BOTTOMLINE TECHNOLOGIES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The statements contained in this report that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). Without limiting
the foregoing, the words may, will, should, could, expects, plans, intends,
anticipates, believes, estimates, predicts, potential and similar expressions
are intended to identify forward-looking statements. All forward-looking
statements included in this Quarterly Report on Form 10-Q are based on
information available to us up to and including the date of this report, and we
assume no obligation to update any such forward-looking statements. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth below under
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Part II. Item 1A. Risk Factors and elsewhere in this Quarterly
Report on Form 10-Q. You should carefully review those factors and also
carefully review the risks outlined in other documents that we file from time to
time with the Securities and Exchange Commission (SEC), including Part II. Item
1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2021, as filed with the SEC on August 30 2021.
In the management discussion that follows, we have highlighted those changes and
operating events that were the primary factors affecting period to period
fluctuations. The remainder of the change in period to period fluctuations from
that which is specifically discussed arises from various individually
insignificant items.
Pending Merger
On December 16, 2021, we entered into a Merger Agreement (See Note 2 to the
unaudited consolidated financial statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q) to be acquired by the private equity investment firm Thoma
Bravo for $57.00 in cash per outstanding common share. Consummation of the
Merger is subject to customary closing conditions, including, without
limitation, the absence of certain legal impediments and approval by our
stockholders.
Overview
We help make complex business payments simple, smart and secure. We provide
solutions that are helping to accelerate the digital transformation of business
payments. Corporations and banks rely on us for domestic and international
payments, efficient cash management, automated workflows for payment processing
and bill review, and fraud detection, behavioral analytics and regulatory
compliance solutions.
We operate payment platforms that facilitate electronic payment and transaction
settlement between businesses and their vendors. We offer solutions that banks
use to provide payment, cash management and treasury capabilities to their
business customers, as well as solutions that financial institutions use to
engage intelligently with customers and acquire, deepen and grow profitable
relationships. Our legal spend management solutions help determine the right
amount to pay for legal services and claims for insurance companies and other
large consumers of outside legal services and provide related tools and
analytics for law firms themselves. Corporate customers rely on our solutions to
automate payment and accounts payable processes and to streamline and manage the
production and retention of electronic documents. Our fraud and risk management
solutions are designed to non-invasively monitor and analyze user behavior and
payment transactions to flag behavioral and data anomalies and other suspicious
activity to gain protection from internal fraud and external financial crime.
Our solutions are designed to complement, leverage and extend our customers'
existing information systems, accounting applications and banking relationships
so that the solutions can be deployed quickly and efficiently. To help our
customers realize the maximum value from our products and meet their specific
business requirements, we also provide professional services for training,
consulting and product enhancement.
Financial Highlights
For the six months ended December 31, 2021, our revenue increased to $252.4
million from $228.4 million in the same period of the prior fiscal year. Our
revenue for the six months ended December 31, 2021 was favorably impacted by
$2.4 million due to the impact of foreign currency exchange rates primarily
related to the British Pound Sterling, which appreciated against the U.S. Dollar
as compared to the same period of the prior fiscal year. The overall revenue
increase was attributable to revenue increases in our Payment Platforms, Banking
Solutions and Legal Spend Management segments of $16.9 million, $8.2 million,
and $2.1 million, respectively, partially offset by a $2.7 million revenue
decrease in our Traditional Solutions segment. The increase in revenue in our
Payment Platforms and Legal Spend Management segments was driven by increased
subscription revenue driven by increased transactional volumes and the impact of
new customers using these solutions. The increased revenue in our Banking
Solutions segment was primarily due to new customer engagements and platform
go-lives, as customers continue to transition to our hosted solutions. The
decrease in revenue in our Traditional Solutions segment was due to decreased
professional services, maintenance revenue and software revenue, as customers
transitioned to our hosted and subscription based solutions.
We incurred a net loss of $21.5 million in the six months ended December 31,
2021 compared to net loss of $4.2 million in the same period of the prior fiscal
year. Our net loss for the six months ended December 31, 2021 was driven by an
increase in costs of subscription revenue of $16.3 million attributable to our
Payment Platform, Banking Solutions and Legal Spend Management segments and
operating expenses of $28.2 million. The increase in operating expenses was
driven by an increase in sales and
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marketing costs of $13.5 million and product development and engineering costs
of $5.5 million, as we continued to invest in our sales channel and new product
innovation. General and administrative costs increased by $9.0 million, of which
$5.3 million was related to our pending Merger and shareholder engagement
initiatives. The increase in costs were partially offset by the $24.0 million
revenue increase discussed above and a $2.8 million reduction in cost of
professional services and maintenance revenues.
In the six months ended December 31, 2021, we derived approximately 39% of our
revenue from customers located outside of North America, principally in the
United Kingdom (UK), continental Europe and the Asia-Pacific region.
On an increasing basis, we continue to make strategic investments in innovative
new technology offerings that we believe will enhance our competitive position,
help us win new business, drive subscription revenue growth and expand our
operating margins. We expect to continue to make investments in our suite of
products so that we can continue to offer innovative, feature-rich technology
solutions to our customers.
COVID-19
The United States and the global communities in which we operate continue to
face challenges posed by the COVID-19 pandemic. Recently, restrictions have been
re-implemented by government bodies and private businesses as disease variants
became more prevalent, most recently the omicron variant. There remains
significant uncertainty over the duration of the pandemic itself, particularly
as the virus continues to evolve. Since March 2020 we have continued to suspend
virtually all travel for employees, our offices generally remain closed and our
employees have continued to work remotely in most geographies.
While we continue to operate effectively during this challenging period, the
full impact of the COVID-19 pandemic on our business and the global economy
remains uncertain. The ultimate consequences will depend on many factors outside
of our control, including the availability and effectiveness of vaccines and
therapeutics and the ultimate duration and severity of the pandemic itself;
including the impact of the COVID variants that have emerged or that may emerge
in the future.
Certain of our transactional revenue streams, specifically those arising through
Paymode-X and Legal Spend Management, were the most significantly impacted
during the prior fiscal year. We have continued to observe that transaction
volumes for Paymode-X have continued to return to more normalized levels. Legal
Spend Management transaction volumes remained constrained during the prior
fiscal year but we saw some modest improvement during the fourth quarter of the
past fiscal year and we recorded a revenue increase in Legal Spend Management
for the three and six month periods ended December 31, 2021 as compared to
December 31, 2020. We are encouraged by these trends and are hopeful that it
supports a conclusion that a sustained recovery of volumes is underway.
Critical Accounting Policies and Significant Judgments and Estimates
We believe that several accounting policies are important to understanding our
historical and future performance. We refer to these policies as critical
because they involve areas of financial reporting that require us to make
judgments and estimates about matters that are uncertain at the time we make the
estimate and different estimates - which also would have been reasonable - could
have been used.
The critical accounting policies and estimates we identified in our most recent
Annual Report on Form 10-K for the fiscal year ended June 30, 2021 related to
revenue recognition, the valuation of goodwill and intangible assets, the
valuation of acquired deferred revenue, capitalized software costs and income
taxes. There have been no changes to the critical accounting policies and
estimates from those we disclosed in Part II. Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2021, as filed with the
SEC on August 30, 2021.
It is important that the discussion of our operating results that follows be
read in conjunction with the critical accounting policies and estimates
disclosed in Part II. Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2021, as filed with the SEC on August 30, 2021.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact
of these pronouncements on our consolidated financial statements, please refer
to   Note     3     Recent Accounting Pronouncements   to our unaudited
consolidated financial statements included in Part I. Item 1 of this Quarterly
Report on Form 10-Q.
Results of Operations
Three and Six Months Ended December 31, 2021 Compared to the Three and Six
Months Ended December 31, 2020
Segment Information
Operating segments are components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Our chief operating decision maker is our chief executive officer.
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During the quarter ended September 30, 2021 we realigned our internal financial
reporting to provide for more specific visibility into key product lines which
resulted in a change to our externally reportable segments. Specifically, our
prior Cloud Solutions segment was renamed Payment Platforms and includes the
revenue and operating results of our Paymode-X and PTX payment platforms. Our
Legal Spend Management Solutions have been presented as a stand-alone operating
segment, having previously been a component of our Cloud Solutions segment.
Finally, our Financial Messaging solutions, previously a component of our Cloud
Solutions segment, has been included as a component of our Banking Solutions
segment. Our prior Payments and Documents segment has been renamed to
Traditional Solutions, with no change to the composition of the revenue and
operating activity included in this segment. These changes are reflected for all
financial periods presented.

The following tables represent our segment revenues and our measure of segment
profit (loss):
                     Three Months Ended            Increase (Decrease)                                              Increase (Decrease)
                        December 31,                 Between Periods          Six Months Ended December 31,           Between Periods
                                                $ Change Inc    % Change                                         $ Change Inc    % Change
                     2021           2020           (Dec)        Inc (Dec)          2021              2020           (Dec)        Inc (Dec)
                                                                      (in thousands)
Segment
revenue:
Payment

Platforms $35,972 $27,542 $8,430 30.6%

$69,779 $52,909 $16,870 31.9% Banking Solutions

            49,959         44,249           5,710        12.9  %             97,640         89,478           8,162         9.1  %
Legal Spend
Management           22,456         21,849             607         2.8  %             44,519         42,399           2,120         5.0  %

Traditional

Solutions            15,684         17,178          (1,494)       (8.7) %   

31,876 34,574 (2,698) (7.8)% Other

                 4,716          5,206            (490)       (9.4) %              8,578          9,029            (451)       (5.0) %
Total segment
revenue          $  128,787      $ 116,024      $   12,763        11.0  %   

$252,392 $228,389 $24,003 10.5%

Segment
measure of
profit
(loss):
Payment
Platforms        $    5,822      $   6,015      $     (193)       (3.2) %  

$11,646 $11,770 $ (124) (1.1)% Banking Solutions

             3,697          3,891            (194)       (5.0) %              7,450         11,103          (3,653)      (32.9) %
Legal Spend
Management            4,468          5,656          (1,188)      (21.0) %              9,676         10,242            (566)       (5.5) %

Traditional

Solutions             3,571          4,087            (516)      (12.6) %              6,685          8,187          (1,502)      (18.3) %
Other                (3,548)        (1,945)         (1,603)      (82.4) %             (7,524)        (5,052)         (2,472)      (48.9) %
Total measure
of segment
profit           $   14,010      $  17,704      $   (3,694)      (20.9) %   

$27,933 $36,250 $(8,317) (22.9)%

A reconciliation of the total segment profit measure to our GAAP loss before income taxes is as follows:

                                              Three Months Ended
                                                 December 31,             

Semester completed the 31st of December,

                                              2021             2020             2021             2020
                                                                 (in 

thousands)

Total segment profit measure $14,010 $17,704 $

27,933 $36,250

Less:

Amortization of acquisition-related costs

 intangible assets                            (5,180)         (5,142)       

(10,251) (10,171)

Stock-based compensation plan

 expense                                     (13,657)        (12,173)       

(27,569) (22,146)

Related to acquisition and integration

 expenses                                       (142)         (1,095)       

(343) (1,340)

 Restructuring expense                            28            (921)             (358)           (991)

Excess depreciation, including

associated with restructuring

 events                                         (357)           (528)             (357)           (528)
 Other non-core expense                         (281)            (48)             (391)            (96)

 Shareholder engagement fees                    (832)              -            (1,779)              -
 Asset write-off                                 (71)              -               (71)              -

Costs associated with waiting

 Merger                                       (3,507)              -            (3,507)              -

Other expenses, net of pensions

 adjustments                                    (930)         (1,139)           (1,938)         (2,165)
 Loss before income taxes               $    (10,919)       $ (3,342)     $    (18,631)       $ (1,187)


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Payment Platforms
Revenue from our Payment Platforms segment increased $8.4 million for the three
months ended December 31, 2021 as compared to the same period in the prior
fiscal year due to increased subscription revenue of $8.3 million driven by both
increased transactional volumes and the impact of new customers that have
adopted our platforms since the corresponding quarter of the prior fiscal year.
Segment profit decreased $0.2 million for the three months ended December 31,
2021 as compared to the same period in the prior fiscal year as the revenue
increases described above were offset by increased cost of subscription revenue
of $3.1 million and operating expenses of $5.6 million related primarily to
increased sales and marketing expenses and product development expenses of $3.6
million and $1.4 million, respectively.
Revenues from our Payment Platforms segment increased $16.9 million for the six
months ended December 31, 2021 as compared to the same period in the prior
fiscal year, primarily due to increased subscription revenue of $16.5 million
driven by both increased transactional volumes and the impact of new customers
that have adopted our platform since the corresponding period of the prior
fiscal year. Segment profit decreased $0.1 million for the six months ended
December 31, 2021 as compared to the same period in the prior fiscal year, as
the increase in revenue described above was offset in part by an increase in
operating expenses of $11.2 million primarily related to sales and marketing
expenses of $7.3 million, product development expenses of $2.9 million, and
general and administrative expenses of $1.0 million and increased cost of
revenues of $5.8 million primarily related to subscriptions costs.
Banking Solutions
Revenues from our Banking Solutions segment increased $5.7 million for the three
months ended December 31, 2021 as compared to the same period in the prior
fiscal year, primarily due to increased subscriptions revenue and service
revenue of $5.8 million and $0.7 million, respectively, partially offset by
decreased maintenance revenue of $0.8 million. The increase in subscriptions
revenue was primarily related to our existing customer base expanding on or
converting to our newer, more technologically advanced SaaS platforms and as a
result of our continued deployment of our newer banking solutions to new and
existing customers. The increase in revenue described above was offset by
increased cost of revenues of $3.2 million, primarily related to subscription
costs, and operating expenses of $2.7 million. The increase in operating
expenses was primarily due to increased sales and marketing expenses and general
and administrative expenses of $1.5 million and $0.9 million, respectively.
Segment profit decreased $0.2 million for the three months ended December 31,
2021 as compared to the same period in the prior fiscal year due to the
increases in revenue and expenses described above.
Revenues from our Banking Solutions segment increased $8.2 million for the six
months ended December 31, 2021 as compared to the same period in the prior
fiscal year, primarily due to increased subscriptions revenue and service
revenue of $8.8 million and $1.4 million, respectively, partially offset by
decreased maintenance revenue of $2.0 million. The increase in subscriptions
revenue was primarily related to our existing customer base expanding on or
converting to our newer, more technologically advanced SaaS platforms and as a
result of our continued deployment of our newer banking solutions to new and
existing customers. The increase in revenue described above was offset by
increased cost of revenues of $5.4 million, primarily related to subscription
costs, and operating expenses of $6.4 million. The increase in operating
expenses was primarily due to increased sales and marketing expenses of $3.4
million, product development and engineering costs of $1.5 million and general
and administrative expenses of $1.5 million. Segment profit decreased $3.7
million for the six months ended December 31, 2021 as compared to the same
period in the prior fiscal year due to the increases in revenue and expenses
described above.
Legal Spend Management
Revenues from our Legal Spend Management segment increased $0.6 million for the
three months ended December 31, 2021 as compared to the same period in the prior
fiscal year, due to increased subscription revenue driven by increased
transactional volumes and the impact of new customers using these solutions
since the corresponding quarter of the prior fiscal year. Segment profit
decreased $1.2 million for the three months ended December 31, 2021 as compared
to the same period in the prior fiscal year as the increase in subscription
revenue discussed above was offset by an increase in cost of revenues of $0.8
million, primarily related to subscriptions, and operating expenses of $1.0
million, primarily due to product development expenses and general and
administrative expenses of $0.5 million and $0.5 million, respectively.
Revenues from our Legal Spend Management segment increased $2.1 million for the
six months ended December 31, 2021 as compared to the same period in the prior
fiscal year, due to increased subscription revenue driven by increased
transactional volumes and the impact of new customers using these solutions
since the corresponding period of the prior fiscal year. Segment profit
decreased $0.6 million for the six months ended December 31, 2021 as compared to
the same period in the prior fiscal year, as the increase in revenue discussed
above was offset by an increase in cost of revenues of $1.4 million, primarily
related to subscriptions, and operating expenses of $1.3 million, primarily
related to sales and marketing expenses of $0.2 million, product development
expenses of $0.2 million and general and administrative expense of $0.8 million.
Traditional Solutions
Revenues from our Traditional Solutions segment decreased $1.5 million for the
three months ended December 31, 2021 as compared to the same period in the prior
fiscal year, primarily due to decreased professional service and maintenance
revenue of $1.6 million and software revenue of $0.2 million, partially offset
by increased subscriptions revenue of $0.5 million. The decrease in professional
service and maintenance revenue and software revenue was driven by the continued
conversion of our customers to our hosted and subscription based solutions
rather than deployed, perpetual license solutions. Segment profit decreased
$0.5 million for
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the three months ended December 31, 2021 as compared to the same period in the
prior fiscal year, as the decrease in revenues discussed above was partially
offset by a decrease in cost of revenue of $0.9 million related primarily to
subscription and professional service and maintenance costs.
Revenues from our Traditional Solutions segment decreased $2.7 million for the
six months ended December 31, 2021 as compared to the same period in the prior
fiscal year, primarily due to decreased professional service and maintenance
revenue of $2.9 million and software revenue of $0.5 million, partially offset
by increased subscriptions revenue of $0.8 million. The decrease in professional
service and maintenance revenue and software revenue was driven by the continued
conversion of our customers to our hosted and subscription based solutions
rather than deployed, perpetual license solutions. Segment profit decreased $1.5
million for the six months ended December 31, 2021 as compared to the same
period in the prior fiscal year, as the decrease in revenues discussed above
were partially offset by a decrease in costs of revenue of $1.6 million
primarily associated with professional service and maintenance costs.
Other
Revenues from our Other segment decreased $0.5 million for the three months
ended December 31, 2021 as compared to the same period in the prior fiscal year,
primarily due to decreased software revenue of $0.5 million. Segment profit
decreased $1.6 million for the three months ended December 31, 2021 as compared
to the same period in the prior fiscal year primarily due the decrease in
revenue discussed above and an increase in cost of revenue of $0.5 million
primarily related to professional services and maintenance costs and increased
operating expenses of $0.5 million primarily related to product development.
Revenues from our Other segment decreased $0.5 million for the six months ended
December 31, 2021 as compared to the same period in the prior fiscal year,
primarily due to decreased maintenance revenue of $0.4 million. Segment profit
decreased $2.5 million for the six months ended December 31, 2021 as compared to
the same period in the prior fiscal year primarily due to the decrease in
revenues discussed above and an increase in cost of revenue of $0.9 million
primarily related to subscriptions, professional service and maintenance costs
and increased operating expenses of $1.2 million primarily related to sales and
marketing and product development.
Revenues by category
                                                                          Increase (Decrease)                                                         Increase (Decrease)
                              Three Months Ended December 31,               Between Periods                Six Months Ended December 31,                Between Periods
                                                                                           % Change                                                                    % Change
                                    2021               2020         $ Change Inc (Dec)     Inc (Dec)           2021                2020         $ Change Inc (Dec)     Inc (Dec)
                                                                                               (in thousands)
Revenues:
Subscriptions                $           108,482    $    93,398    $             15,084      16.2  %    $           211,978    $    183,782    $             28,196      15.3  %
Software licenses                          1,153          1,802                   (649)     (36.0) %                  2,080           2,779                   (699)     (25.2) %
Service and maintenance                   18,632         20,022                 (1,390)      (6.9) %                 37,340          40,586                 (3,246)      (8.0) %
Other                                        520            802                   (282)     (35.2) %                    994           1,242                   (248)     (20.0) %
Total revenues               $           128,787    $   116,024    $             12,763      11.0  %    $           252,392    $    228,389    $             24,003      10.5  %

As % of total revenues:
Subscriptions                            84.2  %       80.5   %                                                     84.0  %       80.5    %
Software licenses                         0.9  %        1.6   %                                                      0.8  %        1.2    %
Service and maintenance                  14.5  %       17.3   %                                                     14.8  %       17.8    %
Other                                     0.4  %        0.6   %                                                      0.4  %        0.5    %
Total revenues                          100.0  %      100.0   %                                                    100.0  %      100.0    %


Subscriptions
Revenues from subscriptions increased $15.1 million for the three months ended
December 31, 2021 as compared to the same period in the prior fiscal year. The
overall revenue increase was driven by an increase in subscriptions revenue from
our Payment Platforms, Banking Solutions and Legal Spend Management segments of
$8.3 million, $5.8 million, and $0.6 million, respectively, due to the impact of
customers going live on or expanding their use of our hosted solutions and the
continued impact of customers converting to our newer, subscription based
solutions.
Revenues from subscriptions increased $28.2 million for the six months ended
December 31, 2021 as compared to the same period in the prior fiscal year. The
overall revenue increase was driven by an increase in subscriptions revenue from
our Payment Platforms, Banking Solutions and Legal Spend Management segments of
$16.5 million, $8.8 million, and $2.1 million, respectively, due to the impact
of customers going live on or expanding their use of our hosted solutions and
the continued impact of customers converting to our newer subscription based
solutions.
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Software Licenses
Revenues from software licenses slightly decreased for the three months ended
December 31, 2021 as compared to the same period in the prior fiscal year,
primarily due to decreased revenue from our Traditional Solutions segment of
$0.2 million and our Other segment of $0.5 million. The decrease in software
license revenue was driven by the continued conversion of our customers to our
hosted and subscription based solutions and our continued de-emphasis of
deployed, perpetual license solutions.
Revenues from software licenses slightly decreased for the six months ended
December 31, 2021 as compared to the same period in the prior fiscal year,
primarily due to decreased revenue from our Traditional Solutions segment of
$0.5 million and our Other segment of $0.2 million. The decrease in software
license revenue was driven by the continued conversion of our customers to our
hosted and subscription based solutions and our continued de-emphasis of
deployed, perpetual license solutions.
Service and Maintenance
Revenues from service and maintenance decreased $1.4 million for the three
months ended December 31, 2021 as compared to the same period in the prior
fiscal year, primarily due to decreased revenue from our Traditional Solutions
segment of $1.6 million driven by the continued conversion of our customers to
our hosted and subscription based solutions rather than deployed, perpetual
license solutions, partially offset by an increase in our Other segment of $0.2
million.
Revenues from service and maintenance decreased $3.2 million for the six months
ended December 31, 2021 as compared to the same period in the prior fiscal year,
primarily due to decreased revenue from our Traditional Solutions and Banking
Solutions segments of $2.9 million and $0.6 million, respectively, driven by the
continued conversion of our customers to our hosted and subscription based
solutions rather than deployed, perpetual license solutions, partially offset by
an increase in revenue in our Payment Platforms segment of $0.4 million.
Other
Our other revenues consist principally of equipment and supplies sales, which
remained and are expected to remain minor components of our overall revenue.
Cost of revenues by category
                               Three Months Ended December 31,        Increase (Decrease)          Six Months Ended December 31,          Increase (Decrease)
                                                                        Between Periods                                                     Between Periods
                                                                   $ Change Inc     % Change                                           $ Change Inc    % Change
                                     2021               2020           (Dec)        Inc (Dec)           2021               2020           (Dec)        Inc (Dec)
                                                                                        (in thousands)
Cost of revenues:
Subscriptions                 $            46,030    $   37,195    $     8,835        23.8  %    $            88,723    $    72,413    $   16,310        22.5  %
Software licenses                              60           126            (66)      (52.4) %                    141            216           (75)      (34.7) %
Service and maintenance                     9,242        10,386         (1,144)      (11.0) %                 18,494         21,302        (2,808)      (13.2) %
Other                                         330           551           (221)      (40.1) %                    625            860          (235)      (27.3) %
Total cost of revenues        $            55,662    $   48,258    $     7,404        15.3  %    $           107,983    $    94,791    $   13,192        13.9  %
Gross Profit ($)              $            73,125    $   67,766    $     5,359         7.9  %    $           144,409    $   133,598    $   10,811         8.1  %
Gross Profit (%)                          56.8  %      58.4   %                                              57.2  %       58.5   %


Subscriptions
Subscriptions costs include salaries and other related costs for our
professional services teams as well as costs related to our hosting
infrastructure such as depreciation and facilities related expenses.
Subscriptions costs increased to 42% as a percentage of subscriptions revenues
in the three months ended December 31, 2021 as compared to 40% in the three
months ended December 31, 2020 due to year-over-year cost of revenue increases
as we continued to grow our subscription revenue streams.
Subscriptions costs increased to 42% as a percentage of subscriptions revenues
in the six months ended December 31, 2021 as compared to 39% in the six months
ended December 31, 2020 due to year-over-year cost of revenue increases as we
continued to grow our subscription revenue streams.
Software Licenses
Software license costs consist of expenses incurred to distribute our software
products and related documentation and costs of licensing third party software
that is incorporated into or sold with certain of our products. Software license
costs as a percentage of software license revenues decreased slightly and
inconsequentially to 5% in the three months ended December 31, 2021 as compared
to 7% in the three months ended December 31, 2020.
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Software license costs as a percentage of software license revenues decreased
slightly and inconsequentially to 7% of software license revenue in the six
months ended December 31, 2021 as compared to 8% in the six months ended
December 31, 2020.
Service and Maintenance
Service and maintenance costs include salaries and other related costs for our
customer service, maintenance and help desk support staffs, as well as third
party contractor expenses used to complement our professional services team.
Service and maintenance costs as a percentage of service and maintenance
revenues decreased to 50% in the three months ended December 31, 2021 as
compared to 52% in the three months ended December 31, 2020, reflecting a shift
in resources to our hosted and subscription based products, the costs of which
are included in subscriptions costs of revenues.
Service and maintenance costs as a percentage of service and maintenance
revenues decreased to 50% in the six months ended December 31, 2021 as compared
to 52% in the six months ended December 31, 2020, reflecting a shift in
resources to our hosted and subscription based products, the costs of which are
included in subscriptions costs of revenue.
Other
Other costs include the costs associated with equipment and supplies that we
resell, as well as freight, shipping and postage costs associated with the
delivery of our products. These remain minor components of our business.
Operating Expenses
                          Three Months Ended December 31,       Increase (Decrease)         Six Months Ended December 31,         Increase (Decrease)
                                                                  Between Periods                                                   Between Periods
                                                                              % Change                                                          % Change
                                                              $ Change Inc      Inc                                             $ Change Inc      Inc
                                2021               2020          (Dec)         (Dec)             2021               2020           (Dec)         (Dec)
                                                                                 (in thousands)
Operating expenses:
Sales and marketing      $            34,655    $   29,237    $    5,418       18.5  %    $            68,469    $    54,980    $   13,489       24.5  %
Product development
and engineering                       21,752        19,183         2,569       13.4  %                 43,217         37,682         5,535       14.7  %
General and
administrative                        21,617        16,658         4,959       29.8  %                 39,366         30,284         9,082       30.0  %
Amortization of
acquisition-related
intangible assets                      5,180         5,142            38        0.7  %                 10,251         10,171            80        0.8  %
Total operating
expenses                 $            83,204    $   70,220    $   12,984       18.5  %    $           161,303    $   133,117    $   28,186       21.2  %

As % of total
revenues:
Sales and marketing                  26.9  %      25.2   %                                            27.1  %       24.1   %
Product development
and engineering                      16.9  %      16.5   %                                            17.1  %       16.5   %
General and
administrative                       16.8  %      14.4   %                                            15.6  %       13.3   %
Amortization of
acquisition-related
intangible assets                     4.0  %       4.4   %                                             4.1  %        4.5   %
Total operating
expenses                             64.6  %      60.5   %                                            63.9  %       58.3   %


Sales and Marketing
Sales and marketing expenses consist primarily of salaries and other related
costs for sales and marketing personnel, sales commissions, travel, public
relations and marketing materials and trade show participation. Sales and
marketing expenses increased $5.4 million in the three months ended December 31,
2021 as compared to the three months ended December 31, 2020, primarily due to
an increase in employee related costs of $4.0 million, marketing expense of $0.5
million and travel costs of $0.3 million.
Sales and marketing expenses increased $13.5 million in the six months ended
December 31, 2021 as compared to the six months ended December 31, 2020,
primarily due to an increase in employee related costs of $10.4 million,
marketing expense of $1.4 million and travel costs of $0.4 million.
Product Development and Engineering
Product development and engineering expenses consist primarily of personnel
costs to support product development, which consists of enhancements and
revisions to our products as well as initiatives related to new product
development. Product development and engineering expenses increased $2.6 million
in the three months ended December 31, 2021 as compared to the three months
ended December 31, 2020, primarily due to an increase in headcount related costs
of $2.1 million.
Product development and engineering expenses increased $5.5 million in the six
months ended December 31, 2021 as compared to the six months ended December 31,
2020, primarily due to an increase in headcount related costs of $4.6 million.
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General and Administrative
General and administrative expenses consist primarily of salaries and other
related costs for operations and finance employees and legal and accounting
services. General and administrative expenses increased $5.0 million in the
three months ended December 31, 2021 as compared to the three months ended
December 31, 2020, primarily due to Merger related costs and costs associated
with shareholder engagement initiatives of $4.3 million and, to a lesser extent,
employee related costs.
General and administrative expenses increased $9.1 million in the six months
ended December 31, 2021 as compared to the six months ended December 31, 2020,
primarily due to Merger related costs and costs associated with shareholder
engagement initiatives of $5.3 million and, to a lesser extent, employee related
costs.

Other expenses, net

                   Three Months Ended          Increase (Decrease)            Six Months Ended            Increase (Decrease)
                      December 31,               Between Periods                December 31,                Between Periods
                                            $ Change Inc     % Change                                  $ Change Inc     % Change
                    2021         2020           (Dec)        Inc (Dec)       2021           2020           (Dec)        Inc (Dec)
                                                              (Dollars in thousands)
 Interest
 income          $     22      $    95      $       (73)      (76.8) %    $      45      $    195      $      (150)      (76.9) %
 Interest
 expense           (1,021)      (1,323)             302        22.8  %       (2,087)       (2,581)             494        19.1  %
 Other income
 (expense),
 net                  159          340             (181)      (53.2) %          305           718             (413)      (57.5) %
 Other
 expense, net    $   (840)     $  (888)     $        48        (5.4) %    $  (1,737)     $ (1,668)     $       (69)       (4.1) %


The components of other expense, net are as depicted above and remain minimal
overall components of our operations. The slight decrease in interest expense in
the three and six months ended December 31, 2021 as compared to the three and
six months ended December 31, 2020, respectively, is a result of a decrease in
borrowings under our line of credit arrangement during the three and six months
ended December 31, 2021 as compared to the three and six months ended December
31, 2020.
Provision for Income Taxes
We recorded income tax provision of $5.7 million and $1.3 million for the three
months ended December 31, 2021 and 2020, respectively. We recorded income tax
provision of $2.9 million and $3.0 million for the six months ended December 31,
2021 and 2020, respectively. Please refer to   Note     9     Income Taxes  

at

our unaudited consolidated financial statements included in Part I. Item 1 of
this Quarterly Report on Form 10-Q for further discussion.
Liquidity and Capital Resources
We are party to a credit agreement with Bank of America, N.A. and certain other
lenders that provides for a credit facility in the amount of up to $300 million
(the Credit Facility). We have the right to request an increase to the aggregate
commitments to the Credit Facility of up to an additional $150 million, subject
to specified conditions. The Credit Facility expires in July 2023. At
December 31, 2021, borrowings were $130 million and we were in compliance with
all covenants.
We have financed our operations primarily from cash provided by operating
activities, the sale of our common stock and debt proceeds. We have consistently
generated positive operating cash flows. We believe that the cash generated from
our operations and the cash and cash equivalents we have on hand will be
sufficient to meet our operating requirements for the foreseeable future. If our
existing cash resources along with cash generated from operations is
insufficient to satisfy our operating requirements, we may need to sell
additional equity or debt securities or seek other financing arrangements.
One of our financial goals is to maintain and improve our capital structure. The
key metrics we focus on in assessing the strength of our liquidity for the
periods ended December 31, 2021 and June 30, 2021 and a summary of our cash
activity for the six months ended December 31, 2021 and 2020 are summarized in
the tables below:
                                                    December 31,       June 30,
                                                        2021             2021
                                                           (in thousands)
            Cash and cash equivalents              $      83,726      $ 133,932
            Marketable securities                          2,967         10,216
            Borrowings under credit facility             130,000        130,000


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                                                      Six Months Ended December 31,
                                                            2021                    2020
                                                              (in thousands)
  Cash provided by operating activities        $        28,430                   $ 24,177
  Cash used in investing activities                    (27,841)                   (34,725)
  Cash used in financing activities                    (47,687)                   (58,586)
  Effect of exchange rates on cash                        (951)                     7,774


Cash, cash equivalents and marketable securities. At December 31, 2021, our cash
and cash equivalents of $83.7 million consisted primarily of cash deposits held
at major banks and money market funds. The $50.2 million decrease in cash and
cash equivalents at December 31, 2021 from June 30, 2021 was primarily due to
cash used to repurchase common stock of $50.0 million, to fund capital
expenditures, including capitalization of software costs of $20.1 million, to
fund business and asset acquisitions, net of cash acquired of $15.1 million,
partially offset by cash generated from operations of $28.4 million and proceeds
from the sale of available for sale securities of $8.1 million.
Cash, cash equivalents and marketable securities included approximately $40.2
million held by our foreign subsidiaries as of December 31, 2021. We continue to
permanently reinvest the earnings, if any, of our international subsidiaries
other than the UK, Switzerland and India; therefore we do not provide for
U.S. income taxes that could result from the distribution of foreign earnings
from our international subsidiaries other than the aforementioned. If our
reinvestment plans were to change based on future events and we decided to
repatriate amounts from other international subsidiaries, those amounts would
generally become subject to state tax in the U.S. to the extent there were
cumulative profits in the foreign subsidiary from which the distribution to the
U.S. was made and we could be further subject to withholding tax.
Cash and cash equivalents held by our foreign subsidiaries are denominated in
currencies other than U.S. Dollars. Decreases primarily in the foreign currency
exchange rate of the British Pound Sterling to the U.S. Dollar decreased our
overall cash balances by approximately $1.0 million for the six months ended
December 31, 2021. Further changes in the foreign currency exchange rates of the
British Pound Sterling and other currencies could have a significant effect on
our overall cash balances, however, we continue to believe that our existing
cash balances, even in light of the foreign currency volatility we frequently
experience, are adequate to meet our operating requirements for the foreseeable
future.
At December 31, 2021, our deferred tax assets have been fully reserved since,
given the available evidence, it was deemed more likely than not that these
deferred tax assets would not be realized.
Operating Activities. Operating cash flow is derived by adjusting our net income
or loss for non-cash operating items, such as depreciation and amortization,
stock-based compensation plan expense, deferred income tax benefits or expenses
and changes in operating assets and liabilities, which reflect timing
differences between the receipt and payment of cash associated with transactions
and when they are recognized in our results of operations. Cash generated from
operations increased by $4.3 million in the six months ended December 31, 2021
as compared to the same period in the prior fiscal year, primarily due to an
increase in cash provided by accrued expenses of $9.0 million, prepaid and
current assets of $1.4 million and other assets of $3.2 million, partially
offset by the increase in our net loss for the six months ended December 31,
2021 of $17.3 million.
Investing Activities. Investing cash flows consist primarily of capital
expenditures, inclusive of capitalized software costs, investment purchases and
sales, and cash used for the acquisition of businesses and assets. The $6.9
million decrease in net cash used in investing activities for the six months
ended December 31, 2021 as compared to the same period in the prior fiscal year
was primarily due to a decrease in cash used to fund notes receivable of $2.6
million, a decrease in cash used to purchase available for sale securities of
$7.3 million and other investments of $7.1 million, partially offset by an
increase in cash used to fund business and asset acquisitions, net of cash
acquired, of $5.2 million and capital expenditures of $5.1 million.
Financing Activities. Financing cash flows consist primarily of cash inflows as
a result of borrowings under our revolving credit facility and proceeds from the
sale of shares of common stock through employee equity incentive plans, offset
by repurchases of our common stock. The decrease in cash used in financing
activities of $10.9 million was due to a decrease in cash used to repay debt of
$50.0 million, offset by an increase in cash used to repurchase common stock of
$39.2 million during the six months ended December 31, 2021.
Contractual Obligations
During the six months ended December 31, 2021, we entered into new facility
leases in India and renewed leases for data centers in the UK and Switzerland,
increasing our contractual obligations by $5.1 million. Other than these new
leases, there have been no other material changes to the contractual obligations
from that which was disclosed in Item 7 of our Annual Report on Form 10-K for
the fiscal year ended June 30, 2021, as filed with the SEC on August 30, 2021.
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Our estimate of unrecognized tax benefits for which cash settlement may be
required is $2.4 million. As of December 31, 2021, we are unable to estimate the
timing of future cash outflows, if any, associated with these liabilities as we
do not currently anticipate settling any of these tax positions with cash
payment in the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to a variety of risks, including interest rate changes, foreign
currency exchange rate fluctuations, and derivative instruments classification
and fair value changes. We have not entered into any foreign currency hedging
transactions or other instruments to minimize our exposure to foreign currency
exchange rate fluctuations nor do we presently plan to in the future.
We are a party to an interest rate swap agreement which we designated as a hedge
instrument to minimize our exposure to interest rate fluctuations under our
Credit Facility.
There has been no material change to our exposure to market risk from that which
was disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year
ended June 30, 2021 as filed with the SEC on August 30, 2021, which is
incorporated herein by reference.
Item 4. Controls and Procedures
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2021. The term disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers as appropriate, to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives, and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of
December 31, 2021, our chief executive officer and chief financial officer
concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
No changes in our internal control over financial reporting occurred during the
fiscal quarter ended December 31, 2021 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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