Expense Management: More Consolidation Ahead?

The acquisition of Captura by Concur may provide just the jolt the expense management business needs for further consolidation and, perhaps, profitability.

Analysts and others are pointing to more potential big moves to come for Redmond, Wash.-based Concur and Emeryville, Calif.-based Extensity, whose shares have languished under $4 for the better part of a year.

"We'll see if this sparks attention," said principal Gregg S. Hymowitz of New York-based EnTrust Capital, a Concur owner. "The big thing about Concur, and it has been around, is that it will start making cash earnings next year. That's a huge inflection point."

Hymowitz speculated on whether interest in buying the now-larger Concur would come from Automatic Data Processing, the Roseland, N.J.-based $7 billion computing services firm that resells Concur's expense solution to midmarket companies.

CIBC World Markets analyst Robert Maina added a number of large enterprise software providers that could be interested in expense management acquisitions, including Minneapolis-based Ceridian Corp.—which last month landed a reseller partnership with Gelco Expense Management, also in Minneapolis—Lawson Software in St. Paul, Minn., and Siebel Systems of San Mateo, Calif.

Extensity also could be an acquisition target, said Maina, who does not own shares in Concur or Extensity. "Given that Extensity's market capitalization is $22 million and they have $40 million in cash, I'd say a large market-cap company would be interested. It could be a payroll outsourcer."

Concur chairman, president and CEO Steve Singh, who called his industry "an emerging multibillion-dollar market," did not rule out the possibility of another company buying Concur. "We have the luxury of deciding on our future," he said, "because we're looking to build a business that has more than a 20 percent margin. There are less than 10 software companies in the world that can say that."

As a result of the acquisition's integration costs, Concur—which has never earned a profit since its inception as Portable Software in 1993—moved its profitability target to the December quarter from the September quarter of this year. Concur's loss for the quarter ending in June was $2.4 million, versus $7.8 million a year earlier. "We were 90 days from being profitable," Singh said. "No one else was even near that."

Extensity's net losses in the same periods were $3.3 million versus $5 million.

Despite Concur's profit delay, part-owner Hymowitz was supportive of the acquisition. The same cannot be said of all Concur shareholders, who drove the stock below $2 for the first time this year.

"This is a phenomenal deal at a very reasonable price," Hymowitz said. "It takes out a significant competitor in the application service provider business. Now there's effectively one other competitor left, Extensity, and it doesn't do much with ASP."

The ASP model to which Captura had transitioned most of its business allows customers large and small to spread out payment for the application, leaving the hosting and management of it up to the vendor. The other option, mainly employed by large global companies, is to license the software and take on its operation. Singh and others see the ASP model as a revenue stabilizer in a software marketplace that is anything but predictable. ASP offers recurring revenues, while the license model requires large upfront payments that are difficult for many companies to handle in the current business environment.

Four percent of Extensity's total revenues are from its ASP solution. With the acquisition, ASP business drives about 75 percent of Concur's revenues—a portion Singh said totals more than the entire revenue stream of any of Concur's closest competitors.

Revenues are not earnings, though, and that's what Singh said Concur needs to show before Wall Street will take notice. "The space is exciting," Maina said. "There's a big opportunity there."