Bill.com | Q2'22 Priors

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 [1]. 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!

-RMTZP
“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

[1] https://discussion.fool.com/retrospective-lessons-from-crowdstri…

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rmtzp, thanks for posting this. I will add a few things here as well.

  1. “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.”

I have seen this before where companies say “we’re not providing details separately”, and then they end up providing details separately. Why would they say one thing and do the opposite? Well, if they preface with “we’re not providing details separately”, and then they don’t provide the details, they can save face by saying “this was the plan all along”. But if they actually end up providing separate details, no one is going to complain. By giving themselves this kind of leeway, if their organic numbers are bad, they’re not gonna provide them. If the organic numbers are solid, they will provide them.

^^To some people this will seem very silly, but investor relations departments aren’t dumb. They know that acquisitions make apples to apples comparisons impossible unless organic numbers are broken out, and they know that Bill.com is a growth stock. People who buy it are growth stock investors and need strong growth rates in order to stay invested.

For this reason, if Bill.com is at all murky with the numbers, I will sell my position. It must be painfully obvious they are still in hypergrowth. The simple reason behind this is because I don’t have to make guesses as to whether SentinelOne, ZoomInfo, and the rest of my holdings are in hypergrowth, so Bill.com should have to live up to that standard. The acquisitions are a large part of why I haven’t let this position go much higher than a 5% or 6% allocation.

To be more clear on this, I’m not saying that Bill.com must individually break out Invoice2Go and Divvy. But they do need to tell us what Bill.com’s stand alone organic growth rate is.

  1. I also think transaction fees are going to be worth watching. They’ve broken out organic transaction fee revenue growth the last two quarters, which I have at 21% QoQ organic growth last quarter and 23% the quarter before that. Prior to that it was 13% QoQ, and prior to that it was 35% QoQ. So there is a decent amount of variability in transactions revenue growth, and they have done a good job breaking out this revenue for us to make it pretty clear how it’s doing. Should they not make this clear in the upcoming report, that will be a yellow flag for me. I think organic transaction over 20% is probably considered a green flag, between 13% and 20% is a yellow flag, and below 13% is probably a red flag. But this will need to be considered with a lot of context with regards to revenue growth, guidance, other factors.

  2. I think you make a good case for 20% organic QoQ revenue growth, but it does seem a bit on the high end historically speaking. I have 13 quarters of data for Bill.com, and they only hit 20% organic QoQ revenue growth one time, which was last quarter. So perhaps they have built momentum and can do another quarter of 20% QoQ growth, but I wouldn’t be surprised to see this come in lower than 20%. Their average QoQ revenue growth rate in 2019 was 11%, in 2020 it was 9%, and in 2021 it’s been 15%. I wouldn’t be surprised to see some mean reversion here, with QoQ growth closer to 15%.

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BILL is my #2 position for good reasons. I don’t buy blindly and hope for the best.

The growth of BILL.com really comes from transaction fee, specifically, from their customers’ organic transaction growth.

Customer growth is not a significant contributor to revenue growth at around 20% to 30% per year. It’s steady but not hyper growth.

Organic transaction fee has been very consistently around 20% QoQ excluding 2 COVID quarters for the past 3 years averaging 22.65%. 2 Years ago, transaction fee was only 30% of BILL total revenue. Now it’s around 70% of total revenue. So total revenue will be closer to transaction revenue growth rate. For next week report, I expect total revenue QoQ of 20% to 25% growth.

Where my expectation of 20% to 25% QoQ revene growth comes from:
-Fee per ransaction increased from $2.1 to $4.86 last quarter, CAGR of 50% per year.
-Customer growth 25% per year.

  • Transaction volume growth of 63% YoY last quarter.

Total: 135% growth per year or 24% per quarter.
This growth rate won’t last forever and we’ll see when it’ll start to slow down.
Note how long Shopify was able to growth the merchant revenue.

Guidance and beat:
Company guided 11.68% QoQ growth next week. Historicaly, company beats quarterly by 12% on average including two COVID quarters. This excluded the crazy 28% beat 2 quarters ago. So it shows management really know their business.
11.68%+ 12% = 24% QoQ. So I expect 20% to 25% QoQ.

And I don’t think it’s good comparison to compare Bill.com TO LSPD. LSPD is in a no growth/low growth of resturant/retail B2C business. The customers of BILL are SMB and their transactions are B2B. Their transactions are very sticky. Transaction fee increased 6.47% ,10.20% during 2 COVID quarters. That was impressive giving that economy was almost shutdown.

“According to a report issued by the Small Business Administration (SBA) in 2019, small businesses account for 44 percent of economic activity in the United States. Small businesses create two-thirds of new jobs and deliver 43.5 percent of the United States’ gross domestic product (GDP).”

Digital transformation has no sign of stopping:

Last ER: “We continue to believe we are in the early innings of a global digital transformation that is disrupting the legacy methods of managing the financial back-office. These trends show no signs of slowing as small businesses are increasingly embracing the need to evolve from analog, paper-based processes to digital solutions that simplify and automate their operations.”

BILL.com will have years of tailwinds of digital transformation from analog financial operations. Think about our bills, credit card, bank statemetns. I haven’t receive a physical one for years and I don’t want to go back.

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Thanks for your thoughtful analysis. I got interested in BILL when I noticed a position in Bear’s monthly summary. I looked at their recent growth and margins. I browsed their site. That was enough for me take a tiny position just to keep it on my radar.

When I first looked at the company I didn’t see any opportunity for “expand” part of a land and expand strategy (they had two products). In that there was no mention of the recent acquisitions (other in the IR section) I missed the potential contribution of their two recent acquisitions.

Going back to their first quarterly report as a public company, CEO René Lacerte said that he would pursue five strategies for growth:

  1. Acquire new customers
  2. Increase adoption by existing customers (expand)
  3. Continue to grow network members (i.e., suppliers of customers)
  4. Expand platform capabilities (feeds #2)
  5. Expand international presence
    It appears that BILL is in fact executing on all five strategies. I think it’s reassuring to see a company actually execute on what the officers said they were going to do.

BILL remains a very small position for me as I still consider it a low confidence but potentially highly rewarding investment. But one must keep in mind that their market is SMB. I’ve read that about 80% of all new companies go out of business in the first 5 years. Even in the face of this stat, BILL seems to be, on net, adding a lot of customers (as you noted above). If they’ve reported churn, I missed it. The economy is doing much better than the media would have one believe. But, if we have a serious downturn it could rapidly impact BILL in a negative way.

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Brittlerock,

In last ER management said that they are now expanding in mid level segment - above small and more into the middle sized types of businesses. I wound’t worry about 80% of their clients going out of business in next years. This is more relevant to their business line of recently acquired Invoice2go which focuses on kind of 1-man shops but is tiny compared to their core bill.com business. Divvy is focusing on mid-sized and enterprise customers. And btw, Divvy growth was in last quarter was like 180-190% yoy - so push to bigger companies is there for sure.

I look forward to BILL ER next Thursday.

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Exponentialdave,

Agree on your points about management providing insight on (1) organic growth, and (2) transaction fee growth.

I think you make a good case for 20% organic QoQ revenue growth, but it does seem a bit on the high end historically speaking

I also agree that 20% QoQ organic revenue growth seems on the high-end, and I wouldn’t be surprised to see it lower. The fact that they guided for 60% organic revenue growth and my belief suggests 78% seems like a large discrepancy. But 78% is what it would take to maintain their Q2 acceleration trajectory; so while I would tolerate a QoQ high in the teens, mid-teens would be an amber flag for me as it would signify the acquisitions might have been necessary to maintain hypergrowth.

CloudL,

Customer growth is not a significant contributor to revenue growth at around 20% to 30% per year. It’s steady but not hyper growth.

Sure, historically it has not been a significant contributor to revenue growth; however, I would expect to see it starting to become an important lever of growth given their acquisitions. We were told that there are 13,500 Divvy customers and 226,000 Invoice2go customers, so an acceleration in customer adds would be an indication that their upsell efforts are working. This would strengthen the case for their acquisitions, and would suggest that the land portion of their business will start supplementing their strong expand model.

Company guided 11.68% QoQ growth next week. Historicaly, company beats quarterly by 12% on average including two COVID quarters. This excluded the crazy 28% beat 2 quarters ago. So it shows management really know their business. 11.68%+ 12% = 24% QoQ. So I expect 20% to 25% QoQ.

Looks like we’re on the same page here, as my belief #2 points to ~25% QoQ growth.

And I don’t think it’s good comparison to compare Bill.com TO LSPD. LSPD is in a no growth/low growth of resturant/retail B2C business. The customers of BILL are SMB and their transactions are B2B. Their transactions are very sticky. Transaction fee increased 6.47% ,10.20% during 2 COVID quarters. That was impressive giving that economy was almost shutdown.

The reason I didn’t specifically mention Lightspeed by name is because I wanted to avoid a direct comparison, hence why I highlighted that they’re totally different businesses. However, what’s true is that they both: (1) service the SMB market, (2) are/were digesting multiple acquisitions, and (3) rely on macroeconomic environment. I will avoid comparing them any further, but I will mention that some of us were impressed at some of Lightspeed’s metrics during peak pandemic too. So it would be silly for me to simply ignore the lessons that I learned with Lightspeed; which is why I’m being careful with my allocation for the time being.

-RMTZP

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Seems like Bill.com’s earnings (+AWS’s) are going to be the another reminder for the market about the strength of best-in-class class cloud software. Share price is +31% after hours. Let’s compare their earnings report to my expectations (which were strengthened by others opining):

Prior belief #1: Organic growth will be ~$93M, representing 78% YoY growth (20% QoQ)
Reality #1: Organic revenue growth was $97M, representing 85% YoY growth (25% QoQ)
Implication: Raw dollars added almost double as last quarter, completing the fifth consecutive quarter of acceleration.

Prior belief #2: Total revenue will be ~$145M, representing 169% YoY growth (25% QoQ)
Reality #2: Total revenue was $157M, representing 190% YoY growth (35% QoQ)
Implication: Inorganic revenue of $52M which is right in line with my expectation. So it looks like it was organic revenue that was the big driver for the beat.

Prior belief #3: Gross margins will nudge lower to the 81% range
Reality #3: Gross margins (non-gaap) jumped up to 85%
Implication: Operating expenses as a % of revenue decreased from 93% to 73% QoQ.

Prior belief #4: Operating loss (non-gaap) will show a slight improvement from -$11M (corrected)
Reality #4: Operating loss (non-gaap) improved to -$3M
Implication: Signals successful integration of their acquisitions, and operating leverage

Prior belief #5: Paying customers will reach 132,500, with net new 5,700 additions
Reality #5: Paying customers increased by ~8,200
Implication: Showing cross-selling with Divvy and Invoice2go is working

First Impressions Summary
It’s a quintuple beat to my expectations, with an impressive jump in organic transaction fees +121% (+313% inorganic), which speaks to the strength of the platform. Indicated that average customer is increasing, and announced a partnership with BAML. Despite my worries about multiple acquisitions and economic pressure to SMBs – there is plenty of evidence that it is firing on all cylinders. Back-office financial management may sound as dull of software as it gets, but its an imperative to businesses of all shapes and sizes, and I’m excited to see Bill.com continue to execute upon its mission!

-RMTZP
Visit https://discussion.fool.com/rules-of-the-board-revised-edition-3… to maximize your learning of the board before posting

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Reality #4: Operating loss (non-gaap) improved to -$3M
Implication: Signals successful integration of their acquisitions, and operating leverage

Even better, it wasn’t an operating loss of -$3M. It was an operating profit of +$3M. Great quarter.

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Great follow up, RMTZP. And nice to see Bill.com blew away all 5 of your priors! There have been several great posts here on Bill’s blowout quarter…but it’s easy to get lost in the huge numbers. Obviously some of the most important:

85% organic revenue growth
190% total revenue growth
121% organic transaction fee growth
313% total transaction fee growth

…however, I’d like to focus on one more that I think is absolutely huge. Their FY guidance. The last 3 quarters they’ve given:

480m
541m (13% raise)
600m (11% raise)

Contrast Lightspeed’s last few:

450m
530m (18% raise)
535m (1% raise)
544m (2% raise)

These raises compound, or in Lightspeed’s case, don’t so much. Therefore, Lightspeed doesn’t get partial credit for their huge 18% raise. Or at worst, it shows they didn’t really have sustainable growth. That’s everything, folks. We’ve seen that so much of what causes some companies (NET, DDOG, ZS) to get premiums and other companies (LSPD, BAND, NTNX) to look (usually deceptively) “cheap,” is the ability to hyper-grow DURABLY. It’s everything.

What happened with Lightspeed is they tried to buy growth, but ended up only buying size. The companies they acquired added revenue, but that revenue wasn’t growing fast and/or durably. Neither was legacy revenue. For Bill.com it’s the opposite. Both their legacy products and their acquired products are growing like weeds.

Guidance is not the goal, and it is a game, but this trend shows us a lot. If Bill.com were to raise their FY guide just 1 or 2% next quarter, I would be shocked. They’ll up it 50m or more, once again! They know the game they’re playing, and they also know how to be conservative and guide only for what they can see. But unlike with Lightspeed, it’s what they can’t yet see that keeps them hyper-growing (as with all great hyper-growers). It’s the new customers they will add, the continued and maybe even increased NRR, etc. (But we can kind of see it right? In the trend. Is it likely they just stop adding customers?? Or that customers stop ramping their spend??)

I’m not sure the market will suddenly realize that Bill.com is hyper-growing durably, but that is now my belief. If the market did realize this, I think this would enjoy the premium we see with NET and DDOG and ZS (which in my eyes would mean a stock price more like $300+ again). Again, I don’t know if/when this will happen. Maybe the market needs more quarters of proof. But I’m convinced. I see this company as the Shopify of the back office, mission driven, mission critical, and hyper-growing durably. That, along with the numbers they’re putting up, solidifies it among the top companies I’m aware of.

Looks like it will be up around $40 per share to start the day. That would propel it to my #1 position, and I’m not inclined to trim it. Congrats to the longs – whether we bought yesterday or buy today higher, I like our chances with this one.

Bear

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