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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000 Commission File Number: 0-25137
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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)
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Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
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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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of December 15, 2000, 25,365,936 shares of Common Stock of Registrant
were outstanding. The aggregate market value of the shares held by non-
affiliates of the Registrant (based upon the closing price of the Registrant's
Common Stock on December 15, 2000 of $1.688 per share) was approximately $42.8
million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, which is anticipated to be filed within 120
days after the end of the Registrant's fiscal year ended September 30, 2000, are
incorporated by reference in Part III hereof.
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CONCUR TECHNOLOGIES, INC.
TABLE OF CONTENTS FOR FORM 10-K
PART I.................................................................................................... 3
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 20
Item 3. Legal Proceedings............................................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders........................................... 20
PART II................................................................................................... 20
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 20
Item 6. Selected Consolidated Financial Data.......................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 23
Item 7A. Quantitative and qualitative disclosures about market risk.................................... 30
Item 8. Financial Statements and Supplementary Data................................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 56
PART III.................................................................................................. 56
Item 10. Directors and Executive Officers of the Registrant............................................ 56
Item 11. Executive Compensation........................................................................ 56
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 56
Item 13. Certain Relationships and Related Transactions................................................ 56
PART IV................................................................................................... 56
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 56
2
PART I
ITEM 1. BUSINESS
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 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. Reliance
should not be placed on these forward-looking statements because they involve
substantial risks and uncertainties. Examples of such risks and uncertainties
are described under "Factors That May Affect Results of Operations and Financial
Condition" contained in Part I, Item 1 of this report, elsewhere in this
report, and 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 on the date of this report. We assume no obligation or duty to update any
such forward-looking statements.
Overview
Concur Technologies, Inc.(TM) is a leading provider of 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)
for travel and entertainment expense management, Concur Payment(TM) for employee
requests for vendor payments, Concur Time(TM) for time tracking and reporting,
and Concur Human Resources(TM) for human resources self-service. These software
products are designed to meet the needs of businesses of all sizes through
license and application service provider ("ASP") models. Since 1996, nearly 600
companies, representing over three million employees, have selected our software
and services to reduce their costs and increase their productivity and access to
data about their internal business processes.
We sell our software and services through our direct sales organization and
through indirect channels. We also have developed a number of strategic
relationships. Currently, one of our most significant reseller arrangements is
with ADP, Inc., a subsidiary of Automatic Data Processing, Inc., a global
payroll solutions and computing services provider. ADP has agreed to resell and
jointly market our ASP solutions for travel and entertainment expense management
to ADP's existing customers and potential new customers.
Industry Background
In response to competitive conditions worldwide, businesses seek cost
savings and productivity gains by using software solutions to automate
enterprise business processes. These solutions traditionally targeted discrete
functional or department-level business processes involving relatively few
employees. However, businesses are now seeking similar solutions for employee-
centric business processes, including travel and entertainment expense
management, time tracking and reporting, employee requests for vendor payments,
human resources self-service, and facilities management. The emergence of the
Internet and corporate intranets has made it possible to deploy software
solutions that reach all employees in an enterprise and connect the enterprise
to corporate partners and service providers. In addition, in contrast to
traditional client-server applications, Internet and intranet-based applications
can be deployed rapidly throughout the enterprise on a cost-effective basis.
We believe that customers using our solutions can realize significant
operating cost savings through reduced processing costs and greater efficiency
through increased business intelligence. Based on a 1997 study conducted by
American Express, businesses using best-in-class automation solutions that
process 1,000 to 5,000 travel and entertainment expense reports per month can
achieve savings of $300,000 to $1.5 million per year in processing costs alone.
We believe our customers can achieve these cost savings rapidly because our
products are designed to minimize burdens on customer information technology
("IT") professionals and to maximize employees' ease of use. Our solutions are
designed to deploy rapidly, scale enterprise-wide, and integrate easily with an
organization's existing IT infrastructure, enabling our customers' IT personnel
to deliver and support solutions quickly and cost-effectively. For example, one
customer deployed our Concur Expense software to more than 25,000 employees in
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less than 90 days, and has since deployed Concur Expense to more than 80,000
employees. Employees readily adopt our solutions because they are easy to use,
significantly reduce unproductive time, and shorten reimbursement, fulfillment,
and processing cycles.
Our Corporate Expense Management Solutions
We believe that we are a leading provider of Corporate Expense Management
software and services, based on a combination of the number of customers we
serve, the number of our solutions, the features our solutions provide, and the
flexibility of our delivery models.
Our software products include:
. Concur Expense for travel and entertainment expense management;
. Concur Payment for employee requests for vendor payments;
. Concur Time for time tracking for billing and allocation purposes; and
. Concur Human Resources for manager and employee self-service HR
transactions.
Our software products can be delivered to customers through two delivery models:
. A license model targeted primarily to large companies; and
. An ASP model targeted primarily to mid-to-large companies that want a
configured solution offered on an outsourced basis.
Presently, we offer Concur Expense, Concur Time, Concur Payment, and Concur
Human Resources in the license model. We offer Concur Expense in the ASP model.
We offer licenses for our solutions based on the number of users or employees in
an enterprise. The typical order size for our license solutions and related
services ranges from $250,000 to $1.5 million, with some transactions exceeding
$2.0 million. We also offer our ASP solutions on a per employee subscription
basis. The typical monthly fee for our ASP solutions ranges from approximately
$500 to $3,000 per month per application, depending on the total number of
users, with some transactions exceeding $15,000 per month per application.
Our software products benefit a number of groups within an enterprise,
including corporate management, IT professionals, and employees. For corporate
management, our software products provide tools that reduce the amount of time
required to administer, manage, and process expense reports, timesheets, and
payment requests. These tools are Web-based "thin client" applications that
greatly increase productivity for these business functions. Also, our software
products provide reporting capabilities that provide corporate management with
access to the information gathered by our software products for the purposes of
trend analysis, vendor negotiation, financial planning, and other needs. For IT
professionals, our software products provide simple, Web-based, thin client
applications for the administration, management, and monitoring of our
solutions. These tools provide a means for managing employee information, batch
processes, database maintenance, and data interoperability. For employees, our
software products provide an intuitive, easy to use interface for the creation
of expense reports, timesheets, and payment requests, which reduces the amount
of time required to create these documents.
Concur Expense
Concur Expense automates the travel and entertainment expense management
process, including expense report preparation, approval, processing, and data
analysis.
Report Preparation. Concur Expense includes features that facilitate report
preparation for end-users. The application uses corporate charge or credit card
information to prepopulate a user's expense report with transaction data
covering various information required for the expense report, including
transaction date, type of expense, vendor, location, method of payment, currency
amount, and foreign currency conversion. Using a graphical user interface,
employees supply additional expense-related information by using pull-down
menus. To eliminate the task of sorting receipts, Concur Expense allows users to
enter data in any order. Features of the application also automate the
complicated process of itemizing hotel receipts. With each use of Concur
Expense, the application retains commonly-incurred expense information and uses
this information to help complete the next expense report. Other ease-of-use
features include simple "checkbook" style input screens, the ability to create
"attendees" lists, mileage reimbursement tracking, and automatic flagging of
non-compliant and incomplete entries.
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Report Approval. Concur Expense allows each customer to determine how
expense reports should be processed, whether by submission to a manager for
approval before processing, or by submission to the accounting department for
immediate review and payment. Once the report is submitted, the approver
receives an e-mail message containing an intranet link to Concur Expense, where
all reports awaiting approval are listed. Concur Expense can be configured to
route the report for approval based on cost center, dollar limit, or other
criteria. Items that do not comply with corporate policy can be automatically
flagged for review, allowing approvers to focus on problematic items. Approvers
can reject individual line items, while allowing the rest of the report to
continue in the approval process. Once approved, the report is automatically
forwarded to the next phase in the process or to the enterprise's accounting
department, and the user is notified of the action.
Report Processing. Concur Expense streamlines back-office processing of
expense reports in a number of ways. Because all expense reports are prepared
electronically, the processing department no longer needs to check the
arithmetic of each report manually. Moreover, businesses can reduce the time
spent auditing reports by choosing to audit only those reports automatically
flagged as not compliant with corporate travel and entertainment expense
policies. In addition, Concur Expense reduces the number of status inquiries
between employees and processing departments by automatically updating the
status of reports in the database, and alerting employees via e-mail to the
status of their reports. Concur Expense allows significant time savings by
automatically posting expense report information to the customer's enterprise
resource planning ("ERP") or accounting package, eliminating the manual re-entry
of this data. Concur Expense further simplifies processing by producing bar-
coded receipt submission cover pages to validate delivery of receipts associated
with expense reports. Concur Expense also helps companies claim reimbursement of
tax credits by tracking VAT, GST, and other international taxes.
Data Analysis. Concur Expense utilizes business intelligence software to
analyze expense data. This information can be presented graphically in various
display formats and allows managers to determine total spending according to
vendor, location, or other user-defined criteria. With knowledge of this data,
managers can analyze trends and determine methods for controlling costs or
negotiating more favorable terms with vendors. Managers can also analyze the
data to monitor compliance with corporate travel and expense policies and
determine if policy modifications are appropriate. Concur Expense also can
provide companies with information relating to unused airline tickets, booked
versus actual travel reporting, and foreign currency rates.
Concur Payment
Concur Payment allows companies to deploy automated "Check Request" and invoice
entry functionality to employees and dramatically reduce the data entry burden
for accounts payable departments. By deploying this functionality to the
employee, companies can ensure that the right information and approvals are
collected, reducing the overall effort for accounts payable departments. Concur
Payment automates every step in the payment process so that companies can
achieve:
. Timely and more accurate vendor payments;
. More efficient approval process;
. More accurate accounting and tracking of non-purchase order expenses;
. Improved efficiency of the accounts payable department; and
. Improved employee productivity.
Overall, Concur Payment eliminates paper forms and manual processing, reducing
processing costs and saving valuable resources. Immediate and long-term benefits
of Concur Payment include:
. Reduced costs. Concur Payment ensures that the right information is
collected up-front from the employees authorizing the purchase or
service, and automates every step within the payment process. By
capturing the right information initially, reducing re-keying and
errors, and processing payment requests online, the accounts payable
departments of our customers can significantly reduce the cost and
effort associated with managing vendor payments.
. Increased employee productivity. Concur Payment streamlines the payment
request process for employees by enabling online forms, identifying and
defaulting required information, and automating the approval process.
Employees have access to instant online status updates.
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. Improved payment turnaround time. Concur Payment automates the manual,
paper-based process, minimizing the number of steps and people involved.
This results in more timely payment to vendors, which in turn improves
supplier relationships and management.
. Increased focus on strategic activities. Concur Payment allows both
individual employees and the accounts payable departments of our
customers to minimize the administrative time and effort associated with
employee-initiated vendor payment requests, freeing them to focus on
more strategic business activities and objectives.
Concur Time
Concur Time allows customers to track time for billing and allocation purposes.
In many businesses today, the time tracking process is fraught with
inefficiencies, such as:
. Lengthy turn-around times and procedures.
. Time and costs of tracking down late or missing time sheets.
. Manual, paper-based approval process.
. Drains on employee and project manager productivity.
. Errors and inefficiencies.
. Time reporting errors due to inaccurate project codes and time data.
. Re-key in payroll or billing departments.
. Delayed billing cycles; slow turn-around on receivables.
. Lack of real-time data.
. Inability to capture real-time billing and revenue data.
. Difficulty tracking project status and cost.
. Lead times in obtaining employee utilization information.
By automating this process using Concur Time, immediate and long term benefits
include:
. Improve billing accuracy and reduce timelines - by collecting time
information directly from employees in a thin-client, Web-based
application and routing the timesheet through manager approval
automatically, companies can improve the accuracy of the timesheets that
reach the accounting department. This in turn allows invoices to reach
customers faster with more accurate information.
. Reduce time collection and accounting costs- by automating this process,
companies eliminate the thousands of paper forms that must be manually
processed through the back office. Our solution allows all timesheets to
arrive in the back office electronically and be processed, routed and
approved online.
. Improve management of project costs - as information is collected
through our solution, companies can access and analyze this information
in order to gain a clearer understanding of the true costs of their
projects. This data can in turn be used to adjust staffing levels,
billing rates, etc.
. Increase employee productivity - by automating this process, companies
can increase the productivity of their most valuable resource - their
employees. Using our solutions, employees spend less time creating
timesheets and have more time to focus on their core responsibilities.
Concur Human Resources
Concur Human Resources is a comprehensive application that automates
employee and managerial human resources processes for enterprise customers.
Concur Human Resources offers a variety of modules for employee and managerial
self-service tasks, enabling customers to choose the applications that meet
their needs and to add new components or customized applications as their
business needs grow and change. Concur Human Resources allows employees and
managers to access and update information easily, process everyday human
resources transactions quickly, and conduct many everyday transactions without
the involvement of human resources
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personnel. This reduces administrative costs and allows the human resources
staff to maximize employee productivity and efficiency.
Employee Self-Service Applications. Concur Human Resources allows employees
to review and modify information in the human resources, payroll, and benefits
management systems. Our HR Core (Personal Information) application, which is a
foundation component of Concur Human Resources, provides security, navigation,
search, display, and maintenance capabilities, and allows employees to access
information about company personnel. Our Payroll and Paid-Time-Off (Payroll
Information) application allows employees to access their payroll and W-4 data,
view their paycheck stubs and perform updates to deductions, withholdings, and
direct deposit data. Our Benefits Enrollment and Modeling (Benefits Enrollment)
application allows employees to access information about the employer's benefit
plans, and to complete enrollment forms, 24 hours per day, seven days per week.
Concur Human Resources' employee self-service applications are "role based" in
that each user's access rights, views, and workflow are tailored to that user's
role in the organization.
Managerial Self-Service Applications. Concur Human Resources also automates
managerial human resources tasks. Our Events@Work (Employee Manager)
application, which is a component of Concur Human Resources, provides managers
the convenience of a single access point to manage planning and day-to-day
transactions such as performance reviews, salary planning, and position
management (including inter-departmental transfers, salary changes, promotions,
and terminations). The Compensation and Salary Management application also
provides managers with easy access to decision-critical information such as
compensation data and department compensation plans, modeling, and approvals.
These applications reduce the time that managers must spend on routine
administrative functions, allowing them to spend more time on core business
matters. Like the Concur Human Resources employee self-service applications,
Concur Human Resources managerial self-service applications are role based.
Human Resources Management System Integration. Concur Human Resources
integrates with the back-office human resources management systems offered by
PeopleSoft and Tesseract. In addition, Concur's open system approach has been
integrated with many other human resources management systems developed by
partners and customers.
HR Procedure Control and Security. Concur Human Resources meets business
needs for scalability, security, and enterprise-wide distribution. Management
staff, HR personnel, and employees can access the HR information they need, but
access is strictly controlled so that each employee only has access to the
applications, functions, and data appropriate to their roles within the company.
Concur's security model ensures that sensitive data is available only to
appropriate users. Dynamic Profiling(TM) determines access dynamically, based on
the relationship of the user to the organization, to the employee records being
accessed, and to the transaction being performed. Company policies, employee
contracts, compensation plans, and rules are securely protected and accessible
to authorized personnel only.
Professional Services
Our professional services organization was formed in 1996 to offer
consulting, customer support, and training in connection with our Corporate
Expense Management software and services.
Consulting. We offer a variety of consulting services in connection with
implementation of our software products. Our consulting staff meets with
customers prior to product implementation to review the customer's existing
business processes and IT infrastructure, and to provide advice on ways to
improve these processes using industry best practices and prior experiences with
similar customers. Our consultants also install, configure, and test our
applications and integrate them with our customers' existing systems. Our
consultants further help customers develop a strategy for the customers'
enterprise-wide deployment of our applications.
Customer Support. We provide product upgrades and customer support through
our "CustomerOne" customer support program. Our CustomerOne program provides
telephone support as well as 24-hour electronic access via the Internet,
including online case entry and review, access to technical information
documents and technical tips. Customers routinely subscribe for the first year
of the CustomerOne program at the time they license an application; thereafter,
support may be renewed on an annual basis.
Training. We offer a variety of training programs for our products. These
classes are tailored to particular user groups, such as end users, help desk
personnel, and trainers. Training classes are offered at customer sites and
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also at our headquarters in Redmond, Washington. We also provide training
classes for third-party service providers, such as systems integrators.
Strategy
Our objective is to extend our leadership position in Corporate Expense
Management solutions that automate business processes across an enterprise. Key
elements of our strategy include the following:
Expand Product Functionality and Architecture. We plan to continue our
innovation and development of advanced features and functionality for our
products, increasing their utility to our customers and facilitating broader
market acceptance for them. In fiscal 2000, we introduced two new product
offerings - Concur Time and Concur Payment - to complement our existing
Corporate Expense Management solutions. We believe that our product expansion,
together with the increasing demand for Concur Expense as an ASP solution, will
allow us to extend our leadership position.
Expand Our Small and Mid-Sized Company Market Presence. We intend to expand
our presence in the market for small and mid-size companies through a
combination of expanding our indirect sales channel and offering our software
products on an ASP basis to this market segment. Our ASP solution is offered on
a per-employee subscription-pricing basis to companies seeking to outsource
their corporate expense management applications. We expect that this offering
will be particularly attractive to businesses with 50-1,000 employees, which
typically have limited IT staff and budget resources. Our ASP solution is
currently available with Concur Expense; we expect to add Concur Time and Concur
Payment at a later date.
Expand Our ASP Solution to the Large Company Market. We expect to expand
our ASP solution to large companies through both our direct and indirect sales
channels. This will enable large companies to outsource their travel and
entertainment expense reporting and still configure the application to meet
their needs in much the same way they would have been able to configure the
application if they had licensed Concur Expense and installed it on their
intranet servers.
Expand International Presence. We believe that additional demand exists for
our products outside of the United States. For fiscal 2000, our international
revenues increased to 10% of total revenues from less than five percent of our
total revenues for fiscal 1999. We intend to continue our investment in
international sales and marketing in an effort to increase sales of our
Corporate Expense Management solutions worldwide. We also plan to localize our
applications for new countries, and to add new features and functionality to our
products to accommodate accounting, customs, currency, and tax requirements of
foreign jurisdictions.
Expand Relationships With Strategic Third Parties. We intend to expand our
relationships with existing strategic partners and to develop additional
relationships with providers of complementary applications and products. We have
developed strong relationships with leading corporate charge card providers,
payroll processors, and systems integration and consulting firms, and we intend
to establish similar relationships with information technology outsourcing
companies.
Our strategy involves substantial risk. There can be no assurance that we
will be successful in implementing our strategy or that it will lead to
achievement of our objectives. If we are unable to implement our strategy
effectively, our business will be materially adversely affected. See "Factors
That May Affect Results of Operations and Financial Condition" below.
Customers
We have nearly 600 customers, representing over three million employees,
who have selected our solutions. The following table lists a selection of our
significant customers since fiscal 1996:
Technology/Telecommunications/Media Consumer
- ----------------------------------- --------
ADP, Inc. Anheuser-Busch Companies Inc.
AT&T Corp. Avon Products, Inc.
American Management Systems, Inc. Bestfoods
Bell South Corporation The Clorox Company
Cable & Wireless DaimlerChrysler Corporation
Cambridge Technology Partners Eastman Kodak Company
Computer Sciences Corporation The Gap, Inc.
Dell Computer Corporation The Gillette Company
DoubleClick J.C. Penney Company, Inc.
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Dow Jones & Company Levi Strauss & Co.
The Hearst Corporation Maytag Corporation
Knight-Ridder, Inc. Ocean Spray Cranberries, Inc.
KPMG Revlon, Inc.
Lucent Technologies, Inc.
Motorola, Inc. Financial Services
The New York Times Company ------------------
Quantum Corporation ABN Amro Holding N.V.
Reuters Limited American Express Travel Related Services Company
SBC, Inc. (Southwestern Bell) Bear Stearns & Co. Inc.
Seagate Technology, Inc. Comdisco, Inc.
Sprint Corporation Credit Suisse First Boston Corporation
Texas Instruments Incorporated Dresdner Kleinwort Benson
First Union Corporation
Industrial/Manufacturing J & H Marsh & McLennan, Inc.
- ------------------------ John Hancock Financial Services
Allied Signal Inc. J.P. Morgan Services Inc.
Case Corporation Lehman Brothers Inc.
Eaton Corporation Nomura International
E.I. du Pont de Nemours and Company Royal Insurance
Equistar Chemicals SAFECO Insurance Company of America
Guardian Industries Corporation Transamerica Corporation
Hughes Space and Communications Company Wells Fargo Bank, N.A.
Monsanto Company
Navistar International Energy and Natural Resources
Northrop Grumman Corporation ----------------------------
PPG Industries, Inc. Amerada Hess Corporation
Solutia, Inc. Baltimore Gas & Electric Company
The Timken Company Broken Hill Proprietary Company Limited
Trinity Industries, Inc. Exxon-Mobil Corporation
USG Corporation Florida Power & Light Company
Occidental Petroleum Corporation
Pharmaceutical/Health Care Ontario Power Generation
- -------------------------- Ultramar Diamond Shamrock Corporation
Baxter Heathcare Corporation Southern California Edison Company
Bristol-Myers Squibb Company Texaco Inc.
Columbia/HCA Healthcare Corporation
Magellan Health Services, Inc. Other
Merck, Sharpe & Dohme Limited -----
Pfizer Inc. American Airlines, Inc.
Pharmacia & Upjohn Co. Battelle Memorial Institute
Solvay Pharmaceuticals, Inc. British Midland
Tenet Healthcare Corporation Federal Express Corporation
Harvard College
J. Walter Thompson
Ontario Ministry of Labour
Rockwell International
United States Postal Service
No customer accounted for 10% or more of our total revenues in fiscal 2000,
1999, or 1998.
Sales
We sell our solutions through our direct sales organization, with sales
professionals located in metropolitan areas throughout the United States and the
United Kingdom, and through indirect channels. Field-based sales engineers
provide technical sales support. Direct telesales and telemarketing
representatives based at our headquarters in Redmond, Washington support the
field sales force in addition to directly selling our ASP solutions.
Because our solutions affect employees throughout an enterprise, our sales
effort involves multiple decision makers and frequently includes the chief
financial officer, vice president of finance, controller, and vice president of
human resources. While the average sales cycle varies substantially from
customer to customer, for initial sales it has generally ranged from three to
twelve months, with some transactions exceeding fifteen months. See "Factors
That May Affect Results of Operations and Financial Condition--Our Lengthy Sales
Cycle Could Adversely Affect Our Revenue Growth."
We have developed a number of strategic relationships. For example, ADP, a
subsidiary of Automatic Data Processing, Inc., a global payroll solutions and
computing services provider, has agreed to resell and jointly market our ASP
solutions for travel and entertainment expense management to existing ADP
customers and potential new
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customers. While we believe that our relationships with our strategic partners
are good, many of them have multiple strategic relationships, and we may not be
regarded as significant for their own businesses. In addition, our strategic
partners may attempt to develop or acquire products or services that compete
with our products or services. Any inability to maintain our strategic
relationships or to enter into additional strategic relationships may have a
material adverse effect on our business. See "Factors That May Affect Results of
Operations and Financial Condition -- It is Important for Us to Establish and
Maintain Strategic Relationships."
Substantially all of our revenues have been derived from the sale of
licenses of Concur Expense and related services, and to a lesser degree, the
sale of licenses and services relating to Concur Human Resources. Revenues from
Concur Expense and related services represented approximately 87% of our total
revenues in 2000, compared to approximately 83% and 86% of total revenues in
1999 and 1998, respectively. We anticipate that revenues from Concur Expense and
related services will continue to represent a meaningful portion of our total
revenues in 2001. See "Factors That May Affect Results of Operations and
Financial Condition -- We Rely Heavily on Sales of One Product."
Marketing
Our marketing efforts are directed at promoting the Concur brand and our
Corporate Expense Management software and services, extending our leadership
position in travel and entertainment expense management and human resources
solutions, and increasing our market share in solutions for employee requests
for vendor payments and time tracking and reporting. Our marketing programs are
targeted at accounting, finance, human resources, and travel executives, and are
focused on creating awareness of, and generating interest in, our solutions.
We engage in a variety of marketing activities, including developing and
executing co-advertising and co-marketing strategies designed to leverage our
existing strategic relationships, targeting additional strategic relationships,
managing and maintaining our Web site, conducting public relations campaigns,
and establishing and maintaining close relationships with recognized industry
analysts. We are an active participant in technology-related conferences and
demonstrate our products at trade shows targeted at accounting, finance, human
resources, and travel executives.
We believe that demand is increasing, and will continue to increase, for
Corporate Expense Management solutions such as those we sell. We may not be able
to expand our sales and marketing staff, either domestically or internationally,
to take advantage of any increase in demand for Corporate Expense Management
solutions. Our failure to expand our sales and marketing organization or other
distribution channels could materially adversely affect our business. See
"Factors That May Affect Results of Operations and Financial Condition--We
Depend on Our Key Employees" and "--We Must Attract and Retain Qualified
Personnel."
Product Development
We have been an innovator and leader in the development of Corporate
Expense Management solutions. We believe that we were one of the first to
introduce a commercially successful travel and entertainment expense reporting
software application. We also believe that we pioneered Corporate Expense
Management solutions in an ASP model.
Our software engineering organization is responsible for developing new
software and services as well as enhancing our existing software and services.
We believe that a technically skilled, quality-oriented, and highly productive
software development organization will be a key component of the continued
success of new product offerings. As of September 30, 2000, we employed 107
people in research and development. Our software engineering team is organized
into six disciplines: development, quality assurance, documentation, product
design, configuration management, and program management. Members from each of
these disciplines, along with a product manager from our marketing department,
form separate product teams that work closely with sales, marketing,
professional services, customers, and prospects to better understand market
needs and requirements. When required, we also use third-party development firms
to expand the capacity and technical expertise of our internal research and
development team. Additionally, we may license third-party technology that is
incorporated into our products. We have a well-defined software development
methodology that we believe allows us to deliver products that satisfy real
business needs and meet commercial quality expectations.
We examine new technologies and platforms on an ongoing basis to determine
their potential benefits to our customers. For example, we currently develop
products using Microsoft(R) development tools and create thin-client,
10
Web-based solutions which run on multiple platforms, including Microsoft(R)
Windows, Unix(R), and Macintosh(R). The solutions currently work with ODBC(R)
compliant databases including Microsoft(R) SQL Server(R) and Oracle(R).
For the years ended December 31, 2000, 1999, and 1998, we incurred gross
research and development expenditures of $31.2 million, $19.4 million, and $10.3
million, respectively. While we believe our software engineering team will
continue to deliver products that meet the business needs and quality
expectations of our customers, our development efforts may not be completed
within our anticipated schedules, and if completed, they may not have the
features necessary to make them successful in the marketplace. Future delays or
problems in the development or marketing of product enhancements or new products
could result in increased research and development costs and otherwise have a
material adverse effect on our business. See "Factors That May Affect Results of
Operations and Financial Condition--We May Experience Difficulties in
Introducing New Products and Enhancements to Existing Products" and "--Our
Effort to Sell Products Under an ASP Model May Fail."
Competition
The market for our solutions is intensely competitive, subject to rapid
change, and significantly affected by new product introductions and other market
activities of industry participants. Our primary source of direct competition
comes from independent software vendors of Corporate Expense Management
solutions, and from providers of ERP software applications that have or may be
developing products similar to those we sell. 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.
Our major competitors in the Corporate Expense Management field include
Captura Software, Inc., Extensity, Inc., Gelco Information Systems, iClick,
Inc., Interlynx Technology Corporation, International Business Machines
Corporation, ProBusiness Services, Inc., and Workscape, Inc. In addition,
several major ERP vendors such as Oracle Corporation, PeopleSoft, Inc., JD
Edwards, and SAP AG have already developed or created partnerships to develop
Corporate Expense Management solutions. These companies have begun to sell these
products along with their ERP application suites. We also expect to face
competition from new entrants including those ERP providers that do not already
market products similar to ours. Most of the major ERP providers have a
significant installed customer base and have the opportunity to offer additional
products to those customers as additional components of their respective ERP
application suites.
We believe that the principal competitive factors considered in selecting
Corporate Expense Management solutions are functionality, interoperability with
existing IT infrastructure, price, and an installed referenceable base of
customers. With respect to functionality, we believe that we offer solutions
with generally more features than other competing solutions, and that we have
often been the first to offer new and innovative features, such as prepopulation
of expense reports based on credit card information. We believe we were one of
the first providers of Corporate Expense Management solutions, and one of the
first companies to offer these solutions in an ASP model. In addition, our
solutions were designed and built to interoperate with existing IT systems and
can often be deployed on an enterprise customer's existing IT infrastructure.
Many of our competitors have chosen to develop their Web-based applications
using an architecture that we believe is difficult to deploy on a large scale
within today's corporate IT infrastructure. We believe the prices of our product
offerings are competitive with the prices for the products of our competitors.
Many of our competitors in the Corporate Expense Management markets have
longer operating histories, significantly greater financial, technical,
marketing, and other resources, significantly greater name recognition, and a
larger installed base of customers. Moreover, a number of our competitors,
particularly major ERP vendors, have well-established relationships with our
current and potential customers as well as with systems integrators and other
vendors and service providers. In addition, these competitors may 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 we can.
11
It is also possible that new competitors or alliances among competitors or
other third parties may emerge and rapidly acquire market share. We expect that
competition in our markets will increase as a result of consolidation and the
formation of alliances in the industry. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
could harm our business. We may not be able to compete successfully against
current or future competitors and the competitive pressures we face may
materially adversely affect our business. See "Factors That May Affect Results
of Operations and Financial Condition--We Face Significant Competition" and "--
It is Important for Us to Establish and Maintain Strategic Relationships."
Intellectual Property Rights
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 primarily on a
combination of copyright, trade secret and trademark laws, confidentiality
procedures, contractual provisions, and other similar measures to protect our
proprietary information. Currently, we do not own any issued patents or have
any patent applications pending. As part of our efforts to protect our
proprietary information, we enter into license agreements with our customers and
nondisclosure agreements with certain of our employees, consultants, corporate
partners, customers, and prospective customers. These agreements generally
contain restrictions on disclosure, use, and transfer of our proprietary
information. We also employ various physical security measures to protect our
software source codes, technology, and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or technology that
we consider proprietary, and third parties may attempt to develop similar
technology independently. In particular, we provide our licensed customers with
access to object code versions of our software, and to other proprietary
information underlying our software. In a small number of instances, we have
provided our licensees with limited access to source code versions of our
software in order to facilitate more extensive testing of such products.
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,
effective protection of intellectual property rights may be unavailable or
limited in certain countries. The laws of some foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States.
Overall, the protection of our proprietary rights may not be adequate and our
competitors may independently develop similar technology. In addition, in
connection with numerous recent changes in our product names, and the relatively
recent change in our company's name, we have recently filed trademark
applications in the United States and in certain foreign countries. We do not
have assurance that our strategy with respect to our trademark portfolio will
prove adequate to secure all necessary intellectual property rights in foreign
countries or to protect us from claims by third parties, either domestically or
in foreign countries. There also can be no assurance that any of our copyrights
or trademarks will not be challenged and invalidated.
We are not aware that our products, trademarks, copyrights, or other
proprietary rights infringe the proprietary rights of third parties. Third
parties may assert infringement claims against us in the future with respect to
current or future products. Further, we expect that software product developers
will increasingly be subject to infringement claims as the number of products
and competitors in our industry segment grows and the functionality of products
in different industry segments overlaps. From time to time, we hire or retain
employees or consultants, including through acquisition, who have worked for
independent software vendors or other companies developing products similar to
those offered by us. Such prior employers may claim that our products are based
on their products and that we have misappropriated their intellectual property.
Any such claims, with or without merit, could cause a significant diversion of
management attention, result in costly and protracted litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements with
such parties. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all, which would have a material
adverse effect upon our business. See "Factors That May Affect Results of
Operations and Financial Condition--Our Ability to Protect Our Intellectual
Property is Limited and Our Products May be Subject to Infringement Claims by
Third Parties."
Employees
As of September 30, 2000, we had approximately 379 full-time employees, of
whom 19 were based in the United Kingdom and three in Australia. These employees
included 107 engaged in research and development, 90 in sales and marketing, 139
in consulting, training, and technical support, and 43 in administration and
finance. No
12
employees are known by us to be represented by a collective bargaining agreement
and we have never experienced a strike or similar work stoppage. We consider our
relations with our employees to be good. Our ability to achieve our financial
and operational objectives depends in large part upon our continuing ability to
attract, integrate, retain, and motivate highly qualified sales, technical
sales, development, professional services, and managerial personnel. Competition
for such qualified personnel in our industry is intense, particularly in the
Seattle area, where our headquarters is located, and in the San Francisco area,
where the majority of the employees servicing the Concur Human Resources product
offering is located, and particularly with respect to software development,
marketing, and management personnel. In addition, competitors may attempt to
recruit our key employees. There can be no assurance that we will be able to
attract or retain employees in the future. See "Factors That May Affect Results
of Operations and Financial Condition--We Depend on Our Key Employees," and "--
We Must Attract and Retain Qualified Personnel."
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. 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 are still in the early stages of our development and our business model
is unproven, so evaluating our business operations and our prospects is
difficult. We incorporated in 1993 and have incurred net losses in each quarter
since then. Our business model and operating plan have evolved over time and
remain unproven. Furthermore, we expect to devote substantial financial and
other resources to expanding our sales and marketing, research and development,
and professional services organizations. These investments may never produce a
profit. We incurred net losses totaling $75.7 million, $46.5 million, and $26.2
million in fiscal 2000, 1999, and 1998, respectively. As of September 30, 2000,
we had an accumulated deficit of $165.4 million. We expect to continue to incur
net losses for the foreseeable future.
We Rely Heavily On Sales of One Product.
Since 1997, we have generated substantially all of our revenues from
licenses and services related to our Concur Expense product. We believe that
Concur Expense revenues 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, Concur Time,
Concur Payment, Concur Human Resources, and other applications, and our business
could be harmed if we fail to deliver the enhancements to our current and future
products that customers want. Although we believe that our products and services
present the basis for growth for our business, 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 the sale of such products
and services.
We Depend on Service Revenues to Increase Our Overall Revenues; Services May Not
Achieve Profitability.
Our service revenues have increased each year as a percentage of total
revenues. Service revenues represented 62.4%, 35.2%, and 34.5% of total revenues
for fiscal 2000, 1999, and 1998, respectively. We anticipate that service
revenues will continue to represent a significant percentage of total revenues.
The level of service revenues depends largely upon our consulting services and
ongoing renewals of customer support contracts by our growing installed customer
base. Our consulting revenues could decline if third-party organizations such as
systems integrators compete 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 service 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. We formed our professional services organization in 1996. Since then,
we have not consistently achieved profitability with respect to these services.
Due to the increasing costs of operating a professional services organization,
we may not be able to sustain profitability in this part of our business in the
near future, or ever.
13
Our Dependence on Software License Revenues Makes Our Operating Results
Difficult to Predict.
Our licensed software products, from which we derive a substantial
percentage of our revenues, are typically shipped when orders are received, so
license backlog at the beginning of any quarter in the past represented only a
small portion of that quarter's expected license revenues. This makes license
revenues in any quarter difficult to forecast because they depend on 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 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 Due to Our Stock Price Volatility."
Our Efforts to Offer Products Under an ASP Model May Fail.
In early fiscal 2000, we began to offer our software products under an
Internet-based ASP model to complement our traditional licencing of these
products. We offer our ASP offering on a subscription basis to companies seeking
to outsource their corporate expense management applications. This business
model is unproven and represents a significant departure from the strategies we
and other enterprise software vendors have traditionally employed. We have no
experience selling products or services under an ASP model, and our efforts to
develop this ASP business have diverted, and we expect will continue to 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 we are and will be responsible for monitoring their
performance. We have limited experience outsourcing services or other important
business functions in the past, and independent contractors may not perform
those services adequately. If any service provider delivers inadequate support
or service to our customers, our reputation could be harmed. We also plan to use
resellers to market our ASP offering. We have limited experience utilizing
resellers 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. Any such
shift in potential license revenues to the ASP model, which is unproven and
potentially less profitable, could harm our business.
Security and Other Concerns May Discourage Customers From Purchasing Under Our
ASP Model.
If customers determine that our ASP offering is not scalable, does not
provide adequate security for the dissemination of information over the
Internet, or is 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 Due to Our Stock Price
Volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation, either due
to stock price declines associated with our failure to meet consensus analysts'
estimates for revenues or earnings for
14
prior fiscal periods or due to future volatility in our stock price. This
litigation could result in substantial costs and divert management's attention
and resources.
We Have Been Public for Only 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 is 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 "--Our Dependence on Software License Revenues 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, human resources self-service software, and from providers of
ERP software that have or may be developing travel and entertainment expense
management software or human resources self-service software. Many of our
competitors have longer operating histories, significantly greater financial,
technical, marketing, and other resources, significantly greater name
recognition, and a larger installed base of customers than we do. Some of our
competitors, particularly major 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. 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. See also "Business -- Competition" above.
Our Efforts to Manage Changing Business Conditions May Fail.
Our future operating results will depend, in part, on our ability to manage
changing business conditions. If we are unable to do so 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. This may be particularly
difficult for us because we implemented a workforce reduction of approximately
68 employees in the third quarter of fiscal 2000. This reduction could impair
our ability to attract, train, and retain qualified personnel and may increase
our recruiting and training costs. 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.
We May Require Additional Financing to Fund Our Operations.
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 new products and services (if any), 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
15
profitability, or if we require working capital beyond currently expected needs,
we may be required to seek additional financing or curtail operations. 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. The time
between initial contact with a potential customer and the ultimate sale, our
sales cycle, typically ranges between three and twelve months, with some
transactions exceeding fifteen months. As a result of our lengthy sales cycle,
we have only a 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 "--Our Dependence on Software License Revenues Makes Our
Operating Results Difficult to Predict."
We Depend Primarily On Direct Sales.
We sell our 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. Our inability to hire
competent sales personnel, or our failure to retain them, would harm our
business. 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. 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 to market our ASP products in particular. We have limited experience
utilizing resellers to date. The failure to expand indirect channels may place
us at a competitive disadvantage.
16
We Have Limited Experience With Large-Scale Deployment, Which Is Important To
Our Future Success.
Only a limited number of large enterprise customers have deployed our
products. We think that the ability of large customers to roll out our products
across large numbers of users is critical to our success. Similarly, because
only a limited number of customers are using the ASP product offerings, we do
not have assurance that our ASP product offerings would be able to support a
large volume of users or transactions. If our customers cannot successfully
implement large-scale deployments, or they determine that our products cannot
accommodate large-scale deployments, our business would be harmed.
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.
Some of the software we license from third parties would be difficult to
replace. In particular, we license technology 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 technology licenses could result in delays in the sale of
our products and services until equivalent technology, if available, is
identified, licensed, and integrated, which could harm our business.
It is Important for Us To Establish 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 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.
We May Experience Difficulties in Introducing New Products and 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, Concur Human Resources, 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.
17
We May Not Meet Our Expectations for the Seeker Software Acquisition.
In June 1999, we acquired Seeker Software, Inc., which was the developer of
our Concur Human Resources product offering. We may fail to achieve our
expectations for this product offering. In particular, we may encounter
substantial difficulties and financial risks with respect to this product
offering, such as:
. difficulties in improving or selling the Concur Human Resources
software;
. problems retaining the key technical and managerial personnel;
. additional operating losses and expenses;
. difficulties in maintaining relationships with existing customers,
business partners and employees;
. competitors having more experience and better name recognition;
. the limited experience of sales and consulting personnel; and
. limited reference accounts for the Concur Human Resources software.
In addition, recent actions and comments from the Securities and Exchange
Commission have indicated that it is scrutinizing the application of the pooling
of interest method of accounting for business combinations. While we believe we
are in compliance with the rules and related guidance as they currently exist
for the Seeker Software acquisition, we can provide no assurance that the
Commission will not challenge our conclusions and ultimately seek to treat this
transaction under the purchase method of accounting for business combinations.
This could result in the restatement of financial statements requiring the
recording of goodwill and related amortization expense and as such could have a
material negative impact on our financial results for the periods subsequent to
the acquisition.
We Depend on Our Key Employees.
Our success depends on the performance of our senior management,
particularly S. Steven Singh, our Chief Executive Officer and Chairman of the
Board, who is not bound by an employment agreement. The loss of Mr. Singh's
services could cause us to lose potential customers, which would harm our
business. If one or more members of our senior management or any of our key
employees were to resign, particularly to join or form a competitor, the loss of
that personnel and any resulting loss of existing or potential customers to that
competitor would harm our business.
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.
In particular, we compete for personnel with Microsoft Corporation, which is
located in the same geographic area as our headquarters. We also compete for
personnel with other software vendors, including ERP 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 these proprietary rights will be adequate, nor 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
18
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 risks, including:
. costs of customizing products for foreign countries;
. laws and business practices favoring local competition;
. 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, primarily in the United
Kingdom, Canada and Australia represented approximately $3.3 million, $932,000,
and $810,000 in fiscal 2000, 1999, and 1998, respectively. A key component of
our business strategy is to expand our sales and support operations
internationally. As of September 30, 2000, we employed 7 sales professionals in
the United Kingdom and Australia. 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 (as well as human
resources self-service solutions) 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.
We recognize revenues from sales of software licenses when we sign a non-
cancelable license agreement with a customer, the software is delivered, no
significant post-delivery vendor obligations remain and collection is deemed
probable. We recognize customer support revenues ratably over the contract term
(which is typically one year) and recognize revenues for consulting and training
services as such services are performed. 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 Effort to Offer Products Under an
ASP Model May Fail."
19
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing and research and development
facility is located in Redmond, Washington and consists of approximately 81,441
square feet of office space held under leases which expire on May 31, 2005. As
of September 30, 2000, we also leased sales offices in Atlanta, Boston, Chicago,
Dallas, London, Los Angeles, Minneapolis, New York, Oakland, Philadelphia,
Phoenix, Raleigh, and Sydney.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are subject to various legal proceedings and claims
arising in the ordinary course of business. Our management does not expect that
the results in any of these legal proceedings will have a material adverse
effect on our financial condition, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is traded on The Nasdaq National Market under the symbol
"CNQR." The following table sets forth the range of the high and low closing
sale prices by quarter as reported on the Nasdaq National Market since December
16, 1998, the date our common stock commenced public trading.
Fiscal year ended September 30, 1999: High Low
---------- ---------
First Quarter (since December 16, 1998)......................... $30.500 $19.500
Second Quarter.................................................. $45.125 $25.000
Third Quarter................................................... $55.000 $ 24.44
Fourth Quarter.................................................. $41.063 $21.938
Fiscal year ended September 30, 2000:
First Quarter................................................... $29.000 $11.125
Second Quarter.................................................. $24.125 $15.063
Third Quarter................................................... $ 7.625 $ 4.188
Fourth Quarter.................................................. $ 3.938 $ 2.375
On September 30, 2000, there were approximately 400 stockholders of record
of our common stock.
Dividends
We have never paid cash dividends on our common stock. We intend to retain
our earnings for use in our business and, therefore, do not anticipate paying
any cash dividends on our common stock.
Recent Sales of Unregistered Securities*
The following table sets forth information regarding all of our securities
sold by us from October 1, 1998 to September 30, 2000. References to warrants
below assume the full exercise of all warrants. Preferred stock numbers are
presented on an as converted to common stock basis.
Class of Number of Aggregate Form of
Purchasers Date of Sale Title of Securities Securities Purchase Price Consideration
- ---------- ------------ ------------------- ---------- -------------- -------------
1 investor December 16, 1998 Exercise of warrant to 33,537 -- Net exercise
purchase common stock
1 investor December 21, 1998 Exercise of warrant to 225,000 $ 2,616,000 Cash
purchase common stock
1 investor February 8, 1999 Exercise of warrant to 10,515 -- Net exercise
purchase common stock
20
53 investors June 1, 1999 Common stock 3,419,929 -- Exchange for
common stock of
Seeker Software, Inc.(1)
Officers, directors, October 1, 1998 to Exercise of options to 116,453 $ 18,033 Cash(2)
employees and other January 12, 1999 purchase common stock
eligible participants
1 investor February 22, 2000 Common stock 1,073,929 $25,001,067 Cash
1 investor February 22, 2000 Common stock 429,571 $10,000,413 Cash
1 investor December 13, 2000 Exercise of warrant to 93,785 -- Net exercise
purchase common stock
__________
* As part of our reincorporation into Delaware, we exchanged 3,099,959 shares
of our common stock, 10,213,553 shares of our redeemable convertible
preferred stock and warrants to purchase 2,329,578 shares of our redeemable
convertible preferred stock for 3,099,959 shares of common stock,
10,213,553 shares of redeemable convertible preferred stock, and warrants
to purchase 2,329,578 shares of redeemable convertible preferred stock,
respectively.
(1) In connection with our acquisition of Seeker Software, we exchanged
3,419,929 shares of common stock for Seeker Software's common stock.
(2) With respect to the grant of stock options, exemption from registration
under the Securities Act was unnecessary in that none of such transactions
involved a "sale" of securities as such term is used in Section 2(3) of the
Securities Act.
All sales of common stock made pursuant to the exercise of stock options
granted under our stock option plans or those of our predecessors were made
pursuant to the exemption from the registration requirements of the Securities
Act afforded by Rule 701 promulgated under the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. The securities were
sold to a limited number of people with no general solicitation or advertising.
The purchasers were sophisticated investors with access to all relevant
information necessary to evaluate the investment and who represented to the
issuer that the shares were being acquired for investment.
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Year Ended September 30,
----------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(in thousands, except per share data)
Consolidated Statement of Operations Data
Revenues, net:
Licenses............................................... $ 12,808 $ 24,002 $ 13,176 $ 6,504 $ 1,717
Services............................................... 21,216 13,011 6,952 2,499 253
-------- -------- -------- ------- -------
Total revenues...................................... 34,024 37,013 20,128 9,003 1,970
Cost of revenues:
Licenses............................................... 3,816 1,184 558 394 386
Services............................................... 22,361 16,653 8,063 2,721 876
-------- -------- -------- ------- -------
Total cost of revenues.............................. 26,177 17,837 8,621 3,115 1,262
-------- -------- -------- ------- -------
Gross profit............................................. 7,847 19,176 11,507 5,888 708
Operating expenses:
Sales and marketing.................................... 38,556 28,993 16,070 6,692 2,990
Research and development............................... 31,212 19,371 10,276 4,479 1,808
General and administrative............................. 14,795 10,385 5,919 2,307 1,019
Merger costs and acquired in-process technology........ (1,240) 8,859 5,203 -- --
Restructuring charges.................................. 3,407 -- -- -- --
-------- -------- -------- ------- -------
Total operating expenses............................ 86,730 67,608 37,468 13,478 5,817
-------- -------- -------- ------- -------
Loss from operations................................... (78,883) (48,432) (25,961) (7,590) (5,109)
Other income (expense), net............................ 3,228 1,956 (263) 31 5
-------- -------- -------- ------- -------
Net loss................................................. $(75,655) $(46,476) $(26,224) $(7,559) $(5,104)
======== ======== ======== ======= =======
Basic and diluted net loss per share..................... $ (3.15) $ (2.75) $ (8.18) $ (2.50) $ (1.69)
======== ======== ======== ======= =======
Shares used in calculation of basic and diluted net loss
per share............................................... 23,981 16,883 3,207 3,025 3,019
======== ======== ======== ======= =======
September 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- -------- -------
(in thousands)
Consolidated Balance Sheet Data
Cash, cash equivalents and marketable securities....... $56,242 $108,722 $ 17,058 $ 7,721 $ 5,702
Working capital........................................ 47,451 90,626 8,450 7,074 4,292
Total assets........................................... 81,668 128,828 28,622 14,180 7,022
Long-term obligations, net of current portion.......... 1,886 6,326 8,605 3,687 415
Redeemable convertible preferred stock and
warrants.............................................. -- -- 37,956 17,345 12,386
Total stockholders' equity (deficit)................... 57,013 93,774 (33,551) (12,503) (8,330)
22
ITEM 7. 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 within the meaning of the
Private Securities Litigation Reform Act of 1995 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. Reliance
should not be placed on these forward-looking statements because they involve
substantial risks and uncertainties. Examples of such risks and uncertainties
are described in this report and 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 document are based
on information available to us on the date of this document. We assume no
obligation or duty to update any such forward-looking statements.
Overview
Concur Technologies, Inc.(TM) is a leading provider of 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)
for travel and entertainment expense management, Concur Payment(TM) for employee
requests for vendor payments, Concur Time(TM) for time tracking and reporting,
and Concur Human Resources(TM) for human resources self-service. These software
products are designed to meet the needs of businesses of all sizes through
license and application service provider ("ASP") models. Since 1996, more than
600 companies, representing over three million employees, have selected our
software and services to reduce their costs and increase their productivity and
access to data about their internal business processes.
We sell our software and services through our direct sales organization and
through indirect channels. We also have developed a number of strategic
relationships. Currently, one of our most significant reseller arrangements is
with ADP, Inc., a subsidiary of Automatic Data Processing, Inc., a global
payroll solutions and computing services provider. ADP has agreed to resell and
jointly market our ASP solutions for travel and entertainment expense management
to ADP's existing customers and potential new customers.
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 QuickXpense through a combination of
retail channels and direct marketing, utilizing a small sales force and no
consulting or implementation staff. In response to inquiries from businesses
seeking to automate the entire travel and entertainment expense reporting
process, including back-office processing and integration to financial systems,
we significantly expanded our product development efforts and released Concur
Expense, a client-server based enterprise travel and entertainment expense
management solution in July 1996. In March 1998, we shipped an intranet-based
version of Concur Expense. Since its release, the intranet-based version has
accounted for a majority of Concur Expense license revenues.
On June 30, 1998, we acquired 7Software, Inc., a privately held software
company and the developer of Concur Procurement. 7Software was incorporated in
May 1997. 7Software was selling the initial version of its product through a
single sales representative at the time of the acquisition. After our
acquisition we continued to sell Concur Procurement until we announced on June
8, 2000 that we had discontinued offering it for sale as part of our new
operating plan.
On June 1, 1999, we acquired Seeker Software, Inc., a privately held
software company and developer of Concur Human Resources. The transaction was
accounted for as a pooling of interests. These consolidated financial statements
have been prepared to reflect the restatement of all periods presented to
include the accounts of Seeker Software. The historical results of the pooled
entities reflect each of their actual operating cost structures and, as a
23
result, do not necessarily reflect the cost structure of the newly combined
entity. 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.
On June 8, 2000, after carefully studying the cost of this integration effort
and its related benefits, we announced that we would not integrate these
products into a single product suite, but rather keep Concur Human Resources as
a separate product offering.
In October 1999, we began offering Concur Expense and Concur Procurement as
an Application Service Provider ("ASP") solution, principally for small and mid-
size companies. Our ASP solution requires limited IT infrastructure and limited
IT support. In December 1999, we introduced an ASP offering for large companies
that want a configured solution offered on an outsourced basis with limited IT
infrastructure and support requirements.
On June 8, 2000, we announced a new operating plan, under which we
discontinued Concur Procurement and discontinued the planned integration of
Concur Human Resources with our other Corporate Expense Management solutions as
a suite of solutions through a common user interface. Additionally, we
announced a workforce reduction of 68 employees to bring our cost structure in
line with our new operating plan. The primary goals of our new operating plan
are to focus on Corporate Expense Management solutions and to focus on
generating positive cash flow and profits.
Results of Operations
Revenues
Years Ended September 30,
================================================================================
(dollars in thousands) 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Licenses $12,808 (46.6%) $24,002 82.2% $13,176
- --------------------------------------------------------------------------------
Services 21,216 63.0% 13,011 87.2% 6,952
================================================================================
Total revenues $34,024 (8.1%) $37,013 83.9% $20,128
================================================================================
We market our software and services primarily through our direct sales
organization in the United States, Canada, and the United Kingdom. Revenues from
licenses and services to customers outside the United States were $3.3 million,
$932,000, and $810,000 in the years ended September 30, 2000, 1999, and 1998,
respectively. Historically, as a result of the relatively small amount of
international sales, fluctuations in foreign currency exchange rates have not
had a material effect on our operating results. We had no customer that
accounted for more than 10% of our revenues in 2000, 1999, or 1998.
License Revenues. License revenues consists of license fees for software
and ASP setup and usage fees. The dollar decrease in license revenues in fiscal
2000 from fiscal 1999 was due primarily to:
. our emphasis during the first half of fiscal 2000 on marketing and
selling Concur Procurement and Concur Human Resources, which caused
sales of Concur Expense to decline,
. increased demand from our customers during fiscal 2000 to purchase our
ASP solutions where revenue is recognized over a multiple year
relationship instead of up front as a license fee,
. our June 8, 2000 decision to discontinue Concur Procurement and to
discontinue our planned integration of Concur Human Resources with our
other Corporate Expense Management solutions as a product suite, which
caused us to lose some sales, and
. a $2.9 million sales allowance in the second half of fiscal 2000 for
sales returns associated with discontinuing Concur Procurement.
The increase in revenues in fiscal 1999 from fiscal 1998 was due primarily to
the market acceptance of Concur Expense, and to a lesser degree, Concur Human
Resources. Also driving this increase in revenues was an increase in the size
and productivity of our sales force and sales related to referrals attributable
to our December 1997 strategic marketing alliance agreement with American
Express. We believe our license revenues will increase in fiscal 2001
24
compared to fiscal 2000, as we focus more on selling our corporate expense
solutions and exploiting expected demand for our ASP solutions.
Service Revenues. Service revenues consists of consulting service fees,
customer support fees, and training fees. Service revenues represented 62.4%,
35.2%, and 34.5% of total revenues for fiscal 2000, 1999, and 1998,
respectively. The dollar increases in service revenues, and the increases in
service revenues as a percentage of total revenues, for fiscal 2000 and fiscal
1999 primarily reflected increased consulting revenue associated with sales,
upgrades, and enhancements of Concur Expense, and to a lesser degree, Concur
Human Resources license sales, as well as increased revenues related to customer
support contracts entered into in the current and prior periods. During the
second half of fiscal 2000, we developed a streamlined approach to deployment of
Concur Expense, known as Express Implementation, which benefits the customer
with a faster "best practices" installation at a lower deployment cost. As a
result, our consulting service fees for each deployment are reduced.
Accordingly, we expect consulting service fees in fiscal 2001 to increase only
slightly over fiscal 2000. Customer support fees are typically billed on an
annual contract and amortized over the period of the contract. The majority of
our license customers choose a customer support contract. We expect customer
support fees to increase in fiscal 2001 compared to fiscal 2000 with the
continued increase in our customer base. Overall, we expect service revenues to
grow modestly in fiscal 2001 compared to fiscal 2000.
Revenue Recognition. For fiscal 1998 and prior years, we recognized
revenues in accordance with the American Institute of Certified Public
Accountants Statement of Position 91-1. Software license revenues were
recognized when a non-cancelable license agreement was signed with a customer,
the software was shipped, no significant post delivery vendor obligations
remained and collection was deemed probable. Maintenance revenues were
recognized ratably over the contract term, typically one year. Revenues for
consulting services were recognized as such services were performed. Commencing
with fiscal 1999, we recognize revenues in accordance with the American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition," or SOP 97-2 and Statement of Position 98-9, which amended
certain provisions of SOP 97-2. These standards generally require revenues
earned on software arrangements involving multiple elements, such as software
products, upgrades, enhancements, post-contract customer support, installation
and training, to be allocated to each element based on the relative fair values
of the elements. The fair value of an element must be based on evidence that is
specific to the vendor. Evidence of the fair value of each element is based on
the price charged when the element is sold separately. The revenues allocated to
software products, including specified upgrades or enhancements, generally are
recognized upon delivery of the products. The revenues allocated to unspecified
upgrades, updates and other post-contract customer support generally are
recognized ratably over the term of the related maintenance contract. Revenues
relating to consulting and training services provided to customers are generally
recognized as such services are performed. If evidence of the fair value for all
elements of the arrangement does not exist, all revenues from the arrangement
are deferred until such evidence exists or until all elements are delivered. In
addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements ("SAB 101"). Concur
is required to adopt the provisions of SAB 101 in the forth quarter of Fiscal
2001. Further implementation guidelines and changes in interpretations of such
guidelines could lead to unanticipated changes in our current revenue accounting
practices that could affect our future revenues and earnings.
25
Cost of Revenues
Years Ended September 30,
================================================================================
(dollars in thousands) 2000 Change 1999 Change 1998
================================================================================
Licenses $ 3,816 222.3% $ 1,184 112.2% $ 558
- --------------------------------------------------------------------------------
Percentage of licenses 29.8% 4.9% 4.2%
- --------------------------------------------------------------------------------
Services 22,361 34.3% 16,653 106.5% 8,063
- --------------------------------------------------------------------------------
Percentage of services 105.4% 128.0% 116.0%
================================================================================
Total cost of revenues $26,177 46.8% $17,837 106.9% $8,621
- --------------------------------------------------------------------------------
Percentage of total revenues 76.9% 48.2% 42.8%
================================================================================
Cost of License Revenues. In fiscal 2000, cost of license revenues included
the cost of our ASP operations, which includes salaries, computers and other
telecommunications costs, amortization of deferred costs, and reseller fees.
Additionally, cost of license revenues in fiscal 2000, 1999, and 1998 included
amortization of purchased technology, royalties for sub-licensing third-party
software and the costs of manuals and media for licensing our products. The
dollar increase in fiscal 2000 from fiscal 1999 was primarily due to the
introduction of our ASP solution and the costs associated with this method of
delivery and, to a lesser extent, an increase in royalties paid for sub-
licensing third-party software. The dollar increase in fiscal 1999 from fiscal
1998 was primarily a result of the amortization of capitalized technology
recorded in connection with our June 1998, acquisition of 7Software, and to a
lesser extent reflects increased expenses associated with sub-licensing of
third-party software due to increased sales of Concur Expense, and the costs of
production, manuals and other media associated with licensing our products. We
expect that the dollar cost of license revenues will increase in the future
depending in part on the demand for our current software products and ASP
solutions.
Cost of Service Revenues. Cost of service revenues includes primarily the
salaries, non-reimbursable expenses, and other operating costs of employees who
provide consulting services and product training. The dollar increase in both
fiscal 2000 and fiscal 1999, was primarily due to increases in professional
service personnel to manage and support our growing customer base. Cost of
service revenues as a percentage of service revenues may vary between periods
due to changes in the level and mix of services provided by us or by our
partners.
Operating Expenses
Years Ended September 30,
============================================================================================================================
(dollars in thousands) 2000 Change 1999 Change 1998
============================================================================================================================
Sales and marketing $38,556 33.0% $28,993 80.4% $16,070
- ----------------------------------------------------------------------------------------------------------------------------
Percentage of total revenues 113.3% 78.3% 79.8%
- ----------------------------------------------------------------------------------------------------------------------------
Research and development 31,212 61.1% 19,371 88.5% 10,276
- ----------------------------------------------------------------------------------------------------------------------------
Percentage of total revenues 91.7% 52.3% 51.1%
- ----------------------------------------------------------------------------------------------------------------------------
General and administrative 14,795 42.5% 10,385 75.5% 5,919
- ----------------------------------------------------------------------------------------------------------------------------
Percentage of total revenues 43.5% 28.1% 29.4%
- ----------------------------------------------------------------------------------------------------------------------------
Merger and acquisition costs (1,240) ----- 8,859 70.3% 5,203
- ----------------------------------------------------------------------------------------------------------------------------
Percentage of revenues 3.6% 23.9% 25.8%
- ----------------------------------------------------------------------------------------------------------------------------
Restructuring charges 3,407 ----- ----- ----- -----
- ----------------------------------------------------------------------------------------------------------------------------
Percentage of total revenues 10.0% ----- -----
============================================================================================================================
Total operating expenses $86,730 28.3% $67,608 80.4% $37,468
- ----------------------------------------------------------------------------------------------------------------------------
Percentage of total revenues 254.9% 182.7% 186.1%
============================================================================================================================
26
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, sales commissions, travel, and facility costs for the Company's sales
and marketing personnel, and, to a lesser extent, advertising, trade shows and
other promotional activities. The dollar increase in fiscal 2000 compared to
fiscal 1999 was primarily due to an increase in payroll and related expenses due
to an increase in the number of personnel in the sales and marketing area and,
to a lesser extent, an increase in advertising and other promotional activities
in the first half of fiscal 2000. The dollar increase in 1999 compared to 1998
primarily reflects our investment in our sales and marketing infrastructure,
including significant