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Executives

Rob Eberle – President & CEO

Kevin Donovan – CFO

Analysts

Jon Maietta – Needham & Company

George Sutton – Craig-Hallum

Gary Prestopino – Barrington Research

John Kraft – D.A. Davidson

Paul [ph] – Stephens, Inc.

Chris Shutler – William Blair

Bottomline Technologies Inc. (EPAY) F3Q10 (Qtr End 03/31/10) Earnings Call Transcript April 22, 2010 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Bottomline Technologies third quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.

Statements made today may include forward-looking information subject to risks, uncertainties and other factors that could materially affect actual results. For further information, please see Bottomline’s reports filed with the SEC pursuant to the Securities Exchange Act of 1934, which are available at SEC’s Website www.sec.gov.

During their remarks, reference to Bottomline's financial results relate to non-GAAP or core financial results. These results are also referred to as core operating income or EBITDA, core net income and core earnings per share in our earnings release. A reconciliation of GAAP net income to core net income is provided in the earnings release.

These results exclude amortization of intangible assets, equity-based compensation, and acquisition-related expenses. Throughout this call, when they refer to their financial results, it has that meaning. Bottomline will be providing forward-looking guidance on this 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.

Rob Eberle

Good afternoon. Thank you for your interest in Bottomline Technologies and welcome to the third quarter fiscal ’10 earnings call. I am delighted to report on what was another strong quarter for Bottomline. I am joined by Kevin Donovan, Chief Financial Officer who will provide a detailed review of the quarter’s financial results and our guidance going forward. We will be available for questions following Kevin’s remarks.

Q3 was a strong quarter for Bottomline. The financial results, revenue growth, operating income and EPS were all strong, evidencing our focused execution. We set the stage for success in subsequent quarters, with several important new customer wins and the expansion of our relationship with Bank of America through the acquisition of its travel commission payments service. And finally, from a longer term strategic perspective, we made significant progress in integrating the PayMode platform with our Business eXchange capabilities.

Our remarks on each, but first I will touch on the key financial results. Revenue growth was a clear highlight of the quarter, with revenue up 20% from the prior year. Subscription and transaction revenues were up 44% from the prior year. Our focus on recurring revenue streams is paying off as indicated by this growth.

Today, almost two-thirds of our revenues are recurring. Core operating income was up 69% from the prior year. Operating income as a percent of revenue was 18%, right in line with our plan. And EPS was $0.24, an increase of 60% from the prior year, and we are on track to earn $1 per share for the fiscal year.

What I am most pleased about however is our balance between current period activities, near-term initiatives, and future growth opportunities. When you look at the quarter, we are clearly executing as posting the financial results and other metrics we have committed to and reported today. From a subsequent quarter in near-term perspective, we have in place initiatives and programs to drive near-term growth and profit. And longer term, we are investing with an eye-to-the-future growth opportunities that is planting the seeds for tomorrow’s growth, profit and continued success.

Results in the quarter speak for themselves. So, I will focus my comments on the near-term activities for subsequent quarters and investments for the future. The key part of our strategic activities to drive subsequent quarter’s results is winning new recurring revenue customers. This past quarter, we added three new Legal eXchange customers, including Markel Insurance, an international property and casualty insurer, ranked 54th by A.M. Best, Markel chose Bottomline’s Legal eXchange for its ease-of-use, budgeting capability and the expertise of our specialized team.

We are also chosen by ANZ, one of the leading global banks in the world and a current Bottomline customer. As a Global Cash Management solution, they will roll out to their New Zealand customer base. Bottomline’s WebSeries is a payment solution ANZ operates and has deployed in its home Australian market with great success. Based on their Australian customers’ positive response, ANZ has decided to roll Bottomline’s platform out to their other geographies.

And finally, we deepened our relationship with Bank of America by acquiring its travel commission payments service. More than two dozen major travel and hospitality companies and tens of thousands of travel agents around the world, use the Bank of America travel commission payments service for commission payments, remittance and reporting. We are building the unique features required to support them into our PayMode platform.

This is currently expected to be completed by calendar year-end at which point the customers will transition to Bottomline. Even though this transaction is relatively small, we are excited by it for a number of reasons. First, it stands and deepens our strategic relationship with Bank of America. Second, it demonstrates the versatility and capability of PayMode, the relative ease with which we can add these customers to PayMode is indicative of that platform’s capability and suggests there are other opportunities for us to add more scale in the future. Third, it allows us to enter an interesting niche market, with marquee global customers. And four, finally from a financial standpoint, while we are investing today, we are ultimately bring on recurring revenue customers adding scale and profitability to our platform.

So, finally, let me touch on future and what we are doing to invest in the future or as I said upfront planting the seeds for our future growth. We have been actively investing in and building out the PayMode platform. So far we have successfully migrated to hosting and all aspects of the data center and operations of this corporate payment network from Bank of America to Bottomline. The customer experience and relationship with Bank of America remains very positive. We have a clear product roadmap and have begun developing the next generation of the PayMode product, combing PayMode’s inherent capabilities with the more advanced features of Bottomline’s Business eXchange.

We have now added the travel commission payments service features to our product roadmap. This continues to be a bit relatively big investment, impacting current year earnings levels, but we are confident with time it will drive even higher revenue growth, earnings and shareholder value. We believe in this platform and make this investment, because our experience with over 9,000 customers tells us this settlement network is the future of business invoices and payments. By providing electronic connectivity between business partners, the inefficiency of waste of today’s paper invoicing and payment processes is replaced with a secure, efficient, electronic settlement network. Each party involved has great visibility and control, with reduced risk and costs. And on Earth Day, I point out that the carbon and environmental impact of the billions and billions of paper invoices and paper payments businesses send each year are eliminated as well.

We see that future and are well positioned to lead it. So, in closing, this was a real strong quarter. 20% growth in revenue, 44% growth in subscription and transaction revenue, 69% growth in EPS and on track during the dollar share in the year. At the same time, we are successfully putting in place the drivers of near term and long-term success, all of which gives me confidence that we will continue to have strong results in the quarters and years ahead.

With that, I will turn it over to Kevin Donovan for a detailed review of the financials and our guidance going forward, and then we will both be available for questions following Kevin’s remarks.

Kevin Donovan

Thank you, Rob. We have very good third quarter, highlighted by strong revenue and profit growth. Revenues grew by 20% in the quarter to $39.8 million, while operating income was $7.2 million, representing an increase of 69% from the prior year. Nine months into the fiscal year, we are solidly on track to deliver the $1 per share on earnings that we committed to for the year.

Highlighting several other strong financial results in the quarter, subscription and transaction revenue increased 44% to $10.8 million. Operating income was 18% of revenue, in line with plan and up from the 13% reported a year ago. EPS was $0.24, a $0.09 increase from the third quarter of last year. EBITDA was $8.4 million, a 61% year-over-year increase, and cash flow from operations was $3.5 million, driving an ending cash balance of $58.3 million.

In addition to the strong financial results, we also completed the acquisition of Bank of America’s travel commission payments service and continued our investment in future growth opportunities with the integration and build out of the PayMode platform. Our financial success is apparent when looking at our year-to-date profit. Through the first nine months of the year, we have generated $21.7 million of operating income, which is $6.4 million that we generated in all of last year.

Looking at this another way, we have already grown last year’s profit by 42%, and we still have an entire quarter left in the fiscal year, a very clear indication of our strong financial performance. I will now provide a more detailed look into several key financial highlights: first, revenue growth; second, margin expansion and profit growth; third, the balance sheet and cash generation; and fourth, our forward-looking guidance.

First to revenue growth, during the quarter, we grew revenue 20%. In fact, we saw growth across each of the major areas of the business. Our revenue growth was highlighted by the 44% growth in subscription and transaction revenue. Subscription and transaction revenue is a major focus for our business, as we are providing more of our offerings on this type of model, and we are increasing our investment in SAS-based platforms. One of the key benefits of the high incremental margins that SAS-based platforms ultimately provide with scale. Using Legal eXchange as an example, we have had quarters where our incremental profit margins were as high as 80%. We expect our newer subscription and transaction based offerings to be one of the key drivers of our future margin expansion as they grow as a percentage of our overall revenue.

Subscription and transaction revenue growth was the primary driver behind the $3.8 million increase in recurring revenue. Recurring revenue was $25.2 million in the quarter or 63% of overall revenue, and it represented over half of our overall revenue growth. At the start of the third quarter, the combination of our recurring revenue and backlog provided visibility to approximately 85% of the revenue we recorded in the quarter, which provides the basis for the predictability of our financial model.

The second item I am going to speak about is margin expansion and profit growth. Operating income was $7.2 million in the third quarter, a 69% increase from the $4.2 million reported a year ago. Our growth in profit during the quarter was driven by the $3.6 million increase in gross margins. On a percentage basis, gross margins declined 39 basis points as a result of the investment in our SAS-based platforms, principally PayMode. From an operating expense standpoint, we have been effectively balancing our spend through increased investment in areas driving future revenue growth by sales and marketing expense, while maintaining or decreasing our expense levels in the G&A areas of our business.

Sales and marketing expense increased 13% from last year and is in line with our focus on revenue growth. Development expense increased 6% from last quarter. We expect the investment in technology to continue through the majority of 2011 as we build out the products driving future growth. And G&A expense decreased 10% from last year to the lowest level in over four years. The combination of gross margin growth and greater leverage in operating expenses drove a 69% increase in operating income.

As I look towards our longer-term model, our focus on subscription and transaction offerings and SAS-based platforms will drive increased levels of profit. With high levels of incremental margins for these offerings, we expect to expand our gross margins into the low-to-mid 60% level over the next three to four years and drive operating margins of 25% plus. As demonstrated by our ability to hit our initial 20% operating margin target earlier this year, ahead of schedule, we have a high degree of confidence in the financial model and our ability to ultimately achieve and exceed this longer-term target.

We also continued to strengthen our balance sheet. Cash at the end of March was $58.3 million, a $3.3 million increase from last quarter. The increase in our cash position was driven by $3.5 million of cash flow from operations. Over the past 12 months, we have generated $24.9 million of cash flow from operations and $21.1 million of free cash flow. DSO was 56 days, a decrease of 6 days from last year and in line with last quarter.

Backlog at the end of March excluding guaranteed PayMode revenues from Bank of America was $73.6 million, a decrease of $8.4 million from last year. The backlog was driven by orders of 35.6 million which were less than last quarter due to the timing of certain large orders and normal levels of seasonality for the March quarter. We ended the quarter with a cash balance equal to $2.12 per share.

Moving from our third quarter’s success, I will now provide some commentary on our forward-looking guidance. Based on the continued strong demand for our product offerings across both new and existing customers, we are increasing our fiscal year revenue guidance to a range of $155.5 million to $156.5 million. With a long-term growth opportunity that is in front of us, we continue to invest in the integration and build out of future platforms. Even with this increased investment, we remain solidly on track to earn $1 per share in the fiscal year.

Our earnings outlook of $1 per share represents over 60% growth from the $0.62 we reported last year and is a clear example of the leverage we have in our financial model. Turning to fiscal 2011, our initial guidance is we expect to grow revenue to between $170 million and $173 million and generate 20% growth in net income. On a quarterly basis, we see first quarter revenue between $39 million and $40 million, with earnings of $0.25. For the second quarter, we see revenue increasing to $41 million to $42 million, with $0.28 of earnings. Revenue of $43 million to $45 million and earnings of $0.30 is forecasted for the third quarter, and we project to finish the year with fourth quarter revenue of $44 million to $46 million and EPS of $0.32.

In summary, we had another very good quarter, with 20% revenue growth, 44% growth in subscription and transaction revenue, 18% operating income, and EPS of $0.24. Three quarters through the fiscal year, we are on track to deliver record financial results in 2010.

We will now open up the call for any questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question today comes from the line of Jon Maietta with Needham & Company. Please go ahead.

Jon Maietta – Needham & Company

Okay. Thanks very much. Rob, I had a question around the growth that we saw in the supplier network on PayMode earlier this – you added roughly about 10,000 [ph] of hires, is that the type of ramp we should expect to see on a quarterly basis, is that?

Rob Eberle

There are two factors behind the ramp that we will see in suppliers, and one would suggest that are higher and the other might suggest we saw a little bit of a backlog. The first part, I will start with the latter, first part is that, we brought more people to on-boarding the suppliers. We have better capabilities in Bank of America operations head. And so, we have been able to accelerate a backlog of suppliers and we may have seen some benefit from that. The flip side to that is though that with the new platform as more pieces of that are released, and as we sign on other banks, channels and we begin to sell ourselves, you build more payers into the system, so you would expect to accelerate the number of suppliers that are on the platform.

Jon Maietta – Needham & Company

Got it, okay. And what’s the timetable for really making a push with the financial institutions with regard to the PayMode platform?

Rob Eberle

The first thing I would tell you is that, working with financial institutions is wonderful given the breadth that they have, the customer base, the brand and distribution. Everything moves slowly. So, step one for us though over the last six months, which has been very, very successful was making Bank of America confident, making sure they continue to resell this. We have a long-term contract to operate it, but the upside for us is really that they go out and they market this morning they grow the network. So, it’s critical for us to have made that our first and frankly only focus over the last six months, primary focus at least.

Second, we needed to bring across the operations, which we brought across the hosting in the prior quarter, this last quarter, we completed everything. So, we are out of Bank of America’s operations now. We have the hosting, the data center, the disaster recovery sites are all now fully up and running in Bottomline-operated facilities. We have begun some dialog with other financial institutions. I would say that the sales cycle is about a year. So, for us to have anything, I think that would be minimum of two to three quarters away and probably more likely a year’s time from now. But that’s the pace that we found financial institutions move, but the plus on that for us is the distribution and the influence that they have in the market.

Jon Maietta – Needham & Company

Yes. And having BoA as a channel, it’s pretty powerful.

Rob Eberle

Right.

Jon Maietta – Needham & Company

And just a last question, Kevin, you had mentioned pipelines, some large deals in there, could you just give us a ballpark sense as to what large it may mean is that, $5 million [ph] or how should we think about that?

Kevin Donovan

I mean, in the aggregate you talk about those types of numbers, it’s not any one single deal that hits those levels, but you are in the area.

Jon Maietta – Needham & Company

Okay. Thanks very much.

Operator

Next, we will go to George Sutton with Craig-Hallum. Please go ahead.

George Sutton – Craig-Hallum

Guys, just to follow on the questioning on the PayMode side, when you are going to see your Fortune 500 customers, how are they responding when you present them with the PayMode option and how do you feel they are using these kinds of systems now or are they simply not using them?

Rob Eberle

Yes, I will take this in reverse order. First off, these systems are really not used today. Estimates that of the 22 billion or so US invoices sent by businesses annually, 90% of those are paper. So, these systems are clearly not using, the payments depending on which important – if you include BSE payments, it would be more like 100 billion number, and again the vast majority of those are made of paper. We are not actively, as indicated to Jon’s response, our primary focus over the last two quarters has been operating this, moving it on to our platform, moving into our hosted centers and getting the roadmap. We will begin marketing the customers we have had dialog, but I want to be clear, we are not actively out aggressively to selling into our base yet. So, the question of the customer response doesn’t come as much from our selling efforts, as it does 20 years of experience in accounts payable.

This we believe is clearly the future. There are a number of things that have to be done correctly for it to work. You have to have some scale behind it; you have to have the flexibility and the workflow, which we have in the system. You have to have flexibility about integration and ERP and receiving invoices, but there is no doubt in our mind that this is the type of system that customers while not using today will adopt in the future. From our perspective, I want to be clear with both the financial institutions and our selling efforts; I wouldn’t look for this to ramp over the next two quarters. This is a much longer-term play for us.

George Sutton – Craig-Hallum

I understand. Couple of questions for Kevin. We had expected the SWIFT to go live this quarter, did that happen and how much impact did that have in the quarter?

Kevin Donovan

Yes, it did happen in the quarter. We don’t disclose the specific numbers with individual customers, but we did go live with release 2 and they are up and running, and that was occurring in this past quarter.

George Sutton – Craig-Hallum

That will recur over a period of time?

Kevin Donovan

It will, yes.

George Sutton – Craig-Hallum

Okay. And then is there a way you could quantify the investment you are specifically making in the integration of the various platforms around PayMode?

Rob Eberle

We don’t quantify specific dollar values in terms of the investment, but it is a significant amount of investment that we are putting into the integration of the PayMode and BBX platforms.

George Sutton – Craig-Hallum

Okay. And I appreciate your discussion on the future margin opportunities. That’s impressive. Thanks.

Rob Eberle

Okay.

Operator

Next question comes from the line of Gary Prestopino with Barrington Research. Please go ahead.

Gary Prestopino – Barrington Research

Hi good afternoon.

Rob Eberle

Hi, Gary.

Gary Prestopino – Barrington Research

Most of my questions have been answered, but just some housekeeping, Kevin, what was the D&A for the quarter, about $1.3 million?

Kevin Donovan

Just bear with me a moment. Yes, it’s really been about $1.2 million.

Gary Prestopino – Barrington Research

Okay. And then could you give us what the Legal eXchange revenues were?

Kevin Donovan

I don’t have that handy right here.

Gary Prestopino – Barrington Research

Okay. And then as I look at your orders and your backlog and again I am newer to the company, but it looks like your orders year-over-year were down about 19%, your backlog was down 10%?

Kevin Donovan

Yes, if you may recall in March of last year, we announced that we signed a very large financial institution. And that deal was included in orders for last year. So, the year-over-year comp is reflective of that very large deal in March of last quarter.

Gary Prestopino – Barrington Research

Okay.

Kevin Donovan

And that was the Top 5 global financial institutions.

Gary Prestopino – Barrington Research

But if we look at that and we back that out, I mean, are you still down or –?

Kevin Donovan

Yes, without disclosing the specific amount of that order, we would not have been down without.

Gary Prestopino – Barrington Research

Has that become less of an issue as you are growing your recurring revenues though, the orders backlog?

Kevin Donovan

Yes, in orders, we will fluctuate as well. As Rob mentioned, we signed several Legal eXchange customers and those customers are on a transaction basis as opposed to a set subscription amount. So, we do not include in orders the value of those transactions and work on projections of what those may be. So, quarter-to-quarter, orders can vary depending on whether there are minimum commitments in some of our longer-term SAS-based platform orders.

Gary Prestopino – Barrington Research

All right. And then can you just refresh us or refresh me, what is the revenue model for PayMode? Is it a monthly subscription fee plus transaction fees?

Kevin Donovan

Yes, it is a subscription –

Gary Prestopino – Barrington Research

How are you selling this?

Kevin Donovan

It’s a subscription fee with an incremental transaction charge on top of that.

Gary Prestopino – Barrington Research

Subscription fee and transaction charge. And as I understand it from some of the other questions that were asked, you have this thing about where you want it right now, I know you are always going to have upgrades and other integration issues, but you actually can’t go out and start marketing this to your banks, your bank client base?

Rob Eberle

Yes, I would answer that. I would say we have it across from Bank of America which is where we wanted it. The whole thesis behind the acquisition and really I would say Bank of America’s decision to move this to Bottomline more so than to part with it in an acquisition was based on the fact that the PayMode technology is not advanced as our own platform Business eXchange, and what we are doing is combining the Business eXchange capability principally around invoice receipt in workflow with the PayMode capability which is reasonable in terms of a payment settlement network, but not as strong around the invoice receipt in workflow, and then we are adding international capability and now adding the travel commission payments capability.

So, we have a pretty intense 18-month build out around the platform which will extend our lead from a technology standpoint, we think address exactly what the market requires. We will be marketing the platform prior to that completion of that 18-month build out, but we will be seeing an increased investment. We will be making, we are doing the development work, and it is really again a combination of PayMode, Business eXchange, new international capability and now the travel commission payments capability.

Gary Prestopino – Barrington Research

Okay. So, right now, you have 100,000 vendors on the network.

Rob Eberle

Right.

Gary Prestopino – Barrington Research

Has it materially changed, I guess, well, lack of a better word, users or corporations or whatever?

Rob Eberle

I would say that the things that have changed so far are the on-boarding capability, because we freed that up a little bit, we do a couple of things differently. So, as a payor and we have some – when we acquired this, we had about 550 or so payors and they drive the suppliers to join. What we have been able to do is to accelerate the onboarding of the suppliers, getting to the 100,000 level. So, that’s certainly one big difference. I think we have also upgraded in moving the hosting, not to get too much into details, but moving the hosting and data centers, we have upgraded that to the latest and greatest technology in security. And in terms of product releases on new PayMode, that will be coming out beginning in the next couple of months would be the first release.

Gary Prestopino – Barrington Research

Okay. And then one last question, with Bank of America, one of the problems of this thing was it was not bank-agnostic, and I guess they were selling it to their corporate clients. And now, what you are kind of saying, Rob, is that there is a big ramp here, because your initial thrust is going to be with you FI, financial institution customer base, are you not going to be going after the –?

Rob Eberle

No, we will go after both. I think part of the challenge here frankly, just to be one of us, we report to you in the Street on a 90-day interval, and the financial institutions and the roadmap and our efforts around this move a little slower than that. So, we spent the last six months really moving the data centers, getting Bank of America comfortable with Bottomline roadmap, putting in place the roadmap and kicking off all the development effort around that. We will see marketing of this directly and we will see it directly to our customers and to financial institutions.

But what I don’t want is to people to measure success of this in 90 days if we haven’t signed on customers or financial institutions. It will take a period of time to do that. We did not want to be, make our Number 1 priority selling this directly and lose perhaps the most powerful channel we will ever have in Bank of America. We really wanted to secure that relationship, and we spent the first six months entirely focused on that. That’s been the right thing to do.

Gary Prestopino – Barrington Research

No, I understand that. I am just trying to get a grasp on how this all works. And I promise this is the last question. So, really materially –

Rob Eberle

We appreciate the questions.

Gary Prestopino – Barrington Research

To get the revenue stream from this business growing, you do have to sign more payors, that’s the key thing, right?

Rob Eberle

Yes.

Gary Prestopino – Barrington Research

Even if you sign vendors and suppliers, it’s getting more payors on the network that drives the revenue stream.

Rob Eberle

Right.

Gary Prestopino – Barrington Research

Okay. Thank you.

Operator

Our next question comes from the line of John Kraft representing D.A. Davidson. Please go ahead.

John Kraft – D.A. Davidson

Hi guys. Congratulations on a steady progress.

Rob Eberle

Thank you, John.

John Kraft – D.A. Davidson

Just to follow on the series of questions, on this PayMode, have you noticed any change in behavior, deal flow, I guess maybe referral flow on behalf of Bank of America to this product, now that you are kind of running the ship?

Rob Eberle

Well, that was a concern, right. What we wanted to do is to make sure it stayed at least at that level or increased. And I would say we are an increase, I think that we have been able to demonstrate capability around our hosting this and running this. We have extremely quick response time on different sales support questions, pricing, etc. And we would expect to see it actually ramp from the levels that they were on the customers, say routing [ph].

John Kraft – D.A. Davidson

Good to hear. And then, moving over to Kevin, the 25% operating margin target, can you give us not a specific date, but a rough estimate of when you think you can get there, is that a couple of years out, three years out?

Kevin Donovan

Yes, that’s a three-to-four year target.

John Kraft – D.A. Davidson

Three to four. And then lastly, FX impact, I know that it doesn’t affect the bottom line too much, but did that contribute, or I guess what was the impact in the quarter on the revenue line?

Kevin Donovan

Yes, there wasn’t a significant impact on that. I think exchange rates were a little bit higher this quarter compared to a year ago. So, there’s a little bit of incremental benefit from that, but nothing major.

John Kraft – D.A. Davidson

Okay. And then last question, you used to provide sort of an exposure to financial institutions or I guess maybe a better way to put it is what – the cash management portion of your business that sort of financial institution business, what percent of that is your business right about now?

Rob Eberle

It’s difficult to do that, because there is so many different ways that we have some influence or some work, so we will have for example, banks particularly in Europe that operate its channels for software products. We now have Bank of America as a channel for PayMode, and then we sell directly to banks. So, there are different levels of engagement and we have not broken on any different kind of percent of that. I would say one of the things I can tell you is that if you go back and look at the results a year ago, or actually probably year-and-a-half ago to be more accurate, when the financial institutions were in unprecedented challenges, Bottomline produced the same level of profit, same revenue growth, it really had outstanding results. So, the question, is there some kind of dependency on risk, exposure, we have not seen that, and it’s been tested again by, I think what everyone in hindsight would agree was a pretty extraordinary period.

John Kraft – D.A. Davidson

Sure. And then I guess tangentially this Australian bank’s expansion of their product, is that a license in professional services sort of implementation or is that I guess?

Rob Eberle

Yes, we get paid on that, exactly.

John Kraft – D.A. Davidson

No, I mean, but it’s of new incremental licenses.

Rob Eberle

Right.

John Kraft – D.A. Davidson

Not as a script, okay. Thanks guys.

Operator

And next, we will go to the line of Brett Huff with Stephens. Please go ahead.

Paul – Stephens, Inc.

Good afternoon. This is Paul [ph] actually standing in for Brett. I was just wondering, maybe kind of explain me on the last question, you talked about the pipeline specifically as it relates to some of the cash management deals that you are seeing out there?

Rob Eberle

Pipeline strong, you know, this is the way – couple of things are going on. First off, this is the way the banks compete, this is the way they face their corporate customers. Second piece is in a broader perspective, actually we are already moving away from developing in-house, but as a reference, the challenge (inaudible) actually cut their capability to do stuff in-house even more. So, today it is absolutely a market where they are going to best-of-breed outside vendor for time-to-market, reduced cost, expertise capability and they are doing so with product rather than an offshore development house.

The same time if you look from a Bottomline perspective, we have been able to grow our influence, we have been able to grow our reference customers we have invested in, our platforms and have more capability than we think anybody else does in the space we compete. So, we have gone from trying to get ourselves into RFPs, say there or four years ago, being in front of situations where there either isn’t an RFP or we are asked to please come into the RFP as opposed to again to working to be in those, and our win-loss ratios are way, way up. And the last aspect of that, that I really enjoy and get to see firsthand almost every day is we moved from, in many cases from a vendor providing a capability to much more a strategic partner where we will be asked about what is the future direction that they see for cash management, what’s the future direction for international payments, domestic payments, and we have the capability and expertise in-house we can bring to that discussion.

So, elevating from more of a tactical vendor to much more of a strategic partner where we have longer-term engagements, and ANZ is a very good example of that, and their decision to go in New Zealand, that’s been a significant customer and an excellent customer for quite some time, and we are just seeing that relationship continue to grow.

Paul – Stephens, Inc.

Great. And lastly, on the travel commission payments kind of acquisition, I was just wondering if you could maybe talk about that opportunity in the market that you see kind of going forward and maybe size it a little bit?

Rob Eberle

Right. Step one would be to bring across the customers and what you have is really a platform that Bank of America has got over-checked now and their choice was to make the investment to try to bring that up to speed, or is there a better way for them to move those customers to a better service. And when we took a look at the capabilities we had in PayMode, what we are adding to PayMode, the pieces we needed to add incremental to that to address the specifics of that service were not that much relative to the opportunity with those customers and certainly the opportunity beyond. So, that’s what we are doing with the technology there. It’s very small for us today in terms of absolute revenues.

I mean, it will be in the Qs, I would tell you that purchase price, upfront purchase price was $1 million, but what’s interesting to us is the marquee customers we get and the opportunity to go in and take them not just from travel commissions but to take them to all payments. So, for example, is a (inaudible) and we want to move them to from just commission payments to travel agents or commission payments to making through this system, do we move them instead to an overall PayMode. So, they are making all their payments.

Paul – Stephens, Inc.

Great. Thanks for your time.

Rob Eberle

Yes.

Operator

And we have a question from the line of Chris Shutler with William Blair. Please go ahead.

Chris Shutler – William Blair

Hi, guys.

Rob Eberle

Hi there.

Chris Shutler – William Blair

Rob, maybe you could just touch on Legal eXchange here for a second, obviously few more customer wins this quarter, can you give us a quick update on the market penetration of that product to date amongst maybe the Top 100 insurance companies? Where you think that can ultimately get and then what we should think about as a realistic revenue growth rate for that product over, let’s say the medium term?

Rob Eberle

Right. So, the majority of the largest insurers have a solution today. Most corporations do not. So, there is an opportunity, while not single deal size is not as large, insurers have made consumers of external legal services, and corporations are consumers of legal services but at a smaller scale. So, you wouldn’t see the large whale deals if you were the same way you see in AIG or some of our larger insurance customers or even the market for that matter. So, the market I think there is still plenty of opportunity, we are seeing plenty of growth as Kevin indicated in his remarks. We are seeing growth in that space. The interesting thing though is you are starting to see a separation between those with scale, which Bottomline clearly would be the leader in capability in the platforms, and those platforms and companies are either down of scale or acquired in some cases by the wrong owner.

I mean, a number of the competitors we had were acquired by providers of legal services, and really the customer is the consumer of the legal services, not the law firm. So, if you are selling into law firms, it actually isn’t that great a fit. And we have seen some of those platforms struggle, and then we have been able to win customers. So, our growth is coming from a couple of places. Insurance companies still coming on. Second, winning over organizations that have been on a platform, but are now moving over to Bottomline and then third, the corporate market.

Chris Shutler – William Blair

Okay, great. So, do you see an opportunity to continue to consolidate that market whether it be clearly through customer wins but then through acquisitions?

Rob Eberle

Yes, we have done that once before. We acquired a number of years back in the space and we certainly are able to do acquisitions generally and that’s certainly a space we are attracted to and we would be interested in acquisitions in that space. I would also tell you though from a Bottomline perspective, the Legal eXchange is really fed to Business eXchange, the core technology that drives the Business eXchange, and then into our PayMode platform. So, we are growing it in a way from a technology standpoint if you will as well as we move it into other markets. But certainly you could see us be a consolidator, no near-term plans on that, but we certainly would have an interest.

Chris Shutler – William Blair

Okay. Fair enough. And then couple of questions on PayMode, first, did you guys give an update on the number of payors on PayMode?

Rob Eberle

We didn’t today, no, that’s Bank of America stats. So, we didn’t today, but we plan to do that soon.

Chris Shutler – William Blair

Got you, okay. And then maybe to talk about since you did acquire PayMode last year, how are most of the new payors finding out about the product today? Are there a lot of situations or something that maybe came on as acquired and as they saw the functionality was great and trying to be a payor, are you seeing that or how are most people finding out about the product today?

Rob Eberle

Today, most people would find that out through Bank of America through their Bank of America account representatives.

Chris Shutler – William Blair

Okay, got you. Okay, thanks guys.

Operator

And next, we have a follow-up from Jon Maietta with Needham. Please go ahead.

Jon Maietta – Needham & Company

Hi, thank you. I just wanted to move away from PayMode and the corporate treasury business for a minute and talk a little bit about workflow and, Rob, maybe what you are seeing there in terms of demand from general corporate workflow on the healthcare side, how does that demand compare today versus year-ago when we were in kind of bottom of the downturn?

Rob Eberle

Yes, it would be difficult for me and I wouldn’t want to make a comment on the healthcare demand overall. The thing that’s interesting for us is we acquired some platforms as you know from Optio several years ago, and what we found is that they weren’t really at a spot we needed them to be and more importantly they weren’t really at the spot the market needed them to be. We made some investments and have done some development work around those platforms where today we have got a much stronger proposition for healthcare and that’s evidencing itself by when. Now, we still frankly, we don’t have the level of scale, brand in healthcare that I would like. So, it’s a future opportunity for us that we are continuing to look at ways to accelerate growth. But I was real pleased with the results from healthcare in the quarter, which followed on the investment and good work that was done around the product.

Jon Maietta – Needham & Company

Okay. Interesting. And then, Kevin, when you talked about the kind of the development plan for the PayMode infrastructure and that kind of 18-month plan, how should we think about that investment? Shouldn’t product development roughly be consistent in terms of a percentage of revenue, was that the right way to think about it or will it taper off overtime a little bit?

Kevin Donovan

Yes, I think we would see a consistent level of development expense here over the course of the next couple of quarters through 2011.

Jon Maietta – Needham & Company

Okay. Thanks very much.

Kevin Donovan

Thank you.

Operator

And gentlemen, there are no other questions at this time.

Rob Eberle

Very good. Thank you for your time and interest. We appreciate the opportunity to report on what was another strong quarter, and we look forward to reporting on Q4 in the year.

Kevin Donovan

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation, and for using the AT&T Executive Teleconference Services. You may now disconnect.

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Source: Bottomline Technologies Inc. F3Q10 (Qtr End 03/31/10) Earnings Call Transcript
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