We are adding Bill.com (BILL) to the Hedgeye Technology Short Bench.
Bill.com is a provider of Bill Pay automation solutions (accounts receivables and accounts payable software) to SMBs. Bulls point to a big market, strong adoption trends, a company early in its monetization of acquired assets across the core user base, unique network effects/distribution model, a market leader with no competitor in the same customer count zipcode, and a strong founder CEO.
We are sufficiently along our investigation of BILL to preview a bearish stance. We see an aging core product, rising competitors with either better or cheaper offerings, initial work on customer TAM analysis that makes us less constructive on ultimate landing potential for organic customer growth, a pivot to acquisitions with the same rationality used by peer Coupa and which may yield similar long term results, a rich second act that accelerated thanks to COVID but is now facing an underlying transaction slowdown, and macro factors in SMB that make us cautious on continuing economic sturdiness in the category. We see FV -25% before even a real ‘river card’ is present.
Like most, we see the Bull case as the ongoing founder leadership, large enough TAM for more growth, very solid execution, and success in their second act in an area several others have notably failed.
We tried to find a way to go long Bill.com but we couldn’t stomach it. Here’s why.
- Tough comparisons come for everyone…when we normalize Transaction volumes for seasonality during COVID we see that in real terms the volume of Transactions have already slowed y/y % in 2H21 and it is just a matter of time before that eased comparison runs out (as of today we see decel beginning in earnest in the June 2022 quarter).
- TechMacro data on SMB economic activity appear to show strong deal closings but increasingly weaker (negative y/y %) deal creations which will resolve in slower deal closing (i.e. SMB Transactions).
- Product deficiencies. We have found a bevy of examples of customers leaving Bill.com for sometimes free, sometimes better featured alternatives from competitors like Ramp, Airbase, and Melio. The company also has 15% gross customer churn (improved from 18% in previous year) which bulls are quick to attribute to ordinary business closures (which if true should reverse with deteriorating business conditions); however, with so many companies built fully or in part on offering solutions that directly compete or displace Bill’s core functionality we find that explanation mostly lacking.
- Acquisition pivot at hand. Divvy and Invoice2Go both preview as solid targets with large potential addressable opportunities. We can’t help but notice that a company that offers investors no forward view ahead of revenue (i.e. RPO or Billings) would suddenly spring $3B in 3 months on M&A just as the company is facing a tough comp on COVID acceleration. And, software integration is not for the faint-hearted in general. With Bill.com’s core facing its own organic issues, adding to this the challenge of a multi-faceted integration at scale, doesn’t seem like an engineering-led idea. Further, companies who typically can see roadmap to 8-10x the core customer base with an organic pathway don’t usually create for themselves the natural distractions of multiple simultaneous acquisitions.
- Is the TAM overstated? A noticeable number of reviews pillory the simplified Quickbooks Online Bill Pay, powered by Bill.com, as too expensive, clunky, and unusable, which lead us to think that many SMBs (and Quickbooks customers) will likely not find their way favorably into Bill’s list of paying accounts and/or will opt for free alternatives along the way such as Ramp or Airbase. Further, we compared BILL’s adoption curve in relation to other back office digital transformation companies (INTU, DOCU) at similar customer count and scale and see BILL on track to under-perform those winners who BILL often borrows for addressable opportunity. Thus, we surmise the landing strip may be narrower than advertised.
What is holding us back from a full blown Short (Best Ideas)?
1) The company captures 10 bps (and improving) on Transactions (~60% of organic core revenue) and while we see a comp issue at hand for the accelerated traction the company has in this area, we don’t see a secular reason to get bearish on this side of the revenue scale, which means that to get our Short really right, we’d have to nail the cyclical ululations of BILL’s customer group. While we have some alternative data that we believe gives us a look into a large territory covering a much wider cohort than BILL customers, the data set isn’t perfectly tied. 2) Data & Customer Capture: while not all of the data we have gathered for BILL is squarely bullish, 2 of the core trackers we have are signaling strength in adoption trends (digital signups and mobile downloads). Relatedly, BILL added 8.2K customers in its latest FQ (largest add period to date) and signaled that a high rate of adoption was expected to continue. While some of that strong customer capture may be explained by cross-sell into / from acquired platforms, a decent portion of it may be related to ramping partnerships / distribution agreements and without better visibility, it is difficult to pinpoint the duration of that healthy adoption data.
Ami Joseph
Managing Director
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Yosef Vaitsblit
Director
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Nick Balch
Analyst
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