Bottomline Technologies, Inc.
Q1 2015 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies First Quarter 2015 Earnings Conference Call. Statements made on today's call will include forward-looking statements about Bottomline's future expectations, plans and prospects. All such forward-looking statements are subject to risks and uncertainties. Please refer to the cautionary language in today's earnings release and Bottomline's most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward-looking statements. Bottomline does not assume any obligation to update any forward-looking statements. During this call, Bottomline's financial results are presented on a non-GAAP basis. These non-GAAP results include, among others, gross margins, operating income, EBITDA, net income and earnings per share. The 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, sir.

[Robert A. Eberle:]

Well, good afternoon, and thank you, everyone, for your interest in Bottomline Technologies, and welcome to the first quarter fiscal '15 earnings call. I'm delighted to report on what was a great quarter for Bottomline Technologies. I'm joined by Kevin Donovan, our Chief Financial Officer, who'll provide a detailed review of the quarter's financial results and our guidance going forward. And then both of us will be available for questions following Kevin's remarks. The headlines for the first quarter are strong financial performance to start the fiscal year; strong sales results, particularly in our strategic growth engines; we've launched several new innovation initiatives; and we are well positioned to drive future growth with significant market opportunities in front of us. The key financial results for the quarter were subscription and transaction revenues grew 30% to $40.9 million. We've reached an important milestone with subscription and transaction revenue now 50% of our total revenues. And with that, recurring revenue is a full 75% of total revenue. Revenues overall grew 21% to $81.3 million; EBITDA was up 30% to a record $17.4 million; operating income was up 28% to $14.9 million; and operating cash flow for the quarter was $14.9 million, resulting in a cash balance of almost $200 million. And finally, we recorded EPS of $0.37 for the quarter, ahead of our target and expectations, so strong financial results across the board and a solid start to the fiscal year. In addition to the financial results, the first quarter also featured strong sales and customer execution. We signed a record 13 new Paymode-X deals under the new vendor pay model. Equally important, we also added a new bank channel. Our pipeline is strong and as the network continues to grow, businesses are looking to maximize the automation and value of their payables through Paymode-X. We signed 8 new legal spend management deals in the first quarter. The size of the market, our competitive position and our ability to execute are all evident in those results. With new product capabilities which I'll cover in some detail in a moment, we expect to further extend our leadership position in this market. In digital banking, we signed 9 new deals to provide banks with online account origination capabilities, allowing them to improve the digital presence and increase customer acquisition. We're doing some very innovative things in digital banking which I'll also be commenting on later in my remarks. So the first quarter was very positive in every regard but I'm most excited about the opportunities ahead of us. Let me spend a moment and walk you through 3 key new innovation initiatives. But before doing so, I'd like to go back to one aspect of the quarter, operating margin at 18% of revenue and EBITDA margin of 21%. In every technology company, from Facebook to Oracle, there's a healthy tension between new product initiatives and current period profitability. We have previously target 25% operating margin but after a long and thorough analysis, we've determined that the current levels, 18% and 21%, represent a healthy midpoint for Bottomline, given the stage of the company, the innovation opportunities we've identified and our overall growth potential and aspirations. We are fortunate. Fortunate in that we have 3 significant new opportunities. I have every confidence that invested in these initiatives while maintaining the 18% operating margin and 21% EBITDA margin will ramp the growth of the company, increase its value and increase its market significance, all of which drives shareholder return. So now I'd like to discuss each of these initiatives. Perhaps the most exciting contract we signed in the quarter was for a new offering I referenced on the last call called PARTNERSELECT. This new product actually incorporates an entirely new business model and complements and extends our Legal Spend management capabilities. What PARTNERSELECT does is help automate the very important process of law firm selection, management and evaluation. The platform sits in that important nexus between buyers and sellers. The buyers in this case being our insurance carrier customers and the sellers mean -- being the many law firms vying for their business. The insurance companies pay us a small fee, but the bulk of the revenue is from the lawyers, each of whom pays a fee to post a profile and experience and an incremental fee for each new case they are awarded. So for the first time, we'll be monetizing the thousands of law firms and tens of thousands of lawyers who interact with our Legal Spend management platform. This is very exciting and the next step is further investment in sales, a marketing launch and broadening the product capability to handle the scale we anticipate. The success of this product will deeper extend our competitive position in the Legal Spend management space, in addition to driving new revenue streams for Bottomline. Second, we're equally excited about the innovations we are bringing to digital banking. We have made great strides with our platform. A key theme for us is leveraging our core payment in cash management functionality but adding broader capabilities to help the bank's customers run their payment and the financial aspects of their business, and importantly, customer engagement analytics and features to allow banks to better understand and engage with their customers. This intimate relationship with our customers positions banks to better understand them and grow wallet share. In simple terms, we'll be the vendor that helps banks grow revenues, not just execute payments. We've been so pleased with early customer responses that we're increasing our investment, particularly around time-to-market and features focused on the capabilities Bottomline will bring to a bank's revenue growth. Finally, we have an area in investment that in some ways represents a new arena for Bottomline, and in other ways has always been part of our DNA. I spent a lot of time with customers. Today, our customers all have the same worry, whether a large bank, a credit union, a multinational corporation or a small business, and that same worry is cybersecurity and payment fraud. It's everywhere. It's in the headlines every day. The problem is real, pervasive and unsolved. As a payments company, we have a lot of experience protecting against, preventing and identifying payment fraud. This has always been a natural component of what we do. What we haven't done previously and what we are now doing is to focus on those capabilities and build upon them as discrete product sets. So now let me be clear, we're not going to provide network security or compete with an RSA, nor are we going to provide malware detection and compete with a FireEye. The niche available to Bottomline, which we are frankly quite good at today, is payment fraud and employee misuse. Where is the payment going and who is sending it? Is there a pattern that suggests fraud or warrants investigation? These are huge issues, not just for payments, but for enterprise system activity generally. The reality is, networks will be breached and insider employee fraud is never going away. Monitoring and detecting activity that's suspicious, fraudulent or criminal is essential. We have a lot of assets, proven assets, directly applicable to the issue. We can carve out an important niche in what is clearly one of the largest growing markets in technology. So concluding my remarks, the results for the first quarter were very strong. The future ahead is even brighter. We've proven our ability to identify attractive markets, investing and develop innovative technologies and execute in front of the customer. My comments are focused on the new opportunities we have. Going forward, we'll continue the strong financial performance recorded this quarter while launching new products, entering new markets and paving the way for even greater success. Most importantly, we'll grow the company in terms of financial results, market importance and shareholder value. I'll now turn it over into Kevin Donovan for a detailed review of the financials. And then, of course, both of us will be available after that for questions.

[Kevin M. Donovan:]

Thank you, Rob. We had a very strong first quarter, with revenue increasing more than 20% and EBITDA increasing 30% from last year. During the quarter, we continued to see the payoff from our investment in cloud-based subscription and transaction offerings. Our subscription and transaction revenue mix increased to 50% and our recurring revenue increased to 75%, both record levels and clearly demonstrating the continued successful execution on our strategy. Financial highlights of the quarter include revenue increasing 21% to $81.3 million, and subscription and transaction revenue increasing 30% to $40.9 million. Operating income of $14.9 million was up 28%, and EBITDA of $17.4 million was up 30%. Operating cash flow was $14.9 million, completing the quarter with a cash balance of $196.6 million, and EPS was $0.37, ahead of guidance. In summary, a very strong quarter and a great start to the new year. I will now provide a more detailed look into the first quarter financial results. Total revenue increased $81.3 million, 21% year-over-year growth. Subscription and transaction revenue was $40.9 million and represented 50% of overall revenue. Subscription and transaction revenue was the largest component of recurring revenue, which was $60.9 million or 75% of overall revenue, which is 3% higher than last year. Annualizing our first quarter results, our subscription and transaction revenue run rate is $163 million, and our recurring revenue run rate is over $243 million, each representing significant scale for these predictable, highly visible revenue streams. We signed new subscription and transaction based deals across our Legal Spend management, Paymode-X, Financial Messaging and Digital Banking solutions. During the quarter, we closed 8 new Legal Spend management deals and signed 13 Paymode-X deals under the vendor pay model. As is always the case, while these new first quarter accounts are not expected to contribute much to revenue in the next several quarters, these new deals represent visibility into our future recurring revenue growth. In fact, over the last 2 quarters, we have signed new subscription and transaction deals with a projected $21 million of annual recurring revenue. These results are a clear indication that our investment in innovation is working and generating strong customer demand for our cloud-based solutions. The revenue growth drove year-over-year expansion in gross margin, operating income and EBITDA. We finished the quarter with record levels of operating income and EBITDA. Operating income grew 28% to $14.9 million and EBITDA grew 30% to $17.4 million. Turning to margins. Overall gross margin was $47.7 million or 59%, an increase from 57% last year and 58% last quarter. Subscription and transaction margin expanded to 53%, growth on both the year-over-year and quarter-over-quarter basis. From an operating expense standpoint, sales and marketing expense was $16 million, representing 20% of revenue, while product development expense was $10.7 million, representing 13% of revenue. Looking at the balance sheet. Cash at the end of September was $196.6 million. During the quarter, we generated $14.9 million of cash flow from operations and $9 million of free cash flow. In addition to the strong cash balance, we have a significant backlog. Backlog at the end of December was $146 million, up 18% from last year. As we look forward, we are very confident in our strategy and the broad market opportunities in front of us as we continue to drive higher levels of recurring revenue. As Rob highlighted, we see several opportunities to accelerate the development of new and enhanced solutions and we'll be increasing our investment in innovation. As a result, we expect to be at 18% operating margin and 21% EBITDA margin for the foreseeable future. Looking specifically at our 2015 guidance. There are 3 adjustments that I would like to highlight

[Operator:]

[Operator Instructions] Our first question will come from Brett Huff with Stephens, Inc.

[Brett Huff:]

So a couple of questions, kind of big picture because it sounds like there's some shifts going on. Number one, I think that you all had been really focused on RBS and Citizens as bank channel partners, really trying to nail those before we moved on to a new bank channel partner. Is the new channel partner a sign that you all are feeling more comfortable with how those are going and feel like we've gotten the first hole behind us and can replicate that success going forward? Just give us a sense of how you all are thinking about that.

[Robert A. Eberle:]

Well, I certainly would say that's true. We've had more sell-through with the channels than we ever have. It's certainly a big impact on the 13 deals in the quarter. And even to date in this quarter, we're seeing that. So yes, that's working and working well. One of the things you wanted to be careful on is that we did not want to have a situation of overlap or nobody would really get going or running on it. So in this case, we've got a bank, a large bank, but folks principally in the Midwest. And it's a good complement to our other 2 channels.

[Brett Huff:]

Okay, great. And then the other question is, it sounds like we're seeing some opportunities out there that are important enough and urgent enough that we're choosing to forego some profit for a little while. Can you -- when we boil them down, are they just a handful that we're really focusing on? And what is the urgency now to kind of make that shift today?

[Robert A. Eberle:]

I think the urgency now, as we see these opportunities and we want to aggressively go after them. Waiting in technology is never a great strategy. The reality is we're not in a mature market. In fact, we're fortunate to have these opportunities in front of us. Some of them, frankly, we wouldn't have seen the same way even 6 months ago. The opportunities around Legal Spend, for example, we're just delighted with the success with PARTNERSELECT, and that says we're going to put a lot more muscle behind that and generally broadening our Legal Spend management capabilities. And then cybersecurity and payment fraud is really frankly, a very new initiative for us. But when we looked at the assets that were out there and we looked at partners, we looked at other companies, we looked to our M&A process, there's a niche that we can play in and it's -- while I say niche, it's niche in all of cybersecurity. But we have tremendous assets for that and we'll be making a lot more investment to really productize those and expand those. So I think it is newer opportunities that have crystallized or are much clearer for us than existed -- or than we saw even 6 months ago.

[Brett Huff:]

And then last question for me. On the Legal Spend, I just want to make sure I get it. So it sounds like it's almost like a vendor pay model. Is that the right analogy with that?

[Robert A. Eberle:]

No, I think of it more as a buyer and seller network and whether a care.com or whatever one you want to look at. And I'm not exactly certain of their revenue model, so I shouldn't have probably used that name. But what it will be is -- what it does is it -- if I'm on the law firm side, I want to sign up and pay fees because it's a way I can highlight my experience and then as cases will be assigned to me and it's -- and I pay a small fee each time one's signed. If I'm on the insurance side, this is a process that's been manual. Even just the assignment of a matter is difficult. So we're providing, as we do in bill review in Legal Spend management, we're providing a base level of automation, supplemented by data information and intelligence to manage the process from the insured side. So I'd really think of it as sitting in that important nexus between buyers and sellers.

[Operator:]

Our next question will come from Elizabeth Colley with Needham & Company.

[Elizabeth Colley:]

Okay, first question. So it's been a mixed earnings season for many of the companies we cover. Are you guys seeing elongated sales cycles at all? Or any pressure on budgets at your clients?

[Robert A. Eberle:]

I don't know that we're seeing pressure on budgets now. I think we've seen, on our end -- I'd temper that. The largest organizations we work with are always very good at putting pressure on their vendors. So that's been uniform. I don't think we see that any differently at any point in time, the largest financial institutions in particular. But I've not seen anything in the market that was elongating sales cycles or changing sales cycle for us, no.

[Elizabeth Colley:]

Okay. And are there any updates on the Andera acquisition? Are you guys on track as expected for fiscal '15? I think it was $10 million of revenue and slightly -- expected to be slightly accretive?

[Robert A. Eberle:]

Yes. No, that's gone very well and we'd be on track for those results. And as we've brought the beginnings of bringing across the account opening capability for small business. And bringing that into our digital banking platform is well underway. So no, that combination's going very well for us.

[Elizabeth Colley:]

Okay, great. And then last question I have to ask. So with the subscription and transaction now at half of total revenue and growing over 30%, would you guys give us a rough target for the revenue mix you expect long term or a target growth rate for this revenue line?

[Kevin M. Donovan:]

We would expect, over time, for that subscription and transaction revenue line to increase as a percentage of overall revenue, but we don't have a specific target in mind. We have solutions that span both subscription and transaction as well as perpetual software, and there isn't a stated target that we have to drive towards. We're really focused on customer demand and it's really about how our customers want to buy from us in terms of how we will sell. Certain of our solutions are only done on a subscription and transaction basis like Paymode-X, like Legal Spend management. But really, we're focused on how customers want to buy from us. And certain classes of customers will demand purchasing software in a certain way which we certainly satisfy their requests.

[Operator:]

We have a question from Wayne Johnson with Raymond James.

[Wayne Johnson:]

So if I can just ask for flushing out a little bit more, my apologies if you're repeating yourself on this, but on the PARTNERSELECT, if you could just go at a high level again, what exactly it is. It's a law firm that pays to be posted for certain functions and services and then there's an automatic match with the insurance companies? Can you guys collect [indiscernible] for or how does that work?

[Robert A. Eberle:]

No. I wouldn't be automated. So I think I've got the question, let me start at kind of the beginning on it. I'll start with from the insurance carrier side. It actually have -- it's a difficult process to cite who's going to get this matter, who's done this type of claim before? So whether this is complicated involving a spinal injury or it's at this particular jurisdiction, whatever it may be, who has handled this before? What kind of success did they have? And believe it or not -- and the large organizations, just the transport of communicating all the pieces they need and getting that law firm up and running is also today, mostly a manual process and an inefficient process. So we're providing from the carrier side, information, ratings, history and the ability to easily assign a matter to a firm. There still will be human judgment across that, but now you're making that judgment with a whole bunch of data, including in some instances, scoring that can help recommend that.

[Wayne Johnson:]

Sorry to interrupt, Rob, but who is making the judgment? You're providing the information, I get that, but so is someone at the insurance company say we want this person? Or do they get like a short list? Here are 5 ...

[Robert A. Eberle:]

No, no. They would use the tool to make their decision but instead of kind of looking through their outlook context, say, who do we call or who's here. And now, they'll be able to look and they'll see Wayne Johnson. Wayne's an expert in payment systems, he's got deep knowledge of how ACH, wire, credit card works, he's handled these types of things before and he is -- look at -- here's the background, I'm going to pick him. So you can see in an automated collected manner, your own internal prior cases and experience with that attorney, as well as what that attorney has chosen to post in terms of his experience in background and prior success.

[Wayne Johnson:]

And what's the fee? So what do you charge for that purpose?

[Robert A. Eberle:]

From a competitive standpoint, we're not going to give out our pricing model on the call here. But I will say it this way, the fee is small to the -- it's administrative fee. What we're really doing is helping on the insurance side. It's an administrative fee to help them automate this process. The bulk of the revenue, you could think of it as 20% coming from the insurance company, it's 80% coming from the law firm. And through the law firm side, it's 2 main sources. One is an enrollment fee where you pay and then you can post your background and the other things about you, your firm, et cetera. And then there's a fee each time a case is awarded through the system.

[Wayne Johnson:]

That's a very helpful explanation.

[Robert A. Eberle:]

You could think of it as an exchange, frankly. With specialized information and on the buyer side, I can track things that the sellers are not seeing relative to their experience, results from me in the past and the like.

[Wayne Johnson:]

That's excellent. And then on the digital banking side, cybersecurity and payment fraud. So what exactly are you guys going to be doing in this case?

[Robert A. Eberle:]

Well, so those 2 are a little distinct, although certainly, some of the payment fraud and cybersecurity capabilities, we'll be offering with the banking solutions. So let me take them one by one. In the banking -- digital banking, what we and every other vendor provided is the ability to execute a payment, the ability to check balances, the online banking experience for businesses from multinationals to small business. We're doing 2 main things around our platform. First is we're providing much more capability to the end customer, to the business, whether that's multinational or a small business. Much more capabilities they actually need to run the financial sides of their business, to interact with their financial institutions, to see the balance of their total cash balances, to see what's happening in foreign accounts, et cetera. The other side of it is these platforms have traditionally just been an engagement with the bank. From the bank, it's just been engagement with their customer providing that functionality. And they haven't collected the different elements of that to intelligently think about what is happening with that customer. Am I getting the largest share of wallet? I might. Are they a candidate for a lending situation? Are they a candidate for a line of credit? Are they constantly at a lower balance? Or are they cash rich and there's some investment product opportunities? And doing things around -- every interaction with the customer is a data point that can be collected then and evaluated in terms of how does the bank maximize the revenue opportunity from their existing customer set. And that's pretty unique stuff that we're doing. We've made some hires out of the marketing automation space to help us implement that in the technical side. And it's a game changer in terms of what those types of platforms will do.

[Wayne Johnson:]

Okay. I apologize Rob, so I lost you there. So in terms of the idea here or my understanding, so how does that relate directly to cybersecurity?

[Robert A. Eberle:]

[indiscernible] It doesn't relate directly. The 2 are separate, and I apologize if they got blended together. So the third...

[Wayne Johnson:]

So you're saying, for payment fraud, that's -- it's the full picture, it's a deep dive and you guys can -- it's another tool in the toolbox to combat it, is that what you're saying?

[Robert A. Eberle:]

So on payment fraud, we looked across the tools we have already and said, if we do more around this, in some cases, package them in other cases, develop them a bit more, we actually have some pretty interesting payment fraud, employee fraud, internal misuse type tools and we are going to bring them out as discrete products. In the past, they've just been features of other products or they'd have been around in the rest of our product set. What we're going to do is focus on that. We've directed the predictive analytics team that we -- a company that we bought in last fiscal year, to focus exclusively on this priority. And we are going to be in market with products that are specifically for payment fraud and other elements of cybersecurity.

[Wayne Johnson:]

Okay. And so I feel like I'm hogging the conference call at this point but so 2 distinct products, payment fraud and then the cybersecurity. Did I miss anything else in terms of the new initiatives? You got legal spend ...

[Robert A. Eberle:]

I think of the 3 initiatives this way

[Operator:]

Then we'll go next to Gary Prestopino with Barrington Research.

[Gary F. Prestopino:]

On this PARTNERSELECT, I'm trying to conceptualize this. I mean, these insurance companies are already dealing with the majority of these law firms in their region or nationally. So why would they need a platform that they have to pay for to select lawyers when they're already selecting lawyers?

[Robert A. Eberle:]

But they're selecting lawyers in a random way. They don't have an automation behind that and they don't have the automation to actually initiate a case with them. It's the same as -- it's actually the other side, if you will, of what we've done in Legal Spend management. When we first entered Legal Spend management, we had customers who had forklifts moving around the paper invoices and data centers where people were entering the billing information. So yes, they are assigning these today, but they're doing it in a very manual, random process, just like companies were keeping track of their customers before salesforce.com. This is a much better vehicle for the insurers to track, rate, score and evaluate and assign matters to the variety -- range of lawyers that are available out there.

[Gary F. Prestopino:]

Have you -- has this product developed? I know you talked about it last quarter. Do you have something out in beta test right now or is it...

[Robert A. Eberle:]

That's what happened. So we built something and we actually have signed our first contract on it. So you always -- with a new initiative, there's always optimism around it. But that optimism is ultimately tested with customers and that's why I said perhaps, the most exciting contract in the quarter was signing our first PARTNERSELECT, that says this hunts and the feedback from -- and it's not just signing one, the feedback we've had from many others to exactly that, a pretty skinny beta version of the product, has been fabulous.

[Operator:]

Our next question comes from Cris Kennedy with William Blair.

[Cristopher Kennedy:]

On the investments, are they kind of -- is it spread, the amount of investments spread evenly amongst the 3 initiatives or is one more heavily focused today?

[Robert A. Eberle:]

No. Actually, it happens that they're spread evenly between those initiatives, yes.

[Cristopher Kennedy:]

Okay. Can you quantify the amount of investment? And then when should we start to see revenues from these?

[Robert A. Eberle:]

Well, I'll let Kevin deal with it on the revenue side. I'd make a bigger statement, though, and that is that in looking at our company and looking at the opportunities in front of us, we are not in a mature market. We're not a company that's run out of runway. So I think what we will be doing going forward is we'll be at that 18% operating income and that 21% EBITDA margin for the foreseeable future because I believe with the right innovation culture, with the right thinking around new customers, an example being PARTNERSELECT, in less than a year, having a beta application that we have customers signed to, we can drive significant growth in the business and that will be our priority rather than trying to ramp the EBITDA level above the 21%. In terms of new revenue, against a company of our size, it's always going to take time before these smaller, newer initiatives are driving a meaningful revenue. But an example here in PARTNERSELECT is we're going to see revenue within the year of even coming up with the idea which I find pretty quick and we're very pleased with that result.

[Cristopher Kennedy:]

Great. And then any update on the M&A pipeline or your appetite?

[Robert A. Eberle:]

Well, we're always out looking from an M&A perspective. You find that the market is -- can, at times, be pricy. But we're a selective buyer, so we're focused on valuation as much as we are the qualities of the company, and that nothing's changed in that. We are always seeing interesting opportunities. We will be continuing to look at M&A and I would add that we'd certainly would be looking in the payment fraud and cybersecurity arena as well to supplement the existing assets we have today.

[Operator:]

Our next question is from George Sutton with Craig Hallum.

[Jason Kreyer:]

It's Jason on the call for George. I wanted to go back to PARTNERSELECT. So you mentioned that you signed your first contract there and I just wanted to understand that a little bit further because it seems like if you sign an insurance carrier, that doesn't do really anything for you until you sign law firms and vice versa. And so I'm just trying to understand where you are on that.

[Robert A. Eberle:]

I think the significance of signing -- so let me explain the significance of signing our first carrier. That means -- and by the way, having a pipeline behind that. It means this works, it means this plays, it means that our judgment around this opportunity and the innovative set of capabilities we brought to address it works in the market. What will happen? This is just the same as Paymode-X, bringing on a set of vendors, the same as bringing on vendors in the -- traditionally in Legal Spend management. As we sign a carrier, the carrier will inform their law firms that they need to join this network in order to receive cases going forward and you have the same power of the payer that we use very well in both, again, Legal Spend management and Paymode-X. So we're pretty experienced at this model of having an anchor tenant, if you will, or anchor tenants that typically, the organization's driving the economics and then getting their vendor community to sign on.

[Jason Kreyer:]

So is there some sort of exclusivity with the carriers where now all referrals have to be directed through this platform?

[Robert A. Eberle:]

No. But carriers will want to use this platform because it's a tremendous automation opportunity for them.

[Jason Kreyer:]

Okay, understood. And then going back to the new bank partner, I'm just wondering if you can talk a little bit more about that partner. I mean, if that's a global partner, if you can kind of handicap the size of that or the opportunity there.

[Robert A. Eberle:]

No, it's a significant size, but it's not global. Regionally focused, headquartered in the Midwest and I think it's a nice complement to our existing channels. What we did not want to do is create something where we're -- as our existing channels are really getting some momentum, that we created something that was head on competitive. There's always some level of overlap and there certainly is in this situation, but I think it's a nice fit against our existing channels today.

[Jason Kreyer:]

Okay. And then just the last one for me. So the previous guidance, the 25% guidance that used to be in place, if I remember correctly, we talked about this as a lot of that would come from the gross margin line. And I just want to make sure that we're still going to see pretty significant leverage on the gross margin line, that you're just going to be reinvesting that in operating expenses. Do I have that right?

[Kevin M. Donovan:]

That's correct. We will see, as our subscription and transaction offerings scale, we will see leverage in the gross margin line and increased operating expenses, specifically sales and marketing and product development.

[Operator:]

And our next question is from Peter Heckmann with Avondale Partners.

[Peter J. Heckmann:]

I just wanted to clarify on this new guidance. It sounds like you're raising the spending on some of these new product areas by about $8 million. Is that about the right magnitude for the remainder of the year?

[Kevin M. Donovan:]

When it's fully ramped, and that will take some time, yes, we would see it as an investment of between $15 million and $20 million on an annualized basis.

[Peter J. Heckmann:]

And it seems like this would be probably more appropriate to do during an annual budgeting session. Can you talk about what occurred in the last 90 days that the lightbulb popped, that these opportunities were worth chasing and basically reinvesting all of the incremental margin in them?

[Robert A. Eberle:]

Well, the first thing I'd comment is we've never aspired to be somebody that responds only on an annual basis. Even as we grow larger, that's the last thing we'd want to be. We want to respond much quicker to market opportunities, much more aggressively to market opportunities. So taking them one by one, in terms of PARTNERSELECT, what's happened is a beta version of product has had tremendous reception in the market and we're going to do more around that, hardening and building out the platform for scale, and at the same time, I mean, go-to-market and sales capabilities around it. On digital banking, it's a question of getting very strong feedback from customers and wanting to push that more and sooner in the market. So that's not as much of a turn in what they caught [ph] last 90 days or 2 quarters or whatever you'd want to say. And then on payment fraud, yes, I would tell you, that is a brand-new realization for us that, that opportunity exists. And as soon as -- exists uniquely for Bottomline or at least we're very well aligned for it and that's come around in the last quarter. And frankly, I'm proud of that, that's the way I'd want the organization to function. We'd never wanted to be an annual budget process just to determining what we're going to do strategically.

[Peter J. Heckmann:]

Okay. But it does sound like these are organic growth opportunities. And so within the next 2 or 3 quarters, we should -- they will help sustain and improve organic growth rates into 2016.

[Robert A. Eberle:]

I think, for example, on payment fraud, that's brand new. So no, I wouldn't expect product to market within a year, no. So I wouldn't expect that to be an impact on 2016. I think that when I look at that in a longer cycle, that's the opportunity for actually, for Bottomline to move from being a payments company to a payments and cybersecurity company, which is what I referenced just briefly. But I think the significance of the business changes pretty dramatically, the market perception of the value of what we're providing. But no, I don't know. I wouldn't want to say brand-new initiative, as you've identified. And the last 90 days is going to be completed technology, complete sales cycle and implemented to impact 12 months -- what would be 12 months from now, 2016. So no, that would be further out. Digital banking, we certainly will see impact. In PARTNERSELECT, we will. But a network like that takes time to scale. So its impact will -- there will be an impact in 2016 but the bulk of the impact would be further out than that.

[Peter J. Heckmann:]

Okay. And then Kevin, can you remind me, I know you have a buyback in place, but can you talk to me about the size of that?

[Kevin M. Donovan:]

We had a $20 million buyback that was in place. We used a component of that and we have roughly around, I think, $16 million, $17 million available under the plan.

[Operator:]

And we have no further questions. So please go ahead with any closing remarks.

[Robert A. Eberle:]

Well, we thank everyone for your interest. We're delighted to report on yet another strong quarter and we look forward to reporting equally strong results at the end of the second quarter in the January time frame. Thank you again.

[Operator:]

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