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.
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 16% of total revenues for the three months ended December 31, 2012, compared to 15% for the same period in the prior year. We expect continued growth in our international revenues, as our products and services continue to gain acceptance in international markets due to our investment in global distribution and increased global awareness of our products. 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 employees and contractors, and other sales and marketing costs, such as advertising, trade shows and other promotional activities.
Systems Development and Programming. Systems development and programming expenses 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), and 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 amortize 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

Three Months Ended December 31, 2012 and 2011

Revenues
               Three Months Ended December 31,           Variance
                      2012                    2011       Dollars
Revenues $        122,798                  $ 100,384    $  22,414

Three Months Ended December 31,

                   2012         %         2011        %
United States  $   103,391    84.2 %   $  84,837    84.5 %
Europe              14,227    11.6 %      11,728    11.7 %
Other                5,180     4.2 %       3,819     3.8 %
Total revenues $   122,798     100 %   $ 100,384     100 %

Revenues increased 22.3%, or $22.4 million, for the three months ended December 31, 2012, compared to the same period in the prior year. This increase was primarily due to 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.
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
                             Three Months Ended December 31,       Variance
                                2012                 2011           Dollars
Cost of operations        $       34,996       $       28,970     $    6,026
Percent of total revenues           28.5 %               28.9 %

Cost of operations expense increased by 20.8%, or $6.0 million, for the three months ended December 31, 2012, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $4.2 million, driven by increased headcount of approximately 60% to support our growing customer base. Additionally, there was an increase in share-based compensation of $1.0 million, resulting from the issuance of share-based awards to employees. Further, allocated overhead and infrastructure costs increased by $0.7 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 continue to increase in absolute dollars in 2013 as we continue to expand our capacity to deploy and support additional new customers.

Sales and Marketing
                             Three Months Ended December 31,       Variance
                                2012                 2011          Dollars
Sales and marketing       $       54,942       $       40,345     $  14,597
Percent of total revenues           44.7 %               40.2 %

Sales and marketing expenses increased by 36.2%, or $14.6 million, for the three months ended December 31, 2012, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $8.2 million, resulting from a headcount increase of approximately 40% to continue adding new customers and increasing penetration within our existing customer base. Additionally, there was an increase in share-based compensation of $2.3 million, resulting from the issuance of share-based awards to employees. Further, customer acquisition costs and amortization of those costs increased by $2.4 million and advertising costs increased by $1.3 million compared to the same period in the prior year. 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
                                       Three Months Ended December 31,       Variance
                                           2012                2011           Dollars
Systems development and programming $        14,227       $       9,723     $    4,504
Percent of total revenues                      11.6 %               9.7 %

Systems development and programming costs increased by 46.3%, or $4.5 million, for the three months ended December 31, 2012, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expense of $2.7 million, driven by increased headcount of approximately 35% to upgrade and extend our service offerings and develop new technologies. Additionally, there was an increase in share-based compensation of $0.7 million, resulting from the issuance of share-based awards to employees. Further, depreciation expenses increased by $1.0 million. In response to the demand for our subscription services, the majority of our systems 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 $2.9 million, from $36.6 million at September 30, 2012, to $39.5 million at December 31, 2012.
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
                              Three Months Ended December 31,       Variance
                                 2012                 2011           Dollars
General and administrative $       19,632       $       15,167     $    4,465
Percent of total revenues            16.0 %               15.1 %

General and administrative expenses increased by 29.4%, or $4.5 million, for the three months ended December 31, 2012, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase of $1.9 million in personnel costs and related expenses, driven by a headcount increase of approximately 35% to support our growth, and a $2.0 million increase in share-based compensation, resulting from the issuance of share-based awards issued to employees. Additionally, there was an increase of $0.4 million in infrastructure costs as we continue to facilitate our growth.
We expect the absolute dollar amount of general and administrative expenses to continue to increase in 2013 compared to 2012 due to increases in personnel costs and infrastructure related to the growth of our business.

Revaluation of Contingent Consideration
                                                     Three Months Ended December 31,        Variance
                                                        2012                2011            Dollars
Revaluation of contingent consideration           $       2,809       $       (2,439 )    $    5,248
Percent of total revenues                                   2.3 %               (2.4 )%

Revaluation of contingent consideration consisted of a loss of $2.8 million primarily relating to the acquisition of TripIt for the three months ended December 31, 2012 compared to a gain of $2.4 million for same period in the prior year. The change in inputs applied to the valuation of contingent consideration, including the decrease in our stock price and decrease in stock volatility, resulted in the revaluation loss of the contingent consideration.

Amortization of Intangible Assets
                                       Three Months Ended December 31,         Variance
                                         2012                   2011           Dollars
Amortization of intangible assets $         4,464         $         3,965     $     499
Percent of total revenues                     3.6 %                   3.9 %

Amortization of intangible assets increased by $0.5 million for the three months ended December 31, 2012, compared to the same period in the prior year, primarily due to a full period of amortization for the intangibles acquired during the first fiscal quarter of 2012.
Interest Income, Interest Expense, Loss from Equity Investments and Other

                                Three Months Ended December 31,       Variance
                                   2012                 2011          Dollars
Interest income              $          554       $          482     $     72
Interest expense                     (4,968 )             (4,755 )       (213 )
Loss from equity investments           (601 )               (496 )       (105 )
Other, net                              (88 )               (478 )        390
Total other expense, net     $       (5,103 )     $       (5,247 )   $    144

We record equity method adjustments in gains (losses) on equity investments in our consolidated statements of operations. Equity method adjustments primarily include our proportionate share of investee income or loss, adjustments to recognize certain differences between our carrying value and our equity in the investee's net assets at the date of investment, impairments, and other adjustments required by the equity method.
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
                                 Three Months Ended December 31,         Variance
                                     2012                   2011         Dollars
Income tax expense (benefit) $          (1,057 )       $       353      $ (1,410 )
Effective tax rate                         7.9 %             (59.4 )%

For the three months ended December 31, 2012, our effective tax rate of 7.9% differs from the U.S. federal statutory rate primarily due to losses in tax jurisdictions where we were not able to record a tax benefit, losses in tax jurisdictions where we have recorded a valuation allowance on deferred tax assets, and revaluation of the contingent consideration which is not subject to income taxes, partially offset by the 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.
On January 2, 2013, subsequent to our first quarter, the American Taxpayer Relief Act of 2012 was enacted which retroactively reinstated and extended the Federal Research and Development Tax Credit ("Federal R&D Tax Credit") from January 1, 2012 to December 31, 2013. As a result, we expect our income tax provision for the second quarter of fiscal year 2013 will include a benefit for the Federal R&D Tax Credit from October 1, 2012 to September 30, 2013 and a discrete tax benefit for the previously expired period from January 1, 2012 to September 30, 2012. Since the enactment date of the American Taxpayer Relief Act of 2012 is subsequent to the first quarter, we did not include the benefit from Federal R&D Tax Credit extension in our effective tax rate. We are in the process of evaluating the impact and expect to include the full year impact of the Federal R&D Tax Credit extension in the second quarter of fiscal year 2013. For the three months ended December 31, 2011, our effective tax rate of (59.4)% varies from the U.S. federal statutory rate primarily due to the relative mix of earnings or losses within the tax jurisdictions in which we operate, losses in tax jurisdictions where we were not able to record a tax benefit, as well as various book expenses which were not deductible for tax purposes. 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 first determine if it is more likely than not that the position will be sustained on audit. We then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We do not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the next twelve months. Tax positions for Concur and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. However, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.

Liquidity and Capital Resources
Our available sources of liquidity as of December 31, 2012, consisted
principally of cash, cash equivalents and short-term investments totaling $484.6
million. Our cash, cash equivalents and short-term investments are comprised
primarily of time deposits, commercial paper, fixed income securities, and
certificates of deposit.
Our cash flows were as follows:
                                 Three Months Ended December 31,
                                2012             2011        $ Change
Cash provided by (used in):
Operating activities        $    5,049       $    6,357     $ (1,308 )
Investing activities           (76,035 )       (128,848 )     52,813
Financing activities             1,068              497          571

Operating Activities
Our operating cash inflows consist of payments received from our customers related to our subscription and other product offerings. Our operating cash outflows mainly consist of payments of compensation to employees, payments to vendors directly related to our services, related sales and marketing and administrative costs, costs of operations, and systems development and programming costs. Net cash provided by operating activities was $5.0 million for the three months ended December 31, 2012, compared to $6.4 million for the same period in the prior year. The decrease in operating cash flows was primarily driven by the changes in working capital accounts, particularly additional use of cash from the compensation related annual payout. Investing Activities
Investing activities generally correspond with purchases, sales, and maturities of investments, cash outlays for acquisitions, strategic investments, capital expenditures including leasehold improvements and internal-use software, and changes in customer funding liabilities, net of the change in restricted cash. Our investing activities used $76.0 million for the three months ended December 31, 2012, compared to $128.8 million for the same period in the prior year. The decrease in cash outflows was primarily due to strategic activities, net purchases of short-term investments, and changes in customer funding liabilities, net of the change in restricted cash. In terms of strategic activities, we used $67.5 million of cash for the asset acquisition from ADP, Inc. during the three months ended December 31, 2011. We used $17.3 million in the strategic investments and loans to the investees during the three months ended December 31, 2012, compared to $6.9 million for the same period in the prior year. Additionally, net purchases of our short-term investments used $51.2 million for the three months ended December 31, 2012, compared to $35.9 million from the same period in the prior year. Customer funding liability activities provided $3.0 million of cash for the three months ended December 31, 2012, compared to a use of cash of $11.0 million for the same period in the prior year.
Financing Activities
Cash provided by financing activities increased $0.6 million for the three months ended December 31, 2012, compared to the same period in the prior year, due mainly to $0.4 million decrease in cash used for common stock repurchases. Senior Convertible Notes
In March 2010, we issued Notes, Notes Hedges, and Warrants for general corporate purposes, including potential acquisitions and strategic transactions. The Notes will mature on April 15, 2015, unless converted earlier. As of December 31, 2012, no Notes have been repurchased or converted. We also have not received any shares under the Notes Hedge or delivered cash or shares under the Warrants. The Company's common stock price did not exceed 130% of the applicable conversion price for 20 trading days during the 30 consecutive trading day period during the quarter ended December 31, 2012. Accordingly, the Notes will not be convertible at the holders' option for the quarter ending March 31, 2013. For further information, see Note 9 of the Notes to Consolidated Financial Statements.
Stock Repurchase
Our Board of Directors previously authorized a stock repurchase program ("Repurchase Program") that allowed us to repurchase up to 9.0 million shares of our common stock through January 2013. In December 2011, our Board of Directors extended the Repurchase Program for an additional two-year period expiring in January 2015, and increased the number of shares eligible for repurchase by an additional 3.0 million shares to 12.0 million shares. We may repurchase our common stock

from time to time in the open market based on market conditions. During the three months ended December 31, 2012 and 2011, we repurchased 3.3 shares and 12.8 shares of our outstanding common stock for a total cost of $0.2 million and $0.5 million, respectively, under this program. As of December 31, 2012, we remain authorized to repurchase up to 7.1 million shares out of the authorized 12.0 million shares under the Repurchase Program.
We believe our cash, cash equivalents, and short-term investment amounts, as well as expected positive operating cash flows, will be sufficient to meet our anticipated cash needs for normal business operations, working capital needs, and capital expenditures for at least the next 12 months. In the longer term, or if we decide to acquire assets or businesses, we may require additional funds and may seek to raise such additional funds through private or public sales of debt or equity securities, or securities convertible or exchangeable into such securities, strategic relationships, bank debt, lease financing arrangements or other available means. There can be no assurances that any such funds will be available or, if available, will be on acceptable terms to meet our business . . .