Bottomline Technologies, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Danielle Sheer:]

Welcome to Bottomline's Fourth Quarter 2020 Earnings Conference Call. I'm Danielle Sheer, and I'm joined by Rob Eberle, Bottomline's CEO; and Rick Booth, our CFO. I'd like to remind everyone that 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, uncertainties and assumptions, including those related to the impacts of COVID-19 on our business and global economic conditions. The forward-looking guidance we provide today is based on our assumptions as to the macroeconomic environment based on the facts as we know them today. Many of these assumptions relate to matters beyond our control, including the impact of COVID-19. 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. Thanks for joining our call. Let me now turn it over to Rob for his remarks. Rob?

[Robert Eberle:]

Good afternoon, and welcome to Bottomline's fourth quarter fiscal 2020 earnings call. We're delighted to be reporting on a strong quarter. As always, we greatly appreciate your interest in Bottomline. I'm here with Rick Booth, our CFO. Rick will provide a detailed review of the quarter's financials, our outlook going forward. And then both of us, of course will be available for any questions following his remarks. The fourth quarter was a strong quarter. In fact, in many ways, it was the strongest quarter of what was a strong year. The quarter was highlighted by record subscription bookings, which drove record bookings for the year. The strong sales number is a result of the technology and innovation investments we've made, our competitive position in our key markets, and increased demand by customers for digital payment capabilities. There's an acceleration occurring in the digital transformation of business payments, and no one is better positioned to benefit than Bottomline. We see the strong demand level we saw in the fourth quarter continuing through fiscal 2021, though we would expect normal seasonality in Q1. We're really pleased with our execution in the quarter's results, but they're very different than we were expecting just six months ago. At that time, we were tracking a 21% subscription growth for this quarter and 19% for the year. But beginning in March, we saw an impact like everyone else on transaction-based revenue streams, principally Paymode-X and legal spend management. Those transaction-based revenues will return and flow at some point. There's no question about that. Until they do, there's a headwind on our growth rate. Overall, we're well positioned and fortunate. The vast majority of our revenues are recurring and unimpacted by this year's economic disruption. Our business model produces consistent strong profitability and cash flow, and the impact we're seeing is relatively modest overall and it's certainly temporary. In fact, we view today's environment as a unique opportunity to increase our innovation and expand our product capabilities, to strengthen and extend our competitive position and to convert increased need for our solutions in years and years of growth at or above our 15% to 20% target range. I'm going to focus my remarks on just that, the product innovations we've completed for customers or have underway to drive accelerated growth for years to come. First, I'll cover the financial results for the fourth quarter. Subscription revenue was $87.7 million, which is up 12% from a year-ago on a constant currency basis. Transaction volume declines on Paymode-X and legal spend management negatively impacted the growth rate. But when transaction volumes normalize, subscription growth will be in the 15% to 20% range, if not higher. Subscription bookings were $25.8 million, which was a record. No other metric speaks as directly to the demand for our solutions or competitive position in the market so I'm delighted to report such a strong bookings quarter. Revenue overall was $110.6 million. EBITDA was $23.4 million for the quarter and $95 million for the year with strong operating cash flow of $27 million for the quarter and $97 million for the year. And we ended the quarter with over $200 million in cash, so strong financial results for the quarter and the fiscal year. I'll now talk about the sales environment and market for our key solutions. The first observation I'd make is we obviously had strong sales results in the quarter, and we expect to see that continue. There are a number of factors behind that. First off, customer demand is strong. There's an acceleration of the digital transformation of business payments as organizations large and small rethink every aspect of their business process. Second, our marketing brand and reputation are excellent. We are well-known in our target markets for thought leadership and innovation, and we are known for a culture that's focused on customer delight as the top priority. Third, our sales execution is strong, both through our direct sales teams and increasingly through effective channels in the U.S., such as Citizens, TD Bank, UMB, Bank of New York Mellon, Bank of America and RBS and Lloyds in Europe. We've always focused on sales execution, and we significantly increased our sales capabilities during FY 2020. Finally, and most important, is product. In the fast-moving markets we compete in, the technology we provide our customers in the future is as important as current capabilities. I say that time and time again that customers choose us as much for who we'll be in the future as we are today. We're able to meet new demands of customers and surprise them with innovations no other competitor offers. Given the importance of product, I'll highlight some of the current competitive differentiators and provide comments around the innovation agenda we're pursuing for each of our major platforms. While I reference these in the context of a single product, it's important to note that many, if not all, of these new capabilities we develop, machine learning being a good example, are deployed across our entire product suite. Driving product excellence and innovation is the most critical factor behind our results in the quarter, and it's also the basis of our confidence in the future. Digital banking is a good place to start. Over the course of a few years, we have gone from competitive to clear leadership. In their most recent cash management survey, Aite recognized Bottomline as the best-in-class cash management technology leader. We led all providers in three or four categories covered, sharing leadership in a fourth. This is no surprise. We've been winning roughly 3/4 of the RFPs we compete in. Today, 265,000 businesses connect to their bank over our platform, and there are another 128,000 businesses which will be on our platform when the current implementation backlog is live. Today, we process more than $1 trillion annually in payments for these businesses, and that number will only continue to go up. We're in an incredibly strategic position and it gives us a ready market for new capabilities we are currently developing. One of the important capabilities we offer banks is online account opening. It's no surprise our customers saw a surge in activity, with new account applications up 62% in Q4 from the prior year. We're broadening the capabilities of our customer engagement solutions in several key ways. We're adding insights, which allows banks to learn more about their customers with each click, and we're developing advanced digital onboarding capabilities to improve every aspect of the digital customer journey. It's a good example of targeting our investments in new capabilities to meet the needs of our customers and to drive TAM expansion and revenue growth. Another good example of our product innovation, sales execution and go-to-market message and customer demand all coming together is the 37 deals we signed for Paymode-X. This is a record quarter for this strategic business payment platform. It's a clear reflection of the hot market we're in and our position in that market. We have effective sales channels in our bank partners and a direct sales team also now contributing to the booking results. From a product standpoint, our size, scale, vendor network and onboarding capabilities and simple smart and secure proposition is a clear winner. And we continue to innovate with new capabilities, most recently extending network insights to our invoicing solution and adding B2C payments so any business on our platform can make payments directed to consumers. We enter FY 2021 in a fabulous position to accelerate the growth of Paymode-X. We're also successfully bringing new customers onto our legal spend management solution. We drove strong sales results for the fourth quarter, which completed a strong sales result year. We have continued our expansion into the UK market where of course, we have a large presence. From a product standpoint, we're continuing to increase our machine learning capabilities for bill review and adding claims adjusters to PartnerSelect. We have strong sales results in Europe as well. Today, we count over 10,000 UK businesses and 2.2 million unique payers that use our PT-X cloud payment platform. With PT-X, a customer can now gain visibility across all their bank accounts on their phone in one consolidated view no matter how many banks they bank with. It's just one of the many tools we provide for businesses to monitor and manage their cash and financial health. The most exciting innovation effort in the fourth quarter may be the launch of an integrated receivables platform effort. It's a very natural extension for us, an area in which we have a lot of experience in existing technology assets. Paymode-X has significant AR capabilities for vendors as does our PT-X platform. And cash application and visibility has always been a critical part of our banking solutions. To accelerate the effort and give it real substance, we purchased a receivables platform from a major financial institution. Having a platform and bank partner, speeds up our time-to-market as we're beginning with an existing technology already being used by real customers. In addition, with an existing product as a starting point, we get an invaluable customer feedback in the development process. In fact, it's the model we successfully used to accelerate the development of Paymode-X. Ultimately, we expect to have global solution we can offer integrated with our other platforms, making it available to the 400,000-plus Paymode-X vendors, the several hundred thousand businesses on our digital banking solutions and our 10,000 plus PT-X customers in Europe. It's a great example of partnership and innovation, providing new capabilities to customers and more TAM sales revenue growth for bottom line. So in conclusion, we're really pleased with the results for the fourth quarter and the year. Bookings and sales results were strong, and every indication is the accelerating demand for our solutions will continue. We're meeting that demand with effective execution and new innovations. FY 2021 will be an exciting and rewarding year for our company and our shareholders. So I'll now turn it over to Rick, and then of course both of us will be available for questions after his remarks. Thank you.

[Richard Booth:]

Thank you, Rob. I'm pleased to report on a strong quarter capping a strong year. As we entered the second half of the year, we were forecasting and tracking towards subscription growth of over 20% in both the third and fourth quarters. Now due to the temporary impact of lower transaction volumes, that's not what we reported. But overall, we were very pleased with the results. We know that volumes from our existing customers will come back, and inbound interest from new customers is very strong. This strong demand allowed us to report record bookings and exceed guidance and expectation on every financial metric. The highlights include subscription bookings of $25.8 million; subscription revenue of $87.7 million, up 12% on a constant currency basis; total revenue of $110.6 million with EBITDA of $23.4 million; and $0.26 core earnings per share. Each of these results was ahead of guidance and expectations. This quarter ended a strong year in which we reported 16% growth on a constant currency basis, $93 million of subscription bookings, $442 million of total revenue along with $95 million of EBITDA and core earnings per share of $1.17. I'll cover four topics in my remarks today. First, a brief review of our business model. Second, I'll review our Q4 and full-year results in more detail. Third, I'll provide guidance for the upcoming quarter. And finally, I'll look ahead and comment on our longer-term outlook. Our business model provides a strong foundation for continued profitable growth. We're well established in the large and growing market for business payments. Customer adoption of our solutions is accelerating. Our product set provides mission-critical functionality that our customer views for 10 to 15 years or more, and we're investing to drive revenue growth while continuing to deliver solid profitability. Turning to detailed results. Subscription revenue grew 12% on a constant currency basis. This was impacted by transaction volumes, which were down in April and May but began to recover in June and July. $87.7 million of subscription revenue is equivalent to $351 million per year. And at this rate, 79% of total revenue came from subscription offerings, up 6 full percentage points from a year-ago. Recurring revenue was 92% of total revenue, up three percentage points year-over-year. And we also produced $8.6 million of license and service revenue, bringing total revenue to $110.6 million. Turning to sales. I'm pleased to report very strong sales results as we benefited from increased demand for our offerings. Customers signed $25.8 million of new subscription bookings, including record bookings for Paymode-X and legal spend management for the quarter and for banking in our European product sets for the year. This brings us to $93 million in new subscription bookings for the year, equivalent to 27% of subscription revenue in the same period. And while booking figures are estimates and customers take time to implement and ramp to full revenue production, this provides us with welcome visibility. Turning to signings. Our Paymode-X network sold a record 37 new payers, including several very large deals. We're seeing strong interest in our full invoice-to-pay value proposition and good traction with both our channel partners and our direct sales force. We signed six new customers to our digital banking product set, including another large platform deal. And with those signings, we have approximately $15 million of annual digital banking subscriptions which are signed but not yet being recognized as revenue in our P&L. Finally, we also signed five new insurers to our legal spend management network, and another nine insurers expanded their relationships with us, so overall, a very strong sales quarter. Turning to profitability. We continue to produce consistent profitability as we identified both natural cost savings and select opportunities to manage spending outside of growth areas. This delivered EBITDA of $23.4 million or 21% of revenue, core operating income of $16 million and core earnings per share of $0.26. Subscription gross margin of 61% was up two percentage points year-over-year, which means that overall, in fiscal 2020, we added $44 million of subscription revenue, of which 76% or over $33 million flowed through to gross margin. This margin reflects the power of our business model to scale with growth. As planned, we invested to fund our sales, marketing and innovation efforts to further distinguish and differentiate our products in this large and expanding market. Sales and marketing expense was $22 million or 20% of revenue, up two percentage points for the full-year. Development expense was $16 million or 15% of revenue, up two percentage points in two years. And between sales and marketing and development, we've increased our growth investments from 31% of revenue to 35% in the past two years as we prioritize driving revenue growth. From a cash flow perspective, in Q4, we generated $27 million of operating cash flow and $20 million of free cash flow, which allowed us to maintain our strong balance sheet position with $205 million of cash and investments on hand. This means we're in a very strong financial position, which is important to both investors and to customers. Turning to guidance. In the upcoming quarter, we expect to deliver subscription revenue of $89 million to $91 million, total revenue of $110 million to $111 million, core income of $16 million to $17 million, adjusted EBITDA of $23 million to $24 million and core earnings per share of $0.27 to $0.28. Looking to the longer-term outlook. As payment volumes recover, we expect to see that reflected in accelerating revenue growth as well. For subscription revenue, we expect to return to subscription revenue growth of 15% to 20%, driven by a combination of increased volumes from existing customers and sustained demand for our products and solutions. For non-subscription revenue, we expect the customer preference for our cloud solutions over on-premise applications to remain strong, and therefore, for services and maintenance to continue to become less important, as we've seen in recent years. In conclusion, I'm pleased to have been able to report record bookings due to accelerated demand for our products and services, strong financial results in the fourth quarter, a solid outlook for next quarter and strong demand in large and expanding market that positions us well for sustained and profitable growth. And with that, we can open the call to questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from Andrew Schmidt with Citigroup. Please go ahead.

[Andrew Schmidt:]

Hey, Rob. Hey, Rick. Thanks for taking my questions. Thanks for the comments on the technology and innovation and good progress on the sales trends. Starting off, just a question on FY 2021, can you talk a little bit about your visibility in terms of returning to that 15% to 20% growth range? Clearly, you have some good momentum here, but just some more comments on visibility returning to that range. And then correspondingly, what does it take to consistently do subset trends at the upper end of that range, any comments around there? That would be helpful.

[Robert Eberle:]

Well, the first comment I'd make is, absent economic events, I think we are consistently in that range, and we certainly would have been this year and we would have been in FY 2021. But as you think - as to your question, when do we get visibility? I think we've got good visibility in our business today. The challenge is what's going to happen. What level of economic disruption will we see? Are we going back to work? Is there more lockdown? And we don't have any more visibility of course to that than anyone else. In our business, the areas that will have some impact that we talked about at legal spend management with transaction volume and - with Paymode-X with transaction volume, and the other is legal spend management, and what occurs there is a couple of things around activity. If all of us are driving less and having less accidents, having less insurance events, having less litigation, that will impact transaction volumes in that - in legal spend management. And the second area that impacts it is activity around the claims. So our court appearance is occurring at the same pace, depositions, et cetera, all the things that lawyers are billing for. So I think the answer to your question is we have in place today 15% to 20% growth engine. No question on that. We have some headwind from transaction volumes in the economic environment that really is beyond our control and I don't think we have better visibility to win that goes away. I don't know Rick, if you'd have more to add or a different perspective on that.

[Richard Booth:]

No. I think that's well said. At this point, it didn't make sense to try to provide full-year guidance. We've seen some encouraging trends in terms of Paymode-X transaction volumes as we've gone through June and July. So we're hopeful about that. But I think we're all watching the news every day and realize that the shape of the recovery is still a big question.

[Andrew Schmidt:]

Okay. That's helpful context. And then clearly as I alluded to, a lot of good sales momentum here, could you talk to the sustainability of the sales momentum? A question we get quite often - I mean, people are pretty confident that you'd see an uptick given the digitization that's going on associated with COVID, but just wondering about the sustainability of current sales momentum. If you could talk a little bit about that that would be helpful.

[Robert Eberle:]

Sure. I think one of the things to really recognize is, one, how much sales have actually changed prior to this event, and then how much has changed during this event. I was on a call with a significant prospect earlier this morning. And in a lot of ways, actually, it's a more powerful form than we would have had before, where you're trying to schedule calendars and who can be there and dialing isn't as effective, people aren't as accommodated and used to that. So we have a very strong digital marketing capabilities. We have a lot of content. We have a lot of thought leadership that creates the top of the funnel. And then we're not finding the fact that folks aren't traveling, aren't meeting to be that disruptive. I think the biggest challenge that's harder to predict is what happens on the customer side. Are there other priorities or other activities? But everything we're seeing today is working in our favor because, as we made - mentioned in the comments, the digital transformation of business payments is clearly a priority. If you're a CFO and you're wondering about offices being open and getting payments out, Bottomline solutions are exactly what you're looking for.

[Andrew Schmidt:]

Okay. It's good to hear about the sales momentum. Just last one for me. The receivables management technology, nice to see the pickup there. Obviously, you guys have - already have assets in place on the AR side with Paymode-X. Could you just talk a little bit about what the technology brings that you don't have today? Because I think it seems like increasingly having both sides of the spectrum. Full capabilities on both sides of the spectrum is increasingly important. So any information you can share on what the tuck-in brings, that would be helpful.

[Robert Eberle:]

Well, all of that's really well put. Yes, we have a lot of capabilities today. We're providing capability and visibility on the other side of the payment. That's critical for payment. What we haven't done is really focused exclusively on the receivables and cash application, other modules around that credit, for example, collections and the like. So the effort, which before, if we get the next question, it's not going to have any revenue in this coming year. But the effort then will be building out a full capability on that. So in lighter versions, we'll be deploying that technology to, for example, vendors and Paymode-X. But it gives us the full opportunity to offer that as an integrated module with Digital Banking or part of PT-X or part of our other solutions and even, ultimately, sell that directly at a point in time.

[Andrew Schmidt:]

Got it. All right. Thanks again, guys. Good job and the results here.

[Operator:]

Thank you. The next question comes from John Davis with Raymond James. Please go ahead.

[John Davis:]

Hey, good afternoon, guys. Wondering if you guys are willing to comment on bookings trends in July kind of similar to what you guys did in April last quarter. Just curious, it looks like given the update you gave intra-quarter, the bookings are relatively consistent throughout your fiscal fourth quarter. We've heard a lot of some of your private peers talk about an acceleration in bookings with COVID. So just have you seen a pickup in July, or is it more steady as it goes? And I have a few follow-ups after that.

[Richard Booth:]

JD, you've probably seen that over time, our summer quarter, this upcoming quarter that ends in September 30, tends to be seasonally a little bit down versus our fourth quarter. So we're seeing solid bookings through July. No indication that we'll have any slowdown in demand. I think we should have a solid quarter. But I would remind everyone that the quarter ended September 30 contains the European summer, which traditionally includes a little bit of a slowdown for us.

[John Davis:]

Okay. That's helpful. And then maybe just an update, I think pre-COVID, you guys have just hired a new direct sales team. As I look at all the wins in the quarter that are in no doubt impressive, specifically the 37 Paymode-X, maybe help us directionally break out how many of those came from the bank channel versus the new sales team or any kind of color you can give on how the new sales team is performing.

[Robert Eberle:]

So we're not breaking out by bank or by direct, but the new sales team is doing real well for us. We had signings in the quarter. We've got a fabulous pipeline. We were able to put together really a strong team that's out in the market, and there's so much market opportunity where we're really not seeing any conflict with channels. So kind of both engines are running well, although it's, of course, earlier, less than a year for the direct sales team at this point.

[John Davis:]

Okay. And then maybe help us a little bit on the opportunity for B2C. Is this more of a nice add-on product that's going to help you retain business? Or is a real revenue opportunity there? Maybe just obviously, given kind of the environment, it's become more important for businesses to be able to pay people. So just curiously, how big of an opportunity that is, or is that basically table stakes at this point?

[Robert Eberle:]

Yes. What we're doing there is we're adding more flexibility, more capability to the Paymode-X platform. So it allows a business then, if there are consumer-directed payments, whether that's refunds or insurance claims or whatever type of payment that may be, to have the capability to do that directly from a single payment platform. So it - I wouldn't see it being something we're deploying exclusively for a B2C application at this point, but it gives us great flexibility and gives our payers great flexibility in the Paymode-X platform.

[John Davis:]

Okay. And last one for me. Rick, on capital allocation, you guys had dedicated slides to the balance sheet in the deck that highlighted the $200 million in cash on the balance sheet, plus I think you have about $120 million or so available on the revolver. Maybe talk about how you balance investments in organic growth versus M&A. Obviously, you guys did a couple, it sounds like, very small tuck-ins or at least with the receivables piece versus share buybacks with the stock hang - still hanging around $50. So just curious there on kind of how you're thinking about deploying that capital over the next year or so?

[Richard Booth:]

Absolutely, JD. As you know, we always pride ourselves on maintaining a strong balance sheet. It's important to our customers as well as to investors. And we remain resolutely focused on accelerating our growth. Organic is the primary means, but doing acquisitions that extend our capabilities where we can sell-through another product to our large installed base is also attractive. So I think you'll continue to see a combination of those things. We haven't nailed out anything larger, but we're not looking to enter a brand new market. So what we're more commonly seeing is smaller tuck-ins.

[John Davis:]

Okay. And then just a quick follow-up to that, I mean as you continue to generate free cash flow, how high are you going to let the cash balance go? Or at some point, are you going to apply those back in the buybacks barring other opportunities? Thanks guys.

[Richard Booth:]

I won't comment on buybacks at this point other than to mention that we do have an open authorization.

[John Davis:]

Okay. Fair enough. Thanks guys.

[Operator:]

Thank you. The next question comes from George Sutton with Craig-Hallum. Please go ahead.

[Adam Kelsey:]

Thank you. This is Adam on for George. Rick and Rob, could you - in terms of the inbound interest, could you provide a little more color? Is there anything new you're hearing from the market as a result of COVID?

[Robert Eberle:]

So let me make sure I get that question right. You sort of broke up there. Is there anything we're hearing from the market with respect to COVID?

[Adam Kelsey:]

Yes, from customers from inbound - potential customers and inbound interest. Is there anything you're hearing from them?

[Robert Eberle:]

Sure. Well, we talk to all of our bank customers and so there's a lot of things that they're thinking about. I'd say if I break that into chunks in the quarter, first off was the change, branches closing, online banking, online applications where small businesses, in particular, would frequent the branch more than leveraging online channels. This is a major shift in that and many branches were closing. So that is one big implication, one big thing we're hearing from customers. And the second of course was the payroll protection plan loans and stimulus and our efforts to help in that by making our technology available for anyone who needed it. Beyond that, I think the things we hear are the same worries that others would have. Where does the economy go? Do we have banks thinking about the loan portfolio, thinking about the strength of their customer base? And then bigger questions around - with your national issues around supply chain in the U.S. medical testing, when do branches open? When do offices open? But I think at the end of the day, I asked one customer, one major bank, I said, "What are the solutions you need from us right now?" His answer was, "The exact solutions you've been developing for the last 10 years." So I think he said that honestly, not just to be nice, but we're - that's what we're - that's the dialogue we're really having. We have the right capabilities and right solution for folks today. Their concerns - customers' concerns are probably the same as all of our concerns. When is there vaccine? When does the economy open? But we're servicing customers well, and they're appreciative.

[Adam Kelsey:]

Great. And then in terms of the direct sales team, with this increase in inbound interest, has there any - been any change in terms of your strategic thinking on how you use that group?

[Robert Eberle:]

Well, we have direct sales teams across all Bottomline. So I wouldn't want to get - have that be confusion just because we launched a newer team for one of our products, Paymode-X. I think that there's been a transition of how direct sales teams have been deployed over time. Digital content is so important, the digital marketing efforts. There's a phrase, 70% of the buying process happens before human interaction. So our brand, our recognition as a trusted innovation partner are so critical. Then what we've seen, and I referenced it earlier, is businesses have adopted. So where in the past it would have been a sign of less interest if we were on a WebEx or Zoom call instead of having more of the team in person, that's obviously the way sales are being conducted now. So it actually allows us to bring more of the team. I personally, which I enjoy them, get to be involved more. And other specialists or other executives can be involved in a call and bring more capability, more of the leadership team to that relationship. So I think there's been an adjustment, but I wouldn't characterize it as a negative impact in any way. The last part of that - and I apologize for such a long answer. What's really interesting is where does that end up in terms of trade shows, on-site travel and all the like. But for now, this is the environment, and we're seeing an adjustment but not an impact.

[Adam Kelsey:]

No. That's very helpful. Final question for me, in terms of the receivables platform that you picked up, curious from your perspective what were one of the two major factors in this decision to go after this specific asset. Was it price? Was it the customer base? Or was there something with the technology they had that got you excited? And then that's all for me.

[Robert Eberle:]

So first off, we did not take a customer base or revenue or the like. It was a technology platform. When you look at what's been current in the M&A market and price points that other assets would be when - as was pointed out earlier, we have a lot of capability ourselves. So this was, I think, a creative and clever way for us to get a jump start with the capabilities that we did not have today. There's no substitute for having real live customers, having a real live in-service platform. As a starting point, that's where we are now, and we're developing the next-generation capability based on that. So it was a mix of factors. The quality of the partnership, certainly on there, the fact that a live customer is using the technology, which is so much better than a theoretical development, and it was the best place then for us to add our existing capabilities.

[Operator:]

Thank you. The next question comes from Gary Prestopino with Barrington Research. Please go ahead.

[Gary Prestopino:]

Hi. Good afternoon, everyone. Most questions have been answered, but I just want to get a - make sure I pinpoint on some of the things you talked about. In terms of your subscription and transaction revenue, Rick, would you say that there was about a 200 basis points to 300 basis point hit because of Paymode-X and legal spend management having a sluggish quarter or less than expected - or not a sluggish, but just the impact of what's going on in the economy?

[Richard Booth:]

Yes. I would say it was actually - it was greater this quarter. Last quarter, it was the two to three that you mentioned. But it was greater this quarter because we had the full quarter of the impact, although the trend, particularly for Paymode, was upward as we move through the quarter.

[Gary Prestopino:]

Okay. And then for the PartnerSelect, does the addition of having - how does the addition of adjusters change the use of that product in any way? Or how does that benefit that product?

[Richard Booth:]

So insurance adjusters, like attorneys, have to submit bills and need to be evaluated as part of that. So it's just a linear extension of that functionality, bringing more and more insurance companies, vendors within our platform.

[Gary Prestopino:]

Okay. Thank you.

[Operator:]

Thank you. The next question comes from Mayank Tandon with Needham. Please go ahead.

[Kyle Peterson:]

Hey, good evening. It's actually Kyle Peterson on for Mayank. Thanks for taking the questions. Just a follow-up on some of the transaction revenue, the headwinds and trends. Wondering if you guys could help size up how big of a lift you guys experienced between throughout the quarter and into July. Just so we can figure out, like, are you guys kind of back to kind of last year's transaction levels and like kind of a same-store sales type of basis? Or are we still kind of fighting our way back there? Just kind of want to see on the transaction side where volumes will need to go to get us towards that 15% to 20% subscription growth in the back half of the year.

[Richard Booth:]

Transaction volumes hit their lowest point in late May, early June and have begun to improve as we moved through June and have continued to improve as we moved through July. The overall transaction volumes are still below the same time in the prior year. But one subtle refinement is that the transaction volumes from our vendor pay model have continued to grow year-over-year, just a little less rapidly than they would have otherwise. So the underlying transaction volumes are healthy. It's just a question of - they're a little bit below where they were prior year.

[Kyle Peterson:]

Great. That's helpful color, and then just a follow-up on the incremental gross margin, the subscription revenue. It's great to see that rolling in at a nice incremental margin. Is that - for kind of future subscription and transaction growth, is that like the kind of incremental gross margins we should be seeing on this business especially as it scales? Or were there any kind of onetime benefits that skewed that incremental margin higher?

[Richard Booth:]

We've been very steady at posting incremental gross margins in the high 70% range, and I think we'll look for that to continue. It may not be as linear, a step forward each individual quarter, but the fixed cost nature of many of our solutions is part of what makes them so attractive.

[Kyle Peterson:]

Great. That's helpful. Thanks guys. Nice quarter.

[Operator:]

Thank you. The next question comes from Brett Huff with Stephens. Please go ahead.

[Brett Huff:]

Good afternoon, Rob and Rick. And hope you both still season well.

[Richard Booth:]

Good afternoon.

[Brett Huff:]

A question on Paymode-X volumes, a few years ago, you gave us a Paymode-X volume number, I think, of north of $200 billion. I wondered if you had updated that or could care to - would care to update that for us to give us a little sense of directionally where that's headed or has been.

[Richard Booth:]

I think we've given you a directional sense, and we don't intend to be breaking out individual transaction volumes on the call. We haven't in some time.

[Brett Huff:]

Okay. Thanks. And then in terms of the direct sales capability, it sounds like, Rob, you mentioned that there were some deals that those folks closed and they've been at it for about a year more earnestly. When you all think of the contribution to Paymode-X revenue growth that could come from direct sales, are there kind of rough amounts or rough percentages that you think about or help us size how much extra growth we might get from that channel?

[Robert Eberle:]

I think we're thinking more about the inputs than the end result of growth that that will produce rather than trying to model that for end produce, but we're growing our distribution. We're doing that by adding new bank channels, and we're doing that by adding the direct team. And for clarity, because somebody on the direct team will call me afterwards, actually - we actually have not been out of the year. We started in October and November in bringing people on. So really actually a very strong effort on the Paymode-X direct team.

[Brett Huff:]

That's helpful. And then last question for me. Rick, when you went through the year or the quarter, you noted that, I think that sort of OpEx for dev and sales and marketing was maybe up 400 basis points, 35% of revenue versus 31% or something like that as you guys spend a little bit and lean in behind the growth in the TAM in these businesses. Have you considered ramping up even more from there? Or are we kind of at a level that feels good? Or as we think about the out-year, is it same percentage, dollars go up? Or is there any sort of thought of maybe pouring more gas on that fire now that we see the TAMs opened up because of COVID?

[Richard Booth:]

I think there's more high-return investments that we can make vis-à-vis sales and marketing and development. Now we'll continue to operate at a reasonable level of profitability as we have so I think I wouldn't picture anything dramatic. We're not going to take our EBITDA margin down to where our competitors are, for example. But we will prudently invest. And now that more of our revenue is coming from subscription and we have that nice ongoing step-up in the gross margin, we feel good about our ability to fund that.

[Brett Huff:]

Great. Those are my questions. I appreciate it.

[Operator:]

Thank you. The next question comes from Chris Kennedy with William Blair. Please go ahead.

[Cristopher Kennedy:]

Hey, guys. Thanks for taking the questions. Just wanted to dig in a little bit more on Paymode-X, I mean you've made a lot of investments over the years. Can you just frame kind of what Paymode-X has been growing historically and what you think it can grow going forward?

[Richard Booth:]

Paymode-X has always been a strong grower. And it's grown even through this reduction in transaction volume, albeit, not as rapidly. So we would continue to see Paymode-X growing in at least the upper end of our 15% to 20% range and potentially even faster given the amount of interest that we're seeing.

[Cristopher Kennedy:]

Okay, thanks.

[Robert Eberle:]

The only one thing I'd add there with the statement we've made a lot of investments, actually, we've been historically light on R&D investment. And so the amounts we brought that up actually bring us closer to a norm and certainly not a high level of investment.

[Cristopher Kennedy:]

Okay. That's helpful. And then any update on the - on bringing legal spend over to Europe? How is that going?

[Robert Eberle:]

It's been going well, yes.

[Richard Booth:]

That's been going very well.

[Robert Eberle:]

Go ahead, Rick. Go ahead, you got it. You've got it.

[Richard Booth:]

Yes. It's been going really well. So we've got strong adoption. It started with the UK divisions of U.S. insurance companies, and we're starting to see some expansion around there. So we think the market is actually a little bit larger than we had originally anticipated, and we're pleased with the progress.

[Cristopher Kennedy:]

Great, and then just one last one. You mentioned $15 million of banking business in the backlog. Any thought on kind of implementation time of when that hits the P&L? Thanks a lot guys.

[Richard Booth:]

Yes. We expect half of that to be going live in the first half of FY 2021 and the remainder by the time we get to the end of the year.

[Cristopher Kennedy:]

Great. Thank you.

[Operator:]

Thank you. The next question comes from Peter Heckmann with D.A. Davidson. Please go ahead.

[Alexis Huseby:]

Hi. This is Alexis on for Pete. Thank so much for taking our question. So just firstly, I wanted to touch on the vendor pay model with Paymode-X. I was hoping you could give us the number of total customers that are on that model now.

[Richard Booth:]

We have well over 1,000 customers on Paymode-X overall, and we don't break it out any further than that.

[Alexis Huseby:]

Okay. That's fair. And then on the receivables management tuck-in deal, could you just give us a sense of the purchase price on that? And also, I just want to make sure we're understanding it correctly. It sounds like it was a software purchase, but not necessarily bringing revenue on board? Or was there revenue associated with it as well?

[Robert Eberle:]

Yes. That's exactly right. And we're not giving out the purchase price today. It will be in the 10-K, but it was a single digit - low single-digit millions.

[Alexis Huseby:]

Okay, great.

[Richard Booth:]

And I think the other piece, just to emphasize in terms of the value in addition to getting the platform itself, which is supporting customers, we're also working with the team and - to further develop the capability.

[Alexis Huseby:]

Got it. Okay. And then you've mentioned the possibility of the current environment expanding the TAM in a couple of different directions. Will you be providing any sizing on that going forward? Or any sense of what that opportunity might look like?

[Robert Eberle:]

Sorry, was that on receivables specifically? Or was that more broadly? I couldn't follow…

[Alexis Huseby:]

More broadly.

[Robert Eberle:]

We, from time-to-time, have provided updates on TAM. I think a simple way to think about it is as a trusted innovation partner to major banks, we continue to see their requirements for new capabilities expanding. I referenced in my remarks, for example onboarding and creating a whole digital journey for each new business and new customer they bring on. That all adds to our TAM. That's all new capabilities. So we've got - between the market opportunity in Paymode-X and digital banking, TAM is not an issue for Bottomline. We've got huge markets in front of us.

[Alexis Huseby:]

Great. Thanks for taking our question.

[Operator:]

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the call back to Mr. Rob Eberle for closing remarks.

[Robert Eberle:]

Well, thank you, everyone. Thank you for your interest in Bottomline. As you could tell from our remarks and questions, we're really pleased with the results of the quarter and the year, and we couldn't be more excited about the opportunity ahead of us in FY 2021. We look forward to reporting a strong Q1 in the October time frame. Thank you.

[Operator:]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.