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.

Well, this is Rob. Thank you, Rick. We appreciate all you've done for Bottom Line, and we certainly wish you well with the new opportunity. For our outside audiences, while these are big, big shoes to fill, We've been working with Spencer Stewart, and we expect to announce a strong CFO shortly. And as Rick noted, he'll be with the company through mid-March, and we have a strong finance and accounting team. So I anticipate a smooth transition, but once again, really say thank you, Rick, for all you've brought to Bottom Line and all you've helped us do to get to the next level. So with that, we'll open it up for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question is from Andrew Smith with Citigroup Financial. Please proceed with your question.

Hey, guys. Thanks for taking my questions. And Rick, let me extend my congratulations. It's great working with you. Sounds like an interesting opportunity. Thank you, Andrew. So, just starting off on product, the treasury management opportunity, and that seems attractive. It's something we've identified as, you know, a prime candidate for innovation. Could you talk a little bit about the revenue model at Treasurer Express and generally, I guess, across the payments and cash lifecycle platform? And then just also, how does that fold into your existing distribution footprint? That would be a great place to start.

Sure. Revenue model on the payments and cash lifecycle platform will be subscription. And the distribution model is really interesting. because we have so many opportunities with existing customers and existing relationships to expand what we're currently doing with them. So as I indicated, we've got thousands of corporate customers that we can expand their capabilities to treasury, intelligent treasury with our insights, and also to receivables. Another interesting opportunity for us is the vendor community on PayModeX. where we've got 425,000 vendors enrolled. Now, 425,000 businesses aren't going to be the right candidates for the platform, but if thousands are, that's an unbelievable opportunity. So that's a really interesting distribution channel. And then last, we sell directly to corporates, and we work with and sell through banks, the service corporates. So bank channels is a wonderful opportunity as well to add those capabilities. So stepping back, hopefully you came across in my remarks, but it's a logical extension of our strong core in payments. We've been anticipating and working towards the convergence of AP and AR. And kind of the midpoint of that is really treasury and intelligent insights. So we're bringing all of those together in the payments and cash lifecycle platform.

Got it. Thank you for that. And then I heard the EBITDA dilution comment, but I didn't hear the revenue sizing comment. Just to give you some indication of size and then in the outlook, if you kind of peel that back, what does, you know, what do your subs and trans growth rates look like? It seems like, you know, just back to the envelope, you should still see a meaningful underlying acceleration, but just want to be clear what's embedded in the outlook from an inorganic perspective.

Andrew, this is Rick. I'll take that one. The outlook includes the small contribution that we expect from Treasury Express. Remember that we're subject to purchase accounting in the early days, and this is a market in which acquiring a strategic asset, even at a very favorable and attractive valuation, which we did, means that there's not a material contribution in the year.

Put differently in a few words. It's put differently. It's principally organic.

Okay. That's great. That's good to hear from an acceleration perspective. And then just as we think about the run rate exiting FY21, you mentioned double-digit growth. You know, it seems like the tailwinds you mentioned outlined, Rick, you know, aren't going to dissipate. New customer additions, you know, you still get some tailwind from volume growth. improvement and you have a good pipeline. Is there any reason to think that, you know, that exit run rate of double digits shouldn't persist in FY22, just thinking ahead?

No, I think you're putting your finger on a pretty fundamental point, Andrew, which is that with the refinements in our business model that we continue to make with subscription revenue now dominating our revenue streams, you're going to see a long-term convergence of total revenue growth and subscription growth. So, I actually think FY22, although we're not ready to guide, should be the best year in the company's history.

Fantastic. Well, it's too bad you're not going to be around for it, but I'm sure we'll keep in touch.

I'll be on the phone. They won't let me in the question queue, but I'll be listening.

There you go. Well, thanks again, guys, and congrats again, Rick.

Really appreciate it. And our next question is from John Davis with Raymond James Financial. Please proceed with your question.

Hey, thanks. Good afternoon, guys. And I'll add my congrats, Rick. So I guess the first question that I wanted to hit on a little bit, if you look, I know bookings can be lumpy quarter to quarter. If I just look at kind of first half of fiscal 21, it looks like it's roughly flat year over year. Obviously, that was during the middle of a pandemic. So just curious if you guys have any high-level thoughts on what you think the COVID impact was on bookings growth in the first half and how we can kind of expect that, not looking for quarterly guidance or anything like that, but how can we expect that going forward? Because obviously you need bookings growth to support that $500 million target and the continued 15 to 20% substance trans growth.

Well, I'll let Rick comment on the math in a second, but remember that as transaction-based businesses, we drive a level of growth outside of bookings. So as our customers grow for legal span of payment acts, we drive growth as well. So not every element of our growth feeds through the bookings number.

Yeah, I would further emphasize that our strategy is geared 100% in alignment with increasing our bookings. We've increased our commitment to our customer success teams, which work more with our existing customers, As we've talked about in prior quarters, we've ramped up our sales and marketing. We did so again this year. And now with the extension of our value proposition, the very logical adjacencies, we have every opportunity to continue to drive at an even faster rate the increases in bookings that you're looking for.

Is it fair to say that bookings were negatively impacted by COVID or is it something that you don't think was really material? I mean, I'm just kind of I'm just trying to maybe gut check against, you know, what were your expectations, you know, I guess where were bookings in the first half of the year, I guess, relative to your expectations, relatively in line, you know, how much disruption was created by the sales organization, just any color there.

You know, I don't think this is, go ahead, Rick, go ahead.

You know, whenever the topic of bookings come up, I always reflect on the fact that they can be very lumpy. Remember, we've got very large, very long-term customer relationships, and individual signings can be material. So, you know, I think we're doing everything appropriate to accelerate that flow. I wasn't disappointed in the trailing 12 months. I believe that was around 23% of subs revenue. So those bookings, although not as much as it sounds like you would have liked, are very solid with the opportunity to get better. Okay, no, that's helpful.

The things I want to add to that, can I add just a little comment on that?

Yeah, go ahead.

First, in terms of growth, remember that our product, a lot of our products set to have a ramp and delay. So one will benefit from prior quarters bookings. It's not all the last quarters bookings. It's going to be two quarters from now's growth. Second, as I mentioned earlier, we grow with our customers' growth. In terms of what we've seen in the market, which you answered, I would say the following. I'd say we've seen more activity than ever at the top of the funnel. More response on our digital materials, more response on webinars, more response. We've seen a bit of pause on banks' decision-making. Not to the level that it's concerning. We actually had our first customer gold bank platform go live that was a full COVID to COVID baby, if you will, signed during COVID and went live during COVID. But there is a bit of hesitation on part of banks for new initiatives and like that's all built into our model and forecast today. I think what we'll see is as we clear COVID, we're going to see the benefit of the top of that funnel start to come all the way through in booking. So I think as we clear COVID, we see a real positive impact.

Okay, no, that's super helpful, Rob. And then I did want to dive in a little bit on PayModeX. I think, I forget if it was Rob or Rick, you mentioned that you've gotten back to pre-COVID volume levels in 2Q. But just curious how, you know, we are about a year in now, I believe, with the sales force. specifically for PayModeX. I'm just curious to kind of get an update there on how that's going, how they're working with the bank channel. I think here the goal was to basically kind of drum up some warm leads and really supplement the bank channel. But just curious, basically a year in now or so, how that's gone in line, better than expected. Just any thoughts that would be helpful.

Well, in short, really well. And I like the way you framed the question, frankly, supplementing the bank channel. This was a really interesting quarter. We had seven different bank channels sign new payers for bottom line. So we're getting a lot of generation from the bank channel. There's a ton of interest in that. And our direct team is a really effective means to attack on the verticals to supplement the bank channel. So it's a big part of our go-to-market strategy.

Okay. And then last one for me, I think, Rick, you mentioned that Treasury Express would be about a million dollars dilutive per quarter. Is there a certain timeframe where you expect that deal to become accretive? Is that FY22 or just any kind of color there on when we can flip that to positive accretion?

Yeah, we expect that profitability rate to improve as we uh as we increase our rate of cross cell but it's a little early to be guiding on that certainly not separately okay that's it for me thanks guys and our next question is from george sutton with craig allen please proceed with your question thank you uh rick my congrats as well

My question is actually for Rob. You mentioned you surveyed the market relative to your new payments platform, payments and cash lifecycle platform. I'm curious what you heard. What did those customers tell you? How did that drive your speed of bringing this together? And ultimately, how large do you think this could be in terms of increment for you?

Well, first off, we surveyed both corporate customers and we had a lot of discussion with our bank channels. You know, our bank channels were a wonderful opportunity for us to get another view of the market, another view of corporates, and also have a distribution channel. The convergence of AP and AR, the desire for intelligence, analytics, and data came back in every interaction and every dialogue we've had. In terms of the growth opportunity and how that comes, I'd frame it two ways. One, it's critical to continue to be competitive and a leader. And so at one level, it's all the work we need to do to ensure where our 15% to 20% target growth rate continues for the years to come. Whether that's got an upside, the market opportunity is big enough, but kind of to quote Rick, we're not in a position to give guidance or to give a suggestion on an acceleration or market size contribution it'll make. But it is exactly the right place for us. Every piece of feedback has been very positive. And I couldn't be more excited about the fact we put this together. And, you know, last thing I'd mention on it, we put this together really quite clever, in a clever way, because we haven't had a big big dilutive acquisition. We just talked about devolution for a couple of quarters of less than a million bucks. That's not particularly meaningful, in my view at least, where we are creating a game-changing platform that is going to drive growth for years and years to come. So hopefully that's helpful in giving you a little color in that question.

That was. Now, in your release, you mentioned U.S. Bank introducing AP Optimizer. We're obviously familiar with how significant a size player U.S. Bank is on the corporate side. Can you give us a little bit better sense on how much of an opportunity that might be?

I think the way to judge opportunity would be one size, and then second is engagement. And engagement is a lot tougher to measure. But I tell you, the U.S. bank engagement couldn't be stronger. We did a lot of planning, a lot of go-to-market, and they're fully behind the platform. So we're really excited about it, and it's a wonderful opportunity for us.

One other question.

Just one brief addendum. It's also a wonderful illustration of continuing to expand our product offerings, you know. U.S. Bank has taken the full invoice-to-pay solution with CARD as an integrated part of the offering, so each successive generation becomes more and more core to the relationship.

Gotcha. Last question, just a quickie, but SRG2, that was something I think you focused on in your last call, didn't necessarily get an update there. I'm curious how much of an expansion you've seen there. Are we through that process?

I would say the macro theme of continuing increasing complexity vis-a-vis regulation, particularly in the European Union, which runs six to 12 months ahead, and the UK is slightly ahead of that before things come over to the U.S., those continue to be strong drivers. And you'll note, if you do the math on our geography, a very strong quarter for our UK operations. I wouldn't tie it specifically to SRD2 or any other regulation, but that wave of change continues.

Okay. Thank you. And our next question is from Gary Prestofino with Barrington Research. Please proceed with your question.

Hi. Good afternoon, everyone. On the legal exchange business, you said you had seven customers expand their relationships. Is that with the partner select program or could you just explain what was expanded there?

Yeah, so there's actually a number of expansion opportunities within our legal spend platform at this point. In addition to partner select, we have a vendor management offering to extend the same functionality to non-legal vendors. And we also have law firm analytics, which provides the next level of insight. So many ways for them to expand.

Okay, thank you. And then can you just clear something up for me? With this new platform that you have out, this corporate treasury capability, cash lifecycle platform, did you need to make the acquisition of Treasury Express to do this, or does Treasury Express allow you to do this in international markets outside of the U.S.?

You know, I wouldn't say we needed to do it. but it gives us so much more capability. So if you think about the states of cash, cash coming in, we add that. We have a lot of cash management in-house. We have a lot of cash management capabilities. Our cash flow optimizer does a lot of capabilities, but it accelerates and gives us so much more. And certainly, as you highlight, gives us excellent international capabilities.

Thank you. And our next question is from Mayank Tandon with Needham and Company. Please proceed with your question.

Great. Thank you. Good evening. Congrats, Rekha. It's been great working with you, and you'll be greatly missed. Thank you. So I wanted to ask, Rob, you talked about the TAM expansion. Could you maybe just dissect that a little bit more, Rob, in terms of what incremental opportunity you see for bottom line given the platform expansion and tied into that question would be, would you now consider maybe doing something on the AR side in terms of M&A to have that entire end-to-end product set up?

So we have the AR side. We have that. We're building that out right now. And let me go back over how we got there. So we had existing capabilities, particularly in Europe, particularly around direct debit, which is one of the – most common receivables, but a full receivables capability in the UK. We then, this spring, acquired a receivables platform from a bank partner, and we've been over the course of this year so far, and then we'll be continuing to do so, building that out to a next-generation platform. So on a receivables end, we have the capabilities we need, and that gives us this full payments and cash lifecycle platform. So yes, that would have been an important part. Yes, that would need to be an acquisition, but we've done that. We did that in a clever way with the bank channel partner and now have supplemented that with our additional build-out and other capabilities we had. In terms of TAM, it's a large TAM, but it's not a number we're giving out today. I think that quickly gets ahead of itself, but it is a major expansion. The other way I'd look at this is the competitive differentiation. Now, any corporate today looking for a point solution, if they are going to go with just a receivables or just a payables provider, they're really committing that they're going to have to have other vendors for other pieces of this. With our platform, we can address the full payments and cash lifecycle, money coming in, money that's being managed in-house, insights and analytics around that, cyber fraud protection, and payments. So the competitive differentiation is massive, huge. And of course the market opportunity is as well. So as we get further out, we'll share what we think near term results could be, what TAM could be. We're not in a position to share that today.

Rob, then tied into that question would be your win rates versus the main competitors, whether it's on the digital banking side or on the APAR side. Without naming names, could you talk about how your win rates have been trending and where you win, you know, I'm assuming that's in the larger tier of the market. Maybe some anecdotal evidence, if not any quantifiable numbers you can share with us in terms of how that win rate's been tracking?

Sure. We're winning approximately three-quarters of the mandates for our new payments and cash management platforms. That's business banks, banks that are serious about their business bank and franchise. Generally, banks of scale and size, although there can be smaller banks that are focused on business banking. And we're the clear leader. You can see IAT's analyst reports, but the market really supports that. So our win rate there is fabulous. As we move, if you wanted that answer for payments and cash lifecycle platform, we're way to where we went out of in-market, actually. We're announcing that this is where we're going. But I'd expect we'd have a real strong win-win with existing customers because we're already there. We're already a trusted innovation partner. So that's really what gives us kind of a loaded odds, if you will, entry into a broader market. We're expanding from a core. We're not entering receivables or entering treasury independent of the existing capabilities and known vendor status we have and enjoy today.

That's helpful. Thank you so much. And our next question is from Brett Huff with Stevenson. Please proceed with your question.

Good evening. And Rob, congrats on the deal. And Rick, sorry to see you leave. You'll be missed. But good luck in the next chapter. Thank you. One quick technical or targeted question on the M&A. I don't think I was trying to listen. I'm not sure if I heard. You talked about the integration. Is it a SAS delivery model, and are you just porting some of that technology over to your existing platform? Just sort of give us the quick and dirty on how the tech integration will go with Treasury Express.

Well, yes, it's a SAS delivery model, but there's actually a lot of work to connect all these pieces. So to connect the full platform from receivables to Treasury to our own insights with our cash flow optimizer to payments. So there's a fair amount of work now. That's not unachievable. We have a plan for that. We'll address that. But it's not a question of, you know, a couple of months. That'll be a couple quarters to get that work in place. It could be about three quarters. But then you have a full platform. And when you have that full platform, then that gives you access to data across all the different points. It gives you data from receivables, data from payments, the whole cycle. So, yes, SaaS platform works. We're doing the work to integrate. It's not a flip a switch integration, but that's part of the moat, if you will, competitive moat and competitive advantage as well.

Great. That's helpful. One more sort of more direct or targeted one. You mentioned the direct sales force for PayModeX. I know you guys have been building that a little bit more. You mentioned that seven different bank channels had delivered some payers that are incremental. Any update on the direct sales force? I know they're kind of working both with and around the banks, but just an update on that.

Yeah, we're not quarter by quarter announcing direct sales results one way or the other. That wouldn't be the right measure to really look at. I think the overall bookings, which was 29 this quarter, super strong. So that's really how we'd end up looking at it. We'll give...

updates from time to time as we just did here on on the direct sales team but there's a super quarter to see seven banks participating seven banks having wins that's fantastic that's great and then last question for me is a little bit bigger picture one rob um given your expertise and you guys playing the b2b payments for a long long time we're still trying to figure out how this market evolves and i was wondering if you could talk about verticalization and b2b And I'm just thinking that it just happens to stick in my mind that you guys have a lot of health care, that you've had a lot of success there. You have a lot of counties. Is that how we should expect B2B or your business or more broadly to kind of happen? Or is it going to be more of a generic across industries kind of progression, do you think?

Well, I think it's some of both, but it's centered on verticals. So if we approach, bottom line approaches you today and your health care provider, we're going to be able to show you 40, depending on where in the country, 40, 50, maybe 60% of your vendors are already on our network. So there's some real advantages of interoperability and network when you're in a particular vertical. So I think we will continue to see a vertical play in that. But on the other hand, those organizations are paying every kind of business. So I think it's both. It's not discrete to verticals, but verticals are a big driver and vertical focus can accelerate adoption.

Great. That's what I needed to appreciate your perspective. And our next question is from Bob Napoli with William Blair. Please proceed with your questions.

Thank you. Thank you very much. And Rick, good luck to you. Been great working with you. Look forward to keeping in touch. So, Rob, just on PayModeX, I think the revenue for PayModeX, I think you've said recently, is all transaction revenue. Is that correct? But I would think on the Treasury side, if you kind of put that in B2B payments on the AR side, you're going to have a lot more software revenue versus transaction revenue on the AP side. Is that correct?

Well, I think that's correct, but I'd say something on transaction revenue. We've been experiencing and driven by transaction revenue for over 15 years in legal spend management. It's been a fabulous way to grow as customers grow. The platforms, the SaaS platform, the monetization is transaction-based, but the predictability of those transactions truly has been extraordinary up until a pandemic. Well, we've had actually a relatively modest impact. It impacts our growth rate, and each percentage point matters there. But it's not like it's been cut in a third or some major impact like that. So the first comment I'd make is, yes, it is subscription revenue, but we like the transaction model, and we're monetizing a sticky SaaS platform. the predictability of those, you know, major insurers are not going to stop having litigation. Businesses are not going to stop paying. And we've seen some level of impact, but that doesn't discourage us at all from the transaction model. And when COVID clears, we'll continue to grow as our customers grow. So in short, yes, more on the subscription model behind the payments and cash lifecycle SaaS platform. But we don't disfavor and we wouldn't look and consider the transaction revenues that our SaaS platforms drive as any less valuable.

No, I don't disagree. It was kind of leading to my next thought once that was confirmed is that the revenue for a transaction, to the extent that you're growing virtual card and cross-border payments monetized on a transaction basis at a dramatically higher level than ACH payments. And our discussions with Visa and other companies we cover in this space are seeing some pretty interesting increases in revenue per transaction. And I was just wondering if you're seeing the same thing, if you could talk about the penetration, where virtual card penetration rates are all over the board in the industry. and I think it really matters by vertical, but I was wondering if you see the opportunity for a substantial increase in revenue per transaction by growing virtual cards and B2B payments and cross-border in particular.

Well, we do, but we also keep a balance across payment types because we're trying to drive full automation for our payer customers, and we're trying to drive acceptance, the largest degree of acceptance in automation across all vendor types. So particularly as you move up to larger enterprises, you can see other types other than virtual card of more acceptance, or you can hit a wall at certain levels of virtual card acceptance. But the main point of your question, absolutely. We see a growth opportunity around virtual card, which is a critical part of our platform now. as well as the other payment types we offer.

Thanks. And then just maybe on PTX, on the open banking efforts that you have, I'd love a little color there. I think that some of the numbers that you guys have given in the past at conferences or at our conference last year suggested some pretty good growth organically out of PTX, out of open banking. What is the opportunity for open banking? What is the size of that business? today and the growth rate and maybe what do you see the long-term opportunity?

Well, the fundamental opportunity is a change around business process and payments, which is wonderful for bottom line. So we can step in as we have and then help businesses adapt to the new regulatory and the new payment types and open banking. And that's exactly what we're doing today. In terms of an overall, what will that TAM be or something, we're not providing a number on that. But it is this massive change. And the interesting thing about it, that change is going to come to other geographies as well. I personally don't think that'll be legislated or required, but we hear it all the time. We hear from banks in the U.S., what does open banking mean? How will that potentially impact? And I think you'll see more of availability of those types of open, interconnected systems even if it's not driven by a regulatory perspective. So we're doing a bunch of interesting things today around open banking with customers. We've won some new deals and a new business model around that, and it is absolutely a key driver of future growth.

Thank you. Appreciate it. Our next question is from Dan Perling with RBC Capital Markets. Please proceed with your questions.

Thanks, guys, and good luck to you, Rick. I wish you the best, buddy. The question I have, just for clarification purposes, when I look at the subscription revenue growth and I X out the transactional nature of legal spend management and pay mode X, I think it was up 19% this quarter, but it was up 25% in the first quarter. So I'm just wondering, what was the driver of that deceleration?

Well, certainly 25% was an extraordinary quarter. And we would, you know, basically prior year impact. But, you know, I think the clear trend of strong growth in our core products showing that the only impacts that we're experiencing short term are transaction volumes is the key takeaway.

I know, but it would seem as though that line item would be a little more stable and so forth to decelerate. Was there some sort of comp that I missed from the year ago, or is there something else?

No, you can have things like go lives and stuff like that that can have an impact one way or the other. I mean, that's a super strong quarter, but I wouldn't look at 19% as disappointing in any way. We drive 19% on an ongoing basis. we're going to end up at a very, very different valuation.

Yeah, there's no complaints out of that. I was just trying to make sure I understood what was driving the step down. So the other thing you mentioned was the incremental margin on the subscription, you know, stepping down this quarter. It looks like you took advantage to invest in delivery and security. Security totally makes sense to me. I'm wondering what was the driver behind the investments in delivery because it did look like it was pretty sizable this quarter. Is there something going on in terms of mix? Is it this kind of post-COVID world that you've got to be better positioned for? I'd be interested to know your thoughts there.

It's part of the overall focus on accelerating both our new bookings as well as our time to revenue. So if you remember, I mentioned that of the 18 million of banking deals that are signed but not yet live, we expect a full three-quarters of that to go live during the current fiscal year. And likewise, we're continuing to analyze and focus on driving accelerated revenue ramp from our PayModeX customers. So, you know, we chose to step up the rate of investment a little bit since we have the capacity to do that within our existing profitability guidance.

That's great.

And then just last one for me, the third quarter step up in subscription growth to 14% and 15%. How much of that is just being driven by the rebound that you're expecting from the transactional nature of the business? If we had a like-for-like number where I was just comparing it to 19% this quarter, what would be the embedded expectation there? Thanks, and good luck again, Rick.

Thank you. I think there's a variety of drivers, not just a rebound in transaction volumes, although we certainly do expect that, and that's built in. The other thing is we actually have 20% more legal spend management customers scheduled to go live in the second half of this year than in the same period in prior year, and a full 50% more PayModeX customers in the second half of this year versus the prior year. So, you know, we've got good momentum going back to the idea that demand has remained strong for us through these pandemic months.

Excellent. Thank you. And our next question is from Peter Heckman with D.A. Davidson. Please proceed with your question.

Good evening. Thanks for taking my question. I wanted to see if, and this is a request going forward, but certainly we get a lot of questions from institutional investors on PayModeX, and people realize that it is a scaled platform with real significant potential for growth with high margins. You know, As you go forward, is there a way that you can provide more granular detail in terms of payment volume, take rate, number of payers? I think you might be surprised at how much more credit the market might give bottom line if they're just able to better quantify exactly what the opportunity here is and better size it.

You know, there's some aspects of that that we probably could provide, and that's good feedback, and we'll take that. There are some aspects as well, though, that because of bank channels, there's different pieces that they wouldn't want us to share or would be complicated for us to disclose. But that's good feedback, and we can certainly take a look at that.

Okay. And then just as a follow-up, you know, we had talked about the company looking to invest more in development and sales and marketing to maximize the the growth of subscription transactions over the intermediate long term. And I think that makes perfect sense. In terms of the new subscription transaction revenue that's coming on with high incremental margins, it appears that you're really reinvesting 100% of that. At this point, do you feel like there's a light at the end of the tunnel where you're going to be able to let some of that incremental margin flow through? Or should we still be thinking about kind of 21%, 22% EBITDA margins for the foreseeable future?

Well, first off, I have a hard time apologizing for 22% EBITDA margins. You know, I think we've got to keep it in context so we have a strong level of profitability. So I'm not sure I'd say we're in a tunnel and light at the end of the tunnel. I don't see this that way. I think part of what you see in margins, though, is what The transition of the model, you're removing services, you're removing software, and while you're building transaction volume over just the past couple years, we have about a $30 million negative impact from the natural focus on subscription revenue, which is more valuable and going to build over time. So that's one element, as well as everything you identified, investment in product and investment in market. If we can drive the 15% to 20% growth, When we hit $500 million, as I outlined, we've got $75 to $100 million of incremental subscription revenue coming off. And at recent incremental gross margins, that's somewhere around $50 to $70, $75 million of incremental gross margin. And that gives us a lot of optionality around margin expansion if we're not seeing a growth opportunity or increased profitability. Okay. That's really our near-term target and driver, putting in place the platforms to drive consistent 15% to 20% subscription growth. As we hit $500 million, I think we have a lot of optionality on are we expanding margin more? What does the market, do our large holders, do our analysts all believe, and management, of course, and the board think that we can drive higher growth? And that's a balance we'll adjust there. You won't see lower profitability. You'll continue to see the profitability levels we've produced. But I wouldn't want to say it's light at the end of the tunnel or this is a dark period because strong subscription growth is going to be the biggest value creator.

Yeah, no, that's fair. And I didn't mean to imply that they weren't good margins. It's just kind of the best Sintec companies historically over the last couple of decades that generate both revenue growth and incremental margin improvement each year. And I think I get a lot of questions on that. So, Thanks for the update. I'll look forward to the next one and good luck to you, Rick. I look forward to seeing where you land.

Thanks, Pete. And again, as a reminder, if you have any questions, you may press star one on your telephone keypad. And our next question is from Andrew Smith with Citigroup. Please proceed with your question.

Hey, guys. Thanks for squeezing this follow-up. I know we're in overtime here, but I just wanted to dig in a little bit more on what you're doing on the AR side. you know what you're building out and what you have is it is it order of cash is it invoice to cash are our clients consuming this as an end-to-end platform or module base just any detail on sort of where you're targeting along the AR spectrum would be very helpful sure so first off to be clear we have customers today in Europe that are utilizing our technology

for receivables. So we have for a long period of time done, have offered receivables capabilities and a lot of customers using that. In terms of the new platform, that's not launched yet. So we don't have new customers on that today. What we'll be doing, so we already have invoicing. Invoicing is part of PayModeX, part of our payment platform. So invoicing would certainly be part. What we'll have there is the full... reconciliation, predictability, receipt, all of the elements, and analytics and machine learning, more advanced technologies around the leading receivables platform. Now, the interesting thing is I think we're going to have a platform that can compete with anyone, but we don't necessarily have to because if you're an existing bottom line payments customer, it makes far more sense to expand one platform and to address receivables, treasury, insights, and analytics, and payments in one platform, then it does have a mix of different vendors. So I'm not saying we won't be stronger than any other receivables platform, but we don't have to be to win a large amount of revenue, to win a large number of customers. So hopefully that's helpful, Andrew, in giving you some color on our perspective.

Yep. Helpful context, guys. Thanks again. Appreciate it. And we have reached the end of the question and answer session, and I'll now turn the call over to management for closing remarks.

Well, thank you, everyone. Thank you for your interest. Thank you, Rick, for the past six years for all you've done for Bottom Line. We look forward to reporting acceleration and subscription growth for Q3 and Q4, as we've outlined. And we couldn't be more excited about the future ahead. So thank you again.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.