Bill.com

Bill.com (symbol BILL) was an IPO on December 12, 2019. It opened at $37.25 and closed that day at $35.50. Traded flat until January 7 and now is at $50.32. I was interested in BILL because of their go-to-market strategy and I have been nibbling and my position is now 0.53%. My first purchase is up 40% and the entire position is up 24%.

What does Bill.com do? From their S-1:

Our mission is to make it simple to connect and do business.
We are champions of small and midsize businesses (SMBs). We are a leading provider of cloud-based software that simplifies, digitizes, and automates complex back-office financial operations for SMBs.

Back office operations are essentially accounts payable and accounts receivable.

How does BILL stack up against Saul’s criteria?

  1. Rapid Revenue Growth. BILL revenue growth for full year 2019 was 67% versus 2018. Q3 2019 versus 2018 was 57%. Not world beating and apparently decelerating but it meets “35% and usually more”.

  2. stock in a special niche, with something special about it. potential big future Well, not really. A/C and A/R are pretty pedestrian. But they are targeting 6 million of the 30 million SMB’s in the U.S. and BILL currently has only 81,000 customers. From the S-1:

We estimate the annual addressable market for the services we offer today to be $30 billion globally and $9 billion domestically. 2019 revenue for BILL was $181 million so there is a potential big future.

  1. recurrent revenue…. usually means software, and a SaaS model
    From the S-1. “We are a leading provider of cloud-based software that simplifies, digitizes, and automates complex back-office financial operations for SMBs.” And, yes, they tout AI features. All cloud based.

  2. Rapidly improving metrics. With the first post-IPO quarterly report due February 6, there isn’t a lot of history on various metrics.

  3. Dollar based retention rate of 100% and even 130%. The S-1 states 106% and 110% for 2018 and 2019, but I calculate 121% for the 2017 cohort.

And, they are founder led and I will wait for Q2 report on the 6th to see what the cash/debt numbers are. So, BILL passes the hurdles, even if some only marginally.

But how does BILL compare up on the go-to-market strategy that attracted me to the stock? And why is it important to me?

I distinctly dislike sales and marketing headwinds and execution issues. NTNX, for example. ZS’s top down, long sales cycle. That sort of thing. Give me a company where the customers are beating down the sales office’s door.

What is the narrative?

The sales channels are direct-to-customer; via “integration with banks’ online banking solutions (Bank of America, JPMorgan Chase, American Express); “partnering” with 70 of the top 100 accounting firms and 4,000 firms overall; and being integrated with Intuit Quickbooks. What I like about the direct-to-customer marketing is that their 81,000 current customers are networked with 1.8 million of their customers’ own customers and suppliers, BILL’s “network members”. Of course BILL has data on all of the network. These 1.8 million network members receive what is essentially a sales presentation everytime a bill is paid. BILL touts their efficient sales and marketing strategy. Do the numbers support the narrative? Maybe. Datadog supposedly has a good S&M story. Let’s look.

DDOG is spending 41% to 42% of revenue on sales and marketing for 88% growth. BILL is spending 28% to 29% of revenue for 67% revenue growth. I’d say that numbers match the narrative, but there might be better comparisons and more data points are needed to confirm the story.

I will wait for Q2 report to get data on EV to Sales, but BILL is certainly “overpriced”. One interesting aspect of BILL’s revenue is the astounding percent of revenue from interest. They annually process $70 billion of payments and my back-of-envelope calculation is that they have that float for an average of a little over 5 days. Interest received is 20% of total revenue. Imagine that! But faster ACM clearing could cut this dramatically.

Anyway, fire away. Any thoughts? Link to S-1: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001786352/b52fff9…

KC

39 Likes

KC,

Here is my quick take on Bill.com.

1. Rapid Revenue Growth. BILL revenue growth for full year 2019 was 67% versus 2018. Q3 2019 versus 2018 was 57%. Not world beating and apparently decelerating but it meets “35% and usually more”.

BILL has 3 sources of revenue (1) subscription fees (monthly or annual per use fee based on service), (2) transaction fees (e.g., ACH, physical checks, wire) and (3) Interest earned on funds held (i.e., the float from the time they collect from customers until they pay the customer’s vendors). The first two (subscriptions and transaction costs) are lumped together in their financials and the interest (which is material). Interest as a % of revenue varies and jumped 185% from FY17 ((12% of REV) to FY18 (21% of REV). So, while total revenues grew 67%, subscription/transaction fee revenue grew 51%. So, while overall revenue was up only 57% in Q1’19, the subscription revenue was actually up 57% in Q1’19 compared to 51% in FY18. So, core business revenue isn’t decelerating, but with approximately 20% of current revenues coming from interest, interest rates will have an impact.

Other revenue items:
a. Their revenue per customer is estimated at $1,500. The S-1 says they have over 81,000 customers which looks to me that they are growing faster than their reported historical customer growth of 21% FY18 and 21% 1Q’19. The S-1 notes that they lost a financial institution client which caused the loss of 5,000 in FY18. They back out that loss from the numbers to show a customer growth rate of 31% for FY18 and 29% 1Q’19.
b. Their pay volume grew 44% FY18 and 42% in 1Q’19.
c. Their transactions processed grew 30% FY18 and 32% in 1Q’19.
d. Gross Margin growth is 70% to 72% for FY17 to FY 18; and 72% to 74% for Q1’18 to Q1’19.
e. They state that 80% of their transactions (i.e., transaction fees) are “recurring payments” - customer has paid vendor before.

2. stock in a special niche, with something special about it, potential big future.
As noted, their target market is small and medium sized business (SMB). TAM - 6 million SMB Domestic and 20 million overseas. Applying their $1,500 per customer gets you $9 billion domestic and $30 billion overseas. With 81,000 (assuming all domestic), they have 1.35% of the domestic market. So, they have a long runway.

They look to be the go to Cloud platform for AP processing. They partner and are integrated with other software such as Quickbooks, accounting firms and financial firms. I’ll note on partnering with financial firms the bar is high to start because of “exhaustive” security audits. They now partner with a number of them including adding JPMorgan recently. I can attest that this is a pain. So, they can get that business, but it is more expense. On the other hand, that business might be “stickier” (unless the financial firm drops the service altogether which is what happened in FY18 and they lost 5,000 customers).

3. recurrent revenue…. usually means software, and a SaaS model.
As noted, they are in the cloud and about 80%+ of their revenue is either subscription based or transaction based (80% of which is recurring - same customer/vendor). Also, AI is integrated in their model.

4. Rapidly improving metrics.
Revenues - yes. Expenses - no (at least not yet). It is still early. They report Q2’19 on February 6. It will be interesting to see and compare.

Other preliminary thoughts and comments.

1. Founder led company. Rene Lacerte (age 52) is the CEO with about a 6% take. Glassdoor approval rate of 92% (if you like that metric). Lacerte previously founded a payroll services company that was acquired in 2009 by Intuit. That company (owned by Intuit) is still a leader in its space. Shortly after that sale, he started BILL.
2. MOAT/Stickiness. BILL has 13 patents and 4 patents pending - unknown, maybe that helps?. I mentioned a barrier with the due diligence for financial firms - that is a pain. They also have a big lead with accounting firms as well. They also are heavily integrated with Intuit Quickbooks beginning back in 2009 and also in 2017 with QuickBooks Simple Pay.
3. Risks. They have three big partners - financial institutions, accounting firms (45% of the revenue) and Intuit. They also work with other accounting software vendors, but quickbook clients seem to be a big share. I think the biggest risk is Intuit/quickbooks developing a competitive program. That would seriously hurt them. But, why haven’t they in the last 10 years? Rahter than devloping something to compete, I think Intuit buying them down the road looks more likely. That has happened before with Lacerte’s prior company. (Insiders (Mainly VC) currently hold about 57% of the shares. They are still within the 180 lock up period.)

From a quick scan of the news/commentators, it looks like most people think this is a winner. Most question the valuation at this time. It’s sitting at 3.55 Billion (about 5% of Intuit’s $73 Billion).

Overall, I like what I see. I’m probably taking a starter position tomorrow (from cash) even though safer bet would be to wait until earnings come out Thursday.

Mike
(First time post here. So, I finally get a chance, without violating the rules to say thank you to everyone for improving my knowledge, and more importantly, my portfolio returns. Even though I’m not as concentrated as many of you, I think there are lots of investors like me who use the info here to “overweight” certain parts of our more diversified portfolios.)

21 Likes

Bill.com just reported for Q2’20 with continued revenue growth. They have an “all-in-one” SaaS platform targeting small and medium size businesses to take away the “pain” of back office for the SMBs.

I recommend reading their news release here. https://s24.q4cdn.com/404137088/files/doc_financials/Bill.co…

Below is my summary which includes some notes from the conference call which seems to have been well received by the analysts. BILL was up 6.89% in after hour trading. Overall, I liked what I heard. Core business - subscriptions and transactions (which are heavily recurring) are growing at 50%. They seem to have a large TAM, wide acceptance in the market and no comprehensive platform to compete with. I established a position this week (a bit under 3% of my trading portfolio -1.59% based on closing price). For better or worse, I understand the business model and market better than many other saas companies.

Bill.com 2nd Quarter Results and Conference Call Notes.

Revenue Growth:
Subscritions: $28.54 million +15% from Q1 and +61% YOY
Float (interest): $6.6 million -7% from Q1 and +10% YOY
Total Revenue: $32.96 million +11% from Q1 and +50% YOY

Growth is growth in customers and growth in transactions.

Customers: 85,900 +20% YOY

Members on System (customers, suppliers etc): 1.8 Million (asset: future prospects, knowledge base to leverage for customers)

Transactions payment volume: $24.8 Billion +41% YOY

Transactions processed: 6.2 Million +29% YOY

Revenue Breakdown:
Subscription: Q2’19 $14.4m; Q1’20 $19.9m (+39%)
Transaction: Q2’19 $6.0m; Q1’20 $13.1m (+114%)
Float: Q2’19 $5.6m; Q2’20 $6.1m (+10%)

Gross Margin (GAAP) Q2’20 75% Q1’20 74% Q2’19 72.4%
Guidance on growth rates: transaction growth rate will be lower. High growth rate in transactions was due to new variable payments on cross border payments and virtual card offering which are only 9 mos and 15 months old. CFO expects lower growth numbers for transactions as the service matures.

Expects GM to be 75-78% long term with short term closer to higher end.

Non-Operating Expenses (up - focused on growth):
R&D - up and will spend on more engineering talent to leverage growth and differentiate
S&M - land new clients
G&A - increased because of public company and notes that it is a bit higher than other saas companies because they have risk management and regulatory issues because of the payment processing (licensed in every jurisdiction where required)

Q3 Guidance:
Q3:Core Revenue $33.2-33.7 million Float Revenue $4.8-5.0 Million Total Revenue $38-38.7 Million. So, quarter to quarter revenue seems lower, but also a lower net loss of $7.4-6.7 million and loss of .10 - .09 per share. (must be non-GAAP). I assume seasonal decrease in subscription and transaction revenue. Float is based on low end int estimate. Annual loss per share of -.21 to -.20. Grow revenue and invest in platform is short term goal always cognizant of becoming a positive income company down the road. Growth and expansion though is current strategy.

Annual Guidance:
Core $129-130 million core; $21.3-21.7 million float $150-151.7 million total revenue. Still see an annual loss of .21 to 20.3 per share annual. Annual Growth rate guidance: 50-51.2% core; 0% float; 38.8-40% total. Seems like pretty tight (conservative?) estimates.

  1. CEO sees Growth: (i) New Customers (sales and adoptions); (ii) new adoptions (increase # of employees using, increase electronic payments processed, adopt new application (i.e., order procurement); (iii) expand network members (1.8 million) - this is knowledge base that benefits customers (i.e., we already know and pay that supplier); (iv) platform capabilities - more capabilities than anyone, sync with more and bigger SMB - improve AI; (v) expanding internationally - $122.4 billion market of international electronic payments.

  2. They believe they have invested and built an integrated platform which has depth that bars entry from most competitors to compete on full scale (maybe a piece here and there but nothing comprehensive). Has AI capability (which they continue to develop - for example it can now read a categorize invoices without data entry). Platform is horizontal across all size client base and can be leveraged by different customers. Larger customers use more - more revenue.

  3. Land with client and take away back office pain. Once in, it sells itself. Add more employees to platform (more subscription revenue). Add more applications. Take away account payable management, read all documents; manage all payments (electronically preferred); can be modified for “white collar” clients (financial institutions) and accounting firms so they look like adding value to clients.

  4. Believe the platform is extremely sticky. They believe they are a “1 stop shop” for all the “painful” back office work for SMBs.

  5. Client payments are now 59% electronic payments 41% paper, up from 55%/45%. SMB market is still 90% paper payments. Need to show them electronic is better. Transaction revenues, margins, and float interest is better with electronic.

  6. Growing procurement order services to platform for additional growth. (Interesting question from William Blair - one part of multiple part question was whether they are adding “working capital” functionality with the financial management business partners for their customers to the platform - he mentioned AMEX. That part of his question didn’t get answered, but it illustrates the functions and opportunities that could (or might be) in the pipeline.)

  7. R&D is spent developing platform to meet client needs. CEO said R&D spend on simpler solutions/better user experience for clients which might not translate directly into revenue stream but is important. He mentioned as an example the move to a better platform/version that is going on right now. That is part of their current R&D spend. Clients much happier. Also, AI builds to read data and eliminate manual entry. Also, their AI now reads international invoices and currencies automatically and converts.

  8. Cross border payment services now at 130 countries and 100+ currencies.

  9. R&D spend to ramp international payments is seen as new revenue stream (unlike behind the curtain spend to make platform better and keep stickiness).

  10. Stable and widespread revenues. No partner is more than 2.5% of their revenues.

  11. Partner with 70 of 100 top accounting firms.

  12. Work with top financial firms - examples: BOA, JPM, Amex. They provide their SMB clients with a back office platform.

  13. Work with all range of accounting software including full integration with Quiickbooks Online.

  14. Core revenue is “highly recurring” (see tight guidance).

  15. Float revenue is possible because they are a licensed money transmitter (every state where required). They believe licensing is a barrier to entry for competitors. They provide clients with “positive pay” which protects clients from fraud. Seasonality, interest rates and short term investment strategy influence float numbers. Guidance is on conservative side with their low end projections or rates and yields.

20 Likes