Bottomline Technologies (de) Management Discusses Q4 2013 Results - Earnings Call Transcript

Bottomline Technologies (de) (NASDAQ:EPAY)

Q4 2013 Earnings Call

August 20, 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

Bhavan Suri - William Blair & Company L.L.C., Research Division

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

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Bottomline Technologies Fourth Quarter 2013 Earnings Conference Call. Statements made today 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 and Bottomline's most recent periodic reports filed with the SEC for discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward-looking statements. 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, gross margins, operating income and 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'd 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 Fourth Quarter Fiscal '13 Earnings Call. I'm delighted to report on what was a very good quarter for Bottomline Technologies. I'm joined by Kevin Donovan, our Chief Financial Officer. He'll provide a detailed review of the quarter's financial results and our guidance going forward. We'll both be available for questions following Kevin's remarks.

We have exciting and outstanding news to report this afternoon. The headlines are: another quarter of strong financial performance to end a record fiscal year; Paymode-X channel sales proceeding well ahead of plan, with 10 overall new dividend deal sales; 8 new legal spend management deals closed in the quarter; and we completed the migration of our commercial banking platform to Bottomline's hosting facility.

Finally, earlier today, we announced 2 acquisitions, which position us to be the leading global SWIFT financial messaging provider. I'll cover each of these topics in more detail during my remarks.

The financial highlights for the fourth quarter was subscription and transaction revenue of $30.4 million. That's an increase of $2.4 million from the prior year. For the fiscal year, we recorded subscription and transaction revenues of $118 million. This is up $33 million from the prior year. That's an increase in subscription and transaction revenue of nearly 40%. The increase in this valuable revenue stream is the result of a clear strategic plan and effective execution against that plan. We have more than doubled our subscription and transaction revenues from just 2 years ago. We remain focused on this important revenue stream and confident it will drive revenue growth, margin expansion, multiple expansion and shareholder value.

Fourth quarter revenues, overall, grew to $65 million. That represents organic growth of 9%, when factoring in our change in business model and deemphasis on banking services and commercial banking. For the fiscal year, we grew revenues by $30 million to $255 million, representing year-over-year growth of 11%; again, factoring in the change in model and deemphasis of banking services and commercial banking.

EBITDA was $12.7 million for the quarter and $50 million on the year. Operating income was $11 million for the quarter and $43 million for the year; and we recorded EPS of $0.32 for the quarter and $1.26 for the year, both of which were well ahead of our target and expectations. In fact, earnings per share for the year grew 27% from the prior year.

During the quarter, we generated $11.2 million in free cash flow. We ended the quarter with a cash balance of $293 million. So a very solid financial performance in the quarter and the year. I'm most excited about the continued growth of our cloud-based offerings. The success we're having is a validation of the decision to move more and more of our offerings to the cloud. This strategic initiative has driven compounded annual growth of 46% and our subscription and transaction revenue line over the last 2 years.

There are 3 principal growth drivers behind the strong growth in subs and trans revenue, and those are: Legal Spend Management; Banking Solutions; and Paymode-X. The unique value proposition and competitive advantage of each of these cloud applications is evident in results we have achieved. I'm going to update you on the latest progress in each of those areas.

We had another strong quarter in Legal Spend Management. We won 8 new deals, representing $2.4 million in ARR or annual recurring revenue. This brings our total of the year to 28 new customers won, representing over $9 million of ARR. A year ago, we increased our product investment to develop a new, next-generation Legal Spend Management platform, which we thought would extend our lead in the market. During the fourth quarter, we completed the first development phase of that new platform on time and on budget, and I'm delighted to report this is everything we had set out to accomplish and more. This platform will be GA-ed in the current quarter, and we are confident that we'll extend our leadership position and drive revenue growth as we both add new customers and increase usage by existing customers.

Next, I'll cover Banking Solutions, the online experience banks use to attract, service and retain their customers. We see an excellent market opportunity in this space. We are leveraging our best-of-breed capabilities, honed with some of the largest banks in the world, and the competitive landscape in the market leaves it open for Bottomline to capture at this moment. Big news in the quarter is we completed the migration of our commercial banking platform from Intuit's facilities to Bottomline's data center.

In addition, strategically, we're seeing a new opportunity emerge, which could have long-term potential. Traditionally, Bottomline was regarded as a leading provider of payment capability. Today, more and more of the banks we work with are looking to us for all manner of customer engagement; all manner of new technology and innovation, which will help them attract and retain customers and drive revenue from those customers. This is a major shift. It allows us to go from a vendor providing discrete payment functionality, like ACH, or wire and such, to an innovation partner banks look to for customer attraction and retention. The opportunity is significant and will be an important focus for us going forward.

Let me now turn to Paymode-X, which, frankly, is one -- a good example of one of the types of platforms bank looks -- banks look to us to provide to drive new customer engagement and more revenue from existing customers. Paymode-X is our settlement network for businesses and the largest and fastest growing network of its type. We believe this is a disruptive technology and that has the potential to revolutionize business payments. In fact, our aspiration is for Paymode-X to become the network by which all businesses pay each other.

During the quarter, we continue to grow the network and today, we have over 230,000 vendors on the network. We expect to be well over 250,000 by the end of the calendar year. We recently announced channel partnerships with Citizens Bank and the Royal Bank of Scotland. These 2 banks are expanding their treasury management offerings with Bottomline's Paymode-X, allowing them to offer their corporate customers the ability to convert paper-based payments to electronic. These channel relationships have exceeded our expectations in Q4. We said we'd expect 2 or 3 vendor-pay deal signed through the channels by the end of the fourth quarter and in fact, we signed 10 new vendor pay deals in the quarter, 7 of which were signed by channels. Significantly, Bank of America signed its first vendor pay deals in the quarter, representing the first time this important channel has adopted our new revenue model. It's all very exciting and going as well or better than we could have hoped.

Looking ahead, the outlook for Paymode-X is extremely positive. Last night, I had the chance to meet with Bruce Van Saun, the new -- newly appointed CEO of Citizens. Citizens could not be more excited about Paymode-X in their pipeline. They see it as a new and innovative way to provide technology and efficiencies for their customers and drive revenue for the bank. From a bottom line perspective, our strategic plan to ultimately have Paymode-X principally sold to banks is coming together, and everything we're seeing today supports that vision.

Finally, let me comment on the 2 acquisitions announced today. These acquisitions extend our existing SWIFT business and put us in a position to be the leading, global SWIFT provider. That's a pretty significant step, and we're very excited about it. They're a logical extension of our current business. They align well with our customer base, and they position Bottomline as a global leader in SWIFT financial messaging.

Let me step back a little bit and explain to those not familiar with it, what's with this and its importance. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. What they do is provide a network that enables financial institutions worldwide to send or receive information about financial transactions in a secure, standardized and reliable environment. The majority of international interbank messages use the SWIFT network. More than 10,000 financial institutions and corporations in over 200 countries use SWIFT every day to exchange millions of standardized messages. The banks and corporations that use SWIFT need technology to connect to the network. This is a capability Bottomline provides today and one our customers are increasingly asking for. In fact, SWIFT capability is a natural complement to our banking solutions and Paymode-X offerings and an attractive up-sell opportunity for our corporate payment customer base.

The acquisitions of Swiss-based Sterci and London-based Simplex, both of which announced today, moved Bottomline from one of many player to a clear leader in this space. Now I remind investors and analysts that we've done this before. In acquiring our leading competitor in the Legal Spend Management space, we moved to the clear #1 choice, and the results have been extremely positive. We're excited about Sterci and Simplex becoming part of Bottomline. Sterci has developed strong customer base in mainland Europe, and Simplex has a number of exciting clients, including relationships with 2 major U.K. banks. Both of these businesses complement our existing financial messaging customer base, which is based principally in the U.K. but also in the U.S.

With this transaction, Bottomline gains access to over 350 new customers, including financial institutions, such as: Deutsche Bank; Franklin Templeton; and the Federal Reserve Bank of New York. And corporations such as: Burberry's; Best Buy; and British Land. The newly combined businesses, that is the acquisitions plus Bottomline's existing SWIFT business, will become a market leader, serving over 500 banks, financial institutions and corporates across 20 different countries with locations in key financial hubs, including: Geneva; Frankfurt; Paris; London; New York; Toronto; and Singapore.

Kevin will cover the full financial details of these transactions. I do want to mention that the accounting rules, principally revenue haircuts, make the acquisitions dilutive over the next 2 quarters. But that, in no way, diminishes our enthusiasm for these transactions. We see and are capitalizing on the opportunity to create an unrivaled global force in financial messaging services and solutions. This is an important and very exciting move for Bottomline, which I am certain will drive future financial results and shareholder value.

So in summary, it's a quarter of strong execution, highlighted by strong financial performance and the acceleration of our strategic plan. The move to cloud is paying big dividends. We are building an attractive SaaS business and are positioned to realize significant operating leverage as we add scale. Finally, we've announced 2 acquisitions, which positions us to establish a global leadership position in SWIFT capabilities.

I couldn't be more confident in the steps we are taking. We're proud of the progress we have made today. We enter fiscal 2014 on a path that will drive increasingly positive results and shareholder value in the fiscal year ahead and beyond.

So with that, I'll now turn it over to Kevin, who'll go through a detailed review of the financials, comment on the specifics related to these trends -- acquisitions, and he'll also give our guidance going forward. And then, of course, the 2 of us will both be available for questions.

Kevin M. Donovan

Thank you, Rob. We continue to execute against our financial objectives, evidenced by our solid fourth quarter results, and have furthered our strategic plan with the 2 acquisitions announced earlier today. Before commenting on the acquisitions and the positive impact on our business going forward, I will summarize the financial highlights of the fourth quarter.

The fourth quarter, which completed a record-setting year, was highlighted by strong growth in operating income, EBITDA, backlog and EPS, which all grew 15% or more from the prior year.

Key metrics of the fourth quarter were revenue of $65 million, up 6% year-over-year and 9% organically, excluding banking services and the planned attrition of a commercial banking business. Operating income of $11 million was up 15%. EBITDA of $12.7 million was also up 15%. Backlog of $121.3 million was up 33%. Operating cash flow was $11.2 million. And EPS of $0.32 was up $0.06 from last year. In summary, another step forward against our financial plan.

Now I will take a more detailed look into the financial results of the quarter. I will then comment on the 2 acquisitions announced earlier today. And finally, I will provide our fiscal 2014 guidance. Strategically, we continue to invest in and grow our cloud-based recurring revenue platforms.

Revenue of $65 million was driven by growth in subscription and transaction revenue. Subscription and transaction revenue was $30.4 million in the quarter and represented 47% of overall revenue. Subscription and transaction revenue is the largest component of recurring revenue, which was a record $46.7 million. Recurring revenue represented 72% of overall revenue.

In addition to the strong revenue results, sales execution drove new subscription and transaction-based deals across our Legal Spend Management, Paymode-X and Banking Solutions, which are not yet reflected in the revenue results.

During the quarter, we closed 8 new Legal Spend Management deals and signed 10 Paymode-X deals under the new vendor-pay model, including 7 of which were delivered via our bank channels. These subscription and transaction-based deals are very attractive to us because of the highly predictable nature of the revenue stream and the long-term leverage in the financial model.

The revenue growth drove year-over-year expansion in gross margins, operating income, EBITDA and EPS. EBITDA was $12.7 million and operating income was $11 million, each increasing 15% on a year-over-year basis. Gross margin of 57% increased 50 basis points from last year, driven by: software license margins of 92%; service and maintenance margins of 60%; and subscription and transaction margins of 51%. EPS was $0.32, an increase of $0.06 from last year and ahead of guidance.

From an operating expense standpoint, we continue to invest in sales and marketing to drive future growth. Sales and marketing expense was $13.9 million, representing 21% of revenue. Product development expense was $7.3 million and was down sequentially and year-over-year, reflecting a larger allocation of development resources on new product features for specific customers, where the spend is reflected as cost of sales instead of operating expense.

Looking at the balance sheet. Cash at the end of June was $293 million. We generated $11.2 million of cash flow from operations and $8.8 million of free cash flow during the quarter. In addition to the strong cash balance, we have a significant backlog. Backlog at the end of June, excluding commercial banking orders and Bank of America pay mode revenues, was $121.3 million, up 33% from last year. Orders of $64.2 million during the quarter helped contribute to the year-over-year growth in backlog.

Before discussing our forward-looking guidance, I wanted to provide some additional details on the 2 acquisitions announced earlier today. As Rob highlighted, these 2 transactions are a logical extension of our business, aligned well with our customer base and position Bottomline as a global leader in SWIFT financial messaging.

Joining Bottomline from Sterci and Simplex will be 150 employees and 350 customers. The acquisitions will use $109 million of net cash, leaving a pro forma cash balance after the acquisitions of $184 million. The purchase price of Sterci, net of cash acquired, is approximately $104 million. The purchase price of Simplex, also net of cash acquired, is approximately $5 million. The Sterci transaction is closed, while the Simplex transaction is subject to certain shareholder approvals and is expected to close with the next month.

We expect the combined fiscal 2014 revenue contribution of the acquisitions, inclusive of the revenue haircut, to be $25 million, growing to $40 million in fiscal 2015. From a valuation perspective, the transactions represent a calendar 2014 enterprise value multiple of 2.9x revenue. Our plan is to integrate the 2 acquisitions with our current SWIFT messaging business, and we do not expect separate reporting of the acquired businesses going forward.

Turning to our forward-looking guidance. We are providing our initial fiscal 2014 quarterly guidance. Our guidance includes the impact of the Sterci and Simplex acquisitions. These acquisitions will be dilutive in the first 2 quarters as a result of the standard purchase accounting deferred revenue haircut and then turn to breakeven in the third quarter and accretive to earnings by the fourth quarter. Specifically, the acquisitions will have a negative drag on earnings of between $4 million and $5 million during the first 2 quarters of the year as a result of the revenue haircut.

For the year, we are providing revenue guidance of $296.5 million. The quarter-by-quarter breakdown is $66 million in Q1, increasing to $73 million in Q2, expanding to $77.5 million in Q3 and closing the year at $80 million. We expect Legal Spend Management and Paymode-X to be key drivers of our revenue growth. The Commercial Banking business will turn into another growth engine later in the year, as the known attrition from the Intuit acquisition comes to an end.

Operating income on the year is projected at $47 million, an increase from the $42.7 million reported last year. From a quarterly perspective, operating income, inclusive of the $4 million to $5 million profit drag from the acquisitions in the first 2 quarters, is projected to be $9.5 million in Q1, $9 million in Q2, increasing to $13.5 million in Q3 and further expanding to $15 million in the fourth quarter. Operating income in the first and second quarter will be down sequentially and year-over-year, solely as a result of the acquisitions.

In addition to the acquisitions, earnings per share will be impacted by a $9 million increase in tax expense, as we move from a tax benefit last year to tax expense this year. The tax expense is not expected to be proportional throughout the year, and the early quarters of the year will be most heavily impacted. Tax expense is projected to be $2.5 million in the first quarter, $2 million in the second quarter, $1 million in the third quarter and a benefit of $500,000 in the fourth quarter for a full year tax expense of $5 million. As a result of the revenue haircut and tax increase, which, combined, will impact fiscal 2014 results by between $13 million and $14 million, we are projecting EPS of $1.05 on the year. EPS is projected to be $0.16 in Q1, $0.17 in Q2, grow into $0.32 in Q3 and $0.40 in the fourth quarter. And those results reflect the revenue haircut and tax increase mentioned earlier.

Now I presented a lot of guidance numbers in my remarks, and I want to make sure that it is not lost among all the numbers that after completing the acquisition -- the integration of the 2 acquisitions, we will exit the fiscal year with: a revenue run rate of $320 million; an operating income run rate of $60 million; and an EBITDA run rate of $69 million; significant growth from where we are today. The schedule with all the guidance numbers covered on this call is available from the company upon request.

In summary, we had another solid quarter, which closed out a very successful year and clear execution on our strategic goals and objectives. We grew operating income, EBITDA, backlog and EPS at 15% or greater levels. As we look towards 2014, we are well positioned with the recently announced acquisitions and leveraging the financial model to drive our future growth.

We will now open up the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] First, we'll go to the line of Bhavan Suri with William Blair.

Bhavan Suri - William Blair & Company L.L.C., Research Division

So just a couple of questions, first on the acquisitions. When you look at the strategy here, Rob, given that you have made the SWIFT acquisition about 1.5 years ago, is this just sort of largely a roll-up in sort of the customer acquisition model here? Or was there technology here that you felt you didn't have from, say, Sterci, that was complementary to what you have today?

Robert A. Eberle

Yes, I'd say it's both. Certainly, we're rolling up and getting the customers, but there is impressive technology, particularly as you play at the higher end of the market. What we've been doing is we've run into a number of customers, Franklin Templeton for example, existing customer of Bottomline, made the choice recently -- chose Sterci. So what this does -- as I said in my remarks, I'd analogize it to our acquisition in the legal space. I think we put together now the clear leader, and we know that, that's been very successful for us in the legal space. So having done it before, it's a logical extension into a market we're already -- or logical expansion of the market we're already in, with customers asking more and more for it. We just see it as a low-risk event for us.

Bhavan Suri - William Blair & Company L.L.C., Research Division

If you combine the customer base and the spend from Sterci, Simplex and your current SWIFT capabilities, if you were to take a guess at market share where you were versus the next-rank competitor, could you give us a sense of that?

Robert A. Eberle

Next rank, wait, you'd fall off from us -- I mean the next rank would be half of the size at best of what Bottomline is -- what Bottomline will be.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Okay. And then obviously, nice job on the payer ads on the vendor-pay model, apart from BofA, which was a pleasant surprise and the other folks. I guess, as you look at the metrics to add more channel partners there, what do you need to see from the execution at Citizens and RBS before you start expanding the channels there?

Robert A. Eberle

Well, you actually answered it in your question. It's just the execution of Citizens and RBS. I think as we've got a number of banks we're in dialogue with, we're able to now go back and share what kind of results have occurred, and I think it's just a matter of time. It's not pressing for us though today to get as many channels up as fast as we can. Rather, what we're doing is getting out and having a bit -- very successful track record with the existing channels. But you said it right there, it's a pleasant surprise that Bank of America has come on the dividend vendor-pay model. And it's just a question of execution and time on adding more channels.

Bhavan Suri - William Blair & Company L.L.C., Research Division

And I'm wondering, Kevin, if I take your guidance for the full year and I back out sort of even just at the high end, the $25 million revenue contribution from the combination of Simplex and Sterci feels like organic growth has slowed next year, which is a little bit of a surprise, given the potential upside of Paymode-X and the vendor-pay model and the strong bookings and backlog. Just some sense and how to explain that a little bit?

Kevin M. Donovan

Yes, and what you have to remember, Bhavan, is we're transitioning the Banking Solutions group over to more of a SaaS-based platform, so what you see is reflective of more subscription and transaction-based deal. And the other thing is the Commercial Banking business as we've talked about, we expect to bottom out on the attrition here in the first quarter and then we would expect to have the growth sequentially flat in Q2 and then begin to grow that commercial banking business. But when you look at the year-over-year comps for commercial banking, those will be down year-over-year. So that will impact the revenue results as well from our growth perspective. So no slowing of the revenue growth; you need to take into account those 2 components when you look at the numbers.

Operator

And next, we'll go to the line of Richard Davis with Canaccord.

Richard H. Davis - Canaccord Genuity, Research Division

Two kind of questions, following up a little bit on the growth. Is it fair to say -- because you kind of talked positively around it. You talked about ARR and things like that. Is that side of the house growing sufficiently fast enough, overall, that you kind of like exit, I don't know, fiscal '14 or even calendar '14, kind of at a, I don't know, a 10% to 13% growth rate organically? Does that feel right? And then the second follow-up question is the 2 companies you acquired, obviously, the bigger one is more important. But are they -- were they subscription or were they perpetual? And do you port them over to a different model and/or do they have kind of cloud architectures or what -- kind of what's their lot in life?

Robert A. Eberle

On the 2 -- the smaller of the 2 was more of a subscription SaaS offering. The larger is mixed. So it's a hybrid and, of course, we're going to focus more on the subscription and transaction and cloud platform. Kevin, on the growth?

Kevin M. Donovan

Yes, on the growth, we would absolutely see double-digit growth from a subscription and transaction line.

Operator

And next, we'll go to the line of the Brett Huff with Stephens Inc.

Brett Huff - Stephens Inc., Research Division

Quick question on the Bank of America vendor pay, when -- you said there was one of those, I think.

Robert A. Eberle

We didn't give the number. I don't want to get these guys fighting each other over who won how many, so we didn't give the specific numbers. Both loser in that fight so...

Brett Huff - Stephens Inc., Research Division

Can you just give us a sense of their approach insofar as you can? I know that there's some sensitivity around that. Is this a strategy where BofA is going to say, "Let's try and sell the model going forward, vendor pay?" Or is this the -- is it possible to start looking backwards and going to their existing clients and changing the way their existing clients -- I think there's 800 or 850 you've said in the past?

Robert A. Eberle

Now I would say there's 3 phases that I think we'll go through. The first phase is, "Let's experiment and try it on a -- in a couple of instances and situations." And that, to be clear, is the phase we're in now. Second, I'd expect we'd move to, "Let's sell that going forward." And the third, "Boy, this really works. Let's turn around and look at the existing base and move it there." We're in the first phase, and things don't move quickly. But the power of what occurs if -- as they do move and our confidence that they will, is what keeps us pretty excited about this.

Brett Huff - Stephens Inc., Research Division

And then on the -- just the overall deals, I think you had said 7 of the 10 were through channels. Are there the other 3 -- I know that some of the pilots that you did were direct sales from you all. Is that where...

Robert A. Eberle

The other 3 were direct sales, where we sold directly to customers, yes.

Brett Huff - Stephens Inc., Research Division

And then another question on the size of those -- on the deals, what is -- can you sort of characterize the end customer for us? Is it large, small...

Robert A. Eberle

It's interesting because it's a mix. We've had a couple in health care. But so far, we're seeing a mix. And we're doing that work ourself to say -- are there certain industries, certain verticals that we're going to end up focus on. But we've seen a pretty solid mix. I would say the largest, largest organizations in the world are not prospects for Bottomline so -- particularly, in manufacturing or retail or Walmart or Ford, those people have automated their supply chain and they, frankly, don't have the room in that supply chain for a vendor-pay model. They squeezed every penny out of that. Dell is not going to be a candidate. The rest of America is.

Brett Huff - Stephens Inc., Research Division

Okay, and then last question just on the growth, I want to make sure I got this. So if we just take $255 million that you guys did in revenue for fiscal '13, and add the $25 million and then take your guidance, that leaves about roughly $17 million that think is all organic. Is that -- is the remainder of the difference all organic? Is that fair to look at it that way?

Robert A. Eberle

Correct.

Brett Huff - Stephens Inc., Research Division

Okay. And so it's about 6.5% organic. You had talked about when...

Kevin M. Donovan

And just on that, Brett, the 6.5% is obviously reflecting the transition on banking services and the year-over-year declines so...

Brett Huff - Stephens Inc., Research Division

Yes, I was going to ask...

Kevin M. Donovan

If you remove those items, we'd be -- we'll be right in line with our historical growth rate that we've talked about.

Brett Huff - Stephens Inc., Research Division

Okay, and that was going to be my question. And so sort of similar to last year, is this -- it seems that the Intuit cash management asset really allowed you to really fulfill a lot of that expectation on switching some of those deals such that you don't want them upfront, you want them over time. Do you expect that asset to be the main driver of that -- the driver of that switching of the revenue model? Is that still going to be the case? Or is there something more complicated there I'm missing?

Robert A. Eberle

Well, there's a whole lot in that. First off, the -- it's -- so no, it's not that asset, although that asset was a catalyst. At this point, it's really Bottomline and Bottomline's capability. What that asset allowed us to do was to move from the top 50 banks globally, where we were providing cash management systems, and develop expertise and technology around the different functions and capabilities required to buy those top 50 banks. We're now taking that and making that available in mid-market, which Intuit did not address. But by getting a hosted platform with some-400 banks, it gave us the catalyst to have a hosted cash management platform and to have a platform that we would add our capabilities to. What I'd see going forward is we're going to focus actually more on the mid-market. That's the market where we can get the best price point, still sell a standard, single-solution, cloud-based platform. That's the market where they're asking us for what else can you provide. And this can be $1 million or more, multimillion-dollar annual recurring revenue deals. So it's far more attractive than the higher services and more niche top end. It's a much bigger and wider market for us in terms of what capabilities they ultimately could look for Bottomline -- to Bottomline for. And I guess, we use the Intuit piece to get into that market, move up. But today, it's really Bottomline people, Bottomline technology and really, think of it more as moving the -- our high-end capability down to the mid-market.

Brett Huff - Stephens Inc., Research Division

And then last question, and I'll hop back in the queue. Just to segue off of what you mentioned about Bottomline Technology, I know that during the last year, 1.5 years, you're sort of picking the best of both worlds and putting them together into an offering, and I don't know if it's a unified offering now. Can you just give us a sense of where we are? Like what is that offering, that is that SaaS offering? Is it a Bottomline-based technology with other things layered -- with other functionality layered on? Or am I recalling it that it was the Intuit sort of underlying structure that you put functionality on?

Robert A. Eberle

Right now, we're building on the Intuit platform because the main thing we need to do, as Kevin's referenced a couple times, was turn around customer defection. And you're not going to do that by telling them there'll be a new platform out in a period of time. So we focused on building out the Intuit -- adding quality customer support and building out the capabilities around the Intuit platforms. I think what we'd see next is taking those platforms and enhancing them further and moving from 2 platforms, by the way, which we acquired from Intuit as you referenced, and moving that to a single, cloud-based cash management and commercial banking platform. And ultimately, you could see us adding a retail capability as well.

Operator

And next, we'll go to the line of Mayank Tandon with Needham & Company.

Mayank Tandon - Needham & Company, LLC, Research Division

Rob and Kevin, can you give us a sense if this was a competitive bidding process for the 2 acquisitions? And also, what kind of multiples did you end up paying? I think you shared some numbers on that, but I have missed it. I apologize. The revenue and EBITDA.

Kevin M. Donovan

Yes, we paid 2.9x calendar 2014 revenue.

Robert A. Eberle

And this was -- neither were competitive. We're not a big fan of an auction process. And my feeling that -- and having said that, of course, if we end up participating in an auction in the future, I'll take that back. But in an auction process, the winner is the guy most willing to pay too much. What we prefer to do is to find businesses, spend some time with them. My first conversation with the CEO of -- Simon Kalfon from Sterci was, at this point, about 3 years ago. So we've developed a relationship. We're confident we can work with the business. We have a high regard for the leadership and their capability. There aren't as many questions around the integration. There aren't questions around the cultural fit. So that's a long answer. The short -- and the short answer would be no, it was not a auction process. I think it's a valuable business that was getting a lot of inquiries. But no, it was not an auction.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And then, Kevin, you said 2.9x revenue for Sterci?

Kevin M. Donovan

That's correct, yes.

Mayank Tandon - Needham & Company, LLC, Research Division

What about on an EBITDA basis, do you have any figures on that?

Kevin M. Donovan

No, we didn't provide the EBITDA multiples.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And then can you give us a sense of what kind of synergies you would be able to capture over the next, say, 12 to 18 months from the acquisition, both on the revenue and cost side?

Robert A. Eberle

Yes, we've done -- our synergies here will be much more on the revenue side. We've done a number of acquisitions, where we've -- the synergies have been on the cost side and we've been aggressive about that. There'll be some cost synergies here but principally, this is a market opportunity in putting together the 3 businesses to give us the over 500 customer base in a global scale. That's the principal thing. The areas of synergies would be hosting data centers would be one, and a little bit on the G&A staffing. But it's not driven by a synergies. It's driven by market opportunity and growth.

Mayank Tandon - Needham & Company, LLC, Research Division

That's fair. And I also wanted to go back to the Paymode growth opportunity. How should we think about the ramp of these 7-channel deals in terms of when they can start to actually impact the model?

Robert A. Eberle

Well, the thing with Paymode-X, actually, I think it's still a while before it's making a significant impact on the model. The thing that makes it difficult for the spot you sit in, in doing that is it -- it has the opportunity, the potential to revolutionize the way businesses pay each other. It could become by far the largest revenue stream in Bottomline. But today, we're not at the scale that these new deals are going to significantly impact the model beyond what's built into Kevin's growth numbers.

Mayank Tandon - Needham & Company, LLC, Research Division

Is it fair to say then that there's really no meaningful contribution from these deals in that $17 million organic growth number for next fiscal?

Kevin M. Donovan

No, you -- I mean, we'll see contribution but across the $300 million business. When you get to meaningful growth, it's not going to be the single, largest driver...

Robert A. Eberle

Yes, I should have rather said that the way I think about things that I see meaningful is 10% of $300 million, not 1%, 10%. So I look at something that's adding $30 million, that's meaningful.

Mayank Tandon - Needham & Company, LLC, Research Division

Great, and I'll -- one final question. Do these acquisitions, in any way, change your thought process around that 25% operating margin goal in 3 years?

Kevin M. Donovan

No, it doesn't change that. It's probably because of the haircut and things that probably pushes it out slightly. But no, it does not change our overall approach to the 25% operating margin target.

Robert A. Eberle

Yes, you could see that in the fourth quarter guidance.

Operator

And next, we'll go to the line of Wayne Johnson with Raymond James.

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

So my apologies if you have addressed this before. I jumped on late, and I'll catch up with you in a second after the call. But the question I have is, if your organic revenue growth is 6.5%, which reflects the Intuit business attrition, kind of 10% apples to apples or so maybe going forward, what would the actual earnings guidance be, excluding the acquisitions and just the core business as you ended the fiscal fourth quarter for fiscal '14?

Robert A. Eberle

Yes, I didn't run a guidance number, excluding that. If you take a look, what I did provide is that there'll be about a $4 million to $5 million impact on operating income in the first and second quarter as a result of the haircut. And then tax, we'll end up with a year-over-year $9 million increase in tax expense. So the combination of those 2 items is about $13 million to $14 million of incremental impact from FY '13 to FY '14.

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

Okay, that's great, and I appreciate that. And then on the Paymode-X and Legal eXchange, just those 2 combined in the fourth quarter, how fast would you say they were organically expanding on the top line?

Robert A. Eberle

We don't break down our product-by-product revenues or growth rates for the business.

Operator

And next, we'll go to the line of Gary Prestopino with Barrington Research.

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

Yes, a couple of questions on the acquisitions. Can you tell us what they were growing top line historically?

Robert A. Eberle

They were growing right in line with our overall business, so they're very much aligned with that.

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

Okay. And then could you refresh my memory, was most of your SWIFT business transactional based, or are you selling that on a subscription?

Kevin M. Donovan

I'd say it's a subscription and transaction-based platform. So our London-based business had a subscription and transaction-based revenue model prior to these transactions.

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

So it was both with each organization that you're connected to?

Robert A. Eberle

When you say each organization, what do you mean?

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

Well, that's using the SWIFT network. Is it -- was -- were you charging a subscription as well as a transaction?

Robert A. Eberle

Yes, there's a subscription component with a transactional component as well, correct.

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

Okay. And I seem to recall that you were working directly with -- you work directly with SWIFT to develop this connectivity. They try to do it themselves, and they just said, "Well, we're going to have you, you all do it." Is that -- do these competitors have the same kind of connectivity that you had in terms of -- I think it was -- you were providing connectivity to maybe small organizations at a lower cost base system than what was out in the market?

Robert A. Eberle

Yes. What you're referring to, Gary, is an earlier relationship with SWIFT, where we were a technology provider to them. Subsequent to that, we actually acquired a London-based business that was in the financial messaging space. That -- these 2 transactions are an extension of that, that prior acquisition we had done.

Operator

And next, we'll go to the line of George Sutton with Craig-Hallum.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

It's Jason, on for George. Most of my questions have been addressed, but I'm just wondering if you can provide a little bit of an outlook on your expectations on the Paymode side? If you can, talk about what you're looking for, for channel ads for the year or possible vendor ads for 2014.

Robert A. Eberle

I think the one thing we'd say is we'll be at 250,000 vendors by the end of the calendar year, at 230,000 today. We're not giving out, or have any forecast on, new deal signed or channels at this point. All I can say is that we're thrilled with the way it's going, and we're thrilled with the -- both the number of deals signed and then in those deals that were out in the market, the vendor adoption has been very encouraging.

Kevin M. Donovan

And we average about 3,000 new vendors per month.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Okay. And then just one, if I could. Rob, you talked about some increasing opportunities in the banking solution where you're seeing customers looking for a full suite of Bottomline products. I'm just wondering if you can maybe give a little bit more color on that or point to some particular instances.

Robert A. Eberle

Yes, I'd use it different than full suite. I actually would say, because I think we provide a full suite of what we're doing today. I think what it gets is bigger than that. It's as simple as an email came in from a big -- from one of our larger hosted bank customers said, "You guys are fabulous. Let's talk what else we could be doing with you." We just signed, and we just came out with the new module for trade. We had a bank, an existing customer immediately signed on for that. So it's -- as we come out with extensions, and it's also dialogue. So if we talk to our banks and they -- unlike the largest banks in the world, who are going to look to Bottomline for specialized piece of capability, as soon as you move or pass those top 50 and you're in -- start to move in the mid-market range, it now becomes, "How can you help us with technology? We need to track customers." So that can range from fraud, AML or anti-money laundering, and it could be analytics. It could be -- Paymode-X is certainly a very good example of that extending beyond. So it's things we have today and other things that we can develop, partner or acquire.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

So this is primarily on the middle-market side that you're seeing these opportunities?

Robert A. Eberle

It's primarily after you get past the largest global banks.

Operator

And at this time, there's no one else in queue with a question. I'd like to turn it back for any closing remarks.

Robert A. Eberle

Well, thank you. Thank you for your interest in Bottomline. We're delighted to have reported another strong quarter and a record fiscal year. And we couldn't be more excited about the 2 acquisitions. I look forward to reporting on our results for Q1 at the end of the October time frame. Thank you.

Operator

And ladies and gentlemen, this conference will be made available for replay after 7 p.m. today, through September 3. You may access the replay system at any time by dialing 1 (800) 475-6701 and entering the access code of 286787. International participants may dial (320)365-3844. That does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!