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Edited Transcript of EPAY earnings conference call or presentation 8-Aug-19 9:00pm GMT

Q4 2019 Bottomline Technologies (DE) Inc Earnings Call

Portsmouth Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Bottomline Technologies (DE) Inc earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Richard Douglas Booth

Bottomline Technologies (de), Inc. - CFO & Treasurer

* Robert A. Eberle

Bottomline Technologies (de), Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew Garth Schmidt

Citigroup Inc, Research Division - Senior Associate

* Brett Richard Huff

Stephens Inc., Research Division - MD

* Cristopher David Kennedy

William Blair & Company L.L.C., Research Division - Associate

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* John Kimbrough Davis

Raymond James & Associates, Inc., Research Division - Research Analyst

* Kyle David Peterson

Needham & Company, LLC, Research Division - Associate

* Matthew Van Roswell

RBC Capital Markets, LLC, Research Division - Associate VP

* Peter James Heckmann

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

* Terrence Kiwala

First Analysis Corporation - VP of Enterprise Productivity Software

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Bottomline's Fourth Quarter 2019 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.

I would now like to turn the conference over to our host, Mr. Rob Eberle. Please go ahead.

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [2]

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Good afternoon. Thank you for your interest in Bottomline, and welcome to the fourth quarter fiscal '19 earnings call. I'm here with our CFO, Rick Booth, who'll provide a detailed review of the quarter's financial results and our guidance going forward. Then, as always, both Rick and I will be available for questions following his remarks.

Fourth quarter was a solid quarter with financial results in line or ahead of our expectations. Quarter featured strong market success in bookings, which position us well to meet or exceed our subs and trans growth targets in FY '20. As we enter the new fiscal year driving acceleration and growth is our focus. And we have every confidence we'll achieve subs and trans growth in our target 15% to 20% range. It's our top priority and the primary objective of our strategic plan.

As we produce acceleration and growth, we'll see multiple expansion. Shareholders will benefit from both the larger S&T revenue base and a higher multiple. Our confidence in the future is underscored by our recently announced $50 million buyback. We announced the buyback for a very simple reason. We're confident we'll see growth acceleration in FY '20. When that happens, the stock will be trading considerably higher than it is today. We see today's price as an excellent buying opportunity.

I have to focus my remarks today on several key new wins in the quarter and then review our product advancements. But first, I'll start with a brief overview of the financial highlights of the fourth quarter. Subscription and transaction revenues grew 13% on a constant currency basis in the quarter. While this is just outside our target of 15% to 20%, we're comparing to a particularly strong quarter a year ago. We enter FY '20 confident we'll see growth accelerate back to our target 15% to 20% range.

Subscription and transaction revenue was $79 million for the quarter and $295 million for the year. We're now a $300 million annual subs and trans revenue business with a plan to get to $500 million in 3 to 4 year's time. That's a valuable business payment franchise. Subscription and transaction bookings were $24.3 million. The strong bookings result was driven by 22 new deals for Paymode-X and our digital banking platform, which added 3 new DBIQ platform deals, including our largest ever.

Revenue overall was $108.2 million. EBITDA was $25 million for the quarter and $100 million for the fiscal year, achieving the ambitious target we set over 2 years ago. EPS was $0.34, above our target and expectations, and we ended the quarter with $100 million in cash. The financial results we're seeing demonstrate the alignment of the market opportunity, our strategic plan, our investment in our product set and our execution.

During the quarter, we saw broad-based demand translate into strong subs and trans bookings. I'll give some examples of the market success we saw in the quarter, starting with Paymode-X. We have a large opportunity with Paymode-X to be the way businesses pay and get paid. During the quarter, we signed 22 new payers to Paymode-X, including several payers that signed on for Paymode-X with Visa Payables.

New payers on the system include one of the leading auto manufacturers, a major athletic shoe brand, a top-tier grocer, several hospitals and health care providers and 2 well-known universities. The breadth of new payers shows the universal appeal of the platform. As in the past, the contribution from Bank of America was strong. We also saw sign-ons through Fifth Third, TD Bank, Citizens and our news channel partner, UMB.

We had a solid sales quarter in legal spend management as well, signing 5 new deals in the quarter. We continue to win and grow in the legal spend market by deploying a leading platform and launching additional offerings, which accompany it. The sales highlight of the quarter was the 3 major platform deals we signed for our DBIQ digital banking platform. It was a very strong quarter for digital banking, and nothing speaks louder to our product leadership and strong market position.

One of the wins with a major global bank ends up being our largest single DBIQ relationship. But what's more exciting is the range of banks represented by the 3 wins: a major global bank, one of the largest in the world; a super-regional $30-plus billion bank; and a regional $6 billion commercial bank. That's quite a range in one quarter. I cannot be more excited by the combination of these wins. It shows we're uniquely qualified to meet the business banking needs across a wide spectrum of the market.

When you consider the range, $6 billion to one of the largest global banks all in one quarter, you see the huge market opportunity. With the $24 million in subs and trans bookings in Q4, we had a total of bookings of $83 million in the year. These bookings are the basis of our FY '20 growth plan and the source of our confidence in growth acceleration this coming year. While the Q4 wins and FY '19 bookings will drive FY '20, it's our product leadership and technology innovation that will ensure we reach $500 million in the next 3 to 4 years.

I'll now highlight some of the most significant items on our innovation agenda. We're at an exciting juncture. Over the next several years, the markets we're in will experience a major transformation. Today's systems of record will be replaced by systems of engagement and intelligence. Systems of engagement and intelligence learn the user and the user's goals. They use ML and AI to do work, they make recommendations, and they predict the events and outcomes. This is the future. But it isn't really that radical. We've already seen this in the consumer world and within some segments of enterprise software.

Bottomline is well ahead of this transformation in our markets. We have an innovation agenda designed to protect and extend our leadership and open up new revenue opportunities and a larger TAM. The move to systems of engagement and intelligence is a major growth opportunity for Bottomline. Customers recognize the changes ahead, and they buy from us for as much as who we are today, as where we'll be tomorrow.

Let me highlight some examples. Starting with Paymode-X, we continue to expand what we offer the mid-market. We've established Paymode-X as the clear leading B2B payment solution for medium and large corporate payers. And our more recent focus has been on integrating our market-leading invoice capabilities, which position us particularly well for mid-market and SMB payers. And then there's security. Paymode-X has always been the most secure way for businesses to pay and get paid.

Customers and prospective customers are raising security more than ever as a value proposition and, importantly, as the catalyst to join the network. There are basic and unique insights we can provide payers with the transaction data produced by the $200 billion in payments that flow through Paymode-X each year. That data produces our network payment score for each payment looking at, for example, whether or not the payer is paying a known vendor with a history of payments from others in the network, whether the amount the payer is paying is consistent with what others have paid that vendor.

New and unknown vendors payments well above the range of payments previously received and other network-only insights make the network payment score a valuable tool to fight fraud. Importantly, the data and insights we're leveraging are only available as part of our large network. No payer could be as secure on their own. With increased security features, the case for Paymode-X is the way to pay and get paid gets more compelling. The combination of our size and scale, platform capabilities, partnerships and market momentum positions Paymode-X well going into FY '20 and beyond. Innovation is a key driver of the growth we'll see in legal spend management in the coming year as well.

2 highlights, our machine learning for bill review and a new offering, Law Firm Analytics. We're using machine learning to approve the bill review process. With ML, the platform observes and learns as bill adjustments are made, and then automates that process as the software detects what are perceived to be repeated patterns. The user provides thumbs-up, thumbs-down, feedback or actual comments to refine the machine-driven process. Over time, this results in bill review efficiencies and results far exceeding today's levels. It's a powerful application of this technology, especially when one considers the over $8 billion in legal spend that flows through Bottomline annually.

We're also actively making data and analytics important part of our value proposition. We've launched a new offering, Law Firm Analytics, this past quarter. We already have 10 pilot customers signed on to drive enhanced visibility and the key case and billing metrics and, ultimately, win, retain and grow major client relationships. New innovations in the legal spend suite have allowed us to increase value for customers, drive growth and expand TAM.

The last product set I'll touch on is our digital banking DBIQ suite, which consists of an integrated payments and cash management, fraud and risk management, account opening and onboarding, customer insights and relationship management, all in a standard-based API, Open Banking platform. The solution combines a 360-degree view of customer relationships, inclusive of the performance and volume of all customer products and services and a complete customer experience across channels, provides bankers with targeted, actionable insights on their customers, powered by machine learning and augmented by integrated internal and external data sources. DBIQ empowers banks to engage intelligently with customers, deliver unified experience and acquire, deepen and grow profitable relationships. It goes to the heart of bank's most critical objective.

So in summary, it's an exciting time for Bottomline. We know the coming year will bring an acceleration in growth. We're back in our growth plan with a $50 million buyback. And beyond the coming year, we have a technology set in plan to drive to $500 million in subs and trans revenue in 3 to 4 years. We're confident in our strategic plan and confident it's the right plan to drive shareholder value.

So with that, I'll now turn it over to Rick, and then both of us will be available for questions following his remarks.

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [3]

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Thank you, Rob. I'm pleased to report on a solid quarter, in line with guidance and expectations. We delivered subs and trans revenue of $79.1 million or $316 million on a run rate basis, total revenue of $108.2 million, which exceeded guidance and EBITDA of $25 million and core earnings per share of $0.34, both of which were at the high end of our range. I'll focus my remarks today on 3 major topics. First, I'll review our Q4 financial results in detail. Second, I'll provide guidance for the first quarter of fiscal '20 and confirm our guidance for the full year. And finally, I'll comment on the new buyback program established based on our confidence in the outlook.

First to review our financial results in detail, I'll speak briefly to each line in our P&L. And in addition, we posted supplemental materials to our website for your convenience. Beginning with revenue, subscription and transaction revenue is our clear priority. We drove $79.1 million of subs and trans revenue in the quarter, which is equivalent to $316 million on an annualized basis. And at this rate, 73% of our revenue comes from subs and trans offerings, up 6 full percentage points from a year ago.

Subs and trans revenue was consistent with guidance and expectations. But I'll note that from a percentage growth perspective, due to an exceptionally tough compare in the prior year, our reported subs and trans growth was 13% overall and 14% from products fully converted to subscription, slightly below our 15% to 20% goal on a constant currency basis. As we head into fiscal '20, we're confident that we will see this growth accelerate back into our 15% to 20% range, driven by implementation of existing signed backlog, year-over-year growth from existing customers and the impact of additional signings.

Maintenance revenue is the other component of recurring revenue. And the combination of maintenance and subs and trans revenue provides us with 89% recurring revenue, up 5 percentage points year-over-year. This gives us excellent visibility to upcoming results. License revenue by design is only a small part of our overall business. In Q4, we reported license revenue of $2.4 million or 2% of revenue. This level is consistent with what we expect for fiscal '20 as we prioritize subs and trans offerings.

Services, which we offer only as needed to help our customers succeed, were $9 million in the quarter. And as I mentioned, total revenue of $108 million was above our guidance. In addition to our revenue results, we had solid sales execution in the quarter. We signed $24.3 million of new subs and trans bookings led by digital banking and Paymode-X. This brings us to $82.9 million in new subs and trans bookings for the last 4 quarters, equivalent to 28% of subs and trans revenue in the same period. While booking figures are estimates and customers take time to implement and ramp to full revenue and production, this provides us with visibility to future subs and trans growth in fiscal '20 and beyond.

We signed 6 new customers to our digital banking product set, including the 3 significant platform deals that Rob described. With these signings and after go-lives in the quarter, we have approximately $18.4 million of annual digital banking subscriptions, which are signed but not yet being recognized in our P&L. Our digital banking implementations continue to go well, and we brought 2 more customers live in the quarter. This visibility gives us high confidence that banking will achieve 15% to 20% growth within fiscal '20.

Our Paymode-X network added 22 new payers across multiple channel partners, including our new channel partner, UMB. This further validates the attractiveness of our highly secured full payment automation value proposition and channel partnership approach. We signed 5 new insurers to our legal spend management network, including another insurer in the U.K. We launched a new offering called Law Firm Analytics and have a robust pipeline of additional offerings to drive continued growth in this product set.

At an overall level, these bookings and sign backlog give us excellent visibility to revenue growth acceleration in fiscal '20. Equally importantly, our continued product innovation and competitive differentiation in the large and growing business payments market gives us confidence in our path to $500 million of subs and trans revenue within 3 to 4 years.

Continuing down the P&L, we delivered on our financial commitments while investing to advance our solutions and drive long-term growth. EBITDA margin was 23%, consistent with our plan and expectations. Core operating income was $18.9 million, and adjusted EBITDA of $25 million and core earnings per share of $0.34 were both at the high end of our range and allowed us to complete fiscal '19 with $100 million of EBITDA.

Our overall gross margin was $62.8 million or 58% of revenue. And our subs and trans gross margin of 59% was up 2 full percentage points year-over-year. As planned, as gross margins expand, we funded development and sales and marketing as we aggressively pursue growth with our innovation agenda.

Development expense was $15.6 million in the quarter or 14% of revenue, up 1 percentage point year-over-year. We see this continuing to fiscal '20 when development will be approximately 15% to 16% of revenue, up from today's 14%. And we see this continuing into fiscal '20 when net development will be approximately 16% of revenue, up from today's 14%. Sales and marketing expense for the quarter was $20.3 million or 19% of revenue, up almost 1 percentage point year-over-year. And G&A expense for the quarter was $8.1 million or 7.5% of revenue, down almost 1 full percentage point year-over-year.

Moving from profitability to cash flow, operating cash flow was $15.3 million. And with only $1 million of net investing cash outflow in the quarter, this allowed us to end the quarter with $100 million of cash and investments on hand. Turning to guidance as the second major topic, our solid results and momentum position us well for Q1 in the short term and for fiscal '20 and beyond in the longer term as we drive towards $500 million of subs and trans revenue in 3 to 4 years beginning with the growth that we can see and touch in fiscal '20.

Now given the recent declines in the British pound, we do need to update guidance for currency, but there are no other changes. For transparency, we've provided a bridge of the impact in our supplemental materials on our website. In Q1, at current FX rates, we expect to deliver $77 million to $80 million of subs and trans revenue, $22 million to $24 million adjusted EBITDA, $105 million to $107 million overall revenue, $15 million to $17 million core operating income, and core earnings per share of $0.25 to $0.29.

Other than currency, there is no change to full year fiscal '20 guidance. We continue to expect subs and trans acceleration as we proceed through the year with new customers going live and subs and trans growth within our target 15% to 20% range, including our digital banking set. We'll continue to present detailed guidance prior to each quarter while evaluating and updating the full year as needed.

With strong bookings, exciting product innovations and solid financial performance, we're highly confident in our strategy. The Board recently authorized a new $50 million buyback authorization with $10 million specifically targeted to be completed in the first quarter of the year. This buyback underscores our conviction in our outlook and the confidence that our strategy will drive shareholder value.

In conclusion, I'm pleased to report a solid quarter, including $108 million in total revenue, $25 million in EBITDA and a subs and trans revenue run rate of $316 million, driving toward $500 million in 3 to 4 years. Further, 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. Subs and trans revenue as a percentage of total revenue is up 6 percentage points year-over-year. Subs and trans gross margin is up 2 percentage points year-over-year. Development expense is up 1 percentage point. Sales and marketing expense is up 1 percentage point, and G&A is down 1 percentage point. We're well positioned in a large and growing market. Our current financial performance is strong. And we're confident in our ability to drive value for customers and shareholders for years to come.

And with that, we can open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Andrew Schmidt with Citi Financial (sic) [Citigroup].

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [2]

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Congrats on the good sales momentum here. It's good to see. Starting with the -- just the subs and trans outlook for FY '20, I was wondering if you could just dig into your confidence in terms of the acceleration. Other factors that can derail this -- and when I think about potential factors, I think about macro and U.K. transaction growth there. At a high level, I was wondering, just discuss your level of visibility in terms of the step-up in subs and trans growth. And then specifically, where you see that coming from?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [3]

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Andrew, this is Rick. One of the great things about our business model is signed contract today give us very high visibility to the upcoming year. Of that $18.4 million of digital banking deals that are signed but not yet live, almost 90% is going live within fiscal '20. Now it's admittedly back end loaded, but that gives us extremely high visibility and confidence.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [4]

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Understood. And I think you actually answered the part of my next question, which was just the cadence of the growth. We should -- I guess just taking the first quarter outlook and then the full year outlook together, we should expect more of a back half acceleration versus, say, second quarter. I guess just talk a little bit about just the timing of the acceleration as the year progresses.

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [5]

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Yes. Very much so from a revenue perspective, but I would also note that as the revenue grows, we'll see margins increase. We've -- we're so confident in our revenue growth that we've invested for our product development innovation starting even in this first quarter. So we're slightly below where we would be otherwise, without that investment.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [6]

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Understood. And then you talked about some areas of incremental investment. But just -- I think you spoke more about things that are rolling out this year. As we think about what you're investing in today, I think it's for the pipeline beyond 2020, what are some things, just as we think about just growth beyond the current year?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [7]

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Well, if your question is on product investment, I think there is a major transformation in the markets that we participate in, going from systems of record to systems of engagement and intelligence. A system of record tells you what the data is. You can pull reports and that. It will give you workflow. But it doesn't know the user, doesn't make recommendations to the user, doesn't predict future events or possible outcomes, make recommendations and the like. And we will see -- you already see that kind of built in ML and AI in some consumer applications. You see that in some areas of digital marketing, for example. That is coming across enterprise software that's coming to our markets. And we're well ahead of that. We just had a strategic advisory board with 18 of our top bank customers. And they're very focused on today's operational excellence, but equally focused on our ability to deliver for them the next generation platforms and next-generation capability, which is all-around systems of engagement.

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Operator [8]

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The next question comes from the line of John Davis with Raymond James Financial.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Rick, just want to start off with a quick housekeeping question. The updated guidance for fiscal 2020 -- I'm assuming that does not include the buyback, but I just wanted to confirm that.

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [10]

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That's correct. We never guide on share count until it's repurchased. But at today's prices, it won't have a material impact on EPS.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Okay. And then Rick, maybe just quick commentary -- sorry, Rob, on the Mastercard's announcement of buying Nets account-to-account business in Europe. Is that similar or different to your business? Do you see any impact from that? And just I guess some high level commentary on your year-over-year transaction?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [12]

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You were breaking up a little bit, JD, so I'm going to repeat the question. It was some commentary on Mastercard's acquisition of Nets.

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [13]

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Right, sure. That's actually more about payment infrastructure, so that's more consistent with their acquisition of VocaLink, for example. So it's the -- kind of need to think of it as the rails. What Bottomline is going to be -- is doing is we're helping organizations put payments onto those rails and receive payments from those rails. But we aren't the rails ourselves. So we aren't going to run NationalACH or a Clearinghouse system or the like. And that's what that acquisition -- and VocaLink, which they've done in the past. That's what -- that gives them that kind of capability.

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [14]

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Yes. When you think about our financial products, for example, we connect to over 30 different types of rails in Europe today. So the more rails there are, the higher our value add.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [15]

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Okay. And then on the capital allocation front, obviously the $50 million buyback is nice to see. Anything -- any interest in doing a bigger M&A transaction? Obviously, you guys have a very strong balance sheet with a lot of flexibly. There's a lot of changing going on, rumors of several of your competitors potentially being up for sale. Just any interest in doing anything more than tuck-ins? Or should we expect tuck-ins and continued buybacks on a go-forward basis?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [16]

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I think it's tuck-ins -- I think it's also technology. So our most recent combination or acquisition was really a pre-revenue company that adds expense and development and sales and marketing, but we get fabulous new capabilities that extend what we're doing today. So I think you'd see some of both tuck-ins and pure technology plays.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [17]

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Okay. And last one for me. Just as we try and bridge the near term, 2020 and I guess the next couple of years margin outlook, call it, 23%, 24% with the longer-term guidance, it looks like a lot of that -- for 30% to 35%, it looks like a lot of that expansion comes from the gross margin and not as much leverage on the fixed expense base. But maybe just talk specifically about what you see driving that gross margin expansion and kind of what gives you confidence in that longer-term margin profile of 30% to 35%?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [18]

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Well, I think, one of the things I'd comment right away, Rob, is that Rick referenced in his remarks that we'd see an increase as we move into this year in dev expense. So actually not only will we not see leverage there, we're going to be spending more on some of the things I've already talked about in terms of product and product initiatives. We will see gross margins on subs and trans move over time as we have this quarter. But the big thing I say on margin and we commented on this before, our focus is solving for growth. We're driving growth. We're going to drive growth in our 15% to 20% target range, and that's definitely the priority as we move into FY '20.

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Operator [19]

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Next question will be from the line of George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [20]

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Guys, I was encouraged to see the breadth of sales from your other channel partners, your non-BofA channel partners. Could you just give us a little bit more specificity into how active those other partners have been in the quarter and then also an update on the BofA side?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [21]

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Sure. They are very active, and we're very active with them. One of the things that makes our channel programs successful is our engagement with those channels. So that's sales training. That's making calls directly. That's strategic meetings. We've just hosted a couple of those banks at our strategic advisory board, just last week. So we're very engaged. And I think that's one of the keys we saw as I referenced in my comments, sales across the board, so really widespread, which is great, which is what we like to see.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [22]

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And just to be clear, Bank of America remains active as well. So...

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [23]

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Absolutely.

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [24]

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Absolutely.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [25]

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More people rowing the boat, if you will. So Rob, you mentioned on the last call that you were making investments in Paymode in particular over kind of a 3-year period. And I just -- I wanted to see if we can get an update on your thought process in terms of the timing and the significance of the investments you're making in that platform?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [26]

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Well, we're making investments, to be clear -- so I'll comment on both. We're making investments across all of our platforms, intelligence, personalization, the analytics, leveraging data. Those are common themes across all of our platforms. In terms of Paymode-X, some of the things we're doing is much -- lot more on security. We've always been a very secured platform. But what we're hearing more and more from customers is security is really a catalyst to come onto the platform. We've been selling against check and antiquated inefficient payment processes, but people kind of live that because we've always done that. Then when they are hit with a fraud incident, which the most recent thing I saw was 79% of businesses that had reported payment fraud in the last year, that becomes a real catalyst to come on.

So we're doing more things around fraud. For example, our network payment score, which, if you think about the network we have, we have data that nobody else can get on their own. So if you're about to pay a vendor for the first time, has anybody else paid this vendor? Or you're paying them an amount that's much more inconsistent with what others have paid? If you've paid this vendor before and so have others, but suddenly there's a multimillion-dollar payment that -- well do they make -- do they sell aircrafts? And that's consistent with what they normally receive or is that an out something that's -- maybe that accounts been compromised?

So we're -- we have a lot of fraud protection built-in, in the network, and now we're adding more for payer specifics, things you could just never do on your own. That's a huge advantage for Paymode-X. Other things we're building in is our invoice capability. We've always had invoice platforms at Bottomline and a lot of expertise around that. We've now fully integrated that into Paymode-X, so we have the invoice to pay. And that addresses a small market -- a small or midsize market needs much better because they look for a broader solution than the mid-market and larger corporates would. So those are a couple of things. And then we're -- on the sales and marketing side, we're adding additional direct sales teams to supplement the bank channels as well. So investment on both sales and marketing and product and Paymode-X.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [27]

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Super. One more question if I could on the digital banking side. So you mentioned signing up one of the world's largest banks. Can you just give us a sense of the significance of that in terms of size, relative to traditional transactions for you? And are you working with the entirety of that bank? Or is this just a portion of the bank? Does this give you additional upsells at any point?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [28]

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Yes. It's actually our largest subscription, and it's just a portion of the bank. It's just a region for the bank. So very exciting. Part of that, by the way, is that we're adding more capability than with single platform there. So we'll have -- we have the ability to have online account openings, cyber fraud, risk protection, secured payments, payment automation and now our insights, which gives you customer insights of the level the banks have not previously had. So those are some of the things that can get us to a larger deal sellers. This had a nice combination of capability of secured payments, real-time payments and our DBIQ platform.

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Operator [29]

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Next question will be from the line of Mayank Tandon with Needham & Company.

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Kyle David Peterson, Needham & Company, LLC, Research Division - Associate [30]

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This is actually Kyle Peterson on for Mayank. Just wanted to kind of follow up on M&A, some of the questions earlier. I know you guys have been potentially interested in doing some deals that are mostly technology plays. Just wanted to see if you guys found the right stuff out there. Would that necessarily impact, say, your elevated R&D investments at all, kind of a build or buy decision? Or is there just a lot of runway in the development front that we'd still see higher R&D cadence for a while?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [31]

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I think that on the development front, which really occurs because we've got such a clear innovation agenda and product vision. This isn't speculation or new features. This is absolute clarity and confidence where our applications are going. That there's an appetite to make such spend. And then we know what we're looking for from an M&A standpoint if we see those capabilities. So it's very targeted, very clear where we're going and where our customers need us to go. So I hope -- is that respond to what you're talking about on the M&A side? We're looking at technology. We know where we're going. We know what we're looking for. It's not randomly looking across a spectrum. It's specific capabilities.

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Kyle David Peterson, Needham & Company, LLC, Research Division - Associate [32]

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Yes. That's helpful color. And then just one follow-up, just on kind of Brexit and kind of noise in the U.K. I know you guys tweaked guidance, just given the pound weakness. Have you guys seen any operational disruption or anything you guys are hearing from clients, whether with their wallets or just verbally that has changed anything? Or is it just purely FX noise?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [33]

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Rick referenced this, but I'll say it as well. One of the things of how we do is we help businesses pay and get paid. In an up economy, down economy, businesses are paying and get paid. We grew in 2008 as kind of a evidence of that. But principal thing of what we see coming out of Brexit is not a slowness in economy. And the reason on that is economy itself seems fine. The second thing is more is going on with payments in the U.K. than anywhere else well, with Open Banking and then across in Europe, PSD2, the changes in payments standards, things that are moving. So it's a fabulous time to be in the business we're in, in the U.K. The one element that does hit us is currency. The volatility of currency -- and, unfortunately, Rick can shout -- I can say on earnings calls what constant currency growth rate was, et cetera. We know people are looking at screens. They are looking at reported numbers. And that's really diminishing unfortunately the progress we're making.

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Operator [34]

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(Operator Instructions) Next question will be from the line of Brett Huff with Stephens Inc.

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Brett Richard Huff, Stephens Inc., Research Division - MD [35]

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2 of them for me. One bigger picture for you, Rob. Can you talk a little bit about -- a question before asked about kind of whether you focus on being a network or sort of an aggregator of networks in an on-ramp. Can you talk a little bit about that, but then also talk about how deep you would like to go into, if at all, within the corporate to help process, get approvals and et cetera for expenses and okaying that kind of stuff, kind of, process automation stuff and kind of where you see yourself ultimately playing in that value chain?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [36]

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Right. So on network or on active -- we're actually both. So we're -- in some places we're a network like Paymode-X, for example. in other places, we'll be aggregating. Like our Universal Aggregator, we'll take different payment types in different rails. So we actually can play both angles, whatever is going to help accommodate the customer, whatever the customer's needs are going to be. In terms of process, we already do a lot of that type of process. When I mentioned our invoicing capability, that's invoice receipt, that's AP automation and how are you handling that workflow. What's -- what occurs? Is the invoice correct? Is there adjustment to be made? Is there stuff to be paid? If you think about what we do in legal spend management, that's all process approval. So we have a lot of strong capabilities on both ends, on the payment side and on the process and approval side.

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Brett Richard Huff, Stephens Inc., Research Division - MD [37]

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That's helpful. And then Rick, one for you. On the bookings, we've gotten a lot of questions on the bookings. I just want to make sure I have it right. You guys put up $24 million, $25 million this quarter in the year-over-year compare. Is that $25 million -- is that the right number to use?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [38]

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In Q4 '18, it was $24.8 million, so yes.

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Brett Richard Huff, Stephens Inc., Research Division - MD [39]

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Okay. And just from an acceleration -- I know it got -- it improved dramatically sequentially in terms of the year-over-year growth. But kind of how should we think about bookings? I know they're naturally lumpy. I know it's hard to estimate them. That's difficult. But in terms of -- you talked about a strong pipeline. Optically, is there any sort of, I don't know, rules of thumb or thoughts you can give us on as we think about the bookings in the future?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [40]

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We try hard not to guide bookings just because, as you noted, that they are lumpy. I'd like to look at them on a trailing 12-month basis. And if we're seeing bookings that are 25% to 30% of our subs and trans revenue in the same period, that's a very strong signal. I'll note that we were a little ahead of it this quarter. It was 31%, but we're 28% for the trailing 12-month, so right where we want to be. The only other thing I'd add on that, by the way, is to remember that, in many cases, we have growth upside of bookings. So for example, if volumes go up on a transactional-based pricing model in Paymode-X or legal spend management, those business that bring on other division and sort of acquire or do other things, that will rarely if ever have a new contract or a new bookings number. So we see actually -- can see a lot of growth outside of straight conversion of bookings into revenue.

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Operator [41]

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Next question will be from the line of Cris Kennedy with William Blair & Company.

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Cristopher David Kennedy, William Blair & Company L.L.C., Research Division - Associate [42]

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Rob, just wanted to follow up on your comments about Open Banking and that opportunity in Europe. Can you just talk about kind of how you guys are positioned? And how material that opportunity can be?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [43]

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Well, the change to payments and how the world will work over time is very material. No one really knows exactly how that will evolve, but that has the potential to be very significant. And that's always good for us because we're the software then that accommodates change in payment. So we help corporates then deal with the next standard or whatever that new piece may be. What -- a definition for everyone, so they understand it. What Open Banking mandates is that banks -- if the owner of the account requested that the bank make that account available through API. So what that means is -- aggregators, for example, other providers can then access that account, leverage that information with API. So some of the places that's an opportunity for us as we work with platforms that would do that directly or provide that capability for banks and challenger banks. We're expecting some level of that kind of thinking that come to the U.S., probably not enforced from a regulatory standpoint the way it has been in the U.K. But some banks -- challenger banks and more forward-thinking banks may decide to provide that capability, and we have a next-generation infrastructure, architecture that allows us to provide that kind of Open Banking capability to a bank, whether they're leveraging our platform or not. So it's actually a product opportunity as well.

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Cristopher David Kennedy, William Blair & Company L.L.C., Research Division - Associate [44]

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Okay. That's helpful. And then on Paymode-X, as you guys go down market, can you just talk about kind of how the competitive landscape is different? And kind of how the business is different versus the larger businesses?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [45]

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Sure. I think there's couple things you'd see too, mix of payments that would be different. You can see more card as you're moving down market. So we have a partnership with Visa. We also can accommodate Mastercard payments. So you'd see more card payments across that. You'd see a broader capability not just looking for payments. You'd look for invoicing through the payment. And then there are some mix of competitors that are focused more on small business or micro business, MineralTree and AvidXchange and other. I think a real advantage we have there is security, scale and the size of our network. Another advantage we have is our channel partner relationship. So banks that has success with Bottomline now have an opportunity to take us further down market into their customer base.

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Cristopher David Kennedy, William Blair & Company L.L.C., Research Division - Associate [46]

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Okay. Great. And just one last one. The bookings, $83 million for the year, is there any way you can put perspective on the key drivers of that, whether it be Paymode-X and banking? And is there any way you can just help us think about the percentage from...

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [47]

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You just hit the 2 biggest right there, so that's exactly right, Paymode-X and then digital banking. And they really represent 2 great opportunities for us going forward. So as we move into next year, I'd expect them to continue to lead our -- be our leaders in bookings.

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Operator [48]

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Next question will be from line of Dan Perlin with RBC Capital Markets.

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Matthew Van Roswell, RBC Capital Markets, LLC, Research Division - Associate VP [49]

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It's actually Matt Roswell in for Dan. Congratulations on a nice quarter, especially with the FX headwinds. In terms of a bigger picture question, you're getting some very nice wins in digital banking. Is there any kind of changes in demand or differences in demand you can see between larger, smaller banks, global banks, European banks versus North American banks?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [50]

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I think the demands to grow your business banking franchise are universal. For anybody, that's a truly important part of their bank, whether they are small or large. That's a real mandate. So you could see it in this quarter with Bottomline, a $6 billion assets bank and then a $30-plus billion asset bank and then a major global bank. So that will see as common. We have -- our technology gives us the ability to scale the capabilities and to scale price point that fits each of those size banks. We're focused more today on North America. We have a presence in Europe and banks in Europe as well. We're not addressing the rest of the globe. And we find -- usually that will bring us more customer requirements, other pieces. And so there's a ton of market opportunity for us in North America and Europe, and that's really what we're focused on.

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Matthew Van Roswell, RBC Capital Markets, LLC, Research Division - Associate VP [51]

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Have you noticed with some -- 2 of the kind of core bank processors tied up in large acquisitions, have you noticed any changes in their push, their competitiveness, et cetera?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [52]

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I couldn't tell you that we've seen that specifically. What is a pattern in the past with other competitors, other cores, that's always been at distraction. That always becomes a focus. I think what's happening instead for us though, whether they slow down or not is going to be less relevant, because what's really happening is we're speeding up. If you listen to what I talked about on the DBIQ platform, we're bringing all these capabilities in one integrated platform, with customer insights. There's nobody else doing that. There's nobody else bringing those kinds of capabilities. So yes, there's probably a theoretical benefit or advantage that they're distracted. I couldn't say we've seen that specifically. But even beyond that, we're moving so fast and bringing so many new capabilities to the market that a core solution is appropriate in some circumstances, but not if you're truly ambitious about growing your business banking franchise.

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Matthew Van Roswell, RBC Capital Markets, LLC, Research Division - Associate VP [53]

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Shifting over to Paymode-X, where do we stand with the move to kind of the interchange like model? And does the kind of move downstream help or hurt that transition?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [54]

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That helps the transition. And it's not a transition at this point. That is our model today. And that helps because this move downstream is a smaller ticket. They're more used to an interchange or paying on a -- being paid on a card and a vendor community. So I think we see a higher acceptance of dividends or a network use fee model, vendor pay model, whichever terminology you want to use.

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Matthew Van Roswell, RBC Capital Markets, LLC, Research Division - Associate VP [55]

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So obviously new clients are on that model. What sort of percentage of kind of the Paymode-X volume do you think is -- has moved to that model?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [56]

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It's still a vast majority, is on the traditional model. They still by a large -- vast majority of that's still on the traditional model, a 90% kind of number.

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Matthew Van Roswell, RBC Capital Markets, LLC, Research Division - Associate VP [57]

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Okay. And a question on the numbers for Rick. Tax rate for the year. I think last quarter you've talked about a 25% rate. Does that still seem reasonable?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [58]

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Correct. Yes, we did, and it's still there.

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Operator [59]

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Our next question will be from the line of Peter Heckmann with D.A. Davidson.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [60]

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Did you -- I'm sure it will be in the K, but just trying to track some of the segments. Legal spend in the quarter, what type of growth did that put up? It really seems like it was outperforming in the first 3 quarters of the year.

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [61]

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Yes. The legal spend, which has been a strong performer throughout the year, can be lumpy at times, depending on the timing of customer go-live. So we actually had 1 large customer that slowed down their roll out a little bit for internal reasons. And so that impacted our growth rate. So it will be off a little bit. I think we're talking later tonight, but we can talk about it then.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [62]

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Okay. Okay. And then -- and that leads me to my other question within the outsource solution or cloud solution segment. It appears settlement networks saw a big deceleration. And of course, that's your Paymode-X business and the SWIFT messaging business. But it looks like it -- depending upon how the fourth quarter came out, it looked like it decelerated. And it seems like as you shift to the interchange model on Paymode-X, we should actually see that line accelerating. I know there is a small currency impact there, but what are the give and takes there? Why aren't we seeing that line item grow 15%, 20% on annual basis?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [63]

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2 pieces. First and foremost, Q4 was an exceptional quarter within payment networks. And we even referenced it in the call as being very, very strong. And then the other thing is the decline in the pound certainly impacts the SM business.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [64]

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Okay. Okay. That's helpful. And then just the free cash flow that might be implied by your 2020 guidance. Can you help us with a range there?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [65]

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Oh, I don't have the free cash flow in front of me.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [66]

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Okay. Maybe just one more then. We did see in the new that -- a little bit of an antitrust issue around this closed acquisition and -- or anticompetitive, and made an order to segregate the business. I know it's a small deal, but it's interesting that such a small deal would result in an investigation by the -- by anticompetition authorities. Can you just give us some insight there into what exactly they might be concerned with?

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [67]

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Yes. We're -- it's entirely customary for them to review transactions of this type. We're working closely with them in the review. And there is some misperception around the recent order. That order is simply requiring us to hold certain confidential information separate. More specifically customers, for example, can't be stored in the same CRF. So it's normal course.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [68]

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Okay. So we should see that resolved in -- hopefully in next quarter or so.

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Operator [69]

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The next question will be from the line of Bob Napoli with William Blair & Company.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [70]

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Just wanted to ask a little bit more on the adoption of virtual cards and the buildout of direct sales force. Any more color that you can give on that. I mean are you -- who are you working with on virtual cards? And what are the plans on building out the sales force for Paymode -- a direct sales force?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [71]

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Well, our strongest partnership is with Visa. We work with Mastercard as well. We've always had a direct sales force. I'm glad you asked the question because it'll give me a chance to clarify. We've always had a direct sales force and with certainly support and are channel-driven first. So if there's a conflict on that, we'll often step back and let that go directly to the channel. We're just going to be adding more horsepower behind that direct sales force.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [72]

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Okay. And just on the virtual card is what percentage of your revenue in Paymode comes from virtual card?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [73]

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Nothing, very little today. I mean it would be a very insignificant portion today. It's part of when we went to, added the card for an integrated payables solution, now we're seeing more from -- we'll begin to see that payment type as well. Part of it is strategic though because that allows us to then accommodate a payer. We have a number of payers in the past where that would be a separate part outside of our platform. We'd handle everything else other than card. Now with a full integrated payables solution, everything can flow through Paymode-X, makes it much easier for the payer. And then we'll start to see revenues on the card as well.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [74]

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And revenue on that card would be much higher, I think, than off the card? I mean the revenue yield is much higher. Is it not or?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [75]

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No, because there's a higher interchange, but there's a much higher payout in terms of a rebate. So -- and then there's a number of other partners that are engaged in that. On a ACH+, where we have a network use fee we're sharing with the bank and the payer, we take the largest share of that. So we're really -- look, we're kind of want to accommodate what the payer wants to do rather than drive for what's more profitable for Bottomline. But the most advantageous payment type for us specifically would be -- would still be ACH+ with the network history.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [76]

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Okay. And last question just on Paymode. I don't know if you -- Rob, if you could give us some color on what the growth rate of that business is. And what you think it would be? Is it above the sub and trans target that you have and...

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [77]

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Yes. The growth rate we'd expect -- that's one of the big drivers next year, and it's higher than our targets, absolutely. We're not breaking out product by product growth rates but yes, absolutely, higher plan for next year plan. And our confidence -- it's a big part for it. That will be higher than the average growth rate.

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Operator [78]

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Next question will be from the line of Terry Kiwala with First Analysis.

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Terrence Kiwala, First Analysis Corporation - VP of Enterprise Productivity Software [79]

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Congratulations on a great quarter. My question is regarding the digital banking onboarding process and how you're structuring investments in development to choose, speed that -- potentially speed that process and how that would impact your 3- to 4-year sub and trans goal?

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [80]

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We're not -- so there are investments we're making in things like next-generation infrastructure that give us an API layer and faster integrations into core and other systems. But the bulk of the investment we're making is around product capabilities and functionality and customer insights and a fully integrated single platform. The time frame on an implementation isn't as much about the technology. It's about steps. It's about the fact that you're working with the bank, working with multiple systems. There is a testing cycle. There is reviews of that. There's a plan. And compressing those isn't as much about technology as it is about the human process. So I think we've seen 9-month implementations today. I think that's a great target. Could that move up slightly? Perhaps. But that's not what we're investing for. What we're investing is to deliver more capability to banks, so they have more insights about their customer. They can know more, determine more actionable next sales and even defensive moves that they would make, more breadth of functionality that they can provide their customers. So speed of integration has some elements in there in the API architecture. But it's not the principal driver or principal benefit of the investment we're making.

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Operator [81]

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At this time, there is no further questions in the queue. I'll turn the call back over to Mr. Eberle for any closing comments.

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [82]

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Well, thank you so much. Thank you for your time. We couldn't be more excited for the position we're in. And heading into the coming year, we couldn't be more excited for the results we're confident we'll post. And with that, we've got our $50 million buyback that will be in place as well. So clearly, we look forward to reporting back on subsequent quarters and the fiscal year as we go forward. And we thank again everyone for your time.

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Richard Douglas Booth, Bottomline Technologies (de), Inc. - CFO & Treasurer [83]

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And Rob, I can add to that, that the free cash flow will support the $50 million buyback.

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Robert A. Eberle, Bottomline Technologies (de), Inc. - President, CEO & Director [84]

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Very good. Thank you.

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Operator [85]

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Ladies and gentlemen, this conference will be made available for replay after 7 p.m. Eastern Time today until August 22 at midnight. You may access the replay service at any time by dialing 1 (800) 475-6701, and entering the access code 470537. International participants may reach it at 1 (320) 365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.