2023-06-07 05:17:37 ET
Summary
- BILL's 3Q23 results show potential for a turnaround with increased quarterly customer growth rate and TPV growth, demonstrating resilience and market share growth.
- The company's network effect and robust distribution network, including partnerships with top accounting firms and banks, provide a competitive advantage and access to millions of SMBs.
- Concerns about potential competition from Intuit are mitigated by the low revenue overlap and the value proposition of BILL's automation solutions for SMBs.
Description
In the past , I have mentioned that it is preferable to wait until the macro environment improves for SMB before putting money into BILL Holdings ( BILL ). As the latest 3Q results show, I do think things are looking up. Starting from the results, I believe expectations going into the print was not great as the macro environment did not seem to have recovered. This lowered the bar for BILL to beat, and the company's strong 3Q23 revenue beat gave me hope that things are turning around. The improved trends in take rates this quarter also gave me cause for optimism. However, management remained cautious, forecasting flat TPV for 4Q23. This was the correct move, as I believe the high level of macro uncertainty makes it difficult to forecast anything in the near future. Taking everything into account, I am convinced that a turnaround might happen soon; however, I continue to recommend a hold rating as the outlook is still murky. If my call is right that things are turning around, we should see BILL continuing its recovery in key metrics and its path to positive profits, and that is when I would start buying.
KPI pointing to turn around
I thought BILL did pretty well, even after considering how low expectations were going into the print. The company's quarterly customer growth rate of 15,200 was significantly higher than the 10,700 seen in the previous quarter and the 11,600 seen in the same quarter a year ago. This includes an increase from 3,500 to 3,700 organic adds for the core BILL business. It's true that the number of adds is lower than in a typical setting, but we're not in a typical setting. I actually found it encouraging that BILL is able to grow its market share growth despite the soft conditions, as this indicates that the company is more resilient than smaller rivals in the market. BILL TPV (excluding Divvy and Invoice2Go) also grew by 11% Y/Y, which was significantly higher than the company's 0% guidance. If we add all of these together, I believe it paints a much better picture than what management has been saying about the SMB market in the last 2 quarters.
Network effect
I believe that BILL's network effect will serve as a crucial competitive advantage, distinguishing it from potential new competitors and facilitating its continued high-level growth. The platform's features have fostered a network effect throughout the entire ecosystem, resulting in a membership base of over 4 million users. It is important to note that this network extends beyond a simple BILL-to-client relationship. Think about it this way, BILL connects to all members in the network, while each member connects with the rest of the network via their receivables and payments relationship. This interconnectivity makes the network highly intertwined and sticky, providing significant value for each user as they are all in the same ecosystem/network. As the network grows with the addition of new users, the potential for BILL to upsell and acquiring new users increases as well. It is worth noting that the network is still evolving, with a portion of customers currently being transactional-only. Therefore, I expect BILL to allocate resources to convert these users, as it is easier to upsell and cross-sell products to subscribing users who have already demonstrated commitment to the platform. In the long term, this network effect will contribute to the expansion of BILL's competitive moat, enabling aggressive growth strategies.
GTM / penetration
The central issue at hand is whether or not BILL can sustainably add new nodes to its expanding network. Given BILL's robust distribution network, I'd say yes. BILL is well-positioned to reach the market's millions of SMB. I wrote about this previously, and I will update my view on it. Since I last wrote about BILL's GTM strategy, I believe it has grown even more robust. Eighty of the top 100 accounting firms and most of the top 10 U.S. banks are now connected with BILL, as reported at the J.P. Morgan Global Technology , Media, and Communications Conference on May 23. With an increased focus on accountants as a key customer acquisition channel, BILL has also increased its efforts to align the business with accountants. With BIL's software, accountants can expand their services beyond traditional tax and auditing to include more value-added advisory work, which in turn benefits both BILL as the accountants will refer customers to BILL platform. Importantly, during the conference, management has stressed the words from key accounting partners that automation penetration rate is still very low in SMBs, which means there is still a long runway of growth left.
Risk
The possibility that Intuit ( INTU ) will introduce competitive payment features is one of the main bearish factors affecting BILL. Many people are worried that BILL will lose business to INTU if its customers decide to switch. This bear thesis has its merits as it makes sense to consolidate to one platform. The flaw here is that I think a lot of investors are still looking at BILL as a business that provides payment solutions. I believe BILL's true value is in helping SMBs, which have traditionally relied on pen and paper, make the transition to digital automation. Furthermore, the Needham Technology & Media Conference on May 18th highlighted the fact that only 1% of BILL's current revenue came from INTU. As such, the overlap here is not huge enough to move the needle. Importantly, most INTU customers who use BILL do so because of the extensive distribution ecosystem BILL offers, which is telling of the value proposition that BILL provides.
Summary
There are positive indicators that suggest a potential turnaround for BILL in the near future. The increase in quarterly customer growth rate and the growth in TPV also demonstrate resilience and market share growth. Furthermore, BILL network effect, with its interconnected ecosystem and growing user base, serves as a competitive advantage that supports continued high-level growth and the potential for upselling and acquiring new users. The company's robust distribution network, including partnerships with top accounting firms and banks, enhances its go-to-market strategy and provides access to millions of SMBs. While there are concerns about potential competition from Intuit, the low revenue overlap and the value proposition of BILL automation solutions mitigate this risk.
For further details see:
BILL Holdings: Things Might Be Turning Around