Bottomline Technologies, Inc.
Q2 2017 Earnings Call Transcript

Published: 2 Feb 2017

[Operator:]

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

[Rob Eberle:]

Good afternoon. Thank you for your interest in Bottomline Technologies and welcome to the second quarter of fiscal 2017 earnings call. I’m delighted to report on what was a very strong 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 as always, both Rick and I will be available for questions following his remarks. Q2 was a very strong quarter for Bottomline. We executed against our strategic plan and we recorded strong financial results with 19% subscription and transaction revenue growth, 22% adjusted EBITDA, and $0.26 core earnings per share. The results in the quarter increased our confidence in our direction and the results demonstrate our plans to deliver increase shareholder value are working. I’ll start my remarks with a review of the financial highlights for the quarter. Subscription and transaction revenue grew to $55.6 million, which represents 19% growth on a constant currency basis. Driving subs and trans revenue growth has been a key objective of our product investment and it is working. Subs and trans revenue was 64% of overall revenue, up from 57% a year ago. Revenues overall were $86.7 million, representing 6% constant currency growth. EBITDA was $18.7 million, or 22% of revenue, well ahead of plan. Operating income was $14.5 million, also ahead of plan. We reported EPS of $0.26 for the quarter, ahead of our target and expectations, and we ended the quarter with $115 million in cash. So strong execution against our financial goals across the Board. Our success reflects in part the market opportunity, which is big and getting bigger. We’re addressing customer needs in a large and evolving market. The current process for business payments is fragmented, unsecure, expensive and broken. That is our opportunity, while other areas have benefited from technology and been automated, business payments remains a huge and untapped market, one which is recognized in getting increased attention with new payment types and protocols, new regulations, increased security concerns, and new technologies. This trend is very good for Bottomline. We make the complex process of business payments simple, secure, and seamless. We have the products, technology, networks and experience to help businesses pay and get paid in an increasingly complex market. Virtually everything we do and every product we provide is in one form or another facilitating, managing or providing secure, reliable business payment automation. A few years ago, we developed a new strategic plan to drive organic growth and shareholder value. Our strong Q2 results validate their plan and are indicative of our long-term potential. Key elements of a plan to drive shareholder value are investing in our leading business payment platforms to accelerate organic subs and trans revenue growth, sell those solutions in a subscription and transaction model, and to the extent, we’re not already doing so convert the model. And as we grow subscription and transaction revenue drive expansion of operating margins. We’re confident, we can execute against this plan and drive very attractive shareholder returns. While our work is not done, Q2’s results show our plan is sound and working. The most important element right now is that the investment we’ve made in products overall was succeeding and driving an acceleration of our organic subs and trans growth. I’m really pleased with today’s product portfolio in terms of market opportunity, competitive position, and pipeline. Let me touch on some of the highlights. Banks rely on Bottomline to retain and grow commercial banking relationships, as new market entrants from challenger banks to non-bank FinTEx [ph] post new competitive threats. We won awards for best small business capabilities, most open architecture, best partner and best user experience. Our first bank customers live on our Digital Banking 3.0 platform and we’re pleased with our market position and opportunity in this dynamic market. We’re the leading provider of legal spend management solutions and we’ve expanded our capabilities with advanced analytics, thinking it easier for customers to access key information, metrics and trends. We launched PartnerSelect to enable organizations to intelligently select the right lawyers for each new case, based on objective metrics and performance reviews. Our best customers live on the PartnerSelect platform and a second is slated to go live later this fiscal year. Security has always been a central requirement for business payments and a focus of ours. Two years ago, we extended our capabilities with the addition of the Intellinx product set. That acquisition has brought much to Bottomline in terms of technology, customer confidence, and competitive differentiations. We’ve refined our cyber fraud sales, product and go-to-market plans, focus on discrete integrated package solutions, which our sales teams can sell to our existing customers. We’re confident, this will add to our subscription revenue growth and drive positive operating results. Finally, perhaps and most visible example of business payment leadership is Paymode-X, where we’ve signed partnerships with both Visa and Mastercard. Our latest release makes credit cards part of the Paymode-X platform, offering a single unified payment optimization program. We’ve also expanded our intelligent payment routing for payment routing rules engine for each specific trading relationship. Paymode-X is the largest and most successful network of its type with $198 billion in transaction volume this past year. It represents the most efficient and effective way for businesses to pay and get paid and it will continue to be a key part of our growth going forward. The consistent theme across our product set in a central premise of our strategy is to establish Bottomline is the leader in business payments. We are and will continue to leverage that position to drive subs and trance revenue growth, expanding margins, and shareholder return. The results this quarter were strong and they indicate our plan is working and the future is bright for Bottomline. I’ll now turn it over to Rick for a detailed review of the financials and then both of us will be available for questions.

[Rick Booth:]

Thank you, Rob. I’m pleased to report on a very strong quarter for Bottomline. The key measures of growth and profitability all exceeded plan and expectations, as we recorded 19% growth in subs and trans revenue, 17% core operating income, and $0.26 core earnings per share. All in all, a very strong financial performance. In my remarks today, I’ll focus on three areas. First, the financial results themselves; second, I’ll comment on the credit facility we entered this quarter; and third, I’ll confirm our guidance for the remainder of the year. As always, for your convenience, we posted detailed supplementary materials to our website. In our financial results, I’ll present a few highlights before providing more detail. Revenue was driven by 19% overall subs and trans growth on a constant currency basis. And remember, that growth is all organic. This brought our total revenue to $86.7 million, up 6% year-over-year on a constant currency basis. And from a profitability perspective, highlights include that adjusted EBITDA was 22% of revenue, or $18.7 million; core operating income was 17% of revenue, or$14.5 million; and core earnings per share were $0.26. I’ll now provide a bit more detail on these financial results, beginning with revenue. With that 19% constant currency growth, we ended with $55.6 million of subs and trans revenue in the quarter, which is equivalent to $222 million on an annualized basis. With that growth, subs and trans is now 64% of our total revenue, up from 57% just last year. Similarly, recurring revenue has grown to 85% of overall revenue from 80% last year. With these changes, we’ve shown significant progress against our financial strategy and demonstrated a continuing return on our investments in innovation. From a new sales perspective, we added 27 new customers across our Paymode-X, legal spend management, and Digital Banking product lines, counting just new logos and without reflecting any add-on sales, 19 new payers joined our Paymode-X network, four. new companies selected our legal spend management solutions, and 4 new banks selected our Digital Banking products, all on the subscription model. When translated into dollars, total estimated subs and trans bookings were $10.4 million, that’s equivalent to a 19% addition to our subs and trans revenue of $55.6 million and is in line with our long-term 15% to 20% growth targets for subs and trans revenue. As I turn to profit and margins, we finished the quarter with adjusted EBITDA of $18.7 million, or 22% of revenue, as well as core operating income $14.5 million, or 17% of revenue. In our established product lines, core operating margin was 20%, while the transitioning digital banking product line delivered 5% core operating income. Overall, gross margin was $49.1 million, or 57% of revenue, and subs and trans gross margin was also 57% consistent with prior year. From an operating expense standpoint, sales and marketing expense for the quarter was $16.1 million, or 19% of revenue, down 3 percentage points from prior year and development expense was $11.7 million, or 13% of revenue, up 1 percentage point from the prior year. We also recorded a non-cash charge of $7.5 million against the goodwill associated with the acquisition of Intellinx, as well as an offsetting reduction in tax expense. In terms of cash flow, operating cash flow was $9.1 million for the quarter, and we ended the quarter with $115 million of cash and investments on hand. Turning to the new credit facility, we entered a five-year $300 million facility on very favorable terms. We intend to use the facility to repay the outstanding convertible bonds, which mature in December 2017. This will allow us to avoid the potential dilution of either new share issuances or a new convertible bond and will allow us to minimize the amount of operating cash that we hope. This structure is also consistent with our long-term financing strategy, which is to fund our growth in the most cost effective way possible, retain the financial strength to be a trusted partner to our customers, and keep our capital structure as simple, flexible and shareholder friendly as possible. We continue to be opportunistic in our share repurchases and in Q2 we repurchased 441,000 shares for $10 million, or an average price of 22.66 per share. This brings the total share repurchases in the last 12 months to $35 million and 1.5 million shares, respectively, as we continue to manage our capital structure consistent with our plans to grow EBITDA, while maintaining a consistent share count. Finally, turning to guidance. I’m pleased to confirm our guidance for the remainder of the year. The pound has recently traded roughly in line with the rate used in our guidance and we’re confident in our pipeline and execution against the plan. As such, we confirm our guidance for Q3 and Q4. So in conclusion, Q2 was a very strong quarter financially, highlighted by 19% subs and trans growth, 17% core operating income, and $0.26 earnings per share. We’re pleased to see the growth resulting from our investments in innovation, and we’re confident we’ll continue to execute against our long-term plan. And with that, we’ll open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Gary Prestopino with Barrington Research. Please go ahead.

[Gary Prestopino:]

Good afternoon, everyone. Hey, Rob, you mentioned Paymode-X processed $198 billion in calendar 2016. Do you have the number for calendar 2015, so we can evaluate the growth?

[Rob Eberle:]

Yes, the number in calendar 2015 was $186 billion, Gary.

[Gary Prestopino:]

$186 billion, okay. And then first time you called out PartnerSelect, Rob, that you are starting to sign up some entities with that. I know you had pulled that a little bit back just because you’re going to add some analytics. But how is the pipeline looking there with the PartnerSelect product?

[Rob Eberle:]

The product – what we found as we got into the product, we’ve actually split it. So that the analytics piece is separate from that. What we found is that the selection part made a lot of sense for many of our customers. The challenge was that the workflow around actually initiating in assignment at more variations. Pipeline is strong today. It’s going to be a nice addition to us. I don’t think it’s going to be as big as we had initially hoped. But I think where we’ve broken out the analytics piece gets pretty interesting for us, as well as our claims case management that kind of broke out of there as well. So it is going to be a successful addition. The investment overall has really worked with the new capabilities we’ve put both in the core platforms, as well as new modules. I think that, if I were to call it, I’d say, it will be a single or double rather than a home run.

[Gary Prestopino:]

Okay. Thank you.

[Operator:]

And our next question is from Brett Huff with Stephens, Inc. Please go ahead.

[Brett Huff:]

Good afternoon, guys. Congrats on a nice quarter.

[Rob Eberle:]

Thank you.

[Rick Booth:]

Thank you, Brett.

[Brett Huff:]

Question on Intellinx. Can you just give us a thought on why the goodwill write-down and kind of how much of that was written down, and if that’s a sign of more to come just with expensive acquisition with lots of hopes, I just want to understand a little bit better?

[Rob Eberle:]

So I’ll comment on the acquisition itself. First off, the fundamental reason for the write-down is, we’re selling less of it than we had hoped. The acquisition actually from an expense standpoint was a three times multiple forward revenue, three times revenue. So I don’t think it was that expensive for us. The challenge for us has been, it’s a little further afield than we fully appreciated. Now, it is the right capabilities for us to have in business payments, having cybersecurity, capability, having this unique set of technologies is critical for us. It’s added to our competitive differentiation. It’s added to the way we’re perceived in the market. What we’ve been doing is reworking how we think about the sale of this technology. We’re formulating package solutions that we – that our existing sales teams can sell as add-ons to our current platforms. We were trying to sell this as more of the way Intellinx had marketed, this is a standalone platform. It becomes a much more complex sale. It becomes more of a security and sees our sale than a payment sale. So it will be a nice driver to us. It absolutely complemented our product set. It was probably more of a stretch than we initially appreciated. But I’m very glad, we have it and we’ve got the plans to make it work we saw unless today than we’d initially planned. But I wouldn’t personally see subsequent write-offs of other things, but I’ll turn the write-off analysis over to Rick.

[Rick Booth:]

Thank you. Goodwill impairment follows mandated accounting procedures, which compare results versus the original acquisition model. And, Brett, I think you characterized it appropriately as a very ambitious model. Put even in the broader context with the number of innovations that we’ve introduced in acquisitions we’ve completed, it’s not surprising that one is progressing a bit more slowly than anticipated, while others outperform. Addressing your question of whether there’s more to come, we regularly monitor goodwill and we disclose the results in our filings. Intellinx is the only reporting unit, which does – which didn’t have a substantial margin of safety, as we noted in our last three filing. But now, after this write-off, there’s less than $5 million of goodwill related to Intellinx remaining on our books. We’ve taken a rigorous look at the forecast and we’ll continue to monitor it. But we have no reason to expect any further impairment.

[Brett Huff:]

Okay, that’s helpful. Also, on the wins for the four big banks in the 19 Paymode deals, can you give us any color on that just on the big banks specifically? Are these sort of similar to the ones that you’re now working through in the transition group, I think sort of that big and complete? And on the Paymode-X deals, any commentary on where they all from the channel and are there any particularly large ones, or ones that are important verticals for you all?

[Rob Eberle:]

So let’s – yes, starting with the Digital Banking, no we didn’t have large payment in cash management deals, which is where the adverse accounting has been hitting us. So these were more of a other standard product portfolio things like customer acquisition solutions and the like. The – turning to Paymode-X, we had a nice mix of deals. We didn’t have a particularly large deal in the quarter, but we had nice mix on Bank of America certainly firing strong and leading the charge, but also other bank sales, as well as some sales direct. So solid from a number standpoint. Again, that didn’t really have a super large deal in there, but that’s fine. I think that’s – we’re going to – we won’t see large, large deals every quarter. We certainly have them in the pipeline.

[Brett Huff:]

And then you gave us some great stats, I think, you said $198 billion in Paymode and I think you said fiscal 2016 versus $186 billion in fiscal 2015, did I hear that right, first of all?

[Rick Booth:]

I mean, it’s $182 billion, yes.

[Rob Eberle:]

Yes, it’s $182 billion in 2015 and $198 billion in 2016.

[Brett Huff:]

And so that’s about a 9% growth rate. Given the – my sense was that this could be a faster-growing business. I know it’s been a slower burn, I think than we expected even though the TAM continues to be very large. How do you guys look at that 9% volume growth and sort of reflect on that? Is that reflective of how you think the business will kind of expand going forward? And B) can you tell us about pricing in there kind of things like that any other sort of nuances that we need to pay attention to in that growth?

[Rob Eberle:]

Well, pricing actually is the whole key and business model is the whole key. So what you have is the vast majority of the volume is in a classic or traditional pricing model. And that was a model charging the payer a certain amount per payment, and not as a – not a basis point or interchange base model by the way, but $0.35, $0.48, whatever would be per payment. So you’ve got a significant amount of scale on volume coming through not being monetized anyone near what an interchange model represents. What we did is, we took a model of scale. We took a network of scale, sorry, and we applied the interchange model to it. So we’re much earlier. Against that basis, a small portion of that is actually being driven by an interchange model, but they’re – our network use fee in dividends model. As we see and if we see conversions of that base, we’ll be monetizing at a whole different level. So from a pricing perspective where we’ve seen a very attractive network use fee model that allows us to share in the amount of the payment for those vendors that are unrolled. We’re seeing a great growth from a revenue standpoint in that business. And the volume I think the way to look at that is a 9% growth. The volume is nobody else has a network of the size and scale we have, it’s the point one. The second point would unless network would be – just would be the opportunity if in fact we can monetize that over a substantial portion of that, or frankly any portion of that in scale with an interchange model it’s a huge upside potential.

[Brett Huff:]

Okay. And then last question for me, additional comments on Visa and Mastercard, I know we’re very interested in that, given those guys have lots of good relationships with thanks and that was one of the things that I think was limiting your kind of near and medium-term revenue. How the conversation is going? Have we closed the deal with either one yet, just give us sort of an update there?

[Rob Eberle:]

The conversation is going really well. We – this quarter we were able to put the card capabilities with these and there are some additional things around how Mastercard network works around security pieces that will be adding subsequently. But Visa card capability is live in the network today. We’re out talking to banks. I would not want to leave anyone with the impression that where our revenue growth is not successful today. So there’s nothing holding back. Paymode-X’s revenue growth is success. I think the question is, can it become a multi $100 million business and become really the face and future of a bottom line, that’s an open question. Theoretically, it’s the appropriate way for businesses to pay and get paid and it should have that capability. But the steps – we’re taking the right steps along the way, signing Mastercard, signing Visa now going out to more banks. Specifically, in your question, we had, as I said, we’ve not signed another bank at this point. But I would expect this to certainly in the next couple of quarters.

[Brett Huff:]

Okay, great. Thank you.

[Operator:]

And our next question we go to Mayank Tandon with Needham & Company. Please go ahead.

[Mayank Tandon:]

Thank you. Rob or Rick, I just wanted to get some clarity on guidance. So obviously, you had a pretty healthy beat for the second quarter, but you kept guidance for 3Q and 4Q intact. Could you just comment on your thought process around quoting guidance, given that you had a nice beat in 2Q?

[Rob Eberle:]

Yes, I think our businesses involved both subscriptions and transactions. There is always an element of ups and downs in there. And where we thought it was prudent to maintain our guidance as it has been. We’re proud of our performance to-date, but we’re not trying to get ahead of ourselves.

[Mayank Tandon:]

Okay. We’re not seeing any indications of any kind of softness is just that you’re being conservative, but the business remains on track, is that fair?

[Rob Eberle:]

Yes, the business remains on track.

[Mayank Tandon:]

Okay. And then just another question on the banking side. I wanted to get sort of your thoughts on just competitive pressures. Are you seeing companies like Q2 starting to penetrate the corporate banking side? Are you seeing other players? Is it becoming more competitive, or do you feel you’re holding your own within the Digital Banking space on the corporate side?

[Rob Eberle:]

Sure. Q2 specifically, I hate to always talk on a – about a competitor, but Q2 is focused on the smaller market and smaller banks. It’s a $10 billion and under typically and certainly focused on the retail side. What we’ve done as a business is, as many of you know, we’ve provided component sub or the cash management – payments in cash management platform for some of the largest banks in the world, 15 in the Top 25 banks, a global banks or Bottomline customers. What we’ve done has been able to bring that level of kit business banking capability down to the mid-market. The folks that are moving up from the retail side can have effective small business capability, but they certainly don’t have the business capability in breadth and depth the Bottomline’s platform does. So we’re delighted with the technology set we have today. We really like the spot. We sit in the market. So we haven’t seen others invest in innovation that we directly compete with. And then the quarters of the Q2 are typically going to be the better solution if you want just simple capability. But if you’re serious about growing your business banking franchise, Bottomline remains the best selection.

[Mayank Tandon:]

Great, that’s a helpful color. And then finally, Rick, could you just give us a little bit more color on your capital allocation strategy going forward between targeted M&A, buybacks, and of course, paying down your convert over time?

[Rick Booth:]

Yes, absolutely. First of all, we feel really good with the capital structure that we’ve put in place with this new facility. Excellent terms, it allows us to avoid dilution and it’s got room for us to grow over time. Our capital allocation approach is unchanged. We’re confident in our organic growth. So the hurdles remain very high for new acquisitions and combinations. But when we find one with the right combination of strategic and operational fit that we believe can drive appropriate results, we’ll move on it. In terms of the share buyback, we continue to be opportunistic. We were – we had the opportunity to buy $10 million worth of shares in this quarter at attractive prices, but we’re not going to get into the business of forecasting that per se. At this point, with $115 million of cash on the balance sheet and $190 million of converts maturing, when those converts mature, it will match and vacate down our operating cash levels.

[Mayank Tandon:]

All right. Great and good job, guys. Thank you.

[Operator:]

[Operator Instructions] Next we go to George Sutton with Craig-Hallum. Please go ahead.

[Jason Kreyer:]

Hey, gentlemen, good afternoon. This is Jason on for George. Two questions for me. First on, Digital Banking 3.0. I was just wondering if you could give an updated feedback from what you’re hearing from customers that have been deployed now? And then any thing in terms of where the pipeline sits on license deals versus subscription deals?

[Rob Eberle:]

Right. Well, customers – we have a customer live now. We have other customers that are in the process of bringing live. I think the feedback has been uniform across the Board and that is – it’s a step forward – a big step forward in innovation and business banking or payments in cash management platform. That’s – it’s been a feedback on customers. It’s been the feedback on prospects. It’s the feedback in the pipeline. I think for us what we’re doing is pretty measured around where that market is. I mentioned earlier how we have the heritage of serving the largest global banks in the world. What you’ll see us do is focus on banks that are going to take this solution as it is today. We want to be providing single solution, where we’re moved away from the higher services component as we did in the past, which was an effective way to grow intellectual property, grow our capabilities, but not the business we want to be in long-term. So that’s our target market. In terms – so that was a two-part question. What was the first in you?

[Jason Kreyer:]

The second question was around the mix of deals in the pipeline?

[Rob Eberle:]

Oh, sure, and whether we see as – I – we’ve not had a software license deal. Banks today are really comfortable buying in subscription. We’re moving this business to subscription. So it’s possible. We’d see a one-off here or there, but we are moving as you can see in the numbers today. You can see in our focus we’re moving our business to subscription and transaction.

[Jason Kreyer:]

Okay, great. And then just a last one for me on – you talk several times about a favorable pipeline. And just wondering if you can comment on that on a segmented basis if you’re seeing any specific pockets of strength in one segment versus another?

[Rob Eberle:]

I think the place that is the most exciting just because of the total market opportunity certainly would be Paymode-X. So if you take a look at what the capabilities we’re bringing to market and how that meets a need in automating payables, as well as being able to monetize that asset, that’s a unique and a huge market opportunity. And I think the biggest opportunity we have when we look at the partners Visa, Master Card. So that’s the area of pipeline, I think I’d be most excited about and has the most full opportunity. Very strong legal spend management quarter in business, where we continue to, but we’re having a leading position there and we’re able to introduce new capabilities and sell those new capabilities and up-sell opportunity against the base gives us some special opportunity around legal spend management. Then Digital Banking, as I mentioned, we’ve got the leading product set, but we’re going to be very focused on the mid-market banks that are the right candidates for them.

[Jason Kreyer:]

Great. Thank you for taking my questions.

[Rob Eberle:]

Thank you for the interest.

[Operator:]

The next question is from Wayne Johnson at Raymond James. Please go ahead.

[Wayne Johnson:]

Yes, good afternoon. So my question is regarding Paymode-X and the cadence, if you will, of the dollar value of the invoice is processed. It includes like that slowed as of late, I thought the cadence was faster than what is you guys just mentioned year-over-year more in the mid-teens or better. And my question, I guess is, are you guys signing up smaller customer, but because you have the percentage of invoice billing schedule in place. The financials are looking better on less revenue and less invoices, or am I not thinking about that correctly?

[Rob Eberle:]

Well, actually to be blunt, you never really thinking about it correctly, I might say. So the way to think and I really appreciate the question, because I think we didn’t present that clearly enough. The network volume of $182 billion last year and $198 billion this year is simply what we processed through the network. We’re monetizing at in an entirely different way. So some of that growth would have been in under the new model. Some of that growth in the network may have been under the older model, as well as existing payers grow. But we’re converting a few of the older folks. It doesn’t bear any correlation. Here’s a key point. It doesn’t bear any correlation to the growth in revenue we’re seeing from Paymode-X. So again, network volume, I think, goes to a couple of things. The scale we have no one else has anywhere near that scale of the business, payments network. And second, it goes to the opportunity we have if we were to monetize a substantial portion of – a meaningful portion of that network volume in an interchange model. We’re still relatively early on in the interchange model, it’s the only thing we sell today. But that’s what’s driving our revenue. So you can’t look at the size of the network. We’re thrilled with the size of the network and the network growth, it doesn’t bare the relation to revenue growth in Paymode-X, which is clearly growing much faster than that.

[Wayne Johnson:]

Okay. So I’m going to circle back on that. So this is kind of part two [ph], so bare with me. What – can you give anymore color on that? What percentage of the total invoice is $198 billion under the old billion methodology versus the new? And kind of how should we think about that going forward? And I don’t think anyone disagrees that there’s an enormous opportunity if the legacy customers are switched to the interchange model, for sure. I’m trying to get a sense of what’s the realistic timeframe for that potential positive event?

[Rob Eberle:]

Well, first off, I’d say it’s – we’re seeing positive results today and Paymode-X was a big contributor to our 19% subs and trans organic revenue growth in the quarter. I think the question of when can we see an accelerator, best indicators of that are going to be activity with Visa, Mastercard and Bank of America are key partners, as well as the third and other bank partners that we’re working with today. So those are going to be the best metrics. We don’t – we certainly aren’t providing any kind of breakout metric that would give better visibility to that. I’m not sure there is one, because we’re really looking at what’s the future sign on this model going to be, or what point in time just Bank of America that has the bulk of our existing volume as customers of Bank of America would they decide to more aggressively convert to the interchange model. We think that what we’ve done is taking a network of real scale and then brought this new interchange model on top of it. So it’s working real well. If we monetize that whole – any portion of that, that’s a major game changer for Bottomline.

[Wayne Johnson:]

Okay. Thanks a lot. I appreciate it.

[Operator:]

And next we go to Dan Perlin with RBC Capital Markets. Please go ahead.

[Daniel Perlin:]

Thanks, guys. About housekeeping. So on the guidance in the second-half, you kind of kept it unchanged. What I want to make sure I understand is, are you absorbing more of an FX headwind in that second-half based on what you have originally estimated? And what is the effect that you’re using?

[Rob Eberle:]

So the FX has changed our prior guidance with that 1. 2Q. And our key currency there’s the euro, the franc and the – or the pound, the euro and the franc. The pound has traded up slightly, but the euro has traded down slightly as has the Swiss franc. So net-net, currency is not a factor relative to our guidance.

[Daniel Perlin:]

Okay. So based on original expectations that wash about…

[Rob Eberle:]

Exactly.

[Daniel Perlin:]

Got it. The operating leverage in the quarter look pretty good. I’m wondering, are you getting to a point now where the kind of G&A and I would say roughly product development. Is that kind of an absolute dollar run rate plus or minus be able to sustain that do you think for – here for the foreseeable future, or is there some sort of investment horizon or investment cycle that we need to just contemplate as we think through not only the next couple of quarters, but even beyond that?

[Rick Booth:]

Yes, I wouldn’t be quite as precise a thing holding flat, but there is certainly operating leverage that will continue emerge as we grow our revenues.

[Rob Eberle:]

[And at a particular level] [ph] listing up from that I would say that the product investment level, as I indicated, we launched on this strategic – our current strategic plan to drive organic subs and trans growth. We did increase our product investment at that point in time. We would not see that kind of a change or anything that would change our fundamental model, our commitments to the street going forward.

[Daniel Perlin:]

Okay. So given any kind of pipeline direction we would expect kind of steady state investment cycles. Okay. The…

[Rob Eberle:]

[Multiple Speakers]

[Daniel Perlin:]

Go ahead, I’m sorry.

[Rob Eberle:]

I would say, I would characterize the evolution that we’re making now is refinement very solid market-leading products, as opposed to total reinvention.

[Daniel Perlin:]

Yes, yes. I’m wondering, you’ve had, I’m sure many conversations with bank partners and in that channel, and I’m just wondering under this new administration, are they more – or you get the sense they’re more likely to spend on your product set, as they kind of pivot of a lot of the regulatory potential spending as they move towards growth, you think that’s going to happen? Is there any indication that you can tell that, because it’s not a full plan yet that’s laid out by the administration from a regulatory perspective if there’s going to be maybe air pockets in spending? I mean, do you get any sense of that, as you had these conversations? Thank you.

[Rob Eberle:]

I don’t – I wouldn’t expect the air pockets and here’s the first things of evidence. In 2008 when we were focused on the largest banks; JPMorgan, Bank of America, Citi were all and some of our largest customers, our revenues grew like you had an unprecedented challenging environment. Reasons for that are one, business model; two, there were customer and revenue-facing. These things are – have a long implementation cycle in our mission critical platforms for banks. So from an air pocket, I don’t think we’re going to get something like 2008, that’s unprecedented really in our lifetimes and we grew during that period. Stepping at what changes could occur? Higher rates is always better for the treasury services and cash management business. So if we were to see right start to move up, that certainly drives much higher levels of revenue and income for them, which makes certainly gives them more to invest in our platforms. I’d say anything at a – anything that’s reducing the regulatory burdens on banks is probably going to benefit technology vendors across the hopeful spectrum, not just in a treasury services or commercial banking that we address. So those would be the couple of indication. I don’t know, Rick, if you’d any add anything else to that, but those would be the couple. I would say, we’re not at Bottomline trying to predict what the administration is going to do. I think anyone and that is probably doing so at their parallel.

[Daniel Perlin:]

Yes, I agree with that. Last thing is the – and this is the nuance. The tax rate is kind of somewhat embedded, it seems to kind of jumps a bit, place a little bit, but this quarter look like on an adjusted basis around 30%, is that, Rick, what you wanted to be in embedding 30%, 35% kind of in the back-half, or is there something, could you provide a little bit offset to EPS at least from our model? Thanks.

[Rob Eberle:]

Yes, I think great question, Dan, and specifically, I believe the tax rate that you’re referring to is the impact of taxes on core net income.

[Daniel Perlin:]

Correct.

[Rob Eberle:]

And alternative tax rate you think about it, there are actual cash taxes paid, which remain extremely low. So I think for modeling purposes, the rates that you referenced are appropriate and they are a little bit conservative. But our actual cash tax burden is extremely low and we continue to have a robot pipeline of NOL. So the calculation that we’re now forced to do is purely hypothetical.

[Daniel Perlin:]

Yes, exactly. Okay, thank you very much.

[Operator:]

And lastly, we have a follow-up from Gary Prestopino with Barrington Research. Please go ahead.

[Gary Prestopino:]

Yes,. Rob, just want to ask something on Paymode-X. You said most of what you’re doing now on processing is really the classic model versus the interchange. And I know Bank of American has been doing the classic for a long time. But when you initially signed up these other banks, were they on the classic as well and when did you exactly switch those banks ex-Bank of America to that interchange product?

[Rob Eberle:]

The only bank that was ever on the classic model was Bank of America. But that’s been the bulk. And remember on Paymode-X to payers, we’ll ramp over a several-year period.

[Gary Prestopino:]

Right.

[Rob Eberle:]

So we’ve – you’re still – still the vast majority of our volume occurs in the classic model and through Bank of America.

[Gary Prestopino:]

Well, can you give us some idea of how your other partners how successfully been in signing? I mean I realize you’ve got to ramp, but…

[Rob Eberle:]

Sure. I think, Fifth Third, for example, has been very successful, successful in healthcare, successful in other verticals, safeguard a very active program, we’re very involved in supporting that program, but they’ve done well, as one example.

[Gary Prestopino:]

Great. Thank you.

[Operator:]

And there are no further questions.

[Rick Booth:]

Thank you very much. I appreciate everyone’s interest.

[Rob Eberle:]

Yes, thank you, everyone. I appreciate the interest. I think we had a very strong quarter, as we outlined. It gives us confidence in our plan going forward and we look forward to reporting on Q3 in about three months time.

[Operator:]

Ladies and gentlemen if you – this conference will be available for replay after 7