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Covisint Corp. reported a loss of 10 cents per share in the third quarter of fiscal 2014, wider than a loss of 9 cents per share reported in the year-ago quarter.

Quarter Details

Revenues jumped 1.3% from the year-ago quarter to $24.1 million. Revenue growth was driven by the addition of new customers. During the quarter, 42 new customer agreements were signed, out of which 21 were with existing customers and the remaining 21 were with new ones who were added to the Covisint platform during the quarter.

Subscription revenue increased 21.0% year-over-year to $17.6 million, whereas Service segment revenue decreased 30.0% year-over-year to $6.5 million.

Gross margin for the quarter was 43.3%, down from 48.9% in the year-ago quarter. Cost of revenue increased 12.2% on a year-over-year basis to reach $13.7 million. The increase in cost of revenue outpaced revenue growth. Non-GAAP gross margin for the quarter was 50.4%, down from 54.2% reported in the year-ago quarter.

Total operating expenses as percentage of revenues were 77.7%, much higher than 49.5% reported in the year-ago quarter. Research & development, sales & marketing and general & administrative expenses as percentage of revenues moved up 12.6, 7.8 and 7.8 percentage points, respectively.

Loss from operations was $8.3 million, wider than $0.15 million reported in the year-ago quarter. Net loss (including stock-based compensation) was $3.6 million or 10 cents per share compared with $2.6 million or 9 cents per share in the year ago quarter.

Our Take

We believe that strong demand for cloud-engagement platforms in the U.S. and internationally will drive business for the company in the long run. Moreover, new contract wins and increasing customer base are also encouraging.

Moreover, the company’s continuous efforts to extend its foothold into various new spheres will help it in reporting robust growth going forward.

Additionally, since the subscription business happens to be a higher margin one, the company has recently adopted the long term goal of focusing more on it rather than the other segments. We strongly believe that the aforesaid activity will enhance margins and profitability of the company going forward.

Also, Covisint’s recent partnership with Cisco is viewed in a positive light. As per this agreement, Cisco will embed Covisint technology within the Cisco Exchange platform to provide high value connected industry solutions to Cisco customers worldwide. The partnership also leverages Covisint’s deep legacy in providing hardened identify management across highly federated operating environments that are typical in Internet of Things (IoT) initiatives.

The IoT is tipped for explosive growth, with Gartner predicting that 26 billion things other than PCs or smartphones will be connected to the Internet by 2020, up from 0.9 billion four years ago. Going by the aforesaid data, we believe that Covisint will be able to make steady progress.

Competition from companies such as Hewlett Packard Co. (HPQ - Analyst Report), Salesforce.com (CRM - Analyst Report) and CA Technologies (CA - Analyst Report), however, remains a concern.

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