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Concur Technologies, Inc. (NASDAQ:CNQR)

F4Q08 Earnings Call

November 11, 2008 5:00 pm ET

Executives

John Torrey - Executive Vice President of Corporate Development.

Steve Singh – Chairman and Chief Executive Officer

John Adair – Chief Financial Officer

Analysts

Steven Ashley - Robert W. Baird & Co.

Laura Lederman - William Blair & Company

Richard Baldry - Canaccord Adams

Tom Ernst - Deutsche Bank Securities

Brendan Barnicle - Pacific Crest Securities

Bradley Whitt - American Technology Research

Joel Fishbein – Lazard

Analyst for Ross Macmillan - Jefferies & Co.

Johh Kraft - D. A. Davidson & Co.

Keirstad – Kaufman Brothers

Operator

Welcome to the [fourth quarter] fiscal year 2008 earnings release conference call. (Operator Instructions) I would now like to turn the conference over to John Torrey, Executive Vice President of Corporate Development.

John Torrey

Welcome everyone to the Concur earnings conference call for our fourth quarter of fiscal 2008. My name is John Torrey, Executive Vice President of Corporate Development for Concur.

This call includes presentation slides that will accompany our prepared remarks. To access these slides, please log onto our web site at www.concur.com. Other information of interest to investors, including our SEC filings, press releases, and recent investor presentations can be found on the Investor Relations page of our web site. We are now on Slide 1.

Our speakers for the call today are Steve Singh, our Chairman and Chief Executive Officer, and John Adair, our Chief Financial Officer. After their prepared statements today, Steve and John will host a brief question and answer session. Please now advance to Slide 2.

Before we get started we want to remind you that during the course of this conference call we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. These forward-looking statements are based on information available to [static in audio - us as of today’s date and are subject to risk and uncertainty. We encourage you to review the details] on Slide 2 and our filings with the Securities and Exchange Commission, which are available at www.sec.gov for additional information on risk factors that could cause actual results to differ materially from our current expectations and the forward-looking statements expressed or implied during this conference call. We assume no duty or obligation to update these forward-looking statements even though our situation may change in the future. Please now advance to Slide 3.

At this time I would like to turn the call over to Steve Singh.

Steve Singh

Good afternoon everyone. Before we get started I would like to recognize Veterans’ Day. We have a number of veterans at Concur and across our customer and investor base. We would like to thank them for their service and dedication to our country.

And to all of you, thanks for joining us for our Q4 earnings call.

There are four core themes to take away from this call. First, we [static in audio] every core metric. Second, the demand environment in Q4 was stronger than any previous quarter and we see a solid demand environment for our services as we head into fiscal 2009. Third, against the backdrop of a difficult economic climate and [static in audio] fiscal 2008, we are reaffirming our expectation to grow revenue 25% in fiscal 2009. And just as importantly, we expect to grow non-GAAP operating margin from 19% to 20%. And fourth, we are in a strong position heading into this economic downturn.

We are benefiting from a strong demand department, we have a strong balance sheet, revenue and earnings are expanding, and we are generating significant free cash flow, all of which combine to give us the ability to perform well in this economic storm to take advantage of compelling opportunities and to continue to invest in growing our leadership position.

Please turn to Slide 4. Before we get into the details of Q4 results, let me take a moment to speak to the challenges and opportunities presented by the global economic downturn and credit crisis.

Let’s start with the challenges. The dislocation of the financial services sector generated downward pressure on 2009 revenue growth as we saw companies such as Merrill Lynch, Washington Mutual, Wachovia, Lehman Brothers, AIG, Bear Stearns, and numerous others get acquired or materially reduce the scope of their operations. Nearly all these companies are our customers. And as they materially reduce their employment levels, they will at some ratio reduce the number of expenses [inaudible] processing.

In a difficult economic climate customers are looking to reduce operating costs and reinvest those savings into revenue growth our internal growth. Our solutions transform manual, expensive, and labor-intensive business processes into quick, simple and efficient processes that significantly lower the cost of doing business for our customers.

When combined with the economic advantages of being delivered in an on-demand model, in which there are nominal upfront costs and the customers broker the service as they use it, the value equation is very compelling. As is the time horizon for return on investment. And as we stated in the past, we tend to see a strong demand environment for our services in challenging economic climates.

In fact, in the closing weeks of September we saw a new business [static in audio] so in planning for fiscal 2009 we, like all companies, assess the current market environment and its expected impact on our business.

Our investment priorities allow us to invest in a prudent manner, balancing revenue growth with earnings growth, by the way exactly we have done for the past several years.

Taking all these factors into consideration, we expect to grow top line revenue 25% year-over-year and continue to expand non-GAAP operating margin.

Please turn to Slide 5. We are turning to Q4. As you can see from the press release we saw exceptional operating performance across the business. As Q4 results were well ahead of our expectations across all key metrics.

Q4 revenue reached an all time high at $57.5 million and driven by higher than expected revenue, as well as the inherent leverage in our business model, non-GAAP EPS for Q4 was $0.24 per share, well ahead of our expectations.

Additionally, driven by stronger earnings, free cash flow in the quarter was $0.38 per share, significantly exceeding our expectations.

Please turn to Slide 6. We saw a very solid demand environment in Q4 as we signed more than 800 new customer contracts. New customers included companies such as Wyatth, Adventist Health System, Aspen Re, Daymon Worldwide, Haworth, Lantech.com, and LORD Corporation.

We also saw continued expense service with customers such as [Belke] International, Continental Tire, Hertz, Toshiba America, and Cannon Financial signing up for our integrated service.

In fact, nearly 10% of new business in the quarter was driven by Concur Invoice including customers such as United Health Group. Concur Pay also saw an increase in the quarter and looking ahead we expect to see Concur Pay adopted by the majority of our new customers.

We increased our investments in the EU and Asia Pacific markets with a focus on expanding distribution, marketing programs to support our sales initiatives, and investment in local product development and deployment resources.

Over the past several quarters the EU and Asia Pacific markets have become meaningful contributors to new customer growth. The new customers in Q4 included L’Oreal, Sol Day, and Hamilton [inaudible]. Look for us to continue expanding our investments in these markets.

Please turn to Slide 7. We also continue to expand the network of partners participating in Concur Connect with the addition of Enterprise Rent-A-Car, including the National and Alamo brands. Additionally, Volaris and Interjet now also provide direct booking capabilities. Concur Connect is a global program connecting our 8,000+ customers who spent more than $35.0 billion last year to content and electronic receives from hundreds of suppliers that are focused on reducing their own operating costs and providing more value to the business traveler.

Please turn to Slide 8. So no let’s turn our attention to [static in audio] partnership. As you recall, we signed a strategic partnership with American Express at the end of July, turning our largest competitor into one of our largest partners. We were given the incredible opportunity to promote Concur services to the American Express customer base in partnership with the American Express field organization.

As you may already know, American Express is a leading global payments and travel management company with tens of thousands of customers across the globe and a field organization that is at least in order of magnitude larger than our field organization.

Depending on the market segment, American Express’ field organization will either provide leads or sell Concur’s services into its customer base. In all cases, the customer is contacting with Concur, they will be deployed by Concur and they will be serviced by Concur.

This partnership validates our industry-leading services through T&E expense management and it focuses two market leaders on driving even more value for their mutual customers.

As with any partnerships, it will take a few quarters for our organizations to learn how best to work together, to develop a pipeline [static in audio] close the very first deal. It is our expectation that the first significant signs of success of this partnership [static in audio] which we expect to see in mid-fiscal 2009 and as you know, once we sign a customer, on a dollar-rated basis, it takes us an average of two quarters to deploy the customer.

Which means the first dollar of revenue from this partnership that will actually show up on the P&L will be in early fiscal 2010. In other words, the American Express partnership will have no appreciable impact to revenue in fiscal 2009.

To execute against the partnership we are increasing our investments and distribution capacity on a global basis to align ourselves with express field organization and we are increasing our investments in customer service and customer deployment teams to support the expected increase in new customers.

[static in audio] partnership, I am pleased to report that we are beginning to see a lead increase to our pipeline as a direct result of this partnership.

Please turn to Slide 9. This year, 2008 was a tremendous year for Concur. We outperformed against all of our targets and raised guidance throughout the year. We are in a fortunate position of being able to reaffirm our revenue and earnings growth rates for fiscal 2009 against the continuing improving proving year.

And while the current economic climate poses challenges and opportunities for our company, [static in audio] on the long-term opportunity. We are operating in a big market and we have an opportunity to build a global brand. We believe the scale of our market is comparable in size to the $12.0 billion payroll processing market. In executing against this market opportunity we had two high-level goals.

Our first priority is to grow our base of customers from the 8,000 customers we have today to more than 50,000 customers. Our investment in distribution, including our partnership with American Express, affords us the opportunity to make that goal a reality over the next decade.

Our second and parallel goal to drive growth, is to expand our role in the travel supply chain with new services such as Concur Travel, Concur Pay, Concur Analytics, and others yet to come. Successful execution against this market opportunity will drive compelling and sustainable growth in revenue, in earnings, and in cash flow, for years to come creating compelling value for our long-term shareholders.

And with that, if you would please turn to Slide 10, I would like to turn the call over to John Adair, our Chief Finance Officer. John will provide more detail on Q4 and fiscal 2008 results as well as our business outlook for [static in audio] and fiscal 2009.

John Adair

While the global economy has suffered significant setbacks over the last several months, we have been fortunate to again quietly and predictably execute on another [static in audio] financial quarter capturing another strong financial year.

We are cognizant of the challenges in the global economy, however, our employees and management services help our customers immediately begin to save hard dollars and we are therefore optimistic, but we remain watchful, in the coming years.

We are pleased to be continued strong operating performance of the business in Q4 and remain focused on the long-term opportunity. In my prepared remarks today I would like to address two primary topics.

First, I would like to quickly summarize our financial performance for Q4 of 2008 and the foundation upon which we will build in 2009.

And second, I would like to provide you with details of our financial outlook from fiscal 2009, including our expectations for growth, operating margin, earnings, and cash flows.

If you would please, advance to Slide 11. Total revenue for the quarter was slightly again of our expectations and reached an all time high of $57.5 million, reflecting an increase of 61% over the same quarter of last year and predictably, subscription revenues continued to drive our growth with a 72% increase over the same quarter of last year.

Please advance to the next slide. Costs during Q4 were in line with our expectations and we continued to invest in distribution, new services, and service excellence.

Our gross margin of 69.8% was up over 100 basis points sequentially and was up over 150 basis points from the same quarter of last year. We also continued to drive efficiency in our operating cost structure, balancing our investment in future growth against current period operating performance. Our non-GAAP operating margin for the quarter of 23.3% compared very favorably to 18.2% for the same period of last year. And for the year as a whole, we grew the non-GAAP operating margin [static in audio] percentage points for 17.3% for fiscal 2007 to 19.4% for fiscal 2008, exceeding our [static in audio] over 1% and a new increase.

Taxes for the quarter and for the year were also better than expected. Our effective tax rate for the year was 35.1%, well below the 38% we had recorded through Q3. On October 3 the federal government passed the TARC legislation which made available for use in the current year certain R&D tax credits that would not have otherwise been available to us. The impact of these R&D tax credits was to lower our effective GAAP tax rate for fiscal 2008 by approximately 2%, all of which was recorded to our fourth quarter provision.

We expect that our effective tax rate for fiscal 2009 will increase only slightly to approximately 36% for the year as a whole.

You will recall as well that we expect our cash tax rate to remain in the low single digits for the next several years and we will continue to utilize tax and [inaudible] to reduce the actual cash taxes paid.

As a result of our revenue and margin out-performance, Q4 non-GAAP earnings were above our expectations, at $0.24 per share, compared to target of $0.22 per share, and improving $0.08 per share over the same period of last year.

Please advance to Slide 13. Cash flow from operations and free cash flow were considerably stronger than expectations for Q4, driven in part by another sequential improvement in days sales outstanding.

Cash flow from operations for Q4 totaled $22.7 million compared to $7.0 million for the same quarter of last year and after capital investments of $3.3 million, free cash flow was $19.4 million for the quarter compared to $4.2 million last year.

These cash flows clearly exceeded our expectations. For the year as a whole, free cash flow totaled nearly $51.0 million, well above non-GAAP earnings of just over $41.0 million. We continue to believe that over the long term, non-GAAP earnings are a readable proxy for free cash flow, notwithstanding the normal fluctuations in working capital.

However, fiscal 2008 free cash flow was well above non-GAAP earnings as it made significant non-recurring improvements in working capital, in part related to our clean up of the acquired balance sheet of Gelco and reductions in days sales outstanding.

We have also continued to be active repurchasing shares of our outstanding stock. Subsequent to quarter end we purchased 1.5 million shares of our stock at an average price of $28.91 per share. We take a long-term approach to capital management and intend to opportunistically repurchase our stock.

Please advance to Slide 14. I would like to now turn your attention toward our expectations for fiscal 2009. Consistent with our long-term objectives, and including the current economic climate, total revenue for fiscal 2009 is expected to grow 25% over 2008 totaling $269.0 million for the year as a whole, taking into account that the December quarter is a seasonally slower quarter for corporate travel and customer deployments naturally proceed at a slower pace, total revenue for the first quarter of fiscal 2009 is expected to grow to $58.0 million.

Please advance to the next slide. As we enter into fiscal 2009 we have evaluated our plan level in investment against our expectations for growth and our visibility into the year. For Q1 and fiscal 2009 as a whole, we will continue to execute on our long-term business plan and invest as appropriate in distribution, new services, and service excellence.

We also reaffirm our commitment to improve our operating margin by 1% for the year. Accordingly, our non-GAAP earnings for Q1 are expected to be $0.20 per share, our non-GAAP earnings for fiscal 2009 as a whole are expected to be $1.11 per share, and our non-GAAP operating margin for fiscal 2009 is expected to be 20%.

Please advance to Slide 16. Cash flows for fiscal 2009 are expected to continue to be strong. You will recall our cash flow model is very different from traditional software companies and even different from some software-as-a-service companies. We do not bill any part of the contractual subscription fees up front, but rather we bill and collect from our customers on a monthly basis.

Our strong customer retention rates allow us the opportunity to align the monthly payment for our services with the customers’ receipt of the tangible benefits, providing a unique structure for both parties’ benefit at the same time.

For fiscal 2009 as a whole, we expect cash flow from operations to total $68.0 million [static in audio] free cash flow to total $47.0 million.

Now to Slide 17. And in closing, when uncertainty exists in a global economy, every business leader should be taking a hard look at their business. At all levels of the company we have and will continue to do exactly [static in audio]. We believe we are pursuing large under-penetrated multi-billion market in which we are the market and innovation leader.

We provide solutions that allow our customers to reduce their travel and expense management costs and provide a rapid return of investments. Our business model is built on recurring revenue streams that afford us significant visibility into future revenue growth and as a result of that visibility we have the ability to invest more efficiently, which gives us tremendous control over our gross and operating margins.

We distribute our services globally through a large and growing direct sales force and through world-class partnerships such as ADP and American Express. We have the opportunity to generate strong cash flows and over the long term we have our business model that allows us the opportunity to generate operating margins in excess of 30%.

And finally, we have a strong balance sheet with significant cash reserves which provides us the ability to perform well in this economic storm, [static in audio] advantage of compelling opportunities as they arise.

We would now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steven Ashley - Robert W. Baird & Co.

Steven Ashley - Robert W. Baird & Co.

You talked about the fact that at the end of September you actually saw the number of new customers being added, pace to that business, accelerate. I have a couple of questions on that. Number one, why do you think that happened and number two, could you also comment on the renewals you were seeing from existing customers and whether there was any change in the monetary amounts you were seeing on the renewals later in the period.

Steve Singh

First and foremost, the mean customer sales in the last few weeks of the quarter did in fact accelerate from what we expected. A lot of that, in all fairness, was probably the same that we had seen over the quarter for last year [audio breaking up] the fact that we had seen the economy slow over the last year and what we have seen is customers are more opportune to looking at ways to reduce their operating costs.

What we provide happens to be a service that is a relatively quick ROI, low up front costs, and compelling in that no monthly fees that are exceptionally better than anything the customer can do on their own.

And the other part is that we have great execution by our field organization. So I think both of those drivers are behind it but there is nothing new relative to behavior that changes that.

The other question you asked was around retention rate?

Steven Ashley - Robert W. Baird & Co.

Renewal and the dollar amount of renewals compared to what you had seen.

Steve Singh

A couple of things to understand about our renewals and how they work is that our customers automatically renew so it’s not a process where you go through on an annual basis and say would you like to renew. It’s an automatic renewal. Customers use our service and effectively are replacing it from a manual system. [inaudible]

We renew [inaudible] retention rate and we would no value for the retention rate across the broad customer set. Having said that, clearly, I commented on the call, that we saw a certain level of upheaval within the financial services sector with the companies that had been mentioned. We made our best estimates of what we expect those relationships to look like in the year and in fact related to our guidance.

Operator

Your next question comes from Laura Lederman - William Blair & Company.

Laura Lederman - William Blair & Company

What sort of a guidance of 25% revenue growth would you have been guiding towards. I’m trying to get a sense of what the [inaudible] environment is.

Steve Singh

I don’t think it’s fair to comment on that because I don’t [static in audio] honestly our commitment really is to go after building a business that has consistent growth 25% year-over-year and improving the operating margin every single year.

The variables change. Every year there is a new [inaudible] to consider and our view is that our job, what we get paid to do, is make sure that we can manage the business and plan for the business to weather ups and downs.

Laura Lederman - William Blair & Company

[inaudible] plus or minus 1%, 2%. Can you talk a little about minimums and how companies work versus their minimums through the month of September and October [inaudible] November.

Steve Singh

So in the September quarter we [inaudible] transactions are and [inaudible] we saw a level [inaudible]. We traditionally see a 1% to 2% conceptualization, transaction volume in any given quarter. We saw the exact same thing in September quarter. There was no additional break to it.

If you don’t mind, I am going to take a second to speak more broadly on this topic. Based on the number of questions and comments we have received, you all think with the idea of hey, your transactions [inaudible] travel as we go down, how they impact our business.

So we will start with that. First and foremost, we are not impacted by travel bookings, by the amount of dollars that are spent on travel across the globe. So travel is obviously going to come down 10%. That does not mean there is a 10% impact on our revenue. In fact, what we are compensated on is expense approach that we process for our customers. And certainly we see some benefits to the number of expense profits, but that’s all really driven by seasonality, particularly in the September quarter and the December quarter. And that’s obviously backed into our September guidance and it’s backed into our December guidance. It is flat out wrong to assume that travel budgets directly impact our expense transactions.

Laura Lederman - William Blair & Company

A follow up on that and then I have another question. If you look at the minimum commitment customers are setting up for 2009, how many things are varying versus 2008? In terms of what customers are signing up for.

Steve Singh

Well, there’s nominal differences here. Every quarter we have customers who say they are going to have less transactions next year than we had planned on, but we also have customers who say they have grown and are going to have more transactions than planned on.

Again, we are talking about on the margin with few minor changes in the difference.

Laura Lederman - William Blair & Company

If you look at what happened to [inaudible] in their issues [inaudible] can you talk a little bit about, if at all, it would affect you and the service revenues, how they’re recognized and that sort of thinking.

John Adair

Maybe I can phrase the question and then answer your question. I believe what you’re after is from a deployment perspective how do we bill customers for our deployment services and then how do we recognize the revenues around those fees we bill the customer. And then for subscription fees, again, how do we bill our customers for the subscription fees and then how do we recognize those fees.

So, relative to deployment services, recall that we bill our customer a set up fee at the onset of the relationship. That set up fee covers the extent of all the services that we provide. We take that set up fee and defer and amortize the set up fee over the expected life of the customer. We also defer the direction incremental costs related to those same set up fees and amortize those over the exact same customer life.

So effectively we treat the set up fees, or deployment costs as a single unit of measure and account for them rabidly over the life of the relationship.

For the subscription fees we charge our customers, we bill the customer for travel bookings and expense reporting fee our services when they begin to book trips and when they file expense reports. So because we bill our customers monthly in advance, we recognize those fees in the following month, which is the month of use. So we bill our customers when they begin to book travel and create expense reports and then recognize in the appropriate month.

Operator

Your next question comes from Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

Can you talk a little about the cost of goods line? It’s been essentially flat to down over the last three quarters, so I am curious about where you see the leverage points there, going forward, so looking into 2009 are there any sort of one-time increments you need? Are there any sort of infrastructure build outs you do ahead of the Amex relationship beginning to ramp that might affect that line?

John Adair

As we have talked about for years now, part of the value of our business model is that we have the ability to build out a rather large infrastructure and then add a large number of customers on that infrastructure without adding any step functions in that cost book. And that’s exactly what you’re seeing. It’s why we call for eleven years a gross margin, for example, to be in excess of 7%. That’s why you see leverage in our cash flow model with operating cash flows and free cash flows growing year over year. It’s simply the leverage in the model.

I think the second question that you had was relative to American Express. Maybe I should broaden that statement. There’s no real correlation to American Express. The fact is, as we add additional customers, regardless of the source, we build out the infrastructures for those customers as we go. There is no step function in building it out, there is no incremental large investment that is required.

Steve Singh

Let me add a couple of points to that. First and foremost, we are very comfortable with the capacity of our system. We have more than enough capacity to serve our customers. However, we always continue to invest ahead of demand. I think if you look at the gross margin line, I would not necessarily focus on is it up every single quarter. I think it will genuinely trend up from here. We haven’t yet determined what the target for gross margin will be now that we have achieved our original target of 7%.

We are, however, comfortable that we will continue to move the operating margin up on a year-over-year basis about 1% every year.

Richard Baldry - Canaccord Adams

Can you talk a little bit about the revenue split for next year? I think we have steadily seen these one-time revenues heading down and where you see that trending into next year. We know as a percentage it will fall. And also you seem to be sitting on a quarter billion in cash now. So that line materially step up in the first quarter?

John Adair

On the interest line, obviously you are correct, we will continue to see that line increase in Q1 over Q4 as we have those funds for a full quarter. The only other thing that I would just draw your attention to relative to interest in cash, as you recall we did dispose as well, that we did a stock buyback during the initial part of this quarter. And so we obviously used the cash there.

Steve Singh

And what was the first part of your question?

Richard Baldry - Canaccord Adams

Really about the revenue split for next year, the one-time versus the recurring.

Steve Singh

I think one-time you will see roughly at or slightly lower than where it’s at right now. Obviously one-time revenues are as nominal as they are today there can be some fluctuation quarter-over-quarter. But in general we expect it to trend down. We certainly don’t expect it to trend up.

Richard Baldry - Canaccord Adams

On headcount, I’m not sure if I missed that. I have some static on my line. But whether the headcount was given. And then maybe talk about the process of ramping Amex, whether it’s the training, as we heard last call, was supposed to begin essentially immediately, so I don’t know if you are allowed to share how many people go through that process and how quickly you think that process works, until you start to see them feeding your pipeline.

Steve Singh

We don’t provide any headcount information. We apologize that there was some static on the line. We heard that there might have been a little bit of static.

Relative to the ramp of Amex, I can’t give you a lot of detail here. We are not in a position to speak to how many sales reps Amex has or how many customers. We can broadly speak to the fact that they have tens of thousands of customers .

What I can tell you is that the first concrete metric that we have that would be publicly visible would be that in mid-fiscal 2009, between the March and June quarters, that we expect to see an appreciable increase in new customerizations. And in order for that to happen obviously we have got to be able to build a pipeline well in advance of that, move those opportunities through the pipeline and actually get them closed.

A typical sales cycle in the larger end accounts tend to be about six months. For a middle-sized customer is about three months or so. If you look backwards from that, we should be in a position to see an improvement in the pipeline, which we are. In fact, they’re pleasantly surprised with where that’s at.

We continue to work with our colleagues at American Express in cross training. It’s not just our training of the American Express field organization, but we are obviously cross training in order to make sure we can represent their products and services to our customers.

Operator

Your next question comes from Tom Ernst - Deutsche Bank Securities.

Tom Ernst - Deutsche Bank Securities

I think you highlighted on the call that your pipeline is developing with American Express. In fact, when you announced the deal you had said that the deal was really focused on expense management side of the business. I know you have an existing relationship with American Express on the Quick Book side, I’m curious, has there been any change in the development of the pipeline that American Express on the Quick Books side since the announcement of the deal?

Steve Singh

Can’t really speak right now to the Quick Book side of it. We are not specifically trying to build the Quick Book side of the pipeline. However, obviously what we focus on is meeting each of American Express’ customers, walking them through the value equation of our travel and expense service and what we’re seeing is that customers are looking to take all the manual processes or [inaudible] and take these processes and find other ways to make them more efficient.

And certainly on the expense side, that’s almost always the case. And on the travel side that’s continually the case as well. And so we think that there’s an opportunity to exceed and uplift in Concur Travel and Expense, so I think that this is right method to kind of come back to, when you look at the quarter we finished. 0ver 800 new customers, about half of those customers are Concur Travel and Expense customers.

Tom Ernst - Deutsche Bank Securities

And I guess we didn’t expect Amex to be selling Quick Book out of the deal on the margin more. It sounds like, as we expected, there’s no occlusion from you, upselling at the point of sale when you get brought in to a customer on the expense management side, upselling the Quick Book side.

Steve Singh

That’s exactly right. There’s just one minor change I would make to the statement you made. It’s really not Amex selling it. Amex typically walks with in to a customer relationship and works with us in that account but it’s [inaudible] we sell the travel and expense solution. And you are absolutely right, there is no limitation on our ability to sell travel and expense.

Operator

Your next question comes from Brendan Barnicle - Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

It looks like short-term deferred revenue was relatively flat sequential. Any explanation for what is going on on that side?

John Adair

Deferred revenues fluctuate quarter-over-quarter. Recall they are not a leading indicator for our business. We go to customers one month in advance. But that number will fluctuate quarter to quarter. I think what is important is you continue to watch total deferred revenues and the trend over time is up, as it should be, as customers go live and we bill that one month in advance.

Brendan Barnicle - Pacific Crest Securities

And on free cash flow, you said it will be down sequentially for free cash flow, what the metric that’s going on there, some additional blow back on Amex that’s going to show up in that?

John Adair

Really what you’re seeing is just fluctuation year-over-year. You will recall as well, free cash flow is not a linear process. On a quarter-to-quarter basis, or a period over a period basis, you will have fluctuations, and particularly in working capital. Fiscal 2008 just happened to be a very strong year.

We had a benefit of roughly $10.0 million in the fiscal year from things like the improvements in days sales outstanding so accounts receivable, as well as clean up on the balance sheet that we acquired from Gelco back at the beginning of the year.

And so on a year-over-year basis, as we said previously, we expect pro forma earnings to be in good proxy. And if you look at fiscal 2008 and fiscal 2009 together, not withstanding fluctuations in working capital, you will see that our average is about at our pro forma earnings rate on a year-over-year basis.

Brendan Barnicle - Pacific Crest Securities

Could you just touch on anything new or any more color on [inaudible] and on analytics?

Steve Singh

Obviously on [inaudible] we had a very strong quarter. About 10% of the business that we sold in Q4 was definitely the controlling point. As we continue to improve our products and services, now understand you’ve multiples, and continue to build out the value equations that we are delivering to our customers, obviously we are developed a new product force, and we have been selling Concur boards for almost two years now, the great success with our customers with it, and we are starting to see as those initial sales start to become a great reference account for us, we are starting to see additional customer interest.

We expect that to continue to trend to be a very nice part of our business. Ten percent, 15% part of our business over time. And I think it’s too early to speak to obviously, we’ve just launched it in the fiscal quarter we just finished.

We certainly see very strong interest from our customers relative to the analytics product. And we expect it to generate about $0.25 on the dollar in additional revenue for the customer. But again, it’s early, we’re only about 2.5 months into the launch of analytics.

Brendan Barnicle - Pacific Crest Securities

Is there anything that helps analytics break out even more rapidly? Not really the Amex, are there other things you see happening next year that really make it sort of break out?

Steve Singh

I think we want to be a little more cautious. We would love to see a little more success before we start to get more detailed about it in our earnings calls. We are seeing a great success with our expense and travel products with our customers. We have a great relationship that we can lever in selling the processes.

Operator

Your next question comes from Bradley Whitt - American Technology Research.

Bradley Whitt - American Technology Research

Just following up on some of the other comments regarding capex. It looks like a pretty steep increase that you are projecting next year considering it was relatively flat in fiscal year 2008. How should we think about that? Is it going to be front loaded in the year? And can you give us some more color as to what investments will be made?

John Adair

Again, there’s no real step function in the capex process. Capex will ebb and flow quarter over quarter. We do expect it to grow to about $21.0 million this coming year, which will be roughly 8% of revenues. This last year it was roughly 6% of revenues so well within the bounds of what we expect in any given year.

Bradley Whitt - American Technology Research

And also curious as to whether you experienced and FX headwinds and just what percentage of revenue at this point is international?

John Adair

International revenue is still in the 13% to 14% range. FX headwinds, no not really. The vast majority of our customers, still we bill in U.S. dollars. So we don’t have a significant exposure to the foreign exchange today.

Bradley Whitt - American Technology Research

And Steve, to follow up on your comments concerning some of the challenges in the financial services sector. I’m just curious, can you give us a little more color, what kind of assumptions you’ve made there and what you have seen so far to date as far as customers possibly coming back to you and asking for lower monthly minimums. Just what exactly are you seeing there?

Steve Singh

First of all the assumptions we made are actually in the guidance. I don’t want to get into the details of it. In all fairness, some of our customers, for example Merrill Lynch, were acquired by an existing customer. Other customers had significant reduced the scope of their operations and it would be dependent upon what was the employee count. We think it would be quite different from company to company. We have made our best assessments here. Obviously we are very close to our customer relationships, we understand what’s going on here. And so we have factored that into our guidance.

The only thing I would add is that we have no concentration of revenues in any one particular vertical so frankly we take some comfort in the fact that even with the [inaudible] we are still able to grow top line revenue 25% throughout the year.

Bradley Whitt - American Technology Research

I don’t know if you’ve given sales headcount metrics and what your expectations are for hire in fiscal year 2009.

Steve Singh

We didn’t update that metric. As you will recall from the last earnings call we have chosen not to break out those specific sales headcounts. However, I think you can get a general sense, it’s simple, a vast majority of our spend is headcounted-related. If you look at the sales and marketing line, I would look at that and say generally if it trends up you can make a pro rata assessment of how many sales headcount we’re adding.

At the end of the day, it’s driven by a simple concept. We are increasing our revenue 25% year-over-year, we expect to improve operating margins about a full percentage point. And every bit of gross margin revenue we get above and beyond that 1% increase we are looking for is going to, in the following order, sales and marketing, R&D, and customer service.

Operator

Your next question comes from Joel Fishbein – Lazard.

Joel Fishbein – Lazard

Just wanted to see why you wanted to increase your investment there. Is there anything specific that’s going on in any of the particular regions, in terms of adoption?

Steve Singh

I think it’s important to start from where we are. A very modest portion of our revenue actually originates outside of the United States. And so we use that as a base. We have a tremendous amount of opportunity in the European Union and Asia Pacific markets.

We are increasing our investment to tap into our relatively untapped markets. And so it’s not that we are trying to increase our investments on a pro rata basis in the EU, Asia Pacific compared to the U.S., or Canada, or Mexico, it’s more that these are largely untapped markets that we want to be able to invest in, all within the structure of our basic business goals, which are to grow the top line by about 25%, while growing the operating margin about a full percentage point.

Operator

Your next question comes from Analyst for Ross Macmillan - Jefferies & Co.

Analyst for Ross Macmillan - Jefferies & Co.

You used to disclose what the attach rate was on new customers for the expense management with corporate travel. Can you update us on that trend?

Steve Singh

It’s about 50% of the new customers that signed in the quarter.

Operator

Your next question comes from Johh Kraft - D. A. Davidson & Co.

Johh Kraft - D. A. Davidson & Co.

Just wanted to make sure I didn’t miss something here. I did get some static as well. At one point you were talking about the last few weeks of September seeing some acceleration. Didn’t you also say what you were seeing in early October?

Steve Singh

We didn’t comment on that. What we did comment on broadly was that we saw the beginning environment as we entered 2009 to be very solid and reflective of what we saw in 2008.

Johh Kraft - D. A. Davidson & Co.

And I know you won’t speak for American Express, but they have talked pretty publicly about some lay offs and now a bank conversion, a new strategy. As far as it may affect you, do you anticipate that to cause delays, or any sort of impact?

Steve Singh

I will speak to the portions that I can speak to. Obviously I can’t speak to American Express’ status as a bank. But what I can speak to is if you look at what’s happening in our relationship and continue to see very positive [inaudible], the basic tenants of why we put together the partnership are exactly the same today as they were over the course of the last year as we have bolstered that relationship.

There is a little bit of concern that some people have relative to the fact that American Express’ travel transactions went down from the June quarter to the September quarter, about 18%. What people overlook is that the September quarter last year to September quarter of this year, they’re actually up 4%.

So travel transactions at American Express and other leading travel management companies are actually up. Also it is important to understand that June to September tends to be down as September to December. So those are important metrics to understand. [inaudible] which we are well positioned to win and to continue to provide great services for our customers.

And our job right now is to get from that 8,000+ customers to 50,000 customers. There’s plenty of headway.

Johh Kraft - D. A. Davidson & Co.

Specifically to your contracts that are based on unique end users, just hypothetically let’s say there’s one of those out there and there’s a lay off announced. How frequently can that customer renegotiate the number of unique end users that they are billed for? Is that instantly or is that something they have to wait until the term is up?

Steve Singh

Contractually, obviously the customers have to wait until the term is up. We negotiate up or down. However, at the end of the day, all great providers always provide the best service to their customers and if the customer says I’m going to have less transactions, then the right thing to do is to give the customer the capacity to have a lower number of transactions. However, the transaction price tends to go up.

I think it is important to look at this and say this is, if you are going to make it to anything, if you want just to use your proxy, I think the minimum rates of law are a good proxy, but at the end of the day, keep in mind that even as the transaction volumes come down, the transaction fee actually goes up.

And the last thing I would say on here is it’s a very horizontal feature. And so we divide services [inaudible] industries. In some industries we see the employment go up, in other industries we see them go down.

Operator

Your next question comes from Karl Keirstad – Kaufman Brothers.

Keirstad – Kaufman Brothers

I wanted to ask about the December quarter guidance. Top and bottom line it looks like the year-over-year growth rate is quite a bit less than it is for the full fiscal year 2009 and it might fall a little bit below some of the Street’s estimates. Could you just describe whether there are any unusual events going on in the December quarter that you would expect to reverse itself a little bit later on in the fiscal year?

Steve Singh

There is nothing unusual going on. It is important to understand that we have actually never provided Q1 guidance for fiscal 2009. The $58.0 million reflects the fact that typically in the December quarter there is some seasonality in deployment. Because a lot of people go on vacation. Not just our people but more importantly the customer. Outside of that there is nothing unusual.

Keirstad – Kaufman Brothers

The projected decline in free cash flow, I heard your explanation that there are just normal ebbs and flows. But this is an important metric. Could you offer a bit more color in terms of why it’s declining?

John Adair

I will take you back to the same place we were. In any given period you will have normal fluctuations in working capital. I think what you are comparing is fiscal 2008 to fiscal 2009. Fiscal 2008 was an exceptionally strong year. In part, two things I would point you to and you can do this as well on the balance sheet.

Take a look at accounts receivable. During the fiscal year accounts receivable were flat or down. Even during a period of time when revenues grew substantially, we dropped DSOs during the year from in the low 70s to the low 60s. We don’t anticipate that kind of a continued improvement. We are within our range of 60 to 70 days on DSOs.

In addition, we acquired Gelco at the beginning of the year. We took the opportunity to clean up Gelco’s balance sheet over this last fiscal year. That as well provided one-time opportunities around working capital changes.

Our expectation is that pro forma earnings are a good proxy for free cash flow and I think you could look at 2008 and 2009 and you will see, again, the normal ebbs and flows in working capital. But if you look at the two years in combination, you will find that we are pretty much dead on that expectation around pro forma earnings being a good proxy for free cash flow during the time.

Steve Singh

A couple of points. First of all, it’s really important to understand the basics here. Free cash flow ought to roughly approximate pro forma earnings. And there obviously our billing mechanism is the most important variable there. And we don’t bill up front a year or up front six months or whatever that might be. We are literally billing 99.9% of our customers on a monthly basis. There are a few odds and ends on a quarterly, but by and large, monthly.

And so free cash flow in any given period ought to roughly equal pro forma earnings. And in 2008 we were 125% of pro forma earnings. 2008 and 2009 is roughly about 100% of pro forma earnings. When you get a fluctuation in working capital quarter-over-quarter it just happened to fall at the end of a fiscal year. If you project out further than that, you’ve got to roughly look at pro forma earnings as a good proxy of free cash.

Operator

This concludes today’s Q&A session.

Steve Singh

On behalf of the Concur team we thank all our shareholders for joining us. I look forward to updating at the January earnings call.

Operator

This concludes today’s conference call.

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Source: Concur Technologies, Inc. F4Q08 (Qtr End 9/30/08) Earnings Call Transcript
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