Attached files
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EX-32.2 - EXHIBIT 32.2 - S1 CORP /DE/ | c16587exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - S1 CORP /DE/ | c16587exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - S1 CORP /DE/ | c16587exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - S1 CORP /DE/ | c16587exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number: 000-24931
S1 CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
58-2395199 (I.R.S. Employer Identification No.) |
|
705 Westech Drive Norcross, Georgia (Address of principal executive offices) |
30092 (Zip Code) |
Registrants Telephone Number, Including Area Code: (404) 923-3500
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report.)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Shares of common stock outstanding as of May 2, 2011: 53,438,360
S1 CORPORATION
QUARTERLY PERIOD ENDED MARCH 31, 2011
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
S1 CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 59,920 | $ | 61,917 | ||||
Accounts receivable, net |
54,862 | 44,370 | ||||||
Prepaid expenses |
4,566 | 4,827 | ||||||
Other current assets |
7,507 | 6,612 | ||||||
Total current assets |
126,855 | 117,726 | ||||||
Property and equipment, net |
21,937 | 22,330 | ||||||
Intangible assets, net |
11,098 | 11,846 | ||||||
Goodwill, net |
147,895 | 147,544 | ||||||
Other assets |
8,377 | 10,207 | ||||||
Total assets |
$ | 316,162 | $ | 309,653 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 9,194 | $ | 9,779 | ||||
Accrued compensation and benefits |
11,593 | 9,705 | ||||||
Current portion of debt obligation |
56 | 5,046 | ||||||
Current portion of accrued restructuring |
954 | 1,528 | ||||||
Income taxes payable |
156 | 1,950 | ||||||
Deferred revenues |
48,575 | 38,022 | ||||||
Other current liabilities |
2,353 | 2,853 | ||||||
Total current liabilities |
72,881 | 68,883 | ||||||
Other liabilities |
3,059 | 3,157 | ||||||
Total liabilities |
75,940 | 72,040 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value per share. Authorized 350,000,000 shares. Issued
and outstanding
53,421,860 and 53,317,063 shares at March 31, 2011 and December 31, 2010, respectively |
534 | 533 | ||||||
Additional paid-in-capital |
1,804,147 | 1,802,795 | ||||||
Accumulated deficit |
(1,563,135 | ) | (1,563,817 | ) | ||||
Accumulated other comprehensive loss |
(1,324 | ) | (1,898 | ) | ||||
Total stockholders equity |
240,222 | 237,613 | ||||||
Total liabilities and stockholders equity |
$ | 316,162 | $ | 309,653 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
S1 CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenue: |
||||||||
Software licenses |
$ | 8,836 | $ | 5,739 | ||||
Support and maintenance |
16,130 | 15,643 | ||||||
Professional services |
18,767 | 17,430 | ||||||
Hosting |
14,107 | 12,347 | ||||||
Total revenue |
57,840 | 51,159 | ||||||
Operating expenses: |
||||||||
Cost of software licenses (1) |
599 | 382 | ||||||
Cost of professional services, support and
maintenance (1) |
23,113 | 19,414 | ||||||
Cost of hosting (1) |
7,345 | 6,668 | ||||||
Selling and marketing |
7,281 | 6,684 | ||||||
Product development |
8,783 | 8,720 | ||||||
General and administrative |
6,766 | 7,047 | ||||||
Depreciation and amortization |
2,533 | 2,386 | ||||||
Total operating expenses |
56,420 | 51,301 | ||||||
Operating income (loss) |
1,420 | (142 | ) | |||||
Interest income |
47 | 56 | ||||||
Interest expense |
(152 | ) | (120 | ) | ||||
Other non-operating expenses |
(182 | ) | (157 | ) | ||||
Interest and other expense, net |
(287 | ) | (221 | ) | ||||
Income (loss) before income tax expense |
1,133 | (363 | ) | |||||
Income tax expense |
(451 | ) | (693 | ) | ||||
Net income (loss) |
$ | 682 | $ | (1,056 | ) | |||
Net income (loss) per share: |
||||||||
Basic |
$ | 0.01 | $ | (0.02 | ) | |||
Diluted |
$ | 0.01 | $ | (0.02 | ) | |||
Weighted average common shares outstanding basic |
53,382,817 | 51,743,937 | ||||||
Weighted average common shares outstanding fully diluted |
54,126,619 | 51,743,937 |
(1) | Excludes charges for depreciation. Cost of software licenses includes amortization of
acquired technology. |
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
S1 CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 682 | $ | (1,056 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: |
||||||||
Depreciation and amortization |
2,825 | 2,565 | ||||||
Provision for doubtful accounts receivable and billing adjustments |
61 | 48 | ||||||
Deferred income taxes |
(30 | ) | (106 | ) | ||||
Stock-based compensation expense |
844 | 373 | ||||||
Changes in assets and liabilities: |
||||||||
(Increase) decrease in accounts receivable |
(10,511 | ) | 11,548 | |||||
Decrease (increase) in prepaid expenses and other assets |
1,381 | (405 | ) | |||||
(Decrease) increase in accounts payable and other liabilities |
(1,726 | ) | 382 | |||||
Increase (decrease) in accrued compensation and benefits |
2,040 | (2,107 | ) | |||||
(Decrease) increase in income taxes payable |
(1,852 | ) | 498 | |||||
Increase in deferred revenue |
10,431 | 6,334 | ||||||
Net cash provided by operating activities |
4,145 | 18,074 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of investment securities |
| (1,117 | ) | |||||
Acquisitions, net of acquired cash |
| (29,249 | ) | |||||
Purchases of property, equipment and technology |
(1,713 | ) | (908 | ) | ||||
Net cash used in investing activities |
(1,713 | ) | (31,274 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds (payments) from the exercise of stock awards |
309 | (48 | ) | |||||
Payments on capital leases and debt obligations |
(4,997 | ) | (332 | ) | ||||
Net cash used in financing activities |
(4,688 | ) | (380 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
259 | 39 | ||||||
Net decrease in cash and cash equivalents |
(1,997 | ) | (13,541 | ) | ||||
Cash and cash equivalents at beginning of period |
61,917 | 61,784 | ||||||
Cash and cash equivalents at end of period |
$ | 59,920 | $ | 48,243 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
S1
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
S1 Corporation is a leading global provider of payments and financial services software
solutions. We offer payments solutions for ATM and retail point-of-sale (POS) driving, card
management, and merchant acquiring, as well as financial services solutions for consumer, small
business and corporate online banking, trade finance, mobile banking, voice banking, branch and
call center banking. We sell our solutions primarily to banks, credit unions, retailers and
transaction processors. We also provide software, custom software development, hosting and other
services to State Farm Mutual Automobile Insurance Company (State Farm), a relationship that we
expect will conclude by the end of 2011. When we use the terms S1 Corporation, S1, Company,
we, us and our, we mean S1 Corporation, a Delaware corporation, and its subsidiaries.
We have prepared the accompanying unaudited condensed consolidated financial statements and
condensed notes pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) regarding interim financial reporting. Accordingly, they do not contain all of the
information and notes required by accounting principles generally accepted in the United States of
America (U.S. GAAP) for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2010. In our opinion, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair statement of our financial position as of March 31,
2011, our results of operations for the three months ended March 31, 2011, and our cash flows for
the three months ended March 31, 2011. The data in the condensed consolidated balance sheet as of
December 31, 2010 was derived from our audited consolidated balance sheet as of December 31, 2010,
as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The
unaudited condensed consolidated financial statements include the accounts of S1 and its wholly
owned subsidiaries after the elimination of all significant intercompany accounts and transactions.
Our operating results for the three months ended March 31, 2011 are not necessarily indicative of
the operating results that may be expected for the full year ending December 31, 2011 or for any
other period. We have evaluated the events and transactions occurring subsequent to the
consolidated balance sheet date of March 31, 2011 for items that could potentially be recognized or
disclosed in these financial statements.
Certain amounts in the prior years consolidated financial statements have been reclassified
to conform to the current year presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the Financial Accounting Standards Board (FASB) amended FASB ASC 605-25
Revenue Recognition: Multiple-Element Arrangements on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition guidance. Under the
new guidance, when vendor specific objective evidence or third party evidence of fair value for
deliverables in an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using the relative selling
price method and additional disclosures on the selling price method. The change is effective
January 1, 2011. As most arrangements accounted for under software revenue recognition guidance
are excluded from the update, the adoption of this change did not have a material effect on our
results of operations.
In October 2009, the FASB amended FASB ASC 985-605 Software: Revenue Recognition to exclude
from its scope all tangible products containing both software and non-software components that
operate together to deliver the products functions. The change is effective January 1, 2011. As
this change does not affect revenue arrangements that have no tangible products or contracts that
bundle services and software, the adoption of this change did not have a material effect on our
results of operations since most of our arrangements have little to no tangible products.
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3. FAIR VALUE MEASUREMENTS
U.S. GAAP defines fair value, establishes a framework for measuring fair value, expands
disclosures about fair value measurements, and establishes a three-tier fair value hierarchy which
prioritizes the inputs used in measuring fair value. These tiers include:
| Level 1 which is defined as observable inputs such as quoted prices in active
markets; |
| Level 2 which is defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and |
| Level 3 which is defined as unobservable inputs in which little or no market data
exists therefore requiring an entity to develop its own assumptions. |
The carrying value approximates fair value for our cash and cash equivalents due to the
short-term nature of these financial instruments. The fair value of fixed-term deposits
approximate their carrying value as the principal is fixed and were included in other current
assets. Our long-term debt in 2010 had a fixed interest rate and the fair value was determined by
discounting cash flows of future interest accruals at market rates currently offered for borrowings
with similar remaining maturities or repricing terms. Deferred compensation consisted of deferred
cash fees for members of our Board of Directors that were issued as deferred cash units, the fair
value of which is remeasured each period based on our closing stock price and were included in
long-term other liabilities.
The liability for deferred compensation below was the only financial instrument that was
remeasured on a recurring basis as of the respective reporting dates and we determined that the
liability was Level 1 in the fair value hierarchy. The fair value estimates of our financial
instruments were as follows (in thousands):
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 59,920 | $ | 59,920 | $ | 61,917 | $ | 61,917 | ||||||||
Restricted fixed term deposit |
2,000 | 2,000 | 2,000 | 2,000 | ||||||||||||
Liabilities |
||||||||||||||||
Debt obligation, excluding
current portion |
32 | 34 | 35 | 36 | ||||||||||||
Deferred compensation |
308 | 308 | 298 | 298 |
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Billed receivables |
$ | 48,697 | $ | 35,264 | ||||
Unbilled receivables |
9,369 | 12,415 | ||||||
Allowance for doubtful accounts and
billing adjustments |
(3,204 | ) | (3,309 | ) | ||||
Total |
$ | 54,862 | $ | 44,370 | ||||
Billed accounts receivables that were more than 90 days past due accounted for 17% and
16% of the billed accounts receivable balance, excluding allowance for doubtful accounts and
billing adjustments, as of March 31, 2011 and December 31, 2010, respectively. As of March 31,
2011 and December 31, 2010, 52% and 60% of the unbilled receivables,
respectively, related to an implementation for an international branch customer. Unbilled
receivables generally relate to professional services projects with milestone billings where
revenue is recognized as services are rendered and billings are sent to customers in accordance
with the terms of the contract, primarily at project milestone dates. We expect to bill and
collect these amounts within one year of the balance sheet date.
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5. OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Restricted cash and escrow deposits |
$ | 2,477 | $ | 2,063 | ||||
Taxes receivable |
1,251 | 1,582 | ||||||
Deferred tax assets, net |
2,156 | 1,859 | ||||||
Other |
1,623 | 1,108 | ||||||
Total |
$ | 7,507 | $ | 6,612 | ||||
6. GOODWILL AND INTANGIBLE ASSETS
Our goodwill balances below include accumulated impairment losses that were recorded in
December 2000 of $212.8 million for our Banking: Large FI segment and $258.1 million for our
Banking: Community FI segment. The changes in the carrying value of our goodwill for the three
months ended March 31, 2011 were as follows (in thousands):
Banking: | Banking: | |||||||||||||||
Payments | Large FI | Community FI | Total | |||||||||||||
Goodwill, net as of December 31, 2010 |
$ | 58,343 | $ | 51,756 | $ | 37,445 | $ | 147,544 | ||||||||
Effect of foreign currency translations |
24 | 307 | 20 | 351 | ||||||||||||
Goodwill, net as of March 31, 2011 |
$ | 58,367 | $ | 52,063 | $ | 37,465 | $ | 147,895 | ||||||||
The changes in the net carrying amount of intangible assets during the three months ended
March 31, 2011 were due to amortization expense and the impact of changes in foreign exchange
rates. Our intangible assets consisted of the following (in thousands):
As of March 31, 2011 | ||||||||||||
Gross | Accumulated | Net | ||||||||||
Carrying Value | Amortization | Carrying Value | ||||||||||
Trade names |
$ | 121 | $ | (121 | ) | $ | | |||||
Acquired technology |
25,328 | (21,938 | ) | 3,390 | ||||||||
Customer lists |
18,190 | (10,482 | ) | 7,708 | ||||||||
Total |
$ | 43,639 | $ | (32,541 | ) | $ | 11,098 | |||||
As of December 31, 2010 | ||||||||||||
Gross | Accumulated | Net | ||||||||||
Carrying Value | Amortization | Carrying Value | ||||||||||
Trade names |
$ | 121 | $ | (101 | ) | $ | 20 | |||||
Acquired technology |
25,328 | (21,646 | ) | 3,682 | ||||||||
Customer lists |
18,196 | (10,052 | ) | 8,144 | ||||||||
Total |
$ | 43,645 | $ | (31,799 | ) | $ | 11,846 | |||||
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Amortization expense of acquired technology, included in Cost of software licenses, and
amortization expense of customer relationships, included in Depreciation and amortization of other
intangible assets, were as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Trade names |
$ | 20 | $ | 10 | ||||
Acquired technology |
292 | 179 | ||||||
Customer lists |
431 | 322 | ||||||
Total |
$ | 743 | $ | 511 | ||||
Based upon our current intangible assets, we estimate aggregate amortization expense for
the next five calendar years to be as follows (in thousands):
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
Payments |
$ | 524 | $ | 524 | $ | 524 | $ | 442 | $ | 34 | ||||||||||
Banking: Large FI |
245 | 184 | | | | |||||||||||||||
Banking: Community FI |
2,089 | 1,493 | 1,277 | 1,277 | 712 | |||||||||||||||
Total |
$ | 2,858 | $ | 2,201 | $ | 1,801 | $ | 1,719 | $ | 746 | ||||||||||
7. INCOME TAXES
FASB ASC 740 Income Taxes and FASB ASC 270 Interim Reporting requires that companies report
income taxes on interim periods financial statements using an estimated annual effective tax rate.
Using this method, income taxes are computed at the end of each interim period based on the best
estimate of the effective rate expected to be applicable for the full fiscal year. Income forecasts
prepared by us do not reflect the distinct taxable jurisdictions required to utilize this approach.
Due to various domestic and foreign jurisdictions in which our business operates, it is difficult
to produce accurate income forecasts by jurisdiction and appropriately apply the net operating
losses we have in these various jurisdictions in the forecast. Therefore, a reliable annual
effective tax rate cannot be estimated for the full year and we use a year-to-date effective tax
rate that is updated each quarter as our effective tax rate can vary depending on the jurisdiction
in which our income is generated. Since our deferred tax assets in the United States and Thailand
are reserved with a valuation allowance, changes in certain temporary items, such as stock-based
compensation, can significantly impact our effective tax rate on a quarterly and annual basis. In
addition, income tax expense from international jurisdictions and the impact of the valuation
allowance with the deferred tax assets in the United States and Thailand may cause significant
variations between income tax expense and pre-tax U.S. GAAP income (loss). During the three months
ended March 31, 2011, our effective tax rate was 40% which was above the expected statutory tax
rate primarily due to the impact of losses in a foreign jurisdiction in which we did not record an
income tax benefit.
8. STOCK-BASED COMPENSATION PLANS
We maintain certain stock-based compensation plans providing for the grant of stock options,
restricted stock, stock appreciation rights (SARs) and other forms of awards to officers,
directors and non-officer employees. Our 2003 Stock Incentive Plan (Amended and Restated effective
February 26, 2008) is the only plan that provides for new grants. Awards that are settled in cash
do not count against the maximum number of shares in these plans. During the three months ended
March 31, 2011, we did not grant any stock-based compensation awards. There was no
capitalized stock-based compensation cost as of March 31, 2011.
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If all outstanding options were exercised, all restricted stock vested, and all available
grants were issued and exercised as of March 31, 2011, our stock-based compensation plans would
provide for the issuance of common stock as follows (in thousands):
Number of | ||||
Shares | ||||
Grants available under 2003 Stock Incentive Plan |
1,271 | |||
Stock options outstanding |
5,762 | |||
Restricted stock outstanding |
1,170 | |||
Total |
8,203 | |||
As of March 31, 2011, all SARs have vested with a liability of $1.9 million based on the
Black-Scholes valuation, which uses our outstanding closing stock price, among other factors, as of
March 31, 2011. The outstanding SARs are cash-settled awards and, accordingly, we will record
changes in fair value until they are settled.
Our stock-based compensation expense relates to our stock options, restricted stock and
cash-settled SARs. The SARs expense is recalculated each quarter based on our updated valuation
which includes, among other factors, our closing stock price for the period. Therefore, changes in
our stock price during a period will cause our SARs expense to change thus impacting our
stock-based compensation expense until the SARs are settled. The overall decrease in our stock
price during the quarters presented resulted in a decrease of our SARs liability which was
reflected in our stock-based compensation expense. The following table shows the stock-based
compensation expense included in the condensed consolidated statement of operations (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Operating expenses: |
||||||||
Cost of professional services, support and maintenance |
$ | 35 | $ | 67 | ||||
Cost of hosting |
30 | 31 | ||||||
Selling and marketing |
89 | (76 | ) | |||||
Product development |
93 | (23 | ) | |||||
General and administrative |
597 | 374 | ||||||
Total stock-based compensation expense |
$ | 844 | $ | 373 | ||||
Grant type: |
||||||||
Stock options |
$ | 363 | $ | 467 | ||||
Restricted stock |
681 | 598 | ||||||
Stock appreciation rights |
(200 | ) | (692 | ) | ||||
Total stock-based compensation expense |
$ | 844 | $ | 373 | ||||
9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consisted of the following (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income (loss) |
$ | 682 | $ | (1,056 | ) | |||
Other comprehensive income (loss): |
||||||||
Currency translation adjustment, net of taxes |
574 | (961 | ) | |||||
Total other comprehensive income (loss) |
574 | (961 | ) | |||||
Comprehensive income (loss) |
$ | 1,256 | $ | (2,017 | ) | |||
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10. SEGMENT REPORTING AND MAJOR CUSTOMERS
S1 Corporation is a leading global provider of payments and financial services software
solutions. We manage our business in three operating segments: Payments, Banking: Large FI, and
Banking: Community FI. We evaluate the performance of our operating segments based on their
contribution before Interest and other expense, net and Income tax expense, as reflected in the
tables presented below for the three months ended March 31, 2011 and 2010. We do not use any
asset-based metrics to measure the operating performance of our segments. The following tables
show revenue and operating income (loss) for our reportable segments (in thousands):
Three Months Ended March 31, 2011 | Three Months Ended March 31, 2010 | |||||||||||||||||||||||||||||||
Banking: | Banking: | Banking: | Banking: | |||||||||||||||||||||||||||||
Payments | Large FI | Community FI | Total | Payments | Large FI | Community FI | Total | |||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||
Software licenses |
$ | 4,907 | $ | 1,766 | $ | 2,163 | $ | 8,836 | $ | 3,325 | $ | 645 | $ | 1,769 | $ | 5,739 | ||||||||||||||||
Support and maintenance |
6,060 | 5,431 | 4,639 | 16,130 | 5,301 | 5,246 | 5,096 | 15,643 | ||||||||||||||||||||||||
Professional services |
4,697 | 13,084 | 986 | 18,767 | 3,904 | 12,649 | 877 | 17,430 | ||||||||||||||||||||||||
Hosting |
308 | 5,755 | 8,044 | 14,107 | 306 | 6,199 | 5,842 | 12,347 | ||||||||||||||||||||||||
Total revenue |
$ | 15,972 | $ | 26,036 | $ | 15,832 | $ | 57,840 | $ | 12,836 | $ | 24,739 | $ | 13,584 | $ | 51,159 | ||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||
Cost of software licenses |
18 | 126 | 455 | 599 | 114 | 128 | 140 | 382 | ||||||||||||||||||||||||
Cost of professional
services,
support and maintenance |
5,810 | 11,926 | 5,377 | 23,113 | 4,352 | 9,901 | 5,161 | 19,414 | ||||||||||||||||||||||||
Cost of hosting |
375 | 3,642 | 3,328 | 7,345 | 212 | 3,720 | 2,736 | 6,668 | ||||||||||||||||||||||||
Selling and marketing |
3,458 | 2,154 | 1,669 | 7,281 | 2,982 | 2,280 | 1,422 | 6,684 | ||||||||||||||||||||||||
Product development |
1,540 | 4,188 | 3,055 | 8,783 | 1,455 | 4,221 | 3,044 | 8,720 | ||||||||||||||||||||||||
General and administrative |
2,249 | 2,547 | 1,970 | 6,766 | 2,034 | 3,175 | 1,838 | 7,047 | ||||||||||||||||||||||||
Depreciation and
amortization |
510 | 1,104 | 919 | 2,533 | 467 | 1,088 | 831 | 2,386 | ||||||||||||||||||||||||
Total operating expenses |
13,960 | 25,687 | 16,773 | 56,420 | 11,616 | 24,513 | 15,172 | 51,301 | ||||||||||||||||||||||||
Operating income (loss) |
$ | 2,012 | $ | 349 | $ | (941 | ) | $ | 1,420 | $ | 1,220 | $ | 226 | $ | (1,588 | ) | $ | (142 | ) | |||||||||||||
Major Customer. Currently, we have one major customer (defined as any customer who
individually contributes more than 10% of total revenue) in the Banking: Large FI segment. We
derived 9% and 15% of our total revenue from State Farm during the three months ended March 31,
2011 and 2010, respectively. Our Banking: Large FI segment derived 20% and 32% of the segments
revenue from State Farm during the three months ended March 31, 2011 and 2010, respectively. In
2008, we announced that we expected our relationship with State Farm to conclude by the end of
2011.
Geography. Our geographic regions are the Americas and International in Europe, Middle East
and India (EMEI), Asia-Pacific (APAC) and Africa. Revenue by geographic region includes
intercompany services performed for other regions. Our long-lived assets in the international
regions primarily are property and equipment. The following table shows revenue and long-lived
assets by geographic region (in thousands):
Revenue | Property and Equipment | |||||||||||||||
Three Months Ended March 31, | March 31, | December 31, | ||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Americas |
$ | 42,058 | $ | 37,194 | $ | 19,374 | $ | 19,685 | ||||||||
International: |
||||||||||||||||
EMEI |
9,277 | 7,422 | 995 | 1,013 | ||||||||||||
Africa |
3,547 | 3,305 | 1,327 | 1,461 | ||||||||||||
APAC |
2,958 | 3,238 | 241 | 171 | ||||||||||||
Total |
$ | 57,840 | $ | 51,159 | $ | 21,937 | $ | 22,330 | ||||||||
11
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11. NET INCOME (LOSS) PER COMMON SHARE
We calculate net income per share by allocating income between the weighted average common
shares outstanding and the weighted average outstanding participating securities during periods in
which we record net income. For periods in which we record a net loss, we calculate net loss per
share as the net loss during the period divided by the weighted average number of common shares
outstanding during the period, as the effect of applying the two-class method would be
anti-dilutive. Because of our net loss in the three months ended March 31, 2010, we did not
include 0.6 million shares of common stock issuable upon the exercise of stock options as they
would have an anti-dilutive effect on our loss per share for that period. The following table
presents the calculation of basic and diluted net loss per share (in thousands except per share
data):
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 682 | $ | (1,056 | ) | $ | 682 | $ | (1,056 | ) | ||||||
Amount allocated to participating restricted stockholders |
(15 | ) | | | | |||||||||||
Net income (loss) available to common
stockholders |
$ | 667 | $ | (1,056 | ) | $ | 682 | $ | (1,056 | ) | ||||||
Basic weighted average common shares outstanding |
53,383 | 51,744 | 52,228 | 51,744 | ||||||||||||
Basic income (loss) per share |
$ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | (0.02 | ) | ||||||
Diluted income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 682 | $ | (1,056 | ) | $ | 682 | $ | (1,056 | ) | ||||||
Amount allocated to participating restricted stockholders |
(15 | ) | | | | |||||||||||
Net income (loss) available to common
stockholders |
$ | 667 | $ | (1,056 | ) | $ | 682 | $ | (1,056 | ) | ||||||
Basic weighted average common shares outstanding |
53,383 | 51,744 | 52,228 | 51,744 | ||||||||||||
Dilutive effect of employee stock options |
744 | | | | ||||||||||||
Diluted weighted average common shares outstanding |
54,127 | 51,744 | 52,228 | 51,744 | ||||||||||||
Diluted income (loss) per share |
$ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | (0.02 | ) |
12
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q and the documents incorporated into this quarterly report
by reference contain forward-looking statements and information relating to the Company within the
safe harbor provisions of the Private Securities Litigation Reform Act. These statements include
statements with respect to our financial condition, results of operations and business. The words
believes, expects, may, will, should, projects, contemplates, anticipates,
forecasts, estimates, intends or similar terminology identify forward-looking statements.
Forward-looking statements may include projections of our revenue, revenue backlog, expenses,
capital expenditures, earnings per share, product development projects, future economic performance
or management objectives. These statements are based on the beliefs of management as well as
assumptions made using information currently available to management. Because these statements
reflect the current views of management concerning future events, they involve risks, uncertainties
and assumptions. Therefore, actual results may differ significantly from the results discussed in
the forward-looking statements. Except as required by law, we undertake no obligation to update
publicly any forward-looking statement for any reason, even if new information becomes available.
When we use the terms S1 Corporation, S1, Company, we, us and our, we mean S1
Corporation, a Delaware corporation, and its subsidiaries. The following discussion should be read
in conjunction with the unaudited condensed consolidated financial statements and notes appearing
elsewhere herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
You are urged to read the risk factors in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2010, as filed with the Securities and Exchange Commission (SEC).
Executive Overview
Background. S1 Corporation is a leading global provider of payments and financial services
software solutions. We offer payments solutions for ATM and retail POS driving, card management,
and merchant acquiring, as well as financial services solutions for consumer, small business and
corporate online banking, trade finance, mobile banking, voice banking, branch and call center
banking. We sell our solutions primarily to banks, credit unions, retailers and transaction
processors. We also provide software, custom software development, hosting and other services to
State Farm, a relationship that we expect will conclude by the end of 2011.
Historically, Software licenses for a majority of our Payments solutions and for some of our
Banking: Large FI solutions were generally recognized upon delivery of the software provided all
other revenue recognition criteria were met. However, as our Payments business expands to serve
larger customers and our Banking: Large FI business provides greater levels of customization and
integration, specifically for our corporate online banking solutions, implementation projects have
been increasing in size, complexity and length. Accordingly, we expect a greater percentage of
Software licenses to be recognized over the implementation period as Software licenses revenue is
recognized over the implementation period when professional services are considered essential to
the functionality of the software. While this shift does have an impact on our current and
near-term financial results, we believe it will provide greater long-term revenue visibility.
Software licenses and professional services revenue recognized under the percentage of completion
method can vary from quarter to quarter due to the number and size of professional services
projects, project scope changes, changes in estimates to completion, and project delays and
cancellations.
In February 2011, we amended certain agreements (collectively, the Amendments) with an
international branch customer to (i) reduce the scope of the project with this customer, and (ii)
revise billing milestones. In exchange for these contract modifications, we granted the customer
licenses to certain of our software products (the Licensed Products). Pursuant to the
Amendments, this customer is entitled to normal and customary upgrades and enhancements related to
the Licensed Products for up to seven years at no additional cost. Consequently, we allocated a
portion of the revenue from this project to the fair value of this obligation which, when netted
against the favorable impact of the reduction in project scope, reduced our revenue in the first
quarter of 2011 by approximately $1.3 million.
In March 2010, we acquired PM Systems Corporation (PMSC) which provides Internet banking,
bill payment and security services to credit unions in the United States. In August 2010, in
support of establishing an office in Latin America, we acquired certain assets and employees from a
company that resold our products in Latin America (the Reseller). Our results of operations
reflect the performance of PMSC and the Reseller since their respective dates of acquisition.
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Summary financial results. Our revenue was $57.8 million for the three months ended March 31,
2011 which was an increase of $6.7 million, or 13%, as compared to the same period in 2010 due
primarily to higher Software licenses revenue across all segments, growth of Professional services
revenue in our Payments and Banking: Large FI segments, and higher Hosting revenue in our Banking:
Community FI segment primarily due to the PMSC acquisition in March 2010. For the three months
ended March 31, 2011, our net income of $0.7 million was an increase of $1.7 million as compared to
the same period in 2010 primarily as a result of this revenue growth, partially offset by an
increase in professional services costs to accommodate project and customer support growth.
During the three months ended March 31, 2011, we generated $4.1 million in cash provided by
operating activities primarily from earnings adjusted for the effect of non-cash expenses. In
February 2011, we paid in full the note payable relating to our corporate headquarters of $5.0
million less the return of $1.6 million held as collateral deposit.
Revenue from Significant Customers
Revenue from State Farm was 9% and 15% of our total revenue and 20% and 32% of our Banking:
Large FI segments revenue during the three months ended March 31, 2011 and 2010, respectively. In
2008, we announced that we expected our relationship with State Farm to conclude by the end of
2011. We expect to generate approximately $16 $17 million in revenue in 2011 from this customer.
Revenue Backlog
Our estimated revenue backlog includes revenue for Software licenses including term licenses,
Professional services, and Hosting services, as specified in executed contracts that we believe
will be recognized in revenue over the next twelve months. Revenue backlog associated with the
State Farm business, the custom development for an international branch customer, and our Banking:
Community FI segment is excluded from the revenue backlog totals. As of March 31, 2011 and
December 31, 2010, our estimate of revenue backlog was $64.3 million and $62.8 million,
respectively. We believe that presenting this estimate provides supplemental information and an
alternative presentation useful to investors understanding trends in our business including the
shift we are experiencing toward recognizing more software license revenue using the percentage of
completion method. However, our estimated revenue backlog is based on a number of assumptions and
is subject to a number of factors, many of which are completely outside of our control. Please see
Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2010 for further discussion.
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CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth our statement of operations for the specified periods (in
thousands, except for per share and percentage data):
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | Change | ||||||||||
Revenue: |
||||||||||||
Software licenses |
$ | 8,836 | $ | 5,739 | 54 | % | ||||||
Support and maintenance |
16,130 | 15,643 | 3 | % | ||||||||
Professional services |
18,767 | 17,430 | 8 | % | ||||||||
Hosting |
14,107 | 12,347 | 14 | % | ||||||||
Total revenue |
57,840 | 51,159 | 13 | % | ||||||||
Operating Expenses: |
||||||||||||
Cost of software licenses (1) |
599 | 382 | 57 | % | ||||||||
Cost of professional services,
support and maintenance (1) |
23,113 | 19,414 | 19 | % | ||||||||
Cost of hosting (1) |
7,345 | 6,668 | 10 | % | ||||||||
Selling and marketing |
7,281 | 6,684 | 9 | % | ||||||||
Product development |
8,783 | 8,720 | 1 | % | ||||||||
General and administrative |
6,766 | 7,047 | -4 | % | ||||||||
Depreciation and amortization |
2,533 | 2,386 | 6 | % | ||||||||
Total operating expenses |
56,420 | 51,301 | 10 | % | ||||||||
Operating income (loss) |
1,420 | (142 | ) | 1100 | % | |||||||
Interest and other expense, net |
(287 | ) | (221 | ) | 30 | % | ||||||
Income (loss) before income tax expense |
1,133 | (363 | ) | 412 | % | |||||||
Income tax expense |
(451 | ) | (693 | ) | -35 | % | ||||||
Net income (loss) |
$ | 682 | $ | (1,056 | ) | 165 | % | |||||
Net income (loss) per share: |
||||||||||||
Basic |
$ | 0.01 | $ | (0.02 | ) | |||||||
Diluted |
$ | 0.01 | $ | (0.02 | ) | |||||||
Effective tax rate |
40 | % | -191 | % | ||||||||
Operating expenses as a percent of revenue: |
||||||||||||
Cost of software licenses (2) |
7 | % | 7 | % | ||||||||
Cost of professional services,
support and maintenance (2) |
66 | % | 59 | % | ||||||||
Cost of hosting (2) |
52 | % | 54 | % | ||||||||
Selling and marketing |
13 | % | 13 | % | ||||||||
Product development |
15 | % | 17 | % | ||||||||
General and administrative |
12 | % | 14 | % | ||||||||
Depreciation and amortization |
4 | % | 5 | % | ||||||||
Operating income (loss) |
2 | % | 0 | % | ||||||||
Net income (loss) |
1 | % | -2 | % |
(1) | The Cost of software licenses, professional services, support and maintenance, and hosting excludes charges for depreciation. The Cost of software licenses includes amortization of acquired technology. | |
(2) | Each cost of revenue is a percentage of the applicable revenue type for the periods presented. |
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RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
Banking: | Banking: | |||||||||||||||
(In thousands) | Payments | Large FI | Community FI | Total | ||||||||||||
Total revenue |
||||||||||||||||
Three months ended March 31, 2011 |
$ | 15,972 | $ | 26,036 | $ | 15,832 | $ | 57,840 | ||||||||
Three months ended March 31, 2010 |
12,836 | 24,739 | 13,584 | 51,159 | ||||||||||||
Revenue growth |
3,136 | 1,297 | 2,248 | 6,681 | ||||||||||||
Percentage change |
24 | % | 5 | % | 17 | % | 13 | % | ||||||||
Total operating income (loss) |
||||||||||||||||
Three months ended March 31, 2011 |
$ | 2,012 | $ | 349 | $ | (941 | ) | $ | 1,420 | |||||||
Three months ended March 31, 2010 |
1,220 | 226 | (1,588 | ) | (142 | ) | ||||||||||
Change in operating income (loss) |
792 | 123 | 647 | 1,562 | ||||||||||||
Percentage change |
65 | % | 54 | % | 41 | % | 1100 | % |
Revenue. Our revenue for the three months ended March 31, 2011 increased $6.7 million, or
13%, as compared to the same period in 2010 primarily due to higher Software licenses revenue
across all segments, growth in Professional services revenue in our Payments and Banking: Large FI
segments, and higher Hosting revenue in our Banking: Community FI segment primarily due to PMSC
which was acquired in March 2010. Banking: Large FI segments Professional services revenue
included a decline in revenue from State Farm of $1.7 million and from an international branch
customer of $1.4 million. Revenue was favorably impacted in the first quarter of 2011 as a result
of changes in foreign exchange rates by approximately $0.4 million primarily for operations in
Europe and South Africa in the Payments segment.
Payments segment revenue increased primarily due to higher Software licenses revenue as the
first quarter of 2011 included an increase in the number of licenses recognized over the
implementation period and license volume upgrades. Professional services revenue increased in this
segment in the first quarter of 2011 from project growth due to increased bookings. Additionally,
Professional services revenue was negatively impacted in the first quarter of 2010 as a result of
increases in the size and complexity of certain projects. The increase in Support and maintenance
revenue in this segment in the first quarter 2011 reflects the continued growth in Software
licensing activity. The acquisition of certain assets and employees of the Reseller did not
materially impact revenue in the first quarter of 2011.
Banking: Large FI segment revenue increased primarily due to higher Software licenses revenue
as the number of licenses recognized over the implementation period increased from the prior years
period. Professional services revenue in this segment increased mainly from project growth due to
increased bookings partially offset by the decline in business with State Farm of $1.7 million and
with an international branch customer of $1.4 million. Professional services revenue for the
international branch customer included a reduction of approximately $1.3 million in revenue as we
netted the allocation of a portion of revenue for upgrade and enhancement obligations against the
favorable impact of the reduction in project scope resulting from the Amendments entered into in
the first quarter of 2011. Banking: Large FI segments Hosting revenue decreased primarily due to
the decline in business with State Farm.
Banking: Community FI segment revenue increased largely due to a revenue increase of $2.5
million from PMSC, which is reflected mainly in Hosting revenue. Software licenses revenue growth
in this segment included a license volume upgrade for a branch customer in the first quarter of
2011. The migration of Banking: Community FIs customers to this segments new platform negatively
impacted revenue growth in the first quarter of 2011 as this migration effort impacted our ability
to add new customers. We expect that the migrations will continue to impact revenue growth in this
segment during 2011.
Operating income (loss). Our operating income increased $1.6 million in the first quarter of
2011 as compared to the same period in 2010 mainly due to revenue growth for both the Payments and
Banking: Large FI segments and the acquisition of PMSC (which is reflected in our Banking:
Community FI segment), partially offset by growth in professional services and support personnel to
accommodate customer and project growth. We incurred lower professional fees as the prior years period included non-recurring professional fees of $1.2 million related to legal
fees and transaction costs offset by higher accruals for variable cash incentives in 2011. The
impact on revenue from changes in foreign exchange rates in the first quarter of 2011 was generally
offset by the impact in operating expenses as most of our foreign operations are naturally hedged.
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Table of Contents
Payments segment operating income increased $0.8 million for the first quarter of 2011 as
compared to the same period in 2010 primarily as a result of an increase in Software licenses and
Professional services revenue and lower professional fees as the prior years period included
non-recurring professional fees. Additionally, we incurred growth in professional services and
support personnel to accommodate customer and project growth and incurred higher accruals for
variable cash incentives. The acquisition of certain assets and employees of the Reseller did not
materially impact Payments segment operating results during the first quarter of 2011.
Banking: Large FI segment operating income increased $0.1 million for the first quarter of
2011 as compared to the same period in 2010 primarily as a result of an increase in Software
licenses and Professional services revenue offset by growth in professional services and support
personnel to accommodate customer and project growth. Banking: Large FI segments operating income
was reduced by higher accruals for variable cash incentives offset by non-recurring professional
fees in the first quarter of 2010.
Banking: Community FI segment operating loss decreased $0.6 million for the first quarter of
2011 as compared to the same period in 2010 due mainly to the acquisition of PMSC in March 2010,
which contributed operating income of approximately $0.3 million in the first quarter of 2011
compared to a loss of $0.2 million in the first quarter of 2010. Banking: Community FI segments
operating loss was impacted by the migration of customers to this segments new platform. We
expect that the costs of migrating customers to Banking: Community FIs new platform will decline
towards the end of 2011.
Interest and other expense, net. Interest and other expense, net was primarily impacted by
net foreign exchange losses and withholding taxes related to international trade receivables and
payment of intercompany services.
Income tax expense. During the three months ended March 31, 2011, we had income tax expense of
$0.5 million primarily from income tax expense in certain foreign jurisdictions where we do not
have net operating loss carryforwards to offset income and the impact of losses in a foreign
jurisdictions in which we did not record an income tax benefit.
Liquidity and Capital Resources
Our primary source of cash is cash collections from our customers following the purchase of
software licenses, support and maintenance, professional services and hosting services. Payments
from customers for support and maintenance and software subscription agreements are generally
billed annually in advance. Our primary uses of cash are for personnel, facilities and capital
expenditures. The following tables show selected information about our cash flows during the three
months ended March 31, 2011 and 2010 and selected balance sheet data as of March 31, 2011 and
December 31, 2010 (in thousands):
Three Months ended March 31, | ||||||||
2011 | 2010 | |||||||
Net cash provided by operating activities before
changes in operating assets and liabilities |
$ | 4,382 | $ | 1,824 | ||||
Change in operating assets and liabilities |
(237 | ) | 16,250 | |||||
Net cash provided by operating activities |
4,145 | 18,074 | ||||||
Net cash used in investing activities |
(1,713 | ) | (31,274 | ) | ||||
Net cash used in financing activities |
(4,688 | ) | (380 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
259 | 39 | ||||||
Net decrease in cash and cash equivalents |
$ | (1,997 | ) | $ | (13,541 | ) | ||
17
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March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Cash and cash equivalents |
$ | 59,920 | $ | 61,917 | ||||
Working capital (1) |
53,974 | 48,843 | ||||||
Total assets |
316,162 | 309,653 | ||||||
Total stockholders equity |
240,222 | 237,613 |
(1) | Working capital includes deferred revenue of $48.6 million and $38.0 million as of March 31, 2011 and December 31, 2010, respectively. |
Operating Activities. For the three months ended March 31, 2011, cash provided by operating
activities of $4.1 million was primarily due to cash generated from our earnings adjusted for the
effect of non-cash expenses. Accounts receivable and deferred revenue increased equally for
billings in advance of professional services and deferred software licenses recognized over the
implementation period. Our unbilled receivables of $9.4 million as of March 31, 2011 related to
revenue recognized on professional services projects in advance of milestone billings that we
expect to bill and collect in future quarters. As of March 31, 2011, 52% of the unbilled
receivables related to the custom development project for an international branch customer. During
the first quarter of 2011, we made restructuring payments of $0.6 million for facilities vacated in
prior years and expect to have net cash expenditures of approximately $1.0 million as the leases
expire by the end of 2011.
Investing Activities. For the three months ended March 31, 2011, cash used in investing
activities was for capital expenditures of $1.7 million primarily related to computer equipment.
Financing Activities. For the three months ended March 31, 2011, cash used in financing
activities was $4.7 million mainly due to the payment of approximately $5.0 million for our notes
payable relating to our corporate headquarters in February 2011 which was funded from our cash
reserves in the United States.
Contractual Obligations and Off-Balance Sheet Arrangements. We generally do not engage in off
balance sheet arrangements in the normal course of business, but we enter into operating lease
arrangements and purchase commitments in the normal course of business. Please refer to our Annual
Report on Form 10-K for the year ended December 31, 2010 for a more complete discussion of our
operating lease arrangements and purchase commitments.
Stock appreciation rights awards. As of March 31, 2011, we have a cash liability of
approximately $1.9 million related to our SARs granted in November 2006 that are vested and
exercisable at the discretion of the employees holding such awards. These estimates are based on
the Black-Scholes valuation, which uses our closing stock price, among other factors, as of March
31, 2011.
Capital requirements. We believe that our expected cash flows from operations together with
our existing cash will be sufficient to meet our anticipated cash needs for working capital, debt
obligations, and capital expenditures for at least the next 12 months. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional
equity, issue debt securities or establish a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our stockholders. The addition
of indebtedness would result in increased fixed obligations and could result in operating covenants
that would restrict our operations. We cannot assure that financing will be available in amounts or
on terms acceptable to us, if at all.
Recent Accounting Pronouncements
In October 2009, FASB) amended FASB ASC 605-25 Revenue Recognition: Multiple-Element
Arrangements on revenue arrangements with multiple deliverables that are outside the scope of the
software revenue recognition guidance. Under the new guidance, when vendor specific objective
evidence or third party evidence of fair value for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to separate deliverables and allocate
arrangement consideration using the relative selling price method and additional disclosures on the
selling price method. The change is effective January 1, 2011. As most arrangements accounted for
under software revenue recognition guidance are excluded from the update, the adoption of this
change did not have a material effect on our results of operations.
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In October 2009, the FASB amended FASB ASC 985-605 Software: Revenue Recognition to exclude
from its scope all tangible products containing both software and non-software components that
operate together to deliver the products functions. The change is effective January 1, 2011. As
this change does not affect revenue arrangements that have no tangible products or contracts that
bundle services and software, the adoption of this change did not have a material effect on our
results of operations since most of our arrangements have little to no tangible products.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The
preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reported period. Generally, we base our estimates on historical experience and on various other
assumptions in accordance with U.S. GAAP that we believe to be reasonable under the circumstances.
Actual results may differ from these estimates under other assumptions or conditions. Critical
accounting policies and estimates are those that we consider the most important to the portrayal of
our financial position and results of operations because they require our most difficult,
subjective or complex judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain. To see further discussion of all the accounting policies
and related disclosures, please read our Annual Report on Form 10-K for the fiscal year ended
December 31, 2010, as filed with the SEC. Our critical accounting policies and estimates include
those related to:
| revenue recognition; |
| estimation of our allowance for doubtful accounts and billing adjustments; |
| valuation and recoverability of long-lived assets, including goodwill; |
| determination of the fair value of stock-based compensation; and |
| income taxes. |
Effects of Foreign Currencies
Our revenue and net income were impacted by foreign exchange rate fluctuations mainly for
transactions in the British Pound, South African Rand, Indian Rupee and the European Euro.
Generally, expenses are denominated in the same currency as our revenue and the exposure to rate
changes is naturally hedged for transactions in the British Pound and European Euro which minimizes
the impact to net income. However, our development center in India is not naturally hedged as their
costs are in the local currency but are funded in U.S. Dollars and British Pounds. Additionally,
our South African operations are mostly naturally hedged as some of the development and
professional services performed are funded in U.S. Dollars and British Pounds. Please refer to
Item 7A of Part II, Quantitative and Qualitative Disclosures about Market Risk of our Annual
Report on Form 10-K for our fiscal year ended December 31, 2010 for a further discussion of
potential foreign currency risks. The estimated effect on our condensed consolidated statements of
operations from changes in exchange rates versus the U.S. Dollar is as follows (in thousands,
except per share data):
Three Months Ended March 31, 2011 | ||||||||||||
At Prior Year | ||||||||||||
Exchange | Exchange Rate | |||||||||||
Rates (1) | Effect | As reported | ||||||||||
Revenue |
$ | 57,400 | $ | 440 | $ | 57,840 | ||||||
Operating expenses |
55,760 | 660 | 56,420 | |||||||||
Operating income |
1,640 | (220 | ) | 1,420 | ||||||||
Net income |
892 | (210 | ) | 682 | ||||||||
Diluted net income per share |
$ | 0.02 | $ | (0.01 | ) | $ | 0.01 |
(1) | Current year results translated into U.S. Dollars using prior years period average exchange rates. |
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Stock-based Compensation
Our stock-based compensation expense relates to our stock options, restricted stock and
cash-settled SARs. The SARs expense (benefit) is recalculated each quarter based on an updated
valuation which includes, among other factors, our closing stock price for the period. Therefore,
changes in our stock price during a period will cause our SARs expense (benefit) to change thus
impacting our stock-based compensation expense until the SARs are settled. The overall decrease in
our stock price during the quarters presented resulted in a decrease in our SARs liability which
was reflected in our stock-based compensation expense. The following table shows the stock-based
compensation expense included in the condensed consolidated statement of operations (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Operating expenses: |
||||||||
Cost of professional services, support and maintenance |
$ | 35 | $ | 67 | ||||
Cost of hosting |
30 | 31 | ||||||
Selling and marketing |
89 | (76 | ) | |||||
Product development |
93 | (23 | ) | |||||
General and administrative |
597 | 374 | ||||||
Total stock-based compensation expense |
$ | 844 | $ | 373 | ||||
Grant type: |
||||||||
Stock options |
$ | 363 | $ | 467 | ||||
Restricted stock |
681 | 598 | ||||||
Stock appreciation rights |
(200 | ) | (692 | ) | ||||
Total stock-based compensation expense |
$ | 844 | $ | 373 | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposures include the effect of foreign currency fluctuations,
interest rate changes, and changes in the market values of our investments. During the three
months ended March 31, 2011, there were no material changes to our quantitative and qualitative
disclosures about market risk. Please refer to Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk included in our Annual Report on Form 10-K for our fiscal year ended
December 31, 2010 for a more complete discussion of the market risks we encounter.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of March 31, 2011, the end of the period
covered by this quarterly report on Form 10-Q, we carried out an evaluation, under the supervision
and with the participation of management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act)) pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were
effective as of March 31, 2011 to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms. Additionally, our disclosure controls and
procedures were also effective as of March 31, 2011 in ensuring that information required to be
disclosed in our Exchange Act reports is accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosures.
Changes in Internal Control over Financial Reporting. There have not been any changes in the
Companys internal control over financial reporting during the quarter ended March 31, 2011, which
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
As originally disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30,
2010, on May 28, 2010, Leon Stambler filed a complaint in the Eastern District of Texas against 29
named defendants including S1 Corporation and S1, Inc. (collectively, S1) and other financial
software services providers. The complaint alleges infringement of two patents generally relating
to encryption technology. In his complaint, Stambler is seeking unspecified monetary damages. The
case is at a preliminary stage. S1 intends to vigorously defend itself in the litigation.
There are no other material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which we or any of our subsidiaries is a party or of which our or
any of our subsidiaries property is subject.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2010, as filed with the SEC.
You should consider carefully the Risk Factors. If any of these risks actually occur, our
business, financial condition or results of operations would likely suffer. In that case, the
trading price of our common stock could decline, and you may lose all or a part of the money you
paid to buy our common stock.
Item 6. Exhibits
Exhibit No. | Exhibit Description | |||
3.1 | Amended and Restated Certificate of Incorporation of S1 (filed as Exhibit 1 to S1s
Registration Statement on Form 8-A (File No. 000-24931) filed with the SEC on September 30,
1998 and incorporated herein by reference). |
|||
3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
June 3, 1999 (filed as Exhibit 4.2 to S1s Registration Statement on Form S-8 (File No.
333-82369) filed with the SEC on July 7, 1999 and incorporated herein by reference). |
|||
3.3 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
November 10, 1999 (filed as Exhibit 3.3 to S1s Annual Report on Form 10-K filed with the SEC
on March 30, 2000 and incorporated herein by reference). |
|||
3.4 | Certificate of Designation for S1s Series B Redeemable Convertible Preferred Stock (filed
as Exhibit 2 to S1s Registration Statement on Form 8-A (File No. 000-24931) filed with the
SEC on September 30, 1998 and incorporated herein by reference. |
|||
3.5 | Amended and Restated Bylaws of S1, as amended (filed as Exhibit 3.6 to S1s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2006 and incorporated herein
by reference). |
|||
4.1 | Specimen certificate for S1s common stock (filed as Exhibit 4 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2000 and incorporated herein by
reference). |
|||
31.1 | Certification of Chief Executive Officer. |
|||
31.2 | Certification of Chief Financial Officer. |
|||
32.1 | Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of
May 5, 2011.
S1 CORPORATION |
||||
By: | /s/ PAUL M. PARRISH | |||
Paul M. Parrish Chief Financial Officer |
||||
(Principal Financial Officer and Principal Accounting Officer) |
||||
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