Bottomline Technologies, Inc.
Q3 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies Third 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 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, 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 turn the conference over to our host, Mr. Rob Eberle. Please go ahead.

[Robert A. Eberle:]

Good afternoon. Thank you for your interest in Bottomline Technologies and welcome to the third quarter fiscal 2018 earnings call. I'm delighted to report on what was an excellent quarter for Bottomline. I'm here with Rick Booth, our Chief Financial Officer. Rick will provide a detailed review of the quarter's financials and our guidance. And as always, both Rick and I will be available for questions following his remarks. The third quarter was an excellent quarter. I'm delighted with the financial results we're reporting. 21% subs and trans revenue growth, $23 million EBITDA, strong bookings, and we're tracking the $90 million EBITDA for FY 2018. I'm even more excited about the future prospects for the business. Our market opportunity, product set and business model are all aligned. We're winning new business and the lifetime customer value of the new customers we're bringing on is significant, ensuring growth for years to come. For a year ago (02

[Richard Douglas Booth:]

Thank you, Rob. I'm pleased to report on another very strong quarter. I'll focus on four topics today. First, I'll review our Q3 results. Second, I'll comment on how we think about investing for growth. Third, I'll address the expected impact of the new revenue standard. And finally, I'll provide updated guidance for the fourth quarter and full year fiscal 2019. Overall, in the third quarter, we delivered subs and trans revenue growth of 21%, EBITDA of $23 million, subs and trans bookings of $20.5 million, and we're on track to report $90 million of EBITDA for fiscal 2018. I'll discuss our financial results in detail with my remarks. And in addition for your convenience, we posted Supplementary Materials to our website. Beginning with revenue, subs and trans revenue grew 21% overall and 24% from products fully converted to subscription. With this growth, we recorded $67.4 million of subs and trans revenue equivalent to $270 million on an annualized basis. This brought total revenue to $101.1 million, up 17% overall, well ahead of plan. And with that growth 67% of our revenue came from subs and trans offerings, up 2 percentage points year-over-year, and 85% of our total revenue is now recurring, which gives us excellent visibility to upcoming results. Equally important, our sales performance was also strong, as customers continue to focus on improving their business payments' capabilities and our product differentiation positioned us to capitalize on the opportunity. We signed $20.5 million of new subs and trans bookings in the quarter. And while booking figures are estimates and customers take time to implement and ramp to full revenue production, this provides us with clear visibility to future subs and trans growth. Looking at new customer signings, our Paymode-X network added 24 new payers, fully validating the attractiveness of our full payment automation value proposition and the effectiveness of our channel partnerships. Four more banks signed on to our Digital Banking products, including the large bank Rob mentioned, and seven brand new insurers signed on to our legal spend management network, and another insurer joined PartnerSelect. This brings us to a total of 11 insurers and over 1,300 law firms now part of PartnerSelect. Turning from sales to profitability. We delivered adjusted EBITDA of $23.1 million, up 21% year-over-year. This is equivalent to over $92 million on an annualized basis and evidence of the predictable profitability of our business model. We also drove core operating income of $18 million and core earnings per share $0.30, which were up 25% and 28% year-over-year, respectively. Overall, core operating margin was 18% of revenue, up 1 percentage point year-over-year, and our established products delivered over 21% operating income, while the transition in (15

[Operator:]

And our first question is from the line of Greg (sic) [George] (20

[Jason Kreyer:]

Hey, gentlemen, good afternoon. It's Jason on for George and thanks for taking my questions.

[Robert A. Eberle:]

(20

[Jason Kreyer:]

First one actually probably for Rick. Just the bookings – the subs and trans bookings that you reported throughout this year have been up substantially from last year, and just can you dive into that a little bit more and give us some sense of where that's coming from?

[Richard Douglas Booth:]

Yeah, certainly. I think it's a combination of a couple of things. One the market focus, our customers focus on adopting business payments solutions is really maturing. I think there's a lot of attention on it. It's causing people to look at adopting, and our products are significantly ahead of the market, so we've been benefiting by that. I think the secondary factor is with rising interest rates and falling taxes. Our bank channel customers are also investing more, and they're even more focused on gaining commercial customers. So really, a fundamentally strong market meeting differentiated products.

[Jason Kreyer:]

What about like categorically, I mean, any color on which segments of the business those are coming from?

[Richard Douglas Booth:]

It's actually been pretty broad strength. I think both Banking and Paymode (sic) [Paymode-X] (21

[Jason Kreyer:]

Okay. On Paymode (sic) [Paymode-X] (22

[Richard Douglas Booth:]

We continue to see the primary growth coming from new logos, which is exactly where we want it. We believe that ultimately will – the conversion will ultimately happen, but right now we're really being driven by new logos.

[Jason Kreyer:]

Okay. Rob, a lot of good color just on the customer LTV is what you're seeing from the customer base. Obviously, we understand there's a lot of investment that has to happen in front of the revenue for some of these larger deals. But just when you give those numbers, is there any sense of how that's changed over time? These LTVs, are they driven by improvements in churn and that's why you're seeing longer customer duration?

[Robert A. Eberle:]

Well, I'm not sure we're seeing longer duration. I think some of that is the business model too where we've transitioned to more of a hosted solution across the board. So that's the first piece I'd comment on. I think as well though our – what we've been able to do is extend our product and market lead. So when we truly (23

[Jason Kreyer:]

Okay. I'll throw one more question in there. Just the attach rates on the cyber fraud, risk management, is seeing any shifting there when you go back to these customers, are you seeing a little bit more buy-in (24

[Robert A. Eberle:]

Yeah. We're actually seeing particularly strong traction in Europe, so we're delighted to have that capability. We certainly – it's a good example of everything I was just talking about. So it's a great question to follow on with that. It's looking at us and saying, wow, we're concerned about security and we've acquired a solution and have an add-on capability for that. So we're seeing solid cross-sells into the – if it will or sells (24

[Jason Kreyer:]

Okay, great. Thanks a lot, guys.

[Richard Douglas Booth:]

Thanks, Jason.

[Operator:]

And our next question is from the line of Andrew Schmidt with Citi. Please go ahead.

[Andrew Schmidt:]

Yeah. Hi, Rob. Hi, Rick. Thanks for taking my question. Good quarter. Quick question on the FY 2019 outlook. Obviously, you have nice margin step-up there and it's nice to see the inflection in the Digital Banking Segment margin sustained expansion there. You look at the incremental margin, it's well above where you are today. How do you guys think about just the longer term margin structure of the business? Obviously, you have to balance the margin progression with reinvestment in things like that, but it seems like there's a lot of leverage and increasing leverage in the model given the shift towards recurring revenues, subs and trans, et cetera. So just curious on your thoughts on just longer term margin progression.

[Richard Douglas Booth:]

I couldn't have said it better myself, Andrew. There is inherent leverage in our networks. And then what we do, the way in which we think about this is we also consider the investments that we'll need to be making in sales and marketing, innovation, and also in customer delivery. The last thing that we want to do is get into a place where to hit a target (26

[Andrew Schmidt:]

Understood, that helps. And then (26

[Robert A. Eberle:]

Well, all of our product set is in one way or another focused on automating business payments. And what we're seeing from customers is the more breadth we can bring to those capabilities, the better position we're in. So combining invoicing capability for example with payment capability, or the fact that we can bring together Paymode-X with our Digital Banking platform and banking solutions is unique in that other competitors we may see in one product category certainly don't have that capabilities that we have in bringing across these other solutions. So that's been a particular focus for us in the last couple of quarters, and it will be something you'll be hearing about over the course of the next year as we drive more and more competitive advantage (27

[Andrew Schmidt:]

Understood, that helps. And then just a question on the quarter, the 24% growth in established subs and trans revenue is pretty strong. Rick, could you unpack that for us and just talk about maybe the breakdown just from a broad just waiting (28

[Richard Douglas Booth:]

Yeah. I think I can characterize it as broad strength in our payment networks with the dominant theme Paymode-X and financial messaging performing very, very well, but really again strong performance across the business.

[Andrew Schmidt:]

All right. Thank you guys very much. Appreciate it.

[Robert A. Eberle:]

Yeah. Thank you, Andrew.

[Operator:]

And our next question is from the line of Gary Prestopino with Barrington Research. Please go ahead.

[Gary Frank Prestopino:]

Hi, everyone. Most questions have been answered, but hey, Rick, I noticed at least from my notes that with PartnerSelect you increased the amount of law firms on there, looks like by about 30%. I mean, this to me seems to be like a very highly leverageable product. Is that the real key to getting more customers signed on, is getting more law firms on the PartnerSelect platform?

[Richard Douglas Booth:]

I think it's a two-sided network. So I'm equally proud of the 11 insurers that we've signed on and the 1,300 law firms. It's early days of this, our newest network, but we do think that in the long run it will be very favorable. In the short run, it's actually not contributing materially to our results. So it's good news to come as opposed to already in the P&L.

[Gary Frank Prestopino:]

Okay. And then the other question, I would have is that you've had both Mastercard and Visa capabilities on Paymode-X, how has that didn't receive in the market? And then how has that helped with the actual sell-through of the product?

[Robert A. Eberle:]

Well, it's been very well received on a couple different fronts. First off, of course, those organizations' endorsement means a lot, means a lot to customers, means a lot to any participant in the market. Second, the ability to offer an integrated payables capability that our payers don't have to segment their payment files, say, what's going to card, what's going to Paymode-X, they can send us one file and we can handle any type of payment for them and where they have established card vendors and vendors that they're paying through a card (30

[Gary Frank Prestopino:]

Thank you.

[Operator:]

And our next question is from the line of Mayank Tandon with Needham & Company. Please go ahead.

[Mayank Tandon:]

Thank you. Good evening. Congratulations, Rob and Rick, on the quarter and guidance. A few questions. First, when I look at the third quarter, that's a big step-up in growth relative to what we've seen historically. So I would love to hear if there's any one-timers in there. And then in the context of the 4Q guide, Rick, there's downtick, so, again, are you just being conservative, or is there something that impacted 3Q that does not flow into the 4Q guidance?

[Richard Douglas Booth:]

Now, there's always a timing element. There's nothing material, nothing like in Q4 last year where we had that $3 million (31

[Mayank Tandon:]

Okay. And then as we look at fiscal 2019, clearly, you're reiterating your outlook for the annual numbers, but how should we think about the quarterly trends, maybe just some perspective on any seasonality we should factor in, so we have our model straight?

[Richard Douglas Booth:]

I wouldn't see any fundamentally different seasonality drivers than we've seen in recent years. As you know, Q3 tends to be a heavier expense quarter for us. For example, the timing of benefits payments that we talked about last quarter that would be coming out, that's $2 million to $3 million alone. So you can take that into account on the expense side, but I think it will be largely similar to normal quarterly cadence.

[Mayank Tandon:]

Okay. And a couple of housekeeping items. Could you comment on your expectations for the tax rate in fiscal 2019 versus the levels you're seeing currently in fiscal 2018? And also, was there any FX benefit in the quarter and how should we model that going forward?

[Richard Douglas Booth:]

Certainly. Well, if I can have a model where the pound is going going forward, I wouldn't be doing this call.

[Mayank Tandon:]

Right.

[Richard Douglas Booth:]

But – so tax rate, we nailed our cash tax estimates within $300,000 for the quarter. So we feel really good about the 25% core tax rate that we announced last quarter for fiscal 2019, so I continue to use 25% on the core tax rate. From a cash tax perspective, we again don't expect to be a significant taxpayer and that's by far the most important measure. In terms of the pound, I have no better estimate of where the pound is going than where it is today.

[Mayank Tandon:]

Any material impact in the third quarter though?

[Richard Douglas Booth:]

Actually, the pound was pretty consistent with the prior quarter. Year-over-year it has normalized a bit and that was a tailwind, but beat without the pound as well.

[Mayank Tandon:]

Right. Thank you.

[Richard Douglas Booth:]

Thank you.

[Operator:]

Our next question is from the line of Brett Huff with Stephens. Please go ahead.

[Blake Anderson:]

Hi. This is Blake on for Brett. Thanks for taking my questions. Kind of building off a previous question, the subs insurance growth was obviously very strong in the quarter, 21%. I believe the $300 million guidance for FY 2019 implies about 16%. So, any reason for a little bit downtick there? Or can you talk about any conservatism you're building in, or again, any one-timers that drove that 21%?

[Richard Douglas Booth:]

I think it's as simple as we are executing almost exactly the plan. We've set out a plan almost two years ago now, and we've been resolutely executing years (34

[Blake Anderson:]

Got it. And then can you remind us how many Digital Banking 3.0 clients you have live now? And then, any commentary on how many more you should add next year?

[Richard Douglas Booth:]

So next year will be a big year for Digital Banking clients coming live. We've got a couple live now. And you see that actually getting masked, so masked in the P&L by the attrition that we talked about earlier this year with the legacy Intuit base. So next year, you'll see more of the customers going live and that's part of what you see in our guidance, continued conservatism around the Intuit base combined with more of those customers going live in 2019.

[Blake Anderson:]

All right. And then on the margins, we've talked about investments a little bit earlier, if you were to experience closer to the higher end of your revenue guidance or even above that, can you talk about the dynamic of would you invest that back or would you pass that through to operating income?

[Richard Douglas Booth:]

We're very disciplined. So I think it depends on the opportunities that we see. But right now looking at the opportunities to continue to advance our capabilities to strengthen our sales and marketing and our delivery, I would expect that we would continue to execute against our plan.

[Blake Anderson:]

Great. And then last one, you talked about the bookings, can you just elaborate more on the Paymode (sic) [Paymode-X] (36

[Robert A. Eberle:]

Yeah, I wouldn't say the new API release is specific to the traction in the quarter, but it was a real strong quarter. On the deal size standpoint, we're actually a little larger than the prior quarter. Now we had a lower deal count. So really seeing great momentum in Paymode-X and that's continuing throughout the – this fiscal year. And we have every belief and reason to see it continuing going forward. Things like APIs and other new capabilities we'll be announcing over the next couple of quarters. Just we'll continue to extend that momentum.

[Blake Anderson:]

Thanks a lot.

[Operator:]

And we have no further questions.

[Richard Douglas Booth:]

Thank you, everyone, for joining us today.

[Robert A. Eberle:]

And thank you all.

[Operator:]

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