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EPAY > SEC Filings for EPAY > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for BOTTOMLINE TECHNOLOGIES INC /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BOTTOMLINE TECHNOLOGIES INC /DE/


8-May-2013

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.


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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.

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.

Convertible Note Offering

In December 2012, we raised approximately $167 million in net proceeds upon completion of an underwritten public offering of convertible senior notes (the Notes). The Notes pay semi-annual interest at a rate of 1.50% per annum on the $189.8 million aggregate principal balance and mature in December 2017. We are required to settle the principal balance of the Notes in cash upon conversion or maturity, however as of January 17, 2013 we are permitted to settle any conversion obligation in excess of the principal balance in either cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

We entered into hedging transactions designed to offset dilution to our common stock in the event of a conversion under the Notes. The note hedge instruments (Note Hedges) have a strike price of $30.03, which is equal to the conversion rate under the Notes, are exercisable by us upon any conversion under the Notes and expire in December 2017. To help offset the cost of the Note Hedges, we also sold warrants (Warrants) in our common stock. The Warrants have a strike price of $40.04, and are exercisable in equal tranches over a 150 day period beginning on March 1, 2018 and ending on October 2, 2018. The Note Hedges and Warrants each cover approximately 6.3 million shares of our common stock, subject to customary anti-dilutive provisions.

We intend to use the net offering proceeds for general corporate purposes which may include the acquisition of businesses or assets, or working capital needs. Refer to Note 10 and 11 of the accompanying unaudited interim financial statements for a complete discussion of these transactions and their accounting implications.

Recent Acquisitions

On February 13, 2013, we acquired Prilos AG (Prilos), a long-time reseller of our document automation products in the German marketplace for cash of 0.5 million (approximately $0.7 million based on exchange rates in effect at the acquisition date).

In October 2012, we acquired the assets of 5280 Dynamic Solutions LLC (5280), a US based software company, in exchange for a cash payment of $1.6 million. The acquisition provides us with new technology with which we intend to expand our product offerings to include SharePoint-based document management solutions for accounts payable automation and other document-centric business needs.

In September 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.


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Financial Highlights

For the nine months ended March 31, 2013, our revenue increased by $26.8 million to $189.7 million from $162.9 million in the same period of fiscal year 2012. This was attributable to revenue increases of $11.6 million in our Banking Solutions segment, $9.0 million in our Payments and Transactional Documents segment and $6.3 million in our Outsourced Solutions segment. The Banking Solutions segment's revenue increase was primarily the result of our fiscal year 2012 commercial banking acquisition. The increased revenue in our Payments and Transactional Documents segment was related to higher revenue in both North America and Europe, in part due to our Albany acquisition. Legal spend management, SWIFT Access Service and Paymode-X solutions accounted for the majority of the revenue increase in our Outsourced Solutions segment.

We had a net loss of $10.6 million in the nine months ended March 31, 2013 compared to net income of $2.9 million in the nine months ended March 31, 2012. Our net loss for the nine months ended March 31, 2013 included a loss of $4.4 million related to derivative instruments associated with our Notes; there were no similar derivative instruments during the nine months ended March 31, 2012. Our gross margin increased by $11.5 million in the first nine months of fiscal year 2013 related primarily to revenue increases across all segments. The increased gross margin was offset by increased operating expense of $24.7 million which was primarily due to increased expenses related to the integration of recent acquisitions, increased employee related costs and increased intangible asset amortization expense as compared to the same period in the prior year. The increase in operating expenses was also attributable to marketing initiatives to support our new and existing products, particularly our commercial banking and Paymode-X solutions. In addition our operating expenses were impacted by increased development costs as we continue to invest in our SaaS-based solutions that we believe will drive future revenue growth, such as our commercial banking, Paymode-X and legal spend management solutions.

In the first nine months of fiscal year 2013, we derived approximately 37% 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, SWIFT Access Service, Paymode-X and WebSeries solutions, 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 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, so that our interim financial statements reflect our most current projections for the full fiscal year.

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 we have already taken in a tax return but that we have not yet 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


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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. The Notes we issued in December 2012 will result in a significant future expense burden for interest expense, in particular non-cash interest expense, as the debt is accreted to the principal amount due on maturity. While we expect to deploy the debt proceeds in a manner that offsets the impact of this expense, if we are unable to do so, all or a portion of our US based deferred tax assets might become impaired which would give rise to the recognition of significant deferred tax expense in the period in which that determination was made. We continuously reassess the recoverability of our deferred tax assets and our conclusion can change at any time.

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 provided an option to present the components of net income or loss and other comprehensive income or loss either as one continuous statement or as two separate but consecutive statements. We incorporated the continuous statement option of this standard effective with the period ending September 30, 2012. This changed the manner in which we present comprehensive income or loss in our overall financial statements, but did not result in any other accounting or financial reporting impact to us.

Results of Operations

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

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.

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)
                                                  March 31,                      Between Periods
                                              2013           2012             2013 Compared to 2012
                                                (in thousands)            (in thousands)            %
Segment revenue:
Payments and Transactional Documents       $   29,642      $ 25,254      $          4,388            17.4
Banking Solutions                              17,051        14,051                 3,000            21.4
Outsourced Solutions                           17,751        16,011                 1,740            10.9

Total segment revenue                      $   64,444      $ 55,316      $          9,128            16.5


Segment measure of profit:
Payments and Transactional Documents       $    7,906      $  5,415      $          2,491            46.0
Banking Solutions                               1,336         1,485                  (149 )         (10.0 )
Outsourced Solutions                            1,530         1,653                  (123 )          (7.4 )

Total measure of segment profit            $   10,772      $  8,553      $          2,219            25.9


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A reconciliation of the measure of segment profit to GAAP (loss) income for the three months ended March 31, 2013 and 2012, before the provision for income taxes, is as follows:

                                                    Three Months Ended
                                                         March 31,
                                                    2013           2012
                                                      (in thousands)
            Segment measure of profit             $  10,772      $  8,553
            Less:
            Amortization of intangible assets        (5,162 )      (3,734 )
            Stock compensation expense               (4,591 )      (3,719 )
            Acquisition related expenses             (3,165 )        (706 )
            Restructuring expenses                      (62 )        (509 )
            Add:
            Gain on derivative instruments, net         482            -
            Other (expense) income, net              (3,134 )         119

            (Loss) income before income taxes     $  (4,860 )    $      4

Payments and Transactional Documents. The Payments and Transactional Documents segment revenue increased $4.4 million for the three months ended March 31, 2013 as compared to the same period in the prior year as a result of increases of $2.5 million in software license revenue, $0.2 million in subscriptions and transactions revenue and $1.8 million in service and maintenance revenue, partially offset by a decrease in equipment and supplies revenue of $0.1 million. The revenue increases were primarily attributable to increased European revenue as a result of our fiscal 2013 acquisition of Albany and increased software license revenue in the US. The revenue includes an unfavorable effect of foreign exchange rates of $0.2 million 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 $2.5 million for the three months ended March 31, 2013 was primarily attributable to increased gross margins related to the increased revenue, offset in part by increased operating expenses of $1.5 million, primarily attributable to increased sales and marketing expenses. We expect revenue and profit for the Payments and Transactional Documents segment to increase during the remainder 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 increases in subscription and transactions revenues of $5.9 million, software license revenue of $0.5 million and maintenance revenue of $0.4 million, offset in part by a decrease in professional services revenue of $3.7 million as a result of the completion of several large projects in the latter part of fiscal year 2012. Segment profit decreased $0.1 million for the three months ended March 31, 2013 as compared to the same period in the prior fiscal year as improved gross margins were offset by 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 anticipated customer losses in our commercial banking business and as a result of increased expenses related to the commercial banking hosted infrastructure and sales and marketing efforts. The customer losses have been anticipated as the acquired commercial banking business had been experiencing customer attrition prior to our acquisition, due in large part to customers' views that the commercial banking 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 as compared to the same period in the prior fiscal year due primarily to the increased revenue contributions from our Paymode-X solution of $1.0 million and our legal spend management solution of $0.7 million. The legal spend management solutions revenue growth was driven primarily by volume increases as more customers adopted our SaaS-based platforms. Segment profit decreased $0.1 million as compared to the same period in the prior fiscal year as a result of increased sales and marketing, product development and general and administrative expense. 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 March 31,                                       Between Periods
                                                        2013                                      2012                           2013 Compared to 2012
                                                              As % of total                             As % of total
                                        (in thousands)          Revenues          (in thousands)          Revenues           (in thousands)            %
Revenues:
Subscriptions and transactions          $        28,749                 44.6      $        20,374                 36.8      $           8,375          41.1
Software licenses                                 7,048                 10.9                4,158                  7.5                  2,890          69.5
Service and maintenance                          26,809                 41.6               28,876                 52.2                 (2,067 )        (7.2 )
Equipment and supplies                            1,838                  2.9                1,908                  3.5                    (70 )        (3.7 )

Total revenues                          $        64,444                100.0      $        55,316                100.0      $           9,128          16.5


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Subscriptions and Transactions. The increase in subscriptions and transactions revenue was due principally to increases in the revenue contribution from our Banking Solutions segment of $5.9 million and our Paymode-X solution of $1.0 million, and, to a lesser extent, from revenue increases in our legal spend management solution, SWIFT Access Service solution and our payments and document automation products. The increases in the Banking Solutions segment revenues arise primarily from our commercial banking solution, which we acquired in 2012. We expect subscriptions and transactions revenues to increase during the remainder of the fiscal year, primarily as a result of the increased revenue contribution from our legal spend management, Paymode-X and SWIFT Access Service solutions.

Software Licenses. The increase in software license revenue was due to an increase in European payments and document automation products of approximately $1.8 million, increased US revenue for payment and document automation products of $0.7 million and increased revenue in our Banking Solutions segment of $0.5 million, partially offset by a decrease of $0.1 million in our European SWIFT Access Service Solution as compared to the same period in the prior fiscal year. We expect software license revenues to decrease during the remainder of fiscal year 2013, principally as a result of decreased European software license revenue in 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 $3.7 million associated with the completion of several large banking projects during the latter part of 2012 and decreased revenues from our SWIFT Access Service solution of $0.3 million partially offset by increased European service and maintenance revenue from our payment and document automation products of $1.8 million. 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 consistent period over period and we expect that equipment and supplies revenues will remain relatively consistent for the remainder of 2013.

Cost of revenues by category

                                                                                                                                   Increase (Decrease)
                                                               Three Months Ended March 31,                                          Between Periods
                                                     2013                                        2012                             2013 Compared to 2012
                                                            As % of total                               As % of total
                                     (in thousands)           Revenues           (in thousands)           Revenues            (in thousands)            %
Cost of revenues:
Subscriptions and transactions       $        16,851                  26.2       $        10,571                  19.1       $          6,280           59.4
Software licenses                                952                   1.5                   656                   1.2                    296           45.1
Service and maintenance                       11,081                  17.2                13,264                  24.0                 (2,183 )        (16.5 )
Equipment and supplies                         1,383                   2.1                 1,514                   2.7                   (131 )         (8.7 )

Total cost of revenues               $        30,267                  47.0       $        26,005                  47.0       $          4,262           16.4
. . .
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