Bottomline Technologies, Inc.
Q4 2019 Earnings Call Transcript

Published: 10 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Bottomline's Fourth Quarter 2019 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. Thank you for your interest in Bottomline, and welcome to the fourth quarter fiscal 2019 earnings call. I'm here with our CFO, Rick Booth, who'll provide a detailed review of the quarter's financial results and our guidance going forward. Then, as always, both Rick and I will be available for questions following his remarks.Fourth quarter was a solid quarter with financial results in line or ahead of our expectations. Quarter featured strong market success in bookings, which position us well to meet or exceed our subs and trans growth targets in FY2020. As we enter the new fiscal year driving acceleration and growth is our focus. And we have every confidence we'll achieve subs and trans growth in our target 15% to 20% range. It's our top priority and the primary objective of our strategic plan.As we produce acceleration and growth, we'll see multiple expansion. Shareholders will benefit from both the larger S&T revenue base and a higher multiple. Our confidence in the future is underscored by our recently announced $50 million buyback. We announced the buyback for a very simple reason. We're confident we'll see growth acceleration in FY2020. When that happens, the stock will be trading considerably higher than it is today. We see today's price as an excellent buying opportunity.I have to focus my remarks today on several key new wins in the quarter and then review our product advancements. But first, I'll start with a brief overview of the financial highlights of the fourth quarter. Subscription and transaction revenues was 13% on a constant currency basis in the quarter. While this is just outside our target of 15% to 20%, we're comparing to particularly strong quarter a year ago. We enter FY2020 confident we'll see growth accelerate back to our target 15% to 20% range.Subscription and transaction revenue was $79 million for the quarter and $295 million for the year. We're now a $300 million annual subs and trans revenue business with a plan to get to $500 million in three to four year's time. That's a valuable business payment franchise. Subscription and transaction bookings were $24.3 million. The strong bookings result was driven by 22 new deals for Paymode-X and our digital banking platform, which added three new DBIQ platform deals, including our largest ever.Revenue overall was $108.2 million.EBITDA was $25 million for the quarter and $100 million for the fiscal year achieving the ambitious target we set over two years ago. EPS was $0.34, above our target and expectations, and we ended the quarter with $100 million in cash. The financial results we're seeing demonstrate the alignment of the market opportunity, our strategic plan, our investment in our product set and our execution.During the quarter, we saw broad-based demand translate into strong subs and trans bookings. I'll give some examples of the market success we saw in the quarter, starting with Paymode-X. We have a large opportunity with Paymode-X to be the way businesses pay and get paid. During the quarter, we signed 22 new payers to Paymode-X, including several payers that signed on for Paymode-X with Visa Payables.New payers on the system include one of the leading auto manufacturers, a major athletic shoe brand, a top-tier grocer, several hospitals and health care providers and two well-known universities. The breadth of new payers shows the universal appeal of the platform. As in the past, the contribution from Bank of America was strong. We also saw sign-ons through Fifth Third, TD Bank, Citizens and our news channel partner, UMB.We had a solid sales quarter in legal spend management as well signing five new deals in the quarter. We continue to win and grow in the legal spend market by deploying a leading platform and launching additional offerings, which accompany it. The sales highlight of the quarter was the three major platform deals we signed for our DBIQ digital banking platform. It was a very strong quarter for digital banking, and nothing speaks louder to our product leadership and strong market position.One of the wins with a major global bank ends up being our largest single DBIQ relationship. But what's more exciting is the range of banks represented by the three wins

[Rick Booth:]

Thank you, Rob. I'm pleased to report on a solid quarter, in line with guidance and expectations. We delivered subs and trans revenue of $79.1 million or $316 million on a run rate basis, total revenue of $108.2 million, which exceeded guidance and EBITDA of $25 million and core earnings per share of $0.34, both of which were at the high end of our range. I'll focus my remarks today on three major topics. First, I'll review our Q4 financial results in detail. Second, I'll provide guidance for the first quarter of fiscal 2020 and confirm our guidance for the full year. And finally, I'll comment on the new buyback program established based on our confidence in the outlook.First to review our financial results in detail, I'll speak briefly to each line in our P&L. And in addition, we posted supplemental materials to our website for your convenience. Beginning with revenue, subscription and transaction revenue is our clear priority. We drove $79.1 million of subs and trans revenue in the quarter, which is equivalent to $316 million on an annualized basis. And at this rate, 73% of our revenue comes from subs and trans offerings, up six full percentage points from a year ago.Subs and trans revenue was consistent with guidance and expectations. But I'll note that from a percentage growth perspective, due to an exceptionally tough compare in the prior year, our reported subs and trans growth was 13% overall and 14% from products fully converted to subscription, slightly below our 15% to 20% goal on a constant currency basis. As we head into fiscal 2020, we're confident that we will see this growth accelerate back into our 15% to 20% range, driven by implementation of existing signed backlog, year-over-year growth from existing customers and the impact of additional signings.Maintenance revenue is the other component of recurring revenue. And the combination of maintenance and subs and trans revenue provides us with 89% recurring revenue, up five percentage points year-over-year. This gives us excellent visibility to upcoming results. License revenue by design is only a small part of our overall business. In Q4, we reported license revenue of $2.4 million or 2% of revenue. This level is consistent with what we expect for fiscal 2020 as we prioritize subs and trans offerings.Services, which we offer only as needed to help our customers succeed, were $9 million in the quarter. And as I mentioned, total revenue of $108 million was above our guidance. In addition to our revenue results, we had solid sales execution in the quarter. We signed $24.3 million of new subs and trans bookings led by digital banking and Paymode-X. This brings us to $82.9 million in new subs and trans bookings for the last four quarters, equivalent to 28% of subs and trans revenue in the same period. While booking figures are estimates and customers take time to implement and ramp to full revenue and production, this provides us with visibility to future subs and trans growth in fiscal 2020 and beyond.We signed six new customers to our digital banking product set, including the three significant platform deals that Rob described. With these signings 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. Our digital banking implementations continue to go well, and we brought two more customers live in the quarter. This visibility gives us high confidence that banking will achieve 15% to 20% growth within fiscal 2020.Our Paymode-X network added 22 new payers across multiple channel partners, including our new channel partner, UMB. This further validates the attractiveness of our highly secured full payment automation value proposition and channel partnership approach. We signed five new insurers to our legal spend management network, including another insurer in the UK We launched a new offering called Law Firm Analytics and have a robust pipeline of additional offerings to drive continued growth in this product set.At an overall level, these bookings and sign backlog give us excellent visibility to revenue growth acceleration in fiscal 2020. Equally importantly, our continued product innovation and competitive differentiation in the large and growing business payments market gives us confidence in our path to $500 million of subs and trans revenue within three to four years.Continuing down the P&L, we delivered on our financial commitments while investing to advance our solutions and drive long-term growth. EBITDA margin was 23%, consistent with our plan and expectations. Core operating income was $18.9 million, and adjusted EBITDA of $25 million and core earnings per share of $0.34 were both at the high end of our range and allowed us to complete fiscal 2019 with $100 million of EBITDA.Our overall gross margin was $62.8 million or 58% of revenue. And our subs and trans gross margin of 59% was up two full percentage points year-over-year. As planned, as gross margins expand, we funded development and sales and marketing as we aggressively pursue growth with our innovation agenda.Development expense was $15.6 million in the quarter or 14% of revenue, up one percentage point year-over-year. We see this continuing to fiscal 2020 when development will be approximately 15% to 16% of revenue, up from today's 14%. And we see this continuing into fiscal 2020 when net development will be approximately 16% of revenue, up from today's 14%. Sales and marketing expense for the quarter was $20.3 million or 19% of revenue, up almost one percentage point year-over-year. And G&A expense for the quarter was $8.1 million or 7.5% of revenue, down almost one full percentage point year-over-year.Moving from profitability to cash flow, operating cash flow was $15.3 million. And with only $1 million of net investing cash outflow in the quarter, this allowed us to end the quarter with $100 million of cash and investments on hand. Turning to guidance as the second major topic, our solid results and momentum position us well for Q1 in the short term and for fiscal 2020 and beyond in the longer term as we drive towards $500 million of subs and trans revenue in three to four years beginning with the growth that we can see and touch in fiscal 2020.Now given the recent declines in the British pound, we do need to update guidance for currency, but there are no other changes. For transparency, we've provided a bridge of the impact in our supplemental materials on our website. In Q1, at current FX rates, we expect to deliver $77 million to $80 million of subs and trans revenue, $22 million to $24 million adjusted EBITDA, $105 million to $107 million overall revenue, $15 million to $17 million core operating income, and core earnings per share of $0.25 to $0.29.Other than currency, there is no change to full year fiscal 2020 guidance. We continue to expect subs and trans acceleration as we proceed through the year with new customers going live and subs and trans growth within our target 15% to 20% range, including our digital banking set. We'll continue to present detailed guidance prior to each quarter while evaluating and updating the full year as needed.With strong bookings, exciting product innovations and solid financial performance, we're highly confident in our strategy. The Board recently authorized a new $50 million buyback authorization with $10 million specifically targeted to be completed in the first quarter of the year. This buyback underscores our conviction in our outlook and the confidence that our strategy will drive shareholder value.In conclusion, I'm pleased to report a solid quarter, including $108 million in total revenue, $25 million in EBITDA and a subs and trans revenue run rate of $316 million, driving toward $500 million in three to four years. Further, as I step back and think about our P&L, I'm struck that all of the year-over-year trends are moving consistent with our strategic plan and long-term model.Subs and trans revenue as a percentage of total revenue is up six percentage points year-over-year. Subs and trans gross margin is up two percentage points year-over-year. Development expense is up one percentage point. Sales and marketing expense is up one percentage point, and G&A is down one percentage point. We're well positioned in a large and growing market. Our current financial performance is strong. And we're confident in our ability to drive value for customers and shareholders for years to come.And with that, we can open the call to questions.

[Operator:]

[Operator Instructions] Our first question will come from the line of Andrew Schmidt with Citi Financial. Please go ahead.

[Andrew Schmidt:]

Hey Rob and Rick thanks for taking my question. And congrats on the good sales momentum here. It's good to see. Starting with just the subs and trans outlook for FY2020, I was wondering if you could just dig into your confidence in terms of the acceleration. Other factors that can derail this – and when I think about potential factors, I think, about macro and UK transaction growth there. At a high level, I was wondering, just discuss your level of visibility in terms of the step-up in subs and trans growth. And then, specifically, where you see that coming from?

[Rick Booth:]

Andrew, this is Rick. One of the great things about our business model is signed contract today give us very high visibility to the upcoming year. Of that $18.4 million of digital banking deals that are assigned but not yet live, almost 90% is going live within fiscal 2020. Now it's admittedly back end loaded, but that gives us extremely high visibility and confidence.

[Andrew Schmidt:]

Understood, and I think you actually answered the part of my next question, which was just the cadence of the growth. We should – I guess just taking the first quarter outlook and then the full year outlook together, we should expect more of a back half acceleration versus, say, second quarter. I guess just talk a little bit about just the timing of the acceleration as the year progresses.

[Rick Booth:]

Yes, very much so from a revenue perspective, but I would also note that as the revenue grows, we'll see margins increase. We're so confident in our revenue growth that we've invested for our product development innovation starting even in this first quarter. So we're slightly below where we would be otherwise without that investment.

[Andrew Schmidt:]

Understood, and then you talked about some areas of incremental investment. But just – I think you spoke more about things that are rolling out this year. As we think about what you're investing in today or the beyond 2020, what are some things just as we think about just growth beyond the current year?

[Rick Booth:]

Well, if your question is on product investment, I think there is a major transformation in the markets that we participate in going from systems of record to systems of engagement and intelligence. A system of record tells you what the data is. You can pull reports and that. It will give you workflow. But it doesn't know the user, doesn't make recommendations to the user, doesn't predict future events or possible outcomes, make recommendations and the like.And we will see – you already see that kind of built in ML and AI in some consumer applications. You see that in some areas of digital marketing, for example. That is coming across enterprise offer that's coming to our markets. And we're well ahead of that. We just had a strategic advisory board with 18 of our top bank customers. And they're very focused on today's operational excellence, but equally focused on our ability to deliver for them the next generation platforms and next generation capability, which is all around systems of engagement.

[Andrew Schmidt:]

Alright, thank you guys. Appreciate that.

[Operator:]

The next question will come from the line of John Davis with Raymond James Financial. Please go ahead.

[John Davis:]

Hey good afternoon guys. Rick, just want to start off with a quick housekeeping question. The updated guidance for fiscal 2020 – I'm assuming that does not include the buyback, but I just wanted to confirm that.

[Rick Booth:]

That's correct. We never guide on share count until it's repurchased. But at today's prices, it won't have a material impact on EPS.

[John Davis:]

Okay. And then, Rick, maybe just quick commentary – sorry, Rob, on the Mastercard's announcement of buying Nets account-to-account business in Europe. Is that similar or different to your business? Do you see any impact from that? And just I guess some high level commentary on your year-over-year transaction?

[Rick Booth:]

You were breaking up a little bit, JD, so I'm going to repeat the question. It was some commentary on Mastercard's acquisition of Nets.

[Rob Eberle:]

Right, sure. That's actually more about payment infrastructure, so that's more consistent with their acquisition of VocaLink, for example. So it's the – kind of need to think of it as the rails. What Bottomline is going to be – is doing is we're helping organizations put payments onto those rails and receive payments from those rails. But we aren't the rails ourselves. So we aren't going to run NationalACH or a clearinghouse system or the like. And that's what that acquisition – and VocaLink, which they've done in the past. That's what – that gives them that kind of capability.

[Rick Booth:]

Yes. When you think about our financial products, for example, we connect to over 30 different types of rails in Europe today. So the more rails there are, the higher our value add.

[John Davis:]

Okay. And then on the capital allocation front, obviously, the $50 million buyback is nice to see. Anything – any interest in doing a bigger M&A transaction? Obviously, you guys have a very strong balance sheet with a lot of flexibly. There's a lot of changing going on, rumors of several of your competitors potentially being up for sale. Just any interest in doing anything more than tuck-ins? Or should we expect tuck-ins and continued buybacks on a go-forward basis?

[Rob Eberle:]

I think it's tuck ins, I think it's also technology. So our most recent combination or acquisition was really a pre-revenue company that adds expense and development and sales and marketing, but we get fabulous new capabilities that extend what we're doing today. So I think you'd see some of both tuck-ins and pure technology plays.

[John Davis:]

Okay. And last one for me. Just as we're try and bridge the near term, 2020 and I guess the next couple of years margin outlook, call it, 23%, 24% with the longer-term guidance, it looks like a lot of that – for 30% to 35%, it looks like a lot of that expansion comes from the gross margin and not as much leverage on the fixed expense base. But maybe just talk specifically about what you see driving that gross margin expansion and kind of what gives you confidence in that longer-term margin profile of 30% to 35%?

[Rob Eberle:]

Well, I think, one of the things I'd comment right away, Rob, is that Rick referenced in his remarks that we'd see an increase as we move into this year in dev expense. So actually not only will we not see leverage there, we're going to be spending more on some of the things I've already talked about in terms of product and product initiatives. We will see gross margins on subs and trans move over time as we have this quarter. But the big thing I say on margin and we commented on this before, our focus is solving for growth. We're driving growth. We're going to drive growth in our 15% to 20% target range, and that's definitely the priority as we move into FY2020.

[John Davis:]

Okay, thanks guys.

[Operator:]

Next question will be from the line of George Sutton with Craig-Hallum. Please go ahead.

[George Sutton:]

Thank you. Guys, I was encouraged to see the breadth of sales from your other channel partners, your non-BofA channel partners. Could you just give us a little bit more specificity into how active those other partners have been in the quarter and then also an update on the BofA side?

[Rob Eberle:]

Sure, they are very active and we're very active with them. One of the things that makes our channel programs successful is our engagement with those channels. So that's sales training. That's making calls directly. That's strategic meetings. We've just hosted a couple of those banks at our strategic advisory board just last week. So we're very engaged. And I think that's one of the keys we saw as I referenced in my comments sales across the board, so really widespread, which is great, which is what we like to see.

[George Sutton:]

And just to be clear, Bank of America remains active as well. So...

[Rob Eberle:]

Absolutely.

[Rick Booth:]

Absolutely.

[George Sutton:]

More people rowing the boat if you will. So Rob, you mentioned on the last call that you were making investments in Paymode in particular over kind of a three-year period. And I just I wanted to see if we can get an update on your thought process in terms of the timing and the significance of the investments you're making in that platform?

[Rob Eberle:]

Well, we're making investments, to be clear – so I'll comment on both. We're making investments across all of our platforms, intelligence, personalization, the analytics, leveraging data. Those are common themes across all of our platforms. In terms of Paymode-X, some of the things we're doing is much – lot more on security. We've always been a very secured platform. But what we're hearing more and more from customers is security is really a catalyst to come onto the platform. We've been selling against check and antiquated inefficient payment processes, but people kind of love that because we've always done that. Then when they are hit with a fraud incident, which the most recent thing I saw was 79% of businesses that had reported payment fraud in the last year that becomes a real catalyst to come on.So we're doing more things around fraud. For example, our network payment score, which, if you think about the network we have, we have data that nobody else can get on their own. So if you're about to pay a vendor for the first time, has anybody else paid this vendor? Or you're paying them an amount that's much more inconsistent with what others have paid? If you've paid this vendor before and so have others, but suddenly there's a multimillion dollar payment that – well do they make – do they sell aircrafts? And that's consistent with what they normally receive or is that an out something that's – maybe that accounts been compromised?So we have a lot of fraud protection built in, in the network, and now we're adding more for payer specifics, things you could just never do on your own. That's a huge advantage for Paymode-X. Other things we're building in is our invoice capability. We've always had invoice platforms at Bottomline and a lot of expertise around that. We've now fully integrated that into Paymode-X, so we have the invoice to pay. And that addresses a small market – a small or midsize market needs much better because they look for a broader solution than the mid-market and larger corporates would.So those are a couple of things. And then on the sales and marketing side, we're adding additional direct sales teams to supplement the bank channels as well. So investment on both sales and marketing and product and Paymode-X.

[George Sutton:]

Super. One more question if I could on the digital banking side. So you mentioned signing up one of the world's largest banks. Can you just give us a sense of the significance of that in terms of size relative to traditional transactions for you? And are you working with the entirety of that bank? Or is this just a portion of the bank? Does this give you additional upsells at any point?

[Rob Eberle:]

Yes. It's actually our largest subscription, and it's just a portion of the bank. It's just a region for the bank. So very exciting. Part of that, by the way, is that we're adding more capability with single platform there. So we'll have – we have the ability to online account opening, cyber fraud, risk protection, secured payments, payment automation and now our insights, which gives you customer insights of the level the banks have not previously had. So those are some of the things that can get us to a larger deal sellers. This had a nice combination of capability of secured payments, real-time payments and our DBIQ platform.

[George Sutton:]

Super, thanks guys.

[Operator:]

Next question will be from the line of Mayank Tandon with Needham & Company. Please go ahead.

[Kyle Peterson:]

Hey good evening. This is actually Kyle Peterson on for Mayank. Thanks for taking my question. Just wanted to kind of follow up on M&A, some of the questions earlier, I know you guys have been potentially interested in doing some deals that are mostly technology plays. Just wanted to see if you guys timed the right stuff out there. Would that necessarily impact, say, your elevated R&D investments at all, kind of a build or buy decision? Or is there just a lot of runway in the development front that we'd still see higher R&D cadence for a while?

[Rob Eberle:]

I think that on the development front, which really occurs because we've got such a clear innovation agenda and product vision. This isn't speculation or new features. This is absolute clarity and confidence where our applications are going. That there's an appetite to make such spend. And then we know what we're looking for from an M&A standpoint if we see those capabilities. So it's very targeted, very clear where we're going and where our customers need us to go. So I hope – is that respond to what you're talking about on the M&A side? We're looking at technology. We know where we're going. We know what we're looking for. It's not randomly looking across a spectrum. It's specific capabilities.

[Kyle Peterson:]

Yes. That's helpful color. Thanks for that. And then just one follow-up just on kind of Brexit and kind of noise in the UK, I know you guys tweaked guidance just given the pound weakness. Have you guys seen any operational disruption or anything you guys are hearing from clients whether with their wallets or just verbally that has changed anything? Or is it just purely FX noise?

[Rob Eberle:]

Rick referenced this, but I'll say it as well. One of the things of how we do is we help businesses pay and get paid. In an up economy, down economy, businesses are paying and get paid. We grew in 2008 as kind of an evidence of that. But principal thing of what we see coming out of Brexit is not a slowness in economy. And the reason on that is economy itself seems fine. The second thing is more is going on with payments in the UK than anywhere else well with Open Banking and then across in Europe, PSD2, the changes in payments standards, things that are moving.So it's a fabulous time to be in the business we're in the UK. The one element that does hit us is currency. The volatility of currency – and, unfortunately, Rick can shout – I can say on earnings calls what constant currency growth rate was, et cetera. We know people are looking at screens. They are looking at reported numbers. And that's really dumb and unfortunately the progress we're making.

[Kyle Peterson:]

Alright yes. That's helpful color. Thanks guys.

[Operator:]

[Operator Instructions] Next question will be from the line of Brett Huff with Stephens Inc. Please go ahead.

[Brett Huff:]

Good afternoon guys. Thanks for taking my question.

[Rob Eberle:]

Hey Brett.

[Brett Huff:]

Two of them for me. One bigger picture for you, Rob. Can you talk a little bit about – a question before asked about kind of whether you focus on being a network or sort of an aggregator of networks in an on-ramp? Can you talk a little bit about that, but then also talk about how deep you would like to go into if at all within the corporate to help process, get approvals and et cetera for expenses and okaying that kind of stuff, kind of, process automation stuff and kind of where you see yourself ultimately playing in that value chain?

[Rob Eberle:]

Right, so on network or on active – we're actually both. So we're – in some places we're a network like Paymode-X, for example. In other places, we'll be aggregating, like our Universal Aggregator, we'll take different payment types in different rails. So we actually can play both angles, whatever is going to help accommodate the customer, whatever the customer's needs are going to be. In terms of process, we already do a lot of that type of process. When I mentioned our invoicing capability, that's invoice receipt, that's AP automation and how are you handling that workflow. What occurs? Is the invoice correct? Is there adjustment to be made? Is this said to be paid? If you think about what we do in legal spend management, that's all process approval. So we have a lot of strong capabilities on both ends, on the payment side and on the process and approval side.

[Brett Huff:]

Thank you, that's helpful. And then, Rick, one for you. On the bookings, we've gotten a lot of questions on the bookings. I just want to make sure I have it right. You guys put up $24 million, $25 million this quarter in the year-over-year compare. Is that $25 million, is that the right number to use?

[Rick Booth:]

In Q4 2018, it was $24.8 million, so yes.

[Brett Huff:]

Okay. And just from an acceleration – I know it got – it improved dramatically sequentially in terms of the year-over-year growth. But kind of how should we think about bookings? I know they're naturally lumpy. I know it's hard to estimate them. That's difficult. But in terms of – you talked about a strong pipeline. Optically, is there any sort of, I don't know, rules of thumb or thoughts you can give us on as we think about the bookings in the future?

[Rick Booth:]

We try hard not to guide bookings just because, as you noted, that they are lumpy. I'd like to look at them on a trailing 12-month basis. And if we're seeing bookings that are 25% to 30% of our subs and trans revenue in the same period, that's a very strong signal. I'll note that we were a little ahead of it this quarter. It was 31%, but we're 28% for the trailing 12-month, so right where we want to be.

[Brett Huff:]

Okay that’s what I needed. Thanks again for the time.

[Rick Booth:]

The only other thing I'd add on that, by the way, is to remember that, in many cases, we have growth upside of bookings. So, for example, if volumes go up on a transactional-based pricing model in Paymode-X or legal spend management, those business that bring on other division and sort of acquire or do other things, that will rarely if ever have a new contract or a new bookings number. So we see actually – can see a lot of growth outside of straight conversion of bookings into revenue.

[Brett Huff:]

Great, that’s helpful detail. Thank you guys.

[Operator:]

Next question will be from the line of Cris Kennedy with William Blair & Company. Please go ahead.

[Cris Kennedy:]

Yes hey guys. Thanks for taking the question. Rob, just wanted to follow-up on your comments about Open Banking and that opportunity in Europe. Can you just talk about kind of how you guys are positioned? And how material that opportunity can be?

[Rob Eberle:]

Well, the change to payment stand and how the world will work over time is very material. No one really knows exactly how that will evolve, but that has the potential to be very significant. And that's always good for us because we're the software then that accommodates change in payment. So we help corporates then deal with the next standard or whatever that new piece may be. A definition for everyone, so they understand it. What Open Banking mandates is that banks – if the owner of the account requested that the bank make that account available through API. So what that means is – aggregators, for example, other providers can then access that account, leverage that information with API.So some of the places that's an opportunity for us as we work with platforms that would do that directly or provide that capability for banks and challenger banks. We're expecting some level of that kind of thinking that come to the U.S., probably not in force from a regulatory standpoint the way it has been in the UK. But some banks – challenger banks and more forward thinking banks may decide to provide that capability, and we have a next generation infrastructure, architecture that allows us to provide that kind of Open Banking capability to a bank whether they're leveraging our platform or not. So it's actually a product opportunity as well.

[Cris Kennedy:]

Okay. That's helpful. And then on Paymode-X, as you guys go down market, can you just talk about kind of how the competitive landscape is different? And kind of how the business is different versus the larger businesses? Thank you.

[Rob Eberle:]

Sure. I think there's couple things you'd see too, mix of payments that would be different. You can see more card as you're moving down market. So we have a partnership with Visa. We also can accommodate Mastercard payments. So you'd see more card payments across that. You'd see a broader capability not just looking for payments. You'd look for invoicing through the payment. And then there are some mix of competitors that are focused more on small business or micro business, MineralTree and AvidXchange and other. I think a real advantage we have there is security, scale and the size of our network. Another advantage we have is our channel partner relationship. So banks that has success with Bottomline now have an opportunity to take us further down market into their customer base.

[Cris Kennedy:]

Okay. Great. And just one last one. The bookings, $83 million for the year, is there any way you can put perspective on the key drivers of that, whether it be Paymode-X and banking? And is there any way you can just help us think about the percentage from...

[Rob Eberle:]

You just hit the two biggest right there, so that's exactly right, Paymode-X and then digital banking. And they really represent two great opportunities for us going forward. So as we move into next year, I'd expect them to continue to lead our – be our leaders in bookings.

[Cris Kennedy:]

Okay, great. Thanks a lot guys.

[Operator:]

Next question will be from line of Dan Perlin with RBC Capital Markets. Please go ahead.

[Matt Roswell:]

Yes, good evening. It's actually Matt Roswell in for Dan. Congratulations on a nice quarter, especially with the FX headwinds. In terms of a bigger picture question, you're getting some very nice wins in digital banking. Is there any kind of changes in demand or differences in demand you can see between larger, smaller banks, global banks, European banks versus North American banks?

[Rob Eberle:]

I think the demands to grow your business banking franchise are universal. For anybody, that's a truly important part of their bank, whether they are small or large. That's a real mandate. So you could see it in this quarter with Bottomline, a $6 billion assets bank and then a $30-plus billion asset bank and then a major global bank. So that will see as common. Our technology gives us the ability to scale the capabilities and to scale price point that fits each of those size banks. We're focused more today on North America. We have a presence in Europe and banks in Europe as well. We're not addressing the rest of the globe. And we find – usually that will bring us more customer requirements, other pieces. And so there's a ton of market opportunity for us in North America and Europe, and that's really what we're focused on.

[Matt Roswell:]

Have you noticed with some – two of the kind of core bank processors tied up in large acquisitions, have you noticed any changes in their push, their competitiveness, et cetera?

[Rob Eberle:]

I couldn't tell you that we've seen that specifically. What is a pattern in the past with other competitors, other cores, that's always been a distraction that always becomes a focus. I think what's happening instead for us though, whether they slow down or not is going to be less relevant because what's really happening is we're speeding up. If you listen to what I talked about on the DBIQ platform, we're bringing all these capabilities in one integrated platform with customer insights. There's nobody else doing that. There's nobody else bringing those kinds of capabilities. So yes, there's probably a theoretical benefit or advantage that they're distracted. I couldn't say we've seen that specifically. But even beyond that, we're moving so fast and bringing so many new capabilities to the market that a core solution is appropriate in some circumstances, but not if you're truly ambitious about growing your business banking franchise.

[Matt Roswell:]

Shifting over to Paymode-X, where do we stand with the move to kind of the interchange like model? And does the kind of move downstream help or hurt that transition?

[Rob Eberle:]

That helps the transition. And it's not a transition at this point. That is our model today. And that helps because this move downstream is a smaller ticket. They're more used to an interchange or paying on a – being paid on a card and a vendor community. So I think we see a higher acceptance of dividends or a network use fee model, vendor pay model, whichever terminology you want to use.

[Matt Roswell:]

So obviously new clients are on that model. What sort of percentage of kind of the Paymode-X volume do you think is – has moved to that model?

[Rob Eberle:]

It's still a vast majority, is on the traditional model. They still by a large – vast majority of that's still on the traditional model, a 90% kind of number.

[Matt Roswell:]

Okay. And a question on the numbers for Rick. Tax rate for the year. I think last quarter you've talked about a 25% rate. Does that still seem reasonable?

[Rick Booth:]

Correct. Yes, we did, and it's still there.

[Matt Roswell:]

Excellent, thank you very much.

[Rick Booth:]

Thank you.

[Operator:]

Our next question will be from the line of Peter Heckmann with D.A. Davidson. Please go ahead.

[Peter Heckmann:]

Good afternoon gentlemen. Could you – I'm sure it will be in the K, but just trying to track some of the segments. Legal spend in the quarter, what type of growth did that put up? It really seems like it was outperforming in the first three quarters of the year.

[Rick Booth:]

Yes. The legal spend, which has been a strong performer throughout the year, can be lumpy at times, depending on the timing of customer go-live. So we actually had one large customer that slowed down their roll out a little bit for internal reasons. And so that impacted our growth rate. So it will be off a little bit. I think we're talking later tonight, but we can talk about it then, yes.

[Peter Heckmann:]

Okay. And that leads me to my other question within the outsource solution or cloud solution segment. It appears settlement networks saw a big deceleration. And of course, that's your Paymode-X business and the SWIFT messaging business. But it looks like it – depending upon how the fourth quarter came out, it looked like it decelerated. And it seems like as you shift to the interchange model on Paymode-X, we should actually see that line accelerating. I know there is a small currency impact there, but what are the give and takes there? Why aren't we seeing that line item grow 15%, 20% on annual basis?

[Rick Booth:]

Two pieces. First and foremost, Q4 was an exceptional quarter within payment networks. And we even referenced it in the call as being very, very strong. And then the other thing is the decline in the pound certainly impacts the SM business.

[Peter Heckmann:]

Okay. Okay. That's helpful. And then just the free cash flow that might be implied by your 2020 guidance. Can you help us with a range there?

[Rick Booth:]

I don't have the free cash flow in front of me.

[Peter Heckmann:]

Okay. Maybe just one more the. We did see in the new that – a little bit of an antitrust issue around this closed acquisition and – or anticompetitive and made an order to segregate the business. I know it's a small deal, but it's interesting that such a small deal would result in an investigation by anticompetition authorities. Can you just give us some insight there into what exactly they might be concerned with?

[Rick Booth:]

Yes, it's entirely customary for them to review transactions of this type. We're working closely with them in the review. And there is some misperception around the recent order. That order is simply requiring us to hold certain confidential information separate. More specifically customers, for example, can't be stored in the same CRF. So it's normal course.

[Peter Heckmann:]

Okay. So we should see that resolved in hopefully in next quarter or so.

[Operator:]

The next question will be from the line of Bob Napoli with William Blair & Company.

[Bob Napoli:]

Just wanted to ask a little bit more on the adoption of virtual cards and the build out of direct sales force. Any more color that you can give on that. I mean, are you – who are you working with on virtual cards? And what are the plans on building out the sales force for Paymode – direct sales force?

[Rob Eberle:]

Well, our strongest partnership is with Visa. We work with Mastercard as well. We've always had a direct sales force. I'm glad you asked the question because it'll give me a chance to clarify. We've always had a direct sales force and with certainly support and are channel-driven first. So if there's a conflict on that, we'll often step back and let that go directly to the channel. We're just going to be adding more horsepower behind that direct sales force.

[Bob Napoli:]

Okay. And just on the virtual card is what percentage of your revenue in Paymode comes from virtual card?

[Rob Eberle:]

Nothing, very little today. I mean it would be a very insignificant portion today. It's part of when we went to, added the card for an integrated payables solution, now we're seeing more from – we'll begin to see that payment type as well. Part of it is strategic though because that allows us to then accommodate a payer. We have a number of payers in the past where that would be a separate part outside of our platform. We'd handle everything else other than card. Now with a full integrated payables solution, everything can flow through Paymode-X, makes it much easier for the payer. And then we'll start to see revenues on the card as well.

[Bob Napoli:]

And revenue on that card would be much higher, I think, than off the card? I mean the revenue yield is much higher. Is it not or…

[Rob Eberle:]

No, because there's a higher interchange, but there's a much higher payout in terms of a rebate. And then there's a number of other partners that are engaged in that. On a ACH+, where we have a network use fee we're sharing with the bank and the payer, we take the largest share of that. So we're really look – we're kind of want to accommodate what the payer wants to do rather than drive for what's more profitable for Bottomline. But the most advantageous payment type for us specifically would be – would still be ACH+ with the network history.

[Bob Napoli:]

Okay. And last question just on Paymode. I don't know if you – Rob, if you could give us some color on what the growth rate of that business is. And what you think it would be? Is it above the sub and trans target that you have and...

[Rob Eberle:]

Yes. The growth rate we'd expect – that's one of the big drivers next year, and it's higher than our targets, absolutely. We're not breaking out product by product growth rates but yes, absolutely, higher plan for next year plan. And our confidence – it's a big part for it. That will be higher than the average growth rate.

[Operator:]

Next question will be from the line of Terry Kiwala with First Analysis.

[Terry Kiwala:]

Congratulations on a great quarter. My question is regarding the digital banking on-boarding process and how you're structuring investments in development to choose, speed that – potentially speed that process and how that would impact your three-year to four-year sub and trans goal?

[Rob Eberle:]

So there are investments we're making in things like next generation infrastructure that give us an API layer and faster integrations into core and other systems. But the bulk of the investment we're making is around product capabilities and functionality and customer insights and a fully integrated single platform. The time frame on an implementation isn't as much about the technology. It's about steps. It's about the fact that you're working with the bank, working with multiple systems.There is a testing cycle. There is reviews of that. There's a plan. And compressing those isn't as much about technology as it is about the human process. So I think we've seen nine-month implementations today. I think that's a great target. Could that move up slightly? Perhaps. But that's not what we're investing for. What we're investing is to deliver more capability to banks, so they have more insights about their customer. They can know more, determine more actionable next sales and even defensive moves that they would make, more breadth of functionality that they can provide their customers. So speed of integration has some elements in there in the AP architecture. But it's not the principal driver or principal benefit of the investment we're making.

[Operator:]

At this time, there is no further questions in the queue. I'll turn the call back over to Mr. Eberle for any closing comments.

[Rob Eberle:]

Well, thank you so much. Thank you for your time. We couldn't be more excited for the position we're in. And heading into the coming year, we couldn't be more excited for the results we're confident we'll post. And with that, we've got our $50 million buyback that will be in place as well. So clearly, we look forward to reporting back on subsequent quarters and the fiscal year as we go forward. And we thank again everyone for your time.

[Rick Booth:]

And Rob, I can add to that, that the free cash flow will support the $50 million buyback.

[Rob Eberle:]

Very good. Thank you.

[Operator:]

Ladies and gentlemen, this conference will be made available for replay after 7