Bottomline Technologies (de), Inc. (NASDAQ:EPAY) Q1 2020 Results Earnings Conference Call November 8, 2019 8:30 AM ET
Rob Eberle - President and Chief Executive Officer
Rick Booth - Chief Financial Officer
Conference Call Participants
Andrew Schmidt - Citi
John Davis - Raymond James
Gary Prestopino - Barrington Research
Mayank Tandon - Needham and Company
Brett Huff - Stephens
Robert Napoli - William Blair and Company
Matthew Roswell - RBC Capital Markets
Terry Kiwala - First Analysis
Ladies and gentlemen, thank you for standing by, and welcome to Bottomline's First Quarter 2020 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, 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. 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. Later, we will conduct a question and answer session. [Operator Instructions]
I would now like to turn the conference over to our host, Mr. Rob Eberle. Please go ahead.
Good morning and welcome to the first quarter fiscal 2020 earnings call. Thank you for your interest in Bottomline. I'm here with our Rick Booth, our CFO. Rick will provide a detailed review of the quarter's financial results and our guidance going forward. And then, as always, both of us will be available for questions following his remarks.
First quarter was a strong quarter highlighted by accelerating subscription revenue growth, booking success, positive customer engagement and continued advancement of our products. We grew subscription revenue and our targets 15% to 20% range and are committed to doing so throughout the fiscal year.
It's the primary objective of our strategic plan and our top priority. I'll start my comments with a brief overview of the financial highlights for the first quarter. Subscription revenue grew 16% on a constant currency basis. The acceleration of our subscription growth rate is aligned with a focus on this valuable revenue stream.
Subscription revenue was $80.1 million for the quarter. We now have $320 million annual subscription revenue business, one step closer to the $500 million we've targeted in three to four years’ time. That's an important business payment franchise.
Subscription bookings were $21.2 million. Revenue overall was $108.2 million. EBITDA was $23.6 million and EPS was $0.30 above our target and expectations. And finally, we ended the quarter with $95 million in cash after stock repurchases of $10 million.
Financial results we're seeing demonstrate the alignment of the market opportunity, a strategic plan or investment in our products set and in our execution. Perhaps the most important result in the quarter was the acceleration of subscription growth. It's a strong start to the fiscal year. It's right in line with our plan to grow subscription revenue at our target 15% to 20% rate throughout the year. It makes our longer term target of $500 million in subscription revenue all the more achievable, and a fundamentally demonstrates the appeal of our product set and the size of our market opportunity.
During the quarter, we saw broad-based demand translate into strong subscription bookings of $21.2 million. I’ll give some examples of the market success we saw on the quarter, starting with Paymode-X.
We have a large opportunity with Paymode-X to be the way businesses paying get paid. During the quarter, we signed 32 new payers to Paymode-X, a record, including several payers that signed on pre Paymode-X excellent visa payables. The new payer’s sign-ons represented the number of articles and demonstrates the massive future opportunity.
New payers on this system include one of the leading e commerce companies, a major furniture manufacturer, several hospitals and healthcare providers, and two universities. The breath of the new payers shows the universal appeal of the platform. As in the past, the contribution from Bank of America was strong. And we also sign on to the Fifth Third, TD Bank, Citizens and UMB.
During the quarter we also grow our direct sales efforts for Paymode-X. We're fully committed to our bank channel partners, but at the same time as a sales opportunity beyond what we achieve with them through the banks. This is a significant investment for us. But one which we're confident will have a strong return in FY 2021 and beyond.
Finally, from a product perspective, we launched enhancements to the Paymode-X platform, including new capabilities for invoice automation, which leverage artificial intelligence, additional virtual card capabilities that expand our addressable market opportunity. And we unveiled the network payments score, providing Paymode-X payers with increased confidence in the security of payments, simple, straightforward and intelligent.
The network payments score provides visibility, their irregularities and potentially risky payments based on insights and roles but whether it's the transaction history, and community data drawn from the massive database spam that flows across the Paymode-X network.
We had a solid quarter and legal spend management as well, signing three new deals in the quarter. We continue to grow in the legal spend market by deploying the waiting platform and launching additional offerings which the company had. During the quarter, we had seven customers expand their relationship with new product offerings.
Turning to international markets. We had a really strong quarter for the business payment and financial messaging in Europe. Any uncertainty around Brexit is not showing up in our growth of bookings. Our European product set had a record bookings quarter and was second only to Paymode-X in its contribution to our total bookings number.
The strength of our European results speaks to opportunity, product set and execution, continually evolving payment standards like Open Banking and PSD2 creates new opportunities. Our relationships with banks in London and across Europe is strong and provides lots of new product sets and innovation opportunities.
Finally, our team is experienced, committed and knowledgeable and our execution has been strong. As a result, we see the opportunity in Europe only getting bigger and better. A product set, our strategy and our go-to-market efforts are all working well and will produce continued growth.
Finally, we had a solid sales quarter and banking with four new deals, including one major platform DBIQ deal, and our second customer and our new insights platform. I'll make a few comments on each. Our platform deal was for DBIQ with our cyber fraud secure payments. This was an important win for a number of reasons.
First, it was a relatively small bank, with roughly 5 billion in assets. There's a misconception and we only play well for large banks. That's simply not the case. Bottomline is the right solution for any bank serious about growing their business banking franchise. We can deliver the business banking and treasury management capabilities, small and medium sized banks need to retain and deepen relationships with their largest customers and drive up market growth, all an attractive SaaS model price point.
The thoroughness of this bank selection process is another reason that choice of Bottomline is particularly meaningful. The bank looked at all their options, and engage the top industry consulting firm in the process. Adding a new customer to our platform is always rewarding.
Doing so in this case is particularly gratifying as it confirms our strategy and the investments we are making to support that strategy are all on target. The other exciting signing in the quarter was a bank that selected our new relationship management and insights capability. This is important because it was a new relationship and a new offering. Bank will be using our solution to provide customer intelligence and insights to the commercial banking and wealth management groups. We know insights as an exciting capability for commercial banks, to see it chosen by a new bank, not currently on our platform, and to be at the point for wealth management and commercial banking suggests the market may be much, much larger than we initially thought.
Before finalizing my remarks, I'd like to comment on some of the customer interaction I've had in the past quarter and what that tells me about the future for Bottomline, I'll comment on two areas in particular, Paymode-X and Banking Solutions.
The opportunity in Banking Solutions is huge, and we are executing against that as evidenced by our record number of new payer signings. The new news is there's an increased appetite and interest from customers to replace their legacy payment process. The breath of our integrated payables makes BT a compelling choice for that task. And our scale, experience and security features make us the safest partner as well, much safer than going it alone.
With Sinclair momentum with our bank channel partners, and with our expanded direct sales team, I'm confident we have continued strong growth ahead of us. During the quarter, I had the opportunity to meet with a number of our bank customers and bank prospects. The opportunity we have with their organizations is large and growing. Importance of our technology comes across in every interaction I have. Banks rely on us today. But more importantly, they're counting on us for the future technology advancement, innovation they need to compete, win and grow.
And whether it's new payment standards, and the ever expanding cyber security threat are just a few of the examples of the challenges they're counting on Bottomline to help them address. That translates into demand for our DBIQ platform, or insights customer analytics and engagement capabilities, real time and faster payment types and cyber fraud solutions.
In addition to product leadership, we’ve also established trust with this important customer group. At a recent senior bank and executive dinner with CIOs, CTOs and heads of commercial banking, we held around AFK, a prospective customer who was invited said, I can't believe you invite your prospects to a dinner with all your customers. My response was simple. Of course we do. Existing customers are key element in our continued sales success and market wins. Our existing customers and reputation we've earned as one of our most valuable assets. In fact, aligning our customers and being a trusted innovation partner is a theme across all of Bottomline. We know that is the foundation for long standing relationships that continue to grow over time.
So in summary, it's an exciting time for Bottomline. We said this year would bring an acceleration and growth, and we're seeing that occur. The 16% subscription growth is just the beginning of what will be a very good year and beyond the coming year, we have a technology set and plan to drive to 500 million in subscription revenue in three to four years’ time. We're confident in our strategic plan, and confident it will drive shareholder value.
So with that, I'll turn it over to Rick, and then we'll open up the call for questions.
Thank you Rob, I'm pleased to report on a strong quarter, with 16% subscription revenue growth on a constant currency basis and subscription bookings at 21.2 million. This is a solid start to a year in which we expect each quarter to be within our targeted 15% to 20% subscription revenue growth range based on visibility through multiple drivers, including sign backlog, implementation success and timing and growth within existing customers.
The results of the quarter were above expectations on almost every metric. These results provide early evidence of the accelerating subscription revenue growth we see in fiscal 2020 and beyond.
Subscription revenue grew 16% on a constant currency basis to $80.1 million. And while we're focused primarily on subscription revenue growth, we also produced total revenue of $108.2 million, $0.30 earnings per share, and EBITDA of $23.6 million, each of which was above expectations.
I'll focus the body of my remarks today on three major topics. First overview, our Q1 financial results in detail, then I’ll provide guidance. And finally, I'll provide my perspective on the most important items in the quarter, and how they tie into our long term economics.
To review our financial results in detail, I'll speak briefly at each line in our P&L. And in addition, we posted supplementary materials to our website for your reference. Subscription revenue continues to be our clear priority. Growth of 16% on a constant currency basis was within our 15% to 20% goal for subscription revenue growth.
We're confident this growth will remain within our 15% to 20% range, because we have visibility through multiple growth drivers, including sign backlog, implementation success and timing, growth within existing customers and expanding our customer base through additional signings.
With $80 million of subscription revenue in the quarter, we're a $320 million run rate subscription business. And at this rate 74% of total revenue came from subscription offerings, up six full percentage points from a year ago.
Maintenance revenue is the other component of recurring revenue, and recurring revenue comprised 89% of total revenue up three percentage points year-over-year. This gives us excellent visibility to upcoming results.
License revenue, on the other hand, by design is only a small part of our overall business. As such, license revenue of $2.6 million was down $2 million year-over-year, consistent with our plans strategy to emphasize our subscription products. We expect similar levels of license revenue for the remainder of the year.
Services, which we offer only as needed to help our customers succeed were $8.7 million in the quarter, bringing total revenue to $108.2 million. We also had solid sales execution, we signed 21.2 million of new subscription bookings, led by Paymode-X. This brings us to 87 million in new subscription bookings over the last four quarters, equivalent to 28% of subscription revenue in the same period. Our bookings figures or estimates and customers take time to implement and ramp to full revenue production; this provides us with visibility to future subscription revenue growth, in fiscal 2020 and beyond.
Our Paymode-X network added 32 new payers across five channel partners. This validates the attractiveness of our highly secure full payment automation value proposition and channel partnership approach. We signed three new insurers to our legal spend management network, and another seven insurers expanded their relationships with us, with additional modules or additional divisions adopting our solutions.
We signed four new customers in our digital banking product set, including one new platform customer who signed up for both payments and cash management and cyber fraud risk management. With the signings, and after go-lives in the quarter, we have approximately 17 million of annual digital banking subscriptions which are signed, but not yet being recognized in our P&L.
The implementations themselves continue to go very well, with another large customer live in the quarter, and six more large banks in a variety of smaller bank scheduled to go live in the second half of the fiscal year. This visibility gives us high confidence the banking noted [ph] 15% to 20% growth within fiscal 2020.
These bookings and sign backlog give us confidence that our targeted investments and product development and sales and marketing are bearing fruit and provide excellent visibility to revenue growth acceleration in fiscal 2020 and beyond.
Equally important, our continued product innovation, and competitive differentiation in this large and growing business payments market give us confidence in our path to 500 million of subscription revenue within three to four years.
While focusing primarily on growth, we delivered on our financial commitments, while investing to advance our solutions and recognizing less software revenue in the quarter. EBITDA of $23.6 million was 22% of revenue, core operating income was $17.5 million, and core earnings per share were $0.30, all at or above expectations.
Even more importantly, subscription, gross margin of 60% was up 2.6 percentage points year-over-year, as we added $10.3 million of subscription revenue, of which 78% flowed through to gross margin.
This margin expansion reflects the power of our business model to scale in a sustainable manner as we aggressively pursue our growth agenda. This agenda includes investment in product development, sales and marketing. Development with $16.7 million in the quarter, were 15% of revenue, up one percentage point year-over-year, still a lean and efficient level of spends.
Sales and Marketing expense was $20.7 million or 19% of revenue, up also up one percentage point year-over-year. While, G&A expense was $8.3 million with 7.7% of revenue. From a cash flow perspective, we generated $18.1 million of operating cash flow. And as planned, we use $10 million to repurchase 233,000 shares within the quarter. This allowed us to end the quarter with $95 million of cash and investments on hand. And going forward, we expect to opportunistically extend our repurchase activity in the coming quarters.
Turning to guidance as the second major topic, our solid results and momentum position us well for Q2 in the short term, and for fiscal 2020 and beyond in the longer term, as we drive towards 500 billion of subscription revenue in three to four years, beginning with the growth we can see in fiscal 2020.
Specifically, in the second quarter, we expect to deliver $82 million to $83 million of subscription revenue $107 million to $109 million of overall revenue. $23 to $25 million of EBITDA, $17 million to $20 million core operating income and core earnings per share of $0.28 to $0.33.
This strong start puts a solidly on track for the year. And all know the pound has traded up recently. But we've all seen rates fluctuate. And for now we're simply confirming our full year guidance. We’ll continue to present detailed guidance prior to each quarter while evaluing and updating the full year as needed.
Finally, in conclusion, I'd like to provide my perspective on the most important items in the quarter, and how they tie into our long term economics. The primary focuses on growing subscription revenue, and the 16% constant currency growth, combined with solid bookings and excellent visibility, give us high confidence in fiscal 2020 and our ability to drive to $500 million of subscription revenue in three to four years.
This quarter illustrates the economic power of this approach. As we added $10.3 million of subscription revenue with $8 million of increased subscription gross margin for 78% incremental gross margin. And as we scale our subscription revenue to $500 million and beyond, this will become a powerful engine of growth and ultimately a shareholder return.
As I step back and think about our P&L, I'm struck that all of the year-over-year trends are moving consistent with our strategic plan and long-term model.
Subscription revenue is a percentage of total is up six percentage points. Subscription gross margin is up 2.6 percentage points. Sales and Marketing expense is up one percentage point, and product development is up one percentage point as we expand the value propositions available to our customers and the future revenue opportunities for the business.
We are well positioned in a large and growing market. Our current financial performance is strong and we are confident in our ability to drive value for the customers and shareholders for years to come.
And with that, I’ll turn it back to Rob for a few concluding remarks before we take questions.
Thank you, Rick. Now before we open up the call to questions, I just like to make a few concluding remarks. First off, I was really delighted to see the acceleration of a subscription grow to 16%. This positions us well to achieve 500 million in subscription revenues in a three to four year time frame. We also, as Rick noted, saw incremental gross margins of 78%.
Time [ph] gross margin potential together, four years out, we should be adding $75 million to $100 million a year in subscription revenue, with as much as 80% of that incremental margin. Turning back to the near term, every quarter in FY 2020 will be in the 15% to 20% subs and trans growth target range and a fiscal 2020 will be a strong year.
So I think we're addressing both near term performance and long term potential. It was exciting quarter and with that we’ll open it up for any questions.
Thank you [Operator Instructions] The first question comes from the line of Andrew Schmidt from Citi. Please go ahead. Andrew Schmidt, your line is open. Please go ahead.
Hi, guys, thank you for taking my question. And good to see the consistent results here in the step up in subsequent trends. He small bank, when you called out, was wondering if you could just talk about just the pipeline for small banks and then generally speaking, what you're seeing from the retention on the legacy portfolio. I know in the past there's been -- there's just been some issue with the retention of the smaller banks. I wonder if you could address that that would be helpful.
Yes, I think as I mentioned in my remarks was really encouraging to win a small bank, I think there is a misconception that we’re targeted on are only appropriate for large banks that couldn't be further from the truth, we really can bring the treasury and commercial banking technology that all banks need to win, compete and grow.
And we can do that in a SaaS model with a price point that fits some really banks of any size. Last quarter, we had a small 5 billion or so assets bank saying this quarter. So that shows the breadth of capability. In terms of the legacy platform, I'm into it, a number of those customers really weren't logical for business banking. Business Banking wasn't a serious part of what they were doing. It wasn't one of their ambitions. So we have had attrition from that phase, we knew that when we acquired that and we acquired that at such an attractive price point, that that was just part of the plan, where what we're doing now on our DBIQ platform is we're building out more of the capabilities that will make an implementation for a medium or small size bank much easier, faster.
And again, the SaaS model allows that way to us to deliver that technology, the price point that's attractive. So the smaller banks are definitely part of our strategy going forward. And we're already seen success with them.
Okay, that's helpful. And then I was wanting to just talk about the pipeline, and I know you don't give bookings forecast, but if you could talk a little bit about the pipeline as you see it today, and that how that might translate to sales going forward. I know you've added a number of good products, obviously, with DBIQ. There's the automation suite around Paymode-X, but anything around the pipeline as it, as it relates to sort of the forward booking trends would be helpful.
Sure. So, on banks, we have a lot of momentum. If you are looking at a business banking platform, Bottomline is probably in the pole position beginning that process, industry analyst, reputation, technology platform, of course, all of those point to Bottomline. So we're in a really strong position from a pipeline for Business Banking and DBIQ.
On Paymode-X, we're continuing to work with our banks. And that's, that drives a fabulous pipeline for us, where we have a newer sales effort on Paymode-X is a direct sales team that we're just building now, and that'll just supplement the channels. But we have a wonderful pipeline and one of the things that's happening on Paymode-X is there's just more market interest. There's more interest in customers that will be there had a fraud event and they want a more secure way to execute payments or they want to change out payments [ph], want to change out legacy systems then get to something more efficient, that also monetizes payments. So pipelines real strong there.
And then there in the last company, make them pipelines Europe. And we'll get a lot of questions around Brexit. Please don't ask us what's going to happen in Brexit? Only Rick would know, and he's not telling anyone, but we don't know what's happening in Brexit, all we do know is we're seeing more momentum. We had a record quarter for bookings, this quarter in Europe with our financial messaging and payment platforms. And we'd expect that momentum to continue, the pipeline is very strong. I can't tell whether that's just the economic dynamics and the fact that payments are something that has to be made all the time, whether it's our solution set or whether it's, there's so much change going on in Europe with Open Banking PSD2 and the need to deploy more cyber security solutions.
It's probably a mix of all those factors. The pipeline is real strong and that's part of the reason we have confidence that we’ll be in the 15% to 20% subs and trans growth for the remainder of the fiscal year.
The other thing I'd add to that is, a few years ago, we were more dependent on attracting new logos now with the additional products and the interoperability of our solutions. You see in areas like legal spend, where we had three new customers joining, we had seven large insurers expanding their relationship with us. So we've got multiple path to revenue growth, and I think that's reflected you can see another quarter of strong bookings. I believe it was up 22% quarter-over-quarter and we never want to micro focus on that. But very strong trends.
All right, good progress. See you next week. Thank you.
Your next question comes from the line of John Davis from Raymond James, please go ahead.
Just want to hit on it on guide for a second here. I think both you and Rob have said you expect subs and trans to remain in the 15% to 20% range for the full year, yet guide implies I think 12.5% or so 13% for the rest of the year. So just FX is now a little bit better, just any commentary there realizing that it’s the first quarter you guys said we don't raise guidance, we just want to make sure not missing anything or there are any offsets? Thanks.
I think you said it very, very well. Both, underlying commercial trends and currency look like tailwinds now, but we never have and I can't imagine that we ever would raise guidance in the first quarter. You know, we tend to look at our guidance pretty hard twice a year. And so in the upcoming quarter we’ll guide for the remainder of the year as we always do.
Okay, and then Rob some of your commentary around the margin and the incremental margins on gross margin side is 78%. Pretty impressive. And you kind of talked about driving that both revenue growth and end margins over the longer term. Does that change? Sounds a little bit more positive on the mid-term outlook? I think last quarter or two quarters ago, you talked about kind of flat margins for the medium term. Any, any kind of update there, it sounds a little bit more positive. But just wanted to get any comments?
I think, it reiterates the importance of our strategy of solving primarily to drive to 500 million subs and trans growth with this wrong economic underpinnings. Now is the time for us to be focusing on revenue and the profit will be there.
Okay, great. And then wanted to touch a little bit more on Andrews question around, around small banks. I think you will appreciate the win this quarter. It's good to see, but any update on the attrition of the legacy into a business? I think you guys have lost or had launched a new product there to try and stem some attrition. I know it's early days, but just any progress there will be helpful?
Yes, the early, early feedback on that product is strong. But, we do expect that will continue to face attrition in those small bank customers for the remainder of this year. We don't see it being a factor beyond that, and there is potential to do better than our original estimate of attrition.
Okay, thanks and then last one for me. Rob, any comments on either competitive landscape given the all the deals that have happened and/or what the M&A landscape looks like, as we sit here, obviously, you guys have a very, very clean balance sheet, the potential to do something, just any comments or update on either one of those topics will be great? Thanks, guys.
Sure, from the competitive landscape. When there's acquisition in M&A activity, it's usually a distraction. We've seen that happen a number of different times. So that's, that's generally a plus for us. You know, for example, I looked at a [Indiscernible] of bringing in first data, there's some elements in areas where we’d overlap. I think the focus will be on first data course.
From our M&A standpoint. We certainly are active in the market. We certainly look, we have all this capability as you just referenced from a balance sheet standpoint. But we also have a fabulous year ahead of us and we're not going to do anything that'll disrupt the momentum of that year that will disrupt, disrupt this subscription growth. Be dilutive to that, be dilutive to earnings level, so it's pretty high bar and what M&A we would do, and we feel the products that we have is fits very well, as Rick pointed out, interoperability gives us a chance to expand TAM with additional cross cells. So we're active in the market, but we're not going to be aggressive or get over our skis.
Okay, thanks, guys.
Your next question comes from the line of Gary Prestopino from Barrington Research, please go ahead.
Hey, morning, everyone. Hey, Rob, just want to get an idea you mentioned you mentioned some of these new signings or payers to the Paymode network. I never really heard you say anything about e-commerce companies signing up, or even a leading furniture manufacturer, which appears to me that this is gaining traction, you're, really moving it into different vertical markets. Is this kind of a correct assumption?
Yes, that's correct. What was interesting to have those wins in particular, because we have done less in with a manufacturing and the e-commerce, this was a big name, we can't give out their name. But it's really interesting to have that one. So I think we've got deep penetration and potential and we’re not penetrated. But real value proposition and verticals we've talked about before, like healthcare, for example, property management being a couple, but there's such a potential beyond that for other verticals and part of the direct sales team will help us bring more of that opportunity.
Were some of these -- were some of these newer verticals generated by the direct sales team or were they through the bank?
No. Well, no, not really, that teams just really ramping for us. We had a couple wins from the existing direct team, but we're going to build out a much bigger direct sales team that we have today.
Okay, thank you then.
Your next question comes from the line of Mayank Tandon from Needham and Company. Please go ahead.
Thank you. Good morning. Congrats on the quarter. Rob, could you talk just high level about the impact of real time payments adoption and how you see that impacting your business? In terms of could it help accelerate transaction growth through your bank channel, or just maybe some thoughts around the implications for your business as real time payments become more mainstream?
Sure. Well, anytime there's a change in payments, that's fabulous for us. All of our customers are going to look to us for this technology solution to address that. With real time payments and faster payments, there’s some other interesting aspects about it. One, you get to – there’s a new capabilities for all banks are going to want to offer ultimately. So that's an upsell opportunity and new market opportunities for us.
The other thing to think through is the cyber security aspect of that. If the payment is settling in a much quicker timeframe, you want more technology around that payment to ensure that's the right payment and the safe payment. And that certainly is an opportunity for us with our cyber fraud, risk management and financial client solutions.
Got it? That's helpful. And then just going back to Paymode-X, I think you mentioned in your comments that you had a record a number of pairs signed up, what changed this quarter or maybe, you could talk just in general, I may have missed that, what's been driving the inflection of growth on the Paymode side. I think we've been waiting on that for a while, but now it seems to be actually getting traction. So some thoughts around that would be very helpful.
I think there are a number of factors I think the acceptance of a network, like Paymode-X. So the fact that you're not going to pay, make payments on your own was a corporate is much more accepted than it was through me know, a couple years ago, like the second piece is cyber security. Many times we’ll talk to a new prospect and they've had an event and the saying of how do we get to a more secure payment process? And Paymode-X certainly represents that.
So I think those are two of the pieces that are big drivers that are seeing more customer interest, openness, we see the sale cycle where in the past, we'd have people have informational meetings, and what drift was seen much more of a driven process today. So it's an excellent market, and we're seeing it grow.
Right. And then finally, for Rick, Rick, in terms of capital allocation, I think I heard Rob's comments around M&A. But otherwise, do you plan to continue to just buy back stock or are there any other initiatives that you have planned around capital allocation going forward?
Yes, we executed exactly according to plan in Q1 on our buyback, we do extend, intend to be opportunistically in the market in upcoming quarters as well. And other than that, our capital allocation strategy is unchanged. We believe in a clean balance sheet as being nimble and ready to respond to opportunities.
Excellent. Thank you.
Your next question comes from the line of Brett Huff from Stephens, please go ahead.
Good morning, guys. Thanks for taking the time. Had a couple of questions on the direct sales force. So I know that we had a direct sales force more many years ago, when Paymode was kind of first being developed or pushed by you guys. And then we move to the bank channel. And we're moving back to using at least some direct sales force.
Can you just explain how that's going to work with the channel, I know that you're still going to rely most on the channel just going to be sort of a lead generation mechanism that we hand over a lead to a bank once we've developed it or just kind of give us a sense of how that will work?
You know, so we continue to have a direct sales force. But it was relatively small, fact that we signed a couple deals this quarter, including one of the ones I'd mentioned was through a direct sales force. But it hasn't been as large and it hasn't been a focus for us.
Now in terms of channel, it's really simple. If we get in this situation, that UMB, the third Citizens Bank of America, any one of our channel partners is there and the customers preferences is to sign with that channel will step back, we're happy to give the business to the channel and the economics work relatively similar to the Bottomline, and we can certainly compensate appropriately our sales teams.
So it's really the look at where all the opportunities new verticals, for example, outside of existing territory coverage with our bank channels, where are the opportunities for us to sell that we are covered in banks. And to the extent we're overlapping, how can we drive that to a decision and if in fact the customer wants to go with the bank, that's wonderful, we’ll step back.
Have you guys sized at all how big that'll be? Just to give us a sense, because I know this is such a big opportunity that I suspect any additional salesperson will drive good bookings. But just curious, how you're thinking about size?
You know, there's a couple ways you could go thinking about it -- and I won't have an absolute number for you. One would be just how big is the market itself, which is a huge number we’re still in the very early innings. We still got 50% of businesses paying 50% or more of their payments by paper check. The other way to think about that is as you're adding new sales executives, one each year -- would they haven’t and we have some plans and some thoughts about that, but we've not bringing that out or disclosing that at this point.
I think more broadly you can look at the plan and the in process investment. We raise sales and marketing investment by about one percentage point year-over-year as we're staffing up, but clearly with the size of the market we're facing, it's a high return investment.
That's helpful. And then just on the implementations that are kind of in process the $17 million. Rick, I think you mentioned this. I know the numbers been out there for a while. It sounds like we got one done. And we have six more. Are those six that you mentioned, the the totality of that 17 million in terms of phasing?
Certainly, that's a great question. And the number has been similar for a while because we're signing new banks as fast as we've been bringing other banks live. So we'll see the majority of that 17 million going live within the fiscal year and more coming in to replace that, the total number of banks there's 13 banks in implementation now. So there's small banks as well as large banks, we tend to focus on the large banks, which are million or more in annual recurring revenue, just to give people a sense of those most complex implementations. And they're going very, very well. We recently brought a bank live in eight and a half months, which is a new record for us. So, we're definitely continuing to speed through speed up our ability to get through that backlog.
Great. And last question for me. I know that the bookings comps are really tough for most of last year. And I think you said that the bookings growth was 22% this year, if I heard that, or this quarter, or that's right. The comps continue to be a little bit easier. I know you had such a really strong, I think fiscal, fiscal 2018. Are the comps sort of more reasonable this year and should we kind of expect to see that going forward?
I understand that bookings are going to vary greatly quarter-to-quarter. You know in my remarks, I always focus on that rolling four quarters $87 million, which was 28% of revenue. So I feel good about both our current bookings and the pipeline. Looking forward, I comment just because it's such an area of focus that I didn't want people in the context of a question about pipeline. I wanted people to realize how strong the bookings were this quarter as well.
Great, definitely. Thanks for the time, appreciate it.
Your next question comes from the line of Bob Napoli from William Blair and Company. Please go ahead.
Thank you. Good morning and thank you for doing a morning call. I think I speak for my peers and appreciate the morning call. First question on on Paymode-X. I mean there’s been a lot of questions asked about it. And Robbie sound more excited about it this morning than he always, I mean he’s obviously been a topic, but the acceleration, any chance? I mean, it would be helpful if we got some sizing on the amount of payment volume or transactions or if that becomes a bigger business for you, and it will -- are you any thoughts around talking about the growth rate of that business or the sizing around it?
Thanks, Bob. Appreciate the question. One of the wonderful things about Paymode-X is the flexibility of the platform. And as we're introducing more capabilities, like invoice processing and those sorts of things, there's so many different metrics that one could look at to try to size that continually evolving. We, our position is unchanged, that is not helpful for us to focus on that level of detail within our broader business payments portfolio.
Okay, and then the what percentage of that business is now vendor pay? I mean, you've been transitioning to vendor pay for I think you don't do anything other than vendor pay. I mean you haven't for several years. Can you -- what percentage is now vendor pay?
Well, 100% of everything we've been signing up last this year on this quarter and last several years is vendor pay. We have a large and one of our competitive advantage is the base and scale. So we have a large base and scale the was a legacy model. And those have been surely those are true. All of those are Bank of America customers, and they have not chosen have not chosen to change their model. So we’re still the vast majority of the volume investment, majority of the transactions vendors are under the payer pay model, that remains an opportunity for us to convert that, but that'll really be a Bank of America decision.
Yes. And the revenue impact is coming from the vendor pay model.
I'm sorry. Rick, what was the last statement you made?
Majority of the volume on classic, majority of the revenue from the vendor pay model would be…
Okay, right. Okay.
So it just shows the power of the model.
Right. Thank you. And then a follow up on the digital banking business. And actually, you changed. I mean, it's been a few quarters, but you used to call that transitioning and now it's just digital banking. So A, is it fully transitioned? And then I have one follow up on that business?
I think the digital banking business performed very strongly this quarter 17% growth, we're confident that…
Right, no the acceleration was great. I'm just saying, you used to call that digital transitioning and it so it's really pretty much transitioned and….
Oh, yes from a revenue model. Yes, that's certainly --when we're looking, and we're confident that we'll see 15% to 20% growth this year. So I think going forward once we achieve a comparable level of growth, and the two are looking more alike then we'll probably put more emphasis on the overall company and less emphasis on providing detail on that transition.
Okay. And then on that business, you have a great banking corporate product that it was very well regarded. Is there an opportunity, I think some of your competitors sell against you with a broader platform trying to cross neither offering both corporate and consumer and there are so many other products I think you can probably cross sell into your customer base. Are there any thoughts of building a consumer platform? And what other, what are you working on R&D wise? What's the new product pipe pipeline?
Well, I don't think we would build I would be unlikely like I'd never say never. And M&A certainly could be an opportunity where we could have a retail focused platform. But as you say, there are a number of competitors. That's what they do. That's what they do well. You know doing things like personal financial management, saving for personal goals, etcetera. That's different than having a file of 10,000 payments that are going to a variety of different currencies and having entitlements. The heavy duty business banking type of stuff that will do from small business to multinational.
An example though, where we're broadening out a couple examples where we sell beyond business banking, would be online account opening today. And then what was really exciting in the quarter was to see our customer relationship and insights solution a brand new capability being bought by a bank that wasn't an existing business banking customer. And they're deploying it in commercial banking, yes, but also in wealth management.
So this is the technology which we've developed and brought into so that we would have the capability to have our banks learn from each click, learn more about the customer, see what our next actionable items, but we had a sale in a quarter, which is a new bank, and they are deploying at wealth management. So that's just an example of a solution that definitely is very applicable to retail, could sit on top of any of the other retail platforms that are out there and give a bank much more insight knowledge of their customers, customer relationships, and next actionable items and sales productivity.
So that's an example where you'd see a selling into that side of the bank, but not with the exact same online platform that we would do in business banking or folks like Q2, or NCR would do on the retail side.
Thank you. Nice quarter. Appreciate it.
Your next question comes from the line of Dan Perlin from RBC Capital Markets. Please go ahead.
Yes. Good morning. It's actually Matt Roswell sitting in for Dan. Following up on the digital banking, it's the -- very nice winds. Are you replacing existing vendors, upgrading your current clients? Or are these banks that are just realizing they need the technology?
We’d be replacing in digital bank. We replacing somebody else, that can be a variety of different capabilities. It can be a bank, that's using something from their core and finding that's not competitive. It can be a bank using that technology solution which hasn't kept up or made the level of investments and innovations that we have, so we're not in that market. You're not going to find someone that doesn't have an online presence has some capability today. But they're finding that they need more to compete.
Okay. And then it's, you've had this great shift to the subscription and the SaaS model. What products do you currently sell that are still kind of under the old license model?
Sure, we would sell on-premise payment capabilities for corporate, for example, we sell our invoicing solutions, which is where we got the technology and the capabilities and all the experience to incorporate invoicing capabilities into Paymode-X. Those are typically existing customers, there's some new sales in them as well. So there's no reason really to shut that off, but -- so as Rick said, we'll probably see 2 million or so in software license a quarter, but a real focus sales marketing product is on the subscription model and SaaS technology deployment.
Okay, and then question for Rick. When -- you're going to be generating a lot of free cash flow. You mentioned opportunistic repurchase. Could you kind of talk about what would be opportunistic? And then are there any kind of platform? Are there technologies or platforms coming up for investment?
I think you hit the nail on the head with our economic model, we do have the potential to drive significant free cash flow. And we will do that. But we're primarily solving for subs and trans growth right now. We've got a strong balance sheet, we want to maintain a strong balance sheet will be selectively repurchasing here, but we're not setting a timeline or an amount for that today.
So think of free cash flow sort of being reinvested in things like the direct sales force or additional product, upgrading of additional product.
So we're executing exactly according to our business model, which is while we're focused on solving to drive 500 million of subs and trans, our primary investments are in product development and sales and marketing, which are being funded through the increase in the gross margin and subs and trends.
Okay, excellent. Thank you.
Your next question comes from the line of Terry Kiwala from First Analysis. Please go ahead.
Hey, good morning. Great job on the quarter. And thanks for taking my question. Just a question on product development and engineering costs, which increased on a relative basis in the quarter. Were those, was the increase directed towards any individual platform? And then, if you could give some thoughts on how we look at those costs and future periods?
So I think you'll see a continued focus on product for us. In terms of whether that’s focused? We're actually doing more across all of the product sets. So there are things like the use of analytics, artificial intelligence, machine learning, those are capabilities we want to deploy and we do deploy across all of our products so what? There's a lot of centralized investment and we expect it to make more centralized investment, than it benefits each of the each of the product sets.
Great. And then moving forward, so that the relative increase in those costs we should we should consider in future periods?
I think we've been pretty consistent in increasing the percentage of spend devoted to R&D as a key component of the expansion in subs and trans gross margin. What we're solving for primarily right now is product excellence and driving the 500 million in three to four years.
Great. Thank you.
And at this time, there are no further questions.
Very good. Well, thank you everyone for your time. It was a pleasure to report on a quarter where we saw acceleration to 16% subscription growth. We're on track to our 500 million in three to four years. The profit potential was demonstrated with the incremental gross margin and we look forward to a year where every year and every quarter is in a 15% to 20% subscription growth range, and a very strong year for Bottomline and for its’ shareholders. So appreciate your time this morning. Thank you all.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.