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COVS > SEC Filings for COVS > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for COVISINT CORP

Form 10-Q for COVISINT CORP


6-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report under "Part II, Other Information-Item 1A, Risk Factors." Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

OVERVIEW
Covisint provides a leading cloud engagement platform for enabling organizations to securely connect, engage and collaborate with large, distributed communities of customers, business partners, and suppliers. Our platform allows global organizations with complex external business relationships to create, streamline and automate external mission-critical business processes that involve the secure exchange of and access to critical information from multiple sources. Our customers deploy our platform to deliver on current and new business initiatives, enhance competitiveness, create new revenue opportunities, increase customer retention and lower operating costs. We have been recognized as a leader in the emerging cloud engagement market due to our market share, technical capabilities and history of successful deployments.
Our platform currently supports customers in the automotive, healthcare, energy, financial services and travel industries. We believe a wide variety of organizations will benefit from using our cloud-based technologies to meet their external collaboration requirements with their customers, business partners and suppliers. We believe we have yet to significantly penetrate the growing available market for our technologies and have a significant opportunity to sell additional solutions to our current customers. We believe the use of our solutions and the development of our markets are at very early stages and that it is important that we build brand awareness, develop channel partners and invest in our platform, vertical solutions, infrastructure and sales and marketing to maintain and extend our leadership in the cloud-based services market.
We generate the majority of our revenue through subscription fees that enable our customers to access our platform. Subscription and support revenue accounted for $16.2 million and $13.6 million, or 66% of our total revenue, during the three months ended September 30, 2013 and 2012, respectively, and $32.1 million and $26.7 million, or 66% and 65% of our total revenue, during the six months ended September 30, 2013 and 2012, respectively. We typically bill subscription fees in advance. Our subscription contract lengths primarily range from one to five years and are typically 36 months. The value of our subscription contracts varies significantly for each customer agreement and is typically related to the number of users or volume of transactions associated with the deployment. Our customers pay us for a minimum level of platform usage. Periodically, a customer's utilization may exceed its committed minimum level, in which case the customer is required to pay us additional fees, called overages. We also generate revenue from the provision of services related to implementation, solution deployment and on-boarding of new customers onto our platform. Services revenue accounted for $8.4 million and $7.0 million, or 34% of our total revenue, during the three months ended September 30, 2013 and 2012, respectively, and $16.5 million and $14.5 million, or 34% and 35% of our total revenue, during the six months ended September 30, 2013 and 2012, respectively We typically bill a portion of our services fees in advance and the remaining balance upon customer acceptance. Services contract value varies significantly for each customer agreement and is typically related to the complexity of the deployment. We consider our backlog balance to be future years of contractually committed arrangements, of which only the billed amounts are included in deferred revenue. As of September 30, 2013 and 2012, our backlog balance was approximately $113.3 million and $108.9 million, respectively.
We sell our solutions through our direct sales force and through our channel partner. We target certain vertical markets and sell to large organizations as well as the interconnected smaller organizations that act as suppliers or business partners. We have over 3,000 customers that have deployed our platform to connect to over 80,000 of their customers, business partners and suppliers. This allows more than 18 million users to access the mission-critical applications and information provided by our customers. Our customers include approximately 150 core platform customers, which represented 95% and 94% of our total revenue for the three


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months ended September 30, 2013 and 2012, respectively, and 94% of our total revenue for both the six months ended September 30, 2013 and 2012. Our remaining customers include a variety of organizations that pay us a relatively nominal fee to either connect to one of our core platform customers or use one of our industry-specific solutions.
The automotive industry accounted for 48% and 55% of our total revenue in the three months ended September 30, 2013 and 2012, respectively, and 51% and 57% of our total revenue in the six months ended September 30, 2013 and 2012, respectively, of which approximately 26%, 33%, 26%, and 35% of our total revenue for such periods was derived from General Motors. We have successfully expanded our customer base from the automotive to the healthcare industry, which accounted for 35% and 32% of our total revenue in the three months ended September 30, 2013 and 2012, respectively, and 32% and 30% of our total revenue in the six months ended September 30, 2013 and 2012, and to the energy, financial services, and travel industries. Revenue from outside of the U.S. accounted for 14%, of our total revenue in each of the three months ended September 30, 2013 and 2012 and the six months ended September 30, 2013 and 2012. We intend to continue expanding our business into additional vertical markets and geographies and expect our revenue to diversify accordingly. Supporting new regulatory and technology requirements as a result of our diversification initiatives may result in increased operating costs and capital expenditures.
Our subscription and support revenue has grown to $16.2 million in the three months ended September 30, 2013 from $13.6 million in the three months ended September 30, 2012, representing an annual growth rate of 19%. Our subscription and support revenue has grown to $32.1 million in the six months ended September 30, 2013 from $26.7 million in the six months ended September 30, 2012, representing an annual growth rate of 20%. Historically, we have experienced significant revenue growth from existing customers as they renew and purchase additional subscriptions. Of the increase in subscription and support revenue between the three months ended September 30, 2013 and 2012, approximately $1.9 million was due to increased revenue from existing customers. Additionally, there was approximately $0.9 million from sales to new customers, offset by a decline in revenue from customers that terminated or elected not to renew their agreements aggregating approximately $0.3 million, between the three months ended September 30, 2013 and 2012. Of the increase in subscription and support revenue between the six months ended September 30, 2013 and 2012, approximately $4.4 million was due to increased revenue from existing customers. Additionally, there was approximately $1.6 million from sales to new customers, offset by a decline in revenue from customers that terminated or elected not to renew their agreements aggregating approximately $0.6 million, between the six months ended September 30, 2013 and 2012.

Our services revenue has grown to $8.4 million in the three months ended September 30, 2013 from $7.0 million in the three months ended September 30, 2012, representing an annual growth rate of 20%. Our services revenue has grown to $16.5 million in the six months ended September 30, 2013 from $14.5 million in the six months ended September 30, 2012, representing an annual growth rate of 14%. As discussed below under "Components of Our Results of Operations-Cost of Revenue," we recognized a larger percentage of our services revenue as delivered during the years ended March 31, 2013 and 2012, as compared to the prior years, as a result of having obtained evidence of stand-alone value for many of these services, which allowed us to recognize revenue using the proportional performance method.
We experienced combined net income (losses) of ($12.7) million and ($2.3) million for the three months ended September 30, 2013 and 2012, respectively, and ($17.4) million and ($2.2) million for the six months ended September 30, 2013 and 2012, respectively. As presented in "Note 5. Benefit Plans - Stock Awards Compensation" within the accompanying notes to the condensed, combined and consolidated financial statements, our loss was primarily due to stock compensation expense of $10.0 million and $10.5 million, respectively, in the three and six months ended September 30, 2013 which was primarily a result of our IPO. Prior to the three months ended September 30, 2013, these losses were mainly due to the substantial investments we made, and continue to make, to build our solutions and services, grow and maintain our business and acquire customers. Our profitability was also negatively affected by decreased capitalization of our research and development costs during the three months ended September 30, 2013 and the six months ended September 30, 2013, as compared to the same periods in 2012, due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This change increased the proportion of our research and development costs expensed relative to our research and development costs incurred.
KEY METRICS
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we monitor non-GAAP measures of non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. Each of these financial measures excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP. These non-GAAP financial measures exclude the impact of stock award compensation expense, the amortization of intangible assets and amounts incurred for capitalized internal software costs.
We monitor these non-GAAP measures to evaluate its ongoing operational performance and enhance an overall understanding of its past financial performance. We believe that these non-GAAP metrics help illustrate underlying trends in its business that


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could otherwise be masked by the effect of the income or expenses, as well as the related tax effects, that are excluded in non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. Furthermore, we use these measures to establish budgets and operational goals for managing its business and evaluating its performance. We also believe that these non-GAAP measures provide additional tools for investors to use in comparing its recurring core business operating results over multiple periods with other companies in its industry.
The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of the non-GAAP financial measures presented below to the most directly comparable GAAP financial measures has been provided for each respective line item. Management uses both GAAP and non-GAAP information in evaluating and operating its business internally and as such has determined that it is important to provide this information to investors.

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