I found Bear’s (et. al’s) pre-earnings posts quite useful to openly share expectations for an upcoming earnings report. I welcome feedback, disagreements, and everything in between as I share my forecast for one of the first hypergrowth companies to report next week.
Prior belief #1: Organic growth will be ~$93M, representing 78% YoY growth (20% QoQ).
Reason for belief #1: Raw dollars added, %YoY, and %QoQ has always been higher in Q2 than Q1. As such, $93M would be the minimum revenue required to maintain this trajectory. It is possible that Bill won’t disclose the organic growth, as they stated on their last earnings call that, “On a go-forward basis, we don’t expect to provide details of Bill.com, Divvy or Invoice2go separately as we are managing 1 consolidated business.” However, I found it useful to begin my expectations with organic growth.
Prior belief #2: Total revenue will be ~$145M, representing 169% YoY growth (25% QoQ).
Reason for belief #2: We don’t know too much about Divvy and Invoice2go’s revenue trajectory, but we can take our organic belief ($93M) and compare it to management’s guide ($84M, or 60% YoY growth) – which results in a ~11% beat. Since management expects Q1 revenue of $131M, we can derive that their inorganic expectation is $47M. Applying our ~11% beat results in ~$52M.
Prior belief #3: Gross margins will nudge lower to the 81% range.
Reasons for belief #3: Management informed us that last quarter’s non-Gaap GM of 83.3% was higher than expected, and “In the near term, we expect our non-GAAP gross margin to be slightly above the range of 77% to 79% provided previously.” They re-iterated that “we expect to increase investments associated with R&D for platform integration with Divvy and Invoice2go, scaling activities with financial institution partners and payments innovation. In addition, we expect to opportunistically accelerate investments in our joint go-to-market initiatives.” While a slight deceleration here is expected, we will have to watch for a potential continuous slowdown.
Prior belief #4: Operating loss (non-Gaap) will show a slight improvement from -$18M.
Reasons for belief #4: Again, I am less worried about Q2’s report than the future trajectory. I previously wrote about how acquisitions can be strategically valuable for a company but dangerous for a hypergrowth portfolio, as metric improvement doesn’t happen instantaneously . Management’s commentary and guide for the rest of the year will be key here.
Prior belief #5 : Paying customers will reach 132,500, with net new 5,700 additions.
Reasons for belief #5: Bill has added around 5,600 customers 4 of the last 5 quarters, so we can’t expect this to radically change. However, I would expect this to start ticking upwards as they upsell Divvy and Invoice2go’s customers.
One benefit of undergoing this exercise is that it served as a check-up on my conviction level. In this case, although the top-line numbers are admirable, the story seems somewhat complicated to me. The combination of cyclicality, acquisitions, and reliance on the SMB market reminds me of a previous holding that didn’t go too well. While the businesses are totally different, I don’t want to ignore the lessons I learned from that.
In short, I see Bill as a high risk holding, which can lead to high reward (or high punishment). The risk being that on their Q1 report, management assumed that there wouldn’t be “a material negative business impact from macroeconomic or supply chain issues faced by customers.” However since then, we have seen some companies highlight supply chain concerns. Further, Omnicron hadn’t made an appearance yet. So there is a chance that their top-line is affected by these two issues.
That being said, Bill has also been disproportionately punished from a valuation standpoint, indicating the market’s potentially lowered expectations. It is now the 9th highest-valued software company at ~26x EV/NTMR, down from being #3 at ~57x in September. The first thing that comes to mind is – what is the market seeing that I’m potentially missing? The higher reliance on the economic environment which was impacted by Omicron? The inability to integrate its acquisitions fast enough? A lack of momentum towards profitability?
Or could it be that the market is underappreciating Bill’s business? I was surprised to see that the last four quarters that Bill has reported, its share price has risen by double-digit percentages the next day. This is including during May ’21 growth stock sell-off. So, could we be in for a surprise? I have no idea how the market will react, but I now have a better idea how I will react!
“We are living through a generational shift in our economy and society. Digital technology is the most malleable resource at the world’s disposal to overcome constraints and reimagine everyday work and life.”-Satya Nadella during Microsoft’s last earnings report