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Bottomline Technologies (de) (NASDAQ:EPAY)

Q2 2013 Earnings Call

February 04, 2013 5:00 pm ET

Executives

Robert A. Eberle - Chief Executive Officer, President and Director

Kevin M. Donovan - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Richard H. Davis - Canaccord Genuity, Research Division

Brett Huff - Stephens Inc., Research Division

Mayank Tandon - Needham & Company, LLC, Research Division

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Bottomline Technologies Second Quarter 2013 Earnings Conference Call. Statements made on today's call will include forward-looking statements about Bottomline's future expectations, plans and prospects. All such forward-looking statements are subject to risks and uncertainties. Please refer to the cautionary language in today's earnings release in Bottomline's most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward-looking statements. Bottomline does not assume any obligation to update any forward-looking statements.

During this call, certain of Bottomline's financial results are presented on a non-GAAP basis. These non-GAAP results include among others: 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 Bottomline's website, www.bottomline.com. Bottomline will be providing forward-looking guidance on the call. A summary of the guidance provided during the call is available from the company upon request.

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

Robert A. Eberle

Good afternoon. Thank you for your interest in Bottomline Technologies, and welcome to the Second Quarter Fiscal '13 Earnings Call. I'm delighted to report on what was a truly outstanding quarter for Bottomline. I'm joined by Kevin Donovan, our Chief Financial Officer, who will provide a detailed review of the quarter's financial results and our guidance going forward, and then both of us will be available for questions following Kevin's remarks.

I said up top that Q2 was a truly outstanding quarter for Bottomline. And it really was, with record financial performance and some landmark events that will have an important positive impact on the future of our business. During the quarter, we exceeded all our key financial metrics with record revenue, record subscription and transaction revenue, record net income and record EPS. We raised additional capital on very favorable terms, positioning us well for strategic acquisitions. And we significantly advanced our strategic plan, signing major new contracts in each of our 3 growth drivers: legal spend management, Paymode-X and commercial banking.

Starting with the financial highlights for the second quarter, subscription and transaction revenue was a record $30.4 million. That's an increase of over $11 million or 59% from the prior year. Growing our subscription and transaction revenue was a priority for Bottomline, and no other metric is cleanly or clearly evidences the success we're having with the 3 primary growth drivers legal spend management, Paymode-X and commercial banking. Subscription and transaction revenues drove a substantial increase in our recurring revenue, which was a record $45.9 million, up over $12 million or 36% from a year ago. Recurring revenue was a record 72% of overall revenue.

Revenues overall grew to $63.6 million, another Bottomline record and an increase of 15% from a year ago. All profitability metrics are strong with EBITDA up $12.3 million, operating income of $10.5 million and we recorded record EPS of $0.33, well ahead of our targets and expectations. So again, outstanding financial performance in the quarter.

The results in the income statement are strong. We also significantly enhanced our balance sheet and in the quarter with over $280 million in cash. We raised $167 million in the successful convertible debt offering and we also generated $9.5 million in operating cash flow during the quarter. This leaves us well positioned to extend our market leadership and accelerate our growth. The highlights of the convertible debt are coupon of 1.5% and an effective conversion price of $40, $40 a share. We raised a significant and profile-changing amount of cash and extremely attractive coupon with an effective conversion price 70% above our market price at the time of the transaction, minimizing any dilution to shareholders. We're extremely pleased with the result.

Let me now turn to comments on our growth engines. Our long-term goal is to provide customers with market-leading cloud platforms for business-critical applications. We want to drive as much of our business as possible from these offerings. Our 3 principal growth drivers: Legal spend management, Paymode-X and hosted commercial banking solutions are fully aligned with this strategy. We see these offerings driving increasingly greater customer demand, higher operational efficiency and expanding operating margins, enabling us to achieve our 25% operating margin target. I said upfront we significantly advanced our strategic plan with major new contract wins in each of these 3 areas. As exciting as the financial results are, as significant as this convertible debt transaction is, the most important events are the new wins. So let me now cover each of them.

We had an exceptional quarter in legal spend management, highlighted by a marquee win. The big news is that after a long and intensely competitive sales process, we signed one of the largest P&C insurers in the country to a multiyear, multimillion dollar contract. This comes after one of our most thorough selection process we've ever been part of. We're -- start to finish was over a 3-year process. The win is yet another confirmation of Bottomline's clear leadership position in the market. And the fact that this customer, one of the largest and most well-known insurers in the country, is adopting legal spend management technology for the first time, and doing so with Bottomline, evidences there's significant opportunity in front of us.

The contract we signed is an annual revenue potential of 7 figures once the multiyear implementation ramp is completed, and will ultimately become one of our largest legal spend customers. As more and more insurers adopt legal spend management, I am confident Bottomline will win the majority of these new customers.

The market is huge. We're the clear leaders with a 50% share and extending our lead each day. I'm delighted with the marquee win and a total 7 wins this quarter. More importantly, I'm confident legal spend management will be an important driver of our revenue and profit growth for years to come.

Turning to Paymode-X. Our goal for some time has been to sign a new channel partner to add to and complement the powerful distribution we have in Bank of America. The bank channel model for Paymode-X is proven. In 2012, Bank of America signed 80 new Paymode-X payers. That brings to our total of payers in the network to over 800. As you know, we've been working for some time to broaden our distribution beyond Bank of America. I am excited to announce that we have signed the U.S. division of a major global bank to be a new channel partner for Paymode-X. And if things go as planned, there is every indication we could sign the parent global bank as well. This has been an 18-month process that involve numerous separate departmental reviews and evaluations, including the bank's new vendor assessment process, operational risk assessment, technology review, security and penetration testing, data center inspection and certification, product review and market analysis, pricing studies and business model development, case study development, client focus groups and sales training with select sales executives.

As those of you who follow us know, we've been talking about this for a while. To get to this level of a bank-sponsored, bank-offered product, not just a partnership but a bank-sponsored, bank-offered product is not easy. To give you some flavor of the physical signature sign-offs -- and this is just a partial list that included accounting policy, procurement, credit risk, operational risk management, legal, compliance, any money laundering, fraud prevention, information security, treasury solutions risk. So we are thrilled to have successfully completed this process and I have this new bank channel partner for Paymode-X signed. While time consuming and expensive, the bank is well positioned to drive growth for Bottomline and the effort it took services an effective barrier to entry for any competitors hoping to replicate what we've developed. Our goal is now have 6 formal pilot proposals with customers at this bank 90 days from now.

This was the clear Paymode-X highlighted the quarter. All our other work around Paymode-X is proceeding well. We are signing new vendors to our vendor pay model and continue to develop the technology platform to support the network of 200,000-plus total vendors. We're excited about the long-term potential of Paymode-X and confident the path we're on will drive increasingly positive results and shareholder value.

Let me now turn to commercial banking. Roughly a year ago, we acquired Intuit's small banking credit union business. We knew it was in the state of decline. Customers were leaving the platform regularly. Our thesis and really the key success assumption behind the acquisition was that we could turn around the business. Our belief was our domain expertise, market-leading technology, first-class data centers, customer-centric support culture would provide a more compelling customer experience. And if that were true, we could halt defections, reverse the revenue decline and ultimately provide a plan -- path to growth. I am delighted to announce we have proven our thesis correct. We've, in fact, been able to win back a number of those defecting customers just as we had hoped. This past quarter, we secured the largest, most meaningful and, in many ways, most difficult of these, a large win with a 10-year contract worth over $7 million. What's really remarkable, though, is the bank had ready signed a new contract with a competitor. They'd already spent over $1 million with that competitor and they were contractually committed to spend a minimum of an additional million dollars plus with that competitor. Bottomline worked patiently to demonstrate our capabilities. We showcased our existing product set and shared our product roadmap. We presented our data center architecture and support protocols. Members of our product, development, hosting, support and executive teams all met numerous times with the banks leadership. When this bank signed with Bottomline this past quarter, it represented much more than a 10-year multimillion dollar deal. It demonstrated that we can clearly compete and win, even when starting millions of dollars behind. Given the nature of these contracts, the turnaround of the revenue decline will take some time to take hold. But the important thing is long-term success of this business is assured.

So before turning the call over to Kevin, the last thing I wanted to comment on a bit was our acquisition philosophy. I think that's particularly important with the additional cash we've raised. Identifying, acquiring and integrating businesses that will positively contribute to our technology, customers set and financial performance is one of our proven core competencies. I can't comment on specific company spaces or other acquisition considerations for obvious reasons, but what I can say is that we have a disciplined and proven process. Our focus is on acquisitions that advance our strategic plan and are quickly, if not immediately, accretive to our financial results.

So in summary, this was a milestone quarter, record results in almost all our key metrics, company's position for greater expansion with a significantly larger cash balance. We signed one of our largest insurers to legal spend market in the multimillion dollar deal. We signed a significant bank to become a new Paymode-X channel. And we convincingly proved our commercial banking proposition is compelling with a 10-year, $7 million win back. I'd call that hitting on all cylinders.

So Kevin and I will be available for comments after his remarks. I'll turn it over to Kevin for a detailed review with the financials and our guidance going forward.

Kevin M. Donovan

Thank you, Rob. We had a very strong second quarter, a quarter which saw us report record results across several key metrics, including revenue, subscription and transaction revenue, net income and EPS. We also completed a very successful convertible debt offering during the quarter. The second quarter results continue to clearly demonstrate our ability to execute on our strategy, which is to invest in and grow our cloud-based recurring revenue platforms and drive a larger percentage of our revenue through these subscription and transaction-based solutions. With 3 primary subscription and transaction-based revenue streams in Paymode-X, legal spend management and hosted banking solutions, we are confident that we will continue to drive growth through these highly leverageable offerings.

The second quarter was highlighted by revenue with $63.6 million, up 15% year-over-year. Subscription and transaction revenue growth of 59%, orders of $63.3 million, up $600,000 over the prior quarter. EBITDA of $12.3 million, a step up from last quarter, and EPS of $0.33, up $0.06 year-over-year and well ahead of guidance. Based on the strength of our first-half results, we are increasing our full year guidance.

Turning to the balance sheet. We completed a successful convertible debt offering on attractive terms and ended the quarter with a cash balance of $281 million, leaving us very well positioned to leverage our disciplined approach to M&A to help drive future growth.

Now I will take a more detailed look into the financial results of the quarter. Revenue of $63.6 million was highlighted by 59% growth in subscription and transaction revenue. Subscription and transaction revenue was $30.4 million in the quarter and represented 48% of overall revenue. Subscription and transaction revenue is the largest revenue component of the business, and with the primary driver behind the increase in recurring revenue, recurring revenue was $45.9 million, up 36% and represented 72% of overall revenue.

In addition to the strong subscription and transaction revenue growth, we closed 7 new legal spend management deals with an annual recurring revenue value of $3.3 million for just these 7 deals alone. By their nature, the cloud-based recurring revenue deals and our growth drivers we have focused on do not produce any revenue in the quarter the deals are signed. Typically, it takes 1 to 2 quarters for a new subscription deal to begin to yield revenue. These deals represent future subscription and transaction revenue growth that is now already under contract. The recurring nature of our revenue streams provides a very predictable business model, with over 85% revenue visibility at the start of the quarter. The strong revenue results drove growth in operating income and EBITDA. EBITDA was $12.3 million and operating income was $10.5 million, increasing $200,000 from last quarter. Gross margin of 57% was in line with expectations and consistent with last year and last quarter. Over time, we see the opportunity to expand overall gross margins to the low- to mid-60% level as we continue to execute on the margin leverage opportunity in our subscription and transaction-based offerings.

From an operating expense standpoint, we are investing in areas which will drive future growth, principally sales and marketing and product development. Sales and marketing expense was $13.1 million, representing 21% of revenue. And product development expense was $7.9 million, representing 12% of revenue. Our sales and marketing and development spend is primarily focused on investments that we are making in our 3 cloud-based growth areas of the business. We see the opportunity to expand our operating margins going forward with top line revenue growth and gross margin expansion. We are on track to grow our operating margin from 17% today to our 25% target by the end of 2015.

Looking at the balance sheet. Cash at the end of December was $281 million. During the quarter, we completed a convertible debt offering, which raised $167 million in net proceeds on attractive terms. The key terms to the offering were a principal amount of the unsecured notes of $189.75 million, date of maturity of 5 years with a coupon rate of 1.5% and effective conversion price of $40. The conversion price represents a premium of 70% over the stock price on the date of the transaction after taking into account the hedge and warrant transactions.

In addition to the convertible notes in the balance sheet, we also recorded a derivative asset and liability in connection with the transaction. These derivatives are temporary and will be reclassified to equity during the third quarter. With the successful offering completed, we are very well positioned to pursue accretive M&A transactions.

In addition to the strong balance -- in addition to the strong cash balance, we have a significant backlog. Backlog at the end of December, excluding commercial banking order backlog and guaranteed pay mode revenues from Bank of America, was $95.8 million, up 13% from last year.

Turning to our forward-looking guidance, we are increasing our fiscal 2013 earnings guidance based on our confidence in the business and the strength of our first half results. We continue to expect to deliver $254 million of revenue on the year and our annual earnings guidance is increased to $1.15, a $0.13 increase over our prior guidance. Our second quarter subscription and transaction revenue was stronger than expected. As we look to the third quarter, we would expect subscription and transaction revenue to be down slightly quarter-over-quarter due to normal seasonality and the revenue impact of acquired canceled contracts from the Intuit acquisition. We expect overall revenue in the third quarter to be at or above our second quarter results.

From an expense standpoint, our earnings guidance includes increased investments in our SaaS-based offerings. As we look forward, we are excited about the opportunity in front of us. Our subscription and transaction offerings and recurring revenue model drive highly predictable financial results, and we have a high degree of confidence in our full year outlook.

In summary, we had a very strong quarter with record results. We continue to execute on our strategy, investing in and growing our cloud-based recurring revenue platforms. We are very well positioned and confident about the long-term prospects of the business and the go-forward leverage in the financial model, which will ultimately deliver 25%-plus operating margins and significant shareholder value. We will now open up the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll first go to the line of Richard Davis with Canaccord.

Richard H. Davis - Canaccord Genuity, Research Division

So one kind of tactical question and one more strategic question. The tactical one, when you're signing these large deals and things like that, is it your -- do you try to run them near breakeven as they're getting deployed or should we at least -- I know you don't break them out specifically, but it just helps us think about modeling -- or should we almost think of them as if they're losing a bit of money and then eventually they kind of normalize? So that's question one. And then the second one is, could you discuss any thoughts with regard to the pricing model on Paymode-X and/or is the U.S. division of this major bank on a different pricing model than the existing one that you have today?

Kevin M. Donovan

So Richard, I'll take the first comment. And I would say that you could think about it with some upfront costs that we incur before the revenue starts to be recorded. So we do incur cost ahead of the revenue and so it's not a consistent profit margin from the start of the arrangement we'll begin to recognize revenue.

Robert A. Eberle

That's an interesting answer. That's exactly right on a deal-by-deal basis. But when you look at the platform, one of the things that we're doing is that we've got -- and one of the risks a business can have is -- one of the risk is if you deviate from a standard platform. We're deploying for a legal spend management, for example, we're deploying Paymode-X and we're now deploying with commercial banking, as a single platform so we won't have massive customizations or big technology implementations. There's an implementation in getting the customer up and running and filing integrations and the like, but we don't incur a lot of customizations. So that's the thing that can prevent not only profitability but the beginning of the relationship going forward. I'm turning to the new bank is coming on our new model, which is a vendor pay model. So that's exciting for us and it's in line with our future direction for the Paymode-X platform.

Operator

We'll go to the line of Brett Huff with Stephens Inc.

Brett Huff - Stephens Inc., Research Division

Just a couple of questions. Can you break down the beat for us a little bit? It was substantial. And there's a number of things I think that could have driven it. You referenced a couple of them. Is there any more detail can give us, be it just dollars or maybe quantifying some of those?

Kevin M. Donovan

So I mentioned in my remarks subscription, transaction revenue was stronger than we had projected at the start of the quarter, and we typically will see that at the end of the calendar year, particularly within legal spend management. Law firms work on a cash basis so we will traditionally see heavier invoicing that occurs towards the end of the year so that the law firms can get paid from their corporate customers. So we did see higher subscriptions and transactions revenue in the quarter. That drove overall operating performance above our expectation. And then it was also supplemented by a tax benefit that we had in the quarter. So that -- those 2 components would be -- what would comprise the beat that we had.

Brett Huff - Stephens Inc., Research Division

Can you quantify the tax benefit for us versus your expectation anyway?

Kevin M. Donovan

I don't have a specific number but it would have been several cents.

Brett Huff - Stephens Inc., Research Division

Okay. And then can you tell us a little bit more about -- congrats on the signing the bank. I think that's good news on Paymode. Can you give us a sense, it just -- reiterate again. You said, Rob, I think you said 80 new payers and what time period was that over? I didn't catch that, I apologize.

Robert A. Eberle

2012.

Brett Huff - Stephens Inc., Research Division

Okay. And then can you describe a little bit how the payers, when they come online, kind of give us a sense of how that works. I know it's probably a long courting process. I think your co-selling with the cash management folks at the bank. How long did that take? When you sign them up, how long is it to get them -- get the corporate customer ramped up and producing revenue, can you give us...

Robert A. Eberle

There's a couple of different -- How long it should take? First off, to get them signed up, the sales cycle can be relatively quick. The challenge is always moving to the front of the priority list in the financial organization, which inevitably has a lot of work and a lot of priorities. So that's prior to sign up. At the sign up spot, then what we'll do is we'll segment the vendors and we'll say, "Well, which are your most top vendors -- which vendors are already in the system, which vendors are your top spend vendors and top volume vendors?" And we'll work through the vendor population in that manner. So we'll over a period of time then would move them to be 100% on the system, but we won't -- we wouldn't start out initially with that. We segment care vendors to whole proprietary process we have of addressing which is going to have the most -- in short, bang for the buck in terms of their phases of implementation.

Brett Huff - Stephens Inc., Research Division

And then lastly, you mentioned, I think you mentioned 6 pilots with the new bank. And what is your sense of timing on that and what gives you a sense you think is reasonable?

Robert A. Eberle

Our goal would be to do that in the next 90 days. Now I do that -- I split that out more to give color. I mean, our business wouldn't have failed if we haven't done that in the next 90 days. But I think what we would want to do is we would want to have those pilots, where we've introduced and we're beginning to test the technology with them -- with them. Proposals is what we really want to have, formal proposals with those customers. So where the bank has their paper out, here's what it would be, here's the pricing, here's how it'd work and they are ready to make a decision.

Brett Huff - Stephens Inc., Research Division

And then last one for me. You mentioned some legal exchange revenue that, remind me, I think you had 32 wins last fiscal quarter. And Kevin, I think you said it takes -- or maybe Rob, it takes 1 or 2 quarters for that to sort of ramp up. Are we seeing some benefit from a Legal eXchange wins you had last year showing up in the quarter as well?

Robert A. Eberle

We are, correct. It's -- let me give a little more color on that. It was 32 actually in the year, not the quarter, but other piece, it depends on the size. So the large win, the marquee win in this quarter, that's going to be a multi-stage process for implementation. But we'll continue to see growth as more divisions comes out of that company.

Operator

We'll go to the line of Mayank Tandon with Needham.

Mayank Tandon - Needham & Company, LLC, Research Division

Kevin, I wanted to first get the organic growth number for the revenue. And also if you can break it down for the subscription and transactions line, that will be helpful.

Kevin M. Donovan

Yes, I don't have specific on subscription and transaction, but excluding the banking services that we're transitioning to more of a subscription and transaction model, the growth would have been 8% in the quarter.

Mayank Tandon - Needham & Company, LLC, Research Division

Excellent. And then just looking at the guidance, I mean, you said you did see some strength in this quarter. Why have you chosen not to raise revenue guidance while you are raising EPS guidance? Maybe just give us input in terms of your thought process there?

Kevin M. Donovan

Yes. So if we look at where we were from a revenue perspective, our previous guidance was $64 million in Q3 and $65 million in Q4. We still feel comfortable with our overall $254 million of guidance. We are looking at the overall results, and we do see the year coming in better than we had anticipated. We had a $0.10 beat here on this quarter, so that's reflected in the year-end results for the year where we raised guidance by $0.13.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And so I was going to go there next in terms of the EPS guide. You raised guidance by $0.03. Will there be any tax benefit assuming that guidance as well, or is all of that operations?

Kevin M. Donovan

We probably expect to be neutral on tax, so not a significant expense or not a significant benefit in the next couple of quarters.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And then just, I wanted to get some thought on the WebSeries7, just in terms of where are we in that upgrade cycle? Is that turning out to be a catalyst for your banking business or is that not a major factor in terms of driving growth?

Robert A. Eberle

New product introductions are always major factor for the driving growth. That's an important new introduction for us. I mean, it's not going to be a catalyst that it's going to impact next quarter or the following quarter because the revenues will drive from that product set are typically spread over a number of quarters anyway. But we're showing the product now and that's definitely generated a lot of interest with both existing customers and new.

Mayank Tandon - Needham & Company, LLC, Research Division

Rob, I thing in the past, you've said that you are benefiting from some of the disruption at your competitors'. Could give us some sense of how that's been progressing? Have you been able to take some opportunities on the banking front, given some of the changes at your key competitors?

Robert A. Eberle

Yes, we have, we definitely have. I don't want to spend time disparaging the competition; I'd rather focus in our success, which is pretty significant. But we certainly have been able to -- I mean, I'm referencing my remarks a situation where a customer that actually sign with a competitor and spent millions -- over $1 million and committed over another $1 million, who was contractually committed and yet they wrote that off and came to Bottomline. So our competitive win position in the banking space, if you look at it in a legal space, the process for the marquee win was incredibly extensive. 3-year process with every type of bake-off you could have and pilots -- and pilots in different regions and other things, and Bottomline prevailed in that as well. So I think our competitive position in the key markets in our key growth drivers is we're very well positioned today. I'm delighted with where we sit in. Of course, we're trying to continue to extend that with the investment we're making in technology.

Mayank Tandon - Needham & Company, LLC, Research Division

And just finally, Kevin, going back to the model, the service and maintenance revenue line has been coming down year-over-year, but it's turning out to be a more profitable revenue stream. Could you give your thought on that in terms of why that shift?

Kevin M. Donovan

Well, as we talked about before, we're transitioning our banking solutions at the high end to more subscription and transaction-based pricing models, so we would expect service and maintenance revenue to decline over time and see the growth area of the business over time will be on the subscription and transaction revenue streamline too. That's by design and it's exactly in the context of what we're trying to focus on.

Operator

We'll go to the line of Wayne Johnson with Raymond James.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

My apologies, I jumped on late if you have already gone over this, but the status of that IT center build out, where does that stand right now and what's the timeline for that completion?

Robert A. Eberle

Sure. The data center is built -- and I assume, by the way, we have existing data centers. My sense is, Wayne, you're talking about on commercial banking.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Yes, exactly.

Robert A. Eberle

Which is where we -- the data center's built. We've migrated a number of customers, starting with some of the larger customers, and we're having regular schedule of continued migrations. So I would expect by the end of our fiscal year, those migrations would be completed at the latest. It could be sooner than that but we're doing those in waves. And most importantly, we're doing them very successfully. So the interruption or disruption, there's no interruption or disruption to customers, which is one of the key things we've measured ourselves by and we've wanted to achieve, so that's a going really well. We've got a very strong team on that, and that's gone particularly well.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. And on the U.S. division of a large foreign bank, you announced the partnership of -- and again, I apologize if you've announced this. Did you identify who that customer's last partner is?

Robert A. Eberle

Yes. We're not -- they're going to do their own press release and sort of media piece with it. We can't announce the name today and so I did not give a name on that.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Okay. And lastly...

Robert A. Eberle

You'd certainly recognize it.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Okay, good. Last question is, can you talk about the prospects for additional banks being signed up? I thought I heard some of that when I was jumping on.

Robert A. Eberle

I would tell you that our biggest focus right now is this new bank channel. I've said this on prior calls, I know and I've said it in another conversations. I don't believe this success is measured by the number of banks today. I think the success is measured by success with the banks we're working with today. So in 80 wins with Bank of America, for example, is a fabulous job of supporting that channel, working with that channel. I'd rather get this next channel up and be in that level of success, particularly since they're focused on our new revenue model. Then they've signed up a half dozen other banks. So we have other banks. We have some banks that are in referral relationships where they will refer customers but they haven't adopted as a specific product. But it's our principal focus is driving success with the new revenue model and driving that with our new bank channel.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Okay, great. And if I could just get one more in there for Kevin. On the tax rate, how should we think about that going forward for the remainder of the year?

Kevin M. Donovan

I would expect it to be neutral, so not a tax benefit, not a tax expense but pretty much flat, neutral.

Operator

We'll go to the line of Gary Prestopino with Barrington Research.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Could you possibly tell us what the dollar volume process through the Bank of America channel was for this calendar year?

Kevin M. Donovan

We haven't disclosed the volume for Bank of America as of yet. The only thing we've commented on is...

Robert A. Eberle

We're lucky to get the 80 deals out. That's one of those stats they're guarding.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

I mean, that's fine then. And then...

Robert A. Eberle

And then I can tell the volume was is up, we can say that. We can say volume was up significantly. We can't say more than that.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Fine. And then terms of this large P&C insurer that you signed for Legal eXchange, is this really -- was it -- this is like a top 5 insurer nationwide. And if it is, is this the first one that you've signed of that magnitude size? Is it rolled out -- will it be rolled out through the whole organization or just one division or whatever?

Robert A. Eberle

Yes, let me try and keep track of all the questions in there. So I'll go backwards. It's rolled out for the company throughout -- it's nationally. They are doing it by multiple -- in a multiphased approach. I believe it was 13 different phases, starting with -- I know it's starting with Florida, for example. So it's a multi-phased process because -- and it's not about the technology. The biggest piece in that is really the training. To use the tool and optimize the tool, which is fairly self intuitive, fairly intuitive or self-explanatory. You still have to have some level of training and get the groups up on it and change some of the business process, so that's the biggest piece. That's why it will take over a year. So it is for all the locations, it is -- we have other insurers of this size, but this is a top 5 insurer. I think that answered all your questions.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

All right. So it is a top 5 insurer. You said you have others of that size too, Rob?

Robert A. Eberle

Yes, we do.

Operator

We'll go to the line of George Sutton with Craig-Hallum.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Guys, I wonder if you could discuss this new bank opportunity in terms of the number of salespeople that would be selling on your behalf relative to Bank of America.

Robert A. Eberle

It wouldn't be Bank of America -- oh, relative. Yes, certainly smaller than Bank of America on a domestic basis. But on a global basis, it's one of the top 10 global banks, but certainly smaller in the U.S. than Bank of America.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

So what you have thus far is the U.S. division and you're hopeful that that will migrate to the...

Robert A. Eberle

Yes. We're working on the migration. It's not just a hope. We're working on the migration to their global bank as well.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Okay, great. And then I'm curious if you could just comment on the orders that were down year-over-year and were up just modestly sequentially relative to the other things we've talked about on the call?

Kevin M. Donovan

Yes. So one thing you have to remember is as we've talked about in the past, we only record an order and only record backlog if it's a contractually committed order. What that means is with a transactional revenue model, for example, on Legal eXchange, we charge a percentage of the value at the invoice that gets submitted. In many instances, when we receive an order in, that does not get booked as an order in that quarter. So on the large, I'm sure that Rob referred to does not actually get recorded as an order in the quarter, now, because it's based on future transactional flows and revenue that will come in. We take a conservative view on orders and backlog and we do not build in any of our own internal projections as to what that revenue amount could be and put that into orders.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Okay, I understand that. And then lastly, Kevin, maybe this is better after the call but relative to this loss in derivatives that you added back that you mentioned would turn into equity in a future period, can you just explain the mechanics behind that?

Kevin M. Donovan

Yes. It's just a relatively nuanced situation with regards to the increase in our authorized share capital. We had 50 million shares authorized pre-convertible debt offering. We increased that in mid-January to 100 million so the derivative asset and liability are tied to that event. So in mid-January, the share capital was increased, which effectively turns the derivative into equity at that point in time. So it's a very short-term period of time we got reflected as that and we strip that out of our core results.

Robert A. Eberle

Yes. Putting that differently in case it -- it took me a bunch of times to get that. The derivative is really in place because at the time of the offering, we didn't have enough shares, authorized shares for all the possible convert, et cetera. So now that we have those shares authorized, the derivative goes away.

Operator

We'll go to the line of Peter Heckmann with Avondale Partners.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

I had a follow-up on the amount of acquired revenue. I just want to make sure I'm clear. The last 2 quarters, you've been saying organic growth x the banking transaction. And I guess the way I look at it on a all-in basis, you've grown organically about 5% in the first half of fiscal '13. Just so we can kind of triangulate that a little better, I know that Intuit is contributing more revenue than we had originally expected, so would we say there's roughly about $6 million of acquired revenue in the quarter?

Kevin M. Donovan

Yes, we don't break down the specific revenue in detail by product, but you are correct that we have said that in previous quarters and it continues to be the situation. We've had more success in keeping customers onto the Intuit platform that had already given Intuit notice that they were departing pre-acquisition. And some of those customers, as Rob highlighted, we've actually won those customers back, won with the 10-year contract. So we are seeing stronger revenue from the Intuit transaction than we would have originally anticipated about a year ago. And that's part of what I referred to in my comments on the subscription and transaction revenue, looking at Q2 compared to Q3. We would see subscription and transaction likely be down sequentially as a result of those acquired Intuit contracts that have already been canceled and notice have been given.

Robert A. Eberle

You got to look at it on the whole, and that's a fully integrated acquisition. So to look at an organic growth rate really doesn't make any sense, because what we would is we have our sales team now taking opportunities that otherwise would have been sold of a traditional installed product and selling those opportunities with the new products. So that wouldn't count towards organic growth, yet to us, the biggest success would be the more we can push to that new hosted platform. So organic growth isn't one of the numbers I look at or focus on. I'm looking at how well do we integrate the new technology, how well are we doing in turning around the customers that had left and what are the growth and profit possibilities for the business going forward as a whole, all of which are extremely positive. The organic growth rate, as Kevin said, is a solid number as well, but it's just not how we're looking at it.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

No, and I understand that. The last several quarters, the service and maintenance line has dropped off.

Robert A. Eberle

Well, we want that to drop off.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Yes, but so essentially, you're losing main inventory, but then that's being transitioned into the subscriptions and transactions line, so...

Robert A. Eberle

And changing the mix of business where we're joined much less in the services. The maintenance piece is, if service and maintenance, if you look in there, maintenance is generally a highly profitable or reasonable margin business. The services piece is much less so, and that's the area we really deemphasized.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay, that's helpful. And so that's one reason why even though revenue is falling and service and maintenance of the margins continue to hold out pretty...

Robert A. Eberle

Oh, sure, yes. If you look at our business over a long horizon, we've done over a very good job of taking a look at what are we in, what's the mix and what do we want to deemphasize as we go forward? I mean, it's the business that at one point we're selling a large amount of equipment and supplies. Today, that's not a meaningful component of our revenues. Making that decision impacts your growth or however you want to measure it, organic or otherwise. But we think it's what's going to help us drive long-term profitability of the business as well as the predictability on recurring revenue streams.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Sure, sure. And it turns what essentially originally was a transaction looked really dilutive into a transaction that is probably not dilutive, and in fact, generating some pretty good returns already?

Robert A. Eberle

Very happy with the transaction. I think it's the business overall that's generating the returns, right?

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. And then a clarification on this international bank. You mentioned on Paymode-X, was that the kind of -- I think we have talked about 2 pilot banks. So is this a third pilot bank, or...

Robert A. Eberle

No, no, no. This would be a bank that be we're signing on and do addition to Bank of America. So I wouldn't want to have an expectation for other channels right now.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. On the previous call, you had mentioned another bank that has signed up some payers. And so is that bank still marketing a solution, or ...

Robert A. Eberle

We have a couple of other banks that have joined referral arrangement where we haven't gone through the whole process. But our focus right now is going to be on Bank of America, on this domestic bank, and then real success would be if we can sign the global bank parent, which I believe we can. I know I used the word hopeful I think at one point, but it's more than hope. I think within the next 6, 9 months, we could have that. And that would take us into the international range, which is great.

Operator

Back to the line of Brett Huff with Stephens Inc.

Brett Huff - Stephens Inc., Research Division

Just 2 quick follow-ups. Kevin, you mentioned that you gave us organic growth number x, the sort of COG or the purposeful reduction of the license revenue and moving that to sub-end trend [ph] at the high-end cash management group. Can you quantify that for us in terms of the negative impact that you've seen from that? Again, I know it's planned but I'm trying to get a sense of how we think about that in our model?

Kevin M. Donovan

From a model perspective, I would expect to continue to see the service and maintenance revenue decline. It's not going to have a dramatic drop-off, but I think if you look at the results over the last couple of quarters, you have seen service and maintenance revenue come down. And then to Pete's question of a minute ago, you've also seen the cost of service and maintenance decline. And that's, as we have a smaller amount of services revenue that we're performing, there's a need for less people to do that. So we have -- the margins have held strong from a service and maintenance line with both revenue and cost declining on a sequential quarter basis.

Brett Huff - Stephens Inc., Research Division

Okay. And then last question for me, and thanks for the extra time here, you had talked about sort of combining the feature functionality of the business you bought, the SaaS cash management business and your legacy large-medium bank business that you sell primary license, what's the status of that? Are we putting -- which way are we going? Are we enhancing one for the other or vice versa? Kind of, where we are in that integration?

Robert A. Eberle

Well, there's some learned pieces from both. With certainly Intuit -- if you look at Intuit, there's a company, there were some things that they would do around the user experience that were fabulous. And we participated with them in some of their innovation centers and some of their methodology that's going beyond our banking products -- frankly, it's going throughout our business. In terms of which products that's moving the most, though, it would be the roadmap for the acquired technology where we're incorporating more of our capabilities.

Operator

Seeing no additional questions at this time.

Robert A. Eberle

Well, very good. Let me just wrap up by saying, I think it, again, was a truly outstanding quarter and a landmark quarter for Bottomline. Record revenue, record subscription and transaction revenue, record net income, record EPS, et cetera. Additional capital that puts us in a position to accelerate our growth and significant advancement in each of our key growth drivers with major wins in legal, Paymode-X and commercial banking. So appreciate your interest and we look forward to reporting back to you after Q3.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 7:00 p.m. Eastern today through midnight, February 18, 2013. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 269093. International participants may dial (320) 365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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