Bottomline Technologies, Inc.

Welcome to Bottom Line Second Quarter 2021 Earnings Conference Call. I'm Danielle Scheer, and I'm joined by Rob Everly, Bottom Line CEO, and Rick Booth, our CFO. I'd like to remind everyone that statements made on today's call include forward-looking statements about Bottom Line's future expectations, plans, and prospects. All such forward-looking statements are subject to risks, uncertainties, and assumptions, including those related to the impacts of COVID-19 on our business and global economic conditions. The forward-looking guidance we provide today is based on our assumptions as to the macroeconomic environment based on the facts as we know them today. Many of these assumptions relate to matters beyond our control, including the impact of COVID-19. Please refer to the cautionary language in today's earnings release and Bottom Line's most recent periodic reports filed with the SEC for 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. Bottom Line does not assume any obligation to update any forward-looking statements. During this call, Bottom Line'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 our website. We'll be providing forward-looking guidance on this call. A summary of the guidance provided during the call is available from the company upon request. I'll now turn it to Rob for his remarks.

Good afternoon, and welcome to Bottom Line's second quarter fiscal 21 earnings call. As always, we appreciate your interest in Bottom Line. Q2 was a solid quarter. While subscription growth continued to reflect transaction volume impacts, Subscription growth excluding those products was 19%. We expect subscription growth to accelerate in both Q3 and Q4. Strategically, Q2 was an important quarter as we made some major advancements in our product set. We're executing against our strategic plan to build a subscription business of scale driven by market-leading SaaS platforms. Our strategic plan is focused on the product set, market position, and execution needed to drive high margin subscription growth at or above our 15% to 20% target range. At the same time, we continue to drive consistent, strong profitability and cash flow. The new capabilities we're developing to expand and enhance our key SaaS platforms positions as well to provide more product capabilities to customers, more growth for bottom line, and increased value for shareholders. With almost 375 million in subscription revenue, we can easily see 500 million as the next important milestone, one which we'll achieve in the next two to three years. At 500 million, our target growth rate translates into 75 to 100 million of incremental high-margin subscription revenue a year. Before I get further into my remarks, let me touch on the key financial results for the second quarter. Subscription revenue was 93.4 million, which was up 11 percent from a year ago. As in the prior quarter, we continued to see an impact on our transaction-based revenue streams, Payment X, and legal spend management. Excluding those two platforms, subscription revenue growth was 19%. The good news is we saw positive momentum in transaction volumes in December, particularly in PayModeX, where for the first time we achieved pre-COVID volume levels. As a result, we're confident we'll see an acceleration in subscription growth over the second half of the year. For Q3, we expect subscription growth of 14 to 15%. For Q4, we expect subscription growth of 18 to 20%. Our business model provides a high degree of visibility to future revenue and growth. We're confident we'll achieve the Q3 and Q4 subscription growth rates I just outlined. Subscription bookings were 21.9 million. Solid bookings quarter, which reflects the strong competitive position and sales execution across our product set. EBITDA was 25.5 million for the quarter, or 22% of revenue. One track to achieve 100 million in EBITDA for the year. And we continue to have a strong balance sheet. As we ended the quarter with just under 140 million in cash, after paying down our senior credit line, and buying back over $10 million in stock. So, solid financial results for the quarter. With that overview of Q2 results and our growth outlook for the next two quarters, the remainder of my remarks will focus on our SaaS platforms and strategy to drive sustained high-margin subscription revenue growth. The factors driving accelerating growth are the size of the opportunity we're addressing, our competitive position in that market, the capabilities and value we're delivering to customers, and our execution in converting that to subscription revenue and value for shareholders. The market opportunity we're addressing is massive. Businesses and the banks who serve them are looking for more and more connected automation capabilities and data-driven insights. We have a strong position centered on our leadership and business payments. That's not just a technology leadership, but also a market position where a large number of customers are on our technology. Over 12,000 corporate customers leverage our corporate payment platforms Paymodex and PTX. Over 425,000 vendors are enrolled on Paymodex. Tens of thousands more businesses receive payments from our PTX customers. And almost 200,000 businesses leverage our platform each day to connect to their banks for payments and cash management capabilities, a number that continues to grow as we bring new banks on. So the position we can leverage is unique. We're well into our strategy to leverage our customer base, brand, and distribution channels to expand from our strong core in payments to a full payments and cash lifecycle platform. Customers benefit from our platform strategy because it provides end-to-end seamless management of a corporate's banking, payments, and cash management activities. The platform empowers financial managers to optimize cash, liquidity, and working capital, and to do so with a unified solution combining payables, receivables, and treasury management. A full integrated payment and cash lifecycle platform provides greater visibility, control, flexibility, automation, and importantly, cybersecurity and fraud protection. And with a single platform, There's a unified view of data from multiple transaction systems, which is enhanced by advanced analytics and machine learning. From a competitive position, offering a full platform strategy gives us a significant advantage over any point solution competitor. The platform breadth provides an opportunity for existing customers to expand their relation with bottom line and new customers to adopt any element or the entire platform. With our large customer base, we have a ready market looking to embrace a broader, more effective platform solution. We're confident we'll drive success with customers we know well and in a market where we are well known and highly regarded. We've gotten to this point with minimal risk, leveraging existing capabilities, and strategic disciplined investments. We started with our core and payments. We added receivables and then added insights and analytics. And then three weeks ago, we added market leading treasury capabilities. I'll take a moment to go over each. Most on the call are familiar with our business payment leadership and expertise. That's our core. Business payments is an area where we're the clear leader. Our platform strategy is a logical extension of our core and centered upon our business payments leadership. An important capability for the platform strategy in any business is receivables. A receipt of cash and all the elements that go with it. Reconciliation, forecasting, predictability, and automation. This past spring, we acquired a receivables platform from one of our bank partners. We're combining that base platform with the European receivables capabilities we've already had, as well as our existing machine learning and data management technology core. That gives us the front end or money end capability. Simultaneously, we've developed our cash flow optimizer. which brings a variety of data related to cash from different sources into an intelligent platform. This is an internal development led by our CTO and an advanced ML and analytics team. The result is a set of unique insights and intelligence across all aspects of the payment and cash lifecycle. To round out our vision for a full payment and cash lifecycle platform, I'm delighted to announce that three weeks ago we closed on the acquisition of Treasury Express. Treasury Express is a highly regarded and recognized leader in intelligent, frictionless treasury solutions. The combination of their offerings brings a sophisticated, on-demand, scalable, enterprise-level treasury solution. Treasury Express serves 200 customers today across Europe and EMEA. The solution, like many of bottom lines, has been sold directly to corporates and through bank channels. The company has recently been awarded Best Treasury Management Solution from Treasury Management International, the Alexander Hamilton Award for Best Liquidity Solution, and Best Overall Customer Satisfaction from IDC. We did a lot of work to find the right business combination from a technology and cultural perspective that we could bring into BT at an appropriate and attractive valuation. We're thrilled to be adding Treasury Express, its technology, and team to Bottom Line. It represents a critical piece in the execution of our full payments and cash lifecycle platform. The work to complete the full integration of these elements is already well underway. The result will be a valuable platform for corporate customers and the banks that serve them, a platform with a broad set of integrated capabilities supported by data insights and intelligence. We've spoken to customers and surveyed the market, so we're confident reception will be strong and make a meaningful contribution to our growth. From a go-to-market perspective, it's a logical extension of our core strength in payments and an obvious opportunity to expand our relationships with our thousands of corporate customers. So in conclusion, as we look ahead, I'm very excited for Bottom Line. We serve a large market and are uniquely positioned. Our intelligent payments and cash lifecycle platform strategy is a natural extension of our current strengths and success. It will drive deeper, stickier customer relationships, and sustained valuable subscription growth. With an acceleration in subscription growth ahead and the strategic advancement of our product set, FY21 is shaping up to be an exciting year. Shareholders will be rewarded as we see the acceleration of subscription growth in the coming two quarters and a strong continuation of that growth beyond this year. So with that, I'll turn it over to Rick, and then we'll open up the call for questions.

Thank you, Rob. Bottom line delivered a solid quarter. Total revenue was above plan at $116 million. Profitability was in line with plan with $25.5 million of EBITDA and $0.30 earnings per share. And overall subscription revenue growth of 11% was below plan But we have a clear visibility to subscription revenue accelerating to 14 to 15% in Q3 and to 18 to 20% in Q4. I'll focus the bulk of my remarks on subscription revenue, focusing on key subscription revenue drivers in the quarter and visible drivers of acceleration in Q3 and Q4. I'll briefly review other financial metrics. And then I'll provide guidance for Q3 and for full year fiscal 21. First, focusing on subscription revenue. At $93.4 million, subscription revenues in Q2 represent over 80% of total revenue and are equivalent to almost $375 million on an annualized basis. Two-thirds of this subscription revenue is unimpacted by transactional volumes. These streams grew at 19% year-over-year, driven by strong performance in our digital banking, PTX, and financial messaging platforms. Now, one-third of our subscription revenue comes from the PayModeX and LSM product lines, which are volume-driven. These lines held total subscription growth to 11% due to the continued impact of transaction volumes, as recovery during the quarter was clear, but that recovery happened later than expected. We have visibility to acceleration in Q3 and Q4, which is expected to drive subscription revenue growth to 14% to 15% in Q3 and 18% to 20% in Q4. In legal spend management, volumes ramped consistently in the quarter, resulting in the most meaningful increase in volumes since the pandemic began. We expect this acceleration to continue for three reasons. We expect existing customers to continue to grow volumes as they did this quarter. We have 20% more customers scheduled to go live in the second half of the year than in the prior year. And new customer demand remains strong. In PayModeX, payment volumes accelerated again from last quarter and are now above prior year. We expect this acceleration to continue for four reasons. First, Existing customers should continue to ramp strongly as they did this quarter. Second, we have almost 50% more payers scheduled to go live in the second half than in prior year. Third, we expect to accelerate time to revenue and volume of usage as we've increased the resources dedicated to launch and ramp support. And finally, new customer demand remains strong. This growth in subscription revenue drove total revenue to $116 million in the quarter. With subscription revenue driving total revenue growth, we expect total revenue growth to accelerate meaningfully in Q3 and to report double-digit revenue growth in Q4. Turning to sales, our booking results also reflect solid demand. Customers signed $21.9 million of new subscription bookings, And while bookings are estimates and customers take time to implement and ramp to full revenue, this provides us with a high level of visibility into future revenue. Our PayModeX network added 28 new payers, including a major healthcare provider. And current quarter deals were driven by seven bank channel partners, as well as by our own direct sales force. Our digital banking product was selected by three customers to serve as their primary system of commercial customer engagement And these customers ranged in size from a $14 billion community bank to $170 billion regional bank, illustrating the breadth of appeal of our commercial banking platform. With those signings, we have approximately $18 million of annual digital banking subscriptions which are signed but not yet being recognized in our P&L. And we expect three-quarters of this $18 million to go live this fiscal year. Our legal spend management network added six brand new customers and another seven insurers expanded their relationship with us, showing continued strong demand for the solution. So overall, it was a solid quarter for bookings as well. Our other financial metrics all achieved our plan as we reported EBITDA of 25.5 million, core operating income of 17.7 million, and core earnings per share of 30 cents Subscription gross margin was 61%. As of year to date, we've added $19.6 million of subscription revenue, of which 69%, or approximately $13.5 million, flowed through to gross margin. In Q2, we invested in delivery and security, which are priorities and competitive advantages for us. This did impact incremental margins in the quarter, but this will normalize over time. Sales and marketing expense was $24.4 million, or 21% of revenue. This is up $2 million, or one percentage point year over year, as we expanded both our direct and channel sales efforts to drive revenue acceleration. Development expense was $17.4 million, or 15% of revenue, as we drove product innovation and platform expansion while managing costs. And from a cash flow perspective, We produced $16.3 million of operating cash flow and $9.9 million of free cash flow. We ended the quarter with $140 million of cash and investments on hand after repurchasing $10.7 million of shares and repaying $50 million against our credit line. And as Rob described, just after quarter end, As part of our focus on treasury and receivables capabilities bottom line acquired a treasury management platform called treasury express for $33 million. This is a very attractive asset in a strategic market and evidences our continued disciplined approach to M&A. There's modest EBITDA dilution in year one of roughly 1 million per quarter, but we remain firmly on track to deliver 100 million of EBITDA in FY21. Turning to guidance, as I've indicated, we expect to deliver strong performance. In Q3, we expect subscription revenue of $99 to $100 million, which will put us at a 14% to 15% subscription growth rate in Q3. Total revenue of $120 to $122 million. EBITDA of $23 to $24 million. Core income of $15 to $16 million. and core earnings per share of 25 to 27 cents. Looking to full year fiscal 21, we expect subscription revenue of 385 to 390 million for the year, inclusive of Q4 subscription growth of 18 to 20%. Total revenue of 470 to 475 million, inclusive of double digit total revenue growth in the fourth quarter. EBITDA of $100 million, operating income of $68 to $70 million, and core EPS of $1.13 to $1.17. So overall, I'm pleased to report on solid results, strong confidence in subscription growth acceleration in Q3 and Q4, and a meaningful expansion of our product capabilities with the addition of Treasury Express. All of which set Bottom Line up for a strong fiscal 21 and beyond. But before we turn to Q&A, there's one item of personal business. Working with Bottom Line for the last six years has been a highlight of my professional life. I've always thought I'd retire from Bottom Line. It's a wonderful company and has a bright future ahead. But recently, I've been presented with the opportunity to help a pre-IPO company take itself to the next level. It's a unique opportunity, and I expect the work to be both challenging and rewarding. I'm proud and grateful to have had the opportunity to work with Rob and the rest of the Bottom Line team over the last six years. And I also appreciate and thank the analysts and investors that have put their faith in Bottom Line. This was a difficult decision for me personally. but I've been fortunate to have built and been supported by an incredibly strong accounting and finance team that will support the next phase of growth for Bottom Line. I'll be here through mid-March and remain available thereafter, so I expect a very smooth transition.