UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-24931

S1 CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		58-2395199 (I.R.S. Employer Identification No.)
705 Westech Drive Norcross, Georgia (Address of principal executive offices)		30092 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (404) 923-3500

NOT APPLICABLE
(Former name, former address and former fiscal year, 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Shares of common stock outstanding as of November 2, 2010: 53,191,006

 

 

S1 CORPORATION

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009			1
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2010 and 2009			2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			22
Item 4. Controls and Procedures			22
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			23
Item 1A. Risk Factors			23
Item 6. Exhibits			23
Signature			24
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

S1 CORPORATION

		September 30,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	52,082			$	61,784
Accounts receivable, net			54,044				64,470
Prepaid expenses			5,147				4,729
Other current assets			9,313				4,931
Total current assets			120,586				135,914
Property and equipment, net			21,691				23,018
Intangible assets, net			12,619				4,895
Goodwill, net			148,055				126,605
Other assets			8,192				9,634
Total assets		$	311,143			$	300,066
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	10,536			$	7,707
Accrued compensation and benefits			8,356				11,569
Current portion of debt obligation			5,188				1,170
Current portion of accrued restructuring			2,106				2,096
Income taxes payable			3,152				1,586
Deferred revenues			36,722				26,837
Other current liabilities			1,908				2,007
Total current liabilities			67,968				52,972
Debt obligation, excluding current portion			—				5,026
Accrued restructuring, excluding current portion			—				1,381
Other liabilities			2,884				2,046
Total liabilities			70,852				61,425
Stockholders’ equity:
Preferred stock			—				10,000
Common stock			531				517
Additional paid-in-capital			1,800,894				1,787,772
Accumulated deficit			(1,559,472	)			(1,557,534	)
Accumulated other comprehensive loss			(1,662	)			(2,114	)
Total stockholders’ equity			240,291				238,641
Total liabilities and stockholders’ equity		$	311,143			$	300,066
Preferred shares issued and outstanding			—				749,064
Common shares issued and outstanding			53,115,181				51,712,710

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue:
Software licenses		$	6,764			$	7,444			$	17,335			$	26,218
Support and maintenance			15,648				14,919				46,436				43,697
Professional services			17,382				25,787				52,682				72,952
Hosting			13,886				12,187				40,160				36,600
Total revenue			53,680				60,337				156,613				179,467
Operating expenses:
Cost of software licenses (1)			803				623				1,754				2,735
Cost of professional services, support and maintenance (1)			21,311				19,200				61,386				55,997
Cost of hosting (1)			7,181				7,079				20,742				21,169
Selling and marketing			6,452				7,214				20,007				23,143
Product development			9,099				8,996				26,572				26,141
General and administrative			5,746				5,864				18,721				18,189
Depreciation and amortization			2,589				2,298				7,610				7,298
Total operating expenses			53,181				51,274				156,792				154,672
Operating income (loss)			499				9,063				(179	)			24,795
Interest income			53				101				164				335
Interest expense			(112	)			(161	)			(350	)			(521	)
Other non-operating expenses			(395	)			(456	)			(867	)			(848	)
Interest and other expense, net			(454	)			(516	)			(1,053	)			(1,034	)
Income (loss) before income tax benefit (expense)			45				8,547				(1,232	)			23,761
Income tax benefit (expense)			847				(1,637	)			(706	)			(3,276	)
Net income (loss)		$	892			$	6,910			$	(1,938	)		$	20,485
Net income (loss) per share:
Basic		$	0.02			$	0.13			$	(0.04	)		$	0.38
Diluted		$	0.02			$	0.12			$	(0.04	)		$	0.37
Weighted average common shares outstanding — basic			53,087,495				52,598,922				52,228,006				52,766,275
Weighted average common shares outstanding — fully diluted			53,455,282				53,452,888				52,228,006				53,494,437

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION

		Nine Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net (loss) income		$	(1,938	)		$	20,485
Adjustments to reconcile net (loss) income to net cash from operating activities:
Depreciation and amortization			8,373				8,650
Provision for doubtful accounts receivable and billing adjustments			1,540				534
Deferred income taxes			(657	)			240
Stock-based compensation expense			1,431				421
Changes in assets and liabilities:
Decrease (increase) in accounts receivable			10,347				(13,926	)
(Increase) decrease in prepaid expenses and other assets			(2,305	)			294
Increase (decrease) in accounts payable and other liabilities			158				(912	)
Decrease in accrued compensation and benefits			(1,899	)			(1,127	)
Increase (decrease) in income taxes payable			1,360				(938	)
Increase in deferred revenue			9,660				5,429
Net cash provided by operating activities			26,070				19,150
Cash flows from investing activities:
Maturities of investment securities			1,384				2,504
Purchases of investment securities			(1,117	)			(3,224	)
Purchases of restricted investment securities			—				(2,000	)
Acquisitions, net of acquired cash			(31,198	)			—
Purchases of property, equipment and technology			(4,140	)			(6,364	)
Net cash used in investing activities			(35,071	)			(9,084	)
Cash flows from financing activities:
(Payments) proceeds from exercise of employee stock awards			(26	)			192
Payments on capital leases and debt obligations			(1,008	)			(2,921	)
Repurchase and retirement of common stock			—				(4,971	)
Net cash used in financing activities			(1,034	)			(7,700	)
Effect of exchange rate changes on cash and cash equivalents			333				1,201
Net (decrease) increase in cash and cash equivalents			(9,702	)			3,567
Cash and cash equivalents at beginning of period			61,784				63,840
Cash and cash equivalents at end of period		$	52,082			$	67,407

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION

1. BACKGROUND AND BASIS OF PRESENTATION

S1 Corporation is a leading global provider of payments and financial services software solutions. We offer payments solutions for ATM and retail point-of-sale (“POS”) driving, card management, and merchant acquiring, as well as financial services solutions for consumer, small business and corporate online banking, trade finance, mobile banking, voice banking, branch and call center banking. We sell our solutions primarily to banks, credit unions, retailers and transaction processors. We also provide software, custom software development, hosting and other services to State Farm Mutual Automobile Insurance Company (“State Farm”), a relationship that we expect will conclude by the end of 2011. When we use the terms “S1 Corporation”, “S1”, “Company”, “we”, “us” and “our,” we mean S1 Corporation, a Delaware corporation, and its subsidiaries.

We have prepared the accompanying unaudited condensed consolidated financial statements and condensed notes pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not contain all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair statement of our financial position as of September 30, 2010, our results of operations for the three months and nine months ended September 30, 2010, and our cash flows for the nine months ended September 30, 2010. The data in the condensed consolidated balance sheet as of December 31, 2009 was derived from our audited consolidated balance sheet as of December 31, 2009, as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The unaudited condensed consolidated financial statements include the accounts of S1 and its wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions. Our operating results for the three months and nine months ended September 30, 2010 are not necessarily indicative of the operating results that may be expected for the full year ending December 31, 2010 or for any other period.

In the first quarter of 2010, we changed our reporting segments to present our Payments, Banking: Large Financial Institution (“Banking: Large FI”), and Banking: Community Financial Institution (“Banking: Community FI”) businesses separately. The Payments segment provides our ATM and POS driving, card management, and merchant acquiring solutions to financial institutions, retailers and transaction processors of all sizes globally. The Banking: Large FI segment provides consumer, small business and corporate online banking, trade finance, and mobile banking solutions to large banks globally, branch and call center banking solutions to large banks outside of the United States, and also supports our business with State Farm (which we expect will conclude by the end of 2011). The Banking: Community FI segment provides consumer and small business online banking, mobile banking, voice banking, branch and call center banking solutions to community and regional banks and credit unions in the United States. Certain reclassifications have been made to the prior years’ financial statements to conform to current year presentation related to our segment reporting.

We have evaluated all subsequent events and determined that there were no subsequent events required to be disclosed or recorded as of September 30, 2010 in our financial statements.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the Financial Accounting Standards Board (“FASB”) amended FASB ASC 605-25 Revenue Recognition: Multiple-Element Arrangements on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence of fair value for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method and additional disclosures on the selling price method. The change was effective for revenue arrangements that began or were changed from June 15, 2010 or later. As most arrangements accounted for under software revenue recognition guidance are excluded from the update, the adoption of this change did not have a material effect on our results of operations.

In October 2009, the FASB amended FASB ASC 985-605 Software: Revenue Recognition to exclude from its scope all tangible products containing both software and non-software components that operate together to deliver the product’s functions. The change was effective for revenue arrangements that began or were changed from June 15, 2010 or later. As this change does not affect revenue arrangements that have no tangible products or contracts that bundle services and software, the adoption of this change did not have a material effect on our results of operations since most of our arrangements have little to no tangible products.

3. BUSINESS COMBINATIONS

On March 4, 2010, we acquired 100% of the outstanding shares of PM Systems Corporation (“PMSC”), a provider of internet banking, bill payment and security services to credit unions in the United States. We believe PMSC provides us with additional financial services solutions and expands our presence in the credit union marketplace. We paid approximately $29.2 million in cash, net of cash acquired, for PMSC and funded the acquisition from our available cash on the acquisition date. In connection with the acquisition, we incurred approximately $300 thousand of legal, valuation, and investment banking fees that were included in General and administrative expenses in our first quarter 2010 operating results. The results of operations of PMSC are included in our condensed consolidated operating results from March 4, 2010 in our Banking: Community FI segment.

In support of establishing an office in Latin America, on August 26, 2010, we acquired certain assets of, and hired certain employees from, a company that resold our products in Latin America (the “Reseller”) and their results of operations are included in our condensed consolidated operating results from August 26, 2010 in our Payments segment. We paid approximately $1.9 million in cash, net of cash acquired, funded from our available cash. The Company will also pay an additional $500 thousand, which will be expensed over the service period, if (i) on August 26, 2012, one of the employees that we hired is still employed by us, or (ii) such employee is terminated without cause by us prior to August 26, 2012.

We accounted for the purchase of PMSC and the purchase of assets of the Reseller in accordance with U.S. GAAP guidance on business combinations. The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill which will be deductible for income tax purposes. We believe the goodwill and other identifiable intangibles from this transaction are attributable to the additional revenue, earnings and customers associated with their respective businesses. We recorded tangible assets acquired and liabilities assumed at fair value as of the acquisition dates. The identifiable intangible assets acquired included existing software technology and trade names for PMSC as well as customer relationships for both PMSC and the Reseller. We used variations of the income approach method to value the intangible assets based upon discounted cash flow projections and the royalty savings method. The final purchase price allocation may be subject to certain post-closing adjustments which may occur up to one year from the acquisition date. The preliminary allocations of the purchase price were as follows (in thousands):

		PMSC				Reseller Assets
Cash		$	751			$	51
Accounts receivables			908				379
Indentifiable intangible assets:
Trade names			121				—
Acquired technology			3,390				—
Customer relationships			5,986				230
Goodwill			19,695				1,726
Property and equipment			502				281
Other assets			506				6
Deferred revenue			(622	)			—
Liabilities			(1,163	)			(673	)
Total		$	30,074			$	2,000

4. FAIR VALUE MEASUREMENTS

U.S. GAAP defines fair value, establishes a framework for measuring fair value, expands disclosures about fair value measurements, and establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. These tiers include: Level 1 which is defined as observable inputs such as quoted prices in active markets; Level 2 which is defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 which is defined as unobservable inputs in which little or no market data exists therefore requiring an entity to develop its own assumptions. We did not have any assets or liabilities that are measured at fair value on a recurring basis as of September 30, 2010 or December 31, 2009.

The carrying value approximates fair value for our cash and cash equivalents due to the short-term nature of these financial instruments. The fair value of fixed term deposits approximate their carrying value as the principal is fixed. Our long-term debt in 2009 had a fixed interest rate and the fair value is determined by discounting cash flows of future interest accruals at market rates currently offered for borrowings with similar remaining maturities or repricing terms. Estimated fair values of our financial instruments were as follows (in thousands):

		September 30, 2010								December 31, 2009
		Carrying				Estimated				Carrying				Estimated
		Value				Fair Value				Value				Fair Value
Cash and cash equivalents		$	52,082			$	52,082			$	61,784			$	61,784
Included in other current assets:
Fixed term deposits			—				—				318				318
Restricted fixed term deposit			2,000				2,000				2,000				2,000
Debt obligation, excluding current portion			—				—				5,026				4,911

5. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Billed receivables		$	39,032			$	42,862
Unbilled receivables			18,476				23,907
Allowance for doubtful accounts and billing adjustments			(3,464	)			(2,299	)
Total		$	54,044			$	64,470

Billed accounts receivables that were more than 90 days past due accounted for 16% and 7% of the billed accounts receivable balance, excluding the allowance for doubtful accounts and billing adjustments, as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, 64% and 42% of the unbilled receivables, respectively, related to an implementation for an international banking customer in our Banking: Large FI segment. Unbilled receivables generally relate to professional services projects with milestone billings where revenue is recognized as services are rendered and billings are invoiced in accordance with the terms of the contract, primarily at project milestone dates. We expect to bill and collect these amounts within one year of the balance sheet date.

6. OTHER CURRENT ASSETS

Other current assets consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Restricted cash and escrow deposits		$	3,871			$	2,059
Short-term investments			—				318
Taxes receivable			2,621				557
Deferred tax assets, net			1,841				1,079
Other			980				918
Total		$	9,313			$	4,931

7. GOODWILL AND OTHER INTANGIBLE ASSETS

As a result of our acquisition of PMSC in the first quarter of 2010, we recorded goodwill of $19.7 million and identifiable intangible assets of $9.5 million, of which $0.1 million was identified as trade names (1 year estimated weighted average useful life), $3.4 million was identified as acquired technology (5 year estimated weighted average useful life), and $6.0 million was identified as customer relationships (10 year estimated weighted average useful life).

As a result of our acquisition of certain assets of the Reseller in the third quarter of 2010, we recorded goodwill of $1.7 million and identifiable intangible assets for customer relationships of $0.2 million with a 6 year estimated weighted average useful life.

Our goodwill balances below include accumulated impairment losses that were recorded in December 2000 of $212.8 million for our Banking: Large FI segment and $258.1 million for our Banking: Community FI segment. The changes in the carrying value of our goodwill for the nine months ended September 30, 2010 was as follows (in thousands):

						Banking:				Banking:
		Payments				Large FI				Community FI				Total
Goodwill, net as of December 31, 2009		$	32,836			$	52,047			$	41,722			$	126,605
Acquisition of PMSC			—				—				19,695				19,695
Acquisition August 2010			1,726				—				—				1,726
Effect of foreign currency translations			155				(126	)			—				29
Goodwill, net as of September 30, 2010		$	34,717			$	51,921			$	61,417			$	148,055

Our intangible assets consisted of the following (in thousands):

		As of September 30, 2010
		Gross				Accumulated				Net
		Carrying Value				Amortization				Carrying Value
Trade names		$	121			$	(71	)		$	50
Acquired technology			25,328				(21,354	)			3,974
Customer lists			18,215				(9,620	)			8,595
Total		$	43,664			$	(31,045	)		$	12,619

		As of December 31, 2009
		Gross				Accumulated				Net
		Carrying Value				Amortization				Carrying Value
Acquired technology		$	21,938			$	(20,592	)		$	1,346
Customer lists			12,000				(8,451	)			3,549
Total		$	33,938			$	(29,043	)		$	4,895

Amortization expense of acquired technology, included in Cost of software licenses, and amortization expense of trade names and customer lists, included in Depreciation and amortization, were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Trade names		$	30			$	—			$	71			$	—
Acquired technology			292				457				763				915
Customer lists			424				283				1,168				565
Total		$	746			$	740			$	2,002			$	1,480

Based upon our current intangible assets, we estimate aggregate amortization expense for the full year 2010 and the next four calendar years to be as follows (in thousands):

		2010				2011				2012				2013				2014
Payments		$	502			$	528			$	528			$	528			$	446
Banking: Large FI			245				245				183				—				—
Banking: Community FI			2,010				2,089				1,493				1,277				1,277
Total		$	2,757			$	2,862			$	2,204			$	1,805			$	1,723

8. DEFERRED REVENUE

Deferred revenue consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Software licenses		$	7,887			$	2,861
Professional services			8,470				7,317
Support and maintenance			20,365				16,659
Deferred revenue, current			36,722				26,837
Deferred revenue, non-current (1)			494				41
Total deferred revenue		$	37,216			$	26,878

Deferred revenue represents payments received and billings to customers for Software licenses, Professional services, and Support and maintenance in advance of performing services or delivery. Support and maintenance is normally billed quarterly or annually in advance of performing the service.

9. INCOME TAXES

FASB ASC 740 Income Taxes and FASB ASC 270 Interim Reporting requires that companies report income taxes on interim periods’ financial statements using an estimated annual effective tax rate. Using this method, income taxes are computed at the end of each interim period based on the best estimate of the effective rate expected to be applicable for the full fiscal year. Income forecasts prepared by us do not reflect the distinct taxable jurisdictions required to utilize this approach. Due to various domestic and foreign jurisdictions in which our business operates, it is difficult to produce accurate income forecasts by jurisdiction and appropriately apply the net operating losses we have in these various jurisdictions in the forecast. Therefore, a reliable annual effective rate cannot be estimated for the full year and we use a year-to-date effective tax rate that is updated each quarter as our effective tax rate can vary depending on the jurisdiction in which our income is generated. Since our deferred tax assets in the United States are reserved with a valuation allowance, changes in certain temporary items, such as stock-based compensation, can significantly impact our effective tax rate on a quarterly and annual basis. In addition, income tax expense from international jurisdictions and the impact of the valuation allowance with the deferred tax assets in the United States may cause significant variations between income tax expense and pre-tax U.S. GAAP income (loss). During the three months and nine months ended September 30, 2010, our income tax expense was due to income in certain foreign jurisdictions which was not offset by tax benefits in the United States due to our deferred tax asset valuation allowances. Additionally, in the third quarter 2010, our income tax benefit was primarily due to $1.4 million in U.S. alternative minimum tax loss carryback pursuant to the American Recovery and Reinvestment Act.

10. STOCK-BASED COMPENSATION PLANS

We maintain certain stock-based compensation plans providing for the grant of stock options, restricted stock, stock appreciation rights (“SARs”) and other forms of awards to officers, directors and non-officer employees. Our 2003 Stock Incentive Plan (Amended and Restated effective February 26, 2008) (the “Plan”) is the only plan that provides for new grants. Awards that are settled in cash do not count against the maximum limit of shares in these plans. During the nine months ended September 30, 2010, we granted 606,000 shares of restricted stock at a weighted average per share grant price of $5.97 and options to purchase 515,000 shares of common stock at a weighted average per share grant price of $6.05. There was no capitalized stock-based compensation cost as of September 30, 2010. We did not recognize any tax benefits in connection with our stock-based compensation expense during the nine months ended September 30, 2010 or 2009.

If all outstanding options were exercised, all restricted stock vested, and all available grants were issued and exercised as of September 30, 2010, our stock-based compensation plans would provide for the issuance of common stock as follows (in thousands):

Grants available under 2003 Stock Incentive Plan			1,109
Stock options outstanding			6,362
Restricted stock			1,288
Total			8,759

As of September 30, 2010, all SARs have vested with an outstanding liability of $1.0 million based on the Black-Scholes valuation, which uses our closing stock price, among other factors, as of September 30, 2010. The outstanding SARs are cash-settled awards and, accordingly, we will record changes in fair value until they are settled. Our cash flows from operating activities included the settlement of $150 thousand for the exercise of SARs in the second quarter of 2010.

Our stock-based compensation expense relates to our stock options, restricted stock and cash-settled SARs. The SARs expense (benefit) is recalculated each quarter based on our updated valuation which includes, among other factors, our closing stock price for the period. Therefore, changes in our stock price during a period will cause our SARs expense (benefit) to change thus impacting our stock-based compensation expense (benefit) until the SARs are settled. The overall decrease in our stock price during the quarterly and year-to-date results presented resulted in a decrease of our SARs liability which was reflected in our stock-based compensation expense (benefit). The following table shows the stock-based compensation expense (benefit) included in the condensed consolidated statement of operations (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Operating expenses:
Cost of professional services, support and maintenance		$	88			$	6			$	229				67
Cost of hosting			33				35				97				78
Selling and marketing			(124	)			(364	)			(111	)			(437	)
Product development			35				36				26				142
General and administrative			217				148				1,190				571
Total stock-based compensation expense (benefit)		$	249			$	(139	)		$	1,431			$	421
Grant type:
Stock options		$	388			$	607			$	1,267			$	1,821
Restricted stock			668				607				1,894				1,169
Stock appreciation rights			(807	)			(1,353	)			(1,730	)			(2,569	)
Total stock-based compensation expense (benefit)		$	249			$	(139	)		$	1,431			$	421

11. SEGMENT REPORTING AND MAJOR CUSTOMERS

S1 Corporation is a leading global provider of payments and financial services software solutions. We manage our business in three operating segments: Payments, Banking: Large FI, and Banking: Community FI. We evaluate the performance of our operating segments based on their contribution before Interest and other expense, net and Income tax expense, as reflected in the tables presented below for the three months and nine months ended September 30, 2010 and 2009. We do not use any asset-based metrics to measure the operating performance of our segments. The following tables show revenue and operating income (loss) for our reportable segments (in thousands):

		Three Months Ended September 30, 2010																Three Months Ended September 30, 2009
						Banking:				Banking:												Banking:				Banking:
		Payments				Large FI				Community FI				Total				Payments				Large FI				Community FI				Total
Revenue:
Software licenses		$	3,437			$	1,806			$	1,521			$	6,764			$	3,913			$	2,069			$	1,462			$	7,444
Support and maintenance			5,531				5,155				4,962				15,648				4,833				5,189				4,897				14,919
Professional services			4,157				12,047				1,178				17,382				5,705				18,847				1,235				25,787
Hosting			314				6,379				7,193				13,886				207				6,932				5,048				12,187
Total revenue		$	13,439			$	25,387			$	14,854			$	53,680			$	14,658			$	33,037			$	12,642			$	60,337
Operating expenses:
Cost of software licenses			—				482				321				803				337				150				136				623
Cost of professional services, support and maintenance			5,096				10,628				5,587				21,311				4,405				10,445				4,350				19,200
Cost of hosting			221				3,727				3,233				7,181				190				3,980				2,909				7,079
Selling and marketing			2,592				2,344				1,516				6,452				2,939				2,517				1,758				7,214
Product development			1,700				3,834				3,565				9,099				1,610				5,209				2,177				8,996
General and administrative			1,754				2,531				1,461				5,746				1,462				2,906				1,496				5,864
Depreciation and amortization			500				1,103				986				2,589				363				1,168				767				2,298
Total operating expenses			11,863				24,649				16,669				53,181				11,306				26,375				13,593				51,274
Operating income (loss)		$	1,576			$	738			$	(1,815	)		$	499			$	3,352			$	6,662			$	(951	)		$	9,063

		Nine Months Ended September 30, 2010																Nine Months Ended September 30, 2009
						Banking:				Banking:												Banking:				Banking:
		Payments				Large FI				Community FI				Total				Payments				Large FI				Community FI				Total
Revenue:
Software licenses		$	9,121			$	3,712			$	4,502			$	17,335			$	14,447			$	5,853			$	5,918			$	26,218
Support and maintenance			15,993				15,335				15,108				46,436				13,565				15,523				14,609				43,697
Professional services			12,675				36,559				3,448				52,682				13,792				55,104				4,056				72,952
Hosting			883				18,969				20,308				40,160				549				21,132				14,919				36,600
Total revenue		$	38,672			$	74,575			$	43,366			$	156,613			$	42,353			$	97,612			$	39,502			$	179,467
Operating expenses:
Cost of software licenses			121				918				715				1,754				1,225				663				847				2,735
Cost of professional services, support and maintenance			14,059				30,885				16,442				61,386				11,498				32,707				11,792				55,997
Cost of hosting			612				11,127				9,003				20,742				473				12,023				8,673				21,169
Selling and marketing			8,353				7,153				4,501				20,007				8,682				9,144				5,317				23,143
Product development			4,574				12,027				9,971				26,572				3,980				15,891				6,270				26,141
General and administrative			5,411				8,439				4,871				18,721				4,321				9,167				4,701				18,189
Depreciation and amortization			1,462				3,320				2,828				7,610				1,182				3,705				2,411				7,298
Total operating expenses			34,592				73,869				48,331				156,792				31,361				83,300				40,011				154,672
Operating income (loss)		$	4,080			$	706			$	(4,965	)		$	(179	)		$	10,992			$	14,312			$	(509	)		$	24,795

Major Customer. Currently, we have one major customer (defined as any customer who individually contributes more than 10% of total revenue) in the Banking: Large FI segment. We derived 10% and 16% of our total revenue from State Farm during the three months ended September 30, 2010 and 2009, respectively, and 13% and 16% for the nine months ended September 30, 2010 and 2009, respectively. Our Banking: Large FI segment derived 21% and 29% of the segment’s revenue from State Farm during the three months ended September 30, 2010 and 2009, respectively, and 27% and 30% for the nine months ended September 30, 2010 and 2009, respectively. In 2008, we announced that we expected our relationship with State Farm to conclude by the end of 2011.

Geography. Our geographic regions are the Americas and our international locations in Europe, Middle East and India (“EMEI”), Asia-Pacific (“APAC”) and Africa. Revenue by geographic region includes intercompany services performed for other regions. Our long-lived assets in the international regions primarily are property and equipment. The following table shows revenue and long-lived assets by geographic region (in thousands):

		Revenue								Revenue								Property and Equipment
		Three Months Ended September 30,								Nine Months Ended September 30,								September 30,				December 31,
		2010				2009				2010				2009				2010				2009
Americas		$	37,157			$	42,517			$	111,144			$	128,200			$	19,080			$	20,451
International:
EMEI			7,456				9,485				21,536				27,629				1,022				985
Africa			3,395				2,814				9,909				8,277				1,433				1,494
APAC			5,672				5,521				14,024				15,361				156				88
Total		$	53,680			$	60,337			$	156,613			$	179,467			$	21,691			$	23,018

12. NET INCOME (LOSS) PER COMMON SHARE

We calculate net income per share by allocating income between the weighted average common shares outstanding and the weighted average outstanding participating securities during periods in which we record net income. For periods in which we record a net loss, we calculate net loss per share as the net loss during the period divided by the weighted average number of common shares outstanding during the period, as the effect of applying the two-class method would be anti-dilutive. Because of our net loss in the nine months ended September 30, 2010, we did not include the additional shares of common stock through the exercise of stock options as they would have an anti-dilutive effect on our loss per share for that period. The following table presents the calculation of basic and diluted net income (loss) per share (in thousands except per share data):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Basic income (loss) per share:
Net income (loss)		$	892			$	6,910			$	(1,938	)		$	20,485
Amount allocated to participating preferred stockholders			—				(135	)			—				(403	)
Amount allocated to participating restricted stockholders			(21	)			(134	)			—				(236	)
Net income (loss) available to common stockholders		$	871			$	6,641			$	(1,938	)		$	19,846
Basic weighted average common shares outstanding			53,087				52,599				52,228				52,766
Basic income (loss) per share		$	0.02			$	0.13			$	(0.04	)		$	0.38
Diluted income (loss) per share:
Net income (loss)		$	892			$	6,910			$	(1,938	)		$	20,485
Amount allocated to participating preferred stockholders			—				(133	)			—				(397	)
Amount allocated to participating restricted stockholders			(21	)			(132	)			—				(233	)
Net income (loss) available to common stockholders		$	871			$	6,645			$	(1,938	)		$	19,855
Basic weighted average common shares outstanding			53,087				52,599				52,228				52,766
Dilutive effect of employee stock options			368				854				—				728
Diluted weighted average common shares outstanding			53,455				53,453				52,228				53,494
Diluted income (loss) per share		$	0.02			$	0.12			$	(0.04	)		$	0.37

13. CONVERTIBLE PREFERRED STOCK

On July 2, 2010, State Farm converted the 749,064 shares of our Series B Convertible Preferred Stock it held into 1,070,090 shares of our common stock. At September 30, 2010, the Company did not have any shares of convertible preferred stock outstanding.

14. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consisted of the following (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income (loss)		$	892			$	6,910			$	(1,938	)		$	20,485
Other comprehensive income:
Currency translation adjustment			2,604				477				452				3,657
Realized gain on securities, net of tax			—				(81	)			—				(69	)
Total other comprehensive income			2,604				396				452				3,588
Comprehensive income (loss)		$	3,496			$	7,306			$	(1,486	)		$	24,073

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

This quarterly report on Form 10-Q and the documents incorporated into this quarterly report by reference contain forward-looking statements and information relating to the Company within the safe harbor provisions of the Private Securities Litigation Reform Act. These statements include statements with respect to our financial condition, results of operations and business. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “estimates,” “intends” or similar terminology identify forward-looking statements. Forward-looking statements may include projections of our revenue, expenses, revenue backlog, capital expenditures, earnings per share, product development projects, future economic performance or management objectives. 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. Except as required by law, we undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

When we use the terms “S1 Corporation”, “S1”, “Company”, “we”, “us” and “our,” we mean S1 Corporation, a Delaware corporation, and its subsidiaries. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes appearing elsewhere herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. You are urged to read the risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as supplemented by the risk factors in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, each as filed with the Securities and Exchange Commission (“SEC”).

Executive Overview

S1 Corporation is a leading global provider of payments and financial services software solutions. We offer payments solutions for ATM and retail POS driving, card management, and merchant acquiring, as well as financial services solutions for consumer, small business and corporate online banking, trade finance, mobile banking, voice banking, branch and call center banking. We sell our solutions primarily to banks, credit unions, retailers and transaction processors. We also provide software, custom software development, hosting and other services to State Farm, a relationship that we expect will conclude by the end of 2011.

In the first quarter of 2010, we changed our reporting segments to present our Payments, Banking: Large Financial Institution (“Banking: Large FI”), and Banking: Community Financial Institution (“Banking: Community FI”) businesses separately. The Payments segment provides our ATM and POS driving, card management, and merchant acquiring solutions to financial institutions, retailers and transaction processors of all sizes globally. The Banking: Large FI segment provides consumer, small business and corporate online banking, trade finance, and mobile banking solutions to large banks globally, branch and call center banking solutions to large banks outside of the United States, and also supports our business with State Farm. The Banking: Community FI segment provides consumer and small business online banking, mobile banking, voice banking, branch and call center banking solutions to community and regional banks and credit unions in the United States.

On March 4, 2010, we acquired 100% of the outstanding shares of PM Systems Corporation (“PMSC”), a provider of internet banking, bill payment and security services to credit unions in the United States. PMSC provides us with additional financial services solutions and expands our presence in the credit union marketplace. We paid approximately $29.2 million, net of cash acquired, for PMSC and funded the acquisition from our available cash on the acquisition date. PMSC’s credit union business is included in our Banking: Community FI segment’s results of operations from March 4, 2010.

In support of establishing an office in Latin America, on August 26, 2010, we acquired certain assets of, and hired certain employees from, a company that resold our products in Latin America (the “Reseller”) and their results of operations are included in our condensed consolidated operating results from August 26, 2010 in our Payments segment. We paid approximately $1.9 million in cash, net of cash acquired, funded from our available cash. The Company will also pay an additional $500 thousand, which will be expensed over the service period, if (i) on August 26, 2012, one of the employees that we hired is still employed by us, or (ii) such employee is terminated without cause by us prior to August 26, 2012.

Historically, Software licenses for our Payments solutions and for some of our Banking: Large FI solutions were generally recognized upon delivery of the software provided all other revenue recognition criteria were met. However, as our Payments business expands to serve larger customers and our Banking: Large FI business provides greater levels of customization and integration, specifically for our corporate online banking solutions, implementation projects are increasing in size, complexity and length. Accordingly, we expect a greater percentage of Software licenses to be recognized over the implementation period as Software licenses revenue is recognized over the implementation period when professional services are considered essential to the functionality of the software. While this shift does have an impact on our current and near-term financial results, we believe it will provide greater longer-term revenue visibility. Professional services revenue can vary from quarter to quarter due to the number and size of professional services projects, project scope changes, changes in estimates to completion, and project delays and cancellations.

Summary financial results. Our revenue was $53.7 million for the three months ended September 30, 2010 which was a decrease of $6.7 million, or 11%, as compared to the same period in 2009 due primarily to lower revenue in our Payments and Banking: Large FI segments, which included a reduction in revenue from State Farm. For the three months ended September 30, 2010, our net income of $900 thousand was a decrease of $6.0 million as compared to the same period in 2009 primarily as a result of the revenue decline in our Payments and Banking: Large FI segments and the increase in development and professional services costs incurred in connection with migrating online banking customers in the Banking: Community FI segment to a new banking platform partially offset by lower variable cash incentives resulting from missed earnings targets.

Our revenue was $156.6 million for the nine months ended September 30, 2010 which was a decrease of $22.9 million, or 13%, as compared to the same period in 2009 due primarily to lower revenue in our Payments and Banking: Large FI segments, which included a reduction in revenue from State Farm. For the nine months ended September 30, 2010, our net loss of $1.9 million was primarily attributable to the revenue decline in our Payments and Banking: Large FI segments and the increase in development and professional services costs incurred in connection with migrating online banking customers in the Banking: Community FI segment to a new banking platform, partially offset by lower variable cash incentives resulting from missed earnings targets.

During the nine months ended September 30, 2010, we generated $26.1 million in cash provided by operating activities primarily from income adjusted for the effect of non-cash expenses, collections of accounts receivable and growth of deferred revenue for annual support services, professional services and software licenses billed in advance.

Revenue from Significant Customers

Revenue from State Farm was 10% and 16% of our total revenue and 21% and 29% of our Banking: Large FI segment’s revenue during the three months ended September 30, 2010 and 2009, respectively. Revenue from State Farm was 13% and 16% of our total revenue and 27% and 30% of our Banking: Large FI segment’s revenue during the nine months ended September 30, 2010 and 2009, respectively. In 2008, we announced that we expected our relationship with State Farm to conclude by the end of 2011. We expect to generate approximately $25 — $26 million in revenue in 2010, and approximately $15 — $16 million in revenue in 2011, from this customer.

Revenue Backlog

Our estimated revenue backlog includes revenue for software licenses including term licenses, professional services, and hosting services, as specified in executed contracts that we believe will be recognized in revenue over the next twelve months. Revenue backlog associated with the State Farm business, the custom development for an international branch customer and our Banking: Community FI segment is excluded from the revenue backlog totals. As of September 30, 2010 and December 31, 2009, our estimate of revenue backlog was $56.7 million and $39.2 million, respectively. We believe that presenting this estimate provides supplemental information and an alternative presentation useful to investors understanding trends in our business including the shift we are experiencing toward recognizing more software license revenue using the percentage of completion method. However, our estimated backlog is based on a number of assumptions and is subject to a number of factors, many of which are completely outside of our control. Please see Part II, Item 1A, “Risk Factors,” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 for further discussion.

CONSOLIDATED RESULTS OF OPERATIONS

The following table sets forth our statement of operations for the specified periods (in thousands, except for per share and percentage data):

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
		2010				2009				Change				2010				2009				Change
Revenue:
Software licenses		$	6,764			$	7,444				-9	%		$	17,335			$	26,218				-34	%
Support and maintenance			15,648				14,919				5	%			46,436				43,697				6	%
Professional services			17,382				25,787				-33	%			52,682				72,952				-28	%
Hosting			13,886				12,187				14	%			40,160				36,600				10	%
Total revenue			53,680				60,337				-11	%			156,613				179,467				-13	%
Operating Expenses:
Cost of software licenses (1)			803				623				29	%			1,754				2,735				-36	%
Cost of professional services, support and maintenance (1)			21,311				19,200				11	%			61,386				55,997				10	%
Cost of hosting (1)			7,181				7,079				1	%			20,742				21,169				-2	%
Selling and marketing			6,452				7,214				-11	%			20,007				23,143				-14	%
Product development			9,099				8,996				1	%			26,572				26,141				2	%
General and administrative			5,746				5,864				-2	%			18,721				18,189				3	%
Depreciation and amortization			2,589				2,298				13	%			7,610				7,298				4	%
Total operating expenses			53,181				51,274				4	%			156,792				154,672				1	%
Operating income (loss)			499				9,063				-94	%			(179	)			24,795				-101	%
Interest and other expense, net			(454	)			(516	)			-12	%			(1,053	)			(1,034	)			2	%
Income (loss) before income tax benefit (expense)			45				8,547				-99	%			(1,232	)			23,761				-105	%
Income tax benefit (expense)			847				(1,637	)			-152	%			(706	)			(3,276	)			-78	%
Net income (loss)		$	892			$	6,910				-87	%		$	(1,938	)		$	20,485				-109	%
Net income (loss) per share:
Basic		$	0.02			$	0.13							$	(0.04	)		$	0.38
Diluted		$	0.02			$	0.12							$	(0.04	)		$	0.37
Effective tax rate			-1882	%			19	%							-57	%			14	%
Operating expenses as a percent of revenue:
Cost of software licenses (2)			12	%			8	%							10	%			10	%
Cost of professional services, support and maintenance (2)			65	%			47	%							62	%			48	%
Cost of hosting (2)			52	%			58	%							52	%			58	%
Selling and marketing			12	%			12	%							13	%			13	%
Product development			17	%			15	%							17	%			15	%
General and administrative			11	%			10	%							12	%			10	%
Depreciation and amortization			5	%			4	%							5	%			4	%
Operating income			1	%			15	%							0	%			14	%
Net income (loss)			2	%			11	%							-1	%			11	%