BILL Holdings, Inc. Q4 FY2023 earnings

Persistent inflation and rising interest rates have increased recession risk and caused BILL standalone customers and Divvy spending businesses to moderate expenditures, leading to lower payment volume growth and lower transaction fee growth than historical trends in fiscal 2023. A significant portion of revenue comes from SMBs, which may have fewer financial resources to weather a downturn.

Net customer adds on the BILL standalone solution were slightly lower than recent trends as businesses took longer to decide whether to implement new software in the current macro environment. Net dollar-based retention rate decreased to 111% in fiscal 2023 from 131% in fiscal 2022.

The March 2023 closure of Silicon Valley Bank created instability because BILL held significant company and customer funds at SVB. Continued instability in the U.S. banking system could impair access to corporate cash, customer funds, and payment processing.

Revenue from interest on funds held for customers was $113.8 million in fiscal 2023, or approximately 11% of total revenue, and increased by 1224% compared with fiscal 2022. MD&A states that given the deceleration in U.S. interest rate increases in 2023, this interest revenue expansion is not expected to continue, and revenue would decrease if interest rates decline.

The Divvy card offering exposes BILL to credit risk because BILL purchases participation interests in card receivables and bears the entire credit risk if a spending business fails to pay card balances. General and administrative expenses increased by $15.2 million in fiscal 2023 for expected credit losses and fraud losses, mainly due to an increase in acquired card receivables.

Divvy credit is originated through Cross River Bank and WEX Bank, and the bank-nonbank program structure faces true lender and valid when made challenges plus increased regulatory scrutiny. Adverse orders against the Issuing Banks could restrict their ability to extend credit through BILL or lead to tighter underwriting controls.

BILL relies on warehouse facilities and purchase arrangements with finance partners to fund purchases of participation interests in Divvy card receivables. If those funding sources are unwilling or unable to provide funding on acceptable terms, BILL may have to use corporate cash, which it has limited ability to do, potentially interrupting or limiting the card products.

Intuit announced in September 2022 its intention to launch a native bill payment solution, and accounting software providers and financial institution partners may develop or bundle competing solutions. Competition is also based on data asset size and ability to leverage AI, and larger competitors may have greater resources and existing customer relationships.

BILL expects its revenue growth rate to decline as the business scales. Total Payment Volume growth slowed to 17% in fiscal 2023 from 62% in fiscal 2022, and growth in businesses using its solutions slowed to 15% from 203% over the same periods.

BILL is licensed as a money transmitter and must hold eligible liquid assets equal to at least 100% of aggregate customer balances in certain jurisdictions. Failure to maintain required controls or accurately manage customer funds could result in reputational harm, fines, and loss of state money transmitter licenses.

BILL is responsible for verifying customer identities and monitoring transactions for fraud, and it is generally required to hold Issuing Banks harmless from fraud and unauthorized card use losses. Fraud techniques continue to evolve, and risk management efforts may not prevent material financial losses.

As of June 30, 2023, BILL had outstanding $1.15 billion of 2025 Notes, $575.0 million of 2027 Notes, and had drawn $135.0 million under its Revolving Credit Facility. The conversion condition was not triggered as of June 30, 2023, but had been triggered for the 2025 Notes in several prior quarters, and future conversion could require cash settlement or reclassification of principal as a current liability.

Relationships with more than 7,000 accounting firm partners contribute a significant portion of consolidated revenue, and BILL also depends on financial institution partners. Failure to maintain or grow these relationships, or partner decisions to develop competing products, could weaken growth prospects and harm operating results.

Fiscal 2023 sales and marketing expenses included $52.2 million of stock-based compensation expense related to separation and advisory agreements with the former Chief Revenue Officer. BILL also notes its management team has limited public company experience, and recruitment or departure of key personnel could disrupt the business.

Sales and marketing expenses increased by $208.7 million in fiscal 2023, including a $78.7 million increase in rewards expense from higher Divvy card transaction volume and higher rewards rates. Rewards redemptions are significant expenses, and competitive pressure may require BILL to increase rewards or provide other incentives.