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TMCNet:  ACI WORLDWIDE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 09, 2012]

ACI WORLDWIDE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and may include words or phrases such as "believes," "will," "expects," "anticipates," "intends," and words and phrases of similar impact. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.


Forward-looking statements in this report include, but are not limited to, statements regarding future operations, business strategy, business environment, key trends, and, in each case, statements related to expected financial and other benefits. Many of these factors will be important in determining our actual future results. Any or all of the forward-looking statements in this report may turn out to be incorrect. They may be based on inaccurate assumptions or may not account for known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those expressed or implied in any forward-looking statements, and our business, financial condition and results of operations could be materially and adversely affected. In addition, we disclaim any obligation to update any forward-looking statements after the date of this report, except as required by law.

All of the forward-looking statements in this report are expressly qualified by the risk factors discussed in our filings with the Securities and Exchange Commission ("SEC"). Such factors include, but are not limited to, risks related to: • the global financial crisis and the continuing decline in the global economy; • volatility and disruption of the capital and credit markets and adverse changes in the global economy; • consolidations and failures in the financial services industry; • increased competition; • restrictions and other financial covenants in our credit facility; • the restatement of our financial statements; • the accuracy of management's backlog estimates; • impairment of our goodwill or intangible assets; • exposure to unknown tax liabilities; • risks from operating internationally; • our offshore software development activities; • customer reluctance to switch to a new vendor; • the performance of our strategic product, BASE24-eps; • our strategy to migrate customers to our next generation products; • ratable or deferred recognition of certain revenue associated with customer migrations and the maturity of certain of our products; • demand for our products; • failure to obtain renewals of customer contracts or to obtain such renewals on favorable terms; • delay or cancellation of customer projects or inaccurate project completion estimates; • business interruptions or failure of our information technology and communication systems; • our alliance with International Business Machines Corporation ("IBM"); • the complexity of our products and services and the risk that they may contain hidden defects or be subjected to security breaches or viruses; • compliance of our products with applicable legislation, governmental regulations and industry standards; • our compliance with privacy regulations; • the protection of our intellectual property in intellectual property litigation; • future acquisitions, strategic partnerships and investments and litigation; • the risk that expected synergies, operational efficiencies and cost savings from our recent acquisition of S1 Corporation ("S1") may not be fully realized or realized within the expected timeframe; • the cyclical nature of our revenue and earnings and the accuracy of forecasts due to the concentration of revenue generating activity during the final weeks of each quarter; and • volatility in our stock price.

25 -------------------------------------------------------------------------------- Table of Contents The cautionary statements in this report expressly qualify all of our forward-looking statements.

The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements and related notes and Management's Discussion & Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed February 22, 2012.

Results for the three and nine months ended September 30, 2012, are not necessarily indicative of results that may be attained in the future.

Overview We develop, market, install and support a broad line of software products and services primarily focused on facilitating electronic payments. In addition to our own products, we distribute, or act as a sales agent for, software developed by third parties. Our products are sold and supported through distribution networks covering three geographic regions - the Americas, EMEA and Asia/Pacific. Each distribution network has its own sales force and supplements its sales force with independent reseller and/or distributor networks. Our products and services are used principally by financial institutions, retailers and electronic payment processors, both in domestic and international markets.

Accordingly, our business and operating results are influenced by trends such as information technology spending levels, the growth rate of the electronic payments industry, mandated regulatory changes, and changes in the number and type of customers in the financial services industry. Our products are marketed under the ACI Worldwide and ACI brands.

We derive a majority of our revenues from non-domestic operations and believe our greatest opportunities for growth exist largely in international markets.

Refining our global infrastructure is a critical component of driving our growth. We have launched a globalization strategy which includes elements intended to streamline our supply chain and provide low-cost centers of expertise to support a growing international customer base. We utilize our Irish subsidiaries to manage certain of our intellectual property rights and to oversee and manage certain international product development and commercialization efforts. We also continue to grow low-cost centers of expertise in Romania and India.

Key trends that currently impact our strategies and operations include: • Global Financial Markets Uncertainty. The continuing uncertainty in the global financial markets has negatively impacted general business conditions. It is possible that a weakening economy could adversely affect our customers, their purchasing plans, or even their solvency, but we cannot predict whether or to what extent this will occur. We have diversified counterparties and customers, but we continue to monitor our counterparty and customer risks closely. While the effects of the economic conditions in the future are not predictable, we believe our global presence, the breadth and diversity of our service offerings and our enhanced expense management capabilitiesposition us well in a slower economic climate. Market analysts, such as Boston Consulting Group, indicate that banks now recognize theimportance of payments to their business, so providing services for that aspect of the business is of less risk than for other aspects of their business.

• Availability of Credit. There were significant disruptions in the capital and credit markets and many lenders and financialinstitutions have reduced or ceased to provide funding to borrowers. The availability of credit, confidence in the entire financial sector, and volatility in financial markets have been adversely affected. These disruptions are likely to have some impact on all institutions in the U.S. banking and financial industries, including our lenders and the lenders of our customers. The Federal Reserve Bank has been providing vast amounts of liquidity into the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets.

A reduction in the Federal Reserve's activities or capacity could reduce liquidity in the markets, thereby increasing funding costs or reducing the availability of funds to finance our existing operations as well as those of our customers. We are not currentlydependent upon short-term funding, and the limited availability of credit in the market has not affected our revolving credit facility or our liquidity or materially impacted our funding costs.

• Increasing electronic payment transaction volumes. Electronic payment volumes continue to increase around the world, taking market share from traditional cash and check transactions. In February 2011 Boston Consulting Group predicted that noncash payment transactions would grow in volume at an annual rate of 9% from $309 billion in 2010 to $740 billion in 2020, with varying growth rates based on the type of payment and part of the world. We leverage the growth intransaction volumes through the licensing of new systems to customers whose older systems cannot handle increased volume and through thelicensing of capacity upgrades to existing customers.

• Adoption of real time delivery. Customer expectations, from both consumers and corporate, are driving the payments world tomore real time delivery. In the UK, payments sent through the traditional ACH multi day batch service can now be sent through the Faster Payments service giving almost immediate access to the funds. This is being considered in several countries including Singapore and the US.

Corporate customers expect real time information on the status of their payments instead of waiting for an end of day report.Regulators expect banks to be monitoring key measures like liquidity in real time. ACI's focus has always been on the real time execution of transactions and delivery of information through real timetools such as dashboards so our experience will be valuable in addressing this trend.

26 -------------------------------------------------------------------------------- Table of Contents • Increasing competition. The electronic payments market is highly competitive and subject to rapid change. Our competition comes from in-house information technology departments, third-party electronic payment processors and third-party software companies located both within and outside of the United States. Many of thesecompanies are significantly larger than us and have significantly greater financial, technical and marketing resources. As electronic payment transaction volumes increase, third-party processors tend to provide competition to our solutions, particularly among customers that do not seek to differentiate their electronic payment offerings or areeliminating banks from the payments service reducing the need for our solutions.

As consolidation in the financial services industry continues, we anticipate that competition for those customers will intensify.

• Adoption of cloud technology. In an effort to leverage lower-cost computing technologies, some financial institutions, retailers and electronic payment processors are seeking to transition their systems to make use of cloud technology. Currently this is impacting areas such as customer relationship management systems rather than payment services. Our investment in ACI On Demand provides us the infrastructure to deliver cloud capabilities in the future.

• Electronic payments fraud and compliance. As electronic payment transaction volumes increase, criminal elements continue to find ways to commit a growing volume of fraudulent transactions using a wide range of techniques. Financial institutions, retailers and electronic payment processors continue to seek ways to leverage new technologies to identify and prevent fraudulent transactions. Due toconcerns with international terrorism and money laundering, financialinstitutions in particular are being faced with increasing scrutiny and regulatory pressures. We continue to see opportunity to offer our fraud detection solutions to help customers manage the growing levels of electronic payment fraud and compliance activity.

• Adoption of smartcard technology. In many markets, card issuers are being required to issue new cards with embedded chip technology.

Chip-based cards are more secure, harder to copy and offer the opportunity for multiple functions on one card (e.g. debit, credit, electronic purse, identification, health records, etc.). The EMV standard for issuing and processing debit and credit cardtransactions has emerged as the global standard, with many regionsthroughout the world working on EMV rollouts. The primary benefit of EMV deployment is a reduction in electronic payment fraud, with the additional benefit that the core infrastructure necessary formulti-function chip cards is being put in place (e.g., chip card readers in ATMs and POS devices) allowing the deployment of other technologies like contactless. We are working with many customers around the world to facilitate EMV deployments, leveraging several of our solutions.

• Single Euro Payments Area ("SEPA"). The SEPA, primarily focused on the European Economic Community and the United Kingdom, is designed to facilitate lower costs for cross-border payments and reduce timeframes for settling electronic payment transactions. Recent moves to set an end date for the transition to SEPA payment mechanisms will drive more volume to these systems with the potential to cause banks to review the capabilities of the systems supporting these payments. Our retail and wholesale banking solutions facilitate key functions that help financial institutions address these mandated regulations. However, current uncertainty over the future of the Euro currency may delay further take up of the SEPA payment mechanisms.

• Financial institution consolidation. Consolidation continues on a national and international basis, as financial institutions seek to add market share and increase overall efficiency. Suchconsolidations have increased, and may continue to increase, in their number, size and market impact as a result of the global economic crisis and the financial crisis affecting the banking and financialindustries. There are several potential negative effects of increased consolidation activity. Continuing consolidation of financial institutions may result in a smaller number of existing and potential customers for our products and services. Consolidation of two of our customers could result in reduced revenues if the combined entity were to negotiate greater volume discounts or discontinue use of certain of our products. Additionally, if a non-customer and a customer combine and the combined entity decides to forego future use of ourproducts, our revenue would decline. Conversely, we could benefit from the combination of a non-customer and a customer when the combined entity continues use of our products and, as a larger combined entity, increases its demand for our products and services. We tend to focus on larger financial institutions as customers, often resulting in our solutions being the solutions that survive in the consolidated entity.

27 -------------------------------------------------------------------------------- Table of Contents • Global vendor sourcing. Global and regional financial institutions, processors and retailers are aiming to reduce the costs in supplier management by picking suppliers who can service them across all their geographies instead of allowing each country operation to choose suppliers independently. Our global footprint from bothcustomer and a delivery perspective enable us to be successful in this global sourced market. However, projects in these environments tend to be more complex and therefore of higher risk.

• Electronic payments convergence. As electronic payment volumes grow and pressures to lower overall cost per transaction increase, financial institutions are seeking methods to consolidate their payment processing across the enterprise. We believe that the strategy of using service-oriented architectures to allow for re-use of common electronic payment functions such as authentication,authorization, routing and settlement will become more common. Using these techniques, financial institutions will be able to reduce costs, increase overall service levels, enable one-to-one marketing in multiple bank channels, leverage volumes for improved pricing and liquidity, and manage enterprise risk. Our Agile Payments Solution strategy is, in part, focused on this trend, by creatingintegrated payment functions that can be re-used by multiple bankchannels, across both the consumer and wholesale bank. While this trend presents an opportunity for us, it may also expand the competition from third-party electronic payment technology and serviceproviders specializing in other forms of electronic payments. Many of these providers are larger than us and have significantly greater financial, technical and marketing resources.

• Mobile banking and payments. There is a growing demand for the ability to carry out banking services or make payments using a mobile phone.

Our customers have been making use of existing products to deploy mobile banking, mobile payment and mobile commerce and mobile payment solutions for their customers in many countries. The recent S1 acquisition has provided new product capabilities and led to the launch of ACI Mobile Channel Manager in June 2012. As the market continues to develop, we expect to extend our product sets as appropriate to support mobile functionality.

The banking, financial services and payments industries have come under increased scrutiny from federal, state and foreign lawmakers and regulators in response to the crises in the financial markets and the global recession. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which was signed into law July 21, 2010, represents a comprehensive overhaul of the U.S. financial services industry and requires the implementation of many new regulations that will have a direct impact on our customers and potential customers. These regulatory changes may create both opportunities and challenges for us. The application of the new regulations on our customers could create an opportunity for us to market our product capabilities and the flexibility of our solutions to assist our customers in addressing these regulations. At the same time, these regulatory changes may have an adverse impact on our operations and our financial results as we adjust our activities in light of increased compliance costs and customer requirements.

It is currently too difficult to predict the actual extent to which the Dodd-Frank Act or the resulting regulations will impact our business and the businesses of our current and potential customers.

Several other factors related to our business may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition in the software industry are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as maturity of the software product licensed, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of our products often cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred. Additionally, while the majority of our contracts are denominated in the United States dollar, a substantial portion of our sales are made, and some of our expenses are incurred, in the local currency of countries other than the United States. Fluctuations in currency exchange rates in a given period may result in the recognition of gains or losses for that period.

We continue to seek ways to grow, through organic sources, partnerships, alliances, and acquisitions. We continually look for potential acquisitions designed to improve our solutions' breadth or provide access to new markets. As part of our acquisition strategy, we seek acquisition candidates that are strategic, capable of being integrated into our operating environment, and financially accretive to our financial performance.

Acquisitions Distra Pty Ltd On September 18, 2012, we closed the acquisition of Distra Pty Ltd ("Distra").

The Distra Universal Payments Platform delivers a fault-tolerant, Service-Oriented Architecture (SOA)-based payments platform that helps to significantly reduce the risk and cost of payments transformation without compromising security, performance, scalability and reliability. The integration of ACI and Distra technologies will enable financial institutions, processors and retailers to enhance the flexibility and performance of their existing payments infrastructure to address market needs, such as mobile, social channels and payment service hubs. In addition, this acquisition will enable ACI's payment products to integrate more tightly with customers' enterprise architectures, reducing their total cost of ownership.

28-------------------------------------------------------------------------------- Table of Contents The aggregate purchase price of Distra was $49.8 million. In addition, we paid $0.5 million in transaction fees in relation to the acquisition of Distra. The consideration paid to complete the acquisition has been allocated preliminarily to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition, North Data Uruguay S.A.

On May 24, 2012, we closed the acquisition of North Data Uruguay S.A. ("North Data"). North Data had been a long-term partner of ours, serving customers in South America in sales, service and support functions. The addition of the North Data team to the Company reinforces its commitment to serve the Latin American market.

The aggregate purchase price of North Data was $4.6 million, which included cash acquired of $0.1 million. The consideration paid by the Company to complete the acquisition has been allocated preliminarily to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The allocation of purchase price is based upon certain external valuations and other analyses that have not been completed as of the date of this filing. Accordingly, the purchase price allocations are preliminary and are subject to future adjustments during the maximum one-year allocation period.

Factors contributing to the purchase price that resulted in the goodwill (which is not tax deductible) include the acquisition of management, sales, and services personnel with the skills to market and support products of the Company in the Latin America region.

SI Corporation On February 10, 2012, we completed the exchange offer for S1 Corporation and all its subsidiaries. The acquisition was effectively closed on February 13, 2012 for approximately $368.7 million in cash and 5.9 million shares of our stock, including 95,500 shares reissued from Treasury stock, resulting in a total purchase price of $587.3 million (the "Merger"). The combination of the Company and S1 will create a leader in the global enterprise payments industry. The combined company will have enhanced scale, breadth and additional capabilities, as well as a complementary suite of products that will better serve the entire spectrum of financial institutions, processors and retailers.

The Merger was accounted for using the acquisition method of accounting with the Company identified as the acquirer. Under the acquisition method of accounting, we recorded all assets acquired and liabilities assumed at their respective acquisition-date fair values.

We used $73.7 million of our cash balance for the acquisition in addition to $295.0 million of senior bank financing arranged through Wells Fargo Securities, LLC. See Note 3, Debt, for terms of the financing arrangement.

The acquisition of S1 positions us as a full-service global leader of financial and payment solutions, with the ability to deliver the broadest suite of payment offerings globally targeting financial organizations, processors and retailers - supported by a global team of expert, local employees. S1 brings to the Company a highly complementary set of products, strong global capabilities and success with a range of financial institutions and retailers.

We have achieved annual cost synergies of approximately $33 million with the integration of S1. We anticipate we will achieve an additional $20 million in cost synergies as a result of IT, facilities, and data center consolidations in future periods. In addition, the increased global scale and expected cost savings are expected to generate margin expansion.

Restructuring During the nine months ended September 30, 2012, we reduced our headcount by 272 employees as a part of our integration of our recent acquisitions. In connection with these actions, during the nine months ended September 30, 2012, approximately $9.6 million of termination costs were recognized in general and administrative expense in the condensed consolidated statements of operations.

Approximately $7.9 million of these termination costs were paid during the nine months ended September 30, 2012. The remaining liability is expected to be paid over the next 12 months.

During the nine months ended September 30, 2012, we terminated our facility leases in New York, New York and Dublin Ireland for $1.1 million and $2.8 million, respectively. Termination fees of $3.4 million were recognized in general and administrative expenses in the condensed consolidated statements of operations with the remaining $0.5 million previously accrued as an unfavorable lease liability as a part of the S1 purchase price allocation.

29-------------------------------------------------------------------------------- Table of Contents International Business Machines Corporation Alliance Agreement IBM exercised their warrants to purchase 11,470 shares of the Company's common stock at $27.50 per share and 350,000 shares of the Company's common stock at $33.00 per share during the three months ended September 30, 2012, for which we received $11.9 million in cash.

On September 21, 2012, we entered into an agreement with IBM to repurchase the remaining common stock warrants held by IBM to purchase 1,415,565 shares of the Company's stock at $27.50 per share and 1,077,035 shares of the Company's common stock at $33.00 per share. The total amount paid to IBM for these warrants was $29.6 million. This repurchase was conducted pursuant to the Company's previously announced share repurchase program. We used an additional $24.0 million from our Revolving Credit Facility and cash on hand to fund this repurchase.

No warrants were outstanding at September 30, 2012.

International Business Machines Corporation Information Technology Outsourcing Agreement On April 1, 2012, we provided notice of termination for the Master Services Agreement with International Business Machines to outsource our internal information technology environment. The effective date of the termination will be January 31, 2013.

We have recorded the $3.0 million termination fee in general and administrative expenses during the nine months ended September 30, 2012 in the accompanying consolidated condensed statements of operations. The termination fee is due on the termination date of January 31, 2013. In addition, we will incur additional fees related to the transition in accordance with the terms of the agreement that we expect to expense and pay as incurred.

Backlog Included in backlog estimates are all software license fees, maintenance fees and services fees specified in executed contracts, as well as revenues from assumed contract renewals to the extent that we believe recognition of the related revenue will occur within the corresponding backlog period. We have historically included assumed renewals in backlog estimates based upon automatic renewal provisions in the executed contract and our historic experience with customer renewal rates.

Our 60-month backlog estimate represents expected revenues from existing customers using the following key assumptions: • Maintenance fees are assumed to exist for the duration of the license term for those contracts in which the committed maintenance term is less than the committed license term.

• License and facilities management arrangements areassumed to renew at the end of their committed term at a rate consistent with our historical experiences.

• Non-recurring license arrangements are assumed to renew as recurring revenue streams.

• Foreign currency exchange rates are assumed to remain constant over the 60-month backlog period for those contracts stated in currencies other than the U.S. dollar.

• Our pricing policies and practices are assumed to remain constant over the 60-month backlog period.

In computing our 60-month backlog estimate, the following items are specifically not taken into account: • Anticipated increases in transaction volumes in customer systems.

• Optional annual uplifts or inflationary increases in recurring fees.

• Services engagements, other than facilities management,are not assumed to renew over the 60-month backlog period.

• The potential impact of merger activity within our markets and/or customers.

We review our customer renewal experience on an annual basis. The impact of this review and subsequent update may result in a revision to the renewal assumptions used in computing the 60-month and 12-month backlog estimates. In the event a revision to renewal assumptions is determined to be necessary, prior periods will be adjusted for comparability purposes. Based on our annual review of customer renewal experience completed during the three months ended December 31, 2011, backlog results for all reported periods have been updated to reflect our most current customer renewal experience.

30-------------------------------------------------------------------------------- Table of Contents The following table sets forth our 60-month backlog estimate, by geographic region, as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 (in millions). The September 30, 2012 60-month backlog estimate includes approximately $709 million as a result of the acquisition of S1. Dollar amounts reflect foreign currency exchange rates as of each period end.

September 30, June 30, March 31, December 31, 2012 2012 2012 2011 Americas $ 1,419 $ 1,414 $ 1,405 $ 912 EMEA 686 653 669 514 Asia/Pacific 262 239 243 191 Total $ 2,367 $ 2,306 $ 2,317 $ 1,617 Included in our 60-month backlog estimates are amounts expected to be recognized during the initial license term of customer contracts ("Committed Backlog") and amounts expected to be recognized from assumed renewals of existing customer contracts ("Renewal Backlog"). Amounts expected to be recognized from assumed contract renewals are based on our historical renewal experience.

The following table sets forth our 60-month Committed Backlog and Renewal Backlog estimates as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.

September 30, June 30, March 31, December 31, 2012 2012 2012 2011 Committed $ 1,122 $ 1,096 $ 1,117 $ 952 Renewal 1,245 1,210 1,200 665 Total $ 2,367 $ 2,306 $ 2,317 $ 1,617 We also estimate 12-month backlog, segregated between monthly recurring and non-recurring revenues, using a methodology consistent with the 60-month backlog estimate. Monthly recurring revenues include all monthly license fees, maintenance fees and processing services fees. Non-recurring revenues include other software license fees and services fees. Amounts included in our 12-month backlog estimate assume renewal of one-time license fees on a monthly fee basis if such renewal is expected to occur in the next 12 months. The following table sets forth our 12-month backlog estimate, by geographic region, as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 (in millions). The September 30, 2012 12-month backlog estimate includes approximately $170 million as a result of the acquisition of S1. For all periods reported, approximately 90% of our 12-month backlog estimate is Committed Backlog and approximately 10% of our 12-month backlog estimate is Renewal Backlog. Dollar amounts reflect foreign currency exchange rates as of each period end.

September 30, 2012 June 30, 2012 Monthly Non- Monthly Non- Recurring Recurring Total Recurring Recurring Total Americas $ 284 $ 57 $ 341 $ 278 $ 63 $ 341 EMEA 127 39 166 120 38 158 Asia/Pacific 54 23 77 48 23 71 Total $ 465 $ 119 $ 584 $ 446 $ 124 $ 570 March 31, 2012 December 31, 2011 Monthly Non- Monthly Non- Recurring Recurring Total Recurring Recurring Total Americas $ 282 $ 59 $ 341 $ 183 $ 47 $ 230 EMEA 124 44 168 97 43 140 Asia/Pacific 48 25 73 38 16 54 Total $ 454 $ 128 $ 582 $ 318 $ 106 $ 424 31 -------------------------------------------------------------------------------- Table of Contents Estimates of future financial results are inherently unreliable. Our backlog estimates require substantial judgment and are based on a number of assumptions as described above. These assumptions may turn out to be inaccurate or wrong, including for reasons outside of management's control. For example, our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including mergers, changes in their financial condition, or general changes in economic conditions in the customer's industry or geographic location, or we may experience delays in the development or delivery of products or services specified in customer contracts which may cause the actual renewal rates and amounts to differ from historical experiences. Changes in foreign currency exchange rates may also impact the amount of revenue actually recognized in future periods. Accordingly, there can be no assurance that amounts included in backlog estimates will actually generate the specified revenues or that the actual revenues will be generated within the corresponding 12-month or 60-month period. Additionally, because backlog estimates are operating metrics, the estimates are not required to be subject to the same level of internal review or controls as a GAAP financial measure.

RESULTS OF OPERATIONS The following table presents the condensed consolidated statements of operations as well as the percentage relationship to total revenues of items included in our condensed consolidated statements of operations (amounts in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011 % of % of % of Total Total % of Total Total Amount Revenue Amount Revenue Amount Revenue Amount Revenue Revenues: Initial license fees (ILFs) $ 14,863 9.6 % $ 15,058 13.4 % $ 52,367 11.8 % $ 40,327 12.2 % Monthly license fees (MLFs) 24,697 15.9 % 24,191 21.6 % 74,748 16.9 % 88,731 26.9 % Software license fees 39,560 25.5 % 39,249 35.0 % 127,115 28.7 % 129,058 39.1 % Maintenance fees 47,920 30.9 % 36,928 32.9 % 141,014 31.9 % 109,193 33.1 % Services 35,811 23.1 % 23,770 21.2 % 92,551 20.9 % 57,814 17.5 % Software hosting fees 31,771 20.5 % 12,202 10.9 % 81,804 18.5 % 33,993 10.3 % Total revenues 155,062 100.0 % 112,149 100.0 % 442,484 100.0 % 330,058 100.0 % Expenses: Cost of software licenses fees 5,874 3.8 % 3,763 3.4 % 16,624 3.8 % 11,341 3.4 % Cost of maintenance, services, and hosting fees 51,944 33.5 % 29,996 26.7 % 148,550 33.6 % 91,421 27.7 % Research and development 34,213 22.1 % 22,481 20.0 % 100,173 22.6 % 69,395 21.0 % Selling and marketing 20,448 13.2 % 19,814 17.7 % 64,324 14.5 % 60,899 18.5 % General and administrative 24,533 15.8 % 19,068 17.0 % 87,131 19.7 % 51,234 15.5 % Depreciation and amortization 9,742 6.3 % 5,759 5.1 % 26,845 6.1 % 16,580 5.0 % Total expenses 146,754 94.6 % 100,881 90.0 % 443,647 100.3 % 300,870 91.2 % Operating income (loss) 8,308 5.4 % 11,268 10.0 % (1,163 ) -0.3 % 29,188 8.8 % Other income (expense): Interest income 222 0.1 % 205 0.2 % 705 0.2 % 639 0.2 % Interest expense (2,620 ) -1.7 % (406 ) -0.4 % (7,386 ) -1.7 % (1,423 ) -0.4 % Other, net (1,430 ) -0.9 % (46 ) 0.0 % (899 ) -0.2 % (88 ) 0.0 % Total other income (expense) (3,828 ) -2.5 % (247 ) -0.2 % (7,580 ) -1.7 % (872 ) -0.3 % Income (loss) before income taxes 4,480 2.9 % 11,021 9.8 % (8,743 ) -2.0 % 28,316 8.6 % Income tax expense (benefit) (1,175 ) -0.8 % 482 0.4 % (7,925 ) -1.8 % 6,355 1.9 % Net income (loss) $ 5,655 3.6 % $ 10,539 9.4 % $ (818 ) -0.2 % $ 21,961 6.7 % Three-Month Period Ended September 30, 2012 Compared to Three-Month Period September 30, 2011 Revenues Total revenues for the three months ended September 30, 2012 increased $42.9 million, or 38.3%, as compared to the same period in 2011 of which $47.8 million, or 42.6%, was due to the addition of S1. Total revenues increased as a result of a $0.3 million, or 0.8%, increase in software license fee revenues, a $11.0 million, or 29.8%, increase in maintenance fee revenue, a $12.0 million, or 50.7%, increase in services revenues, and a $19.6 million, or 160.4%, increase in software hosting fees revenue.

The increase in total revenues was driven by increases in the Americas, EMEA and Asia/Pacific reportable operating segments of $27.9 million, $4.2 million and $10.8 million, respectively.

32 -------------------------------------------------------------------------------- Table of Contents Software License Fees Revenue Customers purchase the right to license ACI software for the term of their agreement which is generally 60 months. Within these agreements are specified capacity limits typically based on customer transaction volumes. ACI employs measurement tools that monitor the number of transactions processed by customers and if contractually specified limits are exceeded, additional fees are charged for the overage. Capacity overages may occur at varying times throughout the term of the agreement depending on the product, the size of the customer, and the significance of customer transaction volume growth. Depending on specific circumstances, multiple overages or no overages may occur during the term of the agreement.

As a result of the maturation of certain retail payment engine products, certain of our initial license fees are being recognized ratably over an extended period. Initial license and capacity fees that are recognized as revenue ratably over an extended period are included in our monthly license fee revenues. Due to the varying periods over which these revenues are being recognized, our MLF revenues may decrease as compared to the same period in 2011.

Initial License Fees (ILF) Revenue ILF revenue includes license and capacity revenues that do not recur on a monthly or quarterly basis. Included in ILF revenues are license and capacity fees that are recognizable at the inception of the agreement and license and capacity fees that are recognizable at interim points during the term of the agreement, including those that are recognizable annually due to negotiated customer payment terms. ILF revenues during the three months ended September 30, 2012 compared to the same period in 2011, decreased by $0.2 million, or 1.3%.

The decrease in ILF revenues is primarily due to modest differences in revenue recognized from customer go-live and capacity events as compared to the year ago quarter. ILF revenue decreased in the Americas operating segment by $1.4 million partially offset by an increase in the EMEA and Asia/Pacific operating segments by $0.6 million and $0.6 million, respectively. Capacity-related revenues were unchanged for the three months ended September 30, 2012 as compared to the same period in 2011. ILF revenue increased $2.0 million, or 13.2%, due to the addition of S1.

Monthly License Fees (MLF) Revenue MLF revenues are license and capacity revenues that are paid monthly or quarterly due to negotiated customer payment terms as well as initial license and capacity fees that are recognized as revenue ratably over an extended period as MLF revenue. MLF revenues increased $0.5 million, or 2.1%, during the three months ended September 30, 2012, as compared to the same period in 2011 with the Americas and Asia/Pacific operating segments increasing by $0.9 million and $0.4 million, respectively, partially offset by a decrease of $0.8 million in the EMEA operating segment. MLF revenue increased $2.4 million, or 9.9%, due to the addition of S1.

Maintenance Fees Revenue Maintenance fee revenue includes standard and enhanced maintenance or any post-contract support fees received from customers for the provision of product support services. Maintenance fee revenues increased $11.0 million, or 29.8%, during the three months ended September 30, 2012, as compared to the same period in 2011. Maintenance fee revenue increased in the Americas, EMEA and Asia/Pacific operating segments by $5.8 million, $1.8 million and $3.4 million, respectively. Maintenance fee revenue increased $12.7 million, or 34.4%, due to the addition of S1.

Services Revenue Services revenue includes fees earned through implementation services, professional services and facilities management services. Implementation services include product installations, product configurations, and retrofit custom software modifications ("CSM's"). Professional services include business consultancy, technical consultancy, on-site support services, CSM's, product education, and testing services. These services include new customer implementations as well as existing customer migrations to new products or new releases of existing products. During the period in which non-essential services revenue is being deferred, direct and incremental costs related to the performance of these services are also being deferred. During the period in which essential services revenue is being deferred, direct and indirect costs related to the performance of these services are also being deferred.

Services revenue increased $12.0 million, or 50.7%, for the three months ended September 30, 2012, as compared to the same period in 2011 of which $12.5 million, or 52.5%, is due to the addition of S1. Services revenue increased in all operating segments with the Americas, EMEA and Asia/Pacific operating segments increasing by $4.5 million, $1.1 million and $6.4 million, respectively.

Software Hosting Fees Revenue Software hosting fee revenue includes fees earned through hosting and on-demand arrangements. All revenues from hosting and on-demand arrangements, which may include set-up fees, implementation or customization services, and product support services, are included in software hosting fee revenue.

33-------------------------------------------------------------------------------- Table of Contents Software hosting fees revenue increased $19.6 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 of which $18.2 million is due to the addition of S1. Software hosting fee revenue increased in the Americas and EMEA segments by $18.0 million and $1.6 million, respectively, and can be attributed to new customers adopting our on-demand or hosted offerings and existing customers adding new functionality or services.

Expenses Total operating expenses for the three months ended September 30, 2012 increased $45.9 million, or 45.5%, as compared to the same period of 2011. Included in operating expenses for the three months ended September 30, 2012 were approximately $44.0 million of operating expenses from the addition of S1.

Additionally, there were approximately $4.5 million and $3.4 million of acquisition related one-time expenses incurred in the three months ended September 30, 2012, and September 30, 2011, respectively. One-time expenses for the three months ended September 30, 2012 included $3.5 million related to termination charges associated with office closures, $0.5 million of employee related charges and $0.5 million of additional professional and other expenses related to the acquisition of S1. Excluding these expenses, total operating expenses increased $0.8 million in the three months ended September 30, 2012 compared to the same period in 2011.

Cost of Software License Fees The cost of software licenses for our products sold includes third-party software royalties as well as the amortization of purchased and developed software for resale. In general, the cost of software licenses for our products is minimal because we internally develop most of the software components, the cost of which is reflected in research and development expense as it is incurred as technological feasibility coincides with general availability of the software components.

Cost of software licenses fees increased $2.1 million, or 56.1%, in the three months ended September 30, 2012 compared to the same period in 2011 primarily from $2.1 million amortization of S1 acquisition software.

Cost of Maintenance, Services, and Hosting fees Cost of maintenance, services and hosting fees includes costs to provide hosting services and both the costs of maintaining our software products as well as the service costs required to deliver, install and support software at customer sites. Maintenance costs include the efforts associated with providing the customer with upgrades, 24-hour help desk, post go-live (remote) support and production-type support for software that was previously installed at a customer location. Service costs include human resource costs and other incidental costs such as travel and training required for both pre go-live and post go-live support. Such efforts include project management, delivery, product customization and implementation, installation support, consulting, configuration, and on-site support.

Cost of maintenance, services, and hosting fees increased $21.9 million, or 73.2%, in the three months ended September 30, 2012 compared to the same period in 2011 primarily as a result of $21.0 million from the addition of S1.

Research and Development Research and development ("R&D") expenses are primarily human resource costs related to the creation of new products, improvements made to existing products and the costs related to regulatory requirements and processing mandates as well as compatibility with new operating system releases and generations of hardware.

Research and development expense increased $11.8 million, or 52.2%, in the three months ended September 30, 2012 compared to the same period in 2011 primarily as a result of $10.1 million from the addition of S1. The remaining increase is primarily related to an increase in personnel related expenses.

Selling and Marketing Selling and marketing includes both the costs related to selling our products to current and prospective customers as well as the costs related to promoting the Company, its products and the research efforts required to measure customers' future needs and satisfaction levels. Selling costs are primarily the human resource and travel costs related to the effort expended to license our products and services to current and potential customers within defined territories and/or industries as well as the management of the overall relationship with customer accounts. Selling costs also include the costs associated with assisting distributors in their efforts to sell our products and services in their respective local markets. Marketing costs include costs needed to promote the Company and its products as well as perform or acquire market research to help us better understand what products our customers are looking for in the future. Marketing costs also include the costs associated with measuring customers' opinions toward the Company, our products and personnel.

Selling and marketing expense increased $0.6 million, or 3.2%, in the three months ended September 30, 2012 compared to the same period in 2011 as a result of $3.3 million from the addition of S1, partially offset by $2.1 million of lower personnel related expenses and $0.6 million in lower advertising and promotion expenses.

34 -------------------------------------------------------------------------------- Table of Contents General and Administrative General and administrative expenses are primarily human resource costs including executive salaries and benefits, personnel administration costs, and the costs of corporate support functions such as legal, administrative, human resources and finance and accounting.

General and administrative expense increased $5.5 million, or 28.7%, in the three months ended September 30, 2012. Included in general and administrative expenses for the three months ended September 30, 2012 were approximately $3.2 million of operating expenses related to the addition of S1. Additionally, there were approximately $4.5 million and $3.4 million of acquisition related one-time expenses incurred in the three months ended September 30, 2012, and September 30, 2011, respectively. One-time expenses for the three months ended September 30, 2012, included $3.5 million related to termination charges associated with office closures, $0.5 million of employee related charges and $0.5 million of additional professional fees related to the acquisition of S1.

Excluding these expenses, total general and administrative expenses increased $1.2 million in the three months ended September 30, 2012 compared to the same period in 2011, partially due to one-time expenses associated with our acquisition of Distra Pty Ltd.

Depreciation and Amortization Depreciation and amortization expense includes charges for depreciation of property and equipment and amortization of acquired intangibles excluding amortization of purchased or developed technology for resale. Amortization of acquired intangibles include customer relationships, trade names, non-competes and other intangible assets.

Depreciation and amortization expense increased $4.0 million, or 69.2%, in the three months ended September 30, 2012 compared to the same period in 2011 as a result of $3.8 million from the addition of S1.

Other Income and Expense Other income and expense includes interest income and expense, foreign currency gains and losses, and other non-operating items. Fluctuating currency rates impacted the three months ended September 30, 2012 by $1.4 million in net foreign currency losses, as compared with less than $0.1 million in net losses during the same period in 2011. Interest expense increased $2.2 million during the three months ended September 30, 2012 compared to the same period in 2011 due primarily to the increased debt used to partially fund the S1 acquisition during the first quarter of 2012. Interest income was flat for the three months ended September 30, 2012 when compared to the corresponding period in 2011.

Income Taxes We reported a tax benefit for the three months ended September 30, 2012 while reporting a pretax profit for the same period. The resulting effective tax rate is negative. The earnings of our foreign entities for the three months ended September 30, 2012 were $14.5 million. The tax rates in the foreign jurisdictions in which we operate are less than the domestic tax rate. The effective tax rate for the three months ended September 30, 2012 was positively impacted by foreign profits taxed at lower rates and a domestic loss taxed at a higher rate. The effective tax rate for the three months ended September 30, 2012 was positively impacted by a $1.6 million release of an accrued tax liability and a favorable adjustment of $1.0 million in our uncertain tax positions as the statute of limitations expired for the tax returns to which they are associated during the three months ended September 30, 2012.

The effective tax rate for the three months ended September 30, 2011 was 4.4%.

The earnings (losses) of our foreign entities for the three months ended September 30, 2011 were $(0.2) million. The effective tax rate for the three months ended September 30, 2011 was positively impacted by the release of a $3.1 million liability due to the expiration of a contractual obligation related to the transfer of certain intellectual property rights from US to non-US entities.

Our effective tax rate was positively impacted by tax rates in foreign jurisdictions that are less than our domestic rate, partially offset by the recognition of tax expense associated with the transfer of certain intellectual property rights from U.S. to non-U.S. entities.

Our effective tax rate could fluctuate significantly on a quarterly basis and could be negatively affected to the extent earnings are lower in the countries in which we operate that have a lower statutory rate or higher in the countries in which we operate that have a higher statutory rate or the extent we have losses sustained in countries where the future utilization of losses are uncertain. Our effective tax rate could also fluctuate due to changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are occasionally subject to examination of our income tax returns by tax authorities in the jurisdictions we operate. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

35-------------------------------------------------------------------------------- Table of Contents Nine-Month Period Ended September 30, 2012 Compared to Nine-Month Period September 30, 2011 Revenues Total revenues for the nine months ended September 30, 2012 increased $112.4 million, or 34.1%, as compared to the same period in 2011 of which $113.4 million was due to the addition of S1. Total revenues increased as a result of a $31.8 million, or 29.1%, increase in maintenance fee revenue, a $34.7 million, or 60.1%, increase in services revenues, and a $47.8 million, or 140.6%, increase in software hosting fees revenue, offset by a $1.9 million, or 1.5%, decrease in software license fee revenues.

The increase in total revenues was driven by increases in the Americas, EMEA and Asia/Pacific reportable operating segments of $73.5 million, $14.6 million and $24.3 million, respectively.

Initial License Fees (ILF) Revenue ILF revenues during the nine months ended September 30, 2012 compared to the same period in 2011, increased by $12.0 million, or 29.9%, of which $3.5 million, or 8.7% was due to the addition of S1. The increase in ILF revenues is primarily due to an increase in revenue recognized from customer go-live and capacity events as compared to the year ago quarter. ILF revenue increased in all operating segments with the Americas, EMEA, and Asia/Pacific operating segments increasing by $1.6 million, $6.6 million and $3.8 million, respectively. Included in the above is an increase in capacity-related revenues of $8.7 million primarily in the EMEA operating segments and to a lesser extent in the Americas and Asia/Pacific operating segments within the nine months ended September 30, 2012 as compared to the same period in 2011.

Monthly License Fees (MLF) Revenue MLF revenues decreased $14.0 million, or 15.8%, during the nine months ended September 30, 2012, as compared to the same period in 2011 with the Americas and EMEA operating segments decreasing by $1.1 million and $13.7 million, respectively, partially offset by an increase of $0.8 million in the Asia/Pacific operating segment. MLF revenue increased $5.3 million, or 6.0%, due to the addition of S1. The overall decrease in MLF revenues is primarily due to a reduction in the amount of ILF revenue that is being recognized ratably over an extended period as a result of the maturation of certain retail payment engine products in the Americas and EMEA operating segments.

Maintenance Fees Revenue Maintenance fee revenues increased $31.8 million, or 29.1%, during the nine months ended September 30, 2012, as compared to the same period in 2011 of which $31.0 million, or 28.4%, was due to the addition of S1. Maintenance fee revenue increased in the Americas, EMEA and Asia/Pacific operating segments by $16.0 million, $9.5 million and $6.3 million, respectively. Increases in maintenance fee revenues are primarily driven by an increase in the customer installation base, expanded product usage by existing customers, and increased adoption of our enhanced support programs.

Services Revenue Services revenue increased $34.7 million, or 60.1%, for the nine months ended September 30, 2012, as compared to the same period in 2011 of which $30.9 million, or 53.5%, is due to the addition of S1. Services revenue increased in all operating segments with the Americas, EMEA and Asia/Pacific operating segments increasing by $12.3 million, $9.1 million and $13.3 million, respectively.

Software Hosting Fees Revenue Software hosting fees revenue increased $47.8 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 of which $42.6 million is due to the addition of S1. Software hosting fee revenue increased in the Americas and EMEA segments by $44.7 million and $3.1 million, respectively, and can be attributed to the acquisition of S1 and new customers adopting our on-demand or hosted offerings and existing customers adding new functionality or services.

Expenses Total operating expenses for the nine months ended September 30, 2012 increased $142.8 million, or 47.5%, as compared to the same period of 2011. Included in operating expenses for the nine months ended September 30, 2012 were approximately $115.4 million of operating expenses related to the addition of S1. Additionally, there were approximately $27.1 million and $3.4 million of one-time expenses incurred in the nine months ended September 30, 2012, and September 30, 2011, respectively. Included in the $27.1 million of one-time expenses for the nine months ended September 30, 2012 were $13.2 million of employee related expense, $4.1 million related to investment banking fees, $3.2 million related to IT outsource termination charges, $3.5 million related to facility termination charges and $3.1 million of additional professional fees related to the acquisition of S1. Excluding these expenses, total operating expenses increased $3.7 million in the nine months ended September 30, 2012 compared to the same period in 2011.

36-------------------------------------------------------------------------------- Table of Contents Cost of Software License Fees Cost of software licenses fees increased $5.3 million, or 46.6% in the nine months ended September 30, 2012 compared to the same period in 2011 as a result of $5.3 million in amortization expense for S1 acquisition software.

Cost of Maintenance, Services, and Hosting fees Cost of maintenance, services, and hosting fees increased $57.1 million, or 62.5%, in the nine months ended September 30, 2012 compared to the same period in 2011 primarily as a result of $55.6 million from the addition of S1.

Research and Development Research and development expense increased $30.8 million, or 44.4%, in the nine months ended September 30, 2012 compared to the same period in 2011 primarily as a result of $27.9 million from the addition of S1 and $2.9 million in increased personnel costs.

Selling and Marketing Selling and marketing expense increased $3.4 million, or 5.6%, in the nine months ended September 30, 2012 compared to the same period in 2011 primarily as a result of $8.0 million from the addition of S1 partially offset by $4.6 million in lower personnel related expenses.

General and Administrative General and administrative expense increased $35.9 million, or 70.1%, in the nine months ended September 30, 2012 compared to the same period in 2011. There were approximately $27.1 million and $3.4 million of one-time expenses incurred in the nine months ended September 30, 2012, and September 30, 2011, respectively. Included in the $27.1 million of one-time expenses for the nine months ended September 30, 2012 were $13.2 million of employee related expense, $4.1 million related to investment banking fees, $3.2 million related to IT outsource termination charges, $3.5 million related to facility termination charges and $3.1 million of additional professional fees related to the acquisition of S1. Additionally, $8.6 million of the increase was the result of the addition of S1. Excluding these expenses, total general and administrative expenses increased $3.6 million in the nine months ended September 30, 2012 compared to the same period in 2011.

Depreciation and Amortization Depreciation and amortization expense increased $10.3 million, or 61.9%, in the nine months ended September 30, 2012 compared to the same period in 2011 as a result of $9.1 million from the addition of S1 and $1.2 million from higher capital expenditures.

Other Income and Expense Other income and expense includes interest income and expense, foreign currency gains and losses, and other non-operating items. Fluctuating currency rates impacted the nine months ended September 30, 2012 by $2.4 million in net foreign currency losses, as compared with less than $0.1 million in net gains during the same period in 2011. Interest expense increased $6.0 million during the nine months ended September 30, 2012 compared to the same period in 2011 due to the increased debt used to partially fund the S1 acquisition during the first quarter of 2012. Interest income was flat for the nine months ended September 30, 2012 when compared to the corresponding period in 2011. The Company also realized a gain of $1.6 million on the shares of S1 stock previously held as available-for-sale during the nine months ended September 30, 2012.

Income Taxes The effective tax rate for the nine months ended September 30, 2012 was 90.6%.

The earnings of our foreign entities for the nine months ended September 30, 2012 were $37.0 million. The tax rates in the foreign jurisdictions in which we operate are less than the domestic tax rate. The effective tax rate for the nine months ended September 30, 2012 was positively impacted by foreign profits taxed at lower rates and a domestic loss taxed at a higher rate. The effective tax rate for the nine months ended September 30, 2012 was positively impacted by a $1.4 million release of a valuation allowance. The valuation allowance was released based upon evidence that one of our foreign entities will be able to fully utilize its remaining tax losses. The effective tax rate for the nine months ended September 30, 2012 was positively impacted by a $1.6 million release of an accrued tax liability and a favorable adjustment of $1.0 million to our uncertain tax positions as the statute of limitations expired for the tax returns to which they are associated during the nine months ended September 30, 2012.

37 -------------------------------------------------------------------------------- Table of Contents The effective tax rate for the nine months ended September 30, 2011 was 22.4%.

The earnings of our foreign entities for the nine months ended September 30, 2011 were $10.2 million. The effective tax rate for the nine months ended September 30, 2011 was positively impacted by the favorable adjustment of $3.9 million to our uncertain tax positions, partially offset by a reversal of related deferred tax assets of $1.7 million. The effective tax rate for the nine months ended September 30, 2011 was positively impacted by tax rates in foreign jurisdictions that are less than our domestic rate, partially offset by the recognition of tax expense associated with the transfer of certain intellectual property rights from U.S. to non-U.S. entities.

Our effective tax rate could fluctuate significantly on a quarterly basis and could be negatively affected to the extent earnings are lower in the countries in which we operate that have a lower statutory rate or higher in the countries in which we operate that have a higher statutory rate or the extent we have losses sustained in countries where the future utilization of losses are uncertain. Our effective tax rate could also fluctuate due to changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are occasionally subject to examination of our income tax returns by tax authorities in the jurisdictions we operate. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Segment Results The following table presents revenues and income (loss) before income taxes for the periods indicated by geographic region (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Revenues: Americas $ 87,766 $ 59,845 $ 243,674 $ 170,149 EMEA 42,844 38,608 137,252 122,629 Asia/Pacific 24,452 13,696 61,558 37,280 $ 155,062 $ 112,149 $ 442,484 $ 330,058 Income (loss) before income taxes: Americas $ 16,846 $ 19,407 $ 47,663 $ 47,098 EMEA 13,274 8,997 36,776 30,541 Asia/Pacific 7,274 2,664 15,036 2,710 Corporate (32,914 ) (20,047 ) (108,218 ) (52,033 ) $ 4,480 $ 11,021 $ (8,743 ) $ 28,316 During the year ended December 31, 2011, we changed our segment operating income reporting measure to exclude certain corporate general and administrative expenses. Previously, corporate expenses were allocated to the segments. In addition, amortization expense on acquired intangibles is no longer allocated to the individual segments. All periods presented have been recast to reflect these changes.

Operating segment results are impacted by both direct expenses and allocated shared function costs such as global product development, global customer operations and global product management. Shared function costs are allocated to the geographic operating segments as a percentage of revenue or as a percentage of headcount. All administrative costs that are not directly attributable or reasonably allocable to a geographic segment are included in the corporate line item.

The increase in revenue and income before taxes for all geographic segments is due to the addition of S1 during the nine months ended September 30, 2012. The Corporate line item's loss before taxes increased for the three and nine months ended September 30, 2012 compared to the same period in 2011 due to approximately $4.5 million and $27.1 million, respectively, in one-time expenses related to the acquisition of S1 as well as an increase in amortization expense for the intangible assets acquired of $1.5 million and $4.7 million for the three and nine months ended September 30. 2012, respectively. Interest expense increased Corporate expense by $2.2 million and $6.0 million for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. The remaining increase for the nine months ended September 30, 2012 compared to the same period in 2011 is due to additional corporate operating costs incurred with the addition of S1. These costs include both duplicative operating costs incurred before the synergy savings plans were fully implemented and increased corporate costs added to support the larger integrated Company.

The Company expects corporate costs to continue to decrease moving forward into 2013 as the synergy savings are realized.

38-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources General Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; and (iii) to fund acquisitions, capital expenditures and lease payments. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents and available borrowings under our revolving credit facility.

As of September 30, 2012, we had $87.7 million in cash and cash equivalents.

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less.

As of September 30, 2012, $77.0 million of the $87.7 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds were needed for our operations in the U.S. we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

The following table sets forth summary cash flow data for the periods indicated.

Nine Months Ended September 30, 2012 2011 (amounts in thousands) Net cash provided by (used by): Operating activities $ (12,742 ) $ 52,235 Investing activities (339,868 ) (43,006 ) Financing activities 243,705 1,126 Net cash flows provided by (used by) operating activities for the nine months ended September 30, 2012 amounted to $(12.7) million as compared to $52.2 million during the same period in 2011. The comparative period decrease was primarily due to the payment of $19.4 million in S1 acquisition related acquired liabilities, $6.6 million of the Company's transaction fees related to its recent acquisitions, $7.9 million in cash payments for restructuring related severance related to the S1 acquisition, $1.1 million in cash payments for facility closures, and an additional $4.9 million in tax payments during the nine months ended September 30, 2012 compared to the same period in 2011. In addition, we experienced a decrease of $14.7 million in the first nine months of 2012 compared to the same period in 2011 due to timing of the collection of receivables primarily related to the integration activities of the recent acquisitions. Our current policy is to use our operating cash flow primarily for funding capital expenditures, our share buyback program, and acquisitions.

During the first nine months of 2012, we paid $270.9 million, net of $97.7 million in cash acquired, to acquire S1. In addition, we paid $4.6 million, net of $0.1 million in cash acquired, to acquire North Data, and $49.8 million to acquire Distra. Additionally, we used cash of $13.6 million to purchase software, property and equipment.

In the first nine months of 2012, we received proceeds of $295.0 million from our Credit Agreement to partially fund our purchase of S1. In addition, we received an additional $24.0 million from the revolving portion of our Credit Agreement which we subsequently used to partially fund the repurchase of common stock warrants from IBM for $29.6 million. We received $11.9 million from IBM for the exercise of the remaining warrants not repurchased. We repaid $9.4 million of the Term Credit Facility during the nine months ended September 30, 2012. In addition, during the first nine months of 2012, we received proceeds of $19.5 million, including corresponding excess tax benefits, from the exercises of stock options and the issuance of common stock under our 1999 Employee Stock Purchase Plan, as amended, and used $57.8 million for the repurchases of common stock and $2.9 million for the repurchase of restricted stock for tax withholdings. We also made payments to third-party institutions, primarily related to debt and capital leases, totaling $6.9 million.

We may also decide to use cash to acquire new products and services or enhance existing products and services through acquisitions of other companies, product lines, technologies and personnel, or through investments in other companies.

We believe that our existing sources of liquidity, including cash on hand and cash provided by operating activities, will satisfy our projected liquidity requirements, which primarily consists of working capital requirements, for the next twelve months and foreseeable future.

39-------------------------------------------------------------------------------- Table of Contents Debt As of September 30, 2012, we had $190.6 million and $194.0 million outstanding under our Term and Revolving Credit Facilities, respectively, with up to $56 million of unused borrowings under the Revolving Credit Facility portion of the Credit Agreement, as amended. The amount of unused borrowings actually available varies in accordance with the terms of the agreement. The Credit Agreement contains certain affirmative and negative covenants, including limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates.

The Credit Agreement also contains financial covenants relating to maximum permitted leverage ratio and the minimum fixed charge coverage ratio. The facility does not contain any subjective acceleration features and does not have any required payment or principal reduction schedule and is included as a long-term liability in our consolidated balance sheet. At September 30, 2012 (and at all times during these periods) we were in compliance with our debt covenants. The interest rate in effect at September 30, 2012 was 2.22%.

We are not currently dependent upon short-term funding, and the limited availability of credit in the market has not affected our Credit Agreement, our liquidity or materially impacted our funding costs. However, due to the existing uncertainty in the capital and credit markets and the impact of the current economic crisis on our operating results and financial conditions, the amount of available unused borrowings under our existing Revolving Credit Facility may be insufficient to meet our needs and/or our access to capital outside of our Credit Agreement may not be available on terms acceptable to us or at all.

Stock Repurchase Program As of December 31, 2011, our board of directors has approved a stock repurchase program authorizing us, from time to time as market and business conditions warrant, to acquire up to $210 million of its common stock. In February 2012, our board of directors approved an increase of $52.1 million to their current stock repurchase authorization, bringing the total authorization to $262.1 million. Under the program to date, we have purchased 9,519,872 shares for approximately $244.9 million. We purchased 1,437,692 shares for $57.8 million during the nine months ended September 30, 2012.

On September 13, 2012, the Company's board of directors approved the repurchase of up to 2,500,000 shares of the Company's common stock, or up to $113.0 million. On September 21, 2012, the Company agreed to repurchase 2,492,600 common stock warrants from IBM for $29.6 million. See Note 16, "International Business Machines Corporation Alliance Agreement", for further discussion on the warrants.

The maximum remaining dollar value of shares authorized for purchase under the stock repurchase program was approximately 1.8 million shares or $76.3 million as of September 30, 2012.

There is no guarantee as to the exact number of shares that will be repurchased by us. Repurchased shares are returned to the status of authorized but unissued shares of common stock. In March 2005, our board of directors approved a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of shares of common stock under the existing stock repurchase program. Under our Rule 10b5-1 plan, we have delegated authority over the timing and amount of repurchases to an independent broker who does not have access to inside information about the Company. Rule 10b5-1 allows us, through the independent broker, to purchase shares at times when we ordinarily would not be in the market because of self-imposed trading blackout periods, such as the time immediately preceding the end of the fiscal quarter through a period three business days following our quarterly earnings release.

40-------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commercial Commitments Other than as discussed below, there have been no material changes to the contractual obligations and commercial commitments disclosed in Item 7 of our Form 10-K for the fiscal year ended December 31, 2011.

Payments due by Period (amounts in thousands) Less than More than Total 1 year 1-3 years 3-5 years 5 years Contractual Obligations Acquired operating lease obligations (1) $ 10,445 $ 3,357 $ 3,954 $ 1,963 $ 1,171 New operating lease obligations (2) 2,286 360 751 891 284 Revolving Credit Facility (3) 194,000 - - 194,000 - Term Credit Facility (3) 190,625 15,625 55,000 120,000 - Revolving Credit Facility interest (4) 17,694 4,307 8,614 4,773 - Term Credit Facility interest (4) 13,503 4,097 6,757 2,649 - Financed internally used software (5) 12,200 2,900 6,100 3,200 - IBM termination fee (6) 2,996 2,996 - - - Total $ 443,749 $ 33,642 $ 81,176 $ 327,476 $ 1,455 (1) Operating leases acquired as a result of the acquisitions.

(2) New operating lease obligations entered into during the nine months ended September 30, 2012.

(3) Increase in the Revolving Credit Facility and Term Credit Facility represent debt used to partially fund the S1 acquisition and the repurchase of the common stock warrants from IBM during the nine months ended September 30, 2012.

(4) Based upon the debt outstanding and interest rate in effect at September 30, 2012 of 2.22%.

(5) During the nine months ended September 30, 2012, the Company financed the five-year license agreement for certain internally-used software for $14.8 million with annual payments due in April through 2016.

(6) Termination fee for IBM IT outsourcing agreement as discussed in Note 16 to the condensed consolidated financial statements.

We are unable to reasonably estimate the ultimate amount or timing of settlement of our reserves for income taxes under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Tax. The liability for unrecognized tax benefits at September 30, 2012 is $14.0 million.

The amount of unrecognized tax benefits for uncertain tax positions increased by $10.9 million during the nine months ended September 30, 2012 for the uncertain tax positions of S1, which were adjusted in the preliminary purchase price allocation.

Critical Accounting Estimates The preparation of the condensed consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be proper and reasonable under the circumstances.

We continually evaluate the appropriateness of estimates and assumptions used in the preparation of our condensed consolidated financial statements. Actual results could differ from those estimates.

The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: • Revenue Recognition • Allowance for Doubtful Accounts • Intangible Assets and Goodwill • Stock-Based Compensation • Accounting for Income Taxes During the nine months ended September 30, 2012, there were no significant changes to our critical accounting policies and estimates. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2011, filed on February 22, 2012, for a more complete discussion of our critical accounting policies and estimates.

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