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| EPAY > SEC Filings for EPAY > Form 10-Q on 6-Feb-2009 | All Recent SEC Filings |
6-Feb-2009
Quarterly Report
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The statements contained in this report that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Without limiting the foregoing, the words "may," "will,"
"should," "could," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential" and similar expressions are intended to
identify forward-looking statements. All forward-looking statements included in
this Quarterly Report on Form 10-Q are based on information available to us up
to, and including, the date of this report, and we assume no obligation to
update any such forward-looking statements. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 1A. Risk Factors" and elsewhere in this Form 10-Q. You should carefully
review those factors and also carefully review the risks outlined in other
documents that we file from time to time with the Securities and Exchange
Commission (SEC).
Overview
We provide electronic payment, invoice and document management solutions to corporations, financial institutions and banks around the world. Our solutions are used to streamline, automate and manage processes and transactions involving global payments, invoice receipt and approval, collections, cash management, risk mitigation, document management, reporting and document archive. We offer software designed to run on-site at the customer's location as well as hosted solutions. Historically, our software has been sold predominantly on a perpetual license basis. Today, however, certain of our newer offerings are being sold on a subscription and transaction basis.
Our corporate customers rely on our solutions to automate their payment and accounts payable processes and to streamline and manage the production and retention of electronic documents. We also provide Legal eXchangeŽ, a Software as a Service (SaaS) offering that receives, manages and controls legal invoices and the related spend management for insurance companies and other large consumers of outside legal services. Our offerings also include software solutions that banks use to provide web-based payment and reporting capabilities to their corporate customers.
Our solutions complement and leverage our customers' existing information systems, accounting applications and banking relationships. As a result, our solutions can be deployed quickly and efficiently. To help our customers receive the maximum value from our products and meet their own particular needs, we also provide professional services for installation, training, consulting and product enhancement.
For the first six months of fiscal year 2009, our revenue increased to $69.8 million from $63.2 million in the same period of fiscal year 2008. This revenue increase was primarily attributable to the revenue contribution from Optio Software, Inc. (Optio), which we acquired in April 2008, and increased revenues from our Legal eXchange product offering as a result of continued customer adoption of that product. These increases were offset in part by a decrease of $4.1 million as a result of declining foreign exchange rates associated with the British Pound Sterling and the European Euro, which depreciated against the US Dollar during the six months ended December 31, 2008.
We had a net loss of $6.7 million in the six months ended December 31, 2008 compared to net loss of $1.5 million in the same period of the prior year. The net loss in the six months ended December 31, 2008 reflected $12.8 million of expense associated with the amortization of intangible assets and stock compensation. The increase of approximately $3.1 million in intangible asset amortization during the first six months of fiscal year 2009 as compared to the first six months of fiscal year 2008 reflects the expense impact of our acquisition of Optio in April 2008. Increases in our cost of revenue and operating expense categories during the first six months of fiscal year 2009 as compared to the first six months of fiscal year 2008 largely reflect our overall increased operating costs as a result of our Optio acquisition and our general business growth, offset in part by a decrease of approximately $3.7 million due to a decline in foreign exchange rates associated with the British Pound Sterling and European Euro.
In the first six months of fiscal 2009, we derived approximately 46% of our revenue from customers located outside of North America, principally in Europe and Australia. We expect future revenue growth to be driven by increased purchases of our products by new and existing bank and financial institution customers in both North America and international markets, the continued market adoption of our Legal eXchange product in the US, increased sales of our payments and transactional documents products, and the contribution of revenue from our newer subscription and transaction based products. However, we anticipate that the British Pound Sterling and European Euro currencies may continue to weaken against the US Dollar. To the extent that this occurs, or to the extent that the already weakened European currencies do not return to pre-fiscal 2009 levels, we expect that the translation of our 2009 European revenues to US Dollars will continue to be negatively impacted as compared to the corresponding periods of fiscal year 2008.
While we continue to grow our business, the economic environment we are operating in has grown increasingly more challenging over the past year. While we have not experienced any decline in our expected volume of customer orders we are observing that, in some cases, closing new business is taking somewhat longer. Our customers operate in many different industries; a diversification that we believe helps us in this economic climate. Additionally, we believe that our recurring and subscription revenue base helps position us defensively against any short term economic downturn. While we believe that we continue to compete favorably in all of the markets we serve, ongoing or worsening economic stresses could impact our business more significantly in the future.
Critical Accounting Policies
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates-which also would have been reasonable-could have been used, which would have resulted in different financial results.
The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended June 30, 2008 related to stock-based compensation, revenue recognition, goodwill and intangible assets and the valuation of acquired intangible assets and acquired deferred revenue. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with the SEC on September 12, 2008. There have been no changes to our critical accounting policies during the six months ended December 31, 2008.
Recent Accounting Pronouncements
Determination of the Useful Life of Intangible Assets
In April 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 142-3, "Determination of the Useful Life of Intangible Assets." FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets." FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 (July 1, 2009 for us) and early adoption is prohibited. We are currently evaluating the impact of this pronouncement on our consolidated financial statements.
Business Combinations
In December 2007, the FASB issued Statement No. 141(R), "Business Combinations" (SFAS 141(R)) which will significantly change the accounting for and reporting of business combination transactions. The most significant changes in the accounting for business combinations under SFAS 141(R) include:
ˇ Valuation of any acquirer shares issued as purchase consideration will be measured at fair value as of the acquisition date;
ˇ Contingent purchase consideration, if any, will generally be measured and recorded at the acquisition date, at fair value, with any subsequent change in fair value reflected in earnings rather than through an adjustment to the purchase price allocation;
ˇ Acquired in-process research and development costs, which have historically been expensed immediately upon acquisition, will now be capitalized at their acquisition date fair values, measured for impairment (without recurring
amortization) over the remaining development period and, upon completion of a successful development project, amortized to expense over the asset's estimated useful life;
ˇ Acquisition related costs will be expensed as incurred rather than capitalized as part of the purchase price allocation;
ˇ Acquisition related restructuring cost accruals will be reflected within the acquisition accounting only if certain specific criteria are met as of the acquisition date. The prior accounting convention, which permitted an acquirer to record restructuring accruals within the purchase price allocation as long as certain, broad criteria had been met, generally around formulating, finalizing and communicating certain exit activities, will no longer be permitted.
SFAS 141(R) is effective for the first annual reporting period beginning on or after December 15, 2008 and earlier adoption is not permitted. Accordingly, we will adopt SFAS 141(R) on July 1, 2009. We expect that the adoption of this pronouncement will significantly affect how we account for business combination transactions consummated after the adoption date, in the areas noted above.
Accounting and Reporting of Noncontrolling Interests
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" (SFAS 160). SFAS 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including the requirement that the noncontrolling interest be classified as a component of equity. SFAS 160 is required to be adopted simultaneously with SFAS 141(R). We are not presently a party to any transaction in which we have a noncontrolling interest and, accordingly, do not currently believe that this pronouncement will have a significant impact on our financial condition, results of operations or cash flows.
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" (SFAS 157). The statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157" (FSP 157-2). FSP 157-2 delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS 157 became effective for us on July 1, 2008, excluding the items deferred by FSP 157-2 which will become effective for us on July 1, 2009. SFAS 157 has resulted in additional disclosures within our consolidated financial statements, as further described in Note 2 to our financial statements.
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115" (SFAS 159). The statement permits all entities to choose, at specified election dates, to measure eligible items at fair value. Additionally, the statement requires that entities report unrealized gains and losses on items for which the fair value option has been elected in earnings. The statement also establishes additional presentation and disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted, provided that the entity also adopts Statement 157. SFAS 159 became effective for us on July 1, 2008; however, as we did not elect to measure any items at fair value, its adoption did not have an impact on our consolidated financial statements.
Three Months Ended December 31, 2008 Compared to the Three Months Ended December 31, 2007
Revenues by segment
We have aggregated similar operating segments into three reportable segments:
Payments and Transactional Documents, Banking Solutions and Outsourced
Solutions. The following table represents our revenues by segment:
Three Months Ended December 31, Increase (Decrease)
Between Periods
2008 2007 2008 Compared to 2007
As % of total As % of total
(in thousands) Revenues (in thousands) Revenues (in thousands) %
Payments and Transactional
Documents $ 22,955 66.9 $ 21,073 66.2 $ 1,882 8.9
Banking Solutions 5,433 15.8 4,782 15.0 651 13.6
Outsourced Solutions 5,946 17.3 5,977 18.8 (31 ) (0.5 )
$ 34,334 100.0 $ 31,832 100.0 $ 2,502 7.9
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Payments and Transactional Documents. The revenue increase for the three months ended December 31, 2008 was primarily attributable to the revenue contribution from Optio, which we acquired in April 2008. This increase was offset in part by a decrease of $2.8 million as a result of declining foreign exchange rates associated with the British Pound Sterling and European Euro. We expect revenue for the Payments and Transactional Documents segment to increase during the remainder of fiscal 2009 as a result of the continued revenue contribution from Optio and from increased sales of our payment and document management solutions. However, we currently expect that the translation of our European based revenues to US Dollars will continue to be negatively impacted as compared to the same periods in fiscal year 2008, due to declining European foreign exchange rates.
Banking Solutions. Revenues from our Banking Solutions segment increased as compared to the comparable quarter of fiscal 2008, as we continued to generate revenue from our continued expansion into the European markets and several large ongoing banking projects, one of which was completed during the quarter. We expect revenues for the Banking Solutions segment to increase during the remainder of the fiscal year as a result of the contribution of revenue from ongoing projects and from additional purchases by new and existing bank and financial institution customers in both North America and international markets.
Outsourced Solutions. The slight revenue decrease for the three months ended December 31, 2008 was due to a decrease in European foreign currency exchange rates and a decrease in revenue from certain of our legacy outsourced accounts payable automation products in Europe. These decreases were offset in part by revenue increases related to our Legal eXchange product offering. We expect revenue for the Outsourced Solutions segment to increase during the remainder of the fiscal year as current customers of Legal eXchange move from the implementation phase (during which no revenue is recorded) into live production and as new customers purchase this solution.
Revenues by category
Three Months Ended December 31, Increase (Decrease)
Between Periods
2008 2007 2008 Compared to 2007
As % of total As % of total
(in thousands) Revenues (in thousands) Revenues (in thousands) %
Revenues:
Software licenses $ 3,597 10.5 $ 3,393 10.7 $ 204 6.0
Subscriptions and transactions 7,744 22.5 7,342 23.0 402 5.5
Service and maintenance 20,527 59.8 18,083 56.8 2,444 13.5
Equipment and supplies 2,466 7.2 3,014 9.5 (548 ) (18.2 )
Total revenues $ 34,334 100.0 $ 31,832 100.0 $ 2,502 7.9
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Software Licenses. The increase in software license revenues was due principally to the revenue contribution from Optio, and an increase in revenue due to an increase in demand for certain of our European payment products, offset in part by a decrease of approximately $0.4 million as a result of declining foreign exchange rates associated with the British Pound Sterling and the European Euro and a small decrease in certain of our domestic payments software license revenues. We expect software license revenues to increase during the remainder of fiscal year 2009, principally as a result of the continued revenue contribution from Optio and as a result of increased software license revenue from our US and European operations as well as our Banking Solutions segment.
Subscriptions and Transactions. The increase in subscription and transaction revenues was due principally to the revenue contribution from new Legal eXchange customers and the revenue contribution from certain Optio products that are sold on a subscription basis. These increases were offset in part by a decrease of $0.8 million as a result of declining foreign exchange rates associated with the British Pound Sterling. We expect subscription and transaction revenues to increase
during the remainder of the fiscal year as a result of orders for our newer subscription and transaction based product offerings, the revenue contribution from new Legal eXchange customers and the continued revenue contribution from Optio.
Service and Maintenance. The increase in service and maintenance revenues was primarily the result of the revenue contribution from Optio and an increase in professional services revenues associated with several large banking projects. These increases were offset by a decrease of $1.5 million as a result of declining foreign exchange rates associated with the British Pound Sterling and European Euro. We expect that service and maintenance revenues will increase during the remainder of the fiscal year as a result of the increased revenue contribution from Optio and from new and existing projects within our Banking Solutions segment.
Equipment and Supplies. The decrease in equipment and supplies revenues was principally due to a decrease of approximately $0.5 million as a result of declining foreign exchange rates associated with the British Pound Sterling, and our continued de-emphasis of lower margin transactions within this aspect of our business. We expect that equipment and supplies revenues will remain relatively consistent during the remainder of 2009.
Cost of revenues by category
Three Months Ended December 31, Increase (Decrease)
Between Periods
2008 2007 2008 Compared to 2007
As % of total As % of total
(in thousands) Revenues (in thousands) Revenues (in thousands) %
Cost of revenues:
Software licenses $ 207 0.6 $ 237 0.7 $ (30 ) (12.7 )
Subscriptions and transactions 3,743 10.9 3,913 12.3 (170 ) (4.3 )
Service and maintenance 9,301 27.1 7,320 23.0 1,981 27.1
Stock compensation expense 261 0.8 236 0.7 25 10.6
Equipment and supplies 1,824 5.3 2,091 6.6 (267 ) (12.8 )
Total cost of revenues $ 15,336 44.7 $ 13,797 43.3 $ 1,539 11.2
Gross profit $ 18,998 55.3 $ 18,035 56.7 $ 963 5.3
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Software Licenses. Software license costs consist of expenses incurred by us to manufacture, package and distribute our software products and related documentation and costs of licensing third party software that is incorporated into or sold with certain of our products. Software license costs remained consistent at 6% of software license revenues in the three months ended December 31, 2008 as compared to 7% for the three months ended December 31, 2007. We expect that software license costs will remain relatively consistent, as a percentage of software license revenues, during the remainder of the fiscal year.
Subscriptions and Transactions. Subscriptions and transaction costs include salaries and other related costs for our professional services teams as well as costs related to our hosting infrastructure such as depreciation and facilities related expenses. Subscriptions and transactions costs decreased to 48% of subscription and transaction revenues in the three months ended December 31, 2008 from 53% in the three months ended December 31, 2007. The decrease in subscription and transaction costs as a percentage of revenue was due principally to the overall increase in our subscription and transaction revenue streams, some of which is related to our acquisition of Optio, improved margins for our transactional revenue streams in Europe, improved Legal eXchange margins in the US and the shift of certain expenses from the subscriptions and transactions cost of sales category to the service and maintenance costs of sales category based on changes in where internal resources were deployed. We expect that subscription and transaction costs will remain relatively consistent as a percentage of subscription and transaction revenue during the remainder of the fiscal year.
Service and Maintenance. Service and maintenance costs include salaries and other related costs for our customer service, maintenance and help desk support staffs, as well as third party contractor expenses used to complement our professional services team. Service and maintenance costs increased as a percentage of service and maintenance revenues to 45% in the three months ended December 31, 2008 as compared to 40% in the three months ended December 31, 2007. The increase in service and maintenance costs as a percentage of service and maintenance revenues was due to lower margins in our Banking Solutions segment, as we continued to expand our professional service and support teams for new customers, the impact of the fair value discount applied to acquired software maintenance contracts in the Optio acquisition, and the shift of certain expenses from the subscriptions and transactions cost of sales category to the service and maintenance costs of sales
category based on changes in where internal resources were deployed. We expect that service and maintenance costs will remain relatively consistent, as a percentage of service and maintenance revenues, during the remainder of the fiscal year.
Equipment and Supplies. Equipment and supplies costs include the costs associated with equipment and supplies that we resell, as well as freight, shipping and postage costs associated with the delivery of our products. Equipment and supplies costs increased to 74% of equipment and supplies revenues in the three months ended December 31, 2008 compared to 69% of equipment and supplies revenues in the three months ended December 31, 2007. The increase in equipment and supplies costs as a percentage of equipment and supplies revenues was due to an unfavorable mix of lower margin revenue transactions and due to higher costs of certain supplies in the three months ended December 31, 2008. We expect that equipment and supplies costs will remain relatively consistent as a percentage of equipment and supplies revenues for the remainder of the fiscal year.
Operating Expenses
Three Months Ended December 31, Increase (Decrease)
Between Periods 2008
2008 2007 Compared to 2007
As % of total As % of total
(in thousands) revenues (in thousands) revenues (in thousands) %
Operating expenses:
Sales and marketing $ 7,502 21.8 $ 7,161 22.5 $ 341 4.8
Stock compensation expense 648 1.9 686 2.2 (38 ) (5.5 )
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