BILL Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2022; comparative periods ended December 31, 2021. Amounts below are in U.S. dollars. Quarterly results refer to the three months ended December 31.
Business context
BILL provides cloud-based financial automation, payments, spend and expense management services primarily to small and midsize businesses, accounting firms and financial institutions. It operates as one reportable segment. Its customer-fund assets are generally matched by customer-fund deposit liabilities and should be distinguished from corporate liquidity.
Key financial results
| Metric | Quarter ended Dec. 31, 2022 | Prior-year quarter | Six months ended Dec. 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $260.0 million | $156.5 million | $489.9 million | $274.8 million |
| Gross profit | $212.5 million | $122.1 million | $397.4 million | $210.6 million |
| Gross margin | 81.7% | 78.0% | 81.1% | 76.6% |
| Operating loss | $112.5 million | $76.1 million | $200.2 million | $150.3 million |
| Net loss | $95.1 million | $80.4 million | $176.7 million | $154.7 million |
| Net loss per share, diluted | $0.90 | $0.78 | $1.68 | $1.56 |
Quarterly revenue grew 66%; six-month revenue grew 78%. Subscription and transaction fees drove growth, alongside a substantial rise in interest earned on customer funds as rates increased. Quarterly revenue from interest on customer funds was $28.9 million, versus $1.0 million a year earlier. Operating expenses rose 64% in the quarter, including higher research and development and sales and marketing costs.
For the six months, operating cash flow was $73.4 million, compared with cash used of $34.1 million in the prior-year period. Free cash flow, as defined by the company, was $59.7 million versus negative $41.6 million. Investing cash flow was negative $94.5 million; financing cash flow was positive $386.9 million, including a $332.7 million increase in customer-fund deposit liabilities and $37.5 million of revolving-facility borrowings.
Balance sheet, debt and liquidity
- At December 31, 2022, corporate cash and cash equivalents were $1.617 billion and short-term investments were $1.067 billion. Funds held for customers were $3.474 billion, matched by customer-fund deposits of the same amount.
- Total assets were $9.738 billion, total liabilities $5.654 billion, and stockholders’ equity $4.084 billion. Accumulated deficit was $721.5 million.
- Debt included $1.725 billion principal of 0% convertible senior notes: $1.15 billion due 2025 and $575 million due 2027. The notes’ net carrying value was $1.701 billion.
- The revolving credit facility has a $225 million commitment and matures in June 2024. Borrowings were $112.5 million, secured by acquired card receivables; the effective interest rate was 7.58%. The company reported compliance with its covenants.
- Management stated that corporate cash, cash equivalents and short-term investments were expected to meet working-capital requirements for at least 12 months. The filing also describes potential cash needs for convertible-note conversions or repurchases.
Changes, outlook and notable items
- Gross margin improved year over year, which management attributed mainly to higher interest revenue on customer funds and a greater mix of variable-priced transaction revenue. Higher interest rates benefited interest income, but floating-rate facility borrowings also expose the company to rising interest costs.
- Management reported that macroeconomic uncertainty led customers to moderate spending, slowing payment-volume growth versus historical trends; net customer additions on the BILL standalone solution were slightly lower than recent trends. The company had not observed other material demand impacts at the time of filing, but warned a recession could reduce demand. No specific financial guidance was provided.
- Quarterly sales and marketing expense included $52.2 million of stock-based compensation related to separation and advisory agreements with the former Chief Revenue Officer. Total quarterly stock-based compensation cost was $121.8 million.
- The company stopped selling acquired card receivables in August 2022. Acquired card receivables, net, rose to $380.9 million from $256.4 million at June 30, 2022; the allowance for credit losses was $11.9 million. Management identified credit losses, fraud and funding availability as material risks to the Divvy card business.
- In November 2022, BILL acquired Finmark Financial, Inc. In January 2023, after quarter-end, the board authorized a share-repurchase program of up to $300 million over 12 months; the program does not require the company to repurchase shares.
- The filing notes macroeconomic, customer-credit, fraud, cybersecurity, partner-bank, regulatory, liquidity and competition risks. The IRS was examining Divvy’s 2020 income and employment taxes; no adjustments had been proposed as of December 31. Management said litigation reserves were immaterial and no pending legal proceeding was expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of revenue and margin growth is attributable to interest earned on customer funds, and how sensitive results are to rates and customer-fund balances.
- Whether payment-volume and customer-addition trends continue to moderate, particularly among SMB customers.
- Credit quality and loss trends in the growing acquired-card-receivables portfolio, including the adequacy of reserves and reliance on funding partners.
- Cash requirements and potential dilution associated with the 2025 and 2027 convertible notes, the revolving facility, and the $300 million repurchase authorization.
- The effect of unusually high stock-based compensation, including the former CRO award, on reported operating expenses and shareholder dilution.