Bottomline Breaks A Leg, And Both Arms (EPAY)

Bottomline Technologies (EPAY) revised guidance down yesterday, saying that the first calendar quarter of the year, their fiscal third quarter, would come in at $24.5 to $25 million. Media reports indicate that Wall Street expected over $27 million. The company provides software products and services for financial process solutions across a broad range of industries.

Investors have to go back a quarter to find the really perplexing news. When the company announced results for its quarter ending December 31, 2005, the top line was $26.1 million up from $24 million a year earlier. But, expenses went up and income from operations fell to $546,000 from $1,111,000 the previous year.

Buried a bit in those numbers was the fact that Bottomline's highest margin business, software licensing, was shrinking. Revenue in that area went from $5.4 million in the 2004 quarter to $3.6 million in 2005. Cost of revenue on this line item only runs about 12%. Margins in the equipment and supply part of the business, where revenue was flat for the quarter, are only 20%, so COR is 80%. The company's largest business, service and maintenance, is growing, but cost of revenue there is 42%.

Bottomline seems to be expanding the wrong business.

The company says it is making a transition to a subscription-based revenue model, and this could have an impact on revenue recognition. The company has also made a couple of acquisitions recently, but they do not seem to be having much of an effect on top line. The company has about $90 million in the bank, so the balance sheet is not an issue.

The stock has put the big hurt on investors, dropping from $18.62, the 52-week high, to below $11. If Bottomline does not come up with some good news soon, $11 could be a ceiling and not a floor.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. McIntyre can be reached at [e-mail].