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Bottomline Technologies (de) (NASDAQ:EPAY)

Q2 2014 Earnings Call

January 30, 2014 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

Brett Huff - Stephens Inc., Research Division

Richard H. Davis - Canaccord Genuity, 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

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

Operator

Ladies and gentlemen, thank you very much for standing by, and welcome to the Bottomline Technologies Second Quarter 2014 Earnings Conference Call. Statements made on today's call will include forward-looking statements about Bottomline's future expectations, plans and prospects. All of 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 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, Bottomline's financial results are presented on a non-GAAP basis. These non-GAAP results include, among others, gross margins, operating income, EBITDA, net income and earnings per share. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the Investor Resources section of Bottomline's website at 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, and please go ahead.

Robert A. Eberle

Well, thank you and good afternoon, everyone. Thank you for your interest in Bottomline Technologies, and welcome to the Second Quarter Fiscal '14 Earnings Call. I'm delighted to report on what was a very strong quarter for Bottomline Technologies. And I'm joined here today by Kevin Donovan, our Chief Financial Officer. Kevin will provide a detailed review with the quarter's financial results and our financial guidance going forward. Both of us will be available for questions following Kevin's remarks.

Q2 was a very strong quarter on all fronts. The highlights, strong financial performance with record revenues, subscription and transaction revenues, operating income and EBITDA. Innovation with several key new product releases and new advanced technology, with the acquisition of Rationalwave announced earlier today. I'll cover each of those in detail during my remarks, but let me start with the financial highlights for the quarter.

Subscription and transaction revenues were $34.8 million, an increase of $4.5 million from the prior year. This important revenue stream now represents a run rate of about $140 million annually. Our focus on this revenue is a key element of driving future revenue growth, margin expansion, multiple expansion and, ultimately, shareholder value. Revenues overall stood at $73.4 million, up 15% year-over-year. EBITDA was a record $14.3 million and operating income was a record $12.2 million, both up 16% year-over-year. And we recorded EPS of $0.28 for the quarter, well ahead of our target and expectations. Finally, with the strong cash generation, we ended the quarter with a cash balance of $206 million. So strong financial performance across all our metrics.

From an innovation standpoint, during the quarter, we launched Paymode-X 2.0 - Vendor View. This is the first in a series of new generation platforms, featuring a unique, unified and rich user experience. By way of background, Paymode-X is the largest and fastest-growing settlement network of its type. It enables payers to migrate from paper to electronic payments, while providing vendors with faster payment and rich electronics remittance data. Serving more than 250,000 members and processing more than $140 billion annually, our ambition is for Paymode-X to become the means by which all businesses pay and get paid.

Paymode-X 2.0 takes the network to the next level, while continuing to provide the security and stability businesses have come to rely on. With Paymode-X 2.0, members can monitor upcoming payments, display payment data in a variety of intuitive graphic formats, and connect directly with payers to obtain additional payment information.

The advancements in Paymode-X were not just related to the technology. During the quarter, we signed 7 new payer deals, and in a calendar year with a 32 new deals, well ahead of our expectations for 2013. In addition, we saw increased enthusiasm from our bank channels. In fact, at the end of the year, we got a call from one of our bank channels, telling us they'd conducted a strategic review and decided to make Paymode-X a key growth driver for 2014. They're planning additional hires to be focused on the sale of our offering, and in the interim, they asked if we wouldn't mind lending them some of our people to help them ramp; which, of course, we are happy to do. So with new technology, new payers and motivated bank channels, the future outlook for Paymode-X is very positive.

Similarly, we had a new product release of our legal spend management platform, which brought new levels of productivity gains, auditor visibility and collaboration tools. Our competitive advantage in that market is evident as we signed 8 new deals in the quarter. The model works. Our investment in leading technology, coupled with obsessive customer focus, has made us the clear choice in the legal spend management space, a position we intend to hold and benefit from for years and years to come.

Our third growth engine is banking solutions. We continue to see the banking market and the business we do with banks as beneficial for Bottomline today, with even greater opportunity tomorrow. This past quarter, we added key technology talent to ensure we execute on and profit from the significant opportunity the space represents.

From a financial perspective, we expected to finish the calendar year with the known acquired customer attrition behind us, and we did just that. That's great news. It means as we enter 2014, we now see the opportunity for new customer acquisition and revenue growth ahead.

Let me turn now to Rationalwave. Earlier today, we announced the acquisition of Rationalwave Analytics. Rationalwave is a early stage company that develops predictive analytics technology. Predictive analytics is an important and exciting opportunity for Bottomline. Let me explain. Today, most enterprise software, including our own, organizes, stores and retrieves data. It provides tools to facilitate business process and workflows, and it reports on events and transactions that have already occurred. That's wonderful. It creates enormous efficiencies. But technology can do more, so much more, than just help the user process work and report on the past and current data. This is where predictive analytics comes in. Instead of just reporting on the past and answering the question "What happened?" predictive analytics leverages the data flows, provides a whole new level of insight by answering the questions, "What will happen?" and "What should the user do?" This is a fantastic and on-point opportunity for Bottomline. We don't intend to sell this as an independent product, but rather see the technologies as a core component we will embed in each of our major product offerings. Our data-rich applications can feed Rationalwave's predictive analytics engine, yielding likely outcomes, recommended actions and fraud prevention. Whether its analyzing the Legal Bill in Legal-X, assessing a payer's vendor community in Paymode-X, or helping banks analyze their customer base in commercial banking. There are many opportunities to increase the value we bring customers and enhance our competitive advantage with this technology.

I'm always excited about new innovation at Bottomline. Innovation is the hallmark of our company, a central part of our commitment to our customers and a key driver of value creation for our shareholders. I'm particularly excited about the innovation Rationalwave and predictive analytics bring to our company.

So in summary, another quarter of solid execution, highlighted by new innovation and strong financial performance. Our solutions are in demand, and we are increasing our already strong competitive position. We are well situated to grow, and as we do to realize significant operating leverage. I'm very pleased to be reporting on this great Q2, delighted with our current position and very excited about the future ahead for Bottomline Technologies.

So with that, I'll turn it over to Kevin Donovan, and as I said upfront, both of us will be available for any questions after his remarks.

Kevin M. Donovan

Thank you, Rob. We had a strong quarter, one which saw us continue to innovate and execute on our strategy to drive more of our business to cloud and recurring revenue-based offerings and drive increasing profitability. Our key metrics, revenue, subscription and transaction revenue, operating income and EBITDA, all grew 15% or more in the quarter, which demonstrates that our strategy is working. As we look forward, with significant customer demand and a strong pipeline, we are very confident in our ability to drive higher levels of revenue and profit over the second half of the fiscal year. With our out-performance in Q2 and a reconfirmation of our Q3 and Q4 outlook, we are increasing our annual guidance. I will have additional comments about our forward-looking guidance later in my remarks.

Key financial highlights of the quarter were revenue of $73.4 million and subscription and transaction revenue of $34.8 million, each increasing 15% year-over-year. Operating income of $12.2 million and EBITDA of $14.3 million, both up 16% from last year. Operating cash flow of $10.4 million and EPS of $0.28, ahead of guidance. Clearly, another strong quarter.

I will now provide a more detailed look into the financial results and our go-forward guidance. Strategically, we continue to invest in and grow our cloud-based recurring revenue platforms. While new subscription and transaction-based deals do not typically result in any current quarter orders, revenue or earnings, they are very attractive to us because of the highly predictable nature of the long-term revenue stream and the leverage in the financial model. A key indicator of our predictable financial model is that we typically start a quarter with 85% of the quarter's revenue already under contract and visible.

Looking at the revenue results, subscription and transaction revenue was a record $34.8 million, and represented 47% of overall revenue. Subscription and transaction revenue was the largest component of recurring revenue, which was a record $52.9 million and represented 72% of revenue. In addition to the strong revenue results in the quarter, we signed new subscription and transaction-based deals across our legal spend management, Paymode-X and banking solutions. During the quarter, we closed 8 new legal spend management deals and signed 7 Paymode-X deals under the new vendor pay model. While these customers are not expected to contribute much to revenue in the current fiscal year, these new deals represent future revenue growth and demonstrate the growth visibility in a recurring revenue model.

The revenue growth drove year-over-year expansion in operating income and EBITDA, and we see further growth opportunities over the remainder of the fiscal year. At the begin of the year, we made a commitment to grow profit on a quarterly basis. Our second quarter results reflect our execution against that commitment, with EBITDA increasing $800,000 from last quarter to $14.3 million, and operating income increasing $600,000 sequentially to $12.2 million. We see an acceleration of profit in the second half of the year, with a $1.3 million step forward in operating income in Q3, and a $3.1 million increase in the fourth quarter compared to the results reported today.

Turning to margins. Overall gross margin of 57% was consistent with last year and last quarter. Software license margins were 93%, representing 4% expansion from the prior year. Subscription and transaction margins were 53% and represented the continued expansion of margins on our largest revenue stream. As we continue to drive scale in our subscription and transaction-based offerings, we see the opportunity for further subscription and transaction gross margin expansion, which will be the single largest driver of our overall margin expansion going forward.

From an operating expense standpoint, we continue to invest in sales and marketing to drive future growth. Sales and marketing expense was $15.4 million, representing 21% of revenue. While product development expense was $8.7 million, representing 12% of revenue.

Looking at the balance sheet, cash at the end of September was over $200 million, at $205.6 million. During the quarter, we generated $10.4 million of cash flow from operations. In addition to the strong cash balance, we have a significant backlog. Backlog at the end of December, excluding commercial banking orders and Bank of America Paymode revenues, was $125 million, up 30% from last year and a slight increase from last quarter.

As Rob mentioned, we announced the acquisition of Rationalwave Analytics earlier today. Rationalwave is a pre-revenue, early stage predictive analytics company. The transaction will have no material impact on Bottomline's financial results. The purchase price was $8 million, consisting of $1.2 million of cash and approximately 206,000 shares of stock. Almost 1/2 of the stock was issued to key employees joining Bottomline, and all such shares are subject to a 4-year vesting period. We believe that predictive analytics will bring new levels of capability to our product set and significant business value to our customers.

Finally, I want to comment on our go forward outlook. Based on the strength of our second quarter results, we are raising our annual guidance and reconfirming our third and fourth quarter guidance. Our updated full-year outlook is revenue of $298.5 million, operating income of $52.6 million and EPS of $1.25. We expect a strong finish to the fiscal year and we'll exit the year with an annualized run rate of $320 million of revenue and $70 million of EBITDA.

On a quarterly basis, we see revenue increasing from $73.4 million this quarter to $77.5 million in Q3, and $80.3 million in Q4, with each quarter representing year-over-year revenue growth of 20%-plus.

From a profit perspective, we are projecting to increase operating income from $12.2 million this quarter to $13.5 million in Q3, and further increasing to $15.3 million in Q4. Tax expense is expected to be $1 million in Q3 and $800,000 in Q4, for a full year tax expense of $4 million, which is slightly below our prior annual guidance of $4.3 million.

Turning to earnings. We are raising our EPS guidance from $1.19 to $1.25 on the year on the strength of our second quarter results. EPS is projected to increase from $0.28 in Q2 to $0.32 in Q3, and expanding further to $0.37 in Q4.

Now, I've covered a lot of guidance numbers on this call. A schedule with the details of our guidance is available from the company upon request.

In summary, we continue to execute on our strategic goals and objectives. We delivered 15%-plus growth in revenue, subscription and transaction revenue, operating income and EBITDA in the quarter. Looking forward, our focus on delivering innovative, market-leading solutions, combined with our leveragable financial model, positions us very well for continued growth in the second half of the fiscal year and beyond. We will now open up the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Brett Huff with Stephens Inc.

Brett Huff - Stephens Inc., Research Division

One question. Rob, you mentioned about the attrition, and I wanted to make sure from the Intuit deal, I want to make sure that I understood it right. If I recall, and correct me if I'm wrong, that this quarter was supposed to be kind of the trough in terms of attrition impact. And then, going forward, we weren't going to have any more attrition. But I wanted to make sure that's what you said, is it still the right understanding?

Robert A. Eberle

Absolutely, that's what I said. And I apologize if that wasn't clear. That's not just what I said, but that's really exciting for us. We paid a great price for the capability, for the customer set, in the acquisition. Part of that though, we inherited customers that were leaving. We've had to endure that, so it's a headwind that we've been facing as we reported our results. Delighted that we've now reached, as you put it, the trough of that, and will be in a positive position going forward and beginning to drive new customers and growth. So yes, that's exactly it.

Brett Huff - Stephens Inc., Research Division

Okay. And then on the sub and tran route, that had sort of fluctuated a little bit, I think because of some of that attrition. What was the real driver of the increase sequentially from 1Q to 2Q this year? I know that you guys have said before, it's hard to really growth that sequentially a lot because the revenue comes in over time. Was this quarter just some catch up, we finally got some revenue that had been sort of in deferred revenue and it showed up, or give us a sense of what drove that big sequential increase?

Kevin M. Donovan

Yes, probably the biggest primary driver on that was legal spend management, and the kind of growth that we're seeing in that platform. We also have contribution from our other subscription and transaction deals, as well as a small amount that would have come from the Sterci acquisition.

Brett Huff - Stephens Inc., Research Division

Okay, and on that, Sterci, the math I'm doing, does that contribute $7 million of revenue? Is that about right? Or can you tell us that?

Kevin M. Donovan

Wouldn't have been that high. We actually have integrated that business into our overall business. So we don't have a separate breakout on that, but our prior guidance, when we announced the transaction was, we expected $25 million of revenue in the fiscal year, and we had completed that acquisition 2 months into the fiscal year. There's a little bit of ramp on that revenue throughout the course of the year, due to the maintenance haircut from the acquisition.

Brett Huff - Stephens Inc., Research Division

Okay. That's helpful. And then on the, I think you said 7 or 8 new Paymode-X deals. Can you characterize those a little bit for us? Did they come through direct sale, or did they come through the new channels? And can you give us a sense of size, et cetera?

Robert A. Eberle

Yes, we haven't been doing anything in terms of size in those deals. Because ultimately, the size is going to be driven by vendor adoption as it rolls out. But the deals came from both direct sale and channel, and the comment I'd make, that's I think important is, you can sign up channels and have it just be a product someplace in their offerings they can sign it off, so that they can talk to it. We couldn't have more engaged channels, which is exciting. And it's -- I've made some comments on one of the channels where we now have invested in Bottomline people, but it's -- these channels are excited about Paymode-X, motivated and out developing a tremendous pipeline. So the short answer is both direct and channel, and channels are motivated and we'll look to see continued strong results in 2014.

Brett Huff - Stephens Inc., Research Division

Okay. And then last one for me. I believe JPMorgan announced that they were going to shut down their sort of B2B payments platform design, which they bought several years ago. My understanding is there's about 40 payers there and maybe $60 billion of spend. I think some of the other folks in this space are trying to figure out how to maybe sign some of those folks. What is your thought or strategy, or what color can you give us on your perspective on that?

Robert A. Eberle

Well, I can give an awful lot of color, but I'll try to limit it to the time we have. First off, what we are doing, is we have a single cloud platform that's automating payments, and bringing whole new levels of efficiency, connectivity and security to the payment process. What Zions was doing, was providing each customer with a customized application to address invoice approval workflow and payment in varying forms amongst every customer. They had the ability to bring on anywhere from 6 to a dozen maybe, top customers a year. We can bring on more than multiples of that per quarter in our model. So the models are very different. And I think ultimately, they -- part of the reasons to exit that, is just the weight of the customized development, customized applications that you've out for each customer, and all that work to develop those customizations. That's not the business we're in, or a business we want to be in. So we're out, we're talking to a number of those customers, but what we're going to do is offer them what think is a much, much better proposition. Bottomline's Paymode-X, which allows vendors to come on, allows you to streamline your whole payment process and allows you to earn dividends. What we call dividends or commonly referred to as rebates. So while we may get some of those, but they're so customized, it's not our principal focus.

Operator

We'll hear next from the line of Richard Davis with Canaccord.

Richard H. Davis - Canaccord Genuity, Research Division

Two questions. One, is a numbers question on Paymode-X and the other, I apologize, don't laugh when I ask the question. So the first part is, the first one is, kind of growth rate, we're kind of mulling that it's probably a -- Paymode's kind of growing 30% to 40%, is that kind of at least ballpark? And then the second question, I did actually get this from an investor, but do you have any comment on this, bitcoin? And then is there any relevance whatsoever to your business, competitive-threat wise, so?

Robert A. Eberle

Yes, I'm so -- first off, we haven't breaking out, Richard, growth. I think that the way we look at it is, what's the market opportunity, which is to be the way that businesses pay and get paid. And everything we're doing today positions us to realize on that opportunity. In terms of bitcoin, and a whole lot of other things that are going on around payments, most of those are consumer-driven; bitcoin is certainly consumer. We wouldn't do anything around bitcoin, just because of all regulatory aspects of who you're paying, AML, anti-money-laundering, sorry, and other aspects of that. So it's not a competitive threat to us. It's not something we're engaged in. I think it's interesting though, to see the amount of innovation that's occurring in the consumer space, and that creates opportunity for Bottomline, as we bring out Paymode-X. Paymode-X 2.0 brings a whole -- brings many learnings that we have from watching what occurs in the best of breed consumer offerings. But again, not a competitive threat, and not even a distraction to us.

Richard H. Davis - Canaccord Genuity, Research Division

Got it, that was my response. It's good to hear that I gave a correct response.

Robert A. Eberle

Make sure they don't pay you in bitcoins.

Operator

Next, we'll hear from the line of Wayne Johnson with Raymond James.

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

My question is to Kevin, and I'm just making sure that I haven't missed anything here. There was a significant upside to the earnings results versus consensus in our estimates, a very happy event, congratulations all around. Metrics seem very strong across-the-board. But just for verification purposes, were there any 1x events that helped that beat that I'm not picking up on?

Kevin M. Donovan

No, there we're any 1x beats. There was a little bit of out-performance on the topline revenue, a little better from an expense standpoint, and then taxes were lower than we had projected. So combination of multiple things, but no 1x is going to change that.

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

No 1x. Right, okay, that's helpful. And this topic, I think, had been talked about a little bit, but I'm going to ask a specific question on a -- from a competitor side point of view. Could you talk a little bit about what you guys see in the market in B2B payments? You talked about Zions, kind of dissolving, and maybe some of the other established players are having second thoughts about being in it. Yet at the same time, I'm hearing messages that other companies are looking to enter the market. So could you give us kind of a -- just a quick overview, competitively speaking, on who you see out there and what you see? Has anything changed in the last 6 or so months on the B2B payments front, particularly on the Paymode-X side?

Robert A. Eberle

Yes, there are always new entrants into the space. There have been in the 14 years I've been involved in this company, 14 years plus, and there always will be. I think it's a particularly difficult space to be a new entrant. If you think about who our target buyers are, the controllers, CFOs, VPs of Finance, companies that are trusted with those organization's money. If you're selling to a marketing group or you're setting to prep sales, newer technologies, trust is less critical to those groups. Paramount is trust and confidence, paramount in what we do. So first thing I'd say, from a competitive perspective, Bottomline's history and our customer base are 65 of the Fortune 100, our thousands of customers globally, our work with 15 of the top 25 banks, and over 400 banks, et cetera. That credibility and that brand in the space is a huge advantage. From new technologies, we see a lot that continually goes after supply chain finance and dynamic discounting. So the idea that there is a cash rich buyer and a cash poor vendor, and a cash rich buyer will be able to extend, will be able to pay earlier and extract the big discount, we've watch that for years, we never really see that materialize. More often than not, the vendor's cash rich, and the buyer's cash poor. So it's not that model of supply chain finance or dynamic discounting is not one that we're betting on, if you will. And we're seeing Paymode-X is not dependent on that kind of relationship or dynamic. Paymode-X is, simply automates the payments, providing new levels of efficiency to both the payer and the vendor, and does so and monetize those transactions at a very reasonable, affordable rate to pay for the technology, and of course drive revenues for Bottomline. So it's interesting. There's always new pieces on it, but there's certainly at this point, there isn't anybody that's threatening us today or bringing out anything that we haven't seen before that we're concerned about.

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

I appreciate the input and the color. And one last housekeeping item here. Just on the cash balance, that's fully, that $205 million or so, that's fully available to Bottomline, is that right?

Robert A. Eberle

That's correct. Now Wayne, on the competitive, too, as in the past, feel free to give a call anytime somebody comes up. You have in the past, you're pretty knowledgeable in the space, and I'm happy to give you, what we see in specific companies as you come across them.

Operator

Next, we will hear from the line of George Prestopino with Barrington Research.

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

Yes, here's George. A couple of questions. Could you just, Kevin, tell me -- I don't know if may have mention this, I tried to write it down. What the recurring revenue was up for the quarter, in terms of percentages?

Kevin M. Donovan

I don't have the exact percentage. Overall, recurring revenue was $52.9 million. About 72% of overall revenue. But from a year-over-year perspective, I just don't have that number. It would've been heavily-driven off of the subscription and transaction, which is up 15%.

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

Okay. And then, how many actual vendors does the system have now, Paymode?

Robert A. Eberle

We're now at 250,000 vendors. We didn't quite hit that by the end of the calendar year, so we're just a little into January, but we're 250,000 vendors today.

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

Okay, and then could you maybe talk about, as you're signing these vendor pay deals, the objective is obviously is trying to transition the vendors into, to that mode. I mean, what's been your early experience, with attempting to do that? Could you maybe elaborate a little bit on that, Rob, or is...?

Robert A. Eberle

Sure, no, happy to. First off, we, even at 250,000 we'll have some level of match vendors that are existing in this. But there'll be new vendors as well. So we'd make sure to -- we'll continue to grow the network and we expect to continue to grow the network. The proposition for a vendor being enrolled in the vendor pay model or a multiple one -- sometimes, payers, by the way, make it mandatory or part of their ongoing purchase or selection of vendors. That's obviously wonderful for us. That's the most effective. Other times, there can be things like an earlier pay. But from a technology standpoint, the Paymode-X 2.0 Vendor View is only available to the vendors that are enrolled; enrolled, meaning that they are absorbing a small network use fee to pay for that technology. So in order to get that efficiency, in order to get that technology, there's -- that's one of the ways we enroll those existing vendors. So it's a combination of factors, can be support from the payer or demand from the payer, can be payment terms from the payer and then technology.

Kevin M. Donovan

And Gary, I just computed the recuring revenue growth, year-over-year it was 15%.

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

Okay, and then in terms of those legal spend deals that you signed, it there a recurring revenue number on an annual basis you can share with us from those deals?

Kevin M. Donovan

I don't have an actual recurring revenue value associated with those deals right at hand.

Operator

And I apologize for the incorrect name there. And next is George Sutton with Craig-Hallum.

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

It's Jason in for George. Rob, a quick question for you. So a couple of quarters ago, you provided kind of an evolution for the vendor pay model, and you talk about 3 different phases; and I think the first one was being experimenting with some customers, the second one was moving forward with a single solution, and then the third one was pursuing that solution towards the existing vendors that you've already signed up. And just wondering if you can give any updates on kind of that phase, and if there's any changes to that and where you currently see yourself there?

Robert A. Eberle

So that makes sense. I'd say we're fully in Phase II. My definition that we've not -- I think on the third, what I meant on the third phase is ultimately would we go back against the $140 billion transacting through the system in the old model. We're not at that point. I wouldn't expect to be at that point, probably for -- that's going be a couple of years. I think that would be until this is really established. Where we are today is we're well past experimenting, well past trying this with Beta customers, et cetera. And as you heard, we're rolling this out with 7 new deals this quarter, great pipeline in front of us. And in that case, all of those deals -- I mean, the vendor pay model, we are not selling anything directly or through our new channels in anything other than the vendor pay model.

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

Okay. That is helpful. And then, you mentioned a couple of times in the prepared remarks about the growing sales pipeline and growth acceleration. And you talked about the backlog number, and I'm wondering is that really what you would point to, as far as something you can identify to show that growth, or is there anything else that you can provide that's supports the growth in the pipeline?

Kevin M. Donovan

No, from a backlog perspective, we only report contractually committed orders as part of our backlog number. So as we move more and more of our business to subscription and transaction-based deals and our cloud-based solutions, that backlog number will become less and less meaningful. We still provide it to just give a metric and allow investors to understand that. But we would see that becoming less and less meaningful as we go forward, given that most of the subscription and transaction deals do not get counted as an order or going to backlog when we sign the deal.

Robert A. Eberle

Yes, pretty interesting evolution of the model as we move more and more of the business, and we're now principally in the cloud model. We used to carry a minimum or used to know we're going to be paid upfront. Now we have the confidence in the transaction flow that in many areas our business, most of the areas we're focused on, there's no real revenue commitment up front in it, and we're dependent on and we are successful with the value of the application and the use by the customer to drive revenue.

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

Okay. That makes sense. I appreciate the color there. And then, just last going back into Paymode, so it was 7 new vendor pay this quarter, right?

Robert A. Eberle

Correct.

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

Okay, and that 7, that's a little bit lower number than we've had the last 2 quarters. Is there anything behind that, is there anything concerning, or is this just kind of ebbs and flows of adding people to the-- or adding customers to the platform?

Robert A. Eberle

Yes, I think it's just that ebbs and flows of adding customers to the platform. There's nothing different.

Operator

[Operator Instructions] We'll hear from the line of Peter Heckmann with Avondale Partners.

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

Maybe you could put a little finer point on something for me. I'm just looking at my model and I'm having trouble reconciling some of the commentary as regards the subscriptions and transaction revenue growth. Am I correct that for the first half of fiscal '14, there's about $9 million in acquired revenue between the 2 acquisitions that were completed in August and September, and the maybe a little bit of trailing revenue from Albany Software? Because when I go back, it looks like the organic growth rate and subscription transactions was negative for the first half of fiscal 2014. Am I missing something? Or am I using a drastically incorrect number for acquired revenue?

Kevin M. Donovan

Yes, I think as we talked about in the past. Pete, I think some of your organic revenue numbers have been light. When you look at the transactions, I mean Albany Software would not have been anything on subscription and transaction, and the large portion of Sterci and Simplex would fall on the service and maintenance and software line, given the fact that they were more perpetual software licensed businesses. We will transition those businesses over to more of a subscription and transaction model, like we've done with other acquisitions we've done. But the legacy model for those businesses was a perpetual software license with service and maintenance.

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

Okay. So we're still thinking roughly $25 million in acquired revenue for fiscal '14, based on the 2 deals that were announced last quarter?

Kevin M. Donovan

Yes. We, I mean, we've integrated those businesses, as I mentioned earlier. But there's nothing that I would highlight that would be different.

Robert A. Eberle

Well, one of the things that's important is when these -- typically in these businesses we bought, are less than perfect. So again, I'll make a couple of comments around it, no offense to the people who have come through those businesses, but there's pieces of those businesses -- one of the things we've done effectively is determine what areas we want to continue and what areas we don't. So part of getting an attractive M&A price point, is taking a look at something that we want some pieces of, but we don't want all of it. So I wouldn't want to suggest that companies we buy, we intend to buy, and grow from there. Often, that's not the case at all. And what that allows us to do is to be pretty effective in terms of price point. Now in this past quarter, we saw the digital insight business bought by NCR, and you look significantly larger than the commercial banking business we bought from Intuit, but very similar. And you look at the -- that was at a multiple somewhere like 4x as much as the multiple we pay, 4x the multiple. That's because we have a declining revenue piece that we took on in the business we bought. So it's -- that's an important part of looking what comes in the Bottomline. Today's acquisition, Rationalwave, has 0 revenue. They've had a couple of projects and for customers, it helped us confirm the technology in which they were paid. But those won't be going forward, and we won't be selling their technology independently at all. So that's again a 0 revenue acquisition.

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

That's a fair point. I appreciate it. And then, Kevin, in -- within service and maintenance, now that number was above my expectations, and looks like it grew 20% or a little bit better year-over-year. Was there anything going on there in terms of maybe an easy comparison, or maybe some more professional services work that occurred?

Kevin M. Donovan

No, it sounds like, just from your earlier question, it might be that you had more of the Sterci revenue modeled in subscription and transaction, when actually it really should have been reflected as service and maintenance.

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

That's helpful. And then lastly, to your comments on Paymode-X and working on your best practices and getting past the experimentation phase, would we expect -- and just in terms of sizing and expectation for the calendar '14, would we expect it to add maybe double the number of payers on the model, or is that too conservative? And can you get to point you're adding 20 payers per quarter?

Robert A. Eberle

I think we can get it, but I wouldn't commit to doing that in 2014. Now, I think that -- a lot of time, there's still a lot of education around the model, which elongates the sales cycle, and it's a lot of what we're doing today. That's why, for example, our bank channels said, "Can you bring -- can you lend us someone?" Because all the pieces we're doing and how we do it are pretty innovative. That's the good news from a competitive standpoint and the value to customers, but that means still a longer sales cycle, more explanation, more references and the like before people coming on. So no, I wouldn't seek 20 deals a quarter in the -- I wouldn't see that hitting that rate yet in 2014.

Operator

Thank you, and there are no further questions in queue. Speakers?

Robert A. Eberle

Well, very good. We had a strong quarter, couldn't be more pleased with the financial results. We'll be more pleased about the innovation that we've launched, Rationalwave acquisition brings a whole new capability to our product set. And we continue to be excited about our growth engines, Paymode-X. We will spend management and commercial banking, and look forward to reporting on the third quarter. And thank you for your interest in Bottomline Technologies.

Operator

Thank you, very much. Ladies and gentlemen, that concludes your conference today. We appreciate your participation and your using AT&T Executive TeleConference. And you may now disconnect.

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