BILL Holdings, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A financial automation software provider for small and mid-sized businesses (SMBs) focusing on streamlining payment and expense management, using AI and machine learning.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BILL Holdings, Inc. (BILL) operates in a competitive but growing market for financial automation software. While the company has a unique position as a payments platform integrated with accounting software, it currently does not display a wide economic moat due to strong competition from legacy players, banks, and newer fintech companies.

Business Overview

BILL Holdings is a cloud-based platform designed to automate back office financial operations for SMBs, connecting them to their suppliers and clients. Its primary goal is to simplify and accelerate the payment process.

  • Revenue Model: The company primarily generates revenue through subscription fees for platform access and transaction fees based on payment volume. A smaller portion of revenue is generated by interest income earned on funds held for customers.

* Subscription revenues are recurring and generally increase with the volume and type of features used by customers.

  • Key Business Metrics:
    • Total Payment Volume (TPV): A critical indicator of the platform’s adoption rate, the TPV reflects the aggregate amount of payments processed through the BILL platform.
    • Transaction Processed: The actual number of payments initiated and processed through the platform in a specific period, which represents the stickiness of the platform with the clients.
    • Number of Businesses using BILL: This shows the growing popularity and adoption of the platform.
  • Trends in the Industry: The demand for digital financial automation tools is rising among SMBs due to their benefits: streamlined processes, improved efficiency and reduced errors, and more visibility on cash flow and expense management.

  • The trend of increasing digital transformation among SMBs is a significant tailwind for BILL.

  • Competitive Landscape:

    • The company competes with legacy accounting software providers (such as Intuit and Xero), large banks, and other payment processors that focus on specific aspects of the business. The key to competition for such companies is the ability to deliver highly specific functionality with a user friendly interface and that is often customized and affordable.

  • BILL’s platform needs to consistently differentiate itself to win business from established and upcoming players.

  • Financial Performance:

    • Revenue Growth: The company has demonstrated significant revenue growth historically, driven by increasing subscription and transaction fees. However, due to the economic downturn and interest rate hikes, growth has slowed in recent quarters.
  • BILL has a strong upward trend in overall revenue with 50% y-o-y revenue growth between 2022-23, primarily caused by the increase in payment and processing volumes through its platform.
    • Gross Profit Margin: Gross margins for BILL have remained consistently high, averaging around 80% in past quarters. This highlights the scalability and profitability of the company’s revenue model.
    • Operating Expenses: Service costs have gradually been increasing. Sales and marketing expenses are growing due to a continued investment into brand awareness. The increase in G&A is due to increased personnel and share based compensation.
    • Net Loss: Despite consistent revenue growth, the company has reported a net loss for the last fiscal years. The continued net loss is primarily due to increasing operating expenses and investment. However, the loss has decreased by 52% in the first nine months of fiscal 2024.

* The company is focusing on controlling its costs and improving the net loss. * Cash Flow: While BILL has seen high revenue and overall growth, the company has yet to reach consistent free cash flow. Operating cash flow turned negative in 2023 but bounced back to positive in 2024. This is due to increased investments and capital expenditure.

  • What Makes BILL Unique: * BILL’s integration with popular accounting platforms (e.g., QuickBooks, Xero, and NetSuite), is a core advantage, enabling seamless transactions and making it an intuitive platform for businesses with existing accounting software. This is their competitive advantage
    • Their data asset is a unique advantage and is the most important asset for the platform. It’s the data collection of more than $100 Billion in B2B payments. They are also leveraging AI to analyze and utilize that data for fraud detection.
    • BILLs emphasis on automation, time saving, user interface, and data security is what differentiates it from its competition.

As we can see, While the company has been exhibiting a strong increase in its revenue stream and its user base, it hasn’t translated to an increase in its profit due to high expenses. BILL is still trying to figure out how to manage costs.

Moat Assessment: 2/5

BILL exhibits some characteristics of a moat, but it doesn’t quite fulfill the conditions of having a great and sustainable one.

  • Network Effects: While BILL’s platform benefits from the network effect as the number of users increases (making it more attractive for other businesses to join) its competition is fierce.
  • Switching Costs: These are somewhat significant as companies must spend time and money to change over their accounting, payments and supplier management. The biggest driver of retention for BILL is the time it takes to onboard to another platform. However, competitors can replicate this to a limited extent.
  • Intangible Assets: BILL has acquired some strong software technologies that serve as intangible assets which help make the platform better. However, with increasing competition, these can lose their power.
  • Economies of Scale: With increasing size, the company’s margins and revenues improve, but they have yet to show that the economy of scale provides a sustainable competitive edge.

Considering all of this, BILL has a narrow and relatively fragile moat at best, giving it a 2 out of 5 rating.

Risks That Could Harm the Moat and Business Resilience

  • Competition: The competitive landscape for financial software is constantly changing. The ability of incumbents to copy the platform and new firms with innovative business models, all pose threats to BILL’s growth and competitive advantages.
  • Acquisition Issues: The company has completed a number of acquisitions in the past, and the difficulties of integrating this technology is a huge operational challenge.
  • Financial Instability: As a non-profitable business, the company has had to depend on capital markets. The recent turmoil in credit markets has created an additional risk factor to the long-term sustainability of the company. If credit conditions become more strict, BILL may not be able to easily get enough liquidity to operate properly.

* While not a major risk at the moment, the company still has to achieve sustained profits over the long term.

  • Regulatory Risks: Payment and money transmission services are subject to complex and evolving regulations that may increase compliance costs and reduce profitability.

Understandability: 3/5

BILL’s business model is relatively straightforward. It’s a software platform that facilitates B2B payments. Its sources of revenue are easy to pinpoint. Yet, some intricacies of the platform, for example the usage of machine learning and AI and the different layers of transactions may be difficult to understand completely for an inexperienced user. Therefore, a understandability rating of 3/5 is suitable.

Balance Sheet Health: 4/5

BILL’s balance sheet is in a healthy state. It is debt free with total assets far exceeding total liabilities. It also has significant short-term investments, making it liquid enough to weather most economic conditions. The only negative is that it is consistently loss making which may eat into the reserves eventually. However the recent trends of improving cost structure and reducing net loss suggests they are on track towards profitability.

Therefore a rating of 4/5 seems appropriate for the health of the balance sheet.

Recent Concerns

  • Guidance Reduction: Management recently lowered their expectations for billable subscription growth for the 2024 fiscal year.
  • This was mostly attributed to a macroeconomic slowdown, as many businesses are seeing reduction in spending and a reduction in billable subscriptions.
  • Decreasing Revenue growth: There was an unexpected dip in revenue growth in last quarter, mostly because of changes in interchange fees and transaction expenses. The company’s stock took a dive from over valuation concerns after this dip.
  • Debt: There has been a slight increase in debt levels in the recent quarters. While still significantly low for the business, it may indicate a shift in company finances if this trend continues.

The management mentioned that this slowdown in growth is a temporary phenomenon and expect it to bounce back in upcoming quarters.