Bottomline Technologies Inc (EPAY) Q2 2021 Earnings Call Transcript

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Bottomline Technologies Inc (EPAY)
Q2 2021 Earnings Call
Feb 2, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Danielle Sheer -- General Counsel

Welcome to the Bottomline Second Quarter 2021 Earnings Call. I'm Danielle Sheer, and I'm joined by Rob Eberle, Bottomline's CEO; and Rick Booth, our CFO.

I'd like to remind everyone that statements made on today's call include forward-looking statements about Bottomline's future expectations, plans and prospects. All such forward-looking statements are subject to risks, uncertainties and assumptions, including those related to the impacts of COVID-19 on our business and global economic conditions. The forward-looking guidance we provide today is based on our assumptions as to the macroeconomic environment based on the facts as we know them today.

Many of these assumptions relate to matters beyond our control, including the impact of COVID-19. Please refer to the cautionary language in today's earnings release and Bottomline's most recent periodic reports filed with the SEC, for 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 our website. We will be providing forward-looking guidance on this call. And the summary of the guidance provided during the call is available from the company upon request.

I'll now turn it to Rob for his remarks.

Rob Eberle -- Chief Executive Officer

Good afternoon and welcome to Bottomline second quarter fiscal '21 earnings call. As always, we appreciate your interest in Bottomline. Q2 was a solid quarter. While subscription growth continue to reflect transaction volume impacts, subscription growth excluding those products was 19%. We expect subscription growth to accelerate in both Q3 and Q4. Strategically, Q2 was an important quarter as we made some major advancements in our product set. We're executing against our strategic plan to build a subscription business of scale, driven by market-leading SaaS platforms.

Our strategic plan is focused on the product set, market position and execution needed to drive high margin subscription growth at or above our 15% to 20% target range. At the same time, we continue to drive consistent strong profitability and cash flow. The new capabilities we're developing to expand and enhance our key SaaS platforms positions us well to provide more product capabilities to customers, more growth for Bottomline and increased value for shareholders.

With almost $375 million subscription revenue, we can easily see $500 million as the next important milestone, one which we'll achieve in the next two to three years. At $500 million, our target growth rate translates into $75 million to $100 million of incremental high margin subscription revenue a year. Before I get further into my remarks, let me touch on the key financial results for the second quarter. Subscription revenue was $93.4 million, which was up 11% from a year ago.

As in the prior quarter, we continue to see an impact on our transaction-based revenue streams, Paymode-X and legal spend management. Excluding those two platforms, subscription revenue growth was 19%. The good news as we saw positive momentum in transaction volumes in December, particularly in Paymode-X, where for the first time we achieved pre-COVID volume levels. As a result, we're confident we'll see an acceleration in subscription growth over the second half of the year.

For Q3, we expect subscription growth of 14% to 15%. For Q4, we expect subscription growth of 18% to 20%. Our business model provides a high degree of visibility to future revenue and growth. We're confident we'll achieve the Q3 and Q4 subscription growth rates I just outlined. Subscription bookings were $21.9 million, solid bookings quarter, which reflects the strong competitive position and sales execution across our product set. EBITDA was $25.5 million for the quarter or 22% of revenue, on track to achieve $100 million in EBITDA for the year. And we continue to have a strong balance sheet as we ended the quarter with just under $140 million in cash after paying down our senior credit line and buying back over $10 million in stock. So, solid financial results for the quarter.

With that overview of Q2 results and our growth outlook for the next two quarters, the remainder of my remarks will focus on our SaaS platforms and strategy to drive sustained high margin subscription revenue growth. The factors driving accelerating growth are the size of the opportunity we're addressing, our competitive position in that market, the capabilities and value we're delivering to customers and our execution in converting that to subscription revenue and value for shareholders.

The market opportunity we're addressing is massive. Businesses and the banks to serve them are looking for more and more connected automation capabilities and data driven insights. We have a strong position centered around our leadership and business payments. That's not just a technology leadership but also a market position where a large number of customers are on our technology. Over 12,000 corporate customers leverage our corporate payment platforms Paymode-X and PTX. Over 425,000 vendors enrolled on Paymode-X. Tens of thousands more businesses receive payments from our PTX customers.

And almost 200,000 businesses leverage our platform each day to connect to their banks for payments and cash management capabilities. A number that continues to grow as we bring new banks on. So the position we can leverage is unique. We're well into our strategy to leverage our customer base, brand and distribution channels to expand from our strong core on payments to a full payments and cash life cycle platform. Customers benefit from our platform strategy because it provides end-to-end seamless management of the corporates banking, payments and cash management activities.

The platform empowers financial managers to optimize cash, liquidity and working capital and to do so with a unified solution combining payables, receivables and treasury management. A full integrated payment and cash lifecycle platform provides greater visibility, control, flexibility, automation and importantly, cyber security and fraud protection. And with a single platform, there is a unified view of data from multiple transaction systems, which is enhanced by advanced analytics and machine learning.

From a competitive position, offering a full platform strategy gives us a significant advantage over any point solution competitor. The platform breadth provides an opportunity for existing customers to expand their relation with Bottomline and new customers to adopt any element or the entire platform. With our large customer base, we have already market looking to embrace broader, more effective platform solution. We're confident we'll drive success with customers we know well and in a market where we are well known and highly regarded.

We've gotten in this point with minimal risk leveraging existing capabilities and strategic disciplined investments. We started with our core on payments. We added receivables and then added insights and analytics, and then three weeks ago, we added market-leading treasury capabilities.

I'll take a moment to go over each. Most on the call are familiar with our business payment leadership and expertise. That's our core. Business payments is an area where we're the clear leader. Our platform strategy is a logical extension of our core and centered upon our business payments leadership. An important capability for the platform strategy in any business is receivables. The receipt of cash and all the elements that go with it, reconciliation, forecasting, predictability and automation.

This past spring we acquired a receivables platform from one of our bank partners. We're combining that base platform with the European receivables capabilities we've already had as well as our existing machine learning and data management technology core. That gives us the front-end or money end capability. Simultaneously, we've developed our cash flow optimizer which brings a variety of data related to cash from different sources into an intelligent platform. This is an internal development, led by our CTO and advanced ML and analytics team. The result is that you set up unique insights and intelligence across all aspects of the payments and cash lifecycle.

To round out our vision for a full payment and cash lifecycle platform, I'm delighted to announce that three weeks ago we closed on the acquisition of TreasuryXpress. TreasuryXpress is a highly regarded and recognized leader in intelligent frictionless treasury solutions. The combination of their offerings brings us sophisticated on-demand scalable enterprise level treasury solution. TreasuryXpress serves 200 customers today across Europe and EMEA. The solution, like many of Bottomline's, has been sold directly to corporates and through bank channels. The company has recently been awarded best treasury management solution from Treasury Management International. The Alexander Hamilton Award for best liquidity solution, and best overall customer satisfaction from IDC.

We did a lot of work to find the right business combination from a technology and cultural perspective that we could bring into BT at an appropriate and attractive valuation. We're thrilled to be adding TreasuryXpress, its technology and team to Bottomline. It represents a critical piece in the execution of our full payments and cash lifecycle Platform. The work to complete the full integration of these elements is already well under way. The result will be a valuable platform for corporate customers and the banks to serve them, a platform with a broad set of integrated capabilities, supported by data insights and intelligence.

We've spoken to customers and surveyed the market, so we're confident reception will be strong and make a meaningful contribution to our growth. From a go-to-market perspective, it's a logical extension of our core strength in payments and an obvious opportunity to expand our relationships with our thousands of corporate customers. So, in conclusion, as we look ahead, I'm very excited for Bottomline. We serve a large market and are uniquely positioned. Our intelligent, payments and cash lifecycle platform strategy is a natural extension of our current strengths and success. It will drive deeper, stickier customer relationships and sustain valuable subscription growth.

With an acceleration in subscription growth ahead and the strategic advancement of our product set, FY '21 is shaping up to be an exciting year. Shareholders will be rewarded as we see the acceleration of subscription growth in the coming two quarters and a strong continuation of that growth beyond this year.

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. Bottomline delivered a solid quarter. Total revenue was above plan at $116 million. Profitability was in line with plan with $25.5 million of EBITDA and $0.30 earnings per share. And overall subscription revenue growth of 11% was below plan, but we have a clear visibility to subscription revenue accelerating to 14% to 15% in Q3, and 18% to 20% in Q4. I'll focus the bulk of my remarks on subscription revenue, focusing on key subscription revenue drivers in the quarter and visible drivers of acceleration in Q3 and Q4. I'll briefly review weather financial metrics and then I'll provide guidance for Q3 and for full year of fiscal '21.

First, focusing on subscription revenue, at $93.4 million subscription revenues in Q2 represent over 80% of total revenue and are equivalent to almost $375 million on an annualized basis. Two-thirds of this subscription revenue is unimpacted by transactional volumes. These streams grew at 19% year-over-year, driven by strong performance in our digital banking, PTX and financial messaging platforms. One-two of our subscription revenue comes from the Paymode-X and LSM product lines, which are volume-driven.

These lines held total subscription growth to 11% due to the continued impact of transaction volumes as recovery during the quarter was clear but that recovery happened later than expected. We have visibility to acceleration in Q3 and Q4, which is expected to drive subscription revenue growth to 14% to 15% in Q3, and 18% to 20% in Q4.

In legal spend management volumes ramped consistently in the quarter, resulting in the most meaningful increase in volumes since the pandemic began. We expect this acceleration to continue for three reasons. We expect existing customers to continue to grow volumes as they did this quarter. We have 20% more customers scheduled to go live in the second half of the year than in the prior year. And new customer demand remains strong. In Paymode-X, payment volumes accelerated again from last quarter and are now both prior year. We expect this acceleration to continue for four reasons. First, existing customers should continue to ramp strongly as they did this quarter. Second, we have almost 50% more payers scheduled to go live in the second half than in prior year. Third, we expect to accelerate time to revenue and volume of usage as we've increased the resources dedicated to the launch and ramp support. And finally, new customer demand remains strong. This growth in subscription revenue drove total revenue to $116 million in the quarter. With subscription revenue driving total revenue growth, we expect total revenue growth to accelerate meaningfully in Q3 and to report double-digit revenue growth in Q4.

Turning to sales, our booking results also reflect solid demand. Customer signed 21.9 million of new subscription bookings. And while bookings are estimates and customers take time to implement and ramp to full revenue, this provides us with a high level of visibility into future revenue. Our Paymode-X network added 28 new payers, including a major healthcare provider. And current quarter deals were driven by seven bank channel partners as well as by our own direct sales force.

Our digital banking product was selected by three customers to serve as their primary system of commercial customer engagement and these customers ranged in size from a $14 billion community bank to $170 billion regional bank, illustrating the breadth of appeal of our commercial banking platform. With those signings, we have approximately 18 million of annual digital banking subscriptions, which are signed, but not yet being recognized in our P&L. And we expect three quarters of this 18 million to go live this fiscal year.

Our legal spend management network added six brand new customers and another seven insurers expanded their relationship with us, showing continued strong demand for this solution. So, overall, it was a solid quarter for bookings as well.

Our other financial metrics, all achieved our plan, as we reported EBITDA of $5.5 million, core operating income of $17.7 million and core earnings per share of $0.30. Subscription gross margin was 61% as year-to-date we've added $19.6 million of subscription revenue, of which 69% or approximately $13.5 million flowed through to gross margin. In Q2, we invested in delivery and security, which are priorities and competitive advantages for us. This did impact incremental margins in the quarter, but this will normalize over time.

Sales and marketing expense was $24.4 million or 21% of revenue. This is up $2 million or 1 percentage point year-over-year as we expanded both our direct and channel sales efforts to drive revenue acceleration. Development expense was $17.4 million or 15% of revenue as we drove product innovation and platform expansion while managing costs. And from a cash flow perspective, we produced $16.3 million of operating cash flow and $9.9 million of free cash flow.

We ended the quarter with $140 million of cash and investments on hand after repurchasing 10.7 million of shares and repaying $50 million against our credit lines. And as Rob described, just after quarter end as part of our focus on treasury and receivables capabilities, Bottomline acquired a treasury management platform called TreasuryXpress for $33 million. This is a very attractive asset in a strategic market and evidences our continued disciplined approach to M&A. This modest EBITDA dilution in year one of roughly $1 million per quarter, but we remain firmly on track to deliver $100 million of EBITDA in FY '21.

Turning to guidance, as I've indicated, we expect to deliver strong performance. In Q3, we expect subscription revenue of $99 million to $100 million, which will put us at a 14% to 15% subscription growth rate in Q3. Total revenue of $120 million to $122 million, EBITDA of $23 million to $24 million, core income of $15 million to $16 million and core earnings per share of $0.25 to $0.27. Looking to full-year fiscal '21, we expect subscription revenue of $385 million to $390 million for the year, inclusive of Q4 subscription growth of 18% to 20%. Total revenue of $470 million to $475 million, inclusive of double-digit total revenue growth in the fourth quarter. EBITDA of $100 million, operating income of $68 million to $70 million and core EPS of $1.13 to $1.17.

So, overall, I'm pleased to report on solid results, strong confidence in subscription growth acceleration in Q3 and Q4 and a meaningful expansion of our product capabilities with the addition of TreasuryXpress. All of which set Bottomline up for a strong fiscal '21 and beyond.

But before we turn to Q&A, there is one item of personal business. Working with Bottomline for the last six years has been a highlighted by professional life. I've always thought I'd retire from Bottomline, it's a wonderful company and has a bright future ahead. But recently I've been presented with the opportunity to help a pre-IPO company take itself to the next level. It's a unique opportunity and I expect to work to be both challenging and rewarding. I'm proud and grateful to have the opportunity to work with Rob and the rest of the Bottomline team over the last six years. And I also appreciate and thank the analysts and investors that have put their faith in Bottomline. This was a difficult decision for me personally, but I've been fortunate to have built and been supported by an incredibly strong accounting and finance team that will support the next phase of growth for Bottomline. I'll be here through mid-March and remain available thereafter. So, I expect a very smooth transition well.

Rob Eberle -- Chief Executive Officer

Well, this is Rob. Thank you, Rick. We appreciate all you've done for Bottomline and we certainly wish you well with the new opportunity. For outside audience, while these are big, big shoes to fill, we've been working with Spencer Stuart and we expect to announce a strong CFO shortly. And as Rick noted he will be with the company through mid-March and we have a strong finance and accounting team. So, I anticipate a smooth transition. But once again really say thank you, Rick, for all you've brought to Bottomline and all you've helped to still to get to the next level.

So, with that, we'll open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Andrew Smith with Citigroup Financial. Please proceed with your question.

Andrew Schmidt -- Citigroup -- Analyst

Hey, guys. Thanks for taking my questions. And Rick, let me extend my congratulations, it's great working with you. Sounds like an interesting opportunity.

Rick Booth -- Chief Financial Officer

Thank you, Andrew.

Andrew Schmidt -- Citigroup -- Analyst

So, quickly on just starting off on products, the treasury management opportunity and that seems attractive, that's something we have identified is a prime candidate for innovation. Could you talk a little bit about the revenue model at TreasuryXpress, and generally, I guess, across the payments and cash lifecycle platform. And then just also how does that fall into your existing distribution footprint? That would be a great place to start.

Rob Eberle -- Chief Executive Officer

Sure. Revenue model on the payments and cash lifecycle platform and the subscription and the distribution model is interesting because we have so many opportunities with existing customers and existing relationships to expand what we're currently doing with them. So, as I indicated, we've got thousands of corporate customers that we can expand our capabilities to treasury, intelligent treasury with our insights and also to receivables. Another interesting opportunity for us is the vendor community on Paymode-X, where we've got 425,000 vendors involved. Now 425,000 businesses aren't going to be the right candidates for the platform, but thousands are, that's unbelievable opportunity. So, that's a really interesting distribution channel.

And then last, we sell directly to corporates, and we work with and sell through banks, the service corporates. So, bank channels is a wonderful opportunity as well to add those capabilities. So, the stepping back, hopefully you came across some of my remarks, but it's a logical extension of our strong core in payments. We've been anticipating and working toward the convergence of AP and AR and kind of the midpoint of that is really treasury and intelligent insights. So, we're bringing all of those together in the payments and cash lifecycle platform.

Andrew Schmidt -- Citigroup -- Analyst

Got it. Thank you for that. And then, I heard the EBITDA dilution comment, but as you hear the revenue sizing comment just if you give some indication of size. And then in the outlook if you kind of peel that back what does -- what do your subs and trans growth rates look like. It seems like just back of the envelope you should still see a meaningful underlying acceleration. But just want to be clear, what's embedded in the outlook from a inorganic perspective?

Rick Booth -- Chief Financial Officer

Andrew, this is Rick, I'll take that one. The outlook includes the small contribution that we expect from TreasuryXpress, remember that we're subject to purchase accounting in the early days. And this is a market in which acquiring a strategic asset even at a very favorable and attractive valuation, which we did means that there is not a material contribution in the year.

Andrew Schmidt -- Citigroup -- Analyst

Understood. That's helpful.

Rob Eberle -- Chief Executive Officer

Put differently in a few words. Put differently, it's principally organic.

Andrew Schmidt -- Citigroup -- Analyst

Okay. That's great. That's good to hear from an acceleration perspective. And then just as we think about the run rate exiting FY '21, you mentioned double-digit growth. It seems like the tailwinds you mentioned outlined, Rick, aren't going to dissipate the new customer additions, you still get some tailwind from volume improvement, and you have a good pipeline. Is there any reason to think that that exit run rate of double-digit should persist in FY '22 just thinking ahead?

Rick Booth -- Chief Financial Officer

No, I think, you're putting your finger on a pretty fundamental point, Andrew, which is that with the refinements in our business model that we continue to make with subscription revenue now dominating our revenue streams, you're going to see a long-term convergence of total revenue growth and subscription growth. So, obviously I think FY '22, although we're not ready to guide, should be the best year in the company's history. Fantastic.

Andrew Schmidt -- Citigroup -- Analyst

Fantastic. Well, it's too bad, you're not to be around for, but I'm sure we'll keep in touch. Thanks. Thanks a lot guys.

Rick Booth -- Chief Financial Officer

I'll be [Speech Overlap] they won't let me in the question queue, but I'll be listening.

Andrew Schmidt -- Citigroup -- Analyst

There you go. Well, thanks again, guys. And congrats, again, Rick. Really appreciate it.

Operator

And our next question is from John Davis with Raymond James Financial. Please proceed with your question.

John Davis -- Raymond James -- Analyst

Hey. Thanks. Good afternoon, guys. And I'll add my congrats, Rick. So, I guess, the first question that I wanted to hit on a little bit, if you will, kind of bookings can be lumpy quarter to quarter, if I just look at kind of first half of fiscal '21, looks like it's roughly flat year-over-year, obviously that was during the middle of the pandemic. So, just curious if you guys have any high-level thoughts on what you think the COVID impact was on bookings growth in the first half and how we can kind of expect that not looking for quarterly guidance or any of that, but how can we expect that going forward, because obviously you need bookings growth to support that $500 million target and the continued 15% to 20% sub and trans growth.

Rob Eberle -- Chief Executive Officer

Well, I'll let Rick comment on the math in the second part, remember that this transaction-based businesses we drive a lot more growth outside of bookings. So, as our customers grow for legal spend at Paymode-X, we drive growth as well. So, not a real element of our growth feeds through the bookings number.

Rick Booth -- Chief Financial Officer

Yeah. I would further emphasize that our strategy is geared 100% in alignment with increasing our bookings. We've increased our commitment to our customers' success teams which work more with our existing customers. As we talked about in prior quarters we've ramped up our sales and marketing and we did so again this year. And now with the extension of our value proposition, the very logical adjacencies, we have every opportunity to continue to drive at an even faster rate, the increases in bookings that you're looking for.

John Davis -- Raymond James -- Analyst

Is it fair to say that bookings were negatively impacted by COVID or is it something that you don't think was really material. I mean, I'm just kind of trying to maybe got to ask you again what were your expectations, I guess, where were bookings in the first half of the year is relative to your expectations, relatively in line, how much disruption was created by the -- for the sales organization, just any color there would be helpful.

Rob Eberle -- Chief Executive Officer

I don't think this is -- go ahead, Rick. Go ahead.

Rick Booth -- Chief Financial Officer

Whenever the topic of bookings come up, I always reflect on the fact that they can be very lumpy. Remember, we've got very large, very long-term customer relationships and individual signings can be material. So, I think, we're doing everything appropriate to accelerate that flow. I wasn't disappointed in the trailing 12 months, I believe that was around 23% of subs revenue. So, those bookings, although not as much as it sounds like you would have liked are very solid with the opportunity to get better.

John Davis -- Raymond James -- Analyst

No, that's helpful. And then just want to...

Rob Eberle -- Chief Executive Officer

The things that I want to add to that. Let me -- can I add just a little color on that.

John Davis -- Raymond James -- Analyst

Yeah, go ahead. Yeah. Go ahead, Rob. Sorry.

Rob Eberle -- Chief Executive Officer

In terms of growth, remember that our product, a lot of our products set to have a ramp in the delay. So, one will benefit from prior quarters bookings, it's not the last quarter's bookings is going to be two quarters from now's growth. Second, as I mentioned earlier, we grow with our customers growth. In terms of what we've seen in the market, which you answered, I would say the following. I'd say, we've seen more activity than ever at the top of the funnel. More response on our digital materials, more response on webinars, more response. We've seen a bit of pause on bank's decision making not at a level that it's concerning, we actually had our first customer go bank [Phonetic] platform go live that was a full COVID to COVID baby, if you will, signed during COVID and went live during COVID. But there is a bit of hesitation on part of banks for new initiatives like that's all built into our model and forecast today.

I think what we'll see as we cleared COVID, we're going to see the benefit of the top of that funnel start to come all the way through in bookings. So, I think, as we clear COVID, we see a real positive impact.

John Davis -- Raymond James -- Analyst

Okay. That's super helpful, Rob. And then I just want to dive in a little bit on Paymode-X, I think, it was Rob or Rick, you mentioned that you've gotten back to pre-COVID volume levels in 2Q, but just curious how -- we are about a year in now I believe with the sales force specifically for Paymode-X, so just curious to kind of get an update there on how that's going, how they are working with the bank channel. And I think here the goal was to basically going to drum up some warm leads and really supplement the bank channel. But just curious basically year-end now or so how that's gone in line better than expected, just any thoughts there would be helpful.

Rob Eberle -- Chief Executive Officer

Well, in short, really well. And I like the way you framed the question frankly supplementing the bank channel. This was a really interesting quarter as we had seven different bank channels sign new payers for Bottomline. So, we're getting a lot of generation from the bank channel, there is a ton of interest that and our direct team is really effective means to attack all the verticals to supplement the bank channel. So, it's a big part of our go-to-market strategy.

John Davis -- Raymond James -- Analyst

Okay. And then last one for me, I think, Rick, you mentioned the TreasuryXpress would be about $1 million dilutive per quarter. Is there a certain time frame where you expect that deal to become accretive, is that FY '22 or just any kind of color there on when we can flip that to positive accretion?

Rob Eberle -- Chief Executive Officer

Yeah. We expect that profitability rate to improve as we increase our rate of cross sell, but it's a little early to be guiding on that, certainly not separately.

John Davis -- Raymond James -- Analyst

Okay. That's it from me. Thanks, guys.

Operator

And our next question is from George Sutton with Craig-Hallum. Please proceed with your question.

George Sutton -- Craig-Hallum -- Analyst

Thank you. Rick, my congrats as well. My question is actually for, Rob, you mentioned you surveyed the market relative to your new payments platform, payments and cash lifecycle platform, I'm curious what you heard, what did those customers tell you how did that drive your speed of bringing this together and ultimately how large you think this could be in terms of increment for you?

Rob Eberle -- Chief Executive Officer

Well, first off we surveyed both corporate customers and we had a wallet discussion with our bank channels. Our bank channels are a wonderful opportunity for us to give another view of the market, another view of corporates and also have a distribution channel. The convergence of AP and AR, the desire for intelligent, analytics and data came back in every interaction in every dialog we've had.

In terms of the growth opportunity and how that comes, I'd frame it two ways. One, it's critical to be continue to be competitive and a leader. And so at one level, it's all the work we need to do to ensure where our 15% to 20% target growth rate continues for the years to come. Whether that's got an upside, the market opportunity is big now, but kind of to quote, Rick, we're not in the position to give guidance or give a suggestion on an acceleration or market size contribution it'll make. But it is exactly the right place for us. Every piece of feedback has been very positive and I couldn't be more excited about the fact we put this together.

And last thing I'd mention on, we put this together really quite clever in a clever way because we haven't had a big dilutive acquisition. We just talked about the dilution for a couple of quarters of less than $1 million. That's not particularly meaningful in my view, at least, where we are creating a game-changing platform that is going to drive growth for years and years to come. So, hopefully, that's helpful in giving you a little color on that question.

George Sutton -- Craig-Hallum -- Analyst

That was. Now, in your release you mentioned U.S. bank introducing AP optimizer, we're obviously familiar with how significant a size player U.S. bank is on the corporate side, can you give us a little bit better sense on how much of an opportunity that might be?

Rob Eberle -- Chief Executive Officer

I think, the way to judge opportunity would be one size. And then second is engagement and engagement is a lot tougher to measure. But I'd tell you the U.S. bank engagement couldn't be stronger. We did a lot of planning, a lot of go-to-market and they are fully behind the platform. So, we're really excited about it and it's a wonderful opportunity for us.

Rick Booth -- Chief Financial Officer

It's also [Speech Overlap]

George Sutton -- Craig-Hallum -- Analyst

One other question...

Rick Booth -- Chief Financial Officer

Just one brief addendum, it's also a wonderful illustration of continuing to expand our product offerings, U.S. bank has taken the full invoice to pay solution with card as an integrated part of the offering. So, it's -- each successive generation becomes more and more core to the relationship.

George Sutton -- Craig-Hallum -- Analyst

Got you. Last question, just a quickie but SRD II that was something you -- I think, you focused on in your last call, didn't necessarily get an update there. I'm curious, how much of an expansion you've seen there. Are we through that process?

Rob Eberle -- Chief Executive Officer

I would say the macro theme continuing increasing complexity vis-a-vis regulation, particularly in the European Union, which runs 6 to 12 months ahead and the UK is slightly ahead of that before things come over to the U.S. Those continue to be strong drivers. And you'll know it if you do the math on our geography a very strong quarter for our UK operations. I wouldn't tie it specifically to SRD II, or any other regulation. But that wave of change continues.

George Sutton -- Craig-Hallum -- Analyst

Okay. Thank you.

Operator

And our next question is from Gary Prestopino with Barrington Research. Please proceed with your question.

Gary Prestopino -- Barrington Research -- Analyst

Hi, good afternoon, everyone. On the legal exchange business, you said you had seven customers expand their relationships, is that with the PartnerSelect program or could you just explain what was expanded there?

Rob Eberle -- Chief Executive Officer

Yeah. So, there is actually a number of expansion opportunities within our legal spend platform at this point. In addition to PartnerSelect, we have a vendor management offering to extend the same functionality to non-legal vendors. And we also have Law Firm Analytics, which provides the next level of insights. So, many ways for them to expand.

Gary Prestopino -- Barrington Research -- Analyst

Okay. Thank you. And then can you just clear something up for me, with this new platform that you have out this corporate treasury capability and cash lifecycle platform, did you need to make the acquisition of TreasuryXpress to do this or just treasury Express allow you to do this in international markets, outside of the U.S.

Rob Eberle -- Chief Executive Officer

I wouldn't say, we needed do it, but it gives us so much more capability. So, if you think about kind of states of cash, cash coming in, we add that. We have a lot of cash management in-house. We have a lot of cash management capabilities, our cash flow optimized. So, it does a lot of capabilities but it accelerates and gives us so much more. And certainly, as you highlight gives us excellent international capabilities.

Gary Prestopino -- Barrington Research -- Analyst

Thank you.

Operator

And our next question is from Mayank Tandon with Needham & Company. Please proceed with your question.

Mayank Tandon -- Needham & Company -- Analyst

Great. Thank you. Good evening. Congrats, Rick. It's been great working with you and you will be greatly missed.

Rick Booth -- Chief Financial Officer

Thank you.

Mayank Tandon -- Needham & Company -- Analyst

So, I wanted to ask Rob, you talked about the TAM expansion. Could you maybe just dissect that a little bit more, Rob, in terms of what incremental opportunity you see for Bottomline given the platform expansion. And tie in that question would be, would you now consider maybe doing something on the AR side in terms of M&A to have that entire end-to-end product setup?

Rob Eberle -- Chief Executive Officer

So, we have the AR side, we have that we're building that out right now. And let me go back over how we got there. So, we had existing capabilities, particularly in Europe, particularly around direct debit which is one of the most common receivables, but full receivables capability in the UK. We then spring acquired receivables platform from a bank partner and we've been over the course of this year so far and then we'll be continuing to do so, building that out to a next generation platform.

So, on a receivables end, we have the capabilities we need and that gives us this full payments and cash lifecycle platform. So, yes, that would have been an important part. Yes, that would need to be an acquisition, but we've done that. We've did that and then clubbed away with the bank channel partner. And now supplemented that with our additional build out in other capabilities we had. In terms of TAM, it's not a large TAM, but it's not a number we are giving out today. I think, that quickly gets ahead of itself, but it is a major expansion.

The other key way I would look at this is the competitive, the competitive differentiation. Any corporate today looking for a point solution, if they are going to go with just a receivables or just a payables provider, they are really committing that they're going to have to have other vendors for other pieces of this. With our platform, we can address the full payments and cash lifecycle, money coming in, money that's been managed in-house, insights and analytics around that cyber fraud protection and payments.

So, the competitive differentiations mass is huge, and of course the market opportunity is as well. So, as we get further out, we'll share what we think near term results could be, what TAM could be. We're not in a position to share that today.

Mayank Tandon -- Needham & Company -- Analyst

Rob then tied into that question would be your win rates versus the main competitors, whether it's on the digital banking side or on the AP, AR side. Without naming names, could you talk about how your win rates have been trending? And where you win, I'm assuming that's in the larger tier of the market, maybe some anecdotal evidence, if not, any quantifiable numbers you can share with us in terms of how that win rate has been tracking?

Rob Eberle -- Chief Executive Officer

Sure. We're winning approximately three quarters of the mandates for our new payments and cash management platforms. That business banks, banks were serious about the business banking franchise. Generally banks sub-scale in size, although there can small banks that are focused on business banking and we are the clear leaders. You can see IAT's list reports, but the market really supports that. So, our win rate there is fabulous.

As we move if you wanted that answer for payments and cash lifecycle platform, we're way to where we went out in market, actually we're announcing that this is where we're going. But I'd expect we'd have a real strong win rate with existing customers, because we're already there. We are already trusted innovation partner. So, that's really what gives us kind of loaded odds, if you will, entry into a broader market. We're expanding from a core. We're not entering receivables or entering treasury independent of the existing capabilities and known vendor status we have and enjoy today.

Mayank Tandon -- Needham & Company -- Analyst

That's helpful. Thank you so much.

Operator

And our next question is from Brett Huff with Stephens, Inc. Please proceed with your question.

Brett Huff -- Stephens, Inc. -- Analyst

Good evening. And Rob, congrats on the deal. And, Rick, sorry to see you leave, you will be missed, but good luck in the next chapter.

Rick Booth -- Chief Financial Officer

Thank you.

Brett Huff -- Stephens, Inc. -- Analyst

One quick technical or targeting question on the M&A, I don't think I was trying to listen, I'm not sure if I heard. You talked about the integration. Is it a SaaS delivery model and are you just reporting some of that technology over to your existing platform. Just sort of give us the quick and dirty [Phonetic] on how the tech integration will go with the TreasuryXpress?

Rob Eberle -- Chief Executive Officer

Well, yes, it's a SaaS delivery model, but there's actually a lot of work to connect all these pieces. So, to connect the full platform from receivables to treasury to our own insights with our cash flow optimizer to payment. So, there is a fair amount of work. Now, that's not unachievable, we have a plan for that, we'll address that. But it's not a question of a couple of months, there will be a couple quarters to get that work in place. Could be three quarters, but then you have a full platform, and when you have that full platform than that gives you access to data across all the different points. It gives you data from receivables, data from payments, the whole cycle.

So, yes, SaaS platform, we're doing a work to integrate, it's not a flip the switch integration, but that's part of the moat, if you will, competitive moat, and competitive advantage as well.

Brett Huff -- Stephens, Inc. -- Analyst

Great. That's helpful. One more sort of more direct or targeted one, you mentioned the direct sales force for Paymode-X, I know you guys have been building that a little bit more, you mentioned that seven different bank channel had delivered some payers that are incremental. Any update on the direct sales force, I know they're kind of working both with and around the banks, but just an update on that?

Rob Eberle -- Chief Executive Officer

Yeah. We're not quarter-by-quarter announcing direct sales results one way or the other. That wouldn't be the right measure to really look at, I think the overall bookings, which was 29 [Phonetic] this quarter, super strong. So, that's really how we'd end up looking out. We will give updates from time to time, as we just did here on on the direct sales team, but it is a super quarter to see seven banks participating, seven banks having wins. That's fantastic.

Brett Huff -- Stephens, Inc. -- Analyst

That's great. And then last question from me is a little bit bigger picture one, Rob. Given that your expertise and you guys plan the B2B payments for a long, long time. We're still trying to figure out how this market evolves. And I was wondering if you could talk about verticalization and B2B and I'm just thinking that it just happens to stick in my mind that you guys have a lot of healthcare that you've had a lot of success there, you have a lot of counties. Is that how we should expect B2B or your business or more broadly to be to kind of happen or is it going to be more of a generic across industries kind of progression do you think?

Rob Eberle -- Chief Executive Officer

Well, I think, it's some of both, but it's centered on verticals. So, if we approach Bottomline approaches you today and you're healthcare provider, we're going to be able to show you 40 depending on where on the country 40-50 maybe 60% of your vendors already on our network. So, there is some real advantages of the interoperability and network when you were in a particular vertical. So, I think, we will continue to see a vertical play in that. But on the other hand, those organizations are paying every kind of business. So, I think, it's both. It's not discrete to verticals, but verticals are a big driver and vertical focus can accelerate adoption.

Brett Huff -- Stephens, Inc. -- Analyst

Right. That's great. Appreciate your perspective.

Operator

And our next question is from Bob Napoli with William Blair. Please proceed with your questions.

Robert Napoli -- William Blair -- Analyst

Thank you. Thank you very much. And, Rick, good luck to you, it's been great working with you and look forward to keeping in touch.

Rick Booth -- Chief Financial Officer

Thank you, Bob.

Robert Napoli -- William Blair -- Analyst

Rob, just on Paymode-X, I think, the revenue for Paymode-X, I think, you've said recently is all transaction revenue, is that correct? But I would think, on the treasury side, if you kind of put that in B2B payments on the AR side, you're going to have a lot more software revenue versus transaction revenue on the AP side, is that correct?

Rob Eberle -- Chief Executive Officer

Well, I think, that's correct, but I'd say some on transaction revenue. We've been experiencing driven by transaction revenue for over 15 years on legal spend management. It's been a fabulous way to grow as customers grow. The platform is a SaaS platform, the monetization is transaction based, but the predictability of those transactions has been truly extraordinary, up until a pandemic. While we've had actually a relatively modest impact, it impacts our growth rate and each percentage point matters there, but it's not like it's been cut in the third or some major impact like that.

So, first comment I'd make is, yes, it is subscription revenue. But we like the transaction model and we're monetizing a sticky SaaS platform. The predictability of those, of major insurers are not going to stop having litigation, businesses are not going to stop pain and we've seen some level of impact. But that doesn't discourage us at all from the transaction model. And when COVID clears what continue to grow is our customers grow. So, in short, yes, more on the subscription model behind the payments and cash lifecycle SaaS platform. But we don't disfavor and wouldn't look and consider the transaction revenues that our SaaS platforms drive is any less valuable.

Robert Napoli -- William Blair -- Analyst

I don't disagree. It's kind of leading to my next thought, once that was confirmed is that the revenue per transaction to the extent that you're growing virtual card and like virtual card and cross-border payments monetize on a transaction basis at a dramatically higher level than ACH payments and our discussions with these and other companies we cover in this space are seeing some pretty interesting increases in revenue per transaction, and I was just wondering if you're seeing the same thing, if you could talk about the penetration, were virtual card penetration rates are all over the board in the industry and I think it really matters by vertical. But I was wondering if you're seeing -- if you see the opportunity for a substantial increase in revenue per transaction by growing virtual cards and B2B -- and cross-border, in particular.

Rob Eberle -- Chief Executive Officer

What we do? But we also keep a balance across payment types, because we're trying to drive full automation for our payer customers and we're trying to drive acceptance, the large degree of acceptance and automation across all vendor types. So, particularly as you move up to larger enterprises, you can see other types other than virtual card of more acceptance or you can hit a wall at certain levels of virtual card acceptance. But the main point of your question, absolutely, we see a growth opportunity around virtual card, which is a critical part of our platform now as well as the other payment types we offer.

Robert Napoli -- William Blair -- Analyst

Thanks. And then just maybe on PTX, on the open banking efforts that you have and love a little color there. I think that some of the numbers that you guys have given in the past at conferences or at our conference last year suggesting some pretty good growth organically out of PTX, out of open banking. What is the opportunity for open banking. what is the size of that business today and the growth rate and maybe where do you see the long-term opportunity?

Rob Eberle -- Chief Executive Officer

Well, the fundamental opportunity is to change around business, process and payments, which is wonderful for Bottomline. So, we can step in as we have and then help businesses adapt to the new regulatory and the new payment types in the open banking. That's exactly what we're doing today. So, in terms of an overall what will that TAM be or something, we're not providing any number on that. But it's a massive change and the interesting thing about it, that change is going to come to other geographies as well. I personally don't think that will be legislated or required but we hear it all the time, we hear from banks in the U.S., what does open banking mean how will that potentially impact. And I think you'll see more of availability of those types of open interconnected systems even if it's not driven by regulatory perspective. So, we're doing a bunch of interesting things today around open banking with customers. We've won some new deals in the new business model around that and it is absolutely a key driver of future growth.

Robert Napoli -- William Blair -- Analyst

Thank you. Appreciate it.

Operator

Our next question is from Dan Perlin with RBC Capital Markets. Please proceed with your question.

Daniel Perlin -- RBC Capital Markets -- Analyst

Thanks, guys, and good luck to you, Rick. I wish you the best buddy. The question I have it is for clarification purposes when I look at the subscription revenue growth and I ex-out the transactional nature of legal spend management and Paymode-X, I think it was up 19% this quarter, but it was up 25% in the first quarter. So, I'm just wondering what was the driver of that deceleration?

Rob Eberle -- Chief Executive Officer

Well, certainly, 25% was an extraordinary quarter and we would -- basically prior year impact, but I think the clear trend of strong growth in our core products, showing that the only impacts that we're experiencing short-term our transaction volumes is the key takeaway.

Daniel Perlin -- RBC Capital Markets -- Analyst

I know, but it would seem though that line item would be a little more stable and so forth to decelerate, was there just a difficult -- was there some sort of comp that I missed from the year ago or is there something else [Speech Overlap]

Rob Eberle -- Chief Executive Officer

No, you can have things like go lives and stuff like that. That can have an impact one way or the other. I mean, that's a super strong quarter, but I wouldn't look at 19% as disappointing in any way, 19%. We drive 19% on an ongoing basis. We're going to end up at a very, very different valuation.

Daniel Perlin -- RBC Capital Markets -- Analyst

Yeah. There is no complaints out of that. I was just trying to make sure I understood with what was driving the step down. So, the other thing you mentioned was the incremental margin on the subscription stepping down this quarter, it looks like you took advantage to invest in delivering security, totally makes sense to me, I'm wondering what was the driver behind the investments in delivery because it did look like it was pretty sizable this quarter. Is there something going on in terms of mix, is it just kind of post-COVID world that you got to be better positioned for, I'd be interested to know your thoughts there.

Rob Eberle -- Chief Executive Officer

It's part of the overall focus on accelerating, both are our new bookings, as well as our time to revenue. So if you remember, I mentioned that, of the 18 million banking deals that are signed, but not yet live, we expect a full three quarters of that to go live during the current fiscal year. And likewise, we're continuing to analyze and focus on driving accelerated revenue ramp from our Paymode-X customers. So, we chose to step up the rate of investment a little bit since we have the capacity to do that within our existing profitability guidance.

Daniel Perlin -- RBC Capital Markets -- Analyst

That's great. And then just lastly from me. The third quarter step up in subscription growth to 14% and 15%, when you -- how much of that is just being driven by the rebound that you're expecting from the transactional nature of the business. And what would that if we had a like-for-like number where I was just comparing it to 19% this quarter, what would be the embedded expectation there? Thanks, and good luck, again, Rick.

Rick Booth -- Chief Financial Officer

Thank you. I think, there is a variety of drivers, not just a rebound in transactional volumes, although we certainly do expect that and that's built in. The other thing is we actually have 20% more legal spend management customers scheduled to go live in the second half of this year than in the same period in the prior year and a full 50% more Paymode-X customers in the second half of this year versus the prior year. So, we've got good momentum going back to the idea that demand has remained strong for us through these pandemic months.

Daniel Perlin -- RBC Capital Markets -- Analyst

Excellent. Thank you.

Operator

And our next question is from Peter Heckmann with D.A. Davidson. Please proceed with your question.

Peter Heckmann -- D.A. Davidson -- Analyst

Good evening. Thanks for taking my question. I wanted to see if -- and this is a request, and going forward, but certainly we get a lot of questions from institutional investors on Paymode-X, and people realize that it is a scaled platform with real significant potential for growth with high margins. As you go forward, is there a way that you can provide more granular detail in terms of payment volume, take rate, number of payers, I think the -- I think, you might be surprised that how much more credit the market might give bottom line, they are just able to better quantify exactly what the opportunity here is and in better size.

Rob Eberle -- Chief Executive Officer

There is some aspects to that that we probably could provide and that's good feedback. I won't take that. There are some aspects as well though that because of bank channels, there's different pieces that they wouldn't want us to share, would be complicated for us to disclose, but as good feedback and we can certainly take a look at them.

Peter Heckmann -- D.A. Davidson -- Analyst

Okay. And then just as a follow-up, we had talked about the company looking to invest more in development and sales and marketing to maximize the growth of subscription transactions over the intermediate long term. And I think that makes perfect sense in terms of the new as in subscription and transaction revenues coming on with high incremental margins and it appears that you're reinvesting 100% of that. At this point, do you feel like there is a light at the end of the tunnel where you're going to be able to let some of that incremental margin flow through or should we still be thinking about kind of 21%, 22% EBITDA margins for the foreseeable future.

Rob Eberle -- Chief Executive Officer

Well, first off, I have a hard time apologizing for 22% EBITDA margins. I think we got to keep it in context. So, we have a strong level of profitability. So, I'm not sure, I'd say we're in a tunnel and light at the end of the tunnel. I don't see this that way. I think part of what you see in margins though is what the transition of the model you're removing services, you're removing software. And while you're building transaction volume over just the past couple of years, we have about a $30 million impact, negative impact from the natural focus on subscription revenue, which is more valuable and going to build over time.

So, that's one element as well as everything you identified investment in product and investment in market. If we can drive the 15% to 20% growth when we hit $500 million as I outlined, we've got $75 million to $100 million of incremental subscription revenue coming off. And a recent incremental gross margins that's somewhere around $50 million to $70 million, $75 million of incremental gross margin. And that gives us a lot of optionality around margin expansion, if we're not seeing a growth opportunity or increased profitability. So that's really our near-term target and driver putting in place the platforms to drive the consistent 15% to 20% subscription growth.

As we hit $500 million, I think, we have a lot of optionality on are we expanding margin more or does the market do our large holders, do our analysts all believe and management of course and the board think that we can drive higher growth? And that's a balance we'll adjust there. You won't see lower profitability. You continue to see the profitability levels we produce. But I wouldn't want to say, it's light at the end of the tunnel or this is a dark period because strong subscription growth is going to be the biggest value creator.

Peter Heckmann -- D.A. Davidson -- Analyst

Yeah. No that's fair. And I didn't mean to imply that they weren't good margins. It just kind of the best Fintech companies historically over the last couple of decades have generated both revenue growth and incremental margin improvement each year. And I think I get a lot of questions on that. So, thanks for the update. I look forward to the next one. And good luck to you Rick. I look forward to seeing where you land.

Rick Booth -- Chief Financial Officer

Thanks, Pete.

Operator

[Operator Instructions] And our next question is from Andrew Schmidt with Citigroup. Please proceed with your question.

Andrew Schmidt -- Citigroup -- Analyst

Hey, guys. Thanks for squeezing this follow-up, I know we're in overtime here. But I just wanted to dig in a little bit more on the -- what you're doing on the AR side. What you're building out and what you have is it order of cash? Is it invoice to cash? Are clients consuming this as an end-to-end platform or module base? Just any detail on sort of where you're targeting along the AR spectrum would be very helpful.

Rick Booth -- Chief Financial Officer

Sure. So, first off, to be clear, we have customers today in Europe that are utilizing our technology for receivables. So, we've had for a long period of time done -- have offered receivables capabilities and a lot of customers are using that.

In terms of the new platform, that's not launched yet. So, we don't have new customers on that today. What we'll be doing -- so we already have invoicing. Invoicing is part of Paymode-X, part of our payment platform. So, invoicing would certainly be part. What we'll have there is the full reconciliation, predictability, receipt, all the elements and analytics and machine learning more advanced technologies around a leading receivables platform.

Now, the interesting thing is, I think, we're going to have a platform that can compete with anyone, but we don't necessarily have to. Because if you're an existing Bottomline payments customer, it makes far more sense to expand one platform and to address receivables treasury insights and analytics and payments in one platform than it does to have a mix of different vendors. So, I'm not saying we won't be stronger than any other receivables platform. But we don't have to be to win a large amount of revenue, to win a large number of customers. So, that's -- hopefully that's helpful Andrew in giving you some color on our perspective.

Andrew Schmidt -- Citigroup -- Analyst

Yeah. Helpful context, guys. Thanks again. Appreciate it.

Operator

And we have reached the end of the question-and-answer session and I'll now turn the call over to management for closing remarks.

Rob Eberle -- Chief Executive Officer

Well, thank you everyone. Thank you for your interest. Thank you, Rick, for the past six years for all you've done for Bottomline. We look forward to reporting acceleration in subscription growth for Q3 and Q4 as we've outlined and we couldn't be more excited about the future ahead. So, thank you again.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Danielle Sheer -- General Counsel

Rob Eberle -- Chief Executive Officer

Rick Booth -- Chief Financial Officer

Andrew Schmidt -- Citigroup -- Analyst

John Davis -- Raymond James -- Analyst

George Sutton -- Craig-Hallum -- Analyst

Gary Prestopino -- Barrington Research -- Analyst

Mayank Tandon -- Needham & Company -- Analyst

Brett Huff -- Stephens, Inc. -- Analyst

Robert Napoli -- William Blair -- Analyst

Daniel Perlin -- RBC Capital Markets -- Analyst

Peter Heckmann -- D.A. Davidson -- Analyst

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