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| EPAY > SEC Filings for EPAY > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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.
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, a growing portion of our 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 offer 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.
In September 2009 we acquired PayMode from Bank of America. PayMode facilitates the electronic exchange of payments and invoices between organizations and suppliers and is a SaaS offering. As part of the acquisition, we also entered into a multi-year agreement with Bank of America to operate PayMode on its behalf.
For the first quarter of fiscal year 2010, our revenue increased to $36.6 million from $35.5 million in the same quarter of last fiscal year. This revenue increase was primarily attributable to revenue increases in our Banking Solutions segment and our European operations. These increases were offset in part by a decrease of $1.8 million, primarily as a result of declining foreign exchange rates associated with the British Pound Sterling and the European Euro, which depreciated against the US dollar compared to the same period in the prior fiscal year.
We had net income of $1.2 million in the three months ended September 30, 2009 compared to net loss of $3.8 million in the three months ended September 30, 2008. The increase in net income was due largely to improved gross margins and a reduction in operating expenses. The decreases in our cost of revenue and operating expense categories were due largely to cost savings related to our fourth quarter fiscal 2009 headcount reduction and a decrease in foreign exchange rates of approximately $1.5 million associated with the British Pound Sterling and European Euro.
In the first quarter of fiscal 2010, we derived approximately 49% of our revenue from customers located outside of North America, principally in the UK and Australia. We expect future revenue growth to be driven by the revenue contribution from PayMode, 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 and increased sales of our payments and transactional documents products.
While we continue to grow our business, the overall economic environment has remained challenging. While we have not experienced any significant decline in our expected volume of customer orders we are observing that, in some cases, closing new business is taking somewhat longer and, in some cases, customer buying decisions are being postponed. 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.
The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended June 30, 2009 related to stock-based compensation, revenue recognition, the valuation of goodwill and intangible assets and the valuation of 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 11, 2009. There have been no changes to our critical accounting policies during the three months ended September 30, 2009.
Recent Accounting Pronouncements
Revenue Recognition
In September 2009, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the Emerging Issues Task Force (EITF) on two issues related to revenue recognition.
The first issue, Revenue Arrangements with Multiple Deliverables, applies to multiple-deliverable revenue arrangements and provides for two significant changes to existing multiple-element revenue recognition guidance. The first change relates to the determination of when individual deliverables within an arrangement should be treated as separate units of accounting. Broadly, a deliverable should be treated as a separate unit of accounting when it has value to the customer on a standalone basis and when delivery or performance of any undelivered items is considered to be probable and substantially within the control of the vendor. The second change relates to the manner in which arrangement consideration should be allocated to any separately identified deliverables. The consensus requires that the allocation of revenue among deliverables be based on vendor specific objective evidence or third-party evidence of selling price and, to the extent that neither of these levels of evidence exist, that the allocation be based on the vendor's best estimate of selling price for each deliverable. Use of the residual method of allocating revenue to arrangement deliverables is prohibited unless the revenue transaction is specifically governed by software revenue recognition literature. Financial statement disclosure requirements have also been significantly expanded.
The second issue, Certain Revenue Arrangements that Include Software Elements, focuses on redefining which revenue arrangements are within the scope of software revenue recognition literature and which are not. The issue provides guidance on determining whether tangible products containing non-software and software elements are governed by software revenue recognition literature and significantly narrows the definition of what constitutes a "software" transaction. In particular, non-software components of products that include software, software products bundled with tangible products where the non-software and software components function together to deliver the product's essential functionality, and undelivered elements related to non-software components are, as a result of this issue, outside the scope of software revenue recognition rules. The issue also provides guidance on allocating revenue between non software and software elements.
Each of these issues is effective for fiscal years beginning on or after June 15, 2010. The issues can be implemented prospectively to all revenue arrangements entered or materially modified after the date of adoption, or retrospectively to all revenue arrangements for all financial statement periods presented. Early adoption is permitted. Both issues must be adopted in the same period and under the same transition method. We expect to adopt these issues prospectively as of July 1, 2010 and are currently evaluating the impact of the pronouncements on our financial statements.
Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008
Revenues by segment
Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
Our operating segments are organized principally by the type of product or service offered and by geography. Similar operating segments have been aggregated into three reportable segments: Payments and Transactional Documents, Banking Solutions and Outsourced Solutions. The following table represents our revenues by segment:
Three Months Ended September 30, Increase (Decrease)
Between Periods
2009 2008 2009 Compared to 2008
As % of total As % of total
(in thousands) Revenues (in thousands) Revenues (in thousands) %
Payments and Transactional
Documents $ 22,767 62.3 $ 23,376 65.8 $ (609 ) (2.6 )
Banking Solutions 7,108 19.4 5,673 16.0 1,435 25.3
Outsourced Solutions 6,681 18.3 6,457 18.2 224 3.5
$ 36,556 100.0 $ 35,506 100.0 $ 1,050 3.0
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Payments and Transactional Documents. The revenue decrease for the three months ended September 30, 2009 was primarily attributable to a decrease of $1.5 million as a result of declining foreign exchange rates associated with the British Pound Sterling and European Euro and a decrease in software license sales for certain of our US products, offset in part by an increase in maintenance revenues from certain of our US document process automation products. We expect revenue for the Payments and Transactional Documents segment to increase during the remainder of fiscal 2010 as a result of increased sales of our payment and document management solutions.
Banking Solutions. Revenues from our Banking Solutions segment increased as compared to the same period in the prior fiscal year due to an increase in professional services revenue, offset in part by a decrease in software license revenues. 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. Revenues from our Outsourced Solutions segment increased slightly as compared to the same period in the prior fiscal year due to revenue contribution from PayMode, which we acquired in September 2009, and an increase in Legal eXchange revenue, offset in part by a decrease in European foreign currency exchange rates of $0.2 million. We expect revenue for the Outsourced Solutions segment to increase during the remainder of the fiscal year as a result of the revenue contribution from PayMode and as current customers of Legal eXchange move from the implementation phase (during which no revenue is recorded) into live production.
Revenues by category
Three Months Ended September 30, Increase (Decrease)
Between Periods
2009 2008 2009 Compared to 2008
As % of total As % of total
(in thousands) Revenues (in thousands) Revenues (in thousands) %
Revenues:
Software licenses $ 2,963 8.1 $ 3,606 10.1 $ (643 ) (17.8 )
Subscriptions and transactions 8,281 22.6 8,229 23.2 52 0.6
Service and maintenance 23,135 63.3 21,149 59.6 1,986 9.4
Equipment and supplies 2,177 6.0 2,522 7.1 (345 ) (13.7 )
Total revenues $ 36,556 100.0 $ 35,506 100.0 $ 1,050 3.0
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Software Licenses. The decrease in software license revenues was due to decreases in software license revenue from our Banking Solutions segment due to the timing of several large ongoing banking projects, decreases in revenues from certain of our domestic payments and transactional documents products and due to a decrease of approximately $0.2 million as a result of declining foreign exchange rates associated with the British Pound Sterling and the European Euro. These decreases were offset in part by an increase in revenue from certain of our European payments and transactional documents products. We expect software license revenues to increase during the remainder of fiscal year 2010, principally as a result of increased software license revenue from our domestic and international Payments and Transactional Documents products and our Banking Solutions segment.
Subscriptions and Transactions. The slight increase in subscription and transaction revenues was due principally to the revenue contribution from PayMode and newly implemented Legal eXchange customers. These increases were offset in part by a decrease of $0.5 million as a result of declining foreign exchange rates associated with the British Pound Sterling and the European Euro. We expect subscription and transaction revenues to increase during the remainder of the fiscal year as a result of the revenue contribution from PayMode and the revenue contribution from newly implemented Legal eXchange customers.
Service and Maintenance. The increase in service and maintenance revenues was primarily the result of an increase in professional services revenues associated with several large banking projects, increased professional service revenues in Europe and increases in software maintenance revenues in the US. These increases were offset in part by a decrease of $0.9 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 new and existing projects within our Banking Solutions segment and as a result of additional revenues from our domestic and international payments and documents products.
Equipment and Supplies. The decrease in equipment and supplies revenues was principally due to a decrease of approximately $0.2 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 2010.
Cost of revenues by category
Three Months Ended September 30, Increase (Decrease)
Between Periods
2009 2008 2009 Compared to 2008
As % of total As % of total
(in thousands) Revenues (in thousands) Revenues (in thousands) %
Cost of revenues:
Software licenses $ 219 0.6 $ 200 0.6 $ 19 9.5
Subscriptions and transactions 3,825 10.4 4,117 11.6 (292 ) (7.1 )
Service and maintenance 9,415 25.8 9,613 27.1 (198 ) (2.1 )
Stock compensation expense 358 1.0 260 0.7 98 37.7
Equipment and supplies 1,621 4.4 1,854 5.2 (233 ) (12.6 )
Total cost of revenues $ 15,438 42.2 $ 16,044 45.2 $ (606 ) (3.8 )
Gross profit $ 21,118 57.8 $ 19,462 54.8 $ 1,656 8.5
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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 relatively consistent at 7% of software license revenues in the three months ended September 30, 2009 as compared to 6% for the three months ended September 30, 2008. 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 46% of subscription and transaction revenues in the three months ended September 30, 2009 from 50% in the three months ended September 30, 2008. The decrease in subscription and transaction costs as a percentage of revenue was due principally to improved margins for certain of our subscription-based products in the US and our accounts payable automation products in Europe and the US. 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 decreased as a percentage of service and maintenance revenues to 41% in the three months ended September 30, 2009 as compared to 45% in the three months ended September 30, 2008. The decrease in service and maintenance costs as a percentage of service and maintenance revenues was due to improved gross margins for professional services in our Banking Solutions segment and due to the impact of cost reduction measures implemented in our prior fiscal year. 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 remained consistent at 74% of equipment and supplies revenues in the three months ended September 30, 2009 and 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 September 30, Increase (Decrease)
Between Periods 2009
2009 2008 Compared to 2008
As % of total As % of total
(in thousands) revenues (in thousands) revenues (in thousands) %
Operating expenses:
Sales and marketing $ 7,234 19.8 $ 7,942 22.4 $ (708 ) (8.9 )
Stock compensation expense 649 1.8 696 2.0 (47 ) (6.8 )
Product development and
engineering 3,886 10.6 5,221 14.7 (1,335 ) (25.6 )
Stock compensation expense 204 0.6 202 0.6 2 1.0
General and administrative 3,593 9.8 4,120 11.6 (527 ) (12.8 )
Stock compensation expense 697 1.9 1,052 3.0 (355 ) (33.8 )
Amortization of intangible
assets 3,306 9.0 4,436 12.4 (1,130 ) (25.5 )
Total operating expenses $ 19,569 53.5 $ 23,669 66.7 $ (4,100 ) (17.3 )
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Sales and Marketing. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials and trade show participation. Sales and marketing expenses decreased in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 due to a decrease of $0.5 million as a result of declining foreign exchange rates associated with the British Pound Sterling and the European Euro, a decrease in headcount related costs and a decrease in trade show costs. We expect that sales and marketing expenses will increase over the remainder of the fiscal year as we continue to focus on our marketing initiatives to support our new products, including PayMode.
Product Development and Engineering. Product development and engineering expenses consist primarily of personnel costs to support product development which consists of enhancements and revisions to our products based on customer feedback and general marketplace demands, as well as development of our newer accounts payable automation products. The
decrease in product development and engineering expenses in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 was primarily attributable to a decrease in the use of contract employees and a decrease in headcount related costs. We expect that product development and engineering expenses will increase during the remainder of the fiscal year as we devote more resources to the enhancement of the PayMode product.
General and Administrative. General and administrative expenses consist primarily of salaries and other related costs for operations and finance employees and legal and accounting services. The decrease in general and administrative expenses was principally attributable to a decrease in headcount related costs and a decrease in the use of contract employees. We expect that general and administrative expenses will increase slightly during the remainder of the fiscal year.
Stock Compensation Expense. During the three months ended September 30, 2009, stock compensation expense decreased to $1.9 million as compared to $2.2 million for the three months ended September 30, 2008 due principally to a decrease in the number of awards outstanding as a result of our headcount reductions in the fourth quarter of fiscal 2009. The expense associated with share based payments is recorded as expense within the same functional expense category in which cash compensation for the applicable employee is recorded. For the three months ended September 30, 2009 and 2008, stock compensation expense was allocated as follows:
Three Months Ended
September 30,
2009 2008
(in thousands)
Cost of revenues, service and maintenance $ 358 $ 260
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