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CNQR > SEC Filings for CNQR > Form 10-K on 15-Nov-2012All Recent SEC Filings

Show all filings for CONCUR TECHNOLOGIES INC

Form 10-K for CONCUR TECHNOLOGIES INC


15-Nov-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations provides information management believes is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with our Financial Statements and Supplementary Data that are included in Item 8 of this report. Also, the discussion under "Critical Accounting Policies and Estimates" in this Item 7 is an integral part of the analysis of our results of operations and financial condition. We report our operating results on the basis of a fiscal year that starts October 1 and ends September 30. For convenience, in this report we refer to our fiscal years as "2010," "2011," "2012" and "2013." All dollar, option and share amounts are reported in thousands unless otherwise noted.
Special Note Regarding Forward-Looking Statements This report contains forward-looking statements regarding our plans, objectives, expectations, intentions, future financial performance, future financial condition, and other statements that are not historical facts. These statements can be identified by our use of the future tense, or by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "intend," "estimate," "continue" and other similar words and phrases. These forward-looking statements involve many risks and uncertainties, described in Item 1A, Risk Factors, as well as in our other filings with the SEC. The occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements, which could have a material adverse effect on our business, results of operations, and financial condition. All forward-looking statements included in this report are based on information available to us as of the date of this report. We undertake no obligation to revise or update any such forward-looking statements, whether as a result of new information, future events, or otherwise. Overview
We are a leading provider of integrated travel and expense management solutions for companies of all industries, sizes and geographies. Our core mission is to reduce costs for our customers and enhance the user experience for their business travelers by leveraging our continuous innovation. Our easy-to-use cloud computing solutions help companies and their employees control costs, save time, and boost productivity by streamlining the expense management, travel procurement, itinerary management, and invoice management processes. By capturing and reporting on activity throughout the travel and expense management process, our solutions provide detailed information to help customers effectively negotiate with vendors, create budgets, and manage compliance. By providing easy-to-use mobile solutions, we help make business travel easier and more productive for our customers' employees. Our solutions adapt to individual employee preferences, while scaling to meet the needs of companies from small to large.
In March 2010 we issued at par value $250.0 million principal amount of 2.50% senior convertible notes due in 2015. In addition, the underwriters executed their option to purchase an additional $37.5 million principal amount of such notes, bringing the total amount of such notes to $287.5 million ("Notes"). In March 2010 we also entered into note hedge transactions ("Note Hedges") and warrant transactions ("Warrants") that cover the number of shares of our common stock issuable upon the conversion of the Notes. The Note Hedges are designed, but not guaranteed, to reduce or eliminate the potential economic dilution arising upon conversion. The Warrants to acquire shares of our common stock at a strike price of $73.29.
On January 24, 2011, we completed the acquisition of TripIt, Inc. ("TripIt Acquisition" or "TripIt"), a market leader in mobile trip management. The combination of Concur and TripIt delivers additional value to existing customers and travelers while helping to expand the addressable market for Concur's services by reaching a new class of travelers previously unaddressed by traditional managed travel solutions.
On July 1, 2011, we completed the acquisition of GlobalExpense Limited ("GlobalExpense Acquisition" or "GlobalExpense"). GlobalExpense is a London-based market leader in web-based end-to-end expense management. The GlobalExpense Acquisition expands Concur's extended services offerings. In March 2011, we established a Japanese joint venture, Concur (Japan) Ltd. ("Concur Japan"), with SunBridge, Inc., a Japanese corporation, and an individual investor, to assist us with our sales efforts in Japan. Our ownership interest in the joint venture is 75%. Because of this controlling interest, we consolidate the venture's financial results, which are reflected in each revenue, cost of revenues and expense categories in our consolidated statements of operations. We then record a noncontrolling interest which reflects the interest that we do not control in the venture's results. As of September 30, 2012, the operating performance and liquidity requirements of the Japanese joint venture were not significant. While the Japanese joint venture plans to expand its selling and marketing activities in order to add new customers, we believe the operating performance and liquidity requirements of the Japanese joint venture will not be significant in 2013.


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Our strategic focus in 2013 is to continue to grow our core subscription business and to reduce our cost of deploying and operating our services as a percentage of revenue. We expect our subscription revenues to increase in 2013 compared to 2012 due to anticipated growth in demand and global expansion. We expect total sales and marketing expenses in 2013 to increase in absolute dollars compared to 2012, driven primarily by an increase in sales personnel and marketing programs globally.
We operate in and report on one segment, which is integrated travel and expense management solutions.
Revenues
Revenues. Revenues consist primarily of fees paid for subscription services. To a much lesser degree, revenues also include the amortization of set-up fees paid to us in connection with subscription services and consulting services. Revenues are affected by pricing, the number of new customers, customer contract durations and our customer retention rate.
International Revenues. Revenues from customers outside the United States represented 15%, 14%, and 13% of total revenues for 2012, 2011, and 2010, respectively. We expect continued growth in our international revenues, as our products and services continue to gain acceptance in international markets due to our GlobalExpense Acquisition, our investment in global distribution, and increased global awareness of our products. In 2012 the foreign currency impact had the effect of slightly decreasing our revenues. Historically, fluctuations in exchange rates have had a de minimis impact on our total revenues. Operating Expenses
Cost of Operations. Cost of operations expenses consist primarily of personnel costs and related expenses (including share-based compensation) and allocated overhead and infrastructure costs (including depreciation, occupancy, telecommunications, and computer equipment expenses) associated with employees and contractors who provide our subscription and consulting services. Cost of operations expenses also includes hosting costs, and amortization of deferred set-up costs that we incur in connection with our subscription services. Sales and Marketing. Sales and marketing expenses consist of personnel costs (including sales commissions) and related expenses (including share-based compensation), referral fees, allocated overhead and infrastructure costs associated with our sales and marketing personnel, and other sales and marketing costs, such as advertising, trade shows and other promotional activities. Systems Development and Programming Costs. Systems development and programming costs consist of personnel costs and related expenses, including share-based compensation, and allocated overhead and infrastructure costs associated with employees and contractors engaged in software engineering, program management and quality assurance.
General and Administrative. General and administrative expenses consist of personnel costs and related expenses, including share-based compensation, allocated overhead and infrastructure costs associated with employees and contractors in accounting, finance, human resources, information technologies, legal and facilities, as well as miscellaneous costs, such as professional fees, and public company regulatory compliance costs.
Revaluation of Contingent Consideration. Revaluation of contingent consideration consists of changes in the fair value of our acquisition-related contingent consideration liability that is not subject to a continued employment requirement. The changes in the fair value of the contingent consideration subject to the continued employment requirement are recognized as compensation expense. We remeasure this contingent consideration each quarter, with any changes in the fair value recorded as income or expense.
Amortization of Intangible Assets. Amortization of intangible assets represents the amortization of the intangible assets from acquisitions. We are amortizing our intangible assets as non-cash charges to operations over an expected useful life which is consistent with the timing and level of expected cash flows attributed to customer relationships, use of acquired technology, and trade name and trademarks.
Results of Operations
Fiscal years 2012 and 2011

Revenues
              Year Ended September 30,         Variance
                 2012               2011       Dollars
Revenues $     439,826           $ 349,488    $  90,338


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Year Ended September 30,
                  2012         %         2011         %
United States  $ 372,993     84.8 %   $ 299,994     85.8 %
Europe            49,963     11.4 %      36,260     10.4 %
Other             16,870      3.8 %      13,234      3.8 %
Total revenues $ 439,826    100.0 %   $ 349,488    100.0 %

Revenues increased by 25.8%, or $90.3 million, in 2012 compared to 2011. This increase was primarily due to the growth in the number of customers for our subscription services as well as higher transaction volumes. The growth in the number of customers for our subscription services reflects higher market demand for our subscription services and high rates of retention of existing subscription customers. We believe this demand reflects the market's growing awareness of our integrated travel and expense management solutions and the increasing acceptance of outsourced services. Additionally, the foreign currency impact had the effect of slightly decreasing our revenues when compared to the same period a year ago.
We expect revenues to grow in 2013 as a result of the growing demand for our subscription service offerings, our planned increase in spending on sales and marketing, and international expansion.

Cost of Operations
                             Year Ended September 30,       Variance
                                2012             2011       Dollars
Cost of operations        $     123,696       $ 98,267     $  25,429
Percent of total revenues          28.1 %         28.1 %

Cost of operations expenses as a percentage of total revenues remained consistent at 28.1% in both 2012 and 2011. Cost of operations expense increased by 25.9%, or $25.4 million, in 2012 compared to 2011. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $14.2 million (driven by increased headcount of approximately 50% to support our growing customer base) and an increase of $4.0 million in share-based compensation. In addition, initial set-up costs that we incur and then amortize in connection with our subscription services increased by $4.8 million and allocated overhead and infrastructure costs increased by $1.9 million. We expect cost of operations expenses to trend downward as a percentage of total revenues over the long term as the incremental cost to deploy and support each new customer is expected to decrease due to economies of scale anticipated in our subscription service model infrastructure. We anticipate that cost of operations will increase in absolute dollars as we continue to expand our capacity to deploy and support additional new customers.

Sales and Marketing

                             Year Ended September 30,       Variance
                               2012             2011        Dollars
Sales and marketing       $    175,514       $ 141,384     $  34,130
Percent of total revenues         39.9 %          40.5 %

Sales and marketing expenses increased by 24.1%, or $34.1 million, in 2012 compared to 2011. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $22.0 million, resulting from a headcount increase of approximately 30% to continue adding new customers and increasing penetration within our existing customer base. There was an increase in share-based compensation of $8.5 million, resulting from the issuance of stock awards to existing and new employees. Additionally, customer acquisition costs and amortization of those costs increased by $8.2 million, and advertising and marketing costs increased by $2.8 million. This was offset by a decrease of $9.0 million in compensation expense associated with the revaluation gain from the TripIt Acquisition contingent consideration, primarily resulting from the decrease in the fair value of contingent consideration (see Note 4 of the Notes to Consolidated Financial Statements).
We expect total sales and marketing expenses in 2013 to increase in absolute dollars compared to 2012, driven primarily by an increase in sales personnel and marketing programs globally. These increases reflect a key part of our strategic focus in 2013, which is to expand our sales and marketing efforts to create greater awareness of our subscription services in our target markets and to support expected demand.
Systems Development and Programming Costs


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                                       Year Ended September 30,       Variance
                                         2012             2011         Dollars
Systems development and programming $     43,794       $  34,787     $    9,007
Percent of total revenues                   10.0 %          10.0 %

Systems development and programming costs as a percentage of total revenues remained consistent year over year. Systems development and programming costs increased by 25.9% or $9.0 million, in 2012 compared to 2011. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $6.0 million, driven by an increase in headcount of approximately 30%. Additionally, depreciation expenses increased by $3.5 million as we continued to upgrade and extend our service offerings and develop new technologies. The increases were offset by a decrease of $1.0 million in compensation expense associated with the TripIt Acquisition contingent consideration, primarily resulting from the decrease in the fair value of contingent consideration (see Note 4 of the Notes to Consolidated Financial Statements).
In response to the demand for our subscription services, the majority of our systems and development resources are focused on developing internal-use software used to provide these services to our customers. We capitalize costs in accordance with accounting principles generally accepted in the United States ("GAAP") for software developed or obtained for internal use and amortize it over its estimated useful life. Capitalized internal-use software costs, net of amortization, increased by $9.6 million, to $36.6 million at September 30, 2012 as compared to $27.0 million at September 30, 2011.
We anticipate that recognized systems development and programming costs in 2013 will increase in absolute dollars compared to 2012 as we continue to focus on product innovation and enhancement.

General and Administrative
                              Year Ended September 30,       Variance
                                2012             2011        Dollars
General and administrative $     69,358       $  51,467     $  17,891
Percent of total revenues          15.8 %          14.7 %

General and administrative expenses increased by 34.8%, or $17.9 million, in 2012 compared to 2011. The growth in absolute dollars was primarily due to an increase in $9.2 million of personnel costs and related expenses, driven by an increase in headcount of approximately 20% to support our growth and $8.3 million increase in share-based compensation, resulting from additional equity awards issued to employees. Additionally, infrastructure costs increased by $2.2 million. These increases were offset by a decrease of $3.2 million in professional fees mainly attributable to lower acquisition, litigation and other related costs in 2012.
We expect the absolute dollar amount of general and administrative expenses to increase in 2013 compared to 2012 due to increases in personnel costs and infrastructure costs related to the growth of our business.

Revaluation of Contingent Consideration
                                                        Year Ended September 30,           Variance
                                                          2012              2011           Dollars
Revaluation of contingent consideration (gain)/loss $     (7,274 )      $     4,034     $    (11,308 )
Percent of total revenues                                   (1.7 )%             1.2 %

Revaluation of contingent consideration consisted of a gain of $7.3 million primarily relating to the TripIt Acquisition for 2012 compared to a loss of $4.0 million for 2011. The change in inputs applied to the valuation during the current period, which consisted primarily of the increase in our stock price, resulted in the change in the amount of the contingent consideration.

Amortization of Intangible Assets
                                     Year Ended September 30,       Variance
                                       2012             2011         Dollars
Amortization of intangible assets $     18,239       $  10,131     $    8,108
Percent of total revenues                  4.1 %           2.9 %

Amortization of intangible assets represents the amortization of the intangible assets from acquisitions. Amortization of


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intangible assets increased by $8.1 million in 2012, compared to 2011, primarily due to additional intangible assets acquired in 2012 and other acquisitions completed in 2011.
Interest Income, Interest Expense, Loss from Equity Investments and Other

                                Year Ended September 30,       Variance
                                  2012             2011        Dollars
Interest income              $      2,373       $   2,177     $    196
Interest expense                  (19,334 )       (18,527 )       (807 )
Loss from equity investments       (2,649 )          (890 )     (1,759 )
Other, net                         (1,237 )          (809 )       (428 )
Total other expense          $    (20,847 )     $ (18,049 )   $ (2,798 )

The loss from equity investments resulted from investments made in privately held companies. Under the equity method, we record our investment at cost and adjust the carrying amount of the investment to recognize our proportionate share of net income or loss, including adjustments to recognize certain differences between our carrying value and our equity in net assets, into our consolidated statements of operations after the date of investment. Interest expense primarily consists of interest on the Notes that we issued in April 2010. Foreign currency transaction gains (loss) are included in the consolidated statements of operations under other income (expense).

Income Tax Expense
                      Year Ended September 30,       Variance
                        2012             2011        Dollars
Income tax expense $     3,227        $  2,233      $     994
Effective tax rate       (74.2 )%        (25.9 )%

The effective income tax rate for 2012 was -74.2% compared to -25.9% for 2011. The negative effective tax rate for 2012 was primarily the result of losses in tax jurisdictions where we are not able to record a tax benefit, losses in tax jurisdictions where we have recorded a valuation allowance on deferred tax assets and the establishment of income tax reserves, partially offset by income from the revaluation of the contingent consideration which is not subject to income taxes, research and development tax credits, and earnings in lower-tax jurisdictions for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the United States, measured against a pretax loss for the year.
We are subject to income taxes in the United States and numerous foreign jurisdictions. The overall effective tax rate will continue to be dependent upon the geographic distribution of our earnings or losses and changes in tax laws or interpretations of these laws in these operating jurisdictions. We monitor the assumptions used in estimating the annual effective tax rate and make adjustments, if required, throughout the year. If actual results differ from the assumptions used in estimating our annual income tax rates, future income tax expense could be materially affected.
We measure and recognize uncertain tax positions. To recognize such positions we must first determine if it is more likely than not that the position will be sustained on audit. We then must measure the benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. For those positions that require a reserve and are in a net operating loss position, we do not include interest and penalties related to those contingencies in our income tax expense.
Fiscal years 2011 and 2010

Revenues
              Year Ended September 30,         Variance
                 2011               2010       Dollars
Revenues $     349,488           $ 292,936    $  56,552


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Year Ended September 30,
                  2011         %         2010         %
United States  $ 299,994     85.8 %   $ 254,751     87.0 %
Europe            36,260     10.4 %      25,963      8.8 %
Other             13,234      3.8 %      12,222      4.2 %
Total revenues $ 349,488    100.0 %   $ 292,936    100.0 %

Revenues increased by 19.3%, or $56.6 million, in 2011 compared to 2010. This increase reflects growth in the number of customers for our subscription services, as a result of higher market demand for our subscription services and high rates of retention of existing subscription customers. We believe this demand reflects the market's continued and growing awareness of our integrated travel and expense management solutions, and the increasing acceptance of outsourced services which is driven in part by limited information technology capital budgets.

Cost of Operations
                             Year Ended September 30,       Variance
                               2011             2010        Dollars
Cost of operations        $     98,267       $  81,737     $  16,530
Percent of total revenues         28.1 %          27.9 %

Cost of operations expense increased by 20.2%, or $16.5 million, in 2011, compared to 2010. The growth in absolute dollars was primarily due to an increase of $6.7 million in personnel costs and related expenses, driven by an increase in headcount of 20% and an increase of share-based compensation by $1.0 million as a result of equity awards issued to new and existing employees. Additionally, there was an increase of $6.9 million in initial set-up costs that we incur and then amortize in connection with our subscription services and an increase in allocated overhead and infrastructure costs of $1.2 million.

Sales and Marketing
                             Year Ended September 30,       Variance
                                2011             2010       Dollars
Sales and marketing       $     141,384       $ 96,955     $  44,429
Percent of total revenues          40.5 %         33.1 %

Sales and marketing expenses increased by 45.8%, or $44.4 million, in 2011, compared to 2010. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $17.8 million, primarily resulting from an increase in headcount of approximately 30% to add new customers and increase penetration within our existing customer base. In addition, share-based compensation increased by $9.5 million in 2011 compared to 2010, resulting from equity awards issued to new and existing employees. Additionally, there was an increase of $8.6 million in compensation expense associated with TripIt Acquisition contingent consideration (see Note 4 of the Notes to Consolidated Financial Statements). Customer acquisition costs and amortization of those costs increased by $5.8 million, and advertising and marketing costs increased by $1.4 million. Systems Development and Programming Costs

                                       Year Ended September 30,       Variance
                                         2011             2010         Dollars
Systems development and programming $     34,787       $  27,236     $    7,551
Percent of total revenues                   10.0 %           9.3 %

Systems development and programming costs increased by 27.7%, or $7.6 million, in 2011 compared to 2010. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $0.9 million, mainly attributable to increased headcount of approximately 30% and an increase in share-based compensation by $3.2 million, resulting from the issuance of equity awards to existing and new employees. Additionally, there was an increase of $0.9 million in compensation expense associated with TripIt Acquisition contingent consideration (see Note 4 of Notes to Consolidated Financial Statements). Allocated overhead and infrastructure costs increased by $2.3 million, primarily due to an increase in depreciation costs as we continued to upgrade and extend our service offerings and develop new technologies. In response to the demand for our subscription services, the majority of our systems and development resources are

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