BOTTOMLINE TECHNOLOGIES INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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, 18-------------------------------------------------------------------------------- Table of Contents 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.

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 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.

19 -------------------------------------------------------------------------------- Table of Contents Recent Acquisitions 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.

Financial Highlights For the six months ended December 31, 2012, our revenue increased by $17.7 million to $125.3 million from $107.6 million in the same period of fiscal year 2012. This was attributable to revenue increases of $8.6 million in our Banking Solutions segment, $4.6 million in our Payments and Transactional Documents segment and $4.5 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. Legal spend management, SWIFT Access Service and Paymode-X solutions 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 higher revenue in both North America and Europe.

We had a net loss of $7.0 million in the six months ended December 31, 2012 compared to net income of $4.2 million in the six months ended December 31, 2011. Our net loss for the six months ended December 31, 2012 included a loss of $4.9 million related to derivative instruments associated with our Notes; there were no similar derivative instruments during the six months ended December 31, 2011. Our gross margin increased $6.3 million in the first six months of fiscal year 2013 related primarily to revenue increases across all segments. The increased gross margin was offset by increased operating expense of $17.4 million which was primarily due to increased acquisition related expenses, increased employee related costs, including increases in compensation 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 six 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 20 -------------------------------------------------------------------------------- Table of Contents 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 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 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 December 31, 2012 Compared to the Three Months Ended December 31, 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.

21 -------------------------------------------------------------------------------- Table of Contents 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) December 31, Between Periods 2012 2011 2012 Compared to 2011 (in thousands) (in thousands) % Segment revenue: Payments and Transactional Documents $ 28,259 $ 25,137 $ 3,122 12.4 Banking Solutions 16,855 13,372 3,483 26.0 Outsourced Solutions 18,495 16,585 1,910 11.5 $ 63,609 $ 55,094 $ 8,515 15.5 Segment measure of profit: Payments and Transactional Documents $ 6,795 $ 6,183 $ 612 9.9 Banking Solutions 819 2,276 (1,457 ) (64.0 ) Outsourced Solutions 2,908 3,387 (479 ) (14.1 ) Total measure of segment profit $ 10,522 $ 11,846 $ (1,324 ) (11.2 ) A reconciliation of the measure of segment profit to GAAP (loss) income for the three months ended December 31, 2012 and 2011, before the provision for income taxes, is as follows: Three Months Ended December 31, 2012 2011 (in thousands) Segment measure of profit $ 10,522 $ 11,846 Less: Amortization of intangible assets (5,201 ) (3,433 ) Stock compensation expense (4,734 ) (3,373 ) Acquisition related expenses (2,565 ) (177 ) Restructuring expenses (834 ) (24 ) Add: Loss on derivative instruments, net (4,917 ) - Other (expense) income, net (585 ) 28 (Loss) income before income taxes $ (8,314 ) $ 4,867 Payments and Transactional Documents. The Payments and Transactional Documents segment revenue increased $3.1 million for the three months ended December 31, 2012 as compared to the same period in the prior year as a result of increases of $1.3 million in software license revenue, $0.3 million in subscriptions and transactions revenue, $1.4 million in service and maintenance revenue and 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. The revenue includes a favorable effect of foreign exchange rates of $0.3 million associated with the British Pound Sterling which appreciated 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 December 31, 2012 was primarily attributable to increased gross margins related to the increased sales volume offset in part by increased operating expenses of $1.6 million, primarily attributable to increased sales and marketing and product development expenses. We expect revenue and profit for the Payments and Transactional Documents segment to increase during the remaining two 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 increases in subscription and transactions revenues of $8.6 million and maintenance revenue of $0.2 million offset by a decrease in professional services revenue of $5.1 million as a result of the completion of several large projects in fiscal year 2012 and a decrease in software licenses of $0.2 million. Segment profit decreased $1.5 million for the three months ended December 31, 2012 as compared to the same period in the prior fiscal year primarily due 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 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.

22-------------------------------------------------------------------------------- Table of Contents 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 $1.2 million and, to a lesser extent, increases in revenue from our legal spend management and SWIFT Access Service solutions. The legal spend management solutions revenue growth and the SWIFT Access Service revenue growth was driven by volume increases as more customers moved to these SaaS platforms. Segment profit decreased $0.5 million as compared to the same period in the prior fiscal year as a result of increased sales and marketing and product development expenses.

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 December 31, 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 $ 30,361 47.7 $ 19,054 34.6 $ 11,307 59.3 Software licenses 5,469 8.6 4,402 8.0 1,067 24.2 Service and maintenance 25,735 40.5 29,667 53.8 (3,932 ) (13.3 ) Equipment and supplies 2,044 3.2 1,971 3.6 73 3.7 Total revenues $ 63,609 100.0 $ 55,094 100.0 $ 8,515 15.5 Subscriptions and Transactions. The increase in subscriptions and transactions revenue was due principally to the revenue contribution from our Banking Solutions segment of $8.6 million and our Paymode-X solution of $1.2 million, and, to a lesser extent, revenue increases in our SWIFT Access Service solution, legal spend management solution and our payments and document automation products. The increases in the Banking Solutions segment revenues relates primarily to our fiscal year 2012 commercial banking acquisition. The increases in legal spend management and SWIFT Access Service revenues were due to our continued customer adoption of these SaaS platforms. 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 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 $0.9 million as well as increased US revenue for payment and document automation products of $0.4 million, which was partially offset by a decrease of $0.2 million in our Banking Solutions segment as compared to the same period in the prior fiscal year. We expect software license revenues to increase during the remainder of fiscal year 2012, 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 $5.1 million associated with the completion of banking projects in prior periods and decreased revenues from our SWIFT Access Service solution of $0.4 million partially offset by increased European service and maintenance revenue from our payment and document automation products of $1.3 million. We expect that service and maintenance revenues will decrease during the remainder of the fiscal year as a result of the recent completion of several large projects within our Banking Solutions segment.

Equipment and Supplies. The slight increase in equipment and supplies revenues was principally due to an increase in revenue from our European payments and transactional document products. We expect that equipment and supplies revenues will remain relatively consistent during the remainder of 2013.

23-------------------------------------------------------------------------------- Table of Contents Cost of revenues by category Increase (Decrease) Three Months Ended December 31, 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 $ 16,573 26.1 $ 9,215 16.7 $ 7,358 79.8 Software licenses 617 1.0 529 1.0 88 16.6 Service and maintenance 11,977 18.8 13,239 24.0 (1,262 ) (9.5 ) Equipment and supplies 1,540 2.4 1,565 2.9 (25 ) (1.6 ) Total cost of revenues $ 30,707 48.3 $ 24,548 44.6 $ 6,159 25.1 Gross profit $ 32,902 51.7 $ 30,546 55.4 $ 2,356 7.7 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 increased to 55% of subscriptions and transactions revenues in the three months ended December 31, 2012 as compared to 48% in the three months ended December 31, 2011. The increase in subscriptions and transactions costs as a percentage of revenue was due primarily to non-recurring costs related to the integration and migration of customers associated with our fiscal 2012 commercial banking acquisition and lower gross margins associated with our Paymode-X solution as we continue to invest in that product's hosted infrastructure. We expect that subscriptions and transactions costs will remain relatively consistent 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 11% of software license revenues in the three months ended December 31, 2012 as compared to 12% for the three months ended December 31, 2011. We expect that software license costs will increase as a percentage of software license revenues during the remainder of the fiscal year due to the impact of certain third party costs, particularly in our Banking Solutions segment.

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 47% of service and maintenance revenues in the three months ended December 31, 2012 as compared to 45% in the same period of 2011. The increased service and maintenance costs as a percentage of revenue was primarily a result of the decrease in revenue upon the recent completion of several large projects in our Banking Solutions segment. 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 decreased to 75% of equipment and supplies revenues in the three months ended December 31, 2012 as compared to 79% for the three months ended December 31, 2011. The cost decrease as a percentage of revenues is primarily related to a higher mix of higher margin transactions. 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.

24-------------------------------------------------------------------------------- Table of Contents Operating Expenses Increase Three Months Ended December 31, Between Periods 2012 2011 2012 Compared to 2011 As % of total As % of total (in thousands) Revenues (in thousands) Revenues (in thousands) % Operating expenses: Sales and marketing $ 15,620 24.5 $ 11,430 20.8 $ 4,190 36.7 Product development and engineering 8,426 13.2 5,932 10.8 2,494 42.0 General and administrative 6,467 10.2 4,912 8.9 1,555 31.7 Amortization of intangible assets 5,201 8.2 3,433 6.2 1,768 51.5 Total operating expenses $ 35,714 56.1 $ 25,707 46.7 $ 10,007 38.9 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 increased in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011 as a result of an increase in employee related costs of $2.8 million, increased travel related expenses of $0.2 million and increased acquisition and restructuring costs of $0.3 million primarily related to our fiscal year 2013 and 2012 acquisitions.

The increase was also driven by increases of $0.3 million in marketing initiatives, $0.2 million in professional services and $0.1 million in recruitment related expenses. 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 and existing products, particularly our commercial banking products and Paymode-X.

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. The increase in product development and engineering expenses in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011 was primarily attributable to an increase in employee related costs of $1.6 million and costs associated with professional services of $0.5 million which augmented existing resources to drive increased product development and enhancement initiatives. We expect that product development and engineering expenses will increase during the remainder of the fiscal year 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.

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. General and administrative expenses increased in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011 primarily due to increases in employee related costs of $0.9 million and an increase in acquisition and restructuring related costs of $0.8 million as a result of our fiscal year 2013 and 2012 acquisitions.

We expect that general and administrative expenses will remain relatively consistent during the remainder of the fiscal year.

Amortization of Intangible Assets. We amortize our intangible assets in proportion to the estimated rate at which the asset provides economic benefit to us. Accordingly, amortization expense rates are often higher in the earlier periods of an asset's estimated life. The increase in amortization expense in the quarter ended December 31, 2012 as compared to the quarter ended December 31, 2011 occurred as a result of increased expense from intangible assets associated with our fiscal year 2013 and 2012 acquisitions. We expect that total amortization expense for fiscal year 2013 will approximate $19.6 million.

Loss on Derivative Instruments Three Months Ended (Decrease) December 31, Between Periods 2012 Compared 2012 2011 to 2011 (in thousands) % Loss on derivative instruments, net $ (4,917 ) $ - $ (4,917 ) - Loss on Derivative Instruments, net. During the three months ended December 31, 2012 we recorded a loss of $4.9 million related to changes in fair value of derivative instruments associated with our Notes; there were no similar derivative instruments during the three months ended December 31, 2011.

25-------------------------------------------------------------------------------- Table of Contents Other (Expense) Income, Net Three Months Ended Increase (Decrease) December 31, Between Periods 2012 Compared 2012 2011 to 2011 (in thousands) % Interest income $ 153 $ 130 $ 23 17.7 Interest expense (703 ) (4 ) (699 ) (17475.0 ) Other expense, net (35 ) (98 ) 63 64.3 Other (expense) income, net $ (585 ) $ 28 $ (613 ) (2,189.3 ) Other (Expense) Income, Net. In the three months ended December 31, 2012 as compared to the three months ended December 31, 2011, interest income increased slightly as a result of increased cash balances. Interest expense increased as a result of interest expense related to our Notes and consisted of cash interest expense of $0.1 million, amortization of debt discount of $0.5 million and amortization of debt issuance costs of $0.1 million. The increase in other expense is the result of a decrease in foreign exchange losses in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011. We expect that interest expense will increase during the remainder of fiscal year 2013 as a result of our Notes.

Provision for Income Taxes We recorded an income tax benefit of $1.3 million and income tax expense of $2.4 million for the three months ended December 31, 2012 and 2011, respectively. The income tax benefit for the quarter ended December 31, 2012 was principally due to the impact of our US operations, offset in part by tax expense associated with our UK and Australian operations. The income tax expense recorded for the quarter ended December 31, 2011 was attributable to our UK, Australian, and US operations. The excess of our effective tax rate over statutory tax rates was primarily due to our inability to fully utilize certain UK foreign tax credits in the determination of US taxable income. This has the effect of taxing certain income twice, once in the UK and again in the US, which drives a higher effective tax rate.

Six Months Ended December 31, 2012 Compared to the Six Months Ended December 31, 2011 Segment Information The following tables represent our segment revenues and our segment measure of profit: Six Months Ended Increase (Decrease) December 31, Between Periods 2012 2011 2012 Compared to 2011 (in thousands) (in thousands) % Segment revenue: Payments and Transactional Documents $ 54,408 $ 49,808 $ 4,600 9.2 Banking Solutions 34,974 26,388 8,586 32.5 Outsourced Solutions 35,916 31,374 4,542 14.5 $ 125,298 $ 107,570 $ 17,728 16.5 Segment measure of profit: Payments and Transactional Documents $ 13,368 $ 12,159 $ 1,209 9.9 Banking Solutions 2,834 4,886 (2,052 ) (42.0 ) Outsourced Solutions 4,676 5,235 (559 ) (10.7 ) Total measure of segment profit $ 20,878 $ 22,280 $ (1,402 ) (6.3 ) 26 -------------------------------------------------------------------------------- Table of Contents A reconciliation of the measure of segment profit to our GAAP (loss) income for the six months ended December 31, 2012 and 2011, before the provision for income taxes, is as follows: Six Months Ended December 31, 2012 2011 (in thousands) Segment measure of profit $ 20,878 $ 22,280 Less: Amortization of intangible assets (9,513 ) (7,317 ) Stock compensation expense (8,941 ) (6,538 ) Acquisition related expenses (4,280 ) (301 ) Restructuring expenses (1,130 ) (51 ) Add: Loss on derivative instruments, net (4,917 ) - Other expense, net (539 ) (85 ) (Loss) income before income taxes $ (8,442 ) $ 7,988 Payments and Transactional Documents. The revenue increase of $4.6 million for the six months ended December 31, 2012 was primarily attributable to increased software license revenue of $2.2 million, increased service and maintenance revenue of $1.9 million and increased subscriptions and transactions revenue of $0.5 million. The increased revenue includes the favorable effect of foreign exchange rates of $0.1 million. The segment profit increase of $1.2 million for the six months ended December 31, 2012 was attributable to improved gross margins of $3.4 million related primarily to the increased revenue, which was offset in part by increased sales and marketing expenses of $1.5 million and increased product development expenses of $0.5 million.

Banking Solutions. Revenues from our Banking Solutions segment increased $8.6 million as compared to the same period in the prior fiscal year due to an increase in subscriptions and transactions revenue of $16.6 million related to our fiscal year 2012 commercial banking acquisition and an increase of $0.5 million in maintenance revenue which was partially offset by a decrease in professional services revenue of $8.1 million as a result of the completion of several large ongoing banking projects and a decrease in software license revenue of $0.4 million. The profit decrease of $2.1 million was primarily due to increased operating expenses of $7.3 million offset in part by improved gross margins of $5.2 million. The increased operating expenses are primarily the result of increased infrastructure and sales and marketing expenses attributable to investments we are making to support, improve and grow the commercial banking business.

Outsourced Solutions. Revenues from our Outsourced Solutions segment increased $4.5 million as compared to the same period in the prior fiscal year due primarily to an increase in the revenue contribution from our legal spend management solutions of $1.3 million, our SWIFT Access Service solution of $1.0 million and our Paymode-X solution of $2.4 million. The segment profit decreased $0.6 million for the six months ended December 31, 2012 compared to the same period in the prior year, as lower margins related to our Paymode-X solution and increased operating expenses offset improved margins in our European solutions.

Revenues by category Increase (Decrease) Six Months Ended December 31, Between Periods 2012 2011 2012 Compared to 2011 As % of As % of total total (in thousands) Revenues (in thousands) Revenues (in thousands) % Revenues: Subscriptions and transactions $ 58,908 47.0 $ 36,648 34.1 $ 22,260 60.7 Software licenses 10,168 8.1 8,435 7.8 1,733 20.5 Service and maintenance 52,190 41.7 58,516 54.4 (6,326 ) (10.8 ) Equipment and supplies 4,032 3.2 3,971 3.7 61 1.5 Total revenues $ 125,298 100.0 $ 107,570 100.0 $ 17,728 16.5 27 -------------------------------------------------------------------------------- Table of Contents Subscriptions and Transactions. The increase in subscriptions and transactions revenues of $22.3 million was due principally to the increased revenue from our Banking Solutions segment of $16.6 million, our Outsourced Solutions segment of $5.1 million, which includes increased revenue from our legal spend management solution of $1.3 million, SWIFT Access Service of $1.4 million, and Paymode-X of $2.4 million, and the revenue increase from our Payments and Transactional Documents segment of $0.5 million. The increase in revenues from our Banking Solutions segment is primarily attributable to our fiscal year 2012 commercial banking acquisition.

Software Licenses. The increase in software license revenues was due to an increase in European revenue of $1.1 million from certain of our payment and document automation products partially the result of our acquisition of Albany and $1.0 million in US revenues in our payment and document automation products partially offset by decreases in revenue from our Banking Solutions segment of $0.4 million.

Service and Maintenance. The decrease in service and maintenance revenues was primarily the result of decreased professional services revenues within our Banking Solutions segment of $8.1 million associated with the recent completion of several large banking projects and decreased European service and maintenance revenues of $0.6 million in our Outsourced Solutions segment partially offset by increased revenue from our Payments and Transactional Documents segment of $1.7 million primarily a result of our acquisition of Albany and increased maintenance revenue of $0.5 million associated with our Banking Solutions Segment.

Equipment and Supplies. The slight increase in equipment and supplies revenues was principally due to an increase in revenue from our European payments and transactional document products.

Cost of revenues by category Increase (Decrease) Six Months Ended December 31, Between Periods 2012 2011 2012 Compared to 2011 As % of As % of total total (in thousands) Revenues (inthousands) Revenues (in thousands) % Cost of revenues: Subscriptions and transactions $ 30,844 24.6 $ 18,300 17.0 $ 12,544 68.5 Software licenses 1,026 0.8 964 0.9 62 6.4 Service and maintenance 24,271 19.4 25,399 23.6 (1,128 ) (4.4 ) Equipment and supplies 3,062 2.4 3,136 2.9 (74 ) (2.4 ) Total cost of revenues $ 59,203 47.2 $ 47,799 44.4 $ 11,404 23.9 Gross profit $ 66,095 52.8 $ 59,771 55.6 $ 6,324 10.6 Subscriptions and Transactions. Subscriptions and transactions costs increased to 52% of subscriptions and transactions revenues in the six months ended December 31, 2012 as compared to 50% in the six months ended December 31, 2011.

The increase in subscriptions and transactions costs as a percentage of revenue was due primarily to increased costs in our Banking Solutions segment related to the integration and migration of our commercial banking customers and lower gross margins in our European sales of payments and transactional documents.

Software Licenses. Software license costs remained consistent at 10% of software license revenues in the six months ended December 31, 2012 as compared to 11% for the six months ended December 31, 2011.

Service and Maintenance. Service and maintenance costs increased as a percentage of service and maintenance revenues to 47% in the six months ended December 31, 2012 as compared to 43% for the six months ended December 31, 2011. The increased service and maintenance costs as a percentage of revenue was primarily a result of the decrease in revenue upon the recent completion of several large projects in our Banking Solutions segment.

Equipment and Supplies. Equipment and supplies costs decreased to 76% of equipment and supplies revenues in the six months ended December 31, 2012 as compared to 79% of equipment and supplies revenues in the six months ended December 31, 2011 as a result of a slight decrease in costs along with slight revenue increases in our payments and transactional document products segment.

28 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Increase Six Months Ended December 31, Between Periods 2012 Compared to 2012 2011 2011 As % of As % of total total (in thousands) revenues (in thousands) revenues (in thousands) % Operating expenses: Sales and marketing $ 29,808 23.8 $ 22,672 21.1 $ 7,136 31.5 Product development and engineering 16,732 13.3 11,864 11.0 4,868 41.0 General and administrative 13,028 10.4 9,845 9.2 3,183 32.3 Amortization of intangible assets 9,513 7.6 7,317 6.8 2,196 30.0 Total operating expenses $ 69,081 55.1 $ 51,698 48.1 $ 17,383 33.6 Sales and Marketing. Sales and marketing expenses increased $7.1 million in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011 as a result of an increase in employee related costs of $5.2 million, primarily due to the impact of our fiscal year 2013 and 2012 acquisitions and increased costs in our Banking Solutions segment, as well as increased travel related expenses of $0.5 million, increased professional services expense of $0.3 million, increased acquisition related expenses of $0.3 million and increased restructuring charges of $0.2 million.

Product Development and Engineering. The increase in product development and engineering expenses was primarily attributable to increased employee related costs of $3.3 million and increased professional services expense of $1.3 million.

General and Administrative. The increase in general and administrative expenses of $3.2 million was principally attributable to an increase in employee related costs of $1.5 million, acquisition related costs of $1.4 million and restructuring costs of $0.4 million.

Amortization of Intangible Assets. We amortize our intangible assets in proportion to the estimated rate at which the asset provides economic benefit to us. Accordingly, amortization expense rates are often higher in the earlier periods of an asset's estimated life. The increase in amortization expense in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011 occurred as a result of increased expense from intangible assets associated with our fiscal year 2013 and 2012 acquisitions.

Loss on Derivative Instruments Six Months Ended (Decrease) December 31, Between Periods 2012 Compared 2012 2011 to 2011 (in thousands) % Loss on derivative instruments, net $ (4,917 ) $ - $ (4,917 ) - Loss on Derivative Instruments, net. During the six months ended December 31, 2012 we recorded a loss of $4.9 million related to changes in fair value of derivative instruments associated with our Notes; there were no similar derivative instruments during the six months ended December 31, 2011.

Other Expense, Net Six Months Ended Increase (Decrease) December 31, Between Periods 2012 Compared 2012 2011 to 2011 (in thousands) % Interest income $ 278 $ 244 $ 34 13.9 Interest expense (704 ) (20 ) (684 ) (3,420.0 ) Other expense, net (113 ) (309 ) 196 63.4 Other expense, net $ (539 ) $ (85 ) $ (454 ) (534.1 ) Other Expense, Net. For the six months ended December 31, 2012 as compared to the six months ended December 31, 2011, interest income increased slightly as a result of increased cash balances. Interest expense increased as a result of 29 -------------------------------------------------------------------------------- Table of Contents interest expense related to our Notes and consisted of cash interest expense of $0.1 million, amortization of debt discount of $0.1 million and amortization of debt issuance costs of $0.5 million. The increase in other expense is the result of a decrease in foreign exchange losses in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011.

Provision for Income Taxes We recorded an income tax benefit of $1.4 million and income tax expense of $3.8 million for the six months ended December 31, 2012 and 2011, respectively. The income tax benefit for the six months ended December 31, 2012 was principally due to the impact of our US operations, offset in part by tax expense associated with our UK and Australian operations. The income tax expense for the six months ended December 31, 2011 was primarily attributable to our UK, Australian and US operations. The excess of our effective tax rate over statutory tax rates was primarily due to our inability to fully utilize certain UK foreign tax credits in the determination of US taxable income. This has the effect of taxing certain income twice, once in the UK and again in the US, which drives a higher effective tax rate.

We currently anticipate that our unrecognized tax benefits will decrease within the next twelve months by approximately $0.1 million as a result of the expiration of certain statutes of limitations associated with intercompany transactions subject to tax in multiple jurisdictions.

Liquidity and Capital Resources We have financed our operations primarily from cash provided by operating activities and the sale of our common stock and, with the issuance of the Notes in December 2012, with debt proceeds. We have generated positive operating cash flows in each of our last eleven completed fiscal years. Accordingly, we believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our operating requirements for the foreseeable future.

In December 2012, we completed an underwritten public offering of $189.8 million aggregate principal amount of our 1.50% Convertible Senior Notes due December 1, 2017, (see Note 10 - Convertible Senior Notes). There are no restrictive covenants associated with these Notes. In connection with the Notes we also entered into convertible note hedge instruments at a purchase cost of $42.3 million, and sold warrants for proceeds of $25.8 million.

On October 25, 2012, we acquired the assets of 5280 Dynamic Solutions LLC (5280) in exchange for a cash payment of $1.6 million.

On September 11, 2012, we completed the acquisition of Albany for a cash payment of £20 million (approximately $32 million based on exchange rates in effect at the acquisition date).

In addition to our operating requirements, we will require cash to pay interest on the Notes and to make principal payments on the Notes at maturity or upon conversion. As of January 17, 2013 we are permitted to settle any conversion obligation under the Notes 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 believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our future obligations. If our existing cash resources along with cash generated from operations is insufficient to satisfy our funding requirements we may need to sell additional equity or debt securities or seek other financing arrangements. Although we believe based on our operations today that we would be successful in obtaining additional financing were that to be required, we cannot be certain that financing alternatives will be available in amounts or at terms that are acceptable to us, or available to us at all.

30-------------------------------------------------------------------------------- Table of Contents One of our goals is to maintain and improve our capital structure. The key metrics we focus on in assessing the strength of our liquidity and a summary of our cash activity for the six months ended December 31, 2012 and 2011 are summarized in the tables below: December 31, June 30, 2012 2012 (in thousands) Cash, cash equivalents and marketable securities $ 280,891 $ 124,862 Six Months Ended December 31, 2012 2011 (in thousands) Cash provided by operating activities $ 19,570 $ 14,334 Cash used in investing activities (35,075 ) (6,875 ) Cash provided by financing activities 169,537 13,258 Effect of exchange rates on cash 1,996 (1,338 ) Cash, cash equivalents and marketable securities. At December 31, 2012 our cash and cash equivalents consisted primarily of cash deposits held at major banks, money market funds and marketable securities. The increase in cash, cash equivalents and marketable securities at December 31, 2012 from June 30, 2012 was primarily due to the net proceeds received under our convertible debt issuance in December 2012 of $167.4 million and $19.6 million of cash generated from operations. This was offset in part by the use of $29.9 million in cash related to business acquisitions we completed during the six months ended December 31, 2012 and $5.2 million used to purchase property and equipment.

Cash, cash equivalents and marketable securities included $56.9 million held by our foreign subsidiaries as of December 31, 2012, of which $16.7 million would be subject to US tax rates if we sought to use those amounts to fund domestic operations. We intend to continue to permanently reinvest our earnings from foreign subsidiaries, and we currently do not anticipate that we will need funds generated from foreign subsidiaries to fund our domestic operations. If in the future we were to change our intention with respect to permanent reinvestment of earnings from our foreign subsidiaries, any foreign earnings that had previously not been taxed in the US would generally become subject to US tax at statutory rates. Cash and cash equivalents held by our foreign subsidiaries are denominated in currencies other than US Dollars. Accordingly, increases in the foreign currency exchange rates of the British Pound Sterling, European Euro, and Australian Dollar to the US Dollar increased our overall cash balances by approximately $2.0 million in the six months ended December 31, 2011. Further changes in the foreign currency exchange rates of these currencies could have a significant effect on our overall cash balances. However, we continue to believe that our existing cash balances, even in light of the foreign currency volatility we frequently experience, are adequate to meet our operating requirements for the foreseeable future.

Operating Activities. Cash generated from operating activities primarily relates to our net income, less the impact of non-cash expenses and changes in working capital. Cash generated from operations increased by $5.2 million during the six months ended December 31, 2012 as compared to the same period in the prior year.

The increase was primarily due to a decrease in cash used in accounts receivable of $4.1 million, an increase in cash provided by deferred revenue of $2.6 million, and a decrease in cash used for accounts payable of $1.6 million, which was offset in part by a decrease in cash provided by prepaid assets of $0.5 million and a decrease in cash provided by other assets of $0.3 million when compared to the same period in the prior year.

At December 31, 2012, a portion of the deferred tax assets associated with our US and European operations have been reserved since, given the available evidence, it was deemed more likely than not that these deferred tax assets would not be realized.

At December 31, 2012, we had US net operating loss carryforwards of $51.3 million, which expire at various times through the year 2031 and foreign net operating loss carryforwards (primarily in Europe) of $8.7 million, which have no statutory expiration date. We also have approximately $2.7 million of research and development tax credit carryforwards available which expire at various points through the year 2032. Our operating losses and tax credit carryforwards may be subject to limitations under provisions of the Internal Revenue Code.

Investing Activities. The increase in net cash used in investing activities for the six months ended December 31, 2012 compared to the six months ended December 31, 2011 was predominantly due to the $29.9 million of cash used to fund current year acquisitions as compared to the $2.9 million of cash used during the six months ended December 31, 2011.

31-------------------------------------------------------------------------------- Table of Contents Financing Activities. The increase in cash inflows from financing activities relates primarily to the proceeds, net of debt issuance costs, received from the issuance of the Notes of $184.0 million, offset in part by net cash used of $16.6 related to our purchase of Note Hedges and a sale of Warrants in connection with the Notes.

Off-Balance Sheet Arrangements During the six months ended December 31, 2012, we did not engage in material off-balance sheet activities, including the use of structured finance, special purpose or variable interest entities, material trading activities in non-exchange traded commodity contracts or transactions with persons or entities that benefit from their non-independent relationship with us.

Contractual Obligations Following is a summary of future payments that we are required to make under existing contractual obligations as of December 31, 2012: Payments Due by Period * Less Than 1 More Than 5 Total Year 1-3 Years 4-5 Years Years (in thousands) Convertible senior notes $ 189,750 $ - $ - $ 189,750 $ - Interest on convertible senior notes 14,144 1,573 8,539 4,032 - Operating lease obligations 20,651 1,633 7,898 4,378 6,742 Capital lease obligations (inclusive of interest) 46 46 - - - Other contractual obligations 8,030 3,589 3,681 760 - Total $ 232,621 $ 6,841 $ 20,118 $ 198,920 $ 6,742 * Payment due dates are calculated from our most recent fiscal year end of June 30, 2012.

Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual obligation amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contract that we can cancel without a significant penalty are not included in the table above. Derivative liabilities of $64.0 million as of December 31, 2012 are not included in the table above. Also excluded from the table is our estimate of unrecognized tax benefits as of December 31, 2012 in the amount of $0.8 million. The derivative liabilities and unrecognized tax benefits have been excluded because, as of December 31, 2012, we are unable to estimate the timing of future cash outflows, if any, associated with these liabilities as we do not currently anticipate settling any of these liabilities with cash payment in the foreseeable future.

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