10-Q 1 cnqr10qq32014.htm FORM 10-Q CNQR.10Q.Q3.2014

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to             
Commission file number 000-25137
_________________________________
Concur Technologies, Inc.
(Exact name of Registrant as specified in its charter)
___________________________________ 
Delaware
 
91-1608052
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
601 108th Avenue NE, Suite 1000
Bellevue, Washington
 
98004
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (425) 702-8808
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    þ Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  [Do not check if a smaller reporting company]
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    þ  No
Number of shares of the registrant’s common stock outstanding as of August 1, 2014: 57,036,165



CONCUR TECHNOLOGIES, INC.
FORM 10-Q
For the quarter ended June 30, 2014

INDEX
 


1


PART I.     FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
Concur Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
178,365

 
$
138,710

 
$
510,965

 
$
388,878

Expenses:
 
 
 
 
 
 
 
Cost of operations
59,988

 
36,545

 
179,492

 
108,105

Sales and marketing
71,243

 
56,111

 
215,599

 
166,571

Systems development and programming
21,034

 
12,724

 
62,967

 
40,750

General and administrative
25,904

 
20,924

 
76,361

 
60,836

Revaluation of contingent consideration
(627
)
 
(6,109
)
 
(2,270
)
 
(3,977
)
Amortization of intangible assets
5,251

 
4,715

 
15,723

 
13,718

Total expenses
182,793

 
124,910

 
547,872

 
386,003

Operating income (loss)
(4,428
)
 
13,800

 
(36,907
)
 
2,875

Other income (expense):
 
 
 
 
 
 
 
Interest income
573

 
502

 
2,047

 
1,546

Interest expense
(11,133
)
 
(6,870
)
 
(33,016
)
 
(16,966
)
Gain (loss) from equity investments, net
13,291

 
(589
)
 
11,025

 
(1,957
)
Other, net
(192
)
 
(22
)
 
(1,006
)
 
(583
)
Total other income (expense)
2,539

 
(6,979
)
 
(20,950
)
 
(17,960
)
Income (loss) before income tax
(1,889
)
 
6,821

 
(57,857
)
 
(15,085
)
Income tax expense (benefit)
(1,663
)
 
4,237

 
22,947

 
2,502

Consolidated net income (loss)
(226
)
 
2,584

 
(80,804
)
 
(17,587
)
Less: loss attributable to noncontrolling interest
194

 
231

 
571

 
725

Net income (loss) attributable to Concur
$
(32
)
 
$
2,815

 
$
(80,233
)
 
$
(16,862
)
Net income (loss) per share attributable to Concur common stockholders:
 
 
 
 
 
 
 
Basic
$

 
$
0.05

 
$
(1.42
)
 
$
(0.30
)
Diluted

 
0.05

 
(1.42
)
 
(0.30
)
Weighted average shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
56,876

 
55,845

 
56,505

 
55,506

Diluted
56,876

 
59,290

 
56,505

 
55,506

See Notes to Consolidated Financial Statements.


2


Concur Technologies, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Consolidated net income (loss)
$
(226
)
 
$
2,584

 
$
(80,804
)
 
$
(17,587
)
Other comprehensive income (loss), before tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,239

 
(281
)
 
2,449

 
(2,487
)
Unrealized gain (loss) on available-for-sale investments
9

 
(7
)
 
(1
)
 
(46
)
Other comprehensive income (loss), before tax
1,248

 
(288
)
 
2,448

 
(2,533
)
Tax effect

 
(2
)
 
136

 
(9
)
Other comprehensive income (loss), net of tax
1,248

 
(286
)
 
2,312

 
(2,524
)
Comprehensive income (loss)
1,022

 
2,298

 
(78,492
)
 
(20,111
)
Less: comprehensive loss attributable to noncontrolling interest
196

 
231

 
565

 
780

Comprehensive income (loss) attributable to Concur
$
1,218

 
$
2,529

 
$
(77,927
)
 
$
(19,331
)
See Notes to Consolidated Financial Statements.

3


Concur Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
 
June 30,
2014
 
September 30,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
475,032

 
$
301,696

Short-term investments
341,338

 
531,065

Accounts receivable, net of allowance of $4,846 and $3,567
126,791

 
106,587

Deferred tax assets, net
23,645

 
43,987

Deferred costs and other assets
59,757

 
55,341

Total current assets
1,026,563

 
1,038,676

Non-current assets:
 
 
 
Property and equipment, net
97,297

 
82,414

Investments
116,112

 
101,756

Deferred costs and other assets
61,735

 
51,082

Intangible assets, net
108,232

 
123,297

Deferred tax assets, net
4,566

 
3,255

Goodwill
330,698

 
324,454

Total assets
$
1,745,203

 
$
1,724,934

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,588

 
$
15,036

Customer funding liabilities
45,335

 
37,039

Accrued compensation
40,927

 
30,142

Acquisition-related liabilities
32

 
2,231

Acquisition-related contingent consideration
1,000

 
3,182

Other accrued expenses and liabilities
30,310

 
34,537

Deferred revenue
106,636

 
88,550

Convertible senior notes, net
275,868

 
265,426

Total current liabilities
516,696

 
476,143

Non-current liabilities:
 
 
 
Convertible senior notes, net
397,144

 
381,807

Deferred rent and other long-term liabilities
11,694

 
10,373

Deferred revenue
10,704

 
15,499

Tax liabilities
27,122

 
22,832

Total liabilities
963,360

 
906,654

Temporary equity: convertible senior notes
11,632

 
22,074

Concur stockholders’ equity:
 
 
 
Common stock, $0.001 par value per share
57

 
56

Authorized shares: 195,000
 
 
 
Shares issued and outstanding: 56,891 and 56,044
 
 
 
Additional paid-in capital
990,110

 
939,423

Accumulated deficit
(221,912
)
 
(141,679
)
Accumulated other comprehensive income (loss)
491

 
(1,815
)
Total Concur stockholders’ equity
768,746

 
795,985

Noncontrolling interest
1,465

 
221

Total equity
770,211

 
796,206

Total liabilities, temporary equity and stockholders’ equity
$
1,745,203

 
$
1,724,934

See Notes to Consolidated Financial Statements.

4


Concur Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Operating activities:
 
 
 
 
 
 
 
Consolidated net income (loss)
$
(226
)
 
$
2,584

 
$
(80,804
)
 
$
(17,587
)
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
Amortization of intangible assets
5,251

 
4,715

 
15,723

 
13,718

Depreciation and amortization of property and equipment
10,182

 
7,648

 
28,958

 
21,351

Accretion of discount and issuance costs on notes
8,719

 
4,913

 
25,779

 
11,312

Share-based compensation
16,990

 
14,684

 
67,066

 
46,131

Revaluation of contingent consideration
(627
)
 
(6,109
)
 
(2,270
)
 
(3,977
)
Deferred income taxes
(4,453
)
 
4,769

 
19,903

 
1,552

Excess tax benefits from share-based compensation
(31
)
 
(352
)
 
(452
)
 
(717
)
Loss (gain) from equity investments
(13,291
)
 
589

 
(11,025
)
 
1,957

Payments of contingent consideration

 

 

 
(591
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
 
 
 
 
Accounts receivable, net
(9,349
)
 
(9,169
)
 
(19,927
)
 
(16,558
)
Deferred costs and other assets
(5,325
)
 
(3,769
)
 
(9,396
)
 
(8,114
)
Accounts payable
1,335

 
(1,327
)
 
3,087

 
334

Accrued liabilities
5,977

 
(1,197
)
 
10,332

 
(12,507
)
Deferred revenue
10,319

 
10,035

 
13,384

 
15,458

Net cash provided by operating activities
25,471

 
28,014

 
60,358

 
51,762

Investing activities:
 
 
 
 
 
 
 
Purchases of investments
(125,412
)
 
(317,926
)
 
(633,406
)
 
(571,111
)
Maturities of investments
257,752

 
137,465

 
822,795

 
349,950

Increase (decrease) in customer funding liabilities
(6,648
)
 
2,910

 
8,029

 
11,039

Investments in and loans to unconsolidated affiliates
(1,750
)
 

 
(28,914
)
 
(17,326
)
Proceeds from sale of cost method investments
16,677

 

 
16,677

 

Capital expenditures
(12,641
)
 
(19,558
)
 
(39,420
)
 
(40,547
)
Payments for acquisitions, net of cash acquired
(1,250
)
 

 
(3,810
)
 
(9,564
)
Payments of contingent consideration related to acquisition of Etap

 

 

 
(1,266
)
Net cash provided by (used in) investing activities
126,728

 
(197,109
)
 
141,951

 
(278,825
)
Financing activities:
 
 
 
 
 
 
 
Equity issuance costs

 
(120
)
 

 
(120
)
Proceeds from borrowings on convertible senior notes, net

 
474,949

 

 
474,949

Proceeds from warrants

 
23,753

 

 
23,753

Payments for convertible senior note hedges

 
(58,161
)
 

 
(58,161
)
Investment in consolidated joint venture by noncontrolling interest

 
619

 
1,809

 
619

Payments on repurchase of common stock
(484
)
 
(450
)
 
(925
)
 
(651
)
Net proceeds from share-based equity award activity
323

 
615

 
2,142

 
2,035

Proceeds from employee stock purchase plan activity
988

 
767

 
2,674

 
2,351

Minimum tax withholding on restricted stock awards
(3
)
 
(15
)
 
(31,988
)
 
(19,362
)
Excess tax benefits from share-based compensation
31

 
352

 
452

 
717

Payments of contingent consideration

 

 

 
(2,497
)
Repayments on capital leases
(2,066
)
 

 
(3,899
)
 

Net cash provided by (used in) financing activities
(1,211
)
 
442,309

 
(29,735
)
 
423,633

Effect of foreign currency exchange rate changes on cash and cash equivalents
780

 
(701
)
 
762

 
(1,891
)
Net increase in cash and cash equivalents
151,768

 
272,513

 
173,336

 
194,679

Cash and cash equivalents at beginning of period
323,264

 
224,440

 
301,696

 
302,274

Cash and cash equivalents at end of period
$
475,032

 
$
496,953

 
$
475,032

 
$
496,953

Supplemental cash flow information:
 
 
 
 
 
 
 
Cash paid for interest
$
4,816

 
$
3,594

 
$
9,706

 
$
7,188

Income tax payments, net
1,076

 
1,172

 
3,520

 
4,574

See Notes to Consolidated Financial Statements.

5


Concur Technologies, Inc.
Notes to Consolidated Financial Statements
(In thousands, unless otherwise noted)
(Unaudited)
Note 1. Description of the Company and Basis of Presentation
Throughout these consolidated financial statements, Concur Technologies, Inc. is referred to as “Concur,” the “Company,” “we,” “us,” and “our.” We report our operating results on the basis of a fiscal year that starts October 1 and ends September 30. We refer to our fiscal years ended September 30, 2012 and 2013 as “2012” and “2013” and our fiscal year ending September 30, 2014 as “2014.” All dollar, option, and share amounts are reported in thousands, unless otherwise noted.
Description of the Company
We are the leading global provider of integrated travel and expense management solutions for companies of all industries and sizes worldwide. Our core mission is to continuously innovate to reduce the costs for our customers and enhance the user experience for travelers. Our easy-to-use cloud computing solutions help companies and their employees control costs, save time, and boost productivity by streamlining processes and providing visibility into expense management, travel management, itinerary management, and invoice management processes. By capturing and reporting on activity throughout the travel and expense management process, our solutions provide detailed information to help clients effectively negotiate with vendors, create budgets, and manage compliance. By providing easy-to-use mobile solutions, we help make business travel easier and more productive for our customers’ employees. Our solutions adapt to individual employee preferences, while scaling to meet the needs of companies from small to large.
Concur, the Concur logo, Concur Connect platform, Concur T&E Cloud, Smart Expense, TripIt, GlobalExpense, TRX, and GDSx, as well as a number of other names and brands that are not referenced in these consolidated financial statements, are trademarks or registered trademarks of Concur or its affiliates. Other parties’ marks are the property of their respective owners and should be treated as such.
Basis of Presentation
These consolidated financial statements include the accounts of Concur, its wholly-owned subsidiaries, and its majority-owned subsidiary. We hold a controlling interest (75% voting interest) in our Japanese joint venture Concur (Japan) Ltd. (“Concur Japan”). We recorded a noncontrolling interest in the consolidated statements of operations for the noncontrolling investors’ interests in the operations of Concur Japan. Noncontrolling interest of $1.5 million and $0.2 million as of June 30, 2014 and September 30, 2013, respectively, is reflected in stockholders’ equity. All intercompany accounts and transactions, including those of Concur Japan, were eliminated in consolidation.
We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting. In our opinion, we have included all adjustments necessary for a fair presentation. These adjustments consist of normal recurring items. Our unaudited consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the Securities and Exchange Commission on November 13, 2013.
Reclassifications
Certain amounts previously presented for prior periods have been reclassified to conform to current presentation.
Note 2. Accounting Estimates, Summary of Significant Accounting Policies, and Recent Accounting Pronouncements
Use of Estimates
We prepared our consolidated financial statements in conformity with GAAP, which requires us to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have a material impact on our consolidated financial statements and accompanying notes. Examples of estimates and assumptions include the determination of the best estimate of selling price of the deliverables included in multiple-deliverable revenue arrangements, valuing assets and liabilities acquired through business combinations, determining the fair value of acquisition-related contingent considerations, valuing and estimating useful lives of intangible assets, recognizing uncertain tax positions, estimating tax valuation allowances on tax attribute carryforwards, valuing strategic investments and determining the other-than-temporary impairments for such investments, deferring certain revenue and costs,

6


share-based compensation, valuing allowances for accounts receivable, estimating useful lives of property and equipment, and estimating product warranties. Actual results could differ from these estimates.
Recently Adopted Accounting Guidance
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) (“ASU 2014-08”). ASU 2014-08 raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually significant disposal transactions that do not meet the definition of a discontinued operation. Under the new standard, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. ASU 2014-08 will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014 with early adoption permitted. We early adopted ASU 2014-08 beginning in the fiscal quarter ended June 30, 2014. The adoption did not have a significant impact on our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the Financial Accounting Standards Board Emerging Issues Task Force) (“ASU 2013-11”). ASU 2013-11 requires the netting of unrecognized tax benefits (“UTBs”) against a deferred tax asset for a loss or other carryforwards that would apply in settlement of the uncertain tax positions. UTBs are required to be netted against all available same-jurisdiction losses or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. We early adopted ASU 2013-11, effective October 1, 2013, on a prospective basis. The adoption did not have a significant impact on our consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Other Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires entities to present (either on the face of the income statement or in the notes to the consolidated financial statements) the significant effects on the line items of the income statement for amounts reclassified out of accumulated other comprehensive income. We adopted ASU 2013-02 effective October 1, 2013. The adoption did not have a significant impact on our consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for us beginning October 1, 2017. We are currently evaluating the impact on our consolidated financial statements upon adoption.
In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830), Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-05”). ASU 2013-05 requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. ASU 2013-05 will be effective for us beginning October 1, 2014. We do not anticipate material impacts on our consolidated financial statements upon adoption.
Note 3. Net Income (Loss) Per Share
We calculate basic net income (loss) per share by dividing net income (loss) attributable to Concur for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share attributable to Concur is computed giving effect to all potential weighted average diluted common stock, including options, restricted stock units, warrants, and convertible senior notes, using the treasury stock method.
The computation of basic and diluted net income (loss) per share is as follows:

7


 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss) attributable to Concur
$
(32
)
 
$
2,815

 
$
(80,233
)
 
$
(16,862
)
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
56,876

 
55,845

 
56,505

 
55,506

Dilutive effect of share-based equity awards

 
1,525

 

 

Dilutive effect of 2015 convertible senior notes

 
1,715

 

 

Dilutive effect of warrants associated with 2015 convertible senior notes

 
205

 

 

Diluted
56,876

 
59,290

 
56,505

 
55,506

Net income (loss) per share attributable to Concur common stockholders:
 
 
 
 
 
 
 
Basic
$

 
$
0.05

 
$
(1.42
)
 
$
(0.30
)
Diluted

 
0.05

 
(1.42
)
 
(0.30
)
We excluded certain shares from the computation of diluted net income (loss) per share because the effect of these shares would have been anti-dilutive. The following table details the shares of potential common stock outstanding, which were excluded from the computation of diluted net income (loss) per share for the three and nine month periods then ended.
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Share-based equity awards
2,666

 

 
2,666

 
2,950

2015 convertible senior notes
5,491

 

 
5,491

 
5,491

Warrants associated with the 2015 convertible senior notes
5,491

 

 
5,491

 
5,491

2018 convertible senior notes
4,662

 
4,662

 
4,662

 
4,662

Warrants associated with the 2018 convertible senior notes
4,662

 
4,662

 
4,662

 
4,662

Under the treasury stock method, the 2015 and 2018 convertible senior notes have a dilutive impact on net income per share when the average stock price for the period exceeds the respective conversion price for the 2015 and 2018 convertible senior notes (see Note 9 of these Notes to Consolidated Financial Statements).
We also have entered into note hedge transactions in connection with our 2015 and 2018 convertible senior notes (“2015 Note Hedges” and “2018 Note Hedges,” respectively, and together, the “Note Hedges”) with respect to our common stock (discussed in Note 9 of these Notes to Consolidated Financial Statements), to minimize the impact of potential economic dilution upon conversion of our 2015 and 2018 convertible senior notes. The Note Hedges were outstanding during the three and nine months ended June 30, 2014 and 2013. Since the beneficial impact of the Note Hedges was anti-dilutive, they were excluded from the calculation of diluted net income (loss) per share.
Note 4. Property and Equipment
As of the dates specified below, our property and equipment consisted of the following:
 
June 30, 2014

September 30, 2013
Land and building
$
7,133

 
$
6,277

Computer hardware
32,334

 
33,985

Computer software
112,980

 
89,307

Furniture and equipment
4,673

 
3,603

Leasehold improvements
14,279

 
11,830

Property and equipment, gross
171,399

 
145,002

Less: accumulated depreciation
(74,102
)
 
(62,588
)
Property and equipment, net
$
97,297

 
$
82,414

Depreciation expense of property and equipment totaled $10.2 million and $29.0 million for the three and nine months ended June 30, 2014, respectively, and $7.6 million and $21.4 million for the same periods in 2013.
Note 5. Investments

8


Our investment portfolio primarily includes strategic investments in privately-held companies. We account for our strategic investments under either the cost or equity method of accounting. Our equity method investment balance is adjusted each period to recognize our proportionate share of investee net income or loss, including adjustments to recognize certain differences between our carrying value and our equity in the investee’s net assets at the date of investment.
Total equity and cost method investment balances recorded as of June 30, 2014 and September 30, 2013 were as follows:
 
June 30, 2014
 
September 30, 2013
Equity method investments
$
26,776

 
$
25,407

Cost method investments
89,336

 
76,349

     Total investments
$
116,112

 
$
101,756

During the three months ended June 30, 2014, we sold our equity interest in Buuteeq, Inc. As a result, we recorded a cost method investment related gain of $14.6 million.
During the nine months ended June 30, 2014, we also invested an additional $17.8 million in the preferred stock of our cost method investees. As our additional investments in preferred stock do not meet the definition of in-substance common stock, they are accounted for using the cost method of accounting.
No other-than-temporary impairment charge was recorded for the three and nine months ended June 30, 2014 and 2013.
Other Investments
We generally invest our excess cash in investment grade short- to intermediate-term fixed-income securities and money market funds. For further information, see Note 12 of these Notes to Consolidated Financial Statements.
Note 6. Goodwill
The changes in the carrying balance of goodwill for the nine months ended June 30, 2014 were as follows:
Balance as of September 30, 2013
$
324,454

Purchase accounting adjustments (1)
4,697

Other adjustments (2)
1,547

Balance as of June 30, 2014
$
330,698

(1) During the nine months ended June 30, 2014, we revised the purchase price allocation for our 2013 acquisitions. The measurement periods for purchase price allocations end as soon as information on the facts and circumstances becomes available, but do not exceed 12 months.
(2) Largely represents the impact of foreign currency translation for instances when goodwill is recorded in foreign entities whose functional currency is also their local currency. Goodwill balances are translated into U.S. dollars using exchange rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive income (loss).
Goodwill amounts are tested for impairment at least annually during the second fiscal quarter. No impairments were recorded for the three and nine months ended June 30, 2014 and 2013.
Note 7. Intangible Assets
The following table presents our intangible assets as of the dates specified below:
 
June 30, 2014
 
September 30, 2013
Description
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Trade name and trademarks
$
3,904

 
$
(1,735
)
 
$
2,169

 
$
3,886

 
$
(1,368
)
 
$
2,518

Technology
46,201

 
(26,635
)
 
19,566

 
45,694

 
(22,427
)
 
23,267

Customer relationships
142,155

 
(55,658
)
 
86,497

 
141,586

 
(44,074
)
 
97,512

Total
$
192,260

 
$
(84,028
)
 
$
108,232

 
$
191,166

 
$
(67,869
)
 
$
123,297

Amortization expense totaled $5.3 million and $15.7 million for the three and nine months ended June 30, 2014, respectively, and $4.7 million and $13.7 million for the same periods in 2013.

9


The following table presents the estimated future amortization expense related to intangible assets held at June 30, 2014:
Years Ending September 30,
Amortization of Intangible Assets
2014 (July 1, 2014 through September 30, 2014)
$
5,226

2015
20,853

2016
18,499

2017
16,980

2018
15,823

Thereafter
30,851

Total
$
108,232

Note 8. Customer Funding Liabilities
We draw funds from and make payments on behalf of our customers for employee expense reimbursements, related corporate credit card payments, and vendor payments. We hold these funds in cash and record our obligation to make these expense reimbursements and payments on behalf of our customers as customer funding liabilities.
Note 9. Debt
The following table presents our outstanding debt:
 
June 30, 2014
 
September 30, 2013
 
Principal
 
Unamortized Discount
 
Notes Issuance Costs
 
Carrying Value
 
Principal
 
Unamortized Discount
 
Notes Issuance Costs
 
Carrying Value
2015 Notes
$
287,500

 
$
(10,513
)
 
$
(1,119
)
 
$
275,868

 
$
287,500

 
$
(19,898
)
 
$
(2,176
)
 
$
265,426

2018 Notes
488,750

 
(82,813
)
 
(8,793
)
 
397,144

 
488,750

 
(96,660
)
 
(10,283
)
 
381,807

Total
$
776,250

 
$
(93,326
)
 
$
(9,912
)
 
$
673,012

 
$
776,250

 
$
(116,558
)
 
$
(12,459
)
 
$
647,233

2015 Convertible Senior Notes
In March 2010, we issued $287.5 million principal amount of our 2.50% convertible senior notes due April 15, 2015 (“2015 Notes”). All amounts from the issuance of the 2015 Notes were settled in April 2010.
The 2015 Notes are governed by an indenture, dated April 6, 2010 (“2015 Indenture”), between Concur and Wells Fargo Bank, National Association, as trustee. The 2015 Notes will mature on April 15, 2015, unless earlier repurchased or converted, and bear interest at a rate of 2.50% per year payable semi-annually in arrears on April 15 and October 15 of each year, commencing October 15, 2010.
The 2015 Notes are convertible into cash and up to 5.5 million shares of our common stock at an initial conversion rate of approximately 19.10 shares of common stock per $1,000 principal amount of the 2015 Notes, which represents an initial conversion price of approximately $52.35 per share, subject to adjustment. Prior to January 15, 2015, conversion is subject to the satisfaction of certain conditions set forth below. Holders of the 2015 Notes who convert their 2015 Notes in connection with a fundamental change (as defined in the 2015 Indenture) will, under certain circumstances, be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the 2015 Notes may require the Company to repurchase all or a portion of their 2015 Notes at a repurchase price equal to 100% of the principal amount of the 2015 Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date (as defined in the 2015 Indenture).
Holders of the 2015 Notes may convert their 2015 Notes on or after January 15, 2015 until the close of business on the second scheduled trading day immediately preceding the maturity date. The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest. Upon conversion, we will satisfy our conversion obligation by delivering cash and shares of common stock, if any, based on a daily settlement amount (as defined in the 2015 Indenture). Prior to January 15, 2015, holders of the 2015 Notes may convert their 2015 Notes under any of the following conditions:
during any calendar quarter commencing after June 30, 2010, and only during such calendar quarter, if the last reported sale price of common stock for 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day;

10


during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2015 Notes for each day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of common stock and the applicable conversion rate on such day; or
upon the occurrence of specified corporate events.
Our common stock price exceeded 130% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the last trading day of the quarter ended March 31, 2014. Accordingly, the 2015 Notes were convertible at the holders’ option for the quarter ended June 30, 2014 and were classified as a current liability on the consolidated balance sheets as of March 31, 2014. As of June 30, 2014, none of the 2015 Notes have been repurchased or converted.
For at least 20 trading days during the 30 consecutive trading day period ended June 30, 2014, the Company’s common stock price exceeded 130% of the applicable conversion price on each applicable trading day. Accordingly, the 2015 Notes are convertible at the holders’ option for the quarter ending September 30, 2014. The 2015 Notes are classified as a current liability on the consolidated balance sheets as of June 30, 2014.
In accounting for the issuance of the 2015 Notes, we separated the 2015 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amount of the liability component over its carrying amount (“2015 Notes Discount”) is amortized to interest expense over the term of the 2015 Notes. The remaining term of the 2015 Notes is approximately nine months at June 30, 2014. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2015 Notes as a whole.
A portion of the equity component attributable to the conversion feature of the 2015 Notes was classified in temporary equity as of June 30, 2014 and September 30, 2013. The amount classified as temporary equity was equal to the difference between the principal amount and carrying value of the 2015 Notes.
Further, in accounting for the transaction costs related to the issuance of the 2015 Notes, we allocated the total amount incurred to the liability and equity components. Transaction costs allocated to the liability component are being amortized to expense over the term of the 2015 Notes, and transaction costs allocated to the equity component were netted with the equity component in additional paid-in capital (“2015 Notes Issuance Costs”). The carrying amounts of the equity component, net of transaction costs, were $44.7 million and $34.3 million at June 30, 2014 and September 30, 2013, respectively.
The following table presents the interest expense related to the 2015 Notes for the three and nine months ended June 30, 2014 and 2013, respectively:
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Contractual interest expense
$
1,797

 
$
1,797

 
$
5,391

 
$
5,391

Amortization of notes issuance costs
356

 
458

 
1,057

 
1,114

Accretion of notes discount
3,185

 
3,028

 
9,385

 
8,771

 
$
5,338

 
$
5,283

 
$
15,833

 
$
15,276

Effective interest rate of the liability component
7.73
%
 
7.73
%
 
7.73
%
 
7.73
%
The net proceeds from the 2015 Notes were approximately $279.0 million after payment of the initial purchasers’ discounts and offering expenses. From these net proceeds, we used a net total of approximately $34.1 million, which included $60.1 million to pay for the cost of the 2015 Note Hedges, partially offset by proceeds of $26.1 million from our sale of 2015 Warrants. These transactions are defined and described in more detail below. We expect to continue to use the net proceeds of the 2015 Notes for general corporate purposes, including potential acquisitions and strategic transactions.
Based on the closing prices of the Company’s common stock of $93.34 on June 30, 2014, the if-converted value of the 2015 Notes exceeded their principal amount by approximately $225.1 million.
2015 Note Hedges
To minimize the impact of potential economic dilution upon conversion of the 2015 Notes, we entered into the 2015 Note Hedges with respect to our common stock. We paid $60.1 million for the 2015 Note Hedges. The 2015 Note Hedges cover approximately 5.5 million shares of our common stock at a strike price of $52.35 per share subject to anti-dilution adjustments and are exercisable upon conversion of the 2015 Notes. The 2015 Note Hedges will expire upon the maturity of the 2015 Notes. The 2015 Note Hedges are intended to reduce the potential economic dilution upon conversion of the 2015 Notes in the

11


event that the market value per share of our common stock, as measured under the 2015 Notes, at the time of exercise is greater than the conversion price of the 2015 Notes.
2015 Warrants
Separately, we entered into warrant transactions, whereby we sold warrants to acquire up to 5.5 million shares of our common stock at a strike price of $73.29 per share (“2015 Warrants”), subject to anti-dilution adjustments. The 2015 Warrants will expire upon the maturity of the 2015 Notes. We received proceeds of $26.1 million from the sale of the 2015 Warrants. If the market value per share of our common stock, as measured under the 2015 Warrants, exceeds the strike price of the 2015 Warrants, the 2015 Warrants will have a dilutive effect on our net income per share. The 2015 Warrants had an anti-dilutive effect on our net loss per share for the three and nine months ended June 30, 2014 and for the nine months ended June 30, 2013.
2018 Convertible Senior Notes
During the quarter ended June 30, 2013, we issued $488.8 million principal amount of our 0.50% convertible senior notes due June 15, 2018 (“2018 Notes”). All amounts from the issuance of the 2018 Notes were settled during the quarter ended June 30, 2013.
The 2018 Notes are governed by an indenture, dated June 4, 2013 (“2018 Indenture”). The 2018 Notes will mature on June 15, 2018, unless earlier repurchased or converted, and bear interest at a rate of 0.50% per year payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2013.
The 2018 Notes are convertible into cash and up to 4.7 million shares of our common stock at an initial conversion rate of approximately 9.54 shares of common stock per $1,000 principal amount of the 2018 Notes, which represents an initial conversion price of approximately $104.85 per share, subject to adjustment. Prior to March 15, 2018, conversion is subject to the satisfaction of certain conditions set forth below. Holders of the 2018 Notes who convert their 2018 Notes in connection with a fundamental change (as defined in the 2018 Indenture) will, under certain circumstances, be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the 2018 Notes may require the Company to repurchase all or a portion of their 2018 Notes at a repurchase price equal to 100% of the principal amount of the 2018 Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date (as defined in the 2018 Indenture).
Holders of the 2018 Notes may convert their 2018 Notes on or after March 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date. The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest. Upon conversion, we will satisfy our conversion obligation by delivering cash and shares of common stock, if any, based on a daily settlement amount (as defined in the 2018 Indenture). Prior to March 15, 2018, holders of the 2018 Notes may convert their 2018 Notes under any of the following conditions:
during any calendar quarter commencing after September 30, 2013, and only during such calendar quarter, if the last reported sale price of common stock for 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2018 Notes for each day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of common stock and applicable conversion rate on such day; or
upon the occurrence of specified corporate events.    
During the three months ended March 31, 2014, none of the above conditions were achieved. Accordingly, the 2018 Notes were not convertible at the holders’ option for the quarter ended June 30, 2014 and were classified as a non-current liability on the consolidated balance sheets as of March 31, 2014. As of June 30, 2014, none of the 2018 Notes have been repurchased or converted.
During the three months ended June 30, 2014, none of the above conditions were achieved. Accordingly, the 2018 Notes are not convertible at the holders’ option for the quarter ending September 30, 2014, and the 2018 Notes are classified as a non-current liability on the consolidated balance sheets as of June 30, 2014.
In accounting for the issuance of the 2018 Notes, we separated the 2018 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amount of the liability component over its carrying amount (“2018 Notes Discount”) is amortized to interest expense over the term of the 2018 Notes. The remaining term of the 2018 Notes is approximately four years at June 30, 2014. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2018 Notes as a whole. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.

12


In accounting for the transaction costs related to the issuance of the 2018 Notes, we allocated the total amount incurred to the liability and equity components. Transaction costs allocated to the liability component are being amortized to expense over the term of the 2018 Notes, and transaction costs allocated to the equity component were netted with the equity component in additional paid-in capital (“2018 Notes Issuance Costs”). The carrying amount of the equity component, net of transaction costs, was $99.6 million at June 30, 2014 and September 30, 2013.
The following table presents the interest expense related to the 2018 Notes for the three and nine months ended June 30, 2014 and 2013, respectively:
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Contractual interest expense
$
611

 
$
176

 
$
1,833

 
$
176

Amortization of notes issuance costs
502

 
139

 
1,490

 
139

Accretion of notes discount
4,676

 
1,288

 
13,847

 
1,288

 
$
5,789

 
$
1,603

 
$
17,170

 
$
1,603

Effective interest rate of the liability component
5.75
%
 
5.75
%
 
5.75
%
 
5.75
%
The net proceeds from the 2018 Notes were approximately $474.9 million after payment of the initial purchasers’ discounts and offering expenses. From these net proceeds, we used a net total of approximately $34.4 million, which included $58.2 million to pay for the cost of the 2018 Note Hedges, partially offset by proceeds of $23.8 million from our sale of 2018 Warrants. These transactions are defined and described in more detail below. We expect to continue to use the net proceeds of the 2018 Notes for general corporate purposes, including potential acquisitions and strategic transactions.
Based on the closing prices of the Company’s common stock of $93.34 on June 30, 2014, the if-converted value of the 2018 Notes was less than their principal amount.
2018 Note Hedges
To minimize the impact of potential economic dilution upon conversion of the 2018 Notes, we entered into 2018 Note Hedges with respect to our common stock. We paid $58.2 million for the 2018 Note Hedges. The 2018 Note Hedges cover approximately 4.7 million shares of our common stock at a strike price of $104.85 per share subject to anti-dilution adjustments and are exercisable upon conversion of the 2018 Notes. The 2018 Note Hedges will expire upon the maturity of the 2018 Notes. The 2018 Note Hedges are intended to reduce the potential economic dilution upon conversion of the 2018 Notes in the event that the market value per share of our common stock, as measured under the 2018 Notes, at the time of exercise is greater than the conversion price of the 2018 Notes.
2018 Warrants
Separately, we entered into warrant transactions, whereby we sold warrants to acquire up to 4.7 million shares of our common stock at a strike price of $138.48 per share (“2018 Warrants”), subject to anti-dilution adjustments. The 2018 Warrants will expire upon the maturity of the 2018 Notes. We received proceeds of $23.8 million from the sale of the 2018 Warrants. If the market value per share of our common stock, as measured under the 2018 Warrants, exceeds the strike price of the 2018 Warrants, the 2018 Warrants will have a dilutive effect on our net income per share. The 2018 Warrants had an anti-dilutive effect on our net loss per share during the periods stated.
Note 10. Income Taxes
We base the provision for income taxes in our interim consolidated financial statements on estimated annual effective tax rates in the tax jurisdictions where we operate. We are subject to income taxes in the United States and numerous foreign jurisdictions. The overall effective tax rate will continue to be dependent upon the geographic distribution of our earnings or losses and changes in tax laws or interpretations of these laws in these operating jurisdictions. We monitor the assumptions used in estimating the annual effective tax rate and make adjustments, if required, throughout the year. If actual results differ from the assumptions used in estimating our annual effective income tax rate, future income tax expense could be materially affected.
For the three and nine months ended June 30, 2014, our effective tax rates of 88.0% and -39.7%, respectively, differed from the U.S. federal statutory rate primarily due to earnings in lower-tax jurisdictions for which no U.S. taxes have been provided because such earnings are planned to be reinvested outside the U.S. and revaluation of the contingent consideration which is not subject to income taxes. These differences were partially offset by losses in tax jurisdictions where we have recorded a valuation allowance on deferred tax assets, losses in our Dutch licensing company, expenses not deductible for tax

13


purposes, and equity investment losses where we are not able to record a tax benefit, measured against a pretax loss for the year.
We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we consider our cumulative loss in recent years as a significant piece of negative evidence. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. As a result, in the second quarter of 2014, we established a valuation allowance against our total U.S. deferred tax assets balance as of December 31, 2013, net of U.S. deferred tax liabilities. We will continue to assess the likelihood that the deferred tax assets will be realizable at each reporting period and the valuation allowance will be adjusted accordingly.
For the three and nine months ended June 30, 2013, our effective tax rates of 62.1% and -16.6%, respectively, differed from the U.S. federal statutory rate primarily due to losses in tax jurisdictions where we are not able to record a tax benefit, losses in tax jurisdictions where we have recorded a valuation allowance on deferred tax assets, and expenses not deductible for tax purposes. These differences were partially offset by the recognition of a tax benefit resulting from legislation enacted January 2, 2013 retroactively reinstating the research and development tax credit, revaluation of the contingent consideration, and earnings in lower-tax jurisdictions for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the U.S., measured against a pretax loss for the year.
We measure and recognize uncertain tax positions. To recognize such positions, we first determine if it is more likely than not that the position will be sustained on audit. We then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We do not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the next 12 months. Tax positions for Concur and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. An adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.
Note 11. Share-Based Compensation
Our 2007 Equity Incentive Plan (“Equity Plan”) provides for grants of restricted stock, stock options, stock bonuses, stock appreciation rights, and restricted stock units (“RSUs”). As of June 30, 2014, we had 4.1 million shares of common stock reserved for future grants under our Equity Plan. Based on our Equity Plan design, the 4.1 million shares of common stock equates to approximately 2.7 million RSUs reserved for future grants, which we generally use as long-term employee incentive and retention tools.
Our share-based awards generally vest over four years and are subject to the employee’s continued employment with Concur. The vesting of certain RSUs is subject to the achievement of specified Company-wide performance goals. On a quarterly basis, we estimate the probability of achieving specified performance goals (including estimating the level of achievement) to determine the probable number of RSUs that may ultimately vest. We adjust our estimate on a quarterly basis, if necessary, until the achievement of the performance goals is known at the end of the measurement period. The amount of share-based compensation recognized in each reporting period can vary based on the level of achievement or expected level of achievement of the specified performance goals. We also estimate forfeiture rates at the time of grants and revise the estimates in subsequent periods if actual forfeitures differ from our estimates. We record share-based compensation net of estimated forfeitures.
During the three months ended December 31, 2013, certain senior executives received RSU grants that will vest based on Company-wide performance goals and service conditions (2014 Performance-based RSUs). The number of 2014 Performance-based RSUs shall be determined based on the achievement of Company-wide goals for 2014. In order to vest, the low end of the predetermined Company-wide goals must be met. Therefore, participants in the 2014 Performance-based RSUs may receive a range of zero to approximately 0.3 million shares depending on the actual achievement level of performance goals. No additional performance-based RSUs were granted since the first quarter of 2014.
The following table presents our share-based compensation resulting from equity awards that we recorded in our consolidated statements of operations:

14


 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Cost of operations
$
2,868

 
$
1,349

 
$
12,441

 
$
5,410

Sales and marketing
7,480

 
7,213

 
30,603

 
22,198

Systems development and programming
2,166

 
1,250

 
8,642

 
4,857

General and administrative
4,476

 
4,872

 
15,380

 
13,666

Total share-based compensation
$
16,990

 
$
14,684

 
$
67,066

 
$
46,131

The following table presents our stock option activity for the nine months ended June 30, 2014 (in thousands, except weighted average exercise price and weighted average remaining contractual term):
 
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding as of September 30, 2013
419

 
$
12.39

 
 
 
 
Exercised
(187
)
 
11.45

 
 
 
 
Outstanding as of June 30, 2014
232

 
$
13.14

 
1.39
 
$
18,604

Exercisable as of June 30, 2014
232

 
$
13.14

 
1.39
 
$
18,604

The following table presents a summary of RSU award activity for the nine months ended June 30, 2014 (in thousands, except weighted average share value):
 
Shares
 
Weighted
Average Share
Value
Outstanding as of September 30, 2013
3,025

 
$
66.38

Granted (1)
377

 
100.42

Vested and released
(936
)
 
62.24

Cancelled
(40
)
 
68.13

Outstanding as of June 30, 2014
2,426

 
$
73.24

(1) Includes 2014 Performance-based RSUs granted during the period.
As of June 30, 2014, we had $79.2 million of unrecognized share-based compensation, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.2 years.
Note 12. Fair Value Measurements
The accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, categorizing the inputs used to measure fair value.
The hierarchy can be described as follows:
Level 1 - observable inputs such as quoted prices in active markets;
Level 2 - inputs other than the quoted prices in active markets that are observable either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 - unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Assets and liabilities recognized or disclosed at fair value in our consolidated financial statements on a nonrecurring basis include items such as property and equipment, cost and equity method investments, and other assets. These assets are measured at fair value if determined to be impaired. The fair values of these investments are determined based on valuation techniques using the best information available and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary.

15


Assets and Liabilities Measured at Fair Value on a Recurring Basis
We have highly liquid investments classified as cash equivalents and short-term investments included in our consolidated balance sheets. Cash equivalents consist of financial instruments that have original maturities of 90 days or less. Short-term investments consist of financial instruments with maturities greater than 90 days, but less than one year.
Our financial assets and liabilities measured at fair value as of June 30, 2014, are summarized below:
 
Fair Value Measurement Using
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
Cash equivalents (1):
 
 
 
 
 
 
 
Money market funds
$
131,010

 
$

 
$

 
$
131,010

Time deposits
36,650

 

 

 
36,650

Commercial paper

 
132,419

 

 
132,419

Total cash equivalents
167,660

 
132,419

 

 
300,079

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
242,268

 

 
242,268

Certificates of deposit

 
63,084

 

 
63,084

Other fixed income securities

 
35,986

 

 
35,986

Total short-term investments

 
341,338

 

 
341,338

Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration
$

 
$

 
$
1,000

 
$
1,000

(1) Included in cash and cash equivalents in the consolidated balance sheets as of June 30, 2014, in addition to $175.0 million of cash.
Our financial assets and liabilities measured at fair value as of September 30, 2013, are summarized below:
 
Fair Value Measurement Using
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
Cash equivalents (1):
 
 
 
 
 
 
 
Money market funds
$
9,095

 
$

 
$

 
$
9,095

Time deposits
41,647

 

 

 
41,647

Commercial paper

 
146,424

 

 
146,424

Total cash equivalents
50,742

 
146,424

 

 
197,166

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
385,223

 

 
385,223

Certificates of deposit

 
96,833

 

 
96,833

Other fixed income securities

 
49,009

 

 
49,009

Total short-term investments

 
531,065

 

 
531,065

Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration
$

 
$

 
$
3,182

 
$
3,182

(1) Included in cash and cash equivalents in the consolidated balance sheets as of September 30, 2013, in addition to $104.5 million of cash.
Our valuation techniques used to measure the fair values of our financial instruments that are classified as Level 1 in the table above were derived from quoted market prices as active markets for these instruments exist. Our valuation techniques used to measure the fair values of our financial instruments that are classified as Level 2 in the table above were derived from non-binding market consensus prices that are corroborated by observable market data and quoted market prices for similar instruments.
As of June 30, 2014, we had $341.3 million of short-term available-for-sale investments whose net carrying values approximated their fair values, due to the short-term nature of the instruments.

16


Acquisition-Related Contingent Consideration
We estimate the fair value of acquisition-related contingent consideration using various valuation approaches including the probability-weighted discounted cash flow approach. Acquisition-related contingent consideration liabilities are classified as Level 3 liabilities because we use unobservable inputs to value them, reflecting our assessment of the assumptions market participants would use to value these liabilities. Changes in the fair value of contingent consideration are recorded as income or expense in the consolidated statements of operations.
As part of our 2013 acquisitions, we agreed to pay additional cash consideration of up to $5.5 million to the former shareholders of acquired entities based on the achievement of certain revenue targets. The fair value of the contingent consideration was estimated by applying a probability-weighted discounted cash flow approach, which utilizes significant inputs that are unobservable in the market. Key assumptions include our assessment of the weighted probability of achieving certain revenue targets at each reporting period. This contingent consideration was included in the current acquisition-related contingent consideration on our consolidated balance sheets.
The following table presents a reconciliation of the contingent consideration measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2014:
Balance as of September 30, 2013
$
3,182

Total losses (gains):


     Recorded as revaluation of contingent consideration
(2,270
)
     Foreign currency translation
88

Balance as of June 30, 2014
$
1,000

The following table presents a reconciliation of the contingent consideration measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2013:
Balance as of September 30, 2012
$
22,692

Contingent consideration issued at business combination
3,049

Total gains:
 
     Recorded as revaluation of contingent consideration
(3,977
)
     Recorded as compensation expense
(2,945
)
Balance as of June 30, 2013
$
18,819

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three and nine months ended June 30, 2014 and 2013, we did not record any other-than-temporary impairments on those assets required to be measured at fair value on a nonrecurring basis.
Other Fair Value Disclosures
The fair values of the 2015 Notes and 2018 Notes were estimated using Level 2 inputs based on quoted market prices in markets that are not active. The fair values of the 2015 Notes and 2018 Notes are primarily affected by our stock price and stated interest rate as compared to the market rate. The following table presents the carrying value and fair values of the 2015 Notes and 2018 Notes as of the dates specified below:
 
June 30, 2014
 
September 30, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2015 Notes
$
275,868

 
$
521,453

 
$
265,426

 
$
610,219

2018 Notes
397,144

 
544,956

 
381,807

 
590,777

Note 13. Equity
The following table shows the changes in equity attributable to both Concur and the noncontrolling interest in our consolidated subsidiary in which we have control, but not total ownership interest:

17


 
Attributable to
Concur
 
Noncontrolling
Interest
 
Total Equity
Equity at September 30, 2013
$
795,985

 
$
221

 
$
796,206

Investment by noncontrolling interest partners

 
1,809

 
1,809

Comprehensive income (loss):
 
 
 
 
 
Net loss
(80,233
)
 
(571
)
 
(80,804
)
Foreign currency translation adjustments
2,443

 
6

 
2,449

Unrealized loss on available-for-sale investments, net of tax
(137
)
 

 
(137
)
Comprehensive loss
(77,927
)
 
(565
)
 
(78,492
)
Share-based transactions and compensation expense
41,171

 

 
41,171

Temporary equity reclassification
10,442

 

 
10,442

Repurchase of common stock
(925
)
 

 
(925
)
Equity at June 30, 2014
$
768,746

 
$
1,465

 
$
770,211

 
 
 
 
 
 
 
Attributable to
Concur
 
Noncontrolling
Interest
 
Total Equity
Equity at September 30, 2012
$
704,599

 
$
581

 
$
705,180

Investment by noncontrolling interest partners

 
619

 
619

Comprehensive income (loss):
 
 
 
 
 
Net loss
(16,862
)
 
(725
)
 
(17,587
)
Foreign currency translation adjustments
(2,432
)
 
(55
)
 
(2,487
)
Unrealized loss on available-for-sale investments, net of tax
(37
)
 

 
(37
)
Comprehensive loss
(19,331
)
 
(780
)
 
(20,111
)
Equity component of convertible senior notes, note hedges and warrants
50,064

 

 
50,064

Share-based transactions and compensation expense
33,175

 

 
33,175

Temporary equity reclassification
10,468

 

 
10,468

Repurchase of common stock
(651
)
 

 
(651
)
Equity at June 30, 2013
$
778,324

 
$
420

 
$
778,744


Immaterial Correction of Balance Sheet Classification
Certain prior period amounts have been adjusted to correct the prior period classification and conform to the current year presentation. In the accompanying September 30, 2013 balance sheet, $22.1 million has been reclassified from permanent equity to temporary equity. This is also reflected in the schedule of changes in equity presented above as Equity at September 30, 2013 has been adjusted accordingly. Additionally, the balance in Equity at September 30, 2012 has been reduced by $35.9 million attributable to temporary equity as of September 30, 2012.
GAAP requires that when convertible debt is redeemable and the net liability recognized within the current liabilities on the balance sheet is less than the amount that would be payable in cash to holders of convertible notes, upon conversion, an excess of the amount payable over the carrying amount shall be reclassified from permanent to temporary equity. This revision, which management has determined to be immaterial, had no impact on previously reported sales, operating expenses, net loss, net loss per share, operating cash flow or cash position.
Note 14. Geographic Data
We operate in and report on one segment, which is integrated travel and expense management solutions.
For the three and nine months ended June 30, 2014 and 2013, no single customer accounted for more than 10% of our total revenue. The following table presents our revenue by geographic region:
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
United States
$
149,067

 
$
117,820

 
$
427,260

 
$
328,936

Europe
20,500

 
14,734

 
58,832

 
43,124

Other
8,798

 
6,156

 
24,873

 
16,818

Total revenue
$
178,365

 
$
138,710

 
$
510,965

 
$
388,878


18


Note 15. Contingencies
Product Warranty and Indemnification Obligations
We provide services and software solutions to our customers under sales contracts, which usually include a limited warranty regarding product and service performance and a limited indemnification of customers against losses, expenses, and liabilities from damages that may be awarded against them if our services or software are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The contracts generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects. We also enter into similar limited indemnification terms in agreements with certain strategic business partners and vendors. To date, we have experienced minimal warranty claims and have not had significant reimbursements to any customers for any losses related to the limited indemnification described above.
Legal Matters
From time to time we are involved in legal proceedings that arise in the ordinary course of our business. Any such proceedings, whether meritorious or not, could be time consuming, costly, and result in the diversion of significant operational resources or management time.
Although the outcomes of legal proceedings are inherently difficult to predict, we are not currently involved in any legal proceeding in which the outcome, in our judgment based on information currently available, is likely to have a material adverse effect on our business or financial position.
ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information that 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 Financial Statements and Notes to Consolidated Financial Statements that are included in Item 1 of this report. Also, the discussion of “Critical Accounting Policies and Estimates” in this section is an integral part of the analysis of our results of operations and financial condition.
Throughout this MD&A, we refer to Concur Technologies, Inc. as “Concur,” the “Company,” “we,” “us,” and “our.” We report our operating results on a fiscal year basis that starts October 1 and ends September 30. We refer to our fiscal years ended September 30, 2012 and 2013 as “2012” and “2013” and our fiscal year ending September 30, 2014 as “2014.” Throughout this MD&A, where we provide discussion of the three and nine months ended June 30, 2014, and we provide data for the same period in the prior year, we refer to the prior period as “2013.” All dollar, option, and share amounts are reported in thousands, unless otherwise noted.
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. These statements can be identified by our use of the future tense, or by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “continue,” and other similar words and phrases. These forward-looking statements involve many risks and uncertainties, described in Item 1A, Risk Factors, of Part II, as well as in our other filings with the Securities and Exchange Commission (“SEC”). The occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements, which could have a material adverse effect on our business, results of operations, and financial condition. All forward-looking statements included in this report are based on information available to us as of the date of this report. We undertake no obligation to revise or update any such forward-looking statements for any reason.
Overview
We are the leading global provider of integrated travel and expense management solutions for companies of all industries and sizes worldwide. Our core mission is to continuously innovate to reduce the costs for our customers and enhance the user experience for travelers. Our easy-to-use cloud computing solutions help companies and their employees control costs, save time, and boost productivity by streamlining processes and providing visibility into expense management, travel management, itinerary management, and invoice management processes. By capturing and reporting on activity throughout the travel and expense management process, our solutions provide detailed information to help clients effectively negotiate with vendors, create budgets, and manage compliance. By providing easy-to-use mobile solutions, we help make business travel easier and more productive for our customers’ employees. Our solutions adapt to individual employee preferences, while scaling to meet the needs of companies from small to large.

19


Our strategic focus in 2014 is to continue to grow our core subscription business. We expect our subscription revenue to increase in 2014 compared to 2013 due to anticipated growth in demand and global expansion. We expect total sales and marketing expenses in 2014 to increase in absolute dollars compared to 2013, driven primarily by an increase in sales personnel and marketing programs globally.
We operate in and report on one segment, which is integrated travel and expense management solutions.
Revenue
Revenue. We generate our revenue from the delivery of subscription services and, to a much lesser degree, professional services provided in connection with subscription services. Revenue is affected by pricing, the number of new customers, customer contract durations, and our customer retention rate.
International Revenue. Revenue from customers outside the United States represented 16% and 15% of total revenue for the three months ended June 30, 2014 and 2013, respectively, and 16% and 15% of total revenue for the nine months ended June 30, 2014 and 2013, respectively. We expect continued growth in our international revenue as our products and services continue to gain acceptance in international markets due to our investment in global distribution and increased global awareness of our products.
Operating Expenses
Cost of Operations. Cost of operations expenses consist primarily of personnel costs and related expenses (including share-based compensation) and allocated overhead and infrastructure costs (including depreciation, occupancy, telecommunications, and computer equipment expense) associated with employees and contractors who provide our subscription and professional services. Cost of operations expenses also include hosting costs and amortization of deferred costs that we incur in connection with our subscription services.
Sales and Marketing. Sales and marketing expenses consist of personnel costs (including sales commissions) and related expenses (including share-based compensation), referral fees, allocated overhead and infrastructure costs associated with our sales and marketing personnel, and other sales and marketing costs, such as advertising, trade shows, and other promotional activities.
Systems Development and Programming. Systems development and programming costs consist of personnel costs and related expenses (including share-based compensation) and allocated overhead and infrastructure costs associated with employees and contractors engaged in software engineering, program management, and quality assurance.
General and Administrative. General and administrative expenses consist of personnel costs and related expenses (including share-based compensation), allocated overhead and infrastructure costs associated with employees and contractors in accounting, finance, human resources, information technologies, legal and facilities, as well as miscellaneous costs, such as professional fees, and public company regulatory compliance costs.
Revaluation of Contingent Consideration. Revaluation of contingent consideration consists of changes in our obligation to transfer additional assets to the former owners of acquired entities if specified future events occur or conditions are met. Contingent consideration is remeasured to fair value at each reporting date with changes included in the consolidated statements of operations.
Amortization of Intangible Assets. Amortization of intangible assets represents the amortization of intangible assets from acquisitions. We are amortizing our intangible assets as non-cash charges to operations over an expected useful life which is consistent with the timing and level of expected cash flows attributed to trade name and trademarks, use of acquired technology, and customer relationships.
Results of Operations
Three Months Ended June 30, 2014 and 2013
Revenue
 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Revenue
$
178,365

 
$
138,710

 
$
39,655


20


 
Three Months Ended June 30,
 
2014
 
%
 
2013
 
%
United States
$
149,067

 
83.6
%
 
$
117,820

 
85.0
%
Europe
20,500

 
11.5
%
 
14,734

 
10.6
%
Other
8,798

 
4.9
%
 
6,156

 
4.4
%
Total revenue
$
178,365

 
100
%
 
$
138,710

 
100
%
Revenue increased by 28.6%, or $39.7 million, for the three months ended June 30, 2014, compared to the same period in the prior year. This increase was primarily due to growth in the number of customers using our subscription services as well as higher transaction volumes. The growth in the number of customers using our subscription services reflects higher market demand for our subscription services and high rates of retention of existing subscription customers. We believe this demand reflects the market’s growing awareness of our integrated travel and expense management solutions and the increasing acceptance of outsourced services.
We expect revenue to continue to grow in 2014 as a result of the growing demand for our subscription service offerings, our planned increase in spending on sales and marketing, and international expansion.
Cost of Operations
 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Cost of operations
$
59,988

 
$
36,545

 
$
23,443

Percent of total revenue
33.6
%
 
26.3
%
 
 
Cost of operations increased by 64.1%, or $23.4 million, for the three months ended June 30, 2014, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $18.8 million, driven by increased headcount of 67% to support our growing customer base, and our 2013 acquisitions. Additionally, share-based compensation increased $1.5 million as a result of increased headcount. Allocated overhead and infrastructure costs increased by $2.4 million to facilitate growth.
As a percentage of total revenue, cost of operations increased to 33.6% during the three months ended June 30, 2014 from 26.3% during the same period in the prior year primarily due to our investments made to grow our implementation resources and to the businesses we acquired during the fourth quarter of 2013, which contribute lower gross margins.
We expect cost of operations to trend downward as a percentage of total revenue over the long term as the incremental cost to deploy and support each new customer is expected to decrease due to economies of scale anticipated in our subscription service model infrastructure. We anticipate that cost of operations will increase in absolute dollars in 2014 compared to 2013 as we continue to expand our capacity to deploy and support additional new customers.
Sales and Marketing
 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Sales and marketing
$
71,243

 
$
56,111

 
$
15,132

Percent of total revenue
39.9
%
 
40.5
%
 
 
Sales and marketing expenses increased by 27.0%, or $15.1 million, for the three months ended June 30, 2014, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $8.3 million, resulting from a headcount increase of 21% as we invested in sales and marketing to acquire new customers and increase penetration within our existing customer base. Customer acquisition costs increased by $1.7 million and advertising and marketing costs increased by $0.7 million. Additionally, in the prior year, we recognized a revaluation gain of $3.6 million on acquisition-related contingent consideration recorded in compensation expense related to the acquisition of TripIt.
We expect total sales and marketing expenses in 2014 to increase in absolute dollars compared to 2013, driven primarily by an increase in sales personnel and marketing programs globally. These increases reflect a key part of our strategic focus in 2014, which is to expand our sales and marketing efforts to create greater awareness of our solutions in our target markets and to support expected demand.
Systems Development and Programming

21


 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Systems development and programming
$
21,034

 
$
12,724

 
$
8,310

Percent of total revenue
11.8
%
 
9.2
%
 
 
Systems development and programming costs increased by 65.3%, or $8.3 million, for the three months ended June 30, 2014, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $5.5 million, driven by increased headcount of 28% to upgrade and extend our service offerings and develop new technologies. Further, depreciation of fixed assets increased by $1.4 million as we invested more heavily in our infrastructure to accommodate expected future growth. Additionally, share-based compensation increased $0.9 million.
In response to the demand for our subscription services, the majority of our systems development resources are focused on developing internal-use software used to provide services to our customers. We capitalize costs in accordance with accounting principles generally accepted in the United States (“GAAP”) for software developed or obtained for internal use and amortize it over its estimated useful life. Capitalized internal-use software costs, net of amortization, increased by $3.9 million, from $52.2 million at March 31, 2014 to $56.1 million at June 30, 2014.
We anticipate that recognized systems development and programming costs in 2014 will increase in absolute dollars compared to 2013 as we continue to focus on product innovation.
General and Administrative
 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
General and administrative
$
25,904

 
$
20,924

 
$
4,980

Percent of total revenue
14.5
%
 
15.1
%
 
 
General and administrative expenses increased by 23.8%, or $5.0 million, for the three months ended June 30, 2014, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase of $4.6 million in personnel costs and related expenses, driven by an increase in headcount of 43% to support our growth. Further, allocated overhead and infrastructure costs increased by $1.0 million to facilitate growth. The increase was partially offset by a decrease of $0.8 million in professional fees.
We expect the absolute dollar amount of general and administrative expenses to increase in 2014 compared to 2013 due to increases in personnel costs and infrastructure costs related to the growth of our business.
Revaluation of Contingent Consideration
 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Revaluation of contingent consideration
$
(627
)
 
$
(6,109
)
 
$
5,482

Percent of total revenue
(0.4
)%
 
(4.4
)%
 
 
For the three months ended June 30, 2014, revaluation of contingent consideration consisted of a gain of $0.6 million, relating to the revaluation of our 2013 acquisitions due to the change in our assessment of the weighted probability of achieving certain revenue targets at each reporting period.
For the three months ended June 30, 2013, revaluation of contingent consideration consisted of a gain of $6.1 million, primarily related to the acquisition of TripIt, which was subsequently paid in 2013. The change in inputs applied to the valuation of contingent consideration included the change in our stock price and stock volatility.
Amortization of Intangible Assets
 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Amortization of intangible assets
$
5,251

 
$
4,715

 
$
536

Percent of total revenue
2.9
%
 
3.4
%
 
 

22


Amortization of intangible assets increased by 11.4%, or $0.5 million, for the three months ended June 30, 2014, compared to the same period in the prior year, primarily due to intangible asset additions obtained through acquisitions during the fourth quarter of 2013.
Interest Income, Interest Expense, Gain (Loss) from Equity Investments, and Other
 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Interest income
$
573

 
$
502

 
$
71

Interest expense
(11,133
)
 
(6,870
)
 
(4,263
)
Gain (loss) from equity investments, net
13,291

 
(589
)
 
13,880

Other, net
(192
)
 
(22
)
 
(170
)
Total other income (expense), net
$
2,539

 
$
(6,979
)
 
$
9,518

Using the equity method of accounting, we record gains (losses) from equity investments in our consolidated statements of operations. Losses from equity investments primarily include our proportionate share of investee losses, adjustments to recognize certain differences between our carrying value and our equity in the investee’s net assets at the date of investment, impairments, and other adjustments required by the equity method.
During the three months ended June 30, 2014, we recorded a gain of $14.6 million related to the sale of our equity interest in Buuteeq, Inc. that we accounted for under the cost method of accounting.
For the three months ended June 30, 2014, interest expense primarily consisted of interest on the 2.50% convertible senior notes due April 15, 2015 (“2015 Notes”) and interest on the 0.50% convertible senior notes due June 15, 2018 (“2018 Notes”). For the three months ended June 30, 2013, interest expense primarily consisted of interest on the 2015 Notes. Foreign currency transaction gains (losses) are included in the consolidated statements of operations under other income (expense).
Income Tax Expense
 
Three Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Income tax expense (benefit)
$
(1,663
)
 
$
4,237

 
$
(5,900
)
Effective tax rate
88.0
%
 
62.1
%
 
 
For the three months ended June 30, 2014, our effective tax rate of 88.0% differed from the U.S. federal statutory rate primarily due to earnings in lower-tax jurisdictions for which no U.S. taxes have been provided because such earnings are planned to be reinvested outside the U.S. and revaluation of the contingent consideration which is not subject to income taxes. These differences were partially offset by losses in tax jurisdictions where we have recorded a valuation allowance on deferred tax assets, losses in our Dutch licensing company, expenses not deductible for tax purposes, and equity investment losses where we are not able to record a tax benefit, measured against a pretax loss for the quarter.
For the three months ended June 30, 2013, our effective tax rate of 62.1% differed from the U.S. federal statutory rate primarily due to losses in tax jurisdictions where we are not able to record a tax benefit, losses in tax jurisdictions where we have recorded a valuation allowance on deferred tax assets, and expenses not deductible for tax purposes. These differences were partially offset by the recognition of a tax benefit resulting from legislation enacted January 2, 2013 retroactively reinstating the research and development tax credit, revaluation of the contingent consideration which is not subject to tax, and earnings in lower-tax jurisdictions for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the United States, measured against a pretax income for the quarter.
We are subject to income taxes in the United States and numerous foreign jurisdictions. The overall effective tax rate will continue to be dependent upon the geographic distribution of our earnings or losses and changes in tax laws or interpretations of these laws in these operating jurisdictions. We monitor the assumptions used in estimating the annual effective tax rate and make adjustments, if required, throughout the year. If actual results differ from the assumptions used in estimating our annual effective income tax rate, future income tax expense could be materially affected.
We measure and recognize uncertain tax positions. To recognize such positions, we first determine if it is more likely than not that the position will be sustained on audit. We then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We do not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the next 12 months. Tax positions for Concur and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. An adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.

23


Nine Months Ended June 30, 2014 and 2013
Revenue
 
Nine Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Revenue
$
510,965

 
$
388,878

 
$
122,087

 
Nine Months Ended June 30,
 
2014
 
%
 
2013
 
%
United States
$
427,260

 
83.6
%
 
$
328,936

 
84.6
%
Europe
58,832

 
11.5
%
 
43,124

 
11.1
%
Other
24,873

 
4.9
%
 
16,818

 
4.3
%
Total revenue
$
510,965

 
100
%
 
$
388,878

 
100
%
Revenue increased by 31.4%, or $122.1 million, for the nine months ended June 30, 2014, compared to the same period in the prior year. This increase was primarily due to growth in the number of customers using our subscription services as well as higher transaction volumes. The growth in the number of customers using our subscription services reflects higher market demand for our subscription services and high rates of retention of existing subscription customers. We believe this demand reflects the market’s growing awareness of our integrated travel and expense management solutions and the increasing acceptance of outsourced services.
We expect revenue to continue to grow in 2014 as a result of the growing demand for our subscription service offerings, our planned increase in spending on sales and marketing, and international expansion.
Cost of Operations
 
Nine Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Cost of operations
$
179,492

 
$
108,105

 
$
71,387

Percent of total revenue
35.1
%
 
27.8
%
 
 
Cost of operations increased by 66.0%, or $71.4 million, for the nine months ended June 30, 2014, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $54.6 million driven by increased headcount of 75% to support our growing customer base and our 2013 acquisitions. Share-based compensation increased $7.0 million as a result of increased headcount. Allocated overhead and infrastructure costs increased by $6.3 million to facilitate growth. Further, transaction costs that we incur in connection with our subscription services increased by $3.0 million primarily related to the volume of transaction activity.
As a percentage of total revenue, cost of operations increased to 35.1% during the nine months ended June 30, 2014 from 27.8% during the same period in the prior year primarily due to investments made to grow our implementation resources and to businesses acquired during the fourth quarter of 2013, which contribute lower gross margins.
We expect cost of operations to trend downward as a percentage of total revenue over the long term as the incremental cost to deploy and support each new customer is expected to decrease due to economies of scale anticipated in our subscription service model infrastructure. We anticipate that cost of operations will increase in absolute dollars in 2014 compared to 2013 as we continue to expand our capacity to deploy and support additional new customers.
Sales and Marketing
 
Nine Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Sales and marketing
$
215,599

 
$
166,571

 
$
49,028

Percent of total revenue
42.2
%
 
42.8
%
 
 
Sales and marketing expenses increased by 29.4%, or $49.0 million, for the nine months ended June 30, 2014, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $26.0 million, resulting from a headcount increase of 21% to acquire new customers and increase penetration within our existing customer base. There was an increase in share-based compensation of $8.4 million, customer acquisition costs increased by $6.9 million, advertising costs increased by $2.7 million, and allocated overhead and

24


infrastructure costs increased by $1.9 million. Additionally, in the prior year, we recognized a revaluation gain of $2.6 million on acquisition-related contingent consideration recorded in compensation expense related to the acquisition of TripIt.
We expect total sales and marketing expenses in 2014 to increase in absolute dollars compared to 2013, driven primarily by an increase in sales personnel and marketing programs globally. These increases reflect a key part of our strategic focus in 2014, which is to expand our sales and marketing efforts to create greater awareness of our solutions in our target markets and to support expected demand.
Systems Development and Programming
 
Nine Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Systems development and programming
$
62,967

 
$
40,750

 
$
22,217

Percent of total revenue
12.3
%
 
10.5
%
 
 
Systems development and programming costs increased by 54.5%, or $22.2 million, for the nine months ended June 30, 2014, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase in personnel costs and related expenses of $13.7 million, driven by increased headcount of 26% to upgrade and extend our service offerings and develop new technologies. Additionally, there was an increase in share-based compensation of $3.8 million. Further, depreciation of fixed assets increased by $3.5 million as we invested more heavily in our infrastructure to accommodate expected future growth.
In response to the demand for our subscription services, the majority of our systems development resources are focused on developing internal-use software used to provide services to our customers. We capitalize costs in accordance with GAAP for software developed or obtained for internal use and amortize it over its estimated useful life. Capitalized internal-use software costs, net of amortization, increased by $10.6 million, from $45.5 million at September 30, 2013 to $56.1 million at June 30, 2014.
We anticipate that recognized systems development and programming costs in 2014 will increase in absolute dollars compared to 2013 as we continue to focus on product innovation.
General and Administrative
 
Nine Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
General and administrative
$
76,361

 
$
60,836

 
$
15,525

Percent of total revenue
14.9
%
 
15.6
%
 
 
General and administrative expenses increased by 25.5%, or $15.5 million, for the nine months ended June 30, 2014, compared to the same period in the prior year. The growth in absolute dollars was primarily due to an increase of $11.9 million in personnel costs and related expenses, driven by an increase in headcount of 41% to support our growth. Additionally, allocated overhead and infrastructure costs increased by $3.6 million to facilitate our growth and there was an increase in share-based compensation of $1.7 million. The increase was partially offset by a decrease of $1.9 million in professional fees.
We expect the absolute dollar amount of general and administrative expenses to increase in 2014 compared to 2013 due to increases in personnel costs and infrastructure costs related to the growth of our business.
Revaluation of Contingent Consideration
 
Nine Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Revaluation of contingent consideration
$
(2,270
)
 
$
(3,977
)
 
$
1,707

Percent of total revenue
(0.4
)%
 
(1.0
)%
 
 
For the nine months ended June 30, 2014, revaluation of contingent consideration consisted of a gain of $2.3 million, relating to the revaluation of our 2013 acquisitions due to the change in our assessment of the weighted probability of achieving certain revenue targets at each reporting period.
For the nine months ended June 30, 2013, revaluation of contingent consideration related to the acquisition of TripIt and consisted of a gain of $4.0 million due to the change in valuation inputs such as our stock price and stock volatility. The TripIt contingent consideration was subsequently paid in 2013.

25


Amortization of Intangible Assets
 
Nine Months Ended June 30,
 
Variance
Dollars
 
2014
 
2013
 
Amortization of intangible assets
$
15,723

 
$
13,718

 
$
2,005

Percent of total revenue
3.1
%