2023-06-05 22:49:53 ET
Summary
- Bill.com, a financial software company, is experiencing strong growth and profitability despite macroeconomic challenges, making it an attractive investment opportunity.
- The company's revenue grew 63% y/y to $272.6 million in Q3, with high gross margins and expanding profitability due to its diversified business model and automation push.
- Despite a higher valuation, Bill.com's growth at scale, huge gross margin profile, and bottom line expansion make it a compelling growth stock to consider.
- High interest rates are also pushing up the company's float revenue to a meaningful contribution.
Amid this incredibly challenging macro environment, I continue to emphasize that the best way to beat the market is to stock-pick aggressively, especially in the beaten-down growth stock space. And in particular, pay attention to companies that have continued to expand their top line while also boosting profitability instead of succumbing to macro pressure.
Bill.com ( BILL ) is a great example here. This financial software company, known for automating accounts payable and receivable for hundreds of thousands of small business customers, is still down by more than two-thirds relative to 2021 highs near $335; and despite strong performance year to date, the stock is up only ~3% since the start of the year.
Toward the end of last year, I noted that while I was neutral on the stock, it was time to put Bill.com on my watch list. Now, after reviewing the company's latest results, I am upgrading BILL stock to bullish.
As a reminder for investors who are newer to this stock, Bill.com's core value proposition is that the company automates the financial backend for smaller businesses that don't necessarily have fully-fledged accounting and finance departments.
The company generates revenue in three ways: it charges a subscription fee for its software, takes a percentage cut of each transaction it helps to process (which is the lion's share of its revenue), and also generates interest income (float) on cash that it holds on behalf of its customers.
Here, in my view, are all the biggest bullish drivers for Bill.com:
- Growth at scale. Despite already reaching a >$1 billion annualized revenue run rate, Bill.com is still managing to grow revenue at an impressive >60% y/y growth pace (and note here that the company's major recent acquisitions of Invoice2Go and Divvy are now fully comped).
- Float revenue will benefit from the high interest rate environment. Float is now contributing just over 10% of the company's revenue, from virtually nothing during the low interest-rate era, and this is a "free" way to help boost Bill.com's margins.
- Automation push. Right now at a time when AI and automation are hot buzzy topics, there is growing interest to automate manual processes and chase as much efficiency as possible - which are all part of Bill.com's core DNA.
- Sky-high gross margins. Bill.com's high-80s gross margins are unparalleled in the industry. As the company continues to grow its customer base and take over a greater portion of these clients' transactions, the fact that Bill.com's revenue nearly all flows to the bottom line will help the company dramatically expand its profitability.
Now, unfortunately, Bill.com doesn't exactly come cheap for investors. At current share prices near $112, BILL stock trades at a market cap of $11.93 billion. After we net off the $2.66 billion of cash and $1.70 billion of convertible debt on Bill.com's most recent balance sheet, the company's resulting enterprise value is $10.97 billion.
Meanwhile, for the next fiscal year FY24 (which for Bill.com is the year ending in June 2024), Wall Street consensus is calling for $1.26 billion in revenue, representing 24% y/y growth (data from Yahoo Finance ). Taking this estimate at face value, Bill.com trades at 8.7x EV/FY24 revenue.
This year, I have gravitated toward growth stocks trading at a low or mid single-digit revenue multiple, but I think Bill.com merits an exception due to A) its fantastic growth at scale, B) its huge gross margin profile, and C) its tremendous bottom line expansion, all of which we'll cover in more detail in the next section.
The bottom line here: if you've been sitting on the sidelines waiting for an entry point in Bill.com, here's your chance. Buy up this stock and continue riding out this rebound.
Q3 download
Let's now go through Bill.com's latest quarterly results in greater detail. The fiscal Q3 (March quarter) results, released in early May, are shown in the summary below:
Bill.com's revenue grew 63% y/y to $272.6 million in the quarter, beating Wall Street's much more bearish expectations of $247.2 million (+48% y/y) by a huge fifteen-point margin. Revenue also barely decelerated from Q2's 66% y/y growth pace, which was when the company first entered into a period of like-for-like compares versus acquisitions completed in FY22.
Underneath the hood, transaction-based revenue grew 52% y/y to $172.8 million, or 63% of the company's total. Again here, we're impressed and encouraged by the fact that macro headwinds have not slowed down this transactional revenue. Float revenue of $33.1 million (12% of total) also expanded substantially from just $1.4 million in the year-ago Q3, buoyed by higher interest rates.
The company's count of customers grew 18% y/y to 455K, while payment volumes on the Bill.com platform grew 13% y/y to $65 billion:
Here is some helpful commentary from CFO John Rettig's remarks on the Q3 earnings call , highlighting customer trends against the current macro backdrop:
Our strong performance highlights the strength of our diversified business model and our commitment to deliver balanced growth and profitability. Our results were delivered amidst the backdrop of multiple challenges being faced by SMBs, most notably the ongoing macroeconomic headwinds and to a lesser extent, the banking uncertainty that materialized in March.
Many of the changing B2B spend patterns that we saw last year continued in Q3. Even though customers continue to face challenging business conditions and are reducing their expenditures, engagement with our platform remains strong and shows that SMBs drive value from our solutions throughout any business cycle.
For example, on our BILL standalone platform, excluding financial institution channel customers or FIs, the average number of transactions per customer was 74 consistent with the March quarter a year ago. Of these payments, approximately 80% were repeat transactions consistent with prior periods. Repeat transactions are defined as payments initiated between the same subscriber and vendor within the preceding three months."
From a profitability standpoint, Bill.com's pro forma gross margins rose 240bps y/y to 87.0% - again, a high watermark across the software industry.
Pro forma operating income also jumped to $34.8 million, representing a 13% pro forma operating margin - up from a loss of -3% in the year-ago quarter.
Free cash flow for the first three quarters of FY23 also jumped to $83.7 million, or an 11% margin - versus a loss of -$18.8 million in the year-ago period.
Key takeaways
With surging growth rates, tailwinds for both domestic customer and international expansion, huge gross margins and the beginnings of pro forma profitability, there is plenty of appeal in Bill.com. Buy here and hold.
For further details see:
Bill.com: Finally, It's Time To Go Long