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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, 2001 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 14, 2001, 25,828,980 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 14, 2001 of $1.65 per share) was
approximately $31.3 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, 2001, are
incorporated by reference in Part III hereof.
CONCUR TECHNOLOGIES, INC.
TABLE OF CONTENTS FOR FORM 10-K
PART I ................................................................................................................... 3
Item 1. Business ...................................................................................................... 3
Item 2. Properties .................................................................................................... 18
Item 3. Legal Proceedings. ............................................................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders. .......................................................... 18
PART II .................................................................................................................. 19
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. ........................................ 19
Item 6. Selected Consolidated Financial Data .......................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................................... 29
Item 8. Financial Statements and Supplementary Data. .................................................................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................... 51
PART III ................................................................................................................. 51
Item 10. Directors and Executive Officers of the Registrant ............................................................ 51
Item 11. Executive Compensation ........................................................................................ 51
Item 12. Security Ownership of Certain Beneficial Owners and Management ................................................ 51
Item 13. Certain Relationships and Related Transactions ................................................................ 51
PART IV .................................................................................................................. 51
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............................................. 51
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PART I
ITEM 1. BUSINESS
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements
regarding our plans, objectives, expectations, intentions, future financial
performance, future financial condition, and other statements that are not
historical facts. You can identify these statements by our use of the future
tense, or by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "intend," "estimate," "continue," and other similar
words and phrases. Examples of sections containing forward-looking statements
include the "Strategy" and other sections of Part I, Item 1 entitled "Business"
and the "Business Outlook" and other sections of Part I, Item 7 entitled
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations." These forward-looking statements involve substantial risks and
uncertainties. Examples of such risks and uncertainties are described under
"Factors That May Affect Results Of Operations And Financial Condition" and
elsewhere in this report, as well as in our other filings with the Securities
and Exchange Commission. You should be aware that the occurrence of any of these
risks and uncertainties may cause our actual results to differ materially from
those anticipated in our forward-looking statements, which could have a material
and adverse effect on our business, results of operations, and financial
condition. All forward-looking statements included in this report are based on
information available to us as of the date of this report. We assume no
obligation or duty to update any such forward-looking statements.
Overview
Concur Technologies, Inc. is a leading provider of Web-based Corporate
Expense Management software and services that automate costly and inefficient
business processes, allowing companies to leverage their most limited resources:
time, money, knowledge, and energy. Our products include Concur Expense(TM)
software for automating travel and entertainment expense management, Concur
Payment(TM) software for automating employee requests for vendor payments, and
Concur Time(TM) software for automating time tracking and reporting. These
software products are designed to meet the needs of businesses of all sizes
through both license and application service provider ("ASP") models. We offer
our products on a license basis primarily to large companies that want a
highly-configurable solution that is managed in-house and delivered over a
corporate intranet. We also offer our Concur Expense product on an ASP basis
primarily to mid-size companies that want a configured solution provided on an
outsourced basis over the Internet.
Since 1996, more than 875 companies, including AT&T, Citigroup,
DaimlerChrysler, DuPont, First Union, and Pfizer, have licensed over 2.4 million
employees to use our market-leading software and services to reduce their costs,
increase their productivity, improve compliance with their business policies,
and expand their knowledge base with respect to their internal business
processes. Our strategic relationships include more than 50 world-class
organizations, such as ADP, Inc., American Express, KPMG Consulting, Inc.,
Microsoft Corporation, and Microsoft Great Plains Business Solutions.
Industry Background
In response to competitive conditions worldwide, businesses have sought
cost savings and productivity gains by using software products to automate
enterprise business processes. These products traditionally targeted discrete
functional or department-level business processes, such as sales, customer
support, finance, human resources, and manufacturing processes. While many
companies have deployed these products, historically they have not focused on
business processes that reach a high percentage of employees within a given
enterprise.
Today, companies are seeking similar products for employee-centric business
processes, including travel and entertainment expense management, employee
requests for vendor payments, and time tracking and reporting. For most
companies, these employee-centric business processes are manual, paper-based
processes that require action by many individuals. Such manual, paper-based
processes are time-consuming, inefficient, and costly, because they involve
re-keying of data, manual tracking of forms and approvals, limited data capture
and reporting, and limited ability to track and enforce business expense
policies.
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In addition, the emergence of the Internet and corporate intranets has made
it feasible for companies to deploy Web-based software products that reach all
employees in an enterprise and to connect the enterprise to corporate partners
and service providers. In contrast to traditional client-server applications,
Web-based applications can be deployed rapidly throughout the enterprise on a
cost-effective basis.
We believe a significant market opportunity exists for Web-based software
and services that automate costly and inefficient employee-centric business
processes, such as travel and entertainment expense management, employee
requests for vendor payments, and time tracking and reporting. We estimate the
market potential for the type of Web-based software and services we offer could
exceed $4 billion in one-time license revenue, and $2 billion annually in
recurring services revenue, based on data available from Dun & Bradstreet
Corporation as of November 2001. We also believe that customers using our
software and services can realize significant operating cost savings through
reduced processing costs and greater efficiency through increased business
intelligence. We think 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
products are designed to deploy rapidly, scale enterprise-wide, and integrate
easily with an organization's existing IT infrastructure. For example, our large
market customers have deployed Concur Expense under our license model to as many
as 25,000 employees in less than 90 days, and to as many as 212,000 employees
within a single enterprise. Our middle market customers have deployed Concur
Expense under our ASP model in as little as 14 days. Our customers also have
reported that their employees readily adopt our products because they are easy
to use, significantly reduce unproductive time, and shorten reimbursement,
fulfillment, and processing cycles.
Our Strategy
Our objective is to extend our leadership position in Corporate Expense
Management software and services. Key elements of our strategy include the
following:
Enhance Product Functionality, Scalability 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. We believe that our continued focus on
product innovation and enhancement will allow us to extend our leadership
position in Corporate Expense Management software and services.
Increase Customer Satisfaction with Our Products and Services. We expect to
continue to interact with our customers in a number of ways, such as surveys,
users' group meetings, and executive contact, to learn how we can deliver better
products and services to increase our customers' satisfaction.
Expand Our Middle Market Presence. We intend to expand our presence in the
market for mid-size companies by expanding our indirect sales channel and
enhancing our offering of software products and services on an ASP basis to this
market segment. Our ASP solutions are offered on a per-user subscription-pricing
basis to companies seeking to outsource Corporate Expense Management
applications. These solutions are particularly attractive to companies with 100
to 2,000 employees, which typically have limited IT staff and budget resources.
Our ASP solutions are currently available with Concur Expense; we expect to add
Concur Payment at a later date.
Expand Our ASP Solutions to the Large Market. We expect to continue our
efforts to expand our ASP solutions to large companies through both our direct
and indirect sales channels. This will enable large companies to outsource
Corporate Expense Management applications and still configure them to meet their
needs in much the same way they would have been able to configure them if they
had licensed and installed them on their intranet servers.
Increase Operational Excellence in Our ASP Hosting and Delivery. We plan to
decrease the employee hours and computer equipment necessary to deploy new
customers and support existing customers of our ASP solutions. We expect to
accomplish this through a combination of product and process improvements.
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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 products and services. 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.
Expand International Presence. We believe that additional demand exists for
our products outside of the United States. We intend to continue our investment
in international sales and marketing through both direct and indirect channels
in an effort to increase sales of our products worldwide. We also plan to
increase our localization of 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.
Our strategy involves substantial risk and 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.
Our Corporate Expense Management Solutions
We are a leading provider of Corporate Expense Management software and
services, based on a combination of factors, including the number of customers
we have deployed, the features our products provide, the flexibility of our
delivery models, and the rate of return on investment our products provide. Our
software products include:
. Concur Expense software for travel and entertainment expense
management;
. Concur Payment software for employee requests for vendor payments; and
. Concur Time software for time tracking for billing and allocation
purposes.
We offer our software products to customers through our license and ASP
delivery models. Under our license model, we offer our products primarily to
large market companies with more than 2,000 employees that want a
highly-configurable solution that is managed in-house and delivered over a
corporate intranet. We offer licenses for our products either on an
authorized-user basis, under which a customer is licensed to use our products
based on the number of user-licenses purchased, or on an enterprise basis, under
which a customer is licensed to use our products throughout its enterprise in
exchange for license fees based on the number of employees in the enterprise.
The typical order size under our license model for products and related services
ranges from $250,000 to $1.5 million, with some transactions exceeding $2.0
million.
Under our ASP model, we offer Concur Expense as a service over the Internet
primarily to middle market companies with 100 to 2,000 employees that want a
configured solution provided on an outsourced basis. We offer our ASP solutions
on a per-user subscription basis. The typical monthly fee for our ASP solutions
ranges from approximately $500 to $3,000 per month, depending on the total
number of users, with some monthly fees exceeding $15,000 per month.
Our software products benefit a number of groups within an enterprise,
including corporate management, IT professionals, and employees. For corporate
management, our software products feature 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
increase productivity for these business functions. Also, our products provide
reporting capabilities that provide 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 products. 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.
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Concur Expense
Concur Expense automates the travel and entertainment expense management
process, including expense report preparation, routing and 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 pre-populate a user's expense report with transaction data
covering various information required for the expense report, including
transaction date, type, vendor, location, method of payment, amount, and
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.
Report Routing and Approval. Concur Expense allows each customer to
determine how expense reports should be processed, whether by routing and
submission to a manager for approval before processing, or by routing to the
accounting department for immediate review and payment. Once the report is
submitted, the approver receives an e-mail message containing a 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 vendor payments;
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. Improved efficiency of the accounts paybable 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 time and
potential 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.
. Improved control of payment timing. Concur Payment automates the
manual, paper-based process, minimizing the number of steps and people
involved. This results in greater control over the timing of payment
to vendors, which in turn improves supplier relationships and
increases the capability to take advantage of discounted payment
terms.
. 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
In some organizations, particularly those in the services sector, employee
time capture is closely tied to expense reporting. For those customers, Concur
Time allows for the tracking of time for billing and allocation purposes. In
many of these businesses today, the time tracking process is fraught with
inefficiencies, such as lengthy turn-around times and procedures, errors and
inefficiencies, and lack of real-time data. 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. Concur Time allows all
timesheets to arrive in the back office electronically and be
processed, routed, and approved online.
. Improve management of project costs. Companies can access and analyze
collected information in order to gain a clearer understanding of the
true costs of their projects. This data can, in turn, be used to
adjust such matters as staffing levels and billing rates.
. Increase employee productivity. By automating this process, companies
can increase the productivity of their most valuable resource - their
employees. Using Concur Time, employees spend less time creating
timesheets and have more time to focus on their core responsibilities.
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.
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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, as well as
help customers develop a strategy for enterprise-wide deployment of our
applications.
Customer Support. We provide product upgrades and customer support through
our "CustomerOne" 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. Most all customers subscribe for the first year of the CustomerOne program
at the time they license an application; thereafter, support is typically
renewed on an annual basis.
Training. We offer a variety of training programs for our products. These
programs are tailored to particular user groups, such as end users, help desk
personnel, and trainers. Training classes are offered at customer sites and at
our headquarters in Redmond, Washington. We also provide training classes for
third-party service providers, such as systems integrators.
Customers
We have more than 875 customers that have licensed over 2.4 million
employees to use our software and services. Our customers span all major
industries, range in size from under 100 employees to over 220,000 employees,
and many are multi-national corporations. Our customer list includes Fortune 500
organizations such as American Express, AT&T, Citigroup, DaimlerChrysler,
DuPont, First Union, and Pfizer and middle market organizations such as Fender
Musical Instruments, Quantum Corporation, and YMCA. No customer accounted for
10% or more of our total revenues in fiscal 2001, 2000, or 1999.
Sales
We offer our market-leading software and services to large market companies
with more than 2,000 employees and to middle market companies with 100 to 2,000
employees. In the large market, we sell our products predominantly through our
direct sales organization, with field sales professionals located in
metropolitan areas throughout the United States and the United Kingdom.
Field-based sales engineers provide technical sales support. Direct
telemarketing representatives based at our headquarters in Redmond, Washington
support the field sales force through lead generation and lead tracking
activities. We also have a number of marketing referral partners that provide
our large-market sales force with prospects.
In the large market, our sales effort involves contact with multiple
decision makers, frequently including the prospective customer's chief financial
officer, vice president of finance, controller, and corporate travel manager.
While the average sales cycle varies substantially, for initial sales it has
generally ranged from six 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."
In the middle market, our distribution strategy includes both direct and
indirect channels. Our middle market sales organization sells our products
primarily to companies with between 1,000 and 2,000 employees, while also
working with our strategic partners to sell our products through their sales
forces primarily to companies with between 100 and 1,000 employees. We have
developed several strategic relationships focused on middle market sales
opportunities. In May 2000, we entered into a strategic relationship with ADP,
Inc., a subsidiary of Automatic Data Processing, Inc., a global payroll
solutions and computing services provider. Sales through our ADP channel
represented a large component of our overall sales of ASP solutions in the
middle market during our fiscal 2001. In February 2001, we entered into a
strategic relationship with Microsoft Great Plains Business Solutions, a leading
provider of business management solutions, under which Microsoft Great Plains
Business Solutions is authorized to resell and jointly market our ASP solutions
through its global value-added reseller network. Microsoft Great Plains Business
Solutions began sales of our ASP solutions in the fourth quarter of fiscal 2001,
one full quarter ahead of plan. While we believe that our relationships with our
strategic partners are good, any inability to maintain our strategic
relationships or to enter into additional strategic relationships may harm our
business. See "Factors That May Affect Results Of Operations And Financial
Condition--It Is Important For Us To Continue To Develop And Maintain Strategic
Relationships."
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In the middle market, our sales effort frequently includes contact with the
prospective customer's chief financial officer, vice president of finance, or
controller. While the average sales cycle varies substantially from customer to
customer, for initial sales it has generally ranged from three to six months,
with some transactions exceeding twelve months. See "Factors That May Affect
Results Of Operations And Financial Condition--Our Lengthy Sales Cycle Could
Adversely Affect Our Revenue Growth."
Substantially all of our revenues have been derived from the sales of
Concur Expense and related services. Revenues from Concur Expense and related
services represented approximately 94% of our total revenues in fiscal 2001,
compared to approximately 87% and 83% of total revenues in 2000 and 1999,
respectively. We anticipate that revenues from Concur Expense and related
services will continue to represent a substantial portion of our total revenues
in fiscal 2002. See "Factors That May Affect Results Of Operations And Financial
Condition--We Rely Heavily On Sales Of One Product."
Marketing
Our marketing programs are designed to promote the Concur brand widely in
our markets and to extend our product leadership position. We are focused on
extending our leadership in the travel and entertainment expense management
solutions and employee requested vendor payment solutions. We are also focused
on establishing ourselves as a leader in time tracking and reporting solutions.
We target our marketing efforts towards accounting, finance, and travel
executives.
We engage in a variety of marketing activities, including co-advertising
and co-marketing strategies designed to leverage existing strategic
relationships, Web site marketing, public relations campaigns, and leveraging
close relationships with recognized industry analysts. We participate actively
in technology-related conferences and demonstrate our products at trade shows
targeted at accounting, finance, and travel executives.
We believe that demand is increasing, and will continue to increase, for
Corporate Expense Management software and services 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 software and services, which could harm our business. See
"Factors That May Affect Results Of Operations And Financial Condition--We Must
Attract And Retain Qualified Personnel."
Product Development
We have been an innovator and leader in developing Corporate Expense
Management software and services. 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 software and services in an ASP model, as well as pioneered automated
solutions for non-purchase order invoice tracking and approval.
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 engineering organization will be important for the success of new
product offerings. As of September 30, 2001, we employed 81 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 further understand market needs and
requirements. When required, we also use independent development firms or
contractors 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.
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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,
Web-based software products which run on multiple platforms, including
Microsoft(R) Windows, Unix(R), and Macintosh(R). These products currently work
with enterprise class databases including Microsoft(R) SQL Server(R) and
Oracle(R).
For fiscal 2001, 2000, and 1999, we incurred gross research and
development expenditures of $16.4 million, $31.2 million, and $19.4 million,
respectively. The reduction in such expenditures in fiscal 2001, compared to
fiscal 2000, is directly attributable to our decision to focus on Corporate
Expense Management software and services, resulting in our discontinuation of
Concur Procurement in June 2000 and the sale of our Concur Human Resources
product line in March 2001. In fiscal 2002, we expect to increase headcount and
related resources in our software engineering organization as we continue to
focus on product innovation and enhancement to enable us to extend our
leadership position in Corporate Expense Management software and services. We
expect total research and development expenditures to decrease moderately as we
continue our company-wide efforts to reduce costs. 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
harm our business. See "Factors That May Affect Results Of Operations And
Financial Condition--We May Not Successfully Develop Or Introduce New Products
Or Enhancements To Existing Products" and "--Our ASP Product Offerings May
Fail."
Competition
The market for our software and services 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 vendors of Corporate Expense
Management software and services, 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, and
International Business Machines Corporation. In addition, several major ERP
vendors such as Oracle Corporation, PeopleSoft, Inc., JD Edwards, and SAP AG
have developed or created partnerships to develop Corporate Expense Management
software and services. These companies 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 software and services are functionality,
interoperability with existing IT infrastructure, price, and an installed base
of referenceable customers. With respect to functionality, we believe that we
offer products with generally more features than other competing products, and
that we have often been the first to offer new and innovative features, such as
pre-population of expense reports based on credit card information. We believe
we were one of the first providers of Corporate Expense Management software and
services, and the first company to offer these products in an ASP model. In
addition, our products 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 our product
offerings are competitively priced when compared to our competitors' products.
We believe that we have the most widely deployed Corporate Expense Management
software and services in the industry today, providing a significant installed
base of referenceable customers.
10
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.
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 change in 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 Continue To Develop 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 third parties 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, over the
past several years, we have made numerous recent changes in our product names.
Although we have 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 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 acquisitions, who have worked for
independent software vendors or other companies developing products similar to
those offered by us. Such vendors or companies 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."
11
Employees
As of September 30, 2001, we had approximately 351 full-time employees,
of whom 21 were based in the United Kingdom. There were 81 in research and
development, 88 in sales and marketing, 84 in consulting, training, and
technical support, 50 in ASP operations, and 48 in administration and finance.
No 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. 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 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. In evaluating our
business, readers should pay particular attention to the descriptions of risks
and uncertainties described below and in other sections of this report and our
other filings with the Securities and Exchange Commission.
Our Business Is Difficult To Evaluate And We Have A History Of Losses.
We incorporated in 1993 and began licensing our software products in
1995. Since 1993, our business model and operating plan have evolved
significantly and remain unproven. This limited operating history and unproven
business model make our business operations and prospects difficult to evaluate.
Investors in our securities should consider all the risks and uncertainties that
are commonly encountered by companies in their early stages of business
operations, particularly companies, such as ours, that are in new and rapidly
evolving industries.
Since 1993, we have spent substantial financial and other resources to
develop our software products and services and otherwise fund our operations,
and we expect to continue to do so to fund our investments in research and
development and our other business operations. To date, we have incurred net
losses in each quarter of operation and have not achieved profitability. We
incurred net losses totaling $35.1 million, $75.7 million, and $46.5 million in
fiscal 2001, 2000, and 1999, respectively. As of September 30, 2001, we had an
accumulated deficit of $200.5 million. We expect to continue to incur net losses
in the immediate future and there can be no assurance that we will ever achieve
profitability.
We Rely Heavily On Sales Of One Product.
Since 1997, we have generated substantially all of our revenues from
Concur Expense products and services. We believe that sales of Concur Expense
will continue to account for a large portion of our revenues for the foreseeable
future. Our future financial performance and revenue growth will depend upon the
successful development, introduction, and customer acceptance of new and
enhanced versions of Concur Expense and other applications, and our business
could be harmed if we fail to deliver the enhancements that customers want with
respect to our current and future products. There can be no assurance that our
products and services will achieve widespread market penetration or that we will
derive significant revenues or any profits from sales of such products and
services.
12
We Depend On Services Revenues; Services Revenues And Services Revenue Margins
May Decline.
Our services revenues represented 56.4% of total revenues for fiscal
2001. We anticipate that services revenues will continue to represent a
significant percentage of total revenues. The level of services revenues depends
largely upon demand for our consulting services and ongoing renewals of customer
support contracts by our installed customer base. Our consulting revenues could
decline if third-party organizations such as systems integrators compete with us
for the installation or servicing of our products. In addition, our customer
support contracts might not be renewed in the future. Our ability to increase
services revenues will depend in large part on our ability to increase the scale
of our services organization, including our ability to recruit and train a
sufficient number of qualified services personnel. Due to the increasing costs
of operating a professional services organization, we may not be able to
maintain profitability in this part of our business.
We Depend On Software License Revenues, Which Makes Our Operating Results
Difficult To Predict.
Our software license revenues represented 32% of total revenues for
fiscal 2001. Our licensed software products are typically shipped when orders
are received, so license backlog at the beginning of any quarter typically
represents only a small portion of the quarter's expected license revenues. This
makes license revenues in any quarter difficult to forecast because they are
determined by orders booked and shipped in that quarter. Moreover, we have
historically recognized a substantial percentage of revenues in the last month
of the quarter, frequently in the last week or even the last days of the
quarter, and we expect this trend to continue for as long as our licensed
software products represent a substantial part of our overall business. Since
our expenses are relatively fixed in the near term, any shortfall from
anticipated revenues or any delay in the recognition of revenues could result in
significant variations in operating results from quarter to quarter. We find it
difficult to forecast quarterly license revenues because our sales cycle, from
initial evaluation to delivery of software, is lengthy and varies substantially
from customer to customer. If revenues fall below our expectations in a
particular quarter, our business could be harmed. In the first three quarters of
fiscal 2000, our revenues did, in fact, fall below our own and consensus
securities analysts' estimates for those quarters and, as a result, the price of
our stock declined significantly during those periods. If our revenues fall
below our own estimates or below the consensus analysts' estimate in an upcoming
quarter, our stock price could decline further, harming our business
significantly in terms of, among other things, diminished employee morale and
public image. See "--We Are At Risk of Securities Class Action Litigation."
Our ASP Product Offerings May Fail.
In fiscal 2000, we began to offer our software products under an
Internet-based ASP model to complement our traditional licensing of these
products. We offer our ASP solutions 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 limited experience selling products or services under an ASP model, and
our efforts to develop this ASP business divert our financial resources and
management time and attention away from other aspects of our business. In
connection with our ASP business, we have engaged third-party service providers
to perform many of the necessary services as independent contractors, and they
may fail to perform those services adequately. If any service provider delivers
inadequate support or service to our customers, our reputation could be harmed.
We also use resellers and strategic referral partners to market our ASP
offerings. We have limited experience utilizing resellers and strategic referral
partners and we may not be successful in this effort. Even if our strategy of
offering products to customers over the Internet proves successful, some of
those Internet customers may be ones that otherwise might have bought our
software and services through our traditional licensing arrangements, which is
likely to reduce our revenue.
Security And Other Concerns May Discourage Customers From Purchasing Under Our
ASP Model.
If customers determine that our ASP offerings are not scalable, do not
provide adequate security for the dissemination of information over the
Internet, or are otherwise inadequate for Internet-based use, or if for any
other reason customers fail to accept our ASP products for use on the Internet
or on a subscription basis, our business will be harmed. As an ASP provider, we
expect to receive confidential information, including credit card, travel
booking, employee, purchasing, supplier, and other financial and accounting
data, through the Internet or extranets, and there can be no assurance that this
information will not be subject to computer break-ins, theft, and other improper
activity that could jeopardize the security of information for which we are
responsible. Any such lapse in security could expose us to litigation, loss of
customers, or other harm to our business. In addition, any person who is able to
circumvent our security measures could misappropriate proprietary or
confidential customer information or cause interruptions in our operations. We
may be required to incur significant costs to protect against security breaches
or to alleviate problems caused by breaches. Further, a well-publicized
compromise of security could deter people from using the Internet to conduct
transactions that involve transmitting confidential information. Our failure to
prevent security breaches, or well-publicized security breaches affecting the
Internet in general, could significantly harm our business, operating results,
and financial condition.
13
We Are At Risk Of Securities Class Action Litigation.
In July 2001, we and several of our current and former officers were
named as defendants in a purported securities class-action lawsuit filed in the
United States District Court for the Southern District of New York. The
complaint generally alleges claims against the underwriters of our initial
public offering in December 1998, our company, and several of our current and
former executives, based on alleged errors and omissions concerning underwriting
terms in the prospectus for our initial public offering. The plaintiffs in this
lawsuit seek damages in an unspecified amount, which could be substantial. We
believe this lawsuit is without merit and intend to defend ourselves vigorously.
Any liability by us could harm our results of operations and financial condition
and, even if we defend ourselves successfully, there is a risk that management
distraction in dealing with this lawsuit could harm our results.
In addition, securities class action litigation has often been brought
against companies that experience periods of volatility in the market prices of
their securities, as we have experienced from time to time. We may in the future
be the target of similar litigation, which could result in substantial costs and
divert management's attention and resources.
We Have Been Public For A Short Time And Our Stock Price Has Been Volatile.
We completed our initial public offering in December 1998. Since then,
the market price of our common stock has been highly volatile and subject to
wide fluctuations. We expect our stock price to continue to fluctuate:
. in response to quarterly fluctuations in our operating results;
. in reaction to announcements of technological innovations, new
products, or significant agreements by us or our competitors;
. in reaction to changes in prices of our products or the products
of our competitors;
. because of market conditions in our industry;
. in reaction to changes in financial estimates by securities
analysts, and our failure to meet or exceed the expectations of
analysts or investors; and
. as a result of the active trading of our stock by online day
traders.
See also "--We Depend On Software License Revenues, Which Makes Our Operating
Results Difficult To Predict."
We Face Significant Competition.
The market for our products is intensely competitive and rapidly
changing. Direct competition comes from other providers of travel and
entertainment expense management, and from providers of enterprise resource
planning software that have developed, or may be developing, travel and
entertainment expense management software. Many of our competitors have longer
operating histories, greater financial, technical, marketing, and other
resources, greater name recognition, and a larger installed base of customers
than we do. Some of our competitors, particularly major enterprise resource
planning vendors, have well-established relationships with our current and
potential customers as well as with systems integrators and other vendors and
service providers. These competitors may also be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, and sale of their products,
than us. In addition, we anticipate the entrance of new competitors in the
future. An increase in competition could result in price reductions and loss of
market share and could have a material adverse effect on our business, financial
condition, and results of operations. We also face indirect competition from
potential customers' internal development efforts and have to overcome their
reluctance to move away from existing paper-based systems.
14
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, including such conditions as the general
economic slowdown, reduced investment in information technology by customers and
prospective customers, and reduced business travel. If we are unable to manage
changing business conditions effectively, our business, financial condition, and
results of operations could be materially and adversely affected. Our ability to
manage changing business conditions depends, in part, on our ability to attract,
train, and retain a sufficient number of qualified personnel to meet our ongoing
needs. There can be no assurance that we will be successful in attracting,
training, and retaining the required number of qualified personnel to support
our business in the future. Failure to manage our operations with reduced
staffing levels may strain our management, financial, and other resources, and
could have a material adverse effect on our business, financial condition, and
results of operations.
We May Require Additional Financing To Fund Our Operations.
Presently, we believe that our existing cash, cash equivalents, and
marketable securities will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, our need for additional financing will depend upon a number of factors,
such as the commercial success of our existing products and services, the timing
and success of any new products and services, the progress of our research and
development efforts, our results of operations, the status of competitive
products and services, and the timing and success of potential strategic
alliances or potential opportunities to acquire or sell technologies or assets.
In addition, since our incorporation in 1993, we have experienced uneven cash
flow and operating results and significant operating losses. If we experience
delays in our progress toward reducing losses and achieving profitability, or if
we require working capital beyond currently expected needs, we may be required
to seek additional financing or curtail operations. Economic and financial
market conditions may discourage potential investors. There can be no assurance
that additional financing will be available on acceptable terms, or at all. Our
failure to obtain such additional financing, if needed, could have a material
adverse effect on our business, financial condition, and results of operations.
Our Lengthy Sales Cycle Could Adversely Affect Our Revenue Growth.
Because of the high costs involved, customers for enterprise software
products typically commit significant resources to an evaluation of available
software applications and require us to expend substantial time, effort, and
money educating them about the value of our products and services. Our sales
cycle, which is the time between initial contact with a potential customer and
the ultimate sale, is often lengthy and unpredictable. As a result , we have
limited ability to forecast the timing and size of specific sales. In addition,
customers may delay their purchases from a given quarter to another as they
elect to wait for new product enhancements. Any delay in completing, or failure
to complete, sales in a particular quarter or fiscal year could harm our
business and could cause our operating results to vary significantly. See "--We
Depend On Software License Revenues, Which Makes Our Operating Results Difficult
to Predict."
We Depend Significantly On Direct Sales.
We sell our licensed products primarily through our direct sales force.
We believe that there is significant competition for direct sales personnel with
the advanced sales skills and technical knowledge we need. If we were unable to
hire or retain competent sales personnel our business would suffer. In addition,
by relying primarily on a direct sales model, we may miss sales opportunities
that might be available through other sales channels, such as domestic and
international resellers and strategic referral arrangements. In the future, we
intend to continue developing indirect distribution channels through third-party
distribution arrangements, but we may not be successful in establishing those
arrangements, or they may not increase revenues. Furthermore, we plan to
continue using resellers and strategic referral partners to market our ASP
products in particular. We have limited experience utilizing resellers and
referral partners to date. The failure to expand indirect channels may place us
at a competitive disadvantage.
15
It Is Important For Us To Continue To Develop And Maintain Strategic
Relationships.
To offer products and services to a larger customer base than we can
reach through direct sales, telesales, and internal marketing efforts, we depend
on strategic referral relationships and reseller relationships. If we were
unable to maintain our existing strategic referral or reseller relationships or
enter into additional strategic referral or reseller relationships, we would
have to devote substantially more resources to the distribution, sales, and
marketing of our products and services. Our success depends in part on the
ultimate success of our strategic referral and reseller partners and their
ability to market our products and services successfully. Our existing strategic
referral partners are not obligated to refer any potential customers to us. In
addition, some of these third parties have entered, and may continue to enter,
into strategic relationships with our competitors. Further, many of our
strategic partners have multiple strategic relationships, and they may not
regard us as significant for their businesses. Our strategic partners may
terminate their respective relationships with us, pursue other partnerships or
relationships, or attempt to develop or acquire products or services that
compete with our products or services. Our strategic partners also may interfere
with our ability to enter into other desirable strategic relationships.
Our Products Might Not Be Compatible With All Major Platforms, Which Could
Inhibit Sales.
We must continually modify and enhance our products to keep pace with
changes in hardware and software platforms, database technology, and electronic
commerce technical standards. As a result, uncertainties related to the timing
and nature of new product announcements or introductions, or modifications by
vendors of operating systems, back-office applications, and browsers and other
Internet-related applications, could hurt our business. In addition, our
products are not currently based upon the Java programming language, an
increasingly widely-used language for developing Internet applications.
Accordingly, certain features available to products written in Java may not be
available in our products, and this could result in reduced customer demand.
We Rely On Third-Party Software That May Be Difficult To Replace.
We rely on software licensed from third parties in order to offer some of
our software products. This software may not continue to be available on
commercially reasonable terms, if at all. The loss or inability to maintain any
of these licenses could result in delays in the sale of our products and
services until equivalent technology is either developed by us, or, if
available, is identified, licensed, and integrated, which could harm our
business.
We May Not Successfully Develop Or Introduce New Products Or Enhancements To
Existing Products.
Our future financial performance and revenue growth will depend, in part,
upon the successful development, introduction, and customer acceptance of new
and enhanced versions of Concur Expense, and other applications, and our
business could be harmed if we fail to deliver enhancements to our current and
future products that customers desire. We have experienced delays in the planned
release dates of our software products and upgrades, and we have discovered
software defects in new releases after their introduction. New product versions
or upgrades may not be released according to schedule, or may contain defects
when released. Either situation could result in adverse publicity, loss of
sales, delay in market acceptance of our products, or customer claims against
us, any of which could harm our business. If we do not deliver new product
versions, upgrades, or other enhancements to existing products on a timely and
cost-effective basis, our business will be harmed. We are also continually
seeking to develop new product offerings. However, we remain subject to all of
the risks inherent in product development, including unanticipated technical or
other development problems, which could result in material delays in product
introduction and acceptance or significantly increased costs. There can be no
assurance that we will be able to successfully develop new products, or to
introduce in a timely manner and gain acceptance of such new products in the
marketplace.
We Must Attract And Retain Qualified Personnel.
Our success depends in large part on our ability to continue to attract,
motivate, and retain highly qualified personnel. Competition for such personnel
is intense and there can be no assurance that we will be successful in
attracting, motivating, and retaining key personnel. Many of our competitors for
experienced personnel have greater financial and other resources than us. We
also compete for personnel with other software vendors and consulting and
professional services companies. Further, we believe stock options are an
important component for motivating and retaining our key personnel. The
significant decline in our stock price during the past year has made stock
options previously granted with higher exercise prices less valuable to our
current employees and has consequently made it more difficult for us to retain
our key personnel. The inability to hire and retain qualified personnel or the
loss of the services of key personnel would harm our business.
16
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, or that our
competitors will not independently develop similar technology. In addition,
there can be no assurance that third parties will not claim infringement by us
with respect to current or future products or other intellectual property
rights. Any such claims could have a material adverse effect on our business,
results of operations and financial condition.
There Are Risks Associated With International Operations.
Our international operations are subject to a number of difficulties and
special costs, including:
. costs of customizing products for foreign countries;
. laws and business practices favoring local competitors;
. dependence on local vendors;
. uncertain regulation of electronic commerce;
. compliance with multiple, conflicting and changing governmental
laws and regulations;
. longer sales cycles;
. greater difficulty in collecting accounts receivable;
. import and export restrictions and tariffs;
. difficulties staffing and managing foreign operations;
. multiple conflicting tax laws and regulations; and
. political and economic instability.
Our international operations also face foreign currency-related risks. To
date, most of our revenues have been denominated in U.S. Dollars, but we believe
that an increasing portion of our revenues will be denominated in foreign
currencies. In particular, we expect that an increasing portion of our
international sales may be Euro-denominated. The Euro is still a relatively new
currency and may be subject to economic risks that are not currently
contemplated. We currently do not engage in foreign exchange hedging activities,
and therefore our international revenues and expenses are currently subject to
the risks of foreign currency fluctuations.
Revenues from customers outside the United States represented
approximately $4.4 million, $3.3 million, and $932,000 in fiscal 2001, 2000, and
1999, respectively. We intend to expand our international sales and marketing
activities and enter into relationships with additional international
distribution partners. We are in the early stages of developing our indirect
distribution channels in markets outside the United States. We may not be able
to attract distribution partners that will be able to market our products
effectively.
We must also customize our products for local markets. For example, our
ability to expand into the European market will depend on our ability to develop
a travel and entertainment expense management solution that incorporates the tax
laws and accounting practices followed in Germany and other European countries,
and to develop applications that support the Euro. Further, if we establish
significant operations overseas, we may incur costs that would be difficult to
reduce quickly because of employee practices in those countries.
17
Our Revenue Recognition Policy May Change And Affect Our Earnings.
We believe our current revenue recognition policies and practices are
consistent with applicable accounting standards. However, current software
revenue recognition accounting standards, and accounting guidance with respect
to such standards, are subject to change. Such changes could lead to
unanticipated changes in our current revenue accounting practices, and such
changes could significantly reduce our future revenues and earnings. See
"Management's Discussion and Analysis of Financial Condition and Results Of
Operations" and "Our ASP Product Offerings May Fail."
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, and research and
development facility is located in Redmond, Washington and consists of
approximately 81,000 square feet of office space held under leases which expire
on May 31, 2005. As of September 30, 2001, we also leased sales offices in
Atlanta, Boston, Chicago, Dallas, London, Los Angeles, Minneapolis, New York,
Philadelphia, Phoenix, and Raleigh.
ITEM 3. LEGAL PROCEEDINGS
In July 2001, we and several of our current and former officers were
named as defendants in a purported securities class-action lawsuit filed in the
United States District Court for the Southern District of New York. The
complaint generally alleges claims against the underwriters of our initial
public offering in December 1998, our company, and several of our current and
former executives, based on alleged errors and omissions concerning underwriting
terms in the prospectus for our initial public offering. The plaintiffs in this
lawsuit seek damages in an unspecified amount, which could be substantial. We
believe this lawsuit is without merit and intend to defend ourselves vigorously.
Any liability of ours resulting from this lawsuit could harm our results of
operations and financial condition and, even if we defend ourselves
successfully, there is a risk that management distraction in dealing with this
lawsuit could harm our results.
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 business, operating results, or financial condition.
See also "Factors That May Affect Results Of Operations And Financial
Condition" above for a detailed description of the risks and uncertainties
associated with the legal proceedings described in this Item 3.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2001.
18
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 for fiscal 2000 and 2001, as reported on the
Nasdaq National Market:
High Low
---- ---
Fiscal year ended September 30, 2000:
First Quarter ............................................................... $34.625 $10.125
Second Quarter .............................................................. $32.000 $15.063
Third Quarter ............................................................... $17.438 $ 4.125
Fourth Quarter .............................................................. $ 6.875 $ 2.156
Fiscal year ended September 30, 2001:
First Quarter ............................................................... $ 3.063 $ 1.030
Second Quarter .............................................................. $ 1.719 $ 0.313
Third Quarter ............................................................... $ 1.490 $ 0.328
Fourth Quarter .............................................................. $ 1.540 $ 0.670
On September 30, 2001, 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 any 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, 2001. 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
53 investors June 1, 1999 Common stock 3,419,929 -- Exchange for
common stock of
Seeker Software,
Inc.(1)
Officers, October 1, 1998 to Exercise of options to 116,453 $ 18,033 Cash(2)
directors, January 12, 1999 purchase common stock
employees and other
eligible
participants
1 investor December 13, 1999 Exercise of warrant to 93,785 -- Net exercise
purchase common stock
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
______________
* As part of our re-incorporation 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.
19
(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.
20
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,
------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of Operations
- ------------------------------------
Revenues, net:
License.......................................... $ 12,489 $ 14,852 $ 24,002 $ 13,176 $ 6,504
ASP.............................................. 4,623 926 -- -- --
Services......................................... 22,407 21,146 13,011 6,952 2,499
----------- --------- -------- ------- -------
Gross revenues................................. 39,519 36,924 37,013 20,128 9,003
Sales returns & allowances....................... 215 (2,900) -- -- --
----------- --------- -------- ------- -------
Net revenues................................... 39,734 34,024 37,013 20,128 9,003
Cost of revenues:
License.......................................... 584 1,342 1,184 558 394
ASP.............................................. 8,933 2,830 -- -- --
Services......................................... 14,398 22,005 16,653 8,063 2,721
----------- --------- -------- ------- -------
Total cost of revenues.............................. 23,915 26,177 17,837 8,621 3,115
----------- --------- -------- ------- -------
Gross profit........................................ 15,819 7,847 19,176 11,507 5,888
Operating expenses:
Sales and marketing.............................. 24,622 38,556 28,993 16,070 6,692
Research and development......................... 16,449 31,212 19,371 10,276 4,479
General and administrative....................... 10,729 14,795 10,385 5,919 2,307
Merger, acquisition & restructuring charges...... 266 2,167 8,859 5,203 --
----------- --------- -------- ------- -------
Total operating expenses....................... 52,066 86,730 67,608 37,468 13,478
----------- --------- -------- ------- -------
Loss from operations............................. (36,247) (78,883) (48,432) (25,961) (7,590)
Other income (expense), net...................... 1,164 3,228 1,956 (263) 31
----------- --------- -------- ------- -------
Net loss............................................ $ (35,083) $ (75,655) $ (46,476) $(26,224) $ (7,559)
=========== ========= ========= ======== ========
Basic and diluted net loss per share................ $ (1.37) $ (3.15) $ (2.75) $ (8.18) $ (2.50)
=========== ========= ========= ======== ========
Shares used in calculation of basic and diluted
net loss per share.................................. 25,574 23,981 16,883 3,207 3,025
=========== ========= ========= ======== ========
September 30,
-------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data
- -------------------------------
Cash, cash equivalents and marketable securities ...... $ 26,715 $ 56,242 $108,722 $ 17,058 $ 7,721
Working capital ....................................... 15,746 47,451 90,626 8,450 7,074
Total assets .......................................... 40,983 81,668 128,828 28,622 14,180
Long-term obligations, net of current portion ......... 7 1,886 6,326 8,605 3,687
Redeemable convertible preferred stock and warrants ... -- -- -- 37,956 17,345
Total stockholders' equity (deficit) .................. $ 22,777 $ 57,013 $ 93,774 $(33,551) $(12,503)
21
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 regarding our plans,
objectives, expectations, intentions, future financial performance, future
financial condition, and other statements that are not historical facts. You can
identify these statements by our use of the future tense, or by forward-looking
words such as "may," "will," "expect," "anticipate," "believe," "intend,"
"estimate," "continue," and other similar words and phrases. These
forward-looking statements involve substantial risks and uncertainties. Examples
of such risks and uncertainties are described in this report under "Factors That
May Affect Results Of Operations And Financial Condition" and elsewhere in this
report, as well as in our other filings with the Securities and Exchange
Commission. You should be aware that the occurrence of any of these risks and
uncertainties may cause our actual results to differ materially from those
anticipated in our forward-looking statements, which could have a material and
adverse effect on our business, results of operations, and financial condition.
All forward-looking statements included in this report are based on information
available to us as of the date of this report. We assume no obligation or duty
to update any such forward-looking statements.
Overview
Concur Technologies, Inc. is a leading provider of Web-based Corporate
Expense Management software and services that automate costly and inefficient
business processes, allowing companies to leverage their most limited resources:
time, money, knowledge, and energy. Our software products include Concur
Expense(TM) software for automating travel and entertainment expense management,
Concur Payment(TM) software for automating employee requests for vendor
payments, and Concur Time(TM) software for automating time tracking and
reporting. These software products are designed to meet the needs of businesses
of all sizes through both license and application service provider ("ASP")
models. We offer our products on a license basis primarily to large companies
that want a highly-configurable solution that is managed in-house and delivered
over a corporate intranet. We also offer Concur Expense as a service on an ASP
delivery basis primarily to mid-size companies that want a configured solution
provided on an outsourced basis over the Internet.
Since 1996, more than 875 companies, including AT&T, Citigroup,
DaimlerChrysler, DuPont, First Union, and Pfizer, have licensed over 2.4 million
employees to use our market-leading software and services to reduce their costs,
increase their productivity, improve compliance with their business policies,
and expand their knowledge base with respect to their internal business
processes. Our strategic relationships include more than 50 world-class
organizations such as ADP, Inc., American Express, KPMG Consulting, Inc.,
Microsoft Corporation, and Microsoft Great Plains Business Solutions.
We were incorporated in 1993 and commenced operations in fiscal 1994,
initially developing QuickXpense, a retail, shrink-wrapped application that
automated travel and entertainment expense reporting for individuals. We first
shipped QuickXpense in fiscal 1995 and sold it through a combination of retail
channels and direct marketing, utilizing a small sales force and no consulting
or implementation staff. Over time, businesses began seeking automation of
enterprise-wide travel and entertainment expense management processes, including
back-office processing and integration to financial systems. In July 1996, in
response to this demand, we significantly expanded our product development
efforts and released Concur Expense, a client-server based Corporate Expense
Management software product. In March 1998, we released a Web-based version of
Concur Expense, which takes advantage of the Internet and corporate intranets to
reach all employees in an enterprise. Our Web-based version of Concur Expense
has accounted for a majority of Concur Expense license revenues since its
release.
On June 30, 1998, we acquired 7Software, Inc., a privately held software
company and the developer of Concur Procurement. The transaction was accounted
for as a purchase. 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.
22
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. Our 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. 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 on an ASP delivery basis,
principally to mid-size companies. In December 1999, we introduced an additional
ASP offering for large companies that want a configured solution offered on an
outsourced basis. Our ASP solutions require limited IT infrastructure and
limited IT support on the part of the customer.
On June 8, 2000, we announced a new operating plan, under which we
discontinued Concur Procurement, discontinued our planned integration of Concur
Human Resources with our other products, and announced a workforce reduction of
68 employees to bring our cost structure in line with our new operating plan.
The primary objective of this operating plan was to focus on providing Corporate
Expense Management software and services and generating positive cash flow and
profitable growth.
On March 30, 2001, we sold our Concur Human Resources product line to MBH
Solutions, Inc. The transaction consisted of the sale of certain assets to, and
assumption of certain obligations by, MBH Solutions, Inc. in exchange for cash
consideration to be paid in installments over time. The transaction resulted in
a workforce reduction of 42 employees, the majority of whom continued employment
with MBH Solutions, Inc. Our primary objective in this sale was to further our
focus on the Corporate Expense Management market.
Results of Operations
Revenues
Years Ended September 30,
(dollars in thousands) 2001 Change 2000 Change 1999
---- ------ ---- ------ ----
License $ 12,489 (15.9)% $ 14,852 (38.1)% $ 24,002
ASP 4,623 399.2% 926 -- --
Services 22,407 6.0% 21,146 62.5% 13,011
-------- -------- --------
Gross revenues 39,519 7.0% 36,924 (0.2)% 37,013
Sales returns & allowances 215 107.4% (2,900) -- --
Net revenues $ 39,734 16.8% $ 34,024 (8.1)% $ 37,013
======== ======== ========
We market our software and services through our direct sales organization
in the United States and the United Kingdom, and through strategic referral and
reseller arrangements in the United States and in international markets.
Revenues from licenses and services to customers outside the United States were
$4.4 million, $3.3 million, and $932,000 in fiscal 2001, 2000, and 1999,
respectively. Historically, as a result of the relatively small amount of our
international sales, fluctuations in foreign currency exchange rates have not
had a material effect on our operating results. We had no customer that
accounted for more than 10% of our revenues in fiscal 2001, 2000, or 1999.
License Revenues. License revenues consist of software license fees. The
decrease in license revenues in fiscal 2001 from fiscal 2000 reflects the
discontinuation of Concur Procurement products and the sale of the Concur Human
Resources product line. We recorded the sales returns and allowances reserve in
fiscal 2000 because of the discontinuation of Concur Procurement, and to cover
any product returns resulting from that decision. A small portion of that
reserve was reversed as a result of a change in estimate during the quarter
ended March 2001. The decrease in license revenues in fiscal 2000, compared to
fiscal 1999, was the result of the discontinuation of the Concur Procurement
products, as well as an emphasis earlier in fiscal 2000 on the marketing and
selling of products other than Concur Expense, which caused sales of Concur
Expense to decline.
23
ASP Revenues. ASP revenues consist of monthly usage fees as well as the
amortization of setup and consulting fees. Setup fees are collected at the time
of sale but revenue recognition is deferred and amortized over the expected life
of the relationship. We have experienced a significant increase in demand for
our ASP solutions since launching these product offerings during the first
quarter of fiscal 2000, which was driven in part by the introduction of sales
through our strategic relationships. In May 2000, we entered into a strategic
relationship with ADP, Inc., under which ADP markets our ASP solutions directly
and indirectly to its existing customers and to potential new customers. Sales
through this channel commenced in the September quarter of fiscal 2000. In
addition, we signed a reseller agreement with Microsoft Great Plains Business
Solutions in June 2001 under which Microsoft Great Plains Business Solutions
agreed to resell and jointly market our ASP solutions to their existing
customers and to potential new customers through its value-added reseller
network. The first sales of product through this channel occurred late in the
September quarter of fiscal 2001. The majority of new ASP sales during the
second half of fiscal 2001 occurred through our indirect channels; nearly all of
which were through ADP. We expect ASP revenues to continue to grow during fiscal
2002 as a result of the continued development and expansion of our strategic
relationships, and to a lesser extent, as we increase our direct sales focus on
companies with 1,000 to 2,000 employees.
Services Revenues. Services revenues consist of customer support fees,
consulting services fees, and training fees. Customer support fees are typically
billed annually and amortized over the period of the contract. The moderate
increase in services revenues in fiscal 2001, compared to fiscal 2000, is
primarily related to an increase in annual customer support contracts entered
into in the current and prior periods, which is a direct result of a growing
installed customer base, offset only in part by a reduction in such contracts as
a result of the discontinuation of Concur Procurement and the sale of the Concur
Human Resources product line. The increase in services revenues in fiscal 2000,
compared to fiscal 1999, was primarily achieved through increased consulting
services revenue associated with sales, upgrades, and enhancements of Concur
Expense, and to a lesser degree, license sales of Concur Human Resources and
related consulting services. We expect consulting services revenues to fluctuate
based on new sales of our products and the related services provided, as well as
the demand for upgrades and enhancements to Concur Expense.
Revenue Recognition. Revenue resulting from license fees is recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable, and collectability is probable. If
the fee due from the customer is not fixed or determinable, revenue is
recognized as payments become due from the customer; however, if collectability
is not considered probable, revenue is recognized when the fee is collected.
Revenues resulting from ASP services, which consist primarily of initiation and
usage fees, are recognized over the lives of the related agreements, which are
typically two years, and as services are provided to end users. Customer
advances and billed amounts due from customers in excess of recognizable revenue
are recorded as deferred revenue. In some cases, revenues generated as an
application service provider are derived from arrangements with partners and
affiliates. These revenues are recorded on a gross basis with related
commissions recorded as a selling expense when we assume the related business
risks such as performance and credit risk. Such business risks are evidenced by,
among other things, instances in which we are the primary obligor in the
arrangement or when we establish the pricing of the arrangement. Otherwise,
these revenues are recorded on a net basis. Services revenues earned from
customers that license our software result from systems integration or other
consulting services, customer support agreements, and training. When software
licenses and services are sold together, the services are evaluated to determine
whether they are essential to the functionality of the software. When services
are considered essential, revenue under the arrangement is recognized using
contract accounting. When services are not considered essential, the revenue
related to the services is recognized as the services are performed. Customer
support agreements provide for technical support and include the right to
receive upgrades. Revenue from customer support agreements is recognized over
the life of the related agreement, which is typically one year.
24
Cost of Revenues
Years Ended September 30,
(dollars in thousands) 2001 Change 2000 Change 1999
---- ------ ---- ------ ----
Cost of license revenues $ 584 (56.5)% $ 1,342 13.3% $ 1,184
Percentage of gross license revenues 4.7% 9.0% 4.9%
Cost of ASP revenues $ 8,933 215.7% $ 2,830 -- --
Percentage of ASP revenues 193.2% 305.6% --
Cost of services revenues $ 14,398 (34.6)% $ 22,005 32.1% $ 16,653
Percentage of services revenues 64.3% 104.1% 128.0%
Total cost of revenues $ 23,915 (8.6)% $ 26,177 46.8% $ 17,837
Percentage of gross revenues 60.5% 70.9% 48.2%
Cost of License Revenues. Cost of license revenues consists mainly of
royalties for sub-licensing third-party software, and, to a lesser extent, the
costs of manuals, media, and duplication for our licensed products. The decrease
in cost of license revenues for fiscal 2001, compared to fiscal 2000, was due in
part to the amortization of purchased technology which was completed in the
third quarter of fiscal 2000. In addition, the decrease was due to a decline in
the volume of manuals, media, and duplication expenditures, as well as a
decrease in royalties paid to third parties for sub-licensed software. The
slight increase in cost of license revenues in fiscal 2000, compared to fiscal
1999, was primarily due to an increase in royalties paid for sub-licensing
third-party software. We expect that the cost of license revenues will continue
to fluctuate modestly in relation to changes in the overall demand for our
license products as well as the cost for sub-licensing third-party software.
Cost of ASP Revenues. Cost of ASP revenues consists mainly of salaries,
server costs and storage fees, telecommunication charges, strategic referral and
reseller fees, and amortization of deferred set-up costs. The cost of ASP
revenues for fiscal 2001 increased significantly from fiscal 2000, primarily due
to our investment in infrastructure to accommodate the current and near-term
growth of our ASP business and, to a lesser extent, the payment of reseller fees
associated with the increase in ASP sales generated through our strategic
partners. We expect the cost of ASP revenues to grow during fiscal 2002
primarily due to the payment of reseller fees relating to our expected growth in
ASP sales through strategic partners. However, we expect the growth in ASP
revenues to exceed the growth in cost of ASP revenues during fiscal 2002,
resulting in a positive ASP gross margin by the end of the third quarter of
fiscal 2002.
Cost of Services Revenues. Cost of services revenues includes primarily the
salaries, non-reimbursable expenses, and other operating costs of employees who
provide customer support, consulting services, and product training. The
decrease in cost of services revenues for fiscal 2001, as compared to fiscal
2000, was primarily due to continued improvements in our solutions which lead to
an overall reduction in our costs to deliver such services, as well as a
decrease in professional services personnel relating to our restructuring and
discontinuation of Concur Procurement, the sale of our Concur Human Resources
product line, and our company-wide efforts to reduce costs. The increase in cost
of services revenues in fiscal 2000 from fiscal 1999 primarily was due to
increases in professional service personnel to manage and support our growing
customer base, across a suite of products. Cost of services revenues as a
percentage of services revenues may vary between periods due to changes in the
level and mix of services provided.
Operating Expenses
Years Ended September 30,
(dollars in thousands) 2001 Change 2000 Change 1999
---- ------ ---- ------ ----
Sales and marketing $ 24,622 (36.1%) $ 38,556 33.0% $ 28,993
Percentage of gross revenues 62.3% 104.4% 78.3%
Research and development $ 16,449 (47.3%) $ 31,212 61.1% $ 19,371
Percentage of gross revenues 41.6% 84.5% 52.3%
General and administrative $ 10,729 (27.5%) $ 14,795 42.5% $ 10,385
Percentage of gross revenues 27.1% 40.1% 28.1%
Merger, acquisition & restructuring charges $ 266 (87.7%) $ 2,167 (75.5%) $ 8,859
Percentage of gross revenues 0.7% 5.9% 23.9%
Total operating expenses $ 52,066 (40.0%) $ 86,730 28.3% $ 67,608
Percentage of gross revenues 131.7% 234.9% 182.7%
25
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, sales commissions, travel, and facility costs for our sales and
marketing personnel and, to a lesser extent, costs of advertising, trade shows,
and other promotional activities. The decrease in fiscal 2001, as compared to
fiscal 2000, was due to lower payroll, advertising expenses, commissions, and
travel costs. These decreases reflect our restructuring and discontinuation of
Concur Procurement, the sale of our Concur Human Resources product line, and our
company-wide efforts to reduce costs. The increase in fiscal 2000, compared to
fiscal 1999, was primarily due to an increase in payroll and related expenses
attributable 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.
Research and Development. Research and development expenses consist
primarily of salaries and contract labor for software development, facility
costs, and expenses associated with computer software and hardware used in our
software development activities. The decrease in fiscal 2001, compared to fiscal
2000, reflects lower utilization of outside contractors and staffing reductions,
primarily due our restructuring and discontinuation of Concur Procurement, the
sale of our Concur Human Resources product line, and our company-wide efforts to
reduce costs. The increase from fiscal 1999 to fiscal 2000 was related to
increased hiring of employees and outside contractors as software engineers,
program managers, and quality assurance personnel to support our expanded
product lines and ongoing product development, and to a lesser extent, higher
salaries paid to employees due to increasing market rates during that time. In
fiscal 2002, we expect to increase headcount and related resources in our
software engineering organization as we continue to focus on product innovation
and enhancement to enable us to extend our leadership position in Corporate
Expense Management software and services. We expect total research and
development expenditures to decrease moderately as we continue our company-wide
efforts to reduce costs. In the development of our new products and enhancements
of existing products, the technological feasibility of the software is not
established until substantially all product development is complete.
Historically, software development costs eligible for capitalization have been
insignificant, and all costs related to internal research and development have
been expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs associated with finance, accounting,
investor relations, human resources, administration and facilities activities.
The decrease in fiscal 2001, compared to fiscal 2000, was primarily due to lower
utilization of contract labor and to a lower provision for bad debts, and, to a
lesser degree, reflects lower facility costs and amortization of deferred stock
compensation. These decreases reflect our restructuring and discontinuation of
Concur Procurement, the sale of our Concur Human Resources product line, and our
company-wide efforts to reduce costs. The increase in fiscal 2000, compared to
fiscal 1999, resulted from a combination of factors, including the hiring of
additional general and administrative personnel to support the growth of our
business, the increased use of outside contractors associated with increased
recruiting efforts, the higher amortization of deferred stock compensation, and
an increase in the allowance for doubtful accounts related to our increase in
revenues.
Merger, Acquisition and Restructuring Charges. Restructuring charges
for fiscal 2001 consist of restructuring costs of $943,000 in connection with
the sale of our Concur Human Resources product line, less: (i) a $178,000 net
gain on the sale of these assets; and (ii) a $499,000 reduction in the amount
accrued for our restructuring in June 2000 as a result of changes in the
estimated amounts required for severance and related benefits, facilities, and
product marketing commitments. Restructuring charges for fiscal 2000 include a
charge of $3.4 million for our restructuring in June 2000, which included
amounts for severance and related benefits, facilities, and product marketing
commitments. Merger and acquisition costs for fiscal 2000 were comprised of a
reduction in the amount accrued as a result of a revision in estimated costs of
$1.2 million relating to the acquisition of Seeker Software in June 1999. Merger
costs for fiscal 1999 include all costs related to the acquisition of Seeker
Software in June 1999.
Interest Income and Interest Expense
Years Ended September 30,
(dollars in thousands) 2001 Change 2000 Change 1999
---- ------ ---- ------ ----
Interest income $ 2,011 (57.8%) $ 4,768 24.7% $ 3,825
Interest expense $ 719 (47.7%) $ 1,376 (8.9%) $ 1,511
26
Interest Income and Interest Expense. The decrease in interest income
in fiscal 2001 compared to fiscal 2000 was due to the decrease in cash, cash
equivalents and marketable securities upon which we earn interest, and to a
lesser extent, to lower interest rates earned on our investment portfolio. The
increase in interest income in fiscal 2000, compared to fiscal 1999, was
primarily due to interest income earned on the higher cash, cash equivalents and
marketable securities balances as a result of proceeds received in December 1998
and April 1999 from our public offerings as well as our private placement in
February 2000. The decrease in interest expense in both fiscal 2001 and fiscal
2000 was primarily due to lower outstanding interest-bearing obligations related
to bank borrowings and capital lease obligations.
Provision for Income Taxes. No provision for federal and state income
taxes has been recorded because we have experienced net losses since inception
that have resulted in deferred tax assets. A valuation allowance has been
recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset balance.
Selected Quarterly Financial Data
(in thousands, except per
share data) Fiscal 2001 Fiscal 2000
For the quarter ended Dec 31 Mar 31 Jun 30 Sept 30 Dec 31 Mar 31 Jun 30 Sept 30