UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2016September 30, 2017

OR

For the transition period from                        to                        

Commission file number: 0-25259

Bottomline Technologies (de), Inc.

(Exact name of registrant as specified in its charter)

(603) 436-0700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act (Check one):Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares outstanding of the registrant’s common stock as of JanuaryOctober 31, 2017 was 40,559,177.40,483,564.

BOTTOMLINE TECHNOLOGIES (de), INC.

FORM10-Q

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017

INDEXTABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Bottomline Technologies (de), Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

See accompanying notes.

Bottomline Technologies (de), Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(in thousands, except per share amounts)

See accompanying notes.

Bottomline Technologies (de), Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

See accompanying notes.

Bottomline Technologies (de), Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2016September 30, 2017

Note 1—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Bottomline Technologies (de), Inc. (referred to below as we, us, our or Bottomline) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (U.S. GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the interim financial information have been included. Operating results for the three and six months ended December 31, 2016September 30, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending June 30, 20172018 (fiscal year 2017)2018). For further information, refer to the financial statements and footnotes included in the Annual Report on Form10-K as filed with the Securities and Exchange Commission (SEC) on August 29, 2016.28, 2017.

Note 2—Recent Accounting Pronouncements

Recently Adopted Pronouncements

Development Stage Entities:In June 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update which eliminated the definition of a development stage entity and the financial reporting requirements specific to development stage entities. The update also eliminated an exception that previously existed in the consolidation accounting standard for determining whether a development stage entity had sufficient equity at risk and therefore was a variable interest entity (VIE). We adopted this standard effective July 1, 2016. Upon adoption, we were required to re-assess whether one of the entities in which we have an equity investment is a VIE. Based on that re-assessment, we concluded that this entity is a VIE, but that we are not the primary beneficiary, and therefore not required to consolidate the VIE. Accordingly, the adoption of this standard did not have a material impact on our financial statements.

Going Concern:In August 2014, the FASB issued an accounting standard update which requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This standard is applicable for our annual reporting in fiscal year 2017 and interim periods beginning July 1, 2017. We do not expect this standard to have a material effect on our financial statements, however, we may be required to provide additional disclosures required by the standard.

Cloud Computing Arrangements:In April 2015, the FASBFinancial Accounting Standards Board (FASB) issued an accounting standard update which provides guidance as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and other similar arrangements) includes a software license and, based on that determination, how to account for such arrangements. We adopted this standard effective July 1, 2016 on a prospective basis. The adoption of this standard did not have a material impact on our financial statements.

Debt Issuance Costs - Classification:In April 2015,December 2016, the FASB issued ana technical update to this standard, clarifying that any software license within the scope of this accounting standard shall be accounted for as an intangible asset by the licensee. We adopted the technical update which requires that debt issuance costs be presented in the balance sheet as a direct reduction to the carrying value of the debt. We retrospectively adopted this standard effectiveon July 1, 20162017, and reclassified debt issuance costssoftware licenses from non-currentproperty and equipment, net to intangible assets, to convertible senior notes in our consolidated balance sheets in all periods presented. Deferred debt issuance costs were approximately $1.1 million at December 31, 2016 and $1.7 million at June 30, 2016. Debt issuance costs related to our credit facility are classified as other assetsnet in our consolidated balance sheets for all periods presented. The total amount reclassified in our June 30, 2017 consolidated balance sheet was $29.1 million.

Deferred Taxes - Classification:Share-Based Compensation:In November 2015,March 2016, the FASB issued an accounting standard update which requires that all deferredintended to simplify several areas of accounting for share-based compensation arrangements, including the income tax assetsimpact of excess tax benefits and liabilities, along with any related valuation allowance, be classified as noncurrenttax deficiencies, accounting for forfeitures, statutory tax withholding requirements and the presentation of excess tax benefits in the balance sheet. As a result, each separate tax jurisdiction will have one net tax position, either a noncurrent deferred tax asset or a noncurrent deferred tax liability. Thestatement of cash flows. We adopted this standard is effective for us on July 1, 2017 with early(the first quarter of our fiscal year 2018). Upon adoption permitted. We elected to adoptof this standard excess tax benefits of $0.2 million were recognized as a component of July 1, 2016 on a prospective basis. If we had adopted the standard retrospectively, the impact would have resulted in a $6.2 million reduction to currentour net deferred tax assets, and noncurrent deferred tax liabilitieswith an offsetting cumulative effect adjustment recorded as a reduction to our accumulated deficit in our Juneconsolidated balance sheet. Please refer toNote 7 Income Taxesfor additional discussion of the recognition of excess tax benefits.

We adopted the cash flow presentation of excess tax benefits retrospectively, which resulted in the reclassification of excess tax benefits associated with stock compensation of $0.04 million from financing activities to operating activities for the three months ended September 30, 2016 balance sheet.in our consolidated statement of cash flows.

The new standard also allows companies to make an accounting policy election to either estimate expected forfeitures or account for them as they occur, and we have elected to continue to estimate forfeitures.

Consolidation:In October 2016, the FASB issued an accounting standard update to remove the requirement that a single decision maker consider, in its assessment of primary beneficiary, its indirect interest held through related parties under common control to be the equivalent of a direct interest in a variable interest entity (VIE). Instead, indirect interest held through related parties under common control will be included in the primary beneficiary assessment based on proportionate basis, consistent with the indirect interest held through other parties. We adopted this standard effective July 1, 2017. The adoption of this standard did not have an impact on our statements of comprehensive loss or cash flows.financial statements.

Accounting Pronouncements to be Adopted

Revenue Recognition: In May 2014, the FASB issued an accounting standard update which provides for new revenue recognition guidance, superseding nearly all existing revenue recognition guidance. The core principle of the new guidance is to recognize revenue when promised goods or services are transferred to customers, in an amount that reflects the consideration to which the vendor expects to receive for those goods or services. The new standard is expected to require significantly more judgment and estimation within the revenue recognition process than required under existing USU.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations. The new standard is also expected to significantly increase the financial statement disclosure related to revenue recognition. This standard is currently effective for us on July 1, 2018 (the first quarter of our fiscal year ending June 30, 2019 (fiscal year 2019)) using one of two methods of adoption, subject to the election of certain practical expedients: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients as defined within the standard; or (ii) modified retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application inclusive of certain additional disclosures.

We are continuing to evaluate the expected impact of this standard on our consolidated financial statements and currently plan to adopt the standard using the modified retrospective method. While our assessment of the impact of this standard is not complete, we currently believe that the most significant impact will be in two specificcertain areas:

However, we are unable to quantify the impact of these outcomes at this time, nor can we ensure that our continuing analysis and interpretation of the standard will result in these financial reporting outcomes.

Financial Instruments - Instruments—Classification and Measurement:In January 2016, the FASB issued an accounting standard update which requires, among other things, that entities measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in earnings. Under the standard, entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available for sale as a component of other comprehensive income.income (OCI). Subject to certain exceptions, entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment, plus or minus adjustments for observable price changes, with all such changes recognized in earnings. This new standard does not change the guidance for classifying and measuring investments in debt securities and loans. The standard is effective for us on July 1, 2018 (the first quarter of our fiscal year 2019) on a prospective basis. We are currently evaluating the anticipated impact of this standard on our financial statements. We have certain cost method investments of $7.7 million at September 30, 2017, and to the extent that there are observable price changes following the date of adoption, the accounting for these investments could be affected.

Leases:In February 2016, the FASB issued an accounting standard update which requires balance sheet recognition of a lease liability and a correspondingright-of-use asset for all leases with terms longer than twelve months. The pattern of recognition of lease related revenue and expenses will be dependent on its classification. The updated standard requires additional disclosures to enable users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This standard is effective for us on July 1, 2019 (the first quarter of our fiscal year ending June 30, 2020) with early adoption permitted; adoption is on a modified retrospective basis. We anticipate that the adoption of this standard will have a material impact to our consolidated balance sheet due to the recognition of right of use assets and lease liabilities; however, we are still evaluating the anticipated impact of this standard on our financial statements.

Share-Based Compensation:In March 2016, the FASB issued an accounting standard update intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact of excess tax benefits and tax deficiencies, accounting for forfeitures, statutory tax withholding requirements and the presentation of excess tax benefits in the

statement of cash flows. This standard is effective for us on July 1, 2017 (the first quarter of our fiscal year ending June 30, 2018) with early adoption permitted. We currently have significant excess tax benefits that have not been reflected as a component of our deferred tax assets since, under current accounting standards, these amounts are recognized only when they provide an actual reduction to currently payable income taxes. Under the new standard, we will be required to recognize excess tax benefits as a component of our deferred tax assets, subject to an assessment of whether such amounts are recoverable (a valuation allowance would be established against amounts assessed as non-recoverable). We are continuing to evaluate the impact of this standard on our financial statements.

Financial Instruments - Instruments—Credit Losses:In June 2016, the FASB issued an accounting standard update that introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments including trade receivables. The estimate of expected credit losses will require entities to incorporate historical information, current information and reasonable and supportable forecasts. This standard also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This standard is effective for us on July 1, 2020 (the first quarter of our fiscal year ending June 30, 2021) with early application permitted. We are currently evaluating the anticipated impact of this standard on our financial statements.

Statement of Cash Flows:In August and November of 2016, the FASB issued updates to the accounting standard which addresses the classification and presentation of certain cash receipts, cash payments and restricted cash in the statement of cash flows. The standard is effective for us on July 1, 2018 (the first quarter of our fiscal year ending June 30, 2019) and requires a retrospective approach. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the anticipated impact of this standard on our financial statements.

Income Taxes: In October 2016, the FASB issued an accounting standard update that requires entities to recognize the income tax effect on intra-entity transfers of non-inventory items when the transfer occurs. The standard is effective for us on July 1, 2018 (the first quarter of our fiscal year ending June 30, 2019), with early adoption permitted; adoption is on a modified retrospective basis. We do not currently believe that the adoption of this standard will have a material impact on our financial statements.

Consolidation:In October 2016, the FASB issued an accounting standard update to remove the requirement that a single decision maker consider, in its assessment of primary beneficiary, its indirect interest held through related parties under common control to be the equivalent of a direct interest in the VIE. Instead, indirect interest held through related parties under common control will be included in the primary beneficiary assessment based on proportionate basis, consistent with the indirect interest held through other parties. The standard is effective for us on July 1, 2017 (the first quarter of our fiscal year ending June 30, 2018), with early application permitted. We do not currently believe that the adoption of this standard will have a material impact on our financial statements.

Business Combinations: In January 2017, the FASB issued an accounting standard update to clarify the definition of a business and to provide guidance on determining whether an integrated set of assets and activities constitutes a business. The standard is effective for us July 1, 2018 (the first quarter of our fiscal year ending June 30, 2019), on a prospective basis. We do not currently believe that the adoption of this standard will have a material impact on our financial statements.

Goodwill Impairment:In January 2017, the FASB issued an accounting standard update to simplify the test for goodwill impairment which removes step 2 from the goodwill impairment test. Under the revised standard, an entity will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrycarrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss should not exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for us on July 1, 2020 (the first quarter of our fiscal year ending June 30, 2021) on a prospective basis, with early adoption permitted for periods beginning on or after January 1, 2017. We are currently evaluating the anticipated impact of this standard on our financial statements and the timing of adoption.

Defined Benefit Plan Expenses:In March 2017, the FASB issued an accounting standard update that changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) andnon-operating expense (all other components of net periodic defined benefit cost). Under the revised standard, the operating expense component will be reported with similar compensation costs, while thenon-operating components will be reported in Other Income and Expense. In addition, only the service cost component is eligible for capitalization as part of an asset such as property, plant and equipment. This standard is effective for us on July 1, 2018 (the first quarter of our fiscal year 2019). We do not currently believe that the adoption of this standard will have a material impact on our financial statements.

Note 3—Fair Value

Fair Values of Assets and Liabilities

We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active.

Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the asset or liability.

Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

At December 31, 2016September 30, 2017 and June 30, 2016,2017, our assets and liabilities measured at fair value on a recurring basis were as follows:

Fair Value of Financial Instruments

We have certain financial instruments which consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, a derivative interest rate swap as more fully described inNote 11 Derivative Instrumentsand our 1.5% Convertible Senior Notes maturing on December 1, 2017 (the Notes) as more fully described inNote 10 Indebtedness. Fair value information for each of these instruments is as follows:

Marketable Securities

The table below presents information regarding our marketable securities by major security type as of December 31, 2016September 30, 2017 and June 30, 2016.2017.

Note 4—Acquisitions and Other Investments

Decillion

On August 14, 2017, we acquired Singapore-based Decillion Group (Decillion) for total consideration of 6.2 million Singapore Dollars (approximately $4.6 million based on the exchange rate in effect at the acquisition date), consisting of cash of $2.8 million and a note payable of $1.8 million. The following table summarizesnote is payable in equal installments over ten quarters starting during the estimated fair valuethree months ended September 30, 2017. Decillion is one of the leading financial messaging solution providers in the Asia Pacific region. Headquartered in Singapore, Decillion has offices in Australia, China, Indonesia, Malaysia and Thailand and they operate a SWIFT service bureau which connects more than 130 financial institutions and corporations to the SWIFT community. This acquisition expands the depth and breadth of our investmentsfinancial messaging solutions, particularly in availablethe Asia Pacific region.

In the allocation of the purchase price, which is preliminary at September 30, 2017, we recorded $1.4 million of goodwill. The goodwill is not deductible for sale marketable securities classified byincome tax purposes and arose principally due to anticipated future benefits arising from the contractual maturityacquisition. Identifiable intangible assets of $2.4 million, consisting of customer related intangible assets, are being amortized over their estimated useful life of twelve years. Decillion’s operating results have been included in our Cloud Solutions segment from the date of the securities

All of our available for sale marketable securities are included in current assets as we doacquisition forward and did not have a material impact on our revenue or earnings.

Acquisition expenses of approximately $0.4 million were expensed during the positive intentthree months ended September 30, 2017 related to hold these investments until maturitythe Decillion acquisition, principally as a component of general and view these investments as available to fund current operations. At December 31, 2016, the difference between the fair value of our available for sale securities and their amortized cost was not significant.administrative expense.

The following table presents the aggregate fair values and gross unrealized losses for those available for sale investments that were in an unrealized loss position as of December 31, 2016, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

Note 4—Other Investments

In December 2015, we made a $3.5 million investment in preferred stock of a privately held, early-stage technology company. We have the ability to exercise significant influence over this company; however, we have no ability to exertexercise control. Investments in common stock or in-substance common stock, through which an investor has the ability to exercise significant influence over the operating or financial policies of the investee, are accounted for under the equity method of accounting. In-substance common stock is an investment that has risk and reward characteristics that are substantially similar to an entity’s common stock. The preferred stock underlying our investment is not in-substance common stock as its terms include a substantive liquidation preference not available to common stockholders. Accordingly, we accountedaccount for ourthis investment under the cost method of accounting, subject to periodic review for impairment. Impairment losses, to the extent occurring, would be recorded as an operating expense in the period incurred. Our maximum investment exposure, which is determined based on the cost of our investment, iswas $3.5 million as of December 31, 2016.September 30, 2017 and is located within other assets on our consolidated balance sheet. There were no indicators of impairment identified as of December 31, 2016.September 30, 2017.

We concluded that this company is a variable interest entity (VIE)VIE as it lacks sufficient equity to finance its activities. However, we also concluded that we are not the primary beneficiary of the VIE as we do not have the power to exert control or direct the activities that most significantly impact the VIE’s economic performance. As we have determined we are not the primary beneficiary, consolidation of the VIE is not required.

Note 5—Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share:

For the three and six months ended December 31,September 30, 2017 and 2016, approximately 3.02.8 million and 3.13.3 million shares, of unvested restricted stock and stock options, respectively, were excluded from the calculation of diluted earnings per share as their effect on the calculation would have been anti-dilutive.

For both the three and six months ended December 31, 2015, approximately 3.2 million shares of unvested restricted stock and stock options were excluded from the calculation of diluted earnings per share as their effect on the calculation would have been anti-dilutive.

As more fully discussed inNote 10 Indebtedness, in December 2012 we issued the Notes maturing in December 2017.2012. We intend, upon conversion or maturity of the Notes, to satisfy any conversion premium by issuing shares of our common stock. We have also issued warrants for up to 6.3 million shares of our common stock at an exercise price of $40.04 per share. For the three and six months ended December 31, 2016,September 30, 2017, shares potentially issuable upon conversion or maturity of the Notes or upon exercise of the warrants were excluded from our earnings per share calculations as their effect would have been anti-dilutive.

Note 6—Operations by Segments and Geographic Areas

Segment Information

Operating segments are the components of our business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. Our operating segments are organized principally by the type of product or service offered and by geography.

During the fiscal year ended June 30, 2016 (fiscal year 2016), we re-examined the aggregation of our operating segments and reclassified our cyber fraud and risk management and healthcare operating segments from the “Payments and Transactional Documents” reportable segment into an “Other” reportable segment. To ensure a consistent presentation of the measurement of segment revenues and profit or loss, these changes are reflected for all periods presented.

Similar operating segments have been aggregated into four reportable segments as follows:

Payments and Transactional Documents. Our Payments and Transactional Documents segment is a supplier of software products that provide a range of financial business process management solutions including making and collecting payments, sending and receiving invoices, and generating and storing business documents. This segment also incorporates our payments automation software for direct debit and receivables management and provides a range of standard professional services and equipment and

supplies that complement and enhance our core software products. Revenue associated with the aforementioned products and services is typically recorded upon delivery. This segment also incorporates certain other solutions that are licensed on a subscription basis, revenue for which is typically recorded on a subscription or transaction basis, or ratably over the expected life of the customer relationship.

HostedCloud Solutions. Our HostedCloud Solutions segment provides customers predominately with SaaS technology offerings that facilitate electronic payment, electronic invoicing, and spend management. Our legal spend management solutions, which enable customers to create more efficient processes for managing invoices generated by outside law firms while offering insight into important legal spend factors such as expense monitoring and outside counsel performance, are included within this segment. This segment also incorporates our global financialsettlement network solutions (financial messaging and Paymode-X solutions.Paymode-X). Our settlement network solutions are highly scalable, secure and cost effective and facilitate cash payment and transaction settlement between businesses, their vendors and banks. Revenue within this segment is generally recognized on a subscription or transaction basis or ratably over the estimated life of the customer relationship.

Digital Banking. Our Digital Banking segment provides solutions that are specifically designed for banking and financial institution customers. Our Digital Banking products are now sold predominantly on a subscription basis, which has the effect of contributing to recurring subscription and transaction revenue and the revenue predictability of future periods, but which also delays revenue recognition over a longer period.

Payments and Transactional Documents. Our Payments and Transactional Documents segment is a supplier of software products that provide a range of financial business process management solutions, including making and collecting payments, sending and receiving invoices, and generating and storing business documents. This segment also provides a range of standard professional services and equipment and supplies that complement and enhance our core software products. Revenue associated with the aforementioned products and services is typically recorded upon delivery. However, if we license products on a subscription basis, revenue is typically recorded ratably over the subscription period or the expected life of the customer relationship.

Other. Our Other segment consists of our healthcare and cyber fraud and risk management operating segments. Our cyber fraud and risk management solutionsnon-invasively monitor, replay and analyze user behavior to flag and even stop suspicious activity in real time. Our healthcare solutions for patient registration, electronic signature, mobile document and payments allow healthcare organizations to improve business efficiencies, reduce costs and improve care quality. When licensed on a perpetual license basis, revenue for our cyber fraud and risk management and healthcare products is typically recorded upon delivery, with the exception of software maintenance which is normally recorded ratably over a twelve monthtwelve-month period. When products are licensed on a subscription basis, revenue is normally recorded ratably over the subscription period.

Periodically a sales person in one operating segment will sell products and services that are typically sold within a different operating segment. In such cases, the transaction is generally recorded by the operating segment to which the sales person is assigned. Accordingly, segment results can include the results of transactions that have been allocated to a specific segment based on the contributing sales resources, rather than the nature of the product or service. Conversely, a transaction can be recorded by the operating segment primarily responsible for delivery to the customer, even if the sales person is assigned to a different operating segment.

Our chief operating decision maker assesses segment performance based on a variety of factors that normally include segment revenue and a segment measure of profit or loss. Each segment’s measure of profit or loss is on apre-tax basis and excludes stock compensation expense, acquisition and integration related expenses (including acquisition related contingent consideration), amortizationcertain items as presented in our reconciliation of acquired intangible assets, impairmentthe measure of goodwill, restructuring related charges, minimum pension liability adjustments, non-core charges relatedtotal segment profit to our convertible notes, global enterprise resource planning (ERP) system implementation costs, charges related to reserves established or released against our deferred tax assets and other non-core or non-recurring gains and lossesGAAP loss before income taxes that arise from time to time.follows. There are no inter-segment sales; accordingly, the measure of segment revenue and profit or loss reflects only revenues from external customers. The costs of certain corporate level expenses, primarily general and administrative expenses, are allocated to our operating segments based on a percentage of the segment’s revenues.

We do not track or assign our assets by operating segment.

Segment information for the three and six months ended December 31,September 30, 2017 and 2016 and 2015 according to the segment descriptions above, is as follows:

		Three Months Ended December 31,								Six Months Ended December 31,
		2016				2015				2016				2015
		(in thousands)
Segment revenue:
Payments and Transactional Documents		$	24,815			$	28,970			$	49,661			$	56,386
Hosted Solutions			38,032				34,887				73,589				68,757
Digital Banking			19,464				16,943				37,650				34,274
Other			4,417				5,248				8,912				9,512
Total segment revenue		$	86,728			$	86,048			$	169,812			$	168,929
Segment measure of profit (loss):
Payments and Transactional Documents		$	7,617			$	8,362			$	15,193			$	16,152
Hosted Solutions			6,778				6,282				12,231				12,856
Digital Banking			1,043				1,255				1,068				3,118
Other			(913	)			26				(1,358	)			(882	)
Total measure of segment profit		$	14,525			$	15,925			$	27,134			$	31,244

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

The following depreciation and other amortization expense amounts are included in the segment measure of profit:segment profit (loss):

Geographic Information

We have presented geographic information about our revenues below. This presentation allocates revenue based on the point of sale, not the location of the customer. Accordingly, we derive revenues from geographic locations based on the location of the customer that would vary from the geographic areas listed here; particularly in respect of financial institution customers located in Australia for which the point of sale was North America.America and customers located in Africa for which the point of sale was Israel.

Long-lived assets based on geographical location, excluding deferred tax assets and intangible assets, which are based on geographical location, were as follows:

Note 7—Income Taxes

The income tax expense we record in any interim period is based on our estimated effective tax rate for the fiscal year infor those tax jurisdictions in which we can reliably estimate our effective tax rate. The calculation of our estimated effective tax rate requires an estimate ofpre-tax income by tax jurisdiction, as well as total tax expense for the fiscal year. Accordingly, this tax rate is subject to adjustment if, in subsequent interim periods, there are changes to our initial estimates of total tax expense orpre-tax income, including income by jurisdiction. For those tax jurisdictions for which we are unable to reliably estimate an overall effective tax rate, we calculate income tax expense based upon the actual effective tax rate for theyear-to-date period.

We recorded an income tax benefit of $4.5 million and an income tax expense of $0.6$0.5 million and $0.7 million for the three months ended December 31,September 30, 2017 and 2016, and 2015, respectively. The income tax benefitexpense for the three months ended December 31, 2016September 30, 2017 was principally due to a discrete tax benefit in Switzerland of $4.5 million related to the impairment of its investment in Intellinx Ltd. (a wholly owned subsidiary). We also recorded tax expense associated with our USU.S. and UK operations, offset in part by a tax benefit associated with our Swiss and Israeli operations. The US incomeTax expense associated with our U.S. operations arose primarily as a result of deferred tax expense was principally due to an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes. The income tax expense for the three months ended December 31, 2015September 30, 2016 was principally due to tax expense associated with our USU.S. and UK operations, offset in part by a tax benefit associated with our Swiss and Israeli operations and by a discrete tax benefit of approximately $0.2 million from the enactment of legislation that decreased UK income tax rates.

We recorded an income tax benefit of $3.8 million and income tax expense of $1.3 million for the six months ended December 31, 2016 and 2015, respectively. The income tax benefit for the six months ended December 31, 2016 was primarily due to

a discrete tax benefit in Switzerland of $4.5 million related to the impairment of its investment in Intellinx Ltd. We also recorded tax expense associated with our US and UK operations, which was offset in part by a tax benefit associated with our Swiss and Israeli operations. The US income tax expense was principally due to an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes. The income tax expense for the six months ended December 31, 2015 was principally due to tax expense associated with our US and UK operations, offset in part by a tax benefit associated with our Swiss and Israeli operations and by a discrete tax benefit of approximately $0.2 million from the enactment of legislation that decreased UK income tax rates.

We currently anticipate that our unrecognized tax benefits will decrease within the next twelve months by approximately $0.3$0.4 million as a result of the expiration of certain statutes of limitations associated with intercompany transactions subject to tax in multiple jurisdictions.

We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. ThisThe process of assessing deferred tax asset recoverability is inherently judgmental, sinceand we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.

Effective July 1, 2017, we adopted a new accounting standard intended to simplify certain aspects of accounting for share-based compensation arrangements, including the associated income tax consequences. Upon adoption, excess tax benefits associated with share-based compensation arrangements that previously were only recognized for financial reporting purposes when they actually reduced currently payable income taxes were recognized as deferred tax assets, net of any required valuation allowance. Accordingly, after adoption, we recognized the following:

This net increase to our deferred tax assets was recorded as a cumulative effect adjustment, reducing the accumulated deficit in our consolidated balance sheet.

At December 31, 2016,September 30, 2017 we have recordedhad a $33.7 milliontotal valuation allowance of $55.1 million against certainour deferred tax assets given the uncertainty of recoverability of these amounts. The increase in our valuation allowance during the quarter ended September 30, 2017 relates to the valuation allowance provided against excess tax benefits associated with share-based payment arrangements, as discussed above.

In November 2016, the Internal Revenue Service commenced an audit on our fiscal 2015 US federal tax return for the fiscal year ended June 30, 2015. We do not expect this audit to have a process that we anticipate will take several quarters to complete.material impact on our financial statements.

Note 8—Goodwill and Other Intangible Assets

Goodwill and acquired intangible assets are initially recorded at fair value and tested periodically for impairment. We perform an impairment test of goodwill during the fourth quarter of each fiscal year or whenever indicators of potential impairment arise. We had identified our Intellinx reporting unit as being at heightened risk of impairment in prior periods and based on our most recent impairment testing, during the fourth quarter of the year ended June

At September 30, 2016, the excess of fair value over2017, the carrying value of goodwill for all of our reporting units was $197.0 million, and the carrying value of goodwill in our Intellinx reporting unit was 14%. Our Intellinx reporting unit is$4.4 million, which we believe to be at a componentheightened risk of impairment. Please refer to Note 7. Goodwill and Other Intangible Assets to our consolidated financial statements included in Item 8 of our Other reportable segment. InAnnual Report in Form10-K for the second quarter of fiscal year ended June 30, 2017 based on continued shortfalls of revenue, we performed the first step of thefor more information regarding our accumulated impairment losses and goodwill impairment test for the Intellinx reporting unit and determined the fair value was lower than its respective carrying value.balances.

Accordingly, we performed the second step of the goodwill impairment test which compares the estimated fair value of a reporting unit’s goodwill to its carrying value. As a result of this test, we recorded a non-cash, pretax, goodwill impairment charge of $7.5 million, which is our preliminary estimate of goodwill impairment. The impairment charge is based on a preliminary analysis and may be subject to material adjustments. During our third quarter ending March 31,Effective July 1, 2017, we intend to complete the impairment testadopted an accounting standard update requiring that software be classified as an intangible asset rather than an element of property and any changeequipment. Intangible asset information as of June 30, 2017 has been recast in the calculation of goodwill impairment will be recorded as a change in estimate duringtable that quarter. The goodwill impairment charge does not affect our liquidity or the financial covenants in any of our outstanding debt agreements. The primary driver offollows, to reflect this impairment charge was related to revenue estimates being below the revenue estimates we made at the time of our Intellinx acquisition (January 2015).

In calculating the goodwill impairment charge recorded during the second quarter of fiscal year 2017, we completed a discounted cash flow model associated with our Intellinx business, including the amount and timing of future expected cash flows, tax attributes, a terminal value growth rate and an appropriate market-participant, risk-adjusted, weighted average cost of capital in each case using estimates that we considered to be reasonable and appropriate.change.

The following tables set forth the information for intangible assets subject to amortization and for intangible assets not subject to amortization.

		As of December 31, 2016
		Gross Carrying Amount				Accumulated Amortization				Net Carrying Value				Weighted Average Remaining Life
						(in thousands)								(in years)
Amortized intangible assets:
Customer related		$	185,555			$	(113,730	)		$	71,825				9.1
Core technology			128,945				(68,368	)			60,577				9.2
Other intangible assets			20,217				(14,392	)			5,825				6.1
Capitalized software development costs			14,572				(2,246	)			12,326				5.5
Total		$	349,289			$	(198,736	)		$	150,553
Unamortized intangible assets:
Goodwill											188,983
Total intangible assets										$	339,536