Bottomline Technologies F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

Bottomline Technologies (NASDAQ:EPAY)

F2Q09 (Qtr End 12/31/08) Earnings Call

January 22, 2009 05:00 PM

Executives

Robert A. Eberle, President and Chief Executive Officer

Kevin M. Donovan, Chief Financial Officer

Analysts

John Kraft - D A Davidson

Tim Willi - Avondale Partners

Brett Huff - Stephens Incorporated

Melissa Moran - Thomas Weisel Partners

John Maietta - Needham & Company

Colin Gillis - The Street

Operator

Ladies and gentlemen thank you for standing by and welcome to the Bottomline Technologies Second Quarter 2009 Earnings Conference Call. At this time, all participants are in a listen only mode and later we will conduct a question-and-answer session, instruction will be given at that time. As a reminder, this conference is being recorded.

Statement made today may include forward-looking information subject to risks, uncertainties and other factors that could materially affect actual results. For further information please see Bottomline’s reports filed with the SEC pursuant to the Securities Exchange Act of 1934 which are available at the SEC’s website www.sec.gov. During our remark Bottomline will refer to certain non-GAAP results, these non-GAAP metrics exclude amortization of intangible assets, stock compensation and acquisition related expenses. Throughout this call when they refer to non-GAAP it has that meaning. Bottomline will be providing forward-looking guidance on the call. A summary of the guidance provided during the call is available from the company upon request.

I would now like to turn the conference over to our host Mr. Rob Eberle. Please go ahead sir.

Robert Eberle

Good afternoon, welcome to our second quarter fiscal ‘09 earnings call and thank you for interest in Bottomline Technologies. I’m happy to say we will be reporting on what was a very good quarter for Bottomline. I’m joined by Kevin Donovan, Chief Financial Officer, who will provide a detailed review of the second quarter results and our guidance going forward and we will both be available for questions following Kevin’s remarks.

The second quarter was another very good quarter for Bottomline, I’m particularly pleased that we continue execute against all of our key financial performance metrics despite the unprecedented challenges in the economy. In fact our strategy, technology, execution and business model have produced positive results in the quarter and allow us to compete in the market from a position to strength.

We see opportunities in this environment, opportunities to increase our competitive position and strengthen our long-term business model. In short, we have growing business that is executing well against its operating plan and financial metrics; revenue, operating income, EPS and cash flow in the quarter all have been in execution and growth.

Our offerings are well received in the market as evidenced by strong order flow in the quarter and we are well positioned for future success based on our leading technologies, strong domain expertise, large customer base and business model which favors predictable long-term recurring revenue streams.

So turning to the second quarter highlights particularly revenue, profit, orders and cash I will go into each briefly. Revenue for the second quarter was $34.3 million as an increase of $2.5 million or 9% from the prior year. Revenue was driven by continued demand across all product categories. It’s important to note that revenue was impacted by fluctuations in currency, and on a consistent currency basis year-over-year revenue growth was 18%. 64% of our revenues were recurring.

All our profit metrics moved forward with EBITDA $4.2 million, an increase approximately 20% from the prior quarter, operating income of 3.2 million an increase of 29% from the prior quarter and EPS of $0.14, which is an increase of $0.02 from the prior quarter all inline with our plan.

Orders were $43.7 million, up approximately $9 million from a year ago, an increase of 26%. Orders reflected the continued demand across all product categories.

Based on the strong orders, we ended the current quarter with backlog up 34% from a year-ago with almost $75 million, a substantial backlog adds visibility and predictability. Cash flow was over $10 million in the quarter, that's a record and with the strong cash flow we ended the quarter with almost $35 million in cash after repurchasing over $1 million in shares. The strength of the financial results speak for themselves and they show a company executing on its plan and opportunity.

Kevin will go through the numbers in detail but I'd like to highlight one key metric I mentioned, orders. Orders are the life blood of any business. Orders are an indication of the businesses market opportunity, competitive position and success in engaging with the customers. Orders are a view of revenue to come, of the future health of the business. At its most basic level, the orders demonstrates the positive reception our offerings continue to receive in the market.

During the quarter, we had $43.7 million of orders, which was up 26% year-over-year, 36% from the prior quarter and on a consistent currency basis 35% year-over-year. Our book-to-bill ratio was 1.27, all of which is strong indicators of our market success. It’s important to note as many of you know, we can have a large order in any given quarter but that was in the case in this quarter we had the largest order was 6% of the total. So put differently, the strong orders result is a broad based steady demand, not just one or two large deals.

I cannot be more pleased with our sales execution and the fact that despite these challenging market conditions, customers are continuing to buy and they are continuing to buy from us and we're continuing to grow as a business. I want to give you a little flavor on why our customers buy from us. Our customers are buying from us because we provide them technologies to drive revenue, to drive competitive advantage, to drive increased operating efficiency and reduced expenses and greater visibility and control, particularly of their cash, a critical asset in any business cycle, but all the more so today.

Let me give you a flavor of some of significant orders we had during the quarter and what's behind our success. During the quarter, we had a very large well known software provider that offers a niche PRP product come to us to provide payment and document automation capability. The order was for $2.6 million which represents a quarterly minimum commitment, and actual revenues will be higher than that based on that levels of sales that occur over the five year committed contracts.

We had a $2.5 million order from a major Australian bank. Despite the headlines and challenges, our bank customers continue to buy from us, to offer their corporate customers our advanced payment capabilities and secure existing customer relationships, win new customers and drive incremental revenue. We had an order in the quarter for a channel offer for our Business eXchange platform. The order has $1.6 million minimum with additional revenue share opportunities as it spread over a three year period.

We had an order from AIG for close to $1 million as they loaded new matters on to our Legal eXchange platform. They used their platform to automate their receipt and evaluation of legal invoices. And we're particularly pleased about an order we had for just over $1 million from a major European bank.

This is the direct outcome of the new effort focused on European banks that I outlined in last quarter’s call, generating over $1 million in business in our first quarter with this effort produces and medium positive return on the investment and more importantly we see large opportunity ahead.

The orders I’ve just highlighted are those of a strong business executing on its plan and opportunities despite the market conditions.

While no one would wish for what we've experienced in the economy and the capital markets, from a competitive and future growth standpoint we see increased opportunity and we intend to capitalize on that opportunity. While Bottomline performs, many of our competitors are struggling. Many of these companies are small privately funded companies dependent on new financings for cash. They don’t have the stable cash flow from operations that Bottomline consistently generates.

In this environment it’s far more difficult for them to get that cash and many of them are forced to cut expenses, cut the level they spend on technology, products, sales and customer service. Thus we are seeing an opportunity to increase our market share, customer base and competitive advantage. In fact we are increasing our investment in several key areas. Customer delivery and support, technology in our leading product set, sales and marketing coverage and programs, and our business model which favors predictable recurring revenue streams.

We’re able to make this investment because Bottomline is continuing to grow. Our future growth will fund increased rather than decreased spending to grow and advance our business while maintaining the positive earnings and cash position we have reported today.

The areas of focus such as our customer base are keys to our sustained growth. Bottomline has a great customer base. With 9,000 customers worldwide, including 80 of the Fortune 100, 70 of the Financial Times 100, 15 of the top 25 global banks, eight of the top 25 insurance companies and over 700 hospitals, including 15 of the top 25 US healthcare providers. This space is a huge competitive advantage.

In this market, customers are looking for trusted prudent providers that they can count on to be around and service them for years to come. Bottomline is just that. And we are increasing the manner, the quality, and the efficiency with which we support our customers in many ways. Supporting our customers and seeing their success and future business is always a focus, all the more so in a tough environment.

The second area that I'd like to mention is our technology, which is a tremendous competitive advantage as well. We are the leading product set in each of the markets we address, and we see an opportunity to further extend our capability and competitive lead. No other organization has the breadth of payment, cash management, invoice and document management capabilities Bottomline has. We will extend this lead over the next year.

Finally, our efforts to build recurring revenue streams are in effect an investment in the future. Each time we forego current revenue opportunity and favorite longer-term predictable and often greater revenue streams, we are positioning Bottomline for a future that will drive the highest reward to shareholders.

So in closing I am very pleased with what was a very strong quarter. In summary customers are buying and we are winning. Revenue, on a consistent currency basis was up 18% year-over-year, while EBITDA, operating income, and EPS all advanced as planned.

Orders were very strong, evidencing our success in the market and giving us confidence in the future. And cash from operations was over $10 million, adding to our solid cash position. And we see an opportunity to take Bottomline further forward in a manner we are confident will produce positive results and reward shareholders.

So that concludes my remarks. I’ll turn it over to Kevin now for his comments on the financials and the we'll both be available for questions.

Kevin M. Donovan

Thank you, Rob. We had a very good second quarter with revenue of 34.3 million and EPS of $0.14. The strengthening US dollar had a $3.3 million impact on top line revenue. On a consistent currency basis revenue increased 18% in the quarter. Customers continued to buy our solutions as evidenced by strong order flow during the quarter, orders were $43.7 million in the quarter which represented 26% growth on a year-over-year basis and 36% growth on a sequential quarter basis. On a consistent currency basis orders grew 35% year-over-year and 43% sequentially.

The strengthening orders number for the quarter help drive a backlog of 74.8 million, the size and predictability of our backlog, provides us with a high level of visibility into our future revenue streams. Looking forward, we are confident in our business and future outlook, with strong customer demand and clear visibility into future revenue results, we are very well positioned in the markets in which we compete.

I will now provide a more detailed review of the financial results. Revenue was $34.3 million in the quarter, a $2.5 million increase over last year, recurring revenues were $21.9 million in the quarter representing 64% of overall revenue. Recurring revenue is derived primarily from software maintenance and subscription and transaction revenues.

Subscription and transaction revenues were $7.7 million in the quarter, 23% of overall revenue. The year-over-year increase in subscription and transaction revenue was primarily driven by a Legal eXchange offering, recurring revenue for the Legal eXchange increased 14% from last year.

Service and maintenance revenues increased by $2.4 million from last year to $20.5 million and included increased professional service revenue associated with several large banking implementations. Revenue from international operations represented approximately 45% of overall revenue and 15% of our international revenue is generated through Asia Pacific operations. As we have previously mentioned, we are in the middle of the implementation of a strategic subscription deal with SWIFT.

During the quarter we billed SWIFT $700,000 for professional services. No revenue or profit was recognized during the quarter on these billings and we expect to begin to recognize the seven figure annual subscription fee and professional service fees beginning near the end of calendar 2009. During the quarter gross margins were 56%, which is consistent with historical levels.

Turning to operating expenses, non-GAAP operating expenses were 1$6.1 million in the quarter, down 7% from last quarter. Operating expenses declined approximately $900,000 from Q1, as a result of exchange rate declines. On a consistent currency basis sales and marketing and development expense were consistent with last quarter, while G&A expense decreased by $300,000, which reflects our goal to drive efficiencies in our G&A function.

Operating income increased 29% over the prior quarter to $3.2 million, while EBITDA increased 19% to $4.2 million. On a consistent currency basis, the sequential quarter growth in operating income was 40%. On a non-GAAP basis net income $3.3 million or $0.14 per share, a $0.02 increase from last quarter and inline with our guidance.

From a balance sheet perspective the company ended the quarter with $34.8 million in cash in short-term investments. During the quarter, we used approximately $1.1 million of cash to repurchase shares of stock under the repurchase program, and the change in exchange rates impact the cash by approximately $4.1 million.

Now, withstanding the use of cash for share repurchases and the impact of exchange rates cash increased $4.4 million during the quarter driven by record cash flow from operations in excess of $10 million. Backlog at the end of December was $74.8 million, an $18.9 million increase from last year and $2.9 million increase from last quarter.

The increase in backlog reflects the strong order flow during the quarter. Our business remains strong and we've seen continued customer demand for the solutions we provide as evidenced by strong order flow and an active pipeline. We have solid visibility in the future quarters with the predictability of our revenue model and the size of our backlog.

At the start of each quarter, we have visibility towards almost 80% of the revenue we will ultimately record during the quarter. I'll take a moment and explain this in more detail. First, our recurring revenue which is comprised primarily of software maintenance in subscription and transaction revenue represent 64% of overall revenue. The highly predictable nature of this recurring revenue provides a strong and stable revenue foundation to build upon each quarter.

In addition to our recurring revenue, we also had visibility at the outset of the quarter into certain amounts of professional services that will be performed during the quarter. Using the second quarter as an example, approximately 13% of our revenues came from services delivered on customer agreements that existed at the beginning of the quarter. Combining the recurring revenue with the services backlog provides us with revenue visibility of almost 80% at the beginning of the quarter.

In today's environment, this high level of revenue predictability allows us to confidently focus on and invest in growth opportunities.

I have covered a lot of numbers in my remarks, for those of you trying to reconcile our historical results, let me summarize the affect of currency changes in the quarter. Revenue was impacted by $3.3 million, orders by $3.3 million, gross profit by $1.8 million, operating expenses by $1.3 million, net income by $400,000, cash by $4.1 million and backlog by $3.1 million.

Turning to our financial outlook, our business continues to grow. Our orders, backlog and pipeline all support future. This growth and the overall predictability of our business model provides us with a competitive advantage. As Rob highlighted, we have the opportunity to leverage the current environment to expand our customer base and share of the markets win which we compete, by increasing our investment in customer, sales and marketing, technology and product initiatives over the coming quarters. During that time, we will continue to grow revenue and deliver earnings.

We expect revenue to be between $33 million and $35 million in the third quarter and between $33.5 million and $35.5 million in the fourth quarter. Our earnings guidance is a range of $0.13 to $0.14 over the next several quarters. It is important to note that this guidance reflects the impact of currency at current levels. Since the time of our last earnings call in late October, the exchange rate of the British pound has dropped by an additional 15%, driving a revenue impact of between $2.1 and $2.3 million per quarter on our prior guidance. We look forward to reporting our continued success in the quarters to come.

In summary, we had a very good quarter with a $2.5 million increase in revenue, a 26% increase in orders, a 29% sequential increase in operating income, and over $10 million cash generated from operations.

As we look forward, the predictability and visibility of our recurring revenue model combined with continued customer demand for our products gives us a high degree of confidence in our future financial outlook.

We will now open up the call for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from the line of John Kraft of D A Davidson.

John Kraft - D A Davidson

Hey, Rob. Hey, Kevin.

Robert A. Eberle

Hello.

John Kraft - D A Davidson

Well first congrats on the orders. The orders look nice and diverse; and backlog, it looks like the highest growth we’ve got on record. I was wondering if you could talk more about the SWIFT partnership, and if you’ve had any early success signing contracts there and really just what the status is besides your implementation that you talked about?

Robert A. Eberle

Yes, sure. I’ll actually cover all fronts of that. First off, the offering has been very well received. We’ve signed on a number of customers to date. And what we’ve done at this point is gone through a detailed review for the next phase and release. Now, that’s actually pushed out the schedule for a go live and a go live on our subscription revenues. But the work we’ve done with SWIFT, I was there for three days at the beginning of the January quarter for part of the work. It’s really setting ourselves up for a much stronger offering and doing a deep dive into what do we want to have from a feature function standpoint. So we are working very closely with that organization. It’s a great partnership. If anything, I think there’s a higher potential on the revenue share piece today than we first signed it. But I don’t have specific metrics that at this point we can layer in. It’s still going to be when we launch, which at this point now will be the end of the calendar year that we will really see the ramp on their end. And we’ll also again begin to start recording the revenues on our side.

John Kraft - D A Davidson

Okay. And then moving on to some other international opportunities, seems to me that we are hearing more and more reports regarding faster payments and SEPA of that second tier adoption slowing or stalling. Can you comment on either of those?

Robert A. Eberle

Yes. You’re definitely hearing reports of that slowing, and then there’s different pieces of legislation which could be delayed in the European Union, or regulation I should say, that would slow that. I would tell you, we haven’t been particularly dependent on that. We view different payment types and payment changes as an opportunity, SEPA has been a long time coming. So we’re really looking at more things we can do around automating the entire cash cycle with customers, the banks in Europe, for example. There’s bigger opportunities than either faster payments, the UK initiative, or SEPA, our European Union initiative.

John Kraft - D A Davidson

And then just to clarify, I am trying to reconcile some old metrics that I have. When you talk about bookings, the total bookings, are those all North American.

Kevin M. Donovan

No, orders would be global orders.

John Kraft - D A Davidson

You used to provide a North American bookings number. Did they used to be simply North American and now they are global? This is just a few quarters ago.

Robert A. Eberle

I’d be surprised, John, if there was a North American number. I would tell you two things on it. One is, we really don’t track or look at it that way. John, in the last couple of year, frankly with Bottomline, it’s become one global company. So one global development organization, supporting our customer sets in different geographies, and we will have groups focused like our banking group that we’ve now launched with the European initiatives. But we are much more of a one organization. So if you have something like that, that could be four or five years ago, and we might have thought about it that way.

John Kraft - D A Davidson

All right.

Robert A. Eberle

Today, Bottomline is one global company.

John Kraft - D A Davidson

Okay. And then if I could sneak in one more, with the guidance reduction, is there a way you could quantify for us how much of the earnings reduction is due to the increased investment?

Kevin M. Donovan

Yes, John, it would be a couple of pennies that would be represented with the increased investment.

John Kraft - D A Davidson

So primarily, that’s what’s happening here.

Kevin M. Donovan

Yes. You have two things. There’s an effect on currency that will have an impact on the earnings guidance and then there will be an increased investment of a couple of pennies.

John Kraft - D A Davidson

Okay. All right, thanks a lot. Thanks, guys.

Operator

And our next question will come from the line of Tim Willi of Avondale Partners. Please go ahead.

Tim Willi - Avondale Partners

Thanks. Good afternoon. A couple of questions here. One is, Kevin, the other income line, about $600,000, I think just looks a little bit higher than it typically is. There is something in there worth noting that would make a sort of a one-time blip.

Kevin M. Donovan

No, I think there’s a little bit of currency related items that are in there, but it’s primarily interest income that’s in that number.

Tim Willi - Avondale Partners

Okay. Next question was, in terms of demand and just selling, obviously the numbers seemed to speak for themselves. I’ve actually heard and you’ve got a lot of big customers or potential customers that are in the news a lot with share prices that frankly in some cases are lower than yours, but it’s been substantially much higher. And they are getting capital from the government. They are not lending it, which is what everybody is mad about. Have you seen any kind of change in some of these really large banks that you are calling on that might be getting government money, whether it be in Europe or the US where there’s just a little bit more confidence that there is capital there and maybe these are sort of kitchen sink kind of years here in ’09, or people will just say, “You know what, let’s just spend and get it over with.” Have you seen any kind of change in an attitude in your discussions with people that as you talk about selling this stuff and making it happen?

Robert A. Eberle

No. We certainly have not seen that. And if I interrupt your question, we’d frankly would welcome that obviously. No, we are still seeing it’s absolutely tougher. It takes longer to get things signed. It’s not uncommon for people who are working with it at some of the organizations you mentioned to be eliminated or reorganized and we’re starting fresh either in an existing customer relationship or an implementation or actually in a sales cycle with new people. There are in a number of our customers, we will have restrictions on travel, so we go to them, so literally prohibited even a short flight to Boston to see us. And I think I’d say there’s still an awful lot of concern and fear in some of our large customers, fear of where’s the next step, what’s the next reorganization, and there absolutely is intense pressure on cost. What we have to do against that is provide greater value. And frankly, part of the increased investment we are making is exactly that. It’s greater customer service to retain these relationships, to prove the value, to be able to frankly travel with them. For example, that’s not a significant big number that moves pennies. But that’s the type of extra support we are providing to these organizations because at the same time they are still buying. What we provide is customer facing and revenue generating. A number of these organizations have either bought or integrating other entities, that requires the move to a single platform. These efforts have momentum. They have funding. So we absolutely see the availability of revenue with these customers, in fact, larger revenue than we’ve typically gotten in the past. It’s just harder to get there. And no, we’ve not seen a “let’s just let it rip” if I understood your question right, kind of environment.

Tim Willi - Avondale Partners

Okay, okay. That’s great. Thanks. Subscription and transaction revenue, if I break out, we will go exchange based upon your commentary. It would look like the rest of that line side’s growth rate slowed. Kevin, would that be some kind of quarterly aberration? Was there some stuff that was larger in the entire quarter that was not recurring?

Kevin M. Donovan

No, what you would see in there is the effect of the change on exchange rate. There’s almost $1 million impact on a sequential quarter basis from exchange rate. So you do see some of that movement.

Tim Willi - Avondale Partners

Okay, okay. Last question, and then I’ll hop out, is cash, buyback and your comments about M&A, it would seem if reading your comments correctly, Rob, that competitors are struggling. You guys have got the benefit of everything that you highlighted. How do you think about M&A right now and also buyback? It would seem to me with where your share price is at, the continued buildup of cash, I am actually a little bit shocked at the low amount of shares that were bought back in the quarter, unless you were blacked out because of some stuff around M&A due diligence that kept you out of there. I would have thought that 1 million shares would have been readily doable given the price of the stock and the cash position, not $1 million. So I am just curious, are you dialing back on buyback a little bit because you’re seeing the pipelines and the potential targets picking up on the M&A front? What should we think about as we try to balance those two?

Robert A. Eberle

Well, two things have happened, right? One, the stock is at a more attractive level. But the second is our ability to use the stock, if and when we’d see M&A opportunities, which I think we will see at some point in the future. I don’t know the capitulation in valuations really there yet. But I think we will see that in the future. Our opportunity to use the stock as currency is obviously much weaker. So we are continuing to buy back shares but we are going to do that at a balanced level I think as a response. And then you did hit something that was pretty important. There’s an awful lot of blackout that will occur that prevents us from being in the market as well.

Tim Willi - Avondale Partners

Are you probably more likely to be in a cash building mode? Should we expect to see these cash balances probably moving up, maybe buy back a little bit of stock, but cash is going to build because you want to have a lot of dry powder for deals because the stock is not a good currency right now?

Kevin M. Donovan

I think that’s the balance. We certainly will be buying stock, but we would generate an increase in cash on a quarterly basis would be the plan.

Tim Willi - Avondale Partners

Okay, thank you.

Operator

Thank you. And next we will go to the line of Brett Huff of Stephens Incorporated. Please go ahead.

Brett Huff - Stephens Incorporated

Good afternoon, guys. Congrats on a nice quarter.

Robert A. Eberle

Thanks, Brett.

Brett Huff - Stephens Incorporated

Three quick questions. Number one, Kevin, I think in your detailed discussion, you talked a little bit about G&A, in that I think what you said is on a common currency basis, G&A was down $300,000 sequentially. Is that right?

Kevin M. Donovan

That’s correct.

Brett Huff - Stephens Incorporated

I guess sort of two sub-parts to this. Number one, what was really driving that; and number two, are there additional, what do we think about common currency going forward on what you guys are doing on that front, given what you’ve said about investments?

Robert A. Eberle

We had some cost savings that we saw during the quarter from a staffing perspective. We would not expect to continue to see $300,000 declines on a sequential quarter basis, but we certainly have focused and moved to try and become more efficient with our G&A function. And the benefit we’ve seen on that is some reductions in overall headcount, which has driven down some of the overall cost of the function.

Brett Huff - Stephens Incorporated

Okay. So we should – it sounds like flat G&A common currency is something to think about.

Robert A. Eberle

Yes, we’d expect that as we continue to scale and grow, we would in turn maintain these current levels. So G&A expense would decline as a percentage of overall revenue.

Brett Huff - Stephens Incorporated

And on your new orders that you were talking about and/or the revenue that you recognized, what were kind of the split between new customers to you and add-on business to existing, any color there?

Robert A. Eberle

We don’t track that per say on our new customer. But I would tell you that typically with the 75% to 80% existing customers, that’s such an asset for us and it’s also a difficult part of the other side of that, in this environment it is difficult to establish new customer relationships. So we’re certainly going back with new offerings to the existing base as a large part of our revenues. And then recurring revenues, of course, are going to be driven by existing customers as well. So it’s substantially weighted towards our existing base, but we have great adds during every quarter and during this quarter as well.

Brett Huff - Stephens Incorporated

Okay. And then last question –

Robert A. Eberle

The European bank, for example, is a very good example of that and a new significant customer.

Brett Huff - Stephens Incorporated

Okay. That’s helpful. Thanks. And then my last question is, can you articulate a little bit where you guys saw the benefit this quarter, and maybe give us a sense looking a couple of quarters forward where you see some of those long-term contracts helping. I know there’s a couple that we’ve talked about over the past few quarters. Kevin, is there a way to articulate, kind of tease out a little bit what in the quarter was the result of those?

Kevin M. Donovan

Well, one of the contracts that we talked about was SWIFT and during the quarter we had about 700,000 of professional service billings that did not result in revenue. Those have all been deferred. They will begin to be some recognizable towards the end of calendar 2009. So that’s an example where we’ve got a long-term contract that we are doing professional service work in the current quarter in the amount of about $700,000 that is deferred out over a future period.

Brett Huff - Stephens Incorporated

And what about any contracts that are still going on and that will continue to be sort of part of you? You mentioned that there is a chunk of, in addition to the recurring revenue, you have something like 13% of current revenues in professional services. Of that, kind of what is an ongoing versus what is sort of more one-time issue?

Kevin M. Donovan

Yes, at these quarter levels,, that would be a consistent level as we went forward. We are always going to have an amount of professional services backlog as we enter a quarter. So with the strong order flow that we had in this quarter, we would enter the third quarter with a similar level, if not even a slightly higher level of services backlog heading into the quarter.

Brett Huff - Stephens Incorporated

Okay. That’s helpful. Thank you.

Operator

And our next question will come from the line of Melissa Moran of Thomas Weisel Partners. Please go ahead.

Melissa Moran - Thomas Weisel Partners

Hey, guys, good afternoon.

Robert A. Eberle

Good afternoon.

Melissa Moran - Thomas Weisel Partners

We had hoped to move this quarter about SWIFT delaying their 2009 standards release, and I know that’s not related to the projects you are doing with them, but I was just wondering if you’ve seen any negative impact on your deal with them? And also if you could give us some color on any of the incremental opportunities as a result of kind of being in this high-profile deal with SWIFT.

Robert A. Eberle

Let me get the last part of that, the incremental opportunities. You broke up on what you were saying on the last part of the question.

Melissa Moran - Thomas Weisel Partners

Just, you talked about SWIFT actually being a very high profile deal and you were expecting to see some incremental work as a result of that.

Kevin M. Donovan

Yes. Melissa, I will cover it on a couple of things. First off, no, we have not seen any delay. We have not seen any delay in spend. In fact, we have actually seen more momentum around the program that’s called SWIFT Alliance Lite that we are doing together with SWIFT. It will be probably be helpful in responding to your question to give just a brief overview of what that is. That’s the ability to bring SWIFT messaging capability to any corporation through the Internet, so that where today you’d have to go to a SWIFT service bureau and have an expensive connection to be able to provide that SWIFT messaging around your global payments that you’d make. This will allow any organization easy access. The revenue opportunity that we have in and I could characterize it as a couple of buckets. The first is, there is a minimum subscription level in the seven figures that will begin once we go live at the end of this calendar year. But the bigger part is the opportunity to share in revenues, where we have a meaningful percentage share of revenues once a certain floor is achieved. That is all in the SWIFT side.

The other piece, though, it is difficult to convey to people that aren’t in the market that we participate how important SWIFT is. They are the principal standard setter in global banking. They also not only set those standards, but they run the network for those global messaging types. So our affiliation with SWIFT brings benefits every day. I would have to think that it was absolutely an influence, for example, in our receiving the million dollar order in the European Bank. It’s something that we’ve seen additional partners come to us. We’ve had one offshore provider that’s done some work with SWIFT come to us about other opportunities for them to implement our technologies at some of the customers they work with. So if I conveyed this correctly, there’s a couple of buckets. One is a minimum subscription level that’s very attractive. And with that, we start to release the services revenue. The second is the revenue share as this offering grows for SWIFT and the third is really strategic in its position in Bottomline overall.

Melissa Moran - Thomas Weisel Partners

Okay, great. Thanks. And then could you also give a little color on what you are seeing in the healthcare vertical. You had mentioned a couple of customer wins that you had there, and perhaps give us just a general sense for how large that part of your business is and what type of growth you are seeing there?

Robert A. Eberle

We are seeing good growth in the healthcare. We really added quite a bit of capability around that in the past year. And what we’ve been doing is we’ve been adding some individuals. Some of the increased investment is additional hiring with expertise and knowledge in that space. We continue to win deals. The principal place that we are playing is on automating the documents that occur, the documents that are mission critical to any healthcare organizations. So for example, patient admittance documents, purchase orders, invoices, those are all the types of documents that that Bottomline will provide. We are fortunate to have increased our presence in that marketplace because while I made reference earlier to some of the challenges, travel restrictions and the like in some of the financial institutions we work with, we find this vertical to be one that’s on a relatively consistent path. So while we’ve not been breaking out vertical by vertical growth rates, we are seeing strong results and it was a strong contributor to the order performance.

Melissa Moran - Thomas Weisel Partners

Okay, great. And actually on the orders number, were there any acquisitions or was there anything in that that would have impacted that number?

Robert A. Eberle

No.

It’s all in the quarter.

Melissa Moran - Thomas Weisel Partners

Okay. And then, Kevin, if you could just give us a sense for what we should expect for the tax rate going forward for the next couple of quarters and then in 2010?

Kevin M. Donovan

Yes, I’d expect a tax rate roughly equivalent to what we see here. We had a little bit over $500,000 of tax provision in the second quarter and that’s a good number to model on a prospective basis.

Melissa Moran - Thomas Weisel Partners

Okay, great. Thank you.

Operator

Thank you. Our next question will come from the line of John Maietta of Needham & Company. Please go ahead.

John Maietta - Needham & Company

Hey, thanks very much. The first question I had, just a couple of housekeeping items here, Kevin. I missed the Legal eXchange number in the quarter.

Kevin M. Donovan

Our Legal eXchange revenue was up 14%.

John Maietta - Needham & Company

Okay.

Kevin M. Donovan

Year-over-year.

John Maietta - Needham & Company

Got you. And so roughly 10 plus in cash from operations, what was CapEx in the quarter?

Kevin M. Donovan

CapEx would have been probably around a million dollars.

John Maietta - Needham & Company

Okay, got it. All right.

Kevin M. Donovan

Our free cash flow for the quarter was about $9.5 million.

John Maietta - Needham & Company

Okay. And then, Rob, I was hoping if you’d kind of talk about, it sounds like pretty broad-based strength across product lines and business units in the quarter. But if they had to kind of say we would see the most strength, I was wondering if you could talk about that, sort of web series for banks versus web series in pay base for corporates versus some of the document automation stuff, and just kind of help me think about that?

Robert A. Eberle

I’ve probably don’t even answer that because for one I try to stay pretty balanced against our opportunities. But we really see a pretty balanced opportunity. We’ve got Legal eXchange continues to be a very attractive offering with a strong ROI. Some of the new combinations we have and some of the new capabilities we are offering in the document automation set have driven growth. We have got a new channel relationship that allows us now to settle into the Microsoft base which is a new attractive opportunity, again on the document automation side. And then corporate payments are absolutely alive and are seeing attractive opportunities as we bring more capability to particularly some of the larger organizations. And then the banks, the size and scale that we've been able to develop on in terms of our deal size and delivery capability has driven a much larger deal. So if you had to pick one, it will sound strange, but the global banks opportunity is actually one of our bigger long-term opportunities.

John Maietta - Needham & Company

That makes sense. And I guess just to …

Robert A. Eberle

I think what I will do with that question two, John, is it’s a balanced portfolio. If you take a look at what occurred in the quarter, there’s no particular single order there. So let’s say the bank market gets rougher, well we’ve got strong presence in healthcare and we’ve got recurring revenue and we sell to enterprises on the corporate payments and document side. So the balanced portfolio supported by a single set of common technologies we think is a pretty effective way to maximize the return on our investment.

John Maietta - Needham & Company

Yes. That makes sense, if you kind of go where the opportunities are. I guess just the last question I had is, with regard to the investment, why today versus last quarter versus next quarter? And then if you could just help me , you talked about kind of the customer service area if you could remind me of the other two areas and then maybe just provide a little color as too some examples as to where that investment is going?

Robert A. Eberle

Sure. So one area would be customer support and how we are engaged with the customer. And a couple of examples would be higher level program managers running a large implementation that I talked about, for example. In this environment where projects are going to be cut and vendors are going to be scrutinized, we want to outperform more so than other. So investments facing the customer, an example would be program managers on the implementations. Also some of the things we’ve done around our documentation and other pieces that will come with our technology to allow a customer to ease training and ongoing support, we are underway with a pretty big investment and increased documentation for Web series, for example. When you move to technology, you always have the opportunity to move the dial and to sell what you have today or to invest more and to make a greater investment in opportunities in the future. There’s a couple things coming together today that suggest to us it’s now is the time, as you put it. One, it’s the capabilities we have in our product set and the combination of those capabilities and the available technology, specifically SOA architecture, for example. So the ability to have reporting capability, payment capability on one platform and leverage that across others, as well as for our customers to use that open architecture to have a more flexible use of our products. So for example, we are beginning to see some banks, while they deploy Web series for the corporate cash management, they would like to have the ability to tap that on the retail side if they wanted to have a single engine to make it to type the payment. So making the investment and being well ahead of the competition from a technology standpoint, we think now is an attractive time to do it. And I think by the way, to be clear, it is a modest investment. As Kevin said, we will keep the earnings levels consistent with where we are today. But we think while you’ve got a challenged capital markets and a customer opportunity and competitors that aren’t making that investment, we think there’s an opportunity for us to significantly grow share.

John Maietta - Needham & Company

Got it. Okay. Thanks very much.

Operator

Thank you. And we have time for one more question. That will come from the line of Colin Gillis of The Street. Please go ahead.

Colin Gillis - The Street

Hey, Rob. Great to be on the call.

Robert A. Eberle

Hey, Colin. Good to have you.

Colin Gillis - The Street

So just along those same lines, right, when you’re looking out from a broader picture, the corporations are feeling the pain. Everyone wants to control expenses. Are you seeing this as one of the better windows you’ve had in the last five or six years to drive more adoption of some of the products that drive cost out of the system?

Robert A. Eberle

It absolutely could be. We have certainly not seen anything shutting down the buying. What we are seeing is a greater focus on expense reduction and control. So we absolutely see that, particularly if we can bring a very clear and near-term ROI, which our technology and products do to those customers. So, yes, we are seeing the strong opportunity on the corporate side. And banks, while there is challenges, they are still absolutely buying, and buying today. So I think that’s right. We’re seeing opportunity not only on the technology and customer side, but with sales and marketing as well as I mentioned.

Colin Gillis - The Street

When you look at the banks, right, what is the degree or the amount of overhead you have to grow inside these customer bases, particularly following all the mergers?

Robert A. Eberle

You mean, what’s the market opportunity we’d have?

Colin Gillis - The Street

Yes.

Robert A. Eberle

Yes, it goes in a couple of directions. I’d say, if you look at Bottomline three, four years ago, we had a few bank customers that had insignificant, $1 million or $2 million relationships. And you may recall, at that time we said that someday we would do a eight figure deal. And we have in fact done an eight figure deal and in fact in our pipeline today are a couple of eight figure opportunities. So one, it’s just growing this scale and capability that Bottomline delivers, and with that grows the deal size. The other aspect is obviously growing the number of customers. So things like SWIFT that moved Bottomline, we would fight three years ago to being an RFP. Today, we are helping to write those RFPs in many cases. So we’ve moved dramatically in terms of the positioning of the capabilities of the company to someone considered to oftentimes the lead choice as these processes began. And that’s multiple things. That’s technology; that’s reputation; that’s SWIFT; and it’s the engagement with the customer that keeps us in that position.

Colin Gillis - The Street

And a history of execution as well?

Robert A. Eberle

Yes. That’s what I mean by the engagement with the customer, right?

Colin Gillis - The Street

Right, yes. Good.

Operator

And gentlemen, do you have any closing remarks?

Robert A. Eberle

Well, I thank everybody for their time and attention. I thought we had a great quarter. I think it’s revenue, orders, cash and the opportunity in front of us we are very excited about and appreciated the interest you’ve had on the call.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 7 PM Eastern Time today through January 29 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 982757. International participants may dial 320-365-3844, again with the access code of 982757. That does conclude the conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.

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