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Bottomline Technologies Inc. (NASDAQ:EPAY)

Q4 2014 Earnings Conference Call

August 12, 2014 5:00 p.m. ET

Executives

Rob Eberle – President and Chief Executive Officer

Kevin Donovan – Chief Financial Officer

Analysts

Bob Napoli - William Blair

Richard Davis - Canaccord Genuity

Mayank Tandon - Needham & Company

Wayne Johnson - Raymond James

George Sutton - Craig Hallum

Peter Heckmann – Avondale Partners

Irvin Liu – Stifel

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Bottomline Technologies’ Fourth 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 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, 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

Good afternoon. Thank you for your interest in Bottomline Technologies. It’s my pleasure to welcome everyone to the fourth quarter fiscal ‘14 earnings call. I am delighted to report on what was a very strong quarter for Bottomline Technologies and I am joined today by Kevin Donovan, our Chief Financial Officer who will provide a detailed review of the quarter's financial results and our guidance going forward. Both of us will be available for questions following Kevin’s remarks.

The headlines for the fourth quarter are strong financial performance to cap an outstanding fiscal year. Strong sales results in each of our key strategic growth drivers and we enter FY ‘15 well-positioned with significant market opportunities in front of us.

The financial highlights for the quarter were subscription and transaction revenues grew 30% to $39.6 million. Revenues overall grew 26% to $81.7 million. EBITDA was up 35% to a record $17.2 million and operating income was also up 35% to another record $14.9 million. Operating cash flow for the quarter was $11.9 million and finally we recorded EPS of $0.39 for the quarter, ahead of our target and expectations.

So very strong financial results which capped the year in which we grew subscription and transaction revenues to $141 million and total revenue to over $300 million. We grew EBITDA to over $61 million, operating income to over $52 million and we earned EPS of $1.29, and we generated over $50 million in operating cash flows. With record performance in virtually every categories, we’re really pleased with FY ‘14’s financial performance.

In addition to the financial results, the fourth quarter also featured strong sales and customer execution. We signed 9 new Paymode-X dividend deals, including our largest deal to date which should produce well over million in annual recurring revenue. Our pipeline is strong as businesses look to maximize the automation and value of their payables.

We signed six new legal spend management deals in the fourth quarter completing the year in which we signed a record 36 new customers. The size of the market available to us, our dominant competitive position and our ability to execute are all evident in our record sales for the year.

In digital banking, we signed a three-year subscription contract with a large global bank that ramps to an annual subscription of over 2 million per year by the third year. This is an excellent example of how we are successfully transitioning more of the business to subscription and transaction revenues.

The fourth quarter was positive in every regard but I am most excited about the opportunities ahead of us. As we enter FY ‘15 we have a leadership position in our key chosen markets and we are poised and committed to expanding the capabilities we offer. This will drive growth and increase our competitive advantage.

Let me spend a moment and walk you through some of the major initiatives and the key new product offerings we will be launching in FY ’15. Paymode-X represents the opportunity to fundamentally change the way businesses pay and get paid. In FY ‘15 we will be increasing our investment in the technology platform, our vendor on-boarding process and the support of our bank channels. This is a key platform for the banks we work with.

Citizens demonstrated Paymode-X’s importance by highlighting it in the bank’s most recent annual report as one of the new strategic technologies for its commercial banking customers. The Paymode-X network continues to grow. We have over 270,000 vendors on the network and at some point in FY ‘15 we will exceed 300,000.

In legal spend management, we plan to not just extend our leadership but also launch new offerings for our insurance and corporate customers and the thousands of law firms that service them. We have a big and bold plan for FY ’15, launching new management capabilities as well as our first law firm K4 [ph] platform. While today we have over 11,000 law firms on the system we do not drive any revenue from them. Law firm fees represent a significant and to date untapped market opportunity for us. We’re excited about launching this new offering later in the fiscal year.

Finally in digital banking, Bottomline is the opportunity to reinvent the manner in which banks engage with their business customers as well as the services banks provide those customers. Our acquisition of Andera in the fourth quarter is an example of our ability to leverage our brand and reach in the banking market with new offerings. In FY ‘15 we will be completing the first phase of a major expansion of our platform’s capabilities, extending the functionality our banks can offer and introducing new customer engagement tools that enhance the banks’ knowledge of, in connection with its most important customers.

So in conclusion, the results for the fourth quarter and the fiscal year are very strong. The future ahead is even brighter. We've proven our ability to identify attractive markets, invest in and develop innovative technologies and execute in front of the customer. FY ‘14 was a fabulous year with many new records and I expect more of the same in FY ‘15 and beyond.

So with that, I will turn it over to Kevin Donovan who will go through a detailed review of the financials and then again both of us will be available for questions following Kevin’s remarks.

Kevin Donovan

Thank you, Rob. We had a very strong fourth quarter which completed a very strong financial year. Our revenue, subscription and transaction revenue, operating income and EBITDA were all up over 25% on a year-over-year basis in the fourth quarter.

At the beginning of the year, we committed that we would deliver revenue of $296.5 million, operating income of $47 million and EPS of $1.05 in the fiscal year. With our fourth quarter results, we've completed a year where we exceeded all of our financial commitments ending with over $300 million of revenue, close to $53 million of operating income and EPS of $1.29. Clearly a very successful year driven by strong customer demand for our solutions, product innovation and leadership and execution on our financial plan.

Turning back to the fourth quarter. Financial highlights include revenue increasing 26% to $81.7 million and subscription and transaction revenue increasing 30% to $39.6 million. Operating income of $14.9 million and EBITDA of $17.2 million were both up 35% from last year. Operating cash flow was $11.9 million and EPS was $0.39 ahead guidance. The financial results clearly demonstrate that we are executing very well on our strategy and driving more of our business to cloud and recurring revenue-based offerings while driving increased profitability.

I will now provide a more detailed look into the fourth quarter financial results. Total revenue increased $81.7 million, 26% year-over-year growth. Subscription and transaction revenue was $39.6 million and represented 49% of overall revenue. Subscription and transaction revenue was the largest component of recurring revenue which was $60.4 million and represented 74% of overall revenue, and that’s 2% higher than any previous quarter.

The revenue mix reflects our focus on growing cloud based recurring revenue platforms. Just a few years ago Our subscription and transaction revenue was less than 25% of our overall business. Today it represents close to half of our overall revenue, a significant and meaningful shift in our revenue mix. We’ve to a large degree transitioned our business, particularly with banks towards subscription and transaction-based pricing and away from larger services engagements while meeting and exceeding our profit targets. We expect this transition to continue and positively impact our revenue mix going forward.

Supporting our focus on recurring revenue, 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 six new legal spend management deals and signed nine Paymode X deals under the new vendor pay model, including our largest Paymode X deal ever. The quarter completed the year which saw us sign up 35 new Paymode X customers and 36 new legal spend management clients or over 70 new recurring revenue deals on a combined basis during the year.

While these new fourth quarter accounts are not expected to contribute much to revenue in the current fiscal year, these new deals represent visibility into our future recurring revenue growth. The revenue growth drove year-over-year expansion in gross margin, operating income and EBITDA. We finished the quarter and year with record levels of operating income and EBITDA. Operating income grew 35% to $14.9 million and EBITDA also grew 35% to $17.2 million.

Turning to margins. Overall gross margin was $47.3 million or 58%, an increase from 57% last year and in line with last quarter. Subscription and transaction margins were 52%, an increase from 50% last quarter. We expect subscription and transaction margin will continue to increase as we grow our cloud-based solutions.

From an operating expense standpoint, we continue to invest in sales and marketing and development to drive future growth. Sales and marketing expense was $16.2 million, representing 20% of revenue while product development expense was $10.2 million representing 12% of revenue. Development expense as a percentage of revenue has increased from 11% to 12% over the past year as we've increased our product investments to capitalize on the large market opportunities in front of us.

Looking at the balance sheet. Cash at the end of March was $191.5 million. During the quarter we generated $11.9 million of cash flow from operations and $8.3 million of free cash flow. The cash balance reflects the $44.5 million of cash used in the Andera acquisition at the beginning of the quarter.

In addition to the strong cash balance, we've a significant backlog. Backlog at the end of March was $147 million, up 21% from last year.

Turning to guidance. We're not making any changes to our forward-looking guidance and we're solidly on track to deliver revenue of $80 million and EPS of $0.33 in the September quarter. Our first quarter guidance reflects 19% topline revenue growth. The projected sequential decrease in EPS is primarily the result of an expected increase in tax expense in the first quarter as compared with a tax benefit recorded in the fourth quarter.

In summary, we continue to execute on our strategic goals and objectives. We delivered 25% plus growth in revenue and subscription and transaction revenue and drove 35% growth in operating income and EBITDA. We continue to generate strong operating cash flow with $11.9 million in the quarter and $33 million over the last six months. As we begin fiscal 2015, we have large market opportunities in front of us and our focus is capitalizing on these opportunities.

We will now open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Bob Napoli with William Blair.

Bob Napoli - William Blair

First question just on the comment that you have – that you signed 14 deals to provide banks with online account origination technology. Is that all through Andera?

Rob Eberle

Yes that would be the Andera.

Bob Napoli - William Blair

And the multi-year agreement with the major global bank, that I think you said would add $2 million of revenue by -- on an annualized basis by year three. That's also Andera?

Rob Eberle

Right. But that’s case where I think that deal was certainly helped by being part of Bottomline as we had existing relationship with that organization.

Bob Napoli - William Blair

So what is – I mean that was a $10 million revenue base, sounds like it's growing pretty fast. And are you able -- are you cross-selling Andera's products, and are you able to cross-sell your own products into Andera’s customer base?

Rob Eberle

We’re not focused as much on cross sellers as much as building the Andera capability into which has traditionally been consumer online origination, and building that into our commercial banking platform.

Bob Napoli - William Blair

On Paymode, you said you signed your largest deal, nine institutions including Jones Lang LaSalle, was Jones Lang the largest deal that you have signed to date?

Rob Eberle

We estimate it to be the largest deal, you don't know what the revenue will be until you roll those out but we estimate it to be our largest deal, yes.

Bob Napoli - William Blair

And then I think you said – with the deals that you have been signing you don't expect that much revenue from them in the coming fiscal year? What is a typical ramp-up time to get these customers to material revenue?

Rob Eberle

Yeah what happens is first, you would have signed on the payer. Then you implement the payer. And then there is -- which under many platforms that would then lead to revenue. Then here it's a process of onboarding the vendors. And then those vendors actually getting paid. So there is a tail behind the signing of a deal that is probably a year-and-a-half to full or close to full revenue. If not even longer than that because you have to get the payer on -- the payer enrolled and then get the vendors on and getting vendors on happens in waves, it's not something that happens all vendors at once. It's a campaigning process where we are sorting through vendors using analytics that we've developed as to which vendors we are approaching first, which we will approach next.

So it's a multiyear process to get to full revenue. What we like about that though is once that revenue builds that's a very sticky application because it's very difficult to move then to any other platform because all the vendor information bank accounts to pay them, all that stuff Bottomline has.

Bob Napoli - William Blair

And then just last question, any possibility you would give kind of -- which product, which segment is growing the fastest right now of your core segments and if you could give a feel for the growth rates of any of the segments, anything in that --.

Rob Eberle

We don't break down the specific revenue by product category or the growth rates. Legal spend management is the most mature of our SaaS platforms and that has the highest leverage of operating margin given the maturity of that platform but we don't break down specific individual revenue numbers by product.

Operator

Thank you. Our next question comes from the line of Richard Davis with Canaccord Genuity.

Richard Davis - Canaccord Genuity

Just ask one question and get back in the line. In light of your growth spending and your M&A, do you guys still feel comfortable exiting fiscal 2015 with a 25% operating margin or what are the puts and takes on that?

Kevin Donovan

That's our current plan today around the 25% operating margin.

Operator

And our next question comes from the line of Brett Huff with Stephens.

Brett Huff – Stephens

Two questions; Rob, you mentioned in your prepared remarks something about Legal eXchange and a way to monetize the law firms and I don't think I quite got that all. Could you reiterate that and maybe give us a little more color on it?

Rob Eberle

Sure. I'm not going to go into an awful lot of product feature on it, just from a competitive standpoint but what we're doing is launching a new platform that will be integrated with the legal spend management platforms but it provides the capability to register and select law firms and helps our customers -- we have helped them today on the billing process and on managing the cost related to the external law firms handling those matters. What we're doing is moving up the stream to how do they actually select that firm. And in that context, we will have the opportunity to charge the law firms to register onto that platform. So that will -- we hope to have our first customers live by the end of this fiscal year, so that’s in terms of revenue impact that’s still a bit of ways away. But it’s an exciting new opportunity both to expand the capabilities that we provide which nobody else would be able to do and then also of course the additional revenue source by tapping into the law firms themselves.

Brett Huff – Stephens

And then did you -- I may have missed it, did you give the mix of bank driven or channel driven versus direct Paymode sales of I think you said you did nine?

Rob Eberle

We did not break that out. We didn't -- our bank channels get pretty touchy on that, so no we did not breakout which was direct and which was channel. The channels I would just make this more generic comment on it. The channels are doing really well. I did make the comment on Citizens, Bank of America is real active. We've got a number of other banks that are looking at Paymode-X. So we're definitely pleased with how the channels are working.

Operator

Thank you. Our next question comes from the line of Mayank Tandon with Needham & Company.

Mayank Tandon - Needham & Company

Kevin, just a few number questions first. Did you give us the backlog number -- if you did I apologize, I missed that and also the book-to-bill which I think you have shared in the past?

Kevin Donovan

Yeah, the book to bill was one and the backlog was 147 million.

Mayank Tandon - Needham & Company

And then just going back to legal spend, you mentioned six new deals in 4Q, 36 for fiscal ’14, is there any way to size the annual recurring revenue from these deals both in terms of the 4Q number and also for the full-year?

Kevin Donovan

No, we don't breakdown the specific sizes of deals for the products.

Mayank Tandon - Needham & Company

Okay, unrelated note, are these deals now coming outside of insurance, I realize insurance was the biggest spender on legal services but are you having some success outside of that vertical as well or is it insurance clients?

Kevin Donovan

It’s principally insurance clients but we have during the course of the fiscal year signed up some corporate accounts outside of the insurance vertical.

Mayank Tandon - Needham & Company

And then one final question for me just in terms of your cash position and looking at acquisitions, what are some of the area that you might consider – without being specific in terms of deals – are there any holes in the portfolio that you would like to fill up with the M&A and what are those you are targeting?

Rob Eberle

We don’t holes that we would fill up the – what we would see is new product capabilities, we would see adjacent markets, so the opportunity to expand, what we're doing in existing market and there is a good example of that of both of those actually and geographic expansion as well. We’re pretty value sensitive, we’re going to be disciplined in what we are paying in acquisitions and so we’re as likely to step back in this market where things are getting – things at times can be pretty heated, we’re going to be pretty disciplined about the value -- valuation in the acquisitions that we consummate.

Operator

Thank you. Our next question comes from the line of Wayne Johnson with Raymond James.

Wayne Johnson - Raymond James

Could you just remind us what percentage of organic revenue of the subscription and transaction processing line came in at, was that nearly 100 -- what was that number?

Kevin Donovan

It is not hundred, Andera is a subscription and transaction-based offering as well as Sterci had some subscription and transaction components. We integrate those businesses into our existing business and so we don't have a pure organic revenue growth as we've integrated those into the overall business as opposed to keeping them as standalone businesses.

Wayne Johnson - Raymond James

So the question is what is the organic revenue growth for subscription and transaction services -- that is the question for the fourth quarter, if you exclude -- what was included in last year's fourth quarter, what would that number have been?

Kevin Donovan

Yeah like I mentioned, with the acquisitions we’ve integrated those in with the business. So there are parts of our -- Sterci and Simplex are part of our financial messaging business, it’s not a discrete standalone Sterci subscription and transaction revenue.

Rob Eberle

To Kevin’s point, we have -- our existing sales teams have been selling that offering rather than a historic Bottomline offering. So while it may be a product we've acquired many cases that's now being sold by Bottomline person, so that’s part of the integration. We’re very focused on integrating all the acquisitions we’ve completed.

Wayne Johnson - Raymond James

And it looks like you guys have done a good job of that in the past. So just remind me again what Andera revenue was – I think Bob was mentioning that it was close to 10 million revenue run rate, is that right?

Kevin Donovan

Our guidance was 2 million for the June quarter and 10 million for next fiscal year.

Wayne Johnson - Raymond James

And then on the expense side, sales and marketing and R&D, just as far as – I know you’ve already provided a quarterly cadence here overall but if you could just remind us again how you see that as a percentage of the top line progressing throughout the year?

Kevin Donovan

Yeah, I would expect that we would see sales and marketing and product development to continue to increase in absolute dollars and potentially to inch up little bit as a percentage of revenue, we’d expect general and administrative G&A expense to stay relatively consistent and over time decline as a percentage of revenue.

Operator

Thank you. Our next question comes from the line of George Sutton with Craig Hallum.

George Sutton - Craig Hallum

Rob, you mentioned the three areas you’re spending money on Paymode in ’15, you mentioned increasing investment in the tech platform on-boarding and bank marketing, I wondered if you could give us a sense or quantify what kind of investments should be making there?

Rob Eberle

You trailed off – what kind of – what we will be doing in those areas?

George Sutton - Craig Hallum

What kind of investments you will be making in those areas?

Rob Eberle

The biggest change for us is in the vendor on boarding, increasing the size of the teams that we have on boarding the vendors that are being paid to Paymode-X and being charged the network use fee and also the technology behind that. So the analytics that we use to segment vendors and determine which vendors we’re going to approach, in what order, what campaign we’re going to approach them, how we're going to approach them, working with the payers. So that area – that’s what drives ultimately once we have signed on payers that's what's driving the revenue. So that’s the biggest -- that's by far the biggest area of investment for us going forward in FY ’15.

George Sutton - Craig Hallum

And you mentioned you signed one deal which should become $1 million in annual recurring revenues, my sense is that would equate to a fairly large dollar amount of volume that you will be processing or bringing through the system, what kind of average size should we be expecting from the Paymode wins?

Rob Eberle

We think its market receptivity really ranges from all size organizations, so many of our banks will have a focus on small and medium-size business as well as multinationals, so we’re working across – there isn’t one particular size or average. In terms of volume through the system, remember that we’ve been operating this system -- this network and been doing so on a payer pay model. So in terms of scale and the ability to handle this volume we certainly have that capability, $141 billion went through this network in the past year, so we certainly have the ability to handle the new payers that we’re bringing on.

George Sutton - Craig Hallum

And lastly just on behalf of your cash management group, there has been no mention on the call of WebSeries, could you give us an update on – that’s still relatively new functional upgrade, I am curious how that’s been doing in markets?

Rob Eberle

Well, actually what – WebSeries what we're doing now a couple things in WebSeries, one, we delivered a single version of code to four different major banks, that's significant because in the past we would have had customizations and modifications for each bank. This is part of turning our business model to lower services and higher subscription and transaction revenue. So we’ve been able to successfully deliver WebSeries, we just had a new release of WebSeries in the past quarter and we also are using that platform as I mentioned – I didn’t mention it by name but the capabilities that we will be launching in FY ‘15 are incorporating a large percentage of that comes from WebSeries.

Operator

Thank you. Our next question comes from the line of Peter Heckmann with Avondale Partners.

Peter Heckmann – Avondale Partners

I have a follow-ups on the tax line, Kevin, can you remind us I guess a bit of variance in the quarter compared to what I thought you were going to come in on the tax line, could you talk about that and you could also remind us on a quarterly basis how you expect the taxes to affect fiscal ’15?

Kevin Donovan

Yes, we had a benefit in the quarter and we had projected that we’d be slightly higher on an expense standpoint than that, so slightly favorable outcome from a tax perspective in the quarter. As we move forward into next year, we were targeting about $4 million worth of tax expense, in projecting tax expense in Q1, so I made those comments with respect to next quarter's earnings where we will move from benefit in the fourth quarter to income tax expense in the first quarter which will have an impact on the EPS line from Q4 to Q1.

Peter Heckmann – Avondale Partners

In terms of -- just trying to fine-tune the model a bit, would you expect subscription and transaction revenue to be up sequentially in the fiscal first quarter?

Kevin Donovan

I would that we had a very strong fourth quarter with subscription and transaction up over 4 million. So we haven't given specific subscription and transaction revenue guidance but we are projecting that as typical in the September quarter we will see revenue step back slightly from the June quarter to the September quarter. And we would see that across several of the different revenue categories.

Peter Heckmann – Avondale Partners

And then just on the FX issue, I was projecting a modest tailwind from FX. Can you talk about constant currency growth in the quarter was – was the FX material?

Kevin Donovan

No it wasn’t material and the majority of our FX is tied to the British pound and that it has moved around a little bit but it's pulled back recently closer to more historical levels.

Operator

Thank you. Next we have David Grossman with Stifel.

Irvin Liu – Stifel

Hi this is Irvin Liu calling in for David. Most of my questions have been answered but I was wondering if you guys can touch on the healthcare vertical, because you guys don't really talk about that very often. Can you just go over some of the initiatives you guys are undertaking and what opportunities that you see out there?

Rob Eberle

Sure, we see a couple of opportunities in healthcare. One is to automate the manner in which healthcare organizations pay and get paid, so the deals that we've signed this past year with Paymode-X were number of hospitals and healthcare organizations that were payers that we signed deals with this past year. So one, I would say that’s on the payments. The second, we actually provide some technologies directly to healthcare, the most exciting of which is a tablet that allows all the patient on-boarding forms, consents, everything when you go in and were traditionally handed a clipboard, we have automated all of that and we have a group that’s focused just on healthcare and just on marketing in that solution. It’s relatively small in comparison to the overall size of Bottomline but we’re excited about what's happening in that area, and we've signed one new channel relationship and we expect to sign a second channel relationship in the coming quarter or two. So that is not a significant driver of our results just as a percent of revenue but it is an exciting opportunity for us going forward.

Irvin Liu – Stifel

And is it possible to break out the size of the healthcare business?

Rob Eberle

No, because part of it is -- there is an area that’s focused just on the tablet I referenced and that would be in the single-digit percent size of overall Bottomline. The rest of the healthcare business -- for example Paymode-X, we wouldn’t break that out discretely as healthcare. So I have never really looked at across the whole business of all the applications we’re providing, what percent are in healthcare but our healthcare group focused on the patient on-boarding tablet technology is relatively small.

Operator

Thank you. Our next question comes from the line of Bob Napoli with William Blair.

Bob Napoli - William Blair

Just a follow-up. I think, Rob, on your comment in your opening comments, a major expansion in digital banking capabilities in 2015. Can you explain what that is? And maybe a little bit into what the WebSeries is doing?

Rob Eberle

I will explain a bit of it but I'm also sensitive to what I'm talking about here is future product roadmap and we certainly participate in a competitive market. So the principal things around that are -- if you think about a cash management platform historically it was providing functionality to execute a payment or balance in transaction reporting and the like. We are providing more capabilities to help businesses run their business, so more technology, and visibility for the corporate customer, commercial customer. And then on the bank side, better engagement with that customer, so what is that customer doing, what are we learning about that customer, what might that customer need next -- think functionality and capabilities along that line, all of which of course is multichannel and all of which is scalable from the largest multinationals to small business because what we’re finding banks today want to be able to run -- on the commercial side want to be able to run one platform that will support the whole scale of their customers.

Bob Napoli - William Blair

Just remind -- I know you're working with banks of all sizes, but what is the sweet spot for you on bank size?

Rob Eberle

That’s interesting. Historically what we've done is we've serviced some of the largest banks in the world and what happens then is we have a technology platform WebSeries and we would provide whatever customizations and modifications they wanted, and that’s probably always going to be the case when you're servicing one of the top global banks, big services and customization component. What we’ve been able to do – and there have been different pieces that were parts of this transition, we’ve been able to move into the midmarket which is actually for us far more attractive market, we’re able to bring the capabilities that the largest banks in the world would deploy but we’re able to do them in a single platform, often – in fact most of the time on a hosted cloud basis in a subscription and transaction revenue model, less services. So we’ve developed our capabilities working with the largest banks in the world and now we've moved our target market – it sits just below those bit older market.

Bob Napoli - William Blair

That's very helpful. And then you gave, Kevin, you gave a pipe backlog number. But I think you've explained in the past, that backlog doesn't mean what it used to mean. So what's the pipeline? How would we relate the backlog to the pipeline, or how does your business look?

Kevin Donovan

Yeah our backlog is just contractually committed orders that have been received in, with a lot of the cloud-based solutions, legal spend management, Paymode-X, they are actually transactional driven revenue streams without any minimum commitment. And so when we sign those deals we actually don't put those deals in the orders, they don't go into backlog given that we would have to provide an estimated number associated with that. So our backlog is a pure contractually committed amount that our customers would pay us in the future.

Bob Napoli - William Blair

And then can you give a feel for what the overall new business activity pipeline looks like relative –

Kevin Donovan

I think I referenced back to the combined 70 deals, new deals that we signed in the year for Paymode-X and LSM which is a very strong result.

Bob Napoli - William Blair

And you see that trend obviously continuing, is what you’re suggesting?

Kevin Donovan

Yes, we’ve been in a consistent level of deals for legal spend management over the last couple of years. So it's a very [multiple speakers] – and Paymode-X is obviously the vendor pay model was launched 18 months ago. So it's still relatively early but good success there.

Bob Napoli - William Blair

Is the average deal size going up?

Kevin Donovan

We don't break down the average deal size.

Rob Eberle

No, I think the way to think about the average deal size in -- on the legal side we see deals of range of sizes -- there are some very large deals that we’ve had this past year, and we’d expect other large deals of this range there. And the way a deal size would go up in Paymode-X is actually with time. So an existing deal will grow with time as you’re getting more and more of the vendors on, and more and more vendors in and are paying a network use fee.

Operator

And at this time we have no more questions in queue. Please continue.

Rob Eberle

Well thank you everyone. We appreciate your interest in Bottomline Technologies. We’re delighted with the fourth quarter results for FY ‘14 and we’re very excited as we enter FY ‘15 and we look forward to reporting to you on the first quarter in late October. Thank you.

Operator

Ladies and gentlemen this conference will be available for replay today after 7 PM Eastern through August 26 at midnight. You may access the AT&T teleconference replay system at anytime by dialing 1800-475-6701 and entering the access code 333117, international participants dial 320-365-3844. Those numbers again are 1800-475-6701, and 320-365-384, the access code is 333117. That concludes our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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