Bottomline Technologies' CEO Discusses F3Q 2014 Results - Earnings Call Transcript

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 |  About: Bottomline Technologies, Inc. (EPAY)
by: SA Transcripts

Bottomline Technologies Inc. (NASDAQ:EPAY)

F3Q 2014 Earnings Conference Call

May 1, 2014 17:00 ET

Executives

Rob Eberle – President and Chief Executive Officer

Kevin Donovan – Chief Financial Officer

Analysts

Gary Prestopino - Barrington Research

Richard Davis - Canaccord

Brett Huff – Stephens

Bob Napoli - William Blair

Wayne Johnson - Raymond James

Mayank Tandon - Needham & Company

Jason Kreyer - Craig-Hallum

Peter Heckmann – Avondale Partners

Irvin Liu - Stifel

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Bottomline Technologies’ Third 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 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 the forward-looking statement. 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, 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.

Rob Eberle - President and Chief Executive Officer

Good afternoon, and welcome to the third quarter fiscal ‘14 earnings call. We appreciate your interest in Bottomline Technologies. I’m delighted to report on what was an outstanding quarter. I’m joined by Kevin Donovan, the Chief Financial Officer who will provide a detailed review of our financial results and our forward-looking guidance. Both of us will be available for questions following Kevin’s remarks.

Q3 was an outstanding quarter on all fronts. The highlights are one, strong financial performance with record results in all our key performance metrics including revenues, subscription and transaction revenues, EBITDA, operating income and EPS. Two, sales execution with new subscription and transaction wins for our strategic platforms, legal spend management, Paymode-X, and digital banking; and three, extension of our capabilities with the strategic and accretive acquisition of Andera.

The financial highlights for the third quarter were subscription and transaction revenues grew 22% to $35.1 million. This important revenue stream now represents a run rate of $140 million annually and is a key element in driving future revenue growth, margin expansion, multiple expansion, and shareholder value. Revenues overall grew 21% to $78.3 million. EBITDA was up 30% to a record $16.2 million. On an annualized basis were running at $65 million EBITDA level, which compares to $49 million we reported for the prior fiscal year.

Operating income was up 32% to a record $14.2 million, a 30% plus EBITDA on operating income growth demonstrates we’re executing against our plan to drive a higher revenue mix. Operating cash flow for the quarter was a record $21.4 million. And put that in perspective, this compares with the total for the prior year of $41 million. The big driver behind the increase in Q3 cash flow is annual contracts. These contracts renew on a calendar basis something we will continue to see and see grow each year.

And finally, we recorded record EPS of $0.34 for the quarter, ahead of our target and expectations. I said outstanding up front. And with 20% plus revenue growth, and 30% plus EBITDA in operating income growth that’s an accurate characterization. It’s important to note that neither of our two recent acquisitions, Rationalwave or Andera, had any impact on the quarter’s results other than increased operating expense for the Rationalwave team that had joined Bottomline.

So let me now turn to the strategic highlights in growth engines. We had a strong quarter with advances in each of our key strategic areas of focus. During the third quarter, we signed seven new payers to our Paymode-X platform and our new vendor pay model. We’re pleased to see the positive sales results and particularly pleased to see the enthusiastic focus the platform continues to receive from our bank channel partners. In fact, of the seven deals in the quarter, six were from bank channel partner, which speaks to the success of this sell-through model.

We also received very positive feedback from some of the payers participating in our vendor pay model. This is critical, because committed payers are an important factor in enrolling vendors in the vendor pay model. They see as we do. The opportunity for Paymode-X with over 250,000 vendors is the largest and fastest growing settlement network of its type, to fundamentally changed the way businesses pay and get paid. We also had a strong sales quarter in legal spend management. We have 13 new wins, including QBE, Publix, Cargill, Cracker Barrel, Freestone Insurance and Atlantic Casualty.

While the number of wins itself, 13 is outstanding, which particularly exciting is our early success in the corporate self insurance market. The features we’ve added to the new release of our platform particularly around ease of use and self-service administration make us especially well-suited for this market. This past quarter we hosted our customer insight exchange. We saw a record attendance with many of the leading insurance carriers represented. As we extend our leadership in this space, this event is becoming an important industry forum for innovation and new business strategies. Our investment in leading technology and customer focus has us at the helm of the industry’s future, and that’s a position we intend to hold and profit from handsomely for years to come.

Our third area of strategic focus is digital banking. We see a large growing market and a clear opportunity to establish a dominant leadership position. Bottomline is committed to be in the trusted innovation partner to leading financial institutions, particularly institutions that aspire to win in digital banking. We offer a unique combination of partnership, industry expertise and innovative technology solutions. In early April, we announced the acquisition of Andera, whose market leading customer acquisition and engagement solutions enable financial institutions to grow their customer base through digital channels. That’s a mouthful. So in simple terms, what Andera does, is it allows banks to open accounts and sign up customers over the web, whether that’s through a smartphone or any other device. They’re a clear market leader. The platform was named Best of Show at Finovate for four times. And Bank Technology News recently named Andera one of the top 10 tech companies to watch.

It’s a big market opportunity. Industry analyst at Javelin has this to say about online account origination. The fact that 88.5 million Americans attempted to open an account online or with the mobile device in the past 12 months underscores how far digital account opening has come in just a few short years. Nonetheless, it’s potential remains largely untapped. We wholeheartedly agree. And compared to users of traditional banking channels, online account openers are less expensive to acquire, more profitable, and a more likely to favor digital channels for servicing.

Andera aligns really well with Bottomline from a technology, customer, and financial model perspective. Online account opening will strengthen our world-class digital banking portfolio. Andera historically focused on retail accounts, but the technology is completely applicable to business banking particularly for the SMB market. Andera has 500 bank customers which extends our customer set and provides a wonderful cross-sell opportunity. And the company had proven success in running and growing a cloud-based business so, it is well aligned with Bottomline’s strategic direction and target business model.

It’s not easy to find profitable cloud businesses particularly those that are a strategic and cultural fit. And it’s even harder to acquire them at an attractive valuation. We did all that with Andera. It was reasonably priced, and as Kevin will go over, we’ll drive accretive results in FY ’15. One of the things we’ve done really well is transition our business from lower margin custom services which we traditionally provided to banks, to cloud-based solutions and one-to-many deployments. This is actually a very natural transition, which began with us having a smaller product set and we would do whatever services were required to meet the customer’s requirement.

Today, where we have more products – we have more capability in our product, we host that and provide that via the cloud, or we’ll provide that on a one-to-many deployment. We expect to continue that transition and the Andera acquisition will allow us to replace an equal amount of services revenue, while continuing our overall growth. The cloud offers an outstanding customer proposition and from our perspective, less people, higher margins, and a more attractive and valuable business.

So in summary on the quarter, it truly was an outstanding quarter. We grew our key revenue metrics by 20% plus and our key profitability metrics by 30% plus. We added a market leading cloud platform to a digital banking suite, and we generated almost half the purchase price in the quarter in cash from operations. We have a clear point. We’re executing against that plan, and we’ll continue to execute against it. I couldn’t be more pleased with our quarter excited about the future for Bottomline Technologies.

So with that, I’ll turn it over to Kevin Donovan, he will give you a detailed review with the financials and our guidance going forward, and then both of us will be here for any questions anyone may have.

Kevin Donovan - Chief Financial Officer

Thank you, Rob. We had a very strong quarter, one which saw us execute on both the top-line and bottom-line with revenue and subscription and transaction revenue growth in excess of 20%, an operating income and EBITDA growth in excess of 30% on a year-over-year basis. We are executing extremely well on our strategy and driving more of our business to cloud and recurring revenue based offerings while driving increased profitability.

Through the first three quarters, we are very well-positioned to achieve and in fact exceed all of our key financial metrics on the year and we look forward to a strong fourth quarter to close out a record year of revenue and profitability. Key financial highlights of the third quarter were revenue increased 21% to $78.3 million and subscription and transaction revenue increased 22% to $35.1 million.

Operating income of $14.2 million and EBITDA of $16.2 million were both up over 30% from last year. We had record operating cash flow of $21.4 million and EPS was $0.34 ahead of guidance. These results highlight a very successful quarter. I will now provide a more detailed look into the financial results and our fourth quarter and fiscal 2015 guidance. Strategically, we continue to invest in and grow our cloud-based recurring revenue platforms.

Subscription and transaction revenue was a record $35.1 million and represented 45% of overall revenue. Subscription and transaction revenue is the largest component of recurring revenue, which was also a record $55.1 million and represented 70% of overall revenue. Total revenue increased to $78.3 million, a 21% year-over-year growth rate. 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, financial messaging, and digital banking solutions.

During the quarter, we closed 13 new legal spend management deals and signed seven 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. Service and maintenance revenue were stronger than expected in the quarter due to increased services revenue from a major European bank that is implementing our financial messaging offering. This incremental revenue realized earlier than projected and represents a small shift in our revenue guidance between Q3 and Q4. As we move forward, we expect to continue to transition our business with banks towards subscription and transaction based pricing and away from larger services engagements. The revenue growth drove year-over expansion in operating income and EBITDA and we see further growth opportunities in the fourth quarter and next question.

At the beginning of the year, we made a commitment to grow profit on a quarterly basis. Our quarterly results reflect our execution against that commitment, with a $2 million step forward in both operating income and EBITDA in the third quarter. EBITDA grew 30% and operating income grew 32% on a year-over-year basis.

Turning to margins, overall gross margin was a record $45.8 million or 59%, an increase from 57% last quarter and 58% last year. Subscription and transaction margins were in line with last year at 50% and represented the continued investment in our cloud-based offerings. As we continue to drive scale in our subscription and transaction based offerings, we see the long-term opportunity for subscription and transaction gross margin expansion, which will be a key driver to our overall margin expansion.

From an operating expense standpoint, we continue to invest in sales and marketing to drive future growth. Sales and marketing expense was $15.7 million representing 20% of revenue, while product development expense was $9.8 million representing 12% of revenue. Now looking at the balance sheet, cash at the end of March was $225 million. During the quarter, we generated $21.4 million of cash flow from operations and $17.8 million of free cash flow. This record level of operating cash flow is significantly higher than any previous quarter and as the result of annual contract renewals occurring for a large part of our financial messaging business. We expect this to be a positive seasonal trend going forward. In addition to the strong cash balance, we have a significant backlog. Backlog at the end of March excluding commercial banking orders and Bank of America Paymode revenues was $137 million, up 13% from last year.

As Rob mentioned, we announced the acquisition of Andera earlier this month. The company’s cloud platform capabilities are an ideal addition to our digital banking suite. The purchased price consisted of $44.5 million of cash and approximately 102,000 shares of stock. Andera’s cloud-based business model drives attractive revenue, margin, and economics and allows us to replace $10 million of 2015 revenue as part of the continuation of the transition of our banking business to a higher mix of recurring revenue. Despite the normal haircuts and acquisition accounting conventions, the transaction is expected to be accretive to earnings by $0.02 on the year, and post acquisition we have over $180 million of cash remaining on the balance sheet.

Now turning to our forward-looking guidance, we are adjusting our fourth quarter revenue guidance to $81.5 million and increasing our earnings guidance to $0.37. These amounts are inclusive of the Andera transaction, the small shift and services revenue between Q3 and Q4 and also reflect a small tax benefit projected for the quarter. We’re also providing our initial 2015 guidance, which reflects a 11% growth in revenue, 26% growth in operating income and 23% growth in EPS on the year.

So for the year, we’re providing revenue guidance of $333 million. The quarterly breakdown is $80 million in Q1 increasing to $83 million in Q2 and Q3 and closing the year at $87 million. We expect legal spend management, financial messaging, digital banking, and Paymode-X to be key drivers of our revenue growth on the year. Operating income on the year is projected at $67 million, a 26% annual increase. From a quarterly perspective, operating income is projected to be $15 million in Q1, increasing to $16.5 million in Q2 and Q3 and further expanding to $19 million in Q4.

From an operating margin perspective, we expect to end 2014 at 18%. We see an expansion of operating margins to 20% in 2015 and expect margins to increase over the course of the year ending at 22% level in the fourth quarter. We are right on track to achieve a 25% operating margin target by the end of fiscal 2016. Tax expenses not expected to be proportional during the year and the early quarters of the year will be more heavily impacted. Tax expenses projected to be $1.4 million in Q1, $1 million in Q2 and Q3 and 600,000 in Q4 for a full year tax expense of $4 million.

Now, turning to EPS, we are projecting a $1.53 in earnings on the year. On a quarterly basis, we are projecting $0.33 in Q1 reflecting the higher tax rate increasing to $0.38 in Q2 and Q3 and further increasing to $0.44 in Q4. Now I’ve presented lot of guidance numbers on this call. And I want to make sure that it is now last among all the numbers that we expect to exit fiscal 2015 with a revenue run rate of closed to $350 million, an operating income run rate of $76 million and an EBITDA run rate of $84 million, significant growth from where we are today.

A schedule with all of the guidance numbers covered on this call is available upon request. So in summary, we continue to execute on our strategic goals and objectives. We delivered 20% plus growth in revenue and subscription and transaction revenue and drove 30% plus growth in operating income and EBITDA. Looking forward, our focus on delivering innovative market leading solutions combined with our leverageable financial model, positions us very well for continued growth in 2015 and beyond.

We will now open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from Gary Prestopino at Barrington Research. Please go ahead. Your line is open.

Gary Prestopino - Barrington Research

Okay, thanks. Quick question; how many total deals have you signed for Paymode this year now, you did seven this quarter. I think we were at 32 at the end of Q2, Rob?

Rob Eberle

We did, yes, we did 32 for calendar year 2013.

Gary Prestopino – Barrington Research

Oh, calendar 2013, okay. So this year then, can you give us an idea of what you’ve done on a nine-month basis or?

Rob Eberle

It was 7 last quarter and then I’ve to go back to the first quarter to grab the number.

Gary Prestopino – Barrington Research

Okay, that’s fine. And then I didn’t get the total amount of vendors that you ended the quarter at.

Rob Eberle

250,000 vendors.

Gary Prestopino – Barrington Research

Thank you.

Operator

And the next question is from Richard Davis with Canaccord. Please go ahead. Your line is open.

Richard Davis - Canaccord

Hey, thanks. Two questions. I’ll just give them to you both that way we can do it. So digital banking, do you – on that side of the house and the product opening, in terms of mobile capture and things like that, what’s your game plan there and where do you sit and then the numbers question is – deferred revenues were up I think like 43%. How much of that is – or what component of that is an organic material acceleration or is there any from kind of a mid-teens trend that we had seen before? Thanks.

Rob Eberle

Well, I’ll answer on the first and Kevin can take the deferred revenue piece. The – everything we’re doing is built around mobile today, I mean, that’s really part of the opportunity – it’s part of what Andera represents, while that platform is built from the ground out for mobile capability and it certainly where we’re going today we have our mobile offerings we’d a pretty strong quarter for new sign-ons with our mobile offering for our hosted digital banking platform. So, it’s a key component. It’s actually frankly at this point in time that’s a jacks to open in the market. I think we’re in as good position as anyone.

Kevin Donovan

And on the deferred revenue piece, Richard, that reflects the annual contracts that are build that we spoke about the drove to $21 million plus of operating cash flow so, you see in deferred revenue is the billing of those contracts during the beginning of the calendar year and received a cash flow, the revenue will come in ratably over the course of the calendar year.

Richard Davis – Canaccord

Got it. And just I want to make sure, Rob, so do you have digital capture as well, I know you have mobile account opening, but do you have digital capture tool as well?

Rob Eberle

Well, we have digital – we have really everything we’re doing we can do from a mobile device so, everything is now built sort of it’s going to work in any environment. In the Andera platform would actually allow you to sign on an account, where you’re capturing images of identification and other materials and bringing those all through so, everything we’re doing today is a mobile focus.

Richard Davis – Canaccord

Perfect, great. Thank you so much.

Operator

Thank you. And our next question is from Brett Huff with Stephens. Please go ahead. Your line is open.

Brett Huff – Stephens

Good afternoon. Thanks for taking my questions.

Rob Eberle

Hi, Brett.

Brett Huff – Stephens

Can you just go over – you gave some – when you are talking about the pro forma EBIT goal the 25%, you said a couple things right before that and then gave us that we’re on track to 25%. I just didn’t get those down. So can you just bear with me and go over those just quickly again?

Kevin Donovan

Sure. So, we expect from an operating margin perspective, we expect to end 2014 at 18%. We see that expanding to 20% for 2015 if you look at the full year in total, but we expect over the course of the year for our margins to increase from Q1 to Q4. So, we expect to exit the year in the fourth quarter at a 22% operating margin level and then I said that we’re right on track at that 22% to achieve our 25% operating margin target by the end of the subsequent fiscal year.

Brett Huff - Stephens

Okay, great. That’s helpful. And then the sub and tran margin, I don’t think expanded much year-over-year, I think it stayed about 50% if I recall from your comments and looking at our model. Can you just give us thoughts on the drivers of that, given that that is sort of the main flagship piece of the margin expansion going forward?

Kevin Donovan

Yes, so, we continue to invest in that area, we typically in Q3 a seasonal down subscription and transaction quarter that typically has to do with legal spend management which has a very high December quarter compared to the March quarter so, which you will notice if you look at last year Q3 subscription and transaction revenue was down sequentially from Q2. This year, we were able to grow the subscription and transaction revenue sequentially slightly from Q2 to Q3. So on an overall basis at 50% reflects the continued investment we’re making in that area. We would expect over-time to see that gross margin grow into the 60 to low 60% level.

Brett Huff - Stephens

Okay, to low 60s, okay. And then, on the Bank of America business, I think maybe earlier this year or late last year, I think you guys have talked about 850 payers. How are those payers transitioning to vendor pay, I know you’ve started having those discussions with them. Can you give us a sense of how that’s going and how we should think about the trend?

Rob Eberle

We’re not today transitioning those payers to vendor pay. What we’re doing to sign a new deals in the vendor pay. So, that’s what’s going on today and the opportunity is once we have more of those new deals signed as that we can go back against the installed base, but we’re not – there are a few select places where we’ve done that, some of the new deals, but the vast majority of that we’re not transitioning that base, if you will we’re going forward because those vendors have come on – it come on in a different model and so it is an opportunity for us, but it’s not something we’re addressing today.

Brett Huff - Stephens

Got it. So, it’s really the growth, it’s the new folks coming in, not – you’re not going back to harvest those?

Rob Eberle

Exactly. Well, that’s right, but I think what we expect to get and I won’t be by next quarter a matter of 90 or 180 days, but I think we get to is this becomes a more predominant model that’s used for business payments, which at point we will go back against that, which is today around $140 billion of total network spend.

Brett Huff - Stephens

Okay, those are the questions I had. Thank you for your time.

Rob Eberle

Thanks, Brett.

Operator

Thank you. And next we go to the line of Bob Napoli with William Blair. Please go ahead.

Bob Napoli - William Blair

Thank you. Good afternoon. I just wanted to clarify a little bit on the key driver to the 25% operating margin is the expansion of the gross margin on the sub and tran piece of your business, it sounds like. And what are the key aspects to drive that – just pure operating leverage?

Kevin Donovan

Yes, it will be the leverage as we continue to scale that part of our revenue stream, we’ll see expansion of the margin so, for example, the 13 new legal spend management deals that we signed this quarter that will be very little revenue from that this fiscal year. That incremental revenue will drive a significant amount of operating leverage and gross margin leverage as we go forward in the next year. We’ve had some quarters where as much as 80% of the incremental legal spend management revenue is dropped down to incremental operating margin. So, it gives you an example of the leverage that we see in the hosted SaaS financial model.

Bob Napoli - William Blair

Great, thank you. Is there any way to get a feel for what the organic growth was this quarter in some of your different segments?

Kevin Donovan

We don’t break that down because when we do acquisitions we integrate those acquisitions right into our business immediately so they did not stay as a separate discrete business unit was separate results. So, our results get combined together with our existing business pre-acquisition.

Bob Napoli - William Blair

Okay. And then how about like you had, I mean it sounds like you had some really good signings in legal spend, brand name companies. Is there a way to get a feel for kind of the revenue that you think that group can represent as you fully implement them versus kind of other quarterly signing periods?

Kevin Donovan

It was a very strong quarter from a number of deals and the total aggregate amount of those deals in terms of what we project for annual revenue amount is – it was very consistent with previous quarters.

Bob Napoli - William Blair

Okay. And then I guess the key driver to this, the most important drivers to the growth this quarter by segment, is it, I mean legal spend obviously, can you give, I mean, Paymode, can you give any feel for kind the other key drivers to the revenue growth this quarter and in your guidance for 2015?

Kevin Donovan

Yes, it was the revenue that we received from banks as well as contribution from legal spend management and Paymode-X.

Rob Eberle

That’s a key opportunity in 2015 is around digital banking the opportunity to provide banks with more capabilities will allow them do attract and retain customers and grow wallet share over digital channels is a significant opportunity and whereas well a better position than anyone else out there to execute on that. And that’s been a key area of focus for us. As I mentioned what component Andera adds additional capabilities to that. But that I think you’ll see becoming one of the bigger drivers, or you’ll see that having a bigger impact than it has historically on our go forward results.

Bob Napoli - William Blair

Great, thank you very much.

Rob Eberle

Thank you.

Operator

And the next question is from Wayne Johnson with Raymond James. Please go ahead.

Wayne Johnson - Raymond James

Hi. Yes, good afternoon. It seems like the company is certainly delivering on positive operating leverage that you guys had laid out earlier in the year and last year, and so congratulations on that. But my question is – is there any call out going forward during this period of margin expansion and I think some of the prior questions were around this. Is there anything in research and development, any kind of product set that we should be aware of or any kind of functionality that you guys are going to be investing more heavily in because the way the model looks like it’s going be tracking, is that we’re going to get higher and higher margins here, which is terrific. I think everyone is looking forward to that. But I’m wondering what functionality do you not have that you wish you had and – or is that going to be reflected in R&D or are you going to continue to make tuck-in acquisitions? How should we think about that?

Rob Eberle

Well, I think it would be both. But I don’t think it changes the model or the opportunity and we thought about that as we put the model out. We will of course continue to do acquisitions that add capabilities that extend or tuck-in however you want it in all of the above and also be continuing to invest new capabilities. We have a vision for the market space that’s pretty big so, there is a number of different capabilities we’re going to build out or acquire. But none of that’s going to change the financial model, or nothing that we’d expect that we can see today, that would it change the financial guidance that we’ve provided.

Wayne Johnson - Raymond James

Okay. I appreciate that. And then so same kind of question on sales and marketing, how do you see that expense line playing out and where are those dollars most heavily being spent?

Rob Eberle

Those dollars are spent across really all areas of our business and particular focus on our three growth drivers. I think one of the things we will see changing is within that line. We’ll see more spend – a little bit more spend on marketing a little bit less spend on direct sales and that’s a natural transition as you bring more and more of the business to the cloud. We’re also engaging with your own customers moreover the cloud. So that frankly is not something we do particularly well today, it’s a opportunity that we can do better with it and so, I think you see a shift in that investment but in the aggregate, the sales and marketing line would look pretty similar to today.

Wayne Johnson - Raymond James

I appreciate it. Thank you.

Operator

And the next question is from Mayank Tandon with Needham & Company. Please go ahead. Your line is open.

Mayank Tandon - Needham & Company

Thank you and good evening. Kevin, sorry I missed the details around the acquisition. I know you’ve shared this in the past. What are the revenue contribution and the earnings contribution both in the fourth quarter and then what is built into fiscal ‘15 guidance?

Kevin Donovan

Yes. So, the contribution in the fourth quarter will be $2 million of revenue and it will be dilutive by $0.02 and then if you move into fiscal 2015 we expect $10 million and $0.02 accretion.

Mayank Tandon - Needham & Company

Okay. And that’s fairly smooth over the course of the year?

Kevin Donovan

It is and that – the $10 million of revenue as I mentioned in my remarks will allow us to replace a similar level of revenue in our banking business such part of a continuation of our transition to a higher mix of recurring revenue.

Mayank Tandon - Needham & Company

Okay. And most of my questions have been answered, but I did want to get some color on future use of cash, since you’re building up the cash balances with the strong cash flow. I know you’ve been acquisitive in the past. Are there any other avenues you’re exploring in terms of the use of cash?

Kevin Donovan

No, we would expect to utilize the cash in a go forward basis for M&A as appropriate transactions present themselves in the future.

Mayank Tandon - Needham & Company

And then if I can just ask, what maybe some of those areas that you will be looking to acquire in?

Rob Eberle

I think it’s all of the areas we’re focused on, we look at digital banking spaces is an interesting arena for us. I think in my remarks I had a commentary that we’re a picky buyer where we would look picky acquirer, we’re looking for businesses at a strategic fit, businesses that share customer base and model and then our cultural fit, and then at an attractive price so, we do a good job with that acquisitions because we look at a lot and we’re pretty selective of what we do and I don’t see any of that changing as we go forward.

Mayank Tandon - Needham & Company

And then finally just looking at your three growth engines, I would imagine that you’ve become even more competitive in all these areas. But maybe you could just comment on the competitive landscape. Who are you seeing in these bake-offs, what is your win rate maybe like, just to give us a sense of how your position is stronger today versus say 12, 18 months ago?

Rob Eberle

I think the biggest difference from a competitive standpoint would be in digital banking and where we would see a square off more frequently with ACI. What we were doing in banking if you go back and whether it’s 12, 18 or 2 or 3 years, we were focused more on the high end of the market almost and at times almost exclusively on the high end of the market. And we would see them but we’re frankly better suited today with our platform we will run into them a far more frequently, but I like our mix of proven technology I like our mix of customer focus and I like our win rate so, they’re certainly one of the competitors that be the most predominant – new competitor. In the legal spend management space, I haven’t seen anything that’s different in that space that I think that one thing that is happen as we just continue to extend ahead of the competition, we’ve gotten bigger, our new platform really extends technology leads in the marketplace and we had a update release to that at this past quarter. And we just continue with new pieces that we’re adding to that. I think we’ll continue to extend that. And then finally in Paymode-X, nobody else really doing exactly what we do, what we see these more alternatives and a question going forward will be – how that we call exist and work with those alternatives rather than it’s not a case of direct competition that we’re typically seeing.

Mayank Tandon - Needham & Company

Okay, I appreciate the color. Thank you.

Rob Eberle

Thank you for the question.

Operator

Thank you. And our next question is from George Sutton with Craig-Hallum. Please go ahead. Your line is open.

Jason Kreyer - Craig-Hallum

Hey guys, it’s Jason Kreyer on for George. Just a quick question on the commercial banking platform, so now that we’ve kind of eclipsed the trough in that business, I’m just wondering if you can spend a little bit of time talking about your expectations for growth in that business and then the trajectory of adding customers.

Rob Eberle

Those are couple of things. We’ve hit the trough from a customer deflection standpoint to reset for everyone. When we bought that platform there were customers that had given notice and we knew that for a period of time we would lose revenue and then now what hit bottom and then move up. The pieces we’re doing now at our capability around that platform so, some of the things we’ve added this mobile, we’ve added now or we’ll be adding the Andera account origination capability and it’s a mix of other features, I’m not going to give a whole product roadmap here on the call, but a bunch of obvious reasons, but there is a mix of pieces that we’re adding that really received that becoming the central part of digital banking business so, as I refer to that, it’s really a mix of those capabilities and a capabilities we owned on the largest banks in the world and then bringing them to market in a cloud-based solution.

Jason Kreyer - Craig-Hallum

Okay, that’s helpful. Thank you. And then, Kevin, you talked about a shift between Q3 and Q4 in revenue and one customer that had an impact on the service and maintenance line item. And just wondering if you could talk about how big of a shift that was and what the impact was?

Kevin Donovan

Yes, it’s about 800,000 so, we just services revenue that we had originally projected recording Q4 that was recorded in Q3. So, it ended up with a slightly stronger Q3 than we were expecting and we reflected that in our Q4 guidance.

Jason Kreyer – Craig-Hallum

Okay, but no change to any other quarters then?

Kevin Donovan

That’s correct.

Jason Kreyer – Craig-Hallum

Okay, thanks guys.

Operator

Our next question is from Peter Heckmann with Avondale Partners. Please go ahead. Your line is open.

Peter Heckmann – Avondale Partners

Good afternoon, gentlemen. I just wanted to follow-up on the acquisitions of Sterci and Simplex. I think when you made those acquisitions, you were talking about $25 million of recognized revenue for ‘14 and then with the deferred revenue adjustment going away $37 million in ‘15. Are those still good estimates that we should use for modeling?

Kevin Donovan

Yes, as I mentioned earlier, it’s not separately broken down in our business because it’s been integrated, we’ve seen a slightly stronger success what I would say anecdotally from that acquisition in the first three quarters post that so, and we’re very pleased from the contribution that we’ve seen on that, but nothing in a big picture sense changing on those acquisitions.

Peter Heckmann – Avondale Partners

Okay, okay. And then can you just go into, I’m not sure if I understand the comment that Andera, the $10 million of acquired revenue there, I’m hearing you say it will replace some legacy maintenance revenue, is that correct? I mean…

Kevin Donovan

It’s services revenue so, as we continue to transition our banking business from a heavier services business to more of a recurring revenue business and as a something we started back around the acquisition of into. We would expect our services revenue within the banking space to be down year-on-year and then it will be replaced with the subscription and transaction revenue from Andera driving a higher mix of recurring revenue within that area of our business.

Peter Heckmann – Avondale Partners

And just last question on the Paymode-X side. Have you disclosed 39 payers on the vendor pay model? Have you disclosed how many of the 250,000 vendors that are accepting the vendor pay model at this point?

Kevin Donovan

No, we’ve not disclosed that, it’s obviously a very small percentage of the overall vendor network given that we have only been at this little over 12 months.

Peter Heckmann – Avondale Partners

Okay, okay, I appreciate it. Thank you.

Kevin Donovan

Thank you.

Operator

Thank you. And our next question is from David Grossman with Stifel. Please go ahead. Your line is open.

Irvin Liu - Stifel

Hi, thank you. This is Irvin Liu calling in for David Grossman. It looks like you had a very good bookings quarter especially in legal spend management. Is there anything that you can point out specifically that drove overall sales execution? And secondly, could you talk about the legal spend management pipeline in regards to the self-insurance market?

Rob Eberle

I’m not sure I got it. Can you repeat your first question?

Irvin Liu – Stifel

Yes. It looks like you had a very good sales quarter especially in legal spend management. Is there anything that you could point out that drove better overall sales execution specifically?

Rob Eberle

I think the thing is playing out in that market as we just have established, truly established clear leadership position. Number of years ago, we combined with our closest competitor and that gave us a larger share and then we continue to invest in the platform and then from a market standpoint, we’ve – we’re the clear obvious choice for an application and its mission critical and people don’t want to take a risk around. So, it evidences itself that things like our customers insight exchange, which we have last quarter where you look around the room and you’ve got them a number of it, many of the largest insurers represented so, I think we’re the – become in that space, we’ve become a clear pick then what we’ve done with the technology as we built our thing around ease of use, self administration, ways that you can establish a work flow, ways that you can establish approval levels and other things that are can be tailored, easily tailored, for smaller organizations and the self-insured components of corporations don’t have the scale or size of a Liberty or an AIG or State Farm or some of our other customer. So, this allows them to use the same technology but in a way that fits for their size, that fits for their practices.

Irvin Liu – Stifel

Got it, thanks.

Operator

And the next question is from Brett Huff with Stephens. Please go ahead. Your line is open.

Brett Huff – Stephens

Hi. Thanks for taking a follow-up. Just as you were talking about Paymode, I wanted to get an update on when you all go out and do the diligence and talk to and do some market research when you’re talking to the end customers, so not the banks, but the corporates who are going to sign up. And I know that you’re still doing that sort of on the side to keep in touch with those customers. What are they saying different today, maybe than they did a year or two ago, about the urgency to adopt an accounts payable automation solution?

Rob Eberle

You know, it’s interesting. We have one customer that just recently had some feedback and the quote I recall and I’m paraphrasing slightly because I don’t have in front of me but it was – just it was a year ago, you had 15 skeptics in a room. Today you have 15 believers, and that was their team. And what happened, this happened in that instance and I think it’s going to happen in this model. We’re not coming up with something revolutionary here. Shifting cost to the supply chain is what real-time inventory is. It’s what purchase cards do. There’s a whole variety of different ways in that occurs. What we done is we developed in technology platform that justifies that in the intellectual property and capability around how do you best get as many vendors on that. Once our customer start to see as this payer did, that works. They can drive real revenue. Now you start to see purchasing become part of that process – become part of their contracts and you see their overall enthusiasm go way up. So, it doesn’t have a long lead cycle or sales cycle, it actually has a long belief cycle and it takes that kind of time for people’s skepticism to go away and for them to say, wow, this works and we’re seeing that time and time again. So, I appreciate the question because it’s tough to convey, but that’s probably one of the most exciting things we’re seeing behind that often.

Brett Huff – Stephens

That’s great. Thank you.

Operator

And there are no questions in queue. Please continue with any closing remarks.

Rob Eberle – President and Chief Executive Officer

Well, thank you all for your time. Thank you for your interest. We were delighted to report on our third quarter couldn’t be happier with the 20% plus revenue metrics increases and the 30% increase in our profitability and cash generation and what that means for our business going forward. So, both Kevin and I look forward to reporting on the fourth quarter and again appreciate your interest in Bottomline Technologies.

Operator

Ladies and gentlemen, this conference will be available through replay today after 7 P.M. Eastern Daylight Time through May 15th at midnight. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code 325438. International participants can dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844. That concludes our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.

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