Before I get started, please check out my newly updated “About” section, where I talk a little about myself and set expectations for this blog.
This post will cover:
a) What happened to Bill this quarter (feel free to skip if you are well versed already)
b) Key quotes from their latest conference call
c) Splitting Bill into its distinct sub-businesses (if you only read one part of this report, this is what I would recommend)
d) Conclusions and What I'm Doing Based off this Report
What Happened to Bill This Quarter
The good/great:
Based off the market's reactions (+18% the next day), it appears on the surface that management did a stand up job managing investor's expectations
GAAP net loss narrowed substantially to -$31.1m from -$86.7m. NG net profit was a record $58.7m
Full year revenue growth guide was bumped from 57.5% to 62.8%
NG gross margin was a scorching 87%, up from 84% last year (more on this later)
Quarterly revenue guidance beat: 10% higher than the -5% contraction they guided for
The so so:
They are on schedule to provide annual guidance for their next fiscal year during their fiscal Q4 call (which is their next earnings report sometime in July). Having to do this during a challenging macro environment will require extra conservatism from management which could disappoint investors.
Overall revenue growth: 5% QoQ, while this number sounds weak, seasonally it's actually not bad for them. Their fiscal Q3 is a seasonally weak quarter for them.
The bad:
Revenue guide for next quarter: 3%, very weak because Q4 guide has historically been much stronger.
Implied growth is to go from 63% YoY growth this quarter to 40% next quarter if they hit their guidance. Bill has a strong history of trouncing guidance, so let's say they beat by 5.5% (which would be tied with their smallest revenue beat ever), they would be sitting at 47% YoY growth.
Transaction revenues grew 3% QoQ, which is the lowest I've ever seen it. The only reason this is maybe ok, is because maybe seasonality is especially strong. The argument against seasonality being a valid excuse is that, in the prior quarter (which is usually quite strong), it only grew 5% QoQ. So they had two bad quarters in a row for transactions. And next quarter doesn’t look particularly bright either (more on this later)
Divvy growth was abysmal QoQ. It grew from 86.6m to 88.8m (2% QoQ). For the record, its YoY growth rate was 155% YoY several quarters ago. Because its YoY growth rate is plummeting every quarter, we know Divvy dropping is not a seasonality thing. It's just plummeting (more on this later too).
Key quotes from latest earnings call:
In Q3, customers were highly engaged with our platform and made a similar number of transactions on a year-over-year basis, yet reduced their expenditures per transaction as belt tightening continued.
While we've seen initial signs of spend trends beginning to stabilize, we anticipate that the challenging macro environment and tightening credit conditions in the near term will translate into customers continuing to reduce spend from the elevated levels of the pandemic years.
For the BILL standalone platform, we expect Q4 TPV to be roughly flat to Q3 and down slightly on a per customer basis quarter-over-quarter
XD: I use statements like the one above to conclude that their next quarter to report (fiscal Q4) is not likely to be a strong one, even though historically it is very strong for them.
Analyst: I wanted to ask about just the spend trends in terms of just a stabilization comment. It's good to hear about just the comment about stabilization, but it does sound like you're expecting kind of more moderation. So maybe you could kind of reconcile on what you're seeing currently, versus how you're setting up kind of the outlook? Any comments about, just what you're seeing in the environment would be helpful.
Rene Lacerte: Super happy with the quarter, and in part, because the deterioration that we had seen at the end of the last quarter, did not continue as strongly into this quarter and so that's the comment around stabilization.
Rene Lacerte: We did expect heading into the quarter, that some of the trends we saw materialized late in the December quarter, which was a pretty sizable drop off in spend. As businesses were reacting to the macro environment, and reducing expenses, we had assumed that those trends would continue in the quarter and it proved to be conservative, frankly.
XD: Rene states the reason for their most recent revenue beat.
We ended up with TPV of 11% year-over-year growth versus our initial estimates of being flat, and down slightly quarter-to-quarter, which is pretty consistent with normal seasonal trends.
I'd say, looking ahead to this June quarter, we're assuming that the environment is going to be relatively stable the external macro environment. And that small businesses are continuing to adjust their spend patterns and what ultimately flows through our platform as TPV in light of inflation interest rates credit.
First, I'd just remind everyone that the March quarter is typically seasonally softer from a spend standpoint in the December quarter. We didn't experience in the December quarter the normal historical like seasonal uptick and so we had assumed that that aberration would continue in the March quarter and we really didn't see that. We saw spend trends throughout the quarter that were pretty consistent with seasonal patterns that we've seen historically.
Now the overall level of spend is reduced as we -- as I mentioned before SMBs are scaling back their spending. But the patterns throughout the quarter seem to be pretty consistent and that's what led to our commentary about some initial signs of stabilization in spend trends.
XD: Here they almost imply they hit a trough, but later an analyst will ask them exactly that. And the answer is that it’s not clear yet.
What we've talked about is that, that macro environment means that businesses in general are in this wait and see, not grow mode and that means that some businesses are waiting to take on additional expense before they actually move forward with the opportunities to create more efficiency.
XD: I included this because I think it has interesting consequences for lots of companies, like say perhaps IOT (Samsara). If companies aren’t willing to invest in things that make them more efficient (like what IOT offers), there could be more short term pain coming down the pipeline for companies like IOT and BILL.
Analyst: we look at the business ex-FI, the TPV per customer was down just 5% year-over-year. It was down 7% year-over-year last quarter and it sounds like you're feeling better about the macro. So, do you think that year-over-year change in TPV per customer ex-FI has troughed? And can you talk about how we should think about the normalized growth of this metric over the medium term and just the building blocks of that?
Rene Lacerte: We felt pretty good about the trends in the quarter in TPV and starting to see what looked like a little more normal patterns. But I think it's early to call a trough or a reversion to growth mode.
Analyst: Just a clarification on TPV. Seasonal patterns held in third quarter 2023 but the guidance for 4Q TPV growth now suggests that seasonally it will be materially different than last year. And I know there was some conservatism I guess baked into flat growth of TPV on the core BILL and we did 11% year-over-year in the quarter. So just trying to think about is it finally the slowdown? How conservative it is versus are we really seeing the slowdown seasonally to kind of guide to those levels?
Rene Lacerte: I'd say, the December quarter, the way spend patterns played out was it was a clear deviation from historical seasonality. The March quarter looked a lot closer to normal seasonal trends. Now our TPV performance on a quarter-to-quarter basis, down 5% or so on a – per customer was a little bit larger of a decline than we would typically see and so we've assumed that the Q4 time period is going to be similar performance.
We're going to see some trends that are still not quite back to normal seasonal patterns. At some point when we get to a true trough or businesses start to expand again is when I think we get back to these historical seasonal trends even if it's at a lower overall level of spend and I think that's still probably a few quarters out. But for Q4, we feel like the trends that we've outlined with our estimates are sort of a continuation of the trends we've seen in the March and to a lesser extent December quarters.
XD: Sounds like a prudent way to do guidance.
I'd say, we obviously have had a tailwind of benefit associated with the increasing yields and float revenue associated with our FDO allowances. As interest rates start to peak potentially here in the near term we'll see that float revenue begin to flatten versus the curve that it's been on throughout FY 2023. That's been a positive benefit of call it 75 to 100 basis points on our non-GAAP gross margin historically. We've also had a very favorable payment mix meaning some of the adoption gains that we've had on the high-monetizing ad valorem products have supported the higher gross margins as well.
XD: Here we get a reminder that interest rates have buoyed revenue growth recently but it won’t continue, and Rene alludes to why gross margins are hitting all time highs.
Splitting the Bill into Sub-businesses
Whenever something is complex, it's almost always easier to analyze once you break down the problem. Bill revenues, unlike many other companies, actually breaks down quite nicely into its various sub-businesses.
Bill revenues are essentially composed of four different parts: Divvy transaction revenues, Bill subscription revenues (includes Invoice2Go), Bill standalone transaction revenues (does not include Divvy), and float revenues.
Some quick footnotes:
a) I do not break out Invoice2Go, because 1) it didn't contribute a particularly meaningful amount of revenue (unlike Divvy) and 2) it is included and folds in quite nicely as part of Bill's subscription revenues.
b) Float revenues are now 12% of Bill's overall revenue, but as recently as four quarters ago, it was a number so small I didn't even track it. And it's meaningless to tell you float revenue has grown 1000% YoY or however much it has grown on a YoY basis, because there's no way it's going to grow anywhere near that in the future. (management basically told us it's supposed to flatten along with interest rates in the near future).
What are the takeaways of this breakdown of splitting the Bill? Here's what I think:
a) Something happened with Divvy. Either 1) Bill management has totally screwed up the integration of Divvy (maybe they gutted a highly effective Divvy sales team?) Or 2) Divvy was already a falling star when they bought it, and they probably shouldn't have bought it.
Divvy growth was at 155% YoY when they bought it, dropped to 113% within a couple quarters, then to 78%, and now to 65%. But its QoQ growth most recently was 2%. This has been nothing short of alarming the entire time.
b) If Divvy can't stabilize, Bill's next best hope at staying in hypergrowth mode is its standalone transaction growth. Management doesn't guide for transaction growth, but they were willing to confide in the conference call not to expect an improvement in total payment volume, which is maybe the closest proxy we will get to them admitting that transaction growth is not going to improve next quarter.
c) Bill subscription growth has always been a drag on overall revenue growth. It's always been much weaker than transactions growth, and it seems to be stable around 6%-8% QoQ, which annualizes to about 31% growth YoY. Realistically, this might be where Bill's overall revenue growth is headed, a big downturn from their current growth rate of 63%.
d) Float revenues: I've said this in a few of my portfolio updates, float revenues only grow when interest rates grow. It follows that soon float revenues will be a headwind, since interest rates will not rise forever. And if they do continue to rise, it will likely not be at the rate of increase that we've seen so far (we have never increased interest rates as fast as Jerome Powell has from 2022-2023).
What I see above is that only Bill's subscription revenue growth is stable, and it's much lower than the revenue growth of the over all business right now. Transaction revenues can fluctuate widely, but the recent trends have been nothing but downward. Comments from management don't suggest any near term changes to that.
And the only way float revenues could grow big enough to help would be for an enormous increase in interest rates from here, which is incredibly unlikely, and if it did happen, all growth stocks (including BILL) would shrivel even further. From this, my takeaway is that splitting Bill into its business components shows us that none of them look particularly promising, and hence overall revenue growth is likely still on its way down.
Conclusions and What I'm Doing Based off this Report
Quick reminder, historically, I have had a very large Bill position in my portfolio. In my last update for the end of April, it was a 6% position. And several months ago, before their December earnings report was released, I had a 15% position in Bill.
With my conclusion being that Bill revenue growth is likely to decelerate in the near term/medium term, I'm certainly not interested in rebuilding a large position in Bill.
If anything, I am likely to sell out of Bill for more interesting investments in the short term/medium term, such as Mercado Libre. Although, should Bill start to show some signs of consistency, it could possibly make for an interesting long term bet as a small percentage of my portfolio (typically under 5%, for Bill my target would be under 3%).
For another hard look at Bill, my friend Muji on hhhypergrowth had a great premium article on why his outlook on Bill has changed. For more bullish opinions, Saul's Investing Discussions has a nice thread as well.
Wrapping up, reminder that I'm wrong a lot, and everyone should come to their own conclusions and do their own research. Thanks for reading!
Disclosure: I am still long BILL. All information provided is given freely and is not advice. This post is not sponsored and I have no affiliation with Bill or any organization named herein.
Nice post, XD! However I think MercadoLibre is much more of a LONG term opportunity,particularly after the huge price appreciation in the last 4 months. JMHO (Disclosure: 7 time buyer. Holding shares since 2012)
exponential dave...was curious you mentioned you have been in tech for a while. Are you a software engineer or what exactly do you do full time in addition to your portfolio management? tnx