BILL Holdings: New Game Plan For Success In 2024 (NYSE:BILL)

When the S&P 500 crosses the 5,000 threshold, it’s a good time for investors to consider some more contrarian positions that can buck a potential market downturn. After all, interest rates are still sitting at multi-year highs and most companies are still citing macro-driven headwinds: so all in all, it’s not a bad time to be cautious.

BILL Holdings, Inc. (NYSE:BILL) continues to strike me as a very appealing opportunity. Year to date, the stock has fallen ~15%, underperforming the markets by nearly 20 points – despite a strong earnings release in early February. It’s a good time, in my view, for investors to reconsider the bull case here.

Revised headcount and go-to-market strategy for 2024

I last wrote a bullish note on BILL Holdings, Inc. in December, when the stock was trading closer to $70 per share. It’s hard to imagine the fact that BILL Holdings, Inc. used to be a market darling that traded at high-flying valuation multiples. And yes, while it’s true that macro compression has driven lower growth rates, we also have to consider the fact that A) rising interest rates have massively boosted BILL Holdings, Inc.’s “free” float revenue, and B) the company itself is belt-tightening and choosing to focus on profitability over growth.

In December, BILL Holdings, Inc. chose to eliminate roughly 15% of its global headcount and close down one of its flagship offices in Sydney. The key for the company in the near-term is to optimize its go-to-market plan for efficiency and contribution margin, rather than chasing growth at all costs.

John Rettig, the company’s CFO, who is now also taking over the role of President, described the company’s new go-to-market strategy as follows on the recent fiscal Q2 (December quarter) earnings call:

All these moving parts created inefficiencies in our acquisition funnel, so we continue to pull back on marketing spend that we referenced last quarter. This had an impact on acquisition and attrition mainly for smaller, lower credit quality prospects and led to lower net new customers for the quarter compared to historical averages. We expect these trends to continue in the near term. As a result, we are adapting our go-to-market approach and processes to offer individual or unified solutions as appropriate to accelerate the pace of customer adoption of our solutions.

Over time, we expect the unified experience will benefit all of our customers, but in the meantime, we will deliver to customers the immediate solutions they need most. Additionally, we are prioritizing our go-to-market towards businesses with a higher propensity to spend, which should translate into increasing penetration within higher ARPU customer segments. Our second priority is to expand our ecosystem by bringing more innovation to our partners and attracting new partners […]

Our third priority is to enrich our payment experiences and drive penetration of our ad valorem solutions. To this end, we are doubling down on our investments for card offerings and international payments.”

The company also recently rebranded Divvy, a spend management platform it acquired recently, under the Bill.com brand – simplifying and unifying its market efforts under one product platform.

Valuation update and the long-term bull case for BILL Holdings, Inc.

As a reminder for investors who are newer to this stock, here is my full long-term bull case for BILL Holdings, Inc.:

• Growth at scale, despite recent guidance cut- Despite already reaching a +$1 billion annualized revenue run rate, BILL Holdings, Inc. is still managing to grow revenue at an impressive +20% y/y growth pace (and note here that the company’s major recent acquisitions of Invoice2Go and Divvy are now fully comped).
• Diversified revenue streams- BILL Holdings, Inc. monetizes its platform in a number of ways, generating revenue from subscription fees, taking a slice of payment transactions, and earning interest on funds held on customers’ behalf (float).
• Float revenue will benefit from the high interest rate environment- Float is now contributing just over 10% of the company’s revenue, from virtually nothing during the low interest-rate era, and this is a “free” way to help boost BILL Holdings, Inc.’s margins.
• Automation push- Right now at a time when AI and automation are hot buzzy topics, there is growing interest to automate manual processes and chase as much efficiency as possible – which are all part of BILL Holdings, Inc.’s core DNA.
• Sky-high gross margins- BILL Holdings, Inc.’s high-80s gross margins are unparalleled in the industry. As the company continues to grow its customer base and take over a greater portion of these clients’ transactions, the fact that BILL Holdings, Inc.’s revenue nearly all flows to the bottom line will help the company dramatically expand its profitability.

Despite these strengths, BILL Holdings, Inc. still trades quite cheaply. At current share prices near $65, BILL Holdings, Inc. trades at a market cap of $6.99 billion. And after we net off the $2.55 billion of cash and $1.71 billion of convertible debt on BILL Holdings, Inc.’s most recent balance sheet, the company’s resulting enterprise value is $6.15 billion.

Meanwhile, for next year, FY25 (the year for BILL Holdings, Inc. ending in June 2025), Wall Street analysts are expecting BILL Holdings, Inc. to generate $1.43 billion in revenue, or 17% y/y growth. This pegs BILL Holdings, Inc.’s valuation at just 4.3x EV/FY25 revenue – quite modest for a company that is generating 80%+ gross margins, has quite a wide go-to-market moat in the SMB ecosystem with vast partnerships with accounting firms, and is still growing in the ~20% neighborhood.

Q2 download

And in spite of massive pessimism for BILL Holdings, Inc. in the wake of earnings, it’s worth noting that the company’s headline results came in well ahead of expectations and its own guidance. The fiscal Q2 (December quarter) earnings summary is shown below:

Revenue grew 23% y/y to $318.5 million, well ahead of Wall Street’s expectations of $298.3 million (+15% y/y), which bracketed the company’s own guidance for 13-17% y/y growth.

Now, part of the market’s concern here may be that BILL Holdings, Inc.’s guidance for Q3 calls for deceleration down to as low as 10% y/y growth.

But the company does have a track record for guiding quite conservatively, as demonstrated this quarter when it beat the low end of its guidance range by 10 y/y points. With that in mind, we should treat BILL Holdings, Inc.’s outlook with a large grain of salt.

The company added over 10k net-new customers in the quarter, while float revenue also grew 50% y/y to $44 million (14% of total revenue) – with BILL Holdings, Inc. earning an impressive 450bps on float balances. The company’s outlook does contemplate interest rates softening in 2024.

Pro forma operating income, meanwhile, soared 44% y/y to $44.3 million, representing a rich 13.9% pro forma operating margin – up 210bps from 11.8% in the year-ago quarter. Note that we should expect pro forma operating income to continue improving in calendar 2024, as the company benefits from headcount reductions that started taking place in December.

Key takeaways

BILL Holdings, Inc. may have been relegated to the penalty box for now, but there’s plenty of value in this stock that has yet to be realized. Stay long here and wait for the rebound.