Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Use of Estimates in Preparation of Our Financial Statements

Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue

Revenue. We adopted Topic 606 Revenue from Contracts with Customers (“ASC 606”) as of January 1, 2018 using the cumulative effect method and have applied ASC 606 to all contracts with clients that had not been completed as of the date of initial application. In conjunction with the adoption of ASC 606, we recorded a cumulative adjustment increasing beginning retained earnings (net of tax) by approximately $7 million, primarily related to contracts that we were previously required to defer revenue as we did not have vendor specific objective evidence (“VSOE”) of fair value for certain undelivered elements. Since we adopted ASC 606 using the cumulative effect method, comparative information in our Financial Statements has not been adjusted and continues to be as previously reported.

The following tables summarize the impacts of adopting ASC 606 on our Financial Statements as of and for the quarter and nine months ended September 30, 2018 (in thousands, except per share amounts):

	As of September 30, 2018
Condensed Balance Sheet	As Reported			Adjustments			Balances without adoption of ASC 606
Unbilled trade accounts receivable	$	36,847		$	(533	)	$	36,314
Other current assets		38,706			4,014			42,720
Client contracts, net of amortization		-			66,364			66,364
Acquired client contracts, net of amortization		39,863			(39,863	)		-
Client contract costs, net of amortization		35,584			(35,584	)		-
Other non-current assets		10,898			5,069			15,967
Other assets		785,411			-			785,411
Total assets (1)	$	947,309		$	(533	)	$	946,776
Deferred revenue	$	54,966		$	2,655		$	57,621
Deferred income taxes		5,881			8			5,889
Other liabilities		528,043			-			528,043
Total liabilities		588,890			2,663			591,553
Accumulated earnings		781,188			(3,196	)		777,992
Other stockholders' equity		(422,769	)		-			(422,769	)
Total stockholders' equity		358,419			(3,196	)		355,223
Total stockholders' equity and liabilities	$	947,309		$	(533	)	$	946,776

(1)

See Note 3 for further discussion related to the reclassification of our client contracts and client contract costs.

	Quarter Ended September 30, 2018
Condensed Statement of Income	As Reported			Adjustments			Balances without adoption of ASC 606
Revenues:
Cloud and related services (2)	$	186,473		$	(6,162	)	$	180,311
Software and services (2)		14,283			1,589			15,872
Maintenance (2)		12,299			5,217			17,516
Total revenues		213,055			644			213,699
Cost of revenues:
Cloud and related services (2)		95,092			(4,544	)		90,548
Software and services (2)		8,669			208			8,877
Maintenance (2)		5,291			4,336			9,627
Total cost of revenues		109,052			-			109,052
Other expenses		83,511			-			83,511
Income before income taxes		20,492			644			21,136
Income tax provision		(4,391	)		(187	)		(4,578	)
Net income	$	16,101		$	457		$	16,558
Net income per diluted share	$	0.49		$	0.01		$	0.50

	Nine Months Ended September 30, 2018
Condensed Statement of Income	As Reported			Adjustments			Balances without adoption of ASC 606
Revenues:
Cloud and related services (2)	$	551,390		$	(19,294	)	$	532,096
Software and services (2)		39,573			4,742			44,315
Maintenance (2)		36,829			15,542			52,371
Total revenues		627,792			990			628,782
Cost of revenues:
Cloud and related services (2)		277,212			(15,542	)		261,670
Software and services (2)		25,816			660			26,476
Maintenance (2)		16,612			13,938			30,550
Total cost of revenues		319,640			(944	)		318,696
Other expenses		246,732			-			246,732
Income before income taxes		61,420			1,934			63,354
Income tax provision		(16,188	)		(561	)		(16,749	)
Net income	$	45,232		$	1,373		$	46,605
Net income per diluted share	$	1.37		$	0.04		$	1.41

(2)

Adjustments are primarily related to software license products and related maintenance contracted as part of our cloud solutions contracts that were not capable of being distinct as a separate performance obligation under ASC 606 and are included in cloud solutions services in the quarter and nine months ended September 30, 2018. Costs associated with these products were also reclassified to cost of cloud solution services in the quarter and nine months ended September 30, 2018.

	Nine Months Ended September 30, 2018
Condensed Statement of Cash Flows	As Reported			Adjustments			Balances without adoption of ASC 606
Net income	$	45,232		$	1,373		$	46,605
Adjustments to reconcile net income to net cash provided by operating activities -
Amortization		31,974			(3,146	)		28,828
Deferred income taxes		2,150			561			2,711
Other		32,255			-			32,255
Changes in operating assets and liabilities:
Other current and non-current assets		(21,763	)		10,231			(11,532	)
Deferred revenue		7,182			(1,689	)		5,493
Other		(23,761	)		-			(23,761	)
Net cash provided by operating activities		73,269			7,330			80,599
Cash flows from investing activities:
Acquisition of and investments in client contracts		-			(7,330	)		(7,330	)
Other		21,692			-			21,692
Net cash provided by (used in) investing activities		21,692			(7,330	)		14,362
Net cash used in financing activities		(18,770	)		-			(18,770	)
Effect of exchange rate fluctuations on cash		(1,262	)		-			(1,262	)
Net increase cash and cash equivalents		74,929			-			74,929
Cash and cash equivalents, beginning of period		122,243			-			122,243
Cash and cash equivalents, end of period	$	197,172		$	-		$	197,172

As a result of adopting ASC 606, we have changed our accounting policies for revenue recognition as discussed in more detail below.

In summary, our revenue from client contracts is primarily related to our cloud and related solutions and, to a lesser degree, software and service and related maintenance arrangements, and is measured based on consideration specified within each of our contracts, excluding sales incentives and amounts collected on behalf of third parties, if any. We account for various products and services separately if they are distinct. A product or service, or group of products or services, is distinct if it is separately identifiable from other items in the context of the contract and if our client can benefit from the product or service on their own or with other resources that are readily available to that client. We recognize revenue when we satisfy our performance obligations by transferring control of a particular product or service, or group of products or services, to our clients, as described in more detail below. Taxes assessed on our products and services based on governmental authorities at the time of invoicing are excluded from our revenue.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2018, our aggregate amount of the transaction price allocated to the remaining performance obligations is approximately $527 million, which is made up of fixed fee consideration and guaranteed minimums expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied). We expect to recognize approximately 70% of this amount by the end of 2020, with the remaining amount recognized by the end of 2028. We have excluded from this amount variable consideration expected to be recognized in the future related to performance obligations that are unsatisfied (a practical expedient allowed under ASC 606). The majority of our future revenue is related to our cloud and related solution client contracts that include variable consideration dependent upon a series of monthly volumes and/or daily usage of services and have contractual terms ending from 2019 through 2028.

We have not disclosed transaction price allocation to remaining performance obligations or an explanation thereof of comparable amounts as of December 31, 2017 (a transitional practical expedient allowed under ASC 606).

Disaggregation of Revenue

In the following table, revenue is disaggregated by geographic region (using the location of the client as the basis of attributing revenues to the individual regions):

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Americas (principally the U.S.)	$	180,489	$	169,880	$	530,609	$	497,852
Europe, Middle East, and Africa		21,723		15,980		64,135		51,011
Asia Pacific		10,843		13,335		33,048		35,515
Total revenues	$	213,055	$	199,195	$	627,792	$	584,378

Billed and Unbilled Accounts Receivable

Billed and Unbilled Accounts Receivable. Billed accounts receivable represents our unconditional rights to consideration. Once invoiced, our payment terms are generally between 30-60 days, and rarely do we have contracts with financing arrangements. Unbilled accounts receivable represents our rights to consideration for work completed but not billed. Unbilled accounts receivable is transferred to billed accounts receivable when the rights become unconditional which is generally at the time of invoicing.

The following table rolls forward our unbilled accounts receivable from December 31, 2017 to September 30, 2018 (in thousands):

	Unbilled Receivables
Beginning Balance, December 31, 2017	$	31,187
Cumulative effect adjustments		4,193
Reclassification - Adoption of ASC 606		(2,276	)
Beginning Balance, January 1, 2018	$	33,104
Recognized during the period		168,198
Reclassified to receivables		(163,117	)
Other		(1,338	)
Ending Balance, September 30, 2018	$	36,847

Deferred Revenue

Deferred Revenue. Deferred revenue represents consideration received from clients in advance of services being performed.

The following table rolls forward our deferred revenue from December 31, 2017 to September 30, 2018 (in thousands):

	Deferred Revenue
Beginning Balance, December 31, 2017	$	(54,231	)
Cumulative effect adjustments		4,344
Reclassification - Adoption of ASC 606		2,276
Beginning Balance, January 1, 2018	$	(47,611	)
Revenue recognized that was included in deferred revenue at the beginning of the period		35,575
Consideration received in advance of services performed net of revenue recognized in the current period		(44,218	)
Other		1,288
Ending Balance, September 30, 2018	$	(54,966	)

Cash and Cash Equivalents

Cash and Cash Equivalents. We consider all highly liquid investments with original maturities of three months or less at the date of the purchase to be cash equivalents. As of September 30, 2018 and December 31, 2017, our cash equivalents consist primarily of institutional money market funds, commercial paper, and time deposits held at major banks.

As of September 30, 2018 and December 31, 2017, we had $3.0 million and $4.2 million, respectively, of restricted cash that serves to collateralize outstanding letters of credit. This restricted cash is included in cash and cash equivalents in our Condensed Consolidated Balance Sheets (“Balance Sheets” or “Balance Sheet”).

Short-term Investments and Other Financial Instruments

Short-term Investments and Other Financial Instruments. Our financial instruments as of September 30, 2018 and December 31, 2017 include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and debt. Because of their short maturities, the carrying amounts of cash equivalents, accounts receivable, and accounts payable approximate their fair value.

Our short-term investments and certain of our cash equivalents are considered “available-for-sale” and are reported at fair value in our Balance Sheets, with unrealized gains and losses, net of the related income tax effect, excluded from earnings and reported in a separate component of stockholders’ equity. Realized and unrealized gains and losses were not material in any period presented.

Primarily all short-term investments held by us as of September 30, 2018 and December 31, 2017 have contractual maturities of less than two years from the time of acquisition. Our short-term investments as of September 30, 2018 and December 31, 2017 consisted almost entirely of fixed income securities. Proceeds from the sale/maturity of short-term investments for the nine months ended September 30, 2018 and 2017 were $190.5 million and $150.8 million, respectively.

Our short-term investments as of September 30, 2018 and December 31, 2017 were $2.1 million and $139.1 million, respectively. The significant decrease in our short-term investments between periods is due primarily to the acquisition of Business Ink in February 2018 for approximately $70 million and positioning of cash as of September 30, 2018 for the acquisition of Forte Payment Systems, Inc., which closed on October 1, 2018 for a purchase price of approximately $85 million, (approximately $80 million, net of cash acquired), less approximately $13 million in cash subject to certain tax filings (see Note 5).

The following table represents the fair value hierarchy based upon three levels of inputs, of which Levels 1 and 2 are considered observable and Level 3 is unobservable, for our financial assets and liabilities measured at fair value (in thousands):

	September 30, 2018						December 31, 2017
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Cash equivalents:
Money market funds	$	14,828	$	—	$	14,828	$	3,544	$	—	$	3,544
Commercial paper	—			—		—	—			32,467		32,467
Short-term investments:
Corporate debt securities	—			—		—	—			124,182		124,182
U.S. government agency bonds	—			1,542		1,542	—			1,547		1,547
Asset-backed securities	—			588		588	—			13,388		13,388
Total	$	14,828	$	2,130	$	16,958	$	3,544	$	171,584	$	175,128

Valuation inputs used to measure the fair values of our money market funds and corporate equity securities were derived from quoted market prices. The fair values of all other financial instruments are based upon pricing provided by third-party pricing services. These prices were derived from observable market inputs.

We have chosen not to measure our debt at fair value, with changes recognized in earnings each reporting period. The following table indicates the carrying value (par value for convertible debt) and estimated fair value of our debt as of the indicated periods (in thousands):

	September 30, 2018				December 31, 2017
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
2015 Credit Agreement (carrying value including current maturities)	$	—	$	—	$	120,000	$	120,000
2018 Credit Agreement (carrying value including current maturities)		146,250		146,250		—		—
2016 Convertible debt (par value)		230,000		242,650		230,000		251,850

The fair value for our credit agreement was estimated using a discounted cash flow methodology, while the fair value for our convertible debt was estimated based upon quoted market prices or recent sales activity, both of which are considered Level 2 inputs. See Note 4 for additional discussion regarding an amendment to our Credit Agreement.

Other Accounting Pronouncements Adopted

Accounting Pronouncements

Equity Method Investment. On July 30, 2018, we made a $2 million investment for a 4% noncontrolling financial interest in a payment technology and services company that enables omni-channel digital payments in Latin America. We are accounting for this investment using the equity method in accordance with Topic 323 Investments – Equity Method and Joint Ventures. Accordingly, we recorded an initial investment of $2.8 million which includes direct costs of acquiring the investment. We will record our share of earnings and losses in the investment on a one-quarter lag basis which will result in an adjustment to our initial investment during the quarter-ending December 31, 2018.

Other Accounting Pronouncements Adopted. In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers. This ASU is effective in annual and interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted, and requires a modified retrospective transition method. We adopted this ASU in January 2018 and the adoption of this standard did not have a material impact on our Financial Statements.

Accounting Pronouncements Issued But Not Yet Effective

Accounting Pronouncements

Accounting Pronouncement Issued But Not Yet Effective. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than twelve months on its balance sheet. This ASU is effective in annual and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. An entity may choose to adopt this ASU either retrospectively or prospectively as of the start of the first period for which it applies the standard (the effective date method).

In 2018, we started the process of evaluating the impact this ASU on our accounting policies, business processes, and financial statements. We have formed a project team and started the process of lease identification, review, and data extraction for purposes of calculating the transition adjustment to be recorded on the effective date. In conjunction with these efforts, we are updating our policies to align with the new accounting guidance and our processes to ensure we properly account for new, existing, and modifications to leases subsequent to the adoption of the ASU. We continue to believe the adoption of this standard will have a material impact on our consolidated balance sheet. We currently intend to adopt the ASU in the first quarter of 2019, utilizing the effective date method of transition.

Cloud and Related Solutions Revenue

Revenue

Cloud and Related Solutions.

Our cloud and related solutions revenues relate to: (i) our software-as-a-service (“SaaS”), cloud-based, revenue management and digital monetization solutions, and various related ancillary services; and (ii) our managed services offering in which we operate software solutions (primarily our software solutions) on behalf of our clients.

We contract for our cloud-based solutions using long-term arrangements whose terms have typically ranged from three to five years. The long-term cloud-based arrangements include a series of multiple services delivered daily or monthly, to include such things as: (i) revenue and customer communications management services; (ii) business support services (e.g., workforce management tools, consumer credit verifications, etc.); (iii) content monetization and delivery functions; and (iv) customer statement invoice printing and mailing services. The fees for these services typically are billed to our clients monthly based upon actual monthly volumes and/or usage of services (e.g., the number of client customers maintained on our systems, the number of transactions processed on our systems, and/or the quantity and content of the monthly statements and mailings processed through our systems).

For cloud-based solution contracts, the total contract consideration (including impacts of discounts or incentives) is primarily variable dependent upon actual monthly volumes and/or usage of services; however, these contracts can also include ancillary fixed consideration in the form of one-time, monthly or annual fees. Although there may be multiple performance obligations, there is generally no allocation of value between the individual performance obligations as all are considered cloud and related solutions revenues that are recognized based on activities performed in each daily or monthly period.

We contract for managed services solutions using long-term arrangements whose terms have typically ranged from three to five years. Under managed services agreements, we may operate software products (primarily our software solutions) on behalf of our clients: (i) out of a client’s data center; (ii) out of a data center we own and operate; or (iii) out of a third-party data center we contract with for such services. Managed services can also include us providing other services, such as transitional services, fulfillment, remittance processing, operational consulting, back office, and end user billing services.

For managed services contracts, the total contract consideration is typically a fixed fee, but these contracts may also have variable fee components. The fees for these services typically are billed to our clients on a monthly basis. Unless managed services are included with a software license contract (as discussed further below), there is generally only one performance obligation and revenue is recognized for these arrangements on a ratable basis as the services are performed.

Fees related to set-up or implementation activities for both cloud-based solution and managed services contracts are deferred and recognized ratably over the related service period to which the activities relate.

Depending on the significance of variable consideration, number of products/services, complex pricing structures and long-term nature of these types of contracts, the judgments and estimates made in this area could have a significant effect on the amount and timing of revenues recognized in any period.

Prior to the adoption of ASC 606, we recognized revenue related to our cloud and related solutions contracts on a monthly basis as we provided the services. The adoption of ASC 606 did not result in any significant changes to the timing of revenue recognition related to these contracts.

Software and Services Revenue

Revenue

Software and Services.

Our software and services revenues relate primarily to: (i) software license sales on either a perpetual or term license basis; and (ii) professional services to implement the software. Our software and services contracts are often contracted in bundled arrangements that include not only the software license and related implementation services, but can also include maintenance, managed services and/or additional professional services.

For our software arrangements, the total contract consideration is allocated between the separate performance obligations based on stand-alone selling prices for software licenses, cost plus applicable margin for services and established pricing for maintenance. The initial sale of software products generally requires significant production, modification or customization, such that the delivery of the software license and the related professional services required to implement the software represent one combined performance obligation that is satisfied over time based of hours worked (hours-based method). We are using hours worked on the project as the measure to determine progress toward completion as we believe it is the most appropriate metric to measure such progress. The software and services fees are generally billed to our clients on a milestone or date basis.

The determination of the performance obligations and allocation of value for software license arrangements require significant judgment. We generally determine stand-alone selling prices using pricing calculations (which include regional market factors) for our software license fees and maintenance, and cost-plus margins for services. Additionally, our use of an hours-based method of accounting for software license and other professional services performance obligations that are satisfied over time requires estimates of total project revenues and costs, along with the expected hours necessary to complete a project. Changes in estimates as a result of additional information or experience on a project as work progresses are inherent characteristics of this method of revenue recognition as we are exposed to various business risks in completing these types of performance obligations. The estimation process to support our hours-based recognition method is more difficult for projects of greater length and/or complexity. The judgments and estimates made in this area could: (i) have a significant effect on revenues recognized in any period by changing the amount and/or the timing of the revenue recognized; and/or (ii) impact the expected profitability of a project, including whether an overall loss on an arrangement has occurred. To mitigate the inherent risks in using this hours-based method, we track our performance on projects and reevaluate the appropriateness of our estimates as part of our monthly accounting cycle.

In certain instances, we sell software license volume upgrades, which provide our clients the right to use our software to process higher transaction volume levels. In these instances, we analyze the contract to determine if the volume upgrade is a separate performance obligation and if so, we recognize the value associated with the software license as revenue on the effective date of the volume upgrade.

A portion of our professional services revenues are contracted separately (e.g., business consulting services, etc.). Such contracts can either be on a fixed-price or time-and-materials basis. Revenues from fixed-price, professional service contracts are recognized using an hours-based method, as these professional services represent a performance obligation that is satisfied over time. Revenues from professional services contracts billed on a time-and-materials basis are recognized as the services are performed.

Prior to the adoption of ASC 606, we recognized revenue for our software arrangements under the guidelines of contract accounting as our software products required significant production, modification or customization and if we had VSOE of fair value for undelivered elements (e.g., maintenance), which we generally had, we would allocate a portion of the total arrangement fee to the undelivered element based on its VSOE of fair value, and the balance of the arrangement fee was recognized using the percentage-of-completion (“POC”) method of accounting.

Maintenance Revenue

Revenue

Maintenance

Our maintenance revenue relates primarily to support of our software once it has been implemented. Maintenance revenues are recognized ratably over the software maintenance period as services are provided. Our maintenance consists primarily of client and product support, technical updates (e.g., bug fixes, etc.), and unspecified upgrades or enhancements to our software products. If specified upgrades or enhancements are offered in a contract, which is rare, they are accounted for as a separate performance obligation. Maintenance can be invoiced to our clients on a monthly, quarterly or annual basis.