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CNQR > SEC Filings for CNQR > Form 10-Q on 6-May-2013All Recent SEC Filings

Show all filings for CONCUR TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CONCUR TECHNOLOGIES INC


6-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with the Financial Statements and Notes to Consolidated Financial Statements that are included in Item 1 of this report. Also, the discussion of "Critical Accounting Policies and Estimates" in this section is an integral part of the analysis of our results of operations and financial condition.
Throughout this MD&A, we refer to Concur Technologies, Inc. as "Concur," the "Company," "we," "us" and "our." We report our operating results on a fiscal year basis that starts October 1 and ends September 30. We refer to our fiscal years ended September 30, 2011, 2012 and 2013, as "2011," "2012" and "2013." Throughout this MD&A, where we provide discussion of the three and six months ended March 31, 2013, and we provide data for the same period in the prior year, we refer to the prior period as "2012." All dollar, option and share amounts are reported in thousands, unless otherwise noted. Special Note Regarding Forward-Looking Statements This document 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, of Part II, as well as in our other filings with the Securities and Exchange Commission ("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 for any reason. 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


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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 15% and 16% of total revenues for the three and six months ended March 31, 2013, respectively, compared to 16% for the same periods 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 consists 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 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 re-measure 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 names and trademarks.
Results of Operations
Three Months Ended March 31, 2013 and 2012 Revenues


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               Three Months Ended March 31,          Variance
                    2013                  2012       Dollars
Revenues $       127,370               $ 108,394    $  18,976


                     Three Months Ended March 31,
                  2013        %         2012        %
United States  $ 107,725    84.6 %   $  91,568    84.4 %
Europe            14,163    11.1 %      12,857    11.9 %
Other              5,482     4.3 %       3,969     3.7 %
Total revenues $ 127,370     100 %   $ 108,394     100 %

Revenues increased by 17.5%, or $19.0 million, for the three months ended March 31, 2013, 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 continue 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 March 31,        Variance
                                2013               2012           Dollars
Cost of operations        $      36,564       $      30,285     $    6,279
Percent of total revenues          28.7 %              27.9 %

Cost of operations increased by 20.7%, or $6.3 million, for the three months ended March 31, 2013, 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 $3.4 million, driven by increased headcount of approximately 40% to support our growing customer base. Additionally, initial set up costs, which we incur and then amortize in connection with our subscription services, increased by $1.2 million. Further, allocated overhead and infrastructure costs increased by $1.3 million.
We expect cost of operations 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 March 31,        Variance
                                2013               2012          Dollars
Sales and marketing       $      55,518       $      41,878     $  13,640
Percent of total revenues          43.6 %              38.6 %

Sales and marketing expenses increased by 32.6%, or $13.6 million, for the three months ended March 31, 2013, 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 $8.1 million, resulting from a headcount increase of approximately 40% to continue adding new customers and increasing penetration within our existing customer base. Additionally, share-based compensation increased by $1.8 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, advertising costs increased by $1.1 million, and allocated overhead and infrastructure costs increased by $0.8 million, each as 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 key elements of our 2013 strategic focus of expanding our sales and marketing efforts to create greater awareness of our subscription services in our target markets and to support expected demand.


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Systems Development and Programming
                                       Three Months Ended March 31,        Variance
                                          2013               2012           Dollars
Systems development and programming $      13,799       $      10,024     $    3,775
Percent of total revenues                    10.8 %               9.2 %

Systems development and programming costs increased by 37.7%, or $3.8 million, for the three months ended March 31, 2013, 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 $1.8 million, driven by increased headcount of approximately 30% to upgrade and extend our service offerings and develop new technologies. Additionally, share-based compensation increased by $0.9 million, resulting from the issuance of share-based awards to employees. Further, allocated overhead and infrastructure costs increased by $1.2 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 $2.0 million, from $39.5 million at December 31, 2012, to $41.5 million at March 31, 2013.
We anticipate that 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 March 31,        Variance
                                 2013               2012           Dollars
General and administrative $      20,280       $      16,577     $    3,703
Percent of total revenues           15.9 %              15.3 %

General and administrative expenses increased by 22.3%, or $3.7 million, for the three months ended March 31, 2013, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase of $1.3 million in personnel costs and related expenses, driven by a headcount increase of approximately 30% to support our growth, and a $0.8 million increase in share-based compensation, resulting from the issuance of share-based awards issued to employees. Additionally, infrastructure costs increased by $0.6 million as we continue to facilitate our growth, and professional fees increased by $1.2 million mainly as a result of acquisitions, litigation and other related costs.
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 March 31,        Variance
                                             2013                2012          Dollars
Revaluation of contingent consideration $     (677 )       $      (1,138 )    $     461
Percent of total revenues                     (0.5 )%               (1.0 )%

Revaluation of contingent consideration consisted of a gain of $0.7 million primarily relating to the acquisition of TripIt for the three months ended March 31, 2013 compared to a gain of $1.1 million for same period in the prior year. The change in inputs applied to the valuation of contingent consideration, including the change in our stock price and stock volatility, resulted in the revaluation gains or losses of the contingent consideration.

Amortization of Intangible Assets
                                     Three Months Ended March 31,        Variance
                                        2013               2012          Dollars
Amortization of intangible assets $       4,539       $       4,634     $    (95 )
Percent of total revenues                   3.6 %               4.3 %

Amortization of intangible assets remained consistent for the three months ended March 31, 2013 compared to the same period in the prior year.


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Interest Income, Interest Expense, Loss from Equity Investments and Other

                                Three Months Ended March 31,        Variance
                                   2013               2012          Dollars
Interest income              $         490       $         530     $    (40 )
Interest expense                    (5,128 )            (4,807 )       (321 )
Loss from equity investments          (767 )              (570 )       (197 )
Other, net                            (473 )                55         (528 )
Total other expense, net     $      (5,878 )     $      (4,792 )   $ (1,086 )

We record equity method adjustments in gains (losses) from 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 (losses) are included in the consolidated statements of operations under other income (expense).

Income Tax Expense
                                Three Months Ended March 31,       Variance
                                  2013               2012          Dollars
Income tax expense (benefit) $      (678 )     $       6,305      $ (6,983 )
Effective tax rate                   7.9 %             469.8 %

For the three months ended March 31, 2013, our effective tax rate of 7.9% differs from the U.S. federal statutory rate primarily due to 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, income from the revaluation of the contingent consideration, which is not subject to taxes and expenses not deductible for tax purposes, partially offset by the recognition of a tax benefit resulting from legislation enacted January 2, 2013 retroactively reinstating the research and development tax credit 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. For the three months ended March 31, 2012, our effective tax rate of 469.8% 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.
Six Months Ended March 31, 2013 and 2012

Revenues
              Six Months Ended March 31,          Variance
                   2013                2012       Dollars
Revenues $      250,168             $ 208,778    $  41,390


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Six Months Ended March 31,
                  2013        %         2012        %
United States  $ 211,116    84.4 %   $ 176,405    84.5 %
Europe            28,390    11.3 %      24,585    11.8 %
Other             10,662     4.3 %       7,788     3.7 %
Total revenues $ 250,168     100 %   $ 208,778     100 %

Revenues increased by 19.8%, or $41.4 million, for the six months ended March 31, 2013, 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 continue 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
                              Six Months Ended March 31,         Variance
                                2013               2012          Dollars
Cost of operations        $      71,560       $      59,255     $  12,305
Percent of total revenues          28.6 %              28.4 %

Cost of operations increased by 20.8%, or $12.3 million, for the six months ended March 31, 2013, 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 $7.6 million, driven by increased headcount of approximately 50% to support our growing customer base. Additionally, share-based compensation increased by $1.4 million, resulting from the issuance of share-based awards to employees. Additionally, initial set-up costs that we incur and then amortize in connection with our subscription services increased by $1.2 million. Further, allocated overhead and infrastructure costs increased by $2.0 million. We expect cost of operations 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
                             Six Months Ended March 31,       Variance
                                2013              2012        Dollars
Sales and marketing       $      110,460       $  82,223     $  28,237
Percent of total revenues           44.2 %          39.4 %

Sales and marketing expenses increased by 34.3%, or $28.2 million, for the six months ended March 31, 2013, 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 $16.3 million, resulting from a headcount increase of approximately 40% to continue adding new customers and increasing penetration within our existing customer base. Additionally, share-based compensation increased by $4.1 million, resulting from the issuance of share-based awards to employees. Further, customer acquisition costs and amortization of those costs increased by $4.8 million, advertising costs increased by $2.3 million, and allocated overhead and infrastructure costs increased by $1.6 million, each as compared to the same period in the prior year. This was offset by a decrease of $0.8 million in contingent consideration associated with the TripIt Acquisition that is included in compensation expense (see Note 12 to 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 key elements of our 2013 strategic focus of expanding 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


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                                        Six Months Ended March 31,         Variance
                                          2013               2012           Dollars
Systems development and programming $      28,026       $      19,747     $    8,279
Percent of total revenues                    11.2 %               9.5 %

Systems development and programming costs increased by 41.9%, or $8.3 million, for the six months ended March 31, 2013, 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 $4.5 million, driven by increased headcount of approximately 35% to upgrade and extend our service offerings and develop new technologies. Additionally, share-based compensation increased by $1.6 million, resulting from the issuance of share-based awards to employees. Further, allocated overhead and infrastructure costs increased by $2.3 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 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 $4.9 million, from $36.6 million at September 30, 2012, to $41.5 million at March 31, 2013.
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. . . .

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