Bottomline Technologies, Inc.
Q1 2018 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies First Quarter 2018 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 on Bottomline's most recent periodic reports filed with the SEC for 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 Resource section of the Bottomline website, www.bottomline.com. 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.

[Robert A. Eberle:]

Good afternoon. Thanks for your interest in Bottomline Technologies, and welcome to the First Quarter Fiscal 2018 Earnings Call. I'm delighted to report on what was a very good quarter for Bottomline. I'm here with Rick Booth, our Chief Financial Officer. Rick will provide a detailed review of the quarter's financial results and our guidance going forward. And then as always, both of us will be available for questions following his remarks. The first quarter was a very good quarter, featuring both strong financial results and positive sales momentum. During the first quarter, we exceeded all of our revenue targets. We took a meaningful step forward in EBITDA. We had a record 29 new Paymode-X deals. We had strong sales execution with $22 million in new subscription and transaction bookings, and we expanded our global presence and offerings in meaningful and powerful ways. All in all, a very strong start to the fiscal year, which gives us confidence in our strategic plan, and our execution against that plan. We've committed to an FY 2019 target of $300 million in subs and trans revenue and $100 million in EBITDA. Results for Q1 clearly demonstrate we're on track to meet or exceed those targets. We're pleased with the quarter, and we're pleased with our execution. The most important thing that occurred in the first quarter is, the level at which our product set is resonating with customers, and we are closing new business. Our financial results are strong and of course important and exceed focus. At the same time, new subscription and transaction bookings tell us how we're doing with customers, how we're faring against competition, and what our results are likely to be in the future. I'll focus my remarks on the drivers behind our strong bookings, and the steps we took in Q1 to expand our capabilities. But first, I'm going to touch on some of the financial highlights in the quarter. Subscription and transaction revenue grew 20% in the first quarter for the products fully converted and traditionally sold in subscription, which is the bulk of our products. Subscription and transaction revenue growth overall was 16%, consistent with our target range. Subscription and transaction revenue was $60.7 million, a run rate of $243 million. Revenue overall was $91.3 million, up 10% over the prior year. EBITDA was up 32% from the prior year at $22.1 million. With annualized EBITDA of over $88 million, we're well on our way to our $100 million FY 2019 target. Operating income was up 38% from the prior year at $17.4 million. EPS was $0.30 ahead of our target and expectations, and we ended the quarter with $128 million in cash. Financial success we saw in the quarter demonstrates our strategy, and the investments we've made are now paying off. We're well-positioned in driving profitable, predictable growth. The remainder of my remarks will focus on the major drivers behind that growth, and some of the new initiatives we've completed. I'll start with Paymode-X. Our aspiration is for Paymode-X to be the way businesses pay and get paid. With each quarter's progress, that goal becomes more achievable. We have 29 new payers sign on for Paymode-X this past quarter. That's a record, and importantly the expected revenue from those signings is also a record. The 29 new payer signings were from organizations of all types and sizes, included a major aerospace and defense contractor, universities, municipalities, and several health care providers. One of the key reasons we're winning is, our network provides a unified compelling value to all parties. I'm going to touch on why Paymode-X is the right business payment platform for payers and vendors. For payers, we provide turnkey payment automation with maximum simplicity, security, and modernization. Paymode-X is a dual card brand, full-service integrated payable solution, which means we offer automation of all payment types, including both Visa and MasterCard. New payers benefit from a network effect to achieve immediate automation and rebates derived from the over 365,000 businesses accepting payments on the Paymode-X network. From a vendor perspective, Paymode-X is an efficient and differentiated way to automate receivables, divisibility of the (06

[Richard Douglas Booth:]

Thank you, Rob. I'm pleased to report on a strong quarter. This quarter's results show that we're tracking well against both our fiscal 2018 guidance and our fiscal 2019 plan of $300 million in subs and trans revenue and $100 million EBITDA. I'll focus my commentary on four topics today. First, I'll review our Q1 results. Second, I'll discuss our business model and the leverage behind profitability. Third, I'll provide an update on our capital structure and the retirement of our convertible debt. And finally, I'll reconfirm our existing full year and fiscal 2019 guidance and provide detailed guidance for the upcoming quarter. In addition to my remarks on this call, for your convenience, we've posted detailed supplementary materials to our website. In the first quarter, we drove all key financial metrics above plan, including subs and trans revenue, total revenue, core operating income, core earnings per share, and adjusted EBITDA. Highlights of the quarter include that subs and trans revenue grew 20% from products fully converted to subscription, which is a majority of our products, and 16% overall. This brought total revenue to $91.3 million, up 10%, and well ahead of plan. This is the first quarter in some time without a currency headwind, which makes the underlying growth of the business more readily apparent. And we recorded $22.4 million of new subs and trans bookings. From a profitability perspective, adjusted EBITDA of $22.1 million was up 32% year-over-year, core operating income of $17.4 million was up 38% year-over-year, and core earnings per share of $0.30 were up 36% year-over-year. I'll now provide a more detailed look into the first quarter results, beginning with revenue. Overall, we had $60.7 million of subs and trans revenue in the quarter, equivalent to $243 million on an annualized basis. Within that, subs and trans revenue for products fully converted to subscription grew 20% versus prior-year, which is at the top of our target 15% to 20% range. As customers go-live on our recently launched Digital Banking 3.0 offering; they will help drive transitioning subs and trans revenue to 15% to 20% growth rates as well. 67% of our revenue is from subs and trans offerings, this is up 3 percentage points year-over-year, and 86% of our total revenue is now recurring. Sales performance was also strong. We signed $22.4 million of new subs and trans bookings in the quarter, led by Paymode-X. While booking figures or estimates, and customers take time to implement and ramp to full revenue production, this quarter's bookings represented 37% of subs and trans revenue for the same period, and provide us with clear visibility to future subs and trans growth. Looking at new customer signings, four new banks selected our Digital Banking products, six new insurers selected our legal spend management solutions, and 29 new payers joined our Paymode-X network, which is a record. Profit and margins were another highlight of the quarter as we delivered adjusted EBITDA of $22.1 million, up 32% year-over-year, and core operating income of $17.4 million, up 38% year-over-year. Overall core operating margin was 19% of revenue, and products in our established revenue models delivered core operating margin of 22% as subs and trans growth lifts operating and EBITDA margins. Our overall gross margin was $52.2 million or 57% of revenue and subs and trans gross margin was up 1 percentage point from the prior year to 56%. From an operating expense standpoint, sales and marketing expense for the quarter was $15.8 million or 17% of revenue, and development expense was $12.1 million or 13% of revenue. So, in total, in Q1, the financial leverage in gross margins and OpEx drove expansion of operating margin by 4 percentage points year-over-year and we delivered record EBITDA of $22.1 million, up 32% year-over-year. As important as these results are, even more important is that the factors that drove this performance are central elements of our business model and will enable us to continue to drive attractive profitability in fiscal 2019 and beyond. Bottomline's business model provides a natural financial leverage as revenue grows through new customers as well as additional products and volumes from existing customers and the associated hosting costs and operating expenses are relatively fixed. This clear business model and our current results provide confidence in our ability to drive $300 million of subs and trans revenue and $100 million of EBITDA in fiscal 2019. Turning to capital structure, next month, we'll refine our capital structure by paying off the maturity of our $190 million convertible bond using a combination of cash on hand and our existing credit facility. Our existing $300 million credit facility has a floating interest rate, which is equivalent to 3% at today's rates and leverage ratios. We've executed an interest rate swap, which locks in a fixed rate just below 4% on the first $100 million of draw for the next 4 years. We expect this to result in a fixed to floating ratio of approximately two-thirds fixed rate and one-third floating rate debt. This approach is the next step in the evolution of our capital structure, as it leverages our low cost source of capital, minimizes the cash held on our balance sheet, and eliminates the convertible overhang without shareholder dilution. Turning to guidance. We're tracking well against both our fiscal 2018 guidance and our fiscal 2019 plan of $300 million subs and trans revenue and $100 million adjusted EBITDA. I'm pleased to reconfirm our existing full-year and fiscal 2019 guidance and to provide additional detail on the second quarter with guidance of $92.5 million of overall revenue, $64 million of subs and trans revenue, $21 million adjusted EBITDA, $16 million core operating income, and $0.26 core earnings per share. Supplemental materials on our website provide additional details on the breakout of both actual results and the guidance. And with that, we can open the call to questions.

[Operator:]

Our first question comes from the line of Brett Huff with Stephens. Please go ahead.

[Brett Huff:]

Hey. Good afternoon, guys. Can you hear me okay?

[Richard Douglas Booth:]

Yes, we can. Hi, Brett.

[Brett Huff:]

Great. Hey. How are you guys? Thanks for the detail, as always. A couple quick questions for me. Number one, can you talk a little bit about the – when we did the math it looks like you all beat on the fundamentals by maybe a penny but that other income was not as much of a negative impact as you thought it was going to be. Is that – are we reading the results right? I recall you said that the other income would be a headwind this quarter. Is that right?

[Richard Douglas Booth:]

I don't recall making any commentary about other income, Brett. We beat on both revenue and profit strongly.

[Brett Huff:]

Okay. And then on the, you mentioned the transitioning businesses, hoping you could get them to 15% to 20% to where your existing subs and trans business growth is. I think it came in stronger than it did last quarter. But what is the timeframe that you all think about that on? Is it a year, two years or what kind of color can you give us on that?

[Richard Douglas Booth:]

The customer response to our Digital Banking platform has been extraordinary. We've won deals totaling $93 million in contract value and $10 million in ARR. The majority of those deals go-live either late in fiscal 2018 or in fiscal 2019. So, we view this as a story primarily about fiscal 2019 and then beyond to get to those full rates.

[Brett Huff:]

Great. That's helpful. And then last question for me is, I think Rob you mentioned that the Paymode-X customer, one of them that you signed, was the largest payer ever. And I know that the legacy business from BofA has some large states in it. Does this compare to those?

[Robert A. Eberle:]

I would – yes, it would compare to a large – there is the largest we've signed in a vendor pay model...

[Brett Huff:]

In the vendor pay model, okay.

[Robert A. Eberle:]

Yes. So, there's certainly other. But it is a large – it would be large compared to legacy as well.

[Brett Huff:]

Okay. Great. That's what I needed. Thank you, guys.

[Robert A. Eberle:]

And it would certainly be more revenue than anybody under the legacy model by a multiple.

[Brett Huff:]

Okay. Great. Well, that's good news. I appreciate that detail. Thanks, guys.

[Operator:]

Our next question will come from the line of Cris Kennedy with William Blair. Please go ahead.

[Cris D. Kennedy:]

Hey, guys. Thanks for taking the question. Can you give – I think you mentioned, you guys did an acquisition in the quarter just under $500 million. Can you give a little bit more color on financials related to that and on the strategy as well?

[Richard Douglas Booth:]

Yeah, certainly. Not $500 million, $5 million. This was a small tuck-in of an existing partner, which was a great way to expand our presence in Asia, particularly for our financial messaging business. So, this partner that we had already been working with was available for acquisition at a very reasonable price, $2.8 million in cash, a $1.8 million note. So, we felt good about that. We are integrating them into our existing technology. The financial impact in the quarter was completely immaterial, few hundred thousand dollars of subs and trans revenue and roughly break-even profitability. So, it's a nice acquisition, gives us the expansion in the geographic region that we were looking for. But it's a small tuck-in, very consistent with our strategy of nothing that's operationally disruptive, and nothing that's dilutive.

[Robert A. Eberle:]

It's really the best way to get into that geography, sending our own teams, or opening, building new relationships. Here we had a group on the ground, and again, as to be clear on the purchase price, less than $5 million. And going-forward what we'll do is, really use that as a center for our financial messaging technology. So, it was really more about a presence and a team than anything else.

[Cris D. Kennedy:]

Okay. Great. And then just if you can talk about some of the key drivers of the $22 million of bookings, I think you mentioned Paymode-X and the legal spend. But if you could just give a little bit more color on that, that would be great. Thanks.

[Robert A. Eberle:]

Sure. Paymode-X was certainly the biggest piece of that. We had, as I referenced, 29 deals. We had our largest payer ever. So, big, big contribution. That was spread actually pretty well amongst the different banks that we work with as channel partners. So, Bank New York Mellon and of course Bank of America, real strong on that. And we also saw, what was interesting is, we saw it across a wide range of industries. We've had a lot of success in healthcare, but we're seeing actually more different municipalities, manufacturers, other industries coming on as well. As the fundamental premises I went through for the payer and vendor, it is the way to pay and get paid for business payers.

[Cris D. Kennedy:]

Okay. Great. Thanks a lot.

[Operator:]

Our next question will come from the line of Mayank Tandon with Needham & Company.

[Mayank Tandon:]

Thank you. Good evening, Rob and Rick. Good job on the quarter. Few questions here; Rob, first at a high level, if you could just talk about competition, particularly on the Digital Banking side, you are obviously seeing good progress. Who are the players in the market you're competing with? Maybe just give us some feel for how that might have changed over the last 6, 9, 12 months and your positioning in the market versus these peers.

[Robert A. Eberle:]

Yeah. I think what we've done is, we've staked out an area in the broader market where we have the clear leading platform. And that's banks that are serious about growing their business banking franchise. So, it could be banks of a certain size, or it can be, as I highlighted in my commentary, it can be a smaller bank, but in either a geography where they're competing with bigger banks and with a significant portion or focus on business banking. The capabilities we build out enables someone – enable a bank to provide additional capabilities to help their corporate customers run their business better. And it allows them to compete with the biggest players in the market that might be in their territory. So, we've really carved that out. We're not doing retail banking. We're not doing smaller bank platforms. If you're a small bank that's doing retail banking, your core or somebody like Q2 would be a better choice than Bottomline. But if you're serious about business banking, we have that platform. And what's encouraging is that's really becoming established in the market. So, we're seeing strong win rate on RFPs. We're seeing folks – we can kind of come in as the leading choice now for business banking. And we've also what we've done in the last several years that's changed that is the level of innovation. We've moved completely away from any services element. So, it's our standard platform deployed in the cloud, and it's a great opportunity for us. There's a lag in the revenue as we moved to subscription. So, I know that some analysts and some investors will look at that transitioning segment with some concern. But we're winning the deals, as Rick had outlined and it's just a question of time till the math starts to have those subscriptions add up. So, that's a fabulous space for us from a competitive standpoint. I'll make a comment on one other area competitively and that's Paymode-X. What we're seeing is we're seeing more noise and entrants in the market, which I believe really favors us. Because what happens if we're the only ones out there saying to automate the business payments, it's less convincing. If there are a number of different organizations, if there's other offerings saying automate business payments then you step back and say, why I have to do this and who's the best place to do that. And I think we're seeing some benefit of that with the 29 deals in this last quarter.

[Mayank Tandon:]

Great. That's very helpful color. Thanks, Rob. And for Rick, a quick question Rick, on the numbers, you clearly beat handily in the first quarter and you gave us guidance for 2Q. I was just trying to get a sense of why you aren't flowing through the upside in the quarter into your full-year guide.

[Richard Douglas Booth:]

That's a great question, Mayank. We have high confidence in our strategy and business models and we've got a solid history of delivering, especially on the key areas of subs and trans revenue and profitability. We continue to guide each quarter in advance and we don't update the two annual periods for immaterial changes in FX. Q2, another strong EBITDA at $21 million, up 26% versus prior year, so.

[Mayank Tandon:]

Got it. Were there any one-timers in the quarter that you saw, which may have impacted the upside in 1Q at all or they're pretty clean?

[Robert A. Eberle:]

Obviously (29

[Richard Douglas Booth:]

Now that's correct. I commented on it in Q4 when there was, but when I look across the year-over-year it's really just the strong growth in subs and trans that's driving the revenue increase and dropping down to the bottom line.

[Mayank Tandon:]

Great. Okay. Great. Thanks, guys.

[Operator:]

Our next question comes from the line of George Sutton with Craig-Hallum. Please go ahead.

[Jason Kreyer:]

Hey, guys. This is Jason on for George. Thanks for taking my questions. Rob, you started to address this but just wondering on the volumes that you're getting in Paymode-X or the new partnerships, wondering in terms of where those are coming from through all your different channel partners and not necessarily in Q1 here but over the last couple of quarters if you've seen any changes there.

[Robert A. Eberle:]

I think what we're seeing is just traction with some of the newer banks. So, we continue to see Bank of America as a strong principal partner for Bottomline but we're seeing Bank of New York Mellon as well. We've seen Fifth Third over prior quarters. We've seen Citizens. So, we're seeing a mix of different channel partners that are contributing to the success we're having, of course, with Bank of America still as our predominant partner.

[Jason Kreyer:]

Okay and similarly just if you can comment at all on the pipeline of opportunities from Visa and MasterCard and how that's progressing and if you have any timeline for contribution.

[Robert A. Eberle:]

Well, I would say contribution exists already. I think one of the reasons we won 29 deals is the capabilities we offer being a dual-card capability is really important. It means even if you're not using that today, even if you don't run a card program and pay vendors, any portion of your vendors with either virtual card or a purchase card, having that flexibility. So, having that built into the platform is actually, absolutely already making an impact today. And then, so, I think we talked about last quarter, we signed a significant channel partner in a joint effort with Visa. So, we're definitely seeing a significant contribution there.

[Richard Douglas Booth:]

Yeah, and we have completed the technical interconnection with that channel partner's system and we're already calling on customers.

[Jason Kreyer:]

Great. One last one for me on Digital Banking 3.0, I guess the four banks that you signed this quarter, wondering if those were all on Digital Banking 3.0. And then if you can give any updates in terms of when we're going to see the first customers go live?

[Robert A. Eberle:]

Well, first – so first off what we have is, we have a couple different platforms for different capabilities, online account opening and like. So, we'll articulate whether we win for new logos that we did not have an existing relationship and that can be with across any of our banking customers. The one I highlighted was for our DB 3.0 platform. So, in terms of go-live, we have customers live today, banks that are live and their customers are live. The question that we've gotten is, when do you start to see that revenue growth and that's really in the second half of 2018 as a larger portion of banks are live and we see more subscription revenue. And then coming into 2019 where as Rick indicated earlier that's when we'll really see that play out, so.

[Richard Douglas Booth:]

Yeah, that's when the largest banks will be going live.

[Robert A. Eberle:]

Yes, and it's math to see the 15% to 20% growth. So, we've got full confidence we'll achieve that. It's really the transition of a model to getting those live and coming through the P&L.

[Jason Kreyer:]

Great. Thank you.

[Operator:]

And the last question that we have in queue comes from the line of Gary Prestopino with Barrington Research. Please go ahead.

[Gary Frank Prestopino:]

Hi. Most of the questions have been answered, but Rick, was there any change in the annualized processing volume for Paymode-X that you could share with us? I think last quarter was $200 million; I don't know if you guys do this on a quarterly basis, trailing 12 months, but just trying to get...

[Robert A. Eberle:]

Yeah, we...

[Gary Frank Prestopino:]

...an idea of how it's growing.

[Robert A. Eberle:]

...we haven't been doing it on a quarterly basis and then what we'll do is periodically do that really with a customer and channel facing marketing programs so when we provide those updates, so there really isn't, Gary, any new update on volume today.

[Gary Frank Prestopino:]

Okay. And then with Digital Banking, you talked about there was a lot of good cross-selling of products, so maybe could you dive into that a little bit deeper and give us some details? May be products that were cross-sold with the Digital Banking?

[Robert A. Eberle:]

Sure. When we talk about Digital Banking principally with this group we're talking about our full payments and cash management platform, DB 3.0. That's where we've invested the most and it's driving the subscriptions that will be coming on live. But there's a whole range of capabilities that we provide to banks for their business banking platform and interfacing with their customers. So, their online account opening, they could be just a particular payment type, so ACH or wire. It can be analytics or balance and transaction reporting, or cash flow forecasting. And what – part of our thesis and strategy is, and it's really planned out, is to be the vendor of choice, as banks look to simplify their world to have less vendors and to have more integrated systems, our ability to provide online account opening, provide different payment types, and unbundle those things, we can provide a full payments and cash management platform in this DB 3.0, but we can also provide – and all of that's provided by the way on a subscription model, but we can also provide other pieces of that. So, that's – and web payment fraud, cyber fraud, for example, would be another example. So, that's what I mean by cross-sell activity. It helps drive ARR, but what we'll give the Street, to be clear, is just new logos. So, if we've already a bank one thing and we sell them something new, even depending on, it could be a whole of DB 3.0, we will not count that as a new deal in the quarter.

[Gary Frank Prestopino:]

And then, just lastly, Rick, as I go through my notes, when you're paying off the converts, you said you're going to take down a draw of about $100 million on the facility, is that correct?

[Richard Douglas Booth:]

We executed a swap, which will fix the interest rate for four years on the first $100 million of draw.

[Gary Frank Prestopino:]

Okay.

[Richard Douglas Booth:]

We expect that our total draw will be around $150 million, and what that will do is, give us about two-thirds fixed rate and one-third floating rate debt.

[Gary Frank Prestopino:]

Okay. So, you're going to draw $150 million and use cash of $37 million. So, is it – or, is your thought process here that since you're generating so much cash flow – free cash flow, that you're going to just continue to keep a little leverage on the balance sheet going forward?

[Richard Douglas Booth:]

Exactly.

[Gary Frank Prestopino:]

Okay.

[Richard Douglas Booth:]

And the variable rate portion is a convenient way for us to trade OpEx for cash against the line without messing up our hedge accounting.

[Gary Frank Prestopino:]

Okay. And then lastly, did you give the cash flow and the free cash flow numbers for the quarter?

[Richard Douglas Booth:]

We had strong cash flow. As always we have a seasonal tilt toward Q3.

[Gary Frank Prestopino:]

Okay.

[Richard Douglas Booth:]

So, our cash flow from operations was $5.8 million. Our free cash flow was $2.1 million. And financing was an outflow of $400,000.

[Gary Frank Prestopino:]

Okay. Thank you.

[Operator:]

And we have no further questions in queue.

[Robert A. Eberle:]

Well thank you, everyone. Thank you for your interest in Bottomline. And we look forward to reporting on the results in Q2 in January.

[Operator:]

Okay. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.