BILL Overview and 4Q'23 Review
Overview
Bill.com is a leading SaaS platform that offers back-office operational tools focusing on small to mid-sized businesses. It provides an indispensable solution for SMBs to streamline their back-office operations, and it has created a strong market presence through strategic partnerships and integrations. The company offers a product suite with clear value propositions and has positioned itself well in the market. The platform’s continuous innovation and efforts to expand into new areas make it an attractive prospect for investors. The platform automates invoicing, payments, and assists businesses in managing their cash flows. Bill.com promotes a paperless office and automates transaction tracking, significantly reducing manpower. According to BILL, the automations in the AP/AR workflow allow clients to turn 3 days of work into an hour, showing a clear financial benefit and measurable ROI.
The CEO and founder, Rene Lacerte, has a rich history in back-office accounting. He worked at Intuit and founded PayCycle in 1999, which eventually sold to Intuit for $170M. In 2006, he founded Bill.com. The Lacerte family has a lineage in the back-office accounting space, with relatives founding tax-prep software companies.
Product Features
Accounts Payable & Accounts Receivable SaaS Offering: These tools help businesses automate their cash flows, both outflows to suppliers and inflows from customers. It reduces the manual process required to manage working capital and frees up time for more revenue generative activities.
Integration with Accounting Software: The platform integrates with various accounting software like QuickBooks, Xero, Oracle NetSuite, and others. This streamlines and simplifies the process of transferring financial data between different software systems. For businesses using accounting software like QuickBooks, Xero, or Oracle NetSuite, the integration ensures that financial information, including invoices and transaction details, can be seamlessly shared and updated across platforms. This helps to eliminate manual data entry errors, reduce duplication of efforts, and save time for finance and accounting teams. Overall, integration with accounting software enhances accuracy, efficiency, and data consistency in financial operations.
Intelligent Virtual Assistant (IVA): AI-powered tool that automates data extraction and categorization from invoices. It’s designed to learn and improve over time. By leveraging AI-powered technology, the IVA can rapidly analyze and interpret invoice data, such as line items, amounts, and payment terms. Over time, the IVA becomes smarter through machine learning, improving its accuracy in recognizing patterns and specific invoice attributes. This automation not only accelerates the invoice processing workflow but also minimizes the potential for human errors associated with manual data entry. Consequently, businesses benefit from increased productivity, reduced processing time, and enhanced accuracy in their financial tasks.
Tiers of Pricing: Pricing varies according to user needs, from the Essentials package at $45/user/month to the Corporate plan at $79/user/month, and an Enterprise package with customized pricing depending on needs.
Payment Layer Overview
Monetization Strategy: Acts as a middle-man between their SMB customers and their suppliers and clients. By providing a platform that facilitates transactions and interactions between different parties, the company can charge fees or take a percentage of the transactions processed. This approach allows the company to create a sustainable revenue stream while offering value to both the SMB customers and their business partners.
Network Members: Built up a network of 3.2 million suppliers, allowing easy interfacing with the platform. Building a network of 3.2 million suppliers is crucial because it establishes a wide ecosystem that fosters easy interaction and collaboration. This network strength enables SMB customers to efficiently connect with their suppliers and clients, simplifying the procurement and payment processes. The larger the network, the more valuable the platform becomes, as it offers a comprehensive solution for various business needs.
Physical and Digital Invoices: Can receive, print, mail, or send digital invoices and issue physical checks. Offering the flexibility to receive, print, mail, or send digital invoices, and issue physical checks, is essential for accommodating the diverse preferences of SMB customers. While some businesses may still rely on traditional paper-based processes, others may prefer digital transactions for convenience and speed. By catering to both options, the platform ensures that it can effectively serve a wide range of customers with varying operational preferences.
International Payments: Added in 2018, supporting a vast list of countries. Providing support for international payments is vital for SMBs engaged in cross-border transactions. With a vast list of supported countries, the platform offers SMB customers the ability to conduct business globally without the hassle of navigating complex international payment systems. This feature enhances the platform's value proposition and expands its reach to businesses operating in different parts of the world.
Virtual Credit Card Capabilities: Partnered with Mastercard in 2019 to offer virtual credit card payments. Virtual credit cards can be used for online transactions, reducing the risk of fraud associated with traditional credit cards. This feature adds an extra layer of security and convenience for SMB customers, making it easier for them to manage payments within the platform.
Instant Transfer: Piloted in Nov 2020 through The Clearing House's Real-Time Payments (RTP) network, targeting SMBs. Real-time payments eliminate the wait time associated with traditional payment methods, providing immediate access to funds. This feature is particularly valuable for small businesses that may require quick access to funds for operational purposes. By offering instant transfers, the platform enhances its appeal to time-sensitive SMB needs and showcases its commitment to innovation and efficiency.
Float Profit
Interest on Funds Held for Customers (Float): This feature involves earning interest on funds that are temporarily held on behalf of customers. It's an important aspect of the platform's revenue strategy, as it allows the company to generate income from the funds that customers have yet to withdraw or use for transactions. By pooling these funds and investing them, the platform can earn interest over time. However, the effectiveness of this strategy can be impacted by changes in Fed policy and interest rates. When the Fed rate is lowered, the interest earned on these funds may decrease, affecting the overall profitability of this revenue stream. Therefore, monitoring and managing the impact of changes in the Fed rate on the platform's float earnings is crucial for maintaining a sustainable and profitable business model.
Facilitation of Various Payments
ACH Payments: Including Faster ACH for an upsell.
Secure Physical Checks: With Faster Check option.
Credit Card (CC) Payments: Including virtual CC payments.
Cross-Border Payments: Via international wire, in USD or local currency.
Instant Transfer: Real-time payments to bank accounts.
Challenges and Future Directions
Interest Rate Challenges: Changes in interest rates can have a direct impact on the platform's financial performance. Fluctuations in interest rates can affect both the top line and gross margin of the business. When interest rates are low, the revenue generated from float interest may decrease, potentially affecting the overall financial health of the company. This challenge requires the platform to carefully manage its revenue streams, monitor interest rate trends, and adjust its strategies to mitigate any adverse effects on its financial metrics.
Focus on Core Buisness: To maintain a robust business model, the platform prioritizes accelerating growth in transaction volume. While float revenue contributes to overall earnings, the core driver of the platform's success lies in the volume of transactions processed. By focusing on increasing the number of transactions, the platform can achieve sustainable revenue growth over time, even in the face of potential challenges related to interest rate fluctuations.
AI/ML: Leveraging artificial intelligence and machine learning is a critical approach for the platform to extract insights from existing data and guide its future directions. By analyzing data patterns, customer behaviors, and market trends, the platform can make informed decisions to optimize its services, enhance user experience, and identify new opportunities for expansion. This data-driven approach empowers the platform to adapt to changing market conditions and customer preferences while driving innovation and maintaining a competitive edge.
Go-To-Market
Direct sales: Has an internal sales team that does outbound calling/emailing to potential customers. This allows for more customized, consultative selling.
Accountants channel: Partners with 7000 accounting firms to distribute its product. Accountants can integrate Bill.com into their practices and recommend it to clients. This channel drives a significant portion of new customers. There is still room to increase penetration into accountants' client bases. Many accounting firms will not take on a client if they do not sign up to Bill.com as it reduces their administrative workload.
Financial institutions: Partners with top banks like JPM, Bank of America, Wells Fargo and others. The banks white label BILL’s products. Focus is on commercial/mid-market customers so far. Recently expanding to small business segment which opens up millions of new potential users.
Digital marketing: Inbound marketing like SEO, content, email nurturing to generate leads. Many customers find Bill.com organically via online searches. Social media ads and retargeting help convert leads and accelerate deals. Referrals are also a big acquisition channel, fueled by word-of-mouth and accountants/bank referrals. Self-service signup is available but many customers need consulting to get set up.
Acquisitions
Divvy
Overview: Divvy is a platform that manages employee spending through physical and virtual cards. This includes expense management with budgeting at no cost. Mainly makes money through credit card interchange fees. Software provides superior spending controls and automation compared to traditional credit cards. Divvy has a balance sheet component, partnering with capital markets firms to fund credit limits, but Divvy is on the hook for any losses. Uses proprietary underwriting methods to extend credit.
Main competitors: Brex targeted tech startups initially, offering high limits. But had to pull back special underwriting for ecommerce companies after high losses. Ramp is focused on rapid feature development and enhancements more than Divvy. Offering advanced capabilities faster. All competitors are building out bill pay and vendor management features to capture more customer wallet share and become a one-stop finance solution.
Deal Details: The deal was worth $2.5 billion, with $1.88 billion in stock, $625 million in cash, and added 400 employees.
Synergies:
Expanding Spend Management Capabilities: Enhancing features like expense and budgeting control, especially for the mid-market segment.
Monetizing Payment Through Cards: Attractive monetization rates through the use of both physical and virtual cards.
Tapping into Smart Corporate Cards Market: Aligning with a growing trend in the industry, and moving closer to immediate competition.
Partnership Shift: Originally with Mastercard and WEX Bank, then switched to Visa through Cross River Bank & Marqeta partnership.
Invoice2Go
Overview: Based in Sydney and Palo Alto, Inv2Go is a mobile-first platform designed to assist small businesses in managing daily operations, invoicing, payments, and more.
Deal Details: The deal was worth $625 million, with 75% in stock, 25% in cash, and added 100 employees.
Customer Reach: 226K customers across 150 countries.
Synergies:
Strengthening AR Product: With added estimate, quote, and invoicing capabilities. By incorporating features such as estimate, quote, and invoicing capabilities, the platform enables businesses to manage their entire invoicing process within a unified system. This not only streamlines operations but also enhances user experience, allowing customers to generate accurate estimates, create professional invoices, and track payments seamlessly. This initiative strengthens the platform's value proposition and positions it as a more complete solution for businesses' financial needs.
Bolstering International Presence: Expansion in employees, customers, and supplier networks. This expansion strategy enhances the platform's ability to serve a diverse customer base, adapt to different regulatory environments, and capitalize on emerging opportunities in international markets.
Untapped Payment Opportunities: Exploring new payment options, including instant payments and financing features. By providing businesses with flexible payment solutions and the ability to access financing, the platform not only becomes more attractive to potential customers but also deepens its engagement with existing users. This initiative aligns with the platform's goal to provide holistic financial services that extend beyond basic invoicing and payment processing.
Possibility of HR and Payroll Integration: As hinted by the CEO, this could be a future direction. The platform's potential future integration with HR and payroll functions aligns with the trend of providing comprehensive business solutions. By offering integration with HR and payroll systems, they can provide businesses with a centralized hub for managing multiple aspects of their operations. This potential direction demonstrates the platform's commitment to becoming an all-in-one solution for businesses' financial and operational needs, further solidifying its position as a valuable partner in their growth journey.
4Q2023 Results
Total revenue was $296 million in Q4, up 48% year-over-year. Full year revenue was $1.06 billion, up 65%.
Subscription revenue was $66.9 million in Q4, up 21% YoY. Driven by customer growth and price increase.
Transaction revenue was $192.6 million in Q4, up 38% YoY. BILL transaction revenue up 33%, Divvy up 44%.
Float revenue was $36.5 million in Q4. Float yield was 453 basis points.
Profitability
ProfitabilityQ4 non-GAAP gross margin was 86.9%, up 270 basis points YoY due to higher float revenue and transaction fees.
Full year non-GAAP gross margin was 85.6%, up 190 basis points YoY.
Q4 non-GAAP operating income was $42.3 million or 14% margin, versus a loss of $3.2 million a year ago.
Full year non-GAAP operating income was $194 million or 18% margin. First year of profitable operations.
Q4 non-GAAP net income was $69.4 million or 23.5% margin, compared to a net loss a year ago.
Full year non-GAAP net income was $194 million or 18% margin.
Customers and Volume
Total customers was 461,000 at quarter end, with 201,000 Bill.com stand-alone customers.
Core Bill.com customers grew 27% YoY. Added 5,300 net new core customers in Q4.
Divvy now serves over 29,200 spending businesses, up 2,100 from last quarter.
Q4 TPV was $69.1 billion, up 7% YoY. Full year growth moderated due to macro environment.
Processed 23.4 million payments in Q4, including 11.6 million on Bill.com platform.
Variable price payments like virtual cards and instant transfers continuing to see good adoption.
Assume ~4,000 net new core customers per quarter in fiscal 2024 guidance.
Divvy
Divvy spend management revenue grew 44% year-over-year in Q4. Now serves over 29,000 spending businesses.
7,200 customers now use both Divvy and Bill.com solutions. Majority are Bill.com customers adding Divvy.
Guidance assumes Divvy will grow revenue in mid-30% range in fiscal 2024.
Launching unified Bill.com and Divvy platform experience in fall to drive further cross-sell opportunities.
Invoice2go
Invoice2go acquisition brings advanced AR automation capabilities, especially for service businesses.
Goal is for Invoice2go to replace legacy AR solution and bring more balance between AP and AR.
Allows BILL to deliver more tools and capabilities to suppliers in the network.
Partnerships
Extended 5 year agreement with JPMorgan Chase to serve commercial banking clients.
Expanding relationship with Bank of America to serve larger portion of their SMB customer base.
Acquired new accounting partners, now at 7,000 firms up from 6,000 a year ago.
Full Year FY2024 Guidance
Total revenue of $1.288-$1.306 billion, reflecting 22-23% YoY growth.
Float revenue expected to be $136.5 million. Assumes float yield of ~415 bps.
Subscription revenue expected to increase mid-single digits YoY due to BofA changes.
Guidance remains conservative, with flat to low single digit TPV growth expected in Q1 and mid-to-high single digit growth in FY24.
Non-GAAP net income of $217-$235 million.
Non-GAAP EPS of $1.82-$1.97 based on 119.5 million diluted shares outstanding.
Other income, net of other expenses expected to be ~$90 million.
Stock-based comp expense of ~$300 million.
Capital expenditures of $35-$40 million.
Continued moderation in SMB spend due to macro environment and uncertainty.
Accounting and direct channel net adds remained healthy in Q4 at 5,300. Guiding for ~4,000 net adds per quarter in FY24.
Expanded partnership with BofA provides large opportunity to serve millions of installed SMB customers, not just net new. Restructured contract pushed out some near-term subscription revenue.
Risks
Limitations to Take Rate Expansion
Could see structural limitations to further take rate expansion through virtual cards in the SMB market. Many easy wins have already been achieved. For more take rate gains will likely need increased adoption of other ad valorem products like cross-border payments and instant transfers. But the ramp there is uncertain.
Could limit ability to drive take rate higher and grow revenue, especially if macro weighs on transaction volume.
Increased Competition
Competition in B2B payments and financial software is increasing from private companies.
Accounting software partners like Intuit are building own AP solutions that compete
Rising competition creates uncertainty around market share gains and growth potential.
Partnership with Intuit to provide embedded bill pay functionality expired in June but this impacted less than 1% of revenue, so minor financial impact.
Intuit has decided to compete directly in B2B payments rather than partner. They built their own competing accounts payable automation solution. Intuit could potentially market and bundle this competitive offering to their large QuickBooks installed base. This creates risk of customer losses among QuickBooks customers who adopt Intuit's own payment solution.
In addition, Intuit partners with some financial institutions to provide white-labeled small business solutions. This could displace FI partnerships.
Adds from the FI channel declined sequentially. While not necessarily due to Intuit yet, an area to monitor.
Intuit has sweeping presence among SMBs that could pose a competitive threat if they gain traction with their proprietary payment/AP offerings.
Softer SMB Spend Environment
SMB payment volumes have moderated over the past year due to macro environment and uncertainty.
Expects headwinds to SMB spend to continue through fiscal 2024, limiting revenue growth.
Valuation and Conclusion:
BILL holds a strong position in the financial technology sector, boasting a diverse range of business dimensions centered around AR/AP workflow automation. The company operates within a vast Total Addressable Market (TAM) of $25 trillion, and despite being in the early stages of digital transformation, it benefits from the usage of manual processes by millions of SMBs. This opens up extensive growth opportunities for the company. Notably, products like virtual cards, cross-border payments, and instant transfers have significant potential for deeper market penetration, which could drive revenue growth beyond mere volume gains. Bill.com's strategic partnerships with top accounting firms and major banks offer distribution advantages and foster customer loyalty. The consistent growth of subscription revenues serves as an entry point into transactions, while its two-sided payment network forms a virtuous cycle by catering to both paying clients and paid suppliers. This cycle leads to further monetization and direct customer acquisition.
BILLs EV stands just under $11 billion, resulting in an EV/Sales multiple of 8.4x based on fiscal year '24 revenue estimates (the fiscal year concludes in June 2024). When applying a reverse DCF analysis to discern the assumptions underlying the current stock price, these assumptions do not appear excessively unreasonable. If BILL can achieve a CAGR of 23% in topline over the next five years while attaining a 20% FCF margin (with 15% FCF margins in '23 and 27% in 4Q '23), and generating $600 million in FCF by Fiscal year '28, certain factors need consideration. The quality of FCF remains low, largely stemming from SBC, necessitating the inclusion of ongoing shareholder dilution. Present SBC trends indicate roughly 2% annualized dilution, which would result in a share count of 115 million from the current 106 million.
To achieve a 10% IRR over a five-year span, BILL would require a trading multiple of 30x FCF, culminating in a market capitalization of $18 billion by the end of the five-year period. Given BILL's competitive stance and its potential to further expand margins, a realistic path exists to attain these financial benchmarks. Nevertheless, the present stock price leaves little room for error, prompting caution in initiating a position at these levels. A more opportune entry point would lie around $90 per share or below (my personal cost basis being $77 per share), affording a safety buffer to mitigate potential competitive pressures from Intuit. Monitoring the competitive landscape, particularly in terms of competition from Intuit, will be a crucial variable moving forward.
Disclaimer - This article is not advice to buy or sell securities, but it is purely for informational purposes. Author has a long position in BILL and reserves the right to buy/sell without notice.