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Bill.com (NYSE:BILL) Reports Upbeat Q3 But Stock Drops 19.4%


Full Report / May 05, 2022
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Payments and billing software maker Bill.com (NYSE:BILL) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 179% year on year to $166.9 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $182.8 million at the midpoint, 8.31% above what analysts were expecting. Bill.com made a GAAP loss of $86.7 million, down on its loss of $26.7 million, in the same quarter last year.

Bill.com (BILL) Q3 FY2022 Highlights:

  • Revenue: $166.9 million vs analyst estimates of $157.9 million (5.7% beat)
  • EPS (non-GAAP): -$0.08 vs analyst estimates of -$0.16
  • Revenue guidance for Q4 2022 is $182.8 million at the midpoint, above analyst estimates of $168.7 million
  • Free cash flow of $22.7 million, up from negative free cash flow of $16 million in previous quarter
  • Customers: 146,600, up from 135,000 in previous quarter
  • Gross Margin (GAAP): 77.6%, up from 74.1% same quarter last year

Started by René Lacerte in 2006 after selling his previous payroll and accounting software company PayCycle to Intuit, Bill.com (NYSE:BILL) is a software as a service platform that aims to make payments and billing processes easier for small and medium-sized businesses.

The software offers a central cloud repository for invoices and provides an interface where its users can issue, process, approve and pay invoices in an easy to use environment. By automating a lot of previously laborious manual work, Bill.com brings down the cost of running the accounts receivable/payable department. The company charges its customers software subscription and also processing fees on the payments they make through the platform.

Finance and accounting software benefits from dual trends around costs savings and ease of use. First is the SaaS-ification of businesses, large and small, who much prefer the flexibility of cloud-based, web-browser delivered software paid for on a subscription basis than the hassle and expense of purchasing and managing on-premise enterprise software. Second is the consumerization of business software, whereby multiple standalone processes like supply chain and tax management are aggregated into a single, easy to use platforms.

Today, Bill.com is mainly competing with legacy manual processes and software companies like SAP (NYSE:SAP) that primarily focus on large enterprises.

Sales Growth

As you can see below, Bill.com's revenue growth has been incredible over the last year, growing from quarterly revenue of $59.7 million, to $166.9 million.

Bill.com Total Revenue

This was another standout quarter with the revenue up a splendid 179% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $10.4 million in Q3, compared to $40 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Bill.com is expecting revenue to grow 133% year on year to $182.8 million, improving on the 85.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 56.1% over the next twelve months.

Customer Growth

You can see below that Bill.com reported 146,600 customers at the end of the quarter, an increase of 11,600 on last quarter. That is a fair bit better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

Bill.com Customers

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Bill.com's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 77.6% in Q3.

Bill.com Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. Trending up over the last year, this is a good gross margin that allows companies like Bill.com to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Bill.com's free cash flow came in at $22.7 million in Q3, turning positive year on year.

Bill.com Free Cash Flow

Bill.com has burned through $4.1 million in cash over the last twelve months, resulting in a negative 0.79% free cash flow margin. This below average FCF margin is a result of Bill.com's need to invest in the business to continue penetrating its market.

Key Takeaways from Bill.com's Q3 Results

With a market capitalization of $18.1 billion, more than $2.78 billion in cash and the fact it is operating close to free cash flow break-even, we're confident that Bill.com has the resources it needs to pursue a high growth business strategy.

We were impressed by the very optimistic revenue guidance Bill.com provided for the next quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. But investors might have been expecting more and the company is down 19.4% on the results and currently trades at $122.75 per share.

Is Now The Time?

Bill.com may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think Bill.com is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its strong gross margins suggest it can operate profitably and sustainably.

The market is certainly expecting long term growth from Bill.com given its price to sales ratio based on the next twelve months is 20.8x. And looking at the tech landscape today, Bill.com's qualities stand out, we think that the multiple is justified and we still like it at this price.

The Wall St analysts covering the company had a one year price target of $308.4 per share right before these results, implying that they saw upside in buying Bill.com even in the short term.

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