BILL Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2020, BILL’s fiscal third quarter of fiscal 2020—not 2019 Q3. The filing was signed May 8, 2020. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
BILL provides cloud-based software and payment services that automate small and midsize businesses’ accounts payable and receivable workflows. Revenue comes from subscription and transaction fees, and interest earned while customer payments clear. The company reported one operating segment and revenue generated in the United States.
Financial performance and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Total revenue | $41.2 in 2020; $28.2 in 2019 (+46%) | $115.5 in 2020; $76.7 in 2019 (+51%) |
| Subscription and transaction fees | $36.1; $22.1 (+63%) | $97.6; $60.7 (+61%) |
| Interest on customer funds | $5.1; $6.1 (−16%) | $17.9; $15.9 (+12%) |
| Gross profit / GAAP gross margin | $31.1 / 75.5%; $20.3 / 72.0% | $86.4 / 74.9%; $55.2 / 72.0% |
| Operating expenses | $40.8; $23.2 | $110.4; $59.9 |
| Operating loss | $(9.7); $(2.8) | $(23.9); $(4.7) |
| Net loss | $(8.3); $(2.0) | $(21.6); $(2.8) |
| Basic and diluted loss per share | $(0.11); $(0.26) | $(0.63); $(0.37) |
For the nine-month period, operating cash flow was negative $3.3 million, versus negative $2.1 million a year earlier. Free cash flow, a non-GAAP measure, was negative $9.6 million versus negative $5.7 million. In the third quarter alone, operating cash flow was positive $0.8 million and free cash flow was negative $2.1 million.
At March 31, 2020, cash and cash equivalents were $228.6 million and short-term investments were $153.8 million. The company also had $40.8 million available under its revolving credit facility after borrowings and letters of credit. Borrowings were $2.3 million; the facility matures June 2022, is secured by substantially all company assets, and the company reported covenant compliance. Funds held for customers of $1,353.6 million were matched by customer fund deposits of the same amount and should not be treated as corporate liquidity.
Total assets were $1,789.8 million and stockholders’ equity was $389.9 million. The nine-month period included $225.5 million of net IPO proceeds; preferred shares converted to common stock upon the IPO. The accumulated deficit was $139.2 million.
Material changes versus the prior comparable period
- Growth was driven by customer adoption and higher usage: customers reached 91,300, up 28%; quarterly payment volume rose 35% to $24.2 billion, and transactions processed rose 23% to 6.05 million.
- Quarterly subscription fees grew 44% and transaction fees 106%. Management attributed transaction-fee growth to adoption of newer products and increased transaction activity.
- Quarterly interest revenue declined 16% as the customer-funds yield fell to 1.51% from 2.25%, despite higher average customer funds in transit. For the nine-month period, interest revenue grew 12% as larger balances more than offset a lower yield.
- GAAP gross margin improved by about 3 percentage points in both comparison periods. However, operating expenses grew faster than revenue: nine-month research and development rose 98%, sales and marketing 66%, and general and administrative 89%. Increased hiring, stock compensation, growth investment, and public-company costs contributed.
- Stock-based compensation was $10.4 million for the nine months, versus $2.6 million a year earlier. The company reported no net profit for either comparison period.
Outlook, commentary, risks, and unusual items
- No quantified financial guidance was provided. Management expected continued investment in product development and customer acquisition, with research and development expenses expected to increase. It also anticipated higher general and administrative costs associated with growth and public-company obligations.
- Management said COVID-19 had not materially affected the quarter, as U.S. restrictions began mainly in mid-to-late March. Future effects were uncertain, including possible customer closures, cancellations, discount requests, lower payment activity, partner or supplier disruption, and liquidity or operating impacts. BILL introduced a three-month free subscription offer for certain new customers and discounts for existing customers; management expected these initiatives could reduce subscription revenue.
- Lower interest rates reduced yields on customer funds and create sensitivity to further rate changes. A 100-basis-point rate change was estimated to change interest on customer funds by approximately $3.4 million for the quarter and $10.1 million for the nine months, based on average balances.
- The company believed cash, investments, and available credit were sufficient for at least the next 12 months, while noting that a more severe COVID-19 impact could require additional capital. It reported no off-balance-sheet arrangements with a material expected effect.
- New San Jose headquarters lease commitments were approximately $70 million net of rent abatement; total future minimum operating lease payments disclosed were $73.8 million. Construction was delayed by shelter-in-place measures. The company also disclosed $15.3 million of future payments under a non-cancellable software agreement.
- Litigation provisions were described as immaterial, and management reported no pending legal proceeding expected to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable-assurance level; no material control changes were reported during the quarter. The filing also notes prior-year material weaknesses in the financial close and customer-funds reconciliation processes, with remediation ongoing.
Important facts for investors to verify
- Confirm the reporting period: this is fiscal Q3 2020, quarter ended March 31, 2020.
- Track COVID-19 effects on customer retention, payment volume, discounts, and the temporary free-subscription offer in subsequent filings.
- Monitor customer-funds yields and balances, since interest revenue is rate-sensitive and customer funds are distinct from corporate cash.
- Assess whether operating-expense growth, including stock compensation and public-company costs, moderates enough to improve operating losses and free cash flow.
- Review the company’s use of IPO proceeds, credit-facility availability and covenants, and its capacity to meet lease and other contractual commitments.
- Check progress on internal-control remediation and the risks associated with payment processing, fraud, cybersecurity, money-transmitter regulation, and third-party partners.