BILL HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. You should read the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal year end isJune 30 , and our fiscal quarters end onSeptember 30 ,December 31 , andMarch 31 . Overview We are a leading provider of cloud-based software that simplifies, digitizes, and automates complex back-office financial operations for small and midsize businesses (SMBs). By transforming how SMBs manage their cash inflows and outflows, we create efficiencies and free our customers to run their businesses. 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. We efficiently reach SMBs through our proven direct and indirect go-to-market strategies. We acquire customers directly through digital marketing and inside sales, and indirectly through accounting firms and strategic partnerships. As ofMarch 31, 2021 , our partners included some of the most trusted brands in the financial services business, including more than 80 of the top 100 accounting firms and several of the largest financial institutions inthe United States (U.S. ), includingBank of America , JPMorgan Chase, and American Express. As we add customers and partners, we expect our network to continue to grow organically. We have grown rapidly and scaled our business operations in recent periods. Our total revenue was$59.7 million and$41.2 million during the three months endedMarch 31, 2021 and 2020, respectively, an increase of 45%, and$160.0 million and$115.5 million during the nine months endedMarch 31, 2021 and 2020, respectively, an increase of 39%. We generated net losses of$26.7 million and$8.3 million during the three months endedMarch 31, 2021 and 2020, respectively, and$56.9 million and$21.6 million during the nine months endedMarch 31, 2021 and 2020, respectively. Proposed Acquisition of Divvy OnMay 6, 2021 , we entered into a Merger Agreement with Divvy, aDelaware corporation that provides a cloud-based financial platform for businesses in theU.S. Pursuant to the terms of, and subject to the conditions set forth in, the Merger Agreement, including customary purchase price adjustments, we will pay an aggregate consideration of approximately$2.5 billion in exchange for all of the outstanding equity interests of Divvy, with approximately$625 million payable in cash, subject to adjustment, and the remainder issuable in shares of our common stock, RSUs and/or options to acquire our common stock (Share Consideration). The Share Consideration will be calculated based on a fixed value of$157.2697 per share, which represents the average daily volume-weighted average price per share of our common stock for each of the twenty consecutive trading days ended on and includingMay 3, 2021 . Upon the consummation of the transactions contemplated by the Merger Agreement, Divvy will become our wholly owned subsidiary. The closing of the merger is subject to customary closing conditions such as (i) the adoption of the Merger Agreement and approval of the merger in accordance withDelaware law and (ii) the expiration or termination of the applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, among other things. Impact of COVID-19 The full impact of the COVID-19 pandemic is inherently uncertain at the time of this report. The COVID-19 pandemic has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses, and greater uncertainty in global financial markets. As the COVID-19 pandemic persists, it has significantly impacted the health and economic environment around the world. Many public and commercial establishments, including 27
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schools, restaurants, and shopping malls, have restricted their operations or closed due to restrictions imposed by the government. Our customers have been, and may continue to be, negatively impacted by the shelter-in-place and other similar state and local orders, the closure of manufacturing sites and country borders, and the increase in unemployment. These conditions will continue to have negative implications on demand for goods, the supply chain, production of goods, and transportation. A negative impact on our customers may cause them to go out of business, request discounts, extension of payment terms, or cancelation of their subscription to our platform. Any of these actions will have a negative impact on our future results of operations, liquidity, and financial condition. Our business continues to operate despite the disruption of many business operations in theU.S. due to the COVID-19 pandemic. However, we continue to require our employees to work from remote locations because of certain government restrictions due to the COVID-19 pandemic. Although we have not experienced significant business disruptions thus far from the COVID-19 pandemic, we are unable to predict the full impact that the COVID-19 pandemic will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic, the actions that may be taken by government authorities across theU.S. , the timing and efficacy of vaccinations, the impact to our customers, strategic partners, and suppliers, and other factors described in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. Our Revenue Model
We generate revenue by charging subscription and transaction fees, and by earning interest on funds held in trust on behalf of customers while their payment transactions are clearing.
Our subscription revenue is primarily based on a fixed monthly or annual rate per user charged to our customers. Our transaction revenue is comprised of transaction fees on a fixed or variable rate per transaction. Transactions primarily include check issuance, ACH origination, cross-border payments, virtual card issuance, and creation of invoices. Much of our revenue comes from repeat transactions, which are an important contributor to our recurring revenue. We also generate revenue from interest earned on funds held in trust on behalf of customers while payment transactions are clearing. When we process payment transactions, the funds flow through our bank accounts and we have a balance of funds held for customers that is a function of the volume and the type of payments processed. Interest is earned from interest-bearing deposit accounts, certificates of deposit, money market funds, commercial paper, andU.S. Treasury securities. We hold these funds from the day they are withdrawn from a payer's account to the day the funds are credited to the receiver. This revenue can fluctuate depending on the amount of customer funds held, as well as our yield on customer funds invested, which is influenced by market interest rates and our investments. We are authorized to hold customer funds and process payments through our bank accounts because we are a licensed money transmitter in all requiredU.S. states. This allows us to provide advanced treasury services and protect our customers from potential fraud. Key Factors Affecting Our Performance
Acquiring New Customers
Sustaining our growth requires continued adoption of our platform by new customers. We will continue to invest in our efficient go-to-market strategy as we further penetrate our addressable markets. Our financial performance will depend in large part on the overall demand for our platform, particularly demand from SMBs, as well as the impact caused by the COVID-19 pandemic. As ofMarch 31, 2021 , we had over 115,000 customers across a wide variety of industries and geographies in theU.S.
Expanding Our Relationship with Existing Customers
Our revenue grows as we address the evolving needs of our customers and as our
customers increase usage of our platform. As they realize the benefits of our
solution, our customers often increase the number of users on our platform. We
also experience growth when we introduce new products and services that are
adopted by our customers.
Our ability to monetize our payments-related services is an important part of
our business model. Today, we charge fixed and variable transaction fees for
payment transactions initiated, and our revenue and payment volume generally
grow as customers process more transactions on our platform. Our ability to
influence customers to process more transactions on our platform will have a
direct impact on our transaction fee revenue. As payment volume grows, we
experience growth in the level of funds held for customers and we also earn
interest revenue on these funds while
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payment transactions are clearing. Our interest earned on customer funds is positively correlated with our interest earnings rate and with customer fund balances. Our interest earnings rate is a function of the market interest rate environment and the mix of our investments across interest bearing accounts, government money market funds, and highly liquid, investment-grade fixed income marketable securities. The fund balances are a function of the amount of money transmitted by our customers and the mix of payment types, with some payment types averaging more days in transit than others.
Investing in Sales and Marketing
We will continue to drive awareness and generate demand to acquire new customers and develop new accounting firm and strategic partner relationships; however, we will adjust our sales and marketing spend level as needed in response to changes in the economic environment. We will continue to expand efforts to market our platform directly to businesses through online digital marketing, referral programs, and other programs. Our investment in supporting accounting firms and strategic partners has been significant. We support these accounting firms and strategic partners through education and training initiatives like hosting webinars and developing sell-sheet case studies.
Investing in Our Platform
We intend to increase our investment in our platform to maintain our position as
a leading provider of SMB back-office financial software. To drive adoption and
increase penetration within our base, we will continue to introduce new products
and features. We believe that investment in research and development will
contribute to our long-term growth but may also negatively impact our short-term
profitability. We will continue to leverage emerging technologies and invest in
the development of more features that meet and anticipate SMB needs. These
efforts will require us to invest significant financial and other resources. As
a result, we expect our expenses related to research and development to
increase.
Key Business Metrics
We regularly review several metrics, including the metrics presented in the
table below, to measure our performance, identify trends affecting our business,
prepare financial projections, and make strategic decisions. We believe that
these key business metrics provide meaningful supplemental information for
management and investors in assessing our historical and future operating
performance. The calculation of the key metrics and other measures discussed
below may differ from other similarly-titled metrics used by other companies,
securities analysts, or investors.
As of March 31,
2021 2020 % Growth
Number of customers 115,600 91,300 27 %
Three months ended Nine months ended
March 31, March 31,
2021 2020 % Growth 2021 2020 % Growth
Total Payment Volume
(amounts in millions) $ 34,971 $ 24,233 44 % $ 98,573 $ 71,047 39 %
Three months ended Nine months ended
March 31, March 31,
2021 2020 % Growth 2021 2020 % Growth
Transactions processed 7,182,000 6,047,000 19% 20,951,000 18,239,000 15 % Number of Customers
For the purposes of measuring our key business metrics, we define customers as entities that are either billed directly by us or for which we bill our strategic partners during a particular period. Customers who are using our platform during a trial period are not counted as new customers during that period. If an organization has multiple entities billed
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separately for the use of our platform, each entity is counted as a customer. The number of customers in the table above represents the total number of customers at the end of our fiscal quarter.
Total Payment Volume
To grow revenue from customers we must deliver a product experience that helps them automate their back-office financial operations. The more they use the product and rely upon our features to automate their operations, the more likely they are to process more transactions on our platform. This metric provides an important indication of the value of transactions that customers are completing on the platform and is an indicator of our ability to generate revenue from our customers. We define Total Payment Volume (TPV) as the value of customer transactions that we process on our platform during a particular period. Our calculation of TPV includes payments that are subsequently reversed. Such payments comprised approximately 1% of TPV during the three and nine months endedMarch 31, 2021 and 2020.
Transactions Processed
We define transactions processed as the number of customer payment transactions, such as checks, ACH items, wire transfers, and virtual cards, initiated and processed through our platform during a particular period.
Components of Results of Operations
Revenue
We generate revenue from two sources: (1) subscription and transaction fees, and (2) interest on funds held for customers.
Subscription fees are fixed monthly or annually and charged to our customers for the use of our platform to process transactions. Subscription fees are generally charged on a per user per period basis, normally monthly or annually. Transaction fees are fees collected for each transaction processed through our platform, on either a fixed or variable fee basis. Transaction fees primarily include processing of payments in the form of checks, ACH, cross-border payments, virtual cards, and the creation of invoices. Interest on funds held for customers consists of the interest that we earn from customer funds while payment transactions are clearing. Interest is earned from interest-bearing deposit accounts, certificates of deposit, money market funds, commercial paper, andU.S. Treasury securities, until those payments are cleared and credited to the intended recipient. Our contracts with SMB and accounting firm customers primarily consist of cancelable contracts that can be terminated at the end of the monthly subscription period in which the last transaction is processed. Our contracts are non-cancelable annual or monthly contracts. We recognize revenue for non-cancelable annual and monthly contracts as a series of distinct services satisfied over time. We determine the transaction price for such contracts by estimating the total consideration to be received over the contract term from subscription and transaction fees. We recognize the transaction price from annual and monthly contracts as a single performance obligation based on the proportion of transactions processed to the total estimated transactions to be processed over the contract period. We enter into multi-year contracts with financial institution customers that typically include fees for initial implementation services that are paid during the period. Fees for subscription and transaction processing services are subject to guaranteed monthly minimum fees that are paid over the contract term. These contracts enable the financial institutions to provide their clients with access to online bill pay services through the financial institution's online platform. Implementation services are required up-front to establish an infrastructure that allows the financial institution's online platform to communicate with our platform. The financial institution's clients cannot access online bill pay services until implementation is complete and the financial institution has provided acceptance of the implementation services. The fees we earn through these contracts vary based on the number of users and transactions processed. We have determined these contracts meet the variable consideration allocation exception and therefore we recognize guaranteed monthly payments and any overages as revenue in the month they are earned. We recognize implementation fees based on the proportion of transactions processed to the total estimated transactions to be processed over the contract period. 30
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Cost of Revenue and Expenses
Cost of revenue - Cost of revenue consists primarily of personnel-related costs, including stock-based compensation expenses, for our customer success and payment operations teams, certain costs that are directly attributed to processing customers' transactions (such as the cost of printing checks), postage for mailing checks, expenses for processing payments (ACH, check, and cross-border wires), direct and amortized costs for implementing and integrating our cloud-based platform into our strategic partners' systems, costs for maintaining, optimizing, and securing our cloud payments infrastructure, amortization of capitalized internal-use developed software, fees on the investment of customer funds, and allocation of overhead costs. We expect that cost of revenue will increase in absolute dollars, but may fluctuate as a percentage of total revenue from period to period, as we continue to invest in growing our business. Research and development - Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation expenses, incurred in developing new products or enhancing existing products, and allocated overhead costs. We capitalize certain software development costs that are attributable to developing new products and adding incremental functionality to our platform and amortize such costs in cost of revenue over the estimated life of the new product or incremental functionality, which is generally three years. We expense a substantial portion of research and development expenses as incurred. We believe that delivering new functionality is critical to attract new customers and expand our relationship with existing customers. We expect to continue to make investments in and expand our offerings to enhance our customers' experience and satisfaction, and to attract new customers. We expect our research and development expenses to increase in absolute dollars, but they may fluctuate as a percentage of total revenue from period to period as we expand our research and development team to develop new products and product enhancements. Sales and Marketing - Sales and marketing expenses consist primarily of personnel-related expenses, including stock-based compensation expenses, sales commissions, marketing program expenses, travel-related expenses, and costs to market and promote our platform through advertisements, marketing events, partnership arrangements, direct customer acquisition, and allocated overhead costs. Sales commissions that are incremental to obtaining new customer contracts are deferred and amortized ratably over the estimated period of our relationship with new customers. We focus our sales and marketing efforts on generating awareness of our company, platform, and products, creating sales leads, and establishing and promoting our brand. We plan to continue investing in sales and marketing efforts by driving our go-to-market strategies, building our brand awareness, and sponsoring additional marketing events; however, we will adjust our sales and marketing spend level as needed, and it may fluctuate from period to period, in response to changes in the economic environment. General and administrative - General and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation expenses, for finance, risk management, legal and compliance, human resources, and information technology, costs incurred for external professional services, losses from fraud and credit exposure, and allocated overhead costs. We have incurred additional general and administrative expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange, expenses related to compliance and reporting obligations pursuant to the rules and regulations of theSecurities and Exchange Commission , as well as higher expenses for director and officer insurance, investor relations, and professional services. We also expect to increase the size of our general and administrative functions to support the growth in our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of total revenue from period to period. Other (expense) income, net - Other (expense) income, net consists primarily of the accretion of debt discount and amortization of debt offering costs in connection with our issuance of the 2025 Notes, interest expense on our bank borrowings, and losses on the revaluation of redeemable convertible preferred stock warrant liabilities, partially offset by interest income on corporate funds invested in money market instruments and highly liquid, investment-grade fixed income marketable securities. (Benefit from) provision for income taxes - (Benefit from) provision for income taxes consists of the income tax benefit from the issuance of the 2025 Notes and state income taxes. 31
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Results of Operations
The following table sets forth our results of operations for the periods
presented (in thousands):
Three months ended Nine months ended
March 31, March 31,
2021 2020 2021 2020
Revenue
Subscription and transaction fees $ 58,622 $ 36,092 $ 154,743 $ 97,604
Interest on funds held for customers 1,116 5,138 5,249 17,886
Total revenue 59,738 41,230 159,992 115,490
Cost of revenue (1) 15,434 10,110 41,513 29,044
Gross profit 44,304 31,120 118,479 86,446
Operating expenses
Research and development (1) 22,286 13,969 60,558 38,476
Sales and marketing (1) 15,190 11,802 42,272 33,560
General and administrative (1) 22,124 15,064 58,897 38,347
Total operating expenses 59,600 40,835 161,727 110,383
Loss from operations (15,296 ) (9,715 ) (43,248 ) (23,937 )
Other (expense) income, net (11,432 ) 1,397 (13,943 ) 2,396
Loss before (benefit from) provision
for income
taxes (26,728 ) (8,318 ) (57,191 ) (21,541 )
(Benefit from) provision for income
taxes - 1 (333 ) 52
Net loss $ (26,728 ) $ (8,319 ) $ (56,858 ) $ (21,593 ) (1) Includes stock-based compensation expenses as follows (in thousands):
Three months ended Nine months ended
March 31, March 31,
2021 2020 2021 2020
Cost of revenue $ 728 $ 422 $ 1,971 $ 781
Research and development 3,638 1,466 9,953 3,221
Sales and marketing 1,711 767 5,086 1,643
General and administrative 4,603 2,430 14,253 4,791
Total $ 10,680 $ 5,085 $ 31,263 $ 10,436
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The following table presents the components of our consolidated statements of operations for the periods presented as a percentage of total revenue:
Three months ended Nine months ended
March 31, March 31,
2021 2020 2021 2020
Revenue
Subscription and transaction fees 98 % 88 % 97 % 85 %
Interest on funds held for customers 2 % 12 % 3 % 15 %
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue 26 % 25 % 26 % 25 %
Gross margin 74 % 75 % 74 % 75 %
Operating expenses
Research and development 37 % 34 % 38 % 33 %
Sales and marketing 25 % 29 % 26 % 29 %
General and administrative 38 % 36 % 37 % 34 %
Total operating expenses 100 % 99 % 101 % 96 %
Loss from operations (26 )% (24 )% (27 )% (21 )%
Other (expense) income, net (19 )% 4 % (9 )% 2 %
Loss before (benefit from) provision
for income
taxes (45 )% (20 )% (36 )% (19 )%
(Benefit from) provision for income
taxes - - - -
Net loss (45 )% (20 )% (36 )% (19 )%
Comparison of the three months ended
Revenue
The components of our revenue during the three months ended
Three months ended
March 31, Change
2021 2020 Amount %
Subscription and transaction fees
62 %
Interest on funds held for customers 1,116 5,138 (4,022 ) (78 )%
Total revenue $ 59,738 $ 41,230 $ 18,508 45 %
Subscription and transaction fees increased to $58.6 million during the three
months ended March 31, 2021 from $36.1 million during the three months ended
March 31, 2020 , an increase of $22.5 million or 62%. Subscription fees increased
to $29.3 million during the three months ended March 31, 2021 from $22.3 million
during the three months ended March 31, 2020 , an increase of $7.0 million or
32%, driven primarily by the increase in customers and average subscription
revenue per customer. Transaction fees increased to $29.3 million during the
three months ended March 31, 2021 from $13.8 million during the three months
ended March 31, 2020 , an increase of $15.5 million or 112%, due primarily to
increased adoption of new product offerings and the mix of transaction revenues
shifting to variable-priced products. Our total customers increased to over
115,000 as of March 31, 2021 compared to over 91,000 as of March 31, 2020 , or an
increase of approximately 27%. Our average subscription revenue and transaction
fees per customer increased by 4% and 67%, respectively, during the three months
ended March 31, 2021 , driven primarily by the increase in customers' usage of
our platform and payment activities.
Interest on funds held for customers decreased to $1.1 million during the three
months ended March 31, 2021 from $5.1 million during the three months ended
March 31, 2020 , a decrease of $4.0 million or 78%. The decrease was due to the
decline in the yield we earned from investing customer funds, partially offset
by the increase in the balance of customer funds held while payment transactions
clear. The average rate of return earned on customer funds held was 0.23% during
the three months ended March 31, 2021 , a decrease of 127 basis points from the
same period in fiscal
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2020. The decrease in yield was due primarily to theU.S. Federal Reserve's action to cut the federal funds rate inMarch 2020 in response to the COVID-19 pandemic. The average daily effective federal funds rate decreased by 116 basis points during the three months endedMarch 31, 2021 from the same period in fiscal 2020. The average daily balance of customer funds held while payment transactions clear increased to approximately$1.9 billion during the three months endedMarch 31, 2021 from approximately$1.4 billion during the same period in fiscal 2020, an increase of 41%. Fund balances increased due to growth in TPV. Our TPV increased to approximately$35.0 billion during the three months endedMarch 31, 2021 from approximately$24.2 billion during the same period in fiscal 2020, an increase of 44%.
Cost of Revenue, Gross Profit, and Gross Margin
Cost of revenue, gross profit, and gross margin during the three months ended
Three months ended
March 31, Change
2021 2020 Amount %
Cost of revenue $ 15,434 $ 10,110 $ 5,324 53 %
Gross profit 44,304 31,120 13,184 42 %
Gross margin 74 % 75 %
Cost of revenue increased to $15.4 million during the three months ended March
31, 2021 from $10.1 million during the three months ended March 31, 2020 , an
increase of $5.3 million or 53%. The increase was due primarily to a $2.1
million increase in direct costs associated with the processing of our
customers' payment transactions, use of software applications and equipment as
we expanded our data processing capacity, and data hosting services, which were
driven by the increase in the number of customers, increase in adoption of new
product offerings and increase in volume of transactions. The increase was also
due to a $2.1 million increase in personnel-related costs, including stock-based
compensation expense and amortization of deferred service costs, and a $1.1
million increase in consulting-related and other costs due to the hiring of
additional personnel and outside services who were directly engaged in providing
implementation and support services to our customers. Our average headcount of
such personnel during the three months ended March 31, 2021 increased by 43%
compared to the same period in fiscal 2020.
Gross margin was 74% during the three months ended
Research and Development Expenses
Research and development expenses during the three months ended
Three months ended
March 31, Change
2021 2020 Amount %
Research and development expenses
60 % Percentage of revenue 37 % 34 % Research and development expenses increased to$22.3 million during the three months endedMarch 31, 2021 from$14.0 million during the three months endedMarch 31, 2020 , an increase of$8.3 million or 60%. The increase was due primarily to a$6.5 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional personnel who were directly engaged in developing new product offerings, a$0.8 million increase in costs for engaging consultants and temporary contractors who provided product development services, and a$0.8 million increase in shared overhead and other costs. Our average research and development headcount during the three months endedMarch 31, 2021 increased by 33% compared to the same period in fiscal 2020.
As a percentage of total revenue, research and development expenses increased to
37% during the three months ended
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Sales and Marketing Expenses
Sales and marketing expenses during the three months ended
Three months ended
March 31, Change
2021 2020 Amount %
Sales and marketing expenses
25 % 29 %
Sales and marketing expenses increased to $15.2 million during the three months
ended March 31, 2021 from $11.8 million during the three months ended March 31,
2020 , an increase of $3.4 million or 29%. The increase was due primarily to a
$2.3 million increase in personnel-related costs, including stock-based
compensation expense, due to the hiring of additional personnel who were
directly engaged in acquiring new customers and in marketing our products and
services, and a $0.8 million increase in marketing initiatives and digital
advertising spend as we continued to promote our products and services. Our
average sales and marketing headcount during the three months ended March 31,
2021 increased by 6% compared to the same period in fiscal 2020.
As a percentage of total revenue, sales and marketing expenses decreased to 25%
during the three months ended March 31, 2021 from 29% during the three months
ended March 31, 2020 as we adjusted our sales and marketing costs in response to
the changing economic environment.
General and Administrative Expenses
General and administrative expenses during the three months ended
Three months ended
March 31, Change
2021 2020 Amount %
General and administrative expenses
47 % Percentage of revenue 38 % 36 % General and administrative expenses increased to$22.1 million during the three months endedMarch 31, 2021 from$15.1 million during the three months endedMarch 31, 2020 , an increase of$7.0 million or 47%. The increase was due primarily to a$4.5 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional executive employees and administrative personnel. Our average general and administrative headcount during the three months endedMarch 31, 2021 increased by 21% compared to the same period in fiscal 2020. The increase was also due to a$2.9 million increase in professional and consulting fees as we obtained additional external assistance to support certain corporate initiatives and a$0.3 million increase in corporate insurance costs (mainly pertaining to costs associated with the insurance policies for our directors and officers), partially offset by a$0.8 million decrease in sales and use tax reserves. As a percentage of total revenue, general and administrative expenses increased to 38% during the three months endedMarch 31, 2021 from 36% during the three months endedMarch 31, 2020 due primarily to the increase in stock-based compensation expense relative to the increase in our revenue. 35
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Other (Expense) Income, Net
Other (expense) income, net during the three months ended
Three months ended
March 31, Change
2021 2020 Amount %
Other (expense) income, net
(19 )% 4 %
The $12.8 million change in other (expense) income, net during the three months
ended March 31, 2021 compared to the same period in fiscal 2020 was due
primarily to an $11.9 million increase in interest expense related to the
amortization of debt discount and issuance costs of our 2025 Notes and a $0.9
million decrease in interest income due to the decrease in interest rates.
Benefit from Income Taxes
Benefit from income taxes during the three months ended
Three months ended
March 31, Change
2021 2020 Amount %
Benefit from income taxes $ -
Comparison of the nine months ended
Revenue
The components of our revenue during the nine months ended
Nine months ended
March 31, Change
2021 2020 Amount %
Subscription and transaction fees $ 154,743 $ 97,604 $ 57,139 59 %
Interest on funds held for customers 5,249 17,886 (12,637 ) (71 )%
Total revenue $ 159,992 $ 115,490 $ 44,502 39 %
Subscription and transaction fees increased to $154.7 million during the nine
months ended March 31, 2021 from $97.6 million during the nine months ended
March 31, 2020 , an increase of $57.1 million or 59%. Subscription fees increased
to $80.4 million during the nine months ended March 31, 2021 from $60.2 million
during the nine months ended March 31, 2020 , an increase of $20.2 million or
34%, driven primarily by the increase in customers and average subscription
revenue per customer. Transaction fees increased to $74.3 million during the
nine months ended March 31, 2021 from $37.4 million during the nine months ended
March 31, 2020 , an increase of $36.9 million or 99%, due primarily to increased
adoption of new product offerings and the mix of transaction revenues shifting
to variable-priced products. Our total customers increased to over 115,000 as of
March 31, 2021 compared to over 91,000 as of March 31, 2020 , or an increase of
approximately 27%. Our average subscription revenue and transaction fees per
customer increased by 5% and 56%, respectively, during the nine months ended
March 31, 2021 , driven primarily by the increase in customers' usage of our
platform and payment activities.
Interest on funds held for customers decreased to $5.2 million during the nine
months ended March 31, 2021 from $17.9 million during the nine months ended
March 31, 2020 , a decrease of $12.7 million or 71%. The decrease was due to a
decline in the yield we earned from investing customer funds, partially offset
by an increase in the balance of
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customer funds held while payment transactions clear. The average rate of return earned on customer funds held was 0.39% during the nine months endedMarch 31, 2021 , a decrease of 137 basis points from the same period in fiscal 2020. The decrease in yield was due primarily to theU.S. Federal Reserve's action to cut the federal funds rate inMarch 2020 in response to the COVID-19 pandemic. The average daily effective federal funds rate decreased by 161 basis points during the nine months endedMarch 31, 2021 from the same period in fiscal 2020. The average daily balance of customer funds held while payment transactions clear increased to approximately$1.8 billion during the nine months endedMarch 31, 2021 from approximately$1.3 billion during the same period in fiscal 2020, an increase of 34%. Fund balances increased due to growth in TPV. Our TPV increased to approximately$98.6 billion during the nine months endedMarch 31, 2021 from approximately$71.0 billion during the same period in fiscal 2020, an increase of 39%.
Cost of Revenue, Gross Profit, and Gross Margin
Cost of revenue, gross profit, and gross margin during the nine months ended
Nine months ended
March 31, Change
2021 2020 Amount %
Cost of revenue $ 41,513 $ 29,044 $ 12,469 43 %
Gross profit 118,479 86,446 32,033 37 %
Gross margin 74 % 75 %
Cost of revenue increased to $41.5 million during the nine months ended March
31, 2021 from $29.0 million during the nine months ended March 31, 2020 , an
increase of $12.5 million or 43%. The increase was due primarily to a $5.9
million increase in direct costs associated with the processing of our
customers' payment transactions, use of software applications and equipment as
we expanded our data processing capacity, and data hosting services, which were
driven by increases in the number of customers, adoption of new product
offerings, and volume of transactions. The increase was also due to a $4.5
million increase in personnel-related costs, including stock-based compensation
expense and amortization of deferred service costs, a $1.1 million increase in
consulting-related costs due to the hiring of additional personnel and outside
services who were directly engaged in providing implementation and support
services to our customers, and a $0.9 million increase in shared overhead and
other costs. Our average headcount of such personnel during the nine months
ended March 31, 2021 increased by 27% compared to the same period in fiscal
2020.
Gross margin was 74% during the nine months ended March 31, 2021 , which
decreased slightly compared to the 75% gross margin during the nine months ended
March 31, 2020 due primarily to a decrease in high-margin interest on funds held
for customers.
Research and Development Expenses
Research and development expenses during the nine months ended
Nine months ended
March 31, Change
2021 2020 Amount %
Research and development expenses
57 % Percentage of revenue 38 % 33 % Research and development expenses increased to$60.6 million during the nine months endedMarch 31, 2021 from$38.5 million during the nine months endedMarch 31, 2020 , an increase of$22.1 million or 57%. The increase was due primarily to a$16.2 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional personnel who were directly engaged in developing new product offerings, a$3.1 million increase in costs for engaging consultants and temporary contractors who provided product development services, and a 37
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$2.3 million increase in shared overhead and other costs. Our average research and development headcount during the nine months endedMarch 31, 2021 increased by 24% compared to the same period in fiscal 2020. As a percentage of total revenue, research and development expenses increased to 38% during the nine months endedMarch 31, 2021 from 33% during the nine months endedMarch 31, 2020 , due primarily to the increase in stock-based compensation expense relative to the increase in our revenue.
Sales and Marketing Expenses
Sales and marketing expenses during the nine months ended
Nine months ended
March 31, Change
2021 2020 Amount %
Sales and marketing expenses
26 % 29 %
Sales and marketing expenses increased to$42.3 million during the nine months endedMarch 31, 2021 from$33.6 million during the nine months endedMarch 31, 2020 , an increase of$8.7 million or 26%. The increase was due primarily to a$6.4 million increase in personnel-related costs (net of increase in capitalized sales commissions of$0.8 million ), including stock-based compensation expense, due to the hiring of additional personnel who were directly engaged in acquiring new customers and in marketing our products and services, a$1.5 million increase in marketing initiatives and digital advertising spend as we continued to promote our products and services, and a$0.8 million increase in shared overhead and other costs. Our average sales and marketing headcount during the nine months endedMarch 31, 2021 increased by 8% compared to the same period in fiscal 2020. As a percentage of total revenue, sales and marketing expenses decreased to 26% during the nine months endedMarch 31, 2021 from 29% during the nine months endedMarch 31, 2020 as we adjusted our sales and marketing costs in response to the changing economic environment.
General and Administrative Expenses
General and administrative expenses during the nine months ended
Nine months ended
March 31, Change
2021 2020 Amount %
General and administrative expenses
54 % Percentage of revenue 37 % 34 % General and administrative expenses increased to$58.9 million during the nine months endedMarch 31, 2021 from$38.3 million during the nine months endedMarch 31, 2020 , an increase of$20.6 million or 54%. The increase was due primarily to a$14.5 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional executive employees and administrative personnel, and a$1.2 million increase in shared overhead and other costs. Our average general and administrative headcount during the nine months endedMarch 31, 2021 increased by 18% compared to the same period in fiscal 2020. The increase was also due to a$5.1 million increase in professional and consulting fees as we obtained additional external assistance to support certain corporate initiatives and a$2.2 million increase in corporate insurance costs (mainly pertaining to costs associated with insurance policies for our directors and officers), partially offset by a$2.5 million decrease in sales and use tax reserves.
As a percentage of total revenue, general and administrative expenses increased
to 37% during the nine months ended
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Other (Expense) Income, Net
Other (expense) income, net during the nine months ended
Nine months ended
March 31, Change
2021 2020 Amount %
Other (expense) income, net $ (13,943 ) $ 2,396 $ (16,339 ) (682 )%
Percentage of revenue (9 )% 2 %
The $16.3 million change in other (expense) income, net during the nine months
ended March 31, 2021 compared to the same period in fiscal 2020 was due
primarily to a $15.6 million increase in interest expense related to the
amortization of debt discount and issuance costs of our 2025 Notes and a $1.4
million decrease in interest income due to the decrease in interest rates,
offset by a $0.7 million loss on revaluation of redeemable convertible preferred
stock warrant liabilities that was reported during the nine months ended March
31, 2020 but none during the nine months ended March 31, 2021 .
(Benefit from) Provision for Income Taxes
(Benefit from) provision for income taxes during the nine months ended
Nine months ended
March 31 , Change
2021 2020
Amount %
(Benefit from) provision for income taxes
The benefit from income taxes during the nine months endedMarch 31, 2021 pertained to a partial reversal of net deferred income tax liability that was established in connection with our issuance of the 2025 Notes. The provision for income taxes during the nine months endedMarch 31, 2020 pertained to state income taxes. Non-GAAP Financial Measures To supplement our condensed consolidated financial statements, which are prepared and presented in accordance withU.S. generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly -titled measures used by other companies, are presented to enhance investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP metrics to assist investors in seeing our financial performance using a management view. We believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. 39
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Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit and non-GAAP gross margin as gross profit and
gross margin, respectively, excluding stock-based compensation expense,
depreciation and amortization expense, and payroll taxes related to stock-based
compensation expense. We believe non-GAAP gross profit and non-GAAP gross margin
provide our management and investors' consistency and comparability with our
past financial performance and facilitate period-to-period comparisons of
operations. The following table presents a reconciliation of our non-GAAP gross
profit and non-GAAP gross margin to our gross profit and gross margin for the
periods presented (amounts in thousands):
Three months ended Nine months ended
March 31, March 31,
2021 2020 2021 2020
Total revenue $ 59,738 $ 41,230 $ 159,992 $ 115,490
Gross profit 44,304 31,120 118,479 86,446
Add:
Stock-based compensation expense 728 422 1,971 781
Payroll taxes related to stock-based
compensation
expense 119 - 263 -
Depreciation and amortization expense 800 514 1,868 1,575
Non-GAAP gross profit $ 45,951 $ 32,056 $ 122,581 $ 88,802
Gross margin 74.2 % 75.5 % 74.1 % 74.9 %
Non-GAAP gross margin 76.9 % 77.7 % 76.6 % 76.9 %
Free Cash Flow
Free cash flow is defined as net cash provided by (used in) operating
activities, reduced by purchases of property and equipment and capitalization
of internal-use software costs. We believe free cash flow is an important
liquidity measure of the cash (if any) that is available, after purchases of
property and equipment and capitalization of internal-use software costs, for
operational expenses and investment in our business. Free cash flow is useful to
investors as a liquidity measure because it measures our ability to generate or
use cash. One limitation of free cash flow is that it does not reflect our
future contractual commitments. Additionally, free cash flow does not represent
the total increase or decrease in our cash balance for a given period. Once our
business needs and obligations are met, cash can be used to maintain a strong
balance sheet and invest in future growth. The following table presents a
reconciliation of our free cash flow to net cash used in operating activities
for the periods presented (in thousands):
Three months ended Nine months ended
March 31, March 31,
2021 2020 2021 2020
Net cash used in operating activities $ (1,580 ) $ 822 $ (13,163 ) $ (3,327 )
Purchases of property and equipment (3,426 ) (2,764 ) (17,062 ) (5,736 )
Capitalization of internal-use software costs (378 ) (149 ) (1,038 ) (489 )
Free cash flow $ (5,384 ) $ (2,091 ) $ (31,263 ) $ (9,552 )
Liquidity and Capital Resources
As of March 31, 2021 , our principal sources of liquidity were our cash and cash
equivalents of $1.2 billion , our available-for-sale short-term investments of
$512.5 million , and funds available under our Senior Facilities Agreement (as
defined and described below). Our cash equivalents are comprised primarily of
money market funds and investments in debt securities with original maturities
of three months or less. Our short-term investments are comprised primarily of
available-for-sale investments in corporate bonds, asset-backed securities, and
U.S. treasury securities with original maturities of more than three months. Our
Senior Facilities Agreement, which expires on June 28, 2022 , allows us to borrow
up to $50.0 million . Available funds under our Senior Facilities Agreement,
after deducting our letter of credit utilization totaling $6.9 million , was
$43.1 million as of March 31, 2021 .
We believe that our cash, cash equivalents, available-for sale short-term
investments, and funds available under our Senior Facilities Agreement will be
sufficient to meet our working capital requirements for at least the next 12
months. In
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the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of additional indebtedness, we may be subject to increased fixed payment obligations and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. There can be no assurances that we will be able to raise additional capital. The inability to raise capital would adversely affect our ability to achieve our business objectives. OnNovember 30, 2020 , we issued$1.15 billion in aggregate principal amount of our 0% convertible senior notes (2025 Notes) due onDecember 1, 2025 . The 2025 Notes, which are further described below, are senior, unsecured obligations, and will not accrue interest unless we determine that special interest obligations are deemed necessary. The 2025 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated to the 2025 Notes and rank equal in right of payment to any of our unsecured indebtedness that is not so subordinated. In addition, the 2025 Notes are subordinated to any of our secured indebtedness and to all indebtedness and other liabilities of our subsidiaries.
Cash Flows
Below is a summary of our consolidated cash flows for the periods presented (in
thousands):
Nine months ended
March 31,
2021 2020 (1)
Net cash provided by (used in):
Operating activities $ (13,163 ) $ (3,327 )
Investing activities (563,192 ) (221,872 )
Financing activities 1,356,043 253,829Net increase in cash, cash equivalents,
restricted cash, and restricted cash equivalents
(1) Amounts have been adjusted to reflect the adoption of ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash. See Note 1 to the
condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q for a summary of the adjustments.
Our primary source of cash provided by our operating activities is our revenue from subscription and transaction fees. Our subscription revenue is primarily based on a fixed monthly or annual rate per user charged to our customers. Our transaction revenue is comprised of transaction fees on a fixed or variable rate per type of transaction. We also generate cash from the interest earned on funds held in trust on behalf of customers while payment transactions are clearing.
Our primary uses of cash in our operating activities include payments for employee salary and related costs, payments to third parties to fulfill our payment transactions, payments to sales and marketing partners, and other general corporate expenditures.
Net cash used in operating activities increased to$13.2 million during the nine months endedMarch 31, 2021 from$3.3 million during the nine months endedMarch 31, 2020 , due primarily to the increase in cash paid for our cost of services and operating expenses, primarily employee salary and related costs due to the increase in headcount and administrative costs; offset by the increase in cash received from subscription and transaction fees revenue. 41
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Cash provided by our investing activities consists primarily of proceeds from the maturities and sale of corporate and customer fund available-for-sale investments. Cash used in our investing activities consists primarily of purchases of corporate and customer fund available-for-sale investments, purchases of property and equipment, and capitalization of internal-use software.
Net cash used in investing activities increased to$563.2 million during the nine months endedMarch 31, 2021 from$221.9 million during the nine months endedMarch 31, 2020 due primarily to the increase in purchases of corporate and customer fund short-term investments and the increased purchases of property and equipment, partially offset by the increase in proceeds from the maturities and sales of corporate and customer fund available-for-sale investments.
Net Cash Provided by Financing Activities
Cash provided by our financing activities consists primarily of proceeds from the issuance of the 2025 Notes, issuance of common stock upon the completion of our initial public offering (IPO), issuance of common stock upon the exercises of stock options, and purchases of common stock under our employee stock purchase plan (ESPP). Cash used in our financing activities consists primarily of payments of costs related to the issuance of debt and common stock, and payments for the purchase of the Capped Calls (as defined and described below). Additionally, changes in customer fund deposits liability could either increase or decrease our net cash from financing activities. Net cash provided by financing activities increased to$1.4 billion during the nine months endedMarch 31, 2021 from$253.8 million during the nine months endedMarch 31, 2020 due primarily to the proceeds from the issuance of the 2025 Notes, the increase in proceeds from the issuance of common stock in connection with the exercise of stock options, and purchases of common stock under our ESPP, and the increase in customer funds liability, partially offset by the purchase of the Capped Calls in connection with the issuance of the 2025 Notes. During the nine months endedMarch 31, 2020 , our cash from financing activities included the proceeds from the issuance of common stock upon the completion of our IPO, net of underwriting discounts and other offering costs.
2025 Notes
As ofMarch 31, 2021 , we had outstanding 2025 Notes with aggregate principal amount of$1.15 billion . The 2025 Notes are convertible on or afterSeptember 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date onDecember 1, 2025 . The 2025 Notes have an initial conversion rate of 6.2159 shares of common stock per$1,000 principal, subject to customary adjustments for certain corporate events. Upon conversion, we have an option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock. Our current intent is to settle conversions of the 2025 Notes through a combination settlement, which involves a repayment of the principal portion in cash with any excess of the conversion value over the principal amount settled in shares of common stock. In conjunction with the issuance of the 2025 Notes, we entered into capped call transactions with certain counterparties (Capped Calls). The Capped Calls each have an initial strike price of approximately$160.88 per share, subject to certain adjustments. The Capped Calls have an initial cap price of$218.14 per share, subject to certain adjustments; provided that such cap price shall not be reduced to an amount less than the strike price of$160.88 per share. The purpose of the Capped Calls is to reduce the potential dilution of our common stock upon any conversion of the 2025 Notes and/or offset any cash payments that we are required to make in excess of the principal amount of such converted notes, as the case may be, with such reduction and/or offset subject to a cap.
Credit Facilities
OnJune 28, 2019 , we entered into a Senior Secured Credit Facilities Credit Agreement (as amended, Senior Facilities Agreement) withSilicon Valley Bank for a revolving credit facility of up to$50.0 million (Total Commitment), which amount may be increased by up to$25.0 million upon request and subject to conditions. Under the Senior Facilities Agreement,Bill.com, LLC is the borrower andBill.com Holdings, Inc. is the guarantor. The Senior Facilities Agreement expires onJune 28, 2022 and is secured by substantially all of our assets. 42
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Borrowings under the Senior Facilities Agreement are subject to interest, determined as follows: (a) Eurodollar loans shall bear interest at a rate per annum equal to the Eurodollar rate plus the applicable margin of 1.75% or 2.75%, depending on company cash balances (Eurodollar rate is calculated based on the ratio of Eurodollar Base Rate, which is determined by reference to ICE Benchmark Administration London Interbank Offered Rate (LIBOR), but not less than 0%) or (b) Alternate Base Rate (ABR) loans shall bear interest at a rate per annum equal to the ABR minus the applicable margin of 0.25% or 1.25% depending on company cash balances (ABR is equal to the highest of (i) the prime rate, (ii) the Federal Funds Effective Rate plus 0.50%, and (iii) the Eurodollar rate plus 1.25%).
The Senior Facilities Agreement requires us to comply with certain restrictive
covenants. As of
Available funds under our Senior Facilities Agreement, after deducting letter of
credit utilization totaling
Contractual Obligations and Other Commitments
InNovember 2020 , we issued$1.15 billion in aggregate principal amount of the 2025 Notes. The 2025 Notes are senior, unsecured obligations, and will not accrue interest. The 2025 Notes are convertible on or afterSeptember 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date. For additional discussion about the 2025 Notes, refer to Note 7 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. InNovember 2020 , we renewed our agreement with a vendor to purchase software licenses and support for a total cost of$9.3 million and payable in annual installments throughMarch 2024 . InAugust 2020 , we expanded our agreement with a vendor, which requires us to purchase services for a total minimum commitment of$11.0 million over three years beginningSeptember 1, 2020 . Other than the 2025 Notes and the agreements that we entered with certain vendors referred to above, there were no material changes in our contractual obligations and other commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 .
Off-Balance Sheet Arrangements
As of
Critical Accounting Estimates
Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenue generated, and reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Except for the accounting estimates used to measure our 2025 Notes as described below, there have been no material changes to our critical accounting estimates as compared to the critical accounting estimates described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 . Convertible Senior Notes - We accounted for the 2025 Notes by separating the principal amount into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which represents the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2025 Notes as a whole. The difference between the principal amount of the 2025 Notes and the liability component was initially recorded as a debt discount and is amortized as interest expense using the effective interest method over the 43
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term of the 2025 Notes. The equity component of the 2025 Notes, which is included in additional paid-in capital, will not be remeasured as long as it continues to meet the conditions for equity classification. The debt issuance costs were allocated between the liability and equity components based on the respective values of the liability and equity components. The debt issuance costs allocated to the liability component are being amortized as interest expense over the term of the 2025 Notes using the effective interest method. The debt issuance costs allocated to the equity component are presented as a reduction of additional paid-in capital.
Recent Accounting Pronouncements
See "The Company and its Significant Accounting Policies" in Note 1 of the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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