Thoughts on BILL post CC

VERY complicated. Takes me a long time to go thru numbers and even START to understand things. Not sure how some can interpret so quickly to buy/sell immediately for them. As I’m still fairly new to following them, I find myself constantly modifying HOW I look at the data in a companion spreadsheet I have to these charts.

FIRST QUARTER NON-GAAP PROFITABILITY!! Look for it to continue!!
Lowering growth expectations due to economic factors. “Only” growing 15% QoQ (with typical beat). Basically, fantastic report, especially given the economy.

Bill is more reliant upon new customers than upsell BUT UPSELL is a part of the upcoming story and the 2nd overall goal for this year! 1 platform is 1st goal; will facilitate this as well.

“Our second priority in fiscal 2023 is to further scale our go-to-market ecosystem by offering more of our platform solutions to our current partners”

FI Channel growth. 9K of 14K new customers added (including one-time migration). 26% TOTAL BILL customers up from 23% last Q, only 4.5% total revenue.

FX benefits moving forward
creates an FX transaction monetization opportunity for us. gives them a better monetization FX rate than what they could get from potentially their local bank, and that’s the value that we create.

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This was a great quarter for BILL. I am just going to piggy back on this post to make a few comments.

Float Revenue
When I first saw that they had $15M in float revenue I thought that it is masking other softness, and it probably is. Without that money the revenue would have been $214M, and most of that $15M goes straight to the bottom line. That same float was basically $0 a year ago. But then I started to think of it as a hedge because it will be high when the rest of the business is soft. When float goes down due to dropping interest rates the rest of the business will probably be doing well due to a better economy. So overall, a positive for the business, but when looking at the core business performance, it must be taken into account.

Unified Platform and Invoice2Go

I think this was the most exciting part of the report. This is a big opportunity for them, especially with Invoice2Go. From the earnings call:

And then I think we try to run some of the math on the Invoice2go revenue, specifically the transaction revenue. And it looks like that continues to step up nicely.

And I was just wondering if you could talk about what’s driving that and I guess, how sustainable that increase is.

Yes. We’re pleased with the progress that we’re making with Invoice2go. In terms of the profile of the product, first, it’s predominantly subscription revenue, and we see a growing transaction revenue stream driven by some of the improvements and changes we’ve made to the product experience, integrating branded payments. And that’s still in the, I’d say, earlier phases of development. It’s not material to our overall business.

It seems they have not done much to integrate the ~270000 Invoice2Go customers into the BILL and Divvy ecosystem. There is a big opportunity there to expand the transaction business to these customers, and a unified platform will help do that.

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I spent several hours this weekend deep-diving into BILL to learn more about their business and future prospects. I have been putting off this exercise thinking that they were a complicated company to understand. However once I looked under the hood, it seems that BILL is not that complex after all.

They sell cloud-based accounting software similar to Quickbooks Online.

If I am an SMB, they help me invoice my customers, collect payments from them, receive invoices from my vendors, make payments to them, manage my business’ cash coming in, manage my expenses and make accounting updates to my business’ books of record. All this is very standard accounting software/process stuff.

Here is how I laid out their financials to step back and take 10,000 foot view of how the business is performing:

I currently still have some open questions that I need to look further into:

  1. What happens when the US economy is hit with a recession or a slowdown in 2023? It is coming. The debate is not if, but how deep or shallow it will be. How will SMBs get impacted with the impending slowdown and how does this translate into BILL’s 2023 prospects? According to the NY Fed, SMBs have typically seen a 20% decline in business during recessions.

  2. BILL seems to be on the cusp of a topline slowdown. Both subscription growth and transaction fee growth has been declining for three quarters. Similarly total payment $ volume has been growing slower for 3 quarters. Perhaps these are leading signs of #1?

  3. Total customer growth had a major slowdown in Q3 - is this a one-time anamoly? To be fair and to eliminate acquisition related comps, I am comparing Q3 2022 all customer growth rate (15%) to the Q2 2021 (24%) and Q1 2021 (27%) growth rates.

  4. With each of the recent acquisitions, there was a 7-10% shareholder dilution event. One could argue that BILL has been step-ramping up it’s growth via acquisition of features/services that add onto it’s core AP/AR platform. Is acquisition their product strategy going forward or does their current platform have enough self-sustaining competence to become a market leader in this space?

Like I said, I still have questions and my research continues…

Cheers
Beachman

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Hi BeachMan,

Thanks for sharing your thoughts! Maybe I can add some thoughts from a product/strategy perspective, especially regarding point 1 and 4.

If we are going to see a strong recession, my prediction is that SMBs still stay on board the core platform, but we will see lower transactions volume.

Payment/Transaction volume revenue is a double-edged sword: It can bring the company (and us fellow investors) a lot of joy, but it is also more volatile and prone to macro softness than subscription revenue. I think this is what we are seeing in BILL now and also what they factored in for next year’s guidance. I assume float tailwinds won’t fully offset the downturn in TPV revenue, especially since transaction revenue currently accounts for 68% of total revenue, while float accounts for 7%.

From the CC:

In today’s climate, businesses are looking for ways to do more with less. While these trends may lead to moderated payment volume growth near term, our platform has never been more relevant.

Most likely, transaction volumes will be more heavily impacted by macro, while the core platform will still be high in demand. This aligns with my personal experience: Card payments and transactions from SMBs are often significant for e.g., Google Ads spend, and these costs are some of the first to be cut in a poor macro environment. But then, there are also many fixed costs that just cannot be cut and will continue to produce transaction revenue for BILL. Additionally, a finance operations solution like theirs is so deeply embedded into the customer’s business and system landscape, it is very hard to get out of these lock-in effects. But still, transaction revenue =! subscription revenue and does have its pitfalls.

On the bright side, they did deliver a really strong quarter and claim to not be seeing change or softness in the demand or new customer added to their core platform. Actually, they had a record add of net new customers and also went Non-GAAP profitable for the first time. Therefore, I remain very confident, even if transaction revenue will be impacted by macro. I have to add, though, that I won’t build BILL as big as a DDOG or SNOW position, since the large share of transaction revenue is holding me back.

About acquisitions:

BILL has acquired and keeps acquiring new companies. That makes a lot of sense and contributes to an overall great product suite and growth momentum (once properly integrated).

  • BILL seeks to consolidate the standalone platform and Divvy, which is very important
  • I’d hope for a proper integration of invoice2go as well, since this would nicely play into their AR part of the core platform and can provide nice cross-sell opportunities
  • Upcoming acquisition of finmark: makes a lot of sense to me because it allows them to additionally streamline cashflow planning and liquidity in their solution. Cash management is what glues accounts payable & accounts receivable together. finmark’s capabilities can also strengthen momentum with accounting firms because the data insights will help accountants provide better service to their customers.

However, I am not so fond of the challenges that come with so many acquisitions, the need to integrate all products to provide a “unified platform experience, our #1 priority for fiscal 2023.”, gives me some headache (speaking as a product manager at a similar company). They also need to repeat integrations for every acquisition they make. On the other hand, they can create great solutions faster, and harness cross-selling opportunities, since the choice of acquired products is nice (but also slightly annoying for us investors to get oriented in the different revenue and product streams).

All in all, I think BILL is doing fine, and I am positively surprised that their core subscription demand seems untouched by macro. Transaction revenue is IMO most guilty of the somewhat disappointing FY23 guidance, plus tough comps from the previous quarters with Divvy included into total revenue metrics.

Final remark: I really love their market opportunity and ecosystem with strong lock-in effects:

  • Once embedded, very hard to remove from accounting processes
  • Synergetic products (data, transactions, AR & AP, spend, invoicing, and soon to come: cashflow planning)
  • Proprietary network for customers and suppliers
  • Multi-funnel GTM approach with a lot of partner focus through accounting firms and Financial institutions (these can create a heavy customer pull!)
  • Different revenue streams create diversified, but also more volatile revenue as I understand
  • BILL’s biggest competitors are paper, and Excel. So, I believe they can still harness lots of opportunities in a large, global TAM. According to my experience, Finance is the department that probably stick to Excel or paper the most, so there is a lot of potential to catch up to the digitization level of other business functions like R&D, Sales, HR, etc. (Thought on global expansion: Localization of accounting is painful, very fractional and local accounting tools in Europe, different legal obligations, numerous third-party providers all make the product expansion very complex.)

All in all, I am looking forward to see BILL to creating that deflationary momentum in times of inflation and will watch core and customer growth closely going forward.

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Folks, don’t forget that 4/5 of all transactions are recurring. Here what the CFO said during last call:

John Rettig

Thanks, Dan, for the question. No, we haven’t really seen or witnessed that trend. The commentary around the softening spend is more businesses, particularly in discretionary categories spending less, but with a very high rate of repeat transactions with their suppliers. So we still see approximately 80% of the transactions on our platform are repeat recurring transactions between buyer and supplier. But they may be transacting in a slightly lower dollar value. It’s not really something that we’ve seen influence of the payment types, so the distribution of payments or ad valorem across the platform. It’s more just the absolute spend at this point.”

It remains to be seen if such a high percentage of transactions would remain recurring during severe recession but in case of mild recession this probably would fare relatively well.

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