Bill.com IPO S-1 Analysis
In this initial prospectus analysis, I’m going to cover Bill.com, the latest fintech unicorn to file to become a public company. It is expected to trade on the NYSE on December 12 under the ticker BILL and there is a lot to be excited about this high-growth venture capital-backed founder-led company. This week, it set the price range between $16 and $18 dollars a share.
COMPANY OVERVIEW
Bill.com was founded in 2006 as Cashboard Inc. after its founder, René Lacerte, recognized that business needed a way to simplify the process of receiving and making payments. Over the years the team has built a cloud-based software to simplify, digitize, and automate back-office financial operations for small and medium businesses (SMBs) and enterprises.
Every finance department within SMB and enterprises have teams responsible for a very laborious and time-consuming activity that include the management of the full accounts payable cycle, from receipt of invoices to payment, and the reconciliation of accounts in the three financial statements (Balance Sheet, Income Statement and Cash Flow Statement).
Alternatively, organizations can outsource these AR/AP functions for a number of specialized consulting and advisory firms to avoid the need of structuring and spending time and resources. According to Robert Half’s 2020 Salary Guide for Accounting and Finance Professionals, AR and AP clerks earn an average of $36,500 and $63,750, respectively on a national level, but companies in San Francisco pay entry level AR/AP clerks over $46,000, while top performing Billing managers can earn $130,000+.
In this context, Bill.com offers a software-as-a-service (SaaS) cloud-based system to streamline the cash flow management, AP/AR and invoicing of SMBs. Here is a demo of their Accounts Payable service that I find interesting, especially for their simple workflow approval process.
Companies can choose from several subscription pricing plans, from 30-day free trial to $60 per month per user plus fees for transactions, with various levels of added features and functionalities.
Its highly-efficient go-to market strategy matches the traditional model from the best of breed SaaS companies with a direct low-touch channel — which Atlassian championed for years — and an indirect channel supported by partnerships with accounting firms, financial institutions and other accounting software firms.
As of last fiscal quarter the company serves over 81,000 customers and has 1.8 million network members, defined as paying customers, their suppliers and clients with accounts on the platform (network members who are not customers do not pay subscription or fees but are targeted at Bill.com to become new paying customers and increasing the stickiness of the network).
For deeper dives in the industry, you can read here, here, here and here.
LEADERSHIP
As important as the financials, it is key to spend time researching the leadership roster of a company to get a better sense of its expertise and culture (there are many specialists in the topic who have written books, articles and podcasts on the topic. I could write a review about some of them in the future).
From its 10-member leadership team, 3 are women and no less than half of the team are former Intuit executives. It has a 92% CEO approval and a 4-star rating on Glassdoor.
Including René, the board has 10 members and only one woman. Except from the founder, Brian Jacobs, General Partner of Emergence Capital Partners, sits on the board for the longest tenure (he was nominated in 2007) and is one of five venture capitalists on the board. The most recent member is Allison Mnookin, senior lecturer at Harvard Business School and founder of Quick Base, who joined Bill.com in July of 2019.
René Lacerte, founder and CEO, has nearly 20 years of experience in the fintech and accounting industries after graduating from Stanford M.S. graduate in industrial engineering and a B.A. in quantitative economics. He started his career at PwC, worked for nearly 5 years at Intuit in the payments, payroll and credit card businesses before founding PayCycle, an on-demand payroll and accounting system for SMBs, where he eventually sold to Intuit for $170m seven years after its founding.
This is a 30-minute interview with René in which he speaks about his entrepreneurial experience, the growth of the company and some of the challenges for the future of the industry including the shift from physical checks to ACH payments and cross border payments. It strikes me how clear and poised he is and how passionated he is about the company.
Interestingly, PayCycle had the backing of some high-flying investors, including DCM, August Capital and TTV Capital, all of which eventually became investors at Bill.com.
FINANCIALS & COMPARABLES
Here I’ll break down some of the most important metrics from Bill.com’s prospectus. Overall, the company posted $108m in revenue in fiscal year 2019 compared to $65m in fiscal year 2018 (+67%YoY) and from $22.4m to $35.2m in the comparison between first fiscal quarter 2020 and 2019 (+56.9%). For the company, its fiscal year ends in June 30.
To understand the company’s growth trajectory, it is important to compare it with similarly public-traded companies. For this analysis, I’m going to be strict and break down data for companies that are (i) high-growth and (ii) in the financial technology industry. Therefore, I resisted the temptation of using 30 or some VC-backed high-flying tech-focused SaaS stocks because I don’t believe they are necessarily representative of the operational, regulatory and market challenges that Bill.com faces. For these reasons, the comparable analysis will include Avalara (AVLR), Intuit (INTU) and BlackLine (BL). However, take Intuit with a grain of salt given their seasonality in the first quarter of each year when enterprises and consumers typically pay one-time fees to fill their taxes, but the trend remains consistent with the cohort as seen in the analysis below
For all graphs in this section, the x axis is represented by the number of quarters and 0 implies the most recent quarter.
Sales and Gross Margins
The company has two main sources of income: (i) subscription and transactions fees and (ii) by earning interest on funds held in trust on behalf of customers while the transactions are clearing. Subscriptions are 80–90% of total revenue and approximately 50% of its subscription revenues are driven by accounting firms and 20% are from small businesses that earn up to $100,000 per year, in line with its strategy to focus on SMBs.
Its growth QoQ is impressive at 56.9% for the first fiscal quarter 2020 especially when compared to its peers that grow in the 20–40% range, with Avalara being the only with consistent sales acceleration over the last four quarters.
When analyzing gross margin (gross profit/total revenue) Bill.com is not only consistently showing 70%+ gross margins, but it has also expanded from 71.7% to 74%. These high margins are a function of the secular shift of tech companies moving its infrastructure to the cloud, converting fixed costs into variable.
OPEX (OPERATING EXPENSES)
For this section, I’ll compare the largest costs centers with total revenue to have a better understanding of each company — path to — profitability, as many are still unprofitable on a GAAP basis.
For Bill.com, Research & Development (R&D) is a key component of future growth and the recent launches of mobile apps and additional features in payments good additions to its service offering. Bill.com R&D as a percentage of revenues is the largest among its comps although Avalara has been increasing its expenses over the last four quarters and Intuit has consistently spent R&D in the mid-to-high 20%.
Sales & Marketing (S&M) expenses are typically the largest cost expense for tech VC-backed companies as they need to structure and scale its salesforce operations to maintain its best-in-class growth rates and to overcome competition.
Here, Bill.com stands apart with the lowest spending in Sales & Marketing as % of Revenue among the four companies. This number is especially relevant when compared to revenue growth, in which Bill.com is clipping 50%+ growth rates and a signal of the effeciveness of Bill.com sales model.
Both BlackLine and Avalara have consistently reduced its S&M as a % of revenue with increased scale of economies and more efficient sales execution to adjust from an increased pressure from investors that are not willing to pay high premiums for companies with less clear path to profitability.
Although General and Administrative (G&A) activities do not receive the same hype of S&M or R&D for being non-core functions by nature, they can still drive value to a company if run properly.
Bill.com has a relative elevated rate of 29.9% of G&A as a % of revenues when compared to its peers, but it is not a sign of concern for its relative young age and because it might have set up its back-office structure in advance of the IPO. Typically, as revenues increase, G&A will benefit from economies of scale with HR, Finance and Sourcing functions scaling less quickly than R&D and S&M.
CONCLUSION
Bill.com is the latest fintech unicorn that will test the public markets after a year of relative success — albeit with high volatility during the second semester — for VC-backed tech-focused companies.
The company predicates its model in a highly efficient SaaS model — as indicated by its sales growth rates and low S&M as a percentage of revenues — to serve SMBs who are in need to automate and streamline its back-office and finance functions. It will be very interesting to observe how the market will value this company that has an IPO valuation of $1.25 billion, up about 25% from the latest round of valuation raised in the private market from as recent as April of 2019.
IMPORTANT NOTICE: This document is intended for informational purposes only. The views expressed in this document are not, and should not be construed as, investment advice or recommendations. Recipients of this document should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance (which are not considered in this document) before investing. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein.
