviously helped by the fact that we keep introducing more payment methods that are electronic. So we have more choices to move away from check payments. So we're continuing to see positive trends there.

All right, great. thanks very much.

Your next question comes from the line of Brian Schwartz from Oppenheimer.

Yes, hi, thanks for taking my questions this afternoon and Just one for René and a follow-up for John. René, just a question on the customer acquisition, a lot of commentary on it. Is it fair to assume that the business saw meaningful change in the velocity of signing up just larger-sized customers this quarter than the business has been seeing in recent quarters? René Lacerte: Thanks, Brian. We had saw -- like John referenced, we saw really good adoption across all of our channels and all sizes of our customers. Our focus and ability to understand how to reach the mid-market customers continues to grow. As a reminder, mid-market customers came -- we started that folks because they've already come to us and on the platform, right? So when we look at the distribution across, we definitely saw a strong retention, which that definitely helps the net customer adds when you don't have any -- don't have as much of the attrition that we might have had a year before. So nothing specific to say, other than it continues to be strong and to build, and we get better and better at understanding how to serve the customers on a quarterly basis.

And then the follow-up question for John. Just the comments about the retention. Clearly, you've done a really good job getting increased usage from the installed base on that dollar retention. Is there anything that you can maybe just share either just qualitatively, if not quantitatively, on what you saw on the gross retention side? Is it fair to assume that you also saw improvements on that metric compared to recent quarters? Thanks.

Yes. Thanks, Brian. That's right. So my comments on the prepared remarks were really directed at the gross retention and how we're seeing customer behavior. We continue to have strong dollar-based net revenue retention that's consistent with recent quarters. But we have seen a slight increase in the annual customer retention rate that we referred to. I think the last number that we reported officially was 82%, and we continue to see improvements there. Which in this pandemic period when there's so much uncertainty, I think, for us, that's really encouraging to see customers engaging with the platform and sticking with it. And taking advantage of the fact that they can really run their business from anywhere, at least their financial operations.

Thank you for that additional color John and great job on the business performance this quarter.

Your next question comes from the line of Tim Willi from Wells Fargo.

Thanks. Thanks, and good afternoon, Tom and René. One quick question, just sort of thinking about the wealth management initiative that you've talked about now for a couple of quarters. Any -- I guess anything unique about the go-to-market there, the product delivery, the sort of the servicing and onboarding, just out of curiosity that you -- and how you think about the ramp-up of that channel? It obviously makes a lot of sense. Just sort of curious if there's nuances to that versus the other channels that you're sort of working through and trying to make sure you're ready to deliver on. René Lacerte: Yes. Thanks, Tim, for the question. It's -- like many of the things that we've done at our -- for entry into the wealth management market is because they were already on our platform. Many of them are on the platform from the accountant focus that we have. Some accountants actually obviously focus on the consumer side with taxes, and sometimes that leads them into helping their clients manage their net worth. And so this expansion into the wealth management space really is because the breadth of the platform and because we build something from the ground up to be able to serve the small businesses that we have, all the way up to the larger businesses across multiple distribution channels. And so things that we had to do to kind of help bring and make it so that we felt comfortable marketing and selling into the wealth management were things around security and the audit capabilities that we already had, but just kind of packaging that so they understood that they were going to get something that was going to meet the needs of their clients, which obviously is important. So I think from a go-to-market, it's going to be, continue to do what we already know how to do, which is to leverage, if you will, aggregators, like accountants, people that are trusted. Help them at all their clients. The fact that we have this ability for one -- Console that we call it, to be able to manage lots of different clients on your platform to divvy up that work across your employees at the wealth management firm, that's a significant opportunity for us to continue to sell those capabilities with the same types of programs that we've done for accounts. So I expect that we'll get better at that each quarter as well.

Great. That's all I had. All the other questions were answered for me. Thanks so much. René Lacerte: Thank you, Tim.

Your next question comes from the line of Jeff Cantwell from Guggenheim Securities.

Hey, thanks guys. Appreciate squeezing me in and nice results here, congrats. I had a very quick question. To what extent is cross-border supplier enablement a precursor to international expansion? And the reason I ask is because the thinking is that it would help to launch the product internationally because the suppliers that you're enabling could eventually become customers, right? I'm just curious if you could talk about that a little bit. René Lacerte: Yes. Thank you, Jeff. It's definitely part of how we think about our strategy for going international. There's a lot of things that would be important for us to understand before making that leap. But one of them would be understanding how customers use the platform that we have today. So getting suppliers that are being paid by US companies to engage and choose their local currency as a payment, being able to manage that interaction, if you will, that will allow us to learn which corridors are important for US businesses, where do we develop density, where do we see the activity, what's the payment volume like between the quarters. All those things will help us understand a good foundation for building a go-to-market strategy for international growth.

Great, thanks so much. René Lacerte: Thank you, Jeff.

We have time for one last question, Ken Suchoski from Autonomous Research. Your line is open.

Hi, John. René. Good afternoon and hope you're well. Thanks for a squeezing me in here. I just -- a lot of my questions were asked already, but I wanted to ask about the subscription revenue per customer. It improved quarter-over-quarter versus sort of the quarter-over-quarter declines the last couple of quarters. So how should we think about that metric trending over time? I mean how much of that increase is driven by going up market versus some of the simple build pay customers dropping off.

Yes. Thanks, Ken. I mean there's a couple of dynamics at play there. One, you touched on with the slightly larger customers that we're having success with and seeing demand from. They typically have more users and are often in a higher price point in terms of the cost per user based on the ERP system or accounting system that they use. I think that's partially offset these days with slightly fewer users per customer. Not significant, but nevertheless something that we've noted during the pandemic. And so it's a little bit below pre-pandemic time, so that softens it a little bit. Subscription revenues last year were certainly supported by higher customer numbers and users and the price increase that we implemented. And that's -- we don't have any price action this year so you've seen some slight deceleration in the growth associated with subscription revenues. And we would expect that to likely continue in the next few quarters. And then I think the dynamics change a bit once our -- some of our newer financial institution partners start to come on line over the next few quarters.

Really helpful. And if I can just ask as my follow-up, I think you mentioned in the past that most of the increase in virtual card penetration historically has come from converting check payments over to virtual card. So have you started converting ACH transactions over to virtual cards as well? And if so, how much is that additional ACH opportunity adding to the increase in transaction revenue and take rate?

Yes. It's -- you're right. We've done both. We certainly started with checks, and that continues to be, I think, the larger opportunity just given how inefficient checks are for everyone involved, whether it's the paying customer, the buyer, the supplier and the financial institution who's doing the clearing and so on and so forth. So, I think that's where we see the most traction, and that's where most of our effort has gone to date. We have started some initiatives to support transitioning ACH payments to virtual card, and we've seen some success there. But I'd say that's not the big driver of our results currently. Over the longer term, as we bring suppliers on board and give them more choices and more control about how they're going to get paid, as René referenced earlier, I think that presents an opportunity as well.

Makes sense. Thanks, John. Thanks, René. René Lacerte: Thank you.

Thank you. I will now turn the call back over to René Lacerte for closing remarks. René Lacerte: Okay, thank you. Thanks, everyone, for joining today's call, and we appreciate your support. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.