Bottomline Technologies, Inc.

Greetings and welcome to the Bottom Line Technologies third quarter fiscal year 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. To queue up for a question, you can press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Danielle Shear, General Counsel. Thank you. You may begin.

Welcome to Bottom Line's third quarter 2021 earnings conference call. I'm Danielle Shear, and I'm joined by Rob Eberle, Bottom Line's CEO, and Bruce Bowden, our CFO. Statements made on today's call will include forward-looking statements about Bottom Line's future expectations, plans, and prospects. These statements are subject to risks, uncertainties, and assumptions, including those related to the impacts of COVID-19 on our business and global economic conditions. Our forward-looking guidance is based on our assumptions as to the macroeconomic environment today. Many of these assumptions relate to matters beyond our control. 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. We do not assume any obligation to update 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. A summary of the guidance provided during the call is available from the company upon request. Let me now turn it over to Rob for his remarks.

Good afternoon and welcome to the Bottom Line third quarter fiscal 21 earnings call. I'm here with Bruce Bowden, who has just joined this quarter as CFO and is an excellent addition to the Bottom Line team. Bruce will provide a review of the quarter's financial results and our future outlook and then Bruce and I will both be available for questions following his remarks. Q3 was an important and very good quarter. Driving subscription revenue growth is a central part of our strategic plan. The highlight of the quarter was the acceleration of our subscription revenue growth, which also drove an acceleration of overall revenue growth. We're delighted to see and report the return of growth. Behind our growth and the financial results we're presenting, and at the core of our strategic plan, is an innovation agenda responding to the most impactful market and competitive dynamics. We successfully executed against that agenda in Q3, extending our product leadership and expanding our market opportunity. I'll provide examples during my remarks. I'll briefly cover some of the key financial results for the third quarter. Subscription revenue was $100 million, which was up 14% from a year ago. We're of course pleased with the acceleration of our subscription growth in the quarter. Subscription growth for the products not impacted by transaction volumes was even stronger at 21%. Looking forward, While currencies moved against us a bit since January, we're confident we'll see continued acceleration in subscription growth in Q4. Subscription bookings were $20 million, which is down about $1.9 million from the prior quarter, as we saw a couple of larger deals for digital banking and Paymodex push out. We expect to see a step up in bookings in the fourth quarter. EBITDA was 24.1 million for the quarter, consistent with our plan and expectations. And we're on track to achieve the 100 million in EBITDA we committed for the year. So, excellent financial results overall for the quarter. While we're really pleased with the financial results we're reporting, we're even more excited by our opportunity ahead and the work we're doing to make the most of that opportunity. Our innovation agenda is a central part of our strategic plan. It's designed to address the fluid competitive dynamics of the markets we compete in, technology advancement, particularly around data, analytics, and machine learning, and the acceleration of the digital transformation of business payments and its impact on our customers and target markets. I'm going to highlight a few development efforts currently underway with specific examples for PayModeX, legal spend management, digital banking, and the UK market. Starting with PayModeX, the most critical factor behind scale, market position, and growth is vendor enrollment. We've made the vendor experience and the technology capabilities for vendors a key priority for the PayModeX network. Solving business pain and reconciling payments, forecasting receipt of funds, and providing remittance detail and formats that allow for automated integration ensures we're delivering critical value to vendors and payers alike. The more value we provide the vendors, the faster the network and our revenues grow. Continuing to deliver increased value to vendors has allowed us to grow the network to over 450,000 vendors. That in turn makes the network more valuable to payers as they get greater automation and rebate and can achieve that faster the larger the vendor network. For our legal spend management product set, growing our market opportunity is a key objective. We're addressing that by introducing new offerings, particularly those targeting law firms, and geographic expansion. A good example is Law Firm Analytics, which is designed to give law firms data insights to help them monitor the performance of the work they do for their largest insurance company clients. Managing partners can access the deduction percentage by attorney to see if a particular lawyer has an unusually high deduction percentage. Access to the data that their most important clients use to evaluate them has real value to law firms. It drives improvements in performance competitive position, and economics. It's also a fabulous way of extending the platform in a means that creates new revenue opportunities and growth, as law firm analytics is a capability we can offer directly to the thousands of law firms on our network. We've also been investing in capabilities to allow for continued success in international expansion, particularly in the UK and Canada. We're fortunate to have a market-leading platform and a well-known and highly regarded brand in these geographies. Our banking customers face a broad range of competitors, from challenger banks to fintech payments and financing providers. Their challenge is customer attraction and retention. They rely on us to provide the technology platform and digital transformation tools to deepen customer engagement grow WalletShare, and grow their business banking franchise. It's a big ask and a big opportunity. So it's no surprise we're bringing a lot of new innovation to market for our digital banking customers. Two significant business banks have signed on as beta customers for our new cash flow optimizer, or CFO, and they're targeting customers and their client base. The early feedback has been fabulous. One bank said, this is an absolute must-have for us. The second bank's comments really went to the core of our mission in serving banks as a trusted innovation partner. They said, our clients can get accounts and services from any bank. This is what we need to have them stick with us. Our customer engagement analytics is another way we're deepening customer engagement for banks. The platform collects data, applies AI and analytics, and delivers actionable insights that enable banks to achieve important objectives, such as increased conversion rates on new account openings, predicting a reduced attrition, target next actions, and measure customer engagement, which is particularly valuable when going through events like bank mergers. The biggest market dynamic in the UK is easily open banking, which has created change, and opportunity. An early but high potential innovation driven by open banking is confirmation of payee. The product detects fraud by matching the recipient's name and account details and the payment to the information maintained by the bank. We have two banks on as early adopters and a strong pipeline. A broader market trend across all of our markets is the convergence of AP and AR. In that regard, the acquisition of Treasury Express during the quarter was a strategically important event. It's a good example of supplementing and accelerating our organic innovation agenda with a strategic technology acquisition. While it's not particularly meaningful in terms of current revenues, adding less than half a million to the quarter, the strategic insignificance is the proven cloud-based Treasury capabilities, which extend the offerings we can provide to new and existing customers. It also gives us an important element of our payments and cash lifecycle platform. Bottom line is clear and acknowledged leadership and business payments. We also have a lot of receivables experience and are developing the next generation integrated receivables platform. Combining these capabilities, AP and AR, and now adding treasury, gives us a single platform to address the full cash lifecycle. Industry analysts regularly speak about the convergence of AP and AR, and we're well on our way to having that capability and more in market. 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 relationship with bottom line and new customers to adopt element or the entire platform. The product pipeline and innovations I've outlined are each strategically directed at addressing market dynamics and opportunities, adding more capabilities for customers, extending our competitive advantage, expanding our TAM, driving growth in subscription revenue and lifetime customer value, and continued success for bottom line and its shareholders. So in conclusion, we're really pleased with the third quarter and our acceleration in subscription growth. At a 400 million subscription run rate, we can easily see our next milestone, 500 million in subscription revenue. With an acceleration in subscription growth coming in Q4 and the strategic expansion of our product set, we're well positioned for the future. Shareholders will be rewarded as we see strong subscription growth in the fourth quarter and next year. So with that, I'll turn it over to Bruce, and then we'll both be available for questions.

Thank you, Rob. It's a pleasure to be speaking with you all today. I'm going to talk about our performance in Q3, both financial and commercial, and with a particular focus on the underlying drivers of our growing subscription revenue streams. Then I'll provide guidance for the fourth quarter and the full year fiscal 21, as well as longer term into fiscal 22. Q3 was a very good quarter for Bottom Line. Total revenue was $121 million, representing 8% growth over the prior year, both of those metrics being right on our target. Most importantly, subscription revenue in Q3 was $100 million, which is 14.2% growth year over year. We're tracking very well to our goal of producing consistent 15% to 20% subscription revenue growth across the business. Profitability was equally strong. with $24.1 million of EBITDA, 15.8 million of operating income, and 27 cents of earnings per share. All in all, we hit every key performance metric we set for ourselves. Let's focus on subscription revenue for a few minutes. In Q3, subscription revenues were 83% of our total revenue and are now on an annual run rate of $400 million. And we achieved that performance despite currency headwinds in Q3 that were greater than we anticipated, and transaction volumes from a few of our products that, while recovering, remain slightly lower than their pre-COVID levels. Subscription revenue growth, excluding PayModeX and legal spend management, was 21%, including particular strength from our solutions in Europe. In PayModeX, we saw substantial year-on-year growth from new payers who were not live on our platform last year, as well as solid growth from our existing customer base that demonstrates the strong customer lifetime value and high net retention rate of this solution. Legal spend management revenue grew from add-on business with some of our leading customers, tempered by some continued lower transaction volumes from the base as a whole. And our leading digital banking offerings continued to perform extremely well. In addition to this strong revenue performance, we achieved some solid bookings wins with our sales and customer success teams this quarter. PayModeX added 25 new payers across a variety of industry verticals, including healthcare, higher education, and property management, both through direct sales and also via our bank channel partners. And we now have more than 450,000 vendors on our network. Eight new customers, including Frontline Insurance and Embark General, chose Bottomline's legal spend management solutions and seven existing customers expanded their relationships. And our digital banking solutions secured key wins with a $500 billion national bank selecting Bottom Line's digital banking platform, a $10 billion consumer credit reporting agency selecting our cloud enabler and encryption solutions, and a $500 billion national bank extending our cyber fraud risk management solution to protect against insider and employee fraud. Although overall, our bookings of 20.3 million were down a bit from last quarter, as you know, we commonly see variability from quarter to quarter. Several large deals pushed into Q4, some of which have now closed. And overall, Q4 bookings are looking very strong. By the way, that bookings number includes new subscription revenue streams from customers that we convert from other revenue models, typically legacy license and maintenance models. Previously, our reported bookings levels excluded those, but when I saw that, I proposed that we include them because they are a real driver of increased subscription revenue growth for the future, which, as you all know, is our primary objective. Over the past few quarters, the difference between those approaches was just a few hundred thousand dollars, so not material, but anyway, I thought I'd call out this tweet to this metric. Turning to the rest of the P&L, as I mentioned earlier, we hit our Q3 EBITDA core operating income and core earnings per share targets. Gross margin for the quarter was 60%, up 2% from Q3 of 2020, powered by 62% gross margins from our subscription products. We reinvested that added gross margin into our go-to-market and product development engines in order to continue to accelerate our growth. Our cash flows and balance sheet remain strong. We produced $37 million of operating cash flow and $28 million of free cash flow in the quarter. As of March 31st, we had 138 million of cash and investments on hand. Notably, during the quarter, we closed our acquisition of Treasury Express for $31 million, and we did not repurchase any shares in the quarter. We expect a strong finish to the year in Q4. We expect subscription revenue of 102 to 104 million, which equates to 16 to 19 percent growth over Q4 of 20. You'll note that this range is a little lower than the 18 to 20% expectation that was previously communicated for Q4, primarily because we now expect currency exchange rates to be a little less favorable in Q4 than we anticipated when we provided that guidance initially. We expect total revenue in Q4 of 122 to 124 million, so 10 to 12% total revenue growth. EBITDA is expected to be 24 to 25 million, core operating income of 16 to 17 million, and core earnings per share of 25 to 27 cents. When we achieve those results, we will hit our previously communicated targets for the full 2021 fiscal year across the board. Subscription revenue growth, overall revenue growth, EBITDA, operating income, and EPS. Looking ahead to fiscal 22, we remain committed to our primary objective of delivering consistent 15 to 20% subscription revenue growth. We've looked at the many variables that will impact where we end up in that range, including go-live and ramp timing of our booked solutions, the pace of volume increases in our transactional revenue streams, forward foreign currency exchange rates, and many others. We have taken what we believe to be conservative assumptions about all of those elements, and we have high confidence in committing to 15%. As the new fiscal year arrives and progresses, we will revisit and refine our projected performance in the 15 to 20% range. Driven largely by this commitment, we expect a minimum of 10% overall revenue growth in fiscal 22. It has been a strong ambition of ours to drive through the impacts of revenue model transitions and bring the company to double digit growth. We expect to achieve that in Q4 of this year and to maintain 10 to 11% overall revenue growth through fiscal 22. In terms of profitability, we are committed to a minimum of $106 million of EBITDA in fiscal 22. We could drive the company to a higher level of profitability next year if we chose to, but there are critical investments that are the better choice to ensure our accelerated longer-term growth. For example, we suspended regular salary increases with the onset of COVID, and as a result, our people have now forgone raises for the past two years. which is not sustainable in today's highly competitive market for technical and leadership talent. In addition, we see an opportunity now to capitalize on the market opportunity in front of us by continuing to invest in new product creation and enhanced go-to-market capabilities. Making these investments is the prudent and impactful course of action that still allows us to deliver $1 to $2 million per quarter of EBITDA growth over fiscal 21 levels. So in summary, for fiscal 22, we anticipate subscription revenue of $445 million or more and total revenue of $520 million or more. We are proud to predict that in fiscal 22, Bottom Line will become a half-billion-dollar revenue company with double-digit growth. We'll provide further updates of our guidance in our next earnings report, including details about operating income and core EPS. I'm also happy to share with you that Angela White has just joined us as Vice President of Investor Relations. Angela is an experienced IR professional, having led the function at Endurance International Group and Vistaprint SimPress. Angela and I look forward to continuing to build on Bottom Line's relationships with our investor community over the coming months and years. When I joined Bottom Line two months ago, I saw a company that is uniquely positioned to capitalize on a huge market opportunity. I saw a company with a very strategic position in the middle of a FinTech market with enormous potential for long-term growth. My highest priority and ambition for Bottom Line is that we continue to realize that potential, accelerating top-line growth while balancing the need for investment, profitability, and cash generation. Along the way, we'll continue to provide you with a clear strategic and financial plan and ensure that we execute against that plan and deliver against our commitments. Our performance in Q3 represents strong achievement across all of those ambitions. And as we look ahead to Q4, fiscal 22, and beyond, I'm increasingly confident that Bottom Line will deliver every bit of the bright future that we envision. Now we'll open the call for questions.

Thank you. Ladies and gentlemen, at this time, we will open up our call for question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number 2 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. Our first question comes from Andrew Schmidt with Citigroup. Please state your question.

Hey, Rob. Hey, Bruce. Thanks for taking my questions. And again, Bruce, welcome.

Thanks, Andrew.

To start off, I'd like to ask sort of incoming CFOs a similar question just on sort of outlook philosophy. Could you talk a little bit about, you know, your philosophy on providing an outlook and communicating with the street? You know, do you tend to set more prudent expectations? Is it, you know, anything along those lines in terms of sort of your philosophy in setting up the forward expectations would be helpful.

Sure. Thanks, Andrew. Good question. Well, I think I'm in a bit of a fortunate position here in some respects because I have the benefit of joining a company that's got accelerating growth. So I can both, with Rob, provide you all with a very optimistic view of our ability to grow by at least 15% in fiscal 2022 and and also feel comfortable in providing that guidance. As I mentioned in my comments, we looked at a lot of variables that go into that. There are some of those that are more within our control than others. And I think to answer your question concisely, I'd say we tried to take conservative but reasonable assumptions. It's not a layup. We didn't want to put a layup in front of us. But it's very, very achievable. My goal, of course, coming out of the chute here is to perform at the expectations that we set.

Got it. It makes a lot of sense. And then you mentioned, I think, $106 million in EBITDAs being the minimum for FY22. Should we think about that 15% subscription growth similarly, that sort of a baseline? to sort of reference and then as you get more visibility, potentially that could come up. Is that the right way to think about it?

That is exactly the right way to think about it. We can deliver the 106 million of EBITDA at the 15% growth level. If we're able to get to 16 or 17 or more, that'll free up more gross margin, obviously, and we probably wouldn't logically reinvest all of that in real time over the course of the year. So yes, I think it would be logical to expect we might bring the EBITDA up accordingly. But I don't want to get too far over our skis. We want to watch those things happen before we adjust.

Yeah, it makes a lot of sense. We're not even in FY22 yet, so it makes sense to start at that level. That's helpful. And then last one for me, and I'll jump back in the queue. So it looks like last quarter, products not impacted by transaction volumes grew 19%. acceleration to 21% this quarter. Why, you know, shouldn't we expect once transaction volumes coming back, start coming back in legal spend in PMOX, what are some of the factors to consider there? Because it seems like you're having pretty robust, you know, 19, 21% revenue growth for those products that aren't impacted. And it seems like, you know, the transaction, the transaction-based businesses should accelerate as you get volume back. Are there gating factors to that math? Because it seems like there should be faster growth just based on the sort of the non-transaction businesses and the transaction businesses and the subscription revenues.

I think, Andrew, the way to think about it is that once the transactional business normalizes, that we will kind of approach that 15% minimum level of overall growth across the various products. There is some variability from product to product across the various subscription revenue offerings, but I don't think it's the case that when you get through the kind of post-COVID recovery of the transactional businesses, suddenly everything is automatically going to go to 20%. It'll average out more. We feel it'll average out more in the range that we indicated.

Yeah, you've got a mix of factors, of course, Andrew, as you know. And you've said probably the most important thing. You said we aren't even in FY22 yet. So we're looking ahead. But it's questions like timing of go-lives, the time of a ramp. Those are all factors that can drive the variability in the level of growth and the difference between the 15 and a higher number. And we wouldn't have confidence or visibility today to 100% commit to those.

Got it. Makes a lot of sense. Thanks, Rob. Thanks, Chris. Appreciate the comments.

Our next question comes from John Davis with Raymond James. Please state your question.

Hey, good afternoon, guys. Rob, maybe just to start on bookings, I think you've noted that a couple of deals got pushed out of 3Q and into 4Q, and some of those have already closed. I'm wondering if you could size those just as I look at at bookings on a year-over-year basis, so I totally understand it can be lumpy, but I think now for basically year-to-date, fiscal 21, we're below where we were. So just trying to kind of solve for the bookings that you need to sustain that 15% to 20% that you talk about, and maybe you could just help us understand what that could look like in 4Q or at least what's closed to date.

Sure. Sure. Well, first off, so when you mentioned deals pushed out, we have one single deal that kind of closed the gap between Q2's bookings and our bookings for Q3. So that is, in fact, we have seen some of those deals close. In terms of the bookings we need to drive the growth, there are a number of factors that drive growth that don't go through bookings. So how we're ramping, I made some comments about vendor enrollment and how we're maximizing the revenue opportunity around PayModeX. That won't appear in bookings. When our customers grow, our revenues grow in legal spend and in PayModeX. So that won't go through bookings. So there's a couple different ways that we, and then last I mentioned is backlog. We have a lot of backlog both in terms of go lives and in terms of vendors come on the network and legal spend opportunity to fully realize ramp. So we're not concerned about having a level of bookings for next year's revenue growth. Certainly can see that and have visibility to that 15% today. In fact, if you think about our model, bookings that occur now are impacting the back half of next year at best. we have the bookings we need for next year's revenue growth, no question. And we've got a very solid pipeline. And as I indicated during my remarks, we expect bookings in Q4 to be stronger than they were in Q3. Okay.

Historically, you guys have talked about on a trailing 12-month basis that bookings could, you know, if they're in the range of 25% to 30% of trailing 12-month subs and trans revenue, that that was a good way to think about that? Is there any change there? Does that still kind of hold true?

You could look at it that way, but there are factors outside of the bookings number. Remember that the ramp, so the more successful we are with vendor enrollment and ramp on PayModeX, for example, can drive a lot of revenue that won't flow through the bookings number.

Okay. Okay. And then, Bruce, one for you, and I can appreciate that this is your first call here. But it seems like the 22 guide is framed a little bit differently than it has in the past in the sense that you're saying this number at least or better. And I think that's a little bit different than how it's passed. I just want to make sure that I'm understanding that correctly for all the numbers that you gave, that they're kind of this is the – the minimum based off of what we know and see today, because I think that's just a little bit of a change in how it's been framed in the past.

Yes, I think you're right. I think it is. There would have been a range in the past, and it's deliberate. I was quite keen to put a number out there that I felt high, high confidence we would make. It's not a guarantee. I don't want to say it is, but as we said a couple times here, we've looked at a lot of factors and tried to say, Even if everything doesn't quite fall the way we want it, can we still hit this number? And I think that's what the 15 and the 106 represent. And the 106, of course, allows for some investment to drive that number higher. The reason the 106 is where it is is because we want to get the 15 to the 16 to the 17 to the 18 over the course of fiscal 22 and going forward.

Okay. And then on that margin, I think you commented on a couple of things and why I think it's implied to be down about 100 basis points year over year or thereabouts. Where exactly are you investing that? I assume you probably see some, from a gross margin perspective, is it fair to say that you still can see some operating leverage? So that would be flat to up. And so all this is kind of in the R&D and G&A line. Just talk specifically about about where you're investing. I think this will be year three with EBITDA right around $100 million. I just kind of want to better understand the investments being made to drive that and then the eventual operating delivers we can see.

Yeah, sure. So if you just think about the difference between 20% and 22% or 23% EBITDA, And you all, I think, when I looked at the average of what your all view was of 22, you had something like 118 million of EBITDA. So that's a difference of about 12 from what we put out. You know, that 12, I can give you three big drivers right off the top. The first is investment in customer-facing functions, sales, marketing, customer success, and vendor enrollment. If I just look at those areas and only the people that we want to bring on board to kind of turbocharge those functions and drive better bookings, better customer engagement, better revenue for the future, that's $8 million, $9 million right there, difference between 21 and 22. I mentioned in my comments that we want to give our people salary increases for the first time in almost two years. $7 million right there. And then one other investment we made last quarter when we closed Treasury Express was to broaden our product portfolio in treasury management. As we've said, that's a really, really important set of functionality to add to our offering. And it's $2.5 million worth of of cost impact dilution in fiscal 22. So when you put all those together, you more than kind of explain that difference between the level you guys had in mind and what we communicated. And we just think those are all the right things to do for the future of the business.

Okay. And the last one for me, Rob, you've talked a lot about shareholders will be handsomely rewarded. I apologize I missed it. Did you guys buy any any stock back in the quarter, and then just remind us where you are on the authorization. And I think given the M&A strategy you kind of deployed to kind of go out and kind of take small bites at the apple and try and develop it internally, which is I think the right way to do things given valuations, but don't be balance sheet. Maybe talk about your appetite for stock buybacks with the stock in the mid-40s and just how you think about capital allocation. Maybe you as well, Bruce, that'd be helpful. That's it for me. Thanks, guys.

Sure. Well, as Bruce had indicated, we did not buy shares this quarter. We spent $31 million on Treasury Express, so we did not buy. We have about $20 million authorized in our buyback program today. What's going to drive shareholder value is not buyback, so what's going to drive shareholder value is growth of the business. You see comp companies and growth is certainly rewarded appropriately. When we're adding customers today, we'll retain those customers for a decade or more. The lifetime customer value of those customers is extraordinary. So we know we're building value in the business-driving growth, and we'll soon be at $500 million in subscription revenue, which is a major change from where we've been and where this company is. I'm hopeful and believe we'll get recognition for that.

Thank you. Our next question comes from George Sutton with Craig Hallam. Please state your question.

Thank you, Bruce. Welcome. I did have a question on the vendor focus. It sounds like you're going to be focusing more on the vendors. Historically, of course, you had been working effectively for the corporations. And I'm curious the thought behind that. with respect to PayModeX, and were you getting any vendor pay pushbacks, and is that behind the move? Thank you.

Sure. Well, first off, it's not driven by vendor pushback, although I would tell you in a vendor pay model, whether that's virtual card, ACH+, or whatever type, there's always some level of pushback to being the side of the transaction bearing the cost of the freight, if you will. So that's always part of the model, but no, it's not driven by that. And I wouldn't want to leave the impression that we're not focused on payers. We're, of course, focused on payers. We're driving new sales with payers, and we have an incredibly competitive platform, and we believe the best platform for payers to pay. The more value we can bring to vendors, though, the more enrollment we have, the larger the automation opportunity for payers, the higher the rebate, and the more revenue for bottom line. So vendors are looking at what does this get for me? Is it helping me with reconciliation? Is it helping integrate into systems? Do I get visibility to payment? Can I handle multiple payment types? Am I able to get a stream of how many different payers are paying me? All of those types of things that we can provide are value to that vendor that make it the value proposition for both sides of the network stronger. So that's really what it's about and that's what it drives for bottom line. Competitive position, value to payers because there's more vendors on the network and more revenue.

Got you. One other question relative to sales and marketing spend. It's up relatively significantly year over year and looks like you're clearly putting some money to work. I just wanted to understand can you give us some sense of where that increase is being spent? Is it being spent on a larger force to go to market, or is there something else there? Thanks.

Well, the first part I'd say in that is on digital marketing. You know, 70% of the buying process happens before human interaction. And we have a phenomenal marketing team, and so we continue to add and invest to that. It's less... The sales team is, of course, critical and important, and that's what brings things across the finish line. But how our... customer engagement, how our new prospect engagement, how we're building pipeline, that's all driven by digital marketing, quality of content, how we're tracking, all of those things. We've also picked up in COVID and doing events. They aren't expensive, but we're making an investment in that so that we have digital events. So we're continuing to use this environment, which actually drove a change in behavior. Rather than ask customers, can you make a hotel in Tennessee, Dallas, or Chicago for a conference? We can now have an afternoon and evening event, all WebEx and remote. So we're making an investment in those capabilities. Yes, we're adding the sales teams, and we're also adding the partnerships. How we can drive revenue opportunities through partnerships is an opportunity that Bottom Line does well through banks, but there are other channels. So those would be all the areas. It's probably an across-the-board answer, but starting with digital marketing.

Great. Thank you very much.

Our next question comes from Gary Prestapino with Barrington Research. Please, to your question.

Yeah, thanks. Hey, Bruce. Hi, Gary. Hey. you called out a couple of things here and investments and all that in 2022. But what are you assuming for FX? And really, what kind of a drag was FX in the quarter, first of all? And then is there an assumption in there for what kind of drag FX is going to be for next year?

FX was a modest drag in the quarter. I think one way you might think about it is, we took our growth range down for Q4 by about a percentage point, and we said that the bulk of that was driven by FX. So I think that gives you an idea of what we experienced in both Q3 and what we're expecting to experience in Q4. The numbers that we provided for fiscal 22 so far do not ponder They're basically based on spot rate logic for 22. We did not bake in some assumption about headwinds nor tailwinds from FX in 22. Okay.

And then can you tell us what's the breakdown of your subscription revenue between actual SaaS and transactions?

Well, So I'll step back, and first I'd make a comment on that. You know, I think for 15 years we saw transaction-based revenues be a better way, a better revenue model. That's the Visa model. It's the MasterCard model, which is what we follow in PaymentX. In legal spend management, we drive more revenue as our customers grow. The one time that was difficult was during the economic disruption of COVID-19. That's the only time we've had that revenue model be to our disadvantage. And I'm certain that, well, I believe that there'll be some economic normality that's going to return. And as that does, I'm certain that this is actually a more attractive revenue model than transactions. So yes, it's hurt us in this past year, but it's definitely the better model for us. It's probably about 40% round numbers. is transaction-based, 60% is subscription. It'll sound odd, Gary. If I had my druthers, I'd have it 100% transaction. I think Visa and MasterCard do pretty well for themselves, even though there are times the transaction can work against you. But today, the majority of our revenues are subscription. A portion is in that transaction model.

Oh, yeah. I'm not trying to be critical. I'm just trying to understand the magnitude here. And then in your guidance for next year, again, when are you assuming some kind of normalization in the transactional business? The back half of the year?

I think, Gary, we're seeing it right now. So when we think about normalization, we are in both pay mode X and legal spend, which are the two businesses primarily impacted. We're seeing them at this point, back right about at or slightly above, going into Q4, above the pre-COVID levels. So, you know, we think we're back where we were and kind of moving forward from there. We also are seeing the growth rates come back up. Now, you're starting to hit some easier laps, of course, in those businesses, but nevertheless, the growth rates are coming up, and there are just good fundamental dynamics in those businesses in terms of the amount of volume we're seeing with our customer base, and our commercial traction.

Thank you.

Our next question comes from Mayank Tandon with Needham & Company. Please state your question.

Great. Thank you. Good evening. Let me also add my welcome to Bruce. I wanted to, Rob, maybe ask you, because you provided some nice metrics on the Paymore to X platform, which is very helpful. are you able to share what is the dollar volume flowing through your rails today? Maybe expectations around that. And also in that same context, you know, how do you see yourself faring against the other AP players out there in the market? Obviously it's a very hot space. I just want to get a better sense of the value proposition that you're able to offer versus your, uh, competition.

Sure. Um, we don't have any particular number on the, um, transaction volume today, other than our over 200 billion runs through our network. The, um, competitive position. My comments on my prepared remarks here really address a good portion of that, where we're driving additional value to vendors. That makes a more compelling network. The other part that's really important in there is 450,000 vendors on the network. That means as we approach a payer, particularly in the verticals where we have a strong presence, one of the first things we'll do is we'll get a file indicating all of their vendors, and we'll have a direct match that can be 30, 40, perhaps even 50% of their vendors are already being paid on their network. So that means the process of ramping that, the process to automation, the process to rebate, is that much easier and that much faster for the payer. So scale and size matters quite a bit. As you reference other networks, I think over time you're going to see more interoperability and connection between networks. This isn't a winner-takes-all single market. I don't say that to suggest we're coming in anything other than first in the market we focus on, which is enterprise. But I think connectivity to other networks just provides more value. So if another network has, we have 450,000 vendors and another network has 200,000, which 50,000 of those are Vendors, our payers would like to pay. I think you're going to see interoperability in the coming years that will make the automation promise become real. Great.

That's helpful color. And then maybe two quick ones for Bruce. In terms of the margin question next year, is it evenly split between COGS and OPEX, or is it going to be skewed towards one of them? I'm sorry if I missed this. And then I have a quick follow-up around the trajectory around the seasonality. Anything we should expect that's abnormal in fiscal 22, or is it pretty evenly split in terms of the trajectory of growth and margins over the course of the year? Thank you.

Yeah, Mike, you broke up a little bit at the beginning of that. I think you said something about where will we be investing between – in COGS or in OPEX. Could you just restate that quickly? I want to make sure I got it right.

Yes, Bruce. I was just wondering the drag on margins in fiscal 22. Is that pretty evenly split between the two segments, or is it going to be skewed toward one or the other?

Yeah, so I don't think of it as necessarily being a drag on margins. I mean, we are still operating at about 20%. EBITDA margin, which is what we did this past quarter and what we're looking at for Q4 as well. So I think what we're doing is largely leveling at that 20% kind of EBITDA level. As we drive revenue growth, we're creating incremental gross margin, of course. So the dollars de facto are going back into OPEX and the kinds of areas that I was talking about earlier. Thanks. Oh, and then you mentioned seasonality. I'm sorry. Right. No, we don't currently anticipate any particular notable aspect of seasonality for next year.

Great. Thank you so much.

You're welcome. Our next question comes from Bob Napoli with William Blair. Please state your question.

Thank you, and welcome, Bruce. Well, good evening, Rob. Question, just on the 15% to 20% and the current trends in subscription transaction, which of your businesses do you expect to perform above average and are going to be bigger drivers of that growth rate over the next couple of years, not just next year?

Well, certainly if you look at the TAM opportunity and what we see going into next year, PayModeX, It's a huge opportunity, no question, to be the way businesses pay and get paid. And every bit of our outlook for next year indicates we'll see real strong results there. At the same time, our digital banking platforms, banks are competing for customer engagement. How can we retain that customer? How can I know more about that customer? How can I drive maximum wallets here? The market's gone so far beyond just how can I allow my customer to make an ACH and see balances and the like. And we're so well positioned with that. So we're in a very good position there. And then last, Europe, I'd mention in open banking, which is really interesting in changing the way businesses pay. And any time there's payment change, that's good for bottom line, because that means new platforms, that means new capabilities. So We look across. We don't see a drag on next year. We don't see a business area or a product set that's hurting us or holding us back. We see really almost unlimited opportunity around PayModeX over time, but feel strong about the full product set.

Thank you. I guess you've never, I don't think, given a net revenue retention rate. I think that would be helpful to investors that you could give a net revenue retention rate, and if you did it by segment, like digital banking, pay mode, even those two, it's got to be over 100%, I would believe, if you're growing on a subscription basis and transaction basis.

Yeah, you're right. It's a very attractive number. I agree that would be helpful. We've looked at bringing that together and out. The COVID and transactions sort of disrupted that and in some places made that skews that number. But I think the comment's well taken, and that's something we'd certainly evaluate to be giving out in the future.

And then just on Treasury Express and how that fits into APAR, the office of the CFO, I mean, the Treasury market is obviously a very large market, some significant players that are large and growing fast. in that area. Can you give some color on what you expect in revenue out of Treasury Express next year? But then, you know, strategically, how is the cross-sell going to work? How are you going to build out that business?

Sure. Well, we don't have a revenue number for next year on Treasury Express. It was less than a million dollars close in January. It was less than a million dollars. I'm sorry, less than half a million dollars in this quarter. So it's not entering the treasury market per se. It's really about the product capability. And if you think about the states of money, AP which is sending my payments out, AR which is receiving payments, and the middle state is treasury, managing cash, managing balance, managing all of those investment and the like. So what we wanted to do to have a full payments and cash lifecycle platform is have that treasury piece. You could sort of think of it as sitting in the middle, if you will, between AR funds being received and AP funds being sent out. What CFO does is that's advanced analytics that we've developed with machine learning and capabilities to help in cash flow forecasting, reconciliation, other aspects of cash and cash management. And bringing all of that together, so the full payments and cash lifecycle with Treasury Express, and then the data insights that CFO brings on top of that, that's our platform vision. And how we wouldn't look at that, we weren't entering the Treasury market just as a Treasury provider. What we're really looking at is a broader platform than anybody else offers today. Again, full AP to AR payments and cash lifecycle. That's the strategic importance of it. That's its relevance, and that's really why we are so excited about the combination. Great.

Thank you, Rob. Thanks, Bruce.

Appreciate it. Thanks, Bob. Our next question comes from Peter Heckman with David. Please state your question.

Hi. Welcome, Bruce. Thanks for taking my questions. I just want to clarify... The company has about, what, 35% of revenue coming from outside of the U.S., and the U.S. dollar has been weakening against those currencies. So it seems to me like the FX was about a 250 basis point tailwind to the quarter, and at current spot rates, it looks like it's going to be about a 250 to 300 basis point tailwind going forward. So if we exclude that, tailwind and the acquisition, is your initial guidance for 2022 really looking for about 12% organic constant currency growth and substance trans?

No. No, I don't think so. We've taken into account the currency effects for this year. And so I don't think the 15% converts to 12. There may be 100 basis points. I could look at that. But I don't think it's more than that when you think about the effect of currency over the entire year versus the entirety of next year. Okay.

Okay. I'll have to check that. And then I didn't hear it. Did you give a backlog for the digital banking business?

We didn't, but I'm happy to. The backlog as of March 31st stood at $16 million. And of that amount, 35% was expected to drop in across the end of the year here, just throughout this last quarter.

Okay, okay, great. And that's really helpful. And then just lastly, maintenance, did you give an operating cash flow number?

Yes, operating cash flow is 137 is my recollection. Oh, you mean for, I'm sorry, did you mean for the quarter itself? Yeah.

It was $37 million.

Right. Oh, okay. I've got it.

All right. Thank you.

Did I say $137? Yeah. Sorry. $37 million. Apologies.

Thanks, Peter. Thank you. Thank you. We have reached the end of the question and answer session, and that also concludes today's conference. Thank you, everyone, for your participation. You may disconnect your lines at