Good afternoon. Thank you for attending today's BILL's Fiscal Third Quarter 2023 Earnings Conference Call. My name is Brika [ph], and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to Karen Sansot, Vice President of Investor Relations at BILL. Please go ahead.

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 Rene Lacerte, Chairman, CEO and Founder of BILL; and John Rettig, Executive Vice President and CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the operations and future results of BILL that involve many assumptions, risks and uncertainties. If any of these risks or uncertainties develop, or if any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements. For a discussion of the risk factors associated with our forward-looking statements, please refer to the text in the company's press release issued today and to our periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The nonrevenue 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 for 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's standalone results, which exclude our Divvy spend management, invoice to-go accounts receivable and Finmark financial planning solutions. Now, I'll turn the call over to Rene. Rene?

Thank you, Karen. Good afternoon everyone. Thank you for joining us today. BILL delivered strong profitable growth for 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 was 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 homebuilding business and 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 to be this easy. We…

Thanks, Rene. 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 the backdrop of multiple challenges being faced by SMBs, most notably the ongoing macroeconomic headwinds and to a lesser extent, the banking uncertainty that materialized in March. Many of the changing 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 drive 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…

Thank you [Operator Instructions] We have the first question from Andrew Schmidt of Citgroup.

Hi, Rene. Hi, 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 a 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. So maybe you could kind of reconcile on 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

Okay. Thank you, Andrew. Super happy with the quarter, and in part, because the deterioration that we had seen at the end of the last quarter, did not continue as strongly into this quarter and so that's the comment around stabilization. And what we saw, what that really tells us is, that once again we have proven and seen 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. And that being, able to manage through uncertainty is something that we feel very comfortable that we can help SMBs do, and we started to see that across the platform. In addition, we continue to see great execution across our business and that enabled us to drive opportunities to support our customers in multiple ways, to be able to drive monetization across the platform, to be able to drive customer growth one of the strongest quarters ever for us for total net new adds around 15,200. So, all of that in this macro environment, I would say, bodes well for our future. I don't know, if John, if you have anything else to say on this.

No, I think that was good. We did expect heading into the quarter, that some of the trends we saw materialized late in the December quarter, which was a pretty sizable drop off in spend. As businesses were reacting to the macro environment, and reducing expenses, we had assumed that those trends would continue in the quarter and 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. So 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.

Super helpful. Thanks for that. And Rene, maybe I could sneak one more in, just since you mentioned the better net new add profile. I remember last quarter there were some delays in decision-making SMBs pushing software decisions out. It seems like XFI [ph], BILL net adds got a little bit better, but still under that kind of 4,000 to 5,000 mark. Are you seeing improvement in terms of the cycles there? And how should we think about normalization over the next few quarters? Thanks a lot.

Yeah. Thank you, Andrew. 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 and that's how we become the financial nervous system for SMBs. And so 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 be in this wait-and-see mode versus a growth mode and so they have waited to make decisions to add on different expenses to their business. And then when it comes to the accountants that we also serve, we see accountants being very focused on how to help their customers from a strategic perspective really drive efficiency in their business and so they're not as busy adding new customers as we would like to see. Ultimately this is the macro condition that we talked about that when it impacts the net new ads it's because they're focused on using our platform to manage their business today. And we believe the opportunity that we see across channels hence what we saw with the financial institution channel shows the robustness of our capabilities here that SMBs when they need something, when it comes to financial operations, they're going to come to BILL.

Got it. Very helpful. Thank you very much, Rene.

Thank you, Andrew.

The next question comes from Josh Beck of KeyCorp [ph].

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. So maybe just help us understand what may be some of the early learnings have been? And really just how we should think about the cross-sell potential in the coming years?

Thank you, Josh. 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. And with the acquisition of Divvy, the focus has been on how do we continue to extend that platform. And so we have defined this as our unified platform it's something that we're very focused on. And to begin that integration, we first started with unifying the data lake if you will being able to have the ability to see customer data across both platforms and have a single view of that. And that led us into also having a unified brand approach, which you saw that in the fall where we released and shared how we're thinking about branding. And 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 integrated from an experience perspective a more unified experience. Not just from a color perspective, which is the first step of look and feel, but now integrating different software features and capabilities across that unified experience. And so we are committed to getting that done this calendar year. It's been our plan all along to deliver that this calendar year. And we feel very good about where we're at in that execution of that requirement for the business. And we're excited about what that's going to mean for the cross-sell opportunity. Like we said, we really believe it is a sizable opportunity. We see from the customers that are already using both BILL and 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.

Okay. Great. And then maybe a related question, it sounds like BofA is really zeroing in on the SMB segment for the white-label option and looking to maybe put the commercial over to more of a direct relationship. So that's certainly interesting to hear. How applicable do you think this is across a broader swath of FI customers and really finding the strong product market fit within SMB in particular?

Yeah. I think the thing that we've always focused on is creating value for our partners and really being there to serve them. And so we do have multiple relations with Bank of America. We have a small business relationship. And we have the commercial relationship. And 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. And so, we're at a point now where this platform now 10 years later, the bank has made a decision to go in a different direction and sunset that legacy platform that supported really just the ACH and check capabilities from a BILL pay product perspective. And so from our perspective this is kind of a one-off situation. When you look at the financial institution partners across we continue to do more and more with all of our partners including Bank of America. And so, we think this channel is going to be super important as financial operations becomes part of the fabric of every SMB and we're going to continue to focus on serving those FIs. We have six out of the top 10. We're going to continue to focus on serving them with more and more products and more capabilities.

Thanks for that.

Thank you, Josh.

Thank you. We now have Darrin Peller with Wolfe Research.

Hey Guys. Thank you. I guess, if we could just start with the take rate expansion and I know that's not -- 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 supply enablement or other categories. I mean, we did see a material expansion this quarter. I think roughly three times or two times more than it had been before, sequentially. So can you just comment on what drove some of that strength? And if there are some proactive moves you're making? You look if there's any sustainability or we can count on? Thanks guys.

Thank you, Darrin. I'll start and then let John, add some more color. First and foremost we've built a very strong platform that allows us to use multiple levers across the business to drive monetization and more uses of our payment products. And in any given quarter, we're doing different things experimenting testing and driving that capability. And we've always said that it's not going to be a linear approach to get to the ultimate expansion of monetization with our customers. And this is a good example. We had a lot of great experiments that worked well for us this quarter. I'll let John kind of talk more to that.

Yes, 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 U.S. dollar transactions and a lower smaller headwind around FX losses that we called out last quarter. Looking ahead, I mean, I think it's fair to assume typical average quarterly expansion rates. Obviously, subject to -- there is some quarterly fluctuation here that Rene mentioned plus any sort of macro-induced behavioral changes. But we feel really good about the performance in the quarter and how the ad valorem products we have are increasingly resonating with our small business customers.

That's really encouraging guys. I mean a very quick follow-up just the comments you made on 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.

I'd say, looking ahead to this June quarter, we're assuming that the environment is going to be 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 inflation interest rates credit. All of those things are continuing to force SMBs, and our customers to react. So we're assuming that continues, but no significant worsening of the environment where we would see major changes from SMB. So it's kind of a continuation of the trends that we feel like we experienced in the March quarter.

Thanks. Nice job guys.

Thank you Darrin.

We now have Brent Bracelin of Piper Sandler.

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 bit about linearity of the core TPV trends there on a monthly basis? And 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.

Yes. Brent. First, I'd just remind everyone that the March quarter is typically seasonally softer from a spend standpoint in the December quarter. We didn't experience in the December quarter the normal historical like seasonal uptick and so we had assumed that that aberration would continue in the March quarter and we really didn't see that. We saw spend trends throughout the quarter that were pretty consistent with seasonal patterns that we've seen historically. Now the overall level of spend is reduced as we -- 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 stabilization in spend trends.

That's helpful.

Just one thing I'd add just you asked about kind of the regional bank. One of the beautiful things about our platform is that our customers can switch and add multiple bank accounts. And so for them this was a non-event because we stood up and we took care of our customers.

Helpful color. And then, Rene, one of the biggest questions I get from investors on Intuit. And I was wondering if you could just talk about Intuit as a partner and maybe potential competitor someday, just given the co-marketing agreement there could lapse here in June? And how you view your differentiation versus at Intuit? Thanks.

Thanks, Brent. First off, I would just say that, the current contract is approximately 1% of the revenue of the business, so it's not material to the business. And the opportunity that we have with larger businesses, which is where we are focused, continues to prove out with our direct and our financial institutional channels. We see lots of large businesses coming on of the platform, so we believe in that. And so, I guess, what I would just say more broadly is that, what may look simple from the outside is really rather difficult to build. I've been building payment solutions for SMBs for over three decades and I'm not the only person on the team and the company that has decades of experience doing this. So that knowledge, that expertise, that ability to execute, allows us to take the complex -- complexities of financial operations and payments and all the things that are involved with bill pay and the spend management receivables and make it simple. And our ability to be able to do that is something, because we've integrated all the process automation and workflow capabilities and payment capabilities into one platform. We're not just a system of record for our customers. We're also the system of engagement for our customers. And behind all of that we have a regulatory compliance and redundancy capabilities that we showed and proved out this quarter with the March challenges in the financial regional bank world. So 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 and ultimately, I would say, that we're busy taking all the learnings from the customers we have, the experiences, the data and really setting the innovation agenda for tomorrow and for the next year and the year after that and so on, while others are really kind of looking at what we did two or three years ago and modeling their entry into the go-to-market of financial operations with what we were doing in the past. So we're going to continue to focus on the future. We're going to continue to innovate, continue to add payment capabilities, continue to add working capital capabilities. We're going to continue to do more and more so that SMBs have less mess to worry about. We're going to take that mess off their plate and really make it go away.

Very clear and helpful explanation. Thank you.

Thank you, Brent.

We now have Kenneth Suchoski from Autonomous.

Hi. Good afternoon, Rene and John. Thanks for taking the questions. I think you mentioned that 3,500 net adds ex the FI channel is kind of the right number going forward. We saw a little bit of an acceleration this quarter versus last, so 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.

Yes. Thanks, Ken, for the question. Yes. First and foremost, and I've said this many times, this is a massive opportunity. Like, we have been creating and defining this category of financial operations automating payable spend, expense and AR capabilities for our customers for a number of years and 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, that macro environment means that businesses in general are in this wait and see, not grow mode and that means that some businesses are waiting to take on additional expense before they actually move forward with the opportunities to create more efficiency. So, we do think that that will change as we see the other side of this economy when we could see the light at the end of the tunnel of this wait and see. And we really believe that the multichannel distribution approach we have will continue to serve us well that we can continue to build our customer base across all channels. And what that means is that just as a reminder that allows us to continue building our network. And the network customers really do provide value for every customer experience and allows us to continue to grow our direct experience as well. And I think the thing that we continue to be most excited about is just the satisfaction we see with customers and how they use the product and the time savings that they have and all the things that we do. So, we believe there's a bigger opportunity that we're going to continue to grow and work on and leverage the simplicity capabilities that we're learning every day to make this more available to more customers.

Okay, great. Thanks Rene. And I guess just as my follow-up question. If we put the FI channel to the side for a second, we look at the business ex-FI, the TPV per customer was down just 5% year-over-year. It was down 7% year-over-year last quarter and it sounds like you're feeling better about the macro. So, do you think that year-over-year change in TPV per customer ex-FI has troughed? And 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?

Yes. 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. But I think it's early to call a trough or a reversion to growth mode. As Rene 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. So, we'll certainly have more visibility into some of these patterns by the time we get to our August FY 2024 call and we'll definitely update everyone then.

Okay, great. Thanks John.

Thank you, Ken.

Thank you. We now have Taylor McGinnis from UBS.

Yes, 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 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? And 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?

Yes, I think this really is -- thank you, Taylor for the question. This really is the macro this wait and see is something that businesses are tightening. Just one perspective maybe to think about is that we serve a broad swath of the economy, right? We have businesses of all sizes all segments and so we see and have insights into spend across businesses and across industries that we think is unique. And one of the things that is consistent is no matter what the industry is that larger businesses have more discretionary spend and they tighten more of their belt than smaller businesses. And so 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. And so what we're starting to see is that the early signs of it stabilizing. I think we need a little bit more data before we say any more about it but 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.

Great. Thanks very much for taking the question.

Thank you, Taylor.

We now have William Nance of Goldman Sachs.

Hey, guys. Thanks for taking my questions. I wanted to kind of follow up on the point that you made on the BofA partnership. With those customers moving from the BofA channel to the direct channel I guess could you put some parameters around just how large of a move in customers we're talking about here? And then 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? And could you kind of talk about how that might differ between upfront movements in subscription versus transaction revenue? Thanks.

Thank you, Will and great question. 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. And already we've seen many of the customers that are active migrate to our platform and it's only been -- May 1 was the effective date that the bank set out. So it's very, very early for us but we feel good that many of the active customers are coming over. And to your point those customers when they come over they have the ability to leverage all of our payment capabilities. And so that could be anything from virtual card which is kind of built into the direct experience 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 that will be an important contributor for us in the future relative to the relationship overall. And it's something that we're happy to serve the customers and make sure that we're delivering for them.

Got it. I appreciate that. And then maybe just a question on working capital. I think you guys have been rolling that out. Could you talk about just kind of where we are and any initial thoughts around how you think about attach rates in that product and what that might look like over time?

Thanks. So let me start and then I'll let John add some additional color. The way we think about things is to always build something that's going to be robust stand the test of time deliver for customers deliver for shareholders. And so as we roll this out into our beta program, we are learning about what it is that customers want how to actually manage the capabilities that we have. And what we see so far has us encouraged about the opportunity in the future we're going to continue to work on rolling that out and making sure that contributes in a way to the customers' experience as well as our financial experience. So John anything else?

Yes, just a quick follow-up to that. One of the things that we previously mentioned is that we're in the middle of the transaction flow with our platform. We see the vast majority of B2B spend with our customers on our platform and we think it's a perfect spot to offer alternatives that help improve cash flow and liquidity for customers. That was our thesis in rolling out this product initially and we've been testing and learning. It's still very small. I wouldn't say we're at full launch yet. The feedback has been very positive and we're starting to be able to validate many of the initial assumptions that we had about product adoption and repeat usage and things of that nature. So I'd say we're a ways away from the scaling phase on that 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 is a really nice addition to our ad valorem portfolio.

Got it. Appreciate taking questions. Nice results today.

Thank you.

Thanks Will.

Your next question comes from Keith Weiss of Morgan Stanley.

Hey, Rene. 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 valorem adoption? Does it resonate more with larger SMBs, smaller SMBs perhaps middle market?

Thank you, Jonathan for the question. We see -- really kind of depends probably on the product, right? Larger businesses, for example, have more cross-border payments so there's definitely strength there. But then you think about our working capital, invoice acceleration and our insta transfers that would be more across the supplier network that we built. One of the things we 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 want to get paid and when they want to get paid. So we see the virtual card product is something that goes across all of our direct customers. And so we see strength across all customer segments there. And I think it's again just a testament and a proof point across the durability of our business and the strength across the business that we have these levers to pull depending on what the customer needs and when they need it, and I think that's 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 have today.

That's helpful color. Thanks. And a follow-up.

Thank you.

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?

Yes. The -- at a holistic perspective, we definitely believe that the macro environment is a headwind for customer adoption right now. And that's really because smaller businesses are not looking to increase any of their expenses now while they wait and see what's going to happen with the economy and we see that across the direct business. We see that in the accounting 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 need more people to be able to add more clients and serve their more businesses, so 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 interact with more businesses because of the financial institution strategy, because of the accounting strategy, because of our direct strategy and that's what's playing out really well for us. The fact that we have multiple ways to serve customers and that allows us to build a stronger and stronger network, which allows us to create a stronger experience for our customers across the platform.

Helpful context. Thank you.

Thanks, Jonathan.

We now have Bryan Keane of Deutsche Bank. Bryan, could you please unmute your line, as I muted lightly?

Hello, can you hear me?

Yes, we can.

Hi, Bryan.

Hey, guys. Sorry, I'm not sure what happened there. Just a clarification on TPV. Seasonal patterns held in third quarter 2023 but the guidance for 4Q TPV growth now suggests that seasonally it will be materially different than last year. And I know there was some conservatism I guess baked into flat growth of TPV on the core BILL and we did 11% year-over-year in the quarter. So just trying to think about is it finally the slowdown? How conservative it is versus are we really seeing the slowdown seasonally to kind of guide to those levels?

Yes. Thanks for the question, Brian. I'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 5% or so on a – per customer was a little bit larger of a decline than we would typically see and so we've assumed that the Q4 time period is going to be similar performance. We're going to see some trends that are still not quite back to normal seasonal patterns. At some point when we get to a true trough or businesses start to expand again is when I think we get back to these historical seasonal trends even if it's at a lower overall level of spend and I think that's still probably a few quarters out. But for Q4, we feel like the trends that we've outlined with our estimates are sort of a continuation of the trends we've seen in the March and to a lesser extent December quarters.

Yes I was going to ask that question about visibility. When will that turn take place to get back to what you think will be seasonal trends? Is that the first half of fiscal year 2024, or is that probably not until the second half?

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 in the credit environment for small businesses. But what we have seen is I'd say, you could characterize it as a healthier set of patterns from businesses. They are adjusting. They are obviously the small business segment is super resilient and we continue to see very high engagement with the platform. So that tells us there's good things ahead but when that starts to turn I think it's still open.

Okay. Thanks so much and congrats on the execution.

Thank you.

We now have Brad Sills with Bank of America Merrill Lynch

Wonderful. Thank you. I wanted to ask a question around the take rate this quarter. Obviously, real strong here. I think John in the past you said perhaps with the macro you could see some pressure a little bit more price sensitivity on – from suppliers in particular taking on virtual card. It doesn't appear to be the case. We saw a nice ramp this quarter looks like a full basis point. So just curious, what were you expecting heading into the quarter with regard to the macro impact on the uptake on ad valorem services? And then how did the quarter shape out relative to your expectations?

Yes. 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 and so 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 it's still small in the overall universe of payment offerings that we have is increasingly seeing adoption. And then we continue to see very healthy levels of international transactions, international payments which includes the FX transaction as well. So all of those things seem to be going in the right direction this quarter and as we've said on prior calls, there is definitely some quarter-to-quarter fluctuation that happened so it's not perfectly linear our expansion. And so 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 any quarter-to-quarter variation that might exist.

That's great to hear. Thanks, John. And one more if I may please. We're hearing real positive feedback from the channel on the potential for Divvy integration with core BILL. Curious 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.

Thank you, Brad. We are definitely hearing the same thing when we talk with all of our joint customers that use both 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 think more confidently about how things are moving for businesses across America. And so from our perspective the sizable cross-sell opportunity is really going to unlock once we have this fully integrated experience. So we're a good part of the way there. We've done all the heavy lifting underneath the covers to kind of make the platforms talk to each other to look like one platform and now we just got to create that execution. So your checks are the same as ours that customers love the value of both and we're going to continue to make sure that that's true and then obviously execute when we get into cross-selling motion.

That's great. Thanks, Rene.

Thanks, Brad.

Thank you. We now have Tien-Tsin Huang of JPMorgan.

Hi. Thanks, good afternoon. I know you've covered a lot already, a lot of good answers. Just wanted to ask a couple of clarifications on the gross margin. It was very, very strong. John you mentioned moderate. I think I heard a lot about monetization et cetera, but can you just explain again the factors or rank the factors that would drive that moderation, or are there any callouts in the third quarter that maybe we missed with gross margin?

Yeah great. Yeah. Thanks for the question. I'd say, we obviously have had a tailwind of benefit associated with the increasing yields and float revenue associated with our FDO allowances. As interest rates start to peak potentially here in the near term we'll see that float revenue begin to flatten versus the curve that it's been on throughout FY 2023. That's been a positive benefit of call it 75 to 100 basis points on our non-GAAP gross margin historically. We've also had a very favorable payment mix meaning some of the adoption gains that we've had on the high-monetizing ad valorem products have supported the higher gross margins as well. If you go back a few quarters I think our visibility was kind of 80% 81% non-GAAP gross margins. We've been operating well above that. We just wanted to call out that the peak margins of 87% that we had this last quarter 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.

That's fair. Thanks for going through that. And just, if you don't mind clarifying just the Bank of America. So that commercial piece is just going to roll off and so that's going to drive some of the difference in the user count on that basis? And then somewhat related, why is the average transaction per customer on the FI side so different than the direct?

Thank you for the question. I'll take the second one, first. The average transaction per customer is different in part because, each of our financial institution partners has different segments that they serve, right? So we -- 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 larger transaction per customer than the small business side. And so, when you look across the channel the reason it's different is because I think of the success that we're seeing 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 the point that, we provide a ton of value for our customers, no matter the size and that's why the banks work with us. And so, when the bank decided to make this decision to sunset the legacy 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 so the customers want to do that and we've so far had good success doing that. Okay? Well, with that -- do you have one more question? Sorry. Follow-up?

No nothing. I don't know if you want -- if you already clarified the Bank of America. If not I can go back to the transcript. But thanks for the education on that Rene. It was helpful for me. Sorry that's a simple question.

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 and have a great evening.

Thank you. I can confirm this does conclude today's call. Please have a lovely day and you may now disconnect your lines.