Concur 10Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2006

Commission file number: 0-25137

CONCUR TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

State of Incorporation: Delaware

I.R.S. Employer I.D. No.: 91-1608052

Address of principal executive offices: 18400 NE Union Hill Road

Redmond, Washington 98052

Telephone number, including area code: 425-702-8808

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock as of April 30, 2006 was 35,806,076.

CONCUR TECHNOLOGIES, INC.

FORM 10-Q

March 31, 2006

INDEX


		Page
PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Statements of Operations for the three and six months ended March 31, 2006 and 2005		3
Consolidated Balance Sheets as of March 31, 2006 and September 30, 2005		4
Consolidated Statements of Cash Flows for the three and six months ended March 31, 2006 and 2005		5
Notes to Consolidated Financial Statements		6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		17

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28

ITEM 4. CONTROLS AND PROCEDURES		29

PART II. OTHER INFORMATION		30

ITEM 1. LEGAL PROCEEDINGS		30

ITEM 1A. RISK FACTORS		30

ITEM 6. EXHIBITS		39

SIGNATURE		40

Concur^{^®}, Concur^{^®} Expense, and Cliqbook^{^®} Travel, among others, are registered trademarks and/or registered service marks of Concur or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners and should be treated as such.

PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

Concur Technologies, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
Revenues from Services:
Subscription services	$	19,236		$	12,697		$	34,405		$	24,758
Consulting services and other		4,277			4,623			8,375			8,842

Total revenues		23,513			17,320			42,780			33,600

Expenses:
Cost of services		9,372			6,874			17,626			13,564
Sales and marketing		5,669			4,279			10,424			8,441
Systems development and programming		3,041			2,532			5,264			4,881
General and administrative		3,638			2,446			6,743			4,820
Amortization of intangible assets		606			285			891			570

Total expenses		22,326			16,416			40,948			32,276

Income from operations:		1,187			904			1,832			1,324
Interest income		130			94			235			192
Interest expense		(218	)		(1	)		(219	)		(4	)
Other income (expense), net		(106	)		(5	)		(148	)		(12	)

Income before income tax:		993			992			1,700			1500
Provision for income tax		60			—			120			—

Net income:	$	933		$	992		$	1,580		$	1,500


Net income per share:
Basic	$	0.03		$	0.03		$	0.05		$	0.05

Diluted	$	0.02		$	0.03		$	0.04		$	0.04

Shares used in calculation of net income per share:
Basic		34,889			32,853			34,086			32,991

Diluted		39,399			36,195			38,401			36,572

See notes to consolidated financial statements.

Concur Technologies, Inc.

Consolidated Balance Sheets

(In thousands, except per share amount)

(Unaudited)


	March 31, 2006			September 30, 2005
Assets
Current assets:
Cash and cash equivalents	$	13,340		$	16,202
Accounts receivable, net of allowances of $1,624 and $734		19,619			12,374
Prepaid expenses		1,593			1,386
Other current assets		5,376			3,527

Total current assets		39,928			33,489

Property and equipment, net		18,343			15,021
Restricted cash		500			500
Intangible assets, net of amortization		11,399			2,090
Goodwill		59,576			3,704
Deposits and other long-term assets		6,512			5,847

Total assets	$	136,258		$	60,651


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,608		$	1,447
Accrued compensation		3,382			2,395
Other accrued liabilities		7,128			2,373
Current portion of long-term debt and short-term borrowings		2,576			—
Current portion of deferred rent		160			145
Current portion of deferred revenues		15,860			13,298

Total current liabilities		32,714			19,658

Long-term debt, net of current portion		14,920			—
Long-term deferred rent, net of current portion		2,988			3,050
Long-term deferred revenues, net of current portion		8,344			7,251

Total liabilities		58,966			29,959


Commitments and contingencies (Note 4)

Stockholders’ equity:
Convertible preferred stock, par value $0.001 per share: Authorized shares – 5,000; No shares issued or outstanding		—			—
Common stock, par value $0.001 per share: Authorized shares – 60,000; Issued and outstanding shares – 35,619 and 33,216		36			33
Additional paid-in capital		280,155			235,025
Accumulated other comprehensive income		(86	)		27
Accumulated deficit		(202,813	)		(204,393	)

Total stockholders’ equity		77,292			30,692

Total liabilities and stockholders’ equity	$	136,258		$	60,651

See notes to consolidated financial statements.

Concur Technologies, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
Operating activities:
Net income	$	933			992		$	1,580		$	1,500
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of intangible assets		606			285			891			570
Depreciation		1,232			656			2,318			1,242
Provision for allowance for accounts receivable		366			256			989			221
Share-based compensation expense		1,171						1,972
Changes in operating assets and liabilities:
Accounts receivable		(3,200	)		(1,558	)		(5,205	)		(1,252	)
Prepaid expenses, deposits, and other assets		(1,203	)		(913	)		(2,603	)		(1,992	)
Accounts payable		1,082			954			2,162			436
Accrued liabilities		385			(607	)		(833	)		(1,036	)
Deferred revenues		1,306			836			2,876			2,587

Net cash provided by operating activities		2,678			901			4,147			2,276

Investing activities:
Purchases of property and equipment		(2,600	)		(3,044	)		(4,911	)		(4,682	)
Payments for acquisition, net of cash acquired		(22,508	)		—			(22,508	)		—

Net cash used in investing activities		(25,108	)		(3,044	)		(27,419	)		(4,682	)

Financing activities:
Proceeds from borrowings		18,000			—			18,000			—
Proceeds from issuance of common stock from exercise of stock options		2,165			456			2,707			631
Proceeds from issuance of common stock from employee stock purchase plan		212			—			414			779
Payments on repurchase of common stock		—			(8,689	)		—			(8,689	)
Payments on borrowings and capital leases		(629	)		—			(629	)		(205	)

Net cash provided by (used in) financing activities		19,748			(8,233	)		20,492			(7,484	)

Effect of foreign currency exchange rates on cash and cash equivalents		—			(54	)		(82	)		120
Net decrease in cash and cash equivalents		(2,682	)		(10,430	)		(2,862	)		(9,770	)
Cash and cash equivalents at beginning of period		16,022			24,395			16,202			23,735

Cash and cash equivalents at end of period	$	13,340		$	13,965		$	13,340		$	13,965

Supplemental disclosure of cash flow information:
Cash paid for interest	$	110		$	—		$	111		$	2
Stock & options issued in connection with acquisition	$	39,900		$	—		$	39,900		$	—

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2006

(Unaudited)

NOTE 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company

Concur Technologies, Inc. is a leading provider of business services and solutions that automate processes involved in the management of corporate expenses. Our core purpose is to use innovation to help our customers drive down their costs associated with corporate expense management (CEM). Concur’s integrated suite of on-demand CEM services includes Cliqbook Travel for corporate travel management, Cliqbook Meeting for corporate meeting and group travel management and Concur Expense Service for managing the expense reporting process. Our solutions are designed to automate and streamline these business processes, reduce operating costs, improve internal controls, and empower businesses to apply greater insight to their spending patterns through comprehensive analytics. We provide our services through flexible subscription services and other delivery models, and market and sell our solutions worldwide through a direct sales organization as well as through indirect distribution channels.

Throughout these financial statements Concur Technologies, Inc. is referred to as “Concur”, “we”, “us”, and “our”.

Unaudited Interim Financial Information

The financial information as of March 31, 2006, and for the three and six months ended March 31, 2006 and 2005 is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position at such dates and our results of operations and cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States (“GAAP”). The balance sheet information at September 30, 2005 has been derived from our audited financial statements at that date but, in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”), does not include all of the information and notes required by GAAP for complete financial statements. Operating results for the three and six months ended March 31, 2006 are not necessarily indicative of results that may be expected for the entire fiscal year. The financial statements should be read in conjunction with the financial statements and notes for the fiscal year ended September 30, 2005 included in Concur’s 2005 Annual Report on Form 10-K.

Segment Information

We operate in and report on one segment (Corporate Expense Management services) based upon the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 131,Disclosure about Segments of an Enterprise and Related Information.

Principles of Consolidation

The consolidated financial statements include the accounts of Concur and its wholly-owned subsidiaries. All intercompany accounts and transactions were eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have a material impact on our financial statements and accompanying notes. Examples of estimates and assumptions include the determination of certain provisions, including allowances for accounts receivable, product warranties, estimating useful lives of property and equipment, valuing and estimating useful lives of intangible assets, valuing assets and liabilities acquired through business combinations, deferring certain revenues and costs, estimating expected lives of customer relationships, estimating share-based payments, and estimating tax valuation allowances.

Revenue Recognition Policy

We recognize revenues in accordance with accounting standards for software and service companies including American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2,Software Revenue Recognition (“SOP 97-2”), as amended by SOP 98-9, the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 00-3,Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware, the consensus reached in EITF Issue No. 00-21,Revenue Arrangements with Multiple

Deliverables, the consensus reached in EITF Issue No. 03-5,Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software (“EITF 03-5”), SEC Staff Accounting Bulletin No. 104,Revenue Recognition, SOP 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and related interpretations, including AICPA Technical Practice Aids.

We generate our revenues from the delivery of subscription services (which include maintenance services), consulting services, and to a lesser degree the sale of software licenses.

We recognize revenue when:

•

evidence of an arrangement exists;

•

delivery has occurred;

•

the fees are fixed or determinable; and

•

collection is considered probable.

If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed or determinable, we recognize revenues as payments become due from the customer. If non-standard acceptance periods or non-standard performance criteria are required, we recognize revenue upon the expiration of the acceptance period or satisfaction of the acceptance/performance criteria, as applicable.

In contractual arrangements that include the provision of multiple elements, we apply the accounting guidance most applicable to the specific arrangement to determine how contract consideration should be measured and allocated to the separate elements in the arrangement. Multiple element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Generally, separate contracts with the same customer that are entered into at or near the same time are presumed to have been negotiated together and, therefore, are accounted for as a single contractual arrangement in determining how contract consideration should be measured and allocated to the separate elements in the arrangement. Typically, we measure and allocate the total arrangement fee among each of the elements based on their fair value or, if necessary, vendor-specific objective evidence of their fair value (“VSOE”). VSOE is determined by the price charged when an element is sold separately or, in the case of an element not yet sold separately, the price set by authorized management if it is probable that the price, once established, will not change prior to separate market introduction.

Subscription Revenues:

Our subscription revenues are typically recognized monthly as the service is provided to the customer and consist of:

•

monthly fees paid for subscription services;

•

amortization of related set-up fees;

•

amortization of fees paid for software maintenance services under software license arrangements; and

•

the amortized portion of the related license and consulting fees in certain multiple element subscription arrangements where VSOE does not exist for an undelivered subscription element.

Set-up fees paid by customers in connection with subscription services, as well as the associated direct and incremental costs, such as labor and commissions, are deferred and recognized ratably over the longer of the contractual lives, which generally range from two to five years, or the expected lives of the customer relationships. If we launch new subscription service offerings, we use the contractual lives as the best estimate of the expected lives of the customer relationships. We continue to evaluate and adjust the length of these amortization periods as we gain more experience with customer contract renewals and contract cancellations.

Software maintenance services include technical support and the right to receive unspecified upgrades and enhancements on a when-and-if available basis. Fees for software maintenance services are typically billed annually in advance of performance of the services with provisions for subsequent automatic annual renewals. We defer the related revenues and recognize them ratably over the respective maintenance terms, which typically are one year.

Subscription revenues are adjusted for estimated sales allowances, which are based on our historical experience, including a review of our experience related to price adjustments and sales credits issued.

Consulting and Other Revenues:

Consulting revenues consist of fees for professional services, which consist of system implementation and integration, planning, data conversion, training, and documentation of procedures. Consulting service fees are typically billed and recognized as revenue on a time-and-materials basis. In some instances, we sell consulting services under milestone or fixed-fee contracts and, in such cases, recognize consulting revenues on a percentage-of-completion basis. Consulting revenues are adjusted for estimated sales allowances, which are based on our historical experience, including a review of our experience related to price adjustments and sales credits issued.

In service arrangements that include consulting and subscription services, but not a license of our software, we recognize consulting revenues as they are performed if the consulting services qualify as a separate unit of accounting within the arrangement. The consulting services qualify as a separate unit of accounting if they have value to the customer on a stand-alone basis, there is objective and reliable evidence of the fair value of the subscription services, and delivery or performance of the subscription services is considered probable and substantially within our control. We have determined that, in our service arrangements of this type, the consulting services typically qualify as a separate unit of accounting and, accordingly, the consulting revenues are recognized as the services are performed. If the consulting services do not qualify as a separate unit of accounting, the related revenues are combined with the subscription revenues, and recognized ratably over the subscription service period.

Other revenues consist of fees earned from, and allocable to, grants of licenses to use our products. We recognize license revenues when evidence of a license arrangement exists, we have delivered the product, the amount of the transaction is fixed or determinable, collection is probable, and VSOE exists for any undelivered elements of the arrangement. Elements included in our multiple-element software arrangements consist of various licensed products and services such as software maintenance services, consulting services, and subscription services.

In software license arrangements that include rights to multiple elements, we allocate the total arrangement fee among each of the elements using the residual method, under which revenues are allocated to undelivered elements based on VSOE and the residual amounts of revenue are allocated to the delivered elements. If sufficient VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE does exist or all elements of the arrangement have been delivered. If the only undelivered element is software maintenance, the entire fee is recognized ratably as subscription revenue.

In software license arrangements where we also provide consulting services, license revenues are recognized upon delivery of the product, provided that the criteria for recognition of software license revenues described above are met, payment of the license fees is not dependent upon the performance of the consulting services, and the consulting services are not essential to the functionality of the software. If we determine that the consulting services are essential to the functionality of the software, or payment of the license fees is dependent upon the performance of the consulting services, then both the license and consulting fees are recognized on a percentage-of-completion basis. We typically do not consider the consulting services we provide in such arrangements to be essential to the functionality of the software and, therefore, license revenues are typically recognized upon delivery of the software and consulting revenues are recognized as the services are performed.

In arrangements where we license our software and also host the licensed software for our customer, a software element is only considered present if our customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty, and it is feasible for our customer to either operate the software on its own hardware or contract with another vendor to host the software. If the arrangement meets these criteria, as well as the other criteria for recognition of license revenues described above, we deem there to be a software element present and recognize license revenues when the software is delivered, and we recognize the subscription hosting revenues as the hosting service is provided. Hosting set-up fees for such arrangements, as well as the associated direct and incremental costs, are deferred and recognized ratably over the hosting service period. If we determine that a separate software element as described above is not present, we combine the software license fees with the subscription hosting fees and recognize them ratably over the subscription service period as subscription revenue.

Portions of our revenues are generated from sales made through our reseller partners. When we assume a majority of the business risks associated with performance of the contractual obligations, we record the revenues on a gross basis, and amounts paid to our reseller partners are recognized as cost of operations. Our assumption of such business risks is evidenced when, among other things, we take responsibility for delivery of the product or service, establish pricing of the arrangement, and are the primary obligor in the arrangement. When our reseller partner assumes the majority of the business risks associated with the performance of the contractual obligations, we record the associated revenues net of the amounts paid to our reseller partner.

Share-based Compensation

Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. Our option plans provide broad discretion to our Board of Directors to create appropriate equity incentives for members of our Board of Directors and our employees. On October 1, 2005, we adopted the provisions of SFAS 123R,Share-based Payment, requiring us to recognize expense related to the fair value of our share-based compensation awards. We elected the modified prospective transition method as permitted by SFAS 123R. Under this transition method, share-based compensation expense for the three and six months ended March 31, 2006, includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and compensation expense for all share-based compensation awards granted subsequent to October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with SFAS 123R, we capitalize the portion of our share-based compensation attributed to internally developed software and defer the portion of our share-based compensation associated with activities that generate deferred revenue. Our Employee Stock Purchase Plan is deemed non-compensatory and therefore is not subject to the provisions of SFAS123R. See Note 8 to our Consolidated Financial Statements for further detail, including the impact of the adoption to our Consolidated Statement of Operations.

Prior to October 1, 2005, We accounted for our share-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees and related interpretations, as opposed to the fair value method allowed by SFAS No. 123,Accounting for Stock-Based Compensation, as amended. Accordingly, no share-based compensation cost is reflected in our statement of operations for the three and six months ended March 31, 2005, as all options granted under these plans had exercise prices equal to the fair market value of the underlying common stock on the date of grant, and any purchase discounts under our employee stock purchase plan were within statutory limits.

Computation of Net Income Per Share

We calculate basic net income per share by dividing net income for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted-average number of shares of common stock outstanding during the period, plus any dilutive effect from stock options, purchase rights, and warrants to purchase common stock during the period, under the treasury stock method. The computation of basic and diluted net income per share is as follows:


	Three Months Ended March 31,				Six Months Ended March 31,
(in thousands, except per share data)	2006		2005		2006		2005
Net income	$	933	$	992	$	1,580	$	1,500
Weighted-average shares of common stock outstanding		34,889		32,853		34,086		32,991
Add: Dilutive effect of stock-based compensation plans (1)		4,510		3,342		4,315		3,581

Dilutive weighted-average shares of common stock outstanding	$	39,399	$	36,195	$	38,401	$	36,572

Net income per share:
Basic	$	0.03	$	0.03	$	0.05	$	0.05
Diluted	$	0.02	$	0.03	$	0.04	$	0.04

(1)

Shares attributable to outstanding stock options granted under our stock-based compensation plans that were excluded from the calculation of diluted earnings per share because the exercise prices of the such options and rights were greater than or equal to the average price of our common stock, and therefore their inclusion would have been anti-dilutive, totaled 1.0 and 0.7 million for the three and six months ended March 31, 2006, and 2.5 and 2.4 million for the three and six months ended March 31, 2005, respectively.

Recent Pronouncements

The adoption of the following recent pronouncement in the first half of fiscal 2006 did not have a material impact on our results of operations and financial condition:

The FASB issued SFAS 154, “Accounting Changes and Error Corrections”, which replaces APB Opinion 20 “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements – An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the earliest practicable date, as the required method for reporting a change in accounting principle and restatement with respect to the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by Concur in the first quarter of fiscal 2007.

NOTE 2. BUSINESS COMBINATION

On January 23, 2006 we acquired all of the outstanding shares of Outtask, Inc., a privately held company based in Alexandria, Virginia. The acquisition was accounted for as a purchase business combination. Certain aspects of the purchase price allocations for Outtask are preliminary and have been made using initial estimates of value. These estimates are the responsibility of management. Adjustments due to the finalization of these estimates will be included in the allocation of the purchase price if the adjustment is determined within one year of the consummation date, or the purchase price allocation period. The operating results of Outtask are included in Concur’s consolidated statement of operations from the date of the acquisition. Pro forma results of operations are presented for Outtask because the effect of this acquisition was material to Concur on an individual basis.

Under the terms of the agreement, all outstanding securities of Outtask were exchanged for approximately $24 million to $36 million in cash and approximately 2.9 million to 3.5 million shares of Concur common stock all totaling between approximately $67 million and $88 million based on the closing price of Concur common stock on January 20, 2006. The final amount of consideration paid in the acquisition is subject to the satisfaction of combined company performance metrics as of September 30, 2006 and certain holdback provisions set forth in the definitive merger agreement. Outtask is a “Software as a Service” provider, delivering employee-facing applications for travel and expense management to corporate customers. We acquired Outtask to expand our on-demand CEM suite, in particular by offering clients a corporate travel management service, Cliqbook. The total preliminary purchase price of $67.0 million was comprised of:


Purchase Consideration(in millions)
Cash	$	24.0
Equity, common stock		26.0
Equity, options		13.9
Acquisition-related transaction costs		3.1

Total	$	67.0

The fair value of the approximately 1.2 million fully-vested options granted was calculated using a Black-Scholes valuation model with the following assumptions: weighted average remaining expected life of 0.5 years, average risk-free interest rate of 4.2% average expected volatility of 38.2%, and no dividend yield.

Acquisition related transaction costs include investment banking, legal and accounting fees, and other third-party costs directly related to the acquisition.

Preliminary Purchase Price Allocation

The preliminary allocation of the total purchase price of Outtask’s net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of January 23, 2006. Adjustments to these estimates will be included in the allocation of the purchase price of Outtask, if the adjustment is determined to be within the purchase price allocation period which will end no later than January 23, 2007. The excess of purchase price over the identifiable intangible and net tangible assets was allocated to goodwill. The total purchase price of $67.0 million has been allocated as follows:


Preliminary Purchase Price Allocation(in millions)
Cash and cash equivalents	$	1.5
Accounts receivable		3.1
Property and equipment		0.6
Goodwill		55.9
Other intangible assets		10.2
Accounts payable		(0.1	)
Accrued expenses		(3.4	)
Deferred revenue		(0.8	)

Total	$	67.0

Intangible assets

Other intangible assets include trade name and trademarks, technology, non-compete agreements, and customer relationships. We estimated the fair value of other intangible assets using the income approach, including the excess earnings methodology, to value these identifiable intangible assets which are subject to amortization. These estimates are the responsibility of management, are based on a preliminary valuation, and are subject to change upon management’s completion of the final valuation. The following table sets forth the components of these other intangible assets at March 31, 2006:


Description (dollars in thousands)	Preliminary Fair Value		Accumulated Amortization		Net Book Value as of 3/31/06		Weighted Average Useful Life (in years)
Trade name and trademarks	$	200	$	38	$	162	1.0
Technology		3,400		132		3,268	5.4
Non-compete agreements		200		19		181	2.0
Customer relationships		6,400		132		6,268	9.3

Total	$	10,200	$	321	$	9,879

Tangible assets acquired and liabilities assumed

We have estimated the fair value of certain tangible assets acquired and liabilities assumed. Some of these estimates are subject to change, particularly those estimates relating to the allowance for doubtful accounts, deferred revenues, and deferred taxes. We currently have provided a full valuation allowance on the acquired deferred tax assets. Adjustments to the allowance for doubtful accounts, deferred revenues, and deferred taxes may be required during the purchase price allocation period.

Pro forma results

The unaudited financial information in the table below summarizes the combined results of operations for Concur and Outtask on a pro forma basis as though the companies had been combined as of the beginning of each of the periods presented. Concur’s results of operations for the three months ended March 31, 2006 included the results of Outtask since January 23, 2006, the date of acquisition. The unaudited pro forma financial information for the three and six months ended March 31, 2006 combines Concur’s results for these periods with the results of Outtask for the period from October 1, 2005 through January 22, 2006 as applicable. The pro forma financial information below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition would have taken place at the beginning of each of the periods presented:


	Three Months Ended March 31,				Six Months Ended March 31,
(in thousands, except per share amounts)	2006		2005		2006		2005
Revenues	$	24,529	$	20,551	$	47,604	$	39,924
Net income	$	426	$	587	$	547	$	569
Net income per share	$	0.01	$	0.02	$	0.01	$	0.01

NOTE 3. INTANGIBLE ASSETS

Amortization of intangible assets represents the allocation of intangible assets from our July 2002 acquisition of Captura Software, Inc. and our January 2006 acquisition of Outtask, Inc. The gross and net carrying amounts of the acquired customer base intangible assets at March 31, 2006 and September 30, 2005 were as follows:


Acquired customer base intangible asset (in thousands)	March 31, 2006			September 30, 2005

Gross carrying amount	$	15,900		$	5,700
Accumulated amortization		(4,501	)		(3,610	)

Acquired customer base intangible asset, net	$	11,399		$	2,090

The related amortization expense reflected in our results of operations totaled $606 thousand and $891 thousand for the three and six months ended March 31, 2006.

Estimated amortization expense for the remaining six months of fiscal 2006 and annually for the remaining estimated useful life is as follows:


Estimated remaining amortization expense (in thousands)
Remainder of Fiscal 2006	$	1,411
Fiscal 2007		2,494
Fiscal 2008		1,413
Fiscal 2009		1,383
Fiscal 2010		1,124
Thereafter		3,574

NOTE 4. COMMITMENTS AND CONTINGENCIES

Litigation

In July 2001, we and several of our current and former officers were named as defendants in two securities class-action lawsuits filed in the United States District Court for the Southern District of New York. In April 2002, these lawsuits were consolidated along with more than 300 similar pending cases filed against companies that completed initial public offerings between 1997 and 2000 and the underwriters that took them public. In October 2002, the court dismissed the individual present and former officers of Concur named as defendants from the consolidated lawsuit, without prejudice, pursuant to a stipulated agreement between the parties. In February 2003, the presiding judge denied a motion to dismiss all claims. In July 2003, we decided to participate in a proposed settlement negotiated by representatives of a coalition of issuers named as defendants in similar actions and their insurers. Although we believe that the plaintiffs’ claims have no merit, we decided to participate in the proposed settlement to avoid the cost and distraction of continued litigation. We do not believe that the proposed settlement will have any material adverse effect on our business, financial condition, or results of operations. The proposed settlement is expected to be funded by a group of insurers on behalf of the issuer defendants. The proposed settlement agreement would dispose of all remaining claims against us and the individual defendants, without any admission of wrongdoing by us or the individual defendants. The proposed settlement has been preliminarily approved by the court, but remains subject to final approval by the parties and the court. There is no guarantee that the parties or the court will finalize the proposed settlement. Should the parties and the court fail to finalize the proposed settlement, we would continue to defend ourselves vigorously.

Product Warranty and Indemnification Obligations

We provide services and software solutions to our customers under sales contracts, which usually include a limited warranty regarding product and service performance and a limited indemnification of customers against losses, expenses, and liabilities from damages that may be awarded against them if our services or software are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The contracts generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain time and geography-based scope limitations and a right for us to replace an infringing product. We also enter into similar limited indemnification terms in agreements with certain strategic business partners and vendors. We account for potential warranty claims in accordance with the guidance in SFAS 5, and base our estimates on historical experience and current expectations.

To date, we have experienced minimal warranty claims and have not had to reimburse any customers for any losses related to the limited indemnification described above.

NOTE 5. COMPREHENSIVE INCOME

SFAS No. 130,Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The item of comprehensive income that we currently report is foreign currency translation adjustments as follows:


	Three Months Ended March 31,					Six Months Ended March 31,
(in thousands)	2006		2005			2006			2005
Net income	$	933	$	992		$	1,581		$	1,500
Other comprehensive income
Foreign currency translation adjustments		—		(55	)		(114	)		97

Total comprehensive income	$	933	$	937		$	1,467		$	1,597

NOTE 6. INTERNATIONAL REVENUES

We market our services and products primarily in the United States, Europe and Australia and we operate in a single industry segment. No single customer accounted for more than 10% of our total revenues in the three months ended March 31, 2006 and 2005, respectively. Information regarding revenues by geographic region for the three months ended March 31, 2006 and 2005, respectively, is as follows:


	Three Months Ended March 31,								Six Months Ended March 31,
(dollars in thousands)	2006		%		2005		%		2006		%		2005		%
Country:
United States	$	20,725	88.1	%	$	15,077	87.0	%	$	37,595	87.9	%	$	28,541	85.0	%
Europe		1,986	8.5			1,349	7.8			3,463	8.1			3,408	10.1
Other		802	3.4			894	5.2			1,722	4.0			1,651	4.9

Total revenues	$	23,513	100.0	%	$	17,320	100.0	%	$	42,780	100.0	%	$	33,600	100.0	%

NOTE 7. INCOME TAXES

For the three months and six months ended March 31, 2006, we recorded an income tax expense of $60,000 and $120,000 for Alternative Minimum Tax related to Concur’s operating results, as compared to no income tax expense reported for the three and six months ended March 31, 2005.

As of March 31, 2006, we had net operating loss carryforwards of approximately $386.2 million and other temporary differences, which resulted in net deferred tax assets of approximately $108.7 million. We currently have a full valuation allowance on our U.S. deferred tax assets and a full valuation allowance on our overseas deferred tax assets. Depending upon the results of our continuing quarterly evaluation of the realizability of these assets in accordance with SFAS 109,Accounting For Income Taxes, and, in particular, the integration and operating results of the recently acquired revenue streams and operations of Outtask for the third and fourth quarters of fiscal 2006, there may be sufficient evidence to support the conclusion it may become more likely than not that all or a portion of our net deferred tax assets will be realized and all or a portion of the valuation allowance should be reduced during the second half of the year. Any such reduction of our net deferred tax valuation allowance is expected to materially increase our net income and materially impact our consolidated balance sheet. As future profitability is not assured, any reduction of the valuation allowance and our future effective tax rate are uncertain. In determining net deferred tax assets and valuation allowances, management is required to make judgments and estimates related to projections of domestic and foreign profitability, the timing and extent of the utilization of net operating loss carryforwards, applicable tax rates, transfer pricing methodologies and prudent and feasible tax planning strategies.

NOTE 8. SHARE-BASED COMPENSATION

We have a share-based compensation program that provides our Board of Directors broad discretion in creating employee equity incentives. The program includes incentive and non-statutory stock options granted under various plans, which are approved by the Board of Directors. Stock options generally vest one to four years after the grant date and expire ten years after the grant date. The company also has an ESPP plan which allows employees to purchase shares of common stock at 95% of fair market value at the date of purchase. Based upon the provisions of SFAS 123R, the ESPP is deemed non-compensatory. As of March 31, 2006, we had approximately 1.7 million shares of common stock reserved for future issuance under our stock option plans, excluding shares of common stock reserved for future issue under our ESPP.

On October 1, 2005 and for the first quarter of fiscal 2006, we adopted the provisions of SFAS 123R, requiring us to recognize expense related to the fair value of our share-based compensation awards. We elected to use the modified prospective transition method as permitted by SFAS 123R and therefore have not restated out financial results for prior periods. Under this transition method, share-based compensation expense for the three and six months ended March 31, 2006 includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of October 1, 2005, based upon the grant date fair value estimated in accordance with the original provisions of SFAS 123. Share-based compensation expense for all share-based compensation awards granted subsequent to October 1, 2005 was based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. We recognize compensation expense for stock option awards on a straight-line basis over the requisite service period of the award.

The following table sets forth the share-based compensation expense resulting from stock options that is recorded in our Consolidated Statement of Operations for the three and six months ended March 31, 2006 (in thousands). Options issued in replacement of outstanding options to purchase shares of Outtask common stock assumed as part of the acquisition of Outtask are non-compensatory and are therefore excluded from all tables, unless otherwise noted:


(dollars in thousands)	Three Months Ended March 31, 2006		Six Months Ended March 31, 2006
Cost of Services	$	312	$	519
Sales and Marketing		457		745
Systems Development and Programming		80		124
General and Administrative		322		584

Total	$	1,171	$	1,972

Net cash proceeds from the exercise of stock options were $2.2 million and $2.7 million for the three and six months ended March 31, 2006, and $456 thousand and $631 thousand for the three and six months ended March 31, 2005 respectively. No income tax benefit was realized from stock option exercises during the three months ended March 31, 2006 and March 31, 2005. In accordance with SFAS 123R, we present excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

For the three months ended March 31, 2006, we capitalized $51 thousand as property and equipment on the balance sheet for share-based compensation incurred in the development of internal use software and deferred $21 thousand of operating costs for share-based compensation associated with the deployment of customers. These amounts would have been charged to the following expense categories for the three and six months ended March 31, 2006 (in thousands):


(dollars in thousands)	Three Months Ended March 31, 2006		Six Months Ended March 31, 2005
Cost of Services	$	21	$	38
Systems Development and Programming		51		79

Total	$	72	$	117

Prior to the adoption of SFAS 123R, we accounted for our stock option plans and ESPP (collectively, our “share-based compensation plans”) using the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No.

25,Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Under this method, no share-based compensation expense is reflected in our results of operations for the three and six months ended March 31, 2005, as all options granted under these plans had exercise prices equal to the fair market value of the underlying common stock on the date of grant, and any purchase discounts under the ESPP were within statutory limits.

SFAS No. 123,Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”), requires companies that choose, prior to the effective date of SFAS123R, to continue to follow APB 25 to provide pro forma disclosure of the impact of accounting for share-based compensation using the fair value method of SFAS 123. For purposes of these pro forma disclosures, the estimated fair value of the options is amortized over the related vesting periods. The estimated fair value of purchases under the ESPP is amortized on a straight line basis over the related purchase periods, ranging from six to twenty-four months. The following table illustrates the effect on net loss after tax and net loss per common share as if we had applied the fair value recognition provisions of SFAS 123 to share-based compensation during the three and six month period ended March 31, 2005:


(in thousands, except per share data)	Three Months Ended March 31, 2005			Six Months Ended March 31, 2005
Net income, as reported	$	992		$	1,500
Add: Share-based compensation expense, as reported		—			—
Deduct: Pro forma compensation expense under SFAS 123		(1,346	)		(2,822	)

Pro forma net income (loss)	$	(354	)	$	(1,322	)

Net income (loss) per share:
Basic as reported	$	0.03		$	0.05
Diluted, as reported	$	0.03		$	0.04
Basic, pro forma	$	(0.01	)	$	(0.04	)
Diluted, pro forma	$	(0.01	)	$	(0.04	)

The fair value of share-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the three and six months ended March 31, 2006 and March 31, 2005, respectively:


	Options Three Months Ended						Options Six Months Ended
(dollars in thousands)	March 31, 2006			March 31, 2005			March 31, 2005			March 31, 2005
Expected life (in years)		4.7			4.0			4.7			4.1
Interest rate		4.6	%		3.7	%		4.4	%		3.6	%
Volatility		0.66			0.65			0.64			0.68
Dividend yield		—			—			—			—
Weighted average fair value at grant date	$	9.05		$	3.90		$	7.41		$	4.64

Our computation of the expected volatility for the three and six months ended March 31, 2006 is based upon historical implied volatility. Our computation of expected life is based on historical exercise patterns. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of the grant.

Stock option activity for the three months ended March 31, 2006 including fully-vested options issued in replacement of outstanding options to purchase shares of Outtask common stock assumed as part of the acquisition of Outtask was as follows:


(in thousands, except per share amounts)	Shares		Weighted Average Exercise Price		Weighted average remaining contractual term	Aggregate Intrinsic Value
Outstanding at December 31, 2005	7,076		$	6.87	—		—
Grants	1,310			4.50	—		—
Exercises	(525	)		4.12	—		—
Forfeiture or expirations	(70	)		8.01	—		—

Outstanding at March 31, 2006	7,791			6.65	6.51	$	93,633
Exercisable at March 31, 2006	5,760			5.24	5.67		77,646

The aggregate intrinsic value in the table above represents total pretax intrinsic value (i.e., the difference between Concur’s closing stock price on the last trading day of our second quarter of fiscal 2006 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. The amount changes based on the fair market value of Concur’s common stock. Total intrinsic value of options exercised was $6.3 and $7.4 million for the three and six months ended March 31, 2006.

As of March 31, 2006, $8.5 million of total unrecognized compensation costs related to non-vested stock options is expected to be recognized over a weighted average period of 1.6 years. Total fair value of options vested during the three and six months ended March 31, 2006 was $0.7 and $1.8 million, respectively.

NOTE 9. LONG-TERM DEBT

In January 2006, we entered into a $22 million secured amended and restated loan and security agreement (“Amended Loan Agreement”) with Comerica Bank to replace the loan agreement in place at the time. The loan agreement that we replaced provided for a $6.5 million revolving line of credit, $4.0 million to fund working capital needs and $2.5 million to fund equipment purchases. The Amended Loan Agreement established a $14.0 million five year term loan to fund the acquisition of Outtask and an $8.0 million line of credit.

The proceeds of the $14 million term loan were used to fund the acquisition of Outtask. The proceeds of the revolving line of credit may be used for working capital, to pay transaction costs of the Amended Loan Agreement, to finance repurchases of our capital stock subject to certain limitations, and for permitted capital expenditures, among other things. The Amended Loan Agreement is secured by pledges of our stock and membership interests in, and guarantees of, our subsidiaries and security interests in substantially all of our assets.

The term loan under the Amended Loan Agreement matures on December 31, 2010. We may make prepayments on advances under the term loan without penalty, provided we pay accrued interest and otherwise make Comerica whole. Because the Amended Loan Agreement calls for a five year term loan, we have minimum payments scheduled in fiscal years 2006 to 2010. These scheduled minimum payments are approximately $0.6 million per quarter in 2006, approximately $0.7 million per quarter in 2007 through 2009, and approximately $0.8 million in 2010. The term loan bears an interest rate equal to Comerica’s prime rate plus a range of 0.75% to 1.25% or LIBOR plus a range of 3.0% to 3.5%, and matures on December 31, 2010.

The revolving credit facility under the Amended Loan Agreement matures on January 23, 2007. We may make prepayments on advances under the revolving line of credit without penalty, provided we pay accrued interest and otherwise make Comerica whole. As the loan agreement is a one year revolving credit facility, there are no scheduled minimum principal repayments. All amounts outstanding under the credit facility are due and payable on January 23, 2007. Advances under the revolving credit facility bear an interest rate equal to Comerica’s prime rate plus a range of 0.50% to 1.00% or LIBOR plus a range of 2.75% to 3.25%.

The Amended Loan Agreement includes certain covenants, including, without limitation, certain restrictions on the use of proceeds and compliance with certain financial covenants (including interest coverage, minimum EBITDA, and our ratio of total indebtedness to EBITDA). The Amended Loan Agreement also requires compliance with other covenants which limit Concur’s ability, without first obtaining written consent of Comerica, to consummate a sale of assets, make changes in our capital structure, and pay out dividends.

In the event of a default under the Amended Loan Agreement, Comerica may terminate the commitments made under the loan agreement, declare amounts outstanding, including interest and fees, payable immediately, and enforce other rights and interests under the agreement and applicable law.

As of March 31, 2006, we had $13.4 million outstanding on our term loan and $4.0 million outstanding on our line of credit and were in compliance with all loan covenants as required.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OurManagement’s Discussion and Analysis of Financial Condition and Results of Operations provides information 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 ourConsolidated Financial Statements and Notes that are included with this report. Also, the discussion ofCritical Accounting Policies and Estimates in this section is an integral part of the analysis of our results of operations and financial condition.

Special Note Regarding Forward-Looking Statements

This document contains forward-looking statements regarding our plans, objectives, expectations, intentions, future financial performance, future financial condition, the integration of Outtask, Inc., 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. Examples of such risks and uncertainties are described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 under “Risk Factors”, as well as in our other filings with the United States Securities and Exchange Commission (“SEC”). Material changes to these examples of risks and uncertainties are described under “Risk Factors” and elsewhere in this report. 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 assume no obligation or duty to update any such forward-looking statements.

Overview

Concur Technologies, Inc. is a leading provider of business services and solutions that automate processes involved in the management of corporate expenses. Our core purpose is to use innovation to help our customers drive down their costs associated with corporate expense management (CEM). Concur’s integrated suite of on-demand CEM services includes Cliqbook Travel for corporate travel management, Cliqbook Meeting for corporate meeting and group travel management, and Concur Expense Service for managing the expense reporting process. Our solutions are designed to automate and streamline these business processes, reduce operating costs, improve internal controls, and empower businesses to apply greater insight to their spending patterns through comprehensive analytics. We provide our services through flexible subscription services and other delivery models, and market and sell our solutions worldwide through a direct sales organization as well as through indirect distribution channels.

On January 23, 2006, we completed our acquisition of Outtask, which added a market-leading online corporate travel management service called Cliqbook to our suite of CEM services. This addition will expand our suite of CEM solutions and simplify the entire travel and expense management workflow of our customers, which we believe will further differentiate Concur from our competition.

Our flagship products are Concur^{^®} Expense Service and Cliqbook^{^®}Travel, which are used by our clients for travel and entertainment expense reporting and corporate travel management, respectively. We also offer value-added services and software that are integrated with our core services and software, as well as consulting, customer support and training for our customers.

We offer our solutions under flexible delivery models that range from highly-configurable to standardized. We sell our solutions predominantly as subscription services and, to a much lesser extent, through our on-premises license agreements. We market and sell our solutions worldwide through our direct sales organization and indirect distribution channels.

We generate our revenues from the delivery of subscription services, consulting services, and, to a lesser extent, the sale of software licenses. Subscription revenues grew from 59% of total revenues in fiscal 2003, to 71% in fiscal 2004, to 74% in fiscal 2005, and 80.4% through the first six months of fiscal 2006. This growth reflects the market’s shift to emphasize purchases of subscription services rather than license software. Generally, our subscription services revenues are recognized over the time period we provide services to customers, in contrast to license revenues, which typically are recognized when software is delivered to the customer. We believe that the shift to the subscription services model provides more stable and predictable revenues and operating results compared to prior years when our license revenues represented a more significant portion of our total revenues, because revenue in any particular period is less dependent upon a small number of large transactions.

Our strategic focus in fiscal 2006 is to continue to expand our suite of CEM services offerings, to expand our direct and indirect distribution network and to set the standard for operational and service excellence for our services. We expect our subscription revenues to increase in fiscal 2006 compared to fiscal 2005, on both an absolute basis and as a percentage of total revenues, due to anticipated demand for our subscription services as well as the acquisition of Outtask. We expect total expenses on an absolute basis to increase in fiscal 2006 compared to fiscal 2005 as a result of the acquisition of Outtask on January 23, 2006 and the continued growth of our business.

We operate in and report on one segment: corporate expense management services.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005

Selected Financial Data

In the following table, we show financial data derived from our unaudited statements of operations as a percentage of total revenues for the periods indicated.


	Three Months Ended March 31,				Six Months Ended March 31,
	2006		2005		2006		2005
Revenues from Services:
Subscription services	81.8	%	73.3	%	80.4	%	73.7	%
Consulting services and other	18.2		26.7		19.6		26.3

Total revenues	100.0		100.0		100.0		100.0

Expenses:
Cost of services	39.9		39.7		41.2		40.4
Sales and marketing	24.1		24.7		24.4		25.1
Systems development and programming	12.9		14.6		12.3		14.5
General and administrative	15.5		14.1		15.8		14.3
Amortization of intangible asset	2.6		1.7		2.1		1.7

Total expenses	95.0		94.8		95.8		96.1


Income from operations	5.0	%	5.2	%	4.2	%	3.9	%
Interest income	0.6		0.5		0.5		0.6
Interest expense	(0.9	)	—		(0.5	)	—
Other income, net	(0.5	)	—		(0.3	)	—

Income before income tax	4.2	%	5.7	%	3.9	%	4.5	%
Provision for income tax	(0.2	)	—		(0.2	)	—
Net Income	4.0	%	5.7	%	3.7	%	4.5	%

Results of Operations

Revenues


	Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	2006		2005		Change		2006		2005		Change
Subscription	$	19,236	$	12,697	51.5	%	$	34,405	$	24,758	39.0	%
Consulting & other		4,277		4,623	(7.5	%)		8,375		8,842	(5.3	%)

Total revenues	$	23,513	$	17,320	35.8	%	$	42,780	$	33,600	27.3	%

Subscription Revenues. Subscription revenues consist of monthly fees paid for subscription services, the amortization of set-up fees paid to us in connection with those services, the amortization of fees paid for software maintenance services under software license arrangements, and in some multiple element subscription arrangements where there is no vendor specific objective evidence of fair value for an undelivered subscription element, the amortized portion of the related license and consulting fees. Subscription revenues are affected by pricing, number of new customers, customer contract durations, and our customer retention rate.

Subscription revenues increased 51.5%, or $6.5 million, for the three months ended March 31, 2006, compared to the same period in fiscal 2005 and 39.0%, or $9.6 million, for the six months ended March 31, 2006, compared with the year earlier period. Revenues from our subscription services (total subscription revenues excluding revenue from the amortization of fees paid for software maintenance services under software license agreements) contributed approximately 102.6%, or $6.7 million, and 102.5%, or $9.9 million of the absolute dollar increase in subscription revenues, offset by a 5.1%, or $0.2 million, and 3.74%, or $0.2 million, decline in maintenance revenue recognized for the three and six months ended March 31, 2006, compared to the same periods in fiscal 2005, respectively. The acquisition of Outtask and the continued expansion of our subscription services customer base, coupled with strong retention of existing customers, were the main reasons for the increase. The larger customer base reflects a trend of increased market demand for our subscription services and strong retention of existing subscription customers. We believe this expansion relates primarily to the market’s continued growing acceptance of outsourced services, driven in part by limited information technology capital budgets. We believe these economic trends make traditional self-hosted software license arrangements, with their substantial up-front costs, less attractive than subscription services.

We expect subscription revenues to continue to grow in fiscal 2006, both on an absolute basis and as a percentage of total revenues, as a result of the growing demand for our subscription CEM service offerings and our planned investment in sales and marketing.

Consulting and Other Revenues. Consulting revenues consist of fees for client services, which include system implementation and integration, planning, data conversion, training, and documentation of procedures. Consulting revenues are affected predominantly by the number and complexity of on-premise license customer upgrade implementations. Recognition of consulting revenues can also be affected by circumstances in which consulting fees in multiple element arrangements require deferral or are deemed to be subscription related. Other revenues consist of fees earned from sales of our software licenses.

The 7.5%, or $0.3 million, decrease and the 5.3%, or $0.5 million, decrease in consulting and other revenues for the three and six months ended March 31, 2006, respectively, compared to the same periods in fiscal 2005, was primarily due to decreased consulting services performed for existing customers upgrading to the latest version of our on-premise license software .

We anticipate that consulting and other revenues in fiscal 2006 will fluctuate on a quarterly basis but be lower for fiscal 2006 compared to fiscal 2005 in absolute dollars and as a percentage of revenues, primarily as a result of fewer existing customers upgrading their on-premise license software, the continued growth of subscription revenues, and the market’s continued shift in demand from a licensed model to a subscription services model.

International Revenues. Revenues from customers outside the United States were $2.8 million (11.9% of total revenues) and $2.2 million (13.0% of total revenues) in the three months ended March 31, 2006 and 2005, respectively and $5.2 million (12.1% of total revenues) and $5.1 million (15.1% of total revenues) in the six months ended March 31, 2006 and 2005, respectively.Historically, fluctuations in foreign currency exchange rates have not had a material effect on our operating results.

We expect our international revenues to grow in the near term, as our CEM service offerings continue to gain acceptance in international markets, due in part to the expansion of international functionality within our solutions.

Expenses


(dollars in thousands)	Three Months Ended March 31,						Six Months Ended March 31,
(dollars in thousands)	2006		2005		Change		2006		2005		Change
Cost of services	$	9,372	$	6,874	36.3	%	$	17,626	$	13,564	29.9	%
Sales and marketing		5,669		4,279	32.5	%		10,424		8,441	23.5	%
Systems development and programming		3,041		2,532	20.1	%		5,264		4,881	7.8	%
General and administrative		3,638		2,446	48.7	%		6,743		4,820	39.9	%
Amortization of intangible assets		606		285	112.6	%		891		570	56.3	%

Total expenses	$	22,326	$	16,416	36.0	%	$	40,948	$	32,276	26.9	%

Cost of Services. Cost of services primarily consist of salaries and related expenses (including share-based compensation and travel related expenses) and allocated overhead costs (including depreciation, occupancy, insurance, telecommunications, and computer equipment expenses) associated with employees and contractors who provide our subscription and consulting services. Cost of services expenses also include co-location and related telecommunications costs, fees paid to third parties for referrals, resale arrangements, royalties, and amortization of deferred set-up costs we incur in connection with our subscription services.

Cost of services represented 39.9% of total revenues for the three months and 41.2% of total revenues for the six months ended March 31, 2006 compared to 39.7% and 40.4% for the same periods in fiscal 2005, respectively. Total salaries and related expenses and allocated overhead costs increased 50.1%, or $2.2 million, for the three months and 35.1%, or $2.9 million for the six months ended March 31, 2006 compared to the same periods in fiscal 2005. This was primarily due to increased headcount, including the acquisition of Outtask in the three months ended March 31, 2006, which accounted for $1.9 and $2.5 million of the increase in the three and six months ended March 31, 2006, and share-based compensation which accounted for $0.3 and $0.5 million, respectively. Excluding the impact of share-based compensation expenses, which the company began recording October 1, 2005 in accordance with Financial Accounting Standard 123R, cost of services expenses represented 38.5% and 40.0% of total revenues for the three and six months ended March 31, 2006 compared to 39.7% and 40.4% for the same period in fiscal 2005. Fees paid to third parties for referrals, resale arrangements, and royalties increased 24.0%, or $0.1 million, for the three months and 19.6%, or $0.2 million, for the six months ended March 31, 2006, compared with the same periods in fiscal 2005, respectively. This increase was due to an increase in the amount of business generated through reseller partners for subscription-based sales. Fees paid for servers and storage increased 34.2%, or $0.2 million, for the three months and 48.9%, or $0.5 million for the six months ended March 31, 2006, compared with the same periods in fiscal 2005. The remainder of the change in the three and six months ended March 31, 2006 was the result of an increase in amortization and other expenses.

We expect cost of services expenses to fluctuate moderately from quarter to quarter, and generally to trend down in fiscal 2006 compared to fiscal 2005 as a percentage of total revenues as the incremental cost to deploy and support each new customer is expected to decrease due to economies of scale anticipated in our subscription service model infrastructure. We anticipate that cost of operations will increase in absolute dollars principally as a result of the acquisition of Outtask and as we continue to expand our capacity to deploy and support additional new customers.

Sales and Marketing. Sales and marketing expenses consist of salaries and related expenses (including share-based compensation, sales commissions and travel related expenses) and allocated overhead costs associated with our sales and marketing personnel, and, to a lesser extent, miscellaneous sales and marketing costs, such as advertising, trade shows, and other promotional activities.

Sales and marketing expenses were 24.1% of total revenues for the three months and 24.4% for the six months ended March 31, 2006 compared with 24.7% and 25.1% for the same periods in fiscal 2005. Total sales and marketing expenses increased 32.5%, or $1.4 million, for the three months and 23.5%, or $2.0 million for the six months ended March 31, 2006, compared with the same periods in fiscal 2005, respectively. The increase in the three and six month periods ending March 31, 2006, compared to the same periods in fiscal 2005, was mainly due to a 38.6%, or $1.4 million, and a 26.8%, or $1.9 million increase in salaries and related expenses and allocated overhead costs, driven primarily by headcount increases including the acquisition of Outtask, as well as a $0.5 million and $0.8 million in share-based compensation expense, respectively. Excluding the impact of share-based compensation expenses, which the company began recording October 1, 2005 in accordance with Financial

Accounting Standard 123R, sales and marketing represented 22.2% of total revenues for the three months and 22.6% for the six months ended March 31, 2006 compared to 24.7% and 25.1% for the same periods in fiscal 2005.

We expect total sales and marketing expenses in fiscal 2006 to increase in absolute dollars compared to fiscal 2005, primarily due to our acquisition of Outtask and our continued emphasis on growing our investment in this area. This increase is expected to be principally driven by an increase in sales headcount and is a key part of our strategic focus in fiscal 2006, which is to ensure that our sales and marketing efforts are able to support expected demand and create additional awareness in our target markets.

Systems Development and Programming Costs. Systems development and programming costs consist of salaries and related expenses (including share-based compensation), and allocated overhead costs associated with employees and contractors engaged in software engineering, program management, and quality assurance.

Systems development and programming costs were 12.9% of total revenues for the three months and 12.3% for the six months ended March 31, 2006, compared to 14.6% and 14.5% for the same periods in fiscal 2005.Systems development and programming costs recognized increased by 20.1%, or $0.5 million, for the three months and 7.8%, or $0.4 million for the six months ended March 31, 2006, compared to the same periods in fiscal 2005. This increase was the result of higher payroll expense and allocated overhead cost including the acquisition of Outtask, partially offset by an increase in capitalized systems development and programming cost. Share-based compensation was approximately $78,000 for the three months and approximately $122,000 for the six months ended March 31, 2006, respectively. Excluding the impact of share-based compensation expenses, which the company began recording October 1, 2005 in accordance with Financial Accounting Standard 123R, systems development and programming represented 12.6% of total revenues for the three months and 12.0% for the six months ended March 31, 2006 compared to 14.6% and 14.5% for the same periods in fiscal 2005.

In response to growing demand for our subscription services, we have focused on the development and programming of internal-use software used to provide these services. Under generally accepted accounting principles, costs for corporate software developed or obtained for internal use are required to be capitalized and amortized over their useful lives. Internal use software costs capitalized were $1.8 million and $0.8 million for the quarters ended and $3.0 million and $1.3 million for the six months ended March 31, 2006 and 2005, respectively.

We anticipate that recognized systems development and programming costs in fiscal 2006 will increase compared to fiscal 2005 driven primarily by our acquisition of Outtask and our continued focus on product innovation and enhancement. We anticipate most of the increase in system development and programming cost will be capitalized.

General and Administrative. General and administrative expenses consist of salaries and related expenses (including share-based compensation), and allocated overhead costs, all associated with employees and contractors in finance, human resources, legal, information technology, facilities, and, to a lesser extent, costs, such as professional fees and public company regulatory compliance costs.

General and administrative expenses were 15.5% of total revenues for the three months and 15.8% for the six months ended March 31, 2006, compared to 14.1% and 14.3% for the same periods in 2004, respectively. General and administrative expenses increased 48.7%, or $1.2 million, for the three months and 39.9%, or $1.9 million for the six months ended March 31, 2006, compared to the same periods in fiscal 2005, respectively. The increase in the three and six month periods ending March 31, 2006, compared to the same periods in fiscal 2005, was mainly due to a 57.7%, or $0.9 million, and a 45.4%, or $1.3 million increase in salaries and related expenses and a 129.3%, or $0.6 million and 70.5%, or $0.7 million increase in overhead costs, respectively. The increase in salaries and related expenses was driven primarily by headcount increases, including expenses associated with the acquisition of Outtask, as well as $0.3 million and $0.6 million in share-based compensation expense. Excluding the impact of share-based compensation expenses, which the company began recording October 1, 2005 in accordance with Financial Accounting Standard 123R, cost of services expenses represented 14.1% of total revenues for the three months and 14.4% for the six months ended March 31, 2006 compared to 14.1% and 14.3% for the same periods in fiscal 2005, respectively.

We expect the absolute dollar amount of general and administrative expenses to increase in fiscal 2006 compared to fiscal 2005 due to increases in personnel costs related to the growth of our business and the acquisition of Outtask.

Amortization of Intangible Assets. Amortization of intangible assets represents the allocation of the intangible assets from our July 2002 acquisition of Captura and from our January 2006 acquisition of Outtask. The Captura intangible asset is being ratably amortized as a non-cash charge to operations over five years, consistent with the timing and level of the

expected cash flows from the underlying acquired customer contracts. The Outtask intangible assets are being amortized as non-cash charges to operations over one to thirteen years, consistent with the timing and level of expected cash flows attributed to customer relationships, use of acquired technology, trade name and trademarks, and non-compete agreements.

Interest Income and Interest Expense


(dollars in thousands)	Three Months Ended March 31,								Six Months Ended March 31,
(dollars in thousands)	2006			2005			Change		2006			2005			Change
Interest income	$	130		$	94		38.3	%	$	235		$	192		22.4	%
Interest expense		(218	)		(1	)	NM			(219	)		(4	)	NM

NM = Not Meaningful

Interest Income and Interest Expense. The increase in interest income in the three months and six months ended March 31, 2006 compared to the same periods in fiscal 2005 reflects higher short term interest rates and more money in interest bearing accounts in 2006 than in 2005. The increase in interest expense in the three months and six months ended March 31, 2006, compared to the same periods in fiscal 2005 was due to debt financing we are utilizing to partially fund the acquisition of Outtask.

Provision for Income Taxes. For the three months and six months ended March 31, 2006, we recorded an income tax expense of $60,000 and $120,000 for Alternative Minimum Tax related to Concur’s operating results, as compared to no income tax expense reported for the three and six months ended March 31, 2005.

Financial Condition

Our total assets were $136.3 million at March 31, 2006 and $60.7 million at September 30, 2005, representing an increase of $75.6 million or 124.5%. This increase was due to an increase in goodwill totaling $55.9 million, net intangible assets totaling $9.3 million, accounts receivable totaling $7.2 million, and an increase in capital expenditures of $3.3 million. Our cash and cash equivalents totaled $13.3 million at March 31, 2006 and $16.2 million as of September 30, 2005, representing a decrease of $2.9 million, or 17.9%. Net property and equipment increased to $18.3 million at March 31, 2006 from $15.0 million at September 30, 2005, with the largest increase due to a $1.8 million investment in development costs for software used internally for our subscription services offerings. Our cash flow activity is described in more detail in the “Liquidity and Capital Resources” section below.

Accounts receivable balances, net of allowances of $1.6 million and $0.7 million, were $20.0 million and $12.4 million as of March 31, 2006 and September 30, 2005, respectively, representing a net increase of $7.6 million or 61.3%. The $7.6 million increase consisted of $3.1 million in accounts receivable related to the acquisition of Outtask and a $4.5 million increase in Concur accounts receivable related to growth in our business and the timing of collections. The increase in the allowance for the period of $0.9 million was based upon an increase in accounts receivable and an increase in the allowance for specific customer receivables, both related to the growth in related revenues. Approximately $0.4 million of the $0.9 million increase in the allowance was related to Outtask accounts receivable.

Our total current liabilities were $32.7 million and $19.7 million at March 31, 2006 and September 30, 2005, respectively, representing an increase of $13.0 million, or 66.0%. This increase was mainly due to other accrued liabilities

totaling $4.8 million, $4.6 million of which consisted of holdbacks related to the acquisition of Outtask. The increase was also attributed to an increase in the current portion of long-term debt of $2.6 million, an increase in the current portion of deferred revenues totaling $2.6 million, and an increase in accounts payable of $2.2 million. Total deferred revenues, including both current and long term, increased by $3.7 million to $24.2 million at March 31, 2006 from $20.5 million at September 30, 2005. Of this increase, $2.6 million resulted from the growth in our customer base for our subscription services offerings over the period and $1.1 million related to both deferred revenues assumed in the Outtask acquisition and deferred revenue related to Cliqbook customers added by Outtask after consummation of the acquisition.

Our common stock and additional paid in capital totaled $280.2 million at March 31, 2006, compared to $235.1 million at September 30, 2005, an increase of $45.1 million, or 19.2%. This increase was primarily due to issuance of $39.9 million in common stock and stock options related to the acquisition of Outtask and to a lesser extent by $3.1 million in proceeds received from the exercise of stock options under our share-based compensation plans during the three months ended March 31, 2006.

Liquidity and Capital Resources

Our available sources of liquidity as of March 31, 2006 consisted principally of cash and cash equivalents totaling $13.3 million. We also have a revolving credit line and equipment purchase facility available, which is discussed in more detail below.

Our operating cash inflows consist of payments received from our subscription and on-premise customers. Our operating cash outflows consist of employee salaries, payments to vendors directly related to subscription and on-premise services, payments under arrangements with third parties who provide hosting infrastructure services in connection with our subscription services offerings, related sales and marketing and administrative costs, and systems development and programming costs. Operating activities provided $2.7 million and $0.9 million in the three months ended March 31, 2006 and 2005, respectively.

Our investing activities used $25.1 million and $3.0 million in the three months ended March 31, 2006 and 2005, respectively. Investing activities for the three months ended March 31, 2006, included $22.5 million in net payments for the acquisition of Outtask, $1.8 million for internally developed software and $0.4 million for purchased software. Purchases of property and equipment accounted for the remainder, consisting mainly of leasehold improvements. The amount capitalized for the development of software used internally is described in more detail above in “Results of Operations – Expenses –Systems Development and Programming Costs” above.

Our financing activities provided $19.7 million in the three months ended March 31, 2006 and used $8.2 million in the three months ended March 31, 2005. Proceeds from financing activities included $18.0 million from the issuance of debt in the three months ended March 31, 2006. Payments for financing activities in the three months ended March 31, 2005 consisted mainly of cash paid to re-purchase company common stock.

In March 2002, we entered into a loan and security agreement (“Loan Agreement”) with a bank for a $1.0 million equipment credit facility (“Term I Advance”). The Loan Agreement for the Term I Advance allowed for borrowings in the amount of actual equipment purchases made through December 2002. In September 2003, we amended the terms of the Loan Agreement to add a revolving line of credit (“Revolver”) in an amount not to exceed the lesser of 80% of eligible accounts receivable or $5.0 million, with interest at the bank’s prime rate. In September 2004 and May 2005, we amended the Loan Agreement further extending the Revolver’s availability to December 31, 2006, at which time any advances become due and payable. The other terms of the Revolver remained the same. There were no amounts borrowed under the Revolver at March 31, 2005.

We also amended the terms of the Loan Agreement in September 2003 to add an additional equipment facility (“Term III Advance”) for advances in the amount of actual equipment purchases up to $1.0 million through September 2004, with interest at the bank’s prime rate, maturing in September 2006. In September 2004 we amended the Loan Agreement to extend the Term III Advance’s availability to June 30, 2005, with any amounts borrowed due on June 30, 2007. The other terms of the Term III Advance remain the same. There were no amounts borrowed under the Term III Advance at December 31, 2005.

In May 2005, we amended the terms of the Loan Agreement to add an additional equipment facility (“Term IV Advance”) for advances in the amount of actual equipment purchases up to $2.5 million through May 30, 2006, with interest at the bank’s prime rate, maturing on May 30, 2008. There were no amounts borrowed under the Term IV Advance at December 31, 2005.

In January 2006, in connection with the acquisition of Outtask, we entered into an Amended and Restated Loan and Security Agreement (“Amended Loan Agreement”) with Comerica Bank (“Comerica”) in order to increase available borrowing amounts under our existing loan agreement. The Amended Loan Agreement provides for a term loan of up to $14 million and a revolving line of credit for up to $8 million. At Concur’s option, the term loan bears an interest rate equal to Comerica’s prime rate plus a range of 0.75% to 1.25% or LIBOR plus a range of 3.0% to 3.5%, and matures December 31, 2010. At Concur’s option, the revolving live of credit bears an interest rate equal to Comerica’s prime rate plus a range of 0.50% to 1.00% or LIBOR plus a range of 2.75% to 3.25%, and matures January 23, 2007. There was approximately $17.4 million outstanding under the term loan and revolver at March 31, 2006.

In January 2003, our Board of Directors authorized a stock repurchase program, under which we were authorized to repurchase up to one million shares of our outstanding common stock over a two-year period expiring in January 2005. We did not repurchase any shares under this program. In January 2005, our Board of Directors authorized a new stock repurchase program, under which we are authorized to repurchase up to two million shares of our outstanding common stock over a two-year period expiring in January 2007. Stock repurchases under the 2005 stock repurchase program may be made from time to time in the open market based on market conditions. Any repurchases will be made at the then-current market prices, and repurchased shares will be retired. During the fiscal year ended September 30, 2005, we repurchased and retired 1,094,494 shares of our outstanding common stock under the 2005 repurchase program, leaving a balance of 905,506 shares remaining eligible for repurchase. There were no share repurchases executed during the three and six months ended March 31, 2006.

We believe our cash and cash equivalents, amounts available under our credit facilities, 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 needs. If additional funds are raised through the issuance of equity securities, stockholders may experience dilution, or such equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock.

Off Balance Sheet Arrangements

None.

We do not use derivative financial instruments.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances; such estimates and judgments are periodically re-evaluated. Actual results may differ materially from these estimates under different assumptions, judgments, or conditions.

The estimates and judgments noted above are affected by our application of accounting policies. Our critical accounting policies are those most important to the portrayal of our financial condition and results of operations, and that require the most difficult, subjective, or complex judgments. Our critical accounting policies include business combinations, share-based compensation expense, revenue recognition, internal-use software, allowances for accounts receivable, accounting for share-based compensation, and accounting for income taxes.

Business Combinations

We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. This valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.

Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, and proprietary technology, and non-compete agreements; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s estimates of fair value are based upon assumptions it believes to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Other estimates associated with the accounting for these acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Share-Based Compensation Expense

We account for share-based compensation expense in accordance with the provisions of SFAS 123R. Under the fair value recognition provisions of SFAS 123R, share-based compensation cost is estimated at the grant date fair value of the award on the grant date and is recognized as an expense ratably over the applicable service period of the award. Determining the appropriate fair value model and calculating the fair value of share-based compensation awards requires the use of estimates, including estimates related to stock price volatility, forfeiture rates, and expected life of the award.

Revenue Recognition

We generate our revenues from the delivery of subscription services (which include software maintenance services), consulting services, and the sale of software licenses. We recognize revenues in accordance with accounting standards for software and service companies.

We recognize revenue when:

•

evidence of an arrangement exists;

•

delivery has occurred;

•

the fees are fixed or determinable; and

•

collection is considered probable.

If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed or determinable, we recognize revenues as payments become due from the customer. Accordingly, our judgment as to the probability of collection and determinability of fees may materially affect the timing of our revenue recognition and results of operations. If non-standard acceptance periods or non-standard performance criteria are required, we recognize revenue upon the expiration of the acceptance period or satisfaction of the acceptance/performance criteria, as applicable.

In contractual arrangements that include the provision of multiple elements, we apply the accounting guidance most applicable to the specific arrangement to determine how contract consideration should be measured and allocated to the separate elements in the arrangement. Multiple element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Generally, separate contracts with the same customer that are entered into at or near the same time are presumed to have been negotiated together and, therefore, are accounted for as a single contractual arrangement in determining how contract consideration should be measured and allocated to the separate elements in the arrangement. Typically, we measure and allocate the total arrangement fee among each of the elements based on their fair value or, if necessary, vendor-specific objective evidence of their fair value (“VSOE”). VSOE is determined by the price charged when an element is sold separately or, in the case of an element not yet sold separately, the price set by authorized management, if it is probable that the price, once established, will not change prior to separate market introduction.

Subscription Revenues

Our subscription revenues are typically recognized monthly as the service is provided to the customer and consist of:

•

monthly fees paid for subscription services;

•

amortization of related set-up fees;

•

amortization of fees paid for software maintenance services under software license arrangements; and

•

the amortized portion of the related license and consulting fees in certain multiple element subscription arrangements where VSOE does not exist for an undelivered subscription element.

Set-up fees paid by customers in connection with subscription services, as well as the associated direct and incremental costs, such as labor and commissions, are deferred and recognized ratably over the longer of the contractual lives, or the expected lives of the customer relationships, which generally range from two to five years. For those subscription service offerings that have been commercially available for only a short period of time, the contractual lives are used as the best estimate of the expected lives of the customer relationships. We continue to evaluate and adjust the length of these amortization periods as we gain more experience with customer contract renewals and contract cancellations. It is possible that, in the future, the estimates of expected customer lives may change and, if so, the periods over which such subscription set-up fees and costs are amortized will be adjusted. Any such change in estimated expected customer lives will affect our future results of operations.

Consulting and Other Revenues

Other revenues consist of fees earned from, and allocable to, grants of licenses to use our software products. We recognize license revenues when evidence of a license arrangement exists, we have delivered the software, the amount of the transaction is fixed or determinable, collection is probable, and VSOE exists for any undelivered elements of the arrangement. Elements included in our multiple-element software arrangements consist of various licensed software products and services such as software maintenance services, consulting services, and subscription services.

arrangement consideration with respect to a given element, and in determining whether an established price is likely to change prior to separate market introduction. These judgments may materially affect the timing of our revenue recognition and results of operations.

In software license arrangements where we also provide consulting services, license revenues are recognized upon delivery of the software, provided that the criteria for recognition of software license revenues described above are met, payment of the license fees is not dependent upon the performance of the consulting services, and the consulting services are not essential to the functionality of the software. If we determine that the consulting services are essential to the functionality of the software, or payment of the license fees is dependent upon the performance of the consulting services, then both the license and consulting fees are recognized on a percentage-of-completion basis. We typically do not consider the consulting services we provide in such arrangements to be essential to the functionality of the software and, therefore, license revenues are typically recognized upon delivery of the software and consulting revenues are recognized as the services are performed. Accordingly, our judgment as to whether consulting services should be considered essential to the functionality of the licensed software may materially affect the timing of our revenue recognition and results of operations.

In arrangements where we license our software and also host the licensed software for our customer, a software element is only considered present if our customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty, and it is feasible for our customer to either operate the software on its own hardware or contract with another vendor to host the software. If the arrangement meets these criteria, as well as the other criteria for recognition of license revenues described above, we deem there to be software element present and recognize license revenues when the software is delivered, and we recognize the subscription hosting revenues as the hosting service is provided. Hosting set-up fees for such arrangements, as well as the associated direct and incremental costs, are deferred and recognized ratably over the hosting service period. If we determine that a separate software element as described above is not present, we combine the software license fees with the subscription hosting fees and recognize them ratably over the subscription service period, as subscription revenue. Our judgment as to whether we meet the criteria above could have a material affect on the timing and mix of our revenue recognition and on our results of operations.

Internal-Use Software

We capitalize certain costs of software developed or obtained for internal use in accordance with AICPA SOP 98-1,Accounting for the Costs of Corporate Software Developed or Obtained for Internal Use (“SOP 98-1”). We capitalize software development costs when application development begins and it is probable that the project will be completed and the software will be used as intended. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. Our policy provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of materials and services associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. Capitalized costs are ratably amortized, using the straight-line method, over the estimated useful lives of the related applications which typically range from three to five years. Our judgment as to which costs to capitalize, when to begin capitalizing such costs, and what period to amortize the costs over, may materially affect our results of operations.

Accounts Receivable Allowances

We record provisions for estimated sales allowances against subscription and consulting revenues in the period in which the related revenues are recorded. We record our sales allowances based on historical experience, including a review of our experience related to price adjustments and sales credits issued.

We make judgments as to our ability to collect outstanding receivables, and we provide an allowance for doubtful accounts, included in general and administrative expenses. In estimating allowances for doubtful accounts, we consider specific receivables when collection is doubtful, as well as an analysis of our historical bad debt experience and the current economic environment. If the data used to estimate the allowance provided for doubtful accounts does not adequately reflect

our future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and future results of operations could be materially affected.

Share-based Compensation

Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. We rely primarily on four stock option plans that provide broad discretion to our Board of Directors to create appropriate equity incentives for members of our Board of Directors and our employees. On October 1, 2005, we adopted the provisions of SFAS 123R, requiring us to recognize expense related to the fair value of our share-based compensation awards. We elected the modified prospective transition method as permitted by SFAS 123R. Under this transition method, stock-based compensation expense for the three and six months ended March 31, 2006, includes compensation expense for all stock based compensation awards granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and compensation expense for all stock based compensation awards granted subsequent to October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with SFAS 123R, we capitalize the portion of our share-based compensation attributed to internally developed software and defer the portion of our share-based compensation associated with activities that generate deferred revenue. Our ESPP is deemed non-compensatory and therefore is not subject to the provisions of SFAS123R. See Note 8 to our Consolidated Financial Statements for further detail, including the impact of the adoption to our Consolidated Statement of Operations.

Prior to October 1, 2005, We accounted for our stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees and related interpretations, as opposed to the fair value method allowed by SFAS No. 123,Accounting for Stock-Based Compensation, as amended. Accordingly, no stock-based compensation cost is reflected in our statement of operations for the quarter ended December 31, 2004, as all options granted under these plans had exercise prices equal to the fair market value of the underlying common stock on the date of grant, and any purchase discounts under our employee stock purchase plan were within statutory limits.

Income Taxes

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This involves estimating our current tax liabilities, including the impact, if any, of additional taxes resulting from tax examinations as well as making judgments regarding our ability to realize our deferred tax assets. Such judgments can involve complex issues.

We have accumulated significant net operating loss carryforwards and other temporary differences, which resulted in net deferred tax assets. We currently have a full valuation allowance on our U.S. deferred tax assets and a full valuation allowance on our overseas deferred tax assets.

Depending upon our actual results for the third and fourth quarters of fiscal 2006, there may be sufficient evidence to support the conclusion that all or a portion of our net deferred tax valuation allowance should be reduced during the second half of the year. Any such reduction of our net deferred tax valuation allowance is expected to materially increase our net income and materially impact our consolidated balance sheet. As future profitability is not assured, any reduction of the valuation allowance and our future effective tax rate are uncertain. In addition, the utilization of our accumulated net operating loss carryforwards may be subject to the limitations and timing as described below.

As a result of prior equity financings and the equity issued in conjunction with certain acquisitions, we have incurred ownership changes, as defined by applicable tax laws. As a result, our use of the acquired net operating loss carryforwards may be limited. Further, to the extent that any single year loss is not utilized to the full amount of the limitation, such unused loss is carried over to subsequent years until the earlier of its utilization or the expiration of the relevant carryforward period. Our net operating loss carryforwards may extend to a period of greater than 10 years, subject to limitations and timing as prescribed by applicable tax laws and generally accepted accounting principles.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate and foreign exchange risks.

Interest Rate Risk.We have borrowing arrangements with variable rates of interest. We also maintain cash in highly liquid investment vehicles including money market accounts, which bear interest at variable overnight or short term rates.

Variable interest rate investment and debt exposes us to differences in future cash flows resulting from changes in market interest rates. Variable interest rate risk can be quantified by estimating the change in cash flows resulting from a hypothetical 100 basis point increase in interest rates.

As discussed in Note 9 to the Unaudited Consolidated Financial Statements, our credit facility bears interest at floating rates we select under the terms of the Amended Loan Agreement. As of March 31, 2006, we had $13.4 million outstanding on our term-loan agreement and $4.0 million outstanding on our line of credit. Neither of the instruments are hedged with an interest rate swap. On an annual basis, a 100 basis point change in interest rates would result in an approximate $0.2 million change to annual interest expense, based upon net variable rate borrowings of $17.4 million.

Foreign Currency Risk.We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. We do not believe movements in the foreign currencies in which we transact will significantly affect future net earnings. Foreign currency risk can be quantified by estimating the change in cash flows resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would not have a material impact on our cash flows of financial instruments that are sensitive to foreign currency exchange risk.

Derivatives. We do not use derivative financial instruments.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures.

The Securities and Exchange Commission, or SEC, defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer have concluded, based on an evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, that our disclosure controls and procedures were effective for the purpose described above as of the end of the period covered by this report.

Changes In Internal Control Over Financial Reporting.

Regulations under the Securities Exchange Act of 1934 require public companies, including our company, to evaluate any change in “internal control over financial reporting,” which is defined as a process to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting during the three month period ended March 31, 2005 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s assessment of the effectiveness of internal controls over financial reporting as of March 31, 2006 excludes the acquisition of Outtask, Inc. on January 23, 2006. See Note 2 of Notes to Consolidated Financial Statements for a further description of this acquisition. Management expects to include the fiscal 2006 acquisition of Outtask, Inc. in its assessment of internal controls over financial reporting in fiscal 2007.

Limitation On Effectiveness Of Controls.

It should be noted that any system of controls, including disclosure controls and procedures and internal controls over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. The design of any control system is based, in part, upon the benefits of the control system relative to its costs. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and the actual effectiveness of our disclosure controls and procedures is described above.

Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in

conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

ITEM 1A.

RISK FACTORS

We operate in a dynamic and rapidly changing business environment that involves substantial risk and uncertainty. The following discussion augments and should be read in conjunction with the “Risk Factors” included in Item 1 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and, collectively, addresses the risks and uncertainties that could cause, or contribute to causing, actual results to differ materially from expectations. In evaluating our business, readers should pay particular attention to the descriptions of risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 as updated by the discussion below and in other sections of this report and our other filings with the SEC.

We Only Recently Acquired Outtask, So It Is Difficult To Determine What Its Impact On Our Financial Results Will Be.

We completed our acquisition of Outtask on January 23, 2006, so we have only a very limited operating history on which to base an evaluation of our combined business and prospects. Our future success will depend on many factors that are not under our control, such as the following:

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successful integration of Outtask service and personnel with our offerings and business;

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growth in demand for our suite of services, and competitive pressures;

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the perceived security of our services, technology, infrastructure and practices; and

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the significant lead times before a new product, service or enhancements, including those that will be added through the acquisition Outtask, begin generating revenues.

To address these risks we must, among other things:

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successfully market our suite of services to new and existing customers;

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attract, integrate, train, retain and motivate qualified personnel;

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respond to competitive developments;

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successfully introduce new services and enhancements to existing services to address changing market conditions.

We May Have Difficulties Integrating Outtask With Our Business Operations, And The Costs We Incur May Be High.

We may experience difficulties integrating the personnel, products, technologies and operations of Outtask. Those difficulties include:

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the need to manage more geographically-dispersed operations, such as Outtask’s operations in the State of Virginia;

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difficulting incorporating acquired technologies into our operations infrastructure;

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the difficulty of assimilating the operations and personnel of Outtask;

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the inability to maintain uniform standards, controls, procedures and policies across the larger organization.

If we are unable to address any of these risks successfully, our business could be harmed. Additionally, there is risk that we may incur additional expenses associated with an impairment of a portion of goodwill and other intangible assets due to changes in market conditions for acquisitions. Under generally accepted accounting principles, we are required to evaluate goodwill for impairment on an annual basis and to evaluate other intangible assets as events or circumstances indicate that such assets may be impaired. These evaluations could result in impairments of goodwill or other intangible assets.

If We Acquire Additional Companies, Products, Or Technologies, We Expect To Face Risks Associated With Those Acquisitions.

In the future, we may acquire additional companies or make investments in other companies, products, or technologies. We may not realize the anticipated benefits of our prior or future acquisitions or investments to the extent that we anticipate, or at all. We may have to incur additional debt or issue additional equity securities to pay for future acquisitions or investments, the issuance of which could be dilutive to our existing stockholders. If any acquisition or investment is not perceived as improving our earnings per share, our stock price may decline. In addition, we may incur non-cash amortization charges from acquisitions, which could harm our operating results. Any completed acquisitions would also require significant integration efforts, diverting our attention from our business operations and strategy.

Because Sales Of Our Concur Expense Solution Accounts For More Than 95% Of Our Total Revenues, A Material Decrease In Demand For These Solutions Would Substantially Harm Our Results Of Operations.

We generated more than 95% of our total revenues for the three and six months ended March 31, 2006, and for all of fiscal 2005, from our Concur Expense services and software. We expect such services and software to continue to contribute a similar percentage of our total revenues for the foreseeable future. Our future financial performance and revenue growth is dependent upon continued market acceptance of our Concur Expense solutions, and our revenues would decline significantly if, for example, our competitors, some of which have substantially greater resources than us, develop expense management products that achieve greater market acceptance, or we do not keep up with technological advancements in software platforms, delivery models or product features. There can be no assurance that our services and software solutions will continue to maintain widespread market penetration or that we will continue to derive significant revenues from sales of such solutions in the future.

We Depend On A Subscription Service Business Model That Has A Limited History And Continues To Evolve, Which Makes Our Business Operations And Prospects Difficult To Evaluate.

Our subscription revenues are based on a business model that has a limited history and continues to evolve, and is therefore subject to a number of risks, including, without limitation:

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an increasing reliance on a relatively novel revenue model for our industry;

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a reduction in our license revenues as we focus on building our subscription business;

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lower gross margins and higher fixed costs associated with our subscription business, as compared to our license business;

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unpredictable sales cycles; and

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the possibility of subscription cancellations.

We began offering our software as a service on an outsourced basis over the Internet in 1999. Our subscription services delivery models have continued to evolve, and we anticipate that our future financial performance and revenue growth will largely depend upon the growth of our subscription services.Our subscription revenues represented 82% and 80% of total revenues in the three and six months ended March 31, 2006, and we depend substantially on outsourced subscription services delivery models for our anticipated revenues and cash flows. We believe that subscription revenues will continue to represent a significant percentage of our total revenues and that our future financial performance and revenue growth will depend, in large part, upon the growth in customer demand for our outsourced subscription services delivery models. As a result, we have invested significantly in infrastructure, operations, and strategic relationships to support these models, which represent a significant departure from traditional software delivery strategies. The relatively short history and continued evolution of this business model makes our business operations and prospects difficult to evaluate.

Our increased strategic focus on growing our subscription business has contributed to a substantial reduction in our software license revenues in recent years. The limited history of our subscription business model makes it difficult to predict whether demand for subscription services will continue. If demand for our subscription services declines, we may not be able to generate sufficient license revenues to offset any decrease in subscription services revenues.

If our subscription services business does not grow sufficiently, our cost of revenues may exceed such revenues, which could harm our operating results. Our costs of providing subscription services are relatively fixed in the short-term, so we may not be able to adjust our expenses quickly enough to offset any potential slowdown in subscription sales. In addition, the cycle for implementing our subscription services can be unpredictable because our services must be integrated with a customer’s existing systems. Any delays in implementation may prevent us from recognizing subscription revenue for indeterminate periods of time, even when we have already incurred costs relating to the implementation of our subscription services. Further, we may experience unanticipated increases in costs associated with providing our subscription services and software maintenance services to customers over the term of our customer contracts as a result of inaccurate internal cost projections or other factors, which may harm our operating results. Additionally, some of our subscription services contracts contain cancellation provisions, and, if cancelled, could result in us recognizing substantially less revenue than the aggregate value of those contracts over their terms. If a customer cancels or otherwise seeks to terminate a subscription or maintenance agreement prior to the end of its term, or if we are unable to renew such an agreement at the end of its term, our operating results in future periods could be substantially harmed.

We Depend On Consulting Revenues, Which May Fluctuate Or Decline.

Our consulting revenues represented 15.2% and 17.0% of total revenues in the three and six months ended March 31, 2006, respectively. We anticipate that consulting revenues will continue to represent a significant component of our total revenues. The level of consulting revenues depends largely upon demand for our consulting services, which consist of system implementation and integration, planning, data conversion, training, and documentation of procedures. Our consulting revenues could fluctuate or decline to the extent sales or upgrades of our subscription services and/or software licenses fluctuate or decline or if third-party organizations such as systems integrators compete with us for the installation or servicing of our offerings. Our ability to increase consulting revenues will depend in large part on our ability to increase the scale of our consulting organization, including our ability to recruit and train a sufficient number of qualified consulting personnel.

We Face Significant Competition From Companies That Have Longer Operating Histories And Greater Resources Than We Do, And Our Business Will Suffer If We Fail To Compete Effectively.

The market for our solutions is intensely competitive and rapidly changing. The direct competition we face depends on the market segment focus and delivery model capabilities of our competitors. We also face indirect competition from potential customers’ internal development efforts and, at times, have to overcome their reluctance to move away from existing paper-based systems. Our principal direct competition comes from independent vendors of Corporate Expense Management software and services, as well as financial institutions and ERP vendors that sell products similar to ours along with their suites of other products and services. Many of our competitors have longer operating histories, greater financial, technical, marketing, and other resources, greater name recognition, and a larger total number of customers for their products and services than we do. Some of our competitors, particularly major financial institutions and ERP vendors, have well-established relationships with our current and potential customers as well as with systems integrators and other vendors and service providers. These competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, and sale of their products, than us. In addition, we anticipate the entrance of new competitors in the future. Increased competition may result in price reductions,

reduced gross margins, and change in market share and could have a material adverse effect on our business, financial condition, and results of operations.

We Depend Upon Strategic Relationships With Third Parties And Our Revenues Will Decline If We Cannot Continue To Sustain And Develop These Relationships.

We depend on strategic reseller and referral relationships to offer products and services to a larger customer base than we can reach through direct sales, telesales, and internal marketing efforts. If we were unable to maintain our existing strategic relationships or enter into additional strategic relationships, we would have to devote substantially more resources to the distribution, sales, and marketing of our products and services, which would increase our costs and decrease our revenues. Our success depends in part on the ultimate success of our strategic reseller and referral partners and their ability to market our products and services successfully. Our existing strategic referral partners are not obligated to refer any potential customers to us. In addition, some of these third parties have entered, and may continue to enter, into strategic relationships with our competitors. Further, many of our strategic partners have multiple strategic relationships, and they may not regard us as significant for their businesses. Our strategic partners may terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our products or services. Our strategic partners also may interfere with our ability to enter into other desirable strategic relationships.

We Depend On Our Relationships With Travel Suppliers And Any Adverse Changes In These Relationships Could Adversely Affect Our Business, Financial Condition And Results Of Operations.

As a result of our acquisition of Outtask, an important component of our business success will depend on our ability to maintain existing, as well as build new, relationships with travel suppliers. Adverse changes in existing relationships, or our inability to enter into new arrangements with these parties on favorable terms, if at all, could reduce the amount, quality and breadth of attractively priced travel products and services that we are able to offer, which could adversely affect our business, financial condition, and results of operations.

Travel suppliers are increasingly seeking to lower their travel distribution costs by promoting direct online bookings through their own websites. In some cases, supplier direct channels offer advantages to consumers, such as loyalty programs or lower transaction fees. In addition, travel suppliers may choose not to make their travel products and services available through our distribution channels. To the extent that consumers increase the percentage of their travel purchases through supplier direct websites and/or if travel suppliers choose not to make their products and services available to us, our business may suffer.

If Our Customers Have Concerns Over The Scalability Or Security Of Our Products, They May Not Continue To Buy Our Products And Our Revenues Will Decline.

If customers determine that our subscription services offerings are not sufficiently scalable, do not provide adequate security for the dissemination of information over the Internet or corporate extranets, or are otherwise inadequate for Internet or extranet use or if, for any other reason, our customers decide not to accept our subscription services for use, our business will be harmed. As part of our subscription services, we receive credit card, travel booking, employee, purchasing, supplier, and other financial and accounting data, through the Internet or extranets, and there can be no assurance that this information will not be subject to computer break-ins, theft, and other improper activity that could jeopardize the security of information for which we are responsible. Any such lapse in security could expose us to litigation, loss of customers, damage to our reputation, or otherwise harm our business.

In addition, any person who is able to circumvent our security measures could misappropriate proprietary or confidential customer information or cause interruptions in our operations. We may be required to incur significant costs to protect against security breaches or to alleviate problems caused by breaches. Any general concern regarding security in the marketplace could deter customers or prospects from using the Internet to conduct transactions that involve transmitting confidential information. Our failure to prevent security breaches, or well-publicized security breaches affecting the Internet in general, could significantly harm our business, operating results, and financial condition.

Privacy Concerns Are Increasing, Which Could Result In Regulatory Changes That May Harm Our Business.

Personal privacy has become a significant issue in the United States and many other countries in which we operate. The United States and various other countries have recommended restrictions on, or taken actions to restrict, the use of personal information by those collecting such information. Any new or existing privacy laws, if applicable to our business, could impose additional costs and could limit our use and disclosure of such information. If such privacy laws were deemed to

apply to us, we may be required to change our activities and revise or eliminate our services, which could significantly harm our business.

Interruption Of Our Operations Could Prevent Us From Delivering Our Products And Services To Our Customers, Which Could Significantly Harm Our Business.

Significant portions of our operations depend on our ability to protect our computer equipment and the information stored in our computer equipment, offices, and hosting facilities against damage from earthquake, floods, fires, power loss, telecommunications failures, unauthorized intrusion, and other events. We back up software and related data files regularly and store the back-up files at various off-site locations. However, there can be no assurance that our disaster preparedness will eliminate the risk of extended interruption of our operations.

We have engaged third-party hosting facility providers to provide the hosting facilities and related infrastructure for our subscription services. These hosting facilities are located in several locations in the United States, United Kingdom, and Australia. We do not control the operation of these hosting facilities. Despite precautions taken at these facilities, the occurrence of a natural disaster, a decision by one of our hosting providers to close a facility without adequate notice to us, or other unanticipated problems at these facilities could result in lengthy interruptions in our services. We also retain third-party telecommunications providers to provide Internet and direct telecommunications connections for our services. Any of these third-party providers may fail to perform their obligations adequately. Any damage to, or failure of, our systems could result in interruptions in our service and/or litigation. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates. Our business will be harmed if our customers and potential customers believe our service is unreliable.

We Utilized Financing To Fund The Acquisition Of Outtask, And We May Require Additional Financings To Fund Operations Or Growth In The Future, Each of Which Could Subject Us To Additional Risks.

On January 24, 2006, Concur incurred indebtedness in the aggregate principal amount of approximately $14 million under the Amended Loan Agreement with Comerica Bank. This indebtedness was used to finance the cash portion of the total merger consideration paid at the closing of acquisition of Outtask, and to pay fees and expenses associated with the acquisition. In the future, we may be required to seek additional financing to fund our operations or growth. Factors such as the commercial success of our existing services and products, the timing and success of any new services and products, the progress of our systems development and programming efforts, our results of operations and cash flows, the use of cash in our stock repurchase program, the status of competitive services and products, and the timing and success of potential strategic alliances or potential opportunities to acquire or sell businesses or assets may require us to seek additional funding sooner than we expect. There is no assurance that such funding will be available on terms that are acceptable to us, or at all. If we raise additional funds through the issuance of equity securities or debt convertible into equity securities, the percentage of stock ownership by our existing stockholders would be reduced. In addition, such securities could have rights, preferences, and privileges senior to those of our current stockholders. If adequate funds were not available on acceptable terms, our ability to achieve or sustain positive cash flows, maintain current operations, fund any potential growth, take advantage of unanticipated opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly limited.

Compliance With New Regulations Governing Public Company Corporate Governance And Reporting Is Uncertain And Expensive.

Many new laws, regulations, and standards, notably those adopted by the SEC and the NASDAQ Stock Market, impose new obligations on public companies in connection with the Sarbanes-Oxley Act of 2002, such as ours, which have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices and have created uncertainty for companies such as ours. These new laws, regulations, and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our continuing preparation for and implementation of these reforms and enhanced new disclosures has resulted in, and will likely continue to result in, increased general and administrative expenses and a significant diversion of management’s time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with regulations regarding our internal control over financial reporting will likely continue to require us to commit significant financial and managerial resources. If we are not able to prepare for and implement the reforms required by new laws, regulations, and standards, our business, operating results, and financial condition could be harmed. Further, these laws, regulations, and standards may make it more difficult for us to attract and retain qualified members to serve on our board of directors and to attract and retain qualified executive officers, which could harm our business.

The Growth Of The International Component Of Our Business Subjects Us To Additional Risks Associated With Foreign Operations.

Our international operations, which are subject to risks associated with operating outside of the United States, are becoming an increasingly important component of our business.Revenues from customers outside the United States represented approximately $2.8 million and $5.2 million for the three and six months ended March 31, 2006. These international operations are subject to many difficulties and incremental costs, including:

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costs of customizing products for foreign countries;

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laws and business practices favoring local competitors;

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uncertain regulation of electronic commerce;

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compliance with multiple, conflicting, and changing governmental laws and regulations;

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longer sales cycles;

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greater difficulty in collecting accounts receivable;

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import and export restrictions and tariffs;

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potentially weaker protection for our intellectual property than in the United States, and practical difficulties in enforcing such rights abroad;

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difficulties staffing and managing foreign operations;

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multiple conflicting tax laws and regulations; and

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political and economic instability.

Our international operations also face foreign currency-related risks. To date, most of our revenues have been denominated in United States dollars, but we believe that an increasing portion of our revenues will be denominated in foreign currencies. We currently do not engage in foreign exchange hedging activities and, therefore, our international revenues and expenses are currently subject to the risks of foreign currency fluctuations. In addition, our ability to expand into international markets will depend on our ability to develop and support services and products that incorporate the tax laws, accounting practices, and currencies of applicable countries.

Our international operations also increase our exposure to international laws and regulations. If we are unable to comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our services and products or levy sales or other taxes relating to our activities. In addition, foreign countries might impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business in international markets.

We intend to continue to expand our international sales and marketing activities and enter into relationships with additional international distribution partners. We are in the early stages of developing our indirect distribution channels in markets outside the United States. We may not be able to attract and retain distribution partners that will be able to market our products effectively.

Our Quarterly Revenues And Operating Results May Fluctuate In Future Periods And We May Fail To Meet Expectations Of Investors And Public Market Analysts, Which Could Cause The Market Price Of Our Common Stock To Be Volatile Or To Decline.

Our revenues and operating results may fluctuate significantly from quarter to quarter. We believe that period-to-period comparisons of our operating results may not be meaningful and should not be relied on as an indication of our future performance. If quarterly revenues or operating results fall below the expectations of investors or public market analysts, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our operating results include:

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developments in the integration of Outtask;

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the evolving demand for our services and software;

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spending decisions by our customers and prospective customers;

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our ability to manage expenses;

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the timing of new product releases;

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changes in our pricing policies or those of our competitors;

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the timing of large contracts;

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changes in mix of our services and software offerings;

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the mix of sales channels through which our services and software are sold;

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costs of developing new products and enhancements;

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our ability to adequately provide services and software; and

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global economic and political conditions.

In addition, due to the continuing weakness of capital spending for enterprise software and business services, we believe that many existing and potential customers may reassess or reduce their planned technology and Internet-related investments and defer or reprioritize purchasing decisions. Any such reduction in business spending for technology could have a material adverse effect on our revenues and operating results. As a result, there is increased uncertainty with respect to our expected revenues.

Our Reported Financial Results May Be Adversely Affected By Changes In Accounting Principles Generally Accepted In The United States.

GAAP is subject to interpretation by the FASB, the American Institute of Certified Public Accountants, the SEC, and various other bodies formed to promulgate and interpret accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, in December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123(R)”),Share-based Payments, which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, with the cost measured based on the estimated fair value of the equity or liability instruments issued. As a result, we are now recording non-cash, stock-based compensation expense, which has a material effect on our results of operations. Further, revenue recognition rules for software and service companies are complex and require significant interpretation by us. Changes in circumstances, interpretations, or accounting principles or guidance may require us to modify our revenue recognition policies. Such modifications could impact the timing of revenue recognition and our operating results. See “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” above regarding our critical revenue recognition policies.

Our Lengthy Sales Cycle Could Adversely Affect Our Financial Results.

Because of the high costs involved over a significant period of time, customers for enterprise software and business services typically commit significant resources to an evaluation of available solutions and require us to expend substantial time, effort, and money educating them about the value of our services and software. Our sales cycle, which is the time between initial contact with a potential customer and the ultimate sale, is often lengthy and unpredictable. As a result, we have limited ability to forecast the timing and size of specific sales. In addition, customers may delay their purchases from a given quarter to another as they elect to wait for new product enhancements or due to other factors. Any delay in completing, or failure to complete, sales in a particular quarter or fiscal year could harm our business and could cause our operating results to vary significantly.

Software License Revenues Are Volatile, Which Makes Our Operating Results Difficult To Forecast.

Our software license revenues represented 2% of total revenues in the three months ended December 31, 2005, respectively. While software license revenues are diminishing as a percent of total revenues, they continue to contribute to our overall operating results. However, the timing and amounts of license revenues can be difficult to predict, which can lead to variability in operating results. For example, our licensed software is typically shipped when orders are received, so license

backlog at the beginning of any quarter typically represents only a small portion of the quarter’s expected license revenues. This makes license revenues in any quarter difficult to forecast because they are determined by orders booked and shipped in that quarter. Moreover, we have historically recognized a substantial percentage of license revenues in the last month of the quarter, frequently in the last week or even the last days of the quarter, and we expect this trend to continue for as long as our licensed software represents a meaningful part of our overall business. Because our expenses are relatively fixed in the near term, any shortfall from anticipated revenues or any delay in the recognition of revenues could result in significant variations in operating results from quarter to quarter. Further, we find it difficult to forecast quarterly license revenues because our sales cycle, from initial evaluation to delivery of software, is lengthy and varies substantially from customer to customer. The continuing weakness of capital spending for enterprise software contributes to the length and unpredictability of our sales cycle for licensed products, making related revenues more difficult to predict and subjecting our operating results to greater volatility on a quarter over quarter basis.

We May Not Successfully Develop Or Introduce New Products Or Enhancements To Existing Products, Or Successfully Integrate The Outtask Products And Services, So We May Lose Existing Customers Or Fail To Attract New Customers And Our Revenues Would Suffer.

Our future financial performance and revenue growth will depend, in part, upon the successful development, introduction, and customer acceptance of new and enhanced versions of our products and services, and on our ability to integrate the products and services of Outtask into our existing and future products and services. Our business could be harmed if we fail to deliver enhancements to our current and future products and services that our customers desire, or fail to integrate Outtask’s products and services into our existing and future products. From time to time, we experience delays in the planned release dates of enhancements to our products and services, and we have discovered errors in new releases after their introduction. New product versions or upgrades may not be released according to schedule, or may contain errors when released. Either situation could result in adverse publicity, loss of sales, delay in market acceptance of our products and services, or customer claims, including, among other things, warranty claims against us, any of which could harm our business. If we do not deliver new product versions, upgrades, or other enhancements to existing products and services on a timely and cost-effective basis, our business will be harmed. We are also continually seeking to develop new offerings. However, we remain subject to all of the risks inherent in product development, including, without limitation, unanticipated technical or other development problems, which could result in material delays in product introduction and acceptance or significantly increased costs. There can be no assurance that we will be able to successfully develop new services or products, or to introduce in a timely manner and gain acceptance of such new products or services in the marketplace.

If Our Products And Services Do Not Keep Pace With Technological Change, Our Sales Could Decline And Our Business Could Be Harmed.

We must continually modify and enhance our services and products to keep pace with changes in hardware and software platforms, database technology, electronic commerce technical standards, and other items. As a result, uncertainties related to the timing and nature of new product announcements or introductions, or modifications by vendors of operating systems, back-office applications, and browsers and other Internet-related applications, could harm our business.

We Rely On Third-Party Software And Services That May Be Difficult To Replace.

We license or purchase software and services provided by third parties in order to offer some of our services and software offerings. Such third-party software and services may not continue to be available on commercially reasonable terms, if at all. The loss or inability to maintain our rights to use any of these software or services could result in delays in the sale of our services or software offerings until equivalent technology is either developed by us, or, if available, is identified, licensed, and integrated, which could harm our business.

Our Stock Price Has Experienced High Volatility In The Past, May Continue To Be Volatile, And May Decline.

The trading price of our common stock has fluctuated widely in the past and may do so in the future, as a result of a number of factors, many of which are outside our control, such as:

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the announcement of a merger or acquisition;

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variations in our actual and anticipated operating results;

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changes in our earnings estimates by analysts;

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failure to achieve earnings expectations;

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the volatility inherent in stock prices within the emerging sector within which we conduct business; and

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the volume of trading in our common stock, including sales upon exercise of outstanding options.

Stock markets, particularly the NASDAQ Stock Market, have experienced extreme price and volume fluctuations that have affected the market prices of many technology and computer software companies, particularly Internet-related companies. Such fluctuations have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock.

Further, securities class action litigation has often been brought against companies that experience periods of volatility in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources. In July 2001, we and several of our current and former officers were named as defendants in two securities class-action lawsuits based on alleged errors and omissions concerning underwriting terms in the prospectus for our initial public offering. In April 2002, these lawsuits were consolidated with more than 300 similar pending cases filed against companies that completed initial public offerings between 1997 and 2000 and the underwriters that took them public. In July 2003, we decided to participate in a proposed settlement negotiated by representatives of a coalition of issuers named as defendants in similar actions and their insurers. Although we believe that the plaintiffs’ claims have no merit, we decided to participate in the proposed settlement to avoid the cost and distraction of continued litigation. The proposed settlement agreement would dispose of all remaining claims against us and the individual present and former officers of Concur named as defendants, without any admission of wrongdoing by us or the individual defendants. The proposed settlement has been preliminarily approved by the court, but remains subject to final approval by the parties and the court. There is no guarantee that the parties or the court will finalize the proposed settlement. Should the parties and the court fail to finalize the proposed settlement, we would continue to defend ourselves vigorously. Any liability we incur in connection with this lawsuit could materially harm our business and financial position and, even if we defend ourselves successfully, there is a risk that management’s distraction in dealing with this lawsuit could harm our results.

If We Fail To Attract And Retain Qualified Personnel, Our Business Could Be Harmed.

Our success depends in large part on our ability to attract, motivate, and retain highly qualified personnel, including personnel recently added through our acquisition of Outtask. Competition for such personnel is intense and there can be no assurance that we will be successful in attracting, motivating, and retaining key personnel. Many of our competitors have greater financial and other resources than us for attracting experienced personnel. We also compete for personnel with other software vendors and consulting and professional services companies. Further, recent changes in applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant options to employees in the future. We rely on our direct sales force to sell our services and software in the marketplace. We anticipate increasing our direct sales force. There is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need. If we were unable to hire or retain competent sales personnel our business would suffer. In addition, by relying primarily on a direct sales model, we may miss sales opportunities that might be available through other sales channels, such as domestic and international resellers and strategic referral arrangements. Any inability to hire and retain salespeople or any other qualified personnel, or any loss of the services of key personnel, would harm our business.

Our Ability To Protect Our Intellectual Property Is Limited And Our Products May Be Subject To Infringement Claims By Third Parties.

Our success depends, in part, upon our proprietary technology, processes, trade secrets, and other proprietary information, and our ability to protect this information from unauthorized disclosure and use. We rely on a combination of copyright, trade secret, and trademark laws, confidentiality procedures, contractual provisions, and other similar measures to protect our proprietary information. We do not own any issued patents or have any patent applications pending. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary, and third parties may attempt to develop similar technology independently. We provide our licensed customers with access to object code versions of our software, and to other proprietary information underlying our software. Policing unauthorized use of our products is difficult, particularly because the global nature of the Internet makes it difficult to control the ultimate destination or security of software or other data transmitted. While we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and we expect that it will become more difficult to monitor use of our products as we increase our international presence. There can be no assurance that our means of protecting our proprietary rights will be adequate, or that our competitors will not independently develop similar technology. In addition, there can be no assurance

that third parties will not claim infringement by us with respect to current or future products or other intellectual property rights. Any such claims could have a material adverse effect on our business, results of operations and financial condition. In addition, over the past several years, we have made numerous changes in our product names. Although we own registered trademarks in the United States and have filed trademark applications in the United States and in certain other countries, we do not have assurance that our strategy with respect to our trademark portfolio will be adequate to secure or protect all necessary intellectual property.

Anti-Takeover Effects Of Our Rights Agreement, Charter Documents, And Delaware Law Could Discourage Or Prevent A Change In Control Of Concur.

We have a shareholder rights agreement in place, under which our stockholders have special rights, in the form of additional voting and beneficial ownership, in the event that a person or group not approved by the board of directors were to acquire, or to announce the intention to acquire 15% or more of our outstanding shares. This plan is designed to have the effect of discouraging, delaying or rendering more difficult an acquisition of us that has not been approved by our Board of Directors.

In addition, there are provisions in our certificate of incorporation and bylaws, as well as provisions in the Delaware General Corporation Law, that may discourage, delay or prevent a change of control. For example:

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our Board of Directors may, without stockholder approval, issue shares of preferred stock with special voting or economic rights;

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our stockholders do not have cumulative voting rights, and, therefore, each of our directors can only be elected by holders of a majority of our outstanding common stock;

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a special meeting of stockholders may only be called by a majority of our Board of Directors, the Chairman of our Board of Directors, or our Chief Executive Officer;

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our stockholders may not take action by written consent;

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our Board of Directors is divided into three classes, only one of which is elected each year; and

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we require advance notice for nominations for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

ITEM 6.

EXHIBITS

(a) The following exhibits are filed as a part of this report:


Exhibit Number		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Date of First Filing	Exhibit Number	Provided Herewith
2.01	Agreement and Plan of Reorganization, dated January 23, 2006, among Concur Technologies, Inc., Galileo 1 Acquisition Corporation, Inc., Galileo 2 Acquisition LLC, and Thomas A. DePasquale, as Representative.	10-Q	000-25137	2/08/2006	2.01	—

10.01	Amended and Restated Loan and Security Agreement, dated January 24, 2006, among Concur Technologies, Inc., Captura Software, Inc., Outtask LLC, and Comerica Bank.	10-Q	000-25137	2/08/2006	10.01	—

31.01	Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).	—	—	—	—	X

31.02	Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).	—	—	—	—	X

32.01	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*	—	—	—	—	X

32.02	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*	—	—	—	—	X

This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Concur specifically incorporates it by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized to sign on behalf of the registrant and as the principal financial officer thereof.

Dated: May 10, 2006


CONCUR TECHNOLOGIES, INC.

By		/s/ John F. Adair
		John F. Adair
		Chief Financial Officer

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Concur (CNQR) Inactive 10-Q2006 Q2 Quarterly report

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