Bill.com (NYSE: BILL) is an online platform for small businesses to process their handle invoices, payments and approvals digitally – improving efficiency and automation. Demand for the deal is high so underwriters have increased the proposed range to $19-21 from the prior $16-18.

Solution & Positioning

It’s a significant problem for most businesses and while there are solutions for large enterprises, they typically require massive investments of time and resources to implement and maintain. Large ERP providers like SAP and Oracle typically handle these accounts. Very small businesses with a single decision-maker can make do without any software but as soon as a business begins to add employees and require more tracking, approval steps, and accurate accounting – it’s time for some software.

Most businesses have to deal with a range of online and offline customers and suppliers which means having to use multiple payment systems – online (Stripe, PayPal, etc.), credit card (American Express, Bank cards), invoicing with payments (ACH, Wire) and still in some cases physical (invoice, check.)

SMB customers may not need “risk management and compliance” they do have some controls and ultimately everything has to get accurately reflected back into their accounting systems like QuickBooks from Intuit (INTU). This is often a labor-intensive process.

There are myriad ways for small companies to tackle these problems. For example here at IPO Candy, we use Freshbooks for invoicing and accepting payments, Stripe for subscriptions and American Express for most business payments. We use an online accounting firm (Bench.co) to pull all that data together and do the books for us, then we pay a “real” accountant to create the forms we need to file with the IRS. There are exceptions of course where we need to mail a check and sometimes make an international payment (we use Payoneer right now for that.) Even as a very small virtual business, we end up spending quite a bit of time and $200+ per month just on online services. We may check out Bill.com ourselves given that their ASP is about $115/month. Of course, they don’t include accounting but if their automation is good enough it might make that part of the process simpler. It feels like it’s going to be quite sometime before a business doesn’t require a human bookkeeper.

This is a very fragmented market with many niche providers that often will have some level of overlap with Bill.com. For example, Freshbooks is a cloud-based back office that is targeted towards freelancers and small B2B companies. One fairly close competitor is Coupa Software (NASDAQ: COUP) with the one key difference is that Coupa tends to serve larger companies. Coupa is about 3x larger and profitable. Their stock has done incredibly well since the IPO which is a positive aspect of the BILL deal for many investors.

There are also many solutions for invoicing, bill payment, online accounting, document management, and workflow management. There are also better cloud-based tracking and automation tools like Smartsheet (SMAR) and Zapier (Private). Vertical solutions are out there too with MINDBODY (NASDAQ: MB and acquired by Vista Equity in late 2018 for $1.9B) being a good example in the fitness and wellness industry. At the low end there are decent free solutions with Zoho Invoice being one example in that category.

Bill.com starts with the billing and payment challenges and then works up to more automation. They also fit best with what most people think of as a traditional small business – they have employees, customers, supply chains and often deal in physical goods or serve individual customers (B2C).

Business & Management

Bill.com is mostly a typical SaaS model but there are some notable differences. First of all Bill.com has three meaningful revenue streams – the usual subscription fees plus transaction revenue and float revenue. Float revenue has grown nearly 100% which is more than double the growth in payment volume which happened because the rates they received on customer funds increased to 2% from 1% between FY 2018 and FY 2019.

In this way, Bill.com is really a hybrid of a traditional SaaS business and a payment processor. They charge small fees on everything from an ACH, check, card payment, wire transfers, and foreign exchange. The low $39/month price point definitely distinguishes Bill.com from the enterprise players like SAP/Concur (NYSE: SAP) and Coupa.

The core management team is solid with the CEO founding the company in 2006. Before that he founded an online payroll company (PayCycle) which was acquired by Intuit for $170M in 2009. (Those were the days!) The SVP of Product has worked as the Director of WW Payments and Financing for Apple Online Stores and held has product management positions at eBay.

We’d also note that the company has a good board that includes David Hornik of August Capital. The CEO will still have a 5% ownership stake in the company post-IPO but we can expect most of the VC insiders to sell or distribute post-lockup. It also worth noting that the the SVP Product doesn’t really own any stock. While she has a comp package that includes equity-based incentives it would be nice to see her owning more stock at the IPO.

Valuation

The market has been kind to enterprise SaaS companies and valuations are high. We’ve built a short list of the most direct comparable companies and their current average trailing P/S is 15x. That compares to 14x for BILL as shown in the table. However their is a huge variation based on how much “value add” each company adds beyond payments. Bill.com would rank higher on this list and trade closer to 20x trailing revenue. If we put a 15x figure on next year revenue then the shares would be at $34/share. We’re not saying that’s a great value but it’s in line with current market

Our Quick PFV indicates a reasonable post-IPO trading level of $32-38/share. Usually when all these metrics come to the same valuation it’s a bit more reliable than usual unless we have missed something major in our analysis. Unfortunately in this market the market opening tends to be close to our PFV which doesn’t offer much upside. Still with some ladder limit orders we may get some and of course we will watch it through quiet period expiration and the end of the lock-up agreement.

One odd benefit that Bill.com has over other SaaS companies is some offset to increasing rates. If interest rates increase then valuations for SaaS companies tend to go down as discount rates go up (they are tied to the risk-free rate.) That will happen to BILL as well but as rates increase they see increases in float revenue which partially offset that. It’s a small wrinkle and one that investors won’t think about if the group starts taking a hit on higher rates but that could help BILL recover faster than other pure SaaS stocks.

 

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