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COVISINT CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[November 06, 2014]

COVISINT CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report under "Part II, Other Information-Item 1A, Risk Factors." Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.



OVERVIEW Covisint provides a leading cloud engagement platform for enabling organizations to securely connect, engage and collaborate with large, distributed communities of customers, business partners, and suppliers. Our platform allows global organizations with complex external business relationships to create, streamline and automate external mission-critical business processes that involve the secure exchange of and access to critical information from multiple sources. Our customers deploy our platform to deliver on current and new business initiatives, enhance competitiveness, create new revenue opportunities, increase customer retention and lower operating costs.

We believe a wide variety of organizations will benefit from using our cloud-based technologies to meet their external collaboration requirements with their customers, business partners and suppliers. We believe there is a growing available market for our technologies. We believe the use of our solutions and the development of our markets are at very early stages and that it is important that we build brand awareness, develop strategic partners and invest in our platform, vertical solutions, infrastructure and sales and marketing to maintain and extend our leadership in the cloud-based services market.


The majority of our revenue is generated through subscription and support fees paid to enable our customers to access our platform. Subscription and support revenue accounted for $16.8 million and $16.2 million, or 77% and 66% of our total revenue, during the three months ended September 30, 2014 and 2013, respectively, and $32.3 million and $32.1 million, or 75% and 66% of our total revenue during the six months ended September 30, 2014 and 2013, respectively.

We also generate revenue from the provision of services related to implementation, solution deployment and on-boarding of new customers onto our platform, and the performance of projects and enhancements. Services revenue accounted for $5.0 million and $8.4 million, or 23% and 34% of our total revenue, during the three months ended September 30, 2014 and 2013, respectively, and $11.1 million and $16.5 million, or 26% and 34% of our total revenue during the six months ended September 30, 2014 and 2013, respectively.

Since March 2014, the Company has undertaken a substantive review of all aspects of its business, including a review of the Company's leadership, organizational structure, sales performance, product, and deployment of resources. As a result of this assessment, the Company has undertaken a series of strategic initiatives to refocus and reposition the Company for success in fiscal year 2016 and beyond. We continue to build-out the senior leadership team and acquire the necessary talent to accomplish our goals. We accelerated the Company's transition from a services and software company to a true cloud-based enterprise software company with a go-to market strategy based upon repeatable, platform-based sales. As part of this transition, we have shifted our healthcare strategy away from developing and selling applications that utilize the platform and we expect to see a decrease in revenue from our healthcare business over the next six to nine months. Further, we are enhancing the ability of our customers and service partners to implement and develop on the platform with limited involvement of Company resources.

We are investing in developing our relationships with strategic partners, like Cisco Systems, Inc., who provide extensive global sales presence to access customers that we would not otherwise reach, thereby providing Covisint with additional scale and bandwidth to sell our core subscription business. We launched our certified partner program and aggressively moved to enhance our partners' abilities to provide service to our customers by agreeing to transfer some of our customer service employees to one of our certified partners.

Finally, the Company is focused on effectively managing its expenses, and it has implemented cost 14-------------------------------------------------------------------------------- Table of Contents reduction efforts including but not limited to a reduction in force of contractors and 69 employees in sales, marketing, operations and research and development.

The automotive industry accounted for 43% and 48% of our total revenue for the three months ended September 30, 2014 and 2013, respectively, and 44% and 51% of our total revenue in the six months ended September 30, 2014 and 2013, respectively. The healthcare industry accounted for 31% and 35% of our total revenue for the three months ended September 30, 2014 and 2013, respectively, and 32% and 32% of our total revenue in the six months ended September 30, 2014 and 2013, respectively. We have seen increases in revenue from our Enterprise business that services the energy, financial services, travel and other non-automotive or healthcare industries, which accounted for 24% and 17% of our total revenue for the three months ended September 30, 2014 and 2013, respectively, and 21% and 17% of our total revenue in the six months ended September 30, 2014 and 2013, respectively. Revenue from outside of the U.S.

accounted for 14% and 14% of our total revenue for the three months ended September 30, 2014 and 2013, respectively, and 16% and 14% of our total revenue in the six months ended September 30, 2014 and 2013, respectively.

Our subscription and support revenue increased to $16.8 million for the three months ended September 30, 2014 from $16.2 million for the three months ended September 30, 2013, representing an annual increase of 4%. Our subscription and support revenue increased to $32.3 million for the six months ended September 30, 2014 from $32.1 million for the six months ended September 30, 2013, representing an annual increase of 1%. The increase in subscription and support revenue between the three months ended September 30, 2014 and 2013 was primarily due to an increase in revenue from new customers of $2.3 million. The increase in subscription and support revenue was mainly offset by a decrease of $0.9 million from two automotive customers that substantially reduced their contractual commitment for our electronic data interchange services during fiscal 2014, as well as decreased revenue from customers that terminated their agreements of $0.7 million. The increase in subscription and support revenue between the six months ended September 30, 2014 and 2013 was primarily due to an increase in revenue from new customers of $2.9 million. The increase in subscription and support revenue was partially offset by a decline in revenue from customers that terminated or elected not to renew their agreements of $1.3 million and a decline of revenue of $1.3 million from two automotive customers that substantially reduced their contractual commitment for our electronic data interchange services during fiscal 2014.

Our services revenue declined to $5.0 million for the three months ended September 30, 2014 from $8.4 million for the three months ended September 30, 2013, representing a period over period decline of 41%. Our services revenue declined to $11.0 million for the six months ended September 30, 2014 from $16.5 million for the six months ended September 30, 2013, representing a period over period decline of 33%. Services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 4) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 5) our relatively low subscription bookings in the 2014 fiscal year.

We experienced net income (losses) of ($7.3) million and ($12.7) million for the three months ended September 30, 2014 and 2013, respectively, and ($19.4) million and ($17.4) million for the six months ended September 30, 2014 and 2013, respectively. Our change in net income (losses) for the three months ended September 30, 2014 was a result of, a $2.8 million decrease in revenues, and a $0.2 million increase in our cost of revenue, offset by a $8.4 million decrease in operating expenses, primarily in general and administrative expense. Our change in net income (losses) for the six months ended September 30, 2014 was a result of a $5.3 million decrease in revenues, a $2.2 million increase in our cost of revenue and offset by a $5.4 million decrease in operating expenses. As presented in "Note 5. Benefit Plans - Stock Awards Compensation" within the accompanying notes to the condensed, consolidated financial statements, our decrease in operating expenses was primarily due to stock compensation expense of $1.3 million and $3.9 million, respectively, in the three and six months ended September 30, 2014, as compared to $10.0 million and $10.5 million, respectively, in the three and six months ended September 30, 2013. These expenses primarily resulted from our IPO. Our profitability was also negatively affected by decreased capitalization of our research and development costs during the three months ended September 30, 2014 and the six months ended September 30, 2014, as compared to the same periods in 2013, due to a recent change to the agile delivery methodology for platform enhancements, which resulted in significantly shorter development cycles thereby reducing our capitalized costs. This change increased the proportion of our research and development costs expensed relative to our research and development costs incurred.

KEY METRICS In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we monitor a number of other metrics to evaluate our business, measure our performance, identify trends affecting our business, allocate capital and make strategic decisions.

Adjusted Gross Profit and Adjusted Gross Margin Adjusted gross profit represents gross profit, adjusted for amortization of capitalized software associated with our research and development expense classified within cost of revenue as well as the stock based compensation associated with certain of our professional services and operations employees.

Adjusted gross margin is adjusted gross profit as a percentage of revenue.

We have historically capitalized a significant portion of our research and development costs and believe the amortization of capitalized software will increase in absolute dollars. Our total research and development costs incurred were $3.2 million and $4.6 million during the three months ended September 30, 2014 and 2013, respectively, and $7.1 million and $9.2 million for the six months ended September 30, 2014 and 2013, respectively. Of our total research and development costs incurred, we capitalized 20% and 30% during the three months ended September 30, 2014 and 2013, respectively and 20% and 36% during the six months ended September 30, 2014 and 2013, respectively. We decreased capitalization of our research and development costs during the three months ended September 30, 2014, as compared to the same period in 2013, due to the timing and stage of our initiatives. In the three months ended September 30, 2014, there was an increase of projects in the planning stage and, thus more of our project costs were not capitalized.

We believe that adjusted gross margin, when viewed with our results under U.S.

GAAP and the accompanying reconciliation, provides additional information that is useful for evaluating our operating performance. Additionally, we believe that adjusted gross margin provides a more meaningful comparison of our operating results against those of other companies in our industry. We believe that including these costs in our results of operations results in a lack of comparability between our operating results and those of our peers in the industry, the majority of which do not have comparable amortization costs related to capitalized software. However, adjusted gross margin is not a measure of financial performance under U.S. GAAP and, accordingly, should not be considered as an alternative to gross margin as an indicator of operating performance.

The table below provides reconciliations between the non-U.S. GAAP financial measures discussed above to the comparable U.S. GAAP measures of gross profit: Three Months Ended September 30, Six Months Ended September 30, 2014 2013 2014 2013 Gross profit $7,409 $10,399 $13,730 $21,190 Gross margin 34 % 42 % 32 % 44 % Adjustments: Stock compensation expense-cost of revenue $69 $593 $584 $598 % of total revenue - % 2 % 1 % 1 % Amortization of capitalized software-cost of revenue $1,731 $1,657 $3,375 $3,305 % of total revenue 8 % 7 % 8 % 7 % Non-GAAP gross profit $9,209 $12,649 $17,689 $25,093 Non-GAAP gross margin 42 % 52 % 41 % 52 % COMPONENTS OF OUR RESULTS OF OPERATIONS Revenue Our revenue is primarily comprised of fees related to subscription and support and services performed. Subscription and support revenue includes fees for our customers and their users, such as automotive suppliers or healthcare organizations, to access our platform and for users, messages and end point connections such as suppliers or healthcare organizations. Our services revenue is generated from implementation, solution deployment and on-boarding.

Implementation services typically consist of user migration, content migration, branding and configuration to support customer-specific workflows. Our services engagements typically occur in phases and can vary from a few weeks to several months depending on the scope and complexity of the solution. Our customers may choose to do much of this work in-house, through a third party or with Covisint.

We currently subcontract portions of our consulting engagements to third-party implementation partners to supplement our staffing needs within this area of the business.

15-------------------------------------------------------------------------------- Table of Contents Cost of Revenue Our cost of revenue is primarily comprised of salaries and personnel-related expenses related to our customer support, implementation, solution deployment, on-boarding and data center operations, the cost of professional services provided by third-party contractors, depreciation and amortization expenses related to capitalized research and development, acquisitions and capital expenditures, third-party hosting fees, third-party software license fees and outside services related to our call center. Where we have established third-party evidence of the stand-alone value of our services, we recognize expense with the associated revenue recognition as services are delivered. Costs associated with deferred services revenue are recognized ratably, generally over five years, beginning upon customer acceptance of the deliverable consistent with the associated revenue.

We expect our cost of revenue may fluctuate as a percentage of total revenue due to relative changes in our services revenue, changes in the percentage of services recognized using the proportional performance method, the amount and timing of depreciation and amortization, changes in the amount of services performed by subcontractors, our customers, or directly by certified partners or other vendors and the mix of subscription and support revenue relative to services revenue.

Research and Development Research and development costs are primarily comprised of salaries and personnel-related expenses, services provided by other third-party contractors related to software development, software license and hardware fees and depreciation, amortization related to acquisitions and capital expenditures and costs from facilities and technology-related costs associated with our research and development functions.

We focus our research and development on new and expanded features of our platform and vertical-specific solutions. Our capitalized research and development costs are amortized as a cost of revenue ratably over 60 months upon completion of the project. We expect our fiscal 2015 research and development costs incurred, as a percentage of revenue, to decrease as compared to fiscal 2014.

Sales and Marketing Sales and marketing costs are primarily comprised of salaries and personnel-related expenses, commissions, travel expense, marketing program fees, services provided by third-party contractors related to our marketing campaigns, amortization related to customer relationship agreements acquired as a result of various acquisitions and costs from facilities and technology-related costs associated with our sales and marketing functions. We plan to invest further in sales and marketing to create brand awareness, expand the scope and scale of our global operations, develop our sales channel and increase revenue from existing customers. Sales and marketing costs in fiscal 2015 were $6.5 million and $1.5 million for the three months ended September 30, 2014 and $14.2 million and $3.5 million for the six months ended September 30, 2014. We expect sales and marketing costs in fiscal 2015 to decrease as compared to fiscal 2014 in absolute dollars.

General and Administrative During the six months ended September 30, 2013, general and administrative costs were primarily comprised of the allocated costs related to the services provided by our parent Compuware for facilities, information technology, tax, internal audit, accounting, finance, human resources, legal and other services, as well as salaries and personnel-related expenses including stock and cash incentive compensation. Since August 2013, we have invested in hiring staff required to become a fully independent company. As of April 1, 2014, we have largely completed our general and administrative separation from Compuware, and we have not had any allocations from Compuware, nor do we anticipate any allocation from Compuware in the future. During the six months ended September 30, 2014, general and administrative costs are primarily comprised of salaries and personnel-related expenses for personnel in these functions including stock and cash incentive compensation and costs from facilities and technology-related costs associated with our corporate functions. We expect general and administrative costs in fiscal 2015 to decrease as compared to fiscal 2014 in absolute dollars.

Income Taxes Provision for income taxes is comprised of federal and state taxes in the United States as well as certain foreign tax jurisdictions. Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in our financial statements and net operating loss carryforwards.

AGREEMENTS WITH COMPUWARE We have entered into certain agreements with Compuware with respect to a real estate lease and taxes. The lease of the Detroit office expires March 31, 2015.

Under the shared services agreement, Compuware provided us with certain tax, insurance, information technology and other services. In general, we were charged for shared services based on a pro rata allocation of Compuware's costs.

As the Company reduced its dependence upon Compuware for these services, the allocation was virtually eliminated. For the six months ended September 30, 2014, this expense was immaterial, and, effective October 31, 2014, the shared services agreement was terminated.

In connection with Compuware's distribution of all of its common stock in the Company (see "Note 7. Subsequent Events" in the accompanying Notes to Condensed Consolidated Financial Statements), effective as of October 31, 2014, the Company and Compuware amended and restated the existing Master Separation Agreement and Tax Sharing Agreement and entered into a Termination of Intercompany Agreement to terminate the other intercompany agreements delivered in connection with the IPO. The amendments set forth in the Second Amended and Restated Master Separation Agreement are to specify the Company's continued cooperation with Compuware in connection with the distribution and to revise the parties' respective liability for costs incurred in connection with the distribution. The amendments set forth in the Second Amended and Restated Tax Sharing Agreement 16-------------------------------------------------------------------------------- Table of Contents (the "New TSA") address certain tax matters related to the facts and circumstances of the distribution, including, among other things, the manner, amount and timing of the tax payments related to the distribution.

Assuming the Merger is completed, the distribution is expected to be taxable to Compuware and Compuware's shareholders. If the Merger is completed, under the New TSA, any corporate-level income tax (including any corporate-level income tax on account of a tax election intended to give rise to a step-up in the tax basis of the Company's assets) incurred as a result of the distribution will be borne by Compuware. If the Merger is not completed, and certain other conditions are satisfied, it is intended that the distribution qualify as a tax-free transaction to Compuware and its shareholders. The New TSA provides for certain continuing restrictions and covenants applicable to both Compuware and the Company that are intended to preserve the ability for the distribution to qualify as a tax-free spin-off.

CRITICAL ACCOUNTING POLICIES Our goodwill balance as of September 30, 2014 was $23.4 million. Goodwill is tested annually as of the end of our fiscal fourth quarter for impairment or more frequently if indicators of impairment exist. Goodwill is considered to be impaired when the Company's net book value exceeds its estimated fair value and the carrying value of goodwill exceeds its implied fair value. No impairment losses have been recorded in the consolidated financial statements as of September 30, 2014. If we experience a sustained decline in our stock price over a continued period, or if other relevant events or circumstances occur, we may be required to test goodwill for impairment earlier than the end of our fourth fiscal quarter and there could be a material change in the estimates or assumptions that we use to test goodwill for impairment and measure any goodwill impairment. Our stock price closed at $4.15 per share on September 30, 2014, and since that date has declined to $2.25 as of November 5, 2014 (the day before this Form 10-Q filing). Accordingly, we may be required to assess goodwill for impairment during the quarter ended December 31, 2014, and we may determine as part of that assessment, that our recorded goodwill balance is partially or entirely impaired. An impairment of a significant portion of our goodwill could materially adversely affect our financial condition and results of operations and would be a noncash expense in the period the goodwill is impaired.

There have been no significant changes to our Critical Accounting Policies as described in our Annual Report on Form 10-K for the year ended March 31, 2014.

STOCK-BASED COMPENSATION Stock award compensation expense, for options that do not have performance conditions, is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award.

RESULTS OF OPERATIONS The following table is a summary of our condensed consolidated statements of comprehensive loss data: 17-------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, Six Months Ended September 30, 2014 2013 2014 2013 Condensed Consolidated Statements of Comprehensive Loss Data: Subscription and support $16,759 $16,153 $32,268 $32,096 Services 4,976 8,372 11,054 16,530 Total revenue 21,735 24,525 43,322 48,626 Cost of revenue(1) 14,326 14,126 29,592 27,436 Gross profit 7,409 10,399 13,730 21,190 Operating expenses: Research and development(1) 2,583 3,244 5,699 5,829 Sales and marketing(1) 8,003 10,787 17,775 18,126 General and administrative(1) 4,111 9,080 9,657 14,614 Total operating expenses 14,697 23,111 33,131 38,569 OPERATING LOSS (7,288 ) (12,712 ) (19,401 ) (17,379 ) Other Income 17 - 39 - LOSS BEFORE INCOME TAX PROVISION (7,271 ) (12,712 ) (19,362 ) (17,379 ) Income tax provision 33 34 58 37 Net income (loss) ($7,304) ($12,746) ($19,420) ($17,416) Basic and diluted earnings per share(2) ($0.19) ($0.42) ($0.51) ($0.58) Weighted-average shares outstanding, Basic and diluted(2) 37,972 30,403 37,730 30,204 (1) All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. The statements and line items above include stock compensation as detailed in the table below.

(2) Please see Note 3 of our condensed consolidated financial statements and related disclosures for an explanation of the method used to calculate the historical net income (loss) per share attributable to common shareholders and the number of shares used in computation of the per share amounts.

Three Months Ended September 30, Six Months Ended September 30, 2014 2013 2014 2013 Stock awards compensation classified as: Cost of revenue $ 69 $ 593 $ 584 $ 598 Research and development 28 451 94 498 Sales and marketing 341 3,989 946 4,036 General and administrative 817 4,987 2,249 5,374 Total stock awards compensation expense before income taxes 1,255 10,020 3,873 10,506 The following table sets forth a summary of our condensed consolidated statements of comprehensive loss as a percentage of our total revenue: 18-------------------------------------------------------------------------------- Table of Contents Three Months Ended Six Months Ended September 30, September 30, 2014 2013 2014 2013 Condensed Consolidated Statements of Comprehensive Loss Data: Subscription and support 77 % 66 % 74 % 66 % Services 23 34 26 34 Total revenue 100 100 100 100 Cost of revenue(1) 66 58 68 56 Gross profit 34 42 32 44 Operating expenses: Research and development(1) 12 13 13 12 Sales and marketing(1) 37 44 41 37 General and administrative(1) 19 37 22 30 Total operating expenses 68 94 76 79 OPERATING LOSS (34 ) (52 ) (45 ) (36 ) Other Income 0 0 0 0 Income (loss) from operations before for income tax provision (33 ) (52 ) (45 ) (36 ) Income tax provision 0 0 0 0 Net income (loss) (33 )% (52 )% (45 )% (36 )% ________________________________________________ (1) All future stock compensation is expected to be granted in the form of Covisint stock awards and recorded as a non-cash expense. Refer to the table above for the breakdown of stock compensation included in these line item percentages.

THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 Revenue Revenue derived from our subscription and support and services is presented in the table below: Three Months Ended September 30, Period-to-Period Change 2014 2013 $ % (In thousands) Subscription and support $16,759 $16,153 $606 4 % Services 4,976 8,372 (3,396 ) (41 )% Total revenue $21,735 $24,525 ($2,790 ) (11 )% Our subscription and support revenue increased to $16.8 million for the three months ended September 30, 2014 from $16.2 million for the three months ended September 30, 2013, representing an annual increase of 4%. The increase in subscription and support revenue between the three months ended September 30, 2014 and 2013 was primarily due to an increase in revenue from new customers of $2.3 million. The increase in subscription and support revenue was offset by a decrease of $0.9 million from two automotive customers that substantially reduced their contractual commitment for our electronic data interchange services during fiscal 2014, as well as decreased revenue from customers that terminated their agreements of $0.7 million.

Our services revenue declined to $5.0 million for the three months ended September 30, 2014 from $8.4 million for the three months ended September 30, 2014, representing a period over period decline of 41%. For the three months ended September 30, 2014, the services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 4) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 5) our relatively low subscription bookings in the 2014 fiscal year.

Cost of Revenue Cost of revenue is presented in the table below: Three Months Ended September 30, Period-to-Period Change 2014 2013 $ % (In thousands) Cost of revenue $14,326 $14,126 $200 1 % Gross margin 34 % 42 % Cost of revenue increased during the three months ended September 30, 2014, as compared to the same period in 2013, by approximately $0.2 million. Cost increases included an increase of $2.0 million in expenses related to the use of subcontractors. This increase was offset by a decrease in salaries and personnel-related expenses in connection with our customer support, implementation, solution deployment, on-boarding and data center operations fees of $1.3 million. Cost decreases also included a decrease of $0.5 million in stock compensation expense.

Our gross margin decreased during the three months ended September 30, 2014 as compared with the same period in 2013. Cost of revenue did not decline in line with the decrease in revenue.

Research and Development Research and development costs incurred, expensed and capitalized are presented in the table below: 19-------------------------------------------------------------------------------- Table of Contents Three Months Ended Period-to-Period September 30, Change 2014 2013 $ % (In thousands) Research and development costs incurred $3,222 $4,640 ($1,418 ) (31 )% Capitalized internal software costs (639 ) (1,396 ) 757 (54 )% Research and development costs expensed $2,583 $3,244 ($661 ) (20 )% Percentage of total revenue: t Research and development costs incurred 15 % 19 % Research and development costs expensed 12 % 13 % Research and development costs incurred decreased during the three months ended September 30, 2014, as compared to the same period in 2013, primarily due to a $1.1 million decrease in salaries and personnel-related expenses and a decrease of $0.3 million in costs related to third-party contractors for software development activities. The decrease in costs incurred was offset by a $0.8 million decrease in capitalized research and development costs resulting in a $0.7 million decrease in research and development costs.

Sales and Marketing Sales and marketing costs are presented in the table below: Three Months Ended September 30, Period-to-Period Change 2014 2013 $ % (In thousands) Sales and marketing $8,003 $10,787 ($2,784 ) (26 )% Percentage of total revenue 37 % 44 % Sales and marketing costs decreased during the three months ended September 30, 2014, as compared to the same period in 2013, primarily due to a $3.6 million decrease in stock compensation expense as a result of the pull forward expense associated with the September 2013 IPO, offset by a $0.5 million increase in marketing expense and a $0.2 million increase in technology and allocated facilities expense.

General and Administrative General and administrative costs are presented in the table below: Three Months Ended September 30, Period-to-Period Change 2014 2013 $ % (In thousands) General and administrative $4,111 $9,080 ($4,969 ) (55 )% Percentage of total revenue 19 % 37 % General and administrative costs decreased during the three months ended September 30, 2014, as compared to the same period in 2013, primarily due to a $4.2 million decrease in stock compensation expense as a result of the pull forward expense associated with the September 2013 IPO.

SIX MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 Revenue Revenue derived from our subscription and support and services is presented in the table below: 20-------------------------------------------------------------------------------- Table of Contents Six Months Ended September 30, Period-to-Period Change 2014 2013 $ % (In thousands) Subscription and support $32,268 $32,096 $172 1 % Services 11,054 16,530 (5,476 ) (33 )% Total revenue $43,322 $48,626 ($5,304 ) (11 )% Our subscription and support revenue increased to $32.3 million for the six months ended September 30, 2014 from $32.1 million for the six months ended September 30, 2013, representing an annual increase of 1%. The increase in subscription and support revenue between the six months ended September 30, 2014 and 2013 was primarily due to an increase in revenue from new customers of $2.9 million. The increase in subscription and support revenue was partially offset by a decline in revenue from customers that terminated or elected not to renew their agreements of $1.3 million and a decline of revenue of $1.3 million from two automotive customers that substantially reduced their contractual commitment for our electronic data interchange services during fiscal 2014.

Our services revenue declined to $11.1 million for the six months ended September 30, 2014 from $16.5 million for the six months ended September 30, 2014, representing a period over period decline of 33%. For the three months ended September 30, 2014, the services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of our services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of our platform that results in quicker/less costly installations, 4) improvements in our platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, and 5) our relatively low subscription bookings in the 2014 fiscal year.

Cost of Revenue Cost of revenue is presented in the table below: Six Months Ended September 30, Period-to-Period Change 2014 2013 $ % (In thousands) Cost of revenue $29,592 $27,436 $2,156 8 % Gross margin 32 % 44 % Cost of revenue increased during the six months ended September 30, 2014, as compared to the same period in 2013, by approximately $2.2 million. Cost increases included an increase of $1.9 million in expenses related to the use of subcontractors mainly as a result of the Company's decision to transfer certain employees to certified partners in the current period. In addition, there was an increase in the amortization of deferred cost of $0.2 million and a decrease in the amount of costs capitalized of $0.2 million.

Our gross margin decreased during the six months ended September 30, 2014 as compared with the same period in 2013. Cost of revenue did not decline in line with the decrease in revenue.

Research and Development Research and development costs incurred, expensed and capitalized are presented in the table below: 21-------------------------------------------------------------------------------- Table of Contents Six Months Ended Period-to-Period September 30, Change 2014 2013 $ % (In thousands) Research and development costs incurred $7,128 $9,177 ($2,049 ) (22 )% Capitalized internal software costs (1,429 ) (3,348 ) 1,919 (57 )% Research and development costs expensed $5,699 $5,829 ($130 ) (2 )% Percentage of total revenue: Research and development costs incurred 16 % 19 % Research and development costs expensed 13 % 12 % Research and development costs incurred decreased during the six months ended September 30, 2014, as compared to the same period in 2013, primarily due to a $2.1 million decrease in salaries and personnel-related expenses. The decrease in costs incurred was offset by $1.9 million decrease in capitalized research and development costs resulting in a $0.1 million decrease to research and development expense for the six months ended September 30, 2014.

Sales and Marketing Sales and marketing costs are presented in the table below: Six Months Ended September 30, Period-to-Period Change 2014 2013 $ % (In thousands) Sales and marketing $17,775 $18,126 ($351 ) (2 )% Percentage of total revenue 41 % 37 % Sales and marketing costs decreased during the six months ended September 30, 2014, as compared to the same period in 2013, primarily due to a $3.1 million decrease in stock compensation expense offset by a $1.0 million increase in marketing expense, $1.1 million increase in technology and allocated facilities expense, and a $0.2 million increase in depreciation and amortization expense.

In addition there was increased sales and marketing costs during the six months ended September 30, 2014 in salaries and personnel-related expenses of $0.2 million and an increase of $0.1 million in costs related to the use of subcontractors.

General and Administrative General and administrative costs are presented in the table below: Six Months Ended September 30, Period-to-Period Change 2014 2013 $ % (In thousands) General and administrative $9,657 $14,614 ($4,957 ) (34 )% Percentage of total revenue 22 % 30 % General and administrative costs decreased during the three months ended September 30, 2014, as compared to the same period in 2013, primarily due to a $3.1 million decrease in stock compensation expense. The decrease in costs also included a reduction in allocated expenses from Compuware as compared to a similar set of expenses incurred as a stand-alone company.

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