Description

We are short Bill.com (“BILL”), a leading provider of accounts payable for SMB businesses. After following the story closely for several years, we have been continually disappointed in BILL’s ability to materially expand its take-rate on organic total payment volume (“TPV”). In addition, as competitive pressures begin to emerge, we believe that investors will struggle to determine whether the reported erosion across all KPIs is temporary or structural in nature. Last, we believe the June 2023 expiration of the simple bill pay partnership with Intuit represents a meaningful overhang for shares, with the potential to wipe out thousands of Bill.com customers. We believe incremental buyers are unlikely to step in before this.

• TPV is slowing. Moody’s Cortera data suggests that this downward trend is accelerating. In December 2022, TPV was down M/M for the first December on record. Management has indicated that F2Q seasonality should be worse than in all prior periods on record (<13% Q/Q, <$69.6B), firmly concluding that organic TPV will miss consensus. BofA card data and AMEX’s reported deceleration in SME network volume growth suggest that this trend will be felt in the company’s Divvy corporate card segment as well.
• Net adds likely under pressure. BILL has recently experienced an acceleration in its customer net additions, largely due to its ramping partnerships with Financial Institutions such as Bank of America. However, digital penetration at BAC fell Q/Q for the first period on record. We believe this is an indication of increased customer churn and is likely to materialize in lower net adds for Bill.com.
• Intuit partnership could expire, wiping out thousands of customers.  Intuit is the biggest player in SMB financials. Approximately 60-70% of Bill.com customers are also Quickbooks customers. The two companies have had a white label partnership for simple bill pay since 2016, which has grown to include thousands of Bill.com customers. That contract is set to expire in June 2023 and Intuit’s aggressive investments in the space including its recent merchant network launch, portend to a contract termination.
• FI parterships are a source of empty calories. Bill has struck partnerships with several financial institutions to provide a white label offering behind for SMB accounts payable offering. However, these customers are typically low-end SMBs and will have a deflationary impact on the company’s KPIs. Consensus estimates fail to reflect this, particularly in out-year periods, and are therefore too high. We see 15%+ downside to consensus TPV in 2H’F22.
• Unprofitable ex-float income. Despite run-rate revenue of nearly $1 billion, excluding the ephemeral benefit to operating income from revenue earned on funds held for customers (i.e., float), Bill is still unprofitable. As a result, we struggle to find valuation support at current levels.  We place a ~6x multiple on EV/Sales, generously in-line with Bill’s high-growth software peers to arrive at our price target of $65, representing approximately 40% downside.

Catalyst

Earnings, Intuit contract expiration, Intuit product launches