Bottomline Technologies, Inc.
Q4 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies Fourth 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 risk and uncertainties. Please refer to the cautionary language in today's earnings release and Bottomline's most recent periodic reports filed with SEC for a discussion of 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 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 fourth quarter fiscal 2017 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, 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 questions, following his remarks. Fourth quarter was an excellent quarter, strong end to our fiscal year that positions us well going forward. We've set near-term targets of $300 million of subscription and transaction revenue and $100 million EBITDA. We have a high confidence we'll achieve those targets and in doing so reward shareholders. The results in the quarter show we are on track to do just that. During the fourth quarter, we exceeded all our financial targets. We signed several new strategically significant relationships. We extended our competitive advantage with new product capabilities. And from an investor perspective, we laid out clear targets, the $300 million in subs and trans revenue and $100 million in EBITDA. And we bought 1 million shares of our stock in the quarter. We enter fiscal 2018 with a high degree of confidence in our strategic plan and our financial commitments. I'm going to touch on some of the financial highlights of the fourth quarter and then focus my remarks on our strategic wins. Subscription and transaction revenue grew 20% on a constant currency basis in the fourth quarter. For the products fully converted and traditionally sold in subscription, which is the bulk of our products, the growth rate was actually 23%. Subscription and transaction revenue was $59.4 million, a run rate of nearly $240 million. Revenue overall was $93.5 million, up 9% on a constant currency basis. EBITDA was $20.8 million, or 22% of revenue. With annualized EBITDA of $83 million, we're well on our path to $100 million FY 2019 target. Operating income was $16.2 million, ahead of plan. EPS was $0.28, ahead of our target and expectations. And we ended the quarter with $127 million in cash after purchasing 1 million shares of our stock. The growth and financial success we saw in the quarter is a result of the market reception to our business payment product set and the business model by which we drive favorable economics. We are well-positioned to drive profitable, predictable growth for years to come. In fact, the most important events in the quarter was the strategic new relationships and major new customers we signed, including a Paymode-X channel partner we jointly won with Visa, a major P&C insurer signed on for PartnerSelect, and our selection by a marquee bank to be their payment and cash management platform. Each of these is significant and will be a key driver of future subs and trans and EBITDA growth. I'll cover each in the remainder of my remarks. Working with Visa, we signed a top 10 bank as a channel partner for Paymode-X with Visa Payables. This full accounts payable solution maximizes payment automation, cost reduction, and financial returns in the form or rebates, all in one simple, secure platform. With their size, reach and market presence, this bank represents an exciting new channel we're delighted to add to our list of channel partners. It's even more meaningful as our first joint sale with Visa. Beyond our sales success with Visa, we had an exciting quarter for Paymode-X with 18 new organizations signing on for the platform. As in the past, Bank of America was a big contributor and we also had significant new payers sign-on for Bank of New York Mellon and Fifth Third. Paymode-X has had annual payment volume of over $200 billion. There are over 365,000 vendors enrolled in this business payment network. Our aspiration for Paymode-X is to be the way business's pay and get paid. Everything we are doing is moving us forward towards that goal. We're confident we continue to lead the market with Paymode-X and that it will be a major contributor to our future growth. Another market which we've established a leadership position is Legal Spend Management and our results in Q4 evidence that. Legal Spend Management was a key driver of Q4 subscription and transaction revenue growth and financial performance. We continue to track customers to this market-leading platform, signing seven new customers in Q4. We also made significant product advancement with entirely redesigned and streamlined bill analysis capabilities. Part of our strategy is to leverage our leadership position with new offerings that give us additional competitive differentiation and new revenue streams. During the fourth quarter, we signed contracts for PartnerSelect with two significant organizations, including one of the top five P&C insurers. PartnerSelect allows our customers to more effectively choose a legal counsel and assign new matters and will allow Bottomline to ultimately drive revenues from the over 13,000 law firms currently on our network. With the new top five insurer and a total of six important customers now mandating this solution to the law firms they use, we can confidently project future revenue growth from this offer. Our Legal Spend Management platform provides a mission-critical service for our customers. And that's certainly the case of our Digital Banking solutions as well. In fact, one of our most strategically important assets is our commercial banking payments and cash management technology. Our bank customers have tens of thousands of their business banking customers leveraging Bottomline Technologies to make billions of dollars' worth of business payments annually. We've invested a significant amount in the latest version of this technology called DB 3.0 and we've received awards and accolades from major industry analysts for our work. The highest and most important recognition however is from customers. During the fourth quarter, we were selected by a marquee customer, Citizens Bank, who purchased our payments and cash management solution suite with our CFRM Web Payment Fraud. Citizens announced their selection of Bottomline as an investment they've made to become a best-in-class treasury management services provider. Customers are the most powerful endorsement of our technology. Citizens win is meaningful from a financial perspective and equally important as a confirmation of our market leadership. We have the leadership position in this attractive and strategic market which we are confident we will leverage for future growth and profit for many years to come. So, a common theme across all our success is leading product set in key targeted business payments markets. In fact, the success we saw in the fourth quarter and the success we'll see in the future is all a result of that strategic plan. It's centered on market-leading business payment solutions driving sustained subscription and transaction revenue growth of 15% to 20% and attractive shareholder returns. We've set near-term targets of $300 million of subscription and transaction revenue and $100 million EBITDA. We have a high confidence we'll achieve those targets and in doing so reward shareholders. The results in the fourth quarter provide confirming evidence of our ability to do so. So, in conclusion, the fourth quarter was a very strong quarter financially and strategically. We posted strong numbers and we signed new key relationships for future growth. We're committed to driving our subscription and transaction revenues and EBITDA goals. And as pleased as we are with the fourth quarter, we're more focused and excited about the road ahead. So, I'll now turn it over to Rick. And then, of course, we'll both be here for any questions.

[Richard Douglas Booth:]

Thank you, Rob. I'm pleased to report on a strong quarter. Last quarter, we introduced our fiscal 2019 targets of $300 million in subs and trans revenue and $100 million of EBITDA. And this quarter's results demonstrate that we are on track with that plan. Our financial model to hit this plan is clear as we drive 15% to 20% subs and trans revenue growth and leverage that growth to expand operating and EBITDA margins. I'm going to focus my commentary on three topics today, each of which supports this plan. First, I'll review our Q4 results. Second, I'll review our capital allocation and share repurchases. And third, I'll provide detailed guidance for the first quarter. In addition to my remarks on this call, for your convenience, we've posted detailed supplementary materials to our website. Our Q4 results were strong, as we drove all key financial metrics above plan, including subs and trans revenue, total revenue, core operating income, core earnings per share and adjusted EBITDA. Highlights of the quarter include that subs and trans revenue grew 23% on a constant currency basis from products fully converted to subscription, which are the majority of our products and 20% overall. This brought total revenue to $93.5 million, up 9% on a constant currency basis and well ahead of plan. And we recorded $15.6 million of new subs and trans bookings, which will enable continued predictable and profitable growth. From a profitability perspective, our adjusted EBITDA of $20.8 million was 22% of revenue and core operating income of $16.2 million or 17% of revenue and core earnings per share of $0.28 were each ahead of plan. So, overall, the fourth quarter was a significant step forward in our strategic and financial plans. In addition to these operating results, we repurchased 1 million shares this quarter for $25 million, which brought our total fiscal 2017 repurchases to 1.7 million shares and $40 million. I'll now provide a more detailed look into the fourth quarter results, beginning with revenue. Subs and trans revenue for products fully converted to subscription grew 23% on a constant currency basis versus prior year. This is ahead of our target 15% to 20% range and shows the momentum of our product offerings in the market. As customers go live on our recently launched Digital Banking 3.0 offering, they will also help drive banking subs and trans revenue to 15% to 20% growth rates as well. Overall, we have $59.4 million of subs and trans revenue in the quarter equivalent to $237 million per year. This provides strong evidence the strategy is working and support the outlook for fiscal 2018 and beyond. 82% of our total revenue is now recurring with 63% of total revenue from subs and trans offerings. This predictable and profitable revenue stream grew 20% year-over-year. We significantly advanced both these metrics year-over-year, while also delivering profits ahead of expectations. In addition to subs and trans revenue, we recorded $3.3 million of software revenue as we continue to focus on cloud solutions over licensed software. In services, successful delivery and acceptance of a large milestone on the legacy banking project resulted in the recognition of approximately $3 million of services revenue in the quarter as well as the associated cost. From a new sales perspective, we signed $15.6 million of subs and trans bookings. This is 26% of subs and trans revenue for the same period and these signings are key element of our 15% to 20% subs and trans growth. These figures are estimates and customers take time to implement and ramp to full revenue production, but this provides visibility and consistency to the model as well as the power to drive margin expansion. Looking solely at new customer signings, 18 new payers joined the Paymode-X network, seven new insurers selected our Legal Spend Management solutions and five new banks selected our Digital Banking products. Turning to profit and margins, we delivered adjusted EBITDA of $20.8 million or 22% of revenue and core operating income of $16.2 million or 17% of revenue, each ahead of plan. Products in our established revenue models delivered core operating margin of 21%, showing the power of our financial model as subs and trans growth lifts operating and EBITDA margins. Our overall gross margin was $52.7 million or 56% of revenue and subs and trans gross margin was also 56%, up 1 percentage point from prior year. From an operating expense standpoint, sales and marketing expense for the quarter was $17.1 million or 18% of revenue and development expense was $12.4 million or 13% of revenue. From a capital allocation perspective, our key priorities continue to be to fund our growth and to opportunistically repurchase shares. We purchased 1 million shares in the quarter and this brings our total repurchases in fiscal 2017 to 1.7 million shares and $40 million. In total, we had operating cash flow of $15.1 million and we ended the quarter with $127 million of cash and investments on hand after the share repurchase. Turning to guidance. This quarter, again, shows that we're on track for our fiscal 2018 guidance as well as our fiscal 2019 plan of $300 million subs and trans revenue and $100 million adjusted EBITDA. We reaffirm this guidance and I am pleased to provide more detailed Q1 guidance of $90 million of overall revenue; $60 million of subs and trans revenue, a full two-thirds of total revenue; $20 million of adjusted EBITDA; $15.5 million core operating income; and $0.25 core earnings per share. As always, the supplemental materials on our website provide additional details on the breakout of both our actual results and the guidance. So, in conclusion, our strategic plan is clear. We're executing against that plan. We target sustained 15% to 20% subs and trans revenue growth with expansion of operating and EBITDA margins. Current financial results show that we're doing that today and our fiscal 2018 and Q1 guidance underscores our confidence in our plan to deliver $300 million in subs and trans revenue and $100 million of EBITDA in 2019. And, with that, we can open the call to questions.

[Operator:]

And our first question today comes from the line of Bob Napoli with William Blair. Please go ahead.

[Robert Paul Napoli:]

Thank you. Good afternoon. Nice job on the quarter.

[Richard Douglas Booth:]

Thanks, Bob.

[Robert Paul Napoli:]

I was hoping can you give a little more color. I mean Legal Spend had a very strong quarter last quarter but just on the growth in subs and trans, if you could like name in order, Legal Spend, Paymode. What's drove the growth? How much of the growth was driven by which product? What is the growth rate of each product, generally, would be helpful.

[Richard Douglas Booth:]

I think, more broadly, Bob – this is Rick. We had broad strengths. It's not an example of one single growth driver that's outperforming the others, just really good broad strength across the business.

[Robert Paul Napoli:]

But which, I mean, were they all growing 20% or is Legal Spend growing 30%? Maybe just some feel for what's growing faster than the other products.

[Richard Douglas Booth:]

The framework that we use internally and that we provide to investors is to differentiate between the transitioning segment, Digital Banking, which has more variability, that was 11%, and the established products, which are in the final rev rec model that they have been in and will be in at 23%. That really shows the power of the model, but we do not and won't be getting into more detail below that within that grouping of products.

[Robert Paul Napoli:]

Okay. Your global ERP system, the investment you're making there. How much longer – where do you stand in that? And once we see that expansion, I think, it shows up as an add-back kind of go away?

[Richard Douglas Booth:]

Great question. We're actually – we're in testing now. We're on track to be live this fall. And we forecast the expenses dropping significantly in fiscal 2018 and you can see the details of that in our GAAP reconciliations in the supplemental materials on the website.

[Robert Paul Napoli:]

Okay. And what is this system going? Last question. What is – once you implement a system, what upgrades will give you operating capabilities that you don't have today?

[Richard Douglas Booth:]

So, it gives us – we substantially redesigned our chart of accounts, which gives us even deeper economic insights. It enhances our ability to use our products with our customers. So, we think that it's a good system for us and that it'll have positive impacts.

[Robert A. Eberle:]

And, fundamentally, I'd add one thing looking forward. One of our goals throughout was to have a system that will not just better support Bottomline today, but also do so at $500 million revenue and $1 billion in revenue. So, I think we've got the system in place that will provide for future growth of our company, which is an important return on that investment.

[Robert Paul Napoli:]

Okay. Thanks, Rob. Thanks, Rick. Appreciate it.

[Richard Douglas Booth:]

No problem.

[Operator:]

And we do have a question 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. Any more commentary on the size of the Digital Banking deals you won this quarter and is the average size of that kind of still in the range you're expecting? Or do you see any trend in that size maybe getting bigger?

[Robert A. Eberle:]

The first thing we see in Digital Banking is we have clearly established a leading product. We've got more capabilities, more flexibility. We can allow any mid-sized – any business bank to compete with the largest banks in their geography and then tailor that to differentiate their experience for their customers. In terms of revenue size, I think, we're going to see that creep up as I think we're the clear leader in this space. We're certainly seeing in our large deal we're very consistent with what we'd expect. It's multi-year contract. It ends up being an eight-figure overall contract, but we're – so that's trending very well for us in terms of price points and return that we would expect on the Digital Banking 3.0 investment.

[Blake Anderson:]

Okay. That's helpful. And then on the payment side, any more comments there you can give on the size and types of the 18 deals you won this quarter? And then maybe how many were sold direct versus a bank channel and for the bank channel were most through Bank of America?

[Robert A. Eberle:]

Yeah. We kind of have the same mix as we're seeing we had a few direct deals, Bank of America being our largest channel. But what I look for is we're seeing real consistency in some of the other key channels like Bank of New York Mellon and Fifth Third. So they were successful contributors. And we're also continuing to see real success in some of the key verticals and looking at expanding in other verticals, so healthcare again being a strong vertical where we're just starting to get some real viral (24

[Richard Douglas Booth:]

And then having another top 10 bank joining us in combination with Visa is – that doesn't show up in the logo count that we traditionally announce. But that's the headline to me from Paymode.

[Robert A. Eberle:]

Yeah. I think that's right.

[Blake Anderson:]

Okay. Great. And out of your (25

[Robert A. Eberle:]

So we had a handful of conversions prior pay or pay (25

[Blake Anderson:]

Okay. Great. Thanks a lot.

[Operator:]

And our next question comes from the line of Wayne Johnson with Raymond James. Please go ahead.

[Wayne Johnson:]

Hi. Yes. Good afternoon. If I heard correctly, Rick, I think you talked about – you mentioned the enablement of a contract. I think $3 million in revenues comes to mind. Could you elaborate a little bit on that and what that contract was for and what the associated expense were and how we should kind of categorize that?

[Richard Douglas Booth:]

Absolutely. One of our legacy banking customers, so a traditional banking customer, had a large pro-services contract. The way that it was structured caused us to recognize the revenue and the associated cost upon substantial completion. And so, work that we were doing in Q1, Q2 and Q3 wasn't recognized until Q4, so, with roughly $3 million of revenue. And you can think of it as normal pro-services margins. We won't get into individual projects. If I was the customer, I wouldn't appreciate that but that gives you a sense.

[Wayne Johnson:]

Right. Okay. That's helpful. And while we're on the topic, can you give us an update on how the biggest – or not the biggest, maybe the biggest, the earliest Digital Banking customers are progressing? How are those installations going? Are they on target for the desired launch date, remind us when that is and how are those expenses tracking as well? Thank you.

[Richard Douglas Booth:]

Yeah. Our deployments continue to go very well. I mean we have another customer who has just started to go live with commercial customers in preparation for full deployment. So, we're up to a significant number of commercial users live on the platform and things are tracking against our expectations, an average of around 18 months to go live.

[Wayne Johnson:]

All right. Thank you.

[Operator:]

And we do have a question from the line of George Sutton with Craig-Hallum. Please go ahead.

[George Frederick Sutton:]

Thank you. Rob, I wondered if you could give us a sense of the opportunity you have in terms of the joint marketing program with Visa. They obviously have different and additional relationships relative to you. I just wanted to get a sense of that significance.

[Robert A. Eberle:]

Sure. They have a number of relationships but we have a very strong relationship. One of the things we bring to Visa is true transaction experience and capability. So, while there is a variety of different partnerships an organization like Visa is going to have, $200 billion went through our network last year. And they know when they sit in front of a top 10 bank that's going to matter. That's going to matter to the product group, the business owner and certainly going to matter to risk compliance and audit functions, all of which should be part of that decision. So, proven capability, I think, is something we're bringing to the table, as well as, of course, we believe the leading platform, leading vision around that platform. Together what we represent, it's an opportunity for a bank to have a true integrated payables, so that it allow their business banking customers to offer a single platform that can address card, can address our Paymode-X ACH with a vendor pay model, can address wire, can address ACH outsourced check. They're sending one file and getting full automation from Business Banking customer. And from the bank standpoint, they're offering them the most advanced payments capability to expediate the automation of payables and to maximize the return on payables. So, you're getting to a top platform with one partner and a partner with a lot of experience.

[George Frederick Sutton:]

Now, the top 10 bank that you added this quarter, once they are fully rolled out, would you define that opportunity as material in size?

[Robert A. Eberle:]

So, if you're asking me material from a securities or wire standpoint, I wouldn't want to be – I'd have to get 12 other guys in the room. But if you're asking me is that significant to us? I'd say today I believe it is. What you can't – on size and the fact that they've chosen both of us that is very meaningful. The end of the day though it's when you actually see oil come through the well. It's when you actually see success through that channel. So, we're actively training today. We're actively working on go-to-market. We're beginning to be in front of some of their customers. That'll be the true measure and we'll report back on that as we see deals come through and as we're able to announce the name of that bank.

[George Frederick Sutton:]

Now was that deal under the vendor pay model or is there some discussion on that?

[Robert A. Eberle:]

There's zero discussion on that. The only way we offer the platform is on the vendor pay model and we do so on uniform pricing, so that there isn't one bank that has a advantage position.

[George Frederick Sutton:]

Got you. One other question, you mentioned the healthcare vertical. You called that out specific relative to success and focus. Can you remind us of the other verticals that you're focused on?

[Robert A. Eberle:]

So, one, we'll sell across to a variety. I mean, we've got Dallas Cowboys as a customer. So, we have a variety of different payers that are on the platform and you don't have to be in any particular vertical. But what we found, we have found some success because of the business model of certain verticals. So, healthcare is certainly one. Property management has been another very successful vertical for us.

[George Frederick Sutton:]

And apparently sports entertainment as well. Thanks for your time.

[Robert A. Eberle:]

Thank you.

[Operator:]

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

[Gary Frank Prestopino:]

Good afternoon, guys. Hey, a couple things real quickly. Rick, what kind of tax rate are you using to model for in fiscal 2018?

[Richard Douglas Booth:]

Great question. We have a really efficient tax structure. We paid less than $3 million in cash taxes in fiscal 2017, which is around 5% of core earnings. I mean that's really the most meaningful rate. We expect that to stay between 5% and 8% for the foreseeable future. Core earnings in terms of the SEC disclosure is the higher tax rate that you see in our supplemental materials. And the difference is even though we have $150 million of NOLs available to us for that supplemental disclosure for that pro forma disclosure we have to ignore that valuable asset.

[Gary Frank Prestopino:]

Okay. And then did you give any data on what your free cash flow for the year was?

[Richard Douglas Booth:]

Free cash flow for the year was $32.4 million. So, it was that.

[Gary Frank Prestopino:]

What was it last year? Do you have that?

[Richard Douglas Booth:]

I don't have that in front of me, Gary.

[Gary Frank Prestopino:]

Okay. And then, Rob, you mentioned something about clients are now mandating the use of PartnerSelect when you talked about the Legal business. So, I would assume those are the insurance companies. So, it's almost like you're booking a double sale in a sense?

[Robert A. Eberle:]

In that instance – there are some instances where our payment network can be a double sale or networks can be. I would not consider that a double sale because really it is a compliance. If you want to get matters assigned from those insurance companies, this is what you have to do. So, there's not a yes-no answer on the law firm side. When this is mandated, it's truly mandated. So, for us, having six organizations, including one of the largest, now mandating this, it means we're going to build up a very nice population of existing law firms, which then starts to have that network effect. As we go to other insurers, we can point to here is, one, the population we already have. Here's how successful we've been in those ramps. So, I think, at this point, we're not seeing significant revenue yet but we can certainly see out path to clear success with PartnerSelect. It's going to be a nice revenue growth item for us, a nice add-on to Legal Spend Management business.

[Gary Frank Prestopino:]

And could you just refresh my memory if the law firms are paying to be posted on this system?

[Robert A. Eberle:]

So, the law firms – to go through the whole thing real quick. The insurance company pays us for this as well. So, they pay a small subscription. And then law firms have a choice of different memberships they can sign on just for the functionality of receiving matters from their client. But the next level they could sign on allows them to market to the rest of Bottomline clients. So, if you think about the pool of insurers that we have, it's an unbelievable opportunity to point out here's the success I've had in these types of claims. Here's the success I have in this geography. Here's my track record of trial. Whatever the points they want to be, it's a phenomenal marketing opportunity. So, the lower price point, it allows you just the functionality of receiving new matters that were assigned by your existing clients. The upper price points allow you to market yourself and your firm to our full population.

[Gary Frank Prestopino:]

Thank you.

[Operator:]

And, at this time, there are no further questions at queue.

[Robert A. Eberle:]

Wonderful. It's been our pleasure to report on our strong fourth quarter and a great conclusion to the fiscal year. We are very focused on our $300 million subs and trans and $100 million EBITDA target. The quarter gives us clear evidence we can achieve that. And, as we enter FY 2018, everything we do is focused on driving those results. So, I look forward to reporting on the first quarter as we continue our progress.

[Operator:]

And, ladies and gentlemen, this conference will be available for replay after 7