Bottomline Technologies, Inc.
Q2 2020 Earnings Call Transcript

Published: 31 Jan 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Bottomline's Second Quarter 2020 Earnings Conference Call. Statements made on today's call will include forward-looking statements about Bottomline's 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 Bottomline's most recent periodic reports filed with the SEC 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. Bottomline does not assume any obligation to update any forward-looking statements.During this call, Bottomline's 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 to the most directly comparable GAAP measures is available in the Investor Resources section of Bottomline's website. Bottomline 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.I would now like to turn the conference over to our host, Mr. Rob Eberle. Please go ahead.

[Rob Eberle:]

Good afternoon and welcome to the second quarter fiscal 2020 earnings call. Thank you for your interest in Bottomline. I'm here with our Rick Booth, our CFO. Rick will provide a detailed review of the quarter's financial results and our guidance going forward. And then, as always, both Rick and I will be available for questions following his remarks.The second quarter was a strong quarter. The quarter was highlighted by accelerating subscription revenue growth, booking success, positive customer engagement and continued advancement of our product set. The most important financial metrics and focus is subscription revenue growth. In the second quarter, subscription revenue growth accelerated to 18%. That's both as reported in constant currency -- by the way as currencies seem to stabilize.We're committed to subscription growth of at least 15% to 20%, and we see an opportunity to accelerate that growth rate in the near-term and over a longer term horizon. We will be 500 million subscription revenues in 3 to 4 years, if not sooner. We see that opportunity clearly and we know how to get there. Our confidence is based on our current results, our continued execution and the alignment of our product certain markets.We make business payments simple, smart and secure. The B2B payment market is exciting, large and growing. No one is better positioned to capitalize on or more focused on the need for simple, smart and secure business payments than Bottomline. We have established improving business payment solutions.We have deep domain expertise in all aspects of business payments. We have seen as a trusted technology partner for customers and businesses and geographies around the globe, and we're actively and aggressively innovating to ensure we not only have the leading business payments capabilities today, but also in five years in a decade and beyond.I will highlight some of the innovations we're progressing to give a sense of opportunity, but first I'll briefly cover the financial highlights for the quarter. As already noted, subscription revenue grew 18% on both reported in constant currency basis. The acceleration of our subscription growth rate is our top priority.Subscription revenue was $84 million for the quarter. We're now at $336 million annual subscription revenue business, a big step closer to $500 million we targeted. Subscription bookings were $23.3 million. Revenue overall was $111.7 million. EBITDA was $24.8 million. EPS was $0.33. And we ended the quarter with $91 million in cash after stock repurchases of $5 million, so a very strong quarter, acceleration in subscription growth and strong performance against all our financial metrics.The quarter's strong results are evident. Rick will cover the details and our product wins. I'm going to focus my remarks on the momentum we have and the future of the business. Innovation is the key to our continuing meet the needs of our expanding customer base and our long-term growth goals. When I talked to customers, I always said the same thing. Choose us in part for who we are today, but as much or more for who will be in 3 years, 5 years and 10 years from now. They always agree.One of the advantages of our strong presence in Europe is we're close to the progressive innovations being developed, and in some cases mandated in those geographies. One example of innovation and payments is the UK's Open Banking. The UK Open Banking usage has doubled in the past six months alone recently passing the 1 million customers. We've been an active participant from the beginning, seeing this consumer first mandate ultimately moving to businesses.Bottomline's PayDirect, which we're piloting with a large bank and some high profile customers, is a full-fledged Open Banking payment play. PayDirect leverages his bottom line status as PISP or Payment Initiation Service Provider, to facilitate direct account to account payments. The benefits include transparency of the payment status, lower costs, and ease of reconciliation.We're delivering innovation to address some benefits from this large opportunity, uniquely situated to our experience and market position. We're in the very early innings here as we are in the digital transformation of business payments generally. We're actively and aggressively driving our product agenda because we can clearly see the change we'll bring and the opportunity it represents.We're innovating around our business payments banking platforms to help banks address the biggest challenges they face today and will face in the future. The most important imperative for banks is to put the customer at the center of their digital transformation. Banks face an increasingly open and competitive environment. The traditional business banking model was being challenged.The fight for primary ownership for the customer relationship is the most important competition banks are engaged in. At the same time, banks business customers are frustrated by excessive complexity, fragmentation and friction. We're providing our banks with seamless, unified digital experience when they uniquely adds a rich understanding of their customer's needs and interests.The future is intelligent systems of engagement with experiences of personalized, tailored, insightful and engaging. And platforms that continuously learn to embed intelligence to deliver targeted, actionable insights. A deeper understanding of the customers and their needs allows banks to win. That's exactly the product capabilities we're offering today and investing further in for banks.It answers the greatest challenge and then doing so ensures our market leadership and growth for years to come. Hope that gives you some color of the innovations we're pursuing. We're approach the market with a deep history and expertise in business payments with established capabilities and well known and trusted by customers. We have a clear vision of the future for business payments, and our company. We're executing to make that vision a reality.So in summary, it's an exciting time for Bottomline. We said this year, we're bringing acceleration in growth and we're seeing that occur. The 18% subscription growth is just the beginning of what will be a very good year. We have strong customer demand and clear visibility to success ahead. Beyond the coming year, we have a technology set and plan to drive to $500 million in subscription revenue in 3 to 4 years time. We're confident we're on the right path and confident we will drive shareholder value.So with that, I'll turn it over to Rick and then again both of us will be available for questions following his remarks.

[Rick Booth:]

Thank you, Rob. I'm pleased to report on a very strong quarter with subscription revenue growth accelerating to 18%. This is another quarter of subscription revenue acceleration in a year-end which we expect each quarter to be within our targeted 15% to 20% subscription revenue growth rates.The results of the quarter were above expectations on almost every metric. These results are evidence of subscription revenue growth we see in fiscal '20 and beyond. Subscription revenue grew 18% to $84.1 million. Subscription bookings were $23.3 million. We focus primarily on subscription revenue growth. We also produce total revenue of $111.7 million, EBITDA up $24.8 million and $0.33 core earnings per share, each of which with at or above expectations.I'll focus my remarks today on three major topics. First, reviewing our financial results in detail; then, providing increased guidance for fiscal '20 in the third quarter; and finally, describing how these results fit into our long-term business model. To review our financial results in detail, I'll speak briefly at each line in our P&L. And in addition, we've posted supplementary materials to our website for your reference.Beginning with revenue, subscription revenue continues to be our clear priority. Growth of 18% on both the reported and a constant currency basis was in the upper half of our 15% to 20%, long-term subscription revenue growth goal. All of our investments are targeted to drive growth at today's rates or higher, and we are confident subscription growth will remain within our 15% to 20% range.We have visibility through multiple growth drivers, including signed backlog, implementation success and timing, growth within existing customers and expanding our customer base through additional signings. We drove $84.1 million subscription revenue in the quarter equivalent to $336 million on an annualized basis. And at this rate, 75% of total revenue came from subscription offerings, up 7 full percentage points from a year ago.Maintenance revenue was the other component of recurring revenue, and recurring revenue comprised 90% of total revenue, up 5 percentage point year-over-year. This gives us excellent visibility to upcoming results. License revenue by design is only a small part of our overall business. As such, license revenue is $2.8 million, was down $2.9 million year-over-year. And this is entirely consistent with our strategy to emphasize subscriptions and recognized $10 million less software maintenance than last year.Services, which we offer only as needed to help our customers succeed, were $8.2 million in the quarter, bringing total revenues $111.7 million. From a sales perspective, we had strong sales execution. We signed $23.3 million of new subscriptions bookings led by Paymode-X. This brings us to $88 million in new subscription bookings for the last four quarters, equivalent to 28% of subscription revenue in the same period.While bookings figures are estimates and customers take time to implement and ramp to full revenue production, this provides us good visibility to future subscription revenue growth in fiscal '20 and beyond. Our Paymode-X network added 21 new payers, including several very large deals. These deals were driven by four channel partners as well as by our own direct sales force. This validates the attractiveness of our highly secured, full payment automation value proposition, and their channel partnership approach augmented by our direct sales force.We signed six new insurers to our legal spend management network, and another 10 expanded their relationships with us with the additional modules or additional divisions adopting our solutions. We signed four new customers for a digital banking product set, including a new platform customer and another customer for our DBiQ Relationship Management and relationship Insights solution. With those signing and after go-lives in the quarter, we have approximately $18.4 million of annual digital banking subscriptions, which are signed, but not yet being recognized in our P&L.The implementations themselves continue to go very well, and we expect roughly three quarters of this to go-live within the fiscal year. This visibility gives us high confidence that banking will continue to achieve 15% to 20% subscription revenue growth within fiscal '20 and beyond. These bookings and signed backlog give us confidence that our targeted investments in sales and marketing and product development are bearing fruit and provide clear visibility to revenue growth acceleration.Equally important, our continued product innovation and creation in the large and growing difference payments market, gives us confidence in our path to $500 million of subscription revenue within three to four years. While focusing primarily on growth, we delivered on our financial commitments while investing to advance our solutions and drive growth at today's rates are higher. EBITDA of $24.8 million or 22% of revenue, core operating income of $18.2 million and core earnings per share of $0.33 we're all at or above expectations.Subscription gross margin of 61% was up almost 4 percentage point year-over-year. This means we've added $23.1 million of subscription revenue year-to-date of which 80% flew through to gross margin. This margin expansion reflects the tower of our business model to scale in a sustainable manner as we pursue our growth agenda. And this agenda includes targeted investment in sales and marketing and product development for consumer's long-term growth.Sales and marketing expense was $22.5 million or 20% of revenue, up 2.5 percentage point year-over-year, as we strengthen our direct sales capabilities. Development expense was $16.6 million in the quarter or 15% of revenue also up slightly year-over-year. And G&A expense was $9 million or 8% of revenue.Turned into cash flow, we generated $24 million of operating cash flow in the quarter. As planned, we used $5 million of that to repurchase 95,000 shares within the quarter and we paid down $10 million on our credit facility. We ended the quarter with $91 million our cash and investments and expect to continue to be active for repurchasing share in the upcoming quarter.Turning to guidance, as the second major topics, our solid results and momentum positions us well for Q3 in the short-term, and for fiscal '20 and beyond in the longer term, as we drive toward $500 million in subscription revenue in three to four years, beginning with the growth we can see in fiscal '20.Specifically, in the third quarter, we expect to deliver $87 million to $90 million of subscription revenue, a $112 million to $114 million overall revenue, $24 million to $26 million of EBITDA, $18 million to $21 million core operating income and core earnings per share of $0.31 to $0.36.And for the full fiscal year 2020, we expect to deliver $342 million to $345 million of subscription revenue, which is an increase of $6 million to $8 million from our previous guidance, $450 million to $452 million overall revenue, an increase of up to $8 million, $100 million to $102 million EBITDA, which will be up slightly year-over-year. $76 million to $80 million core operating income and core earnings per share of $1.30 to $1.37. We'll continue to present detailed guidance prior to each quarter while evaluating and updating the full year as needed.And finally, I'd like to provide my perspective on how the most important items in the quarter tie into our long-term economics. Our primary focuses on growing subscription revenue and the 18% constant currency growth, combined with solid looking and excellent visibility, give us high confidence in both fiscal '20 and our ability to drive to $500 million in subscription revenue in 3 to 4 years.Performance year-to-date illustrates the economic power of this approach, as we added $23.1 million of subscription revenue with $18 million of increased subscriptions gross margin for an 80% incremental gross margin. As we scale our subscription revenue, this will become a powerful engine of growth and ultimately a shareholder return. In fact, all of the year-over-year trends are consistent with our strategy and long term model.Subscription revenue as a percentage of total is up 7 percentage points. Subscription gross margin is up 4 percentage points. Sales and marketing expense is up 2 percentage points, and product Development is up as well as we expand the value propositions available to our customers and the future revenue opportunity for the business. While doing all this, we continue to operate at attractive levels of profitability while funding these growth investments.So in conclusion, we're well positioned in the large and growing market. Our financial performance is very strong. We're raising guidance and we're confident in our ability to drive value for both customers and shareholders for years to come.And with that, we can open the call for questions.

[Operator:]

[Operator Instructions] And our first question from the line of Andrew Schmidt with Citi Financial. Please go ahead.

[Andrew Schmidt:]

Hey guys, thanks for taking my questions here. Nice to see the acceleration assumption trends and progress with the direct sales force. So just digging a little bit into the established products subs and trans growth in the quarter, wondering if you could just unpack that a little bit and talk about what drove the acceleration there? If you could just -- I know you don't always be down to this level, but if you could, by product, talk about some of the key drivers in the quarter that would be helpful?

[Rob Eberle:]

I'll give it a general comment and Rick can anything he wants to. I'd say, we're surprisingly seeing really strong strength in Europe. And the reason I say surprisingly, everyone keeps telling us Brexit, Brexit and Brexit. We continue to see strength in Europe and the quarter in Europe was very strong.

[Rick Booth:]

Yes, and I would say it was really a continuation of some of the trends that we've been year-to-date, lots of strong growth from our European platforms, Paymode-X. LSM contributing strongly, but not quite the same rate, and financial messaging continued to be in a building year. So pretty similar trends to what you see in the first quarter.

[Andrew Schmidt:]

Understood, that's helpful. And then on the full year outlook for us subs and trans. If you take a look at the implied fourth quarter rev grow outlook, it looks like there's a little bit of implied decel there. I just want to sort of dig into the factors that sort of drive your visibility and then sort of your confidence. And I know, you typically have the 15% to 20% subs and trans target, but just talk about maybe visibility towards that being a little bit higher perhaps towards the mid or upper end of that outlook, and I guess in the intermediate term, especially as you absorb some of these go-lives?

[Rob Eberle:]

I think it's only prudent, Andrew. When we're talking about large complex implementations going live six months plus from now, that we take that into account, be a little conservative with our Q4 guidance, but now there's no part of me that's worried that we're going to have a period that's not at least that our 15% to 20% range.

[Andrew Schmidt:]

Understood. And then just you might as well just round it out in the outlook, the takedown in the operating income assumptions. I assume some of that's probably investment related, but can you just talk through what drove the reduction in operating income outlook?

[Rob Eberle:]

Sure. First of all, some of that is by model transitions, selling less software and services by design of course, but the other piece of that is just the opportunity in the market. I highlighted two places, some of the things we're doing around intelligence and insights in digital banking, and also what we're doing with Open Banking. Those are just two of a pretty aggressive product agenda. We have a whole team coming on in February's development team for additional product capabilities. So we're leaning into the market. It's a great time to be in B2B payments. We have a fabulous set of technologies. We've got wonderful domain expertise. We want to accelerate our growth rate and making further investments the key to that.

[Rick Booth:]

And from a financial perspective, I'd share I've worked at businesses where you have limited internal investment opportunities and you end up returning capital to shareholders because it's the right thing to do. This is quite the offset. We're talking about an adjustment of a couple of million dollars and putting into the highest ROI investments that we possibly could with clear short-term payoffs. We're talking about hiring salespeople with we're already seeing start to produce as well as continuing to invest in plus one opportunities to had an add-on capabilities to our existing platforms and we've seen what that can do. So, I've never been more confident in the decision in my life.

[Operator:]

And our next question will be from the line of John Davis with Raymond James. Please go ahead.

[John Davis:]

I just wanted to follow up a little bit on Andrew's last question there. So, lowering, call, EBITDA by roughly $3 million at the midpoint, I think given the outside and revenue, kind of would expect it to go $2 million or $3 million the other way. So, just kind of $5 million, I guess I'm surprised to see the magnitude of that change. So, I guess the real question is, what opportunities have you seen in the last three to six months since you've given us outwork that warrant this increase step up into the fact that your Paymode-X direct sales people are performing at a high level and so you're going to double your hiring there. Just a lot, maybe talk a little bit about what changed from three to six months ago, until now, to kind of warrant that incremental spend?

[Rob Eberle:]

First of I don't think there's a change from three to four months ago, I mean, the magnitude of the change, there's a few million dollars and we never said if we had upsides that we would be increased in the EBITDA piece, and I've met with a lot of investors over the last quarter, and I'm very clear, more focused on driving subscription revenue growth, and this alignment. So now when I step back and you ask, where are we making that? I wouldn't want to suggest this all Paymode-X sales team because it's certainly not. A lot of it is in product capabilities in go to market.So what we're doing around digital banking, how we're bringing intelligence and insights into the payments and cash management platform? What we're doing across our solutions and how you're bringing analytics, data, predictive intelligence, all those pieces into our platforms. That's all expensive, but we're leaning in on that. So, those are -- it's across the board, really a product piece. And there's new capabilities, some of which we've announced, some of which we're not talking about yet that are going to drive growth for three five, 10 years. That's really our objectives. Now we're going to get in the next two quarters from an EBITDA standpoint.

[John Davis:]

Okay, fair enough. I think everyone agree. You have tremendous opportunity ahead. Rick, maybe as quickly, I just want to make sure I heard the bookings number correct at 23.3.

[Rick Booth:]

That's correct.

[John Davis:]

Okay. So let's call it, right at call, 28% of trailing 12 months subs and trans revenues kind of help. I think you've talked about in the past, the way to think about it, any reason why that should vary from that kind of 25% to 30% in the back half of the year. Anything specifically to call out or just going to your guide to bookings, which is making sure that there's no change in the way to think about that.

[Rob Eberle:]

Well, I'll throw in one comment before Rick can comment and that is that remember we grow also as our customers growth. So for example, if we have see more volume through payment of sourcing customer and we're seeing more volume through a legal spend, that won't flow through bookings. So bookings is one important element of how to grow, it's an estimate. It takes time to ramp. But there's other ways that we're driving growth that don't show up through the bookings numbers. So probably didn't help because it probably complicates the thing more. Now I'll turn it over to Rick as they do. But that's really the reality of the booking number is only a component of our growth.

[Rick Booth:]

Yes. And as you pointed out, John, we've never guided bookings. We are investing in salespeople, and we believe that they'll be effective. But it takes more than a couple of quarters to build a pipeline. So it's not going to change your policy and not guidance.

[John Davis:]

Okay. Fair enough. The last one, if I can hear. Anything, obviously, you're not going to give the exact numbers here. But your Paymode-X, have we seen a pickup and adoption? I think you signed a fair number of new clients in the quarter. But just trying to think about B2B I think you had picked up steam over the last, call it, three to six months and some of the industry folks that I talked to. And I'm just wondering, if you're seeing kind of an incremental pick up in the pace of growth at Paymode-X and any kind of movement from classics of vendor pay models? Just kind of any kind of color commentary you can give them to be helpful.

[Rob Eberle:]

Well, I'd agree with that. We're seeing a lot more interest in B2B payments. We're not -- there were times where we'd be explaining these capabilities for us. That's not the market today, which again, part of the reason we're investing. One of the newer catalysts we've seen and I've mentioned this before, but it's definitely new in the last six months, maybe or so, as that security and cyber fraud events.So payers will come to us and now they want to move the payments to a more efficient, more effective means handling that one more for maximize monetization. Of the top of that list they want to be in a more secure environment. And if you're a payer and you're sending a payment to a new bank account, you don't know is that account paid by others before is that just an established as part of a fraud ring.When you're part of Paymode-X, we can provide visibility to that. Has somebody paid that pair before? Have they paid them an amount consistent with that? Are you paying a million dollars to someone who's never received a 1 million, a business that never has? And so, there's a lot around the fraud piece that I think is definitely creating a real tailwind in the market.

[Operator:]

And our next question from George Sutton with Craig-Hallum. Please go ahead.

[Adam Kelsey:]

Hey, good afternoon. This is Adam on for George. Thanks for taking my questions. Rob, you mentioned the UK PayDirect trial that you have currently going on. I was hoping you could share a little more details on that?

[Rob Eberle:]

Well, I covered some of the comments on it. What we're really doing there is, leveraging Open Banking, to provide account-to-account payment capability for a pilot with a couple of corporate customers. I'm not going to go into more details. This is just pilot where the banks we're working with. The point of it, though is, there's so many new opportunities for Bottomline. B2B payments are changing, technology is changing and we're well positioned in that marketplace.And then, we're making investments that will be well positioned with growth of 3, 5, 10 years and more. So Open Banking is a mandated requirement in the UK. We believe some form of that is going to come either voluntary or mandated to other geographies, including the U.S. over time. So developing the capabilities for them, having an experience with that is bigger actually than even just that market.

[Rick Booth:]

And as you know, the PT-X platform or Open Banking-ready platform in the UK has been a strong growth driver and every time we see these regulatory changes sweep through is a catalyst for growth.

[Adam Kelsey:]

Great, thank you. And then, I still know it's early days for the direct sales force, but I'm sure you've had some good feedback so far. What have you learned from having that unit so far?

[Rob Eberle:]

Oh, what we're learning -- sorry, just getting to trail off in the end of that. I think of the direct sales force just gives us some is the name supplies. It gives us into other markets and channels where we might not necessarily have been. So that's one thing that's really interesting for us. I think it also was helping us to me, as we're moving more into mid market. So and we've added invoicing the payment next with a well situated mid market solution. And that team is helping us in that as well. So, it's a market intelligence, it's new verticals, and it's also moving more to mid-market.

[Adam Kelsey:]

And is there anything interesting that you've learned from them that you weren't really aware of just working directly with the channel?

[Rob Eberle:]

No, I'd say we've, validated our understanding of our competitive advantage. And they're finding the reasons that they came here in terms of our capabilities are very, very true. And one thing that's actually good is the more we lean into that direct sales force, the more we see our partners leaning in and getting more aggressive about how they are training their sales team.

[Operator:]

And our next question is from the line of Mayank Tandon with Needham and Company.

[Mayank Tandon:]

Rob and Rick, I think you mentioned earlier one or few about the opportunities with both new client wins and obviously expansion with existing client break that down in terms of future growth, how you think that breaks down? Maybe in the same context, if you could talk about legal and financial messaging and swift and other areas that may not get as much focus as the digital banking and Paymode-X pieces?

[Rob Eberle:]

So, there's a couple different ways we grow with existing clients. First off, they could have more volume. So something like legal spend more transit, rational base platform like a Paymode-X will see more growth to that. The other way we grow with existing customers is so important, is we're providing them the new capabilities they need to be successful.So for example, if we've provide a payments to cash management platform, a real time payments, and it comes out as a new payment type, our banks are looking for us for that solution, but that's something we're not giving them, we're selling that to them as we're bringing out insights into the customer and analytics to better understand customer and next actionable items. That's something else we sold.So, the lifetime customer value for the platforms we sell what oftentimes by the way, I won't hear from customers. You're our most critical platform for you're one of our most important vendors. That means we have an opportunity to continue to sell them more capabilities, because they're going to look at us for new solutions as the market changes as technology changes. So what you want to be is not selling a single feature here or capability there want to be that missing critical kind of application that grows as your customers grow.So we'll see in a couple of different ways we see one transactions can increase some ramp or so add a new division, things like that an acquisition in LSM and we also then see it as we're providing new capabilities, whether that's partner select, law firm in analytics, banking insights, I wouldn't break that apart product by product. It's really the same playbook, and oftentimes the same technology or similar technology across multiple verticals.

[Mayank Tandon:]

Okay, that's helpful. And then if I could just pivot to digital banking, want to get a little perspective on when do you think the transition will be over? Because it seems like I know there's some lumpiness from quarter to quarter, but it's been running a little bit shy of the established products and trends growth rate over time. So when do we see that start to maybe accelerate and maybe potentially even end with the transitions so it's now part of the established piece versus being called out separately as a transitioning area?

[Rob Eberle:]

I think that's a great question Mayank. We made a commitment several years ago that we would break it out until it started to achieve similar growth rates. And I'm highly confident that by the end of fiscal '20, we'll look at it and I think we'll all agree is performing at a level that just combined it all that gap, we haven't made any decisions yet. But we feel good about the first half growth with more to come remember, here we go lives our back end loaded in this year.

[Mayank Tandon:]

Right, okay. Thank you. Last question on the ramp in marketing costs this quarter is going to continue or will that extent be more weighted towards R&D going forward?

[Rob Eberle:]

We expect the incremental investment to be more heavily development over the next few quarters. We had some had some opportunities to bring on board senior sales and marketing talent. We couldn't pass up.

[Operator:]

And our next question from the line of Christopher Kennedy with William Blair. Please go ahead.

[Christopher Kennedy:]

Hey, guys, thanks for taking my questions, just two. On the banking -- profitability of the banking business, can you talk about what the long-term objectives is for that segment?

[Rick Booth:]

Absolutely, you noticed that banking for the first half of the year has been operating at a lower level of profitability than it did in the prior year. Of course, in the prior year, we're recognizing software revenue from perpetual licenses. And as banking revenue scales in the back half of the year, you'll see profitability improved significantly.

[Christopher Kennedy:]

Okay, that's helpful. And then just one more on Paymode-X last year, you talked a lot about several different initiatives would there be going after the S&B market, improving vendor acceptance, improving automation, what have you. Are we seeing the benefits from those investments today? Or is that still typical? Thank you.

[Rob Eberle:]

Certainly, our technology and capabilities around identifying vendors segmenting those vendors and rolling those vendors are significant. I'd also say that our capabilities around the value that we're providing to those vendors in that platform, it's much more than getting the payment. We'll sometimes be referred to as an AP shop, a sort of either disagree or bristle at that, because we're providing a ton of value on the vendor side, it's just as important as the payer side, if you want to have a network that's effective. So visibility to payment, remittance detail, all those types of things that we're providing to vendors and we're continuing to make investment on what other capabilities can we be providing to vendors.

[Rick Booth:]

Yes, this is true bank grade security. Customers value that and our banking partners value that.

[Operator:]

And we'll go next to Dan Perlin from RBC Capital Markets.

[Matt Roswell:]

Yes, good evening. It's actually Matt Roswell in for Dan. Circling back to sales force and the increase in sales and marketing that you mentioned. When we think about it, did you hire more people in the quarter than you were originally planning because they were available? Or am I misinterpreting the remarks?

[Rob Eberle:]

No, I wouldn't look at the sales and marketing line and attribute that all to Paymode-X or direct sales team. I mean, we're simply spending more on sales and marketing across all of our products. And that's driving a higher growth rate.

[Matt Roswell:]

Okay. And then, I guess when it comes to the R&D investments, can you, is that across the board or is that in any particular area?

[Rob Eberle:]

I think it goes in two different directions. So, one is across the board capabilities that represent where technology is going. So that's machine learning and analytics that's pieces along those lines. It's about how APIs, connectivity, other systems, all of those things have uniform across all of our products. And then, there are specific areas that we're investing in things like I referenced in my comments.Open Banking, for example, that we see not just as a UK, but we see ultimately as a global trend in different flavors, but a global trend. And also around insights in analytics, which would be specific to product but example would be DBiQ, Insights, given the bank visibility on their customer and run knowledge about their customer, more intimate relationship with actionable insights.So again, it's across the whole platform new technology capabilities to make sure we're leading the market. And then it's a specific in dynamics that may have changed within a particular area like an Open Banking or an opportunity we see around banks.

[Matt Roswell:]

If you look at the competitive market now, say, compared to a year ago, we've seen a lot of activity in PD. We've seen a lot of activity among core processes in terms of M&A. Has there been any change?

[Rob Eberle:]

I think the biggest change is that we're investing in leaning and more, it moves us further ahead. I think the competitive environment is similar. It does not mean that those organizations are not also moving forward. But if we can move forward more aggressively, we can move forward with more insights and more focused on the things that matter that our customers need.I think we're in a wonderful competitive position, I can't think of a market where we're second to somebody bigger or stronger than us across all of our major product sets. So, that's a great position to be in and the investment we're making to lean in on product, if you will, is all about extending that driving that further and accelerating growth. Go ahead, Rick.

[Rick Booth:]

Further, I try to track our competitors fairly closely. I don't see anyone as focused as we are on the central problem of B2B payments which is how do you drive high-volume transactions in a highly secure and automated way. A lot of the press that you hear and see is on the edges of card only, or primarily card, whereas we have these accounts and account payments relationships.And that really -- I mean that's the focus came in today. Card is certainly growing, but it's still less than 15% of total payments. So I'm very impressed by the growth rates that we're seeing right now. But I don't see anyone using a squarely at the center of the target as we are.

[Matt Roswell:]

And the quick modeling question, how should we think of tax rate for the back half of the year?

[Rob Eberle:]

Tax rate for the back half of the year will be roughly in the 23% to 25% range for non-GAAP. And of course, the most important is, we're expecting less than $3 million of cash taxes. Remember, we have a very efficient tax structure.

[Operator:]

Thank you. And our next question will be from the line of Peter Heckman with D.A. Davidson. Please go ahead.

[Peter Heckman:]

Good afternoon, gentlemen. Could you give us a little bit more insight into some of the metrics at Paymode-X, for example, maybe the dollars process on the network in calendar 19, as well as how many payers are affiliated with the network at this time?

[Rob Eberle:]

Sure, Peter. I can give you a little bit more flavor. Paymode continues to perform extremely strongly. Without getting into all the metrics that we moved away from, but we see people in the marketplace that are growing at 30% to 40%. And we are certainly experiencing similar growth in the vendor paid portion of our model. So, similar to all of our previous comments, Paymode-X is performing very strongly. It's a got good adoption across additional channel partners and robust bookings.

[Peter Heckman:]

Alright. So somebody doesn't put there. If the vendor pay model is growing 30% to 40% and Paymode-X overall is growing10 to 15. Does that -- what am I missing there?

[Rob Eberle:]

So, Paymode is certainly in our 15% to 20% growth, roughly half of it is the classic model was by design is static and the other half is growing at the rate that I just described.

[Peter Heckman:]

Okay. And then just my last question. Bank M&A has ticked up little bit in the mid-tier. I think we've seen one that might be an effect for you, but are you seeing anything there in terms of potential losses?

[Rob Eberle:]

It's always an opportunity. It can be a loss, that's fine. I think we're not going to have a stumble over one M&A event on the strength of our overall business and momentum. But it actually generally is opportunity. We're really strong and helping a bank how do you think through these systems? How to how do you want to combine systems? What capabilities do we offer that might overlap with the existing platforms. So more often than not it's been a growth opportunity for us.

[Rick Booth:]

And remember, we're stronger -- the larger the bank, the stronger our positioning. So, as banks combined, we tend to be a net gainer.

[Operator:]

And our next question from the line of Terry Kiwala with First Analysis. Your line is open.

[Terry Kiwala:]

Hey, good afternoon. And thanks for taking my question. Just wanted to get a little more insight into the sales cycle, so you've met or the sales process and the timeline to close as you've made investments in the direct sales staff, which is probably in its early stages. And then you continue product evolution and product development to add additional features. I'm just wondering, if you've seen any declines in the sales -- in the time in the sales cycle, and if you project any in future periods?

[Rob Eberle:]

We certainly haven't seen a decline in sales cycle. Sale cycle will vary depending on product and depending on the organization in particular needs. We can see fast sales cycle in a complex product. If the bank for example wants to move off a system or it's finding themselves for the competitive disadvantage, we can find sales cycle that can be a long period of time.We're actually sort of patient about the sales cycle because we have the best solution we're going to win over time. And it's working. It's driving. So we're not someone who is pushing to a close, we want to have that customer come in us when they recognize the capabilities and the need. And that's been a very good strategy for us.

[Operator:]

Thank you and I'll turn it back to our speakers for any closing comments.

[Rob Eberle:]

Sure. So thank you everyone for your time. It's certainly an exciting time for B2B payments and for Bottomline of 18% subscription growth as, I believe, just the beginning of what should be a very good year. And we've got around the 500 million subscription growth, subscription revenue level and we know that's going to reward shareholders.So thank you and I look forward to reporting on Q3.

[Operator:]

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