SMB Payments Company, Bill.com, Files for IPO

I love it when a company I have followed for a long time finally goes public.  That’s definitely the case for Bill.com, which is a pure-play SMB invoice and payments company.  Now we get to see Bill.com’s metrics.

About Bill.com

If you are not familiar with Bill.com, here’s how the company describe its software in the S-1:

Our purpose-built, artificial-intelligence (AI)-enabled financial software platform creates seamless connections between our customers, their suppliers, and their clients. Customers use our platform to generate and process invoices, streamline approvals, send and receive payments, reconcile their books, and manage their cash. We have built sophisticated integrations with popular accounting software solutions, banks, and payment processors, enabling our customers to access these mission-critical services through a single connection. In essence, we sit at the center of an SMB’s accounts payable and accounts receivable operations.

Think of Bill.com as an A/R and A/P network and light A/P and A/R apps for SMBs.  Bill.com sits between customers and suppliers and their G/Ls.

Business Model

Bill.com makes money three ways:

• per user/per month subscription fees
• transaction fees from ACH processing, check and invoice mailing, virtual card payments, and cross-border payments
• earning interest on funds held in trust on behalf of customers while their payment transactions are clearing

Subscription and transaction revenues represent about 79% of total revenue.  Earned interest account for the other 21% of revenue.  Interest earned grew rapidly in FY 2019 as payment volumes increased and short-term interest rates rose.

Bill.com Payments and Network Metrics

I’ll let others opine on the classic SaaS metrics found in Bill.com’s S-1.  I’m interested in the payments and network-related metrics.

1.  First, I’m often asked what payments or check mailing services should cost.  You can see what Bill.com charges SMBs above.  Obviously, these prices are high relative to enterprise prices.
2.  As of September 30, 2019, Bill.com had 81,374 customers, processing a run rate of about $90 billion.  That’s about $1.1 million in payments per customer.
3. Bill.com’s run rate is about 24 million transactions per year which equates to about $3750 per payment and about 300 payments per customer per year.
4. Bill.com has a run rate of $120 million in revenue on a run rate of $90 billion in payments which means a total take rate of 13 bps.  Interestingly, $120 million in revenue on 24 million payment transactions equates to $5 per payment, though this includes the creation and processing of invoices. Finally, this revenue translates to about $1500 per customer per year.
5. Bill.com’s customer base connects to a total of about 1.8 million counterparties (suppliers and customers).  The ratio of counterparties to customers is about 22:1.

Some Observations on the Metrics

1. Because Bill.com is in the SMB space it focuses equally on A/P (receiving invoices/making payments) and (A/R) (sending invoices/receiving payments).  As you can see from their pricing page, the language is “double-sided”.  I’m not used to this! In the enterprise market, A/P players are largely separate from the A/R players!
2.  The average payment size was a little larger than I was expecting, but that is probably because SMBs put a fair bit on credit cards and consolidate those small payments.  The average payment of $3750 is 1/3 or less of typical averages I have seen in the enterprise space.
3. The take rate per $ of payments of 13 bps does not surprise me.  It’s much higher than most of the enterprise networks Bill.com could be compared to, but Bill.com serves higher cost to serve customers. This take rate is well below what the companies doing “virtual card arbitrage” (e.g., Comdata, WEX, etc.) net.  This might explain why Bill.com is partnering with Comdata for virtual card payments.  (Bill.com also partners with Cambridge for cross-border payments, so it is a nice customer for Fleetcor.)
4. The take rate of $5 per payment may sound high when you say it that way, but, of course, it is never said this way to clients.  That’s the beauty of a two-part pricing model: a subscription per month per user for the software and $0.49 to send/receive ACH payments.

Bill.com’s Prospects

I’m not going to opine on whether you should buy the stock or not because, at best, my recommendations are a contra-indicator!  All I can say is that there is still a lot of paper out there in the US and that companies like this can grow 20-30% per year for very long periods of time.  That’s the positive side.  The negative side is that the Quickbooks, Xeros, and the Freshbooks of the world could encroach.  So far, while Quickbooks does offer some payment capability, it does not do so at a comparable price point and set of services.

I must add that every time I review an SMB offering I filter it through the lens of my own small business.  This is completely irrational because my business consists of one employee and provides “professional” services.  This is not Bill.com’s target market.    In any case, each time I review a new subscription service, I compare the price of the new service to the price I pay for:  web hosting at WordPress,  Quickbooks, Mailchimp, Zoom, Google, and Microsoft Office 365.  I invariably end up reminded of the value I receive relative to the price paid especially for QB, Google, and Microsoft.  There’s a reason those are incredibly valuable companies–with pricing leverage!