Bill $BILL: Thinking Long-Term When Rates are 4%
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Bill reported earnings last month, beating both revenue and earnings estimates but forecasting significantly slower growth for next fiscal year. While total revenue grew 65% in 2023 (helped partially by interest income increasing over 1000%!), management is forecasting 22-23% growth for ‘24, which includes subscription revenue growth slowing from 31% to mid-single digits, Divvy revenue growth slowing from 69% down to the mid-30s, and Bill stand-alone (excluding Divvy and Invoice2Go) TPV per customer decreasing in the low single digit range. Assuming these forecasts are right, Bill is now reaching the end of a strange golden period for an unprofitable tech company: one in which growth remained strong and the company benefited from rising rates given its float revenue. There are two points from the call worth discussing in more depth. The first is NRR, which came in at 111% for the year, above where it was in 2018/2019 but significantly below where it’s been for the past three years. The second is its partnership with Bank of America, which has been modified to result in less revenue over the next year, but far greater revenue potential over the longer term.
Before exploring NRR for the past fiscal year, it might be helpful to look at what it’s done over time:
The explanations behind NRR figures from year to year aren’t all uniform, although they all have at least something to do with variable priced payments (also known as ad valorem) from 2020 on. The 2018 and 2019 figures were before variable priced payments took off, and so primarily the result of an increase in both number of users and transactions per customer.1 2020 was driven by a combination of price increases and adoption of Bill’s virtual card and cross-border payments functionality. 2021 and 2022 metrics were driven not only by strong virtual card and cross-border payments adoption, but also improving gross customer retention, which increased from 82% in 2019/2020 to 85% in 2021, then up to 86% in 2022/23. Management attributed ‘23’s NRR to continuing customer uptake of its new payment offerings, but some of it was also likely due to the price increase that was initially rolled out in Q2. For Bill, NRR is a function of a few different things:
Its customers can add back-office employees, leading to more subscription seats.
Its customers’ own businesses can grow, leading to (most likely) accounts receivable and accounts payable growing proportionally. This results in greater TPV per Bill customer, and thus higher payments revenue.
Its customers can stay the same size, but:
Instead of paying suppliers via Bill’s flat fee offerings (such as check or ACH) they use a virtual card, which Bill charges a percentage fee on. Alternatively, they pay international suppliers in their native currency rather than USD, which Bill also charges a percentage fee on.
Instead of waiting 2-4 days to receive a payment from suppliers they opt for instant transfer, which Bill takes a 1% haircut from.
Given management’s assessment of the macro, it’s unlikely that NRR will be lifted by the first two options over the next year.2 Option three remains, but also needs to be modified somewhat. TPV per customer is expected to decline by 5% YoY, so Bill’s ad valorem payments products actually need to grow even more so as a portion of customer spend than they have in previous years. Management now gives (relatively) granular information on uptake of three of these products:
Cross-border payments requires a bit more explanation, and can be split into two buckets: payments made in USD and payments made in foreign currency. A flat fee is charged for payments made in USD, meaning only the foreign currency piece is relevant for ad valorem payments growth. That doesn’t mean USD payments are irrelevant for NRR. A customer adding an international supplier to its Bill workflow and paying that supplier in dollars does drive higher revenue, just not a meaningfully higher take rate. Management’s initial thesis around foreign currency payments was that they were artificially suppressed due to deficiencies in Bill’s product. At the end of fiscal 2020, 25% of Bill’s international suppliers were paid in foreign currency, a percentage the company hoped to increase through features such as allowing merchants to be paid in their local currency even if the invoice was in USD. This percentage has ticked up over the past few years to 36%, but still sits below the 50/50 split the company is aiming for. Virtual card usage has also continued to grow since Bill’s IPO, but remains far short of the 5-10% target range.3 There’s some doubt on the sell-side4 as to how much more room the virtual card piece really has to run, but that may not matter for NRR given the more recent rollouts of Instant Transfer and Invoice Financing, both of which should perform well in a challenging macro environment.
The other note worth making on Bill’s NRR is how it differs from other consumption based business models. It’s tempting to look at the company’s metrics and dismiss it as another Covid-beneficiary that managed to extend its growth for an extra year but is now coming back down to earth. While it’s true that Bill benefited from the software boom, Covid also came at a time when the company’s payments business was in its infancy. While Bill’s multiple expansion was a Covid phenomenon, its growth was predominantly genuine. This is especially the case for cross-border payments, where the question for management was not whether small businesses have international suppliers but instead how management could get those international supplier payments to happen within Bill.5 Bill also has a customer base that differs significantly from other software companies that emphasize NRR. This isn’t an original insight, but businesses like Snowflake, Datadog and AWS experienced breakneck growth partially because its customer base consisted of companies that were temporarily rewarded for revenue growth over profit growth.6 Optimizing the AWS bill simply wasn’t a priority when both public and private markets were myopically focused on the top line. This meant consumption-based businesses looked good not necessarily because they had built products stellar enough that customers wanted to use them as part of more and more workflows, but instead because those customers simply weren’t incentivized to pay attention to their vendor bills growing 40% YoY for unjustifiable reasons. This stands in stark contrast to Bill, where NRR will fluctuate based on general macro/strength of new product initiatives, but probably not for reasons related to customers forgetting about the bottom line for a few years.
The second important takeaway from the earnings call concerns Bill’s partnership with Bank of America. The initial SMB relationship with BofA was announced in Q422, and enabled Bill to serve any of the bank’s new SMB customers. As with Bill’s other financial institution partnerships, it receives contractual minimums over the first few years over the agreement, with the opportunity to generate significant subscriptions and transaction fees over a longer time frame. Said differently, the immediate result of working with FIs is that customer adds far outstrip revenue growth. Had Bill’s relationship with BofA remained the same, subscription fees related to those FI customers would’ve kicked in for next fiscal year. Instead, the agreement was amended:
“As Rene discussed earlier, we are enhancing and expanding our solution with Bank of America to serve their large installed SMB customer base in addition to their new SMB customers. Together with BofA, we will both be accelerating our investments to address this very large market opportunity. As a part of this initiative, we are restructuring the contractual minimums to push out subscription fees planned for fiscal 2024 to future years. While this impacts our fiscal 2024 revenue and profitability, we expect it to unlock a significantly larger revenue opportunity in the future and accelerate the adoption of financial operations for SMBs.” - John Rettig, Q42023 earnings call
It’s encouraging to see Bill prioritize customer growth over immediate revenue and profits, particularly during a tougher macro period for its customer base. Companies such as Netflix kept prices low for years, recognizing the importance of long-term subscriber growth over an immediately impressive topline, but those decisions are easier when the risk free rate is almost zero and money in five years is worth the same as money now.7 Bill’s decision has tangible consequences for subscription growth next year, which would’ve been forecasted 8-10% higher had the BofA relationship not been amended. Not many management teams can stay focused on the long-term when everyone around them has flipped to optimizing for the next quarter or fiscal year.
It’s interesting to think about what the biggest obstacles to Bill’s growth might be over time. A few analysts left the earnings call concerned about the threat of Intuit, which has now decided to compete rather than partner with Bill on payments functionality. While Intuit’s a competitor worth thinking about, the larger competitor may be non-consumption, as per Bill’s annual report:
“The market for cloud-based software that automates the financial back-office is highly fragmented, competitive, and constantly evolving. We believe that our primary competition remains the legacy manual processes that SMBs have relied on for generations. Our success will depend, to a substantial extent, on the widespread adoption of our cloud-based automated back-office solution as an alternative to existing solutions or adoption by customers that are not using any such solutions at all.”8
In other words, Bills’ primary competition is small businesses sending/receiving paper invoices and paying suppliers via a check in the mail. The risk of small businesses not shifting to the cloud is one that may be more pertinent to Bill than it is for other technology businesses. Toast doesn’t have to pitch a restaurant owner on the concept of a POS in general, only on the benefits of Toast’s POS against an incumbent like MICROS. AWS doesn’t need to convince its prospects to use servers, only that renting them out makes more sense than running your own data center. Bill, on other hand, has to convince potential customers that there’s a better way to handle accounts receivables/payables than pen and paper.9 This sounds like an easy task, but people stubborn enough to still use pen and paper in 2023 might just not have any interest in changing how they do things. Square’s early days consisted of persuading coffee shops there was value in accepting credit/debit cards rather than only cash, but that value’s easier to demonstrate when it leads to a demonstrable increase in revenue. Managing finances online saves time, headcount, and can improve cash flow dynamics, but such benefits might be back of mind for a small construction company CEO who spends most of his time on work sites.
Thanks for reading! If you enjoyed this earnings update you might enjoy my previous piece on Bill, which can be found here.
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence.
There’s a broader question here as to whether anyone should take a company’s economic predictions seriously. Forecasting macro trends is a brutally difficult thing to do, and something that perhaps no one (sans Druckenmiller and Soros) can do with any degree of accuracy.
This target was given in Bill’s Q42020 earnings call
MS Research talked about this at length with their concerns for Bill going forward.
On the company’s IPO roadshow there was a lot of skepticism among analysts as to whether SMBs would really use cross-border payments, but presumably there wasn’t a lot of skepticism among Bill’s management.
Byrne Hobart has written about this before over at The Diff, but I unfortunately can’t remember precisely where.
A key part of Bill Nygren and Dan Sundheims’ bull cases for Netflix was that there was a lot of latent pricing power the company hadn’t yet exercised.
Page 23, Bill’s most recent annual report
There’s a reason Bill offers a paper check payments service, which is still quite heavily used by customers.