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Executives

Todd Friedman

S. Steven Singh - Chairman and Chief Executive Officer

Rajeev Singh - Co-Founder, President, Chief Operating Officer and Director

Francis J. Pelzer - Chief Financial Officer and Principal Accounting Officer

Analysts

Brent Thill - UBS Investment Bank, Research Division

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division

Laura Lederman - William Blair & Company L.L.C., Research Division

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Michael Huang - Needham & Company, LLC, Research Division

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

David M. Hilal - FBR Capital Markets & Co., Research Division

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Brad R. Reback - Stifel, Nicolaus & Co., Inc., Research Division

Kenny Jiang - BofA Merrill Lynch, Research Division

Yun S. Kim - Janney Montgomery Scott LLC, Research Division

Concur Technologies (CNQR) Q1 2013 Earnings Call January 30, 2013 5:00 PM ET

Operator

At this time, I'd like to welcome everyone to the Concur Fiscal Year 2013 First Quarter Earnings Release. Today's leader is Todd Friedman. I would now like to turn the call over to you. Mr. Friedman?

Todd Friedman

Thank you, operator. Good afternoon, and welcome, everyone, to the Concur earnings conference call for our first quarter of fiscal 2013.

This call includes presentation slides that will accompany our prepared remarks. To access these slides, as well as the press release and 8-K concerning [ph] today's earnings, please visit the Investors section of our website at concur.com.

We're now on Slide 1. Our speakers for the call today are Steve Singh, our Chairman and Chief Executive Officer; Rajeev Singh, our President and Chief Operating Officer; and Frank Pelzer, our Chief Financial Officer. After their prepared statements today, we 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, future events and the future financial performance of the company. These forward-looking statements are based on information available to us as of today's date and are subject to risk and uncertainty. We encourage you to review the details on this Slide 2 and our filings with the Securities and Exchange Commission, which are available at 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. On the call today, we will also be discussing certain non-GAAP financial measures. Reconciliations of those measures to their comparable GAAP measures can be found in the table within our press release.

Please now advance to Slide 3. At this time, I'll turn the call over to Steve Singh.

S. Steven Singh

Thank you, Todd. Good afternoon, everyone. We had a strong start to the year across the business from global multinational corporations to SMB customers, from North America to Germany to Japan and in our vertically focused markets. The trend lines continue to show solid momentum.

With that serving as a backdrop for today's discussion, there are 4 key messages that you should take away from the call. First, Q1 was a strong quarter. Our key financial metrics all exceeded or met our expectations. Just as importantly, we continue to make progress against our operational and strategic objectives. Second, driven by our Q1 results and progress against our operational and strategic objectives, we are well-positioned to achieve our goals for the full fiscal year and to continue to drive that momentum into the next fiscal year. Third, our federal government business is off to a very strong start, with our first ETS2 wins occurring sooner and at a more significant scale than we had originally expected. We don't expect any incremental revenue benefit from these wins in fiscal 2013. However, in combination with the continued momentum we're seeing in our private sector business, we're putting in place a foundation for compelling revenue growth in fiscal 2014. And fourth, we continue to build a foundation for growing Concur over the next decade, executing on our vision of The Perfect Trip and driving the innovation curve in our industry through an open platform that enables the entire travel industry to add value for customers and for each other. And to foster even broader innovation around the Concur T&E Clouds, we're putting our balance sheet to work with the establishment of The Perfect Trip Fund.

Please turn to Slide #4. Turning briefly to the results for the quarter, we once again exceeded or met our expectations across every core metric. For the quarter, we delivered $123 million in revenue, up 22% year-over-year and about $1.5 million better than we had expected. As you will recall, in Q3 and Q4 fiscal 2012, we mentioned that travel transaction volumes had turned from a tailwind into a headwind. With the impact of Superstorm Sandy, we took a more conservative view on transaction volume and customer deployments for the December quarter. We were able to exceed our expectations in the December quarter. However, we think it's pragmatic to assume that the macro environment is still fairly challenging. Within the quarter, we accelerated some investments we've planned to make in the second half of the fiscal year as we saw a faster-than-expected customer signing under the ETS2 contract. And I'll provide a little more color on this later. As such, our operating margin and non-GAAP EPS for the quarter met our expectations. And as Frank will discuss in more detail, cash flow from operation and free cash flow were also in line with our expectations.

Please turn to the next slide. There are a number of developments since our last earnings call that I'd like to highlight and provide some more color around. First, we saw solid new customer growth in Q1 within the range we had anticipated and up substantially on a year-over-year basis. We saw solid demand across the geographies and customer segments that we serve. In fact, we welcomed new customers such as Toll Brothers, BNP Paribas and Commonwealth Bank of Australia to the Concur family. We continue to see strength in the demand environment, and thus, we're continuing to build out our distribution capacity, in line with the goals that we outlined at the start of the fiscal year. And that's reflected in the 13% quarter-over-quarter increase in sales and marketing costs, as well as the 40% increase in headcount on a year-over-year basis. Second, we crossed a major milestone for Concur Japan. Last fiscal year, we signed our first Japanese multinational account and, in the month of January, went live to over 10,000 users. Concur Japan continues to execute ahead of our expectations, and we're excited about the scale of the opportunity in Japan over the next several years. Third, we extended and expanded our partnership agreement with the American Express Corporate Card group to broaden the markets that we're targeting and the range of services we can deliver together. We are very pleased with our partnership as it continues to drive substantive value for each of our companies and our mutual customers, and expect that it will continue to be a rewarding relationship for years to come.

Please turn to Slide #6. As you'll recall, we began actively engaging with the civilian agencies of the federal government in the early days of fiscal Q1, and as of the last earnings call, we were pleased by the early traction and enthusiasm that we received. It was clear that the government agencies were anxious to move to world-class, commercial-grade services to manage their online bookings, travel authorizations and expense vouchers. At that time, our expectations were that we would see the first few agencies buying contracts in the second half of fiscal 2013. We're pleased to report that over the course of the past few months, we've signed a number of civilian agencies under the ETS2 contract. Needless to say, we're excited about the early success that we're seeing. And as I mentioned earlier, over the past few months, we've begun to accelerate investments and deployment resources that were originally scheduled to be made later in the fiscal year. As we ramped those investments, our existing team will have a rather full pipeline of customer deployments.

Let me quickly highlight the financial implications driven by agencies signing up faster than anticipated. On the revenue side, it's important to remind you that given our average deployment time periods, we don't expect any incremental benefit to our revenue expectations for fiscal 2013. However, it certainly builds upon our confidence for our fiscal 2014 revenue expectations. We look forward to working with the GSA and the civilian federal agencies to improve the experience for their travelers and drive down their operating costs. On the cost side, you will recall that our operating margin guidance last quarter assumed a range of spending outcomes. Our investments in speeding up our government initiative, it was in that original guidance and simply indicate that we're finding strategic areas to invest in our growth.

Please turn to the next slide. One of the most important initiatives we're investing against is the Concur T&E Cloud. It's an open platform that provides a broad range of integration opportunities through which customers, partners, third-party developers and suppliers can add substantive value for each other. It's a platform that enables innovation from around the world to be consumed by business travelers anywhere in the world. In concert with Concur Travel, Concur Expense and TripIt, the Concur T&E Cloud not only improves the business traveler experience but it enables a more efficient and personal relationship between the business traveler and the suppliers that serve them. [Audio Gap] foster innovation and growth across that open platform. Last quarter, we announced the formation of the $150 million Perfect Trip Fund. We're excited about the innovation we can enable and our ability to help bring about services we described in our vision of The Perfect Trip. We're seeing significant interest from entrepreneurs and innovators around the world, and that's attributable to 2 key factors: first, our ability to serve at the distribution channel for innovative services and global content; and second, commitment to invest in people and products that enable our vision of The Perfect Trip.

Last quarter, we made initial investments in 2 innovative companies. We invested in Evature, which provides a natural language travel search technology that allows me to type or speak my travel needs. For example, I might say, "I want a flight to San Francisco that leaves this afternoon and returns by 3:00 p.m. on Friday. And by the way, I need a hotel." Evature, in combination with Concur, will take care of the rest. We also invested in Nor1, an innovative company that's a data analytics provider for the hospitality industry, delivering data-driven pricing and merchandising services for hotels and resorts to maximize the value that they can deliver to their business travelers. Evature and Nor1 services will be available within the Concur T&E Cloud for use by any T&E Cloud partner. In combination with our investments in Taxi Magic, ClearTrip, Yapta, our expanded investment in Room77 and the more than 50 third-party applications from companies like Replicon and Visage Mobile that are already available on the Concur T&E Cloud. We're rapidly establishing Concur as a central platform for innovation in the corporate travel market. Perhaps most important are the ongoing innovations that we are driving not just in the products that we deliver but across our industry.

If you'd please turn to Slide 8, I'd like to turn the call over to Rajeev Singh, our President and Chief Operating Officer, to update you on some of our products and industry initiatives. Raj?

Rajeev Singh

Thank you, Steve. Concur's technology and product investments are naturally aligned with our core business objective, and that is to enable The Perfect Trip for all business travelers and corporations. To enable The Perfect Trip, we have to deliver the best Travel & Expense solutions in the world in every major market and market segment. We are doing this on an open web services platform that can link travelers and corporations with suppliers and developers seamlessly. At the core of this strategy is the strength of our market-leading Travel & Expense solutions. Every month, we drive the innovation curve in the market with new releases that deliver capabilities across the globe in every single market segment. While we strive to lead globally, we do recognize that global leadership is very much about leading locally and delivering the services and solutions that meet the specific needs of geographies and verticals. For example, in Q1, we delivered comprehensive VAT tax calculation capabilities, which drove the release of a first-of-its-kind guaranteed VAT compliance service in the United Kingdom. Now companies of all sizes in the U.K. simply hand over their VAT receipts and have 100% comfort that they are in compliance with U.K. tax and treasury laws. We also, in Europe, launched new data centers in the Netherlands and France. These centers are consistent with our global cloud strategy, leveraging both public and private capabilities, and are fully virtualized. Not only do these data centers enhance our broader global footprint, redundancy and performance, but they also meet a growing requirement from European companies and governments for hosting within the boundaries of the European Union. In the federal government space, we're in the midst of developing new reporting capabilities that, for the first time ever, will get the U.S. federal government the capacity to report, analyze and benchmark data across all federal government agencies. This incredibly exciting capability has the capacity to significantly improve the efficiency of the overall program, and we believe it is a feature set that will be of interest to other governments around the world. And in Asia, where travel requests are a common business practice, Concur delivered the market's most comprehensive travel request central reconciliation capabilities, which will drive increased demand and adoption in markets like India.

This is just a small sampling of the new capabilities we delivered in Q1. We firmly believe that the best companies in the world never stop innovating on their core platforms and capabilities. It's important to note as well that to lead in a space as complicated as the T&E supply chain requires both the depth of functionality I described briefly earlier, but also content from all over the world. We define content as data and services from suppliers and developers that enhance the business travel experience for travelers or corporations. As you know, to enable that content, we have delivered the Concur T&E Cloud, which is based upon an open web services platform fundamentally designed to enable the industry as a whole to participate in delivering The Perfect Trip. In the first quarter of the year, via the T&E Cloud, we delivered enhanced or new content from developers like ClearTrip and suppliers like Virgin Australia and Air Canada, within Concur Travel.

I'd like to spend a moment providing now a short preview of Fusion, our upcoming client conference scheduled for mid-April in Las Vegas. Last year, we had over 1,600 attendees and 40 partners exhibiting. This year will be our biggest event ever. Fusion has become the largest non-trade event for the industry with great opportunities for solution, discovery and also industry networking. As a premier client event of the year, Fusion brings together both Concur clients and partners and staff to connect, collaborate and learn more about the products and services that will help their organizations manage travel, expenses and other corporate spend. The event includes a wide range of educational sessions, product trainings, one-on-one consulting sessions and keynotes from some of the greatest minds in the industry and more. A primary focus at Fusion will clearly be broadly introducing our customers and partners to Open Booking. As we discussed last quarter, Q2 marks the official release to clients of Concur Open Booking. It is the next major evolution of the managed and unmanaged travel business process that will drive value for the entire T&E ecosystem. Open Booking is an offering that anticipates changing travel behavior and acknowledges that individual travelers will not always do what they are told but they often do the right thing. It's a solution that can link an itinerary from any source, regardless of where travelers booked, right to your expense report. And, importantly, a solution that motivates the traveler to submit their itineraries and sources them automatically to suppliers, and it allows administrators to have visibility they've never had before. Concur Open Booking allows business travelers to book hotels and car rentals in whatever manner is easiest for them, either at the supplier website or within Concur Travel, while still providing a single, easy-to-manage itinerary and the personalization and content that they expect.

For our corporate clients, Open Booking is also immensely powerful. In fact, for small and midsized businesses who don't have a managed travel experience, we are completely changing their travel process, delivering what is, in effect, a managed travel experience to an unmanaged world. For larger businesses, the benefits are equally measurable. We're providing the tools needed for travel managers, procurement department and TMCs to improve compliance, duty of care and control while acknowledging and accommodating the changing behavior of travelers. For TMCs specifically, or travel management companies, Open Booking enables access to bookings and supplier information which previously occurred outside of their view. Using the Concur T&E Cloud, leading TMCs will be able to access those bookings, report on them and use them in order to help their clients meet their duty of care responsibilities. In addition, today, we are working closely with our closest TMC partners to leverage Open Booking and the T&E Cloud into new business models and opportunities, all of which will enable the perfect business trip for travelers and their corporations. To be sure, Open Booking creates a brand new paradigm for managed travel. We see strong demand in the client base for the offering, and we'll continue to keep you updated on adoption.

In conjunction with this year's Fusion, we will also be hosting an Analyst Day. It will be a great opportunity to meet with Concur executives, get updates and previews from Concur R&D and service organization, including a preview of our new mobile experience, new traveler services, Concur Open Booking and the opportunity to learn more about the Concur T&E cloud partners. Be on the lookout for a save-the-date email in the very near future.

We're also pleased to formally announce the first-ever Perfect Trip Developer Conference scheduled for this summer in San Francisco. We'll be welcoming developers and suppliers from around the world to collaborate in enabling The Perfect Trip. More details on the conference will be on concur.com in the days ahead.

With that, I'll turn the call back over to Steve.

S. Steven Singh

Thanks, Raj. With a strong Q1 behind us and as we look ahead to the full fiscal year, we remain comfortable with our expectation of roughly 25% revenue growth for the full year. And with stronger-than-expected new customer signings in the public sector, we have accelerated investment and deployment resources that were originally planned for the back half of the fiscal year. And as we stated on the last earnings call, to the extent that the demand environment warrants, you should expect non-GAAP operating margin to be closer to the low end of our expected range of 16% to 19%. We're executing against a broad strategy that's redefining the corporate Travel & Expense management market in a manner that delivers upon our vision of The Perfect Trip, which is enabled by creating a travel ecosystem that dynamically responds to the needs of business travelers, the companies that they work for and the suppliers that serve them. Not surprisingly, it's a vision that's being embraced by customers, partners, developers and suppliers. When you think about our increasing ability to reach a market that's underpenetrated and the scope of innovation that we're driving and enabling, it should be obvious why we're so excited about the next decade. Collectively, to our investment and successful execution against our goals, we can constructively disrupt and drive efficiency into the entire corporate travel supply chain. And by reinventing that supply chain over many years, all while executing each and every quarter, we're focused on creating higher and higher levels of shareholder value. With 20 million business travelers, 3 million of which are now using our mobile services on a regular basis, and with 19,000 corporate customers and the capacity to invest against a compelling vision on a global basis, we're the best company in the world to deliver on that future. That's our ambition and that's what drives us.

With that, if you'd please turn to the next slide, I'd like to turn the call over to Frank, who will provide you details on Q1 fiscal 2013 results, as well as our business outlook for the remainder of the year. Frank?

Francis J. Pelzer

Thank you, Steve, and good afternoon, everyone. I would like to convey 3 key messages in my prepared comments this afternoon. First, our core business drove strong financial and operational results in the first quarter of fiscal 2013. In the quarter, we grew revenue over $22 million or 22% year-over-year, 130 basis points above our expectation. Because we chose to invest our revenue upside during the quarter, our operating results, such as non-GAAP operating margin and non-GAAP EPS, performed as expected. Second, we continue to execute against our investment objective designed to further drive top line growth and expand our role in the trillion-dollar travel market. Our investment thesis continues to be validated by the global demand we are experiencing for our services and the ecosystem coming together around Concur. And third, our investments in distribution and innovation are creating a foundation for sustainable growth at best-in-class levels.

If you would, please advance to Slide 13 and let's look at Q1 results. Q1 revenue of $122.8 million exceeded our expectation, growing 22.3% year-over-year and 4.2% sequentially. Recognized revenue in the quarter benefited from stronger-than-anticipated transaction volume. Customer retention rates were again strong for the quarter, consistent with our historical averages in the high 90s.

The following comments refer to Slides 14 and 15. Unless otherwise stated, please note that all of my comments reference non-GAAP operating metrics. Gross margin was 74% for the quarter. Gross margin is a reflection of the economies of scale inherent in our business model with high-margin products, offset by our investments made to support our growth initiatives. As we have stated repeatedly, our goal is to invest across the business to expand our distribution and product capabilities. Sales and marketing expense increased 39% year-over-year, reflecting our ongoing and sizable investment in reaching prospects and customers. R&D expense increased 46% year-over-year, driven by growth in headcount to drive the innovation curve in our industry. G&A expense increased 18% year-over-year, reflecting investments in corporate infrastructure to support our global expansion. Our operating margin was 15.4%, and our pretax earnings per share were $0.30, both in line with our expectations.

Please advance to Slide 16. Cash flow from operations and free cash flow performed as expected for the quarter. Excluding acquisition and other related costs and noncontrolling interest, cash flow from operations was $5.6 million, while capital expenditures were $10.5 million. Free cash flow, excluding acquisitions and other related activities and noncontrolling interest, was negative $4.9 million, in line with our expectations.

Our balance sheet continues to be very strong and provides us tremendous leverage to continue to expand our market and our leadership position. During the quarter, we invested approximately $17.3 million from The Perfect Trip fund. Cash and short-term investments, net of customer funding liabilities declined $21.7 million quarter-over-quarter, ending the quarter at $452 million. Driven by strong cash collections, days sales outstanding ended at 63 within our 60- to 70-day expected range. Deferred revenue grew to $88.4 million by quarter-end. As we have mentioned in the past, please note that change in our deferred revenue is not an accurate reflection of our bookings growth since we bill the vast majority of our customers monthly.

Please advance to Slide 17. Now let's turn the discussion to expectations for Q2 and the full year. As Steve mentioned, demand for our services has remained strong. We continue to expect FY '13 revenue to grow approximately 25%. For Q2, we expect total revenue to grow approximately 19% year-over-year or 5% sequentially. We believe we have a large and strategic window of opportunity to further strengthen our leadership position, especially in new markets around the globe, our government business and new service offerings associated with our Concur T&E Cloud platform. We are maintaining our guidance for operating margins for FY '13 in the range of 16% to 19%. As demonstrated by Q1 results, we are finding good people to hire and good areas in which to invest capital. Specifically, as Steve mentioned, we are seeing strong demand in our public sector business and chose to accelerate investments that were originally planned for the second half of the fiscal year to support a greater number of customer deployments on which we must focus. Based on our current outlook for revenues and costs, we would encourage you to model the operating margin towards the bottom end of the 16% to 19% range. As mentioned last quarter, we expect Q2 to be below this level, Q3 to be in the range and Q4 to be above the range. We are reaffirming our expectation for pro forma pretax earnings per share of at least $1.40 in FY '13. We expect Q2 to contribute $0.24 out of the total for the year. I will remind everyone that we target annual operating margin and pro forma EPS goals, and we are less focused on variations that happen quarter-to-quarter.

Let me now turn to cash flows. The cash-generating dynamics of our business continue to be strong, and cash flow from operations should continue to be largely linked to our non-GAAP earnings. I will remind you of some of the dynamics that impact this relationship in FY '13. In the latter half of FY '13, we will reconcile the TripIt consideration, which we have discussed in the past. Due to the employment obligations associated with key employees as part of the deal structure, GAAP requires that we run almost 1/2 of the payout, if any, through cash flow from operations. Given that the ultimate payout is driven by our stock price, we cannot determine the impact to cash flow from operations at this time.

I would like to also note another factor impacting cash flow from operations in FY '13. We expect to fully utilize the U.S. federal financial statement NOL and R&D tax credits near the end of this year. We still have a large U.S. federal tax NOL associated with the tax benefits from share-based compensation that we cannot record as an asset under GAAP. Once the NOL and the R&D tax credits recorded on the financial statements have been fully utilized, GAAP requires that we report the usage of the excess tax benefits as a cash outflow from operations and a cash inflow from financing activities. In other words, there is no actual impact to our cash position but a difference on where the inflows and outflows reside on the cash flow statement. It's important to note that the actual income tax cash payments will be less than what we report in the GAAP cash flow statement as a cash outflow from operations.

As we mentioned over the last few quarters, the accounting effects of the TripIt acquisition and several other factors have rendered our effective tax rate unpredictable. For IBES consensus purposes, please consider using the 35% federal statutory rate but recognize that this does not reflect the taxes we pay. For FY '13, we expect cash income tax payments to be a single-digit percentage of pro forma pretax income. With strong revenue growth offset by our higher rate of investment and the factors that I described above, we are reaffirming our expectation of cash flow from operations, excluding the TripIt reconciliation, excess benefits from share-based compensation and acquisition and other related costs, to be at least $80 million for the year. As mentioned last quarter, we do expect to spend a slightly higher percentage of revenue on capital expenditures than our typical 6% to 8% due to the build-out of our new corporate headquarters in Bellevue, Washington to accommodate anticipated employee growth.

Please advance to Slide 18. In closing, we continue to experience strength in new business generation from our core business that will continue to benefit our top line growth in future quarters. Using the strong operating leverage of the core business, we continue and will continue to invest in our growth initiatives, which are bearing the rewards in the form of our expected fiscal 2013 growth rate and which should bear additional rewards over the medium to long term. And finally, we have a strong balance sheet with significant cash reserves. Our general capital strategy continues to be to use our balance sheet wisely to aggressively pursue the growth of our market.

Now I'd like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

On the revenue side, Frank, just 19% growth for Q2 given the 25% for the full year. Is that just given the big comp from last year? Why the dip on the revenue? And I had a quick follow-up.

S. Steven Singh

Sure. Brent, it's Steve. Look, I'd say that as we think about the revenue guidance, we really think about it in the context of the entire year. Obviously, we're pleased with the performance of the business Frank has demonstrated by Q1 results both on the revenue outperformance we saw in Q1, as well as the customer demand environment. The Q2 revenue guidance reflects our best estimate at this time. It's a reflection of our deployment expectations and, to some degree, the broader economic environment. I think what's important to remember is that the trajectory of the business remains consistent with our prior comments, and it reflects the fact that we've affirmed our full year revenue outlook, as well as the fact that we've seen very strong new [ph] customer growth environment.

Brent Thill - UBS Investment Bank, Research Division

Okay. And I missed this, but I think in 2011, you gave a bookings number. Did you have a similar metric for 2012?

S. Steven Singh

Yes, we provided that, obviously, at the start of each fiscal year. And what you ought to take away from a bookings perspective for the calendar 2012 is obviously reflected in the guidance. So in order to get to the 25% top line growth that we expected to see this year, it assumed a bookings in the range that we had guided to.

Operator

[Operator Instructions] Our next question comes from Steve Ashley with Robert Baird.

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division

Tanya Yaramada for Steve Ashley. Just on ADP, I was wondering if we can get an update on the pace of leads you're seeing from the partnership and the ramp in terms of conversion and up-sell for the existing ADP customers?

S. Steven Singh

Yes, of course. We continue to see actually very, very strong lead generation out of our ADP partnership. It's a partnership that has been very strong for a number of years and obviously became exceptionally strong when it moved to a floor [ph] base model. We don't see that environment changing. In fact, we expect it to be fairly consistent in the forward several quarters. But it's really fundamentally now about how do we sell -- cross-sell our travel products into that base of customers, as well as our itinerary management and other services. And we're seeing good solid traction in the basic vein that we had expected over the start of the -- from when we transitioned the relationship. We expect it to take about 2 to 3 years, and we're seeing that continue to track to our expectations. I think, frankly, one of the areas that's most exciting about that opportunity really in the SMB market segment is that Open Booking will become a really fantastic product service that we can deliver into that customer set. As Rajeev spoke to it, it really enables effectively a managed travel program within what is traditionally an unmanaged travel environment.

Operator

Your next question comes from the line of Laura Lederman with William Blair.

Laura Lederman - William Blair & Company L.L.C., Research Division

I am confused as to why the growth would slow so much sequentially. You guys usually have so much visibility. Is it that customers have not got up and running as quickly as expected? Because your growth rate doesn't tend to bounce around much unless there's a reason. For example, 2 years ago, it fell to 16%, and I think it was in Q2 because you had turned off some of the old systems. There's usually an explanation. And if Q1 faced Sandy and you come in at 22.3%, I truly don't understand why Q2 would come in at 19%. I'm missing something here, and I don't know what it is.

S. Steven Singh

Yes, Laura, look, the biggest things that impact our growth rate really are twofold. Number one, and the smaller item, is travel transactions and the related expense transaction volumes that they may drive in an incremental basis. The single biggest thing is deployments, and really, it's just the timing of deployments. And so the guidance that we've provided around 19% for the quarter reflects our estimate of those timing. I think the important thing to just remember is that the quarter-over-quarter growth rate is actually up in Q2 as compared to what we saw from Q4 to Q1.

Laura Lederman - William Blair & Company L.L.C., Research Division

Yes, I was really talking about year-over-year. I guess another related question is -- and I realize you're not going to give guidance for next year and the year after. But as we think about Concur having Q1 of 19% -- excuse me, 22.3% growth and Q2 at 19% and exiting the year at 30%, I have 2 questions on that to reach that 25%. When you say around 25%, does that mean 24% to 26% or you're not as comfortable with the 25% as you were before?

S. Steven Singh

No, please don't read anything more into around 25%. It's just -- obviously, it's in the future and so you can't be precise. And that's it, nothing more than that.

Laura Lederman - William Blair & Company L.L.C., Research Division

Okay. And final question, then I'll pass it on. Sorry to be difficult, but I'm still trying to understand. If you look at the growth rate of the company, it's -- when you think of long term over the next few years, do you think it's 20%? Do you think it's 25%? Somewhere between 20% and 25%? I'm trying to understand the underlying growth rate.

S. Steven Singh

Sure. Laura, I think the way to think about this is the following: we're investing in the business at the levels that we are because we believe that this is a business that should continue to grow in the mid-20s for quite some time, and that's why we're investing in the manner that we are. We're investing to expand distribution, not just obviously in the North American market where we have a fantastic business that's continued to grow at a very compelling rates, but frankly, in the SMB segments of multiple different geographies, as well as enterprise segments of multiple geographies like in Japan. So, for example, if you think about the growth we're seeing out of Japan, right, in Japan, they are roughly just shy of a few thousand companies that have 2,000 employees or more. And until we opened up our operations in Japan, we had none of those customers. The first year of operation, we signed a couple of accounts in Japan that have -- that are in the multinational level. In fact, in January, we went live to our first Japanese multinational that has more than 10,000 accounts. So we're investing from the perspective that we think this is a mid-20s growth rate for quite some time. And to the extent that it's not, then we would obviously look at our investments in a different light.

Operator

[Operator Instructions] Your next question comes from Michael Nemeroff from Crédit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Question. Just following up on what you had said earlier, Steve, around the -- it's your best guess on where the guidance reflects the -- what you see on the deployments in Q2. Is there some sort of a bottleneck? Or is there something that you can do or hire more capacity to accelerate those deployments going forward? Is that on the plans? Because it seems that, obviously, there's a bit of a downtick in Q2, and you said it was related to deployments.

S. Steven Singh

Yes, Mike, so that's a fair comment and observation. Obviously, we saw continued strong demand in our private sector business and, frankly, much better than expected demand in the public sector business. And as you would rationally conclude, that creates a fairly full pipeline relative to deployment cash pipeline. And as we mentioned, as we saw this in the December and obviously in January, that uptick in the public sector opportunity or the customer signings in the public sector opportunity, we started to accelerate our investments in deployment. Obviously, it's not a perfect world where everything works completely smoothly. We do expect to be able to work through those deployments, and you may see some minor fluctuations on a quarter-over-quarter basis relative to when the customers go live and when the revenue are recognized for those particular customers.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

And just 1 follow-up, if I may, on the modeling. For the back half of the year, given the 19% in Q2, could you -- so we don't go through this again in Q3 in terms of what -- in terms of guidance for Q3. What exactly are you guys modeling for your Q3 and Q4 in terms of year-over-year revenue growth so that we and the consensus here can get this accurate?

S. Steven Singh

I understand that. And look, we really look at this on an annual basis. In fact, the way we run the business, we look at it and say, "How do we invest? And what are our operational priorities to go deliver 25% revenue growth for the year as a whole?" That's the way we manage the business. I understand that from an external perspective, it's important to say, "Look, I want to be able to know each quarter." I think the important takeaway here is the trajectory we're talking about from Q1 to Q2, to Q3 and Q4 is still in line with the original comments we made at the beginning of the fiscal year and arguably, frankly, more conviction around the back half of the year.

Operator

Your next question comes from the line of Michael Huang from Needham.

Michael Huang - Needham & Company, LLC, Research Division

Just wondering if I can get some additional color around the first couple of agency wins. Were these -- are these migrations off ETS1? Maybe how large are these agencies? And given the data, why do you think the activity around ETS2 is stronger than you would have modeled?

S. Steven Singh

Sure. So Michael, I'll be able to provide some detail here but not a tremendous amount of detail. One of the things that I think Raj mentioned on the call, that I just want to remind everyone of, is that we will have an Analyst Day at our user conference in April. And we expect to be able to provide a fair bit more information around our ETS work at that point in time. Right now, what I can tell you is that the number of agencies that are signed is obviously much higher than we anticipated because we didn't actually expect any agencies to sign until the back half of the fiscal year. From a scale perspective, it's across the spectrum. Obviously, you're going to see not just some of the smaller agencies but even some of the larger agencies in the signings that we've seen so far. As far as the migrations comment, yes, they're all from ETS1. As is required under the ETS2 award, the civilian agencies have to move from ETS1 to ETS2 over a prescribed period of time.

Operator

Your next question comes from the line of Fred Grieb with Nomura.

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

Just in terms of growth by geography, would you mind digging into that for the last quarter for us? I think the growth looked a little bit weak in Europe in your Q4. So I'm just curious if there was a bounce back in Q1 or anything you're seeing in terms of European growth.

Francis J. Pelzer

Yes, sure, it's Frank. Yes, North America and EMEA were both about the same growth rate, I think right around 22% each. International revenue contributed 16% of the total revenue. And then ATA, I think we're right around 36% on a year-over-year basis.

S. Steven Singh

By the way, that international component is up from the same period last year at 15%.

Operator

Your next question comes from the line of David Hilal with FBR.

David M. Hilal - FBR Capital Markets & Co., Research Division

A follow-up to some of the guidance questions. Obviously, we all can impute what your expected growth in the back half of the year is, which requires a pretty good acceleration from the 19% you're calling in Q2 to somewhere around 30% in the back half. So there are 2 parts to my question. One, is that 25% growth for the year, does that assume you guys making an acquisition? And then two, if not, what is going on in your business that's going to show the big acceleration in the back half of the year versus what you're seeing in the first half?

S. Steven Singh

Yes, sure, David. So the direct answer to your question, no, it doesn't assume any acquisitions. Look, if you think about the model of how we recognize revenue, as you know, it's fairly straightforward. It's driven by deployments to a large degree. That's what drives the incremental revenue growth in any given quarter. And what you ought to hear from this is, obviously, if you go back to September and June quarters, we had some exceptionally strong quarters relative to new business that we signed. And frankly, within that, there are a number of very large customer signings. These large customer signings tend to take a lot longer than the average. And, in fact, when you combine that with the federal contract that we're signing, they just put a fair bit of workload on our deployment teams. And what you see is the confidence that we have coming into the back half of the year is driven by the fact that we've signed these customers and we're in the process of deploying them. Several of them happen to be much larger than are typical for our contracts.

Operator

Your next question comes from the line of Richard Baldry with Wunderlich.

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Kind of getting around to existing [ph] questions other people are asking but in a different way. Your sequential growth in the second half would have to step up pretty sharply. So maybe could you talk about the deployment capacity you have that would support that type of -- you go from somewhere in a $5 million or $6 million in the first half to something closer to $10 million or $11 million second half. Do you feel comfortable with that deployment capacity to get those numbers of customers live?

S. Steven Singh

Yes, we do feel comfortable with that. Obviously, you're right that there's a fair bit of work still to do, but this is something that we've been doing for 15-plus years. And so we're not overly worried about it. In fact, what we like about this is that we're positioned, we've already sold these accounts, and it's really a process of deploying them. And so as you think about the growth rate, they're actually accelerating on a quarter-over-quarter basis, and I think that's a reflection of the fact, not only that we see great customer growth in additions in the prior quarters but, frankly, to what I see driving that to the deployment pipeline. Just to be clear, right, so this is exactly how we framed the discussion at the beginning of the fiscal year is that what you'll expect to see roughly comparable to improving growth rates through the course of the year, and this is exactly in line with what we're expecting.

Richard K. Baldry - Wunderlich Securities Inc., Research Division

And your sale and marketing had one of the biggest ever sequential upticks. Is there any onetime items in there or if there's for a kickoff things that might have dealt with that more than normal and how that would look sequentially? And then the last would be, in the fund where you're investing in other companies, is that including sort of direct to development where they're doing specific initiatives to take that investment in or even options to acquire those companies?

S. Steven Singh

Sure. I want to make sure I get each of your questions there. On the sales and marketing, are there any kind of large charges? No. No, they're just typical investments in sales and marketing. Of course, the vast, vast, vast majority of that is increasing headcount, which is about 40% increase in a year-over-year basis. The other question, I think, was related to the investments that we're making. The investments that we make through The Perfect Trip Fund really are focused on how do we deliver additional services, whether it's -- obviously deliver through additional parties, how do we deliver additional services that fulfill that vision of The Perfect Trip. And so these are companies that would naturally want to work with Concur or naturally want to target corporate customers and deliver value for those corporate customers, okay? By the way, the other thing that -- just to make sure we highlight, is that the sales and marketing dollars, just in case this is not clear, this is all headcount growth and/or the vast majority of headcount growth. And it's frankly what we've been talking about for a number of quarters, that we see a solid demand environment and we're investing against that demand environment.

Operator

Your next question comes from the line of Brad Reback with Stifel, Nicolaus.

Brad R. Reback - Stifel, Nicolaus & Co., Inc., Research Division

Steve, last quarter, you talked about the macro being a gentle headwind. As the guidance laid out now for the March quarter, have you changed expectations around the relative strength of that headwind?

S. Steven Singh

No, we just think that it continues to be a headwind, so there's no real change in that perspective. But it certainly is not an improving environment relative to the global travel environment. But look, I think that's really important for people to hear that I know there are different external data points that are picked up like, for example, what's happening with travel management companies. And I think that we ought to separate those 2 things out. The changes that we're seeing across some of the travel management companies are more a reflection of the fact that transactions are moving from an offline model to an online model, for which we tend to be the beneficiaries of that. But broadly speaking, it's very consistent with what we had anticipated, and we're certainly not going to be overly optimistic in our view of what's happening in the macro environment.

Operator

Your next question comes from Kenny Jiang with Bank of America Merrill Lynch.

Kenny Jiang - BofA Merrill Lynch, Research Division

I'm calling for Kash Rangan. Congratulations that you are seeing an acceleration of the signing of the federal agencies, as well as the deployments. I'm just wondering if it is changing your expectation about the subscription revenue for next year, as well as your originally planned investment cycle of the distribution capacity. Maybe the conversion of the federal agencies are happening faster than you expected, even going into second half of this year.

S. Steven Singh

Sure, Kenny. Look, the -- obviously, we're very happy with the faster-than-expected signings around ETS2 contract. As you know and as we said in the call, it has no incremental revenue benefit that we get in fiscal '13. As far as fiscal '14, we're certainly not prepared to provide guidance on '14. What it does do is give us obviously a greater sense of comfort as we look out into '14, as to what our growth rates are going to be and what the revenue number is going to be. And I'll just ask you to refer back to the call for some additional details around ETS2.

Kenny Jiang - BofA Merrill Lynch, Research Division

How about your originally planned expansion of distribution capacity? Will that in any way to increase maybe the size, as well as the -- maybe the time frame of that investment? Because the original investment was supposed to end by the end of the fiscal '13, correct?

S. Steven Singh

No. So there's no -- it's not a -- I want to make sure that we're looking at the right way. The investments in the public sector opportunity aren't onetime. They're not a "here's an investment" and then it ends at the end of some period. We're obviously investing behind the public sector opportunity because we think it's as big as the managed travel segment or the unmanaged travel segment. It's literally 1/3 the size of the market segments that we serve. So it's literally a massive, massive market opportunity. The ETS2 contract happens to be one of many public sector opportunities that we're pursuing. The right way of thinking about this is that we're accelerating some of the investments that we had planned to make in the back half of the year and pulling them forward, most notably around deployment, right, which we obviously expected to sign the first set of agency contracts in the back half of the year. We would then add in at that same time the deployment resources and then be able to go deploy those customers into fiscal 2014. Having signed them earlier than expected it's important that we pull forward those deployment resources, but then the same resources just being pulled forward. All that is within the operating margin guidance that we provided at the start of the fiscal year, which was 16% to 19%. And the way we would see getting to 16% is if we saw investment opportunity that were compelling and that warranted accelerating investments.

Operator

And we have time for one more question. Your question -- next question comes from the line of Yun Kim with Janney Capital Markets.

Yun S. Kim - Janney Montgomery Scott LLC, Research Division

So let me just switch the topic a little bit on the SMB market segment. If you can talk about how much of your business today is driven by the SMB segment. And how did that part of business perform in the quarter? And while we're on the subject of SMB, just trying to better understand your SMB growth strategy. Is that business primarily going to be driven by your planned increase in sales capacity? Or do you expect larger contribution coming from your partners, resellers and affiliates?

S. Steven Singh

That's a pretty broad question. I'll attempt to answer it as well as I can. Look, the SMB segment of the customer segments that we serve is, by a simple definition of the bell curve distribution of companies, a very large segment opportunity. We continue to do very, very well within the SMB segment. It's important that you also hear that, look, we serve small-size companies, medium-size companies, large market companies and enterprise companies on a -- not just a North American basis but on a global basis, so in multiple different geographies. We're seeing growth in all those segments across all those geographies. So while we are absolutely investing the SMB market in North America, Germany, France and multiple other geographies, it's just one component of the growth engine for this company. It's one component of what we're investing in. And so you should not take away from this that, that's the primary growth engine of the company. It's a fantastic growth engine of the company, but it's just one of many, right? Obviously, our large market business continue to do very, very well. The enterprise business continue to do very, very well, and -- as I referenced in prior comments. And, of course, our public sector business is also off to a very strong start. So we're seeing good, solid performance across every segment of the customers and geographies that we serve.

Operator

There are no further questions at this time. Do you have any closing remarks?

S. Steven Singh

Yes. Raj and Frank and John and Todd and I want to thank all of our investors for calling in for our Q1 earnings call. We look forward to updating you on the progress of our company at the April earnings call and look forward to seeing you at the Analyst Day at Fusion in April. Thanks so much. Goodbye.

Operator

This concludes today's conference. You may now disconnect.

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