Bottomline Technologies, Inc.
Q1 2009 Earnings Call Transcript

Published: 24 Oct 2008

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies first quarter 2009 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. Statements made today may include forward-looking information subject to risks, uncertainties, and other factors that could materially affect actual results. For further information, please see Bottomline’s report filed with the SEC pursuant to the Securities Exchange Act of 1934, which are available at the SEC’s website at www.sec.gov. During their remarks, Bottomline will refer to certain non-GAAP results. These GAAP metrics include amortization and intangible assets, stock compensations, and acquisition-related expenses. Throughout this call when they refer to non-GAAP, it has that meaning. 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. Robert Eberle.

[Robert A. Eberle:]

Thank you for your interest in Bottomline Technologies and welcome to the first quarter fiscal ’09 earnings call. I am delighted to have the opportunity to report on what was a very good quarter for Bottomline. I am joined by Kevin Donovan, Chief Financial Officer, who will provide a detailed review of the first quarter financial results and our guidance going forward. We will be available for questions following Kevin’s remarks. The first quarter was a very good quarter for Bottomline. I am particularly pleased that while we continue to execute against all of our key financial performance metrics, during the quarter we also launched new initiatives and advanced important strategic relationships which would drive future growth and financial performance. I will provide some specific examples during my remarks. I will also comment on the business climate in our outlook ahead. In short, we have good visibility based on a strong pipeline, a significant backlog, and an increasingly predictable revenue model. We enter Q2 confident, and we will continue to execute in the current quarter and the quarters ahead. Turning to the first quarter’s results. Revenue for the first quarter was $35.5 million, an increase of $4.1 million or 13% from the prior year. Revenue was driven by continued demand across all our product categories. Subscription in transaction revenue, an area of key focus, was $8.2 million, an increase of 20% from the prior year, and was highlighted by 29% year-over-year growth in legal exchange revenues. Overall, 64% of revenue was recurrent. Our growing subscription in transaction revenues and a high percentage of recurring revenues are key components of our consistent execution in the past and our confidence going forward. EBITDA was $3.5 million and operating income was $2.5 million, both in line with plan. That drove EPS of $0.12 which was above our expectation. Orders were $32 million, up from $28 million a year ago, an increase of 15%. Orders reflected the continued demand across all product categories. We entered the current quarter with a backlog of $72 million, which is up from $55 million a year ago, an increase of 31%. We repurchased $1.5 million of stock and ended the quarter with over $30 million in cash. At current prices, we’ll be buying stock as soon as our blackout lifts two days from now. Before leaving the financial results, I would also mention that we had some significant billings which did not generate revenue in the quarter, but would drive future revenues and profit. In fact, it was a substantial amount of revenue, just over $2 million and related profits that were deferred in the quarter as part of our subscription based contract with SWIFT. So with that, let me turn to some of the more important developments in the quarter and I will start with our recently announced partnership with SWIFT. Last quarter we referenced a situation where we were doing work for a large unnamed global financial institution. I am delighted to report that during the quarter we announced our relationship with SWIFT. By way of background, SWIFT which stands for Society for Worldwide Interbank Financial Telecommunication, is arguably the most important organization in global payments. Headquartered in Belgium with offices around the world, SWIFT is a member-owned cooperative with over 8,300 banking organizations, securities institutions, and corporate customers in over 200 countries which every day exchange millions of financial messages with speed, certainty, and confidence. SWIFT’s role is two-fold

[Kevin M. Donovan:]

We had a very good first quarter with revenue of $35.5 million and EPS of $0.12. Revenue was up 13% over last year while EPS was above the high end of our previously issued earnings guidance. As we have discussed on prior calls, an important component of our overall strategy is to continue to drive our focus towards recurring revenue. Our success in the quarter in this area was evidenced by the 20% year-over-year growth in subscriptions and transactions revenue highlighted by the growth in Legal eXchange. Looking forward, we’re confident in our business and future financial outlook. With strong customer demand, an active pipeline, and clear visibility into future revenue results, we are very well positioned in the markets in which we compete. I will now provide a detailed review of the financial results. Revenue was $35.5 million in the quarter, a 13% increase over last year, despite the negative impact on topline revenue from the strengthening of the US dollar. Recurring revenues were $22.8 million in the quarter, a 14% increase over last year. Recurring revenue was 64% of overall revenue and is derived primarily from software maintenance and subscription and transaction revenues. Subscription and transaction revenues were $8.2 million in the quarter and represented 23% of overall revenue. The year-over-year increase in subscription and transaction revenue was primarily driven by our Legal eXchange offering. Recurring revenue for Legal eXchange increased 29% from last year. Service and maintenance revenues increased by $3.5 million last year to $21.1 million reflecting increased professional service revenue associated with several large banking implementations and the revenue contribution from Optio. Equipment and supplies revenue decreased from $3.5 million to $2.5 million on a year-over-year basis reflecting our continued de-emphasis of this part of our business. Excluding equipment and supplies, revenue grew 18% on a year-over-year basis. Revenue from international operations represented approximately 47% of overall revenue. The majority of our international revenue is generated by our European operations. There were also certain activities this quarter that are not reflected in the revenue numbers we reported. As Rob mentioned, we’re in the middle of the implementation of a strategic subscription deal with SWIFT. Due to the accounting rules, we did not record revenue on the $2 million we billed SWIFT during the quarter. This revenue was not lost, but rather the amounts we have billed to SWIFT are included in deferred revenue on our balance sheet and will be recognized along with the 7-figure annual subscription fee beginning towards the end of fiscal 2009. During the quarter, gross margins were 56%, a 1% expansion from last quarter, which was principally driven by slightly higher service and maintenance margins during the quarter. Overall gross margins were consistent with historical levels. Turning to operating expenses, non-GAAP operating expenses were $17.2 million in the quarter, relatively flat with last quarter. As a percentage of revenue, sales and marketing and G&A expense were consistent with last quarter while product development expense increased from 13% to 15% of revenue which reflects our continued investment in new product offerings. As we go forward, we will continue to invest in the sales and marketing and product development areas of the business as appropriate based on market opportunities and expect our general and administrative expenses to decrease as a percentage of revenue over time. On a non-GAAP basis, net income was $2.8 million or $0.12 per share, a $0.01 increase from last quarter and above the high end of our guidance range. From a balance sheet perspective, the company ended the quarter with $30 million in cash and short-term investments. During the quarter, we used approximately $1.5 million of cash to repurchase shares of stock under the repurchase program, and the change in exchange rates impacted cash by approximately $3.1 million. We have approximately $6.3 million remaining under the repurchase program and we will buy shares at these levels when our quarterly blackout lifts next Tuesday. Backlog at the end of September was $71.9 million, a $17 million increase from last year. The increase in backlog on a year-over-year basis reflects the strong order flow over the last 12 months combined with the backlog added from the Optio acquisition. I will now comment on our business going forward and will focus on two things

[Operator:]

(Operator Instructions). Our first question will come from the line of Colin Gillis from Canaccord Adams.

[Colin Gillis:]

Could you just give us some color about how the dislocation of some of your major customers, the pressures going on in your AIGs, some of the major banks, what that’s doing to transaction volumes, and if that’s causing concern for EPAY or if it’s creating opportunity for EPAY?

[Robert A. Eberle:]

I think it’s creating opportunity. We haven’t had the customer that we work with be in a situation where they’ve been acquired merger, a Lehman type situation. We service 15 of the top 25 banks, but we’ve been fortunate that the organizations we work with, Bank of America for example, are winners in this process, and others that were working with SWIFT for example till now are somewhat immune from it. What we actually have seen is increased cash balances and cash revenues. What you have got is a flight to quality. One of our banks just told me that their cash balance revenues or their float revenues are up 23% over last year. Another organization we work with has a whole separate group to open new accounts because what’s happening is corporations are switching banks to make sure they are with organizations that are perceived to be safer. So, to some degree we have been fortunate that the organizations we work with have been so solid, but then ultimately we see opportunity out of it, an example being Bank of America acquiring Merrill presents a couple of opportunities. First off, there is integration work around the payment platforms that would be utilized by the combined entity. The second opportunity is that while there is such a focus on a major integration, other areas within the bank represent opportunities for Bottomline to take those on, take them on as a project, or even run them for an organization like that. So, we have not seen any cancelation, we’ve not seen anything delayed, we’ve not seen a pipeline opportunity going away, and we actually see more opportunity around it. The last point I had mentioned, you know this Colin, but for those that aren’t familiar, what we’re doing in the cash management area is a customer facing application. So, it’s a part of the way these organizations serve their customers and drive their revenues. So, they can attract new customers, they can attract new cash balances, and they can increase fees charged for payments and other transactions processed through our software. It has not impacted us at the customer end and it certainly, I believe, has impacted us in the capital markets because we’re associated with a group of organizations that are challenged. I do believe that’s put some pressure on the stock price.

[Colin Gillis:]

Can we get the backlog number again please?

[Kevin M. Donovan:]

The backlog number was just under $72 million.

[Operator:]

Our next question will come from the line of Jonathan Maietta with Needham & Company.

[Jonathan Maietta:]

The SWIFT opportunity obviously is a great opportunity. Are there other industry groups that you could work with whether it be a [inaudible] oe I am not sure who else is even out there that you could potentially partner with in the same fashion?

[Robert A. Eberle:]

No, there’s really nobody that’s the same or anywhere near the same scale as SWIFT. The other opportunities around it are the fact that we now are going to have inside knowledge, if you will, the inside capability on connections to SWIFT. So, the other opportunities for us aren’t with other organizations, but rather they are in providing and leveraging this connectivity format. So, leveraging Bottomline on the other side, on the SWIFT side, if you will, with additional platforms and additional capability in our platforms.

[Jonathan Maietta:]

And should we expect to see more BBX pilots coming on board this year?

[Robert A. Eberle:]

Wouldn’t expect, our plan hasn’t been to have more on this. Our plan is to execute on the pilots today and then to move to market, go to market, as we enter the calendar ’09. The other piece I’d add on SWIFT though which I missed leaving out is that that organization is such a high profile, it’s hard to explain if you are not in this space. The Sibos conference for example was over 7000 attendees. It is clearly the top global in banking and treasury conference in the world, and the credibility that we’ve gotten out of being named as the technology partner for SWIFT will certainly create other opportunities for us with major corporates and banks. It’s a good question, what are the other opportunities, you asked. I think in connecting to our connectivity that we’re providing to SWIFT, and second, it’s the credibility that we’ve gained as being chosen by such an important organization.

[Jonathan Maietta:]

And when could you really leverage that credibility? I am sure you could leverage a little bit now, but do you have to go live in order to really...

[Robert A. Eberle:]

No, you know what’s interesting? I am not going to name other parties on this, but we’ve got calls before it was announced of some major organizations that had heard that we were the provider and that has already begun discussions. Where those will go, what will happen out of that, time will tell, but they were calls into Bottomline where we’ve been told, “you’ve been chosen for Alliance Lite, you’re providing that, we want to talk.” And it’s a mix of different types of organizations. It’s financial institutions, banks that would want to deploy, major players that would want to deploy the technology, and these major technology firms that would want to understand our capability and leverage our capability around that.

[Operator:]

And the next question will come from the line of John Kraft with D. A. Davidson & Co.

[John Kraft:]

Legal eXchange was up 25%?

[Kevin M. Donovan:]

Was up 29% year-over-year.

[John Kraft:]

29%. Okay. And then a couple other items that stood out. You highlighted them a little bit, but specifically on the equipment and supplies, you said that that’s not an area you are focusing on and then on product development, you said that you spend as needed, but on both of those, those were out of line with recent results. Is the Q1 number a reasonable number to use going forward for 2009?

[Kevin M. Donovan:]

Yes. I think that’s the case. Since some of our supplies revenue comes from Europe, there is some currency impact that’s in that number, but as we go forward, we’d expect that probably to be $2.5 million to $3 million.

[John Kraft:]

And then expectations for taxes?

[Kevin M. Donovan:]

Taxes, we would expect that next quarter we will have a small tax provision, probably a couple of hundred thousand dollars.

[Operator:]

Our next question will come from the line of Melissa Moran with Thomas Weisel Partners.

[Melissa Moran:]

Was the SWIFT contribution included in your previous annual guidance?

[Kevin M. Donovan:]

In our previous guidance there wouldn’t have been really any contribution from SWIFT during the year. We’re projecting that towards the tail end of the fiscal year when we begin to record some revenue, but there won’t be any real meaningful contribution in the fiscal year from SWIFT.

[Melissa Moran:]

But there’s $2 million that you’ve recorded to deferred revenue and that will come primarily in 2010?

[Kevin M. Donovan:]

It’ll begin in 2010, that’s the $2 million of service billings that will end up starting to be recorded in 2010.

[Melissa Moran:]

Okay. And did you quantify the currency impact on the quarter?

[Kevin M. Donovan:]

Yes. Top line impact on currency was just under a million dollars.

[Melissa Moran:]

Okay. And then I was looking at the backlog and it looks like that that was down sequentially. What was the reason behind that?

[Kevin M. Donovan:]

Yes. The first thing would be that there is a currency impact on the backlog as well as our European backlog gets converted into US dollars, and the second thing is our backlog does fluctuate from quarter to quarter, some of the large banking deals that we sign and as we bill against those contracts, the backlog will move down from quarter to quarter at different points in time. So nothing unusual in that, it’s regular part of the business.

[Melissa Moran:]

Okay. You talked about your pipeline being strong. Could you give us a little more color on that, how it trended sequentially, and just in terms of sales cycles, both for the banking products and your business overall, how are they trending, are you seeing decision making taking longer or being delayed, just a little color on that will be great.

[Robert A. Eberle:]

We haven’t seen decisions taking longer or being delayed, and what we’ve seen, which I alluded to a little bit earlier particularly around banking is we’re enjoying a better and better reputation with our banking product. Now, I said better reputation because frankly 3 or 4 years ago we were pretty much an unknown, and what we’ve been able to do is win some important deals, have been able to execute with customers, have been able to build on that, building out our technology, we’ve made a significant investment in the platform as well as our delivery methodology, and what that’s resulted in is that now we are chosen to participate in any significant RFP in the banking space, and often times one of the front runners. Even just in the last quarter, we’ve seen more of that activity where we’re being asked to please participate where 2 years ago we would have been trying to become part of the process. A mix of factors again, product, delivery methodology, execution with customers, and the most recent piece would be the SWIFT win that’s so high profile.

[Operator:]

Our next question comes from the line of Bill Kitchel with Millrace Asset Group.

[William Kitchel:]

I am wondering if you could expand a little bit on the SWIFT arrangement, the contract you have with them, I think you said a 7-figure subscription opportunity that begins really next year, but I also thought some of that was recognized, that some of the $2 million was recognized in Q4 of this fiscal year...

[Robert A. Eberle:]

That will be a timing issue on when the full first release is completed and accepted out in the market. That could be at some point in the fourth quarter, it could be by the end of the fourth quarter, but certainly we would enter the next fiscal year with those revenues up and ramping, but it’s a flick of a switch if you will, it doesn’t ramp up rateably, when it’s on, it’s on, but it will occur once there is acceptance which today we would expect to be in the end of our fourth quarter.

[William Kitchel:]

Okay. And I think in your prepared remarks you mentioned that there is a revenue share feature to that. Wondering if you could elaborate on that a little bit?

[Robert A. Eberle:]

No, I really can’t elaborate more than that other than to say it could absolutely have a material impact on Bottomline, it could be significant for us like any revenue share, you need the revenue as you are sharing it to be successful and significant, but the feedback we’ve gotten from customers and from, in particular the reaction at Sibos, suggest that SWIFT is really right on with this offering, that’s exactly what the market needs, it suggests there will be big demand and to be successful, and the share that Bottomline will have a meaningful impact on our results if that’s the case.

[William Kitchel:]

Maybe, if you could elaborate on some of the functions provided by your service and types of either payment transfers or information exchange, or just some of the features so that we can get a sense of the vitality of that opportunity.

[Robert A. Eberle:]

SWIFT is solely a carrier of messages. It does not hold funds or manage accounts on behalf of customers or store financial information on an ongoing basis. It’s really a data carrier, but it is the principal data carrier for messaging between financial institutions and organizations communicating with their financial institutions. That activity involves secure exchange of proprietary data and Bottomline’s platform manages the input of that and the receipt of that data. So all the remittance data around payments in different formats is all then conducted through Bottomline’s platform. Over time we’ll be adding more around securities and additional things around balances and in forecasting.

[William Kitchel:]

So revenue share is derived from fees earned by SWIFT offering to their member banks or something...

[Robert A. Eberle:]

SWIFT will offer this on an annual subscription basis and we would share in the revenues that SWIFT would derive from that.

[Operator:]

And there are no other questions from the phone line. Please continue.

[Robert A. Eberle:]

Thank you for your attention and thank you for your time this afternoon. Again, we’re pleased with the quarter, not only the results we posted, but the future opportunities which SWIFT and the other initiatives we’ve taken during the quarter present. I look forward to our next earnings call and reporting our progress to you all at that point.

[Operator:]

Thank you. Ladies and gentlemen, this conference will be made available for replay after 7 pm Eastern time today running through Thursday, October 30th at midnight. You may access the AT&T Executive Playback Service by dialling 1800-475-6701 or 320-365-3844 using the access code of 965175. That does conclude your conference for today. We thank you for your participation and for using AT&T’s Executive TeleConference. You may now disconnect.