##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From                      to
 Commission File Number: 000-24931
 S1 CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    58-2395199(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)705 Westech DriveNorcross, Georgia
    
    30092(Address of principal executive
    
    (Zip Code)offices)
 (404) 923-3500
 (Former name if changed since last report.)
 þ o
  o þ o
 o þ




---



##### 



S1 CORPORATION
 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSignatureEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  2




---



##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 S1 CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE DATA)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    68,538
    
    
    $
    69,612Short-term investments
    
    
    3,014
    
    
    
    21,392Accounts receivable, net
    
    
    48,071
    
    
    
    53,371Prepaid expenses
    
    
    3,530
    
    
    
    4,036Other current assets
    
    
    8,932
    
    
    
    2,308Total current assets
    
    
    132,085
    
    
    
    150,719Property and equipment, net
    
    
    19,889
    
    
    
    12,137Intangible assets, net
    
    
    12,310
    
    
    
    12,903Goodwill, net
    
    
    124,976
    
    
    
    125,300Other assets
    
    
    5,790
    
    
    
    6,746Total assets
    
    $
    295,050
    
    
    $
    307,805LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,254
    
    
    $
    3,750Accrued compensation and benefits
    
    
    12,559
    
    
    
    9,642Accrued restructuring
    
    
    5,851
    
    
    
    9,092Accrued other expenses
    
    
    9,092
    
    
    
    12,415Deferred revenues
    
    
    26,458
    
    
    
    29,265Current portion of debt obligation
    
    
    3,288
    
    
    
    3,328Total current liabilities
    
    
    60,502
    
    
    
    67,492Debt obligation, excluding current portion
    
    
    8,541
    
    
    
    4,119Accrued restructuring, excluding current portion
    
    
    6,328
    
    
    
    10,386Other liabilities
    
    
    3,867
    
    
    
    1,579Total liabilities
    
    
    79,238
    
    
    
    83,576Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    584
    
    
    
    613Additional paid in capital
    
    
    1,823,725
    
    
    
    1,845,529Accumulated deficit
    
    
    (1,616,238
    )
    
    
    (1,629,302
    )Accumulated other comprehensive loss:Net loss on derivative financial instruments
    
    
    (129
    )
    
    
    (168
    )Cumulative foreign currency translation adjustment
    
    
    (2,130
    )
    
    
    (2,443
    )Total stockholders equity
    
    
    215,812
    
    
    
    224,229Total liabilities and stockholders equity
    
    $
    295,050
    
    
    $
    307,805Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    58,420,853
    
    
    
    61,290,973
  3




---



##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Software licenses
    
    $
    8,291
    
    
    $
    10,508
    
    
    $
    21,808
    
    
    $
    22,920Support and maintenance
    
    
    11,695
    
    
    
    11,120
    
    
    
    33,397
    
    
    
    32,974Professional services
    
    
    19,426
    
    
    
    18,355
    
    
    
    60,539
    
    
    
    49,926Data center
    
    
    11,647
    
    
    
    11,616
    
    
    
    35,077
    
    
    
    35,113Other
    
    
    255
    
    
    
    297
    
    
    
    657
    
    
    
    1,142Total revenues
    
    
    51,314
    
    
    
    51,896
    
    
    
    151,478
    
    
    
    142,075Operating expenses:Cost of software licenses
    
    
    975
    
    
    
    1,128
    
    
    
    2,807
    
    
    
    3,220Cost of professional services, support and maintenance
    
    
    16,135
    
    
    
    17,385
    
    
    
    47,077
    
    
    
    47,836Cost of data center
    
    
    6,333
    
    
    
    5,713
    
    
    
    18,522
    
    
    
    16,888Cost of other revenue
    
    
    34
    
    
    
    244
    
    
    
    306
    
    
    
    693Selling and marketing
    
    
    7,979
    
    
    
    7,155
    
    
    
    23,144
    
    
    
    19,713Product development
    
    
    7,220
    
    
    
    9,516
    
    
    
    20,912
    
    
    
    28,999General and administrative
    
    
    6,339
    
    
    
    7,085
    
    
    
    20,748
    
    
    
    19,280Restructuring costs
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    1,282Depreciation
    
    
    1,611
    
    
    
    2,074
    
    
    
    5,182
    
    
    
    5,797Amortization of other intangible assets
    
    
    282
    
    
    
    327
    
    
    
    892
    
    
    
    981Total operating expenses
    
    
    46,908
    
    
    
    51,027
    
    
    
    139,590
    
    
    
    144,689Operating income (loss)
    
    
    4,406
    
    
    
    869
    
    
    
    11,888
    
    
    
    (2,614
    )Interest and other income, net
    
    
    855
    
    
    
    1,277
    
    
    
    2,510
    
    
    
    3,526Income before continuing operations
    
    
    5,261
    
    
    
    2,146
    
    
    
    14,398
    
    
    
    912Income tax expense
    
    
    (113
    )
    
    
    (253
    )
    
    
    (1,334
    )
    
    
    (907
    )Income from continuing operations
    
    
    5,148
    
    
    
    1,893
    
    
    
    13,064
    
    
    
    5Income from discontinued operations, net of tax
    
    
    
    
    
    
    31,452
    
    
    
    
    
    
    
    30,785Net income
    
    $
    5,148
    
    
    $
    33,345
    
    
    $
    13,064
    
    
    $
    30,790Basic earnings per shareContinuing operations
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.21
    
    
    $
    Discontinued operations
    
    $
    
    
    
    $
    0.43
    
    
    $
    
    
    
    $
    0.43Net income per share
    
    $
    0.09
    
    
    $
    0.46
    
    
    $
    0.21
    
    
    $
    0.43Diluted earnings per shareContinuing operations
    
    $
    0.08
    
    
    $
    0.03
    
    
    $
    0.21
    
    
    $
    Discontinued operations
    
    $
    
    
    
    $
    0.43
    
    
    $
    
    
    
    $
    0.43Net income per share
    
    $
    0.08
    
    
    $
    0.46
    
    
    $
    0.21
    
    
    $
    0.43Weighted average common shares outstanding  basic
    
    
    58,718,077
    
    
    
    71,007,675
    
    
    
    60,439,490
    
    
    
    70,798,519Weighted average common shares outstanding  fully diluted
    
    
    59,966,505
    
    
    
    71,161,983
    
    
    
    61,289,708
    
    
    
    70,987,628
  4




---



##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
(Unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    13,064
    
    
    $
    30,790Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    8,224
    
    
    
    9,555Gain on disposal of discontinued operations, net of tax
    
    
    
    
    
    
    (32,817
    )Provision for doubtful accounts receivable and billing adjustments
    
    
    37
    
    
    
    897Stock based compensation expense
    
    
    7,902
    
    
    
    3,899Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    5,130
    
    
    
    (12,664
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (3,485
    )
    
    
    506(Decrease) increase in accounts payable
    
    
    (629
    )
    
    
    25Decrease in accrued expenses and other liabilities
    
    
    (10,010
    )
    
    
    (10,276
    )(Decrease) increase in deferred revenues
    
    
    (2,340
    )
    
    
    7,001Net cash provided by (used in) operating activities
    
    
    17,893
    
    
    
    (3,084
    )Cash flows from investing activities:Cash paid in connection with acquisition
    
    
    
    
    
    
    (14,000
    )Proceeds from sale of subsidiaries
    
    
    
    
    
    
    32,639Maturities of short-term investment securities
    
    
    29,255
    
    
    
    41,600Purchases of short-term investment securities
    
    
    (10,877
    )
    
    
    (23,439
    )Amounts held in escrow related to sale of business
    
    
    
    
    
    
    (3,500
    )Amounts held in escrow related to property
    
    
    (1,638
    )
    
    
    Purchases of property, equipment and technology
    
    
    (8,384
    )
    
    
    (5,169
    )Net cash provided by investing activities
    
    
    8,356
    
    
    
    28,131Cash flows from financing activities:Proceeds from exercise of employee stock options
    
    
    9,990
    
    
    
    2,543Payments on capital leases and debt obligations
    
    
    (2,617
    )
    
    
    (1,856
    )Repurchase of common stock
    
    
    (35,275
    )
    
    
    Proceeds from sale-lease back transaction
    
    
    
    
    
    
    2,502Net cash (used in) provided by financing activities
    
    
    (27,902
    )
    
    
    3,189Effect of exchange rate changes on cash and cash equivalents
    
    
    579
    
    
    
    (116
    )Net (decrease) increase in cash and cash equivalents
    
    
    (1,074
    )
    
    
    28,120Cash and cash equivalents at beginning of period
    
    
    69,612
    
    
    
    85,108Cash and cash equivalents at end of period
    
    $
    68,538
    
    
    $
    113,228Noncash investing and financing activities:Equipment financed through capital leases
    
    $
    1,761
    
    
    $
    6,616Property financed through notes payable
    
    $
    5,238
    
    
    $
    
  5




---



##### Table of Contents



S1 CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. BACKGROUND AND BASIS OF PRESENTATION
       6




---



##### Table of Contents



2. RECENT ACCOUNTING PRONOUNCEMENTS
    3. DISCONTINUED OPERATIONS
  7




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Risk and Compliance
    
    $
    
    
    
    $
    2,176
    
    
    $
    
    
    
    $
    12,434Pretax income (loss) from discontinued operationsRisk and Compliance
    
    $
    
    
    
    $
    (712
    )
    
    $
    
    
    
    $
    (1,969
    )Gain (loss) on disposal of Edify
    
    
    
    
    
    
    (97
    )
    
    
    
    
    
    
    457Gain on disposal of Risk and Compliance
    
    
    
    
    
    
    32,263
    
    
    
    
    
    
    
    32,263Income tax benefit (expense)
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    34Income from discontinued operations
    
    $
    
    
    
    $
    31,452
    
    
    $
    
    
    
    $
    30,785
 4. GOODWILL AND INTANGIBLE ASSETS
   Gross
    
    
    AccumulatedCarrying Value
    
    
    AmortizationPurchased and acquired technology
    
    $
    21,938
    
    
    $
    (15,702
    )Customer relationships
    
    
    12,000
    
    
    
    (5,926
    )Total
    
    $
    33,938
    
    
    $
    (21,628
    )
  2007
    
    2008
    
    2009
    
    2010
    
    2011Enterprise
    
    $
    723
    
    
    $
    329
    
    
    $
    245
    
    
    $
    245
    
    
    $
    245Postilion
    
    $
    3,389
    
    
    $
    3,326
    
    
    $
    2,445
    
    
    $
    1,335
    
    
    $
    1,282
  8




---



##### Table of Contents



Enterprise
    
    
    Postilion
    
    
    TotalBalance, January 1, 2007
    
    $
    49,887
    
    
    $
    75,413
    
    
    $
    125,300Utilization of acquisition related
income tax benefits
    
    
    (62
    )
    
    
    (262
    )
    
    
    (324
    )Balance, September 30, 2007
    
    $
    49,825
    
    
    $
    75,151
    
    
    $
    124,976
 5. STOCK OPTION PLANS
    2007
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    45
    %
    
    
    60
    %Risk-free interest rate
    
    
    4.9
    %
    
    
    4.8
    %Expected life
    

    4.0
    years

    

    4.0
    years
 9




---



##### Table of Contents



2007
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    44
    %
    
    
    59
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    4.6
    %Expected life
    
    
    3.9
    years
    

    
    4.9
    years
  Nine Months Ended September 30,2007
    
    
    2006Costs and expenses:Professional services, support and maintenance
    
    $
    457
    
    
    $
    406Data center
    
    
    47
    
    
    
    60Selling and marketing
    
    
    3,892
    
    
    
    1,150Product development
    
    
    1,652
    
    
    
    690General and administrative
    
    
    1,854
    
    
    
    1,417Discontinued operations
    
    
    
    
    
    
    175Total stock-based compensation expense
    
    $
    7,902
    
    
    $
    3,898
  Unrecognized
    
    Weighted AverageExpense
    
    Period(in thousands)
    
    (in years)Stock
Options
    
    $
    5,400
    
    
    
    1.13Restricted
Stock
    
    
    900
    
    
    
    0.75Stock Appreciation
Rights
    
    
    5,700
    
    
    
    1.09
 6. COMPREHENSIVE INCOME (LOSS)
  10




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    5,148
    
    
    $
    33,345
    
    
    $
    13,064
    
    
    $
    30,790Foreign currency translation adjustment
    
    
    147
    
    
    
    (327
    )
    
    
    313
    
    
    
    (659
    )Unrealized income (loss) on cash flow hedges
    
    
    1
    
    
    
    (40
    )
    
    
    (18
    )
    
    
    (263
    )Comprehensive income
    
    $
    5,296
    
    
    $
    32,978
    
    
    $
    13,359
    
    
    $
    29,868
 7. RESTRUCTURING CHARGES
 2003 and Prior Restructuring Plans
  Lease CostsBalance, December 31, 2006
    
    $
    5,161Amounts utilized
    
    
    (592
    )Balance, September 30, 2007
    
    $
    4,569
 2005 Restructuring Plan
  Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance, December 31, 2006
    
    $
    660
    
    
    $
    3,645
    
    
    $
    4,305Amounts
utilized
    
    
    (627
    )
    
    
    (1,022
    )
    
    
    (1,649
    )Balance, September 30,
2007
    
    $
    33
    
    
    $
    2,623
    
    
    $
    2,656
 2006 Restructuring Plan
  Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance, December 31, 2006
    
    $
    4,018
    
    
    $
    5,994
    
    
    $
    10,012Amounts
utilized
    
    
    (3,087
    )
    
    
    (1,971
    )
    
    
    (5,058
    )Balance, September 30,
2007
    
    $
    931
    
    
    $
    4,023
    
    
    $
    4,954
  11




---



##### Table of Contents



8. CONTINGENCIES AND DEBT
 Litigation
   Sale-Leaseback Transaction
  G uarantees
  Long-term Debt
  September 30,
    
    
    December 31,2007
    
    
    2006Capital leases
    
    $
    6,288
    
    
    $
    6,807Note payable on property
    
    
    5,232
    
    
    
    Other notes payable
    
    
    309
    
    
    
    640Total debt
    
    $
    11,829
    
    
    $
    7,447Less current portion
    
    
    (3,288
    )
    
    
    (3,328
    )Total long-term debt
    
    $
    8,541
    
    
    $
    4,119
 12




---



##### Table of Contents



9. INCOME TAXES
     10. STOCKHOLDERS EQUITY
   11. SEGMENT REPORTING AND MAJOR CUSTOMERS
   13




---



##### Table of Contents



Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended September 30, 2007:Enterprise
    
    $
    1,774
    
    
    $
    4,030
    
    
    $
    15,709
    
    
    $
    6,301
    
    
    $
    152
    
    
    $
    27,966Postilion
    
    
    6,517
    
    
    
    7,665
    
    
    
    3,717
    
    
    
    5,346
    
    
    
    103
    
    
    
    23,348Total
    
    $
    8,291
    
    
    $
    11,695
    
    
    $
    19,426
    
    
    $
    11,647
    
    
    $
    255
    
    
    $
    51,314
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended September 30, 2006:Enterprise
    
    $
    5,291
    
    
    $
    3,527
    
    
    $
    14,159
    
    
    $
    5,186
    
    
    $
    138
    
    
    $
    28,301Postilion
    
    
    5,217
    
    
    
    7,593
    
    
    
    4,196
    
    
    
    6,430
    
    
    
    159
    
    
    
    23,595Total
    
    $
    10,508
    
    
    $
    11,120
    
    
    $
    18,355
    
    
    $
    11,616
    
    
    $
    297
    
    
    $
    51,896
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine Months Ended September 30, 2007:Enterprise
    
    $
    4,116
    
    
    $
    11,418
    
    
    $
    48,485
    
    
    $
    18,095
    
    
    $
    465
    
    
    $
    82,579Postilion
    
    
    17,692
    
    
    
    21,979
    
    
    
    12,054
    
    
    
    16,982
    
    
    
    192
    
    
    
    68,899Total
    
    $
    21,808
    
    
    $
    33,397
    
    
    $
    60,539
    
    
    $
    35,077
    
    
    $
    657
    
    
    $
    151,478
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine Months Ended September 30, 2006:Enterprise
    
    $
    7,831
    
    
    $
    10,282
    
    
    $
    38,789
    
    
    $
    15,512
    
    
    $
    408
    
    
    $
    72,822Postilion
    
    
    15,089
    
    
    
    22,692
    
    
    
    11,137
    
    
    
    19,601
    
    
    
    734
    
    
    
    69,253Total
    
    $
    22,920
    
    
    $
    32,974
    
    
    $
    49,926
    
    
    $
    35,113
    
    
    $
    1,142
    
    
    $
    142,075
  Three Months Ended September 30, 2007Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    27,966
    
    
    $
    23,348
    
    
    $
    51,314Operating expenses:Direct costs
    
    
    13,971
    
    
    
    9,506
    
    
    
    23,477Selling and marketing
    
    
    3,085
    
    
    
    4,894
    
    
    
    7,979Product development
    
    
    3,127
    
    
    
    4,093
    
    
    
    7,220General and administrative
    
    
    3,707
    
    
    
    2,632
    
    
    
    6,339Depreciation
    
    
    1,016
    
    
    
    595
    
    
    
    1,611Amortization of other intangible
assets
    
    
    
    
    
    
    282
    
    
    
    282Total operating expenses
    
    
    24,906
    
    
    
    22,002
    
    
    
    46,908Segment operating income
    
    $
    3,060
    
    
    $
    1,346
    
    
    $
    4,406
 14




---



##### Table of Contents



Three Months Ended September 30, 2006Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    28,301
    
    
    $
    23,595
    
    
    $
    51,896Operating expenses:Direct costs
    
    
    15,245
    
    
    
    9,225
    
    
    
    24,470Selling and marketing
    
    
    3,290
    
    
    
    3,865
    
    
    
    7,155Product development
    
    
    5,711
    
    
    
    3,805
    
    
    
    9,516General and administrative
    
    
    3,878
    
    
    
    3,207
    
    
    
    7,085Restructuring costs
    
    
    261
    
    
    
    139
    
    
    
    400Depreciation
    
    
    1,384
    
    
    
    690
    
    
    
    2,074Amortization of other intangible
assets
    
    
    45
    
    
    
    282
    
    
    
    327Total operating expenses
    
    
    29,814
    
    
    
    21,213
    
    
    
    51,027Segment operating (loss) income
    
    $
    (1,513
    )
    
    $
    2,382
    
    
    $
    869
 Nine Months Ended September 30, 2007Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    82,579
    
    
    $
    68,899
    
    
    $
    151,478Operating expenses:Direct costs
    
    
    42,281
    
    
    
    26,431
    
    
    
    68,712Selling and marketing
    
    
    9,814
    
    
    
    13,330
    
    
    
    23,144Product development
    
    
    9,107
    
    
    
    11,805
    
    
    
    20,912General and administrative
    
    
    11,465
    
    
    
    9,283
    
    
    
    20,748Depreciation
    
    
    3,377
    
    
    
    1,805
    
    
    
    5,182Amortization of other intangible
assets
    
    
    45
    
    
    
    847
    
    
    
    892Total operating expenses
    
    
    76,089
    
    
    
    63,501
    
    
    
    139,590Segment operating income
    
    $
    6,490
    
    
    $
    5,398
    
    
    $
    11,888
 Nine Months Ended September 30, 2006Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    72,822
    
    
    $
    69,253
    
    
    $
    142,075Operating expenses:Direct costs
    
    
    41,508
    
    
    
    27,129
    
    
    
    68,637Selling and marketing
    
    
    9,271
    
    
    
    10,442
    
    
    
    19,713Product development
    
    
    17,718
    
    
    
    11,281
    
    
    
    28,999General and administrative
    
    
    10,066
    
    
    
    9,214
    
    
    
    19,280Restructuring costs
    
    
    898
    
    
    
    384
    
    
    
    1,282Depreciation
    
    
    3,805
    
    
    
    1,992
    
    
    
    5,797Amortization of other intangible
assets
    
    
    133
    
    
    
    848
    
    
    
    981Total operating expenses
    
    
    83,399
    
    
    
    61,290
    
    
    
    144,689Segment operating (loss) income
    
    $
    (10,577
    )
    
    $
    7,963
    
    
    $
    (2,614
    )
 Geography.
 Subscription.
 15




---



##### Table of Contents



Major Customer.
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Total Revenues
    
    2007
    
    2006
    
    2007
    
    2006Enterprise Segment
    
    
    37
    %
    
    
    43
    %
    
    
    40
    %
    
    
    48
    %Total Company
    
    
    20
    %
    
    
    24
    %
    
    
    22
    %
    
    
    25
    %
 12. NET INCOME (LOSS) PER COMMON SHARE
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share data)Basic earnings per share:Income from continuing operations
    
    $
    5,148
    
    
    $
    1,893
    
    
    $
    13,064
    
    
    $
    5Amount allocated to participating preferred stockholders
    
    
    (92
    )
    
    
    (28
    )
    
    
    (227
    )
    
    
    Income from continuing operations
available to common stockholders  basic
    
    $
    5,056
    
    
    $
    1,865
    
    
    $
    12,837
    
    
    $
    5Weighted average common shares outstanding
    
    
    58,718
    
    
    
    71,008
    
    
    
    60,439
    
    
    
    70,799Basic income from continuing operations
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.21
    
    
    $
    Diluted earnings per share:Income from continuing operations
    
    $
    5,148
    
    
    $
    1,893
    
    
    $
    13,064
    
    
    $
    5Amount allocated to participating preferred stockholders
    
    
    (92
    )
    
    
    (28
    )
    
    
    (227
    )
    
    
    Income from continuing operations
available to common stockholders  diluted
    
    $
    5,056
    
    
    $
    1,865
    
    
    $
    12,837
    
    
    $
    5Weighted average common shares outstanding
    
    
    58,718
    
    
    
    71,008
    
    
    
    60,440
    
    
    
    70,799Weighted average effect of common stock equivalent
Stock options and restricted stock
    
    
    1,249
    
    
    
    154
    
    
    
    850
    
    
    
    189Weighted average diluted shares outstanding
    
    
    59,967
    
    
    
    71,162
    
    
    
    61,290
    
    
    
    70,988Diluted income from continuing operations
    
    $
    0.08
    
    
    $
    0.03
    
    
    $
    0.21
    
    
    $
    
 16




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
     17




---



##### Table of Contents



Recent Accounting Pronouncements and Critical Accounting Policies and Estimates
  Quarterly and Year-to-Date financial highlights
  
    
    Income from continuing operations increased $3.3 million to $5.1 million;
    
    Product development costs are down $2.3 million due to lower costs following our
restructuring activities in the fourth quarter of 2006;
    
    Selling and marketing, Product development, and General and administrative costs
increased due to higher stock based compensation expense which increased by $1.8
million to $2.9 million;
    
    Stock repurchases of $19.7 million or 2.7 million shares;
    
    Source code license of mobile phone banking software for $2.4 million; and
    
    Restructuring payments of $1.1 million.
  
    
    Income from continuing operations increased to $13.1 million from break even;
    
    Professional services revenues increased $10.6 million, due to growth in the
Enterprise banking and Postilion payment business;
    
    Product development costs are down over $8.1 million due to lower costs following
our restructuring activities in the fourth quarter of 2006;
    
    Selling and marketing, Product development, and General and administrative costs
increased due to higher stock based compensation expense which increased by $4.0
million to $7.9 million;
    
    Stock repurchases of $35.3 million or 4.6 million shares;
    
    Source code license of mobile phone banking software for $2.4 million; and
    
    Restructuring payments of $7.3 million.
 18




---



##### Table of Contents



Comparison of the Three Months Ended September 30, 2007 and 2006
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended September 30, 2007:Enterprise
    
    $
    1,774
    
    
    $
    4,030
    
    
    $
    15,709
    
    
    $
    6,301
    
    
    $
    152
    
    
    $
    27,966Postilion
    
    
    6,517
    
    
    
    7,665
    
    
    
    3,717
    
    
    
    5,346
    
    
    
    103
    
    
    
    23,348Total
    
    $
    8,291
    
    
    $
    11,695
    
    
    $
    19,426
    
    
    $
    11,647
    
    
    $
    255
    
    
    $
    51,314
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended September 30, 2006:Enterprise
    
    $
    5,291
    
    
    $
    3,527
    
    
    $
    14,159
    
    
    $
    5,186
    
    
    $
    138
    
    
    $
    28,301Postilion
    
    
    5,217
    
    
    
    7,593
    
    
    
    4,196
    
    
    
    6,430
    
    
    
    159
    
    
    
    23,595Total
    
    $
    10,508
    
    
    $
    11,120
    
    
    $
    18,355
    
    
    $
    11,616
    
    
    $
    297
    
    
    $
    51,896
     19




---



##### Table of Contents



Direct costs.
   20




---



##### Table of Contents



Selling and marketing expenses.
 Product development expenses.
  General and administrative expenses.
 Restructuring costs.
 Depreciation.
 Amortization of other intangible assets.
 Interest and other income, net.
 Income tax expense.
 21




---



##### Table of Contents



time-to-time we are required to record an
income tax provision in periods:
    
    for tax expense in certain subsidiaries or jurisdictions for which we do not have NOLs
to utilize;
    
    in the United States due to limitations on the use of our federal NOLs for alternative
minimum tax purposes which will be paid in cash;
    
    if there are NOLs that were acquired as part of a business combination, upon which we
placed a valuation allowance at the acquisition date. This results in non-cash income tax
expense as goodwill is reduced and the valuation allowance is released; or
    
    if it is more likely than not a tax benefit cannot be sustained, tax expense is recorded
for the contingent tax liability.
  Income from discontinued operations.
 22




---



##### Table of Contents



Comparison of the Nine Months Ended September 30, 2007 and 2006
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine Months Ended September 30, 2007:Enterprise
    
    $
    4,116
    
    
    $
    11,418
    
    
    $
    48,485
    
    
    $
    18,095
    
    
    $
    465
    
    
    $
    82,579Postilion
    
    
    17,692
    
    
    
    21,979
    
    
    
    12,054
    
    
    
    16,982
    
    
    
    192
    
    
    
    68,899Total
    
    $
    21,808
    
    
    $
    33,397
    
    
    $
    60,539
    
    
    $
    35,077
    
    
    $
    657
    
    
    $
    151,478
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalNine Months Ended September 30, 2006:Enterprise
    
    $
    7,831
    
    
    $
    10,282
    
    
    $
    38,789
    
    
    $
    15,512
    
    
    $
    408
    
    
    $
    72,822Postilion
    
    
    15,089
    
    
    
    22,692
    
    
    
    11,137
    
    
    
    19,601
    
    
    
    734
    
    
    
    69,253Total

    
    $
    22,920
    
    
    $
    32,974
    
    
    $
    49,926
    
    
    $
    35,113
    
    
    $
    1,142
    
    
    $
    142,075
     23




---



##### Table of Contents



Direct costs.
   24




---



##### Table of Contents



Selling and marketing expenses.
 Product development expenses .
  General and administrative expenses.
 Restructuring costs.
 Depreciation.
 Amortization of other intangible assets.
 25




---



##### Table of Contents



Interest and other income, net.
 Income tax expense.
 
    
    for tax expense in certain subsidiaries or jurisdictions for which we do not have NOLs
to utilize;
    
    in the United States due to limitations on the use of our federal NOLs for alternative
minimum tax purposes which will be paid in cash;
    
    if there are NOLs that were acquired as part of a business combination, upon which we
placed a valuation allowance at the acquisition date. This results in non-cash income tax
expense as goodwill is reduced and the valuation allowance is released; or
    
    if it is more likely than not a tax benefit cannot be sustained, tax expense is recorded
for the contingent tax liability.
  Income from discontinued operations.
 Liquidity and Capital Resources
  Nine Months Ended September 30,2007
    
    
    2006Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    29,227
    
    
    $
    12,324Change in operating assets and liabilities
    
    
    (11,334
    )
    
    
    (15,408
    )Net cash provided by (used in) operating activities
    
    
    17,893
    
    
    
    (3,084
    )Net cash provided by investing activities
    
    
    8,356
    
    
    
    28,131Net cash (used in) provided by financing activities
    
    
    (27,902
    )
    
    
    3,189Effect of exchange rates on cash and cash equivalents
    
    
    579
    
    
    
    (116
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (1,074
    )
    
    $
    28,120
 26




---



##### Table of Contents



As ofSeptember 30, 2007
    
    December 31, 2006Cash and cash equivalents
    
    $
    68,538
    
    
    $
    69,612Short term investments
    
    
    3,014
    
    
    
    21,392Working
capital
    
    
    71,583
    
    
    
    83,227Total assets
    
    
    295,050
    
    
    
    307,805Total stockholders
equity
    
    
    215,812
    
    
    
    224,229
 Operating Activities.
  
    
    our net income of $13.1 million;
    
    depreciation and amortization expense of $8.2 million;
    
    stock based compensation expense of $7.9 million;
    
    increase of $2.0 million due to an escrow deposit for a termination settlement of a
vacated facility;
    
    decrease in accrued expenses and other liabilities of $11.8 million primarily due to
payments made from the restructuring reserve and bonus payments;
    
    decrease of $5.1 million in accounts receivable due to the improvement of days
sales outstanding to 85 days from 95 days; and
    
    decrease in deferred revenues for professional service projects of $4 million offset
partially by an increase of $2.3 million in software licenses revenues.
  
    
    our net income of $30.8 million;
    
    depreciation and amortization expense of $9.6 million;
    
    gain on the disposal of Edify of $0.6 million and gain on disposal of the Risk and
Compliance business of $32.3 million;
    
    provision of doubtful accounts receivable and billing adjustments of $0.9 million;
    
    stock based compensation expense of $3.9 million;
    
    decrease in accrued expenses and other liabilities of $10.3 million mainly due to
payments made from our restructuring reserve;
    
    increase of $12.7 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter;
and
    
    $7.0 million increase in deferred revenues resulting from annual billing of
maintenance and subscription fees.
 Investing Activities.
  
    
    converted $18.4 million, net, from short-term investments to cash and cash
equivalents;
    
    paid an escrow deposit related to the purchase of our corporate headquarters of $1.6
million; and
    
    purchased $8.4 million of property, equipment, and technology, comprised of $2.8
million for property, $2.4
million for a source code license and the remainder for leasehold improvements and
hardware expenditures.
  
    
    paid $14.0 million to the shareholders of Mosaic in settlement of an earn-out in
connection with the acquisition
 27




---



##### Table of Contents



of that business in 2004;
    
    converted $18.2 million, net, from short-term investments to cash and cash
equivalents;
    
    received net proceeds from the sale of the Risk and Compliance segment of $32.6
million;
    
    had cash held in escrow of $3.5 million related to the sale of the Risk and
Compliance segment; and
    
    purchased $5.2 million of property and equipment.
 Financing Activities.
  
    
    paid $35.3 million for the repurchase of our common stock pursuant to a tender offer
and authorized stock repurchase program;
    
    received $10.0 million from the sale of common stock under our employee stock option
plans; and
    
    paid $2.3 million for capital lease obligations and $0.3 million for debt
obligations.
  
    
    received $2.5 million from the sale of common stock under our employee stock option
plans;
    
    received $2.5 million from a sale lease back transaction; and
    
    paid $1.5 million for capital lease obligations and $0.4 million for debt
obligations.
  Stock Repurchase Program.
 Restructuring
 Debt Obligations
 Other Obligations.
 28




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls.
 Changes in Internal Control over Financial Reporting.
 29




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation
   
 Item 1A. Risk Factors
  You should consider carefully the risk factors in our Annual Report on Form 10-K for the year
ended December 31, 2006, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007,
and the additional risk factors noted below. If any of these risks actually occur, our business,
financial condition or results of operations would likely suffer. In that case, the trading price
of our common stock could decline, and you may lose all or a part of the money you paid to buy our
common stock.
 We depend on one customer, State Farm Mutual Automobile Insurance Company (State Farm), for
a significant portion of our revenue and if that customer terminates its contract with us, or
reduces the amount of software or services they buy from us, our revenues and financial performance
would decline
  Security
breaches or computer viruses could harm our business by disrupting
our delivery of services and damaging our reputation and
business.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (c)
    
    The following table provides information with respect to any purchase made by or on
behalf of the Company or any affiliated purchaser, as defined in Section 240.10b-18(a)(3)
of the Securities Exchange Act of 1934, of shares of our common stock.
 Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 30




---



##### Table of Contents



Maximum number (orTotal number of
    
    
    approximate dollarTotal

    
    
    
    
    
    
    shares purchased
    
    
    value) of shares thatnumber

    
    
    
    
    
    
    as part of a publicly
    
    
    may yet be purchasedof shares
    
    
    Average price
    
    
    announced plan or
    
    
    under the plan orPeriod
    
    purchased
    
    
    paid per share
    
    
    program
    
    
    programJuly 1, 2007 - July 31, 2007
    
    
    520,600
    
    
    $
    7.61
    
    
    
    520,600
    
    
    $
    11,041,563August 1, 2007 - August 31, 2007
    
    
    2,088,300
    
    
    $
    7.27
    
    
    
    2,088,300
    
    
    $
    15,858,993September 1, 2007 - September 30, 2007
    
    
    63,800
    
    
    $
    8.48
    
    
    
    63,800
    
    
    $
    15,317,884Total
    
    
    2,672,700
    
    
    $
    7.37
    
    
    
    2,672,700
   
 Item 6. Exhibits
 ExhibitNo.
    
    Exhibit Description3.1
    
    Amended and Restated Certificate of Incorporation of S1 Corporation (S1) (filed as
Exhibit 1 to S1s Registration Statement on Form 8-A filed with the Securities and Exchange
Commission (the SEC) on September 30, 1998 and incorporated herein by reference).3.2
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
June 3, 1999 (filed as Exhibit 4.2 to S1s Registration Statement on Form S-8 (File
No. 333-82369) filed with the SEC on July 7, 1999 and incorporated herein by reference).3.3
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated
November 10, 1999 (filed as Exhibit 3.3 to S1s Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 and incorporated herein by reference).3.4
    
    Certificate of Designation for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 2 to S1s Registration Statement on Form 8-A filed with the SEC on September 30, 1998
and incorporated herein by reference).3.5
    
    Amended and Restated Bylaws of S1, as amended (filed as Exhibit 3.6 to S1s Quarterly Report
on Form 10-Q filed with the SEC on May 8, 2006 and incorporated herein by reference).4.1
    
    Specimen certificate for S1s common stock (filed as Exhibit 4 to S1s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference).4.2
    
    Specimen certificate for S1s Series B Redeemable Convertible Preferred Stock (filed as
Exhibit 4.3 to S1s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).31.1
    
    Certification of Chief Executive Officer
 31




---



##### Table of Contents



ExhibitNo.
    
    Exhibit Description31.2
    
    Certification of Chief Financial Officer32.1
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes-Oxley Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002
 32




---



##### Table of Contents



SIGNATURE
  S1 CORPORATIONBy:
    /s/ JOHN A. STONEJohn A. StoneChief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 33




---



##### Table of Contents



Exhibit Index
 ExhibitNo.
    
    Exhibit Description31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes-Oxley Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002
 34