Summary
- Bill.com recently reported a good FQ2 report that topped estimates, though core revenue trends are decelerating.
- FQ3 guidance was a bit concerning with management expecting TPV to be flat yoy.
- The company has generated non-GAAP profitability both quarters this year, but this is only because stock-based compensation is materially increasing, and is added back.
- Valuation remains challenged with the stock currently ~8.6x forward revenue.
Bill.com (BILL) recently reported FQ2 results that topped analyst's expectations, however, the underlying financial performance and guidance raised some flags. While Bill.com remains one of the leaders in bill payment automation software, I believe the stock could remain penalized near-term.
Core revenue growth continues to decelerate and while total revenue beat expectations, this was driven by a material increase in float revenue due to higher interest rates. Yes, this is still revenue, but it's less sticky and more dependent on interest rates than the company's core revenue.
Guidance for the remainder of the year also called for decelerating growth, including flat payment volume for Q3. In addition, the company's non-GAAP profitability is only achievable because of the significant amount of stock-based compensation they add back. Their GAAP profitability has actually deteriorated the past several quarters, which is only being masked by the stock-based compensation add-backs.
While the stock has pulled back around 30% since they reported earnings, it's very important to look at a multi-year chart for Bill.com. Even at the current levels, the stock remains over 40% above their pre-COVID levels of ~$60. Yes the company was a beneficiary of the pandemic and their revenue has significantly accelerated, but the combination of a more challenging macro, delegating trends, and higher interest rates (which is usually bad for high-valuation companies) leaves me on the sidelines for now.
Valuation is still ~8.6x forward revenue, and given the uncertain macro outlook and lack of true profitability, investors should be cautious around valuation potentially falling out from the bottom.
Financial Review and Guidance
Bill.com recently reported Q2 financial results that topped analyst estimates across the board. However, I believe their financials are not as crisp and clean as they appear to be at face value, and investors should be taking a deeper look at the revenue growth and "profitability" metrics.
Total revenue of $260 million grew 66% yoy which easily beat consensus estimates of $243 million. However, float revenue, which consists of interest on funds held for customers, was $29 million during the quarter, well above the $1 million reported in the year-ago period and even above the $6-9 million reported in FY21 and FY22. Essentially, Bill.com had a $28 million yoy benefit from higher interest rates, directly benefitting their revenue.
Yes, consensus estimates likely reflected some of this benefit, but considering the significance of float revenue during the quarter, revenue growth was not nearly as strong as it appears. In fact, core revenue growth was 49% yoy during the quarter, decelerating from the 83% yoy core revenue growth last quarter.
Digging further into the company's metrics, the numbers of business using Bill.com's solutions grew 17% yoy, with total transactions processed growing 34% yoy and payment volume growing 15% yoy. Of course the broader macro conditions are weighing on small businesses, with many companies starting to slow their expenses. And these metrics support this, as transactions grew quicker than volume, indicating a lot more smaller ticket transactions, which typically occurs when companies become more cautious around their spending patterns. Management also talked about the macro impacting their customers.
As we discussed on our Q4 and Q1 calls, macro conditions are impacting small businesses, and they are taking action to moderate expenses. As we anticipated, these trends continued in fiscal Q2, and we experienced lower growth in total payment volume compared to prior periods.
Not only is core revenue and underlying growth metrics slowing down for the company, but their "profitability" still has significant room to go. Sure, the company has reported non-GAAP operating income and non-GAAP net income profits for both quarters so far, but this is largely being driven by the significant increase in stock-based compensation, which is added back.
The chart above does a great job depicting how the company's non-GAAP operating income and non-GAAP net income would actually be deteriorating if we were to exclude stock-based compensation. In fact, total stock compensation has reached nearly $200 million so far this year (just two quarters into FY23), which is nearly the same amount as the $206 million in all of FY2.
While I agree the use of stock-based compensation is very important for leading technology companies to attract top talent, the idea of Bill.com getting "profitability" credit for this does not seem appropriate.
At the end of the day, adjusted EPS in Q2 was $0.42, which beat expectations for $0.14.
For Q3, the company guided revenue of $245-248 million, reflecting 47-49% growth. However, they don't breakout the contribution from core versus float revenue, and given the trend we saw in Q2 with higher float revenue, it seems likely that Q3 will benefit from higher float revenue (on yoy basis).
FY23 revenue guidance was also raised to $999-1,007 million, which was above consensus estimates for $1,000 million. However, Q2 revenue beat by $17 million, so the company essentially lowered their guidance for the second half of the year. This does not come as too much of a surprise given the challenging macro backdrop, and management addressed this on their call.
We anticipate the trends we've experienced in recent quarters will continue in the second half fiscal 2023. This will impact our business, most notably on near-term payment volume growth.
We estimate that BILL's standalone TPV growth in Q3 will be approximately flat on a year-over-year basis, reflecting both the continuation of macro trends and our expectations for typical seasonally softer payment volume in the March quarter compared to the December quarter. For Divvy card spend, we anticipate growth of approximately 50% on a year-over-year basis in fiscal Q3. We're excited about our market opportunity and ability to extend our leadership position through this economic cycle, but we also believe that near-term trends warrant a conservative financial outlook.
As a result, we've adjusted our core revenue estimates to account for the risks that SMBs continue to adjust their spending levels. We will be disciplined in managing our operating expenses going forward and have proactively reduced plan hiring. We are also continuing to focus on investing in the highest impact initiatives for customers. Thus, we are taking a balanced approach to investing for growth over the longer term while addressing short-term challenges and delivering increased profitability.
Given management's commentary and updated guidance, payment volume growth will continue to slowdown and their core revenue will continue to decelerate. The overall macro pressures on SMBs right now is certainly weighing on growth, and I believe the company could see some challenging quarters ahead. With Q3 payment volume expected to be flat yoy, I believe this caught many investors by surprise, and could weigh on the stock until we get their next quarterly report.
Valuation
Given the magnitude and suddenness of Bill.com's core revenue and payment volume slowdown, the stock dropped over 25% the next day and has continued to trade lower over the past few weeks.
I believe the current environment has made valuing stocks even more difficult, as it's not as easy as "slapping a 10x revenue multiple" on growth stocks, regardless of their trajectory or profitability. Bill.com was a beneficiary of the pandemic as businesses of all sizes looked to improve their bill payment functionality and technology, however, this pull-forward in demand combined with a challenging macro could weigh on growth near-term.
Even after this post-earnings pullback, the stock still trades at 8.6x forward revenue, which does not scream cheap for a company with significantly decelerating revenue and ongoing lack of profitability (backing out the material increase in stock-based compensation). Sure, almost all companies add back their stock-based compensation expenses for their non-GAAP financial metrics, but Bill.com has seen GAAP profitability deteriorate and their non-GAAP profitability is only being aided by the stock-based compensation add-back.
Given the ongoing macro headwinds causing uncertainty around near-term growth trajectory, I believe the stock could remain in the penalty box for quite some time. It's not likely that the macro returns to "normal" healthy levels in the near future, which makes the stock even more challenging to support at the current valuation levels.
For further details see:
Bill.com: Decelerating Growth And Lack Of True Profitability