Bottomline Technologies, Inc.
Q1 2017 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies First Quarter 2017 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 of 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 like to 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 first quarter of fiscal 2017 earnings call. 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. As always, both Rick and I will be available for questions following his remarks. Our results in Q1 were a solid step forward and a very good start to the fiscal year. We recorded strong financial results with subscription and transaction revenue growth, adjusted EBITDA and core earnings per share, all reflecting disciplined execution against our strategic plan. Our sales results were strong with $14.3 million of new subscription and transaction bookings in the quarter. And strategically, we entered into an important new relationship with Mastercard. Looking forward, we continue to enhance our market position as a leader in business payments, while driving increasing levels of subscription and transaction revenue. Our visibility to our future recurring revenues gives us confidence that our strategic plan is working and will drive increased shareholder value. I'll touch on each of these topics during my remarks, starting with a review of the financial highlights for the quarter. Subscription and transaction revenue grew to $52.1 million. That represents 16% growth on a constant currency basis. Driving subscription and transaction revenue growth has been a key objective of our strategic plan and product investment and it is clearly working. Subscription and transaction revenue was 63% of overall revenue. That's up from 45% two-and-a-half years ago and 56% a year ago. Revenues overall were $83.1 million. We continue to experience a revenue headwind due to currency that can make it more difficult to track the progress and trends of the business. Without the two-year decline in the pound, revenue would have been $91 million or $8 million higher this quarter. Turning to profitability metrics, EBITDA was $16.7 million or 20% of revenue. Operating income was $12.6 million, operating margin across the established product set was 19%, and finally we reported EPS of $0.22 for the quarter, ahead of our target and expectations. We ended the quarter with a strong cash position of $128 million, so solid execution against our financial targets and plan. We have the leading product set for business payments, and we are continually innovating to extend and expand our market position. The strength of our offerings is evidenced by the financial results we reported today, as well as the $14.3 million of new subscription and transaction bookings we recorded in the quarter. In Q1, we had 18 new organizations choose Paymode-X to automate their payment process. We had 11 organizations chose our cloud-based legal spend management platform to automate, manage and control legal spend. And we signed seven new Digital Banking deals, helping banks to grow their business banking franchise. While these customers contracted for different solutions, they're all seeing in Bottomline a trusted innovation partner, the products, technologies and execution to address their business payment process needs, and a vision and commitment to help them adapt to the new technology and change the future will inevitably bring. So with $14.3 million in the first quarter and now over $90 million of new subscription and transaction bookings over the past five quarters, the sales result is clear. We're selling more new customers and more new subscription and transaction revenue. The investment in innovation is clearly paying off. Our sales result evidences the strategic value of the products, technology, networks, domain expertise, customer set and brand we have built around business payments. We make the complex process of business payments simple, secure and seamless. Virtually everything we do and every product we provide is in one form or another facilitating, managing or providing secure, reliable business payment automation. The current process for business payments is fragmented, unsecure, expensive and broken. That is our opportunity. While the areas of commerce and business in general have benefited from technology, business payments remains a huge and untapped market, one which is recognized and getting increased attention from large players. We believe our technology investment products and experience positions us as well as anyone to help businesses pay and get paid. Last week, I had the opportunity to attend the Money20/20 conference with over 10,000 attendees focused entirely on technologies and means by which money is transferred. While a bulk of the attention is consumer payments, there is increased interest in the business payments as a huge opportunity. And no one is better positioned to capitalize on that opportunity than Bottomline. One benefit of the leadership we have established in business payments is the ability to attract partners like Mastercard. We just recently signed an agreement with Mastercard to connect Mastercard and control for commercial payments with Bottomline's Paymode-X. This will create a universal business payment solution that allows customers to automate payments while increasing revenue opportunities, efficiencies and control. We have begun sales training events for both Mastercard and Bottomline's team and have already done some early-stage prospect work. The Mastercard partnership is significant in its validation of our business payments leadership and in the long-term revenue potential it represents. So, in conclusion, over the past several years, we've made important investments in new product innovation. We've also transitioned to a predictable and highly profitable recurring revenue business model. Both were done to achieve the best long-term sustainable growth and profitability of the business, continued value to our customers and return to our shareholders. We are just beginning to see those benefits play out, and are confident as they do we will show increasingly positive results and drive return for shareholders. Q1 was a very good start to FY 2017 and we look forward to reporting continued success through the fiscal year. With that, I'll turn it over to Rick Booth for a detailed review of the financials. And then we'll open up the call for questions.

[Richard Douglas Booth:]

Thank you, Rob. I'll focus on three topics today. First I'll discuss our overall financial strategy. Second I'll provide an update on our strong Q1 financial results. And third, I'll update our fiscal 2017 guidance. In addition to my remarks on this call, for your convenience, we have posted detailed supplemental materials to our website. Our long-term financial strategy is to win new customers through our leading business payment solutions, retain those customers for a decade or more in a subs and trans model, grow their usage in revenue over time, and expand gross operating and EBITDA margins with this increased subs and trans revenue. We're confident that continued execution on this financial strategy will drive increasingly positive financial results and shareholder value. And the Q1 was a solid step forward in the execution of this strategy. The quarter was defined by continued strong growth in our subs and trans revenue, which exceeded guidance. This performance helped drive core operating income and core earnings per share, both above guidance as well. The highlights of the quarter include 16% overall subs and trans revenue growth on a constant currency basis which brought our total revenue to $83.1 million, which was up 5% year-over-year on a constant currency basis. From a profitability perspective, adjusted EBITDA was $16.7 million, or 20% of revenue. Core operating income of $12.6 million was 15% of revenue and ahead of guidance. And core earnings per share of $0.22 were also ahead of guidance. I'll now provide more detail behind those highlights, beginning with revenue. With the 16% constant currency growth in our subs and trans revenue, we ended with $52.1 million of subs and trans revenue in the quarter, which is equivalent to $209 million on an annualized basis. With that growth, subs and trans is now 63% of total revenue, which shows significant progress against our financial strategy. For context, subs and trans revenue was just 52% of overall revenue in fiscal 2015 and 56% last year. Similarly, recurring revenue has grown to 85% of overall revenue, up from 76% in fiscal 2015 and 80% last year. This gives us confidence in our continued ability to execute against our financial strategy. In this quarter, we did record lighter software revenue than planned, primarily due to the impact of seasonality between the summer and our first fiscal quarter. Fortunately, our transitioned business model, with its lesser dependence on software, mitigated the financial impact. Moving down to service and maintenance, we reported $3.1 million less of these revenues than in the same period a year earlier. As planned, this reflected both our model transition and our de-emphasis of stand-alone services. The sales performance was good. We added 36 new customers across Paymode-X, legal spend management, and Digital Banking. Counting just new logos, and without reflecting any add-on sales, 18 new payers joined our Paymode-X network. Eleven new companies selected our legal spend management solutions, and seven new banks selected our Digital Banking products, all on the subscription model. When translated into dollars, including add-on sales, total subs and trans bookings were $14.3 million. This is continued significant sales success. That's $57.2 million on an annualized basis, which is equivalent to a 27% addition to our run rate subs and trans revenue. Now, of course, these figures are estimates, and these customers take time to implement and ramp to full production. But this provides visibility and consistency to the model, as well as the power to drive long-term margin expansion. As I turn to profit and margin, we finished the quarter with adjusted EBITDA of $16.7 million, or 20% of revenue, as well as core operating income of $12.6 million, or 15% of revenue. In our established product lines, core operating margin was 19%, while the transitioning product line ran at essentially breakeven, which was consistent with our guidance for the period. Overall gross margin was $46.4 million, or 56% of revenue. And subs and trans gross margin was 55%, consistent with the prior quarter. From an operating expense standpoint, sales and marketing expense for the quarter was $15.5 million, or 19% of revenue. And development expense was $11.5 million, or 14% of revenue. In terms of cash flow, operating cash flow was $8.5 million for the quarter, and we ended the quarter with $128 million of cash and investments. With this strong cash position, we've begun to execute against the $60 million share repurchase authorization announced at the end of August. We began repurchases following that call, and we've repurchased 214,000 shares for $5 million prior to quarter end. And before turning to guidance, I want to expand on Rob's earlier comments regarding historical declines in the pound over the last two years. To illustrate the extent to which such a trend can obscure our underlying growth, the pound deteriorated from $1.67 at the end of our fiscal Q1 2015 to $1.22 at the end of this current quarter. Without that decline, the $83 million of revenue we're reporting for Q1 would have been $91 million, a significant $8 million delta for this quarter's revenue alone. When looking at our total revenue growth over recent years, it's important to keep this in mind because it's easy to lose sight of such long-term trends when focused on day-to-day and quarterly results and that can obscure our underlying growth. Turning to guidance, I'll confirm our fiscal 2017 guidance other than a small adjustment for foreign exchange because the pound has weakened from $1.30 in our previous guidance to $1.22 today. We can't predict foreign exchange, and so we adjusted the rest of year guidance to today's $1.22 rate. If exchange rates stay at this level, we will report $1.2 million less operating income in fiscal 2017 on $4.4 million less of reported U.S. dollar revenue than we would have at the rates embedded in our earlier guidance. This results in total fiscal 2017 guidance of $348 million in revenue, including constant currency growth of 17% in our established subs and trans products and 16% overall. Our core operating income is expected to be $54 million or 16% of revenue and based on our Q1 ending share count, we expect core earnings per share of $0.85, even without assuming any further share buybacks beyond those completed in the first quarter. So in conclusion, I believe Q1 was another solid step forward in executing our financial strategy. We're pleased by our financial results for the quarter, including 16% constant currency growth in subs and trans revenue, our core operating income of 15% and adjusted EBITDA margins of 20%. Finally, our subs and trans bookings continue to reinforce our confidence in our long-term growth and our fiscal 2017 guidance. And with that, we'll open the call for questions.

[Operator:]

Our first question comes from the line of Dan Perlin with RBC Capital Markets. Please go ahead.

[Daniel Perlin:]

Thanks, guys. Good evening. Nice job on the subs and trans line. I had a question about kind of all other. So when we track it, we clearly look at subs and trans and then we take everything else and track that. And what it looks like to me was all the other revenue in aggregate, and I understand some of this is the pound, but it definitely took a step-down relative to – even trying to adjust for the FX, it definitely took a step down over the past six quarters. And I'm just wondering is there something else in the nature of the transition that's driving that incrementally that you comment on? Or is that just kind of where you guys are in this transition cycle? Thanks.

[Robert A. Eberle:]

I'll make a comment on – this is Rob and then Rick could add – I don't think there's anything in the transition. There are some structural pieces. So one, I think we saw the seasonality on software. That's been pretty typical, and Q1 has been softer for us on software. The second piece is around services that with the transition, even though we're performing and billing services we're not booking those services and instead they'll be spread over the life of the customer. So as we're finishing projects under the older model, we'll see services revenue decline as we did this quarter with the new revenues to come on and be spread over time.

[Richard Douglas Booth:]

Yeah, exactly. If you're looking at six quarters, you're going from Q4 2015, which would be a high license quarter through fiscal 2016, as we discussed, is the decline period. And in fiscal 2017 we've not yet had our first Digital Banking customers going live. So between the software, which I mentioned, and Rob just repeated in that, that's what explains the transition. But there's nothing other than that going on in the model.

[Daniel Perlin:]

Okay. And then I guess on Digital Banking, you mentioned not going live yet. What is the timeframe for that again? And then I think last quarter you had alluded to the fact that you might actually be contemplating accepting some license revenues within that category in order to kind of smooth out the gross profit degradation. Where do we stand on that?

[Robert A. Eberle:]

Yeah, a couple questions in there. In terms of going live, our first Digital Banking 3.0 customer will be live by the end of the year. So we're live on some customers now and that's right on track and going very well. We've not done any license deal. I mentioned that last call as a possibility. We had the flexibility to deliver the technology on premises or host it. And with that flexibility, we'd have the flexibility on a business model to do a license deal. We haven't done a license deal. If we did any license deals, it might be one a year. So it wouldn't be significant and we certainly will announce that if we have but we have not, as Rick mentioned in his remarks, done any license deals.

[Daniel Perlin:]

Okay. And then the last one for me is you did talk about the seasonality in software but that would suggest that it's something we see every year and it sounds like it was weaker this year than in years past. And I'm just wondering what's the messaging around that so?

[Richard Douglas Booth:]

Yeah, I think it's more that the summer months, particularly given our strong European business, are more variable, as well as, of course, we're in the first quarter of a new fiscal year – so you've got folks that are taking some vacation after the prior year. So there's just historically been more variability in our software revenue in this quarter. We didn't see it coming in slightly below plan, which I think just reinforces the wisdom of our long-term approach.

[Daniel Perlin:]

Okay. So it's not weaker clients or weakness within the channel. It's more that – it just has a lot more variability and this time around it was just a little bit more difficult.

[Richard Douglas Booth:]

Yeah. Yeah.

[Daniel Perlin:]

Okay, all right.

[Richard Douglas Booth:]

Thank you.

[Robert A. Eberle:]

As Rick pointed out, to some degree it's the nature of the software model, right. It's one of the many reasons the transition Bottomline's making is making sense. You can see our – it's nice to have that software line. But this quarter demonstrates we're certainly not dependent on it.

[Richard Douglas Booth:]

Yeah. And even without that, we still beat on the dollars of profit.

[Daniel Perlin:]

Absolutely. Thank you, guys.

[Operator:]

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

[Blake Anderson:]

Hey. This is Blake on for Brett. Thanks for taking my question. I know you mentioned investment in innovation. But anything else you can call out for the slight strength in subscription and transaction revenue versus your guidance?

[Richard Douglas Booth:]

We beat subs and trans revenue versus guidance.

[Blake Anderson:]

Yeah, right. Anything else you can call out for that strength?

[Richard Douglas Booth:]

Oh, for the strength, yeah. Oh sorry. I thought you – so I think our leading products are clearly the primary thing. And then the other thing that I would point out is we also exceeded in Q4 on subs and trans, and we did not raise our guidance. So we're continuing to be conservative.

[Robert A. Eberle:]

What I'd say on that is exactly that. When we went back a couple years now, I think it's probably two years to the quarter that we made a bigger investment in product, and that in this past year, we had $76 million of new ARR sales. You add to that this quarter we're now at $90 million in the last five quarters of new subscription and transaction bookings. As we get those customers live, we'll see the growth in subscription and transaction revenue. So it's actually a better situation than a strong pipeline. It's a strong backlog of bookings that we're bringing live. Now that $90 million has estimates in it, and as some of them ramp over three years' timeframe, and there's a lot of variables in it, but fundamentally we sold more in the last year than we had in the two years prior to that, combined. So that's why we're seeing the acceleration in subs and trans. You're seeing the sales results come through the income statement.

[Blake Anderson:]

Great. And so could we expect that same kind of level of conservatism for your subs and trans revenue for the rest of the year?

[Richard Douglas Booth:]

Well I think we're not updating guidance for anything but foreign exchange.

[Blake Anderson:]

Okay. Appreciate it.

[Robert A. Eberle:]

Yeah. And we'll see strong subs and trans growth through the remainder of the year, yeah.

[Blake Anderson:]

Great. And then just any update you can give on the implementation of the three larger SaaS Digital Banking deals you signed last year that...

[Robert A. Eberle:]

Yeah, I really just gave the key update in that the first Digital Banking 3.0 customers started going live with customers – actually to be clear in this quarter that we're in now, so that didn't occur in the last quarter. It's occurred here in the December quarter. And we'll provide more of an update at the end of January on that but everything on those implementations is tracking as expected.

[Blake Anderson:]

Great. Thanks a lot.

[Operator:]

Our next question comes from the line of Mayank Tandon with Needham & Co. Please go ahead.

[Dylan Dittrich:]

Hi. This is Dylan Dittrich on for Mayank. Wondering if you could just provide a little bit of insight in terms of what you're seeing in the competitive landscape for Digital Banking, particularly with regards to entrants that are cloud-based SaaS competitors. Thanks.

[Robert A. Eberle:]

Sure. For Digital Banking looking at – defining that first it's our payment and cash management platform, the commercial banking platform that banks would provide to their business customers. We have invested in that platform and taking a clear lead. Last quarter, I had in my comments I referenced the fact that Aite had given us four awards, more than any other company for our Digital Banking platform, awards for the user design, experience, capabilities. Nobody else that we see has the breadth of business payment capability. Where you see a lot of new entrants, and I saw this quite a bit out at Money20/20 which I referenced recently attending. Where you see a lot of new entrants is in consumer platforms and particularly around personal financial management. Personally, I think that space is over played but that's where more of the new entrant activity is because a business banking platform has to have such rich and deep capabilities. It's much more difficult for a start-up to come after that. Another example of public company, Q2, focuses on the retail side where Bottomline's focus is on business banking.

[Dylan Dittrich:]

Fair enough. Thank you.

[Operator:]

And we have no further questions in queue. Please continue.

[Robert A. Eberle:]

Well, thank you, everyone. I think Q1 was an excellent start to FY 2017, right on track with our plans and model and we look forward to reporting back to you on the second quarter at the end of January.

[Operator:]

Okay, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.