Bill.com Profile (NYSE: BILL): automating payments for SMBs
Bill.com (NYSE: BILL 0.00) is a provider of invoice management software for SMBs; however, the company generated almost 70% of its Q1 2022 (Fiscal Q3 2022) revenue from payment processing. Therefore, I my view, it fits a profile of a Fintech company.
Last year, the company acquired two businesses, Divvy and Invoice2Go, as well as raised $1.34 billion in additional capital from the public markets. Thus, I would expect the next few years to be filled with growth and exciting opportunities. Let’s break down Bill.com's business model and financials!
Bill.com is a leading provider of Accounts Receivable / Accounts Payable management software serving Small and Medium-sized Businesses (SMBs). Businesses use Bill.com's solution to issue, review, process, and reconcile B2B payments. The company’s cloud software helps SMBs automate manual processes (i.e. approval) and process payments using multiple payment methods (ACH, cross-border, cards, checks, etc.). The company was founded in 2006 and went public on December 12, 2019.
In June 2021, the company completed the acquisition of Divvy, a corporate card spend management solution. Businesses use Divvy's solution to issue their employees corporate cards, manage card limits, and reconcile and analyze card transactions. Bill.com acquired Divvy for approximately $2.5 billion, paying $625 million in cash and $1.875 billion in stock. Divvy was founded in 2016 and raised $417 million in venture funding before the acquisition.
Finally, in September 2021, the company completed the acquisition of Invoice2Go, a mobile-first solution that allows small businesses and sole proprietors to issue invoices and accept payments from their customers. Bill.com acquired Invoice2Go for approximately $625 million, paying $156 million in cash and $469 million in stock. Invoice2Go was founded in 2022 and raised $60 million in venture capital before the acquisition.
The company generates revenue by charging clients monthly (or annual) subscription fees (“Subscription revenue”), charging a fixed or a variable fee for processing payments (“Transaction revenue”), and finally, earns interest from investing customer funds into securities (“Float revenue”).
It should be noted that Bill.com, Divvy, and Invoice2Go have different monetization models (i.e. Bill.com generates both subscription and transaction revenue, while Divvy generates transaction revenue only). I will indicate the differences in revenue models in the text below, but in general, in Fiscal Q3 2022 (calendar Q1 2022), the combined Bill.com entity generated 68% of the revenue from transaction fees, 31% of revenue from subscription fees, and just 1% from investing customer funds.
The company is addressing a massive market of an estimated 6+ million SMBs and 26+ million sole proprietors in the United States, as well as 20+ million SMBs and 50+ million sole proprietors globally. Given that the company serves less than 400,000 customers across all three businesses as of the end of Q1 2022, the opportunity ahead is quite impressive.
As of July 25, 2022 the company had a market capitalization of $13.5 billion, down from the all-time high of $35.1 billion on November 9, 2021.
Please note that the company’s fiscal year ends on June 30 (thus, the latest reported quarter, FY Q3 2022, covers the company’s performance in Q1 2022). I will use “FY” and/or “Fiscal” to indicate fiscal periods in the text below.
Let’s start the company’s review by looking at the number of customers. Bill.com served over 146.6 thousand customers as of Fiscal Q3, 2022 (Q1 2022) (excluding Divvy and Invoice2Go), and as can be seen from the chart the company has been consistently increasing the number of served customers at the annual rate of 20%+. Bill.com defines customers as “entities that are either billed directly by us or for which we bill our strategic partners during a particular period”, and excludes customers on a trial period from the reported number of customers.
In addition to Bill.com customers, the company served 18.1 thousand customers (referred to as “spending businesses” in quarterly reporting) via its Divvy business (acquired on June 1, 2021, hence, not reported in the previous periods), and 221.4 thousand customers (referred to as “subscribers”) via its Invoice2Go business (acquired on September 1, 2021, hence, not reported in the previous periods).
Bill.com and Invoice2Go charge monthly (or annual) subscription fees (Divvy does not); thus, the number of customers is a direct driver for the subscription revenue, and an indirect driver for the transaction revenue (more customers make more payments; thus, generating more transaction fees).
Total Payment Volume
Bill.com processed $200.1 billion in payments on behalf of its customers (excluding Divvy and Invoice2Go) over the last four quarters (TTM). Total Payment Volume is the key driver for the transaction revenue. Thus, the company charges fees for each transaction processed, on either a fixed or variable fee basis.
It should be noted that the growth of Total Payment Volume is the result of growth in both the number of transactions processed and the average transaction value. For example, the chart below illustrates that the number of processed transactions in FY Q3 2022 grew 32% compared to FY Q3 2021, and, in addition, the average transaction value grew 19% YoY compared to FY Q3 2021.
In addition, to the Total Payment Volume reported by the Bill.com business, the company reported $2.1 billion in card transactions by Divvy customers and $259 million in payments processed for Invoice2Go customers in FY Q3 2022.
It should be noted (again), that Divvy does not charge its customers any subscription fees; thus, the key source of revenue for the company is the interchange fee it receives on the card transactions (i.e. $2.1 billion in FY Q3 2022).
Bill.com generated $344 million in total revenue over the last four quarters (TTM, trailing twelve months), which represents a 117% growth compared to the Fiscal Year 2021 (calendar Q3 2020 - Q2 2021). However, as can be seen from the revenue breakdown below, the revenue growth was partially attributable to the acquisition of Divvy and Invoice2Go. Excluding Divvy and Invoice2Go, the TTM revenue (“Organic”) grew 53% compared to the full FY 2021.
Bill.com completed the acquisition of Divvy on June 1, 2021, and the acquisition of Invoice2Go on September 1, 2021. Thus, FY Q4 2021 (April - June, 2021) revenue number includes one month of Divvy’s revenue, and FY Q1 2022 (July - September, 2021) includes one month of Invoice2Go revenue. FY Q2 2022 and FY Q3 2022 fully include revenue generated by Divvy and Invoice2Go businesses ($58.5 and 63.4 million in Q2 and Q3 respectively).
I illustrated above the growth of the customer base and the Total Payment Volume, but it is also worth looking at the Average Quarterly Revenue Per Customer (Subscription and transaction fee revenue relative to the number of customers), and the Average Take Rate (Subscription and transaction fee revenue relative to Total Payment Volume).
Thus, you can see that besides showing strong growth in the number of customers, Bill.com managed to considerably increase the average revenue per customer (from $361 in Fiscal Q1 2022 to $725 in Fiscal Q3 2022).
Looking at Average Take Rate data, one can see that the company managed to increase its Average Take Rate from 0.13% in Fiscal Q1 2020 to 0.19% in Fiscal Q3 2022.
In my next reviews, I will try to break down the subscription revenue and transactions revenue into components, to calculate the average subscription revenue per customer (subscription revenue / number of customers), and average transaction revenue per customer (average TPV per customer * Take Rate / number of customers).
During the latest earnings call, the company’s management guided for $182.3 - $183.3 million in total revenue in Fiscal Q4, 2022 and $624.0 - $625.0 million in revenue for the full Fiscal Year 2022. This would represent 133-134% YoY growth for the quarter, and 162% YoY growth for the full year.
The company generated $396.2 million in Gross profit over the last four quarters (TTM), which represents a 125% growth compared to the full Fiscal Year 2021. Similar to the revenue, the Gross profit growth over the last twelve months was to a large extent driven by the consolidation of Divvy and Invoice2Go.
The company has been operating with a 70%+ gross profit margin over the last few years, and the acquisition of Divvy and Invoice2Go drove the gross profit margin even higher. Thus, in the last two quarters (when both Divvy and Invoice2Go were fully consolidated into reporting), the company reported an uptick in gross profit margin from 75% to 78%.
The company defines the “Cost of revenue” as “primarily personnel-related costs, including stock-based compensation expenses, for our customer success and payment operations teams, costs that are directly attributed to processing customers’ transactions (such as the cost of printing checks), postage for mailing checks, expenses for processing payments (ACH, check, and cross-border wires), direct and amortized costs for implementing and integrating our strategic partners’ systems, costs for maintaining, optimizing, and securing our cloud payments infrastructure, amortization of capitalized internal-use developed software, amortization of developed technology, fees on the investment of customer funds, and allocation of overhead costs.”
The company’s management did not provide guidance for the Gross profit, but the revenue guidance implies $142-143 million in Gross profit in Fiscal Q4 2022 (assuming the 78% gross profit margin), and $480.4 - 481.2 million in Gross profit for the full Fiscal year 2022.
Bill.com reported $702.3 million in Operating expenses over the last four quarters (TTM), which resulted in an Operating loss of $306.1 million. Again, it should be noted that Bill.com completed the acquisition of Divvy in Fiscal Q4 2021, occurring the acquisition costs and taking over the company's personnel and stock-based compensation obligations.
Quarterly operating expenses greatly illustrate the escalation of operating expenses following the acquisition of Divvy and Invoice2Go. On a positive note, the growth in the revenue seems to keep up with the growth in operating expenses, so there is no dramatic increase in the operating loss post the acquisition.
Bill.com groups the operating costs into three categories, “Research and development”, “Sales and marketing” and “General and administrative”. Plotting on a chart these expense categories as % of the Total revenue, illustrates well that following the acquisitions, the “Research and development” expenses remained on the same level as before, “General and administrative” jumped temporarily because of the one-time expenses, but came back to the historic level in the last reported quarter. So the only relative impact of the acquisitions was the escalation of the “Sales and marketing expenses from <30% of the Total Revenue level before the acquisitions to >50% level after the acquisitions.
The company’s management did not provide guidance for the expected Operating loss in Fiscal Q4 2022 or the full Fiscal year 2022.
Net Loss and Adjusted Net Loss
The company generated a Net Loss of $284.7 million over the last four quarters (TTM), which is a considerable increase for the full fiscal year 2021. The increase in the Net Loss is the result of the acquisitions of Divvy and Invoice2Go, as well as the scaling of Bill.com operations.
Nevertheless, the company is reporting a modest Adjusted Net Loss (“Non-GAAP Net Loss” in the company’s reports, which is the GAAP Net Loss adjusted for the stock-based compensation, amortization, depreciation, as well as one-time expenses) and negative Free Cash Flow. Thus, the company reported an Adjusted Net Loss of $28.8 million and a negative Free Cash Flow of $4.1 million over the last four quarters (TTM).
The company’s management guided for an Adjusted Net Loss of $13.9-14.9 million in Fiscal Q4 2022, and a Net Loss of $34.9-$35.9 for the full Fiscal year 2022.
The company had $2.8 billion in cash, cash equivalents, and short-term investments. Thus, given the historic cash burn, one can conclude that the company is not running out of cash anytime soon.
Things to Watch in 2022
FY 2023 Guidance (Q3 2022 - Q2 2023). The company will report the results of the full fiscal year 2022 next month, and, hopefully, will provide guidance for the fiscal year 2023. A comparison of FY 2022 results vs the 2023 guidance will provide guidance on the growth rate of the combined business (meaning Bill.com, Divvy, and Invoice2Go), as well as its separate components.
Full consolidation of Divvy and Invoice2Go. I would expect the company to start cross-selling its products across the customer bases of Bill.com, Divvy, and Invoice2Go. Bill.com and Divvy offerings are clearly complementary and strengthen the company’s offering in the US, while Invoice2Go provides a path to international growth (60% of Invoice2Go subscribers are residing outside of the US).
Use of cash balance. The company has a large cash buffer on its balance sheet that it accumulated through additional share offerings after the IPO. As the company’s cash burn is modest, it is interesting to see how it will use its cash: either to stimulate organic growth or to acquire more companies.
In summary, Bill.com and very interesting company that has been delivering solid growth at a modest cash burn, and the acquisition of Divvy and Invoice2Go provide a stepping stone for the next phase of growth. The company will report FY Q4 2022 and full fiscal year results on August 18, 2022.
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Source of the data used above: Investor Relations
Disclosure & Disclaimer: despite rocky performance in 2021 and H1 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your own research.