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EPAY Bottomline Technologies

Participants
Danielle Sheer General Counsel
Rob Eberle Chief Executive Officer
Bruce Bowden Chief Financial Officer
Peter Heckmann D.A. Davidson
Bob Napoli William Blair
Mayank Tandon Needham & Company
Gary Prestopino Barrington Research
George Sutton Craig-Hallum
John Davis Raymond James
Andrew Schmidt Citigroup
Call transcript
Operator

Greetings and welcome to the Bottomline Technologies Third Quarter Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Danielle Sheer, General Counsel. Thank you.

You may begin.

Danielle Sheer

Welcome to Bottomline's third Quarter 2021 Earnings Conference Call. I'm Danielle Sheer and I'm joined by Rob Eberle, Bottomline CEO and Bruce Bowden, our CFO. Statements made on today's call will include forward-looking statements about Bottomline's future expectations, plans and prospects. These statements are subject to risks, uncertainties and assumptions, including those related to the impacts of COVID 19 on our business and global economic conditions our forward-looking guidance is based on our assumptions as to the macroeconomic environment today. Many of these assumptions relate to matters beyond our control. 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. We do not assume any obligation to update 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. A summary of the guidance provided during the call is available from the company upon request.

Let me now turn it over to Rob for his remarks.

Rob Eberle

Good afternoon and welcome to the bottom third Quarter fiscal 21 Earnings Call. I'm here with Bruce Bowden who has just joined this quarter as CFO. And this is an excellent addition to the Bottomline team.

First I will provide a review of the quarter's financial results and our future outlook. And then, Bruce and I have both be available for questions following his remarks. Q3 was an important and very good quarter. Driving subscription revenue growth is a central part of our strategic plan. The highlight of the quarter was the acceleration of our subscription revenue growth which also drove an acceleration of overall revenue growth. We're delighted to see and report the return of growth. Behind our growth in the financial results we are presenting and at the core of our strategic plan. It's an innovation agenda responding to the most impactful market and competitive dynamics. We successfully executed against that agenda in Q3 extending our product leadership and expanding our market opportunity. I'll provide examples during my remarks.

First, I'll briefly cover some of the key financial results for the third quarter. Subscription revenue was $100 million, which was up 14% from a year ago. We of course pleased with the acceleration of our subscription growth in the quarter. Subscription growth for the products non impacted by transaction volumes was even stronger at 21%.

Looking forward, while currency is moved against us a bit since January. We're confident we'll see continued acceleration in subscription growth in Q4. Subscription bookings were $20 million which is down about $1.9 million from the prior quarter as we saw a couple of larger deals for digital banking and Paymode-X pushout.

We expect to see a step-up in bookings in the 4th quarter. EBITDA was $20.1 million for the quarter. Consistent with our plan and expectations. And we're on track to achieve the $100 million in EBITDA, we committed for the year.

So excellent financial results overall for the quarter.

While we're really pleased with the financial results. We're reporting, we're even more excited by our opportunity ahead and the work we're doing to make the most of that opportunity.

Our innovation agenda is a central part of our strategic plan. It's designed to address the fluid competitive dynamics of the markets we compete in technology advancement particularly around data analytics and machine learning and the acceleration of the digital transformation of business payments and its impact on our customers and target markets. I'm going to highlight a few development efforts currently underway with the specific examples for Paymode-X legal spend management, digital banking and the UK market. Starting with Paymode-X, most critical factor behind scale market positioning growth is vendor enrollment. We've made to vendor experience and the technology capabilities for vendors, a key priority for the Paymode-X network.

Solving business pain and reconciling payments, forecasting receipt of funds and providing remittance detail and formats that allow for automated integration insurance we're delivering critical value to vendors and payers alike. The more value we provide to vendors, the faster the network and our revenues grow. Continuing to deliver increased value to vendors, has allowed us to grow the network to over 450,000 vendors. That in turn makes the network more valuable to payers as they get greater automation and rebate and can achieve that faster the large the vendor network.

For our legal spend management product set growing our market opportunity is a key objective.

We are addressing that by introducing new offerings, particularly those targeting law firms and geographic expansion. Good example is law firm analytics, which is designed to give law firms data insights to help them monitor the performance of the work they do for their largest insurance company clients. Managing partners can access the deduction percentage by attorney to see a particular lawyers an unusually high deduction percentage access to the data that their most important clients used to evaluate them has real value to law firm. It drives improvements and performance competitive position and economics. It's also a fabulous way of extending the platform and it means that creates new revenue opportunities and growth as law firm analytics is a capability we can offer directly to the thousands of law firms on our network. We've also been investing in capabilities to law firm for continued success in international expansion, particularly in the UK and Canada. We're fortunate to have a market-leading platform and a well known and highly regarded brand in these geographies.

Our banking customers face a broad range of competitors from challenger banks to FinTech payments and financing providers. Their challenge is customer attraction and retention, they rely on us to provide the technology platform and digital transformation tools to deepen customer engagement grow wallet share and grow their business banking franchise. It's a big ask and a big opportunity.

So it's no surprise, we're bringing a lot of new innovation to market for our digital banking customers. Two significant business banks have signed on as beta customers for our new cash flow Optimizer or CFO and they're targeting customers in their client base. The early feedback has been fabulous. One banks and this is an absolute must have for us.

The second banks comments really went to the core of our mission in serving banks as a trusted innovation partner. They said, our clients can get accounts and services from any bank. This is what we need to have them stick with us.

Our customer engagement analytics is another way and we're deepening customer engagement for banks. The platform collects data applies AI and analytics. And delivers actionable insights that enables banks to achieve important objectives such as increased conversion rates on new account openings, predicting a reduce attrition, target next actions and measure customer engagement, which is particularly valuable when going to events like bank mergers. The biggest market dynamic in the UK is easily open banking which is created change and opportunity and early but high potential innovation-driven by Open Banking is confirmation of pay. The product to text fraud by matching recipients name and account details and the payment to the information maintained by the bank.

We have 2 banks on is early adopters and a strong pipeline. A broader market trend across all of our markets is a convergence of APNR. In that regard. The acquisition of treasury expressed during the quarter was strategically important event. It's a good example of supplementing and accelerating our organic innovation agenda with a strategic technology acquisition.

While it's not particularly meaningful in terms current revenues, adding less than $0.5 million to the quarter. The strategic and significance is the proven cloud-based treasury capabilities which extend the offerings we can provide to new and existing customers. It also gives us an important element of our payments and cash life cycle platform. Bottomline is clear and acknowledged leadership and business payments.

We also have a lot of receivables experience and are developing the next generation integrated receivables platform. Combining these capabilities AP and AR and now adding treasury gives us a single platform to address the full cash life cycle. Industry analysts right away speak about the convergence of AP and AR and we're well on our way to having that capability and more in market. 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 the relationship with Bottomline and new customers to 11:16 Dr element or the entire platform. The product pipeline and innovations I've outlined are each strategically directed and addressing market dynamics and opportunities adding more capabilities for customers extending our competitive advantage, expanding our TAM driving growth in subscription revenue and lifetime customer value and continued success for Bottomline and its shareholders.

So, in conclusion, we're really pleased with the third quarter and our acceleration in subscription growth. At a $400 million subscription run rate, we can easily see our next milestone $500 million in subscription revenue. With an acceleration in subscription growth come in Q4 and the strategic expansion of our product set, we're well positioned for the future. Shareholders will be rewarded.

As we see strong subscription growth in the 4th quarter and next year.

So, with that, I'll turn it over to Bruce and then we'll both be available for questions.

Bruce Bowden

Thank you, Rob. It's a pleasure to be speaking with you all today. I'm going to talk about our performance in Q3, both financial and commercial and with a particular focus on the underlying drivers of our growing subscription revenue streams. Then I'll provide guidance for the 4th quarter and the full year fiscal 21 as well as longer term into fiscal 22. Q3 was a very good quarter for Bottomline. Total revenue was $121 million representing 8% growth over the prior year. Both of those metrics being right on our targets. Most importantly, subscription revenue in Q3 was $100 million which is percent growth year-over-year.

We are tracking very well to our goal of producing consistent 15%-20% subscription revenue growth across the business. Profitability was equally strong with $24.1 million of EBITDA, $15.8 million of operating income and $0.27 of earnings per share, all in all we hit every key performance metric we set for ourselves.

Let's focus on subscription revenue for a few minutes. In Q3, subscription revenues were 83% of our total revenue and are now on an annual run rate of $400 million and we achieved that performance despite currency headwinds in Q3 that were greater than we anticipated and transaction volumes from a few of our products that while recovering remained slightly lower than their pre-COVID levels. Subscription revenue growth excluding Paymode-X and legal spend management was 21% including particular strength from our solutions in Europe. In Paymode-X we saw substantial year-on-year growth from new payers who were not live on our platform last year, as well as solid growth from our existing customer base that demonstrates the strong customer lifetime value and high net retention rate of this solution. Legal spend management revenue grew from add-on business with some of our leading customers tempered by some continued lower transaction volumes from the base as a whole. And our leading digital banking offerings continue to perform extremely well.

In addition to the strong revenue performance we achieved some solid bookings wins with our sales and customer success teams this quarter. Paymode-X added 25 new payers across a variety of industry verticals including healthcare, higher education and property management, both through direct sales and also by our bank channel partners and we now have more than 450,000 vendors on our network. 8 new customers, including frontline insurance and Embark general chose Bottomline's legal spend management solutions and 7 existing customers expanded their relationships and our digital banking solutions secured key wins with $500 Billion National Bank selecting Bottomline's digital banking platform, a $10 billion consumer credit reporting agency selecting our cloud enabler and encryption solutions and $500 billion National Bank extending our cyber fraud, risk management solution to protect against insider and employee fraud, although overall our bookings of $20.3 million were down a bit from last quarter.

As you know we commonly see variability from quarter to quarter. Several large deals pushed into Q4, some of which have now closed and overall Q4 bookings are looking very strong. By the way that bookings number includes new subscription revenue streams from customers that we convert from other revenue models typically legacy license and maintenance models. Previously, our reported bookings levels excluded those but when I saw that I propose that we include them because they are a real driver of increased subscription revenue growth for the future, which, as you all know is our primary objective.

Over the past few quarters, the difference between those approaches was a just a few hundred thousand dollars.

So, not material. But anyway, I thought I'd call out this tweak to this metric.

Turning to the rest of the P&L, as I mentioned earlier, we hit our Q3 EBITDA, core operating income and core earnings per share targets. Gross margin for the quarter was 60%, up 2% from Q3 of 2020 powered by 62% gross margins from our subscription products. We reinvested that added gross margin into our go-to-market and product development engines in order to continue to accelerate our growth.

Our cash flows and balance sheet remain strong. We produced $37 million of operating cash flow and $28 million of free cash flow in the quarter.

As of March 31, we had $138 million of cash and investments on hand. Notably, during the quarter we closed our acquisition of treasury express for $31 million and we did not repurchase any shares in the quarter.

We expect a strong finish to the year in Q4, we expect subscription revenue of $102 million to $104 million which equates to 16% - 19% growth over Q4 of 20.

You'll note that this range is a little lower than the 18% to 20% expectation that was previously communicated for Q4, primarily because we now expect currency exchange rates to be a little less favorable in Q4 than we anticipated when we provided that guidance initially.

We expect total revenue in Q4 of $122 million - $124 million, so 10% to 12% total revenue growth. EBITDA is expected to be $24 to $25 million, core operating income of $16 million to $17 million and core earnings per share of $0.25 to $0.27. When we achieve those results, we will hit our previously communicated targets for the full 2021 fiscal year across the board. Subscription revenue growth, overall revenue growth, EBITDA, operating income and EPS.

Looking ahead to fiscal 22. We remain committed to our primary objective of delivering consistent 15% to 20% subscription revenue growth. We've looked at so many variables that will impact where we end up in that range, including go live and ramp timing of our book solutions. The pace of volume increases in our transactional revenue streams.

Forward foreign currency exchange rates and many others.

We have taken what we believe to be conservative assumptions about all of those elements and we have high confidence in committing to 15%.

As the new fiscal year arrives and progresses, we will revisit and refine our projected performance in the 15% to 20% range. Driven largely by this commitment, we expect a minimum of 10% overall revenue growth in fiscal 22. It has been a strong ambition of ours to drive through the impacts of revenue model transitions and bring the company to double-digit growth.

We expect to achieve that in Q4 of this year and to maintain 10% to 11% overall revenue growth through fiscal 22.

In terms of profitability we are committed to a minimum of $106 million of EBITDA in fiscal '22. We can drive the company to a higher level of profitability next year if we chose to. But there are critical investments that are the better choice to ensure our accelerated longer-term growth.

For example, we suspended regular salary increases with the onset of COVID and as a result, our people have now foregone races for the past two years, which is not sustainable in today's highly competitive market for technical and leadership talent.

In addition, we see an opportunity now to capitalize on the market opportunity in front of us by continuing to invest in new product creation and enhanced go to market capabilities, making these investments is the prudent and impactful course of action, but still allows us to deliver $1 million to $2 million per quarter of EBITDA growth over fiscal ‘21 levels.

So in summary for fiscal ’22, we anticipate subscription revenue of $445 million or more and total revenue of $520 million or more.

We are proud to predict that in fiscal ‘22 Bottomline will become a $0.5 billion revenue company with double-digit growth. We'll provide further updates of our guidance in our next earnings report, including details about operating income and core EPS. I'm also happy to share with you that Angela White has just joined us as Vice President of Investor Relations, Angela is an experienced IR professional having led the function at Endurance International Group and Vistaprint's Cimpress. Angela and I look forward to continuing to build on Bottomline's relationships with our investor community over the coming months and years. When I joined Bottomline two months ago I saw a company that is uniquely positioned to capitalize on a huge market opportunity. I saw a company with a very strategic position in the middle of a FinTech market with enormous potential for long-term growth. My highest priority and ambition for bottom line is that we continue to realize that potential accelerating top line growth while balancing the need for investment profitability and cash generation. Along the way we'll continue to provide you with a clear strategic and financial plan and ensure that we execute against that plan and deliver against our commitments.

Our performance in Q3 represent strong achievement across all of those ambitions and as we look ahead to Q4 fiscal ‘22 and beyond. I'm increasingly confident that Bottomline will deliver every bit of the bright future that we envision.

Now we'll open the call for questions.

Operator

[Operator Instructions] Our first question comes from Andrew Schmidt with Citigroup. Please state your question.

Andrew Schmidt

Hey, Rob. Hey, Bruce. Thank you for taking my questions and again, Bruce welcome. To start, I'd like to ask you sort of incoming CFOs, similar question just on sort of outlook philosophy. Can you talk little bit about your philosophy on providing an outlook in communicating with the Street, do you tend to set more prudent expectations, is it, anything along those lines in terms of sort of your philosophy in setting up that foreign expectations would be helpful?

Bruce Bowden

Sure. Thanks, Andrew. Good question. Well, I think, I mean, a bit of a fortunate position here in some respects because I have the benefit of joining a company that's got accelerating growth.

So I can both with Rob provide you all with a very optimistic view of our ability to grow by at least 15% in fiscal ’22 and also feel comfortable in providing that guidance.

As I mentioned in my comments, we looked at a lot of variables that go into that. There are some of those that are more within our control and others. And I think to answer your question concisely I'd say I tried to take, we tried to take conservative but reasonable assumptions, they are not, it's not a layup. We didn't want to put a layup in front of us, but it's very, very achievable. My goal of course coming out of the chute here is to perform at the expectations that we saw.

Andrew Schmidt

Got it. Makes a lot of sense. And then you mentioned I think $106 million of EBITDA is being the minimum for FY ’22. Should we think about that 15% subscription growth similarly that sort of baseline to sort of reference and then as you get more visibility potentially that could come up is that the right way to think about it?

Bruce Bowden

That is exactly the right way to think about it, we can deliver the $106 million of EBITDA at a 15% growth level. If we were able to get to 16% or 17% or more that will free up more gross margin, obviously and we probably wouldn't logically reinvest all of that in real-time over the course of the year.

So yes, I think it would be logical to expect we might bring the EBITDA up accordingly. But I don't want to get too far over our skis, let's, we want to watch those things happen before we adjust.

Andrew Schmidt

Yes, makes a lot of sense. We're not even in FY ‘22 yet, so it make sense to start at that level. That's helpful. And then last one for me and I'll jump back in the queue.

So it looks like last quarter products and affected not impacted by transaction volumes grew 19% acceleration to 21% this quarter, why shouldn't we expect once transaction volumes coming back circling back in legal spend in Paymode-X. What are some of the factors to consider there because it seems like you're having pretty robust 19% to 21% revenue growth for this products or an impact of, it seems like the transaction, the transaction based businesses should accelerate as you get volumes back other gating factors to that math, it seems like there should be faster growth just based on the sort of the non-transaction businesses in the transaction business in the subscription revenues?

Bruce Bowden

I think, Andrew. The way to think about it is that once the transactional business normalizes that we will kind of approach that percent minimum level of overall growth across the various products. There is some variability from product to product across the various subscription revenue offerings, but I don't think it's the case that when you get through the kind of post COVID recovery of the transactional business is suddenly everything is automatically going to go to 20% it will average out more, we feel it will average out more in the range that we indicated.

Rob Eberle

Yes, you've got a mix of factors, of course, Andrew.

As you know, I mean you've said probably the most important thing you said we aren't even in FY ‘22 yet.

So we're looking ahead. But it's questions like timing go lives, the time of a ramp, those are all factors that can drive the variability in the level of growth and the difference between the 15% and a higher number and we wouldn't have confidence of visibility to a 200% commit to those.

Andrew Schmidt

Got it, makes lot of sense. Thanks, Rob. Thanks. Appreciate the comments.

Operator

Our next question comes from John Davis with Raymond James. Please state your question.

John Davis

Hey, good afternoon guys. Rob, maybe just to start on bookings.

You noted that a couple of deals got pushed out of both 3Q and into 4Q and some of those have already closed. Wondering if you could size those, I mean just, as I look at that bookings on a year-over-year basis, totally understand that it can be lumpy, but I think now for basically year-to-date fiscal ‘21 were below where we were.

So just trying to kind of solve for the bookings that you need to sustain that 15% to 20% that you talk about maybe you could just help us understand what that could look like in 4Q or at least what's closed to date?

Rob Eberle

Sure. Well, first off, so when you mentioned deals pushed out.

We have us, one single deal that kind of close the gap between Q2's bookings and what our bookings for Q3.

So that is in fact we've have seen those some of those deals close in terms of the bookings, we need to drive that growth. The fact that there are a number of factors to drive growth that don't go through bookings, so how we're ramping I made some comments about vendor enrollment and how we're maximizing the revenue opportunity around Paymode-X that won't appear in bookings when our customers grow our revenues grow and legal spend and in Paymode-X so that won't go through bookings.

So, there's a couple of different ways that we. And then last I'd mentioned is backlog.

We have a lot of backlog both in terms of go lives and in terms of vendors to come on the network and legal spend opportunity to fully realized ramp.

So when I concerned about having the level of bookings for next year's revenue growth, certainly can see that and have visibility to that 15% today.

In fact, that if you think about our model, bookings that occur now or impacting the back half of next year, at best.

So we have the bookings we need for next year's revenue growth, no question. And we've got a very solid pipeline and as I indicated during my remarks we expect bookings in Q4 to be stronger than they were in Q3.

John Davis

Okay. Historically, you guys have talked about on a trailing 12-month basis that your bookings could if they were in the range of 25% of 30% of trailing 12 months.

Some trans revenue that that was a good way to think about that as they change there. Is that still kind of hold true?

Rob Eberle

You could look at it that way but there are factors outside of the bookings number. Remember that the ramps.

So the more successful we are with vendor enrollment and ramp on Paymode-X for example can drive a lot of revenue that want to flow through the bookings number.

John Davis

Okay. And then, Bruce, one for you and I can appreciate that this is your first call here, but it seems like the ‘22 guide is framed a little bit differently than it has in the past in the sense that you're seeing this number. At or better and I think that's a little bit different than how it's passed I to make sure that I'm understanding that correctly for all the numbers that you gave that they're kind of this is the, the minimal and based off of what we know and see today because I think that's just a little bit of a change in how it's been framed in the past?

Bruce Bowden

Yes, I think you're right, I think it is, there would have been a range in the past and it's deliberate I was quite keen to put a number out there that I felt high, high confidence we would make. It's not a guarantee. I don't want to say it is, but as we said a couple of times here, we've looked at a lot of factors and tried to say even if everything doesn't quite follow the way we want it, can we still hit this number. And I think that's what the 15 and the 106 represent and the 106 of course allows for some investment to drive that number higher. The reason the 106 is where it is, is because we want to get the 15 to the 16 to the 17 and 18 over the course of fiscal ‘22 and going forward.

John Davis

Okay. And then on that margin, I think you commented on a couple of things. Why I think it's implied to be down about 100 basis points year-over-year thereabouts where exactly you investing that I assume you probably see some from a gross margin perspective, is it fair to say that you would still can see some operating leverage, so that would be flat too often.

And so all of this is kind of in the R&D and G&A lines and just talk specifically about where you're investing, I think this will be year three with EBITDA right around $100 million.

Just kind of better understanding the investments being made to drive that and then the eventual operating leverage you can see?

Bruce Bowden

Yes, sure.

So if you just think about the difference between 20% and 22% or 23% EBITDA and you all.

I think when I looked at the average of what your view was of 22%, you had a sort of something like $118 million of EBITDA.

So that's a difference of about 12 from what we put out that 12, I can give you three big drivers right off the top.

The first is investment in customer-facing functions, sales marketing customer success and vendor enrollment. If I just look at those areas and only the people that we want to bring on board to kind of turbocharge those functions and drive better bookings, better customer engagement, better revenue for the future. That's $8 million to $9 million dollars right there difference between ‘21 and ‘22. I mentioned in my comments that we want to give our people salary increases for the first time in almost two years, that's $7 million right there. And then one other investment we made last quarter when we closed Treasury Express was to broaden our product portfolio and treasury management as we've said, that's a really important set of functionality to add to our offering and it's $2.5 million worth of cost impact dilution in our fiscal ‘22.

So when you put all those together, you more than kind of explain that difference between the level you guys had in mind and what we communicated. And we just think those are all the right things to do for the future of the business.

John Davis

Okay and last one for me, Rob, you've talked a lot about shareholders will be handsomely rewarded. Apologies, I missed it, did you guys buy any stock back in the quarter and then just remind us where you are on the authorization. And I think given the M&A strategy, you kind of deployed to kind of go out and kind of take small bites at the apple and try and develop it internally, which I think the right way to do things given valuations but healthy balance sheet. Maybe talk about your appetite for stock buybacks with the stocking mid '40s and just how you think about how the capital allocation maybe you as well Bruce, that would be helpful. That's it from me. Thanks guys.

Rob Eberle

Sure, well we, as Bruce indicated, we did not by shares this quarter, we spent 31 million on the treasury espresso. We did not buy.

We have about $20 million authorized in our buyback program today. What's going to drive shareholder value is not buyback.

So it's going to drive shareholder value is growth of the business you see comp companies and growth is certainly rewarded appropriately when we're adding customers today will retain those customers for a decade or more the lifetime customer value of those customers is extraordinary.

So we know we're building value in the business driving growth and will soon be at $500 million in subscription revenue, which is a major change from where we've been. And where this company and I'm hopeful and believe we'll get recognition for that.

Operator

Thank you.

Our next question comes from George Sutton with Craig-Hallum. Please state your question.

George Sutton

Thank you, Bruce. Welcome. I did have a question on the vendor focus you sounds like you're going to be focusing more on the vendors, historically, of course, you had been working effectively for the corporations and I'm curious, the thought behind that. With respect to Paymode-X and where are you getting any vendor pay pushbacks and is that behind the move. Thank you.

Bruce Bowden

Sure. It's, first off, it's not driven by vendor push back.

Although I would tell you in the vendor pay model whether that's virtual card, ICH plus or whatever type, there's always some level of push back to being the side of the transaction bearing the cost of the freight, if you will.

So that's always part of the model, but no, it's not driven by that and I shouldn't, I wouldn't want to leave the impression that we're not focused on payers, we're of course focused on payers. We're driving new sales with payers and we have incredibly competitive platform and we believe the best platform for payers to pay. The more value we can bring the vendors, so the more enrollment.

We have the larger the automation opportunity for payers, the higher the rebate and the more revenue for Bottomline.

So vendors are looking at what is this get for me, is it reconciling is helping me with reconciliation, is it helping integrate into systems, do I get visibility to payment. Can I handle multiple payment types of. Am I able to get stream from of how many different payers are paying me all of those types of things that we can provide or value to that vendor that make it the value proposition for both sides of the network stronger.

So that's really what it's about. And that's what to drives for Bottomline. Competitive position, value to payers, because there's more vendors on the network and more revenue.

George Sutton

Got you. One other question relative to sales and marketing spend, it's up relatively significantly year-over-year and looks like you're clearly putting some money to work. I just wanted to understand, can you give us some sense of where that increases being spent. Is it being spent on a larger forced to go to market or it was there something else there. Thanks.

Bruce Bowden

Well the first part, I'd say on that is, is on digital marketing. 70% of the buying process happens before human interaction and we have a phenomenal marketing team and so we continue to add and invest to that it's less the sales team is of course critical and important and that will bring things across the finish line but how our customer engagement, how our new prospect engagement how we're building pipeline that's all driven by digital marketing quality of content, how we're tracking all of those things. We've also picked up in COVID and doing events there aren't expensive, but we're making in investment in that so that we have digital events and we're continuing to use this environment which actually drove a change in behavior rather than ask customers. Can you make a hotel and Tennessee Dallas, Chicago for a conference? We can now have an afternoon and evening event all WebEx and remote.

So we're making an investment in those capabilities. Yes, we're adding the sales teams and also adding the partnerships, how we can drive revenue opportunities through partnerships as a opportunity to Bottomline does well through banks, but there are other channels.

So those would be all the areas it's, it's probably an across the board to answer but starting with digital marketing.

Operator

Our next question comes from Gary Prestopino with Barrington Research. Please state your question.

Gary Prestopino

Thanks. Hey you called out a couple of things here and the investments in all at in 2022 the guidance, but what are you assuming for FX and really what kind of a drag was FX in the quarter first of all. And then, is there an assumption in there for what kind of drag FX is going to be for next year.

Bruce Bowden

FX was a modest drag in the quarter.

I think one way you might think about it is we took our growth range down for Q4 by about a percentage point, and we said that the bulk of that was driven by FX.

So I think that gives you an idea of what we experienced in both Q3 and what we're expecting to experience in Q4, the numbers that we provided for fiscal ‘22 so far. Do not ponder they're basically based on spot rate logic for ‘22 we did not bake-in some assumption about headwinds nor tailwinds from FX in ’22.

Gary Prestopino

Okay. And then, can you tell us of, what's the breakdown or your subscription revenue between actual SaaS and transactions?

Rob Eberle

Well, I'll step back and first make a comment on that.

You know what, I think for us the 15 years we saw transaction based revenues can be a better way a better revenue model, that's the Visa models, Mastercard model, which is what we follow on Paymode-X and legal spend management we drive more revenue as well as our customers grow but one time that was difficult was doing and the economic disruption of COVID that's the only time we've had that revenue model be to our disadvantage. And I'm certain that well. I believe that there'll be some economic normality and it's going to return and as asset does, I'm certain that this is actually more attractive revenue model transaction, so yes it's hurt us in this past year, but it's a better. It's definitely the better model for us, it's probably about 40% round numbers is transaction based 60% is subscription. It will sound odd Gary, if I had my druthers; I have a 100% transaction.

I think Visa Mastercard to pretty well for themselves even though there are times the transaction can work against you. But today the majority of our revenues are subscription a portion is in that transaction model.

Gary Prestopino

Well, yes, I'm not trying to be critical. I'm just trying to understand the magnitude here. And then in your guidance for next year again when are you assuming some kind of normalization in the transactional business, the back half of the year?

Rob Eberle

I think Gary we expect, we're seeing it right now.

So when we think about normalization.

We are in both Paymode-X and legal spend, which are the two businesses, primarily impacted.

We are seeing them at this point back right about at or slightly above going into Q4, above the pre-COVID levels.

So we think we're back where we were and kind of moving forward from there.

We also are seeing the growth rates come back up.

Now, you're starting to add some easier lapse of course in those businesses. But, but nevertheless, the growth rates are coming up and there are just good fundamental dynamics in those businesses.

In terms of the amount of volume, we're seeing with our customer base and our commercial traction.

Gary Prestopino

Okay, thank you.

Operator

Our next question comes from Mayank Tandon with Needham and Company. Please state your question.

Mayank Tandon

Great, thank you. Good evening.

Let me also add my welcome to Bruce, I wanted to Rob maybe ask you because you provide us some nice metrics on the Paymode-X platform, which is very helpful. Are you able to share what is the dollar volume flowing through your rails today maybe expectations around that and also in that same context, how do you see yourself faring against the other AP players out there in the market, obviously is a very hot space. I just want to get a better sense of the value proposition that you are able to offer versus your competition?

Rob Eberle

Sure. We don't have any particular number on the transaction volume today out other than our over 200 billion runs through our network. The competitive position what my comments on my prepared remarks, it really address a good portion of that where we're driving additional value to vendors that makes them more compelling network.

The other part that's really important, and there is 450,000 vendors on the network that means as we approach are particularly in the verticals where we have a strong presence. Well, one of the first things we'll do is we'll get a file indicating all of their vendors and will have a direct match that can be 30%, 40% perhaps even 50% of their vendors already been paid on our network.

So that means the process of ramping the process to automation and process to rebate is that much easier and that much faster, for the payers.

So scale and size matters quite a bit, as you referenced other networks I think over time, you're going to see more interoperability in connection between networks. This isn't a winner-takes-all single market. I don't say that to suggest we're coming in anything other than first in the market. We focus on which is enterprise but I think connectivity to other networks just provides more value.

So it's, and other network has.

We have 150,000 vendors and another network has 200,000 of which 50,000 of those vendors are payers would like to pay.

I think you're going to see interoperability in the coming years that will makes automation promise become real.

Mayank Tandon

Great, that's helpful color and then maybe two quick ones for Bruce.

In terms of the margin next year it is evenly split between COGS and OpEx or is it going to be skewed towards one of them. I'm sorry if I missed this and then I have a quick follow-up around the trajectory around the seasonality. Anything we should expect that's abnormal in fiscal ‘22 or is it pretty evenly split in terms of the trajectory of growth and margins over the course of the year? Thank you.

Bruce Bowden

Yes, Mayank I think you broke up a little bit at the beginning of that I think you said something about, where will we be investing between will we be investing more in COGS or in OpEx. Could you just restate that quickly I want to make sure I got it right?

Mayank Tandon

Yes, I was just wondering the drag on margins in fiscal ’22 that pretty evenly split between the two segments or is it going to be skewed towards one or the other.

Bruce Bowden

Yes, so I don't think of it as necessarily being a drag on margins. I mean we are still operating at about 20% EBITDA margin, which is what we did this past quarter and what we're looking at for Q4 as well.

So I think what we are doing is largely leveling at that 20% kind of EBITDA level as we drive revenue growth we’re creating incremental gross margin of course.

So the dollars the fact that we're going back into OpEx and the kinds of areas that I was talking about earlier.

Rob Eberle

And then you mentioned seasonality. I'm sorry. No, we don't currently anticipate any particular notable aspect of seasonality for next year.

Mayank Tandon

Great, thank you so much.

Operator

Our next question comes from Bob Napoli with William Blair. Please state your question.

Bob Napoli

Thank you and welcome, Bruce. Good evening Rob. Question just on the 15% to 20% in the current trends and subscription transaction which of your businesses do you expect to perform above the average and. And we're going to be bigger drivers of that growth rate over the next couple of years not just next year?

Rob Eberle

Well, certainly if you look at the TAM opportunity and what we see going into next year Paymode-X a huge opportunity. No question to be the way businesses pay and get paid and every bit of our outlook for next year indicates we'll see real strong results there. At the same time, our digital banking platforms banks are competing for customer engagement, how can we retain our customer going to know more about that customer going to drive maximum wallet share with the market's gone so far beyond just how can I allow my customer to make an ACA balances more I can. We're so well positioned for that. With that, so we're in a very good position there. And then last, on Europe. I'd mentioned and Open Banking, which is really interesting and changing the way businesses pay in any time this payment change that's good for Bottomline because that means new platforms that means, new capabilities.

So we look across, we don't see a drag on next year. We don't see a business daily or product set that's hurting us are holding us back. We see really almost unlimited opportunity around Paymode-X over time but feel strong about the full product set.

Bob Napoli

Thank you. And I guess you've never. I don't think given the net revenue retention rate.

I think that would be helpful to investors that you could give the net revenue retention rate if you did it by segment like digital banking Paymode, even just even those to enter that would it's going to be over 100% I would believe if you're growing on a subscription has been transaction?

Bruce Bowden

Yes, you're right, it's a very attractive number I agree that would be helpful. We looked at bringing that together and out the COVID and transaction sort of disrupted that and in some places made that first SKUs that number, but I think the comments well taken. And that's something we've certainly evaluate to be giving out in the future.

Bob Napoli

And then, just on Treasury express and how that fits into APAR, the office of the CFO. I mean the treasury market is, as you know, obviously a very large market some significant players that are large and growing fast in that area.

First, can you give us some color on what you expect in revenue out of Treasury expressed next year, but then strategically how is the cross-sell going to work. How are you going to build out that that business?

Rob Eberle

Sure. Well, we don't have a revenue number for next year on Treasury express it was less than $1 million and closed in January. It was less than $1 million and I mean, I'm sorry, less than $0.5 million in this quarter.

So it's not entering the treasury market per se. It's really about the product capability and if you think about the states of money AP which is sending my payments out, AR which is receiving payments and the middle state is treasury managing cash, managing balance, managing all of those investment and the like.

So what we wanted to do full payments and cash life cycle platform is have that Treasury piece could sort of think of that is sitting in the middle, if you will, between AR funds have been received in EPay funds being sent out. What CFO does is that's advanced analytics that we've developed with machine learning capabilities to help in cash flow forecasting reconciliation other aspects of cash and cash management and bringing all of that together.

So the full payments and cash life cycle with Treasurer Express. And then the data insights that CFO brings on top of that, that's our platform vision and how we wouldn't look at that we weren't entering the treasury market just as a Treasury provider or we're really looking at is a broader platform than anybody else offers today a full again full APAR payments and cash life cycle.

So that's the strategic importance.

So that's its relevance and that's really why we are so excited about the combination.

Bob Napoli

Great. Thank you, Rob. Thanks, I appreciate it.

Operator

Our next question comes from Peter Heckmann with D.A. Davidson. Please state your question.

Peter Heckmann

Hi, welcome Bruce. Thanks for taking my questions. I just want to clarify the company has about 35% of revenue coming from outside of the US and the US dollar has been weakening against the currency, so it will be like that. FX was about a 250 basis point tailwind for the quarter and at current spot rates, it looks like it's going to be about 250 to 300 basis point tailwind going forward. If we exclude that tailwind and the acquisition is your initial guidance for 2020, you're really looking for about 12% organic constant currency growth [indiscernible].

Bruce Bowden

No, I don't think so. We've taken into account, the currency effects for this year and so I don't think the 15% converts to 12%. There may be, there may be 100 basis points. I could look at that. But, but I don't think it's more than that when you think about the effective of currency over the entire year versus the entirety of next year.

Peter Heckmann

Okay. I have to check that. And then I didn't hear it, did you give a backlog for the digital banking business.

Bruce Bowden

We didn't, but I'm happy to the backlog as of March 31 stood at $16 million and of that amount 35% was expected to drop in across the end of the year here or just throughout this last quarter.

Peter Heckmann

Okay, great. And that's really helpful. And then I just lastly maintenance, but did you give an operating cash flow number?

Bruce Bowden

Yes. Operating cash flow was 137 [ph]. This is my recollection. oh, you mean for. I'm sorry, did you mean for the quarter? It was $37 million.

Peter Heckmann

Right. Got it.

Bruce Bowden

Sorry, $37 million, apologies.

Peter Heckmann

Thank you.

Operator

Thank you.

We have read at the end of the question and answer session. And that also concludes today's conference. Thank you everyone for your participation.

You may disconnect your lines at this time. Have a good day.