Back-office financial workflows are essential to all businesses, especially small and medium-sized enterprises (SMEs). The transactional lifecycle is time-consuming, lengthy and requires many steps across disparate and antiquated systems to get paid. Financial and cash flow management has become paramount in the persisting uncertain macroeconomic environment and paper-based tools can no longer be relied upon when business is increasingly digital and performed from a non-traditional office setting.
Goldman Sachs stated that the current SME back-office automation and payments industry is highly fragmented and under served. According to the SMB Technology Adoption Index, approximately 90% of SME business-to-business transactions still use paper checks to make and accept payments. Small enterprises still rely on inefficient and time-consuming manual processes to track their accounts receivable, accounts payable and cash flow. Therefore, these businesses need an automation solution for the back-office in general as well as the finance department to optimize their workflow and keep up with the increasing digital transformation trend.
Bill.com (BILL US: $314), founded in 2006, is an affordable cloud-based software that digitizes and automates back-office financial operations for SMEs worldwide. The company provides software-as-a-service (SaaS) and cloud-based payments products, which allow users to automate account payables (AP) and account receivables (AR) transactions, acting as a central hub for all bills and invoices to enhance office efficiency. Bill.com offers game-changing solutions for SMEs to manage their financial operations effortlessly:
• AP automation: AP automation streamlines the entire traditional legacy AP process. Bill.com automates the receipt of an invoice, approvals, final payment and synchronization with the Enterprise Resource Planning (ERP) accounting system. After signing up with Bill.com, customers are assigned an email address to receive and send invoices. The data from these invoices are automatically pre-populated with the Intelligent Virtual Assistant (IVA) feature before routing the bill internally for approvals. Once uploaded, Bill.com securely stores invoices and automatically connects them with the relevant supplier. Business owners no longer have to waste time making payment decisions, answering supplier questions and providing documentation to accountants or auditors.
The AP dashboard allows customers to see a full view of cash inflows and outflows as well as upcoming bills. A survey conducted by Bill.com in 2019 shows that most respondents save at least 50% of their time using this automation platform compared to other AP methods.
• AR automation: AR automation automatically creates and delivers invoices, collects funds and synchronizes back to the ERP. Customers have total visibility into the AR process as they can see when invoices are delivered, opened, authorized to be paid and received. All documents are accessible for future reference.
• Payments: Bill.com’s proprietary payments platform allows customers to send funds to suppliers through multiple methods including Automated Clearing House (ACH), card, network and international payments.
ACH is an electronic funds-transfer system that facilitates payments in the U.S. In Q3 2021, it managed 7.3 billion payments worth $18.1 trillion, up 13.8% YoY. Many SMEs are switching to ACH payments because it is fast, secure and cost-effective. Though most online banking platforms offer ACH capabilities, the lack of integration with key workflows results in lots of manual work, especially for SMEs which are growing but do not yet have enough resources to accelerate this process. Bill.com’s data integrations and two-way sync with major accounting software solutions make it easy to bring payments information in as one lump-sum entry, instead of individual payments.
On large ACH payments, percentage rate fees can skyrocket and become a significant expense. Bill.com customers pay only a low fixed fee per transaction, whether they’re paying or receiving. Thus, ACH on Bill.com is much easier, faster and cheaper compared to traditional-banking software.
With Pay by card, Bill.com collects all perks, i.e. points, miles or rebates, when paying vendors with credit cards. Payments can be deferred so businesses have more time to settle debts and free up cash flow. This feature earns Bill.com millions of business and top accounting firms such as KeyBank, American Express, Warren Averett, MBS Accountancy Corporation, etc.
Bill’s Network payments provides a secure platform for digital payments with ACH or virtual cards. It offers (1) easy connection (automatic payments are made through vendors’ chosen formats); (2) increased control and visibility (vendors get automatic status updates); and (3) secure arrangements (SMEs are protected from business email compromise, the leading cause of payments fraud).
Bill.com drives revenue through two main avenues: accelerated payment options (e.g., virtual card, instant transfers) and other value-added services such as AR/AP automation. Much of the company’s revenue is driven by repeated transactions which are an important contributor to the company’s recurring revenue stream and visibility. Most of its SME customers pay monthly subscription fees, while some customers enter into annual contracts with up-front payments.
Guggenheim Securities forecasts a robust revenue outlook for Bill.com thanks to two key tailwinds: a secular shift of SMEs from paper to electronic and Bill.com’s rapidly growing network of payers that create a strong flywheel effect for users. For Q3 2021, core revenue, which represents subscription and transaction fees, was $115.6 million, up 164% YoY. Revenue can grow 2x from $158 million in 2020 to $333 million in 2023 while its network can double to 5 million members over the next three years.
According to Deutsche Bank, Bill.com’s TAM is expected to be $15 billion in domestic revenue and $75 billion globally, focusing on the underserved and less-penetrated SMEs. Compared to its TAM of $9 billion domestically and $30 billion globally in 2020, it achieved growth of 67% and 250% respectively. Bill.com boasts high retention rates, specifically from new cohorts, with dollar-based revenue retention of 124%, as well as strong payback trends.
Average revenue per user (ARPU) has expanded from $5.72 in 2020 to $7.97 in 2021, growing 39% YoY because of the company’s shift to higher-priced products like virtual cards, cross-border FX and instant transfers. Virtual card penetration at 2.2% of TPV grows 300% YoY with significant room for expansion.
Recent acquisitions of Divvy and Invoice2go present the most significant cross-sell opportunity to expand into fast-growing adjacencies like spend management, down-market into sole proprietors and new markets internationally. The company served 13,500 spending businesses that used Divvy in September 2021 and approximately 226,000 subscribers that used Invoice2go, processing 4.6 million transactions with Divvy cards and over 100,000 transactions through Invoice2go.
Acquisitions complement strong core organic growth where there is great upside potential. Deutsche Bank expects 70% YoY organic growth in 1Q 2022 and 57% YoY for 2022, driven by new customers, higher engagement and increasing take rates. Growth can reach as high as 124% YoY in 2022.
Bill.com holds several key competitive advantages in technology and strategy that set it apart from rivals:
• Purpose-built, end-to-end solution for SMEs: Bill.com provides SMEs with core functionality often reserved for larger companies.
• Two-way sync with leading accounting platforms: Bill.com enables customers to automatically synchronize and reconcile transactions.
• Diverse distribution channels: Bill.com leverages direct and indirect channels to cost-efficiently reach a historically challenging SMEs market.
• Large, growing network of connected businesses: The company creates a powerful network effect that adds customer acquisition efforts where participants become prospects.
• Valuable data asset: Bill.com processes millions of documents and billions of dollars in payments each year, powering the firm’s AI/Machine Learning capabilities that drive innovation.
• Risk management expertise: Bill.com’s risk engine has been trained on millions of B2B transactions, which increases funds’ security.
Therefore, Bill.com’s biggest competitors, Coupa and Tipalti should not overtake the company’s leading position. Coupa owns software providers the traditionally sell solutions for large enterprises or consumers but struggles in the SME market. Meanwhile, Bill.com dominates the market of advanced AR/AP for SMEs, with 126,000 active customers.
Tipalti is a niche provider that focuses exclusively on payments and invoice processing. On the contrary, Bill.com provides a holistic solution that automates all accounting processes for SMEs. Thus, it enjoys greater revenue growth 1Q2021 of 164% YoY compared to Tipalti’s 83%, suggesting that Bill.com is gaining much more traction than Tipalti.
Bill.com’s determination to dominate cloud-based financial solutions for SMEs will enhance its pioneer market position, thanks to three key growth opportunities: (1) the rise of virtual cards; (2) the ease of cross-border B2B payments; and (3) partnerships expansion.
