Q2 2021 Bottomline Technologies (DE) Inc Earnings Call
Welcome to the bottom line second quarter 'twenty 'twenty, One earnings conference call on Daniel here, and I'm joined by Robert really Bottomline, CEO and Rick Booth, our CFO I'd.
I'd like to remind everyone that statements made on today's call include forward looking statements bottomline future expectations plans and prospects all such forward looking statements are subject to risks uncertainties and assumptions, including those related to the impacts of COVID-19 on our business and global economic conditions.
Forward looking guidance, we'd provides day is based on our assumptions for the macroeconomic environment based on the facts as we know this day.
Any of these assumptions relate to matters beyond our control, including the impact from COVID-19.
Please refer to the cautionary language in today's earnings release and Bottomline is most recent periodic reports filed with the SEC for discussion on the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward looking statements.
Bottomline does not assume any obligation to update any forward looking statements.
During this call bottom line financial results are presented on a non-GAAP basis. These non-GAAP results include among others constant currency growth rates for gross margins operating income EBITDA net income and earnings per share of <unk>.
Reconciliation of these non-GAAP financial measures the most directly comparable GAAP measures is available in the Investor resources section of our website.
We will be providing forward looking guidance on this call a summary of the guidance provided during the call is available from the company upon request.
I'll now turn it for Bob for his remarks.
Good afternoon, and welcome to bottom line second quarter fiscal 'twenty, one on earnings call.
As always we appreciate your interest in Bottomline.
Q2 was a solid quarter.
While subscription growth continues to reflect transaction volume impacts.
Ascription growth excluding those products.
19%.
We expect subscription growth to accelerate in <unk>.
Both Q3 and Q4.
Strategically Q2 was an important quarter as.
As we made some major advancements in our product set.
We're executing against our strategic plan to build a subscription business of scale driven by market, leading SaaS platform.
Our strategic plan is focused on the products that.
Market position and execution needed to drive high margin subscription growth at or above our 15% to 20% target range.
At the same time.
We continue to drive consistent strong profitability and cash.
Cash flow.
The new capabilities for developing to expand and enhance our key SaaS platforms.
Position us well to provide more product capabilities to customers.
More growth for Bottomline.
And increased value for shareholders.
With almost 375 million for subscription revenue.
We can easily see 500 million as the next important milestone.
One which will achieve in the next two to three years.
At $500 million, our tracker growth rate translates into $75 million to $100 million of incremental high margin subscription revenue a year.
Before I get further into my remarks, let me touch on the key financial results for the second quarter.
Subscription revenue was.
With $93 4 million, which was up 11% from a year ago.
As in the prior quarter, we continued to see an impact on our transaction based revenue streams, <unk> X and legal spend management.
Excluding those two platforms.
Subscription revenue growth was 19%.
The good news is we saw positive momentum in transaction volumes in December, particularly on <unk> X where for the first time, we achieved pre COVID-19 volume levels.
As a result, we're confident we'll see an acceleration in subscription growth over the second half of the year.
For Q3, we expect subscription growth of 14% to 15%.
For Q4, we expect subscription growth of 18% to 20%.
Our business model provides a high degree of visibility into future revenue and growth.
We're confident we'll achieve the Q3 in Q force subscription growth rates I just outlined.
Subscription bookings were $21 9 million solid.
Solid bookings quarter, which reflects the strong competitive position and sales execution across our product set.
EBITDA was $25 5 million for the quarter for 22% of revenue.
We're on track to achieve a $100 million in EBITDA for the year.
And we continue to have a strong balance sheet.
As we ended the quarter with just under $140 million in cash after paying down our senior credit line and buying back over $10 million in stock.
So solid financial results for the quarter.
With that overview of Q2 results and on.
Growth outlook for the next two quarters.
The remainder of my remarks will focus on our SaaS platforms and strategy to drive sustained high margin subscription revenue growth.
The factors driving accelerating growth or the size of the opportunity were addressing.
Our competitive position in that market.
The capabilities from value, we're delivering to customers.
And our execution and converting that to subscription revenue and.
And value for shareholders.
The market opportunity.
Opportunity, we're addressing is massive.
Okay.
Businesses in the banks to serve them, we're looking for more and more connected automation capabilities and data driven insights.
We have a strong position centered on our leadership in business payments.
It's not just a technology leadership.
But also on market position, where a large number of customers or on our technology.
Over 12000, corporate customers leveraged our corporate payment platforms, <unk> X and <unk>.
Over 425000 vendors are enrolled on <unk> X.
Tens of thousands more businesses received payments from our P. T X customers.
And almost 200000 businesses leverage our platform each day to connect to their banks payments and cash management capabilities. A number that continues to grow as we bring new banks on.
So the position we can leverage is unique.
We're well into our strategy to leverage our customer base brand and distribution channels to expand our from a strong corn payments to a full payments and cash lifecycle platform.
Customers benefit from our platform strategy because it provides end to end seamless management of our corporate banking payments and cash management activities.
The platform empowers financial managers to optimize cash liquidity and working capital and to do so with a unified solution, combining payables receivables and Treasury management.
For integrated payment in cash lifecycle platform provides greater visibility control flexibility automation, and importantly, cyber security and fraud protection.
And with a single platform, there's a unified view of data from multiple transaction systems, which is enhanced by advanced analytics and machine learning.
From a competitive position offering a full platform strategy gives us a significant advantage over any point solution competitor.
The platform breadth provides an opportunity for existing customers to expand our relation with bottomline and new customers to adopt any element.
For the entire platform.
With our large customer base, we have a ready market looking to embrace a broader more effective platform solution.
We're confident we will drive success with customers, we know well.
And on a market, where we're well known and highly regarded.
We've gotten at this point with minimal risk leveraging existing capabilities and strategic disciplined investments.
We started with our corn payments.
We added receivables and then added insights and analytics.
And then three weeks ago, we added market, leading treasury capabilities.
I'll take a moment to go over each.
Mostly on the car familiar with our business payment leadership and expertise that's our core.
Business payments is an area on where we're the clear leader.
Our platform strategy is a logical extension of our core and centered upon our business payments leadership.
An important capability for the platform strategy in any business as receivables.
Our receipt of cash and all of the elements that go with it right.
A reconciliation forecasting predictability and automation.
This past spring, we acquired a receivables platform from one of our bank partners.
We're combining that based platform with a European receivables capabilities, we've already had.
Well as our existing machine learning and data management technology core.
That gives us the front end or money and capability.
Simultaneously, we've developed our cash flow optimizer, which brings a variety of data related to cash from different sources into an intelligent platform.
This is an internal development led by our CTO on an advanced ammo on analytics team.
The result is that you set of unique insights and intelligence across all aspects of the payments and cash lifecycle.
To round out our vision for a full payment in cash lifecycle platform I'm honored to announce the three weeks ago, we closed on the acquisition of Treasury Express.
Treasury expressed as a highly regarded and recognized leader in intelligent frictionless Treasury solutions.
The combination of their offerings springs, a sophisticated on demand scalable enterprise level Treasury solution.
Treasury Express serves 200 customers today across Europe and EMEA.
The solution like many of Bottomline has been sold directly to corporates and through bank channels.
The company has recently been awarded Best Treasury management solution from Treasury management and international.
The Alexander Hamilton Award for best liquidity solution.
And best overall customer satisfaction from IDC.
We did a lot of work to find the right business combination from a technology and cultural perspective that we could bring in to BT and on appropriate and attractive valuation.
We're thrilled to be adding Treasury express its technology and team to Bottomline.
Ah represents a critical piece in the execution of our full payments and cash lifecycle platform.
The work to complete the full on integration of these elements is already well underway.
The result will be a valuable platform for corporate customers and the banks to serve them our platform at a broad set of integrated capabilities supported by data insights and intelligence.
We've spoken to customers and surveyed the market. So we're confident reception will be strong and make a meaningful contribution to our growth.
From a go to market perspective, it's a logical extension of our core strength in payments and an obvious opportunity to expand our relationships with our thousands of corporate customers.
So in conclusion as we look ahead I'm very excited for Bottomline.
We serve a large market and are uniquely positioned.
Our intelligent payments and cash lifecycle platform strategy is a natural extension of our current strength and success.
It will drive deeper stickier customer relationships and sustained valuable subscription growth.
With an acceleration in subscription growth ahead, and the strategic advancement of our product set.
FY 'twenty, one is shaping up to be an exciting year.
Shareholders will be rewarded as we see the acceleration of subscription growth in the coming two quarters and a strong continuation of that growth beyond this year.
So with that I'll turn it over to Rick and then we'll open up the call for questions.
Thank you Robert.
Bottomline delivered a solid quarter total.
Total revenue was above plan at $116 million.
Profitability was in line with plan with $25 5 million of EBITDA and 30 cents earnings per share.
And overall subscription revenue growth of 11% was below plan, but we have a clear visibility to subscription revenue accelerating to 14% to 15% in Q3.
And the 18% to 20% in Q4.
I'll focus the bulk of my remarks on subscription revenue.
Focusing on key subscription revenue drivers in the quarter.
And visible drivers of acceleration in Q3 and Q4.
I'll briefly review other financial metrics, and then I'll provide guidance for Q3 and for full year fiscal 'twenty one.
First.
Focusing on subscription revenue.
At 93 point for a million subscription revenues in Q2 represent over 80% of total revenue and are equivalent to almost $375 million on an annualized basis.
Two thirds of this subscription revenue is on impacted by transactional volumes.
These streams grew at 19% year over year, driven by strong performance in our digital banking P T X and financial messaging platforms.
Now one third of our subscription revenue comes from the payload X L. S N product lines, which are volume driven.
These lines held total subscription growth to 11% due to the continued impact of transaction volumes as recovery during the quarter was clear, but that recovery happened later than expected.
We have visibility to acceleration in Q3 and Q4.
Which is expected to drive subscription revenue growth to 14% to 15% in Q3.
In 18% to 20% in Q4.
In legal spend management volumes ramped consistently in the quarter, resulting in the most meaningful increase in volumes since the pandemic began.
We expect this acceleration to continue for three reasons.
We expect existing customers to continue to grow volumes as they did this quarter.
We have 20% more customers scheduled to go live in the second half of the year than in the prior year.
And new customer demand remains strong.
In P Mod ex payment volumes accelerated again from last quarter and are now above prior year. We expect this acceleration to continue for four reasons.
First <unk>.
Existing customers should continued to ramp strongly as they did this quarter.
Second we have almost 50% more payers scheduled to go live in the second half than in prior year.
Third we expect to accelerate time to revenue and volume of usage as we've increased the resources dedicated to launch and ramp support.
Finally.
New customer demand remains strong.
This growth in subscription revenue drove total revenue for $216 million in the quarter.
With subscription revenue driving total revenue growth, we expect total revenue growth to accelerate meaningfully in Q3 Andrew.
Andrew reported double digit revenue growth in Q4.
Turning to sales our booking results also reflect solid demand.
Customers signed $21 9 million of new subscription bookings.
And while bookings are estimates and customers take time to implement and ramp to full revenue.
This provides us with a high level of visibility into future revenue.
Our <unk> X network added 28, new payers, including a major health care provider.
And current quarter deals were driven by seven bank channel partners as well as by our own direct sales force.
Our digital banking product was selected by three customers to serve as their primary system on a commercial customer engagement.
And these customers ranged in size from a $14 billion community Bank.
To 170 billion regional bank illustrating the breadth of appeal of our commercial banking platform.
With those signings, we havent approximately 18 million of annual digital banking subscriptions, which are signed but not yet being recognized on our P&L.
And we expect three quarters of this $18 million to go live this fiscal year.
Our legal spend management network added six brand new customers and another seven insurers expanded their relationship with US showing continued strong demand for this solution.
So overall it was a solid quarter for bookings as well.
Our other financial metrics all achieved our plan as we reported EBITDA of $25 5 million.
Core operating income of $17 7 million.
And core earnings per share of 30 cents.
Subscription gross margin was 61%.
As year to date, we've added $19 6 million of subscription revenue of which 69% for approximately $13 5 million flowed through to gross margin.
In Q2, we invested in delivery and security, which are priorities and competitive advantages for us.
This day being cracked impact incremental margins in the quarter, but this will normalize over time.
Sales and marketing expense was $24 4 million for 21 per cent of revenue.
This is up $2 million.
We're one percentage point year over year, as we expanded both our direct and channel sales efforts to drive revenue acceleration.
Development expense was $17 4 million or <unk> 15 per cent of revenue as we drove product innovation and platform expansion, while managing costs.
And from a cash flow perspective, we produced $16 3 million of operating cash flow and $9 9 million of free cash flow.
We ended the quarter with $140 million of cash and investments on hand.
After repurchasing $10 7 million of shares and repaying 50 million against our credit line.
And as Rob described just after quarter end as part of our focus on Treasury and receivables capabilities Bottomline acquired a treasury management platform called Treasury Express for $33 million.
This is a very attractive assets in a strategic market and evidence is our continued disciplined approach to M&A.
There's modest EBITDA dilution in year, one of roughly 1 million per quarter, but we remain firmly on track to deliver 100 million of EBITDA in FY 'twenty one.
Turning to guidance as I've indicated we expect to deliver strong performance.
In Q3, we expect subscription revenue of $99 million to $100 million, which will put us at a 14% to 15% subscription growth rate in Q3.
Total revenue of $120 million to $122 million.
EBITDA of $23 million to $24 million.
Core income of $15 million to $16 million.
And core earnings per share of <unk> 25 to 27 assets.
Looking to full year fiscal 'twenty one.
We expect subscription revenue of $385 million to $390 million for the year.
Inclusive of Q4 subscription growth of 18 to 20 per cent.
Total revenue of $470 million to $475 million.
Inclusive of double digit total revenue growth in the fourth quarter.
EBITDA of 100 million on.
Operating income of $68 million to $70 million and core EPS of $1 13 to $1 17.
So overall I am pleased to report on solid results strong confidence in subscription growth acceleration in Q3 and Q4.
In a meaningful expansion of our product capabilities with the addition of Treasury Express.
All of which set bottomline app for a strong fiscal 'twenty, one and beyond.
But before we turn to Q&A, there's one item a personal business.
Working with bottom line for the last six years has been a highlight of my professional life.
I've always thought I'd retire from bottom line its a wonderful company and has a bright future ahead.
But recently had been presented with the opportunity to help a pre IPO company take itself to the next level.
It's a unique opportunity and I expect to work to be both challenging and rewarding.
I'm proud and grateful to have had the opportunity to work with Rob and the rest of the Bottomline team over the last six years.
And I also appreciate and thank the analysts and investors that have put their faith in bottom line.
This was a difficult decision for me personally.
But I've been fortunate to have built and been supported by an incredibly strong accounting and finance team that will support the next phase of growth for Bottomline.
I'll be here through mid March and remain available thereafter, so I expect a very smooth transition.
Well this is Rob. Thank you Rick we appreciate all you've done for Bottomline.
And we certainly wish you well with the new opportunity.
For outside the audiences, while these are big big shoes to fill.
We've been working with Spencer Stuart and.
And we expect to announce a strong CFO shortly.
As Rick noted he'll be with the company through mid March and we have a strong finance from accounting team. So I anticipate a smooth transition, but once again really say thank you Rick for all you've brought to Bottomline and all you have helped us do to get to on the next level.
So with that we'll open it up for questions.
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One moment, please while we poll for questions.
And our first question.
Thanks from Andrew Smith, we'd see the good financial please proceed with your question.
Hey, guys. Thanks for taking my questions and Rick Let me extend my congratulations it's great working with you and it sounds like an interesting opportunity.
Okay. Thank you Andrew.
So.
What are we on just starting off on products.
On the Treasury management opportunity that seems attractive and it's something that we've identified as a prime candidate for innovation.
Could you talk a little bit about the revenue model, a treasurer express and generally I guess across the payments and cash lifecycle platform.
And then just also how does that fall into your existing distribution footprint that.
That would be great place to start.
Sure.
Revenue model on the payments cash lifecycle platform will be subscription.
On the district, <unk> really interesting because.
Because we have so many opportunities with existing customers and existing relationships to expand what we're currently doing with them.
So as I indicated we've got.
<unk> of corporate customers.
We can expand their capabilities to treasury intelligent treasury with Arvind sites and also to receivables and on the another interesting opportunity for us as the vendor community on came up assets.
We've got 425000 vendors involved no 425000 businesses aren't going to be the right candidates for the platform but.
If the Allison sorry, that's unbelievable opportunity. So that's a really interesting distribution channel and then last we sell directly to corporates and work weapons and sell through banks that service corporates.
Bank channels, there's a wonderful opportunity as well to add on those capabilities. So low.
Stepping back hopefully that came across in my remarks, but it's a logical extension of our strong core and payments, we've been anticipating and working towards the convergence of a PNA are and kind of a mid point of that is really treasury and intelligent insights. So we're bringing all of those together and the payments and cash lifestyle.
Platforms.
Got it. Thank you for that and then I heard the EBITDA dilution comments, but I didn't hear it would be a revenue sizing comment.
Just can you give some indication of size and then in the outlook. If you kind of Peel that back what does.
But to your subs and trans growth rates look like it seems like just back of the envelope you should still see a meaningful underlying acceleration, but just just wanted to be clear what's embedded in the outlook from buy from an inorganic perspective.
Andrew This is Rick I'll take that one.
The outlook includes includes the small contribution that we expect from Treasury Express remember that.
We're subject to purchase accounting in the early days and this day.
It's a market in which you acquired them.
Strategic asset, even though the very favorable and attractive valuation, which we did.
It means that there's not a material contribution in the year.
Okay.
Under such a different land a few words.
On a late hits principally organic.
Okay.
Great. That's good to hear from an acceleration perspective, and then just as we think about the run rate exiting FY 'twenty, one you mentioned double digit growth.
Yes.
It seems like the tailwind for you mentioned outlined Rick aren't going to dissipate and new customer additions and then you get you still get some tailwind from volume.
Treatment and you have a good pipeline is there any reason to think that debt.
Debt exit run rate of double digit should persist into FY 'twenty two just thinking ahead.
No I think you're putting your finger on it pretty fundamental point, Andrew which is net with the refinements in our business model that we continue to bank with subscription revenue now dominating our revenue streams youre going to see a long term convergence of total revenue growth in subscription growth. So I actually think FY 'twenty to well they were not.
Ready to guide.
Should be the best the best year on the company's history.
Fantastic well, it's too bad youre not going be around for it but I'm sure we'll keep in touch.
Thanks, a lot guidance.
But they won't let me in the question queue, but I'll be listening.
Well, Thanks, again, guys and congrats again, Rick really appreciate it.
And our next question is from John Davis with Raymond James Financial. Please proceed with your question.
Hey, Thanks, Good afternoon, guys on I'll add my congrats Rick.
So I guess the first question that I wanted to hit on a little bit. If you look I know bookings can be lumpy quarter to quarter, but if I just look at kind of first half of fiscal 'twenty one.
Like it's roughly flat year over year, obviously that was I'm sorry in the middle of the pandemic. So just curious if you guys have any high level thoughts on what you think the Covid impact was on on bookings growth on the first half and how we can kind of expect that not looking for quarterly guidance on how can we expect that going forward, because obviously you need bookings growth to some.
<unk> debt $500 million targeted in the continued 15% to 20%.
Subs and trans growth.
Well I'll, let Brett comment on the math on the second but remember that this transaction based businesses, we drive a lot more growth outside of bookings so as our customers growth for legal spend on <unk>, we drive growth as well so not a real element of our growth.
Growth feeds for the bookings number.
Yes, I would I'd further emphasize that our strategy is geared for 100% and alignment with increasing our bookings we've increased our commitment to our customer success teams, which work more with our existing customers as we've talked about in prior quarters, we've ramped up on.
Sales and marketing and we did so again this year and now with the extension of our value proposition very logical adjacencies.
We have every opportunity to.
Continue to drive at moving faster rate the increases in bookings that you are looking for.
Is it fair to say that bookings were negatively impacted by Covid or is it something that you don't think it was really material I mean on just.
Kind of just.
Trying to maybe got chassis again what.
What are your expectations.
Well guess what were bookings on the first half for the year relative to your expectations on relatively in line.
How much disruption was created by the for the sales organization just any color there.
I don't think this is yes go ahead Rick go ahead.
Whenever whenever the topic of bookings come on I'm on.
I always reflect on the fact that they can be very lumpy remember, we've got very large very long term customer relationships and individual signings can be material.
So now I think we're doing everything appropriate to accelerate that flow.
I wasn't disappointed in our in the trailing 12 months I believe that was.
I believe that was around 23, 23% of subs revenue so those bookings, although not as much as as it sounds like you would've liked are very solid with the opportunity to get better.
Okay. That's helpful and then the things that I wanted to switch let me can.
Can I have just a low.
Yes.
In terms of growth remember that our product a lot of our products. So that's a lot for ramp in July so one will benefit from prior quarters bookings, it's not one for last quarter's bookings is going to be two quarters from mouse growth Secondly, as I mentioned earlier, we grow with our customers growth in terms of what we've seen in the market, which you answered.
I would say the following I'd say, we've seen more activity than ever at the top on the funnel.
More response on our.
Digital materials more response on Webinars for response.
Seen a bit on pause on banks' decision, making.
Now from the level that it's concerning we actually had our first customer gold Bank platform go log that was the full COVID-19 to cope with daily if you will sign during Covid and went live during COVID-19, but there is a there is a bit of hesitation on part of banks for new initiatives. That's all built into our model and forecast today.
I think what we'll see is as weak court COVID-19, we're going to see the benefit of the top of that funnel.
Start to come all the way through on bookings, So I think as we call, but we see a real positive impact.
Okay.
<unk> helpful. Robert.
And then I just wanted to.
Diving, a little bit on say low debt. So I think I forget for Robert you mentioned that you've gotten back to pre COVID-19 volume levels into Q.
But just curious how.
About a year and now I believe with the sales force specifically for for <unk>. So just curious to kind of get you there.
Update there on how thats going how they are working with the <unk>.
Inc. Channel I think here the goal was to basically on a drum up some warm leads and really supplement with bank channel, but just curious based on.
For the year end now for so how thats gone.
Well in line better than expected would you say you thought there would be helpful.
Well in short really well and.
I like the way you framed the question frankly, supplementing the bank channel. This was a really interesting quarter for US we had seven different bank channels.
On new new payers for bottom line. So again on a lot of generation from the bank channel Miss a ton of interest that Dan our direct team is really effective means to attack on the verticals to supplement the bank channel. So it's a big part of our go to market strategy.
Okay, and then last one for me I think Rick you mentioned that the Treasury express would be about $1 million dilutive per quarter.
Certain timeframe when you expect that deal to become accretive in FY 'twenty, two or just any kind of color. There on when we can flip that to the positive accretion.
Yes, we expect that profitability rate to improve as we are as we increase our rate of cross sell but it's a little early to be guiding on that certainly not separately.
Okay. That's it for me thanks, guys.
Okay.
And our next question is from George Sutton with Craig Hallum. Please proceed with your question.
Thank you Rick Mike Congrats as well.
My question is actually for Rob you mentioned, you surveyed the market relative to your new payments platform payments and cash.
Cash lifecycle platform I am curious what you heard what what did those customers tell you.
How did that drive your your speed of of bringing this together and ultimately how large do you think this could be in terms of increment for you.
Well first off we surveyed both corporate customers and we have a lot of discussion with our bank channels.
Channels for a wonderful opportunity for us to give another view of the market on the view of corporates and also have a distribution channel.
The convergence of eight P M a R.
On Cyrusone intelligence analytics data.
Came back and every interaction and every dialogue we've had in terms from the gross opportunity and how that comes I'd frame. It two ways one.
It's critical to be continue to be competitive from a leader.
And so on one one level.
All the work we need to do to ensure we're on a 15% to 20% target growth rate continues for the years to come on.
Whether that's gone on upside the market opportunity is bigger now, but kind of on the call. Rick one out of a position to give guidance sort of give us suggestion on an acceleration or.
Market size contribution at all Mike, but it is exactly the right place for US every piece of feedback has been very positive and couldn't be more excited about the fact, we put this together and last thing I would mention on it we've put this together really quite collaborate in a clever way because we happened to have a big big.
Dilutive acquisition, we just talked about the evolution for a couple of quarters from less than a million box, that's not particularly meaningful in my view at least where we are creating.
Creating a game changing platform.
To drive growth for years and years come on.
That's helpful in giving you a little color on that questions.
That was in your release, you mentioned U S bank, introducing AP optimizer.
We're obviously familiar with how significant a size player.
Player.
U S Bank is on the corporate side can you give us a little bit better sense on how much of an opportunity that might be.
I think the way to judge opportunity would be one size and then second disengagement and engagements a lot tougher but measured on.
I would tell you that U S bank engagement couldn't be stronger we did a lot of planning well on a go to market and they are fully behind the platform. So we're really excited about it and it's a wonderful opportunity for us.
One other question.
Just one brief brief addendum.
It's also a wonderful illustration of continuing to expand our product offerings.
U S Bank has taken the full invoiced based solution with card is an integrated part of the offering so it's.
Each successive generation becomes more and more core to the relationship.
Gotcha.
Last question, just a quickie, but srd too.
That was something you I think you're focused on on your last call didn't necessarily get an update there I'm curious.
How much of an expansion you've seen there or are we through that process.
Yes.
I would say that the macro theme.
On continuing increasing complexity vs IV regulation.
Particularly in the European Union, which runs six six to 12 months ahead in the U K is slightly ahead of that before things come over to the U S.
Those continue to be strong drivers and.
You'll note if you do the math on our geography, a very strong a very strong quarter for.
For our U K operations I wouldn't tie it specifically to.
<unk> two or any other any other regulation.
But that that wave of change continues.
Okay. Thank you.
Okay.
And our next question is from Gary <unk> with Barrington Research. Please proceed with your question.
Hi, good afternoon, everyone.
On the legal exchange business, you said you had seven.
Customers expand their relationships.
Or is that with the partner select program or could you just explain what was expanded there.
Yes. So there is there's actually a number of expansion opportunities within.
Within our legal spend platform at this point in addition to partner select we have a vendor management operating to extend the same functionality 10 on legal vendors and we also have law firm analytics on which provides the next level of insight so many ways for them to expand.
Okay. Thank you and then can you just clear something up for me with this this new platform that you have out this corporate treasury capability cash lifecycle platform did you need to make the acquisition of Treasury Treasury Express to do this or just Treasury Express allow you to to do this in international markets outside of the U.
Yes.
I would I wouldn't say we needed it to do it.
But it gives us so much more capability. So if you think about state zip cash cash coming in way out that well.
We have a lot of cash management.
The house, we have a lot of cash management capabilities, our cash flow optimize so it does a lot of capabilities, but it accelerates and gives us so much more on certainly as you highlight gives us excellent international capabilities.
Thank you.
And our next question is from <unk> Tandon with Needham <unk> Company. Please proceed with your question.
Great. Thank you good evening, Congrats breaker, it's been great working with you on you'll be greatly missed.
Thank you.
So I wanted to ask a Rob you talk about the Tam expansion could you, maybe just dissect that a little bit more Robert in terms of what incremental opportunity you see for Bottomline, given the platform expansion and tightened.
Tied into that question would be would you now consider maybe doing something on the HR side in terms of M&A to have that entire end to end product set setup.
So we have the E R side.
We have that we're building that out right now yeah. Let me go back over how we got there so we had existing capabilities, particularly.
Particularly in Europe.
Particularly around direct debit, which one of the most.
Most common receivables from full receivables capability in the U K.
Then this spring acquired receivables platform from a bank partner.
And we've been out for the course of this year. So far and then we will be doing continuing to do so building that out to on next generation platforms. So on our receivables and we have the capabilities we need.
It gives us this fall.
Payments and cash lifecycle platforms. So yes that would have been an important part, yes that would need to be an acquisition, but we've done that we did that on the corporate wide with bank channel partner and now supplemented that with our additional build out and other capabilities. We have in terms of Tam, it's math large tam, but it's not on.
Number we're giving now today I think that quickly gets ahead of itself, but it is a major expansion. The other way I would look at that since the competitive on that.
Competitive differentiation.
No any corporate today looking for a point solution.
They are going to go with just the receivables or just the payables provider really committing that theyre going to have to hop on their vendors for other pieces of this.
With our platform, we can address the full payments simple cash lifecycle money coming in money, that's being managed in house insights and analytics around that cyber fraud protection and payments.
So the competitive differentiations massive huge and of course, the market opportunity as well so as we get further out we'll share what we think near term.
<unk> could be what Tam could people, but we're not in a position to share that tonight.
Rob then tied into that question would be your win rates versus.
The main competitors, whether it's on the digital banking side or on the AP side without naming names could you talk about how your win rates have been trending.
And where you win.
Assuming that the larger tier of the market maybe some.
Anecdotal evidence if not any quantifiable number you can share with us in terms of how that win rates been tracking.
Sure.
Approximately three quarters of the mandates for new payments and cash management platforms.
That business banks banks that are serious about their business banking franchise generally banks of scale and size, although the small banks that are focused on business banking.
And what are the coil later, you can see I E Ts.
And on list reports, but the market really supports that so our win rate there was fabulous.
We moved if you wanted the answer for.
Payments and cash lifecycle platform work way to where we went out of end market actually were announcing that this is where we're going but I would expect we'd have a real strong win rate with existing customers.
Because we're already there we're already a trusted innovation partner. So that's really what gives us kind of up low to the odds. If you will entry into a broader market. We're expanding from our core we're not entering receivables for entering treasurer independent of the existing capabilities known non vendor status, we have an injury.
Good day.
That's helpful. Thank you so much.
And our next question is from Brett Huff with Stephens Inc. Please proceed with your question.
Good evening and Robert.
Bob Congrats on the deal and Rick sorry to see you leave you'll be missed but good luck in the next chapter.
Thank you.
Yes.
Quick one quick technical or.
Targeted question on the M&A.
I don't think I was trying to listen I'm not sure. If I heard you talked about the integration is it a SaaS delivery model.
Or are you just putting some of that technology over to your existing platform just sort of give us some quick and dirty on on how the tech integration will go with the Treasury Express.
Well, yes, its a SaaS delivery model, but there's actually a lot of work to connect all these pieces.
So to connect the full platform from receivables to treasury to our own insights with our cash flow optimizer to payments. So there's a fair amount of work now that's not unachievable, we plan for that well dressed up but it's not a question on a couple of months that'll be up a couple of quarters to get that one.
Can place could be out three quarters, but.
Then you have a full platform on when you have that full platform. Then that gives you access to data across all the different points. It gives you data from receivables data from payments.
We'll cycle so.
<unk> platform, we're doing the work to integrate it's not it's not a flip the switch and integration, but that's part of the moat. If you will competitive mountain competitive advantage as well.
Great. That's helpful. One more sort of more direct and targeted one you mentioned the direct sales force for paint on X. I know you guys have been building out a little bit more you mentioned the seven different bank channel had delivered some payers that are incremental.
Update on the direct sales force I know, they're kind of working both with and around the banks, but just an update on that.
Yeah, we've not quarter by quarter I'm announcing direct sales results, one way or the other that wouldn't be the right measure to really look at it I think the overall bookings which was.
29, this quarter Super strong so that's really how we end up looking at it will give.
Updates from time to time as we just did here on on the direct sales team, but it was a super quarter to see.
Seven banks participating some banks have been wins that's fantastic.
That's great and then last question for me is a little bit bigger picture one Rob.
Given that your expertise in your guys playing the BTB payments for a long long time, we're still trying to figure out how this market evolves and I was wondering if you could talk about vertical integration and b to B and I'm just thinking that just it just happens to stick on my mind that you guys have a lot of health care that you've had a lot of success. There you have a lot of counties.
Is that how we should expect <unk> to be your your business or more broadly to be kind of happen.
Or is it going to be more of a generic across industries.
Kind of progression do you think.
Well I think it's some of both but it's centered on vertical so if I. If we approach bottomline approaches shoot today in your health care provider.
We're gonna be able to show you 40, depending on where on the country 40, 50, maybe 60% of your vendors already on our network.
So there's some real advantages of interoperability and network when you're in a particular vertical. So I think we will continue to see a vertical.
Playing on that but on the other hand, those organization on pain at re kind of business.
So I think its both its not discreet to verticals, but protocols for a big driver on Berg vertical focus can accelerated adoption.
Great Thats all I appreciate your perspective.
And our next question is from Bob Napoli with William Blair. Please proceed with your questions.
Alright. Thank you. Thank you very much and.
Ric Good luck to you has been great working with you and look forward to keeping in touch.
So Bob.
Rob just.
On the on <unk>, because I think the net revenue per pay mode. Actually I think you said recently is is all transaction revenues.
Is that correct and I would think on the Treasury side, if you kind of put that in BTB payments on the AUR side, you're going to have a lot more software revenue.
Vs transaction revenue on the AP side is that correct.
Well I think that's correct, but I would say something on transaction revenue.
For we've been experiencing on driven by transaction revenue for over 15 years on legal spend management.
It's been a fabulous way to grow with customers growth.
The platforms of SaaS platform. The monetization is transaction based but the predictability of those transactions has been.
Truly it's been extraordinary up until a pandemic.
We've had actually a relatively modest impact.
It impacts our growth rate and each percentage point matters, there, but it's not like it's been cut.
Third or some major impact like that so first comment I'd make is yes. It is subscription revenue, but we like the transaction model and what monetizing sticky sticky staff SaaS platform the predictability of those.
Major insurers are not going to stop having litigation businesses are not going to stop paying and we've seen some level of impact, but that doesn't discourage us at all from the transaction model on when Covid clears will continue to grow as our customers growth. So in short, yes, more subscription more on the subscription model behind.
No.
On the payments and cash lifecycle of SaaS platform, but why aren't we don't disfavor on why Wouldnt look and consider the transaction revenues that our SaaS platforms drive is any less valuable.
No I don't disagree I was kind of leading to my next.
Thought on.
Once that was confirmed is that the revenue per transaction to the extent that you are growing.
Virtual card.
Virtual card and cross border payments monetize on a transaction basis at a dramatically higher level.
Then then ACTH payments and our discussions with visa.
And other companies we cover in the space.
We're seeing some pretty.
An interesting increases in revenue per transaction.
Just.
Wondering if youre seeing the same thing if you could talk about the penetration.
Actual card penetration rates are all over the board in the industry.
And I think it really matters by vertical.
But I was wondering if youre seeing if you see the opportunity for a substantial increase.
And revenue per transaction by growing virtual cards, <unk> and cross border.
In particular what.
We do.
Well, we all should keep a balance across payment types, because we're trying to drive full automation for our payer customers and we're trying to drive acceptance large degree of acceptance on automation across all vendors type so, particularly as you move up to larger enterprises.
You can see other types other than the virtual card up more acceptance or you can hit a wall at certain levels of virtual card acceptance, but.
The main point of your question, absolutely, we see a growth opportunity around virtual card, which is a critical part of our platform now that's why we'll see how the payment types we offer.
Thanks.
And then just maybe on PT X on the open banking efforts that you have and lovely little color. There I think there's some of the numbers that you guys had given in the past at conferences that are on our conference.
Last year suggested some pretty good growth organically added CTX on kind of open banking what is the opportunity for open banking what is the size of that business today and the growth rate.
And.
And maybe what do you see for long term opportunity.
The fundamental opportunities have changed around business change around business process on payments, which is wonderful for bottom line. So we can step in and as we have and then help businesses adapt to the new regulatory on the new payment types and open banking and that's exactly what we're doing to that so in terms of.
On an overall, what what about Tam b or something or not provide a number on that but.
But it is.
Is this massive change on the interesting thing about that change is going to come to other geographies as well I personally I don't think that it'll be legislated or required for.
We hear it all the time, we hear from banks in the U S. What is open banking mean, how will that potentially impact on I think you'll see more of availability of those types of open interconnected systems, even if it's not driven by regulatory perspective. So.
We're doing a bunch of interesting things today around open banking with customers. We've won some new deals in the new business model around that and it is absolutely a key driver of future growth.
Yeah.
Thank you I appreciate it.
And our next question is from Dan Perlin with RBC capital markets. Please proceed with your question.
Thanks, guys and good luck to you Rick.
I wish you the best Buddy.
The the.
The question I have it just for clarification purposes, when I look at the subscription revenue growth.
And I ask out the transactional nature of legal spend management <unk> X I think it was up 19% this quarter, but was up 25 per cent and in the first quarter. So I'm just wondering what was the driver of debt deceleration.
Well, certainly 25% was an extraordinary quarter and we.
We would.
Basically prior prior year impact but.
The clear trend of strong growth in our core products showing that the only impacts that we're experiencing short term or transaction volumes as the key takeaway.
I know, but it would seem as though that that line item would be a little more stable and so forth to decelerate was there just a difficult where there's some sort of comp that I missed from a year ago or is there something else.
No you can have you can have things like go lives some stuff like that that can have an impact one way or the other I mean, that's a super strong quarter.
But I wouldn't be up 19% as well.
Disappointing in any way, 19% now.
We drive 19% on on ongoing basis.
And they end up at a very very different valuation.
[laughter], Yeah, Theres no complaints out of that I was just trying to make sure I understood what that what was driving the step down. So the other thing you mentioned was the incremental margin on the subscription stepping down this quarter. It looks like you took advantage to invest in delivering security.
Security is totally makes sense for me I'm wondering what was what was the driver behind the investments in delivery because it did look like it was a pretty sizable this quarter.
Ah going on in terms of mix.
Is it just kind of post Covid world that you got to be better positioned for I'd be interested to know your thoughts there.
It's part of the overall focus on accelerating both our our new bookings as well as our time to revenue.
If you.
Remember I mentioned that of the 18 million of banking deals that are signed but not yet, but we expect a for three quarters of that to go live during the current fiscal year, and likewise, where we're continuing to analyze and focus on driving accelerated revenue ramp from our <unk> X customers.
So we chose to step up the rate of investment a little bit.
Since we have the capacity to do that within our existing profitability guidance.
That's great and then just last one for me the.
Third quarter step up in in subscription growth of 14, and 15% when you how much of that is just being driven by the rebound that you're expecting from.
From the transactional nature of the business and and what would that if we had a like for like number where I was just comparing it to 19% this quarter what would be the embedded expectation there. Thanks and good luck again.
Thank you I think there's a variety of drivers not just a rebound in transaction volumes. Although we certainly do expect that and that's that's built on the other thing is we actually have.
20% more in legal spend management customers scheduled to go live in the second half of this year than in the same period in prior year on it.
Full 50% more payload X customers.
In the second half of this year versus first.
First as in the prior year.
So we've got good momentum going back to the idea that demand has remained strong for us <unk>.
Through these pandemic months.
Excellent. Thank you.
And our next question is from Peter Heckmann with D. A Davidson. Please proceed with your question.
Good evening, Thanks for taking my question.
Wanted to see.
Yes.
And this is a request.
Going forward, but certainly we get a lot of questions from institutional investors on pay mode acts and people realize that it is a scale platform with real significant potential for for growth with high margins.
As you go forward is there a way that you can provide more granular detail in terms of payment volume take rate number of payers I think.
I think you might be surprised at how much.
Credit more credit.
The market might get bottom line, if theyre, just able to better quantify exactly what the opportunity here is in better size it.
There's some aspects of debt that we probably could provide and that's good feedback on won't take that there are some aspects as well because of bank channels theres different pieces that they wouldn't want us to share or would be complicated for us to disclose but that's good feedback on we can certainly take a look at that.
Okay, and then just as a follow up you know we had talked about the company looking to invest more in development and sales and marketing to maximize the growth of subscription transactions over the intermediate and long term and I think that makes perfect sense.
In terms of the new subscription.
Subscription and transaction growth, that's coming on with high incremental margins. It appears that you are really reinvesting 100% of that at this point do you feel like there is a.
Light at the end of the tunnel, where youre going to be able to let some of that incremental margin flow through or should we still be thinking about kind of 'twenty, one 'twenty, 2% EBITDA margins for the for.
For the foreseeable.
Foreseeable future.
Well first off I have a hard time low power.
<unk> on for 22% EBITDA margins, you know I think we got to keep it in context. So we have a strong level of profitability. So I'm not sure I'd say why on a ton on a light at the end of the tunnel I don't see it that way I think part of what you're seeing margins, though is what the transition on the model you are removing services moving.
And while you're building transaction.
On mobile just the past couple of years with about a 30 million dollar impact negative impact from the natural focus on subscription revenue, which is more valuable than going to build over time. So that's one element is what was everything you identified investment in product and.
In investment and Mark if we can drive for 15% to 20% growth when.
When we hit 500 million as I outlined we've got $75 million to $100 million.
Incrementals from subscription revenue coming off and recent incremental gross margins, that's somewhere around 50 to $70 75 million of incremental gross margin and that gives us a lot of optionality on Mt margin expansion for not seen the growth opportunity or increased profitability.
So that's really our near term target and driver put it in place for platforms to drive consistent and 15% to 20% subscription growth as we hit $500 million I think we have a lot of optionality on are we expanding margin more or does the market to our large holders to our analysts all beliefs.
And management of course from our board and think that we can drive higher growth and that's a balance we'll adjust there you won't see lower profitability, you'll continue to see the profitability levels, we produce but I wouldn't want to say it's light at the end of the tunnel or this is a dark period, because strong subscription growth is going to be the biggest value.
Great.
Yeah, No that's fair.
You mean to imply that they werent good margins it just kind.
The best Fintech companies historically over the last couple of decades, it generate both revenue growth and an incremental margin improvement each year and I think I get a lot of questions on that so thanks for the update I'll look forward for the next one and good luck. Good luck for you Rick I look forward to seeing where your line.
Thanks Pete.
And again as a reminder, if you have any questions you May press star one on your telephone keypad and our next question is from Andrew Smith with Citigroup. Please proceed with your question.
Hey, guys. Thanks for squeezing this follow up I know, we're in overtime here, but I just wanted to dig in a little bit more on what youre doing on the AR side.
And what you're building out and what you have is it is it order of cash is invoice to cash.
Our our clients consuming this is an end to end platform or module base just any day.
Detail on sort of where you're targeting along the spectrum would be very helpful.
Sure So first off to be clear we have.
Customers today in Europe that are utilizing our technology for receivables. So we'd have for a long period of time done have offered for receivables capabilities from a lot of customers using that in terms of the new platform that has not launched yet so.
So we don't have new customers on that today.
What we'll be doing so we already have been voicing invoicing as part of <unk> part of our payment platform. So invoicing would certainly be part what will happen. There is the full reckon.
A reconciliation predicted predictability receipt on all the elements and analytics and machine learning more advanced technologies surround a leading receivables platform and on the interesting thing is I think we're gonna out but.
A platform that they can compete with anyone but.
But we don't necessarily have to.
Because if you're on existing bottomline payments customer.
It makes far more sense to expand one platform.
And to address receivables treasury insights and analytics and payments on one platform and it does have a mix of different vendors. So I'm not saying, we won't be stronger than any other receivable for spot for them, but we don't have to be to win a large amount of revenue, but when the large number of customers. So that's on hopefully.
That's helpful. Andrew I'm, giving you some color on our perspective.
Yes couple of context, guys. Thanks again appreciate it.
And we have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.
Well. Thank you everyone. Thank you for your interest.
Rick for the past six years for all you've done for Bottomline.
I look forward to reporting acceleration in subscription growth for Q3 and Q4 as we've outlined.
And we couldn't be more excited about the future ahead.
Thank you again.
Yeah.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.