Bottomline Technologies' (EPAY) CEO Robert Eberle on Q2 2016 Results - Earnings Call Transcript

Bottomline Technologies, Inc. (NASDAQ:EPAY)

Q2 2016 Results Earnings Conference Call

January 28, 2016, 05:00 PM ET

Executives

Robert Eberle - President and Chief Executive Officer

Richard Booth - Chief Financial Officer

Analysts

Brett Huff - Stephens Inc.

Jason Palmer - Craig-Hallum

Wayne Johnson - Raymond James

Mayank Tandon - Needham & Company

Gary Prestopino - Barrington Research

Chris Kennedy - William Blair

Operator

Ladies and gentlemen, thank you standing by and welcome to the Bottomline Technologies Second Quarter 2016 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 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, constant currency growth rates, 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. Please go ahead.

Robert Eberle

Good afternoon. Thank you for your interest in Bottomline Technologies and welcome to the second quarter fiscal '16 earnings call. I'm here with Rick Booth, our Chief Financial Officer, who will provide a detailed review of the quarter's financials results and our guidance going forward. Both Rick and I will be available for questions following his remarks.

We are delighted with the results for the second quarter and our progress against our strategic plan. With a strong sales quarter with record ARR bookings we entered into a strategic relationship with Visa and we executed to deliver strong financial results in the quarter.

During my remarks I will cover our financial results, our record ARR sales, a significant win for our newly launched digital banking platform and the Visa partnership which we signed in and of this past quarter.

I'll start with the financial highlights for the second quarter. Subscription and transaction revenues grew 15% on a constant currently basis to $48.6 million. Revenues overall were $86 million up 7% on a consistent currently basis or 12% excluding banking services. EBITDA increased to $19.2 million. Operating income was $15.9 million or 18.5% of revenue and finally we recorded EPS of $0.38 for the quarter ahead of our target and expectations, so strong financial results across the board.

We have a strategic plan and we are executing against that plan. We made strategic well thought-out investments in large markets where we have a lot of knowledge, experience and customers. Key focus of FY '16 is driving sales results to produce a return on those investments.

We've been successful in doing so in the first half and our pipeline gives us confidence our success will continue. We are growing the company while transitioning the revenue model. This year, FY '16 is the last year of model transition and financial headwind as we focus on signing new ARR to drive revenue growth and margin expansion in FY '17 and beyond.

Accordingly, we've given guidance for 2017 that begins to show the financial benefit of our strategy. Second quarter's results confirm our confidence in that guidance and our strategic plan. With that in mind the clear highlight of the second quarter was our strong sales results. During the quarter we booked a record $19.4 million of new ARR. The market's positive reaction to our offerings is clear. With over half the record ARR coming from Paymode-X and other new products we can confidently see the return on the investments we've been making.

To put the $19.4 million sales results in context, Q2's ARR represents 110% increase from the same quarter a year ago. Through the first half of the year we are double the prior year's ARR sales result. So what does this mean for Bottomline? Well we clearly have exhilarating momentum in our markets.

Our product innovations are well received and the investments we've made well-placed and we are building a high-growth subscription and transaction business with significant leverage in the business model. I couldn't be more pleased with our position or more excited about our future.

Our strategic plan is designed to extend our leadership position, win new business and drive accelerating subscription revenue growth and expanding our operating margins. Our sales efforts are aligned with that strategy with all our key growth drivers and major products that's now sold on subscription and transaction revenue model.

In fact each of our key growth drivers contributed to our strong sales results in the second quarter with 16 new Paymode-X customer wins, nine new digital banking customer wins and five new legal fund management wins. Perhaps the most meaningful and most gratifying new Q2 customer engagement from a strategic perspective was for our newly launched digital banking platform. While the seven-figure ARR is financially significant, the most important thing is the validation of our new digital banking growth and investment strategy. We are directly addressing a compelling market need with a platform that is differentiated from anything else in the markets.

The bank who has selected us as is a leading West Coast regional bank with a strong business in commercial banking franchise, a strong desire to grow that market and a commitment to best-in-class digital technologies. It shows our digital banking platform to enable them to deliver a world-class user experience, to acquire growing deep and highly profitable relationships with businesses of all sizes from SMBs to major multinational corporates and to strengthen their competitive position through innovation and best-in-class payments and cash management services.

We just launched this platform to the market in the second quarter. The market reaction we received, the pipeline we are building and our selection by this leading technology bank, all point to the positive return on the investment we are making.

Finally, a key event in the quarter was our signing of a strategic alliance with Visa. This is an important market validation and a strategic step forward in Bottomline becoming the way for businesses to pay and get paid. The combination of Paymode-X with Visa Payables advances the two company's shared vision business payments. It provides a seamless experience that simplifies payment automation and maximizes cost savings efficiency and security.

There are a number of reasons Visa chose to partner with Bottomline. At the top of the list I put our success, scale and experience in business payments. We processed over $182 billion through Paymode-X in 2015. A $182 billion. We now have over 330,000 members on the network. We are automating business payments of scale efficiently, effectively and securely. Second, I'd cite our vendor pay model which we have proven works and is comparable to and aligns well with Visa's interchange business model

And then finally, I'd point to innovation and technology. The proprietary IP we've developed around vendor segmentation, enrollment and onboarding are unique and the advanced platform capabilities we've developed are specifically designed to facilitate and expedite business payments and they are well ahead of the market.

We're delighted to partner with Visa. It provides a validation and endorsement for one of the largest payment companies in the world. It gives us the opportunity to expand our existing bank relationships and it opens the door to new relationships and the combination will enhance our platform to include card payments, driving adoption and network growth.

So in summary, we entered FY '16 with a bold plan and we are executing against that plan. We are building a high-growth subscription and transaction business with significant operating leverage. The strong sales in Q2 validates our strategy and it positions us well to produce continued increases in shareholder value.

I'll now turn it over to Rick Booth for a detailed review of the financials and then we'll open up the call for questions.

Richard Booth

Thank you, Rob. From a financial perspective I'm pleased to say the quarter was shaped primarily by continued strong growth in subs and trans revenue and this performance helped drive core operating income and earnings per share both above guidance.

The financial highlights of the quarter included the subs ad trans revenue grew 15% on a constant current basis, which brought our total revenue to $86. We booked $19.4 million of ARR up 110% year-over-year. Operating income was $15.9 million or 18.5% of revenue. EBITDA was $19.2 million or 22% of revenue and earnings per share of $0.38 with three times ahead of guidance. In addition to these financial metrics we're seeing sales success and a pipeline that positions us well for the remainder of 2016 and 2017.

I will now provide a more detailed look into the second quarter financial results, turning first to revenue. Our total revenue of $86 million represents 7% year-over-year growth on a constant currency basis. Excluding the banking services which we'll be emphasizing total revenue was up 12% on a constant current basis year-over-year. The biggest driver of that growth is subs and trans revenue which was up 15% on a constant current basis year-over-year to $48.6 million which is equivalent to $195 million on an annualized basis.

With that growth as a percentage of revenue subs and trans is now 57% of total revenue up five percentage points year-over-year. When you include maintenance as well as subs and trans, total recurring revenue of $68.6 million is 80% of total revenue up four percentage points year-over-year and equal to $275 million on an annualized basis. Software and maintenance were each up slightly year-over-year and although these are secondary to our subscription and transaction growth, we appreciate their profit contribution.

Turning to professional services, as we've discussed in the past, we want to provide services only as necessary to implement our solutions and to ensure our customer success. We believe this is the right strategy to grow revenue, income and shareholder value and we'll continue to deemphasize services.

Consistent with this approach, we recorded $3.4 million less of banking professional services revenue than in the same period in the prior year and excluding the banking professional services which would be empathizing revenue growth with 12% on a constant currency basis.

Turning to sales performance which is arguably even more important than current revenue production, we added a significant number of new subs and trans based customers across our key growth drivers where our product vision is driving new deal signings at a very significant rate. We signed 16 Paymode-X agreements under the vendor pay model. We were selected by nine new customers for our digital banking platforms and we also added five new legal spend management customers.

We are particularly pleased that the deals we are signing are getting larger and more valuable. When translated into annual recurring revenue, bookings for the quarter were $19.4 million up 110% year-over-year and this brought total first half ARR bookings to $34 million. This is up 97% versus the same period a year before. It is this strength in level of ARR bookings that give us confidence in the long term growth in our subs and trans businesses.

Now as you know, these ARR figures are estimates of transactional volume and in our model these customers take time to implement to go live and then to ramp up in the full revenue production. But once revenue is achieved they provide visibility and consistency to the model as well as the power to drive margin expansion.

As we turn to profit and margins, we finished the quarter with operating income of $15.9 million or 18.5% of revenue as well as EBITDA of $19.2 million or 22% of revenue. This higher revenue drove the year-over-year expansion in gross margins particularly in subs and trans. Our overall gross margin was $51.3 million or 60% of revenue and the subs and trans gross margin was 57% a gross margin expansion of two percentage points on a year-over-year basis.

From an operating expense standpoint sales and marketing expense for the quarter was $18.5 million or 21% of revenue up 1% year-over-year and development expense was $10.3 million or 12% of revenue consistent with the prior year.

In terms of cash flow or operating cash flow was $16.1 million for the quarter. In addition to our customary CapEx significant uses of cash in the quarter included $4.5 million through secured and minority interest in a small software company and a source code license both in the banking space and $2.6 million spent completing our prior share buyback. As a result we ended the quarter with $129.8 million of cash on hand.

In addition to the strong cash balance we also have a significant backlog. Backlog at the end of December was $163.2 million up 15% from last year. When considering backlog it is important to remember that backlog included only contractually committed revenues and therefore excludes estimated amounts for our transaction based businesses including Paymode-X and legal spend management offerings.

Looking ahead, our visibility improves because a good portion of the strong ARR bookings will become revenue in fiscal '17 and as a result we're pleased to reconfirm with increased confidence the fiscal 2017 guidance of 18% to 19% growth in subs and trans revenue and 20% to 21% operating income.

Based on the year-to-date we are throwing [ph] up our fiscal '16 guidance for two items. First, the impact of foreign exchange and second our continued de-emphasis of the professional services. Relative to foreign exchange the recent strength of the dollar means that foreign currency is expected to have an impact on revenue of approximately $2 million per quarter versus the previous guidance, but this will have little or no impact on operating income margins.

Relative to professional services we continue to deemphasize standalone services in favor of more strategic and profitable revenue streams. We expect the impact of this to be approximately $2.5 million per quarter versus the previous guidance.

So in summary, we're pleased by the performance of our key growth drivers with constant currently growth of 15% in subs and trans as well as operating income performance of 18.5% and $0.38 earnings per share and we're focused on continuing to execute on our strategy which is built on three things. First, investing in solutions targeted at large markets where we have competitive advantage; second, leveraging those offerings to drive new deal signings and recurring revenue; and third, using the power of the subs and trans revenue to expand growth and operating margins. Q2 was another solid step forward on this plan.

And with that, we'd be pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is going to be from the line of Brett Huff with Stephens. Please go ahead.

Brett Huff

Good afternoon guys.

Robert Eberle

Hi good evening Brett.

Brett Huff

Just want to go through the guidance change again so the Forex, increased Forex headwind is $2 million lower revenue guide for the quarter and the deemphasizing of the professional services in banking is lower $2.5 million per quarter on rev and there is no impact on EPS per quarter, are those all right assumptions?

Robert Eberle

Yes, the 2 and the 2.5 are correct and we don’t see any significant impact on profitability.

Brett Huff

Okay and then the new ex-banking statistic that you guys are giving is the, I think you are talking about growth ex-banking that excludes the just professional services associated with legacy perpetual license contracts related services is that right?

Robert Eberle

Yes. It is kind of both periods that you are comparing.

Brett Huff

Okay. Can you talk a little bit also about the digital banking deal, is the new one you just announced different than the one you announced last quarter?

Robert Eberle

Yes it was different. This is actually a bigger deal for us and it's a deal for our platform capabilities in a much, in a larger market. And I think it is a bank that is more of a technology leader. So they took a look across a number of the players and their selection to buy Bottomline is pretty meaningful in the market. We've not disclosed the name at this point for a mix of reasons, but I'd say that's a significant difference for us was just the level and certainly the economics.

I think it's a clear endorsement of what we've brought to the platform a lot of strategy is in terms of the capabilities around monetizing and securing small business and large corporate relationships and being able to do so in an environment where banks are increasingly challenged by different outside technology providers trying to get into essentially the businesses that our banking customers have been in and are in today.

Brett Huff

Okay, that’s helpful and one more question for me on the special services change, is this kind of – how did – give us kind of logic, so you guys decide that you don’t want to be as engaged on the perpetual license side of the digital banking services and you want to probably develop more of your resources to those folks you are closing that have on a more of a recurring revenue basis some of these new deals which I think is probably what happened. But how did you quantify that $2.5 million a quarter like was that just what was in the pipeline or were those contracts being negotiated that you just then said, we’re not going do them, kind of give us how you – to that?

Robert Eberle

Well, so let me help a little on that, so we did what we – we’re not going to say to customers we're are not going to do something, so that’s why we still have some level of those services. What’s turning out is, we're having less of those services which we're delighted. It’s not the business we want to be in. And also when we are selling a subscription transaction now there isn’t the revenue for those services and those services would be any services revenue we have would be recorded spread over the life of the subscription.

So, it’s really two things driving it, one is our strategic change from, if you look back years ago we provide, the number would be far more than $3 million if we did a 3 or 4-year comparison it be probably $10 million lost in the quarter or services, because we used to provide a lot of services around our software for larger banks. Today where we are selling a standard product and by design and strategy we will want to sell a standard product and we’re providing much less in services and then the other piece around that is of course the accounting when we are selling purely subscription and transaction revenue model.

Brett Huff

Okay and then just rolling forward a little bit to guidance for fiscal '17 one of the metrics you gave Rick was you reiterated the percent change. I think you said 18% to 19% subs and trans, you didn’t reiterate the $400 million number. Is that because the base will be smaller this year because there is lower services and can you give us any number from the 400 if possible?

Richard Booth

Brett, you heard me exactly correctly. For '16 we adjusted for currency and pro services and currency is extremely hard to predict. We do see a continuation of a similar trend for services and we'll be coming back in the Q3 call with full '17 guidance.

Brett Huff

Okay, I'll get back in the queue. Thank you.

Operator

And our next question is from the line of George Sutton with Craig-Hallum Capital. Please go ahead.

Jason Palmer

Hey, good afternoon guys, its Jason on for George.

Robert Eberle

Hi Jason.

Jason Palmer

I wanted to dig in a little bit further on the acceleration that you are seeing in ARR. You mentioned that about half that comes from Paymode-X. I'd assume that’s from the customer wins that we’ve seen on the vendor pay model, so maybe you can dig into that and just a little bit more on the balance of the acceleration?

Robert Eberle

I'm glad you asked the question because actually what I said is half of that is from Paymode-X and new products. So what I really was trying to make the point is that our investments are on track. The big investments we've been making are around Paymode-X, around the digital banking platform for example.

So over half of the new ARR was from not just Paymode-X, but it was Paymode-X and new products that we've had for actually less than a year's time. So it was really a point about our investments are well placed and we are seeing the return on those investments, so the early indications of the return on those investments.

Jason Palmer

Okay and then I guess digging a little bit deeper then, can you give any updates on what you are seeing in the cyber fraud market, any kind of early feedback on the PartnerSelect launch?

Robert Eberle

Yes, on PartnerSelect we’re building a pipeline. We changed the product slightly as you'll recall, where we've broken out an additional capability. So there is a little bit of change to those that we're working with, but we’re building the pipeline. We’re delighted with the reception the product is getting in the market. This ensures a long sales cycle. So having just G8 at the end of September it will, we wouldn’t have expected to sign any deals in this past quarter and we wouldn’t expect to sign any in this quarter, but the reception of that product is good and it's certainly going to be making a positive contribution to our financials going forward.

Jason Palmer

And then, anything on the cyber fraud?

Robert Eberle

Cyber fraud is in some ways actually what we’ve done is we've built out sales teams that are calling in the protocols and again we’re pleased with the pipeline. We are doing well with the existing channel partners that team with the Intellinx acquisition, the upside opportunity which we'll be executing on as we move into FY 2017 is we're selling directly to the Bottomline channel and be selling more.

As you know or may recall, we've sold the product well and when it is combined with our banking platform it is a huge opportunity. The ability to have a stop payment go directly into the payment application, so we will continue to be leveraging that, but let's roll with the CFRM [ph] capability and the market reception to that.

Jason Palmer

Perfect and then just a last one from me, I wanted to see if you can give some more detail on the Visa relationship, maybe you can talk about how you are going to market with that? And then maybe the breadth of the offering, is it based on any key industries or are you kind of going after all industries?

Robert Eberle

No what we've been doing with them so far is actually focused on bank relationships, the bank relationships at your existing Visa banks or banks that don’t have a card program today. From a capability standpoint what this allows us to do, it allows us to provide payers with the ability to execute any type of payments. So now if they have existing card program or want to have a card program for a portion of the vendor community, they can do that through Paymode-X, leverage all the technology, payment remittance state and other information and we by the way will make attractive economics on that.

And then the last piece I think it’s truly as I said in my remarks it is a true market validation. You know there are a lot of different people that Visa could partner with or a lot of people that would try to attempt to change the way business is paying or get paid. With $182 billion in transaction volume to 2015 and with 333,000 members we think we have established ourselves as a clear leader amongst those that are watching this space closely and we think that Visa in addition to the specifics of opening new doors and providing new payment capability is also a huge validation.

Jason Palmer

Okay, perfect. Thank you.

Operator

And our next question is from the line of Wayne Johnson with Raymond James Financial. Please go ahead.

Wayne Johnson

Hi yes. Good afternoon. So news continues to be favorable regarding Paymode-X, so congratulations on that. My question is, are we entering a phase do you think where there is going to be an acceleration of adoption by new customers for Paymode-X and is that being driven by additional resellers? Is it easier to install and enable and to use today? Can you kind of provide some color around that topic. Thank you.

Robert Eberle

I think there is a couple of things I'd point to, one is we've proven out the model and when you are talking to someone in the industry you can't point to anyone else that's doing or were talking about doing or leveraging our model and you can’t point to a significant number of vendors that are already engaged and it is much tougher to do. We have crossed that point. So in the key verticals we can point to and with many businesses we can point to a large number of the vendors onboard today and so that it is not a leap of faith that they are taking.

The second big thing is our relationship with Bank of America, a huge driver behind Paymode-X and that is continuing to move forward and move forward in meaningful ways. It took a while for the bank to be behind the model and frankly for a big organization it makes sense to be out front with Bottomline and other banks proved this was working before you are going to endorse the vendor pay model.

And now we have Bank of America truly behind the vendor pay model. So those would be the two biggest factors for me and then I think the next one we will see coming on will be the impact of these. It is hard, it is positive, that is clear. Quantifying that, what will that mean by when and what markets is very difficult to do today, but this is our business hard piece that I think will drive on the momentum we are in fact seeing.

Wayne Johnson

Okay, great. I appreciate that and then the second question I have is a follow up if I may and I apologize if I missed this, but did you guys reiterate your margin goals going forward?

Richard Booth

Yes, we did Wayne, 20% to 21% in 2017 and no impact on operating margin percentages in 2016.

Wayne Johnson

I see and you guys still aspire to 25% mid 20s kind of operating margin longer term?

Robert Eberle

Yes well, it is more than aspire. If you take a look at the results in the quarter, I mean the way we are going to get there is selling new subscription deals and those subscription deals and so we've aligned our business model, again not to repeat all the remarks, but last year of a headwind, so we have difficult transition this year with services that we would have had, software licenses that we would have had are no longer revenue and instead have the implementation costs and we have, but we don’t get any of the services revenue or any other subscription revenue.

We complete that, we start to see those revenues come on a relatively fixed cost base. I mean costs will go up, but they won’t go up as fast as revenue. And the key to that is what new subscription is coming on. Our $19.4 million new ARR in the quarter is huge and not all of that will show up in fiscal 2017 as Rick has already outlined, but a good portion of that will and we've had actually a very strong first half or double the prior year, so that is really the key to the 25%. It is not only that we aspire a committable, we have much more visibility each quarter as we're booking more of these subscription deals.

Wayne Johnson

So, could you quantify what the recurring revenue is at the beginning of this quarter and going forward?

Richard Booth

Yes, the recurring revenue as of this quarter is 80% of total revenue which is given on an annualized basis to $275 million.

Wayne Johnson

Yes, that is right, so we should extra and my question is, I apologize thank you for giving for providing that. So just going forward we should think, hey at the beginning of every quarter we are starting at 80%. We are good to go on that kind of rationale?

Robert Eberle

I think that is right. So about 57% is right subs and trans on that. Our subs and trans, part of our subs and trans business is a fixed amount. A good portion of our business is take Paymode-X for example, transaction based. So there is some level of variability. But fundamentally what you are seeing is we are building a very predictable business, yes.

Wayne Johnson

Terrific, thank you very much.

Operator

And our next question is from the line of Mayank Tandon with Needham and Company. Please go ahead.

Mayank Tandon

Thank you, good evening. First Rick another question on guidance, I know you said you are reaffirming the 18% operating margin target, but given that the revenue base is lower, should we expect some impact on earnings? I think the Street has got you a $0.40 and $0.44 respectively for the next two quarters, what to expect there will be some impact from the lower revenue base on those EPS numbers?

Robert Eberle

I think it’s fair to assume that there will be some impact. As you know we are naturally hedged on much of the foreign exchange and we did a good job managing expenses, but there may be some impact there.

Mayank Tandon

Okay. All right, fair enough and then most of my questions have been answered, but I do want to ask you about future M&A strategy or how are you thinking about that, I mean given the strong ARR numbers are you going to be focused more on the organic front for now or should we expect you to be opportunistic in terms of M&A?

Robert Eberle

Well it is a little bit of both, but it is certainly we are going to be driving the organic growth opportunities we have in front of us. And most importantly, we are not going to do anything to disrupt that. So we are not going to have a dilutive transaction that would disrupt the results, the favorable results so that we can see and with the second quarter sales just we can start to get more visibility around. So no, we will not do a dilutive transaction.

I think what we are seeing in the market we would look at opportunities, opportunistically. We are always interested in consolidating a competitor or transactions of those types. But the bar is raised in terms of what we would look for in a transaction. I also think pricing in this market is still very difficult. So we feel our timing to be focused on organic growth initiatives and Bottomline fits pretty well is what we are seeing generally in the M&A market.

Mayank Tandon

If I can just follow up with one more question Rob, in terms of healthcare I know in the past you've talked about that as being one of the secular growth drivers for Bottomline. We haven’t heard much about that lately. Has that changed with all the regulation or do you still think that longer term that scenario that you might want to be more aggressive in, whether it's organically or through M&A?

Robert Eberle

What had happened, so it certainly is an opportunity for us in the place and that is a big opportunity is around the cyber fraud and risk management. If you recall, we really looked at the technology and capability for our banking markets and our corporate customers and what we discovered is the organization we combined with are required to bring on this capability had some hospital customers and it is a fabulous fit.

Patient privacy and data security is critical because the healthcare setting is really the Holy Grail. Everything is there, so security number, credit cards, all personal information. And under HIPAA, when there is a breach, those organizations have to disclose that. So reputational risk is huge, practical risk is huge for both financial fraud and theft of different medications, and private patient privacy.

We announced a major deal with Cedars-Sinai in the May timeframe and we're in the process of implementing that. So that will really be the big kick off for us when we get that fully live then we would expect to go to market and bring on other hospitals under that platform. So I apologize if it was too long an answer, but yes healthcare is a great opportunity for us and even bigger opportunity now with patient privacy and data security.

What else I would add is, healthcare has been a wonderful vertical for us for Paymode-X. We typically just refer to it as Paymode-X, but we have a number of significant healthcare providers and it's one of the verticals where because we’ve got a number of providers on the vendor pay model, each time we go into a new hospital chain and healthcare organization, we have a pretty good percentage of their existing vendors that are already enrolled.

Mayank Tandon

All right, that's very helpful, thank you.

Operator

And our next question is from the line of Gary Prestopino with Barrington Research. Please go ahead

Gary Prestopino

Hi Rick, Rob, I couldn’t hurdle [ph] down quicker, what did you say was the processing volume for Paymode, was that 2015?

Richard Booth

Gary, it’s a $182 billion was processed through the network in calendar 2015, $182 billion and we have over 330,000 members, so vendors in the payment, in the network.

Gary Prestopino

Okay and then I'm just a little confused Rick, when you went through the guidance and you lowered the sales expectations you said there will be no concurrent impact on profitability and then one of the questioners asked will there be an impact and you said yes there will be. So, could you maybe straighten that out, will there or will there not be?

Richard Booth

So we focused on profitability as an operating income margin, the 18%. Within that and we expect there may be some small impact and the bottom line down to EPS, but not material.

Gary Prestopino

Okay, so it’s the 18% operating margin…

Richard Booth

Yes, exactly.

Gary Prestopino

Okay, that is fine, that clears that out, thank you. And then couple of things you, that the new banking deal that you signed the West Coast bank did you say that that was larger than the one you announced last quarter which you said was like somewhere between $5 million and $10 million deal overall?

Richard Booth

Yes, it was.

Gary Prestopino

Okay, is it much bigger or can you elaborate or you can't?

Robert Eberle

Yes, again half of our attendance on the earnings calls is competitors. So, I'm not going to give out the exact pricing on that, but it was, it’s a seven figure annual subscription and it’s a multi – it is a seven-year deal, so it’s a very attractive transaction.

Gary Prestopino

Okay and then last question real quickly, as you look at your pipeline is it new business is it pretty well diversified across all of your key products or is there one area where you are seeing a lot more interest?

Robert Eberle

Yes, that’s one of the things I really like about the position we sit in is we've got a number of growth drivers and hopefully it comes away from the commentary, but we had a real strong quarter Paymode-X real strong with digital banking. And I think coming behind them we've got opportunities with cyber fraud risk management and then also the PartnerSelect. So we have across the board which was part of what we did about a year and a quarter ago when we were making a bigger investment in product, we really were setting ourselves up as you just identified in multiple different product sets in verticals to drive next level growth and that’s really where we sit today.

Gary Prestopino

Okay, thank you very much.

Operator

Thank you. Our next question is from the line of Chris Kennedy with William Blair. Please go head.

Chris Kennedy

Hey guys, thanks for taking my question. Rick, just a clarification one more time on guidance, did you confirm the 16% to 17% subs and trans growth target for fiscal '16?

Richard Booth

For fiscal we confirmed the 18% to 19% subs and trans growth for '17, no change to fiscal '16 growth, so impressively yes.

Chris Kennedy

Okay, great and then can you just talk a little bit more about your visibility and how these new signings will, when they will actually hit the income statement and how that’s – how we can track that going forward?

Robert Eberle

Well, probably both are the front end, and the first thing I'd will tell you though at a product level is it really varies by product and in some cases it also will vary by an estimation of what will that transaction volume be. So in some instances it can be a modular capability that we could be live for a fixed amount in a matter of six months. In other instances it could be something like Paymode-X where somebody could be live in even as quick as a quarter, but it will take three years to fully ramp in our estimates.

The digital banking product will probably be on a full platform could be 18 months or less live as much as 18 months and that will have, during that time period we're of course absorbing all the services and implementation costs without having any revenue. So I probably didn’t help you a bit because the short answer is it varies, it varies by product and it varies by whether it is going up instantly, whether it's going up and goes to a full fixed rate subscription or its transaction volume is increasing over time.

What we do think across all of these products is there is always opportunity to grow as the customer grows, particularly in the transaction based pricing and then to grow it with by adding new capabilities into those platforms. So we would expect to actually realize over time a number bigger than the ARR we've given today assuming we're effective in years to come in selling new additional capabilities and those businesses we've sold to on a transaction basis if their business grows.

Chris Kennedy

Okay, great. And one last one if I could, on the 25% operating margin could you just give us a roadmap on kind of what the gross margin would be and then kind of what – where the leverage will be on the expense side? Thanks.

Richard Booth

Certainly, I think the most important thing is to focus on our ARR production which gives us great visibility into subs and trans growth. The subs and trans growth with our continuing strong gross margins there against a fixed cost base provides the room that we need for gross had an operating income margin expansion.

Chris Kennedy

Okay, all right, thank you.

Operator

And our next question is from the line of Brett Huff with Stephens Inc. Please go ahead.

Brett Huff

Hey, just a couple of follow ups for you guys, the 18% to 19% fiscal '17, subs and trans rev growth guide is that constant currency?

Richard Booth

Implicitly, because we didn’t adjust currency when we were doing that model.

Brett Huff

Okay.

Richard Booth

As currently continues to fluctuate the total amount will vary, but the percentage will be the same.

Brett Huff

Okay and then I want to make sure I heard the number right, 333,000, did you call them now members or vendors?

Richard Booth

Vendors or members, we use the term, so it is what you think of as a vendor, but yes we call them members.

Brett Huff

Okay. The Paymode deal growth rate slowed a little bit or the number of deals closed, any thoughts, I think it was 24 over the last quarter and maybe 14 or 16 this quarter, any thoughts on that or what the pipeline looks like?

Robert Eberle

We had some large deals in there too, so the pipeline is strong. The momentum is strong. I think hopefully we've not - I wouldn’t expect us to go from 20 to 25 to 30 to 35. 15 deals is a wonderful run rate to be at and it was a nice mix of deals. So pipeline is strong and I think we will continue to see deals in this range in the range from 15 to 24 range and couldn’t be happier with where that is going now.

Brett Huff

Okay and then in the digital banking you guys have had two quarters and two really nice wins, one question on this digital banking deal this time, it will also include the any of the fraud functionality?

Robert Eberle

No, in this case it did not, but that is always a capability we could be adding. In this case though what is interesting is this particular customer was on an existing platform or was already using our customer acquisition solution which provides the ability to bring on new customers over any channel, so it can be a mobile phone, it can be an iPad, it can be PC, but it allows them to initiate customer relationships.

So it really plays to what we are doing by broadening the capabilities that we can provide banks and be coming someone that can help them in their digital battle for continued customer retainment and growth. It was wonderful to see an existing customer dramatically expanding their relationship with Bottomline.

Brett Huff

And then what is the pipeline look like for those kind of deals, I know there is probably some in the pipeline or can you give us a sense, is it kind of thing where that could happen every couple of quarters where we have a big deal like that here?

Robert Eberle

Yes, I think - I saw – it could happen, that's what every couple of quarters makes sense. What the pipeline, there is two different things I would say, one the level of excitement and reception to our offering has been outstanding. What drives pipeline now was more than just that. It is timeframe need – the funding are all part of that. So the reception to our new offering has been outstanding. What will ultimately drive pipeline and like you said a deal every couple of quarters of this size is banks that have that funding, have that need and the timeframe where we have less control over that. But we couldn’t be in a better position at the top of the pipeline, at the top of the funnel if you will, of organizations that are impressed with and interested in bringing out some of the technologies we've now announced.

Brett Huff

Okay and then last one, I hate to belabor the guidance question, I just want to make sure I've got it, is it fair for us to assume a reasonable services margin and I don’t know what reasonable is maybe 15% pro forma EBIT services margins on the revenue that is going away in order to flow that through to the bottom line and is it fair just to assume a company average margin on the FX given your natural hedging, should that get us close to the right number on the bottom line?

Robert Eberle

I think those are reasonable assumptions Brett.

Brett Huff

Okay. That is all I needed, thank you so much.

Operator

Now I will turn it back to our presenters for closing remarks.

Robert Eberle

Well thank you, thank you for your interest. We are thrilled with the second quarter, particularly as we have indicated the progress we have made in providing indications of the return on the investments $19.4 million in new ARR. In moving ourselves forward we think we are in a very good potion and couldn’t be more confident about our ability to generate continued shareholder value. So I appreciate your interest and we look forward to reporting on the third quarter at the end of April.

Operator

Thank you. And ladies and gentlemen this will conclude our teleconference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect

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