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COVS > SEC Filings for COVS > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for COVISINT CORP

Form 10-Q for COVISINT CORP


7-Aug-2014

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 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 there is a growing available market for our technologies. 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 strategic 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.
The majority of our revenue is generated through subscription and support fees paid to enable our customers to access our platform. Subscription and support revenue accounted for $15.5 million and $15.9 million, or 72% and 66% of our total revenue, for the three months ended June 30, 2014 and 2013, respectively. We also generate revenue from the provision of services related to implementation, solution deployment and on-boarding of new customers onto our platform, and the performance of projects and enhancements. Services revenue accounted for $6.1 million and $8.2 million, or 28% and 34% of our total revenue, for the three months ended June 30, 2014 and 2013, respectively. Since March 2014, the Company has undertaken a substantive review of all aspects of its business, including a review of the Company's leadership, organizational structure, sales performance, product, and deployment of resources. As a result of this assessment, the Company has undertaken a series of strategic initiatives to refocus and reposition the Company for success in fiscal year 2016 and beyond. We accelerated the Company's transition from a services and software company to a true cloud-based enterprise software company with a go-to market strategy based upon repeatable, platform-based sales. We are enhancing the ability of our customers and service partners to implement and develop on the platform with limited involvement of Company resources. We are investing in developing our relationships with strategic partners, like Cisco Systems, Inc., who provide extensive


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global sales presence to access customers that we would not otherwise reach, thereby providing Covisint with additional scale and bandwidth to sell our core subscription business. We launched our certified partner program and aggressively moved to enhance our partners' abilities to provide service to our customers by agreeing to transfer some of our customer service employees to one of our certified partners. Finally, on May 22, 2014, the Company effectuated a reduction in force of contractors and 69 employees in sales, marketing, operations and research and development. In addition, 21 employees left the company during the three months ended June 30, 2014 through normal attrition. The automotive industry accounted for 45% and 53% of our total revenue for the three months ended June 30, 2014 and 2013, respectively. The healthcare industry accounted for 32% and 31% of our total revenue for the three months ended June 30, 2014 and 2013, respectively. We have seen increases in revenue from our Enterprise business unit that services the energy, financial services, travel and other non-automotive or healthcare industries, which accounted for 22% and 16% of our total revenue for the three months ended June 30, 2014 and 2013, respectively. Revenue from outside of the U.S. accounted for 18% and 14% of our total revenue for the three months ended June 30, 2014 and 2013, respectively. Our subscription and support revenue decreased to $15.5 million for the three months ended June 30, 2014 from $15.9 million for the three months ended June 30, 2013, representing an annual decline of 3%. The decrease in subscription and support revenue between the three months ended June 30, 2014 and 2013 was primarily due a decline in revenue from customers that terminated or elected not to renew their agreements of $1.3 million, including two automotive customers that substantially reduced their contractual commitment for our electronic data interchange services during fiscal 2014. The decrease in subscription and support revenue between the three months ended June 30, 2014 and 2013 was partially offset by $0.9 million of increased revenue from sales to new and existing customers.
Our services revenue declined to $6.1 million for the three months ended June 30, 2014 from $8.2 million for the three months ended June 30, 2013, representing a period over period decline of 25%. Services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 4) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 5) our relatively low subscription bookings in the 2014 fiscal year.

We experienced net income (losses) of ($12.1) million and ($4.7) million for the three months ended June 30, 2014 and 2013, respectively. Our change in net income (losses) was a result of, a $2.5 million decrease in revenues, a $2.0 million increase in our cost of revenue and a $3.0 million increase in operating expenses, primarily sales and marketing. Our increase in expenses was primarily due to a $2.1 million increase in stock compensation expenses, a $1.3 million increase in salaries and personnel related expenses, and a $1.1 million decrease in capitalized research and development. As presented in "Note 5. Benefit Plans
- Stock Awards Compensation" within the accompanying notes to the condensed consolidated financial statements, our loss included stock compensation expense of $2.6 million and $0.5 million, respectively, in the three months ended June 30, 2014 and the three months ended June 30, 2013, which primarily resulted from our IPO.

KEY METRICS
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we monitor a number of other metrics to evaluate our business, measure our performance, identify trends affecting our business, allocate capital and make strategic decisions.

Adjusted Gross Profit and Adjusted Gross Margin Adjusted gross profit represents gross profit, adjusted for amortization of capitalized software associated with our research and development expense classified within cost of revenue as well as the stock based compensation associated with certain of our professional services and operations employees. Adjusted gross margin is adjusted gross profit as a percentage of revenue. We have historically capitalized a significant portion of our research and development costs and believe the amortization of capitalized software will increase in absolute dollars. Our total research and development costs incurred were $3.9 million and $4.5 million during the three months ended June 30, 2014 and 2013, respectively. Of our total research and development costs incurred, we capitalized 20% and 43% during the three months ended June 30, 2014 and 2013. We decreased capitalization of our research and development costs during the three months ended June 30, 2014, as compared to the same period in 2013, due to the timing and stage of our initiatives. In the three months ended June 30, 2014, there was an increase of projects in the planning stage and, thus more of our project costs were not capitalized.
We believe that adjusted gross margin, when viewed with our results under U.S. GAAP and the accompanying reconciliation, provides additional information that is useful for evaluating our operating performance. Additionally, we believe that adjusted gross margin provides a more meaningful comparison of our operating results against those of other companies in our industry. We believe that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which do not have comparable amortization costs related to capitalized software. However, adjusted gross margin is not a measure of financial performance under U.S. GAAP and, accordingly, should not be considered as an alternative to gross margin as an indicator of operating performance.
The table below provides reconciliations between the non-U.S. GAAP financial measures discussed above to the comparable U.S. GAAP measures of gross profit:

                                                              Three Months Ended June 30,
                                                                2014                2013
Gross profit                                                       $6,321             $10,791
Gross margin                                                      29 %                45 %
Adjustments:
Stock compensation expense-cost of revenue                           $515                  $5
% of total revenue                                                 2 %                 - %
Amortization of capitalized software-cost of revenue               $1,643              $1,648
% of total revenue                                                 8 %                 7 %
Non-GAAP gross profit                                              $8,479             $12,444
Non-GAAP gross margin                                             39 %                52 %

COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenue
Our revenue is primarily comprised of fees related to subscription and support and services performed. Subscription and support revenue includes fees for our customers and their users, such as suppliers or healthcare organizations, to access our platform and for users, messages and end point connections such as suppliers or healthcare organizations. Our services revenue is generated from implementation, solution deployment and on-boarding. Implementation services typically consist of user migration, content migration, branding and configuration to support customer-specific workflows. Our services engagements typically occur in phases


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and can vary from a few weeks to several months depending on the scope and complexity of the solution. Our customers may choose to do much of this work in-house, through a third party or with Covisint. We currently subcontract portions of our consulting engagements to third-party implementation partners to supplement our staffing needs within this area of the business. Cost of Revenue
Our cost of revenue is primarily comprised of salaries and personnel-related expenses related to our customer support, implementation, solution deployment, on-boarding and data center operations, the cost of professional services provided by third-party contractors, depreciation and amortization expenses related to capitalized research and development, acquisitions and capital expenditures, third-party hosting fees, third-party software license fees and outside services related to our call center. Where we have established third-party evidence of the stand-alone value of our services, we recognize expense with the associated revenue recognition as services are delivered. Costs associated with deferred services revenue are recognized ratably, generally over five years, beginning upon customer acceptance of the deliverable consistent with the associated revenue.
We expect that our cost of revenue in absolute dollars will decrease in the future as we reduce our workforce to align costs with revenue. We expect our cost of revenue may fluctuate as a percentage of total revenue due to relative changes in our services revenue, changes in the percentage of services recognized using the proportional performance method, the amount and timing of depreciation and amortization, changes in the amount of services performed by subcontractors, our customers, or directly by certified partners or other vendors and the mix of subscription and support revenue relative to services revenue.
Research and Development
Research and development costs are primarily comprised of salaries and personnel-related expenses, services provided by other third-party contractors related to software development, software license and hardware fees and depreciation, amortization related to acquisitions and capital expenditures and costs from facilities and technology-related costs associated with our research and development functions.
We focus our research and development on new and expanded features of our platform and vertical-specific solutions. Since February 2010, when we implemented additional tracking related to the time spent on approved research and development projects, we have capitalized an increasing portion of our research and development costs. Our capitalized research and development costs are amortized as a cost of revenue ratably over 60 months upon completion of the project. We expect our fiscal 2015 research and development costs incurred, as a percentage of revenue, to decrease as compared to fiscal 2014. Sales and Marketing
Sales and marketing costs are primarily comprised of salaries and personnel-related expenses, commissions, travel expense, marketing program fees, services provided by third-party contractors related to our marketing campaigns, amortization related to customer relationship agreements acquired as a result of various acquisitions and costs from facilities and technology-related costs associated with our sales and marketing functions. We plan to invest further in sales and marketing to create brand awareness, expand the scope and scale of our global operations, develop our sales channel and increase revenue from existing customers. Sales and marketing costs in fiscal 2014 were $35.2 million and $9.8 million for the three months ended June 30, 2014. We expect sales and marketing costs in fiscal 2015 to remain consistent with fiscal 2014 in absolute dollars. General and Administrative

During the three months ended June 30, 2013, general and administrative costs were primarily comprised of the allocated costs related to the services provided by our parent Compuware for facilities, information technology, tax, internal audit, accounting, finance, human resources, legal and other services, as well as salaries and personnel-related expenses including stock and cash incentive compensation. Since August 2013, we have invested in hiring staff required to become a fully independent company. As of April 1, 2014, we have largely completed our general and administrative separation from Compuware, and we do not anticipate any significant allocation from Compuware in the future. During the three months ended June 30, 2014, general and administrative costs are primarily comprised of salaries and personnel-related expenses for personnel in these functions including stock and cash incentive compensation and costs from facilities and technology-related costs associated with our corporate functions.


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Income Taxes
Provision for income taxes is comprised of federal and state taxes in the United States as well as certain foreign tax jurisdictions. Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in our financial statements and net operating loss carryforwards.
AGREEMENTS WITH COMPUWARE
We have entered into certain agreements with Compuware with respect to a real estate lease and taxes. The lease of the Detroit office expires March 31, 2015. Under the shared services agreement, Compuware provides us with certain tax, insurance, information technology and other services. In general, we are charged for shared services based on a pro rata allocation of Compuware's costs. As the Company reduces its dependence upon Compuware for these services, the allocation is virtually eliminated. As of June 30, 2014, this expense was immaterial.
CRITICAL ACCOUNTING POLICIES

There have been no significant changes to our Critical Accounting Policies as described in our Annual Report on Form 10-K for the year ended March 31, 2014.
STOCK-BASED COMPENSATION
Stock award compensation expense, for options that do not have performance conditions, is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award.

RESULTS OF OPERATIONS
The following table is a summary of our condensed consolidated statements of
comprehensive loss data:


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                                                                  Three Months Ended June 30,
                                                                     2014              2013

Condensed Consolidated Statements of Comprehensive Loss Data:
Subscription and support                                                $15,509          $15,942
Services                                                               6,078             8,158
Total revenue                                                         21,587            24,101
Cost of revenue(1)                                                    15,266            13,310
Gross profit                                                           6,321            10,791
Operating expenses:
Research and development(1)                                            3,116             2,585
Sales and marketing(1)                                                 9,772             7,339
General and administrative(1)                                          5,546             5,534
Total operating expenses                                              18,434            15,458
OPERATING LOSS                                                       (12,113 )          (4,667 )

    Other Income                                                          22                 -

LOSS BEFORE INCOME TAX PROVISION                                     (12,091 )          (4,667 )
Income tax provision                                                      25                 3
Net income (loss)                                                     ($12,116)         ($4,670)
Basic and diluted earnings per share(2)                                 ($0.32)          ($0.16)
Weighted-average shares outstanding, Basic and diluted(2)             37,499            30,003

(1) All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. The statements and line items above include stock compensation as detailed in the table below.

(2) Please see Note 3 of our condensed consolidated financial statements and related disclosures for an explanation of the method used to calculate the historical net income (loss) per share attributable to common shareholders and the number of shares used in computation of the per share amounts.

                                                                  Three Months Ended June 30,
                                                                     2014               2013
Stock awards compensation classified as:
Cost of revenue                                               $             515     $         5
Research and development                                                     66              47
Sales and marketing                                                         605              47
General and administrative                                                1,432             387
Total stock awards compensation expense before income taxes               2,618             486

The following table sets forth a summary of our condensed consolidated statements of comprehensive loss as a percentage of our total revenue:


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                                                                   Three Months Ended June 30,
                                                                     2014               2013
Condensed Consolidated Statements of Comprehensive Loss Data:
Subscription and support                                              72  %              66  %
Services                                                              28                 34
Total revenue                                                        100                100
Cost of revenue(1)                                                    71                 55
Gross profit                                                          29                 45
Operating expenses:
Research and development(1)                                           14                 11
Sales and marketing(1)                                                45                 30
General and administrative(1)                                         26                 23
Total operating expenses                                              85                 64
Operating loss                                                       (56 )              (19 )

    Other Income                                                       0                  0

LOSS BEFORE INCOME TAX PROVISION                                     (56 )              (19 )
Income tax provision                                                   0                  0

Net income (loss) (56 )% (19 )%



(1) All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. Refer to the table above for the breakdown of stock compensation included in these line item percentages.

Three Months ended June 30, 2014 and 2013
Revenue
Revenue derived from our subscription and support and services is presented in
the table below:

                                                               Period-to-Period
                            Three Months Ended June 30,             Change
                                 2014              2013          $           %
                                          (In thousands)
Subscription and support              $15,509     $15,942         ($433 )    (3 %)
Services                                6,078       8,158        (2,080 )   (25 %)
Total revenue                         $21,587     $24,100       ($2,513 )   (10 %)

Our subscription and support revenue decreased to $15.5 million for the three months ended June 30, 2014 from $15.9 million for the three months ended June 30, 2013, representing an annual decline of 3%. The decrease in subscription and support revenue between the three months ended June 30, 2014 and 2013 was primarily due to a decline in revenue from customers that terminated or elected not to renew their agreements of $0.8 million. In addition, there were two automotive customers that substantially reduced their contractual commitment for our electronic data interchange services during fiscal 2014, resulting in an additional aggregate reduction in subscription and support services by $0.5 million. The decrease in subscription and support revenue between the three months ended June 30, 2014 and 2013 was partially offset by $0.7 million of increased revenue from sales to new customers and $0.2 million of increased revenue from existing customers.

Our services revenue declined to $6.1 million for the three months ended June 30, 2014 from $8.2 million for the three months ended June 30, 2013, representing a period over period decline of 25%. For the three months ended June 30, 2014, the services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus


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last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 4) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 5) our relatively low subscription bookings in the 2014 fiscal year. Cost of Revenue
Cost of revenue is presented in the table below:

Period-to-Period
Three Months Ended June 30, Change 2014 2013 $ %
(In thousands)

Cost of revenue $15,266 $13,310 $1,956 15 % Gross margin 29 % 45 %

Cost of revenue increased during the three months ended June 30, 2014, as compared to the same period in 2013, by approximately $2.0 million. Cost . . .

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