Bill.com's Divvy Growth

Investment Analysis Clubs Saul’s Investing Discussions
1

If you reconcile the difference between Bill.com’s overall transaction revenues vs. its organic transaction revenues, you’re basically left with Divvy’s numbers.

This is because Invoice2Go is more than 90% subscription revenue as they are still in the early stages of monetizing invoices through payments.

What we’re left with is this:

Last 3 quarters of overall transaction revenue
$46.3 mil
$80.6 mil
$106.3 mil

Organic transaction revenues
$36.0 mil
$43.7 mil
$56.8 mil

Inorganic/Divvy revenues
$10.3 mil
$36.9 mil
$49.5 mil

But what’s important to point out is that the $10.3 mil number only includes 1 month of Divvy’s contribution because of the date the acquisition closed (h/t Muji & Bear).

“In addition, our acquisition of Divvy closed on June 1 and therefore our reported fiscal fourth quarter results include one month of Divvy’s results. At times during this call we will discuss organic or stand-alone results which exclude Divvy to help listeners understand our organic performance.”

Over the past two quarters, Divvy’s YoY growth has been 187% and 188% respectively. So we can use that to triangulate what a full Q4 of Divvy’s revenue could’ve looked like.

180% growth is ~9% monthly compounded growth.

So if $10.3 mil was the last month, we can take 9% off of the previous two months which would be ~$9.4 mil and ~$8.7 mil.

Adding all three up, the full quarter may have been something like $28.4 mil.

So then the last three quarters of Divvy revenue would be:
$28.4 mil
$36.9 mil (30% QoQ)
$49.5 mil (34% QoQ)

Management did say that Divvy’s growth would be 132% for the upcoming quarter, citing travel slowdown:

“For Q3, Bill.com organic core revenue annual growth is expected to be approximately 67% on a stand-alone basis, while Divvy’s spend management revenue growth is expected to be approximately 132%, which reflects lower seasonal card spend in Q3 for the advertising and travel categories and an estimated take rate closer to the top end of the 230 to 250 basis points previously discussed.”

But the point is that for the past two quarters Divvy’s QoQ growth has been over 30%. Two data points doesn’t quite make a trend and management has told us to expect Q3 to be a little lighter but the numbers do look good.

I also dug up the acquisition SEC filing when Bill.com bought Divvy: https://www.sec.gov/Archives/edgar/data/1786352/000119312521…

It notes that Divvy’s annual revenue last year was $69 million. I think it’s possible that Divvy will do well over $200 million for this year, maybe even $225 million. At a $2.5 billion purchase price, that means Bill.com bought Divvy, which will grow 200% this year, for 11-13x forward revenues.

Not a bad deal!

All in all, I think the acquisition of Divvy has been amazing for Bill.com and it’s great to see Blake Murray (Divvy’s founder) stick around and become Bill.com’s Chief Revenue Officer. This is the exact opposite of what happened when Teladoc bought Livongo. Glen Tullman and company couldn’t get out of there fast enough.

Best,
Fish

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2

Fish, great post, though I do have a question about how we should be looking at Divvy’s revenue: gross versus net.

Reading the 10Q, we find that they put the rewards expense associated with Divvy into the Sales/Marketing expense category. These card rewards are needed to attract and retain Divvy customers against the competition out there, so I don’t expect the proportion of rewards expense to decrease significantly any time soon (if ever)

Should we be looking at Divvy through a “net” revenue lens where total Divvy gross revenue has rewards expenses substracted out? In Q1-2022, 42% of Divvy revenue was spent on card rewards. That figure was 43% in Q2-2022.
I looked at Mastercard’s filings for comparison, and they list a “net” revenue figure that subtracts out the contra-revenue of incentives/rebates (contrarevenue made up 35.6% of Mastercard’s total gross revenue in the past quarter), so it seems proper that we should see Divvy in a similar light?

That being said, taking this into account, the ‘net’ revenue growth rate of Divvy is still quite substantial at 31% QoQ for Q2-2022 (instead of 34% QoQ for gross revenue)

                         Q1-22  Q2-22
Divvy gross rev          36.9  49.5
Divvy gross rev QoQ            34%

rewards expense          15.6  21.5
rewards % of gross rev   42%   43%
rewards expense QoQ            38%

"Net" revenue            21.3  28
"Net" revenue QoQ              31%

Something to also consider here is that the ‘true overall margin’ of BILL’s business should continue to be lower than the reported gross margin, as Divvy gobbles up a larger share of revenue from its faster growth…what I’m not sure is should Divvy’s rewards expenses be subtracted from total revenue, or added to the ‘cost of revenue’ instead of being hidden into Sales/Marketing expense?

BILL reported a GAAP gross margin of 78% and non-GAAP gross margin of 85.3% for Q2-2022.
If, for example, we take into account the $21.5M rewards expense as an actual part of the cost of revenue, then wouldn’t the ‘true’ GAAP gross margin be 64.3% and ‘true’ nonGAAP gross margin at 71.6%?

I’m not an accountant and have no finance background, so please let me know if I’m looking at this all incorrectly.

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