Bill.com is a fast-growing company that is benefitting from a strong cohort of customers: small-medium businesses (SMB). The company has also completed a couple of transformational M&A transactions in recent quarters which have led to successful cross-selling of solutions, inflecting growth at the core company and the acquired businesses. We believe that the company’s large asset of B2B payment data gives them an advantage in understanding their end market and allows them to efficiently grow. Furthermore, network effects should sustain topline growth going forward. I discuss the company’s fundamentals in more detail below, followed by a discussion of Bill.com’s recent financial results and risks to our thesis.
Bill.com’s Market Position and hidden assets
Bill.com is a back-end accounting software platform that was built to facilitate transactions for small-medium businesses (SMB). The company’s niche is facilitating accounts receivables (AR) and accounts payable transactions (AP), which is the most common business transaction. Every AR transaction involves an AP transaction, and Bill.com has positioned itself to be between this essential business function.
The company’s platform includes accounts payable automation which streamlines the entire process: from bill receipt, to approval, to payment and then entry into an accounting system such as QuickBooks. Bill.com provides a portal that allows customers and suppliers to link their bank accounts and to make electronic payments, improving payment times. If the invoice is mailed, customers can scan the invoice and Bill.com’s AI-enabled software can automatically input the key details. Furthermore, all invoices are stored and searchable which helps settle outstanding AP issues.
The AP automation also allows for bill approval, which Bill.com states is one of the top three uses of its software. Inherent in the approval process is the separation of duties, which assigns roles such as payor, approver, clerk or accountant. This ensures the checks and balances of a back office and helps reduce fraud and provides an audit trail for auditors.
The AR automation solution provides a template to create an invoice and sync with accounting systems. Furthermore, if both parties of the transaction are on Bill.com’s network, then customers can see if the invoice has been viewed and if it has been authorized. Simply put, the AP and AR solutions allow for easier payments and trackability.
Being positioned between AP and AR transactions gives Bill.com two significant assets: a data asset and a network. The data set includes payment data from over 130,000 customers, 3.2 million network members and millions of transaction details. Having access to B2B payment data is a significant advantage in today’s AI/ML-enabled world, and Bill.com is able to leverage this data to find insights that fuel topline growth. In fact, payment data was estimated at a total value of $58 billion in 2020. Bill.com disclosed that data is key to its success. It stated in its 10-K that:
“We recognize and understand patterns that our customers may not, because we see the aggregate – millions of accounts payable and accounts receivable transactions per month. We use what we learn to continuously improve the platform and the customer experience.”because we see the aggregate – millions of accounts payable and accounts receivable transactions per month. We use what we learn to continuously improve the platform and the customer experience.”
Furthermore, this data is not an asset shown on the balance sheet, nor does it directly impact the income statement. However, access to this data allows Bill.com to better understand its customer’s needs, leading to outsized growth over time.
Another asset that isn’t shown on the balance sheet is Bill.com’s network. When a customer signs onto the platform, they also add on their clients and suppliers as the other side of the AR/AP transaction. This increases the network beyond customers, and Bill.com has built a B2B payment directory of over 3.2 million network members. These network members are all potential customers, leading to a low-cost customer acquisition strategy. As more customers sign up, they add clients and suppliers as AP/AR transactions, further increasing the network and providing more payment data. This network effect can lead to robust, high margin growth in the future as the business scales.
Catalysts for future growth
Bill.com has reported a series of quarters with accelerating growth, highlighting both the success of its cloud-based solutions and the strength of its main customer cohort: SMB.
If economic activity picks up, especially among SMB, then AP and AR transactions will also grow, benefitting Bill.com’s usage-based business model (discussed in more detail below). SMBs appear well-positioned to succeed in the digital economy. This is because major corporations are providing tools that help SMB better compete with legacy enterprises.
For instance, SMBs can quickly build a working e-commerce website on Shopify without hiring and employing an army of web developers. An SMB can also rent server capacity from AWS without investing large amounts of upfront capital to run its operations at scale.
The SMB market opportunity in front of Bill.com is large. There are over 6 million SMB in the US and 20 million globally. As of the latest quarter (Q2 FY2022), Bill.com has captured just over 2% of this market. With an annualized core revenue run rate of $2,000 per customer, Bill.com’s total addressable market is around $70 billion.
Furthermore, the Small Business Administration (SBA) has prioritized increasing capital to small business owners in the U.S. The SBA disclosed that in 2021, they had provided $45 billion in loans through more than 61,000 individual loans, this was up from $28 billion in the prior year. This also excludes the over $500 billion in PPP loans provided to SMB during 2020. Clearly, SMBs are flush with capital, which should lead to increased business activity for this cohort in the near term.
Data from the Kansas City Fed showed that SMB loan demand remained robust in 2021 (excluding PPP loans). The chart below shows that net change in loan demand for small businesses, and “about 10 percent of respondents indicated stronger loan demand in the third quarter, which is the third consecutive quarter of net increases in loan demand”. More recent data from the New York Fed showed that credit card balances increased $52 billion in Q4, the largest increase in the 22-year history of the data. However, credit card debt remained $71 billion below 2019 levels, suggesting continued room for growth. The rise in credit card balances may be a sign that SMB activity was robust in Q4, as credit cards are often a short-term funding tool used by small businesses. Bill.com also has exposure to this with its corporate card product, discussed below.
Moreover, Bill.com has made a couple of transformational acquisitions in 2021 that allow it to cross-sell solutions. The company acquired corporate card issuer Divvy in June 2021 for $2 billion. When Divvy was acquired, sales were growing over 100% with annualized revenue of around $100 million. Bill.com’s CEO-Founder explained on during the Q4 2021 call that the Divvy acquisition allows for a “sizable cross-sell opportunity that we will aggressively pursue”. He added that the Divvy acquisition “more than doubled” the company’s domestic addressable market.
We can see signs that there has been significant cross-selling between platforms. For instance, Divvy customers have increased from 7,500 in March 2021 to 15,500 customers as of December 2021. At the same time, Bill.com reported that Q4 customer count had increased 8,100 QoQ in the December quarter to 135,000, which was well above trend of ~5,000-6,000 quarterly additions. The robust customer metrics between the two segments suggest that Bill.com has been successful in cross-selling both solutions. Further highlighting this trend, Divvy’s sales increased 188% and 187% in Q2 and Q1 FY2022, respectively, an acceleration from its growth rate of 100% before it was acquired. Likewise, Bill.com’s organic sales have accelerated for five consecutive quarters.
Another recent acquisition was Invoice2go, which was acquired in September 2021 for $674 million, which added 220,000 customers to the platform and $25 billion in annual invoice volumes. On the Q2 FY2022 call, CEO Lacerte explained that the acquisition was driven by management’s intention to cross-sell payable solutions to Invoice2go customers, and vice versa. Highlighting the momentum in Bill.com’s ability to cross-sell solutions, management recently raised their full-year sales guide for Invoice2go from $24 million to $34 million, an increase of 42%.
However, it should be noted that customer count declined QoQ at Invoice2go and deaccelerated for Divvy in the most recent quarter. Management stated this was due to higher credit standards and onboarding criteria after being acquired. I discuss this risk and others in more detail further below.
Financials
As mentioned above, Bill.com has reported five consecutive quarters of accelerating topline growth. Organic sales most recently grew 85% YoY to $97 million, an acceleration from the 78%, 73%, 45%, and 38% YoY growth rates in the prior four quarters. The continued acceleration in core sales has been driven by its ability to cross-sell solutions and strength with its SMB cohort.
Total sales increased 190% YoY to $156 million in the latest quarter. Sales were driven by subscription fees (31% of Q2 FY2022 sales) and transaction fees (68%). Subscriptions are fixed payments while transaction fees are based on usage and include interchange fees on a fixed or variable rate per transaction. Bill.com also earns interest on funds held for clients, which was 1% of total sales.
Subscription sales increased 85% YoY to $49 million, or 31% of Q2 FY2022 sales. The increase was driven by a 24% YoY rise in core customer count, which increased to 135,000 customers and a rise in ARPU. Bill.com also adopted a new accounting standard which added $4 million to subscription revenues and signed a new partnership agreement with Bank of America that added ~$6 million in subscription sales. Absent these one-time items, organic subscription sales increased 51% YoY, which still represented an acceleration from the 43% YoY growth rate in the prior quarter.
Accounting for the majority of Bill.com’s recent topline outperformance was growth in transaction fees, which increased 314% YoY to $106 million, or 68% of Q2 sales. Transactions fees followed a 62% YoY rise in total purchase volumes (TPV), which increased to $56.4 billion. TPV per customer also increased 31% YoY to $418,000, highlighting the company’s ability to successfully cross-sell solutions from recently acquired companies.
Further fueling Bill.com’s transaction fees was an increase in the take rate, which rose 3 bps YoY to 10 bps, following a shift to variable-priced products. Payment volumes on Bill.com’s core platform increased 36% YoY to 9.8 million and revenue per transaction also increased 62%, following the higher take rate. On the Q2 call, CFO John Rettig explained that transaction revenue was driven by “strong TPV growth, increased adoption of our ad valorem products and increased usage of our spend management card solution”. On an organic basis, transaction revenue increased 121% YoY.
The growth in transaction fees has been a key driver of Bill.com’s success, and there is room for continued improvement since new customers typically ramp spending over time. According to Bill.com’s pricing schedule, credit and debit card fees are variable, suggesting that there has been a material rise in credit card usage in recent quarters. This ties back to the fundamental data discussed above, as the New York Fed stated that credit card usage grew at the fastest pace in Q4, dating back 22 years. However, credit card balances still remain below 2019 levels, suggesting that there may be room for continued growth.
Adjusted operating profit was $3.4 million and non-GAAP EPS broke even at $0.00, which beat estimates by $0.17. The market tends to award companies that report consistent profitability and Bill.com is likely nearing that threshold. Bill.com had $2.8 billion of cash on balance as of Q2, allowing the company to continue to scale its business. Furthermore, Bill.com held $3.4 billion of customer funds, up 39% QoQ driven by the ramp in TPV discussed above. If interest rates rise, Bill.com’s float could be a material contributor to its topline. CFO Rettig explained that if the federal funds rate rose 100 bps, its annual float revenue would rise to ~$35 million, or 9% of TTM sales.
Looking forward, management expects sales to be $158 million, up 164% YoY and besting estimates that expected growth of 146%. Q3 sales are expected to be driven by 67% organic growth while Divvy is expected to increase 132% YoY. Non-GAAP EPS is expected to be a loss of -$0.16, which was better than the initial -$0.22 loss expected by the Street. Management also raised their full-year 2022 topline estimate to $600 million. Organic growth expectations were increased from 55% to 69% and Divvy sales growth was raised from 115% to 132% growth. Invoice2go sales are expected to be $34 million for the year, up from the initial guide of $24 million.
Valuation and risks
Bill.com is performing strongly, likely as a result of its large data asset of B2B payment data that gives it insights into what its customer’s needs are. Bill.com has leveraged this data and has made some transformational acquisitions that have increased cross-selling opportunities, leading to accelerating growth at the core platform and the newly acquired companies. Following this success, the company trades at a premium.
As shown below, Bill.com has outsized growth relative to peers, which has contributed to a premium multiple. The company trades at a 42x 1-year forward P/S multiple, which is well above peers. However, Bill.com has a largely untapped market in front of it, and has captured just 2% of its market opportunity, suggesting that there is a long runway of growth ahead of the company. The company’s data asset of B2B payment data and network effects from signing on new customers also support a premium multiple. Moreover, considering the nearly $70 billion software opportunity in front of it, coupled with the uncapped usage-based revenue, there is a significant opportunity for growth.
While Bill.com trades at a premium, this is due to its outsized growth rate. Viewed differently, if Bill.com's growth slows down to the per median rate of 33% and its multiple compresses to the peer median of 11x, then Bill.com will grow into its valuation in less than five years. However, we expect Bill.com to grow faster than peers given its unique data advantage, network effects, and untapped market opportunity.
Other near-term risks include a slight slow down in customer growth at Bill.com’s recently acquired companies. While there are clear signs of cross-selling, ultimately customer growth needs to be sustained to support Bill.com’s multiple. However, management explained that the slowdown was driven by higher credit standards onboarding new clients, which we view as a positive.
The company has also taken on relatively higher levels of risk by entering the credit card market. This has led to higher variable fees, which has led to outsized growth, but also introduces the possibility of fraud and liability. However, fraud losses have been low and the increase in credit standards discussed above should limit this risk. Furthermore, a decline in credit card usage would pressure Bill.com's grow rate.
Bill.com is also beholden to having a strong relationship with its partners, especially Intuit. Bill.com’s platform is integrated into Intuit’s QuickBooks product, and the company has an agreement with Inuit that extends until June 2023. The agreement enables continued support of Bill.com with QuickBooks. While this is a risk, the longer the two platforms are integrated, the greater the lock-in, which likely results in a symbiotic relationship between the two platforms.
In conclusion, Bill.com is positioned between AP and AR transactions which allow the company to capture valuable B2B payment data. The company’s main cohort of customers, SMB, appear well funded and have the tools to compete in the digital economy. Bill.com has also completed a transformational acquisition with Divvy, which has led to accelerating growth at both companies and increased cross-selling opportunities. While there are risks, such as its partnership with Inuit and expansion into credit cards, we believe that Bill.com will continue to perform well given its unique position that benefits from increased SMB business activity and network effects.