Bottomline Technologies, Inc.
Q4 2016 Earnings Call Transcript

Published: 26 Aug 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies’ Fourth Quarter 2016 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 discussions of the risk 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 your host, Mr. Rob Eberle, President and CEO. Please go ahead.

[Rob Eberle:]

Good afternoon. Thank you for your interest in Bottomline Technologies and welcome to the fourth quarter fiscal ‘16 earnings call. I am 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. We are pleased to be reporting our results for the fourth quarter and our progress against our strategic plan. We had an excellent sales quarter with new subscription and transaction bookings of $25.5 million, which gives us a total of $76 million in new subscription and transaction bookings for the year. We executed to deliver strong financial results in the quarter and we are well-positioned in taking some specific actions to ensure we drive shareholder value going forward. I will start my remarks with a review of the financial highlights for the fourth quarter. Subscription and transaction revenue grew to $50.9 million. That represents 19% growth across our established product sets on a constant currency basis. The belief when we increased our new product innovation investment was we would be able to drive 15% to 20% organic growth in subscription and transaction revenue. The 19% achieved in the fourth quarter validates the return on net investment. Revenues overall were $88.1 million, representing 8% growth on a constant currency basis across our established product sets. EBITDA was $18 million or 20% of revenue. Operating income was $14 million. Operating margin across the established product sets was 19.2%. Operating margin for the transitioning digital banking product set was 6%. Cash was $132 million. And finally, we reported EPS for the quarter of $0.37, ahead of our target and expectations. Beyond the financial results, there are three important shareholder takeaways I want to cover on this call. First, we see an opportunity to mitigate the near-term impact the transitioning digital banking model has had on operating margin. We will be doing so resulting in improvements in our operating income by Q3 and Q4 this year. Second, we had $76 million in new subscription and transaction bookings in FY ‘16 and will convert a third of that to EBITDA within a 3-year timeframe and we will do so with a share count equal or less than our share count today. The third and most important takeaway is the strategic value of the business payments assets we have developed. We have established improvement products, technology and capabilities to help businesses pay and get paid, a huge market of significant interest. These are key points for investors and prospective investors. So, I am going to provide more detail on each. Starting with the improved digital banking results, the first important takeaway is we are as disappointed as anyone, the stock reaction of lower operating income resulting from the accounting for the transition of the digital banking product set to an entirely subscription model. We can execute the transition in a way which will result in improved profitability in Q3 and Q4, but deploying the platform on one or two on-premise traditional license arrangements, revenue and profit from which will contribute to current period results. Given the accounting treatment, this will have a positive impact on near-term results while modestly reducing our go-forward subscription growth. The second important takeaway is the investments we have made in product innovation are paying off and we will convert that sales success to EBITDA. One of the most important characterizations of the successful business is the ability to sign new bookings and convert those bookings to revenue and profitability. We recorded new subscription and transaction bookings in the fourth quarter of $25.5 million, which is up 93% from the prior year. The fourth quarter ends a strong year overall, which brought our new subscription and transaction bookings to $76 million, an increase of 79% year-over-year. To put that in perspective, the $76 million compares to $29 million for FY ‘14 and $42 million for FY ‘15. We sold one new subscription business in the past year than in the two prior years combined. The sales result is clear. We are selling more new customers and more new subscription and transaction revenue. The investment in innovation is paying off. Our strategic plan has always been to convert a substantial portion of the new subscription and transaction revenue to incremental EBITDA. Based on the sales results we saw for FY ‘16, we expect to convert one-third of the $76 million, approximately $25 million EBITDA, raising our annual EBITDA from the current $75 million to $100 million within 3 years time. We are also committed to having the share count 3 years from today, less than our current share count. We will achieve that through the $60 million buyback announced today, prudent issuances of equity and future share repurchases. We are confident the combination of our current product set, continued sales execution, $100 million EBITDA and a lower share count will drive shareholder value. The final important takeaway for investors is 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, unsecured, expensive and broken. While other areas of commerce and business in general have benefited from technology, business payments remains a huge and untapped market opportunity, one which is recognized in 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. We have worked hard to make sure customers and prospective customers understand the value we provide. We have also attracted and are working with several important strategic partners like Bank of America and Visa, but we can and will do more in the way of leveraging our assets through partners. We have a significant presence, technology set and level of experience in business payments. I will touch on a couple of examples. Starting with Paymode-X, Paymode-X is the world’s largest business payments network with over 330,000 members and $182 billion in payments processed annually. During the fourth quarter, we added 17 new Paymode-X payers to the platform. We also worked hand-in-hand with partners such as Bank of America and Visa to expand the reach and accelerate the adoption of this simple, secure and seamless way to execute business payments. Our hosted digital banking platforms process transactions with a value of $450 billion annually. During the fourth quarter, we signed four new customers for our digital banking platforms. Our Digital Banking 3.0’s clear innovation leadership was recognized by the top industry analysts, AAT, with four awards

[Rick Booth:]

Thank you, Rob. From a financial perspective, I will cover three topics today. First, our very strong Q4 and full year financial and sales results in both our products with established and transitioning business models. Second, an update on fiscal ‘17 guidance in which I will reaffirm last quarter’s growth and margin guidance while updating for foreign currency and a new SEC requirement regarding income tax reporting. And third, I will describe a new share repurchase program and how it represents the first step in updating our capital structure. As we did for our prior earnings call, we posted supplementary materials to our website and encourage you to review those materials in conjunction with this call. From a financial perspective, Q4 was shaped by strong sales results and continued strong growth in our subs and trans revenue. This helped drive core operating income and earnings per share both above our prior guidance. The highlights of the fourth quarter include subs and trans revenues that grew 19% in our established products and 15% overall on a constant currency basis. This brought our total revenue to $88.1 million, which is above guidance for both established and transitioning products by $2.1 million overall. Core operating income of $14.3 million was 16.2% of revenue, ahead of guidance for both established and transitioning products by $1.5 million overall. We signed the $25.5 million of new subs and trans bookings. This is up 93% over the same period a year earlier and this brought total subs and trans bookings for the full year to $76.3 million, which is up 79% over the prior full year. EBITDA was $18 million or 20% of revenue and core earnings per share of $0.37 were significantly ahead of guidance on a like-for-like basis. On a full year basis, subs and trans revenue grew 19% in our established products and 15% overall on a constant currency basis, which brought our total revenue just $343.3 million. Core operating income was $61.5 million or 18% of revenue and EBITDA was $75 million for the year or 22% of revenue. Core earnings per share for the year were $1.52, ahead of guidance on a like-for-like basis. And I will now turn to a more detailed look at the fourth quarter’s financial results, beginning with revenue. With the growth in our subs and trans revenue, we ended with $50.9 million of subs and trans revenue in the quarter, which should be $204 million on an annualized basis. And with that growth, as a percentage of revenue, subs and trans is now 58% of total revenue. This is up 6 percentage points year-over-year from 52% of revenue in Q4 ‘15. And recurring revenue is 80% of overall revenue, up 4 percentage points year-over-year. Moving down to service and maintenance, we reported approximately $2.4 million less than the same period a year earlier as we pursue and provide services only as necessary to implement our solutions and ensure our customers success. And in terms of sales performance, we again showed shareholder strong sales performance as we added 28 new customers across Paymode-X, legal spend management and digital banking. These accounts are new logos and exclude add-on sales. These deals are get larger and more valuable. In terms of total new subs and trans bookings, which includes add-on sales, but excludes renewals. Total bookings for the quarter were $25.5 million and for the year were $76.3 million. This means that we are up 93% for the quarter and 79% for the full year. Of course, these figures are estimates and in our model these customers take time to implement to go live and then to ramp to full revenue production. But as revenue is achieved, it provides visibility and consistency to the model as well as the power to drive margin expansion. As we turn to profit and margins, we finished the quarter with operating income of $14.3 million or 16.2% of revenue as well as EBITDA of $18 million or 20% of revenue. Overall gross margin was $50.9 million or 58% of revenue and subs and trans gross margin was 55%, which was consistent with the margin a year earlier because investments in digital banking offset margin expansion in the established products. From an operating expense standpoint, sales and marketing expense for the quarter was $18.6 million or 21% of revenue and development expense was $11.1 million or 13% of revenue. In terms of cash flow, our operating cash flow was $14 million for the quarter and we ended the year with $132.4 million of cash on hand. Turning to guidance, I will note that coming off a strong Q4, we are reaffirming the constant currency growth rates and operating margins provided in April for both our established and transitioning product lines. We are updating guidance for two factors; one, is foreign exchange rates and the other is a new SEC interpretation on the reporting of income tax effects on non-GAAP adjustments. Neither item is operational and we detailed them fairly in the supplementary materials on our website, but I will also walk you through them in some detail now. In terms of FX, as you all know, 28% of our revenue comes from the UK and the pound has weakened relative to the dollar. It was at $1.42 in our previous guidance and is at $1.30 today. This has no impact on our constant currency growth rates or on our anticipated core profitability as a percentage of revenue, but nonetheless if exchange rates stay where they are today, we will report $2.3 million less operating income in fiscal ‘17 on $8.7 million less of reported U.S. dollar revenue at these lower rates. We also live in a world of evolving regulatory requirements. In May, the SEC issued a new interpretation, which mandates a presentation of the theoretical income tax effect of non-GAAP adjustments. Before I dive into this in detail, I will first note that this change in presentation has no effect on cash taxes or cash flows. It has no effect on EBITDA and it has no effect on core operating income or margin. It is a hypothetical tax calculation for reporting purposes only and it does not consider several key elements of our tax planning. In reality, we do have substantial GAAP expenses, which generate and will continue to generate valuable tax deductions. Above and beyond that, we have accumulated NOLs, those total $83 million in the U.S. and $96 million worldwide, which can be used to offset taxes that would otherwise be payable. And finally, our tax planning allows us to take advantage of the lower corporate tax rates in UK and other operating locations. Despite all of this, the SEC interpretation now requires us to report the tax effect of any non-GAAP adjustments at the higher tax rate that would apply if we did not have those deductions. Earlier, I described our core earnings per share using our old methodology, but going forward, we will present only the new methodology. In Q4, using our old methodology, we had earnings per share of $0.37 for the quarter, which was up $0.02 from $0.35 one year earlier and earnings per share of $1.52 for the year, up $0.08 from $1.44 in the prior year. Under the new requirements, our EPS would have been $0.24 for the quarter, up $0.03 from one year earlier at $0.21 and EPS would be $1.01, up $0.14 from $0.87 for the full year 2015 on a like-for-like basis. When I turn to share purchases and capital structure, I will note that we currently trade at 2.5x trailing 12 months revenue and 11.3x trailing 12-month EBITDA. Both management and the board view our stock as an undervalued at these levels. Accordingly, the board has authorized a $60 million stock repurchase program to allow us to take advantage of this opportunity, while simultaneously utilizing excess cash. At today’s prices, that’s approximately 3 million shares. Just so there is no confusion, to be conservative, we have not adjusted the share count used in our EPS guidance, because we don’t know the actual amounts or prices at which we will repurchase shares. This program is part of an overall focus on our capital structure. We are focused on growing in the most financially efficiently ways possible. With 80% recurring revenue, debt is an important and appropriate part of our capital structure and we do not need to hold the levels of cash that we historically have held on our balance sheet for acquisitions. We are establishing new credit facilities and positioning ourselves for the maturity of our outstanding convertible bond. Our financial profile makes us an extremely attractive candidate for financing. And these actions will move us toward a more efficient capital structure with lower cost of capital. With the combination of these actions, we are committed to drive to $100 million per year of EBITDA with no more than today’s share count and to do so within 3 years. So, in conclusion, we are pleased by our strong financial results, including 19% growth in our established subs and trans products and 15% growth in our subs and trans overall on a constant currency basis for both the quarter and the year and operating margins of 16% for the quarter and 18% for the year. We are very pleased with our sales results in subs and trans bookings, up 93% for the quarter and 79% for the year. And note, that we actually had more subs and trans bookings in 2016 than we had in the two prior years combined. Finally, we are confident in our long-term growth and our fiscal ‘17 guidance as updated and committed to repurchasing shares at the current valuation. And with that, we will open the call to questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Brett Huff with Stephens Inc. Please go ahead.

[Brett Huff:]

Good afternoon, guys. Thanks for taking my question.

[Rob Eberle:]

Hey, Brett.

[Brett Huff:]

Rob, you said one thing and I want to make sure I understood what that was and the implications. I think you said of the three large SaaS Digital Banking 3.0 customers that you sold and are in the middle of implementing, did you say you are not going to do two of those for on-premise and keep one of them as a SaaS deployment or did I hear that wrong?

[Rob Eberle:]

No, no. Let me go over that. So, we are all straight on it. All of those today are subscription. What the accounting does is that requires us then to take all of the costs of an implementation and none of the revenue. What we are looking at is signing perhaps if we would typically sign anywhere from one to two deals a quarter, so anywhere from four to eight deals in a year of significance what we are looking at is doing one or two of those annually in a traditional on-premise and software license model. That will significantly offset the painful accounting that we have on the subscription model. So, we haven’t signed any today on a license model, but we are looking at that and that’s a relatively straightforward way to mitigate the transition to improve near-term operating income. And yes, we would have a lighter subscription and we have some in maintenance on that deal here or there, but that’s a modest impact to pick up better economics in the near term.

[Brett Huff:]

On that just a quick follow-up, what has been the feedback now that you have been in market with it for a while and three big successful SaaS deals signed anyway that you are working on. What has been the feedback, I mean, have folks been continued to be more interested in the SaaS deployment or have you had a little demand around the edges for the license deals?

[Rob Eberle:]

So, there is two different ways on that. In terms of subscription, there sometimes is a little bit of pushback on that, but the world has moved to subscription. I typically will ask do you license Salesforce.com or other prevalent platforms that are only available on a subscription. The other piece is whether folks are taking it on-premise or not. And while most have moved to a hosted platform are comfortable with hosted platform, there definitely are banks from a regulatory perspective, control perspective, security data and everything else that want to maintain on-premise. So, we actually have now moved that we have the ability through accounting and other things we have the ability to deliver our Digital Banking 3.0 either in an on-premise or in a hosted delivery, but we will typically, our pricing remains even if it’s on-premise, our pricing remains subscription and then we will look at doing one or two deals a year until we cross through this transition to soften the impact and improve the near-term operating income.

[Brett Huff:]

Okay, that’s helpful. And then can you go over the ERP system sort of callout that you guys, I think you are excluding that from your pro forma EPS, can you give us a sense of what that is, how long that will go on, how expensive it will be?

[Rick Booth:]

Yes, so that is we are updating our global ERP system, that’s reflected in our 2016 results and we expect it to also impact 2017 and then to be largely completed as we head into 2018.

[Brett Huff:]

Okay, how much was it in ‘16? I don’t know if I caught that and how much was it in ‘16 and kind of how much do we expect all in for ‘17 impact?

[Rick Booth:]

Let’s see. Give me one second to look it up for ‘16. ERP, it was $4.3 million for fiscal ‘16 and it will be roughly comparable in 2017 and then drop off significantly in 2018.

[Brett Huff:]

Okay. And then last question or last, yes, I guess, last question, you mentioned that you feel, I think Rick you said this you feel like you can hold a lower cash balance these days, because you are not as focused on acquisitions. Can you flush that out a little bit? I know that you have acquisitive in the past and a little bit less so these days give us an updated view on that in light of that comments?

[Rick Booth:]

Yes. We are absolutely committed to growth and we continue to monitor the M&A market. But with our strong organic growth, the hurdle for new combination remains high and there is other more efficient ways to [indiscernible] carrying all that cash on our balance sheet.

[Brett Huff:]

Okay, that’s great. Thanks, guys.

[Operator:]

And next, we will go to the line of George Sutton with Craig-Hallum. Please go ahead.

[George Sutton:]

Thank you. Rob, the $25 million of bookings this quarter, I wondered if you could just give us a sense of which of the segments you saw particular strength or is it correlated with the number of customer signings you had in each segment?

[Rob Eberle:]

It doesn’t – the size doesn’t necessarily correlate with number of signings. We had, as I mentioned in my remarks, we had a large legal spend management deal, but I tell you size doesn’t – the number of signings don’t necessarily correlate. We were really strong across the board, staying strong in our bank channels as well for Paymode-X, so a fabulous quarter. I wouldn’t by the way, just I wouldn’t expect to take a next step-up at that level, I mean that’s annualized, that’s $100 million of new subs and trans bookings against $204 million base. So even with the 3-year ramp, nobody is committing to that level on an annualized basis. It was a fabulous bookings quarter and a fabulous year from a bookings perspective.

[George Sutton:]

But will there be a specific segment you would call out relative to the strength particularly in this quarter?

[Rob Eberle:]

Through the year, it’s actually been a really nice mix. We have seen strong results in financial messaging, we are seeing strong results in Paymode-X. We have seen strong results in legal spend management here in the fourth quarter. So it’s really all the pieces are contributing. I referenced that almost 5,000 users on our monthly subscription platform for our business payments in the UK, that’s also been a nice contributor. So what we have done is we have taken the whole business and moved all of our innovation, all of our new platforms to subscription and transaction and targeting that subscription and transaction bookings. What we did is we went too far on that around the global banking, banking and cash management platforms. And by doing one or two deals a year, until we are through that transition, we can again mitigate the impact. So what you are seeing and where that number is coming from, it’s coming from our investment in technology and those new products selling and they are selling in the subscription and transaction model.

[George Sutton:]

Got it, okay. And then on Paymode, I wondered if you could just give us a general fundamental update and I would point you in maybe three directions, the Visa contribution, just curious how that’s going, the Bank of America ability to transition their historic customers to vendor pay and any of the contribution you are getting from the newer partners, the post BofA partners that you are working with in the market?

[Rob Eberle:]

Yes. It was a nice quarter. We had deals from three different bank channels. Bank of America continues to lead and is strongest just for a number of reasons, their scale, their knowledge of platform, the way they are associated with the platform and the market. We had a lot of good activity with Visa and we expect to bring on new partners or I mean, new bank channel partners through Visa as well. So it really was – the bank channels are all working pretty well for us. I think those are all the pieces of your question, did I missed any in there?

[George Sutton:]

Well, no and I think again, BofA’s ability to migrate...?

[Rob Eberle:]

I am sorry. Yes. That’s a great question. So just a bit of that, but it’s not at a program level today. So what I mean by that is they have not gone out methodically to all of their payers and say, hey you have got to convert, you should convert, so what’s occurring it’s typically of one or two a quarter that happened to have been existing classic model, if you will or payer pays model that will come on. But they are not today embarking on a conversion program of aggressively going after all of their customers or the vast majority of that $182 billion that goes through there. I think at some point that occurs, but it’s not something we are pushing today. We are thrilled to be getting the new sales and new deals that we are seeing through them. So I am very pleased with how that’s working as a channel.

[George Sutton:]

Okay, perfect. Thanks guys.

[Operator:]

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

[Wayne Johnson:]

Hi, good afternoon. Just picking up on Rob what you are talking about in your comments on the transition to SaaS, I understand about the Digital 3.0 and the new clients there and that’s very clear on your guys part, what I am trying to figure out is to what degree is the transition from existing clients, not new clients, but existing clients to SaaS having a drag on fiscal ‘17, if you could just break that out or quantify that in someway, that will be very helpful and nice job on the quarter?

[Rob Eberle:]

I don’t see the transition of existing clients to SaaS being a drag. I think that existing clients, if they are staying on their current platform that continue to pay maintenance, we don’t have the contractual ability a reason to add that. And when there is new platform across any other areas – and other business payment areas we have the same thing come up and there is a new platform that’s only sold on subscription, then it will come on in subscription. The world is pretty much moved there. Again, when I used to have more of these calls and explain them to executive, why we are selling that way, I would pull out to buy sales force, to buy service now, do you had these others. So we don’t see resistance. We would see people staying on a platform. It’s another version of when do the classic payers convert to a dividend – vendor pay model that will convert over time. Similarly, maintenance customers will come on the new platforms that are now subscription and they will do so over time.

[Rick Booth:]

One of the powerful things about having the very selective for large bank perpetual license model is it allows us to attenuate any P&L impact that would otherwise occur. If and then there is a faster adoption within the installed based of the new platform, so it really gives us a lot more control and optionality, so we are less of at mercy of our customers adoption.

[Wayne Johnson:]

Alright, okay, terrific. And just one quick follow-up if I may, in the competitive market of business to business payments, could you give us an update about where you see AribaPay or any other large competitors in the market, is there any change in the competitive landscape?

[Rob Eberle:]

So we don’t see a change in competitive landscape. On AribaPay, they really are the leaders in procurement and in trying to put payment on the back of that, so if you look at the volume, I think it was $22 billion that had gone through lifetime in their platform. We are doing that month and a half. So it – they are on a whole different level of much, much smaller in terms of scale. We don’t see them. I think what’s interesting is payment types. So the question that we are seeing is how does a business payer, how do they want to manage payments, who do they want to pay on a card and be able to take advantage of a rebate who they want to pay through our system and take advantage of what we call a rebated dividend through a network use fee and how do they then automate the rest of their payments that’s aren’t going to be available to monetization, so it’s more about that mix than any particular competitor. Last thing I would say is you see people that use dynamic discounting, which is really just factoring that’s been automated. That’s a model that’s been tried and tried business applications. And I think it’s a very difficult model because you are only being paid as the provider, a portion of the discount in those instances where the vendor is willing to take a discount, a 2% discount to be paid within 10 days. We much prefer to be pay it all the time and we find that just a much more reliable model and have watched companies come and go with the dynamic discounting model. So a lot of what we see from so called competition in a market are folks that are coming at the dynamic discounting model.

[Wayne Johnson:]

Thanks.

[Operator:]

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

[Mayank Tandon:]

Thank you. Good evening. I had some quick modeling questions Rick, in terms of the gross margins, I know you have given a lot of detail on guidance, so we appreciate that, but what should we expect in terms of gross margin trend to drive the core operating margins over time. And then also if you could just give us some maybe color on the various OpEx line items in terms of the trend for ‘17?

[Rick Booth:]

I think we will – we should continue to have expansion in gross margins. I don’t want to get too far into the weave of defining exactly how much gross margin and how much OpEx. Obviously, the rate of ARR growth has been driving a slight increase as a percentage of revenue and our sales and marketing expense has been more than offset by gross margin expansions, especially within our established business models. And that’s been offset in the most recent quarter by banking. So we think in 2017, we will return to expansion in the subs and trans gross margin line. And we don’t see a dramatic change in the OpEx, but we should see some improvement in that.

[Mayank Tandon:]

Okay. Let me just ask, in terms of getting that $100 million EBITDA target in 3 years, should we think of the margin improvement sort of slate down [ph] the middle between gross margin and OpEx leverage or will it be more skewed towards one or the other?

[Rick Booth:]

It’s a mixture of both. If you think about the $100 million EBITDA in 3 years, what that takes is mid to high-teens subs and trans growth, which we already have modestly improving gross margins on that revenue and just the discipline to grow OpEx more slowly than revenue. Each of which we are committed to, along with maintaining share count that’s no more than we have today.

[Mayank Tandon:]

Right, that’s helpful. And then sorry, I missed this, you said about the pound exposure, if you could just, once again, remind us in terms of revenue and cost exposure on the pound? And then also, what kind of shares are you building in, in terms of increases X the buyback program?

[Rick Booth:]

Certainly, Mayank. In terms of the FX impact, that’s $2.3 million of operating income and $8.7 million of revenue and we have actually for just to ease the modeling purposes, we have provided a supplemental pack, which walks through quarter by quarter the impact on established and its transitioning products. Within that, in terms of share count, just like we didn’t increase the revenue guide for the strong performance in Q4, which actually caused a couple of the growth rates to swizzle around a little bit, we also did not forecast the share decrease that will result from the buyback. So, what we have tried to do is update you on our strong performance and maintain a consistent and conservative guide.

[Mayank Tandon:]

Okay. In other words, the guidance X the share buyback would then assume maybe a modest increase in share count in terms of your EPS guidance in fiscal ‘17?

[Rick Booth:]

Yes, consistent with what we provided and what you saw in April.

[Mayank Tandon:]

Great. One final question, we saw the cash drop off from the third quarter we don’t have the cash flow statement handy, so if you could just give us some color in terms of the cash flow impact? That would be helpful. Thank you.

[Rick Booth:]

Absolutely. Operating cash flow was $14 million and we repurchased about $20 million of stock in total completing that prior buyback. Let me just quickly – I will quickly give you the headings here. So, for the full year, operating cash flow was $67 million, investing cash flow was $45 million and financing was $40 million. For the quarter, operating cash flow was $14 million, investing cash flow was $9 million, and financing cash flow was $20 million. And essentially all of the financing cash flow was the repurchase of common stock.

[Mayank Tandon:]

Got it. Thank you.

[Operator:]

And next we will go to the line of Gary Prestopino with Barrington Research. Please go ahead.

[Gary Prestopino:]

Couple of questions here. Just Rick, just as I kind of back to the envelope, it looks the tax rate you are using is about 35%, is that about right in your guidance?

[Rick Booth:]

That’s actually – don’t get me started on this new tax interpretation. Let me start by pointing out that our GAAP tax rate is less than 5%. In terms of the incremental impact of the theoretical tax rate, it does balance between 35% and 40%. And I can talk you through it is 35% in Q1, it’s roughly 40% in the other periods.

[Gary Prestopino:]

Okay.

[Rick Booth:]

As you know, sorry, it’s 25% on the adjustment. I was thinking of a different measure when I was thinking of the 35% and 40%.

[Gary Prestopino:]

Okay.

[Rick Booth:]

But I think the important thing about that tax rate is it’s totally theoretical. On a GAAP basis, our tax rates less than 5% has no impact on actual taxes paid.

[Gary Prestopino:]

No, no, I understand that. Couple of other things here. Rob, how many new payers did you add this year for Paymode, I know you cited ‘17 in the quarter, I mean, do you have that number handy, which you added all year?

[Rob Eberle:]

It’s going to be around 80, roughly 80 on the number exactly, but I think...

[Rick Booth:]

Yes, I will have that for you in a moment, Gary.

[Gary Prestopino:]

Okay. And the question I would have then with the payers is there any vertical market where you are saying a tremendous amount of interest? I think you tried at a couple of large ones for medical, but are there any verticals other than….

[Rob Eberle:]

We are seeing – I think it’s a great question, because I think it’s going to be, as we scaled this, I think it’s going to be a product that’s going to play particularly well in different verticals. Healthcare is one. The second one that we are seeing some real traction is we are seeing with municipalities in a particular state. So, I think that, that’s one of the places. So, I think we will see other verticals. The verticals that are never going to work are things that have a really, really tight pricing and margins and we are never going to be in electronics manufacturing, for example. But healthcare we are continuing to see success and then interesting newer vertical of municipality – state and municipal government agencies.

[Gary Prestopino:]

That’s interesting statement, okay. And then you talked about, I mean couple of quarters ago, you were talking about you are not going to sell anymore license sales, now you are saying you will do one or two to offset what’s going on, on the large implementations on the SaaS side. But how do you control that if you are still going to be offering license sales, but you want to really do all SaaS, how do you control that through the sales force to the end customer? I mean, how do you make that determination? We would suppose you get a quarter where you get four large banks that are saying we don’t want SaaS, we want license. What do you do then?

[Rob Eberle:]

Well, so first off, the way we control it is we are pretty close to that pipeline and close to those deals generally. Actually, I am always – we are almost always have been meeting with those organizations personally. I think as we referenced there are still some banks that are taking – so it would have to be an on-premise delivery. There are some banks that are delivering on-premise and we are charging a subscription or will continue to charge a subscription. It’s that subset that would be the potential candidate for a license deal.

[Gary Prestopino:]

Alright. Alright, thanks then.

[Operator:]

Okay. The next question comes from the line of Richard Davis with Canaccord. Please go ahead. Richard Davis, your line is open.

[Unidentified Analyst:]

Sorry, it’s [indiscernible] on the line for Richard. I just want to follow-up on the last question there. So, help us think about the lifetime value of the digital banking customer on subscription versus one where you signed a license deal and then why – is it a bit of a nearsighted decision to pull some of these to a license deal when we think about kind of the long-term health of the business?

[Rob Eberle:]

Well, so first off, I guess I would call it a balanced decision. And I think that I want to be clear on this. Our priority all along has been to grow subs and trans revenue. You can see it in the results. You can see it in the bookings. And you can see it in the percentage of subs and trans, 52% to 58% year-over-year. That’s massive. To our view, that we have been very successful in that. You can also look at the stock price and the impact that the accounting provisions have on operating – near-term operating income and it just has not worked for shareholders as a whole, so one that is my fault and our fault of going too far in that. But second, if we are going to sell, let’s say, with a 4 to 8 new deals a year and we do one or two of them in a license model, that’s not going to – we are going to continue to drive subs and trans growth. And the economics on that, you are still going to see your 18%, 20% maintenance in a recurring revenue. So, it’s just – it’s mostly that tough accounting piece on it where we have to take all of the costs and none of the revenue. So, if we do one deal we will at least have some of the services revenue and we will have a license deal and that will mitigate this – because the Street spoken to us, the way we are charging full steam ahead, all subs and trans have kind of burn the boats, if you will, on a licensing model. And at this point, we will do one or two, we will announce if we are doing them, we will let you know on a quarter whether we have done them, but I would consider this still almost entirely subscription and transaction and it won’t have impact of significance on our subscription and transaction growth or bookings. It’s just going to help fill in that gap while we transition.

[Unidentified Analyst:]

Okay. And then maybe you could update us on PartnerSelect and what you are seeing there in the legal exchange side of things?

[Rob Eberle:]

What we have done there is actually we are having – we have broken that apart and we are having quite some success with a capability that was part of PartnerSelect around predictive analytics. And so we are piloting that today with half dozen or so other – half dozen or so of our insurance carriers. We have actually had more success in our other product areas than we have with PartnerSelect. So you look at the bookings, PartnerSelect is probably one that disappointed in terms of bookings in the year. But when you come out with the investments we made in new technology and then to see the bookings number and to see the 19% subs and trans growth in those areas that aren’t impacted by a transitioning business model, we are really pleased with the investment. PartnerSelect is pretty small investment that hasn’t played out as well as we might have hoped.

[Unidentified Analyst:]

Okay, got it. Alright. Thanks for the color.

[Operator:]

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

[Wayne Johnson:]

Yes. So just a follow-up on the Digital Banking 3.0, I understand the other contracts that have been signed or difficult to unwind now to switch to an outsourced third-party implementer, but would you consider future contracts using a third-party service implementer and then we are not talking about this topic as much in the future?

[Rob Eberle:]

I think we certainly will. We have to get to the spot that we have done several of these implementations our self and then from several points. One, we are not going to be in the services business as it allows us to accelerate the adoption of that platform. And of course there is an accounting impact that in that instance or at that point in time, we will be able to take the services revenues as soon as we have a third-party. So we don’t have the schedule on that now committing them, but that is inevitable that at the point in time, we will have a third-party doing implementations.

[Wayne Johnson:]

Alright, great. Thanks a lot.

[Operator:]

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

[Bob Napoli:]

Thank you for squeezing me in. I appreciate it. I guess just a question on the – I guess what was the share count, I mean your commitment to the share count I thought was interesting and I guess what was the share count – what would be the change in the share count based on the option – stock option program if you did not buyback any stock?

[Rob Eberle:]

We would maintain – we would certainly maintain our stock comp incentive plans. We are going to be able to scale them back a bit here. We had – we brought on a lot of technical talent to make the investment in new platforms and we are able to scale that back and measure that. So I think we would probably be down 30% or so in the year here and we have been down in the last couple of years. It takes a while for that to flow through in the numbers because of the way it’s accounted for, but we are making some adjustments to our equity incentive plans.

[Bob Napoli:]

So would it be like 5% to 6% per year increase in shares without the buyback?

[Rob Eberle:]

No, we wouldn’t be at that level an increase...

[Rick Booth:]

No. It’s much less than that. So if you exclude acquisitions, it’s anywhere from the...

[Rob Eberle:]

It’s about 2%, 2% range…

[Rick Booth:]

But as Rob pointed out, we actually year-over-year, we had a decrease in the number of shares. We project that again in fiscal ‘17.

[Bob Napoli:]

And then you had two new Board members, I was just curious, are the two Board members leaving or you expanded the Board and what is the thought around the new Board members?

[Rob Eberle:]

So we added two new Board members in May. We are continuing to look at our Board as part of an overall Board refresh program. We announced the two Board members would be stepping down in November. And excited about the two individuals we have added. One was banking experience that’s really helpful for us and the other gentleman, Peter Gibson, has worked with advanced technologies, particularly predictive analytics and data – big data applications for financial services. So we are continuing – excited about adding those two and we will look at continuing to evolve our Board as we go forward.

[Bob Napoli:]

Okay. And then any chance you could give I guess the growth rate or I mean obviously, investors are dying to get revenue by product line, which like Paymode-X and legal spend, but could you give the growth rates for each of those product lines, I know if you are giving any new information in the K, segment information?

[Rob Eberle:]

We have – as we have said here, we are investing across – we have new investments that are all contributing to the sales results we had, the $76 million and the 19% in the quarter. We want to have the flexibility to drive the products that are going to have the most market opportunity, that are going to have the biggest growth. So we aren’t breaking out on a product by product scale. One of the things to see us as we go forward in FY ‘17, I referenced in my remarks that we really missed this. We have had external partners and others look at us as a mix of businesses and what we haven’t done is go to job as we are – and we are doing some work on that is really positioning all the business payment assets that we have. I would say for a business our size, there is nobody else our size and there are few businesses that have the same business payments capabilities we do. So we are actually looking to bring in our applications together more for us selling more and lifting up the message around who and the capabilities we have so that we have more partnership opportunities with the many organizations that are in business payments or aspire to be in business payments.

[Bob Napoli:]

Great. And that would be wonderful if you are able to put that into a segment that we could track until I mean I think you do have some great assets and it will just be helpful to see those assets to be able to really see how they perform, but? Thank you very much. I appreciate it.

[Rick Booth:]

Thank you, Bob. Alright and I will as always, be available for questions following this call. And anytime that folks want to reach out.

[Rob Eberle:]

Thank you, everyone. Thank you for your interest in Bottomline and I look forward to seeing many of you over the coming weeks.

[Operator:]

And it does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may disconnect your lines.