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EPAY > SEC Filings for EPAY > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BOTTOMLINE TECHNOLOGIES INC /DE/

Form 10-Q for BOTTOMLINE TECHNOLOGIES INC /DE/


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). 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.

In the management discussion that follows we have highlighted those changes and operating factors that were the primary factors affecting period to period fluctuations. The remainder of the change in period to period fluctuations from that which is specifically disclosed is arising from various individually insignificant items.

Overview

We provide cloud-based payment, invoice and banking solutions to corporations, insurance companies, 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 hosted or Software as a Service (SaaS) solutions, as well as software designed to run on-site at the customer's location. A growing portion of our offerings are being sold as SaaS-based solutions and paid for on a subscription and transaction basis. Historically, however, our software has been sold predominantly on a perpetual license 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 spend management solutions that automate receipt and review of legal invoices for insurance companies and other large corporate consumers of outside legal services. We operate a cloud-based network that facilitates the exchange of electronic payments and invoices between buyers and their suppliers. We also offer solutions that banks use to provide cash management and treasury capabilities to their business customers. Our document automation solutions are used by organizations to automate paper-intensive processes for the generation of transactional and supply chain documents.


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Our solutions complement, leverage and extend our customers' existing information systems, accounting applications and banking relationships and can be deployed quickly and efficiently. To help our customers receive the maximum value from our products and meet their specific business requirements, we also provide professional services for installation, training, consulting and product enhancement.

On September 11, 2012, we completed the acquisition of Albany Software Ltd. (Albany), a UK based corporation. We acquired, through a UK subsidiary, all of the Albany outstanding share capital from Albany's stockholders in exchange for a cash payment of 20 million (approximately $32 million based on exchange rates in effect at the acquisition date). Albany is one of the UK's leading BACS solution providers, and their solutions are used by more than 5,000 businesses to streamline, automate and manage processes involving the collection of direct debits and electronic payments.

For the first three months of fiscal year 2013, our revenue increased to $61.7 million from $52.5 million in the same period of fiscal year 2012. This revenue increase was attributable to revenue increases of $5.1 million in our Banking Solutions segment, $2.6 million in our Outsourced Solutions segment and $1.5 million in our Payments and Transactional Documents segment. The Banking Solutions segment's revenue increase was primarily the result of our fiscal year 2012 commercial banking acquisition. The revenue contribution from our legal spend management solutions, our SWIFT Access Service solution and increased revenue from our Paymode-X solution accounted for the majority of the revenue increase in our Outsourced Solutions segment. The increased revenue in our Payments and Transactional Documents segment was related to increased revenue in both North America and Europe. These increases were offset by an unfavorable effect of foreign exchange rates of $0.3 million primarily associated with the British Pound Sterling, which depreciated against the US Dollar when compared to the same period in the prior fiscal year.

We had net income of $18 thousand in the three months ended September 30, 2012 compared to net income of $1.7 million in the three months ended September 30, 2011. Our gross margin increased $4.0 million in the first three months of fiscal year 2012 related primarily to revenue increases across all segments. The increased gross margin was offset by increased operating expense of $7.4 million which was primarily due to increased acquisition related expenses, including increased employee related costs, and increased intangible asset amortization expense as compared to the same period in the prior year.

In the first three months of fiscal year 2013, we derived approximately 36% of our revenue from customers located outside of North America, principally in the UK, continental Europe and Australia. We expect future revenue growth to be driven by increased purchases of our products, including our legal spend management solutions, SWIFT Access Service solution, Paymode-X and WebSeries, by new and existing bank and financial institution customers in both North America and international markets and from increased sales of our payments and transactional documents products.

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, 2012 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 August 27, 2012 and in conjunction with the discussion of income taxes which follows below.

Income Taxes

We are subject to the income tax laws of the United States (including its states and municipalities) as well as the tax laws of the foreign jurisdictions in which we operate. Our annual tax rate is determined based on our income, statutory tax rates and the tax impact of items treated differently for tax purposes than for financial statement purposes. The income tax expense we record in any interim period is based on our estimated tax rate for the full fiscal year, which requires us to estimate our annual pretax income and tax expense by jurisdiction. This process is inherently subjective and requires us to make estimates relative to our business plans, planning opportunities and operating results. An interim tax rate is subject to adjustment if, in later periods, there are changes to our estimate of total tax expense or pretax income, including income by jurisdiction. We update these estimates on a quarterly basis, to ensure that our interim financial statements always reflect our most current projections for the full fiscal year.


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Our income tax expense consists of two components: current and deferred. Current tax expense represents our estimate of taxes to be paid for the current period, including income tax expense arising from uncertain tax positions. Deferred tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets and liabilities arise due to differences between when certain transactions are reflected in our financial statements and when those same items are included in a tax return. Deferred tax assets generally reflect the impact of a tax deduction, tax credit or operating loss carryforward that we have available for use in future year tax returns. Deferred tax liabilities generally reflect the impact of a deduction or expenditure that has already been taken in a tax return but that has not yet been reflected in our financial statements.

We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income and the availability of tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. The particularly sensitive component of this evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.

We establish reserves to remove some or all of the tax benefit we would have otherwise recorded if a tax position is uncertain. In evaluating whether a tax position is uncertain, we base our assessment on existing tax legislation, case law and legal statute. We also presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. We recognize tax benefits related to uncertain tax positions at the largest amount deemed more likely than not will be realized upon tax examination. We review our tax positions quarterly and adjust the balances as necessary.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued an accounting standards update regarding the presentation of comprehensive income in financial statements. The provisions of this standard provide an option to present the components of net income and other comprehensive income either as one continuous statement of comprehensive income or as two separate but consecutive statements. This will change the manner in which comprehensive income is presented in our overall financial statements, but will not result in any other accounting or financial reporting impact to us. We incorporated the continuous statement option of this standard effective for the period ending September 30, 2012.

Results of Operations

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Segment Information

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.

During fiscal year 2012, we changed the segment classification of certain customers' revenue. To ensure a consistent presentation of the measurement of segment revenues and profit or loss, these changes are reflected for all periods presented.


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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 tables represent our segment revenues and our segment measure of profit:

                                              Three Months Ended               Increase (Decrease)
                                                September 30,                 Between Periods 2012
                                              2012           2011               Compared to 2011
                                                (in thousands)            (in thousands)            %
Segment revenue:
Payments and Transactional Documents       $   26,149      $ 24,671      $          1,478            6.0
Banking Solutions                              18,119        13,016                 5,103           39.2
Outsourced Solutions                           17,421        14,789                 2,632           17.8

                                           $   61,689      $ 52,476      $          9,213           17.6


Segment measure of profit:
Payments and Transactional Documents       $    6,573      $  5,976      $            597           10.0
Banking Solutions                               2,015         2,610                  (595 )        (22.8 )
Outsourced Solutions                            1,768         1,848                   (80 )         (4.3 )

Total measure of segment profit            $   10,356      $ 10,434      $            (78 )         (0.7 )

A reconciliation of the measure of segment profit to our GAAP (loss) income for the three months ended September 30, 2012 and 2011, before the provision for income taxes, is as follows:

                                                   Three Months Ended
                                                      September 30,
                                                   2012           2011
                                                     (in thousands)

             Segment measure of profit           $  10,356      $ 10,434
             Less:
             Amortization of intangible assets      (4,312 )      (3,884 )
             Stock compensation expense             (4,207 )      (3,165 )
             Acquisition related expenses           (1,715 )        (124 )
             Restructuring expenses                   (296 )         (27 )
             Add:
             Other income (expense), net                46          (113 )

             (Loss) income before income taxes   $    (128 )    $  3,121

Payments and Transactional Documents. The revenue increase for the three months ended September 30, 2012 was primarily attributable to North American and European revenue increases of $0.9 million in software licenses, $0.5 million in service and maintenance and $0.2 million in subscriptions and transactions. The revenue increases were partially offset by an unfavorable effect of foreign exchange rates of $0.2 million primarily associated with the British Pound Sterling which depreciated against the US Dollar when compared to the same period in the prior fiscal year. The segment profit increase of $0.6 million for the three months ended September 30, 2012 was primarily attributable to the revenue increases described above, partially offset by increased sales and marketing expenses as compared to the three months ended September 30, 2011. We expect revenue and profit for the Payments and Transactional Documents segment to increase during the remaining three quarters of fiscal year 2013 primarily as a result of our recent acquisition of Albany.

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 subscriptions and transactions revenue of $8.1 million, primarily due to our 2012 commercial banking acquisition, partially offset by a decrease in professional services revenue of $3.0 million associated with the completion of certain large banking projects. Segment profit decreased $0.6 million for the three months ended September 30, 2012 as compared to the same period in the prior fiscal year, due primarily to increased sales and marketing and product development related costs. The increased sales and marketing and product development costs were primarily related to increased headcount costs related to our commercial banking acquisition. We expect revenue and profit for the Banking Solutions segment to decrease during the remainder of the fiscal year as a result of customer losses and increased expenses related to the hosted infrastructure and sales and marketing efforts associated with our commercial banking business. The customer losses have been anticipated as the acquired commercial banking business had been experiencing customer attrition prior to


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our acquisition, due in large part to customers' views that the business's solutions required further investment and improvement. The increased infrastructure and sales and marketing expenses are attributable to investments we are making to support, improve and grow the commercial banking business.

Outsourced Solutions. Revenues from our Outsourced Solutions segment increased $2.6 million as compared to the same period in the prior fiscal year due primarily to increased revenue contribution from our legal spend management solutions of $0.8 million, our Paymode-X solution of $1.2 million and our SWIFT Access Service solution of $0.7 million. Segment profit decreased $0.1 million as compared to the same period in the prior fiscal year as lower margins related to our Paymode-X solution and increased operating expenses offset improved margins in our European solutions. We expect revenue and profit for the Outsourced Solutions segment to increase during the remainder of the fiscal year as a result of the revenue contribution from our legal spend management, Paymode-X and SWIFT Access Service solutions.

Revenues by category

                                                                                                                                    Increase (Decrease)
                                                                Three Months Ended September 30,                                      Between Periods
                                                        2012                                       2011                            2012 Compared to 2011
                                                              As % of  total                             As % of  total
                                        (in thousands)           Revenues          (in thousands)           Revenues           (in thousands)            %
Revenues:
Subscriptions and transactions          $        28,547                  46.3      $        17,594                  33.5      $          10,953          62.3
Software licenses                                 4,699                   7.6                4,033                   7.7                    666          16.5
Service and maintenance                          26,455                  42.9               28,849                  55.0                 (2,394 )        (8.3 )
Equipment and supplies                            1,988                   3.2                2,000                   3.8                    (12 )        (0.6 )

Total revenues                          $        61,689                 100.0      $        52,476                 100.0      $           9,213          17.6

Subscriptions and Transactions. The increase in subscriptions and transactions revenues of $11.0 million was due principally to the increase in revenue contribution from our banking products of $8.1 million, Paymode-X solutions of $1.2 million, legal spend management solutions of $0.8 million and European outsourced solutions of $0.7 million. The increase in banking products revenue was principally the result of our commercial banking acquisition in fiscal year 2012. We expect subscriptions and transactions revenues to increase during the remainder of the fiscal year, primarily as a result of the revenue contribution from our legal spend management, Paymode-X and SWIFT Access Service solutions.

Software Licenses. The increase in software license revenues was due to an increase in North American revenue of $0.6 million and increased European revenue of approximately $0.2 million. These increases occurred within our Payments and Transactional Documents segment. This increase was offset by a decrease of $0.2 million in our Banking Solutions segment. We expect software license revenues to increase during the remainder of fiscal year 2013, principally as a result of increased software license revenue from our Payments and Transactional Documents segment.

Service and Maintenance. The decrease in service and maintenance revenues was primarily the result of a decrease in professional services revenues of $3.0 million associated with the completion of certain large banking projects, offset by an increase in service and maintenance revenue from our payment and document automation products of $0.5 million. The increase in revenue from our payment and document automation products includes an unfavorable effect of foreign exchange rates of $0.1 million primarily associated with the British Pound Sterling which depreciated against the US Dollar when compared to the same period in the prior fiscal year. We expect that service and maintenance revenues will remain relatively consistent during the remainder of the fiscal year.

Equipment and Supplies. Equipment and supplies revenue remained relatively unchanged as compared to the same period in the prior fiscal year. We expect that equipment and supplies revenues will remain relatively consistent during the remainder of 2013.


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Cost of revenues by category

                                                                                                                                         Increase (Decrease)
                                                                Three Months Ended September 30,                                           Between Periods
                                                        2012                                          2011                              2012 Compared to 2011
                                                               As % of  total                               As % of  total
                                       (in thousands)             Revenues           (in thousands)            Revenues            (in thousands)              %
Cost of revenues:
Subscriptions and transactions        $          14,271                   23.1       $         9,085                   17.3       $           5,186            57.1
Software licenses                                   409                    0.7                   435                    0.8                     (26 )          (6.0 )
Service and maintenance                          12,294                   19.9                12,160                   23.2                     134             1.1
Equipment and supplies                            1,522                    2.5                 1,571                    3.0                     (49 )          (3.1 )

Total cost of revenues                $          28,496                   46.2       $        23,251                   44.3       $           5,245            22.6

Gross profit                          $          33,193                   53.8       $        29,225                   55.7       $           3,968            13.6

Subscriptions and Transactions. Subscriptions and transactions 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 50% of subscriptions and transactions revenues in the three months ended September 30, 2012 as compared to 52% in the same period of 2011. The decrease in subscriptions and transactions costs as a percentage of revenue was due primarily to improved margins related to our European solutions. We expect that subscriptions and transactions costs will increase slightly as a percentage of subscriptions and transactions revenue during the remainder of the fiscal year.

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 9% of software license revenues in the three months ended September 30, 2012 as compared to 11% for the three months ended September 30, 2011. We expect that software license costs will increase, as a percentage of software license revenues, during the remainder of the fiscal year primarily the result of increased third party software costs sold with certain of our banking products.

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 to 46% of service and maintenance revenues in the three months ended September 30, 2012 as compared to 42% of service and maintenance revenues in the three months ended September 30, 2011. The increased costs as a percentage of revenue were primarily related to lower gross margins associated with certain of our banking products and European payment and transactional document products. We expect that service and maintenance costs will decrease slightly, 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 and remained consistent at 77% of equipment and supplies revenues in the three months ended September 30, 2012 as compared to 79% for the three months ended September 30, 2011. 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



                                                                                                                                                  Increase
                                                                        Three Months Ended September 30,                                       Between Periods
                                                                2012                                        2011                            2012 Compared to 2011
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