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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 December 31, 2001 Commission file number: 0-25137
______________
CONCUR TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 91-1608052
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6222 185th Avenue NE
Redmond, Washington 98052
(Address of principal executive offices)
(425) 702-8808
(Registrant's telephone number, including area code)
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:
Yes [X] No [_]
As of January 31, 2002, there were 25,847,480 shares of the Registrant's
Common Stock outstanding.
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CONCUR TECHNOLOGIES, INC.
FORM 10-Q
DECEMBER 31, 2001
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 2001 and September 30, 2001 ..................... 3
Consolidated Statements of Operations for the three months ended December 31, 2001
and 2000 ....................................................................................... 4
Consolidated Statements of Cash Flows for the three months ended December 31, 2001
and 2000 ....................................................................................... 5
Notes to Consolidated Financial Statements ..................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ................................. 22
PART II. OTHER INFORMATION ............................................................................... 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Concur Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
December 31, September 30,
-----------------------------
2001 2001
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 19,761 $ 22,650
Marketable securities 2,001 4,065
Accounts receivable, net of allowance for doubtful accounts
of $963 at December 31, 2001 and $979 at September 30, 2001 (1)
4,797 6,211
Prepaid expenses and other current assets 1,335 918
--------- ---------
Total current assets 27,894 33,844
Property and equipment, net 6,146 6,706
Deposits and other assets 188 433
--------- ---------
Total assets $ 34,228 $ 40,983
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,840 $ 1,715
Accrued payroll and benefits 1,580 3,865
Accrued commissions 592 949
Other accrued liabilities 4,909 4,755
Current portion of long-term debt 504 926
Current portion of capital lease obligations 470 770
Deferred revenues 5,710 5,118
--------- ---------
Total current liabilities 15,605 18,098
Capital lease obligations, net of current portion -- 7
Accrued rent expense 82 101
Stockholders' equity:
Common stock, par value $0.001 per share:
Authorized shares - 60,000,000; Issued and outstanding shares -
25,828,467 and 25,814,422 at December 31, 2001 and September 30,
2001, respectively 223,248 223,245
Accumulated deficit (204,707) (200,468)
--------- ---------
Total stockholders' equity 18,541 22,777
--------- ---------
Total liabilities and stockholders' equity $ 34,228 $ 40,983
========= =========
See accompanying notes.
(1) Includes amounts due from related parties of $469,000 and $688,000 at
December 31, 2001 and September 30, 2001, respectively.
3
Concur Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended
December 31,
------------------------
2001 2000
---------- ----------
Revenues:
License $ 2,157 $ 3,875
ASP 2,002 732
Services 5,896 5,796
--------- ---------
Total revenues (1) 10,055 10,403
Cost of revenues:
License 111 117
ASP 2,606 1,819
Services 2,765 3,873
--------- ---------
Total cost of revenues 5,482 5,809
Gross profit 4,573 4,594
Operating expenses:
Sales and marketing 4,196 7,280
Research and development 2,535 5,200
General and administrative 2,167 3,165
--------- ---------
Total operating expenses 8,898 15,645
--------- ---------
Loss from operations (4,325) (11,051)
Interest income 142 799
Interest expense (70) (245)
Other expense, net 14 (10)
--------- ---------
Net loss $ (4,239) $ (10,507)
=========
=========
Basic and diluted net loss per share $ (0.16) $ (0.42)
========= =========
Shares used in calculation of basic and diluted net
loss per share 25,817 25,272
========= =========
See accompanying notes.
(1) Includes sales to related parties of $584,000 and $243,000 in the
periods ended December 31, 2001 and 2000, respectively.
4
Concur Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
December 31,
-------------------------------
2001 2000
---------- ---------
Operating activities
Net loss $ (4,239) $(10,507)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred stock compensation -- 45
Depreciation 1,555 1,669
Provision for bad debts -- 610
Changes in operating assets and liabilities:
Accounts receivable 1,414 737
Prepaid expenses, deposits, and other assets (172) 563
Accounts payable 125 (605)
Accrued liabilities and accrued commissions (2,507) (1,632)
Deferred revenues 592 (116)
-------- --------
Net cash used in operating activities (3,232) (9,236)
-------- --------
Investing activities
Purchases of property and equipment (995) (870)
Purchase of marketable securities (2,000) (354)
Maturity of marketable securities 4,064 21,500
-------- --------
Net cash provided by investing activities 1,069 20,276
-------- --------
Financing activities
Proceeds from issuance of common stock from exercise of
stock options 3 3
Proceeds from issuance of common stock in connection with Employee
Stock Purchase Plan -- 412
Payments on borrowings (422) (955)
Payments on capital leases (307) (623)
-------- --------
Net cash used in financing activities (726) (1,163)
-------- --------
Net (decrease) increase in cash and cash equivalents (2,889) 9,877
Cash and cash equivalents at beginning of period 22,650 12,224
-------- --------
Cash and cash equivalents at end of period $ 19,761 $ 22,101
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 68 $ 231
======== ========
See accompanying notes.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
(Unaudited)
NOTE 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of the Company
Concur Technologies, Inc. ("Concur" or the "Company") is a leading
provider of Corporate Expense Management software and services that automate
costly and inefficient business processes. The Company's software products
include Concur Expense(TM) software for automating travel and entertainment
expense management, Concur Payment(TM) software for automating employee requests
for vendor payments, and Concur Time(TM) software for automating time tracking
and reporting. These software products are designed to meet the needs of
businesses of all sizes through license and application service provider ("ASP")
models. The Company offers its products on a license basis primarily to large
companies that want a highly-configurable solution that is managed in-house and
delivered over a corporate intranet. The Company also offers its Concur Expense
product on an ASP basis primarily to mid-size companies that want a configured
solution provided on an outsourced basis over the Internet. The Company offers
its products through a direct sales organization as well as indirect channels.
The Company was originally incorporated in the state of Washington on August 19,
1993 and operations commenced during 1994. On November 25, 1998, the Company was
reincorporated in the State of Delaware and completed the initial public
offering of its common stock on December 16, 1998.
Unaudited Interim Financial Information
The financial information as of December 31, 2001, and for the three
months ended December 31, 2001 and 2000, is unaudited, but includes all
adjustments (consisting of normal recurring adjustments) that the Company
considers necessary for a fair presentation of its financial position at such
dates and its operations and cash flows for the periods then ended. The
financial statements should be read in conjunction with the financial statements
and notes thereto for the fiscal year ended September 30, 2001, included in the
Company's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission ("SEC"). Operating results for the three months ended December 31,
2001 are not necessarily indicative of results that may be expected for the
entire fiscal year.
The balance sheet at September 30, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Concur
Technologies, Inc. and its wholly owned subsidiaries. All significant
inter-company accounts and transactions are eliminated in consolidation.
Revenue Recognition Policy
The Company delivers its products in the form of software licenses and,
beginning in early fiscal year 2000, by providing customers access to its
software on a hosted basis in an ASP model.
License revenues are comprised primarily of fees for the delivery of
software licenses. Revenues resulting from those fees are recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable, collectability is probable and
vendor-specific objective evidence (VSOE) exists to allocate the total fee to
any undelivered products or services ("elements") of the arrangement. If the fee
due from the customer is not fixed or determinable, revenue is recognized as
payments become due from the customer. If collectability is not considered
probable, revenue is recognized when the fee is collected. VSOE for all elements
is based on the price charged when an element is sold separately or, in the case
of an element not yet sold separately, the price established by management, if
it is probable that the price will not change before market introduction. The
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-- (Continued)
Company's software license contracts include a standard software performance
warranty provision. The Company accounts for potential warranty claims in
accordance with Statement of Financial Accounting Standards No. 5. To date, the
company has experienced minimal warranty claims. The Company's software license
contracts typically do not include contingencies such as rights of return or
conditions of acceptance.
Revenues resulting from ASP services, which consist primarily of set-up
and usage fees, as well as direct and incremental costs related to set-up
consisting primarily of labor and hardware costs, are all recognized over the
expected lives of the related agreements. Because the Company's ASP services
have been commercially available for only a short period of time, set-up fees
and related costs are currently amortized over the contractual lives of the
related agreements, which are typically two years. The Company continues to
evaluate and will adjust this amortization period as more information becomes
available regarding the expected life of the related agreements, such as
customer contract renewals and contract terminations. Usage fees related to ASP
services are recognized monthly as services are provided to customers. Set-up
fees, net of related costs, and other billed amounts due from customers in
excess of recognizable revenue are recorded as deferred revenue.
In some cases, revenues generated from ASP services are derived from
arrangements with strategic reseller partners. These revenues are recorded on a
gross basis, with the amounts paid to the strategic partners recognized as cost
of sales, when the Company assumes the related business risks such as
performance and credit risk. Such business risks are evidenced when the Company
is responsible for delivery of the service, establishes pricing of the
arrangement and, among other things, instances in which the Company is the
primary obligor in the arrangement. Otherwise, these revenues are recorded on a
net basis. Currently, all revenues from ASP services are recorded on a gross
basis. Related sales commissions paid to our channel support personnel are
recorded as a selling expense.
Services revenues earned from customers that license the Company's
software result from customer support agreements and consulting services such as
system implementation and integration, planning, data conversion, training and
development, and documentation of procedures. Maintenance agreements provide for
technical support and include the right to receive unspecified upgrade if-and-
when available. When software licenses and services are sold together, the
services are evaluated to determine whether they are essential to the
functionality of the software. Our services are typically not considered
essential to the functionality of the software and, therefore, revenues related
to such services are recognized as the services are performed. When services are
considered essential, revenues under the arrangement are recognized using the
percentage of completion method of contract accounting. Consulting services are
primarily performed on a time-and-materials basis under separate service
arrangements. Customer support agreements provide for technical support and
include the right to unspecified upgrades on an if-and-when-available basis.
Revenues from customer support agreements are recognized ratably over the life
of the related agreement, which is typically one year.
Liquidity
The Company continues to incur losses from operating results and had
total stockholders' equity of $18.5 million at December 31, 2001, including an
accumulated deficit of $204.7 million. As a result of its significant product
development, customer support, and selling and marketing efforts, the Company
has required substantial working capital to fund its operations. To date, equity
offerings have been the Company's principal external source of liquidity.
Management believes that the Company has sufficient working capital available
under its operating plan to fund its operations and anticipated capital
expenditures through at least December 31, 2002. Any substantial inability to
achieve the current business plan could have a material adverse impact on the
Company's financial position, liquidity, or results of operations and could
require the Company to reduce expenditures or seek additional debt or equity
financing to enable it to continue operations through December 31, 2002.
Management believes that it will be able to reduce expenditures sufficiently to
sustain operations through at least December 31, 2002 if no such debt or equity
financing were available.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-- (Continued)
Net Loss Per Share
Basic and diluted net loss per share is calculated using the
weighted-average number of shares of common stock outstanding. Other common
stock equivalents, including convertible preferred stock, stock options, and
warrants, are excluded from the computation, as their effect is anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from these estimates.
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
NOTE 2. STOCK OPTION EXCHANGE PROGRAM
In December 2001, the Company offered a voluntary stock option exchange
program to its employees. The program allowed eligible employees, at their
discretion before January 4, 2002, to elect to cancel unexercised stock options
with an exercise price equal to or greater than $1.30 per share that were
previously granted to such employees under the Company's 1994 Stock Option Plan,
1998 Equity Incentive Plan, and 1999 Stock Incentive Plan. Any option granted
within the six months preceding December 3, 2001 to an employee who elected to
participate in the program was automatically cancelled, and those cancelled
options with an exercise price equal to or greater than $1.30 per share became
eligible for exchange under the program. Each participating employee is eligible
to receive a replacement option to purchase a number of shares equal to
two-thirds of the number of eligible cancelled options, provided that the
participating employee remains employed by the Company on the date that the
replacement options are granted. The replacement options will be granted at
least six months and one day after the date that the cancelled options are
accepted by the Company for exchange. The Company currently expects the
replacement grant date to occur on or after July 5, 2002. The exercise price of
the replacement option will be equal to the closing price of a share of the
Company's common stock as reported on the Nasdaq National Market on the
replacement grant date. Each replacement option will vest fully in 30 months
after the replacement grant date, with 40% vesting on the first anniversary of
the replacement grant date and 3.3334% vesting monthly for 18 months thereafter.
The replacement options will expire ten years from the replacement grant date.
Other terms and conditions of the new options will be substantially similar to
those of the cancelled options.
The expiration date for participation in this stock option exchange
program was January 4, 2002. At that time, options to purchase 374,552 shares
were surrendered in the program, out of options to purchase approximately
4,495,000 shares that were eligible to participate in the program. If all
participating optionees are employees of the Company upon issuance of the
replacement options, options to purchase approximately 250,000 shares will be
granted at the replacement option exercise price upon the replacement grant
date. The members of the Board were not eligible to participate in the program,
and no executive officer elected to participate in the program.
For financial reporting purposes, the stock option exchange program is
not considered compensatory or variable; therefore, Concur does not anticipate
recording stock compensation charges as a result of the implementation of the
program.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which we
believe is relevant to an assessment and understanding of our results of
operations and financial condition. This discussion should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
Special Note Regarding Forward-Looking Statements
This document contains forward-looking statements regarding our plans,
objectives, expectations, intentions, future financial performance, future
financial condition, and other statements that are not historical facts. You can
identify these statements 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 substantial risks and uncertainties. Examples
of such risks and uncertainties are described in this report under "Factors That
May Affect Results Of Operations And Financial Condition" and elsewhere in this
report, as well as in our other filings with the Securities and Exchange
Commission. You should be aware that 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 and
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 Web-based Corporate
Expense Management software and services that automate costly and inefficient
business processes, allowing companies to leverage their most limited resources:
time, money, knowledge, and energy. Our software products include Concur
Expense(TM) software for automating travel and entertainment expense management,
Concur Payment(TM) software for automating employee requests for vendor
payments, and Concur Time(TM) software for automating time tracking and
reporting. These software products are designed to meet the needs of businesses
of all sizes through both license and application service provider ("ASP")
models. We offer our products on a license basis primarily to large companies
that want a highly-configurable solution that is managed in-house and delivered
over a corporate intranet. We also offer Concur Expense as a service on an ASP
delivery basis primarily to mid-size companies that want a configured solution
provided on an outsourced basis over the Internet. We offer our products through
a direct sales organization as well as through indirect channels.
Since 1996, more than 950 companies, including AT&T, Citigroup,
DaimlerChrysler, DuPont, First Union, and Pfizer, have licensed over 2.5 million
employees to use our market-leading software and services to reduce their costs,
increase their productivity, improve compliance with their business policies,
and expand their knowledge base with respect to their internal business
processes. Our strategic relationships include more than 50 world-class
organizations such as ADP, Inc., American Express, KPMG Consulting, Inc.,
Microsoft Corporation, and Microsoft Great Plains Business Solutions.
We were incorporated in 1993 and commenced operations in fiscal 1994,
initially developing QuickXpense, a retail, shrink-wrapped application that
automated travel and entertainment expense reporting for individuals. We first
shipped QuickXpense in fiscal 1995 and sold it through a combination of retail
channels and direct marketing, utilizing a small sales force and no consulting
or implementation staff. Over time, businesses began seeking automation of
enterprise-wide travel and entertainment expense management processes, including
back-office processing and integration to financial systems. In July 1996, in
response to this demand, we significantly expanded our product development
efforts and released Concur Expense, a client-server based Corporate Expense
Management software product. In March 1998, we released a Web-based version of
Concur Expense, which utilizes the Internet and corporate intranets to reach
employees in an enterprise. This product has accounted for a majority of Concur
Expense license revenues since its release.
On June 30, 1998, we acquired 7Software, Inc., a privately held
software company and the developer of Concur Procurement, in a transaction
accounted for as a purchase.
9
On June 1, 1999, we acquired Seeker Software, Inc., a privately held
software company and developer of Concur Human Resources, in a transaction
accounted for as a pooling of interests. Upon our acquisition of Seeker
Software, it was our intention to integrate Concur Human Resources with Concur
Expense and Concur Procurement as a suite of solutions through a common user
interface known as Concur eWorkplace.
In October 1999, we began offering Concur Expense on an ASP delivery
basis, principally to mid-size companies. In December 1999, we introduced an
additional ASP offering for large companies that want a configured solution
offered on an outsourced basis.
On June 8, 2000, we announced a new operating plan, under which we
discontinued Concur Procurement, discontinued our planned integration of Concur
Human Resources with our other products, and announced a workforce reduction of
68 employees to bring our cost structure in line with our new operating plan.
The primary objective of this operating plan was to focus on providing Corporate
Expense Management software and services and generating positive cash flow and
profitable growth.
On March 30, 2001, we sold our Concur Human Resources product line to
MBH Solutions, Inc. The transaction consisted of the sale of certain assets to,
and assumption of certain obligations by, MBH Solutions, Inc. in exchange for
cash consideration to be paid in installments over time. The transaction
resulted in a workforce reduction of 42 employees, the majority of whom
continued employment with MBH Solutions, Inc.
Important Accounting Principles
Revenue Recognition. License revenues are comprised primarily of fees
for the delivery of software licenses. We recognize license revenues when we
obtain a signed contract from our customer, we have delivered the software, the
amount of the transaction is fixed or determinable, collectability from that
customer is probable, and we have the ability to allocate to any undelivered
products or services in the transaction their respective fair values. If the fee
due from the customer is not fixed or determinable, revenue is recognized as
payments become due from the customer. If collectability is not considered
probable, revenue is recognized when the fee is collected. Our software license
contracts typically include an industry standard software performance warranty
for which the Company provides a reserve based on historical experience. To
date, the Company has experienced minimal warranty claims. However, our software
license contracts typically do not include contingencies such as rights of
return or conditions of acceptance.
Revenues from ASP services, which consist primarily of one-time set-up
fees and monthly usage fees, as well as costs incurred directly for this
one-time set-up such as labor and hardware costs, are all recognized over the
expected lives of the relationship with the customer. Because our ASP services
have been commercially available for only a short period of time, we are
currently amortizing set-up fees and the related costs over the contractual
lives of the related agreements, which are typically two years. We will continue
to evaluate and adjust this amortization period as we gain more experience with
customer contract renewals and contract cancellations. It is possible, based on
that experience, that in the future we will extend the period over which we
amortize such set-up fees. We recognize ASP usage fees monthly as the service is
provided to the customer. Set-up fees net of set-up costs and other amounts that
are billed to our customers in excess of the amounts currently recognizable are
recorded as deferred revenue on our balance sheet.
Some of our ASP revenues are generated from sales made through our
reseller partners, ADP and Microsoft Great Plains Business Solutions. Where we
assume the majority of the business risks associated with providing ASP
services, such as hosting, set-up, establishing pricing, or the risk of credit
loss, we record these revenues on a gross basis with amounts paid to our
reseller partners being recognized as cost of sales. If a reseller partner were
to assume the majority of these risks, we would record associated ASP revenues
net of the amounts paid to the reseller partner. Currently, all revenues from
ASP services are recorded on a gross basis. Sales commissions paid to our
channel support personnel are recorded as a selling expense.
Services revenues consist of fees from software maintenance agreements
with customers that have purchased our license software and consulting services.
Maintenance agreements provide for technical support and include the right to
receive unspecified upgrades and enhancements to our software products. Revenues
from maintenance agreements are recognized ratably over the life of the related
agreement, which is typically one year. Consulting services consist of initial
systems implementation of our software products, implementation of upgrades and
enhancements to our software products, and other services, such as planning,
data conversion, training, and
10
documentation of procedures. Our consulting services are primarily performed on
a time-and-materials basis. When we sell our software and consulting services
together, the consulting services are evaluated to determine whether they are
essential to the functionality of the software. If our consulting services were
to be considered essential to the functionality of the software, both the
software and consulting services revenues would be recognized using the
percentage of completion method of contract accounting. However, our services
typically are not considered essential to the functionality of the software, so
we recognize software revenues as described above and we recognize consulting
services revenues as the services are performed.
Reserves and Estimates. Preparing our financial statements in
conformity with generally accepted accounting principles requires us to make
estimates and assumptions that affect the amounts recorded as revenues and
expenses. In particular, our financial statements include reserves against
revenues, and reserves against general and administrative expenses for accounts
receivable we believe will prove to be uncollectible. We provide an allowance
for bad debts as well as revenue reserves based on historical experience,
current and expected economic trends, and specific information about customer
accounts. These estimates could change if actual results could differ
materially from those estimates based on more accurate information in the
future.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
Selected Financial Data
The following table sets forth certain financial data, derived from the
Company's unaudited statements of operations, as a percentage of total revenues,
for the periods indicated. The operating results for the three months ended
December 31, 2001 and 2000, are not necessarily indicative of the results that
may be expected for any future period.
Three Months Ended
December 31,
------------------------
2001 2000
--------- ---------
Revenues:
License 21.5% 37.3%
ASP 19.9 7.0
Services 58.6 55.7
----- -----
Total revenues 100.0 100.0
Cost of revenues:
License 1.1 1.1
ASP 25.9 17.5
Services 27.5 37.2
----- -----
Total cost of revenues 54.5 55.8
----- -----
Gross profit 45.5 44.2
Operating expenses:
Sales and marketing 41.7 70.0
Research and development 25.2 50.0
General and administrative 21.6 30.4
----- -----
Total operating expenses 88.5 150.4
----- -----
Loss from operations (43.0) (106.2)
Interest income 1.4 7.7
Interest expense (0.7) (2.4)
Other expense, net 0.1 (0.1)
----- -----
Net loss (42.2)% (101.0)%
===== =====
11
Revenues
Quarters Ended December 31,
(dollars in thousands) 2001 2000 Change
---- ---- ------
License $2,157 $3,875 (44.3)%
ASP 2,002 732 173.5 %
Services 5,896 5,796 1.7 %
------- ------- ------
Total revenues $10,055 $10,403 (3.3)%
License Revenues. License revenues consist of license fees for our
software products, which we sell through our direct sales organization, and
through strategic referral and reseller arrangements, in the United States and
in international markets. The decrease in license revenues for the quarter ended
December 31, 2001 from that ended December 31, 2000 reflects our discontinuation
of sales of Concur Human Resources resulting from our divestiture of the Concur
Human Resources product line in March 2001. In addition, for the quarter ended
December 31, 2001, we experienced a decrease in demand for our software as a
result of a generally weak economic environment in that quarter.
ASP Revenues. ASP revenues consist of monthly fees that customers pay
to use our ASP services, as well as amortization of set-up and consulting fees
paid by customers. We market our ASP services through our direct sales
organization, and through strategic referral and reseller arrangements, in the
United States and in international markets. Demand for our ASP services has
increased since launching these services in the first quarter of fiscal 2000,
which was driven in part by the introduction of sales through our strategic
relationships. In May 2000, we entered into a strategic relationship with ADP,
Inc., under which ADP markets our ASP services to its existing customers and to
potential new customers. In June 2001, we signed a reseller agreement with
Microsoft Great Plains Business Solutions, under which Microsoft Great Plains
Business Solutions agreed to resell and jointly market our ASP services to its
existing customers and to potential new customers through its value-added
reseller network. The majority of new ASP sales during the quarter ended
December 31, 2001 occurred through these indirect channels, nearly all of which
were through ADP. We expect ASP revenues to continue to grow during fiscal 2002
as a result of the continued development of our existing strategic
relationships, and to a lesser extent, as we focus our direct sales efforts on
large sales opportunities for ASP services.
Services Revenues. Services revenues consist of customer support fees,
consulting services fees, and training fees. The increase in services revenues
in the quarter ended December 31, 2001, compared to the quarter ended December
31, 2000, primarily reflects additional consulting services provided to
implement upgrades and enhancements of Concur Expense. We expect consulting
services revenues to fluctuate based on new sales of our products, as well as
demand associated with implementation of future upgrades and enhancements of our
products.
International Revenues. Revenues from licenses and services to
customers outside the United States were $773,000 and $959,000 for the quarters
ended December 31, 2001, and December 31, 2000, respectively. Historically, as a
result of the relatively small amount of our international sales, fluctuations
in foreign currency exchange rates have not had a material effect on our
operating results.
Cost of Revenues
Quarters Ended December 31,
(dollars in thousands) 2001 2000 Change
---- ---- ------
Cost of license revenues $ 111 $ 117 (5.1)%
Percentage of license revenues 5.1% 3.0%
Cost of ASP revenues 2,606 1,819 43.3 %
Percentage of ASP revenues 130.2% 248.5%
Cost of services revenues 2,765 3,873 (28.6)%
Percentage of services revenues 46.9% 66.8%
------- -------
Total cost of revenues $ 5,482 $ 5,809 (5.6)%
Percentage of total revenues 54.5% 55.8%
Cost of License Revenues. Cost of license revenues consists mainly of
royalties for sub-licensing third-party software, and, to a lesser extent, the
costs of manuals, media, and duplication for our licensed products. We expect
12
that the cost of license revenues will continue to fluctuate modestly in
relation to changes in the overall demand for our license products.
Cost of ASP Revenues. Cost of ASP revenues consists of salaries, server
costs and fees, co-location and telecommunication charges, strategic referral
and reseller fees, and amortization of deferred set-up costs. The cost of ASP
revenues for the quarter ended December 31, 2001 increased from the quarter
ended December 31, 2000 primarily due to growth of amortized customer set-up
costs incurred in prior quarters and recognized over time. To a lesser extent,
this increase was also a result of increased infrastructure costs required to
accommodate the current and near-term growth of our ASP business, as well as
incremental costs incurred to support a larger customer base, such as referral
and reseller fees, telecommunication charges, and server and storage fees. We
expect the cost of ASP revenues to grow during fiscal 2002 primarily due to the
payment of reseller fees relating to our expected growth in ASP sales through
strategic partners and, to a lesser extent, incremental infrastructure costs
associated with such growth. However, we expect the growth in ASP revenues to
exceed the growth in cost of ASP revenues during fiscal 2002, resulting in a
positive ASP gross margin by the end of the third quarter of fiscal 2002.
Cost of Services Revenues. Cost of services revenues consists primarily
of the salaries, benefits, and other expenses associated with employees who
provide customer support, consulting services, and product training. The
decrease in cost of services revenues for the quarter ended December 31, 2001,
as compared to the quarter ended December 31, 2000, was primarily due to a
decrease in consulting services personnel, which was made possible by
improvements in our solutions that enable us to provide consulting services more
efficiently. In addition, this decrease reflects personnel reductions related to
our sale of the Concur Human Resources product line, as well as our company-wide
cost reduction efforts. Cost of services revenues as a percentage of services
revenues may vary between periods due to changes in the level and mix of
services provided to our customers.
Operating Expenses
Quarters Ended December 31,
(dollars in thousands) 2001 2000 Change
---- ---- ------
Sales and marketing $4,196 $ 7,280 (42.4%)
Percentage of total revenues 41.7% 70.0%
Research and development 2,535 5,200 (51.3%)
Percentage of total revenues 25.2% 50.0%
General and administrative 2,167 3,165 (31.5%)
Percentage of total revenues 21.6% 30.4%
------ -------
Total operating expenses $8,898 $15,645 (43.1%)
Percentage of total revenues 88.5% 150.4%
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, sales commissions, travel, and facility costs for our sales and
marketing personnel and, to a lesser extent, costs of advertising, trade shows,
and other promotional activities. The decrease in sales and marketing expenses
for the quarter ended December 31, 2001, as compared to the quarter ended
December 31, 2000, was primarily due to a decrease in sales and marketing
personnel, commissions, travel costs, and recruiting expenses. In addition, this
decrease reflects personnel reductions related to our sale of the Concur Human
Resources product line, as well as measures taken to increase productivity
across the direct sales force, increased focus on channel sales, reduced
advertising, and company-wide efforts to reduce costs. Based on our expected
revenue growth in future periods, we expect our sales and marketing expenses to
increase modestly but decrease as a percentage of such revenues.
Research and Development. Research and development expenses consist
primarily of salaries and benefits, costs of consulting for software
development, allocated facility costs, and expenses associated with computer
software and hardware used in our software development activities. The decrease
in research and development expense in the quarter ended December 31, 2001, as
compared to that of the quarter ended December 31, 2000, was primarily related
to a decrease in the number of employees and outside contractors employed in
software engineering, program management, and quality assurance to support our
product lines and ongoing product development. This decrease was primarily due
to our sale of our Concur Human Resources product line in March 2001 and our
company-wide efforts to reduce costs. In fiscal 2002, we expect to increase
headcount and related resources in our software engineering organization as we
continue to focus on product innovation and enhancements
13
to enable us to extend our leadership position in Corporate Expense Management
software and services. As a result, we expect total research and development
expenditures to increase modestly during the remainder of the year.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs associated with personnel in
finance, investor relations, human resources, legal, administration, and
facilities, together with the provision for bad debts. The decrease in general
and administrative costs in the quarter ended December 31, 2001, from the
quarter ended December 31, 2000, was primarily due to a decrease in the amount
incurred for the provision for bad debts. To a lesser extent, this decrease is
also the result of a decrease in personnel and spending for legal and other
third party service providers in connection with our company-wide effort to
reduce costs. We expect total general and administrative costs to remain
relatively constant for the remainder of the year.
Interest Income and Interest Expense
Quarters Ended December 31,
(dollars in thousands) 2001 2000 Change
---- ---- ------
Interest income $ 142 $ 799 (82.2%)
Interest expense 70 245 (71.4%)
Interest Income and Interest Expense. The decrease in interest income
in the quarter ended December 31, 2001, as compared to the quarter ended
December 31, 2000, was due to the decrease in cash, cash equivalents and
marketable securities upon which we earn interest, and to a lesser extent, to
lower interest rates earned on our investment portfolio. The decrease in
interest expense in the quarter ended December 31, 2001, from the quarter ended
December 31, 2000, was due to lower outstanding bank borrowings and capital
lease obligations.
Provision for Income Taxes. No provision for federal and state income
taxes has been recorded because we have experienced net losses since inception
that have resulted in deferred tax assets. A valuation allowance has been
recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset balance.
Financial Condition
Our total assets were $34.2 million and $41.0 million at December 31,
2001 and September 30, 2001, respectively, representing a decrease of $6.8
million, or 16.6%. This decrease was primarily due to the use of cash in our
operations during the quarter, and a related decrease in marketable securities
and accounts receivable. As of December 31, 2001, we had $21.8 million of cash,
cash equivalents and marketable securities, compared to $26.7 million at
September 30, 2001, representing a decrease of $4.9 million, or 18.4%.
Our accounts receivable balance, net of allowance for doubtful accounts
of $963,000 and $979,000, was $4.8 million and $6.2 million as of December 31,
2001 and September 30, 2001, respectively, representing a decrease of $1.4
million, or 22.6%. Days' sales outstanding ("DSO") in accounts receivable was 44
days and 53 days as of December 31, 2001 and September 30, 2001, respectively.
This improvement was primarily the result of improved collections of outstanding
accounts receivable, decreased license revenues as a percentage of total
revenues as well as the increase in significance of monthly ASP billings which
are, for the most part, collected in advance of each monthly period. We expect
that DSO will fluctuate in future quarters, based on then-current period
revenues, the accounts receivable aging, as well as the revenue mix between
license and ASP sales.
Our total current liabilities were $15.6 million and $18.1 million as
of December 31, 2001 and September 30, 2001, respectively, representing a
decrease of $2.5 million, or 13.8%. This decrease consisted primarily of a
decrease in accrued payroll and benefits due to the payment of accrued bonuses
during the quarter ended December 31, 2001.
14
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through sales of
equity securities and, to a lesser degree, through the use of long-term debt and
equipment leases. Our sources of liquidity as of December 31, 2001 consisted
principally of cash, cash equivalents, and marketable securities, totaling $21.8
million. Of that amount, $450,000 was pledged against a line-of-credit securing
the lease of our corporate headquarters and $500,000 secured the daily
transactions processed through our ASP business.
Net cash used in operating activities was $3.2 million and $9.2 million
during the quarters ended December 31, 2001 and December 31, 2000, respectively.
For these periods, net cash used by operating activities was primarily a result
of funding normal, on-going operations.
Our investing activities have consisted primarily of purchases of property
and equipment, and purchases and related maturity of marketable securities.
Property and equipment acquisitions totaled $995,000 and $870,000 during the
quarters ended December 31, 2001 and December 31, 2000, respectively. We
anticipate that the level of our capital expenditures for the remainder of
fiscal 2002 will decrease slightly from the level in the quarter ending December
31, 2000.
Our financing activities used $726,000 and $1.2 million in the quarters
ending December 31, 2001 and December 31, 2000, respectively. The use of cash
reflects payments made on loans and capital leases.
The following are contractual commitments associated with our debt, lease,
and facilities obligations:
Remainder
(in thousands) of Fiscal Fiscal Year Ending September 30,
-----------------------------------
2002 2003 2004 2005 Total
Debt - principal and interest $ 528 $ -- $ -- $ -- $ 528
Capital leases, interest and tax 523 8 -- -- 531
Operating leases 1,154 1,337 1,362 908 4,761
------ ------ ------ ---- ------
Total contractual commitments $2,205 $1,345 $1,362 $908 $5,820
====== ====== ====== ==== ======
We believe that our existing cash, cash equivalents, and marketable
securities will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. In the future,
we may seek additional funds to support our working capital requirements or for
other purposes and may seek to raise such additional funds through private or
public sales of securities, strategic relationships, bank debt, lease financing
arrangements, or other available means. If additional funds are raised through
the issuance of equity securities, stockholders may experience additional
dilution, or such equity securities may have rights, preferences, or privileges
senior to those of the holders of our common stock. There can be no assurance
that additional financing will be available on acceptable terms, or at all. If
adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on our business,
financial condition, and operating results.
Business Outlook
The following statements are based on our current expectations and we do
not undertake any duty to update them. These statements are forward-looking and
inherently uncertain. Actual results may differ materially as a result of the
factors described under "Factors That May Affect Results Of Operations And
Financial Condition" and elsewhere in this report, as well as in our other
filings with the Securities and Exchange Commission. Looking forward, we
currently have the following expectations for the second quarter and full year
of fiscal 2002:
. we expect revenues to grow 10% to 15% in fiscal 2002 over fiscal 2001;
. we expect that the business for our ASP services in both the large and
middle markets will become a more significant portion of our overall
business by the end of fiscal 2002;
. we expect that the business for our ASP services will reflect positive
gross margin by the end of the third quarter of fiscal 2002;
. we expect to achieve profitability by the end of fiscal 2002 and to
become cash flow positive before the end of fiscal 2002;
. we expect total revenues to be between $10.3 and $10.6 million for the
second quarter of fiscal 2002, and between $45.2 and $46.0 million for
fiscal 2002;
. we expect total cost of revenues to be between $5.6 and $5.7 million
for the second quarter of fiscal 2002, and between $21.9 and $22.1
million for fiscal 2002;
. we expect total operating expenses to be between $8.5 and $8.7 million
for the second quarter of fiscal 2002, and between $34.9 and $35.3
million for fiscal 2002; and
. we expect a loss per share of between $0.13 and $0.15 for the second
quarter of fiscal 2002, and a loss per share of between $0.40 and
$0.46 for fiscal 2002.
15
Factors That May Affect Results Of Operations And Financial Condition
We operate in a dynamic and rapidly changing business environment that
involves substantial risk and uncertainty. The following discussion addresses
some of 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 below and in other sections of this report and our
other filings with the Securities and Exchange Commission.
Our Business Is Difficult To Evaluate And We Have A History Of Losses.
We incorporated in 1993 and began licensing our software products in
1995. Since 1993, our business model and operating plan have evolved
significantly and remain unproven. This limited operating history and unproven
business model make our business operations and prospects difficult to evaluate.
Investors in our securities should consider all the risks and uncertainties that
are commonly encountered by companies in their early stages of business
operations, particularly companies, such as ours, that are in new and rapidly
evolving industries.
Since 1993, we have spent substantial financial and other resources to
develop our software products and services and otherwise fund our operations,
and we expect to continue to do so to fund our investments in research and
development and our other business operations. To date, we have incurred net
losses in each quarter of operation and have not achieved profitability. We
incurred net losses totaling $35.1 million, $75.7 million, and $46.5 million in
fiscal 2001, 2000, and 1999, respectively. As of December 31, 2001, we had an
accumulated deficit of $204.7 million. We expect to continue to incur net losses
in the immediate future and there can be no assurance that we will ever achieve
profitability.
We Rely Heavily On Sales Of One Product.
Since 1997, we have generated substantially all of our revenues from Concur
Expense products and services. We believe that sales of Concur Expense will
continue to account for a large portion of our revenues for the foreseeable
future. Our future financial performance and revenue growth will depend upon the
successful development, introduction, and customer acceptance of new and
enhanced versions of Concur Expense and other applications, and our business
could be harmed if we fail to deliver the enhancements that customers want with
respect to our current and future products. There can be no assurance that our
products and services will achieve widespread market penetration or that we will
derive significant revenues or any profits from sales of such products and
services.
We Depend On Services Revenues; Services Revenues And Services Revenue Margins
May Decline.
Our services revenues represented 58.6% of total revenues for the
quarter ended December 31, 2001. We anticipate that services revenues will
continue to represent a significant percentage of total revenues. The level of
services revenues depends largely upon demand for our consulting services and
ongoing renewals of customer support contracts by our installed customer base.
Our consulting revenues could decline if third-party organizations such as
systems integrators compete with us for the installation or servicing of our
products. In addition, our customer support contracts might not be renewed in
the future. Our ability to increase services revenues will depend in large part
on our ability to increase the scale of our services organization, including our
ability to recruit and train a sufficient number of qualified services
personnel. Due to the increasing costs of operating a professional services
organization, we may not be able to maintain profitability in this part of our
business.
We Depend On Software License Revenues, Which Makes Our Operating Results
Difficult To Predict.
Our software license revenues represented 21.5% of total revenues for
the quarter ended December 31, 2001. Our licensed software products are
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
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 products represent a substantial part of our overall
business. Since our expenses are relatively fixed in the near term, any
shortfall from anticipated revenues or any delay in the recognition of revenues
16
could result in significant variations in operating results from quarter to
quarter. 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. If revenues fall below our
expectations in a particular quarter, our business could be harmed. In the first
three quarters of fiscal 2000, our revenues did, in fact, fall below our own and
consensus securities analysts' estimates for those quarters and, as a result,
the price of our stock declined significantly during those periods. If our
revenues fall below our own estimates or below the consensus analysts' estimate
in an upcoming quarter, our stock price could decline further, harming our
business significantly in terms of, among other things, diminished employee
morale and public image. See "--We Are At Risk of Securities Class Action
Litigation."
Our ASP Model Has A Limited History.
In fiscal 2000, we began to offer our software products under an
Internet-based ASP model to complement our traditional licensing of these
products. We offer our ASP services on a subscription basis to companies seeking
to outsource their Corporate Expense Management applications. This business
model has been in operation for a limited period of time and represents a
significant departure from the strategies we and other enterprise software
vendors have traditionally employed. We have limited experience selling products
or services under an ASP model, and our efforts to develop this ASP business
divert our financial resources and management time and attention away from other
aspects of our business. In connection with our ASP business, we have engaged
third-party service providers to perform many of the necessary services as
independent contractors, and they may fail to perform those services adequately.
If any service provider delivers inadequate support or service to our customers,
our reputation could be harmed. We also use resellers and strategic referral
partners to market our ASP offerings. We have limited experience utilizing
resellers and strategic referral partners and we may not be successful in this
effort. Even if our strategy of offering products to customers over the Internet
proves successful, some of those Internet customers may be ones that otherwise
might have bought our software and services through our traditional licensing
arrangements, which is likely to reduce our revenue.
Security And Other Concerns May Discourage Customers From Purchasing Under Our
ASP Model.
If customers determine that our ASP offerings are not scalable, do not
provide adequate security for the dissemination of information over the
Internet, or are otherwise inadequate for Internet-based use, or if for any
other reason customers fail to accept our ASP products for use on the Internet
or on a subscription basis, our business will be harmed. As an ASP provider, we
expect to receive confidential information, including 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, or other harm to 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. Further, a well-publicized
compromise of security could deter people 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.
We Are At Risk Of Securities Class Action Litigation.
In July 2001, we and several of our current and former officers were
named as defendants in a purported securities class-action lawsuit filed in the
United States District Court for the Southern District of New York. The
complaint generally alleges claims against the underwriters of our initial
public offering in December 1998, our company, and several of our current and
former executives, based on alleged errors and omissions concerning underwriting
terms in the prospectus for our initial public offering. The plaintiffs in this
lawsuit seek damages in an unspecified amount, which could be substantial. We
believe this lawsuit is without merit and intend to defend ourselves vigorously.
Any liability by us could harm our results of operations and financial condition
and, even if we defend ourselves successfully, there is a risk that management
distraction in dealing with this lawsuit could harm our results.
17
In addition, securities class action litigation has often been brought
against companies that experience periods of volatility in the market prices of
their securities, as we have experienced from time to time. We may in the future
be the target of similar litigation, which could result in substantial costs and
divert management's attention and resources.
We Have Been Public For A Short Time And Our Stock Price Has Been Volatile.
We completed our initial public offering in December 1998. Since then, the
market price of our common stock has been highly volatile and subject to wide
fluctuations. We expect our stock price to continue to fluctuate:
. in response to quarterly fluctuations in our operating results;
. in reaction to announcements of technological innovations, new
products, or significant agreements by us or our competitors;
. in reaction to changes in prices of our products or the products of
our competitors;
. because of market conditions in our industry;
. in reaction to changes in financial estimates by securities analysts,
and our failure to meet or exceed the expectations of analysts or
investors; and
. as a result of the active trading of our stock by online day traders.
See also "--We Depend On Software License Revenues, Which Makes Our Operating
Results Difficult To Predict."
We Face Significant Competition.
The market for our products is intensely competitive and rapidly changing.
Direct competition comes from other providers of travel and entertainment
expense management, and from providers of enterprise resource planning software
that have developed, or may be developing, travel and entertainment expense
management software. Many of our competitors have longer operating histories,
greater financial, technical, marketing, and other resources, greater name
recognition, and a larger installed base of customers than we do. Some of our
competitors, particularly major enterprise resource planning 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. An
increase in competition could result in price reductions and loss of market
share and could have a material adverse effect on our business, financial
condition, and results of operations. We also face indirect competition from
potential customers' internal development efforts and have to overcome their
reluctance to move away from existing paper-based systems.
It Is Important For Us To Continue To Manage Changing Business Conditions.
Our future operating results will depend, in part, on our ability to manage
changing business conditions, including such conditions as the general economic
slowdown, reduced investment in information technology by customers and
prospective customers, and reduced business travel. If we are unable to manage
changing business conditions effectively, our business, financial condition, and
results of operations could be materially and adversely affected. Our ability to
manage changing business conditions depends, in part, on our ability to attract,
train, and retain a sufficient number of qualified personnel to meet our ongoing
needs. There can be no assurance that we will be successful in attracting,
training, and retaining the required number of qualified personnel to support
our business in the future. Failure to manage our operations with reduced
staffing levels may strain our management, financial, and other resources, and
could have a material adverse effect on our business, financial condition, and
results of operations.
18
We May Require Additional Financing To Fund Our Operations.
Presently, we believe that our existing cash, cash equivalents, and
marketable securities will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, our need for additional financing will depend upon a number of factors,
such as the commercial success of our existing products and services, the timing
and success of any new products and services, the progress of our research and
development efforts, our results of operations, the status of competitive
products and services, and the timing and success of potential strategic
alliances or potential opportunities to acquire or sell technologies or assets.
In addition, since our incorporation in 1993, we have experienced uneven cash
flow and operating results and significant operating losses. If we experience
delays in our progress toward reducing losses and achieving profitability, or if
we require working capital beyond currently expected needs, we may be required
to seek additional financing or curtail operations. Economic and financial
market conditions may discourage potential investors. There can be no assurance
that additional financing will be available on acceptable terms, or at all. Our
failure to obtain such additional financing, if needed, could have a material
adverse effect on our business, financial condition, and results of operations.
Our Lengthy Sales Cycle Could Adversely Affect Our Revenue Growth.
Because of the high costs involved, customers for enterprise software
products typically commit significant resources to an evaluation of available
software applications and require us to expend substantial time, effort, and
money educating them about the value of our products and services. 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. 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. See "--We
Depend On Software License Revenues, Which Makes Our Operating Results Difficult
To Predict."
We Depend Significantly On Direct Sales.
We sell our licensed products primarily through our direct sales force. We
believe that 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. In the future, we
intend to continue developing indirect distribution channels through third-party
distribution arrangements, but we may not be successful in establishing those
arrangements, or they may not increase revenues. Furthermore, we plan to
continue using resellers and strategic referral partners to market our ASP
products in particular. We have limited experience utilizing resellers and
referral partners to date. The failure to expand indirect channels may place us
at a competitive disadvantage.
It Is Important For Us To Continue To Develop And Maintain Strategic
Relationships.
To offer products and services to a larger customer base than we can reach
through direct sales, telesales, and internal marketing efforts, we depend on
strategic referral relationships and reseller relationships. If we were unable
to maintain our existing strategic referral or reseller relationships or enter
into additional strategic referral or reseller relationships, we would have to
devote substantially more resources to the distribution, sales, and marketing of
our products and services. Our success depends in part on the ultimate success
of our strategic referral and reseller 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.
19
Our Products Might Not Be Compatible With All Major Platforms, Which Could
Inhibit Sales.
We must continually modify and enhance our products to keep pace with
changes in hardware and software platforms, database technology, and electronic
commerce technical standards. 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 hurt our business. In addition, our
products are not currently based upon the Java programming language, an
increasingly widely-used language for developing Internet applications.
Accordingly, certain features available to products written in Java may not be
available in our products, and this could result in reduced customer demand.
We Rely On Third-Party Software That May Be Difficult To Replace.
We rely on software licensed from third parties in order to offer some of
our software products. This software may not continue to be available on
commercially reasonable terms, if at all. The loss or inability to maintain any
of these licenses could result in delays in the sale of our products and
services until equivalent technology is either developed by us, or, if
available, is identified, licensed, and integrated, which could harm our
business.
We May Not Successfully Develop Or Introduce New Products Or Enhancements To
Existing Products.
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 Concur Expense, and other applications, and our
business could be harmed if we fail to deliver enhancements to our current and
future products that customers desire. We have experienced delays in the planned
release dates of our software products and upgrades, and we have discovered
software defects in new releases after their introduction. New product versions
or upgrades may not be released according to schedule, or may contain defects
when released. Either situation could result in adverse publicity, loss of
sales, delay in market acceptance of our products, or customer 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 on a timely and
cost-effective basis, our business will be harmed. We are also continually
seeking to develop new product offerings. However, we remain subject to all of
the risks inherent in product development, including 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 products, or to
introduce in a timely manner and gain acceptance of such new products in the
marketplace.
We Must Attract And Retain Qualified Personnel.
Our success depends in large part on our ability to continue to attract,
motivate, and retain highly qualified personnel. 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 for
experienced personnel have greater financial and other resources than us. We
also compete for personnel with other software vendors and consulting and
professional services companies. Further, we believe stock options are an
important component for motivating and retaining our key personnel. The
significant decline in our stock price during the past year has made stock
options previously granted with higher exercise prices less valuable to our
current employees and has consequently made it more difficult for us to retain
our key personnel. The inability to hire and retain qualified personnel or the
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.
We depend upon our proprietary technology. We rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures, and contractual provisions to protect our proprietary information.
We presently have no patents or 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. 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
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these 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.
There Are Risks Associated With International Operations.
Our international operations are subject to a number of difficulties and
special costs, including:
. costs of customizing products for foreign countries;
. laws and business practices favoring local competitors;
. dependence on local vendors;
. uncertain regulation of electronic commerce;
. compliance with multiple, conflicting and changing governmental laws
and regulations;
. longer sales cycles;
. greater difficulty in collecting accounts receivable;
. import and export restrictions and tariffs;
. difficulties staffing and managing foreign operations;
. multiple conflicting tax laws and regulations; and
. political and economic instability.
Our international operations also face foreign currency-related risks. To
date, most of our revenues have been denominated in U.S. Dollars, but we believe
that an increasing portion of our revenues will be denominated in foreign
currencies. In particular, we expect that an increasing portion of our
international sales may be Euro-denominated. The Euro is still a relatively new
currency and may be subject to economic risks that are not currently
contemplated. 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.
Revenues from customers outside the United States represented approximately
$4.4 million, $3.3 million, and $932,000 in fiscal 2001, 2000, and 1999,
respectively. We intend 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 distribution partners that will be able to market our products
effectively.
We must also customize our products for local markets. For example, our
ability to expand into the European market will depend on our ability to develop
a travel and entertainment expense management solution that incorporates the tax
laws and accounting practices followed in Germany and other European countries,
and to develop applications that support the Euro. Further, if we establish
significant operations overseas, we may incur costs that would be difficult to
reduce quickly because of employee practices in those countries.
Our Revenue Recognition Policy May Change And Affect Our Earnings.
We believe our current revenue recognition policies and practices are
consistent with applicable accounting standards. However, current software
revenue recognition accounting standards, and accounting guidance with respect
to such standards, are subject to change. Such changes could lead to
unanticipated changes in our current revenue accounting practices, and such
changes could significantly reduce our future revenues and earnings. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations" and "Our ASP Model Has A Limited History."
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our operating results are not materially sensitive to changes in the
general level of U.S. interest rates. Based on our marketable securities
portfolio and interest rates at December 31, 2001, a one percent increase or
decrease in interest rates would result in a decrease or increase of
approximately $20,000, respectively, in the fair value of the marketable
securities portfolio. Changes in interest rates may affect the fair value of the
marketable securities portfolio; however, such gains or losses would not be
realized unless the investments are sold.
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PART II. OTHER INFORMATION
None.
SIGNATURES
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: February 14, 2002 CONCUR TECHNOLOGIES, INC.
By /s/ John F. Adair
------------------------------
John F. Adair
Chief Financial Officer
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