<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-24931
------------------------
S1 CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 58-2395199
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3390 PEACHTREE ROAD, NE, SUITE 1700
ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 812-6200
NOT APPLICABLE
(Former name if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]. No [ ].
Shares of common stock outstanding as of November 13, 2000: 56,144,387
--------------------------------------------------------------------------------
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<PAGE> 2
S1 CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 197,895 $ 67,850
Investment securities available for sale (cost of $1,343
at September 30, 2000 and $1,800 at December 31,
1999)................................................... 22,612 62,754
Accounts receivable, net of allowance for doubtful
accounts and billing adjustments of $8,512 at September
30, 2000 and $8,584 at December 31, 1999................ 95,739 70,136
Notes receivable.......................................... 1,000 1,500
Prepaid expenses.......................................... 7,240 6,625
Other current assets...................................... 2,973 678
---------- ----------
Total current assets............................... 327,459 209,543
Property and equipment, net............................... 62,823 24,580
Intangible assets, net.................................... 88,797 106,508
Goodwill, net............................................. 925,207 788,293
Other assets.............................................. 8,427 3,563
---------- ----------
Total assets....................................... $1,412,713 $1,132,487
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,655 $ 29,493
Accrued salaries and benefits............................. 10,647 12,123
Accrued other expenses.................................... 42,199 44,122
Deferred revenues......................................... 24,105 20,469
Notes payable............................................. 4,118 6,351
Current portion of capital lease obligation............... 6,096 759
---------- ----------
Total current liabilities.......................... 93,820 113,317
Deferred revenues......................................... 5,293 9,283
Capital lease obligation, excluding current portion....... 10,095 1,086
Deferred tax liability.................................... 15,386 15,386
Other liabilities......................................... 2,618 2,608
---------- ----------
Total liabilities.................................. 127,212 141,680
---------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 25,000,000
shares. Issued and outstanding 1,186,564 and 1,393,014
shares at September 30, 2000 and December 31, 1999,
respectively............................................ 252,781 23,089
Common stock, $0.01 par value. Authorized 350,000,000
shares. Issued and outstanding 55,868,136 and 48,831,243
shares at September 30, 2000 and December 31, 1999,
respectively............................................ 558 488
Additional paid-in capital................................ 1,595,555 1,126,607
Receivable from the sale of stock......................... (12,057) (11,735)
Accumulated deficit....................................... (572,231) (207,927)
Accumulated other comprehensive income:
Net unrealized gains on investment securities available
for sale, net of taxes................................. 20,483 60,143
Cumulative foreign currency translation adjustment, net
of taxes............................................... 412 142
---------- ----------
Total stockholders' equity......................... 1,285,501 990,807
---------- ----------
Total liabilities and stockholders' equity......... $1,412,713 $1,132,487
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 3
S1 CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Software licenses....................... $ 14,586 $ 2,260 $ 40,635 $ 6,898
Professional services................... 42,206 14,769 113,818 33,402
Data center............................. 5,789 2,072 14,613 5,663
Other................................... 1,798 5,698 4,766 6,511
----------- ----------- ----------- -----------
Total revenues.................. 64,379 24,799 173,832 52,474
----------- ----------- ----------- -----------
Operating expenses:
Cost of software licenses............... 1,136 99 3,883 331
Cost of professional services, excluding
stock compensation expense of $24 and
$88 in 2000 and 1999, respectively... 28,471 8,480 80,220 19,866
Cost of data center..................... 4,915 2,163 13,073 5,879
Cost of other revenues.................. 1,542 4,425 4,220 5,102
Selling and marketing, excluding stock
compensation expense of $564 in
2000................................. 13,666 1,153 38,468 3,406
Product development, excluding stock
compensation expense of $1,274 and
$204 in 2000 and 1999,
respectively......................... 16,924 5,221 47,746 13,981
General and administrative, excluding
stock compensation expense of $2,195
and $29 in 2000 and 1999,
respectively......................... 10,350 3,291 31,152 6,985
Depreciation and amortization........... 6,536 1,465 16,069 3,926
Stock option compensation expense....... 1,333 107 4,057 321
Marketing cost from warrants issued..... -- -- 4,962 --
Merger related costs.................... 5,055 1,851 18,213 2,101
Acquired in-process research and
development.......................... -- -- 14,100 --
Amortization of acquisition
intangibles.......................... 112,360 -- 301,873 206
----------- ----------- ----------- -----------
Total operating expenses........ 202,288 28,255 578,036 62,104
----------- ----------- ----------- -----------
Operating loss.................. (137,909) (3,456) (404,204) (9,630)
Interest and investment income............ 1,809 777 39,900 1,531
----------- ----------- ----------- -----------
Net loss.................................. $ (136,100) $ (2,679) $ (364,304) $ (8,099)
=========== =========== =========== ===========
Basic and diluted net loss per common
share................................... $ (2.46) $ (0.10) $ (6.83) $ (0.31)
=========== =========== =========== ===========
Weighted average common shares
outstanding............................. 55,389,682 27,628,446 53,359,206 26,136,974
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
S1 CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D COMMON STOCK
------------------ ----------------- ----------------- ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------- ------- ------- ------- ------- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1999... 428,950 $1,062 749,064 $10,000 215,000 $12,027 -- -- 48,831,243 $488
Net loss.................... -- -- -- -- -- -- -- -- -- --
Change in net unrealized
gains on investment
securities available for
sale, net of taxes......... -- -- -- -- -- -- -- -- -- --
Change in cumulative foreign
currency translation
adjustment, net of taxes... -- -- -- -- -- -- -- -- -- --
Realized gain on sale of
investment securities...... -- -- -- -- -- -- -- -- -- --
Proceeds from issuance of
preferred stock, net of
expenses................... -- -- -- -- -- -- 244,000 $231,957 -- --
Conversion of preferred
stock to common stock...... (428,950) (1,062) -- -- (21,500) (1,203) -- -- 900,900 9
Payment on receivable from
the sale of stock.......... -- -- -- -- -- -- -- -- -- --
Interest earned on
receivable from the sale of
stock...................... -- -- -- -- -- -- -- -- -- --
Common stock sold under
Employee Stock Purchase and
Option Plans............... -- -- -- -- -- -- -- -- 3,432,498 34
Deferred stock option
compensation expense....... -- -- -- -- -- -- -- -- -- --
Warrants issued in
connection with marketing
agreements................. -- -- -- -- -- -- -- -- -- --
Issuance of common stock in
connection with
acquisitions............... -- -- -- -- -- -- -- -- 2,703,495 27
Comprehensive loss..........
-------- ------- ------- ------- ------- ------- ------- -------- ---------- ----
Balance September 30,
2000....................... -- $ -- 749,064 $10,000 193,500 $10,824 244,000 $231,957 55,868,136 $558
======== ======= ======= ======= ======= ======= ======= ======== ========== ====
<CAPTION>
RECEIVABLE ACCUMULATED
ADDITIONAL FROM THE OTHER TOTAL
PAID-IN SALE OF ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
CAPITAL STOCK DEFICIT INCOME EQUITY INCOME (LOSS)
---------- ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1999... $1,126,607 $(11,735) $(207,927) $ 60,285 $ 990,807
Net loss.................... -- -- (364,304) -- (364,304) $(364,304)
Change in net unrealized
gains on investment
securities available for
sale, net of taxes......... -- -- -- (16,154) (16,154) (16,154)
Change in cumulative foreign
currency translation
adjustment, net of taxes... -- -- -- 270 270 270
Realized gain on sale of
investment securities...... -- -- -- (23,506) (23,506) --
Proceeds from issuance of
preferred stock, net of
expenses................... -- -- -- -- 231,957 --
Conversion of preferred
stock to common stock...... 2,256 -- -- -- -- --
Payment on receivable from
the sale of stock.......... -- 451 -- -- 451 --
Interest earned on
receivable from the sale of
stock...................... 773 (773) -- -- -- --
Common stock sold under
Employee Stock Purchase and
Option Plans............... 16,672 -- -- -- 16,706 --
Deferred stock option
compensation expense....... 3,686 -- -- -- 3,686 --
Warrants issued in
connection with marketing
agreements................. 4,962 -- -- -- 4,962 --
Issuance of common stock in
connection with
acquisitions............... 440,599 -- -- -- 440,626 --
---------
Comprehensive loss.......... $(380,188)
---------- -------- --------- -------- ---------- =========
Balance September 30,
2000....................... $1,595,555 $(12,057) $(572,231) $ 20,895 $1,285,501
========== ======== ========= ======== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
S1 CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(364,304) $ (8,099)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization including acquisition
charges............................................... 317,942 4,164
Acquired in-process research and development........... 14,100 --
Compensation and marketing expense for stock options
and warrant........................................... 8,648 321
Provision for doubtful accounts receivable and billing
adjustments........................................... 3,155 449
Gain on the sale of investment securities available for
sale.................................................. (35,057) --
Increase in accounts receivable........................ (26,694) (5,070)
Increase in prepaid expenses and other assets.......... (1,196) (5,192)
Decrease in accounts payable........................... (23,063) (1,267)
(Decrease) increase in accrued expenses and other
liabilities........................................... (6,972) 4,244
Decrease in deferred revenue........................... (4,089) (3,519)
--------- --------
Net cash used in operating activities................ (117,530) (13,969)
--------- --------
Cash flows from investing activities:
Net cash acquired (advanced) in connection with
acquisitions........................................... 6,040 (31,000)
Proceeds from sales of investment securities available for
sale................................................... 36,546 --
Investments in and advances to unconsolidated companies... (6,883) --
Proceeds from payment on notes receivable................. 500 --
Purchases of property and equipment and purchased
technology............................................. (32,084) (9,555)
--------- --------
Net cash provided by (used in) investing
activities.......................................... 4,119 (40,555)
--------- --------
Cash flows from financing activities:
Sale of preferred stock, net of expenses.................. 231,957 --
Sale of common stock, net of expenses..................... -- 63,959
Proceeds from payment on subscription receivables......... 451 962
Proceeds from sale of common stock under employee stock
purchase and option plans.............................. 16,706 4,749
Payments on capital lease obligations..................... (3,344) (825)
Payments on borrowings.................................... (2,242) --
--------- --------
Net cash provided by financing activities............ 243,528 68,845
--------- --------
Effect of exchange rate changes on cash..................... (72) 5
--------- --------
Net increase in cash........................................ 130,045 14,326
Cash and cash equivalents at beginning of period............ 67,850 14,504
--------- --------
Cash and cash equivalents at end of period.................. $ 197,895 $ 28,830
--------- --------
Noncash financing activities:
Conversion of preferred stock to common stock............. $ 2,265 $ 798
Issuance of Series C Preferred Stock in exchange for
subscription receivable................................ -- 12,027
Acquisition of businesses through issuance of common
stock.................................................. 440,626 --
Capital lease obligations................................. 17,703 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
S1 CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
S1 is a leading global provider of innovative eFinance solutions and
services that are centered on banking, brokerage and insurance. S1 is enabling
financial service providers to create a complete Enterprise eFinance
Experience(TM) by delivering the tools necessary to meet the evolving demands of
their customers across various lines of businesses, market segments and delivery
channels. Through its Open eFinance Architecture(TM), S1 offers a broad range of
applications that empower financial institutions to increase revenue, strengthen
customer relationships and gain competitive advantage. Additionally, through the
Company's professional services organization, S1 applications can be implemented
in-house or hosted in an S1 data center.
The consolidated financial statements include the accounts of S1 and its
wholly owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation. The consolidated financial statements for
the three and nine month periods ended September 30, 2000 and 1999 are unaudited
and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash flows. The
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
present fairly the Company's consolidated financial statements. The results of
operations for the three and nine months ended September 30, 2000 are not
necessarily indicative of the expected results for the year ending December 31,
2000.
2. BUSINESS COMBINATIONS
On April 7, 2000, the Company completed the acquisition of Q Up Systems,
Inc. ("Q Up"), a leading provider of Internet banking and e-commerce portal
solutions for financial institutions, primarily community banks. On April 12,
2000, the Company completed the acquisition of Davidge Data Systems Corp.
("Davidge"), a software company that specializes in middleware and order routing
software and systems for the brokerage industry. Both acquisitions have been
accounted for using the purchase method of accounting with the excess of the
purchase price over the estimated fair value of the net assets recorded as
goodwill. The consolidated financial statements include the results of
operations of Q Up and Davidge from April 7, 2000 and April 1, 2000,
respectively.
The Company issued 2,453,345 shares of common stock with a value of
approximately $271.3 million for all of the outstanding shares of Q Up.
Approximately, 237,000 of the total shares exchanged were issued to escrow in
connection with a general indemnity provision. The Company also exchanged all
outstanding options to purchase Q Up stock into 1,381,824 options to purchase S1
common stock with an estimated fair value of $143.0 million. Of the total
purchase price of $414.9 million, which includes $0.7 million of costs incurred
directly related to the acquisition, $3.4 million was allocated to net assets
acquired, $12.6 million to identifiable intangible assets, $384.8 million to
goodwill and $14.1 million to in-process research and development. The
in-process research and development was expensed upon the closing of the
acquisition. Amounts allocated to goodwill, developed technology, and customer
lists are being amortized on a straight-line basis over three years. The
intangible asset related to the assembled work force is being amortized on a
straight-line basis over five years.
The Company issued 250,150 shares of common stock with a value of
approximately $25.1 million for all of the outstanding shares of Davidge. The
Company also exchanged all outstanding options to purchase Davidge stock into
17,615 options to purchase S1 common stock with an estimated fair value of $1.2
million. Of the total purchase price of $27.0 million, which includes $0.6
million of acquisition costs, $0.5 million was allocated to net assets acquired
and $26.5 million to goodwill. The amount allocated to goodwill is being
amortized on a straight-line basis over three years.
6
<PAGE> 7
Unaudited pro forma results of operations of the Company for the nine
months ended September 30, 2000 and 1999 would not be materially different as a
result of the acquisitions of Q Up and Davidge and are, therefore, not
presented.
3. COMMITMENTS AND CONTINGENCIES
In the second quarter of 2000, the Company was named in a number of related
shareholder lawsuits (see Part II, Item 1 of this Form 10-Q). The ultimate
results and outcomes of these actions and claims cannot be determined at this
time. An adverse verdict could have a material impact on the Company.
4. STOCKHOLDERS' EQUITY
Basic net loss per share is calculated as loss available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated to reflect the
potential dilution that would occur if stock options or other contracts to issue
common stock were exercised and resulted in additional common stock that would
share in the earnings of the Company. Because of the Company's net losses, the
issuance of additional shares of common stock under stock options and warrants
or upon the conversion of preferred stock would be antidilutive. The total
number of common shares that would have been used in the Company's computation
of diluted earnings per share for the three month period ended September 30,
2000 and 1999 was 68,036,634 and 37,725,143, respectively. The total number of
common shares that would have been used in the Company's computation of diluted
earnings per share for the nine month period ended September 30, 2000 and 1999
was 71,717,822 and 36,260,699, respectively.
On May 25, 2000, the Company issued a total of 244,000 shares of newly
authorized convertible preferred stock ("Series D") to five purchasers for a
total of approximately $244 million in cash. The preferred stock is convertible
into common stock at a rate of 29.283 per share. The terms of the Series D
Preferred Stock provide the holders with identical rights to common stockholders
with respect to dividends and distributions in the event of liquidation,
dissolution, or winding up of the Company. The holders of the Series D Preferred
Stock are entitled to voting rights equal to those of the common stockholders.
5. SEGMENT REPORTING
In the third quarter of 2000, S1 began to operate and manage the Company in
four business segments: Large Financial Institution, Community Bank, Call Center
Technology and Internet Aggregation. The Large Financial Institution and
Community Bank segments build, deliver and operate integrated, transactional and
brandable Internet applications for financial institutions worldwide, available
as an in-house solution or outsourced to an S1 data center. While the Large
Financial Institution segment provides highly customized solutions to large
global and national financial institutions, the Community Bank segment provides
solutions that require little or no customization and are primarily sold to
local and regional banks. Through the Call Center Technology, S1 offers
interactive voice response and voice e-Commerce technology. The Internet
Aggregation segment provides technology that enables consumers to aggregate
personal account information from multiple sources. S1 manages the business
based on these operating segments.
S1 evaluates the performance of its operating segments based on revenues,
direct costs, gross margins and operating expenses, excluding depreciation and
amortization, stock option compensation expense, marketing cost from warrants
issued, merger related costs, acquired in-process research and development,
interest and investment income and amortization of acquisition intangibles. In
addition, the Company provides general and administrative services to the
operating segments on a shared service basis and does not allocate these costs
to the individual segments, therefore the general and administrative costs are
included in the other category. The Company does not produce reports that
measure the performance according to any asset-based metrics.
7
<PAGE> 8
STATEMENTS OF OPERATIONS BY SEGMENT
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------
INTERNET CALL
LARGE COMMUNITY AGGRE- CENTER
FI BANK GATION TECH OTHER TOTAL
------- --------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses.... $ 5,048 $3,268 $ -- $ 6,270 $ -- $ 14,586
Professional
services........... 36,672 1,462 -- 4,072 -- 42,206
Data center.......... 4,845 385 559 -- -- 5,789
Other................ 1,798 -- -- -- -- 1,798
------- ------ ------- ------- -------- --------
Total revenues..... 48,363 5,115 559 10,342 -- 64,379
------- ------ ------- ------- -------- --------
DIRECT COSTS:
Software licenses.... 3 556 -- 577 -- 1,136
Professional
services........... 24,910 1,120 -- 2,441 -- 28,471
Data center.......... 4,114 175 626 -- -- 4,915
Other................ 1,542 -- -- -- -- 1,542
------- ------ ------- ------- -------- --------
Total direct
costs............ 30,569 1,851 626 3,018 -- 36,064
------- ------ ------- ------- -------- --------
Gross margin....... 17,794 3,264 (67) 7,324 -- 28,315
------- ------ ------- ------- -------- --------
OPERATING EXPENSES:
Selling and
marketing.......... 6,184 1,829 1,474 4,179 -- 13,666
Product
development........ 11,192 282 3,047 2,403 -- 16,924
General and
administrative..... -- -- -- -- 10,350 10,350
------- ------ ------- ------- -------- --------
Total operating
expenses......... 17,376 2,111 4,521 6,582 10,350 40,940
------- ------ ------- ------- -------- --------
Operating income
(loss)*.............. $ 418 $1,153 $(4,588) $ 742 $(10,350) $(12,625)
======= ====== ======= ======= ======== ========
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------
INTERNET CALL
LARGE COMMUNITY AGGRE- CENTER
FI BANK GATION TECH OTHER TOTAL
------- --------- -------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses.... $ 2,260 $-- $-- $-- $ -- $ 2,260
Professional
services........... 14,769 -- -- -- -- 14,769
Data center.......... 2,072 -- -- -- -- 2,072
Other................ 5,698 -- -- -- -- 5,698
------- -- -- -- ------- -------
Total revenues..... 24,799 -- -- -- -- 24,799
------- -- -- -- ------- -------
DIRECT COSTS:
Software licenses.... 99 -- -- -- -- 99
Professional
services........... 8,480 -- -- -- -- 8,480
Data center.......... 2,163 -- -- -- -- 2,163
Other................ 4,425 -- -- -- -- 4,425
------- -- -- -- ------- -------
Total direct
costs............ 15,167 -- -- -- -- 15,167
------- -- -- -- ------- -------
Gross margin....... 9,632 -- -- -- -- 9,632
------- -- -- -- ------- -------
OPERATING EXPENSES:
Selling and
marketing.......... 1,153 -- -- -- -- 1,153
Product
development........ 5,221 -- -- -- -- 5,221
General and
administrative..... -- -- -- -- 3,291 3,291
------- -- -- -- ------- -------
Total operating
expenses......... 6,374 -- -- -- 3,291 9,665
------- -- -- -- ------- -------
Operating income
(loss)*.............. $ 3,258 $-- $-- $-- $(3,291) $ (33)
======= == == == ======= =======
</TABLE>
8
<PAGE> 9
STATEMENTS OF OPERATIONS BY SEGMENT
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------
INTERNET CALL
LARGE COMMUNITY AGGRE- CENTER
FI BANK GATION TECH OTHER TOTAL
-------- --------- -------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses.... $ 13,082 $6,552 $ -- $21,001 $ -- $ 40,635
Professional
services........... 99,759 2,568 -- 11,491 -- 113,818
Data center.......... 12,506 650 1,457 -- -- 14,613
Other................ 4,766 -- -- -- -- 4,766
-------- ------ -------- ------- -------- ---------
Total revenues..... 130,113 9,770 1,457 32,492 -- 173,832
-------- ------ -------- ------- -------- ---------
DIRECT COSTS:
Software licenses.... 102 741 -- 3,040 -- 3,883
Professional
services........... 70,524 1,851 -- 7,845 -- 80,220
Data center.......... 11,485 297 1,291 -- -- 13,073
Other................ 4,220 -- -- -- -- 4,220
-------- ------ -------- ------- -------- ---------
Total direct
costs............ 86,331 2,889 1,291 10,885 -- 101,396
-------- ------ -------- ------- -------- ---------
Gross margin....... 43,782 6,881 166 21,607 -- 72,436
-------- ------ -------- ------- -------- ---------
OPERATING EXPENSES:
Selling and
marketing.......... 19,715 3,156 3,658 11,939 -- 38,468
Product
development........ 34,102 761 6,755 6,128 -- 47,746
General and
administrative..... -- -- -- 31,152 31,152
-------- ------ -------- ------- -------- ---------
Total operating
expenses......... 53,817 3,917 10,413 18,067 31,152 117,366
-------- ------ -------- ------- -------- ---------
Operating income
(loss)*.............. $(10,035) $2,964 $(10,247) $ 3,540 $(31,152) $ (44,930)
======== ====== ======== ======= ======== =========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------
INTERNET CALL
LARGE COMMUNITY AGGRE- CENTER
FI BANK GATION TECH OTHER TOTAL
------- --------- -------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses.... $ 6,898 $-- $-- $-- $ -- $ 6,898
Professional
services........... 33,402 -- -- -- -- 33,402
Data center.......... 5,663 -- -- -- -- 5,663
Other................ 6,511 -- -- -- -- 6,511
------- -- -- -- ------- -------
Total revenues..... 52,474 -- -- -- -- 52,474
------- -- -- -- ------- -------
DIRECT COSTS:
Software licenses.... 331 -- -- -- -- 331
Professional
services........... 19,866 -- -- -- -- 19,866
Data center.......... 5,879 -- -- -- -- 5,879
Other................ 5,102 -- -- -- -- 5,102
------- -- -- -- ------- -------
Total direct
costs............ 31,178 -- -- -- -- 31,178
------- -- -- -- ------- -------
Gross margin....... 21,296 -- -- -- -- 21,296
------- -- -- -- ------- -------
OPERATING EXPENSES:
Selling and
marketing.......... 3,406 -- -- -- -- 3,406
Product
development........ 13,981 -- -- -- -- 13,981
General and
administrative..... -- -- -- -- 6,985 6,985
------- -- -- -- ------- -------
Total operating
expenses......... 17,387 -- -- -- 6,985 24,372
------- -- -- -- ------- -------
Operating income
(loss)*.............. $ 3,909 $-- $-- $-- $(6,985) $(3,076)
======= == == == ======= =======
</TABLE>
---------------
* Excluding depreciation and amortization, stock option compensation expense,
marketing cost from warrants issued, merger related costs, acquired in-process
R&D, amortization of acquisition intangibles and interest & investment income.
For the three and nine months ended September 30, 2000, one major customer
accounted for approximately 32% and 29% of total revenues, respectively. For the
three months ended September 30, 1999, three major customers accounted for
approximately 53%, 16% and 14% of total revenues, respectively. For the nine
months ended September 30, 1999, three major customers accounted for
approximately 49%, 16% and 14% of total revenues, respectively.
6. SUBSEQUENT EVENT
Early in the fourth quarter, management determined to discontinue
development on the Edify retail banking platform and focus its sales efforts on
the Consumer Suite and Community Banking Suite products. S1 intends to continue
to offer support services to the approximately 140 financial institutions using
the discontinued platform for up to 24 months and will offer the existing
customers a migration path to either the Consumer Suite or Community Banking
Suite products. As part of this decision, in November 2000, S1 announced a 7%
reduction of its existing workforce, primarily in the discontinued product
group. This restructuring effort is expected to result in up to a $5 million
charge that will be recorded during the fourth quarter of 2000.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This quarterly report contains forward-looking statements and information
relating to us and our subsidiaries. The words "believes," "expects," "may,"
"will," "should," "projects," "contemplates," "anticipates," "forecasts,"
"intends" or similar terminology identify forward-looking statements. These
statements are based on the beliefs of management as well as assumptions made
using information currently available to management. Because these statements
reflect the current views of management concerning future events, they involve
risks, uncertainties and assumptions. Therefore, actual results may differ
significantly from the results discussed in the forward-looking statements. You
are urged to read the risk factors described in our Form 10-K for the year ended
December 31, 1999 filed with the Securities and Exchange Commission on March 30,
2000. Except as required by applicable law, we undertake no obligation to update
publicly any forward-looking statement for any reason, even if new information
becomes available.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes appearing elsewhere herein and the
audited consolidated financial statements and notes thereto in our Form 10-K for
the year ended December 31, 1999.
GENERAL
We are a leading global provider of innovative eFinance solutions and
services that are centered on banking, brokerage and insurance. We are enabling
financial service providers to create a complete Enterprise eFinance
Experience(TM) by delivering the tools necessary to meet the evolving demands of
their customers across various lines of businesses, market segments and delivery
channels. Through our Open eFinance Architecture(TM), we offer a broad range of
applications that empower financial institutions to increase revenue, strengthen
customer relationships and gain competitive advantage. Additionally, through the
our professional services organization, our applications can be implemented
in-house or hosted in an S1 data center.
We provide a comprehensive set of Internet-based financial services
solutions which touch every significant facet of the financial services
industry. From banking, brokerage and insurance to personal financial management
and tax preparation capabilities, our suites of consumer, retail, small business
and corporate applications provide a comprehensive set of solutions for global,
national, regional and local financial organizations. Our solutions, including
our VerticalOne personal information aggregation service and our Edify
interactive voice response technology, reach beyond traditional online financial
services to help financial organizations deliver value to their customers,
resulting in greater customer retention and increased revenue opportunities for
our clients. In addition, we have implemented wireless solutions in the United
States, Europe and Australia that allow our clients' customers to access account
information and conduct transactions through cellular telephones and hand-held
personal digital assistants.
On April 7, 2000, we completed the acquisition of Q Up. On April 12, 2000,
we completed the acquisition of Davidge. On November 10, 1999, we completed the
acquisitions of Edify and VerticalOne. On November 18, 1999, we completed the
acquisition of FICS. All of these acquisitions have been accounted for as
purchase business combinations. Accordingly, the results of operations for the
three and nine months ended September 30, 1999 do not include the results of
operations for these acquired companies.
Early in the fourth quarter, management determined to discontinue
development on the Edify retail banking platform and focus its sales efforts on
the Consumer Suite and Community Banking Suite products. S1 intends to continue
to offer support services to the approximately 140 financial institutions using
the discontinued platform for up to 24 months and will offer the existing
customers a migration path to either the Consumer Suite or Community Banking
Suite products. As part of this decision, in November 2000, S1 announced a 7%
reduction of its existing workforce, primarily in the discontinued product
group. Management estimates that the reduction in staff will reduce overall
costs by approximately $13-15 million per year. However, S1 intends to invest in
its remaining products and, accordingly, the reduction in costs noted above is
estimated to return over the next several quarters as the remaining product
groups grow. In addition, the restructuring effort is expected to result in up
to a $5 million charge that will be recorded during the fourth quarter of 2000.
10
<PAGE> 11
We continue our strategic review of all operations we have acquired in
recent periods. This review process could result in partnerships, outside
investors or other equity participation with regard to the acquired businesses
and, as a result, could cause us to reassess the estimated useful life of the
remaining goodwill and other acquisition intangibles.
Revenues
We derive our revenues primarily from three sources:
Software licenses. We receive license fees from direct licensees and
third-party data processors. Direct licensees install and operate our products
in their own environments. We generally receive an initial license fee plus
ongoing fees which are based on either the number of end-users or a percentage
of the initial license fee. We generally recognize revenues from software
license sales upon shipment if no significant obligations remain. When services
are considered essential to the functionality of the software, the software
license and the related services are recognized over the implementation period
using the percentage of completion method of accounting.
A portion of our software license revenue is being recognized on a
straight-line basis over either the term of the agreement or, for contracts
without a term, the estimated period during which post-contract support is
expected to be provided. Under these arrangements, post-contract support and
maintenance were bundled as part of the license agreements and sufficient vendor
specific evidence did not exist to allocate the total fee to all elements of the
arrangement.
Third-party data processors install our products in their own data
processing centers and license the product to their client institutions,
typically smaller financial services entities like community banks and thrifts.
We receive monthly fees from third party data processors based on the total
number of end-users served by the processors' client institutions. These fees
are recognized as revenue in the period earned.
Professional Services. We provide professional services related to the
installation and integration of our products. These services include:
- installing the product at direct licensees and third-party data
processing centers;
- integrating the financial organization data processing systems with
our data center for data center clients;
- providing product enhancements;
- consulting; and
- training.
Revenues derived from contracts to provide services on a time and materials
basis are recognized as the related services are performed. Revenues from
professional services provided on a fixed fee basis are recognized using the
percentage of completion method, measured by the percentage of labor hours
incurred to date to estimated total labor hours for each contract.
Data Center. Data Center revenue consists of revenue from our two data
centers located in Atlanta, GA, and Singapore. We receive recurring monthly fees
from financial institutions that have chosen to use our software and outsource
the processing of their financial transactions to our data center. These fees
are generally based on the number of end-users of the client institution. In
addition, we receive monthly fees for technical support. We recognize these
revenues as the services are performed.
Customer Concentrations. As a result of the size of many of S1's
customers, the magnitude of the implementations for companies of this size and
our limited amount of capacity to perform implementations, in any given period a
significant portion of our revenues may be attributed to a limited number of
clients. For the three and nine months ended September 30, 2000, one major
customer accounted for approximately 32% and 29% of total revenues,
respectively. For the three months ended September 30, 1999, three major
customers accounted for approximately 53%, 16% and 14% of total revenues,
respectively. For the nine months ended September 30, 1999, three major
customers accounted for approximately 49%, 16% and 14% of total revenues,
respectively.
11
<PAGE> 12
S1 CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------------------- -------------------
9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 9/30/99 9/30/00
-------- --------- -------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses................... $ 2,260 $ 12,152 $ 10,719 $ 15,330 $ 14,586 $ 6,898 $ 40,635
Professional services............... 14,769 23,030 34,382 37,230 42,206 33,402 113,818
Data center......................... 2,072 3,195 3,507 5,317 5,789 5,663 14,613
Other............................... 5,698 2,039 1,761 1,207 1,798 6,511 4,766
------- --------- -------- --------- --------- ------- ---------
Total revenues................ 24,799 40,416 50,369 59,084 64,379 52,474 173,832
------- --------- -------- --------- --------- ------- ---------
DIRECT COSTS:
Software licenses................... 99 311 1,521 1,226 1,136 331 3,883
Professional services............... 8,480 16,419 25,884 25,865 28,471 19,866 80,220
Data center......................... 2,163 3,129 3,352 4,806 4,915 5,879 13,073
Other............................... 4,425 2,010 1,594 1,084 1,542 5,102 4,220
------- --------- -------- --------- --------- ------- ---------
Total direct costs............ 15,167 21,869 32,351 32,981 36,064 31,178 101,396
------- --------- -------- --------- --------- ------- ---------
Gross margin.................. 9,632 18,547 18,018 26,103 28,315 21,296 72,436
------- --------- -------- --------- --------- ------- ---------
OPERATING EXPENSES:
Selling and marketing............... 1,153 8,763 11,406 13,396 13,666 3,406 38,468
Product development................. 5,221 10,097 14,992 15,830 16,924 13,981 47,746
General and administrative.......... 3,291 6,928 9,351 11,451 10,350 6,985 31,152
------- --------- -------- --------- --------- ------- ---------
9,665 25,788 35,749 40,677 40,940 24,372 117,366
------- --------- -------- --------- --------- ------- ---------
OPERATING LOSS*............... (33) (7,241) (17,731) (14,574) (12,625) (3,076) (44,930)
Depreciation and amortization......... 1,465 2,998 3,404 6,129 6,536 3,926 16,069
Stock option compensation............. 107 797 1,125 1,599 1,333 321 4,057
Marketing cost from warrants.......... -- 715 4,600 362 -- -- 4,962
Merger related costs.................. 1,851 6,643 6,814 6,344 5,055 2,101 18,213
Acquired in-process research and
development......................... -- 59,300 -- 14,100 -- -- 14,100
Amortization of intangibles........... -- 40,000 77,127 112,386 112,360 206 301,873
Interest & investment income.......... (777) (706) (35,593) (2,498) (1,809) (1,531) (39,900)
------- --------- -------- --------- --------- ------- ---------
NET LOSS........................ $(2,679) $(116,988) $(75,208) $(152,996) $(136,100) $(8,099) $(364,304)
======= ========= ======== ========= ========= ======= =========
Net loss per common share....... $ (0.10) $ (3.05) $ (1.49) $ (2.82) $ (2.46) $ (0.31) $ (6.83)
======= ========= ======== ========= ========= ======= =========
GROSS MARGIN %:
Software licenses................... 96% 97% 86% 92% 92% 95% 90%
Professional services............... 43% 29% 25% 31% 33% 41% 30%
Data center......................... (4%) 2% 4% 10% 15% (4%) 11%
Other............................... 22% 1% 9% 10% 14% 22% 11%
------- --------- -------- --------- --------- ------- ---------
39% 46% 36% 44% 44% 41% 42%
======= ========= ======== ========= ========= ======= =========
% OF TOTAL REVENUES:
OPERATING EXPENSES:
Selling and marketing............... 5% 22% 22% 23% 21% 6% 22%
Product development................. 21% 25% 30% 27% 26% 27% 28%
General and administrative.......... 13% 17% 19% 19% 16% 13% 18%
------- --------- -------- --------- --------- ------- ---------
39% 64% 71% 69% 63% 46% 68%
======= ========= ======== ========= ========= ======= =========
</TABLE>
---------------
* Excluding depreciation and amortization, stock option compensation expense,
marketing cost from warrants issued, merger related costs, acquired in-process
R&D, amortization of acquisition intangibles and interest & investment income.
12
<PAGE> 13
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999
Total revenues increased by $39.6 million to $64.4 million for the three
months ended September 30, 2000 from $24.8 million in the three months ended
September 30, 1999, an increase of 160%. The primary components of revenue for
the third quarter 2000 were $14.6 million in software license fees, $42.2
million in professional services fees, $5.8 million in Data Center revenue and
$1.8 million in other revenue. Total revenues increased by $121.4 million to
$173.8 million for the nine months ended September 30, 2000 from $52.4 million
for the nine months ended September 30, 1999. Approximately $32.2 million and
$86.5 million of the increases for the three and nine months ended September 30,
2000, respectively, relate to the companies acquired in the fourth quarter of
1999 and the second quarter of 2000. The remaining increase for the three and
nine months ended September 30, 2000 primarily relates to increases in
professional services and Data Center revenue. The increases in professional
service revenues were driven by several large implementation projects and a
large product enhancement project. The growth in financial institutions and
end-users using S1's Internet Financial applications in our data centers
resulted in the increase in Data Center revenue for the three and nine months
ended September 30, 2000.
Direct costs increased by $20.9 million to $36.1 million for the three
months ended September 30, 2000 from $15.2 million for the three months ended
September 30, 1999, an increase of 138%. Direct costs increased by $70.2 million
to $101.4 million in the nine months ended September 30, 2000 from $31.2 million
for the nine months ended September 30, 1999. Gross margins were 44% and 42% of
total revenues in the three and nine months ended September 30, 2000,
respectively, compared to 39% and 41% of total revenue in the three and nine
months ended September 30, 1999, respectively. Approximately $15.1 million and
$44.9 million of the increases for the three and nine months ended September 30,
2000, respectively, relate to the companies acquired in the fourth quarter of
1999 and the second quarter of 2000. The remaining increase for the three and
nine months ended September 30, 2000, primarily relates to increases in the cost
of professional services and Data Center. The increase in professional services
cost were driven by increased personnel and infrastructure costs to drive
several large implementation projects and a large product enhancement project.
The increase in Data Center costs for the three and nine months ended September
30, 2000 relate to additional personnel and infrastructure necessary to support
new customers, the addition of a new applications by our existing customers and
the operations of our new data center in Singapore.
General and Administrative. General and administrative expenses increased
by $7.0 million to $10.3 million in the three months ended September 30, 2000
from $3.3 million in the three months ended September 30, 1999, an increase of
214%. General and administrative expenses increased by $24.2 million to $31.2
million in the nine months ended September 30, 2000 from $7.0 million in the
nine months ended September 30, 1999, an increase of 346%. General and
administrative expenses were 16% and 18% of total revenues in the three and nine
months ended September 30, 2000, compared to 13% of total revenues in the three
and nine months ended September 30, 1999, respectively. The increase relates to
the acquisition of five companies during the last year and the expanded
personnel infrastructure necessary to manage our growth and global operations.
Depreciation and Amortization. Depreciation and amortization expenses
increased by $5.0 million to $6.5 million in the three months ended September
30, 2000 from $1.5 million in the three months ended September 30, 1999, an
increase of 346%. Depreciation and amortization expenses increased by $12.1
million to $16.1 million in the nine months ended September 30, 2000 from $3.9
million in the nine months ended September 30, 1999, an increase of 309%.
Depreciation and amortization expenses were 10% and 9% of total revenues for the
three and nine months ended September 30, 2000, respectively, compared to 6% and
7% of total revenues in the three and nine months ended September 30, 1999. A
substantial portion of the increase is the result of the acquisition of five
companies and their existing infrastructures during the last year. The balance
of the increase is primarily the result of the acquisition of additional
equipment for data center customers and the build out of the new data centers in
Singapore and United Kingdom. We anticipate that the depreciation and
amortization will continue to increase as the new United Kingdom data center
goes into full production during the fourth quarter and as new and existing
customers expand their activities in the data centers.
13
<PAGE> 14
Stock Option Compensation Expense. Stock option compensation expense
increased by $1.2 million to $1.3 million for the three months ended September
30, 2000 compared to $107,000 for the three months ended September 30, 1999, an
increase of 1091%. Stock option compensation expense increased by $3.7 million
to $4.1 million for the nine months ended September 30, 2000 compared to
$321,000 for the nine months ended September 30, 1999, an increase of 1152%. The
increase is primarily the result of the acquisitions completed in the fourth
quarter of 1999.
Marketing Cost for Warrants Issued. The Company recorded $5.0 million of
marketing costs in the nine months ended September 30, 2000 which includes a
charge for $362,000 related to the vesting of a warrant previously granted to
Andersen Consulting and a charge for a warrant issued in connection with a pilot
project and distribution agreement between the third-party and one of our
subsidiaries. The fair values of the warrants were determined based on the
Black-Scholes option-pricing model.
Merger Related Costs. Merger related costs for the three and nine months
ended September 30, 2000 were $5.1 million and $18.2 million, respectively,
related to the acquisitions in 1999 and 2000. Approximately $1.5 million and
$5.9 million of merger related costs incurred in the three and nine months ended
September 30, 2000, respectively, consist of the cost of product development
personnel working on the integration of all the products and platforms of the
acquired companies. Also included in merger related costs incurred in the nine
months ended September 30, 2000 are approximately $1.8 million of personnel
costs related to professional service employees who are being cross trained on
the products and services of the acquired companies. After the integration
efforts are complete, these costs will be captured in the product development
and professional services expense categories in the statement of operations. The
remaining merger related costs incurred in the three and nine months ended
September 30, 2000 consist primarily of expenditures related to building and
consolidating infrastructure and other operations of the companies we acquired
in the fourth quarter of 1999 and the second quarter of 2000.
We anticipate that an additional $2 million to $3 million of merger related
costs will be incurred in the fourth quarter of 2000 and then such charges will
end.
Amortization of Goodwill and Acquisition Charges. Amortization of goodwill
and acquisition charges increased $112.4 million to $112.4 million in the three
months ended September 30, 2000 from $0 in the three months ended September 30,
1999. Amortization of goodwill and acquisition charges increased $301.7 million
to $301.9 million in the nine months ended September 30, 2000 from $206,000 in
the nine months ended September 30, 1999. The increase related to the
amortization of goodwill and other identifiable intangible assets resulting from
the acquisitions in the fourth quarter of 1999 and second quarter of 2000.
Segment Analysis
In the third quarter of 2000, S1 began to operate and manage the Company in
four business segments: Large Financial Institution, Community Bank, Call Center
Technology and Internet Aggregation. The Large Financial Institution and
Community Bank segments build, deliver and operate integrated, transactional and
brandable Internet applications for financial institutions worldwide, available
as an in-house solution or outsourced to an S1 data center. While the Large
Financial Institution segment provides highly customized solutions to large
global and national financial institutions, the Community Bank segment provides
solutions that require little or no customization and are primarily sold to
local and regional banks. Through the Call Center Technology, S1 offers
interactive voice response and voice e-Commerce technology. The Internet
Aggregation segment provides technology that enables consumers to aggregate
personal account information from multiple sources. S1 manages the business
based on these operating segments.
S1 evaluates the performance of its operating segments based on revenues,
direct costs, gross margins and operating expenses, excluding depreciation and
amortization, stock option compensation expense, marketing cost from warrants
issued, merger related costs, acquired in-process research and development,
interest and investment income and amortization of acquisition intangibles. In
addition, the Company provides general and administrative services to the
operating segments on a shared service basis and does not allocate these costs
to the individual segments, therefore the general and administrative costs are
excluded in the segment presentations. The Company does not produce reports that
measure the performance according to any asset-based metrics.
14
<PAGE> 15
LARGE FINANCIAL INSTITUTION SEGMENT (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LARGE FINANCIAL INSTITUTION SEGMENT
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------------- ------------------
9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 9/30/99 9/30/00
------- -------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses.... $ 2,260 $ 6,524 $ 3,666 $ 4,368 $ 5,048 $ 6,898 $ 13,082
Professional
services........... 14,769 20,708 30,969 32,118 36,672 33,402 99,759
Data center.......... 2,072 3,190 3,193 4,468 4,845 5,663 12,506
Other................ 5,698 2,039 1,761 1,207 1,798 6,511 4,766
------- ------- ------- -------- ------- ------- --------
Total
revenues...... 24,799 32,461 39,589 42,161 48,363 52,474 130,113
------- ------- ------- -------- ------- ------- --------
DIRECT COSTS:
Software licenses.... 99 25 24 75 3 331 102
Professional
services........... 8,480 15,327 23,351 22,263 24,910 19,866 70,524
Data center.......... 2,163 3,027 3,154 4,217 4,114 5,879 11,485
Other................ 4,425 2,010 1,594 1,084 1,542 5,102 4,220
------- ------- ------- -------- ------- ------- --------
Total direct
costs......... 15,167 20,389 28,123 27,639 30,569 31,178 86,331
------- ------- ------- -------- ------- ------- --------
Gross margin.... 9,632 12,072 11,466 14,522 17,794 21,296 43,782
------- ------- ------- -------- ------- ------- --------
OPERATING EXPENSES:
Selling and
marketing.......... 1,153 4,891 6,632 6,899 6,184 3,406 19,715
Product
development........ 5,221 7,137 11,066 11,844 11,192 13,981 34,102
------- ------- ------- -------- ------- ------- --------
6,374 12,028 17,698 18,743 17,376 17,387 53,817
------- ------- ------- -------- ------- ------- --------
Segment operating income
(loss)*................. $ 3,258 $ 44 $(6,232) $ (4,221) $ 418 $ 3,909 $(10,035)
======= ======= ======= ======== ======= ======= ========
GROSS MARGIN %:
Software licenses.... 96% 100% 99% 98% 100% 95% 99%
Professional
services........... 43% 26% 25% 31% 32% 41% 29%
Data center.......... (4%) 5% 1% 6% 15% (4%) 8%
Other................ 22% 1% 9% 10% 14% 22% 11%
------- ------- ------- -------- ------- ------- --------
39% 37% 29% 34% 37% 41% 34%
======= ======= ======= ======== ======= ======= ========
% OF SEGMENT REVENUES:
OPERATING EXPENSES:
Selling and
marketing.......... 5% 15% 17% 16% 13% 6% 15%
Product
development........ 21% 22% 28% 28% 23% 27% 26%
------- ------- ------- -------- ------- ------- --------
26% 37% 45% 44% 36% 33% 41%
======= ======= ======= ======== ======= ======= ========
</TABLE>
---------------
* Excluding depreciation and amortization, stock option compensation expense,
marketing cost from warrants issued, merger related costs, acquired in-process
R&D, amortization of acquisition intangibles and interest & investment income.
Revenues, Direct Costs and Gross Margins
Total revenues increased by $23.6 million to $48.4 million for the three
months ended September 30, 2000 from $24.8 million in the three months ended
September 30, 1999, an increase of 95%. The primary components of third quarter
2000 revenue were $5.1 million in software license fees, $36.7 million in
professional service fees, $4.8 million in Data Center revenue and $1.8 million
of other revenue primarily related to third party hardware and software sales.
Total revenues increased by $77.6 million to $130.1 million for the nine months
ended September 30, 2000 from $52.5 million in the nine months ended September
30, 1999, an increase of 148%.
Direct costs increased by $15.4 million to $30.6 million in the three
months ended September 30, 2000 from $15.2 million in the three months ended
September 30, 1999, an increase of 102%. Direct costs increased
15
<PAGE> 16
by $55.1 million to $86.3 million in the nine months ended September 30, 2000
from $31.2 million in the nine months ended September 30, 1999, an increase of
177%. Gross margin was 37% in the quarter ended September 30, 2000 compared to
39% of total revenues in the quarter ended September 30, 1999. Gross margin was
34% for the nine months ended September 30, 2000 compared to 41% for the nine
months ended September 30, 1999.
In November 2000, S1 announced a 7% reduction of its existing workforce.
The reduction in the workforce is primarily the result of management's decision
to discontinue development of the Edify retail banking platform. S1 intends to
continue to offer support services to the approximately 140 financial
institutions using this platform for up to 24 months. During this period, S1
will offer the existing customers a migration path to either the Consumer Suite
or Community Bank Suite products. The revenues and costs associated with the
discontinued platform are primarily reflected in the Large Financial Institution
segment. As a result of discontinuing the product, certain customers may elect
to move to other products resulting in a potential reduction in revenue.
Software license. Software license fees increased by $2.8 million to $5.1
million in the three months ended September 30, 2000 from $2.3 million in the
three months ended September 30, 1999, an increase of 122%. Software license
fees increased by $6.2 million to $13.1 million in the nine months ended
September 30, 2000 from $6.9 million in the nine months ended September 30,
1999, an increase of 90%. Software license fees represented 10% of total
revenues in the three months ended September 30, 2000 compared to 9% of total
revenues in the three months ended September 30, 1999. Software license fees
represented 10% of total revenues in the nine months ended September 30, 2000
compared to 13% of total revenues in the nine months ended September 30, 1999.
The majority of the increase for the three and nine months ended September 30,
2000 relates to the acquisitions of Edify and FICS, which occurred in the fourth
quarter of 1999.
Direct software license costs consist primarily of the cost of third-party
software used in the S1 Consumer Suite. Direct costs associated with software
licenses decreased by $96,000 to $3,000 in the three months ended September 30,
2000 from $99,000 in the three months ended September 30, 1999, a decrease of
97%. Direct costs associated with software licenses decreased by $229,000 to
$102,000 in the nine months ended September 30, 2000 from $331,000 in the nine
months ended September 30, 1999, an decrease of 69%. Gross margins of software
licenses were 100% and 99% for the three and nine months ended September 30,
2000 compared to gross margins of 96% and 95% for the three and nine months
ended September 30, 1999, respectively. We anticipate that direct costs
associated with software licenses as a percentage of revenue could increase in
future periods as additional products are sold that include third-party
software.
During the three and nine months ended September 30, 2000, S1 recognized
approximately $126,000 and $1.8 million, respectively, in license fees from the
sale of the discontinued Edify retail banking platform. Due to the
discontinuance of the platform, we anticipate that further license sales will be
minimal.
Professional services. Professional services revenues increased by $21.9
million to $36.7 million in the three months ended September 30, 2000 from $14.8
million in the three months ended September 30, 1999, an increase of 148%.
Professional services revenues increased by $66.4 million to $99.8 million in
the nine months ended September 30, 2000 from $33.4 million in the nine months
ended September 30, 1999, an increase of 199%. Professional services revenues
represented 76% of total revenues in the three months ended September 30, 2000
compared to 60% of total revenues in the three months ended September 30, 1999.
Of the $21.9 million increase in the three months ended September 30, 2000,
$13.4 million is related to the acquisitions in the second quarter of 2000 and
fourth quarter of 1999. Professional services revenues represented 77% of total
revenues in the nine months ended September 30, 2000 compared to 64% of total
revenues in the nine months ended September 30, 1999. Approximately, $37.6
million of the $66.4 increase for the nine months ended September 30, 2000
relates to the acquisitions in the second quarter 2000 and fourth quarter of
1999. The remaining increases for the three and nine months ended September 30,
2000 were driven by several large implementation projects and a large product
enhancement project.
Direct professional services costs consist primarily of personnel and
related infrastructure costs. Direct costs associated with professional services
increased by $16.4 million to $24.9 million in the three months
16
<PAGE> 17
ended September 30, 2000 from $8.5 million in the three months ended September
30, 1999, an increase of 193%. Direct costs associated with professional
services increased by $50.6 million to $70.5 million in the nine months ended
September 30, 2000 from $19.9 million in the nine months ended September 30,
1999, an increase of 254%. Approximately $10.6 million and $30.1 million of the
increase in professional services costs for the three and nine months ended
September 30, 2000, respectively, is attributable to the acquisitions in 1999
and 2000. The remaining increase for the three and nine months ended September
30, 2000 relates to additional resources needed to perform work on the large
implementations and product enhancement projects. Gross margin on professional
services for the three months ended September 30, 2000 was 32%, compared to 43%
for the three months ended September 30, 1999. Gross margin on professional
services was 29% for the nine months ended September 30, 2000, compared to 41%
for the nine months ended September 30, 1999. This decrease is primarily due to
lower margin contracts inherited as part of the acquisitions made in 1999. We
anticipate that professional services margins could remain at these levels for
the next several quarters as the acquired companies historically experienced
lower professional services margins than we experienced on a stand-alone basis.
During the three and nine months ended September 30, 2000, S1 recognized
approximately $2.8 million and $9.8 million, respectively, in professional
services and maintenance fees from the implementation and maintenance of the
discontinued Edify retail banking platform. At the time of announcement, several
customers were in the process of implementing the discontinued product. These
implementations should be completed during the next two quarters. Subsequent to
the completion of these projects, we anticipate that further implementation fees
from the discontinued product will be minimal.
Data Center. Data Center revenues increased by $2.7 million to $4.8
million in the three months ended September 30, 2000 from $2.1 million in the
three months ended September 30, 1999, an increase of 129%. Data Center revenues
increased by $6.8 million to $12.5 million in the nine months ended September
30, 2000 from $5.7 million in the nine months ended September 30, 1999, an
increase of 119%. Data Center revenues represented 10% of total revenues in the
three months ended September 30, 2000 compared to 8% of total revenues in the
three months ended September 30, 1999. Data Center revenues represented 10% of
total revenues in the nine months ended September 30, 2000 compared to 11% of
total revenues in the nine months ended September 30, 1999.
The increase in revenues for the three and nine months ended September 30,
2000 is attributable to growth in financial institutions and end-users using
S1's Internet financial applications. Revenues associated with our data centers
are directly influenced by the number of financial institutions that are using
the Company's products through our data centers and the number of end-users of
these financial services entities. As of the end of September 2000, the data
centers processed in excess of 864,000 Internet accounts, representing
approximately 722,000 end-users. This represents an increase of 240% in the
number of accounts processed from approximately 254,000 and an increase of 343%
in the number of end-users from approximately 163,000 for the month of September
1999. The average quarterly revenue per billable end-user decreased to $9.09 in
the third quarter of 2000 from $14.52 in the third quarter of 1999. As expected,
the average quarterly revenue per billable end-user has decreased as financial
services entities have increased the number of their customers using the
products. S1 anticipates that this trend will continue.
S1 anticipates that Data Center revenue will continue to grow both
domestically and as a result of its new data center in the UK, which is expected
to open with its first customers on-line in a testing environment during the
fourth quarter of 2000. However, the rate of Data Center revenue growth could be
impacted by the termination of one U.S. hosted financial institution during the
fourth quarter, which contributed approximately $287,000 in revenue during the
third quarter of 2000.
Direct Data Center costs consist of personnel and infrastructure to support
customer installations. Direct costs associated with Data Center services
increased by $2.0 million to $4.1 million in the three months ended September
30, 2000 from $2.1 million in the three months ended September 30, 1999, an
increase of 95%. Direct costs associated with Data Center services increased by
$5.6 million to $11.5 million in the nine months ended September 30, 2000 from
$5.9 million in the nine months ended September 30, 1999, an increase of 95%.
The increase in cost is primarily attributed to additional personnel and
infrastructure necessary to
17
<PAGE> 18
support new customers, the addition of new applications by our existing
customers and the operations of our new data center in Singapore. The gross
margin on the Data Center revenue was 15% for the three months ended September
30, 2000, compared to a negative margin of 4% for the three months ended
September 30, 1999. Gross margin was 8% for the nine months ended September 30,
2000, compared to a negative margin of 4% for the nine months ended September
30, 1999.
In the fourth quarter management anticipates that the UK data center will
open with its first customer on-line in a testing environment. Historically, a
new data center operates at a negative gross margin for a period of time. As a
result, the Data Center gross margin could remain stable with the third quarter
or grow at a reduced rate.
Other. Other revenues, primarily related to the sale of third party
hardware and software that are used in connection with our products, decreased
by $3.9 million to $1.8 million in the three months ended September 30, 2000
from $5.7 million in the three months ended September 30, 1999, a decrease of
68%. Other revenues decreased by $1.7 million to $4.8 million in the nine months
ended September 30, 2000 from $6.5 million in the nine months ended September
30, 1999, a decrease of 26%. Other revenues represented 4% of total revenues in
the three months ended September 30, 2000 compared to 23% of total revenues in
the three months ended September 30, 1999. Other revenues represented 4% and 12%
of total revenues in the nine months ended September 30, 2000 and September 30,
1999, respectively. The decrease in other revenue for the three and nine months
ended September 30, 2000 is due to a large sale of third party hardware and
software made in the third quarter of 1999.
Other direct costs consist primarily of the cost of third party software
and hardware sold for use with our products. Other direct costs decreased by
$2.9 million to $1.5 million in the three months ended September 30, 2000 from
$4.4 million in the three months ended September 30, 1999, a decrease of 66%.
Other direct costs decreased by $882,000 to $4.2 million in the nine months
ended September 30, 2000 from $5.1 million in the nine months ended September
30, 1999, a decrease of 17%. Gross margin on other revenue was 14% for the three
months ended September 30, 2000, compared to 22% for the three months ended
September 30, 1999. Gross margin on other revenue was 11% for the nine months
ended September 30, 2000, compared to 22% for the nine months ended September
30, 1999.
Operating Expenses
Operating expenses, which includes sales and marketing and product
development expenses, increased by $11.0 million to $17.4 million in the three
months ended September 30, 2000 from $6.4 million in the three months ended
September 30, 1999. Operating expenses increased by $36.4 million to $53.8
million in the nine months ended September 30, 2000 from $17.4 million in the
nine months ended September 30, 1999.
Selling and Marketing. Selling and marketing expenses increased by $5.0
million to $6.2 million in the three months ended September 30, 2000 from $1.2
million in the three months ended September 30, 1999, an increase of 417%.
Selling and marketing expenses increased by $16.3 million to $19.7 million in
nine months ended September 30, 2000 from $3.4 million in the nine months ended
September 30, 1999, an increase of 479%. The increase in selling and marketing
expense for both the three and nine months ended September 30, 2000 was
primarily due to the acquisitions completed in the fourth quarter of 1999.
Selling and marketing expenses were 13% and 15% of total revenues in the three
and nine months ended September 30, 2000, respectively, compared to 5% and 6% of
total revenues in the three and nine months ended September 30, 1999.
Product Development. Product development expenses increased by $6.0
million to $11.2 million in the three months ended September 30, 2000 from $5.2
million in the three months ended September 30, 1999, an increase of 115%.
Product development expenses increased by $20.1 million to $34.1 million in the
nine months ended September 30, 2000 from $14.0 million in the nine months ended
September 30, 1999, an increase of 144%. Product development expenses were 23%
and 26% of total revenues in the three and nine months ended September 30, 2000,
respectively, compared to 21% and 27% of total revenues in the three and nine
months ended September 30, 1999. The increase in product development expense for
both the three and nine months ended September 30, 2000 was primarily due to the
acquisitions completed in the fourth quarter
18
<PAGE> 19
of 1999 and second quarter of 2000. In addition, S1 is committed to enhancing
products by migrating the existing products to a more efficient software
architecture and to developing new applications.
In November 2000, S1 discontinued development on the Edify retail banking
platform. The expenses associated with developing this platform have been
reflected in the Large Financial Institution segment. As a result of the
decision to discontinue this platform, S1 anticipates that product development
expenses should decline in the fourth quarter of 2000.
COMMUNITY BANK SEGMENT (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMUNITY BANK SEGMENT
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------------- -------------------------------------
9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 9/30/99 9/30/00
------- -------- ------- ------- ------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses............... $ -- $ -- $ -- $3,284 $3,268 $ -- $6,552
Professional services........... -- -- -- 1,106 1,462 -- 2,568
Data center..................... -- -- -- 265 385 -- 650
------- -------- ------- ------ ------ --------- ------
Total revenues............. -- -- -- 4,655 5,115 -- 9,770
------- -------- ------- ------ ------ --------- ------
DIRECT COSTS:
Software licenses............... -- -- -- 185 556 -- 741
Professional services........... -- -- -- 731 1,120 -- 1,851
Data center..................... -- -- -- 122 175 -- 297
------- -------- ------- ------ ------ --------- ------
Total direct costs......... -- -- -- 1,038 1,851 -- 2,889
------- -------- ------- ------ ------ --------- ------
Gross margin............... -- -- -- 3,617 3,264 -- 6,881
------- -------- ------- ------ ------ --------- ------
OPERATING EXPENSES:
Selling and marketing........... -- -- -- 1,327 1,829 -- 3,156
Product development............. -- -- -- 479 282 -- 761
------- -------- ------- ------ ------ --------- ------
-- -- -- 1,806 2,111 -- 3,917
------- -------- ------- ------ ------ --------- ------
Segment operating income*........... $ -- $ -- $ -- $1,811 $1,153 $ -- $2,964
======= ======== ======= ====== ====== ========= ======
GROSS MARGIN %:
Software licenses............... -- -- -- 94% 83% -- 89%
Professional services........... -- -- -- 34% 23% -- 28%
Data center..................... -- -- -- 54% 55% -- 54%
------- -------- ------- ------ ------ --------- ------
-- -- -- 78% 64% -- 70%
======= ======== ======= ====== ====== ========= ======
% OF SEGMENT REVENUES:
OPERATING EXPENSES:
Selling and marketing........... -- -- -- 29% 36% -- 32%
Product development............. -- -- -- 10% 6% -- 8%
------- -------- ------- ------ ------ --------- ------
-- -- -- 39% 41% -- 40%
======= ======== ======= ====== ====== ========= ======
</TABLE>
---------------
* Excluding depreciation and amortization, stock option compensation expense,
marketing cost from warrants issued, merger related costs, acquired in-process
R&D, amortization of acquisition intangibles and interest & investment income.
Revenues, Direct Costs and Gross Margins
The Community Bank Segment was established following the acquisition of Q
UP in the second quarter 2000, therefore the entire increase as compared to 1999
relates to the acquisition. Total revenues were $5.1 million in the three months
ended September 30, 2000 and $9.8 million in the nine months ended September 30,
2000. License revenue was $3.3 million and $6.6 million in the three and nine
months ended September 30, 2000, respectively. Professional services revenue
were $1.5 million and $2.6 million in the three
19
<PAGE> 20
and nine months ended September 30, 2000, respectively. Data Center revenues
were $385,000 and $650,000 in the three and nine months ended September 30,
2000, respectively.
Total direct costs were $1.9 million in the three months ended September
30, 2000 and $2.9 million for the nine months ended September 30, 2000. The
gross margin was 64% and 70% for the three and nine months ended September 30,
2000, respectively. Direct costs of license revenue were $556,000 and $741,000
in the three and nine months ended September 30, 2000, respectively. Gross
margin on license revenue was 83% and 89% for the three and nine months ended
September 30, 2000, respectively. Direct costs of license revenue primarily
represents the cost of third party software used in Community Bank products.
Direct cost associated with license revenue will vary from quarter to quarter
based on the percentage of sales, which include third party software. Direct
costs of professional service revenues were $1.1 million and $1.9 million in the
three and nine months ended September 30, 2000, respectively. Gross margin on
professional services revenue was 23% and 28% for the three and nine months
ended September 30, 2000, respectively. Direct costs of Data Center revenues
were $175,000 and $297,000 in the three and nine months ended September 30,
2000, respectively. Gross margin on Data Center revenue was 55% and 54% for the
three and nine months ended September 30, 2000, respectively.
Operating Expenses
Selling and marketing expenses were $1.8 million and $3.2 million in the
three and nine months ended September 30, 2000, respectively. Selling and
marketing expenses as a percentage of revenues were 36% and 32% in the three and
nine months ended September 30, 2000, respectively. Selling and marketing
expenses grew during the third quarter of 2000, as compared to the second
quarter of 2000, due to the expansion of the sales force necessary to focus on
the larger number of prospective customers.
Product development expenses were $282,000 and $761,000 in the three and
nine months ended September 30, 2000, respectively. Product development expenses
were 6% and 8% of total revenues in the three and nine months ended September
30, 2000, respectively. S1 anticipates that product development costs will
increase in future periods as the product offerings will be enhanced to address
a broader market of financial institutions.
INTERNET AGGREGATION SEGMENT (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INTERNET AGGREGATION SEGMENT
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------- --------------------
9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 9/30/99 9/30/00
------- -------- ------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Data center................. $ -- $ 5 $ 314 $ 584 $ 559 $ -- $ 1,457
DIRECT COSTS:
Data center................. 102 198 467 626 1,291
------- ------- ------- ------- ------- --------- --------
Gross margin........... -- (97) 116 117 (67) -- 166
------- ------- ------- ------- ------- --------- --------
OPERATING EXPENSES:
Selling and marketing....... -- 764 997 1,187 1,474 -- 3,658
Product development......... -- 1,029 2,159 1,549 3,047 -- 6,755
------- ------- ------- ------- ------- --------- --------
-- 1,793 3,156 2,736 4,521 -- 10,413
------- ------- ------- ------- ------- --------- --------
Segment operating loss*.......... $ -- $(1,890) $(3,040) $(2,619) $(4,588) $ -- $(10,247)
======= ======= ======= ======= ======= ========= ========
GROSS MARGIN %:
Data center................. -- (1940%) 37% 20% (12%) -- 11%
------- ------- ------- ------- ------- --------- --------
-- (1940%) 37% 20% (12%) -- 11%
======= ======= ======= ======= ======= ========= ========
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
INTERNET AGGREGATION SEGMENT
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------- --------------------
9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 9/30/99 9/30/00
------- -------- ------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
% OF SEGMENT REVENUES:
OPERATING EXPENSES:
Selling and marketing....... -- 15280% 318% 203% 264% -- 251%
Product development......... -- 20580% 688% 265% 545% -- 464%
------- ------- ------- ------- ------- --------- --------
-- 35860% 1005% 468% 809% -- 715%
======= ======= ======= ======= ======= ========= ========
</TABLE>
---------------
* Excluding depreciation and amortization, stock option compensation expense,
marketing cost from warrants issued, merger related costs, acquired in-process
R&D, amortization of acquisition intangibles and interest & investment income.
Revenues, Direct Costs and Gross Margins
The Internet Aggregation Segment was established following the acquisition
of VerticalOne in the fourth quarter 1999, therefore the entire increase as
compared to 1999 relates to the timing of the acquisition.
Total revenues for the Internet Aggregation Segment were $559,000 in the
three months ended September 30, 2000 and $1.5 million in the nine months ended
September 30, 2000. Total direct costs were $626,000 in the three months ended
September 30, 2000 and $1.3 million for the nine months ended September 30,
2000. Gross margin was negative 12% and 11% for the three and nine months ended
September 30, 2000, respectively. The negative gross margin in the third quarter
was the result of costs incurred related to two new customers that did not
result in a significant increase in revenue during the third quarter 2000.
We have experienced domestic competitive pricing pressures during the most
recent quarters, which we expect to have a continuing impact on revenues and
gross margins in the future.
Operating Expenses
Selling and marketing expenses were $1.5 million and $3.7 million in the
three and nine months ended September 30, 2000, respectively. Selling and
marketing expenses were 264% and 251% of total revenues in the three and nine
months ended September 30, 2000, respectively. We will continue to make
investments in our selling and marketing activities to establish market share
and promote our aggregation services both domestically and internationally.
Product development expenses were $3.0 million and $6.8 million in the three and
nine months ended September 30, 2000, respectively. Product development expenses
were 545% and 464% of total revenues in the three and nine months ended
September 30, 2000, respectively. The increase in product development expenses
as a percentage of total revenue during the third quarter was the result of
expanded efforts to enhance the international functionality of the Aggregation
product.
S1 recognizes that the aggregation business is still in its very early
stages and is likely to require continued significant investment in sales and
marketing and product development. While S1 is committed to maintaining the
aggregation feature as part of its products and services, we continue to analyze
our alternatives for utilizing this operating segment.
21
<PAGE> 22
CALL CENTER TECHNOLOGY SEGMENT (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CALL CENTER TECHNOLOGY SEGMENT
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------- -------------------------------------
9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 9/30/99 9/30/00
------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licenses.............. $ -- $5,628 $ 7,053 $ 7,678 $ 6,270 $ -- $21,001
Professional services.......... -- 2,322 3,413 4,006 4,072 -- 11,491
------- ------ ------- ------- ------- --------- -------
Total revenues............ -- 7,950 10,466 11,684 10,342 -- 32,492
------- ------ ------- ------- ------- --------- -------
DIRECT COSTS:
Software licenses.............. -- 286 1,497 966 577 -- 3,040
Professional services.......... -- 1,134 2,533 2,871 2,441 -- 7,845
------- ------ ------- ------- ------- --------- -------
Total direct costs........ -- 1,420 4,030 3,837 3,018 -- 10,885
------- ------ ------- ------- ------- --------- -------
Gross margin.............. -- 6,530 6,436 7,847 7,324 -- 21,607
------- ------ ------- ------- ------- --------- -------
OPERATING EXPENSES:
Selling and marketing.......... -- 3,108 3,777 3,983 4,179 -- 11,939
Product development............ -- 1,889 1,767 1,958 2,403 -- 6,128
------- ------ ------- ------- ------- --------- -------
-- 4,997 5,544 5,941 6,582 -- 18,067
------- ------ ------- ------- ------- --------- -------
Segment operating income*.......... $ -- $1,533 $ 892 $ 1,906 $ 742 $ -- $ 3,540
======= ====== ======= ======= ======= ========= =======
GROSS MARGIN %:
Software licenses.............. -- 95% 79% 87% 91% -- 86%
Professional services.......... -- 51% 26% 28% 40% -- 32%
------- ------ ------- ------- ------- --------- -------
-- 82% 61% 67% 71% -- 66%
======= ====== ======= ======= ======= ========= =======
AS A PERCENT OF REVENUE:
OPERATING EXPENSES:
Selling and marketing.......... -- 39% 36% 34% 40% -- 37%
Product development............ -- 24% 17% 17% 23% -- 19%
------- ------ ------- ------- ------- --------- -------
-- 63% 53% 51% 64% -- 56%
======= ====== ======= ======= ======= ========= =======
</TABLE>
---------------
* Excluding depreciation and amortization, stock option compensation expense,
marketing cost from warrants issued, merger related costs, acquired in-process
R&D, amortization of acquisition intangibles and interest & investment income.
Revenues, Direct Costs and Gross Margins
The Call Center Technology segment was established following the
acquisition of Edify in the fourth quarter 1999, therefore the entire increase
as compared to 1999 relates to the timing of the acquisition.
Total revenues were $10.3 million in the three months ended September 30,
2000 and $32.5 million in the nine months ended September 30, 2000. License
revenue was $6.3 million and $21.0 million in the three and nine months ended
September 30, 2000, respectively. Professional services revenue was $4.1 million
and $11.5 million in the three and nine months ended September 30, 2000,
respectively.
Total direct costs were $3.0 million in the three months ended September
30, 2000 and $10.9 million for the nine months ended September 30, 2000. Gross
margin was 71% and 66% for the three and nine months ended September 30, 2000,
respectively. Direct costs of license revenue were $577,000 and $3.0 million in
the three and nine months ended September 30, 2000. Gross margin of license
revenues for the three and nine months ended September 30, 2000 was 91% and 86%,
respectively. Direct costs of license revenue primarily represents the cost of
third party software used in our call center technology products. Direct cost
associated with license revenue will vary from quarter to quarter based on the
percentage of sales, which include third party software. Direct costs of
professional services revenues were $2.4 million and $7.8 million in the three
22
<PAGE> 23
and nine months ended September 30, 2000. Gross margin of professional services
revenues was 40% and 32% for the three and nine months ended September 30, 2000,
respectively.
Operating Expenses
Selling and marketing expenses were $4.2 million and $11.9 million in the
three and nine months ended September 30, 2000, respectively. Selling and
marketing expenses as a percentage of revenues were 40% and 37% in the three and
nine months ended September 30, 2000, respectively. Selling and marketing
expenses as a percentage of revenues in the Call Center Technology Division are
greater than the other divisions within the company as a result of having a
larger sales force to focus on the larger number of prospective customers.
Product development expenses were $2.4 million and $6.1 million in the
three and nine months ended September 30, 2000, respectively. Product
development expenses were 23% and 19% of total revenues in the three and nine
months ended September 30, 2000. We anticipate that product development costs
will continue to increase as we continue to invest in research and development
to address multi-channel and natural language processing technologies.
LIQUIDITY AND CAPITAL RESOURCES
Total stockholders' equity increased to $1,285.5 million at September 30,
2000 from $990.8 million at December 31, 1999. The increase in stockholders'
equity is attributable to $440.6 million of common stock and stock options
issued in connection with the acquisitions completed during the second quarter
of 2000, $232.0 million of net proceeds from the issuance of Series D Preferred
Stock, $16.7 million of proceeds from the sale of common stock under the
Employee Stock Purchase and Options Plans, offset by the net loss of $364.3
million for the nine months ended September 30, 2000, the realized gain on the
sale of investment securities available for sale and a decrease in the net
unrealized gain on investment securities.
As of September 30, 2000, we had cash and cash equivalents of $197.9
million compared to $67.9 million at December 31, 1999 and investment securities
available for sale, which consisted entirely of equity securities, of $22.6
million at September 30, 2000 compared to $62.8 million at December 31, 1999.
During the nine months ended September 30, 2000, cash used in operations
was $117.5 million compared to cash used in operations of $14.0 million in the
nine months ended September 30, 1999. The increase in cash used in operations
during 2000 is primarily the result of the net loss for the period offset by
non-cash charges, the reduction of accounts payable and accrued expenses of
$30.0 million and an increase in accounts receivable of $26.7 million.
Cash provided by investing activities was $4.1 million for the nine months
ended September 30, 2000 compared to net cash used in investing activities of
$40.6 million in the comparable period of 1999. The increase in cash provided by
investing activities for the nine months ended September 30, 2000 is the result
of the proceeds from the sale of investment securities available for sale of
$36.5 million and $6.0 million of cash acquired through acquisitions, which was
offset by purchases of property and equipment of $32.1 million. Capital
expenditures in 2000 relate to the expansion of our facilities infrastructure to
accommodate our growth and the establishment of our new data center facilities
in Asia and Europe. During the nine months ended September 30, 2000, investments
were made in companies that are considered to have technology or products that
compliment our product and services offerings.
Cash provided by financing activities was $243.5 million for the nine
months ended September 30, 2000 compared to $68.8 million in the comparable
period of 1999. The increase relates to proceeds of $232.0 million, net of
issuance costs, from the sale of preferred stock and $16.7 million in proceeds
from common stock sold under the Employee Stock Purchase and Option Plans in the
nine months ended September 30, 2000. During the nine months ended September 30,
1999, the Company received proceeds of $64.0 million, net of expenses, for the
sale of common stock.
Basic loss per share is calculated as income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated to reflect the
potential dilution that would occur if stock options or other contracts to issue
common stock were
23
<PAGE> 24
exercised and resulted in additional common stock that would share in the
earnings of the Company. Because of the Company's net losses, the issuance of
additional shares of common stock under stock options and warrants or upon the
conversion of preferred stock would be antidilutive. The total number of common
shares that would have been used in the Company's computation of diluted
earnings per share for the three month period ended September 30, 2000 and 1999
was 68,036,634 and 37,725,143, respectively. The total number of common shares
that would have been used in the Company's computation of diluted earnings per
share for the nine month period ended September 30, 2000 and 1999 was 71,717,822
and 36,260,699, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB101"). In June 2000, the SEC
released SAB101B, which defers reporting on the effects of the adoption of SAB
101 until December 31, 2000. The Company is evaluating the implications of
SAB101 and to date nothing has been identified that would significantly change
the Company's historical practices with respect to the events that trigger
revenue recognition and the measurement of revenue.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting of Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25. The Interpretation poses
and answers 20 questions dealing with APB 25 implementation practice issues. The
Interpretation will be applied prospectively to new awards, modification to
outstanding awards and changes in employee status on or after July 1, 2000. In
certain circumstances, the Interpretation must be applied commencing December
15, 1998 and January 12, 2000. The Company adopted Interpretation No. 44 upon
the July 1, 2000 effective date and the adoption did not have a material effect
on the consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. This
statement is effective for financial statements for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company intends to adopt this
statement when required and does not expect the adoption of SFAS 133 to have a
material impact on the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk were included in
Item 7A of the Company's 1999 Annual Report on Form 10-K. There have been no
significant changes in the Company's market risk from December 31, 1999.
24
<PAGE> 25
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Commencing May 8, 2000, several substantially similar complaints were filed
in the United States District Court in Atlanta, Georgia against S1, Michel
Akkermans, James Mahan and Robert Stockwell alleging violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and
Section 20 of the Securities Exchange Act of 1934. The named plaintiffs seek to
represent a class of all persons who purchased S1 shares between November 2,
1999 and May 2, 2000. Their complaints assert generally that S1 and the
individuals defendants made or authorized the issuance of false and misleading
statements concerning the anticipated performance of S1, which they claim led to
artificial inflation of the price at which S1's shares were traded. S1 expects
that several cases will be consolidated into one proceeding. S1 believes that
the allegations in these complaints are wholly devoid of merit, and it and the
individual defendants intend to defend themselves vigorously against these
claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) On July 17, 2000, S1 issued 43,000 shares of common stock to Royal Bank
of Canada upon the conversion of 21,500 shares of S1's Series C
Redeemable Convertible Preferred Stock. The issuance of the stock to
Royal Bank of Canada satisfied the requirements of Section 4(2) of the
Securities Act (transactions by an issuer not involving any public
offering).
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
25
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<C> <S>
No. Description
10.1 Amendment to Security First Network Bank Amended and
Restated Directors' Stock Option Plan.*
10.2 Amendment to Security First Technologies Corporation 1998
Directors' Stock Option Plan.*
10.3 Alliance Center Office Lease Agreement, entered into as of
February 25, 2000, by and between Solano Associates, as
Landlord, and Security First Technologies, Inc., as Tenant
10.4 Employment Agreement, entered into as of August 14, 2000, by
and between S1 Corporation and Daniel H. Drechsel.*
27 Financial Data Schedule
</TABLE>
---------------
* Management contract or compensatory plan
(b) Reports on Form 8-K.
S1 filed the following Current Reports on Form 8-K with the Securities and
Exchange Commission (the "SEC") during the quarter ended September 30, 2000:
Current Report on Form 8-K filed with the SEC on August 9, 2000 (date
of report August 1, 2000) (regarding a press release and an analysts
conference call related to second quarter 2000 results and S1 and its
operations).
Current Report on Form 8-K filed with the SEC on September 8, 2000
(date of report September 8, 2000) (announcing an analysts conference).
Current Report on Form 8-K filed with the SEC on September 12, 2000
(date of report September 8, 2000) (regarding an analysts conference).
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, as of November 14, 2000.
S1 CORPORATION
By:
------------------------------------
Robert F. Stockwell
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.1 Amendment to Security First Network Bank Amended and
Restated Directors' Stock Option Plan.*
10.2 Amendment to Security First Technologies Corporation 1998
Directors' Stock Option Plan.*
10.3 Alliance Center Office Lease Agreement, entered into as of
February 25, 2000, by and between Solano Associates, as
Landlord, and Security First Technologies, Inc., as Tenant.
10.4 Employment Agreement, entered into as of August 14, 2000, by
and between S1 Corporation and Daniel H. Drechsel.*
27 Financial Data Schedule.
</TABLE>
---------------
* Management contract or compensatory plan
28
