Bottomline Technologies (EPAY) Q1 2020 Earnings Call Transcript

Bottomline Technologies (EPAY)
Q1 2020 Earnings Call
Nov 08, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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

Rob Eberle -- President and Chief Executive Officer

Good morning, and welcome to the first-quarter fiscal '20 earnings call. Thank you for your interest in Bottomline. I'm here with 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, bookings success, positive customer engagement, and continued advancement of our product set. We grew subscription revenue in our target 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 our focus on this valuable revenue stream. Subscription revenue was $80.1 million for the quarter.

We're now at $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. 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. 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 it fundamentally demonstrates the appeal of our products 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 in the quarter, starting with Paymode-X. We have a large opportunity with Paymode-X to be the way business is paying get paid. During the quarter, we signed 32 new payers, Paymode-X, a record, including several payers that signed on for Paymode-X with Visa payables.

The new payer sign-ons represented a number of verticals and demonstrates the massive future opportunity. New payers on the system include one of the leading e-commerce companies, a major furniture manufacturer, several hospitals and healthcare providers and two universities. The breadth 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 saw sign-ons through Fifth Third, TD Bank, Citizens, and UMB.

During the quarter, we also grew our direct sales effort for Paymode-X. We're fully committed to our bank channel partners. But at the same time, there's a sales opportunity beyond what we achieved with and through the banks. This is a significant investment for us, but one which we're confident we'll have a strong return in FY '21 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 payment score, providing Paymode-X payers with increased confidence in the security of their payments. Simple, straightforward, and intelligent, the network payment score provides visibility of their regularities and potentially risky payments based on insights and roles that leverage the transaction history and community data drawn from the massive B2B spend that flows across the Paymode-X network. We had a solid quarter in legal spend management, as well, signing three new deals in the quarter.

We continue to grow in the legal spend market by deploying the leading platform and launching additional offerings, which accompany it. 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 or bookings.

Our European product set a record bookings quarter and was second only to Paymode-X and its contribution to our total bookings number. The strength of our European results speaks to opportunity, products set, and execution. Continually evolving payment standards, like Open Banking and PSD2, creates new opportunity. Our relationships with banks in London and across Europe is strong and provides lots of new product set 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. Our 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 in banking with four new deals, including one major platform DBiQ deal, and our second customer in 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 that we only play well for the 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 the largest customers and drive up market growth, all at an attractive SaaS model price point.

The thoroughness of this bank's selection process is another reason their choice of Bottomline is particularly meaningful. The bank looked at all their options and engaged to 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. The bank will be using our solution to provide customer intelligence and insights to the commercial banking and wealth management groups. We know insights is an exciting capability for our commercial banks to see if chosen by a new bank, not currently on our platform, and to be at a point for wealth management and commercial banking suggest the market may be much much larger than we had 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 bottom line. I'll comment on two areas in particular, Paymode-X and banking solutions. The opportunity in Paymode-X is huge, and we are executing against that, as evidenced by a 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 breadth 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 in alone. We're seeing clear 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.

The 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 and innovation they need to compete, win, and grow. Analytics, new payment standards and the ever-expanding cybersecurity threat are just a few of the examples of the challenges they are counting on Bottomline to help them address.

That translates into demand for our DBiQ platform, our 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 banking executive dinner with CIOs, CTOs and heads of commercial banking, we held around AFP, a prospective customer that we'd 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 a key element in our continued sales success and market wins. Our existing customers and the reputation we've earned is one of our most valuable assets. In fact, aligning our customers and being a trusted innovation partner is the theme across all of Bottomline. We know that it's 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 in 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.

Rick Booth -- Chief Financial Officer

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 of $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 signed 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 '20 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, I'll review 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 to each line in our P&L.

And in addition, we've 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 that this growth will remain within our 15% to 20% range because we have visibility through multiple growth drivers, including signed 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 3 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 planned 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. While bookings figures are 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 '20 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 for additional divisions our adopting 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 those 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 implementation themselves continue to go very well with another large customer live in the quarter, and six more large banks and a variety of smaller banks scheduled to go live in the second half of the fiscal year. This visibility gives us high confidence that banking will achieve 15% to 20% growth within fiscal '20. These bookings and signed backlog give us confidence that our targeted investments in product development and sales and marketing are bearing fruit and provide excellent visibility to revenue growth acceleration in fiscal '20 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 was $16.7 million in the quarter or 15% of revenue, up 1 percentage point year-over-year, but still a lean and efficient level of spend.

Sales and marketing expense was $20.7 million or 19% of revenue, also up 1 percentage point year over year. While G&A expense was $8.3 million or 7.7% of revenue. From a cash flow perspective, we generated $18.1 million of operating cash flow. And as planned, we used $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 into 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 '20 and beyond in the longer term, as we drive toward $500 million of subscription revenue in three to four years, beginning with the growth we can see in fiscal '20. 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 million 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 us solidly on track for the year. Now all note, 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 evaluating 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. Our primary focus is on growing subscription revenue and the 16% constant-currency growth combined with solid bookings and excellent visibility, give us high confidence in fiscal '20 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 instruct that all of the year-over-year trends are moving consistent with our strategic plan and long-term model. Subscription revenue as a percentage of total is up 6 percentage points. Subscription gross margin is up 2.6 percentage points. Sales and marketing expense is up 1 percentage point.

And product development is up 1 percentage point as we expand the value propositions available to our customers and the future revenue opportunities for the business. 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, I'll turn it back to Rob for a few concluding remarks before we take questions.

Rob Eberle -- President and Chief Executive Officer

Thank you, Rick. Now before we open up the call to questions, I'd just like to make a few concluding remarks. First off, I was really delighted to see the acceleration of our subscription growth of 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%. Tying growth and 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 '20, we'll be in the 15% to 20% subs and trans growth target range and fiscal '20 will be a strong year. So I think we're addressing both near-term performance and long-term potential.

It was an exciting quarter. And with that, we'll open it up for any questions.

Questions & Answers:

Operator

[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.

Andrew Schmidt -- Citi -- Analyst

Hi, guys. Thank you for taking my question. And good to see the consistent results here in the step-up in subs and trans. The small bank, when you called out, I 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.

Rob Eberle -- President and Chief Executive Officer

Yeah. I think, as I mentioned in my remarks, it 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 and really banks of any size. Last quarter, we had a small of $5 billion or so assets bank, same in this quarter. So that shows the breadth of capability.

In terms of the legacy platform Intuit, 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 base.

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. We're -- 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-sized bank much easier, faster. And again, the SaaS model allows that to us to deliver that technology at a price point that's attractive. So the smaller banks are definitely part of our strategy going forward, and we're already seeing success with them.

Andrew Schmidt -- Citi -- Analyst

OK, that's helpful. And then I was wondering if we could just talk about pipeline. And I know you don't give booking's forecast. But if you could talk a little bit about the pipeline as you see it today, and how that might translate to sales going forward? I know you've added a number of good products, obviously, your DBiQ, there's the automation suite around Paymode-X, but anything around the pipeline as it relates to sort of the forward booking trends would be helpful.

Rob Eberle -- President and Chief Executive Officer

Sure. So on banks, we have a lot of momentum. If you are looking at a business banking platform, Bottomline is probably in the pull position beginning that process. Industry analysts, reputation, technology platform across all 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 drives a fabulous pipeline for us, where we have a newer sales effort on Paymode-X as a direct sales team that we're just building out now, and that will just supplement the channels. But we have a wonderful pipeline. One of the things that's happening in Paymode-X, there's just more market interest.

There's more interest in customers that will have either had a fraud event and they want a more secure way to execute payments or want to change out finally -- want to change out legacy systems, then get to something more efficient that also monetizes payments. So pipeline is really strong there. And the last comment I'd make on pipeline is Europe. 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. But what 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 secure solutions, it's probably a mix of all those factors. The pipeline is really 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.

Rick Booth -- Chief Financial Officer

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 paths 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.

Andrew Schmidt -- Citi -- Analyst

All right. Good progress. See you next week. Thank you.

Rob Eberle -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of John Davis from Raymond James. Please go ahead.

John Davis -- Raymond James -- Analyst

Just want to hit on guide for a second here. I think both you and Rob have said that 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? I realize it's the first quarter, you guys typically don't raise guidance, but just want to make sure not missing anything and there aren't any offsets? Thanks.

Rick Booth -- Chief Financial Officer

I think you said it very, very well, both. 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. 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.

John Davis -- Raymond James -- Analyst

OK. And then Rob, some of your commentary around the margin and the incremental margins, I think on the gross margin side is 78%, pretty impressive. And you kind of talked about driving both revenue growth and margins over the longer term. Does that change, sounds a little bit more positive on the midterm outlook, I think, the last quarter or two quarters ago, you talked about kind of flat margins for the medium term.

Any any kind of update there? It sounded a little bit more positive, but just wanted to get any comments.

Rick Booth -- Chief Financial Officer

I think it reiterates the importance of our strategy here of solving primarily to drive to $500 million of subs and trans growth. With the strong economic underpinnings, now it's the time for us to be focusing on revenue and the profit will be there.

John Davis -- Raymond James -- Analyst

OK, great. And then I wanted to touch a little bit more on Andrew's question around small banks. I think I appreciate the win this quarter, it's good to see. But any update on the attrition of the legacy Intuit business.

I think you guys have lost or had a -- launched a new product there to try and stem some attrition. I know it's early days, but just any progress there would be helpful.

Rick Booth -- Chief Financial Officer

Yeah. The early feedback on that product is strong, but we do expect that we'll 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 estimates of attrition.

John Davis -- Raymond James -- Analyst

OK, thanks. And last one for me. Rob, any comments on either competitive landscape given 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 would be great.

Thanks, guys.

Rob Eberle -- President and Chief Executive Officer

Sure. From the competitive landscape, when there's acquisition and M&A activity. It's usually a distraction. We've seen that happen a number different times.

So that's generally a plus for us. For example, I looked at a Fiserv bringing in First Data. There are some elements in areas where we'd overlap. I think their focus will be on First Data, of course.

From our M&A standpoint, we certainly are active in the market. We certainly look. We have all of 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 will disrupt the momentum of that year, disrupt the subscription growth, be dilutive to that, be dilutive to our earnings level. So there's a pretty high bar in 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-sells. So we're active in the market, but we're not going to be aggressive or get over our skis.

John Davis -- Raymond James -- Analyst

OK. Thanks, guys.

Operator

Your next question comes from the line of Gary Prestopino from Barrington Research. Please go ahead.

Gary Prestopino -- Barrington Research -- Analyst

Hey, good morning, everyone. Hey, Rob, just wanted to get an idea. You mentioned some of these new signings are 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?

Rob Eberle -- President and Chief Executive Officer

Yeah, that's correct. Where -- it was interesting to have those wins, in particular, because we have done less in -- with the manufacturing and e-commerce. This was a big name. We can't give out their name.

But it's really interesting to have that win. So I think we've got deep penetration and potential, and we're not penetrated, but real value proposition in 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.

Gary Prestopino -- Barrington Research -- Analyst

Were some of these newer verticals generated by the direct sales team or were they through the bank?

Rick Booth -- Chief Financial Officer

No. well, no, not really. That team is just really ramping for us. We had a couple of wins from the existing direct team.

But we're going to build out a much bigger direct sales team than we have today.

Gary Prestopino -- Barrington Research -- Analyst

OK. Thank you then.

Operator

Your next question comes from the line of Mayank Tandon from Needham & Company. Please go ahead.

Mayank Tandon -- Needham and Company -- Analyst

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? Just maybe some thoughts around the implications for your business as real-time payments become more mainstream?

Rob Eberle -- President and Chief Executive Officer

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 are some other interesting aspects about it.

One, you get to -- its new capabilities but 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 cybersecurity aspect of that. If the payment is settling in a much quicker time frame, you want more technology around that payment to ensure that's the right payment and a safe payment.

And that certainly is an opportunity for us with our Cyber Fraud Risk Management and financial crime solutions.

Mayank Tandon -- Needham and Company -- Analyst

Got it. That's helpful. And then just going back to Paymode-X. I think you've mentioned in your comments that you had a record -- a number of payers 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 gaining traction. So some thoughts around that would be very helpful.

Rob Eberle -- President and Chief Executive Officer

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 make payments on your own as a corporate is much more accepted than it was a couple of years ago. I think the second piece is cybersecurity.

Many times, we'll talk to a new prospect, then they've had an event and saying 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 they're seeing more customer interest openness. We see the sales cycle, where in the past, we have people at informational meetings and were addressed, we see much more of a driven process today. So it's an excellent market, and we're seeing it in the growth.

Mayank Tandon -- Needham and Company -- Analyst

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?

Rick Booth -- Chief Financial Officer

Yeah. 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 and being nimble and ready to respond to opportunities.

Mayank Tandon -- Needham and Company -- Analyst

Excellent. Thank you.

Operator

Your next question comes from the line of Brett Huff from Stephens. Please go ahead.

Brett Huff -- Stephens Inc. -- Analyst

Good morning, guys. Thanks for taking the time. I 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 moved 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? Is this 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?

Rob Eberle -- President and Chief Executive Officer

So we continue to have a direct sales force, but it was relatively small. In fact, it's -- we signed a couple of deals this quarter, including one of the ones I've mentioned, was through our 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 a situation that UMB, Fifth Third, Citizens, Bank of America, any one of our channel partners is there on the customers' preferences to sign with that channel, we'll step back, and we're happy to give the business to the channel, and the economics work relatively similar for bottom line, and we can certainly compensate appropriately our sales teams. So it's really to look at where all the opportunities, new verticals, for example, outside of existing territory coverage with our bank channels, where are other 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.

Brett Huff -- Stephens Inc. -- Analyst

Have you guys sized at all how big that will 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?

Rob Eberle -- President and Chief Executive Officer

There's a couple of ways you could go in thinking about it. 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've still got 50% of business is 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, ARR where they haven't. We have some plans and some thoughts about that, but we're not bringing that out or disclosing that at this point.

Rick Booth -- Chief Financial Officer

Yeah. I think more broadly, you can look at the plan and the in-process investment. We've raised sales and marketing investment by about 1 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.

Brett Huff -- Stephens Inc. -- Analyst

OK, 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 that number has 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 totality of that $17 million? And can you give us a sense of phasing?

Rick Booth -- Chief Financial Officer

Certainly. That's a great question. And the number has been similar for a while because we're signing new banks as fast 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 is 13 banks in implementation now. So there is small banks, as well as large banks. We tend to focus on the large banks, which were $1 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.

Brett Huff -- Stephens Inc. -- Analyst

Great. And last question for me. I know that the bookings comps were 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, if I heard that's right.

The comps continue to be a little bit easier. I know you had such a really strong, I think, fiscal '18. Are the comps sort of more reasonable this year? And should we kind of expect to see that going forward?

Rick Booth -- Chief Financial Officer

I understand that bookings are going to vary greatly quarter to quarter. In my remarks, I always focus on the 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 the people to realize how strong the bookings were this quarter, as well.

Brett Huff -- Stephens Inc. -- Analyst

Great. That's for me. Thanks for the time. Appreciate it.

Rick Booth -- Chief Financial Officer

Pleasure.

Operator

Your next question comes from the line of Bob Napoli from William Blair & Company. Please go ahead.

Bob Napoli -- William Blair and Company -- Analyst

Thank you. Good morning, and thank you for doing a morning call. I thinkspeak for my peers, and I appreciate the morning call. First question on Paymode X.

I mean, there's been a lot of questions asked about it, and Rob, you sound more excited about it this morning than you always have been. Obviously, it has 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 has that becomes a bigger business for you? And any thoughts around talking about the growth rate of that business or some sizing around it?

Rick Booth -- Chief Financial Officer

Thanks, Bob. I 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, it's continually evolving. We -- our position is unchanged. That it's not helpful for us to focus on that level of detail within our broader business payments portfolio.

Bob Napoli -- William Blair and Company -- Analyst

OK. 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?

Rob Eberle -- President and Chief Executive Officer

Well, 100% of everything we've been signing up in the last -- this year and this quarter and the last several years is vendor pay. We have a large and one of our competitive advantages is the base and scale. And so we have a large base and scale that was the legacy model. And those are -- the majority of those -- virtually all of those are Bank of America customers, and they've not chosen, have not chosen to change that model.

So we've -- still the vast majority of the volume and vast majority of the transaction to vendors are under the payer pay model. That remains an opportunity for us to convert that, but that will really be a Bank of America decision.

Rick Booth -- Chief Financial Officer

Yes. And the majority of the revenue impact is coming from the vendor pay model.

Bob Napoli -- William Blair and Company -- Analyst

I'm sorry, Rob -- Rick, what was the last thing that you made?

Rick Booth -- Chief Financial Officer

Majority of the volume on classic, majority of the revenue from the vendor pay model would be...

Bob Napoli -- William Blair and Company -- Analyst

OK. Right. Right. Right.

OK. OK.

Rob Eberle -- President and Chief Executive Officer

So it just shows the power of the model.

Bob Napoli -- William Blair and Company -- Analyst

Right. Thank you. And then a follow-up on the digital banking business. And actually, you changed them, and 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 one follow-up on that business.

Rick Booth -- Chief Financial Officer

I think the digital banking business performed very strongly this quarter, 17% growth, and we're confident that --

Bob Napoli -- William Blair and Company -- Analyst

Right. No, the acceleration was great. I'm just saying, you used to call that digital transitioning. And so it's really pretty much transitioned and...

Rick Booth -- Chief Financial Officer

Yeah. Yeah. From a revenue model, yes. That's certainly the answer when we're looking transitioned, 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.

Bob Napoli -- William Blair and Company -- Analyst

OK. And then on that business, you have a great banking corporate product, that it's very well regarded. Is there an opportunity? I think some of your competitors sell against you with a broader platform trying to cross -- offering both corporate and consumer. And there are so many other products that, 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 pipeline?

Rob Eberle -- President and Chief Executive Officer

Well, I don't think we would build -- it would be unlikely, 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're doing things like personal financial management, saving for personal goals, etc. That's a different than having a file of 10,000 payments that are going through a variety of different currencies having entitlements, the heavy-duty business banking type of stuff that we'll do from small business to multinational. An example, though, where we're broadening out, a couple of 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 insight 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 in it so that we would have the capability to have our banks learn from each click, learn more about customer, see what our next actionable items but we had a sale in the quarter, which is a new bank, and they're deploying it in wealth management. So that's 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 us 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.

Bob Napoli -- William Blair and Company -- Analyst

Thank you. Nice quarter. Appreciate it.

Rob Eberle -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Dan Perlin from RBC Capital Markets. Please go ahead.

Matt Roswell -- RBC Capital Markets -- Analyst

Yes, good morning. It's actually Matt Roswell sitting in for Dan. Following up on the digital banking, it's the various wins. Are you replacing existing vendors, upgrading your current clients? Or are these banks that are just realizing they need the technology?

Rob Eberle -- President and Chief Executive Officer

We'd be replacing. In digital bank, we will be 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 a technology solution, which hasn't kept up or made the level of investments in 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 or some capability today. But they're finding that they need more to compete.

Matt Roswell -- RBC Capital Markets -- Analyst

OK. And then you've had this great shift to the subscription and in the SaaS model, what products do you currently sell that are still kind of under the old license model?

Rob Eberle -- President and Chief Executive Officer

Sure. We would sell on-premise payment capabilities for corporate, for example. We'd sell our invoicing solution, 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 there, 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 of software license a quarter. But our real focus, sales marketing product is on a subscription model and SaaS technology deployment.

Matt Roswell -- RBC Capital Markets -- Analyst

OK. And then a 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?

Rick Booth -- Chief Financial Officer

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. We'll be selectively repurchasing shares, but we're not setting a timeline or any amount for that today.

Matt Roswell -- RBC Capital Markets -- Analyst

So think of free cash flow sort of being reinvested in things like the direct sales force or additional product, upgrading of additional product?

Rick Booth -- Chief Financial Officer

So we're executing exactly according to our business model, which is, while we're focused on solving to drive to $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 trans.

Matt Roswell -- RBC Capital Markets -- Analyst

OK. Excellent. Thank you.

Operator

Your next question comes from the line of Terry Kiwala from First Analysis. Please go ahead.

Terry Kiwala -- First Analysis -- Analyst

Hey, good morning. A 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 toward any individual platform? And then if you could give some thoughts on how we look at those costs in future periods?

Rob Eberle -- President and Chief Executive Officer

So I think you'll -- you'll see a continued focus on product for us. In terms of where 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 there's a lot of centralized investment, and we'd expect to make more centralized investment than the benefits each of the product sets.

Terry Kiwala -- First Analysis -- Analyst

Great. And then moving forward. So the relative increase in those costs we should consider in future periods?

Rick Booth -- Chief Financial Officer

Well, I think we've been pretty consistent in increasing the percentage of spend devoted to our 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 to excellence and driving the $500 million in three to four years.

Terry Kiwala -- First Analysis -- Analyst

Great. Thank you.

Operator

And at this time, there are no further questions.

Rob Eberle -- President and Chief Executive Officer

Very good. Well, thank you, everyone, for your time. It was a pleasure to report on a quarter where we saw acceleration of 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 is in -- every quarter is in our 15% to 20% subscription growth range and a very strong year for Bottomline and for its shareholders. So I appreciate your time this morning. Thank you all.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Rob Eberle -- President and Chief Executive Officer

Rick Booth -- Chief Financial Officer

Andrew Schmidt -- Citi -- Analyst

John Davis -- Raymond James -- Analyst

Gary Prestopino -- Barrington Research -- Analyst

Mayank Tandon -- Needham and Company -- Analyst

Brett Huff -- Stephens Inc. -- Analyst

Bob Napoli -- William Blair and Company -- Analyst

Matt Roswell -- RBC Capital Markets -- Analyst

Terry Kiwala -- First Analysis -- Analyst

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