S1 Corporation (SONE) - Description of business

Company Description
.          This annual report on Form 10-K and the documents incorporated into this annual report on Form 10-K by reference contain forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act. These statements include statements with respect to our financial condition, results of operations and business. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These statements are based on our beliefs as well as assumptions made using information currently available to us. Because these statements reflect our current views concerning future events, they involve risks, uncertainties and assumptions. Therefore, actual results may differ significantly from the results discussed in the forward-looking statements. The risk factors described below provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except as provided by law, we undertake no obligation to update any forward-looking statement.Business Overview          S1 Corporation develops and markets customer interaction software solutions for financial and payments services primarily to banks, credit unions, insurance companies, retailers and telecommunication companies. Our products address the needs of financial institution customers in the areas of online banking, branch automation, call center automation, teller automation, insurance company banking services, voice banking, payment processing, point-of-sale (“POS”) functions and automated teller machine (“ATM”) driving.          We sell to large, mid-sized and small financial organizations around the world including retail banks, wholesale banks, insurance companies and community banks. Our payment solutions are also sold to retailers, telecom operators, and third-party payment processors. Our operations are organized geographically in two regions: the Americas and International. Additional information about our business, geographic disclosures and major customers is presented in note 18 to our consolidated financial statements contained elsewhere in this report.          We license customers the right to use our software through a direct sales channel and with channel partners including information systems integrators and select bank core processors. In addition to providing maintenance, support, enhancements and implementation services related to our software, in some circumstances we host our software for our customers in our data center.          We have solution sets that address the various needs of the markets we serve. For global, national and regional financial institutions, we offer the S1 Enterprise suite of products. This product line is comprised of an integrated set of solutions that cover Internet, call center, teller and branch applications. We believe that S1 Enterprise makes it possible for our customers to deliver a personalized and compelling experience to their retail, s and corporate customers across multiple customer interaction channels, leveraging one common technical platform.          For community banks and credit unions in the United States, we offer a more simplified set of packaged solutions for Internet banking, telephone banking and ATM capabilities. These applications are designed to meet the needs of those organizations that have more limited information technology resources, yet still want and need to compete aggressively with larger financial institutions in their target markets.          For financial institutions of all sizes, as well as retailers, telecom operators and third-party payment processors, we offer advanced electronic payment capabilities, which help these organizations automate payments at the POS or client interface, whether that is a device in a store, an ATM, or over the phone or Internet.General Background          We are headquartered in Norcross, Georgia with 18 offices in ten countries, including domestic offices in Littleton, Massachusetts; Charlotte, North Carolina; Austin, Texas; Fairport, New York; Colorado Springs, Colorado; and West Hills,California; and international offices in Brussels, Cape Town, Dubai, Dublin, Johannesburg, London, Melbourne, Munich, Pune, Chertsey and Singapore. We are incorporated in Delaware. We have a global software and services organization with approximately 3,000 financial institution customers. We are primarily focused on the financial services industry, but also deliver POS and payment solutions to a broader market.          We were founded in 1996 when we started the world’s first Internet bank — Security First Network Bank. In 1998, we sold the banking operations to Royal Bank of Canada. We then focused on software development, implementation and support services. Our core business was Internet banking and insurance applications for several years. Through a series of strategic acquisitions, we were able to execute on our strategy of offering multiple applications that address several customer interaction channels, many bank officer support channels and workstations of financial services companies on a common platform.Sources of Revenue          Our revenue is derived from software licenses and subscriptions, support and maintenance fees, professional implementation services, hosting and data center operations and other revenue. Refer to note 2 to our consolidated financial statements for further discussion of the various types of revenue and our revenue recognition policies.S1 Vision and Strategy          Our vision is to be the leading global provider of customer-facing solutions for financial and payments services. The key initiatives that support the execution of this vision are:   •   Achieve financial and operational stability by focusing on the satisfaction of our current customers across all product lines. In 2006, we generated approximately 75% of our revenues from the sale of licenses and services in the global financial services market and the remaining 25%, or approximately $47.9 million, from services provided to our principal insurance customer (State Farm Mutual Automobile Insurance Company). The State Farm revenue is expected to be between $45.0 and $48.0 million in 2007. In February 2006, we released a new version of our Enterprise solution to a small number of customers in our Managed Introduction Program (“MIP”). Following the MIP implementations, we plan to make this version available to the broader market. We will continue to sell to our community bank customers and invest in the next-generation of Internet, voice and ATM banking solutions that meet their unique needs. We believe that there are opportunities for cross-selling our products and services across certain of our customer segments as we continue to enhance and add new solutions to our offering. We remain committed to a recurring license revenue model for our community bank customers, while using a traditional license and maintenance revenue model in the other markets we serve. In addition, we expect to generate implementation fees from the sale of most of our products, and offer hosting services to our customers using most of our products.     •   Release quality software solutions to the market that help our customers differentiate themselves and be more successful. We believe by improving the quality of our software code, our implementation services, and our customer support processes, we will improve customer satisfaction and long-term profitability and will have a positive impact on our ability to sell additional applications to our customers and use them as references to help win future customers.     •   Invest in our people to build greater return for our customers and shareholders. We believe that our employees are at the core of our success. Based on input from the employees and the management team, we embrace corporate values that ensure all employees act with integrity through every customer and fellow employee interaction, have the tools and knowledge to do their jobs to the best of their ability, understand the specific standards of quality that are acceptable through a series of guiding principles, and take pride in the leadership position that we hold in the markets that we serve. S1 Segments          We are divided into two segments based on target customer markets and technology platforms. The first segment, Enterprise, offers software solutions either built on the S1 Enterprise Platform or custom developed solutions that are targeted to customers in the global banking and insurance sectors.          The second segment, Postilion, markets the Postilion and Full Service Banking (“FSB”) solutions product lines. The Postilion segment includes the community financial business and the global ATM/payments business.          We provide below a more detailed description of the products and services offered by each segment.S1 Enterprise          S1 Enterprise offers applications for online banking, bank branch operations and call centers. The products are also marketed to financial institutions seeking to expand their business from banking to insurance services. All of the Enterprise products are built using the S1 Enterprise Platform.          Because we use a common technology platform for substantially all of our S1 Enterprise applications, our customers may benefit in a number of ways. Information generated from customer interactions can be integrated and made available across multiple applications on a real-time basis, though it is produced and collected in multiple delivery channels including branch banking, call center, telephone and Internet. The S1 Enterprise Platform supports an enterprise authentication framework which provides maximum flexibility to implement a spectrum of authentication options and to integrate cleanly with third-party vendors solutions. Finally, the S1 Enterprise Application Manager enables our customers’ employees to seamlessly manage their Internet products and to market and service customers. The S1 Enterprise Application Manager includes the ability to perform on-behalf-of transactions, set up and manage marketing campaigns, manage bank branding, customize affiliate bank parameters, generate system reports and set up companies.          There are three product groups in S1 Enterprise. These include S1 Enterprise Online Banking, S1 Enterprise Branch Banking and Call Center and S1 Enterprise Insurance. The Online Banking solutions allow our customers to establish and maintain online banking functionality. The Branch Banking and Call Center product group provides our customers with the technology necessary to carry out customer service functions within the bank branch and call center environments. The Insurance solutions allow our customers in the insurance industry to technology-enable product offerings traditionally provided by a bank, in a way that is suited to an insurance company’s organizational structure and business processes. S1 Enterprise Online Banking Solutions          Our Enterprise Online Banking solutions enable financial institutions to support customers of all sizes from personal banking customers, to ses, to Fortune 500 companies. The needs of each of these customer groups differ. Our products have been packaged in such a way that we can offer a solution set appropriate to each segment. A description of each product set is provided below:   •   S1 Enterprise Personal Banking allows our customers to offer online capabilities for personal finance management, electronic bill payment and presentment, account aggregation, external account transfers, alerts and reminders, online self-service tools, and more. The S1 Personal Banking user interface has been carefully designed and rigorously tested for ease of use and visual appeal to ensure a satisfying customer experience.     •   S1 Enterprise Business Banking provides online financial solutions appropriate for small to mid-market business banking customers. The online tools allow these smaller businesses to manage their money quickly and effectively. This allows our financial institution customers to offer product packages that can satisfy an array of business customer segments and include such features as account management and enhanced reporting, payments, foreign exchange and self-service features including the ability to open new accounts online, report lost cards, reset passwords, stop payments, reorder checks, request check copies, and create electronic alerts.     •   S1 Enterprise Corporate Banking delivers a sophisticated multilingual, multi-currency, and multi-delivery channel offering with proven performance, giving our banking clients the ability to offer cash management functions on a global basis for high-volume users. S1 Corporate Banking provides users real-time data on account balances and transactions as well as straight-thru processing on payments from ACH to Fedwire to SWIFT.   •   S1 Enterprise Trade Finance streamlines the trade finance process for the online marketplace. The S1 Enterprise Trade Finance product is engineered to increase the efficiency of processing trade transactions and delivers one integrated system to create and report on trade documents from purchase orders, to letters of credit, to direct collections. S1 Enterprise Branch Banking and Call Center Solutions          S1 Enterprise’s branch banking and call center products are an integrated suite of applications and modules that enable the delivery of a full-range of banking services at the financial institution branch and call center. Branch banking call center products include high-performance teller and platform capability with integrated channel management and cross-channel data integration. This allows our customers to produce consistent customer service while increasing sales and lowering costs across the entire enterprise. Since one common system and set of tools support teller applications, sales platform, and call center applications, implementation and ongoing maintenance are dramatically simplified. Applications in the S1 Enterprise Branch Banking and Call Center Solution include:   •   S1 Enterprise Teller utilizes thin and rich client technologies rather than PC based technologies. This provides scalability, real-time connectivity, and low total cost of ownership with deep off-line capabilities. The application is highly flexible and customizable, and its centralized administration capabilities enable quick and efficient rollout of new products, features, and upgrades.     •   S1 Enterprise Sales and Service Platform provides transaction functionality and embedded relationship management tools. With real-time information from all channels and advanced features that support selling, branches can increase their visibility of potential cross-sell and up-sell opportunities, and have the tools to act on those opportunities.     •   S1 Enterprise Call Center is a fully integrated call center solution that offers workflows, transactions and core services that meet the specialized needs of the call center environment. In addition to the core services found in the teller and sales and service platform, S1 Enterprise Call Center provides the customer information, sales and service capabilities, process flows, reporting, and fulfillment management functionality that is typically found in call center operations.     •   S1 Enterprise Voice Banking provides voice banking capabilities that can be rapidly deployed using technology from a third-party solution partner. The voice application is integrated with the S1 Enterprise Platform so it can be fully deployed with all of our applications. As a result, customer information generated with Voice Banking can be integrated and accessed with bank customer information from all other channels and applications. S1 Enterprise Insurance          S1 offers products and services for insurance carriers that enable them to effectively operate an Internet bank under the umbrella of their insurance company. The solutions are designed to support the unique distribution channels utilized by insurance carriers that differentiate them from traditional banking operations. S1’s Enterprise Insurance solutions provide account opening, inquiry, transaction, and maintenance features for agencies and the consumer-direct Internet channels. The products we support include banking, credit origination and investment accounts.          In addition to our bank-specific solutions, S1 Insurance also offers custom solutions to provide agency and consumer direct interfaces that allow quoting, purchasing, inquiry, endorsements and claims initiation via web-based interfaces. The products and solutions that comprise S1’s Enterprise Insurance solutions can be implemented individually or together on the S1 Enterprise Platform to improve channel integration and provide a consistent view of the customer.          S1 Enterprise Insurance includes our business with State Farm Mutual Automobile Insurance Company and its subsidiary State Farm Bank (“State Farm”). Revenues from services provided to State Farm were $45.4 and $47.9 million or 25% of revenue from continuing operations in 2005 and 2006.Postilion          Postilion markets the Full Service Banking solutions and Postilion product lines. The Postilion business unit is segmented from the Enterprise business unit on the basis of the type of customers it targets which include the community financial business in the USA and global ATM/payments business. Postilion     The Postilion payment application provides an end-to-end solution with a single platform for fully integrated self-service banking transactions. In the community bank and credit union environment, it is used for retail Internet banking, business Internet banking, ATM, driving, voice banking, mobile payment services, card management and POS applications. Postilion is also used by retailers, telecom operators, and third-party payment processors for a broad array of functions including POS applications, card management, Internet shopping, prepaid airtime, prepaid utilities, bill payment, gaming and remote banking.   •   IBS Cash Management System is designed to help community banks deliver services to small businesses. Functions include integrated front and back office systems, multiple payment vehicles such as domestic and SWIFT wires, ACH, and EFTPS, integration with the IBS Retail Internet Banking application and Electronic Data Interchange (“EDI”) data display.     •   IBS Retail Internet Banking is designed specifically with the unique needs of the community banking market in mind. This turn-key application includes functions such as the ability to view statements, account activity, and cleared and pending transactions online, to transfer funds between accounts and to pay bills electronically.     •   Voice Banking delivers integrated voice response (“IVR”) functionality in a stable, flexible, Windows-based application. With the push of a button, users can check on a deposit or account balance, find a CD rate, pay bills or transfer funds.     •   Postilion is a payment solution used by financial institutions, retailers, telecom operators and processors to drive electronic payments through ATMs, POS terminals, phones and Internet access points. It is a modularized family of products that can be implemented in large financial institutions as well as smaller community and regional banks and credit unions.           Beginning in February 2007, we moved the voice banking functionality onto the Postilion integrated platform. Internet banking functionality will be moved in April 2007 and cash management functionality will be moved in August 2007. FSB          FSB offers a full-range of branch banking and lending technology solutions primarily for community financial institutions. The FSB product line is targeted to suit the needs of community financial institutions in North America.          The FSB applications are divided into four categories including FSB Branch Automation, FSB Banking Call Center, FSB Marketing Center and FSB Lending. An overview of each category is provided below:   •   FSB Branch Automation includes FSB Teller and FSB Sales and Services Platform. FSB Teller is a functionally rich, client-server based application that provides the complete set of transactions and core services necessary for the teller function including host communications, sharing and storing of information, cumulative totals, electronic journal, transaction security and approval and balancing aids. The FSB Sales and Services Platform combines extensive transaction processing functionality with sales tools, and core services that expedite selling new products, as well as servicing existing accounts.     •   FSB Banking Call Center provides the customer information, sales and service capabilities, process flows, reporting, and fulfillment management specific to call center operations. The FSB Banking Call Center application       integrates with other call center technologies, including IVR systems, computer telephony integration (“CTI”) servers and automatic call distributor systems.     •   FSB Marketing Center provides our customers the ability to develop and execute marketing campaigns based on multiple segmentations of customers and prospects. It includes robust inbound and outbound telemarketing features that can be combined with advanced CTI functionality to enhance the efficiency of our customers’ marketing personnel.     •   FSB Lending provides a highly customizable, complete credit origination system designed for indirect, direct, credit card, home equity and revolving credit lending, to be used in conjunction with multiple scoring and decision support tools for the personal lending market. The application also offers a workflow solution that meets s lending requirements from data entry through qualification, notification, closing and document delivery. Additional Solutions   •   S1 Website Solutions is a virtual financial lobby which provides customers with a destination web site or portal that gives them access to product information, news and other content, as well as community pages and bulletin boards. The S1 Customer Center enables financial institutions to efficiently create, manage and quantify their web presence.     •   The S1 online adoption solution, marketed as S1 to One Solutions, is designed to help financial institutions of all sizes improve their base of active online users. These solutions range from marketing support to educational programs.     •   Pay Anyone Bill-Pay services offered through partnerships with Checkfree, Princeton and Metavante through all of our personal on-line banking applications.     •   Account Aggregation. Through a reseller agreement with Yodlee, Inc. (described in Note 19 to our consolidated financial statements included elsewhere in this report) we provide account aggregation capabilities, which allow the delivery of an integrated balance sheet consolidating, organizing and presenting a consumer’s personal account information from a variety of providers for confidential viewing and access.     •   Voice and Speech Recognition. Through a strategic relationship with Edify Corporation ( previously an S1 company now a wholly owned subsidiary of Intervoice, Inc.), we provide advanced voice and speech recognition solutions. Edify’s voice solution was one of the first third-party solutions to integrate with the S1 Enterprise Platform. Through this solution, customers benefit from an ability to provide one view of the transactions, transaction history and total banking relationship by providing a consistent view between S1 Enterprise and Edify / Intervoice. Services          In addition to licensing software, both the Enterprise and Postilion segments provide a broad array of services to meet the needs of their customers. The services include planning, implementation and customization of customer software applications, as well as ongoing maintenance and support and application hosting services. Professional Services          Our professional services teams in the Enterprise and Postilion segments help financial institutions implement our product solutions. Our professional services organization is engaged in the following activities:   •   Project Management — Our project managers are responsible for oversight of services projects throughout the implementation cycle;     •   Custom Software Development — Our software developers customize certain software solutions to meet the specific       business requirements of our customers — from analysis and design to building and testing;     •   Technical Services — Our technical services teams design, implement and test the servers and network infrastructure to support our solutions. Our expertise includes software integration, database services, networking and the applications skills required to deliver secure, robust solutions;   •   Educational Services — Our training professionals help financial institutions train their employees to use our solutions to better serve their customers; and     •   Web Design Services — Our web design group assists with delivery of a complete web presence for financial institutions.           We also provide custom product development, implementation and hosting services to State Farm. Revenues from State Farm were 26%, 25% and 25% of our revenue from continuing operations during the years ended December 31, 2004, 2005 and 2006, respectively. We expect our State Farm revenue in 2007 to be between $45.0 and $48.0 million. Customer Support          The Customer Support team offers various levels of service to meet an organization’s support needs and budgets, including:   •   Technical Support — Customer support engineers provide technical support for solutions on our products;     •   Software Release Management — We provide software upgrades that include enhancements to our software as well as operational and performance improvements; and     •   Online Support — The Support Website is designed to provide “one-stop” access to technical information for our products. The Website provides access to technical FAQs, download patches, the latest documentation, and support bulletins. Hosting Services          Our hosting services provide systems outsourcing, data center hosting, operational management and control across the full range of personal, s and corporate cash management, Internet banking applications, insurance and loan applications. We host S1 applications for approximately 350 customers in our global data center facility in Norcross, Georgia, which handles more than 3.2 million end users daily. Our mature operating environment was designed to address mission-critical operations for financial applications, such as security, recovery and availability of data. Our data center is a hardened facility that can scale to support large volumes of customers. Other Revenue          Other revenue is principally generated from the resale of certain software and hardware products produced by third-parties and sold by us under reseller agreements to our customers in conjunction with the sale of our products and services.Financial Industry Background          There are many factors influencing the competitive environment for financial services providers, including:   •   pressure to grow their businesses organically instead of through mergers and acquisitions;     •   increased security concerns and regulatory requirements; and     •   the need to minimize information technology and infrastructure costs while meeting the ever-rising consumer expectations for customer service and convenience.           We believe that the above factors are influencing financial services companies to look for new ways to effectively service and sell to their customers through all of their interaction channels, including the branch (teller and platform), call center, Internet, phone and ATM.          As in some other industries, financial services providers can more cost-effectively grow their businesses by cross- selling additional products and services to their existing customers. This is difficult to do if they are not able to understand the needs of their customers and customer segment behavior and intelligently market services and products to these customers. Our solutions are designed to not only provide financial institutions with greater insight into their customer data, but also into the transactions that their customers conduct.          As each customer interaction channel was introduced, many financial institutions took a tactical approach in expanding their offerings, incrementally adding these new channels as they fit in with their evolving business plans. By and large, each channel functioned independently, with limited, if any, interactions and knowledge of the customer interactions occurring in the other channels. This silo-like infrastructure, often facilitated with several disparate vendors and technologies, has become too expensive for many institutions to support and too inefficient for consumers and businesses to utilize as a basis for interaction with their financial institution. By implementing multiple applications on a single technology platform – the long-term value proposition for many of our solutions — banks are able to reduce the number of technology platforms, interfaces and administrative resources associated with supporting their operations.          We believe that financial institutions providing a unified experience for their customers across multiple points of interaction, delivered at the lowest possible cost, will have a key competitive advantage. Financial institutions will need to deliver a consistent and compelling experience to their customers and provide them with products and services that better meet their needs and are relevant to their stage in life. We believe it is very challenging for financial institutions to deal with multiple channels, using different vendors and technologies, all of which must be integrated with a variety of legacy applications. Financial institutions must determine how to leverage their existing solutions while moving to new technologies that will protect their investments and better position them for the future.          In addition to these broad industry drivers, there are other catalysts that are driving new technology purchase decisions in the branch and Internet markets. In October 2005, the Federal Financial Institution Examination Council (“FFIEC”) announced new guidelines for identity theft prevention for those institutions offering online banking. These guidelines call for multi-factor authentication of a user’s identity before that user is authorized to proceed in conducting an Internet transaction. Many internally developed systems or older systems either do not support these requirements or require a costly investment to bring those systems into compliance. As a result, we believe that banks are likely to evaluate new technologies for their online banking offering to their on-line retail, s and corporate banking clients. We are developing solutions in conjunction with other technology partners to ensure that our solutions can help our customers satisfy these guidelines.          Bank branches have been experiencing a significant amount of attention in terms of technology investment over the past several years. Legislation referred to as “Check 21” in the United States, was enacted to recognize that an electronic check is a legal substitute for a paper based check, thus eliminating the need for physical exchange of the paper check for clearing and settlement purposes. While this legislation largely impacts back office clearing operations, the large benefit or opportunity for banks is in the front office deposit capture process. Image capture at the point of deposit such as in teller applications greatly improves the efficiency and accuracy of deposit taking, areas where we have a strong offering and complete solution for compliance with Check 21.          We believe that these factors are influencing the decision on the part of many financial institutions of all sizes to consider new solutions to help them increase revenue opportunities, improve customer loyalty and reduce their costs. We believe our products can address these needs.Discontinued Operations Risk and Compliance          On August 11, 2006, we completed the sale of our Risk and Compliance segment to CETP FRS S.a.r.l. (“CETP”), which provided regulatory reporting solutions with its suite of regulatory reporting, financial intelligence and analytic solutions to the financial institutions world. CETP has contracted with our Pune, India location to continue to provide development and administrative services. Edify          In December 2005, we sold our Edify business, which delivered voice and speech recognition solutions to a range of industries, to Intervoice, Inc. We maintain a strategic reseller agreement with Intervoice to offer our customers the Edify voice and speech recognition solutions.Customers and Markets          We provide solutions to all sizes of financial institutions, ranging from global financial services organizations to community banks and credit unions. We currently serve approximately 3,000 banks, credit unions and insurance providers and retailers.          We also provide custom development, implementation and hosting services to State Farm. Revenues from State Farm were 26%, 25% and 25% of our revenues from continuing operations for 2004, 2005 and 2006, respectively. We expect revenues from State Farm to be between $45.0 and $48.0 million in 2007.Strategic Alliances and Partners          We have built a global network of more than 15 alliances, allowing us to more fully extend our expertise, capabilities, and reach within the financial services industry. We have established strategic, technology, and channel relationships with a number of organizations. We have alliances with companies such as IBM and numerous core processing vendors such as Misys, Fiserv, and Fidelity National. We also have relationships with key technology providers, including bill payment providers, credit card processing vendors and printed product vendors.          In certain geographies, including Asia, the Middle East and some European countries, we are using partners as our primary sales channel to increase our market reach.Sales and Marketing          Each segment maintains a dedicated sales and marketing team that is focused on marketing and sales of their specific solutions to their target market. Within each group are trained sales support personnel and solutions architects who provide functional and technical expertise to maximize the customer’s understanding of our solutions. We reported revenues from continuing operations of $185.2 million, $179.1 million and $192.3 million in 2004, 2005 and 2006, respectively, of which 89%, 83% and 82%, respectively, were attributed to sales in the United States.          In the United States, we utilize direct sales teams that call on financial institutions continuously to identify sales opportunities. This group primarily calls on new prospects in the market place. We rely on dedicated relationship managers (“RMs”) for existing customers. RMs are responsible for the full relationship with their assigned customers including customer satisfaction, product and service delivery and cross-selling new and add-on applications and services.          The sales cycle for large financial institutions generally lasts from six to 18 months and the resulting contracts typically have multi-year terms. Sales to the small community and regional financial institutions are typically executed by both direct and telephone-based sales teams. The sales cycle for these small to mid-sized financial organizations generally lasts from six to nine months, and the contracts entered into with them typically provide for direct delivery and service requirements. In addition, we have relationships with resellers that act as an indirect channel to expand our market penetration.          In the Europe and Middle East (“EME”) region, we sell primarily through direct sales in specific territories such as the United Kingdom, Belgium, the Netherlands, Germany, Italy, the Nordics, Eastern Europe, Spain, and Portugal, Dubai and most countries in the Middle East, and through resellers in other areas such as Austria, Greece, Jordan, Egypt and Israel. In Africa, we sell on a direct sales basis in South Africa and reseller basis in the rest of Africa. In the Asia Pacific (“APAC”) region, our sales efforts are focused primarily through resellers in countries such as China, Hong Kong, Taiwan, Thailand, Indonesia, Malaysia, Singapore, with direct sales into Australia and New Zealand.          In addition to internal sales efforts and joint efforts with distribution partners, we market our products and services in other ways to build awareness of our brands: S1 Enterprise, Postilion and Full Service Banking Solutions. Our marketing efforts include participating in and exhibiting at industry conferences and trade shows, hosting an annual user’s conference, maintaining memberships in key industry organizations and establishing close relationships with industry analysts to help guide product development and marketing efforts.Product Development          We develop the majority of our product solutions ourselves. Each major product group has dedicated development centers in the United States and internationally. In addition, all of our product groups utilize resources from our Pune, India location to augment their staff for product development as well as implementation services.          We spent $41.1 million, $40.4 million and $38.9 million on product development efforts related to continuing operations in 2004, 2005 and 2006, respectively. During 2007, we expect product development costs to be between $30.0 and $35.0 million.          We released our Enterprise 3.5 products from development in a Managed Introduction Program in February 2006. The MIP is designed to enable the entire organization to work with a limited number of customers in pre-production and live production environments. Our applications currently available on S1 Enterprise 3.5 include S1 Personal Banking, S1 Business Banking, S1 Enterprise Teller, S1 Enterprise Sales and Service Platform, S1 Enterprise Call Center and S1 Trade Finance. The applications are available independently or collectively as an integrated solution that gives banks one view of their customers across channels. S1 Trade Finance became available on S1 Enterprise 3.5 in 2007.          In November 2006, our first client went live on version 3.5 of the S1 Personal Banking application. We expect that a significant portion of our S1 Enterprise installed base of customers will migrate to S1 Enterprise 3.5 in the future.Competition          The market for financial software is competitive, rapidly evolving and subject to technological change. We currently perceive our near-term competition as coming from four primary areas: (1) proprietary in-house development organizations of financial institutions, (2) single-point solution vendors, (3) core processing vendors and (4) enterprise solution vendors. We perceive our long-term competition as coming from other enterprise software vendors, but most of our competition currently arises from single-point solution vendors. In-house Development Organizations           Some financial institutions retain a significant portion of their software development in-house while others have chosen to use third-party vendor solutions. In-house software development is a source of competition in the sale of our products and services. Generally, only very large organizations have a bias to develop solutions internally. We believe financial organizations may encounter the following challenges when building financial software in-house:   •   building, maintaining and upgrading an in-house solution can be very costly;     •   attracting and retaining the necessary technical personnel can be difficult and costly; and     •   technological development may be too far outside the financial organization’s core competencies to be effective or successful. Single-Point Solution Vendors           These vendors offer solutions for a specific line of business and/or channel for the financial institution. In the retail Internet banking space, we compete primarily with Digital Insight Corporation (a division of Intuit, Inc.), Financial Fusion (a division of Sybase, Inc.), and Corillian Corporation (a division of CheckFree Corporation). In branch banking, we competeprimarily with Argo Data Resource, Inc. and Fidelity Information Services, Inc. In business banking, we compete primarily with Fundtech Ltd., P&H Solutions, Financial Fusion, Inc. and Digital Insight Corporation. In the electronic payment space, we compete primarily with Transaction Systems Architects, Inc. We believe the disadvantages associated with single point solution providers include:   •   integrating applications and channels from multiple vendors may greatly lengthen a financial organization’s time-to-market and implementation costs;     •   operating and upgrading solutions from multiple vendors is typically very costly; and     •   a combination of best-of-breed solutions across different channels does not provide a single view of the customer. Core Processing Vendors           These vendors offer data processing services and outsourcing for financial institutions’ systems of record. In this space, we compete with companies such as Fidelity National, Metavante, Fiserv, Inc. and Jack Henry and Associates, Inc. A number of these companies offer front-office products within a packaged pricing scheme integrated with their core back-office capabilities. We believe the primary disadvantage of this approach is that these front-office applications will lag behind the market to some degree in terms of functions and features and are of a secondary focus to the vendor behind their back-office products and services. Enterprise Solution Vendors           As we continue to introduce new releases of our Enterprise products in 2007, we believe we may increasingly see interest and competition from various enterprise software and solution providers, such as SAP and Oracle. We believe our advantage in the financial services market will continue to stem from our deep domain knowledge and tight integration with the various key business systems within our financial organization customer base. Additionally, we believe our large installed base will differentiate our ability to establish, deliver and maintain our core market over time. In addition, we believe our large installed customer base gives us a distinct advantage in serving the needs of this market segment.Government Regulation          We are subject to examination and are indirectly regulated by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the various state financial regulatory agencies that supervise and regulate the banks and thrift institutions for which we provide data processing services. Matters subject to review and examination by federal and state financial institution regulatory agencies include our internal controls in connection with our performance of data processing services and the agreements giving rise to those processing activities as well as certain design specification of our software licensed to financial institutions.          Laws and regulations that apply to communications and commerce over the Internet are becoming more prevalent. Currently, there are Internet laws regarding copyrights, taxation and the transmission of specified types of material. Congress also adopted legislation imposing obligations on financial institutions to notify their customers of the institution’s privacy practices, restrict the sharing of non-public customer data with non-affiliated parties at the customer’s request, and establish procedures and practices to protect and secure customer data. These privacy provisions are implemented by regulations with which compliance is now required. Additionally, many legislative and regulatory actions have been enacted or are pending at the state and federal level with respect to privacy. Further, we and our customers may be faced with state and federal requirements that differ drastically, and in some cases conflict. In addition, the European Union enacted its own privacy regulations and is currently considering other Internet-related legislation. Laws applicable to internet based transactions remain unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet. In addition, the growth and development of the market for online financial services, including online banking, may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online. We are also subject to encryption and technology export laws which, depending on future developments, could adversely affect our business.Employees          As of December 31, 2006, we had approximately 1,380 employees, including 450 in customer support, hosting services and professional services, 90 in sales and marketing, 720 in product development and 120 in general and administrative. In addition to full-time employees, we have used the services of various independent contractors primarily for professional services projects and product development.Available Information          Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are available free of charge at our website at www.s1.com as soon as reasonably practicable after we electronically file such materials with, or furnish to, the Securities and Exchange Commission. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site ( www.sec.gov ) that contains our reports.Item 1A. Risk Factors           You should consider carefully the following risks. If any of the following 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.Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price of our common stock          Our quarterly operating results have fluctuated significantly to date. If we fail to meet the expectations of securities analysts or investors as a result of any future fluctuations in our quarterly operating results, the market price of our common stock would likely decline. We may experience fluctuations in future quarters because: •   we cannot accurately predict the number and timing of contracts we will sign in a period, in part because the budget constraints and internal review processes of existing and potential customers are not within our control;   •   as we will be selling our financial institutions products on both a perpetual license and a term or subscription license, we cannot accurately predict the mix of perpetual licenses to term licenses sold in any one quarter. Term licenses significantly reduce the amount of revenue recognized in the first year of the contract, but is intended to increase the overall revenue earned from the customer during the typical customer life cycle; perpetual license revenue can vary significantly on a quarterly basis;   •   the length of our sales cycle to large financial organizations generally lasts from six to 18 months, which adds an element of uncertainty to our ability to forecast revenues;   •   if we fail to or are delayed in the introduction of new or enhanced products, or if our competitors introduce new or enhanced products, sales of our products and services may not achieve expected levels and/or may decline;   •   our ability to expand the mix of distribution channels through which our products are sold may be limited;   •   our products may not achieve widespread consumer acceptance, which could cause our revenues to be lower than expected;   •   we have had significant contracts with legacy customers that have decreased or terminated their services and we may not be able to replace this revenue and / or the gross margins associated with this revenue;   •   our sales may be constrained by the timing of releases of third-party software that works with our products; •   a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses in the short term if revenues decrease; and   •   the migration of our license sales model to be more focused on recurring revenue contracts may result in less predictable revenue due to an inability to predict the rate at which it is adopted by our customers, or the rate at which it may be deferred. We have experienced substantial losses in the past and may not achieve or maintain profitable operations in the future          We incurred losses from continuing operations in fiscal years 2005 and 2006 and from time-to-time make changes in our organizational structure to improve operating efficiencies. These changes can create additional costs during periods of transition, and we could experience losses in the future, which could negatively impact the value of our common stock.In 2007, we will depend on one customer, State Farm, for a significant portion of our revenue and if that customer terminates its contract with us, our revenues and financial performance would decline          In 2006, we derived 25% of our total revenues from continuing operations from State Farm. State Farm accounted for 26% and 25% of our total revenue from continuing operations in 2004 and 2005, respectively. We expect revenues from State Farm to be between $45.0 and $48.0 million in 2007. We can give no assurance that we will be able to retain State Farm as a customer. State Farm’s license and possession rights for the source code of the Enterprise and insurance products give them great flexibility on how they choose to further invest in these products.System failures or performance problems with our products could cause demand for these products to decrease, require us to make significant capital expenditures or impair customer relations          There are many factors that could adversely affect the performance, quality and desirability of our products. In certain instances, product releases have been delayed. This has impacted and may continue to impact or prevent these products from gaining market acceptance. These factors include, but are not limited to the following: •   delays in completing and/or testing new products, resulting in significant delays in delivering new products;   •   extraordinary end-user volumes or other events could cause systems to fail;   •   our products could contain errors, or “bugs”, which could impair the services we provide;   •   during the initial implementation of some products, we have experienced significant delays in implementing and integrating software, and we may experience similar difficulties or delays in connection with future implementations and upgrades to new versions; and   •   many of our products require integration with third-party products and systems, and we may not be able to integrate these products with new or existing products. We are subject to government regulation          We are subject to external audits, examination, and are indirectly regulated, by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the various state financial regulatory agencies that supervise and regulate the banks and thrift institutions for which we provide data processing services. Matters subject to review and examination by federal and state financial institution regulatory agencies, and external auditors, include our internal information technology controls in connection with our performance of data processing services and the agreements giving rise to those processing activities.We are enga