Wild Ride at Bill.com
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Wild Ride at Bill.com
Disappointing revenue guidance, acquisition rumors, acquisition denials, and lessons from the Divvy acquisition
BILL’s (aka Bill.com) stock price has been on a wild ride since going public in 2019 and the last few weeks were no exception. BILL’s stock price has cratered by 50% in the past few weeks due to a 1) disappointing quarterly earning/guidance and 2) rumored $2B acquisition that was subsequently denied by BILL.
Outline:
Timeline of events, what happened, and lessons
BILL’s prior acquisitions
Lessons from Divvy acquisition
Final thoughts on BILL and acquisitions
Timeline of Events
November 2nd - Reporting Quarterly Earnings
BILL reported earnings and forward looking guidance after market close. They beat current quarter expectations with revenue of $305M vs estimates of $299M and $0.54 earnings per share (EPS) vs estimates of $0.50. This represents a pretty good beat for BILL.
But…the company slashed guidance by 6% and came in significantly under analyst expectations.
During market hours the next day, the stock traded as far as 35% lower and closed “only” down 25%.
November 8th - Acquisition Rumor
Bloomberg released an article after the stock market close on November 8th that said BILL was in talks to acquire digital payment tools company Melio Payments for $2B.
November 9th - Acquisition Denial
At market open BILL’s stock tanked as investors seemed to hate the possible acquisition. The stock price dropped as much as 16% before BILL issued a statement during market hours that it was not pursuing an acquisition of Melio.
After the acquisition denial, the stock jumped up to only being down to 6% - the stock actually got halted for a few minutes after the denial due to high volatility.
So why didn’t all of the stock price decline get erased after the denial?
BILL never denied that the Bloomberg report wasn’t true. They just said that they were “not pursuing any such acquisition at this time”.
Maybe a day earlier they were pursuing the acquisition but based on the market’s highly negative reaction to the rumor they changed their mind.
Maybe after the ~30% drop in stock price following their quarterly results a few days earlier they decided that an acquisition that heavily relied on stock consideration would be too expensive.
Maybe the deal still happens but BILL uses the market reaction as leverage to get a better price.
It seems unlikely that the acquisition rumor was completely fake. And that is why investors were still upset and the stock price continued to trade lower despite BILL saying that they aren’t pursuing the acquisition.
If investors think some of management’s ideas are stupid, then they lose trust in management for considering the stupid thing. If they lose trust in management, then investors should further discount the company’s ability to drive long-term value through growth and profitability.
Proper capital allocation is the #1 priority of management to maximize value creation for shareholders. If the executive team is bad at capital allocation or they start to drive in the wrong direction, then long-term growth and profits will eventually fall off a cliff.
Capital Allocation = the distribution, re-distribution, and investment of financial resources to maximize stakeholder profits.
High growth for a couple of years means very little if it isn’t sustainable. Great capital allocation is required for software companies to sustain high growth and achieve high profit margins.
I don’t know enough to say whether the acquisition would definitely be a stupid idea other than the fact that the reported $2B acquisition price was almost 1/3 of BILL’s valuation and the stock trades at a fairly low revenue multiple.
Great capital allocators know when their stock is overvalued or undervalued. They then use their equity currency (i.e. their stock) accordingly. If their stock trades at a high premium then all else being equal, it is a good time to use equity currency since it’s relatively cheap. If the stock is cheap, then it’s a bad time to use that currency.
BILL’s Prior Acquisitions
Here are the companies that BILL has acquired:
Divvy in May 2021 for $2.3B
$1.6B equity
$0.7B cash
Invoice2go in July 2021 for $674M
$510M equity
$164M cash
Finmark - November 2022 for undisclosed amount
Given the acquisition is immaterial to BILL and the amount of goodwill that was added, I would guess the acquisition price is between $45-65M
BILL has spent ~$3.1B on acquisitions and its current enterprise value is $5.4B. That is 57% of its current enterprise value!
Is 57% of enterprise value on acquisitions good or bad? It depends…
The two large acquisitions (Divvy and Invoice2go) occurred in 2021 when BILL had the 3rd highest valuation premium amongst public software companies — a 40.7x revenue multiple! Side note - It’s fun to revisit 2021 revenue multiples and wonder what we were possibly thinking.
Both of these acquisitions were done with 70%+ equity consideration with the remaining in cash. Proper capital allocation also requires proper uses of equity and understanding of when that currency is cheap vs expensive. While companies were also more expensive to acquire in 2021, if the acquirer traded at an even higher premium, then it was still relatively cheaper. And BILL certainly traded at a high premium.
Lessons from Divvy Acquisition
How has BILL done with its largest acquisition?
Divvy’s quarterly revenue prior to the acquisition was $21M (or $84M annual revenue run rate). So the $2.3B acquisition price represents a 27x revenue run rate multiple when acquisition conversations started.
The first full month after being acquired by BILL (June 2021), Divvy generated $10.3M in revenue (or $123.6M annual revenue run rate), which is a ~19x multiple on run rate revenue. At this point I assume BILL had little influence over Divvy’s revenue growth.
Divvy’s revenue for the 12 months following the close of the acquisition was $208M 🤯! Using the actual NTM revenue from acquisition we get an ~11x NTM revenue multiple at the time Divvy was acquired compared to BILL’s 40.7x NTM revenue at the time the acquisition was announced.
Obviously, synergies between the two companies and the ability to cross-sell the Divvy product to BILL customers drove a lot of growth, but the combined company’s ability to drive that much revenue for Divvy is amazing.
When we had started the acquisition, we had 1,000 joint customers. And what we disclosed today is that we have 7,200 joint customers so roughly up 6,000. Of that, around 5,000 are BILL customers adopting Divvy. The others are Divvy customers adopting BILL. — from Bill.com CEO earlier this year
Below is BILL’s total ARR by quarter split between Divvy and everything else.
In its most recent quarter Divvy generated $106M in quarterly revenue (or $424M in annual revenue run rate), which is a YoY growth rate of 36%. In September 2021, immediately after the acquisition, Divvy accounted for 31% of BILL’s total revenue while today it accounts for 35% (Divvy has grown faster than BILL’s core revenue).
In just over 2 years since acquisition, the valuation of Divvy as a standalone company using today’s revenue multiples is about back to what BILL paid for Divvy. The 4.3x is the revenue multiple that BILL currently trades and the 5x multiple is under the scenario that Divvy should trade at least a little bit higher than BILL standalone (or that both are undervalued).
You might read this and say, “BILL paid $2.3B so they overpaid!”. Not so fast…$1.6B of that price tag was with BILL stock. The stock price at the acquisition was $157 while today it trades at $57 — at 64% decline.
If 2021 was just a crazy valuation time (which it was) and today is the new normal, then you can think about the acquisition price being closer to $1.3B — $0.7M in cash and $0.7M in equity (estimate based on valuation decline since acquisition).
Pretty good acquisition if the starting point is $1.3B and it’s grown to $2B+ in less than two years.
Final Thoughts
BILL clearly did extremely well with the Divvy acquisition. They acquired Divvy when their stock price was overvalued, which made the majority of their acquisition currency relatively cheap. Proper capital allocation means understanding when your stock trades at a high premium or is relatively undervalued. Good capital allocators will use its equity currency wisely when it trades at a premium and use it cautiously when it is undervalued.
BILL’s valuation fell 25%+ after its recent quarterly report and now trades at a relatively low NTM revenue multiple.
So when there was a rumor of a $2B acquisition (1/3 of BILL’s valuation) that would likely use a significant chunk of BILL’s equity currency, which currently trades fairly low, of course investors hated it. And even if they are not pursuing the deal, investors are punishing BILL for considering something they considered stupid.
Perhaps this presents an opportunity to buy BILL’s stock at a discount, but can investors trust management to not actually do something stupid? Can they be great capital allocators like they were with the Divvy acquisition?
***Author may own positions in securities discussed. Nothing in this article should be considered investment, tax, or legal advice. Do your own diligence.