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 þ 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 3, 2011: 55,193,438

 

 

S1 CORPORATION

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010			1
Condensed Consolidated Statements of Operations for the Three Months Ended and Nine Months Ended September 30, 2011 and 2010			2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended and Nine Months Ended September 30, 2011 and 2010			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			26
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			27
Item 6. Exhibits			29
Signature			31
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

S1 CORPORATION

		September 30,				December 31,
		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	88,090			$	61,917
Accounts receivable, net			51,749				44,370
Prepaid expenses			5,046				4,827
Other current assets			9,967				6,612
Total current assets			154,852				117,726
Property and equipment, net			21,723				22,330
Intangible assets, net			9,662				11,846
Goodwill, net			147,095				147,544
Other assets			6,133				10,207
Total assets		$	339,465			$	309,653
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	13,941			$	9,779
Accrued compensation and benefits			13,584				9,705
Current portion of debt obligation			20				5,046
Accrued restructuring			—				1,528
Income taxes payable			1,647				1,950
Deferred revenue			45,721				38,022
Other current liabilities			3,694				2,853
Total current liabilities			78,607				68,883
Other liabilities			3,985				3,157
Total liabilities			82,592				72,040
Stockholders’ equity:
Common stock, $0.01 par value per share. Authorized 350,000,000 shares. Issued and outstanding 55,019,593 and 53,317,063 shares at September 30, 2011 and December 31, 2010, respectively			550				533
Additional paid-in-capital			1,812,757				1,802,795
Accumulated deficit			(1,553,588	)			(1,563,817	)
Accumulated other comprehensive loss			(2,846	)			(1,898	)
Total stockholders’ equity			256,873				237,613
Total liabilities and stockholders’ equity		$	339,465			$	309,653

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenue:
Software licenses		$	9,711			$	6,764			$	27,670			$	17,335
Support and maintenance			17,468				15,648				50,576				46,436
Professional services			20,224				17,382				62,050				52,682
Hosting			14,136				13,886				42,408				40,160
Total revenue			61,539				53,680				182,704				156,613
Operating expenses:
Cost of software licenses (1)			1,049				803				2,173				1,754
Cost of professional services, support and maintenance (1)			26,086				21,311				74,142				61,386
Cost of hosting (1)			6,805				7,181				21,181				20,742
Selling and marketing			7,741				6,452				22,230				20,007
Product development			8,779				9,099				26,099				26,572
General and administrative			10,870				5,746				27,182				18,721
Depreciation and amortization			2,587				2,589				7,695				7,610
Total operating expenses			63,917				53,181				180,702				156,792
Operating (loss) income			(2,378	)			499				2,002				(179	)
Interest income			58				53				171				164
Interest expense			(7	)			(112	)			(213	)			(350	)
Other non-operating income (expense)			11,270				(395	)			10,342				(867	)
Interest and other income (expense), net			11,321				(454	)			10,300				(1,053	)
Income (loss) before income tax (expense) benefit			8,943				45				12,302				(1,232	)
Income tax (expense) benefit			(903	)			847				(2,073	)			(706	)
Net income (loss)		$	8,040			$	892			$	10,229			$	(1,938	)
Net income (loss) per share:
Basic		$	0.15			$	0.02			$	0.19			$	(0.04	)
Diluted		$	0.14			$	0.02			$	0.18			$	(0.04	)
Weighted average common shares outstanding — basic			54,528,880				53,087,495				53,829,977				52,228,006
Weighted average common shares outstanding — diluted			55,722,570				53,455,282				54,744,806				52,228,006

See accompanying notes to unaudited condensed consolidated financial statements.

S1 CORPORATION

		Nine Months Ended
		September 30,
		2011				2010
Cash flows from operating activities:
Net income (loss)		$	10,229			$	(1,938	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization			8,571				8,373
Provision for doubtful accounts receivable and billing adjustments			(76	)			1,540
Deferred income taxes			(635	)			(657	)
Stock-based compensation expense			4,880				1,431
Changes in assets and liabilities:
(Increase) decrease in accounts receivable			(8,235	)			10,347
Decrease (increase) in prepaid expenses and other assets			332				(2,305	)
Increase in accounts payable and other liabilities			3,755				158
Increase (decrease) in accrued compensation and benefits			2,107				(1,899	)
(Decrease) increase in income taxes payable			(202	)			1,360
Increase in deferred revenue			9,117				9,660
Net cash provided by operating activities			29,843				26,070
Cash flows from investing activities:
Purchases of investment securities			—				(1,117	)
Maturities of investment securities			—				1,384
Acquisitions, net of acquired cash			—				(31,198	)
Proceeds from the sale of property, equipment and technology			139				—
Purchases of property, equipment and technology			(6,168	)			(4,140	)
Net cash used in investing activities			(6,029	)			(35,071	)
Cash flows from financing activities:
Proceeds (payments) from the exercise of stock awards			7,148				(26	)
Payments on capital leases and debt obligations			(5,042	)			(1,008	)
Net cash provided by (used in) financing activities			2,106				(1,034	)
Effect of exchange rate changes on cash and cash equivalents			253				333
Net increase (decrease) in cash and cash equivalents			26,173				(9,702	)
Cash and cash equivalents at beginning of period			61,917				61,784
Cash and cash equivalents at end of period		$	88,090			$	52,082

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.

On October 3, 2011, the Company entered into a Transaction Agreement (the “Transaction Agreement”) with ACI Worldwide, Inc., a Delaware corporation (“ACI”), and Antelope Investment Co. LLC, a Delaware limited liability company and wholly owned subsidiary of ACI (“ACI Merger Sub”), pursuant to which ACI will acquire the Company, subject to customary closing conditions. Please see Note 3, “Business Combinations” and Note 15, “Subsequent Event” to our condensed consolidated financial statements for further information.

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, 2010. 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, 2011, our results of operations for the three months and nine months ended September 30, 2011, and our cash flows for the nine months ended September 30, 2011. The data in the condensed consolidated balance sheet as of December 31, 2010 was derived from our audited consolidated balance sheet as of December 31, 2010, as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. 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, 2011 are not necessarily indicative of the operating results that may be expected for the full year ending December 31, 2011 or for any other period. Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation.

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 January 1, 2011. 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 January 1, 2011. 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.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for annual and interim periods beginning after December 15, 2011, with early adoption prohibited. The new guidance will require prospective application. We do not expect the adoption of this guidance to have a material impact on our consolidated results of operations and financial position.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income which provides new guidance on the presentation of comprehensive income in financial statements. Entities are required to present total comprehensive income either in a single, continuous statement of comprehensive income or in two separate, but consecutive, statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity, but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The guidance is effective for annual and interim periods beginning after December 15, 2011, and is to be applied retrospectively. The adoption of this guidance is a financial presentation change and is not expected to have an impact on our consolidated results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other: Testing Goodwill for Impairment which amended the guidance on the annual testing of goodwill for impairment. The amended guidance would allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This guidance is effective for annual periods beginning after December 15, 2011, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated results of operations and financial position.

3. BUSINESS COMBINATION

Fundtech. On June 26, 2011, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Fundtech Merger Agreement”) with Finland Holdings (2011) Ltd. (“Merger Sub”), a company organized under the laws of Israel and a wholly owned subsidiary of S1, and Fundtech Ltd., a company organized under the laws of Israel (“Fundtech”). Pursuant to the terms of the Fundtech Merger Agreement, Merger Sub was to be merged with and into Fundtech, with Fundtech surviving the merger and becoming a wholly owned subsidiary of S1. On September 15, 2011, the Company announced that Fundtech had delivered to the Company a notice of its intent to change its recommendation with respect to the pending merger with the Company, to terminate the Fundtech Merger Agreement and to enter into a written definitive agreement with entities formed by GTCR Fund X/A LP and its affiliated entities. The Company’s board of directors determined not to revise the Company’s proposal to acquire Fundtech and instead to terminate the Fundtech Merger Agreement. The Company announced on September 16, 2011 that it had terminated the Fundtech Merger Agreement and, in connection with such termination, received an $11.9 million termination fee from Fundtech in September 2011 which was recognized in Interest and other income (expense), net, during the third quarter of 2011.

ACI Worldwide. On October 3, 2011, the Company entered into a Transaction Agreement with ACI and ACI Merger Sub, pursuant to which ACI will acquire the Company. Pursuant to the terms and conditions of the Transaction Agreement, ACI amended its previously commenced tender offer (the “Amended Offer”) to purchase all of the outstanding shares of Company common stock (the “Shares”) for a purchase price of either (i) $10.00 in cash per Share, without interest (the “Cash Consideration”), or (ii) 0.3148 of a share of ACI common stock per Share (the “Stock Consideration,” and together with the Cash Consideration, the “Offer Price”), subject to proration.

On October 31, 2011, ACI extended the Amended Offer until 5:00 p. m., Eastern time, on November 30, 2011, unless further extended. ACI Merger Sub’s obligation to accept for payment and pay for Shares tendered in the Amended Offer is subject to customary conditions, including, among other things, that (i) at least a majority of the outstanding Shares (determined on a fully-diluted basis) shall have been validly tendered in accordance with the terms of the Amended Offer and not properly withdrawn, and (ii) the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or terminated.

Following the completion of the Amended Offer, and subject to satisfaction or waiver of certain conditions set forth in the Transaction Agreement, including, if required, a vote of the Company’s stockholders with respect to the adoption of the Transaction Agreement, ACI Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of ACI; alternatively, the parties may agree to effect the merger through the merger of the Company with and into ACI Merger Sub, with ACI Merger Sub serving as a wholly owned subsidiary of ACI (collectively, the “Merger”). At the effective time of the Merger, each remaining issued and outstanding Share (other than (i) Shares held by the Company, ACI or their respective subsidiaries, (ii) certain shares of restricted stock of the Company that convert into restricted shares of ACI common stock pursuant to the Transaction Agreement, or (iii) by stockholders who have properly exercised their dissenters’ rights under Section 262 of the Delaware General Corporation Law) will be automatically converted into the right to receive $6.62 in cash, without interest, and 0.1064 of a share of ACI common stock.

The Transaction Agreement includes customary representations, warranties and covenants of the Company, ACI and Merger Sub. The Company has agreed to operate its business in the ordinary course until the Merger is consummated. The Company has also agreed not to (i) solicit proposals relating to alternative business combination transactions, or (ii) enter into discussions or negotiations or an agreement concerning, or provide confidential information in connection with, any alternative proposals for alternative business combination transactions. Each of these covenants is subject to exceptions as provided in the Transaction Agreement. The Transaction Agreement also includes customary termination provisions for both the Company and ACI and provides that, in connection with the termination of the Transaction Agreement under specified circumstances, including a change in the recommendation of the Company’s board of directors, the Company may be required to pay to ACI a termination fee of $19.14 million.

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.

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, which were included in other current assets, approximates their carrying values as the principal was fixed. Our long-term debt had a fixed interest rate and the fair value was determined by discounting cash flows of future interest accruals at market rates currently offered for borrowings with similar remaining maturities or repricing terms. Deferred compensation consisted of deferred cash fees for members of our Board of Directors that were issued as deferred cash units, the fair value of which is remeasured each period based on our closing stock price and were included in accrued compensation and benefits.

The liability for deferred compensation below was the only financial instrument that was remeasured on a recurring basis as of the respective reporting dates and we determined that the liability was Level 1 in the fair value hierarchy. The fair value estimates of our financial instruments were as follows (in thousands):

		September 30, 2011								December 31, 2010
		Carrying				Estimated				Carrying				Estimated
		Value				Fair Value				Value				Fair Value
Assets
Cash and cash equivalents		$	88,090			$	88,090			$	61,917			$	61,917
Restricted fixed term deposit			2,000				2,000				2,000				2,000
Liabilities
Debt obligation, excluding current portion			21				19				35				36
Deferred compensation			661				661				298				298

5. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (in thousands):

		September 30,				December 31,
		2011				2010
Billed receivables		$	44,492			$	35,264
Unbilled receivables			10,237				12,415
Allowance for doubtful accounts and billing adjustments			(2,980	)			(3,309	)
Total		$	51,749			$	44,370

Billed accounts receivables that were more than 90 days past due accounted for 10% and 16% of the billed accounts receivable balance, excluding allowance for doubtful accounts and billing adjustments, as of September 30, 2011 and December 31, 2010, respectively. As of September 30, 2011 and December 31, 2010, 39% and 60% of the unbilled receivables, respectively, related to an implementation for an international branch customer. Unbilled receivables generally relate to professional services projects with milestone billings where revenue is recognized as services are rendered and billings are sent to customers 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,
		2011				2010
Restricted cash and deposits		$	2,185			$	2,063
Taxes receivable			1,248				1,582
Deferred tax assets, net			4,907				1,859
Other			1,627				1,108
Total		$	9,967			$	6,612

7. GOODWILL AND INTANGIBLE ASSETS

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, 2011 were as follows (in thousands):

						Banking:				Banking:
		Payments				Large FI				Community FI				Total
Goodwill, net as of December 31, 2010		$	58,343			$	51,756			$	37,445			$	147,544
Effect of foreign currency translations			(427	)			32				(54	)			(449	)
Goodwill, net as of September 30, 2011		$	57,916			$	51,788			$	37,391			$	147,095

The changes in the net carrying amount of intangible assets during the nine months ended September 30, 2011 were due to amortization expense and the impact of changes in foreign exchange rates. Our intangible assets consisted of the following (in thousands):

		As of September 30, 2011
		Gross				Accumulated				Net
		Carrying Value				Amortization				Carrying Value
Trade names		$	121			$	(121	)		$	—
Acquired technology			25,328				(22,522	)			2,806
Customer lists			18,201				(11,345	)			6,856
Total		$	43,650			$	(33,988	)		$	9,662

		As of December 31, 2010
		Gross				Accumulated				Net
		Carrying Value				Amortization				Carrying Value
Trade names		$	121			$	(101	)		$	20
Acquired technology			25,328				(21,646	)			3,682
Customer lists			18,196				(10,052	)			8,144
Total		$	43,645			$	(31,799	)		$	11,846

Amortization expense of acquired technology, included in Cost of software licenses, and amortization expense of customer relationships, included in Depreciation and amortization of other intangible assets, were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Trade names		$	—			$	30			$	20			$	71
Acquired technology			292				292				876				763
Customer lists			432				424				1,295				1,168
Total		$	724			$	746			$	2,191			$	2,002

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

		2011				2012				2013				2014				2015
Payments		$	526			$	526			$	526			$	444			$	36
Banking: Large FI			245				184				—				—				—
Banking: Community FI			2,089				1,492				1,277				1,277				712
Total		$	2,860			$	2,202			$	1,803			$	1,721			$	748

8. 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 tax 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 and Thailand 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 and Thailand may cause significant variations between income tax expense and pre-tax U.S. GAAP income (loss). During the nine months ended September 30, 2011, our effective tax rate was approximately 17% which was below the expected statutory tax rate, primarily due to the $11.9 million fee associated with the termination of the Fundtech Merger Agreement which was recorded in the U.S. where we have net operating loss carry forwards that are subject to a full valuation allowance.

9. RESTRUCTURING

We implemented cost reduction plans in prior years to change our organizational structure, reduce operating costs and more effectively align the Company with the needs of our customers. The remaining restructuring reserves at the end of 2010 related to rent expense for a vacated facility. We had payments net of sublease income of approximately $1.5 million during the nine month period ended September 30, 2011 for the facility. The lease for the vacated facility ended during the third quarter of 2011 and all obligations were paid off as of September 30, 2011. We had a $2.0 million letter of credit that was held by the lessor as security on the lease which was cancelled as of October 6, 2011.

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) is the only plan that provides for new grants. Awards that are settled in cash do not count against the maximum number of shares in these plans. During the nine months ended September 30, 2011, we did not grant any stock-based compensation awards. There was no capitalized stock-based compensation cost as of September 30, 2011. If all outstanding options were exercised, all restricted stock vested, and all available grants were issued and exercised as of September 30, 2011, our stock-based compensation plans would provide for the issuance of common stock as follows (in thousands):

		Number of
		Shares
Grants available under 2003 Stock Incentive Plan			1,314
Stock options outstanding			4,283
Restricted stock outstanding			805
Total			6,402

As of September 30, 2011, all SARs have vested with a liability of $2.5 million based on the Black-Scholes valuation, which uses our outstanding closing stock price, among other factors, as of September 30, 2011. The outstanding SARs are cash-settled awards and, accordingly, we will record changes in fair value until they are settled. There were cash settlements for SARs included in cash flows from operating activities of $1.6 million during the quarter ended September 30, 2011.

Our stock-based compensation expense relates to our stock options, restricted stock and cash-settled SARs. The SARs expense 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 to change thus impacting our stock-based compensation expense until the SARs are settled. The overall increase in our stock price during the quarters presented resulted in an increase of our SARs liability which was reflected in our stock-based compensation expense. The following table shows the stock-based compensation expense included in the condensed consolidated statement of operations (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Operating expenses (benefits):
Cost of professional services, support and maintenance		$	51			$	88			$	123				229
Cost of hosting			23				33				83				97
Selling and marketing			748				(124	)			1,257				(111	)
Product development			263				35				544				26
General and administrative			1,310				217				2,873				1,190
Total stock-based compensation expense		$	2,395			$	249			$	4,880			$	1,431
Grant type:
Stock options		$	251			$	388			$	918			$	1,267
Restricted stock			589				668				1,913				1,894
Stock appreciation rights			1,555				(807	)			2,049				(1,730	)
Total stock-based compensation expense		$	2,395			$	249			$	4,880			$	1,431

11. COMPREHENSIVE INCOME (LOSS)

The fluctuations in foreign currency rates for the U. S. Dollar against primarily the British Pound Sterling, South African Rand, Indian Rupee and European Euro resulted in currency translation adjustments mainly due to our net intangible assets and goodwill in these currencies. Comprehensive income (loss) consisted of the following (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net income (loss)		$	8,040			$	892			$	10,229			$	(1,938	)
Other comprehensive (loss) income:
Currency translation adjustment, net of taxes			(1,991	)			2,604				(948	)			452
Total other comprehensive (loss) income			(1,991	)			2,604				(948	)			452
Comprehensive income (loss)		$	6,049			$	3,496			$	9,281			$	(1,486	)

12. 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 income (expense), net and Income tax (expense) benefit, as reflected in the tables presented below for the three months and nine months ended September 30, 2011 and 2010. 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, 2011																Three Months Ended September 30, 2010
						Banking:				Banking:												Banking:				Banking:
		Payments				Large FI				Community FI				Total				Payments				Large FI				Community FI				Total
Revenue:
Software licenses		$	5,169			$	2,847			$	1,695			$	9,711			$	3,437			$	1,806			$	1,521			$	6,764
Support and maintenance			6,855				6,043				4,570				17,468				5,531				5,155				4,962				15,648
Professional services			5,557				13,138				1,529				20,224				4,157				12,047				1,178				17,382
Hosting			419				5,939				7,778				14,136				314				6,379				7,193				13,886
Total revenue		$	18,000			$	27,967			$	15,572			$	61,539			$	13,439			$	25,387			$	14,854			$	53,680
Operating expenses:
Cost of software licenses			23				445				581				1,049				—				482				321				803
Cost of professional services, support and maintenance			6,935				14,071				5,080				26,086				5,096				10,628				5,587				21,311
Cost of hosting			283				3,286				3,236				6,805				221				3,727				3,233				7,181
Selling and marketing			3,453				2,608				1,680				7,741				2,592				2,344				1,516				6,452
Product development			2,043				3,765				2,971				8,779				1,700				3,834				3,565				9,099
General and administrative			3,504				4,360				3,006				10,870				1,754				2,531				1,461				5,746
Depreciation and amortization			573				1,186				828				2,587				500				1,103				986				2,589
Total operating expenses			16,814				29,721				17,382				63,917				11,863				24,649				16,669				53,181
Operating income (loss)		$	1,186			$	(1,754	)		$	(1,810	)		$	(2,378	)		$	1,576			$	738			$	(1,815	)		$	499

		Nine Months Ended September 30, 2011																Nine Months Ended September 30, 2010
						Banking:				Banking:												Banking:				Banking:
		Payments				Large FI				Community FI				Total				Payments				Large FI				Community FI				Total
Revenue:
Software licenses		$	15,409			$	6,815			$	5,446			$	27,670			$	9,121			$	3,712			$	4,502			$	17,335
Support and maintenance			19,439				17,150				13,987				50,576				15,993				15,335				15,108				46,436
Professional services			16,295				41,640				4,115				62,050				12,675				36,559				3,448				52,682
Hosting			1,024				17,597				23,787				42,408				883				18,969				20,308				40,160
Total revenue		$	52,167			$	83,202			$	47,335			$	182,704			$	38,672			$	74,575			$	43,366			$	156,613
Operating expenses:
Cost of software licenses			54				833				1,286				2,173				121				918				715				1,754
Cost of professional services, support and maintenance			19,338				39,471				15,333				74,142				14,059				30,885				16,442				61,386
Cost of hosting			866				10,309				10,006				21,181				612				11,127				9,003				20,742
Selling and marketing			10,119				7,117				4,994				22,230				8,353				7,153				4,501				20,007
Product development			5,226				12,149				8,724				26,099				4,574				12,027				9,971				26,572
General and administrative			8,954				10,622				7,606				27,182				5,411				8,439				4,871				18,721
Depreciation and amortization			1,654				3,423				2,618				7,695				1,462				3,320				2,828				7,610
Total operating expenses			46,211				83,924				50,567				180,702				34,592				73,869				48,331				156,792
Operating income (loss)		$	5,956			$	(722	)		$	(3,232	)		$	2,002			$	4,080			$	706			$	(4,965	)		$	(179	)

Major Customer. Currently, we have one major customer (defined as any customer who individually contributes more than 10% of total revenue), State Farm, in the Banking: Large FI segment. Revenue from State Farm was 5% and 10% of our total revenue and 11% and 21% of our Banking: Large FI segment’s revenue during the three months ended September 30, 2011 and 2010, respectively. Revenue from State Farm was 8% and 13% of our total revenue and 17% and 27% of our Banking: Large FI segment’s revenue during the nine months ended September 30, 2011 and 2010, respectively. We expect our relationship with State Farm to conclude by the end of 2011.

Geography. Our geographic regions are the Americas and International 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,
		2011				2010				2011				2010				2011				2010
Americas		$	39,963			$	37,157			$	125,573			$	111,144			$	19,517			$	19,685
International:
EMEI			10,765				7,456				30,465				21,536				897				1,013
Africa			3,722				3,395				10,769				9,909				1,090				1,461
APAC			7,089				5,672				15,897				14,024				219				171
Total		$	61,539			$	53,680			$	182,704			$	156,613			$	21,723			$	22,330

13. 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 0.5 million shares of common stock issuable upon the exercise of stock options as they would have an anti-dilutive effect on our loss per share for those periods. 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,
		2011				2010				2011				2010
Basic income (loss) per share:
Net income (loss)		$	8,040			$	892			$	10,229			$	(1,938	)
Amount allocated to participating restricted stockholders			(118	)			(21	)			(191	)			—
Net income (loss) available to common stockholders		$	7,922			$	871			$	10,038			$	(1,938	)
Basic weighted average common shares outstanding			54,529				53,087				53,830				52,228
Basic income (loss) per share		$	0.15			$	0.02			$	0.19			$	(0.04	)
Diluted income (loss) per share:
Net income (loss)		$	8,040			$	892			$	10,229			$	(1,938	)
Amount allocated to participating restricted stockholders			(116	)			(21	)			(188	)			—
Net income (loss) available to common stockholders		$	7,924			$	871			$	10,041			$	(1,938	)
Basic weighted average common shares outstanding			54,529				53,087				53,830				52,228
Dilutive effect of employee stock options			1,194				368				915				—
Diluted weighted average common shares outstanding			55,723				53,455				54,745				52,228
Diluted income (loss) per share		$	0.14			$	0.02			$	0.18			$	(0.04	)

14. OTHER NON-OPERATING INCOME (EXPENSE)

On September 16, 2011 we terminated the Fundtech Merger Agreement and, in connection with such termination, received a termination fee of $11.9 million from Fundtech in September 2011. Other non-operating income (expense) consisted of the following (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Termination fee from Fundtech		$	11,900			$	—			$	11,900			$	—
Foreign exchange transaction loss			(190	)			(324	)			(607	)			(340	)
Foreign withholding tax			(318	)			(64	)			(826	)			(502	)
Other expenses and loss on investments			(122	)			(7	)			(125	)			(25	)
Other non-operating income (expense)		$	11,270			$	(395	)		$	10,342			$	(867	)

15. SUBSEQUENT EVENTS

Other than the subsequent events disclosed below, we determined that there were no other subsequent events required to be disclosed or recorded as of September 30, 2011 in our financial statements.

On October 25, 2011, we announced that the Company and other named defendants reached an agreement in principle with plaintiffs to settle the consolidated class action lawsuit captioned In re S1 Corporation Shareholders Litigation. This lawsuit relates to the now-terminated merger with Fundtech and the proposed acquisition of the Company by ACI. Pursuant to this agreement, the Company filed an amendment to its Solicitation/Recommendation Statement on Schedule 14D-9 (“Schedule 14D-9”) with the Securities and Exchange Commission. The amended Schedule 14D-9 contains certain additional disclosures the Company agreed to make in connection with the settlement of the lawsuit, although the Company has not admitted in any way that those disclosures are material or are otherwise required by law. In addition, the defendants have agreed to negotiate in good faith with plaintiffs’ counsel regarding the appropriate amount of fees, costs and expenses to be paid to plaintiffs’ counsel by the Company or its successor. The Company does not expect this cost to be material to our consolidated results of operations and financial position. The settlement will not affect the offer price to be paid in the Amended Offer by ACI Merger Sub or the merger consideration the Company’s stockholders would be entitled to receive pursuant to the terms of the Transaction Agreement.

On October 28, 2011, the Company and ACI announced that they each received a request for additional information from the U.S. Department of Justice (the “DOJ”) relating to ACI’s proposed acquisition of the Company. The request was under notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). The effect of the request is to extend the waiting period imposed by the HSR Act until 30 days after ACI has substantially complied with the request, unless voluntarily extended or terminated sooner by the DOJ. The request is focused on the Company’s card payments business.

On October 31, 2011, ACI extended the Amended Offer until 5:00 p.m., Eastern time, on November 30, 2011, unless further extended.

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, revenue backlog, expenses, 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, 2010. You are urged to read the updated risk factors discussed under Item 1A of Part II of this Form 10-Q and the risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 as supplemented by the risk factors in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, each as filed with the Securities and Exchange Commission (“SEC”).

Executive Overview

Background. 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.

Mergers and acquisitions. On June 26, 2011, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Fundtech Merger Agreement”) with Finland Holdings (2011) Ltd. (“Merger Sub”), a company organized under the laws of Israel and a wholly owned direct subsidiary of S1, and Fundtech Ltd., a company organized under the laws of Israel (“Fundtech”). Pursuant to the terms of the Fundtech Merger Agreement, Merger Sub was to be merged with and into Fundtech, with Fundtech surviving the merger and becoming a wholly owned subsidiary of S1. On September 15, 2011, the Company announced that Fundtech had delivered to the Company a notice of its intent to change its recommendation with respect to the pending merger with the Company, to terminate the Fundtech Merger Agreement and to enter into a written definitive agreement with entities formed by GTCR Fund X/A LP and its affiliated entities (“GTCR”). The Company’s board of directors determined not to revise the Company’s proposal to acquire Fundtech and instead to terminate the Fundtech Merger Agreement. The Company announced on September 16, 2011 that it had terminated the Fundtech Merger Agreement and, in connection with such termination, received an $11.9 million termination fee from Fundtech in September 2011.

On October 3, 2011, the Company entered into a Transaction Agreement (the “Transaction Agreement”) with ACI Worldwide, Inc., a Delaware corporation (“ACI”), and Antelope Investment Co. LLC, a Delaware limited liability company and wholly owned subsidiary of ACI (“ACI Merger Sub”), pursuant to which ACI will acquire the Company. Pursuant to the terms and conditions of the Transaction Agreement, ACI amended its previously commenced tender offer (the “Amended Offer”) to purchase all of the outstanding shares of Company common stock (the “Shares”) for a purchase price of either (i) $10.00 in cash per Share, without interest (the “Cash Consideration”), or (ii) 0.3148 of a share of ACI common stock per Share (the “Stock Consideration,” and together with the Cash Consideration, the “Offer Price”), subject to proration.

On October 31, 2011, ACI extended the Amended Offer until 5:00 p. m., Eastern time, on November 30, 2011, unless further extended. ACI Merger Sub’s obligation to accept for payment and pay for Shares tendered in the Amended Offer is subject to customary conditions, including, among other things, that (i) at least a majority of the outstanding Shares (determined on a fully-diluted basis) shall have been validly tendered in accordance with the terms of the Amended Offer and not properly withdrawn, and (ii) the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or terminated.

Following the completion of the Amended Offer, and subject to satisfaction or waiver of certain conditions set forth in the Transaction Agreement, including, if required, a vote of the Company’s stockholders with respect to the adoption of the Transaction Agreement, ACI Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of ACI; alternatively, the parties may agree to effect the merger through the merger of the Company with and into ACI Merger Sub, with ACI Merger Sub serving as a wholly owned subsidiary of ACI (collectively, the “Merger”). At the effective time of the Merger, each remaining issued and outstanding Share (other than (i) Shares held by the Company, ACI or their respective subsidiaries, (ii) certain shares of restricted stock of the Company that convert into restricted shares of ACI common stock pursuant to the Transaction Agreement, or (iii) by stockholders who have properly exercised their dissenters’ rights under Section 262 of the Delaware General Corporation Law) will be automatically converted into the right to receive $6.62 in cash, without interest, and 0.1064 of a share of ACI common stock.

The Transaction Agreement includes customary representations, warranties and covenants of the Company, ACI and Merger Sub. The Company has agreed to operate its business in the ordinary course until the Merger is consummated. The Company has also agreed not to (i) solicit proposals relating to alternative business combination transactions, or (ii) enter into discussions or negotiations or an agreement concerning, or provide confidential information in connection with, any alternative proposals for alternative business combination transactions. Each of these covenants is subject to exceptions as provided in the Transaction Agreement. The Transaction Agreement also includes customary termination provisions for both the Company and ACI and provides that, in connection with the termination of the Transaction Agreement under specified circumstances, including a change in the recommendation of the Company’s board of directors, the Company may be required to pay to ACI a termination fee of $19.14 million.

We currently anticipate transaction related costs for the ACI and Fundtech transactions of approximately $11.0 to $12.0 million which are being expensed as incurred. Through September 30, 2011, we have incurred and expensed $4.8 million in transaction related costs.

In March 2010, we acquired PM Systems Corporation (“PMSC”) which provides Internet banking, bill payment and security services to credit unions in the United States. In August 2010, in support of establishing an office in Latin America, we acquired certain assets and employees from a company that resold our products in Latin America (the “Reseller”). Our results of operations reflect the performance of PMSC and the Reseller since their respective dates of acquisition.

Summary financial results. Our consolidated revenue was $61.5 million for the three months ended September 30, 2011 which was an increase of $7.9 million, or 15%, as compared to the same period in 2010 due primarily to higher Software licenses, Professional services, and Support and maintenance revenue in our Payments and Banking: Large FI segments. For the three months ended September 30, 2011, our net operating loss of $2.4 million was a decrease of $2.9 million as compared to net operating income in the same period in 2010, primarily due to an increase in professional services costs to accommodate project and customer support growth, a loss resulting from a product investment made on behalf of one customer in our Banking: Large FI segment, expenses related to the ACI and Fundtech transactions, higher variable cash incentives and higher stock-based compensation expense. For the three months ended September 30, 2011, we reported net income of $8.0 million, an increase of $7.1 million as compared to the same period in 2010. Our net income for the three months ended September 30, 2011 included the receipt of an $11.9 million fee associated with the termination of the Fundtech Merger Agreement.

Our consolidated revenue was $182.7 million for the nine months ended September 30, 2011, which was an increase of $26.1 million, or 17%, as compared to the same period in 2010 due primarily to higher Software licenses, Professional services, and Support and maintenance revenue in our Payments and Banking: Large FI segments and higher Hosting revenue in our Banking: Community FI segment primarily due to the PMSC credit union business that we acquired in March 2010. For the nine months ended September 30, 2011, our operating income of $2.0 million represented an increase of $2.2 million as compared to an operating loss in the same period in 2010 primarily as a result of this revenue growth partially offset by an increase in professional services costs to accommodate project and customer support growth, a loss resulting from a product investment made on behalf of one customer in our Banking: Large FI segment, expenses related to the ACI and Fundtech transactions, higher variable cash incentives, and higher stock-based compensation. For the nine months ended September 30, 2011, we reported net income of $10.2 million as compared to a net loss of $1.9 million in the same period in 2010. Our net income for the nine months ended September 30, 2011 included the receipt of an $11.9 million fee associated with the termination of the Fundtech Merger Agreement.

During the nine months ended September 30, 2011, we generated $29.8 million in cash provided by operating activities primarily from earnings adjusted for the effect of non-cash expenses and a termination fee of $11.9 million associated with the termination of the Fundtech Merger Agreement less expenses of $4.8 million related to the ACI and Fundtech transactions. During the nine months ended September 30, 2011, we incurred $6.2 million of capital expenditures primarily related to computer equipment. In February 2011, we paid in full the note payable relating to our corporate headquarters of $5.0 million less the return of $1.6 million held as collateral deposit. During the nine months ended September 30, 2011, we received $7.1 million in cash proceeds from the exercise of employee stock options.

Historically, Software licenses for a majority of 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 have been 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 negatively impacted our financial results in 2010 and early 2011, it has provided greater long-term revenue visibility. Software licenses and professional services revenue recognized under the percentage of completion method 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.

In February 2011, we amended certain agreements (collectively, the “Amendments”) with an international branch customer to (i) reduce the scope of the project with this customer, and (ii) revise billing milestones. In exchange for these contract modifications, we granted the customer licenses to certain of our software products (the “Licensed Products”). Pursuant to the Amendments, this customer is entitled to normal and customary upgrades and enhancements related to the Licensed Products for up to seven years at no additional cost. Consequently, we allocated a portion of the revenue from this project to the fair value of this obligation which, when netted against the favorable impact of the reduction in project scope, reduced our revenue in the first quarter of 2011 by approximately $1.3 million.

Revenue from Significant Customers

Revenue from State Farm was 5% and 10% of our total revenue and 11% and 21% of our Banking: Large FI segment’s revenue during the three months ended September 30, 2011 and 2010, respectively. Revenue from State Farm was 8% and 13% of our total revenue and 17% and 27% of our Banking: Large FI segment’s revenue during the nine months ended September 30, 2011 and 2010, 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 $16 — $17 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, 2011 and December 31, 2010, our estimate of revenue backlog was $65.2 million and $62.8 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 have experienced toward recognizing more software license revenue using the percentage of completion method. However, our estimated revenue 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 I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 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,
		2011				2010				Change				2011				2010				Change
Revenue:
Software licenses		$	9,711			$	6,764				44	%		$	27,670			$	17,335				60	%
Support and maintenance			17,468				15,648				12	%			50,576				46,436				9	%
Professional services			20,224				17,382				16	%			62,050				52,682				18	%
Hosting			14,136				13,886				2	%			42,408				40,160				6	%
Total revenue			61,539				53,680				15	%			182,704				156,613				17	%
Operating Expenses:
Cost of software licenses (1)			1,049				803				31	%			2,173				1,754				24	%
Cost of professional services, support and maintenance (1)			26,086				21,311				22	%			74,142				61,386				21	%
Cost of hosting (1)			6,805				7,181				-5	%			21,181				20,742				2	%
Selling and marketing			7,741				6,452				20	%			22,230				20,007				11	%
Product development			8,779				9,099				-4	%			26,099				26,572				-2	%
General and administrative			10,870				5,746				89	%			27,182				18,721				45	%
Depreciation and amortization			2,587				2,589				0	%			7,695				7,610				1	%
Total operating expenses			63,917				53,181				20	%			180,702				156,792				15	%
Operating (loss) income			(2,378	)			499				-577	%			2,002				(179	)			1218	%
Interest and other income (expense), net			11,321				(454	)			2594	%			10,300				(1,053	)			1078	%
Income (loss) before income tax expense			8,943				45				19773	%			12,302				(1,232	)			1099	%
Income tax (expense) benefit			(903	)			847				-207	%			(2,073	)			(706	)			-194	%
Net income (loss)		$	8,040			$	892				801	%		$	10,229			$	(1,938	)			628	%
Net income (loss) per share:
Basic		$	0.15			$	0.02							$	0.19			$	(0.04	)
Diluted		$	0.14			$	0.02							$	0.18			$	(0.04	)
Effective tax rate			10	%			-1882	%							17	%			-57	%
Operating expenses as a percent of revenue:
Cost of software licenses (2)			11	%			12	%							8	%			10	%
Cost of professional services, support and maintenance (2)			69	%			65	%							66	%			62	%
Cost of hosting (2)			48	%			52	%							50	%			52	%
Selling and marketing			13	%			12	%							12	%			13	%
Product development			14	%			17	%							14	%			17	%
General and administrative			18	%			11	%							15	%			12	%
Depreciation and amortization			4	%			5	%							4	%			5	%
Operating (loss) income			-4	%			1	%							1	%			0	%
Net income (loss)			13	%			2	%							6	%			-1	%