MINDBODY's (MB) CEO Rick Stollmeyer on Q2 2016 Results - Earnings Call Transcript

| About: Mindbody (MB)

Start Time: 16:30

End Time: 17:12

MINDBODY, Inc. (NASDAQ:MB)

Q2 2016 Earnings Conference Call

July 27, 2016, 16:30 PM ET

Executives

Rick Stollmeyer - Co-Founder and CEO

Brett White - CFO and COO

Nicole Gunderson - IR

Analysts

Brendan Barnicle - Pacific Crest Securities

George Kelly - Imperial Capital

Brian Essex - Morgan Stanley

Patrick Walravens - JMP Securities

Michael Nemeroff - Credit Suisse

Brent Thill - UBS

Operator

Good day, ladies and gentlemen, and welcome to the MINDBODY, Inc. 2016 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Ms. Nicole Gunderson. Ma’am, please begin.

Nicole Gunderson

Good afternoon, everyone. Welcome to MINDBODY’s second quarter 2016 earnings conference call. Joining me on the call today are Rick Stollmeyer, MINDBODY’s Chief Executive Officer; and Brett White, Chief Financial Officer and Chief Operating Officer. MINDBODY’s press release was released after the market closed today and was furnished to the SEC on Form 8-K.

You can access the press release and related investor materials including non-GAAP reconciliations on the MINDBODY Investor Relations Web site. Today’s call is being recorded and a replay will be made available at investors.mindbodyonline.com. In addition, MINDBODY posted supplemental materials to this Web site and we encourage investors to check there.

This discussion will include forward-looking statements including but not limited to statements regarding MINDBODY’s business and growth strategies, demand for its products and services, product performance, partnerships and network effects.

Additionally, we will be discussing projected financial results including among others, expectations regarding profitability, gross margins, operating expenses, and guidance for Q3 2016 and full year 2016. These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections, and are subject to risks and uncertainties that could cause actual results and events to differ materially from those stated in such statements.

Please refer to the press release and the risk factors in the documents MINDBODY files with the SEC including MINDBODY’s Quarterly Report on Form 10-Q which will be filed for the quarter ended June 30, 2016 for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. These forward-looking statements are being made as of today and MINDBODY disclaims any obligation to update or revise these statements.

And with that, I’ll turn the call over to Rick.

Rick Stollmeyer

Thanks, Nicole, and welcome to everyone joining us on our second quarter 2016 earnings call. We are pleased to announce the completion of another successful quarter, featuring strong revenue and subscriber growth, record engagement across our transaction-enabled marketplace and significant progress towards profitability.

In the second quarter, total revenue grew 36% year-over-year to $33.6 million while adjusted EBITDA loss declined 62% year-over-year to $1.9 million, a strong demonstration of our continued ability to grow while on a path to profitability. We can confidently reiterate our commitment to adjusted EBITDA profitability no later than Q2 2017 without sacrificing growth.

Our total subscriber base increased 22% year-over-year while rising average subscription fees, strong payments volume growth and continued expansion of API partner revenues produced record high ARPS and 111% dollar-based net expansion rate. We are now serving 55,771 subscribers in over 130 countries and the average lifetime value of those subscribers is significantly higher than it was just one year ago. This is thanks to our focus on acquiring higher value wellness businesses and moving them up the value chain.

Meanwhile, registered consumer users on the MINDBODY app increased 90% year-over-year to more than 3.5 million people and the quantity of their in-app purchases increased 145%. As all MINDBODY app purchases are processed via the MINDBODY payments platform, our rapidly increasing consumer app engagement is contributing to strong payments volume growth and record payments revenue.

In addition, subscriber adoption of our MINDBODY Engage custom branded apps more than doubled year-over-year to over 8,000 subscribers. Engage has been a huge success story of the trailing 12 months with strong subscriber adoption indicative of our subscribers' desire for direct mobile-to-mobile engagement experiences with their customers. You can expect us to continue deepening our mobile-to-mobile capabilities in the quarters ahead while expanding adoption of all MINDBODY apps.

The second quarter was the first quarter of MINDBODY’s marketing platform adoption and we are pleased to announce that more than 2,000 of our subscribers opted into our innovative and powerful new marketing platform in just the first 90 days. Revenue contribution for the marketing platform is ramping up and it did not materially contribute to our second quarter results, but we are pleased with the rate of early subscriber adoption of this innovative and powerful marketing tool. And we have multiple initiatives in process that we believe will accelerate both subscriber adoption and consumer engagement of our marketing platform moving forward.

In the trailing 12 months, people around the world attended over 445 million class and appointment sessions and made nearly $8 billion in purchases through our transaction-enabled marketplace. This scale of activity is attracting a new wave of exciting partnerships. We recently entered into an exciting platform agreement with Under Armour whose consumer apps power the world's largest digital health and fitness community. We deeply admire the Under Armour team and will be working closely with this outstanding company to help other greater numbers of people improve their health and wellness.

We also partnered in the second quarter with wellness pioneer Deepak Chopra to connect MINDBODY’s network to his recently released Jiyo wellness app, spelled J-I-Y-O. You can find it in the iTunes and Google Play stores. The Jiyo app is amazing. Deepak never thinks small. His stated goal is to reach more than 1 billion people around the world with Jiyo so that they may learn simple proven techniques to live healthier, happier lives.

Deepak’s cause resonates deeply with the entire MINDBODY team and connecting his massive audience to the more than 300,000 wellness practitioners on our platform is a match made in heaven, and we are thrilled to be working with him. These second quarter accomplishments point to the success of our three-dimensional growth strategy which connects a focused subscriber acquisition model to deepening relationships with our existing subscribers to multiple initiatives to connect the wellness practitioners we serve to a more growing consumer audience.

The combined success of this strategy produces the powerful platform network effects we see taking hold across our business. The entire MINDBODY team have much to celebrate. Our brand is expanding beyond just the businesses we serve and is now increasingly recognized by people around the world. This is contributing to our strong performance across all key metrics and positioning us for sustained growth and profitability in the years ahead.

As our business continues to grow in both scale and sophistication, it has become increasingly important to me to focus on setting and communicating our vision, mission, and strategy. I enjoy that work immensely and this is where I'm certain I have the highest value for our team, our customers, and our stockholders. And it is therefore my deep pleasure to announce that Brett White has accepted the expanded role of Chief Operating Officer in addition to his duties as Chief Financial Officer.

Brett has worked side-by-side with me since his arrival in July 2013, learning all operational aspects of our business from the tiniest details to the formulation of our global growth plan. Brett played a pivotal role in preparing us for our successful IPO 13 months ago and has built a world-class finance and accounting team. He’s earned the highest respect of our team, our Board of Directors, and our stockholders, and I've no doubt his additional focus now on operational execution will benefit the company and its stakeholders for years to come.

I’d like to close by highlighting our favorite MINDBODY event of the year, the annual MINDBODY BOLD conference to be held this year on October 5 and 6 at the Loews Hollywood. MINDBODY BOLD is our capstone user conference event that builds on the momentum of our regional MINDBODY University events held throughout the year. At BOLD, our remarkable business owner clients and prospects will travel from around the world to spend two full days with us networking with their peers and learning how to run their businesses more effectively.

They come and they do this because the best practices we have learned across more than 16 years serving this community are proven to help them run businesses that are highly successful and long-term durable by simplifying their operations, boosting the revenues, and focusing on their customers. And this year we’re particularly thrilled to welcome our new technology partner Deepak Chopra, and fitness expert Jillian Michaels as our keynote speakers. Deepak and Jillian are renowned leaders in their field and we expect their uniquely inspiring insights to add unparalleled energy to BOLD 2016.

With that, I’ll turn the call over to Brett.

Brett White

Thanks, Rick. We had a strong second quarter. Total revenue grew 36% year-over-year to $33.6 million. Subscription and services revenue increased 35% year-over-year to $20.1 million and represented approximately 60% of total revenue. Core subscription revenue growth remained strong and Q2 saw normal sequential seasonality in consumer bookings, the primary driver of our API partner revenue.

Payments revenue, which we recognized net of all third-party processing fees, increased 39% year-over-year to $12.9 million and represented approximately 38% of total revenue. Product and other revenue was approximately $545,000, down slightly year-over-year consistent with our expectations.

Looking at revenue geographically, for the second quarter of 2016, 83% of revenue was from the U.S. and 17% international consistent with the past several quarters. For the remainder of my commentary, unless otherwise noted, I’ll discuss non-GAAP results which exclude the impact of stock-based compensation expense and accretion of redeemable convertible preferred stock. A reconciliation to the corresponding GAAP results can be found on our Web site at investors.mindbodyonline.com.

In the second quarter, gross margin was 68.7%, a 380 basis point improvement from 65% in the second quarter of 2015 and in line with our expectations. We expect gross margins to range between 68% and 70% for the remainder of the year.

Sales and marketing expense which includes our investment in acquiring new subscribers, deepening relationships with existing subscribers, driving adoption of our payments platform and bringing more consumers to our subscribers was $13.3 million or 40% of revenue compared to 10.9 million or 44% of revenue in the second quarter of 2015.

R&D expense was $7.1 million or 21% of revenue compared to 5.3 million or 21% of revenue in the second quarter of last year reflecting our commitment to continuously improve and expand our wellness services platform, which consists of our industry leading business management software, our popular consumer apps, our growing API partner platform program and our emerging fee-based marketing platform.

G&A expense was $6.4 million or 19% of revenue compared to 6.6 million or 27% of revenue in the second quarter of last year, showing ongoing leverage. Adjusted EBITDA was a loss of approximately $1.9 million or 6% of revenue, an improvement from a loss of 5.2 million or 21% of revenue in the second quarter of 2015.

Non-GAAP net loss was $4.2 million or 12% of revenue compared to a loss of 7 million or 28% of revenue in the second quarter of last year. Non-GAAP EPS was a loss of $0.10 per share compared to a loss of $0.21 per share in the second quarter of 2015. Weighted average shares outstanding for the quarter was 39.7 million.

Turning to the balance sheet, we finished the quarter with cash and cash equivalent position of $87.9 million and no debt. In the second quarter, we used approximately $1 million cash in operating activities and 2.7 million in capital expenditures.

Our four key metrics were strong again in the second quarter. Subscribers grew 22% year-over-year to 55,771 at the end of Q2. We added 2,168 net subscribers during the second quarter compared to 2,965 a year ago. Our focus on higher value subscribers is generating positive results with the number of brick and mortar subscribers added during Q2 exceeding both last quarter and Q2 of last year.

Average monthly revenue per subscriber or ARPS was approximately $202, which represents 9% growth year-over-year. Payments volume was $1.6 billion, a 29% increase year-over-year compared to a 23% increase in Q2 of last year. This continued strength in payments volume is reflective of the overall health of the wellness industry we serve both in same-store sales as well as new location openings.

Our dollar-based net expansion rate was 111% compared to 115% a year ago. This metric indicates that for the cohort of subscribers who are on board in June of 2015, their revenue grew to 111% by June of 2016 net of all attrition.

Turning to guidance. We expect revenue for the third quarter of 2016 to be in the range of $34.5 million to $35.5 million or 32% to 36% growth from Q3 last year. We expect non-GAAP net loss for the third quarter to be in the range of $4 million to $5 million and weighted average shares outstanding for the third quarter of approximately 39.8 million shares.

We expect revenue for the full year 2016 to be in the range of $137 million to $139 million reflecting full year growth of approximately 35% to 37%. We expect non-GAAP net loss for the full year 2016 to be in the range of $16.3 million to $18.3 million. We expect weighted average shares outstanding for the full year of approximately 39.7 million shares. For Q4, we expect weighted average shares outstanding of approximately 40 million shares.

In summary, we are very pleased with our strong second quarter performance. We are in a leadership position in a highly valuable, rapidly growing global market. We look forward to continuing to execute along our path towards growth and profitability.

With that, I’ll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question will come from the line of Brendan Barnicle from Pacific Crest. Your line is open.

Brendan Barnicle

Thanks so much. Rick, I was intrigued by the early success with the marketing product and I was wondering if you could provide just a little more color on how some of those initial 2,000 subscribers were using the product?

Rick Stollmeyer

Sure. So the marketing platform right now, it has the single functionality. It’s going to be expanding down the road but right now what it does is promote introductory offers. And certainly introductory offers are something that our subscribers have been doing for many, many years. They have a distinct characteristic and you can only purchase them once. So the desire is to get those offers out to people who may not have known about your business or have certainly not attended your business in the past. And so they’re using our platform now to sell those offers and promote those offers onto a larger audience. You can expect us to be expanding the things that can be offered to this platform and expanding the channels by which that inventory is sold in the periods ahead.

Brendan Barnicle

Terrific. And could you give us any update on what you’ve seen in the hair and salon market in the second quarter?

Rick Stollmeyer

Yes, we continue to see solid growth in the hair and salon market. We’ve spent more energy in the last 12 months on the fitness market, because it’s just been so white hot. And we are of course in a leadership role around the world and wanting to continue the rapid growth and really kind of have the majority of the target audience on our system soon. But the salon market is a solid place for us. You can expect us actually to be focusing more on salon in the back half of the year. And we get great reviews off of our software from independent, mobile salons to big names, some of the major salon chains that you find in Manhattan and West Palm Beach and places like that.

Brendan Barnicle

Great. And then, Brett, just one last one for you. First, congratulations on your promotion.

Brett White

Thank you.

Brendan Barnicle

What I’m trying to look at is you were talking about a little bit slower sub growth, because higher quality subs but then net dollar amount year-over-year was down a bit. Can you help me reconcile those two pieces?

Brett White

Sure. So let’s start with the dollar-based net expansion rate. What that measures is the revenue derived from a cohort of subscribers in June 2016 based on the subscribers that were onboard in June of 2015. So as long as that number is greater than one; that means that the growth of that cohort of subscribers exceeds any attrition. The reason it’s down a little bit is because frankly June of 2015 was a fantastic quarter. We had 22% ARPS growth. We had I think about a 20% increase in basis points, because we had just renegotiated the cost side of one of our largest payment processers. So the answer is the business is still doing great, it’s just a tough comp Q2 to Q2.

Brendan Barnicle

Terrific. Thanks for the clarity. Thanks, guys.

Brett White

Sure.

Operator

Thank you. Our next question will come from the line of George Kelly from Imperial Capital. Your line is open.

George Kelly

Hi, guys.

Rick Stollmeyer

Hi, George.

George Kelly

First, if I could just follow up on the last question. You mentioned about your marketing initiative that you expect new offerings in potentially new channels. What kind of timing – is this something that we could expect to see more on later this year?

Rick Stollmeyer

Well, I think as we indicated, there’s a relationship with Under Armour and you’re going to be hearing more about that very soon. We expect to have some joint press releases. What we’re doing as far as in the software to provide more capacity to promote the businesses on our system, of course we’re not going to signal the exact things that we’re going to be doing. And it’s always dangerous to preannounce release dates. So I won’t do that. But I will tell you these are things that are in process right now, it’s not long term.

George Kelly

Okay, great. And then a question on the international business, any kind of numbers you can point to from the quarter or big customers – anything internationally, which you can talk about?

Rick Stollmeyer

I think a couple of things that would be nice to look at. First of all, we were all curious to see if Brexit had any impact on us and we’re pleased to note that our local team in London and why Boston [ph] were a little bit concerned in the weeks following. But it seems like things have kind of returned to business as usual. In terms of same-store sales, in terms of business formation, deal closures, things look very healthy for us in the UK and the EU. Way across on the other side of the world, our Australian team just continues to knock it out. And we’re extremely excited about the opportunities not just to continue growing in Australia and New Zealand but start moving in significant ways through the Pacific Rim.

George Kelly

Great. And then last question, one of your bigger API partners tweaked around their pricing this spring and can you comment at all about what you’ve seen? Is your API partner revenue stable, did it grow off of the first quarter? What are you seeing there?

Rick Stollmeyer

First of all, there’s a sequential effect that’s important to note. So we all come out of the holidays full of good intentions and New Year’s resolutions. And as a result, the fitness and wellness industry just kind of explodes in the first quarter of every year. So you see a large increase in the attendance, like both classes and appointments across our ecosystem. And that’s part of the big pop you saw in revenue in ARPS in the first quarter. And what naturally happens and it has happened every year since we launched our business more than a decade ago is a flattening. It all kind of plateaus in the second quarter, then starts building again in the third quarter to the end of the year. And so we saw a similar phenomenon this year. As far as particular platform partners there’s multiple platform partners that have launched businesses that help our subscribers move off peak inventory. And what you’re seeing right now is it’s a new industry. It was born on our platform and they’re still iterating, they’re still learning how to develop a business that grows properly that gives a nice gross margin. And so yes, we have seen price evolution and movement across multiple partners, we think that’s healthy. It shows that there’s a sustainable dynamic market out there. And long term, we think it’s very good for us.

George Kelly

Thank you.

Operator

Thank you. Our next question will come from the line of Brian Essex from Morgan Stanley. Your line is open.

Brian Essex

Hi. Good afternoon and thank you for taking the question. I was wondering if you could talk a little bit to follow-on to a few other comments about the rate of additions and to subscriber growth. We’re looking at, for example, this quarter about just under 2,200, last quarter just over 2,100 subscribers added onto the platform. Last year, you were adding 2,000 subs onto the platform. I understand you’re focusing higher quality subscribers, but how do you intend to – I guess what are the expectations as far as progression there and how do you expect to grow that relative to the revenue added onto the platform?

Rick Stollmeyer

Well, we expect it to start gradually ramping up again. But what we learned so well, Brian, over the last year, year and a half is that there’s a real diversity and capability and quality and likely lifetime value of these businesses, particularly when you add solos into the mix. Solos is a course of a non-brick and mortar and they could be a teacher, a trainer or a therapist who’s actually making a living from their practice. They’re working 30, 40 hours a week, they’re going to have significant payments volume, they’re going to have a real amount of inventory to add to our platform. And we have people that are just kind of frankly hobbyist. And so by raising the price of solo and changing some of our marketing lead generation strategies, we’re aiming toward those people that are in the former category. And so while year-on-year when you look at raw subscriber growth, it looks like, boy, it went down. Actually, it didn’t. We boarded more brick and mortar subscribers in Q2 of this year than we did a year ago. And the average subscription revenue of those brick and mortar subscribers is significantly higher this year than it was a year ago. And then on top of that, selling additional subscription such as the Engage and the marketing platform agreement into these people, the strategy is working really well. I think the key thing that you should look for from us moving forward is a focus on quality and then steady increases kind of from this space moving forward would be what we look for. But to put a fine point on it, our marketing team now is actually doing a concerted effort to qualify leads before they’re even given to sales specialists. We have a whole new cohort of people called marketing qualified representatives or market qualification representations who will actually disqual a lead because they don’t meet our criteria. That’s not an approach that we were taking in past periods. So we think it’s a long-term benefit, recognize that what it amounts to several dollars in MSR right now will amount to much greater differences in payments volume and marketing platform revenues in future periods.

Brian Essex

Got it. And then maybe to follow up on a prior question as well. As you target this salon space towards the backend of the year or you shift your focus more towards the salon space, how might your spend and focus on operations in the business change? And what might be – how might we expect that to manifest itself in OpEx?

Rick Stollmeyer

You won’t see it in OpEx. Our cost of acquisition of salons, it’s a bit higher than fitness but not a lot higher at this point. To be very clear to everyone listening, we’re certainly not going to be slowing down in fitness. It’s just that now we have the capacity to be continuing our growth in fitness and opening up the front in a serious way in salons and spas again. And we’ve got frankly product improvements over the last year that we think even better position us than we were in '15. So I don’t think I see it in OpEx. You can continue to expect to see us driving down the EBITDA and losses and net losses until we get to that profitability that we’ve promised next year.

Brian Essex

Got it. And what about on gross margins, your onboarding costs, it strikes me as that space may be a little more complex and require a little bit more education as opposed to maybe a sole practitioner in the health and wellness space. How is the onboarding expected to impact your margins?

Rick Stollmeyer

It’s about on par. Salons and spas have their own special flavor of complexities but in many ways they’re simpler. If it’s a Pilate's studio, they’re going to have classes, appointments and workshops whereas the salon is only appointments. Conversely, salons now have a lot more retail going on. And so what’s important is that onboarding team understands those distinctions, and we do. We’ve been boarding material amounts of salons every quarter for the last several years and we’re now among the leading cloud-based salon software providers in the world. So we know what we’re doing. It’s not going to change gross margins. As Brett indicated, 68 to 70 is a good range to expect for the quarters moving forward.

Brian Essex

Got it. Thank you very much.

Rick Stollmeyer

You’re welcome.

Operator

Thank you. Our next question will come from the line of Patrick Walravens from JMP Securities. Your line is open.

Patrick Walravens

Great, thanks. Can you guys hear me?

Rick Stollmeyer

Yes.

Patrick Walravens

All right. Congratulations on the quarter. So I really like this whole discussion around targeting your new customers a little better, and I was wondering if you could maybe walk us through how that’s going to impact your cost of acquisition and how you think it will impact the lifetime value of your customers?

Rick Stollmeyer

Sure. Well, it’s relatively neutral to cost of acquisition. The cost of acquisition is primarily the sales and marketing and onboarding expense, with sales and marketing being the bulk of it. So that’s relatively neutral. It’s just about where you’re aiming your marketing strategies. And so of course we’re not going to give away all of our secret sauce, but I will give you an example. We have significant presence in the major metropolitan areas around the world, we can leverage the customers we already have in those areas and all you got to do is take the MINDBODY app and zero in on San Francisco, north side of Chicago, Manhattan, West L.A., and you can see these clusters of businesses and we can start leveraging them to refer across other verticals, the yoga studio owner who attends that hair salon and recommends us. And so there’s just one example, it’s actually very affordable to leverage that and that’s of course in a major metro area, which is logically going to have significantly higher ARPS. There’s just more business volume per square foot and per subscriber that it’s going to our payments platform in those places than it would be in a second or third tier town. Secondly, we can and are incentivizing now our sales specialists to focus on major metropolitan. That’s just one dimension of higher value, higher potential new subscribers. Now what it means is they’re taking the time to actually discern is this business in these categories that we want them to focus on. So to some degree it slows down subscriber acquisition a little bit but way made up for in the much higher LTV. This is what we didn’t understand as well in past years was how do we understand these different cohort groups and their wildly different lifetime values? And we talked about some of these numbers before, but you can just – these businesses can easily be worth more than $1,000 a month to us in ARPS when we focus them properly.

Patrick Walravens

Okay, that’s really helpful. And then, Brett, if you wouldn’t mind and maybe I missed it, but what exactly is the issue with giving EPS guidance? What’s the challenge there?

Brett White

There’s no challenge. It’s just math. The numbers that we choose to guide to are revenue, non-GAAP net loss and the share.

Patrick Walravens

Do other businesses typically do that, guide EPS?

Brett White

Yes. We’ll take a second and look at it.

Patrick Walravens

Okay. Thank you guys very much.

Rick Stollmeyer

Thanks, Pat.

Brett White

Thanks, Pat.

Operator

Thank you. Our next question will come from the line of Michael Nemeroff from Credit Suisse. Your line is open.

Michael Nemeroff

Hi, guys. Thanks for taking my questions. So just looking at the subscriber growth this quarter and understanding that you’re focusing a little bit more on the higher value subs, how should we think about that subscriber growth going forward? And then if we could just maybe dig in on the 2,168 number this quarter. Could you maybe give us a sense what were domestic versus international? I think that’s where we’re looking for some growth.

Rick Stollmeyer

Okay, sure. So I think that our expectation is subscriber growth stays similar to the numbers you’ve seen in the last two quarters with a gradual ramp. And understanding that the total subscription revenue being added though is significantly higher year-on-year. So that translates into less of the lower pricing tiers and more of the higher pricing tiers. And then as far as international versus domestic, Brett, can you provide some color there?

Brett White

Yes, I’d say about – I think our last statistic was about 75% of our subscribers are U.S., 25% international and right now I think international is growing faster than the U.S. on a subscriber basis.

Rick Stollmeyer

Yes. In fact, we can share one number that I know of is that our UK, EU subscriber base increased 33% year-on-year, for example, against the 22% global. And similarly --

Michael Nemeroff

That’s helpful.

Rick Stollmeyer

Yes, and similarly better than those averages in Australia and New Zealand.

Michael Nemeroff

That’s really helpful. And then if we can maybe just talk about the payments a little bit. If you can maybe just update us what percent of payments are you capturing at your customers currently? And then also how are the payments volumes trending internationally too?

Rick Stollmeyer

Sure. So I’ll take the second question first while Brett pulls up that first number. We actually have a slide that speaks to that point. The total transaction volume --

Brett White

It’s 5.8 trailing 12 months that we process versus 7.9 through our platform.

Rick Stollmeyer

So to say that again, 7.9 billion in transactions flowed through our platform and of that, 5.8 billion went through our payments platform. And so closing that gap is one of our big opportunities and we’re just gradually closing it. The largest area to start closing the gap of course is overseas where we just opened up the key payments methods in the last year, year and a half. And so we’ve had a good couple of quarters in Europe and in Australia, in New Zealand. Starting to sell into Hong Kong and we expect to keep doing that more.

Michael Nemeroff

That’s great. Thanks very much for taking my questions.

Rick Stollmeyer

Thanks, Michael.

Brett White

Thanks, Michael.

Operator

Thank you. [Operator Instructions]. Our next question will come from the line of Brent Thill from UBS. Your line is open.

Brent Thill

Good afternoon. Rick, many of the metrics; total revenues, subscription and payments, the year-over-year growth slowed. Realized the comp was big from last year but just away from the comp, there was really from your perspective no concerns on the organic underlying business that you’re seeing. Obviously, we’re just looking at these growth rates across the board and everything slowed down a tick.

Rick Stollmeyer

Yes, no concerns. What we have here is there’s a typical seasonality that flattens out the transaction-based revenue streams which are, just to remind everyone, are the payments volume as well as the API partner revenue streams, which are primarily based on volume of consumer activity. There were some unique things that happened in Q2 of '15 that gave it a pop from Q1 to Q2 that weren’t present in Q2 of '16. So what you’re seeing in this phenomenon is going to be more typical of future years. The underlying business is very strong. The focus on higher value subscriber growth will take quarters to truly manifest itself, because what’s really about again as the payments volume and the ability to monetize API volume, and that develops over many quarters with each cohort group.

Brett White

And Brent I think I would just also add to that. If you look at just the core payments business, payments volume grew 29% year-on-year versus 23% year-on-year last year and bips grew 8% year-on-year as well, plus bips grew sequentially. So payments business is in great shape, very healthy. The subs and services line you saw sequentially had some of the seasonality that Rick mentioned.

Brent Thill

Okay. Brett with your new role and Bob leaving, can you just talk through that transition? And correct me if I’m wrong but I think in terms of Bob, was he physically located in your office or he was remote? So just trying to understand the transitional risk, it seems like you’re probably even – were even closer to the core business than maybe Bob was at the time of departure here?

Rick Stollmeyer

So I’ll start and then Brett can follow up. So Bob and I since we began our business partnership back in 2004, we’ve always been bicoastal. He lived in The Hamptons in New York and I’ve of course always been in San Luis Obispo. And Bob’s not leaving the company at this moment. Bob’s actually going to be helping to focus on some of our efforts in Europe. Your point is right on and that is in terms of risk, Brett is much more closely involved right now with the entire operation and literally his office is down the hall from mine. So it’s actually an easier communication path and he’ll have significantly more responsibilities as COO than Bob has had recently.

Brett White

Yes, and I’d say it’s kind of a natural extension. CFOs today are just kind of a wash-in data and especially our business, which is very, very metrics-oriented. So I spend all my day in metrics and actually looking at the operational pieces of the business. And so this is just kind of a next logical extension. Well, now I can actually engage in addressing areas of opportunity and working with our executives to bring them together, to execute, to prioritize and do the things. And so it’s kind of just the next logical step of what I’ve been doing for the last three years.

Rick Stollmeyer

That’s absolutely right.

Brent Thill

Okay. And real quick, just a follow up, Brett; sorry, Rick, on the Under Armour. Can you – I know you were pretty vague and maybe that’s all we’re going to get for now until you clear more details, but what’s the shape and kind of fuels this relationship going forward? That’s obviously a significant brand --

Rick Stollmeyer

The most important thing that --

Brett White

Yes, they are a significant brand. We have a lot of alignment around strategic focus. I think what excites us about Under Armour the most is their focus on technology and digital apps. They own MyFitnessPal, they have Under Armour Record, MapMyFitness and a significant user base that you can probably imagine correlates to the folks that are target audience for the businesses we serve. So that kind of tells you why we’re getting into a relationship together. There’s ways that we can be mutually beneficial to each other and I think I’m not allowed to say any more than that.

Brent Thill

Great. Thank you.

Rick Stollmeyer

Brent, I’ll give you one month – since you’re asking about health, I’ll give you one other interesting statistic on health and this goes to subscribers. The MSR, so that’s the initial subscription value of subscribers boarded, this quarter was the highest it’s ever been. So more to onboarding higher value subscribers, driving payments revenue through them, just another data point for you.

Brent Thill

Thank you.

Operator

Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Rick Stollmeyer for closing remarks.

Rick Stollmeyer

Well, thanks everybody for joining us. Hopefully, we’ve laid out the case today that what we have is a multifaceted growth strategy. We expect this business to continue to grow in the kind of levels you guys have seen historically for many years to come and crossover into profitability in less than a year. So, we’re pleased with our results and we’re excited about the future. Thanks a lot and take care.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day.

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