Description

Bottomline Technologies (“Bottomline”, “EPAY”, or the “Company”) is a SAAS software company that delivers payments and banking software to enterprises as they embark on digital transformations.  With the stock at ~$37.38, it’s a ~$1.7bn market cap company with effectively no net debt.  The reason why it’s interesting is the stock capitulated after the new CFO, Bruce Bowden, joined the Company earlier this year and put out a very conservative guide (creating a ‘beat and raise’ setup for the rest of the year).  Beyond the attractive entry point (and implied valuation of ~4.5x subscription revenue that’s growing high teens with ~70%+ incremental margins), the Company is also well positioned to take advantage of the secular shift in B2B payments which are finally moving ‘online’.  There is also a ‘mix shift’ dynamic where the attractive and faster growing parts of the business will be representing larger portions of the business which should result in a topline inflection that sees subscription revenue ramp from teens growth into the 20’s%.  Finally, there is also an element of ‘reopening’ as a portion of the subscription revenue comes from transactions which are beginning to inflect positively over easy compares from the pandemic.  In summary, the bet you’re making is that subscription growth inflects into the high teens (from mid/low teens) in FY22 (beginning 2H this year), and the Company beats and raises numbers after an extremely conservative guide from the newly appointed CFO.  At 5.5x FY23 (ending June ’23) subscription revenue of ~$550mm, the stock would trade for ~$65, representing 70%+ upside over the next 12-18 months.

Bottomline operates primarily within three different segments and generates approximately ~$400mm of subscription revenue across the three.  1) B2B Payments, represents approximately ~50% of the $400mm and is comprised of Paymode-X (automates AP for enterprises in the US), PTX (provides a B2B payments platform for enterprises in the UK), and financial messaging.  This ~$200mm of subscription revenue is growing ~20% (normalized for transaction revenue).  2) Digital Banking, represents ~25% of the $400mm of subscription revenue and this software offering helps primarily regional banks ‘digitalize’ their offerings to help them remain competitive with fintechs and larger banks.  As the world has shifted to digital (exacerbated by the pandemic), regional banks are looking to remain relevant / able to serve their customers in an effective manner, and they utilize Bottomline software to facilitate a better banking experience through web-based and mobile banking interfaces.  This segment is similarly growing 15-20%.  3) Legal Spend Management, represents ~25% of the $400mm of subscription revenue and is growing 10-15%.  The Legal Spend business is a software platform sold to insurance companies to help them manage their legal expenses.  This business is transaction-based around the level of insurance claims (and auto insurance claims had dropped due to a reduction in commuting during the pandemic), so there is a bit of a reopening play for this business as we get back to work.  In total, Bottomline generates approximately ~$400mm of subscription revenue that is growing ~15% but should begin to inflect toward 20% as reopening continues.

The key premises of the thesis are: 1) the secular trends driving the business, 2) the mix shift dynamics that will lead to a revenue inflection, 3) the attractive positioning in the market as a top 5 player in each of their end-markets, 4) the attractive valuation, 5) the potential for asset separation / the SOTP, and 6) the setup after the latest guidance from the newly appointed CFO.  With respect to secular trends, business payments are still somewhat early days on transitioning to fully electronic rails, but this ongoing shift has been accelerated from the pandemic.  Nearly two thirds of all organization make more than half of their payments by paper check.  At the same time, a similar two thirds of businesses recognize that smarter payment systems that drive efficiencies are necessary for success.  Both Paymode-X and PTX are at the heart of these transitions.  Similarly, the digital banking business is being driven by the need for traditional regional banks to upgrade their offerings to better compete with the well-funded fintechs.  Digital Banking IQ, Bottomline’s key offering, is a leading solution in the market for this.  Next, the mix shift dynamics will lead to a mechanical inflection of topline over the next 24 months.  Within the payments business (~50% of ARR), 60% of the business is growing ~30% while 40% is growing LSD.  As this plays out, the collective payments business growth will inflect into the 20’s%.  In terms of positioning, the Company has more than 10,000 corporate customers, 60 of the Fortune 100, works with 15 of the top 25 global banks, and 89 of the FTSE 100.  The main competitors on the payments side are AvidExchange (will be going public shortly and could shed additional light on the value of Bottomline’s ‘hidden’ payments assets), and potentially Coupa (which is attempting to gain traction in AP payments).  On the digital banking side, the primary competitor is ACI Worldwide.  And on the legal spend management business, they primarily compete with companies like LexisNexis and Wolters Kluwer.  In all, Bottomline has a leading market position in each of their business lines and should continue to capture their fair share of these growing markets.  The Company is also attractively valued at reasonable mid-teens multiple of forward EBITDA and less than 4x forward subscription revenue.  This is both cheap on a relative and absolute basis and leaves the possibility of multiple expansion if the beat and raise story plays out.  The Company could also create value by simplifying the structure such as spinning off/selling their legal spend management business.  While there are cross-selling opportunities between the payments and digital banking businesses, there’s not a great reason for the legal spend business to be part of the same company and may be an attractive carve-out for private equity.  Using a SOTP lens, you can make the case that Paymode-X + PTX could be worth the entire market cap (7-8x ~$250mm of ’23 subscription revenue that is compounding in the 20’s%).  Finally, as previously alluded to, the new CFO set the stage for a multi-quarter run of beats and raises.  The Company guided to at least ~15% of subscription revenue growth for FY22 at the same time that the business will be ‘comping’ against low teens compares from the pandemic and the transaction related revenue is now starting to come back.  The Company reported that excluding transaction-related revenue, the business has been growing subscription revenue ~20% in recent quarters, so it’s unlikely it would decelerate toward the 15% guide next year against the easy compares and once the transaction revenue is back in fold. 

In summary, the current setup at Bottomline creates an attractive entry point to participate in the secular growth of digitizing B2B payments and digital transformations.  Unlike some of the other growth assets in the software space, this business actually trades for a real EBITDA multiple and an attractive revenue multiple.  The key risks to watch are mainly around execution and competition.  This is admittedly not the best management team in the business, and they have had ‘fits and starts’ in the past in terms of execution.  However, with a new CFO on board and a newly hired head of IR (the prior CFO had historically handled investor relations on the side), the Company seems to be making the right moves to both execute and better communicate with wall street.  On the competition front, it’s prudent to monitor the progress of Coupa on the payments side, but as of late, Bottomline hasn’t really been seeing Coupa in deals.  The combination of the leading positions in secularly growing end-markets at a reasonable valuation, and with an easily achievable bar with the recent FY22 guidance, sets up an attractive back half / 2022.  As a kicker, I wouldn’t be surprised to see some strategic alternatives/divestitures put on the table. 

Catalyst

• Next few quarters of beats and raises after very conservative guidance
• Potential divestitures/activists