Bottomline Technologies (EPAY) has faced middling growth through the pandemic, but the provider of payments services is forecasting brisk growth in its subscription services later this year. Bottomline's fiscal second-quarter 2021 earnings report, filed on Feb. 2, featured a minimal improvement in revenue, and a slight loss for the quarter.
The $2 billion market-cap company provides numerous software services to banking and several other industries, from cloud-based accounts-payable automation to secure financial messaging services. Below, let's review the key highlights of the Q2 report and break down management's outlook for the back half of the fiscal year.
A meager quarter and a promise of acceleration
Bottomline's revenue increased by 3.9% year over year to $116 million. Subscription service revenue advanced by 11.2% to $93.4 million, while service and maintenance revenue declined by 17% to $20 million. Software license revenue fell by 36% against the prior year, to $1.8 million.
As you can see, subscription services -- the company's highest-margin revenue stream -- provided significant support to overall sales. Yet the small growth in total revenue didn't provide much in the way of operating leverage. Operating expenses rose 7.6% against fiscal Q2 2019 to $70.2 million. These higher expenses, combined with a $5 million swing from an income tax benefit in Q2 2020 to an income tax provision this quarter, caused Bottomline to book a net loss of $4.6 million, versus net income of $2.6 million in the prior-year quarter.
During the company's earnings conference call, management attributed the weaker performance to lower transaction volumes tied to uneven economic activity among customers as the pandemic wears on. About one-third of Bottomline's subscription revenue is transaction volume-dependent, specifically, its "Paymode-X" (automated accounts payable processes) and "LSM" (Legal Management Spend) services.
The organization expects to achieve 15% to 20% growth in subscription services in fiscal 2021, which means management anticipates meaningful expansion, since Bottomline has booked just 12% growth in this revenue stream so far this year. During the earnings call, CFO Rick Booth said management has decent visibility into subscription services ahead and foresees year-over-year growth of 14% to 15% in the third quarter, and 18% to 20% in the fourth quarter.
Booth provided several factors underlying these projections. First, LSM has 20% more new customers scheduled to go live in the second half of fiscal 2021 versus the same period last year, while Paymode-X has 50% more new customers scheduled to onboard during the period. Second, the company has worked to accelerate its time-to-revenue and volume usage following customer onboarding. Third, new customer demand across the business remains vigorous. Overall, Bottomline projects that total revenue will expand by double-digits in the second half of 2021 versus the prior year.
Clearly, Bottomline sees the benefit in transitioning its product offering to a purer software-as-a-service (SaaS) model. Subscription revenue made up 81% of total revenue last quarter, an increase of six percentage points against the comparable period. Bumping up this percentage further is a sensible way to boost earnings growth, given the higher profitability of SaaS revenue versus service and maintenance sales. Bottomline is intent on grabbing a higher percentage of its total addressable SaaS market, and over the long term, recent efforts such as an investment in a direct sales force to grow the Paymode-X business should yield greater market share.
Nonetheless, investors seem skeptical of the company's near-term subscription growth targets. Shares fell by nearly 10% on Wednesday (the day following the earnings release). By next quarter, we'll know if the skepticism is warranted, or if Bottomline is indeed accelerating into the second half of its 2021 fiscal year.