Bill - Divvy Growth

So… I’m FINALLY getting around to listening to the Bill call. I’m new to following bill and am very pleased by some of the stuff I’ve discovered so far on the call. One concern I’ve seen is the slower than expected Divvy growth. Looks like it only grew something like 9.9% QoQ (from 49.5M to 54.4M). Valid concern for what grew 30% QoQ the previous quarter!! However, with seasonality, we aren’t sure if the slower DIVVY was all seasonal.

Unbeknown to me, on the call, they provide guidance for Divvy and with a little math, they have for the past couple quarters. For the next quarter they guided for Divvy to be 64M. This by itself is 17.6% QoQ (91% annualized) over this quarter’s 54.4M. Well, they also indicated that the year ago quarter that corresponds to had Divvy revenue of 29M.

On the previous call, they said Divvy would grow 132%, which amounted to flat (49.5M). They came in at 54M, which is about a 10% beat. These numbers also line up with the 155% growth Divvy just reported.

So… if we apply the same 9.9% beat to the 64M guidance for next quarter, we get 70.3M. This is 29% QoQ (179% aQoQ).

These numbers support this quarter’s larger than I expected Divvy slowdown to be almost completely SEASONAL & EXPECTED. Means the Divvy driving revenue into the future story is STILL IN-TACT. Also, as Zoro pointed out yesterday, means the next 2 quarters ORGANIC revenue should see a big improvement due to Divvy being included in organic revenue 1/3 next quarter and fully the quarter after that.

Still haven’t finished the call as my wife decided I need to get away from the computer for a while. She’s right as usual. Anyway, this information makes me feel a whole lot better about my BILL position. Not planning on selling.

Someone please check my math and let me know if it checks out. Been a long day!!


Thanks FinallyFoolin, I have the same numbers written in my spreadsheet, but in my other post reply (…) I had transcribed the wrong set (I wrote out total divvy revenue which included subscription revenue, and not the divvy transaction fee revenue numbers that you have).
I also found the divvy transaction number that I previously said I could not find: it was 5.9 million, up 11.3% QoQ from 5.3 million.

Anyway, I will write in here my last thoughts on BILL:

Stock investing is all about looking forward. As usual, BILL management said that their forecast assumes no forward negative macro impact.
We have to consider: what if there is a macro impact down the line? While BILL is not consumer facing like UPST, in my opinion BILL’s macro risk due to exposure to SMBs is substantially heightened versus other companies like CRWD, NET, DDOG who focus on large enterprises.

We know that wall street is currently freaking out over a possible growth slowdown or recession. Will it happen? We can’t know in advance, but it really is a larger, actual risk here with rates/yields climbing and Fed quantitative tightening than compared to, say, one year ago.

If the market has a perception that within the next year, there is a 50% chance of recession (…) then stocks with outsized macro exposure will likely be assigned a lower valuation multiple than others. In order to fight this lower valuation multiple, BILL must grow much faster than the market expects, and avoid any rapid deceleration in growth.

This is why for my portfolio, I have a higher bar to keep fintech related companies like BILL, even if 80% of their business is about repeat transactions between suppliers.
It means I have very high expectations.
BILL must prove to me they have very high and durable growth rates beyond what I’d expect for a pure SaaS business. And if numbers miss my expectation (as Divvy’s lackluster growth did in this report), I have a lower threshold to cut BILL loose than my cloud/security businesses.
I believe BILL did not meet my bar this quarter: I wanted Divvy to add over 6M more in revenue than they actually did (we got 54.4M instead of 61M) which would have resulted in 10% beat on their total revenue guidance and thus a flat or mild acceleration in total revenue YoY growth from prior quarter.

BILL already has customer gross retention rates in the 80% range during good macro times. Its product is just not as well loved as its competitors, or as sticky as the very best SaaS.
What happens to that during a recession? Some of its small, medium sized businesses will actually go bankrupt. BILL’s customers are not the typical very large enterprises that are less likely to fail (like for example, SNOW’s fortune 500 clients).
And an actual recession means BILL will face credit losses, which will eat into profitability.
Not only that, but BILL’s underwriting during a true recession will also tighten up even more, causing Divvy to slow down growth badly, as more and more credit applications are rejected.

For my investment in DDOG, ZS, CRWD etc I am not anywhere near as concerned about a recession impact, versus for BILL. A recession will definitely slow their growth down too and certainly punish their stock price further, but in these businesses, their customers are larger/less likely to bankrupt, their customers’ spending are tied to mission critical infrastructure or security (retention rates should still stay elevated), and they simply aren’t loaning credit card money out to their customers to spend (no credit risk!).
This translates to smaller risk of revenue decreasing (negative growth) from quarter to quarter, I’d instead expect their revenue to simply grow but do so slower (still positive growth).
During the brief COVID recession, BILL grew only +2% QoQ from Q3 2020 to Q4 2020. But that was when they didn’t have Divvy! Now with Divvy added as a substantial part of revenue, these are more volatile SMB credit card expenses - during a recession they likely will face overall negative QoQ rev growth.

I hope a significant economic growth slowdown or recession doesn’t happen at all. BILL looks poised to definitely keep expanding for a long time, and I can be very wrong about my decision here but I’m not willing to stick around if they decelerate already at this stage with an increasing macro risk.