2023-08-29 09:49:53 ET
Summary
- BILL's 4Q23 revenue beats expectations, but other operating metrics show mixed results.
- The end of BILL's partnership with Intuit could negatively impact the stock price in the near term.
- Contract extensions with Bank of America and JPMorgan Chase are positive indicators for BILL's growth.
Investment action
I recommended a hold rating for Bill.com (BILL) when I wrote about it the last time in June, as I wanted to see BILL showing recovery in its key metrics and a more visible path to positive profits before investing. Based on my current outlook and analysis of Bill, I recommend a hold rating. I believe the operating metrics disclosed are not fully aligned with my expectations yet. Until such time, I think the wise action is to stay on the sidelines and await better timing.
Review
BILL's 4Q23 revenue of $296 million was higher than the $282 million expected by consensus, driven by 30% year-over-year growth in organic core revenue and 43% growth in Divvy. Adj EBIT of $42 million, or 14.3% operating margin, was a result of the top-line beat and higher adjusted gross margins (100bps higher than consensus). I note that BILL has shown a strong beat on operating margin, which is positive to expectation for BILL profitability outlook.
However, I believe that other operating metrics provide a more nuanced picture of the company's health. On the positive side, growth in BILL's core business, excluding FI, accelerated to 5,300 organic adds in 4Q23 from 3,700 in 3Q23. In addition, the average revenue per transaction of $7.90 was up 21% year over year and a record high for the company. Contrarily, a slowdown of 450bps was seen in the growth of core BILL transactions processed from 15% in 3Q23 to 10.5% in 4Q23. Total payment volumes [TPV] for Core BILL also slowed by 400bps to 7%. In addition, while there has been a notable increase in transaction revenue per transaction, TPV per customer has decreased by 16%. The rate of net dollar retention excluding Divvy has also continued to slow, falling to 111% from 131% in 3Q23.
If we just look at the metrics above, it is hard to voice out in confidence that BILL is turning for the better, which is what I am hoping for. Aside from that, I think the market's reaction to the news that BILL's partnership with Intuit ( INTU ) is ending could weigh on the stock price in the near term. The June expiration of the co-marketing and embedded bill pay agreement between BILL and INTU will cause the majority of the 12,000 affected BILL customers to leave BILL. This group of affected customers accounts for about 6% of the core book, which is not a huge number but will have a negative impact on the company's headline performance over the next two quarters as they inevitably churn. The good news in this otherwise discouraging update is that while the embedded API is indeed being retired, the vast majority of BILL's current clientele also use Quickbooks, and so they will continue to be supported via a direct model that can take full advantage of the BILL AP solution. Most importantly, BILL's management thinks they can increase ARPU by better showcasing the platform's value to existing customers.
When taken as a whole, the results are mixed, with some major risks and uncertainties in the near future. Given the underwhelming performance of the stock price, I believe the market agrees with my assessment. Even though I'm maintaining my hold rating, I do see some good news in the announcement of contract extensions with BILL's two largest FI partners, Bank of America (BAC) and JPMorgan Chase. As a result of these partnerships, BILL will be able to reach a wider audience and provide its customers with more flexible payment options beyond those offered by traditional ACH transactions or paper checks. By extending the partnership with Bank of America, BILL is now able to reach a wider audience than just the new BAC customers who are onboarded to the BILL platform. This change also provides BILL with a large exposure to the large customer set, which gives Bill substantial upside (upselling) in the coming years. As for JPMorgan Chase, the majority of the benefits their customers will reap from the 5-year extension will come in the form of expanded payment options. But the more important takeaway is that these big financial institutions continue to trust BILL, which is supportive of BILL product value proposition.
Valuation
I believe BILL can grow at 20% over the mid-term from a CAGR perspective because of the strong value proposition it provides to users and the extended distribution capabilities it has. According to my model, assuming 24% growth in FY24 as guided, 20% for the next 2 years, and 8x forward revenue, the stock has 41% upside. I believe BILL should trade at a premium given its growth profile and long-term growth profile (relative to peers, as BILL has a much higher gross margin profile). As BILL is expected to turn profitable on an EBIDA basis next quarter, the accelerating earnings growth further supports a valuation premium. The issue with BILL is near-term expectations and when to go long the stock. As I mentioned above, the results are rather mixed. Hence, I continue to recommend a hold rating and wait for better timing (all key metrics turn for the better) before recommending a buy.
Final thoughts
My analysis of BILL reveals a mixed landscape of operating metrics. Core business growth showed promise, but various slowdowns in transaction volumes and net dollar retention, compounded by the impending impact of the Intuit partnership ending, cast uncertainties on BILL's immediate future. That said, the extensions of partnerships with Bank of America and JPMorgan Chase are certainly positive indicators that should support BILL growth over the medium term. Overall, I maintain my hold rating, as the potential for growth exists with its strong value proposition and distribution capabilities, but I advise waiting for more favorable conditions before considering a buy.
For further details see:
BILL Holdings Q4: Operating Metrics Are Still Mixed, Reiterate Hold