Bill - Bert Article

A few of us here have posted on BILL. BILL provides a SaaS solution for SMBs accounts payable and payments. Growth of its subscription and payments revenues has been well north of 50%. (Interest float revenue has become more insignificant).

Bert recently did an excellent comprehensive write-up for BILL on SA https://seekingalpha.com/article/4357822-bill-com-solution-t….

The article summarizes everything that has been posted here. Bottom line, he likes just about everything about it other than its current price. He believes it is valued at 31x EV/S which is greater than companies like CRWD, AYX, ZS and SMAR but less than SHOP, OKTA and COUP. Bottom line, he thinks BILL is attractive at a discount of 25% from current prices.

As for entry points, I would note that the lock up period expired in June and had little impact on the share price.

BILL is currently my second largest holding, but my last buy was on May 26.

OT: I don’t have the guts to concentrate my stock positions as much as many here (and as I did when I was younger). I couldn’t sleep at night. I tend to buy, add to winners and hold. Nevertheless, I believe plenty of people are like me and are able to utilize info from this board to juice their returns. As I type, my XIRR for the year is well over 200% (i.e., my taxable account is up over 100% YTD). My 401k which has limited investment options and where I have 80% S&P index funds and 20% company stock is down YTD. It has been simply remarkable year.

Thanks all,

Mike

14 Likes

Sorry for the OT of this but I think it is critical information to share:

My 401k which has limited investment options and where I have 80% S&P index funds and 20% company stock is down YTD

Know that there are VERY liberal 401k Covid withdrawal rules for this year. You could pull out up to 100k from your 401K and indirectly roll it to your IRA.

I have had a similar experience as you and I completed my rollover today.

7 Likes

The article summarizes everything that has been posted here. Bottom line, he likes just about everything about it other than its current price. He believes it is valued at 31x EV/S which is greater than companies like CRWD, AYX, ZS and SMAR but less than SHOP, OKTA and COUP. Bottom line, he thinks BILL is attractive at a discount of 25% from current prices.

I read the top part of the article that describes the business model and the ecosystem of accountants and banks they have built. Number-wise they have 91,000 customers out of a universe of six million.

Bert says the stock is too expensive and to wait for a 25% haircut. I think this is bad advice. One cannot bargain with the market, it’s take it or leave it. If you wait for the 25% haircut there is a good chance you’ll miss the boat altogether. The sensible thing is to figure out if the current price is worth paying and for that you have to look into the future. The past is a nice reference but not enough data to make a decision.

I like the business model and similar businesses three or four decades ago, Automatic Data Processing (ADP), were excellent investments. So let’s do a spreadsheet experiment

  • At 90,000 customers in a 6 million universe they have a 1.5% market penetration

  • Over ten years they should be able to grab half the market if it’s really an increasing returns type of business, 3 million customers

  • Over ten years with new products and new services they should be able to increase the billing per customer five fold

  • If the above holds, their revenue growth rate is in the order of 66.8%

How much are you willing to pay for 67% revenue growth? Don’t use my numbers, play with your own guesstimates. If you think revenue will only grow four fold the growth rate drops to 63.1%

No position yet.

Denny Schlesinger

16 Likes

Bill.com is interesting, thanks for sharing. I put it through some criteria that’s popular on this board. Below is what I found:

  1. Recommended? Yes, Bert from Seekingalpha.com, which holds significant weight, in my opinion. Not currently recommended by Motley Fool (at least on the services I subscribe to).
  2. Rapid Revenue Growth: yep, 46% (previous quarter compared to the same quarter a year ago).
a.	I typically do a quick check to see if __*revenue growth is accelerating*__.  In the case of BILL, it’s not. at least not in the latest quarterly:  
YoY growth of the previous quarter compared to the same quarter a year ago was 50%.  That could change in the next quarter, of course.
  1. Special niche, moat, competitive advantage, etc.?: this is difficult to assess and has been the subject of much debate on the definition of this attribute. BILL does have competition: Square plays in this space and offers more financial services (according to an article in MF), but trades at a lower multiple. But maybe BILL is trading higher because it’s a better company? I’d say this is TBD
  2. Recurring revenue?: Subscription revenue was 55% of FY’19 revenue. I didn’t see where they break out their subscription revenue for the previous quarter, but I assume it’s growing
  3. High Gross Margins?: yes, almost 79%!
  4. Rapidly improving metrics
a.	Adj. gross profit improved from 76% to ~79%:  improving
b.	Adj. loss from operations was $4.3 million, compared to loss of $1.1 million in same quarter a year ago: declining, but spending more $ to expand their share. (research, S&M, and GA all rose sequentially)
c.	Adj. net loss was $2.9M, or ($0.04) per share, compared to Adj net loss of $138,000, or break-even on a per share basis, basic and diluted, in the same period last year:  declining, but, again, 
could be explained given OPS expenses growing to land and expand more business.
d.	FCF:  Total FCF for previous Q: -2.1M ; Total FCF  for previous Q year ago:  -1.1M: declining

  1. DNER>100%?: DBNER = 110%
  2. Cash to debt comparison: cash = $229M; total debt = $1.4B;
  3. OPS FCF picture
 a.FCF from OPS: improving  
          i.	FCF from OPS in previous quarter = $822,000;  
          ii.	FCF from OPS in same quarter from previous year = $101,000

For fun, I checked Ron and Saul’s Oomph factor for a handful of companies I follow, as a relative comparison of valuation to Bill.com (ordinal, not interval, nor ratio; lower numbers are better. My high conviction companies in bold)


Company	share price	EVSO:  EV/S/Ron's Oomph factor	EVSO= EV/S / Saul's Oomph factor
**CRWD**	   $116 	                 7.08 	                    6.02 
LVGO	   $104 	                11.06 	                    9.37 
**ZM**	   $275 	                11.86 	                    9.88 
Alteryx	   $177 	                16.13 	                   13.67 
TWLO	   $240 	                16.54 	                   15.04 
NET	    $40 	                19.17 	                   15.98 
**DDOG**	    $96 	                19.63 	                   16.92 
DOCU	   $208 	                21.18 	                   17.79 
OKTA	   $218 	                23.98 	                   20.15 
COUP	   $309 	                30.15 	                   25.59 
BILL	    $88 	                29.90 	                   26.70 
FSLY	    $95 	                36.03 	                   30.03 
SHOP	 $1,021 	                61.99 	                   57.40 

In my summary, Bill.com is definitely in the mix and could be a good investment, but I’ll monitor to see how revenue growth progresses.
One could make an argument that there could be revenue improvement once the COVID dynamic stabilizes and SMB spending sentiment improves, or SMB stimulus is extended. The fact that they’ve done well
in the COVID dynamic is intriguing.

I hope this data is useful.
Gary

41 Likes
Gary, here are a couple comments on your post:

<i>2. Rapid Revenue Growth: yep, 46% (previous quarter compared to the same quarter a year ago).
I typically do a quick check to see if revenue growth is accelerating.  In the case of BILL, it’s 
not. at least not in the latest quarterly: YoY growth of the previous quarter compared to the same
quarter a year ago was 50%.  That could change in the next quarter, of course.</i>

BILL has 3 revenue sources: subscription, transaction and interest float. They call subscription and
transaction "core" revenue. When looking at revenue, I think you need to back out the interest float
revenue to get to the real growth numbers and prospects. The float revenue is basically just a nice
additional source of revenue that they get from the float of payments. (FWIW, they said it will be 
very low next quarter due to low interest rates.) Nevertheless, here are the revenues numbers I have:

Revenues: 
           Q2      Q3    2Q-3Q  2Q(YOY) 3Q(YOY)
Core     $33.0m  $36.1m   9.5%   61%     63%
Interest $ 6.1m  $ 5.1m -16.0%   10%    -16%
Total    $39.1m  $41.2m   5.4%   50%     46%

First, keep in mind, the last few weeks of Q3 was impacted by Covid-19. With that said, they 
did grow revenues 5.4% from 2nd to 3rd quarter. More importantly, their core revenue grew 9.5%
from Q2 to Q3 (even with some covid-19 disruption). Subscription made up $22.3 million of the core
revenue (+44% YOY). Transaction was $13.8 million (+106% YOY).

Unlike other companies at the height of Covid19, they did not withdraw guidance. Instead, 
they gave covid-conservative estimates of $37-38.4 million total revenue and $34.8-35.6 core (-2.2% 
Q3-Q4) and $2.6-$2.8 million of float (-47% Q3-Q4 due to interest rate). 

Bottom line though, their core revenue is expanding and growing. They also announced in May a core
financial institution partner (likely Wells Fargo). That revenue will likely hit in 2021. So, they
now have JPM, Bank of America, Wells Fargo and American Express as heavy adopters of their
platform. Some of the biggest providers of SMBs. 

<i> 3. Special niche, moat, competitive advantage, etc.?: this is difficult to assess and has been
the subject of much debate on the definition of this attribute. BILL does have competition: Square
plays in this space and offers more financial services (according to an article in MF), but trades
at a lower multiple. But maybe BILL is trading higher because it’s a better company? I’d say this
is TBD.</i>

So, I don't think Square directly provides a back office account payable and receivable solution.
Square certainly provides solutions to SMBs, but I don't think they have an AP/AR platform. 
Quick books would seem like a natural competitor, but they actually use the BILL platform in their 
software. I suppose payment processors might compete with generic electronic payments, but I think 
BILL's focus on the the back office solution is a bit unique. (I own PYPL, ADYEY, MELI, and SE in 
the payment space as well.) On the electronic payment side, BILL mentioned one barrier and cost of
entry being qualifying as a payment processor in all 50 states and other jurisdictions.

Although a new IPO, BILL has been in business for 12+ years. They have substantial relationships 
with accounting firms and big financial institutions serving SMBs - JPM, BOA, AXP and now Wells.
(Likely under a white label arrangement).  

BILL says its biggest competition is SMBs using a manual process instead of a cloud based back 
office solution. Their biggest R&D expense is focusing on continually improving their platform. 

With that said, I think the biggest risk to long term multiple growth to an investor is BILL 
being acquired by a company like Square or Intuit. (Note, the CEO/founder of BILL's last company 
was bought by Intuit.)

Covid-19 had me worried going into last quarter, but they seemed to do well. We will see how much
it impacts them this quarter ending 6/30. I don't think the lock-up expiring hurt the stock price
at all. 

Mike
9 Likes

I fixed the formatting.

Gary, here are a couple comments on your post:

  1. Rapid Revenue Growth: yep, 46% (previous quarter compared to the same quarter a year ago).
    I typically do a quick check to see if revenue growth is accelerating. In the case of BILL, it’s
    not. at least not in the latest quarterly: YoY growth of the previous quarter compared to the same
    quarter a year ago was 50%. That could change in the next quarter, of course.

BILL has 3 revenue sources: subscription, transaction and interest float. They call subscription and
transaction “core” revenue. When looking at revenue, I think you need to back out the interest float
revenue to get to the real growth numbers and prospects. The float revenue is basically just a nice
additional source of revenue that they get from the float of payments. (FWIW, they said it will be
very low next quarter due to low interest rates.) Nevertheless, here are the revenues numbers I have:


Revenues: 
           Q2      Q3    2Q-3Q  2Q(YOY) 3Q(YOY)
Core     $33.0m  $36.1m   9.5%   61%     63%
Interest $ 6.1m  $ 5.1m -16.0%   10%    -16%
Total    $39.1m  $41.2m   5.4%   50%     46%

First, keep in mind, the last few weeks of Q3 was impacted by Covid-19. With that said, they
did grow revenues 5.4% from 2nd to 3rd quarter. More importantly, their core revenue grew 9.5%
from Q2 to Q3 (even with some covid-19 disruption). Subscription made up $22.3 million of the core
revenue (+44% YOY). Transaction was $13.8 million (+106% YOY).

Unlike other companies at the height of Covid19, they did not withdraw guidance. Instead,
they gave covid-conservative estimates of $37-38.4 million total revenue and $34.8-35.6 core (-2.2%
Q3-Q4) and $2.6-$2.8 million of float (-47% Q3-Q4 due to interest rate).

Bottom line though, their core revenue is expanding and growing. They also announced in May a core
financial institution partner (likely Wells Fargo). That revenue will likely hit in 2021. So, they
now have JPM, Bank of America, Wells Fargo and American Express as heavy adopters of their
platform. Some of the biggest providers of SMBs.

  1. Special niche, moat, competitive advantage, etc.?: this is difficult to assess and has been
    the subject of much debate on the definition of this attribute. BILL does have competition: Square
    plays in this space and offers more financial services (according to an article in MF), but trades
    at a lower multiple. But maybe BILL is trading higher because it’s a better company? I’d say this
    is TBD.

So, I don’t think Square directly provides a back office account payable and receivable solution.
Square certainly provides solutions to SMBs, but I don’t think they have an AP/AR platform.
Quick books would seem like a natural competitor, but they actually use the BILL platform in their
software. I suppose payment processors might compete with generic electronic payments, but I think
BILL’s focus on the the back office solution is a bit unique. (I own PYPL, ADYEY, MELI, and SE in
the payment space as well.) On the electronic payment side, BILL mentioned one barrier and cost of
entry being qualifying as a payment processor in all 50 states and other jurisdictions.

Although a new IPO, BILL has been in business for 12+ years. They have substantial relationships
with accounting firms and big financial institutions serving SMBs - JPM, BOA, AXP and now Wells.
(Likely under a white label arrangement).

BILL says its biggest competition is SMBs using a manual process instead of a cloud based back
office solution. Their biggest R&D expense is focusing on continually improving their platform.

With that said, I think the biggest risk to long term multiple growth to an investor is BILL
being acquired by a company like Square or Intuit. (Note, the CEO/founder of BILL’s last company
was bought by Intuit.)

Covid-19 had me worried going into last quarter, but they seemed to do well. We will see how much
it impacts them this quarter ending 6/30. I don’t think the lock-up expiring hurt the stock price
at all.

13 Likes

Mike, first you write:

2. Rapid Revenue Growth: yep, 46% (previous quarter compared to the same quarter a year ago).
I typically do a quick check to see if revenue growth is accelerating. In the case of BILL, it’s not. at least not in the latest quarterly: YoY growth of the previous quarter compared to the same quarter a year ago was 50%.

Second you classify revenue as core and interest

When looking at revenue, I think you need to back out the interest float revenue to get to the real growth numbers and prospects. The float revenue is basically just a nice additional source of revenue that they get from the float of payments.

And third you show the revenue with core increasing from 61% to 63%:


Revenues: 
           Q2      Q3    2Q-3Q  2Q(YOY) 3Q(YOY)
Core     $33.0m  $36.1m   9.5%   61%     63%
Interest $ 6.1m  $ 5.1m -16.0%   10%    -16%
Total    $39.1m  $41.2m   5.4%   50%     46%

The point I'm trying to make is that the order of the presentation plants a negative image in the reader's mind, slowing revenue growth rate is a growth stock killer! But the reality of the core business is that core revenue growth rate is increasing but that is buried in the middle of the post. From a growth investor's point of view, interest rate volatility is noise pure and simple. In fact, it might be proper accounting to move interest float income from top line "Revenue" to near the bottom "Other Income and Expenditures." It depends entirely on how you view the business, it would not be moved to the bottom at a financial institution. This is the kind of thing that separates GAAP from real accounting.

But this brings up a question in my mind, if Bill manages clients’ money, how much risk does that add to the investment thesis? Any idea how to address that question?

Thanks,

Denny Schlesinger

6 Likes

I found this video explaining Bill.com’s businesses as well, very informative:

https://youtu.be/5Ml1k3WmasM
“How Bill.com is Leveraging AWS to Accelerate Growth and Innovation”

Dominic
Started a small position

3 Likes

Denny,

I think my formatting may have been bad. The first part was a quote (in italics) from a previous poster. The second part was my view.

I do think revenue growth (core revenue) is increasing +9.5% 2nd quarter to 3rd quarter (the last weeks of which were codiv 19) and +64% YOY. While BILL guided to flat growth in the third quarter related covid impact, I think future growth is solid. They are adding accountant partners and just added a new fin. inst. part (I believe it’s Wells Fargo) as a white label partner for all of their new SMB clients. Small service revenue in balance of 2020. Big core revenue boost in 2021.

The second question I was responding to was whether BILL has a “moat” or not.

Mike

Denny,

You also asked about the risk of BILL “managing clients’ money”. Technically, they don’t manage it. They receive it into their client fund accounts at financial institutions, hold it in conservative interest bearing accounts, then pay it out to vendors. They earn and get to keep the interest on that “float”. I assume they aggregate client money in a form of OMNIBUS account, but I suppose that they many have dedicated accounts for each client. Maybe it depends on how much cash flow is coming from a particular client. I’ve never heard anyone ask that question, but its an interesting one. BILL mentioned this risk in their S-1 as follows:

• We transfer large sums of customer funds daily, and are subject to the risk of loss, errors, and fraudulent activities of customers or third parties, any of which could result in financial losses, damage to our reputation, or loss of trust in our brand, which would harm our business and financial results;
• Customer funds that we hold in trust are subject to market, interest rate, foreign exchange, and liquidity risks, as well as general political and economic conditions. The loss of these funds could have a material adverse effect on our business;

Again, I’ve never heard of anyone ask questions related to these issues.

So, admittedly, like any payment processor, they have technical risks for receiving funds and making payments, but they seem to manage it well (for more than 14 years). Also, as for security protocols, BILL’s systems have been vetted by at least JPMorgan Chase, Bank of America, Wells Fargo and American Express. Any big financial institution must thoroughly vet any 3rd party vendor for risk compliance, confidentiality etc. The vendor has access to the financial institutions accounts and information. I also view this due diligence vetting as a bit of a moat for competitors because its a time consuming and arduous process. Less arduous is the vetting and licensing by all jurisdictions that they operate in - BILL however did mention this barrier to entry for competitors.

Finally, I’ll mention something that shocked me when I first heard it - according to a 2016 study, 90% of SMBs still rely on a manual AP/check writing process. Those are the customers they are going after.

Mike

2 Likes

I think my formatting may have been bad. The first part was a quote (in italics) from a previous poster. The second part was my view.

Got it, sorry to have been confused by the formatting.

Denny Schlesinger

Mike, regarding the risk of managing money, I’ve learned a lot about Bill from this thread. The video Domeyrock recommended “How Bill.com is Leveraging AWS to Accelerate Growth and Innovation” was very interesting. The risk I was thinking of was not from outside sources but dereliction of fiduciary duty by Bill.

Finally, I’ll mention something that shocked me when I first heard it - according to a 2016 study, 90% of SMBs still rely on a manual AP/check writing process. Those are the customers they are going after.

This is something I’m familiar with, in the late 1960s and early 1970s I was busy reorganizing the administration of small businesses. Most entrepreneurs concentrate on their business, not on its management so this is a big field ripe for picking.

Frankly I feel like a young boy in a toy store not sure which one I want to play with, BILL, DOCU, FSLY… This market is truly a once in a lifetime opportunity.

Denny Schlesinger

5 Likes

One quick little contrarian anecdote about Bill.com.

I work for a SMB, and we used Bill.com for a few years, up until this year. For the most part, we liked it (although it was occasionally tricky to successfully sync it with QuickBooks, such as when a check had to be voided, etc.). But this year, Bill changed the user interface, which made the experience of using it much ‘busier’ and less elegant in our opinion. We tried to get accustomed to the new bells and whistles, but just kept finding it more annoying than it used to be. Simultaneously to changing the UI, Bill.com fairly significantly increased their monthly fees. So now we are no longer using Bill.com. We are strictly using our bank’s bill paying functions and QuickBooks and are actually happier.

Not that this experience is indicative of anyone else’s, but just wanted to share.

Todd
no position in BILL at this time but watching the numbers in any case :slight_smile:

13 Likes