Bottomline Technologies, Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Feb 2018

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies Second 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 Eberle:]

Good afternoon. Thanks for your interest in Bottomline Technologies. It my pleasure to welcome you at the second quarter fiscal 2018 Earnings Call and the report on what was a very good quarter for Bottomline. I'm here with Rick Booth, our Chief Financial Officer, who will provide a detailed review of the quarter's financial results and our guidance going forward. And then as always, both Rick and I will be available for any questions following his remarks. The second quarter was a very good quarter, featuring both strong financial results and strong sales execution. During the second quarter, we exceeded our revenue targets with strong profitability in EBITDA. We had a record 29 new Paymode-X deals. We had strong sales execution of $22 million in new subscription and transaction bookings, all in all, a very strong second quarter which gives us confidence in our strategic plan and execution against our goals. We've certain committed to an FY 2019 target of $300 million in subs and trans revenue and $100 million in EBITDA. The results for Q2 in the first six months of FY 2018 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. We’re demonstrating product leadership in our key markets and our offerings are resonating with customers. Our financial results are strong and of course important and a key focus, but at the same time, new subscription and transaction bookings tell us we have true product leadership, we are winning with customers and our results in a future will continue to be strong. I'll focus my remarks on the products and markets and the implications for the business going forward. But first the financial highlights for the quarter. Subscription and transaction revenue grew 21% in the second quarter for the products fully converted and traditionally sold in subscription as a head of our goal. Subscription and transaction revenue growth overall was 14%, Subscription and transaction revenue was $63.2 million, a run rate of $253 million and importantly tracking well against our $300 million FY 2019 target. Revenue overall was $95.2 million, up 10% over the prior year. EBITDA was up $22.5 million, up 20% from the prior year at $22.1 million. With annualized EBITDA of $90 million, we're well on the path to a $100 million FY 2019 target. EPS was $0.31, ahead of our target and expectations, and we ended the quarter with $78 million in cash after retirement on our convertible debt using cash and senior debt. Financial success we saw in the quarter demonstrates the strength of product set. We are well-position in driving profitable, predictable growth in our target markets. The remainder of my remarks will focus on our product leadership and the key drivers behind the 22 million in new subscription and transaction bookings. 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 31 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 and a major contributor to overall bookings. The 31 new payer signings were from organizations of all types and sizes, they included two universities, a major insurer, a number of health care providers and several technology companies. With a record new sign-ons this quarter, Paymode-X market leadership is evident and we are well-positioned for continued growth. We have the opportunity to be the way businesses pay and get paid and we’re executing against that opportunity. Paymode-X is not the only area we’re benefiting from innovation and executing. That’s been a key element in our legal spend management offering success as well. Bottomline is the clear choice for organizations that want to drive efficiencies and insights and legal spend management. We’ve long been the market leader in this compelling space. Recently we've been able to extend our competitive leadership and drive new revenue streams to the launch of PartnerSelect. PartnerSelect allows insurance companies and other large organizations to intelligently select the right lawyers for each new case based on objective merits and performance reviews, and it allows lawyers to market their services to our growing group of insurers on the platform. During Q2 we added six new customers including two important PartnerSelect wins. Our investment in product innovation is paying off. When we launch PartnerSelect we expected to extend our competitive position and create additional revenue sources. Today seeing that play out as planned. But we’re not stopping here. We have a product pipeline of new innovations will bring the market for the delighting in securing our existing customers. We will be there true innovation partner at the same time increasing our competitive advantage and driving new revenue growth. It’s a great example of extending platform success. One of the attractive markets we’ve been targeted and having platform success in today and will be a big part of our future this commercial bank. Banks who want to defend and grow their business banking franchise or consistently choosing Bottomline. No technology provider can match the capabilities. A relationship with customers with a level of new business we’ve won. But the success we’re seeing is more than just sales and wins. We’re establishing a leadership position in a large addressable market. It’s a great opportunity in which we enjoy well-defined and sustainable advantages. I think I’ll touch on why this is such compelling market and why would a clear provider of choice. First off, it's important to understand these are mission-critical applications. This is the bank's primary interaction with its corporate and commercial customer base, and it’s a key element in winning relationships and growing revenue. This continued demand for new capabilities as banks compete with each other and increasingly, new Fintech providers. We’re well-established as the vast majority of the addressable spend is concentrated in the segment market we’re targeting and which we are highly advantage. And while there are significant and complex implementation process and delayed revenue these platforms typically have replacement cycles of seven to 10 years or even more. So these engagements result in extraordinarily sticky customer relationships and long-term revenue streams. Finally, the barriers to entry are extensive and include the deep expertise, experience and investment required and the complexity inherent in the commercial and corporate banking space. We win because we’re occupying a strategically and increasingly vital position enabling the interface with the customer and deliver a unified digital experience. No one else can match our capabilities, expertise or vision which positions us well be a true long-term strategic partner. We’ve applied our considerable domain expertise, a lot of time and a significant investment to driving true innovation. The result is much more than a business banking or payments capability. It's a truly unique offering in the market. Our platform is a customer engagement platform that empowers banks to compete in commercial and corporate banking. We enable banks to acquire deepen and grow profitable relationships that are anchored in payments and cash management. We’re combining the depth and breadth of our market-leading payments and cash management services with UI, UX innovation for uniquely compelling digital experience and value proposition. We currently have 14 million of annual subscription revenue in the process of being implemented. This past quarter we added two new significant customers and eight new wins overall at this product set. The revenue and profit backlog we built is impressive and will drive future Bottomline growth, but perhaps the most exciting thing is our strategic position as the customer engagement platform for many banks who are choosing to work with and trust Bottomline Technologies So in conclusion, the second quarter was a very strong quarter. Financial results evidence the merits of our strategic plan and our execution against that plan. Customers are responding to and buying our offerings. We are establishing clear product leadership in enhancing our long-term franchise value. We posted strong numbers with EBITDA on operating income up over 20% and we sign 22 million of new bookings. We have the drivers, plan and execution capability for further success in place. We’re fully committed to FY 2019 targets of 300 million subscription and transaction revenue and a 100 million EBITDA. We have a high confidence that we will achieve those targets and in doing so reward our shareholders. So with that, I’ll turn it over to Rick. And then of course both of us will be available for questions.

[Richard Booth:]

Thank you, Rob. I'm pleased to report on another very strong quarter. Our focus on four topics today. First, I’ll review our Q2 results. Second, our preliminary [ph] results in the context of our fiscal 2019 for 300 million of subs and trans revenue and 100 million adjusted EBITDA. Third, I’ll provide an update on U.S. income tax reform and our capital structure. And finally, I’ll provide updated guidance for the third quarter and full year 2018. Overall in the second quarter we drove our key metrics well above plan including revenue, core operating income, core earnings per share and adjusted EBITDA. I’ll address each area in turn in my remarks and in addition for your convenient we post the detail supplementary material to our website. Beginning with revenue, subs and trans revenue grew 21% from product fully convert into a subscription, and 14% overall. With this growth we recorded 63.2 million of subs and trans revenue, equivalence at 253 million on an annualized basis. This brought total revenue to $95.2 million, up 10% overall and well ahead of plan. With that growth 66% of our revenue is from subs and trans offerings, up two percentage points year-over-year and maybe 6% of our total revenue is now recurring, which give us excellent visibility to upcoming results. Sales performance was also strong. We sign 25.1 million of new subs and trans bookings in the quarter. While bookings figure are estimates and customers takes time to implement and ramp the full revenue production, this provide us with clear visibility to future subs and trans growth. Those win included eight new banks selecting our digital banking product set. We now almost 14 million of annual subscription, which are in implementation and not yet being recognized in our P&L. The record 31 new payers joined our Paymode X network, further validating strength of our full payment and automation value proposition, and the effectiveness of our channel partnership. In legal spend management, five new brand new insurers signed on to our bill review network and two more insurers signed on to joint PartnerSelect. A total of 10 insurers have now signed on the PartnerSelect along with over a thousand offerings. This is our newest network and not yet driving material revenue, but the momentum is very promising. Turning to profitability. We leverage this revenue to drive adjusted EBITDA of $22.5 million, up 20% year-over-year, and this equivalent to 90 million on an annualized basis, which provides good evidence of the scalability of our business model. We also drove core operating of $17.6 million and core earnings-per-share of $0.31 which were up 21% and 23% year-over-year respectively. Overall core operating margin was 19% of revenue, up two percentage point year-over-year driven by established products which delivered over 22% operating income. Our overall gross margin was $55.4 million or 58% of revenue and subs and trans gross margin was up one percentage point from the prior year to reached 58% as well. From an operating expense standpoint sales and marketing expense for the quarter with $18 million or 19% of revenue and development expense was $12.5 million or 13% of revenue. Having reviewed our quarterly results I’d also like to put them in the context of our goals for the next fiscal year. A clear business model and our current results provide confidence in our ability to deliver 300 million of subs and trans revenue and 100 million of EBITDA in fiscal 2019. Annualized subs and trans revenue was already at $253 million, well on track to $300 million next year. Annualized EBITDA is already at $90 million, well on track to $100 Subs and trans of 21.7 million in a strong pipeline, reinforce the competitive different of our products, and the expansion of gross and operating margins by combined two, four percentages point years-over-year reinforces the scalability of our model. Turning briefly from operations to tax reform and capital structure. I’ll first note that the tax structure we’ve established is very efficient today, and it will be even more efficient in the future, thanks to the new tax legislation. We expect two important benefits from the new tax law. First, our core effective tax rate will fall from 30% previously to 25% in physical 2019. And second we will no longer face U.S. income tax barriers through repatriation of our near $50 million of overseas cash. From a capital structure perspective, the maturity of our convertible bonds provided an opportunity to improve our capital structure. We successfully retired our convert with no dilution to shareholders by paying off the bond using a combination of $40 million of cash on hand and drawing $150 million from our credit facility. 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 four years. And this results in a fixed to floating ratio of approximately two-thirds fixed and one third-floating-rate debt. This approach leverages a low-cost source of capital, minimizes the cash held on our balance sheet and eliminates the convertible overhang without shareholder dilution. After this repayment we ended the quarter with $77.5 million of cash on hand. Finally, turning to guidance, I’m pleased to provide detailed guidance for Q3 and to raise our guidance for full-year fiscal 2018. In Q3, we expect to deliver $65.5 million of subs and trans revenue, $20 million adjusted EBITDA, $97 million overall revenue, $15 million core operating income and $0.25 core earnings per share. For the full year fiscal 2018 were increase in our guidance to $257 million to $258 million subs and trans revenue, $86 million to $87 million adjusted EBITDA, $384 million to $385 million overall revenue, $66 million to $67 million core operating income and $1.13 to $1.15 core earnings-per-share. So in conclusion, with our product leadership, strong bookings, excellent financial results, and clear visibility we’re very confident in our path for $300 million of subs and trans revenue and $100 million EBITDA in the next fiscal year. And with that we can we can open the call to questions.

[Operator:]

[Operator Instructions] Our first question will come from the line of George Sutton, Craig-Hallum. Please go ahead.

[George Sutton:]

Thank you. Nice results guys. Rob, I was wondering if you could address the 31 new pay mode customers. In this context you obviously have channel partner growth occurring and maturing of those channel partners. You’ve got vendor pay which I assume makes it easier to sell to an initial customer. And then you’ve got a little bit of what I would define as a network effect and then additional partnerships. Can you kind of give us a sense of what drivers are most important of those?

[Robert Eberle:]

So I think that the channels have been very effective for us. Bank of America has certainly been our most effective channel. I think we’re seeing momentum in growth because we saw a number of other of our 31 deals come in through channels. Probably one of the big highlights was seen our first joint card sale was TD Bank, so that was really exciting to get that across finish line of a joint visa Paymode X, payer coming on. So truly the consolidated payables story coming together and selling well for us.

[Richard Booth:]

Yes. And that was a channel partner that was signed just last quarter, so very pleased to see the engagement and the drive there.

[George Sutton:]

Yes. Now TD is a new name. That's great. Rick, I’m curious relative to the math of the bookings relative to your go forward subs and trans growth, obviously you appear to be growing your bookings at a accelerating rate relative to your subs and trans revenues, can you give us a sense of at what point does it appear that you're filling the funnel more than you’ve suggested to us?

[Richard Booth:]

Let’s see. Trying to understand the question, at one point does it become clear of filling in the funnel more?

[Robert Eberle:]

Let me take one step at the question. The question is when we look at the bookings number, that's a bigger number than the growth number today, and when that flip. Well, I think there’s couple of things in the bookings number to remember one, that’s in some cases an estimate, in some cases a subscription. Its hopping on a subscription we have to wait to a go live, so we reference 14 million of digital banking subscriptions that are in the implementation process that would be component of that kind of backlog. And then there's a ramp on customers. The only other piece that would work against that is whatever churn rate we do have against the existing base, probably the only place where we experience churn of any concern is the – like I see it into it base where we still up some of those some digital banking platform customers that are coming off over time but basically those bookings will over time all turn into revenue growth that's definitely indication and plan. It doesn't model out to the following quarter or anything like that. In some cases it's as much as a three-year ramp to get there, but to us it's just gives us a tremendous confidence, We could report these quarter's numbers, but the most important thing is the bookings it’s just for us that growth is in place giving us the confidence in the 300 million subs and trans and a $100 EBITDA for FY 2019.

[George Sutton:]

Perfect. Just lastly, can you give us sense of your thought process around repatriation or proceeds to repatriated dollars?

[Richard Booth:]

Yes, certainly. We’re very discipline in our approach to capital allocation, its new news that these funds maybe available but it won’t change our focus on organically growing our subs and trans revenue and we’re appropriate picking advantage of opportunities to improve our capital structure like we just did with the convert.

[George Sutton:]

Thanks, guys.

[Robert Eberle:]

Thank you.

[Operator:]

Next question comes from the line of Gary Prestopino with Barrington Research. Please go ahead.

[Gary Prestopino:]

Hi. Has everybody doing all right?

[Robert Eberle:]

Very well, thanks Gary.

[Gary Prestopino:]

Good. Rick, did you cash flow and free cash flow numbers for the quarter?

[Richard Booth:]

No, Gary, I did not give that, but I’ve got those right here. So the operating cash flow was $3.9 million, the investing cash outflow was $28.5 million, the financing cash outflow was $40 million and our free cash flow was therefore a negative1.5. As you recall from history, Q2 is also an unusual quarter for us driven by timing of invoicing and we had more invoicing than normal at the end of the quarter, so that’s going to actually increase our cash collections during the remainder of the year that resulted in a lower than normal Q2.

[Gary Prestopino:]

Okay. And then, you said you fixed your debt, I think a $100 million or 4%, what is the floating rate that you’re getting on the remainder of debt now?

[Richard Booth:]

That’s about 3.3 today.

[Gary Prestopino:]

Okay. And then, I may have missed it, but on your transitioning product, description and transaction revenues were down about 4%. Could you just explain why that happened? I see that you have 14 million that an implementation, but is that just a function of time to implement or whatever?

[Richard Booth:]

It's really a function of a year ago we had some terminations, so that increases a year ago and then of course there off by now. So that's really a function of the timing there.

[Gary Prestopino:]

Okay.

[Robert Eberle:]

Yes. And that’s all into it related.

[Gary Prestopino:]

All in to it related. Okay. Thank you.

[Operator:]

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

[Mayank Tandon:]

Thank you. Good evening. Rick, you mentioned that you're already at $90 million in EBITDA adjusted as of 2Q, 2018 and that $100 million goal seems to be quite a conservative target, but I wanted to ask you about the second half guidance specifically it does call for margins to be down. Are there some incremental investments that we need to factor in for margins to be declining in the second half especially given that revenue will be ramping higher, and those I think tend to be seasonally stronger quarters for you? Maybe just some perspective on that would be helpful.

[Robert Eberle:]

We do have some operating expenses that tend to hit in Q3, everything from the social welfare taxes that restart for the New Year, as well as some product investments. So as you know, Mayank, we aim for a balance between revenue growth and profitability, and we expect to continue to be able to grow our product and maintain our product differentiation while still delivering very satisfying EBITDA growth. So we feel great about $90 million as a current run rate and very strong about $100 million.

[Mayank Tandon:]

Right. Good to hear. And then, can you just remind investors and us in terms of the key margin levers over time. I mean what is the long-term margin profile look like for the company let’s two, three years out beyond the $100 million target that you’ve laid out for the fiscal 2019?

[Robert Eberle:]

Yes. My crystal ball gets a little fuzzy once we get beyond three years, but I think that last -- over the last year we saw growth in our operating margin coming primarily from scaling gross margin, lot of that coming from subs and trans and I’ll note that this quarter we had -- we were actually down quite a bit on software revenue and we still delivered very strong profitability. So as we look forward I would look for our subs and trans gross margin which is currently 58% to continue to expand at those customers go live. And we will take some benefits from scale and sales and marketing and development as appropriate based on competitive differentiation of the products, but very importantly we’re not to going to start product that would cost that differentiation of revenue.

[Mayank Tandon:]

Got it. Okay. And then just two more number questions, one FX, how much of that benefit the quarter, if you could quantify that, Rick, and also in terms of guidance, then also related to the service and maintenance revenue stream that seemed a little higher than what we've seen recently, there was any one-time effect and how we should be modeling that going forward?

[Richard Booth:]

Yes, certainly. So, FX, it’s nice that that pound is working favorably for us these days. It actually had a nominal effect versus guidance in Q3. We initiate in Q2 – we initiate our Q2 guidance at $1.31 and our average for the quarter came in at $1.33. So it didn’t have a big impact versus guide. It was -- it had a less than 2% impact when you do it year-over-year.

[Mayank Tandon:]

Okay. And the service and maintenance revenue stream in terms of modeling going forward?

[Robert Eberle:]

Yes. That one, I continue to advise the people model services and maintenance for a longer slower decline and it continue to outperform expectations due to two things; one is the strength of our maintenance customer base which has allowed us to continually optimize our pricing there. And then the second is that we are recognizing some services revenue related to a booking about two or three quarters ago within digital banking.

[Mayank Tandon:]

Got it. One last one if I could squeeze it in for Rob. Rob, competition, has that changed, I mean, there seem to be several upstarts out there in terms of competing on the SaaS or on the cloud platform. I’m just wondering if you're seeing more competition and if so are the competitors different than you’ve seen historically?

[Robert Eberle:]

Well, the markets continuing evolving. And so one of the things we do see as we see one noise frankly around digital banking solutions while at the same time we’re building a bigger and bigger brand and a better reputation. So when we first launch our newest platform digital banking 3.0, it was a process of launching that, getting that story out. We’ve got real momentum on new RFPs in our target markets. So we’re doing really well there while the banks, our customers were actually more threatened because of the different Fintechs and other pieces that other players to see around. In Europe exciting things went on. Our open banking and PSD2 which changes the environment requiring banks to provide an open API for customers so that more Fintech providers can access those platforms, but that really plays right to our solutions as well because that allows us to provide a platform for a single consolidated picture of cash and it allows us to also see an opportunity with those banks to give them the technologies they need to come to compete in what’s a continually evolving environments. So we like where we sit from a competitive standpoint, but it's definitely a moving market.

[Mayank Tandon:]

Great. It’s helpful. Thank you so much.

[Operator:]

[Operator Instructions] Our next question comes from the line of Brett Huff with Stephens. Please go ahead.

[Unidentified Analyst:]

Hi, guys. This is Blake [ph] on for Brett. Can you just talk a little bit more about the digital banking wins? Those were good at eight in the quarter, up nicely from recent quarters. I think you said you maybe had two significant customers out of those eight. Any more commentary you can give on the size of those or did you get more cross sell or anything out of the contracts as well?

[Robert Eberle:]

Yes. So in one of those was payments and cash management which included then our CFRM capability, so our cyber fraud capabilities. And the competitive dynamics there, those are Texas-based banks, so it was highly competitive situation. The second of significance was actually a situation where the bank was on a competitor had chosen another competing solution a couple years ago before we really had momentum in the market as a reference kind of a five minutes ago with digital banking 3.0 and actually canceled that project. One of the things that I reference it very quickly, but one of the big competitive barriers we have in digital banking solutions is the complexity of these offerings are integrating with multiple platforms. You’re taking files with tens of thousands of payments all of this has to happen seamlessly and securely and simply for our customers. That’s a hard, hard thing to do. So actually, and I’m not going to name who it was, but we actually replaced a program that they pulled the plug on in the second situation. So two big wins for us just as evidence of the momentum we’re having in. Stepping back but wasn't clear in my remarks what's exciting about that is we’re not really getting the financial impact from that area of our business yet. So as I as CEO, sit here and think about, well, what is next year, if every cylinders firing, if everything's – then what’s going to happen next year. What we have is we have the bookings. We have 14 million of subscription it's going to come on. We know this is going to be a big contributor to our profit and strategically we can see ourselves continuing to win in that space. So, I kind of look at it – its Super Bowl next week. I'll say it's like a star player that's just in injured reserve right now, but that's going to make a big, big impact when we get back on the field with the subscriptions.

[Unidentified Analyst:]

Then, on the longer-term margin profile I know you kind of touched on that earlier. I'm wondering specifically your digital banking, I don’t know, Rick, if you could provide when do we start to see that margin really improve for the transitioning digital banking? It was nice to see you now expect operating income in positive territory for this year. Was that just the revenue upside or was there something going on, you’re getting better with implementations or lower expenses, just any commentary on the digital banking margin?

[Richard Booth:]

Yes. I think we’re getting more and more efficient at the rollout of these customers which has been helpful. And I’ve been pleased to see some profitability coming from that. Of course, we’re also doing large – we’re also signing large contracts. So, you’ll see that we continue to guide modestly on profitability. Certainly as we ramp into fiscal 2019 it will begin moving upward. And I hope that by the end of fiscal 2020 it has a profitability profile more like the rest of the business.

[Unidentified Analyst:]

Are you still in terms of the implementation process you said you’re getting better with that. You said last time in the call you had some larger banks that are coming online next year. Are those still on track?

[Robert Eberle:]

Yes, they are.

[Unidentified Analyst:]

Okay.

[Robert Eberle:]

Yes. We review each of the implementation each week, it’s one of the key areas of executive focus.

[Unidentified Analyst:]

Great. And then lastly I think Paymode X was the biggest driver of the bookings last quarter, was that the case again this quarter?

[Robert Eberle:]

Actually banking solutions was our biggest contributor to bookings this quarter. Paymode-X was real, real strong with bank institutions [Indiscernible].

[Unidentified Analyst:]

Thanks a lot.

[Robert Eberle:]

They all listen to the call, so I have to give them credit.

[Operator:]

And we have no further questions in queue.

[Robert Eberle:]

Well, thank you everyone. Thank you for your interest. We've been very clear on what our goals are. 300 million subs and trans and 100 million in EBITDA. I think the progress we’re making against those goals is clear, and we look forward to reporting on Q3, and continuing that across.

[Operator:]

Okay, ladies and gentlemen, it does conclude today's call. Thank you for your participation. You may now disconnect.