9/7/2017 Value Investors Club / BOTTOMLINE TECHNOLOGIES INC (EPAY)

Inbox (/txts) Signed in as byronval. Logout (/logout)

Search the site

BOTTOMLINE TECHNOLOGIES INC EPAY

September 06, 2017 - 12:21am EST by techval699 (/member/techval699/19331)
2017 2018
Price: 30.00 EPS 0 0
Shares Out. (in M): 38 P/E 0 0
Market Cap (in $M): 1,135 P/FCF 0 0
Net Debt (in $M): 63 EBIT 0 0
TEV ($): 1,198 TEV/EBIT 0 0

Description
Introduc on
Bo omline Technologies ( cker: EPAY) is a misunderstood, value-oriented, catalyst driven name where the public market value of this FinTech roll-up is signicantly below its comps
and private market value.

EPAY provides so ware and manages payment hubs to enable electronic payments, invoicing, digital banking, fraud preven on and document management to both banks and
corporates globally.

My price target for EPAY is $40-45/sh (33%-50% upside) over the next one year for the following reasons:
1) Several industry trends driving increased demand and adop on from banks and corporate customers.
2) Strategic players from adjacent industries are focused on partnering with and acquiring B2B Payment providers to par cipate in this high growth opportunity.
3) The Companys recent business model transi on has led to 80%+ recurring revenue, and a double-digit revenue growth and expanding margin opportunity.
4) Management has recently signaled that they are willing to shi from a strategy of growth thru acquisi ons to one focused on be er execu on and disclosures that should help
remove the valua on gap that currently exists rela ve to its publicly traded comps.
5) Rapid industry consolida on sets up the Company to be acquired at a premium valua on or the board to sell parts of the business to maximize shareholder value.

Industry Trends
Bo omline competes in the business-to-business electronic payments (B2B Payments) market globally. The product oerings in this market consist of so ware products to
streamline accounts receivable collec ons, accounts payable bill payment, and global cash management as well as industry specic payment hubs for vendor sourcing, procurement,
contrac ng, invoicing, ACH bill payment and se lement.

Goldman Sachs in a recent in-depth payments industry report es mated that the B2B Payments market generates $12B in fees across $23T in payment volumes globally. The market
is expected to nearly double to $21B in fees and $41T in volumes over the next decade as corporates upgrade their back-end infrastructure to adopt more ecient and lower cost
payment processes. As a result, this large and mature market is expected grow at an above GDP rate of 6% annually for the next decade.

The B2B Payments market has been shi ing to electronic form for several decades but the automa on trend has recently accelerated due to 1) increased cost transparency and lower
cost alterna ves, 2) need for fraud preven on and 3) requirement for faster se lement mes. Today, B2B Payments are made mainly by paper checks (50% of all transac ons),
Automated Clearing House (ACH) transfers (32%), credit cards (10%) and wires (8%). A Payments Costs Benchmarking Report published in 2015 es mated that the average cost
(direct and indirect) of processing checks was $2-$4/payment, 2-3%/transac on for credit cards, $8-10/transac on for wires, and $.26-$.50/transac on for ACH. The meaningfully
lower cost, lower error rate, faster se lement me and ease of use of ACH transfers has led to its volumes growing by 50% in the past 3 years while check volumes are down by 20%
over this period. ACH is expected to be the primary driver of the conversion from paper-based checks in the B2B market over the next decade.

B2B Payment products are either sold to banks who provide the products to their customers or directly to corporates who use it as means to lower the cost of paying and managing
their vendors. Given their broad and s cky customer base, recurring revenue model and high margins, B2B Payment products have become valuable to players in various adjacent
sectors such as core banking, credit card processing and ERP so ware.

The core banking so ware industry provides back-end systems to banks that enable automated processing of customer transac ons (e.g. account opening, deposit, loan and credit
issuance). As the number of commercial banks in the US has shrunk from 7,500 to below 5,000 over the last decade following the nancial crisis, the core banking so ware industry
has consolidated to ve major vendors (FIS, FISV, JKHY, Misys Group plc, and QTWO) who have been ac vely looking for new products to oer their large, mid-size and regional
banking customer base in the US. As a result of the rapidly shrinking customer base, the core banking so ware players have expanded into B2B Payment products to grow their
wallet share and drive revenue growth within their exis ng bank customer base. These players ini ally entered the B2B Payments segment thru acquisi ons of online bill payments
so ware vendors. More recently, they have acquired cross-border cash management and treasury solu ons providers and payment hubs, many of which compete with EPAY. For
example, Fundtech, one of EPAYs direct compe tors, was bought by the private equity rm GTCR in 2011. It was then later sold in 2015 for a large gain to D+H Corp, a core banking
so ware vendor. D&H Corp was recently bought by Misys Group plc, a Vista Equity Partners por olio company, to become the number four core banking vendor globally. Fundtechs
cash and treasury management solu ons along with its nancial messaging products enables Misys to cross-sell more products into its exis ng client base. FIS, the number one core
banking so ware vendor globally, recently acquired Clear2Pay, a European payments technology provider with a bank service payment hub.

The credit card processing industry has also entered the B2B Payments segment thru acquisi ons and partnerships to diversify from their tradi onal B2C market. Credit card and
debit cards comprise a very small share of the online and oine B2B Payments markets due to their high processing costs (2-3% of bill) and limited use cases related to corporate
travel and entertainment. Recently, both Visa and Mastercard launched ini a ves to gain a foothold in the B2B Payments market. Mastercard Send and Visa Direct are lower-cost
push payment networks that allow corporates, banks and governments to proac vely send funds to a clients bank account ed to a debit card. Though the costs of these debit

https://www.valueinvestorsclub.com/idea/BOTTOMLINE_TECHNOLOGIES_INC/140894 1/5
9/7/2017 Value Investors Club / BOTTOMLINE TECHNOLOGIES INC (EPAY)
transac ons are 0.5% - 1.15%, less than the cost of an average credit card transac on, they are not as low as that of ACH-based transac ons. To con nue to lower its cost structure
for the B2B marketplace, Mastercard recently acquired VocaLink, a faster payments infrastructure provider in the UK, to compete even more directly with exis ng ACH networks in
Europe.

The major ERP So ware vendors have also realized that to meet the needs of their enterprise customers vendor sourcing and payment needs, they have to oer robust B2B Payment
capabili es. For example, SAP acquired Ariba with its AribaPay product that includes a supplier sourcing and payment hub that also competes with EPAY.

Company Overview
Since its founding in 1989, Bo omline evolved from an outsourced check printer to a so ware developer of products and solu ons for facilita ng the transi on from paper checks to
electronic funds transfer. Thru the crea on of standardized electronic le formats, EPAY enabled its bank customers to automate bill payment func onality for its corporate end-
customers. The Company went public in 1999 and through a series of more than 20 acquisi ons in nearly 20 years, EPAY has diversied its customer and product oerings. As the
Companys products, revenue models and compe on are not well disclosed nor well understood by the market, I have a empted to describe the Companys three product
segments and its underlying major product lines.

Cloud Solu ons
1) Legal eXchange acquired in 2011 for $54M
SaaS-based legal spend management so ware and payment hub to help P&C and healthcare insurers and enterprises source, procure, invoice and pay mul ple outside legal
service vendors.
Web-based portal that integrates with claims management and me and billing systems to automate the process of invoicing, rou ng and claims review, and manage day-to-
day legal expenses.
This payment hub includes 13K law rms and over 200 insurance customers where the average client saves 8% of their legal expenses annually.
Revenue model subscrip on service based on invoice processing fees + success fee based on cost saving realized.
Compe on TyMetrix/Wolters Kluwer ELM, CSC/DXC, LexisNexis/RELX, and Serenge Law/Thomas Reuters. EPAY is the leading payment hub in this ver cal with over 50%
market share.
FY17 Revenues were $59M and grew at 24% yoy.

2) Paymode-X started by Fleet Bank and Clariant in 2000, this business was acquired in 2009 from Bank of America (BofA) for $20M and integrated with EPAYs own Business
eXchange solu on
SaaS-based B2B electronic sourcing, payment and se lement hub solu on for businesses.
Web-based, bank-neutral portal that enables the exchange of electronic payments and invoices between payors and vendors and can be integrated with various ERP systems.
Processing $200B in annual payment volumes with 365,000 vendors and 1,000 payers on the network.
To drive increased volumes on its network, EPAY recently changed the revenue model from payer-pay to vendor-pay with a por on of fees returned to the payor in the form of
a rebate. Even with the rebates, the new model is approximately 4-6x more protable.
Bank channel partners that resell this product include BofA, RBS/Ci zens, Trustmark, BoNY/Mellon and Fi h Third. BofA, in par cular, has been an important partner in driving
new customer growth; EPAY has had a long-term reseller and service agreement in place with BofA since 2009.
Strategic partnerships with Visa and Mastercard to integrate with their corporate cards.
Compe on ACIW, AribaPay/SAP, Digital Insight/NCR, Clear2Pay/FIS, Bill.com, AvidXchange, as well as home grown systems from JPM, Ci , Syncada/US Bancorp and Wells
Fargo. EPAY has one of the leading B2B Payment hubs in the market.

3) Financial Messaging acquired two European nancial messaging companies in 2013 and combined with its own US-based product
SaaS-based pla orm to connect banks and corporate customers to the SWIFT global network.
Enables banks and corpora ons to exchange cross-border payment instruc ons to facilitate se lements.
Revenue model primarily subscrip on-based.
Compe on Fundtech/D+H Corp/Misys and Sungard/FIS.
FY17 Revenues for Se lement Network Solu ons (Paymode-X + Financial Messaging) were $96M and grew by 5% yoy.

Digital Banking
4) Digital Banking Solu ons formed thru a series of acquisi ons from 2000 to 2014 that cost over $200M
White-label so ware for commercial banks to provide web-based and mobile portals to their corporate customers.
Includes mul ples solu ons that enable cash and treasury management, real- me fraud monitoring, bill payment, as well as customer acquisi on and new account opening
tools.
The Companys legacy cash management business has nearly 150 customers while its recently-launched, next genera on Digital Banking 3.0 (DB 3.0) pla orm has signed up
over a dozen major banks and nancial ins tu ons.
Revenue model subscrip on-based that includes heavy upfront professional services for up to a 18 month integra on cycle per customer; large legacy bank customers are
slowly transi oning to the new product while EPAY is ac vely transi oning away from its small regional banks and credit unions (many of which were acquired from Intuit in
2012 for $20M) that dont value the new pla orm.
Compe on S-1/ACIW, Clear2Pay/FIS, FISV, JKHY and Fundtech/D+H Corp/Misys, Digital Insight/NCR, Oracle, and IBM.
FY17 Revenues were $79M and are expected to grow by $5-10M in FY18 given the visibility that they have from two newly deployed customers. Several customers are
expected to go live in FY18 and FY19.

Payments, Transac onal Documents & Other
5) Cyber Fraud & Risk Management acquired Intellinix for $85M in 2015
Licensed based so ware products for nancial ins tu ons and healthcare organiza ons.
Solu ons that monitor, replay and analyze bank employee behavior on their terminals to ag and stop fraudulent ac vity and transac ons.
Revenue Model licensed + maintenance.
Compe on NICE, De ca/BAE Systems, and SAS.

6) Healthcare Solu ons acquired thru a series of acquisi ons for over $50M
Document management so ware for hospitals and healthcare providers.

https://www.valueinvestorsclub.com/idea/BOTTOMLINE_TECHNOLOGIES_INC/140894 2/5
9/7/2017 Value Investors Club / BOTTOMLINE TECHNOLOGIES INC (EPAY)
Integrates with electronic healthcare records solu ons to convert paper based documents and enable electronic document crea on, capture, and storage; provides analy cs
to detect fraud.
Revenue model licensed + maintenance.
Compe on Access, FairWarning, and FormFast.

Compe on
EPAY has dozens of compe tors across it various product lines but no pure play compe tor that is in all the same product categories. Many of its compe tors have been smaller
players that have been acquired by the core banking players, credit card processors and ERP Vendors. The B2B Payments industry remains very fragmented as there are many players
that are solely focused on selling directly to banks while others that are focused on enabling enterprises to conduct electronic transac ons but very few like EPAY that cross-over both
types of customers sets. As the industry matures, I expect it will con nue to consolidate amongst a small set of players that will need to have the capabili es to cross-sell between
both customer sets.

Financial Model
Though EPAY discloses its revenue based on standard revenue recogni on accoun ng criteria, I have a empted to show the Companys recent nancial history based on the product
segments retrieved from disclosures from footnotes in public lings and supplementary disclosures (see Table 1). I believe re-framing the Companys nancials based on product
segments provides a be er understanding of the growth drivers and prot margins.

Similar to many other legacy so ware companies, EPAY has been undergoing a mul -phase business model and product transi on over the last several years. First, most of its
Established Products (most products except Digital Banking) have transi oned to a recurring subscrip on and transac ons revenue model from a tradi onal license plus
maintenance model. Second, its Transi oning Products (Digital Banking related products) have undergone both a revenue model change and a pla orm re-write as part of
launching the DB 3.0 product. This transi on has been not easy as contracts are large, and require extensive professional services integra on with a banks core banking systems.
The integra on and tes ng of this new product has taken several quarters longer than expected where all costs were recognized upfront without any corresponding revenues. In the
last two quarters, the rst two clients on DB 3.0 went live which enabled EPAY to start recognizing revenues.

Managements recent disclosure of product segment revenue and margin details have started providing investors more visibility into the main drivers of growth and protability. The
Companys Cloud Solu ons product line is growing at 10-15% while EBITDA margins have doubled over the last ve years to 23%. The Payments & Transac onal Documents product
line has been transi oning a por on of its revenues from license to subscrip ons causing revenue growth to be vola le though margins have held steady at 26%. The Digital Banking
segment has underperformed the last several years as revenue growth has been inconsistent and margins have been stuck in the low teens. Management believes that the transi on
to the DB 3.0 pla orm with live customers should enable more consistent revenue and margin growth for this product segment.

The Companys business model and product transi ons have led to a series of revenue and earnings guidance misses in the last two years while revenue growth slowed down from
an average of 13% thru FY15 to 2% in FY17. As a result, the stock has been range-bound between $20-30 for the last several years. Now that nearly 85% of its revenues are recurring
(in the form of subscrip ons, transac ons and maintenance) while DB 3.0 has begun to generate revenues, Bo omline is in a be er posi on to re-accelerate its revenue growth
(expects 7% in FY18 and 10% in FY19) and meet or exceed managements $300M in subscrip on and transac ons revenues and $100M in EBITDA targets by FY19. The Company is
expected to generate nearly $70M in free cash ow in FY19 as a result of posi ve working capital from its growing deferred revenue, low cash 5% tax rate (due to $140M in NOLs)
and maintaining capex at current levels.

Balance Sheet and Use of Cash
Bo omline has a strong balance sheet and cashow genera on prole. The Company ended its June 30th scal year-end with $127M of cash and plans to re re an upcoming $190M
conver ble bond maturity with a low-cost debt facility. As net leverage is less than 1.0x, the Company remains signicantly under-leveraged given its high recurring revenue, s cky
and diversied customer base and strong margin prole. In the past year, EPAY has spent $25M buying back 1M shares. Management has also signaled that they are re-focusing
their historical strategic priority of M&A to one focused on mee ng their near-term organic growth opportuni es, improving margins while using their free cash ow for stock
buybacks.

Table 1 Current Valua on and Financial Model

https://www.valueinvestorsclub.com/idea/BOTTOMLINE_TECHNOLOGIES_INC/140894 3/5
9/7/2017 Value Investors Club / BOTTOMLINE TECHNOLOGIES INC (EPAY)

Valua on Target
The Company is currently valued at 2.9x EV/Revenue and 11.7x EV/EBITDA based on its two-year forward guidance while its public comps trade at an average 2-year forward
valua on of 6x EV/Revenue and 14x EBITDA (see Table 2) The comparable M&A transac ons in the sector are at 4x EV/Revenue and 22x EV/EBITDA (see Table 3). Assuming the
company uses its free cash ow for buy backs and applying a 14x EV/EBITDA forward mul ple and 20x EV/EBITDA current year mul ple, I believe EPAYs stock is worth $40-45/share
in one year under various scenarios. My valua on is also supported by a sum of the parts analysis that applies a 10-12x EV/EBITDA mul ple for the Digital Banking segment but a
premium valua on to the rest of the business given their higher and more consistent growth and strong margin prole.

Risks
Managements mixed history of mee ng its nancial targets along with making dilu ve acquisi ons is the primary downside risks in this stock in my view. Another risk is the loss of a
large bank channel customer such as BofA which in fact has been a strong customer and reseller for over 8 years. Though no customer represents more than 10% of revenues, the
loss of a large bank channel customer would impact EPAYs revenue growth. I believe the downside in the stock is 10x EV/EBITDA which is historically the low point of where under-
performing players in the sector have traded. This implies a downside target price of $25/sh.

Catalysts
Consistent execu on that demonstrates the Company is on track to meet or exceed managements $300M in subscrip on and transac on revenues target and $100M in
EBITDA target for FY19.
Increasing leverage to accelerate share buyback program.
Ac vist investors or current shareholders (e.g. Vista Equity Partners) pushing the board to run a strategic review process.
Poten al separa on of the Digital Banking segment to improve revenue growth, margins and mul ple.
Sale of the en re company to a strategic player focused on B2B Payments or a nancial buyer that has a pla orm company in the space.

Given the stock is at $30/sh currently, I believe an investment in EPAY provides a very favorable risk/reward for long-term, pa ent investors.

Table 2 Publicly Traded Equity Comps

https://www.valueinvestorsclub.com/idea/BOTTOMLINE_TECHNOLOGIES_INC/140894 4/5
9/7/2017 Value Investors Club / BOTTOMLINE TECHNOLOGIES INC (EPAY)

Table 3 M&A Comp Transac ons

Disclaimer

My rm is currently a holder of Bo omline Technologies securi es. This is not a solicita on to buy or sell securi es. Please do your own individual research and thorough due diligence before transac ng in any shares in Bo omline Technologies. We

may buy or sell Bo omline Technologies in the future and are under no obliga on to provide any update or details on our trading ac vi es.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst
Consistent execu on that demonstrates the Company is on track to meet or exceed managements $300M in subscrip on and transac on revenues target and $100M in
EBITDA target for FY19.
Increasing leverage to accelerate share buyback program.
Ac vist investors or current shareholders (e.g. Vista Equity Partners) pushing the board to run a strategic review process.
Poten al separa on of the Digital Banking segment to improve revenue growth, margins and mul ple.
Sale of the en re company to a strategic player focused on B2B Payments or a nancial buyer that has a pla orm company in the space.

Messages
https://www.valueinvestorsclub.com/idea/BOTTOMLINE_TECHNOLOGIES_INC/140894 5/5