Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to bottom lines first quarter 2020 earnings Conference call statements made on today's call will include forward looking statements about bottomlines future expectations plans and prospects all such forward looking statements are subject to risks and uncertainties.
Please refer to the cautionary language in today's earnings release and bottom line <unk>. Most recent periodic reports filed with the FCC for a discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward looking statements bottom line does not assume any obligation to update any fee.
Forward looking statements. During this call Bottomlines financial results are presented on a non-GAAP basis. These non-GAAP results include among others constant currency growth rates gross margins operating income EBITDA net income and earnings per share a reconciliation of these non-GAAP financial measures.
So the most directly comparable GAAP measures is available in the Investor resources section of bottom lines website bottom line will be providing forward looking guidance on the call. A summary of the guidance provided during the call is available from the company. Upon request later, we will conduct a question and answer session. If you have a question.
At any time. Please press one then zero I would now like to turn the conference over to our host Mr. Rob Amberley. Please go ahead.
Good morning, and welcome to the first quarter fiscal 20 earnings call.
Thank you for your interest in bottom line.
I'm here with Rick Booth, our CFO .
Rick will find a detailed review with a quarter's financial results and our guidance going forward.
And then as always both of us will be available for questions. Following his remarks.
First quarter was a strong quarter.
Hi, Linda by accelerating subscription revenue growth.
What can success.
Positive customer engagement.
Continued advancement of our products up.
We grew subscription revenue when our target 15% to 20% range.
And are committed to doing so throughout the fiscal year.
It's the primary objective robust strategic plan.
And our top priority.
I'll start my comments with a brief overview of the financial highlights for the first quarter.
Subscription revenue grew 16% on a constant currency basis.
The acceleration of our subscription growth rate is aligned with our focus on this valuable revenue stream.
Subscription revenue was 80.1 million for the quarter.
Well now a 320 million annual subscription revenue business.
One step closer to the 500 million we've targeted in three to four years' time.
That's an important business payment franchise.
Subscription bookings were 21.2 million.
Revenue overall was 108.2 million.
EBITDA was 23.6 million any P.S. was 30 cents above our target and expectations.
Finally, we ended the quarter with 95 million in cash after stock repurchases of 10 million.
Financial results were seeing demonstrate the alignment of the market opportunity a strategic plan our investment in our product set and our execution.
Perhaps the most important result in a quarter, what's the acceleration of subscription growth.
It's a strong start to the fiscal year.
It's right in line with our plan to grow subscription revenue at our target, 15% to 20% rate throughout the year.
It makes a longer term target of 500 million and subscription revenue all the more achievable.
And a fundamentally demonstrates the appeal of our product set and the size of our market opportunity.
During the quarter, we saw broad based demand translated into strong subscription bookings of 21.2 million.
I'll give some examples of the market success, we saw in the quarter, starting with Paymode X.
We have a large opportunity with paymode X to be the way businesses pain get paid.
During the quarter, we signed 32, new payers Paymode X.
A record, including several payers have signed on for Paymode X with visa payables.
The new payer sign ons represented a number of articles.
And demonstrates the massive future opportunity.
New payers on the system include one of the leading e-commerce companies.
A major furniture manufacturer.
Several hospitals and health care providers.
And to universities.
The breadth of the new payer shows the universal appeal of the platform.
As in the past the contribution from Bank of America was strong.
We also saw sign ons to assess our TD bank citizens and you wouldn't be.
During the quarter. We also grew our direct sales effort for Paymode X.
We're fully committed to our bank channel partners, but at the same time as a sales opportunity beyond what we achieved with them through the banks.
This is a significant investment for us.
The one once we're confident we'll have a strong return enough why 21 and beyond.
Finally from a product perspective, we launched enhancements to the Paymode X platform, including new capabilities for invoice automation, which leverage artificial intelligence.
Additional virtual card capabilities that expands our addressable market opportunity.
And we unveiled in that weren't payment score.
Fighting Paymode X pay us with increased confidence in the security their payments.
Simple straightforward and intelligent.
And that worked payment score provides visibility there regularity and potentially risky payments.
Based on inside some rules that leverage the transaction history and community data drawn from the massive b to b spend the flows across the Paymode X network.
We had a solid quarter in legal spend management as well signing three new deals on the quarter.
We continue to growing in the legal spend market by deploying waiting platform and launching additional offerings, which the company.
During the quarter, we had seven customers expand their relationship with new product offerings.
Turning to international markets, we're really strong quarter for the <unk> business payment and financial messaging in Europe .
Any uncertainty around Brexit is not showing up in our growth or bookings.
Our European product set a record bookings quarter.
Second only to Paymode X in its contribution to our total bookings number.
The strength of our European results speaks to opportunity.
Make sense and execution.
Continually evolving payments standards like open banking and PST to creates new opportunities.
Relationships with banks in London and across Europe is strong and provides lots of new product set and innovation opportunities.
Finally, our team has experienced committed and knowledgeable and our execution has been strong.
As a result, we see the opportunity in Europe , only getting bigger and better product set.
Our strategy and our go to market efforts are all working well and won't produce continued growth.
Finally, we had a solid sales quarter in banking with four new deals, including one major platform Dbi Q deal and our second customer on our new insights platform.
Take a few comments on each.
Our platform deal was for Dbi Q with our cyber fraud secure payments.
This was an important win for a number reasons.
First it was a relatively small bank with roughly 5 billion and assets.
That's a misconception that we only play well for large banks, that's simply not the case.
Bottom line is the right solution for any bank serious about growing their business banking franchise.
We can deliver the business banking in Treasury management capabilities, small and medium sized banks need to retain and deepen relationships with our largest customers and drive up market growth.
All of them attractive SaaS model price point.
Thoroughness of this bank selection process is another reason that choice a bottom lines, particularly meaningful.
The bank looked at all or options and engage the top industry consulting firm in the process.
Adding a new customer to our platform as always rewarding doing so in this case is particularly gratifying as it confirms our strategy and the investments were making to support that strategy. We're on target.
The other exciting signing in the quarter was a bank that selected our new relationship management and insights capability.
This is important because it was a new relationship and a new offering.
Bank will be using our solution to provide customer intelligence and insights to the commercial banking and wealth management groups.
We know insights as an exciting capability for our commercial banks to see it chosen by a new bank.
Not currently on our platform and to be at <unk> point for wealth management and commercial banking suggest the market may be much much larger than we did initially thought.
Before finalizing my remarks, I'd like to comment on some of the customer interaction I've had the past quarter, what that tells me about the future for Bottomline.
I'll comment on two areas in particular.
Paymode X and banking solutions.
The opportunity in Paymode X is huge and we're executing against that as evidenced by a record number of new payer signings.
The New news is there was an increased appetite and interest from customers to replace the legacy payment process.
The breadth of our undergrad payables makes BT, a compelling choice for that task and our scale experience and security features make us the safest partner as well.
Much safer than going it alone.
We're Sinclair momentum with our bank channel partners and with our expanded direct sales team I'm confident we have continued strong growth ahead of us.
During the quarter I had the opportunity to meet with a number of our bank customers and bank prospects.
The opportunity we have with their organizations is large and growing.
The importance of our technology comes across every interaction I have.
Thanks rely on us today, but more importantly, there counting on us for the future technology advancement in innovation, they need to compete when and grow.
Analytics, new payment standards and the ever expanding cyber security threat or just a few of the examples are the challenges they are counting on bottom line to help them address.
That translates into demand for our Dbi, Q platform or insights customer analytics and engagement capabilities.
All time and faster payment types and cyber cloud solutions.
In addition to product leadership, we've also established trust with this important customer group.
At a recent senior bank in executive dinner, let's see I O CTO isn't heads of commercial banking, we held around half Kay.
Aspect of customer we didn't buy that said I can't believe you invite your prospects to identify with all your customers.
My response was simple.
Of course, we do.
Existing customers a key element in our continued sales success in market wins, our existing customers and the reputation we have learned as one of our most valuable assets in fact, delighting, our customers and being a trusted innovation partner is a theme across all of bottom line.
We know that is the foundation for long standing relationships that continue to grow overtime.
So in summary, it's an exciting time for Bottomline.
We said this year would bring an acceleration in growth and we're seeing that occur.
The 16% subscription growth is just the beginning of what will be a very good year.
Beyond the coming here, we have a technology sat and plan to drive to 500 million them subscription revenue in three to four years time.
We're confident in our strategic plan I'm confident we'll drive shareholder value.
So with that I'll turn it over to Rick and then we'll open up the call for questions.
Thank you Rob.
We used to report on a strong quarter was 16% subscription revenue growth on a constant currency basis.
In subscription bookings of 21.2 million.
This is a solid start to a year in which we expect each quarter to be within retargeted, 15% to 20% subscription revenue growth rate.
Based on visibility through most of the drivers, including sign backlog implementation success and timing in groups within existing customers.
The results for the quarter were above expectations on almost every metric.
These results provide early evidence of the accelerating subscription revenue growth, we see in fiscal 2000 and beyond.
Subscription revenue grew 16% on a constant currency basis to 80.1 million.
And while we're focused primarily on subscription revenue growth. We also produced total revenue of 108.2 million.
30 cents earnings per share an EBITDA of 23.6 million.
Each of which was above expectations.
Well focus the body of my remarks today are three major topics.
First a reviewer Q1 financial results in detail.
Ben or provide guidance.
Finally, I'll provide my perspective on the most important items in the quarter and how they tie into our long term economics.
To review, our financial results into two well speak briefly each winding arpino.
And in addition, we posted supplementary materials to our web site for your reference.
Subscription revenue continues to be are clear priority.
Note that 16% or a constant currency basis was within our 15% to 20% goal for subscription revenue growth.
Recompeted this growth will remain within our 15% to 20% range, because we have visibility through multiple growth drivers, including sign backlog.
Implementation success and timing.
Within existing customers and expanding our customer base through additional savings.
We baby millions of subscription revenue in the quarter were 320 million dollar run rate subscription business and at this rate 74% of total revenue came from subscription offerings.
Six full percentage points from year ago.
Maintenance revenue with the other component of recurring revenue and recurring revenue comprised 89% of total revenue of three percentage points year over year. This gives us excellent visibility to upcoming Rudolph.
License revenue on the other hand by design is only a small part of our overall business as such license revenue of 2.6 million was down 2 million year over year.
System with our plan strategy to emphasize our subscription products.
We expect similar levels of license revenue for the remainder of the year.
Services, which we are firmly as needed to help our customers succeed were 8.7 million in the quarter.
Bringing total revenue 208.2 million.
We also had solid sales execution, we signed 21.2 million of new subscription bookings led by Paymode X.
This brings us to 87 million in new subscription bookings over the last four quarters.
Equivalent to 28% of subscription revenue in the same period.
Well bookings figures are estimates and customers take time to implement a ramp to full revenue production. This provides us with visibility to future subscription revenue growth in fiscal 2000 and beyond.
Our Paymode X network added 32, new payers across five channel partners.
This validates the attractiveness of our highly secure full payment automation value proposition and channel partnership approach.
We signed three new insurance story legal spend management network and another seven insurers expanded their relationships with us with additional modules were addition divisions adopting our solutions.
We signed for new customers and our digital banking products.
Including one new platform customer, who signed up for both payments and cash management and cyber fraud risk management.
With this signings and after go lives in the quarter, we have approximately 17 million of annual digital baking subscriptions, which are signed but not yet being recognized in European now.
The implementations themselves continue to go very well with another large customer life in the quarter.
And six more large banks in a variety of smaller big scheduled to go live in the second half of the fiscal year. This visibility gives us high confidence the banking will achieve 15% to 20% growth within fiscal 20.
These bookings at same backlog give us confidence that our targeted investments in product development in sales and marketing are bearing fruit and provide excellent visibility to revenue growth acceleration in fiscal 2000 and beyond.
Equally important our continued product innovation and competitive differentiation in this large and growing business payments market give us confidence in our path to 500 million of subscription revenue within three to four years.
While focusing primarily on groups, we delivered on our financial commitments, while investing the advanced our solutions in recognizing less software revenue in the quarter.
EBITDA of 23.6 was 22% of revenue.
Core operating income was 17.5 in core earnings per share were 30 cents.
Oh at or above expectations.
Even more importantly subscription gross margin of 60%.
Was up 2.6 percentage points year over year.
As we added 10.3 million of subscription revenue.
Of which 78% flowed through to gross margin.
This margin expansion reflects the power of our business model to scale in a sustainable manner as we aggressively pursue our growth agenda.
This agenda includes investment in product development sales and marketing.
Development was 16.7 million in the quarter were 15% of revenue.
One percentage point year over year, still a lean and efficient level expand.
Sales and marketing expense was 20.7 million grew 19% of revenue.
Also up one percentage point year over year.
Well DNA expense was 8.3 million.
Were 7.7% of revenue.
From a cash flow perspective, we generated 18.1 million of operating cash flow.
And as planned we use 10 million to repurchase 233000 shares within the quarter.
This allowed us to end the quarter with 95 million as cash and investments on hand.
And going forward, we expect to opportunistically extend our repurchase activity into coming quarters.
Turning to guidance as the second major topic.
Our solid results and momentum position us well for Q2 in the short term and for fiscal 2000 beyond in longer term as we drive toward 500 billion of subscription revenue in three to four years.
Beginning with the growth we can see in fiscal 2000.
Specifically in the second quarter, we expect to deliver 80 to 83 million of subscription revenue.
107 to 109 million of overall revenue.
23 to 25 million of EBITDA.
17 to 20 million core operating income.
In core earnings per share of 28 to 33 cents.
This strong start puts us solidly on track for the year.
Yes, I'll note the pound has traded up recently, but we've all seen rates fluctuate and for now we're simply confirming our full year guidance, we'll continue to present detailed guidance, probably it each quarter, while evaluating and updating the full year as needed.
Finally in conclusion I'd like to provide my perspective on the most important items in the quarter and how they tie in to our long term economics.
Our primary focuses on growing subscription revenue in the 16% constant currency growth combined with solid bookings you actually have visibility give us high confidence in fiscal 2000, and our ability to drive to 500 million of subscription revenue in three to four years.
This quarter illustrates the economic power. This approach as we added 10.3 million of subscription revenue was 8 million of increased subscription gross margin for 78% incremental gross margin.
And as we scale or subscription revenue to 500 million and beyond this will become a powerful engine of growth and ultimately of shareholder return.
As I sit back and think about arpino.
Struck that all of the year over year trends are moving consistent with our strategic plan in long term model.
Subscription revenue as a percentage of total is up six percentage points.
Subscription gross margin is up 2.6 percentage points.
Sales and marketing expense is up one percentage point.
And product development is up one percentage point as we expand the value proposition is available to our customers and the future revenue opportunities for the business.
We're well positioned and a large and growing market or current financial performance is strong.
And we're confident in our ability to drive value for customers and shareholders for years to come.
And with that I'll turn it back to Rod for a few concluding remarks before we take question.
Thank you Rick.
Now before we open up the call to questions I'd, just like to make a few concluding remarks.
First off I was really delighted to see the acceleration of a subscription growth to 16%.
This positions us well know achieved 500 million in subscription revenues and a three to four year timeframe.
We also as Rick noted saw incremental gross margins of 78%.
Hi growth and margin potential together.
For years out we should be adding 75 to 100 million a year and subscription revenue.
With this much as 80% of that incremental margin.
Turning back to the near term every quarter and endpoint 20 won't be in 15% to 20% subs and trans growth target range.
Fiscal 20 will be a strong year.
So I think we're addressing both near term performance and long term potential was exciting quarter I went that well open up for any questions.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press one than zero on your telephone keypad you may withdraw your question that anytime by repeating the one zero command if you're using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you ever question. Please press one than zero at this time and one moment. Please for your first question.
Your first question comes from the line of Andrew Schmidt from Citi. Please go ahead.
Andrew Schmidt Your line is open. Please go ahead.
Hi, guys. Thank you for taking my question and good to see the consistent results here in the step up in subs and trans.
Yes, the small bank when you called out I was wondering if you could just talk about just the pipelines for small banks and and then generally speaking what you're seeing from the retention on the legacy portfolio I know in the past or spend.
There's been some issue with the retention of descend the smaller banks I Wonder if you could address that that would be helpful.
Yes, I think as I mentioned in my remarks was really encouraging.
When a small bank I think there is a misconception that were targeted on our only appropriate for large banks I couldn't be further from the true we really.
Can bring the treasury and commercial banking technology that all banks need to win compete and grow and we can do that in a SaaS model whether price point fit some really thanks of any size last quarter, we had a small 5 billion or sell assets bank same this quarter. So that shows the breadth.
Ability almond terms on the legacy platform momentum with a number of those customers really weren't logical for business banking business banking wasnt, a serious part of what they were doing it wasn't one of them ambitions. So we have had attrition from that base. We knew that when we acquired that we acquired that at such an attractive price point.
That was just part of the plan, where what we're doing now on our.
Q platform, it's worth pointing out more of the capabilities that will make it an implementation for medium or small size bank much easier faster and again the SaaS model allows us to deliver that LNG price point, that's attractive so.
The smaller banks are definitely part of our strategy going forward and we're already seeing successful.
Okay. That's helpful. And then I was wondering if we just talked about the pipeline and I know you don't give bookings forecast, but if you could talk a little bit about the pipeline is you see it today and that how that might translate to to sales going forward I know you've added a number of good products. Obviously STB Q2 is the automation.
Sweet around Paymode X.
But the anything around the pipeline as it as it relates to sort of the for booking trends would be helpful.
Sure.
So.
Thanks, we have a lot of momentum.
If you are looking at a business banking platform.
Bottom line is probably in pole position, beginning that process industry analysts reputation technology platform across all those point bottom line. So we're in a really strong position from a pipeline for business banking Dbi Q a.
Paymode X what continuing to work with our banks and that that drives a fabulous pipeline for us where we have a newer sales effort on paymode access a direct sales team that were just building out now and that will just supplement the channels, but we have a wonderful pipeline on one of the things that is happening and Paymode Xs, there's just more marketing.
Interest that's more interesting customers either had a fraud events and they want a more secure way to execute payments or are there.
Want to change out finally, just want to change out legacy systems and get to something more efficient that also monetizes payments. So pipelines real strong there and then last comment I'd make on pipelines, Europe , and well get a lot of questions around Brexit.
Please don't ask us, what's kind of happening Brexit I'm only Rick would not only is not telling anyone but we don't we don't know what's happened in Brexit. All we do know is we're seeing more momentum we had a record quarter for bookings this quarter.
In Europe , with our financial messaging and payment platforms, and we'd expect that momentum to continue the pipelines very strong.
I can't tell whether that's just the economic.
Dynamics and the fact, the payments or something that has to be made all the time, whether it's our solution set or whether it's there's so much change going on in Europe with open banking PST too and the need point more cyber security.
Solutions, it's probably a mix of all those factors the pipelines real strong and that's part of the reason we have.
Evidence that will be in the 15, 20% subs and trans growth for the remainder of the fiscal year.
I'd add to that is.
A few years ago, we were more dependent on attracting new logos now with the additional products and the interoperability of our submission you see in areas like legal spend where we had three new customers. Joining me here seven margin churn expanding their relationship with us. So we've got multiple paths to revenue growth and I think thats reflected you can see another corners.
Okay.
No I believe it was up 22% quarter over quarter, and we never want to micro focus on that.
Very strong trends.
Alright, good progress see next week. Thank you.
Thank you.
Your next question comes from the line of John Davis from Raymond James. Please go ahead.
Just wanted to a hit on it on guide for a second here I think both you and Robert said.
Do you expect.
Subs and trans to remain in the 15% to 20% range for the full year, yet guide implies I think 12%.
Or so a 13% for the rest of the year.
So just FX is now will that better just any commentary there realizes first quarter you guys. Typically don't raise guidance, we just want to make sure not miss anything or any offsets.
Thanks.
Thank you said it very very well, both both underlying commercial trends and currency look like Tailwinds now.
We never happened I can't imagine that we ever would raise guidance in the first quarter, we tend to look our guidance pretty hard twice a year.
And so in in.
Coming quarter will will guide for the remainder of the year as we always do.
Okay and then.
Rob some of your commentary around the margin than the incremental margins I think.
Gross margin sided 78% pretty impressive.
And you kind of talked about driving the both revenue growth and and margins over the longer term does that change sound a little bit more positive on the midterm outlook I think the last quarter or two quarters ago, you talked about kind of flat margins for the.
Medium term.
Any update there it sounds a little bit more positive, but just wanted to get the comments I.
I think it reiterates the importance of our strategy.
Solving primarily for drive to 500 million subs and trans growth, but this strong economic underpinning.
Now in the time for us to be focusing on revenue and profit will be there.
Okay great.
I wanted to touch a little bit more Andrew's question around Brown small banks I think I appreciate the when this quarter, it's good to see but any update on the attrition of the legacy Intuit business. I think you guys had lost or had.
Washington, New product there to try and stem some attrition I know, it's early days, but just any progress there will be helpful.
Yes.
Feedback on that product is strong.
Yes, we do expect that we'll continue to face attrition in no small bank customers for the remainder of this year, we don't see as being a factor beyond that and there's potential to do better than our original estimates of attrition.
Okay. Thanks last one for me Rob any comments on.
Either competitive landscape given.
All the deals that have happened and or what the M&A landscape looks like.
We sit here, obviously you guys have a very very clean balance sheet potential to do something just any comments or update on either one of those topics would be great. Thanks guys.
Sure on the competitive landscape when there is.
Acquisition and M&A activity, it's usually a distraction we've seen that happened a number different time. So that's that's generally a plus for us.
For example, I look at a five star bringing in.
First data, there's some elements scenarios, where we'd overlap I think the focus will be on first data of course.
From our M&A standpoint.
We certainly are active in a market. We certainly look we have almost capability as you just reference from a balance sheet standpoint.
I also have a fabulous year ahead of us and we're not going to do anything that will disrupt that momentum of that year that on just struck disrupt the subscription growth.
Be dilutive to that be dilutive.
To our earnings level, So that's pretty high bar and what M&A, we would do and we feel the products that we have.
That's very well as Rick pointed out interoperability it gives us a chance to expand Tam with additional cross sell so I'm. We're active in the market, but were not going to be aggressive or get over our skis.
Okay. Thanks, guys.
Your next question comes from the line of Gary Prestopino from Barrington Research. Please go ahead.
Turning everyone.
Hey, Rob just wanted to get it idea you mentioned.
Some of these new signings are payers to the Paymode network.
I never really heard you say anything about e-commerce companies, signing up or even a leading furniture manufacturer.
Appears to me that is this is gaining traction you're you really moving it into different vertical markets is this kind of a correct assumption.
Yes, that's correct.
Well it was interesting to have those headwinds in particular, because we have done less and with the manufacturing and E. Commerce. This was a big name we can't give out their name, but it's really interesting to have that ones. So I think we've got deep penetration and potential and that will not penetrated but real value proposition and verticals, we've talked about before.
Like health care for example.
Property management being a couple, but there's such a potential beyond that for other other verticals and part of the direct sales team will help us bring out more of that opportunity.
Where some of these were some of these newer verticals generated by the direct sales team or where they through the bank now.
Well no not really that teams just really ramping for us we had a couple of wins from the existing direct team, but we're going to build out a much bigger direct sales team we have to that.
Okay. Thank you then.
Oh.
Western comes from the line of Mayank Tandon from Needham and company. Please go ahead.
Thank you good morning, congrats on the quarter.
Rob could you talk just high level about the impact of real time payments adoption and how you see that impacting your business in terms of good it help accelerate transaction growth. So you're a bank channel just maybe some thoughts around the implications for your business as a real time payments become a more mainstream.
Sure well anytime this a change in payments that's fabulous for US all of our customers are going to look to us for this technology solution to address that.
Real time payments and faster payments as some other interesting aspects about one you get too.
The new capabilities, all banks don't want to offer ultimately so thats, a upsell opportunity in new market opportunities for us. The other thing to think through a cyber security aspect to that the payment is settling at a much quicker timeframe you want more technology around that payment to ensure that's the right payment in a safe payment and that certainly is.
Opportunity for us the cyber fraud risk management and financial crime solutions.
Got it that's helpful. And then just going back to Paymode X I think you mentioned in your comments that you had a record number a pair signed up what changed this quarter or maybe you could talk just in general it may have missed that.
What's been driving the inflection of growth on the Paymode side, I think we've been waiting on that for a while but now it seems to be actually getting traction. So some thoughts around that would be very helpful.
I think there are number factors I think the acceptance of an in network.
Paymode X. So the fact that you're not going to pay make payments on your own corporate is much more accepted than it was.
A couple of years ago. Thank the second piece is cyber security.
Many times, we'll talk to a new prospect than they had an event and the saying how do we get to a more secure payment process and Paymode X certainly represents that so those are two with uptick pieces that a big drivers that are seeing more customer interest openness, we see the sales cycle where it.
Past, we'd have people up informational meetings and in what dress, we've seen much more of a driven process today. So it's an excellent market and we're seeing the growth.
Right and then finally up or Rick Rick in terms of capital allocation I think I heard robs comments around M&A, but otherwise I do you plan to continue to just buy back stock or are there any other initiatives that you have planned around capital allocation going forward.
Yes, we we executed exactly according to plan in Q1, our buyback, we we do extension and intend to be opportunistically in the market in upcoming quarters, as well and other than that our capital allocation strategy is unchanged, we believe in a clean balance sheet and being nimble and ready to respond opportunities.
Excellent. Thank you.
Your next question comes from the line of Brett Huff from Stephens. Please go ahead.
Good morning, guys. Thanks for taking the time.
And a couple of questions on the direct sales force. So I know that we had a direct sales force more many years ago. When paymode was kind of first being developed or or or pushed by you guys. And then we need to the bank channel and we're moving back to using at least some direct salesforce can you explain how that's going.
Work with the channel I know that Youre still going to rely most on the challenge is going to be sort of a lead generation mechanism that we hand over a lead to a bank once we've developed and or just kind of give us a sense of how that'll work.
Yes, so we continue to have a direct sales force.
But it was relatively small package, we signed a couple deals this quarter.
Including on one of the once I've mentioned west through our direct salesforce, but it hasn't been as large and it hasn't been a focus for US now in terms of channel. It's really simple if we get this situation that you want me to start citizens Bank of America any one of our channel partners is there on the customers' preferences to sign.
With that channel will step back and we're happy to give the business in that channel economics work relatively some off the bottom line and we can.
We can certainly compensate appropriately our sales teams. So it's really that looked at where all the opportunities new verticals for example.
Outside of existing territory coverage with our bank channels wherever there are opportunities for us to sell them. We are covered a max and to the extent, we're overlapping how can we drive that to us.
Session and if in fact customer wants to go with the bank Thats wonderful will step back.
Have you guys sized at all how big that will be just to give us a sense because I know this is such a big opportunity that I suspect any additional sales person will drive good bookings, but just curious how you're thinking about size.
You know this couple of ways you could go into thinking about it.
All of an absolute number 401 would be just how big is the market itself, which you see huge number was still in the very early innings now it's still got 50% of business is paying.
50% or more of their payments by paper check the other way to think about that is as you're adding new sales executives what each year.
They are what they have it we have some plants and some thoughts about that but we've not went up bringing that out of disclosing that at this point I think more broadly you can look at the plan and begin process investment, we raised sales and marketing investment.
By about one percentage point year over year as were ever staffing up but clearly with the size of marketing we're facing at the high return investments.
Okay. That's helpful and then.
Just on the implementations that are.
Kind of in process to $17 million, Rick I think you mentioned this I know that that number has been out there for a while it sounds like we got one done and we have six more are those six that you mentioned the the totality of that 17 million and.
Phasing.
Certainly that's a great question and the number has been similar for a while because we're signing new banks.
As we've been.
Bringing other banks lie so we'll see the majority of that 17 million.
Going live within fiscal year, and more coming into place that the total number of banks, there's 13 banks and implementation now.
Small banks as well as large banks, we tend to focus on the large banks matured million or more in annual recurring revenue just to give people attached to those most complex implementations and they are going very very well. We recently brought a bank live in behalf marks which is a new record for us. So we're definitely continuing.
Speed through will speed up our ability to get through that backlog.
Great and last question for me I know that the bookings comps are really tough for most of last year. I think you said the bookings growth was 22%. This year if I heard that are this quarter or that's right.
It's continued to be a little bit easier I know you had such a really strong I think since gold.
Fiscal 18.
Our the come sort of more reasonable this year and should be kind of.
We expect to see that going forward.
I understand that bookings are going to vary greatly quarter to quarter in my remarks, I always focus on that rolling four quarters 87 million, which was 28% of revenue. So I feel good about both our current bookings and the pipeline looking forward.
Hi comment just because it's such an area. Okay I didn't want people in the context.
Hi, Brian I want to people, we realized how strong the bookings were in this quarter as well.
Does it mean, thanks for the time I appreciate it.
Hi.
Your next question comes from the line of Bob Napoli from William Blair and company. Please go ahead.
Thank you.
Good morning, Thank you for doing them wanting call I think I speak for my Pearson.
I appreciate the morning call.
First question on on Paymode, Paymode Xs and has been a lot of questions asked about adding that Robbie sign more excited about it this morning than.
You always I mean, obviously has been a topic, but the acceleration.
Chance I mean, it would be helpful. If we got some sizing on the amount of.
Payment volume or transactions or.
As that becomes a bigger business for you when.
We are you any thoughts around.
Talking about the growth rate of that business or.
The then some sizing around it.
Thanks, Bob appreciate the question one of the wonderful things about Paymode X is the flexibility of platform and as we're introducing more capabilities like invoice processing and those sorts of things theres. So many different metrics when I look at to try to size that continually evolving we our position is unchanged that is not helpful for us.
So on that level of detail within our broader business payments portfolio.
Okay and then.
The what percentage of that business is now vendor pay I mean, you've been transitioning to vendor pay for I think you don't do anything other than vendor pay.
I mean, you haven't for several years can you what percentages now vendor pay.
Well, 100% of everything we've been signing up in our last year this quarter than last several years as vendor pay when I have a large from one of our competitive advantages as the base and scale. So we have a large face some scale. The was a legacy model those jordi those.
Okay. So all of those are bank of America customers and they've not chosen not chosen to change that model. So we still the vast majority of the volume and vast majority of that.
Transactions vendors are underwrote the payer pay model that remains an opportunity for us to convert that but that won't really be a bank of America decision.
Any other revenue impact is coming from the vendor pay model.
I'm sorry.
Rick what was the last statement you made.
The majority of the volume on a classic majority of that revenue from the vendor pay model, Okay, great great right. Okay. Okay. So.
The power of the model.
Right.
Thank you and then a follow up on the digital banking business and actually you changed I mean, it's been a few quarters, but you used to call that transitioning and now it's just digital banking. So he is it is it fully transitioned and then one follow up on that business.
I think the digital banking business has performed very strongly this quarter, 17% growth more confident right now with the acceleration was great I'm, just saying maintenance you it used to call that didnt transitioning in it so it's really pretty much transition than Oh, yeah revenue model, Yeah, that's sorry, yes.
When we're looking transitioned and we're confident that we'll see 15% to 20% growth. This year. So I think going forward once we've seen a comparable levels of growth and that you're looking more like then we'll probably put more emphasis on the overall company and less emphasis on providing detail on that transition now.
Okay, and then on that business you have a great banking corporate product a that it's we're very well regarded.
Is there an opportunity I think some of your competitors sell against you with.
A broader platform trying to cross nita offering both corporate and consumer and there's so many other products I think you can probably cross sell into your customer base are there any thoughts of.
Building, a consumer platform and what other you know what are you working on R&D wise, what's the new product pipe a pipeline well I don't think we would build I wouldnt be unlikely I'd never say never an M&A certainly could be an opportunity where we could have a retail office platform, but as you say there are number competitors thats, what they do that.
Well, you doing things like personal financial management saving for personal calls et cetera, that's different.
Having a file 10000 payments that are going to.
Brian a different currencies, having entitlements that heavy duty business banking type of stuff than wealth from small business. So multinational and example, however, broadening out a couple of examples but we sell beyond business banking, let me online account opening today and then what was really exciting in the quarter was just see our custom.
Our relationship and insights solution, a brand new capability being bought by a bank and welcome to an existing business banking customer.
At the point, Ed and commercial banking, yes.
But also in wealth management. So this is the technology, which weve.
Developed and brought into so that we would have the capability to have our banks learn from each click on more about the customer I've seen what our next actionable items like we had a selling a quarter, which is a new back and they're deploying it in wealth management. So that's example of a solution that definitely is very applicable to retail could sit on top.
If any of the other retail platforms that are out there and give a bank much more insight in how much of their customers customer relationships and next actionable items and sales productivity. So that's an example, where you'd see us selling into that side of the bank, but not with the exact same online platform.
We would do in business banking or folks like up Q2, Laura.
NCR with due on the.
Retail side.
Thank you and nice quarter appreciate it thank you.
Your next question comes from the line of Dan Perlin from RBC capital markets. Please go ahead.
Yes, good morning, it's actually met Roswell sitting in for Dan.
Following up on the digital banking, it's the very nice wins are you, replacing existing vendors upgrading your current clients or are these banks that are just realizing they need the technology.
Be replacing and digital bank, we replacing somebody else I can be a variety of different capabilities that can be a bank thats using something from the corn planting that's not competitive it can be a bank using that technology solution, which hasn't kept up or made the level of investments and innovations that we have so they were not in.
Market, you're not going to find someone that doesn't have an online presence or some capability today, but they're finding that they need and want to compete.
Okay and then it's you've had this great shift to the subscription and this half model what products do you currently sell that are still kind of under the old license model.
Sure we would sell on premise payment capabilities for corporate for example, we sell our invoicing solutions, which is where we got the technology and the capabilities and all the experience to incorporate invoicing capabilities into Paymode X. Those is typically existing customers. There's some new sales on them as well.
So there's no reason relate to shut that off but are so as Rick said, we'll probably see 2 million or solar software license a quarter, but our real focus sales marketing product is on a subscription model in SaaS.
Technology deployment.
Okay, and then a question for for Rick when.
You're going to be generating a lot of free cash flow you mentioned.
Opportunistic repurchase could you kind of talk about what would be opportunistic and then are there any kind of platform.
They're technologies are platforms coming up for investment.
I think.
I'm going ahead with our economic model you have the potential to drive.
Yes, again free cash flow.
And we will do that but were primarily solving or subs and trans growth right now.
Yes, we've got a strong balance sheet, we want to maintain a strong balance sheet will be selectively repurchasing shares over not setting a timeline or an amount for that today.
So think of free cash flow sort of being reinvested in things like the direct salesforce or additional product upgrading of additional product. So we're we're executing exactly according to our business model, which is while we are focused on solving to drive to 500 million subs and trans our primary investments are in product development.
Sales and marketing, which are being funded through the increase in the gross margin in subs and trans.
Excellent. Thank you.
Your next question comes from the line of.
Terry key Walla from first analysis. Please go ahead.
Hey, good morning, Great you up on the quarter and thanks for taking my question just a question on product development and engineering costs, which increased on a relative basis in the quarter, where those was the increase directed towards any individual platform and then if you could give some thoughts on how we look at those costs in future periods.
So I think you'll see you'll see a continued focus on product for us.
In terms of web, let's focus we're actually doing more cross all of the product sets. So there are things like the use of analytics artificial intelligence machine learning capabilities. We wanted to point, we do deployed across all of our product. So.
Theres a lot a centralized investment and we'd expect that make more centralized investment then the benefits each of the each of the product sets.
Great and then moving forward so that the the relative increase in in those costs, we should we should consider in future periods.
Well I think we've been pretty consistent and increasing the percentage.
Then devoted to RMB.
As a key component of the expansion in subs and Trans gross margin, what we're selling port primarily right now is.
Product excellence and driving the 500 million in three to four years.
Great. Thank you.
And at this time there are no further questions.
Very good well. Thank you everyone for your time was a pleasure to report on a quarter or what we saw acceleration to 16% subs subscription growth. We're on track to our 500 million in three to four years profit potential was demonstrated with the incremental gross margin and we look forward to one year wherever you Arison every key.
Orders in our 15% to 20% subscription growth range and a very strong year for bottomline and for our shareholders. So appreciate your time. This morning. Thank you all.
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