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Concur Technologies Inc. (NASDAQ:CNQR)

F1Q09 (Qtr End 12/31/08) Earnings Call

February 04, 2009; 05:00 pm ET

Executives

Steven Singh - Chairman & Chief Executive Officer

John Adair - Chief Financial Officer

John Torrey - Executive Vice-President of Corporate Development

Analysts

Thomas Ernst - Deutsche Bank

Brendan Barnicle - Pacific Crest Securities

Ross McMillan - Jeffries & Co.

Brad Reback - Oppenheimer & Co.

Steve Ashley - Robert W. Baird

Mark Murphy - Piper Jaffray

Brad Whitt - Broadpoint AmTech

Laura Lederman - William Blair

Michael Nemeroff - Wedbush Morgan

Operator

Good afternoon. My name is Marcello and I will be your conference operator today. At this time I would like to welcome everyone to the Concur Technologies first quarter fiscal ‘09 earnings release conference call. All lines have been placed on mute to prevent background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mr. John Torrey, Executive Vice-President of Corporate Development. Mr. Torrey, you may begin.

John Torrey

Thank you, operator. Good afternoon and welcome everyone to the Concur earnings conference call, for our first quarter of fiscal 2009. 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 on to our website 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 website. We are now on slide one.

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

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 us as of today’s date and are subject to risk and uncertainty.

We encourage you to review the details on this slide two 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 three.

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

Steve Singh

Thank you, John. Good afternoon everyone. Thanks for joining us for our Q1 2009 earnings call. There are six core themes to take away from this call. First, we exceeded Q1 expectations across ever core metric; revenue, earnings and cash flow were higher than expected.

Second, the demand environment in Q1 was very strong and we see a solid demand environment for our services as we head into Q2. Third, given the challenging economic climate and eroding macro trends, we continue to see downward pressure on our near term revenue growth rate.

Fourth, as evidenced by the continued strength in new customer growth, our long term growth rate and the fundamentals of our market opportunities remain unchanged. Fifth, we have seen significant traction in our partnership with American Express and this quarter we expect to see the first wave of new customer additions as a result of that partnership.

Finally, we view the financial strength and flexibility afforded by our business model and balance sheet as strategic assets as we head into the next chapter of this economic downturn. We remain committed to investing in product innovation, service excellence and distribution capacity to extend our leadership position.

We’re bullish on the long-term opportunity in our market because of the strength of the demand environment. We have a deep understanding of what it takes to flourish in difficult times, so we’re investing, but with a level of pragmatism that acknowledges the eroding economic environment. Please turn to slide number four.

Before we speak to Q1 results, let me take a moment to speak to our fiscal 2009 outlook and the challenges and opportunities presented by a deepening recession in most of the larger economies. Let me start with a simple, but critical statement. Our long-term growth rate for both revenue and earnings is driven by new customer additions and cross-selling of new services.

Our rate of growth in these areas continues to be very strong. In fact, in Q1 we signed nearly 700 new customer contracts, with more than 50% of our customers choosing Concur Travel and Expense, and as compared to the year ago quarter, new customer additions were up more than 50%.

Because we have exceptionally high retention rates, we were able to build upon what has traditionally been a stable base of revenue, as we add new customers and sell new services. However, there are four factors impacting existing customer usage and thus the existing revenue base. These factors are as follows: unemployment, travel budgets, foreign currency exchange rates and recession driven attrition; whether that takes the form of business failures or M&A. Collectively these factors are placing an increasing amount of downward pressure on our existing revenue base. Please turn to the next slide.

Let me highlight each of these areas. At the end of October, national unemployment levels stood at 5.7%. The consensus estimate for where unemployment would peak was somewhere around 8%. As of the end of December, the national unemployment rate reached 7.2% and the new consensus is that unemployment will reach at least 9%.

As you can see from the slide, unemployment has already crossed that mark in several large states and this trend is playing out equally across the European Union. In fact, last month more than 100,000 jobs were eliminated across major corporations, most of which were Concur customers. Of course, as unemployment rises, there are less people available to use our services and thus less revenue that we can be assured of.

The second factor that impacts our existing revenue base is recession driven customer attrition. We’ve all seen a growing consolidation of businesses in all markets as companies close their doors or are acquired by other companies, which often time tends to be followed by a reduction in the work force.

We’re all familiar with the collapse of Lehman, Washington Mutual, Bear Stearns, AIG and numerous other financial firms, but similar events are occurring across other verticals and other market segments. So even if the macro environment has faced repeated challenges over the last year and a half, we’ve been able to sustain our retention rates at 97% to 98%, consistent with our historical average. However as unemployment rises, there are less people available to use our services and thus less revenue that we can be assured of. Please turn to the next slide.

The third factor that impacts our existing revenue base is travel spend, which ultimately impacts travel transactions. On a same store sales basis, travel spend was down across the industry in October and November, very much in line with industry expectations. However, in the month of December, same store travel spend was down much sharper than expected.

Relative to December, travel spend has improved modestly in the month of January, but it is still down substantially year-over-year. Clearly the volatility displayed in the last four months, gives you some perspective on how difficult it is to predict a trend for the rest of the year. Please turn to slide number seven.

The fourth factor that impacts our existing revenue base is foreign currency exchange rates. Since the start of our fiscal year, the pound is up more than 22% and the Euro more than 10% and we expect these trends to continue for the remainder of the year.

As you know, about 11% of our business originates outside of the United States, the vast majority of which in the UK or other European Union based countries and over the past two years we’ve been investing aggressively to grow our business in the European Union, with roughly 20% of new customer additions over the past year coming from the European Union. Please turn to slide number eight.

When you consider all of these factors, even in light of the fact that we outperformed against our Q1 targets, until we see some stability in the macro environment, it’s difficult to gauge how much revenue will grow in fiscal 2009. Having said that, we expect revenue to grow roughly 6% sequentially from Q1 to Q2, marking the largest sequential dollar increase in subscription revenue in our history and we expect revenue to grow sequentially in each of the remaining quarters of fiscal 2009.

We expect operating margin to be in line with or better than originally expected, even as we continue to invest aggressively against our long-term market opportunity. As such, we expect to deliver $1.11 in earnings per share. So to be clear, we expect revenue to grow significantly year-over-year and we expect earnings to grow 29% year-over-year. Please turn to slide number nine.

We saw exceptional operating performance across the business in Q1 and results were ahead of our expectations on all key metrics. Revenue reached an all-time high at $58.6 million and exceeded our expectations as customer deployments were modestly ahead of schedule.

Driven by higher than expected revenue and tempered increases in investments across the business, non-GAAP EPS for the quarter was $0.25 per share, well ahead of our expectations and driven by stronger earnings, cash flow from operations and free cash flow in the quarter were also well ahead of our expectations. Please turn to slide number 10.

New customer additions were up more than 50% year-over-year, as we signed nearly 700 new customer contracts. We see a strong demand environment for our services as we head into Q2, as customers continue to focus on services that can help them reduce operational costs. New customers included companies such as Allianz Global Investors, Harley-Davidson Europe, Ontario Lottery and Gaming, Plexus, Thomas Weisel Partners and North American Energy Services.

We’re very pleased to see that more than 50% of our new customers selected Concur travel and expense. Over the past year there has been a clear move in the market towards integrated travel and expense. The reason is simple; we provide the greater return on investment to our customers, while significantly improving the end user experience. Our company has been the driver of that market shift and you should expect us to continue to drive the innovation curve in our industry.

We continue to see momentum around Concur Invoice, including customers such as Elizabeth Arden. Lien rates moved up in the quarter as customers gravitate towards companies that they believe will be long-term providers. And finally, we continue to ramp our investment in the European Union and Asia-Pacific markets, with a focus on expanding distribution, marketing program to support our sales initiatives and investment in local product development and deployment resources.

Over the past several quarters, the European Union and Asia-Pacific markets have become meaningful contributors to new customer growth. We look for us to continue expanding our investments in these markets. Please turn to slide number 11.

We also continue to expand the network of partners, participating in Concur Connect, with the addition of Startwood Hotels and Resorts world wide. Concur Connect is a global program connecting our 8,000 plus customers, who have spent more than $35 billion last year, to content and electronic receipts 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 number 12.

Now let’s turn our attention to the American Express partnership. As you’ll 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 have an incredible opportunity to promote Concur services to the American Express customer base in partnership with the American Express field organization.

As with any partnership, it was our expectation that it would take a few quarters for our organizations to learn how best to work together, to develop a pipeline of business, and close the very first deal. Over the course of the past few quarters, we developed a healthy pipeline and we expect to close our first wave of new customers through this partnership in the March quarter.

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 will not show up on the P&L until fiscal 2010. So, while we don’t expect the partnership to have any appreciable impact to revenue in 2009, we do expect the partnership to help fuel our growth in fiscal 2010. We are very pleased with the progress of our partnership and excited by the scale of benefit that it can drive for both of our companies. Please turn to the next slide.

As I said in my opening remarks, driven by the strength of the demand environment and the performance of our business, we are bullish on the long-term opportunity in our market, but as prudent managers, we are investing with a level of pragmatism that acknowledges the eroding economic climate, but also allows us to capitalize on a market opportunity that we believe is comparable in size to the $12 billion payroll processing market.

In executing against this market opportunity, we have two high-level goals. Our first priority is to grow our base of customers from the 8,000 plus customers we have today to more than 50,000 customers.

Our investment in product innovation, service excellence and 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 a 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, earnings and cash flow for years to come, creating compelling value for our long-term shareholders. In fact, the resiliency of our business, even in the face of a very difficult economic climate is a testament to the skill of that market opportunity and our ongoing ability to execute.

With that, if you’ll please turn to the next slide; I’d like to turn the call over to John Adair, our Chief Financial Officer. John will provide more detail on Q1 results, as well as our business outlook for Q2 and fiscal 2009. John.

John Adair

Thank you, Steve and good afternoon everyone. We are pleased with the continued strong operating performance of the business in Q1 and believe strongly in the long-term opportunity we’re pursuing. In my prepared remarks today, I’d like to address two primary topics. First, I’d like to highlight some of the financial and operating results from Q1, and second I’d provide you with more detail on our outlook for the remainder of fiscal 2009. If you would please, advance to slide number 15.

Total revenue for the quarter of $58.6 million was above our expectations, representing an increase of 19% over the same quarter of last year. Subscription revenues which now represent 97% of total revenue, another growth driver in the business, grew 22% over the same period of last year.

Sales to new and existing customers were strong and adoption of new service offerings, such as Concur Invoice and Concur Pay, was the strongest of any quarter yet. Additionally deployments of both new and existing customers continued to be strong as customers sought to utilize our services, to drive down operating costs. Overall, we were very pleased with revenue growth in Q1. Please advance to the next slide.

In keeping with our long-term objectives, we continued to invest during the quarter in distribution, new service offerings and service excellence, reflecting the continued strength of the opportunity in the near and long-term. In the latter half of Q1, we began to moderate the rate of growth of those investments in response to external economic factors and accordingly, expenses were lower than the expectations we presented in the last earnings call.

Our gross margin for the quarter was 69.5%, up 190 basis points from the same quarter of last year, and similarly our operating margin was 20.9% for Q1, compared to 17.2% a year ago or an increase of 370 basis points. Note that the operating margin we committed to in our last conference call for all of fiscal 2009 was 20%.

Interest rates paid on investments were lower than our expectations for the quarter, with the rate paid on our holdings falling from roughly 2.2% at the outset of the quarter, to nearly 1% by quarter’s end. We expect the rate environment to continue at this level or lower for the duration of the year.

The effective tax rate for the quarter of 36% was in line with our expectations. You’ll recall that while we expect our effective tax rate to continue at 36% for the year, we expect our cash tax rate to remain in the low single-digits for the next several years as we will continue to utilize tax NOLs to reduce actual cash taxes paid.

As a result of our revenue and margin out performance, Q1 non-GAAP earnings were above our expectations, growing to $0.25 per share, compared to our target of $0.20 per share and improving $0.08 over the same period of last year. Please advance to slide number 17.

Cash flow from operations and free cash flow were also better than expectations for the quarter. Consistent with our normal pattern, Q1 is a seasonally low quarter for cash flow from operations. Note that as a result of stronger than expected collections, day sales outstanding remained at 62 days, which is at the low end of our 60 to 70 day range. We also believe that it’s realistic to expect that over the course of the year, DSOs may increase as a result of external economic factors.

As expected, capital expenditures of $5.6 million were larger than our expectation for the remaining quarters of the year. As we discussed on last quarter’s call, we took advantage of longer negotiated payment terms and paid in the current quarter for approximately $2 million of capital assets that were ordered in Q4. We also continued to be active repurchasing shares of our outstanding stock, totaling 2.25 million shares at an average price of $27.05 per share. Please advance to slide 18.

I’d like to now provide more detail on our expectations for the remainder of fiscal 2009. While being pragmatic about the state of the economy, we remain very positive on our expected financial performance for fiscal 2009 and the large opportunity we are pursuing. We believe the following framework is important to keep in mind as we consider expectations for the remainder of the year.

One, new business growth was strong in Q1 with the signing of nearly 700 new customer contracts and more than 50% of new customers choosing Concur Travel and Expense. Two, we expect revenue for Q2 to grow by approximately 6% over Q1 and to continue to grow quarter-over-quarter throughout the remainder of the year.

Third, customer deployments during Q1 progressed well and we expect this to continue for the remainder of the year. And four, we expect to continue to grow our investments and distribution, new service offerings and service excellence, consistent with our long-term objectives.

Fifth, we expect to deliver pro forma earnings per share at $0.22 for Q2. For the year as a whole, we expect pro forma earnings per share to total $1.11 which is $0.25 per share and 29% higher than last year. Six, we expect our pro forma operating margin for the year to be at or above our previously committed 20%, and finally, we expect to deliver free cash flow for the year, between $43 million and $47 million or $0.83 to $0.90 per share.

Now to slide 19 and in closing, our perspective on the long-term objectives we have been pursuing for years has not changed and while we will continue to take a pragmatic approach to managing the daily operations of the business, we will do so in the context of this larger and longer term opportunity.

Specifically, we believe we are pursuing a large under penetrated multi-billion dollar market in which we are the clear leader. We provide solutions that allow our customers to reduce their employees and management costs and provide a rapid return of investments. We expect to generate annual revenue growth of 25% over the long term.

We believe our business model affords us tremendous earnings leverage and we expect to continue to grow the operating margin to 30%. Our business model is such that we generate strong and sustainable cash flows as a result of our earnings growth. And last, but certainly not the least, we have a strong balance sheet with $200 million in cash reserves. We are very comfortable with our ability to perform well in the near term and intent to aggressively pursue the growth and consolidation of this market.

Operator, we’d like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Thomas Ernst with Deutsche Bank. Please go ahead with your question.

Thomas Ernst - Deutsche Bank

Good afternoon gentlemen, thanks for taking our questions.

Steven Singh

Hey Tom.

Thomas Ernst - Deutsche Bank

Last call you talked about the growth profile for 2009 as being somewhat back-end loaded due to the nature of some of your deferred bookings. Do you still see that back end loaded deferred growth profile with some of your previous bookings or is some of that changed because of the macro conditions?

Steven Singh

Sure, let me take a stab at that question Tom. The nature of our revenue growth is very much driven by deployment of new customers or deployment of new services at existing customers, and as we’ve always said, it averages roughly six months to deploy a new customer.

Sometimes as in this quarter, we are slightly ahead of our deployment schedules, so we got a little bit of an upside in the quarter because of faster than expected deployment, butif you look at new customer growth that we saw in the prior fiscal year, which is what’s driving the growth in this fiscal year, it was very much a significant up-tick in new customer additions in the June and September quarters, which if you add six months to them and actually roll them to the P&L, you’ll see that deployment really hit in the March and June quarters. So by default you see a little bit of what you reference as back-end-loaded, because of the way the customer signs came through in the prior year.

Now, in addition to that, I think it’s important to note that from Q1 to Q2, we expect to see frankly the largest increase in absolute dollar subscription growth that we’ve ever forecast before. So we do see that being obviously back-end loaded as you mentioned, and we’re seeing success against that, and so it’s really much more a factor of what’s happening to the existing customer revenue base that we’re trying to communicate here.

Thomas Ernst - Deutsche Bank

Okay and one more follow-up if you permit. You mentioned the traction with American Express and it sounds like you’re on track in terms of customers and revenues with what you had set expectations for previously. The question is, have you had the chance now to cycle the training through American Express account managers and how extensive is that? Where are we in terms of the program for going through and getting them ready? Thank you.

Steven Singh

Sure, Tom. So yes, we are very happy with the relationship we have with American Express. Obviously the first phase of this relationship is really, the first five months of the relationship was all around coordinating how our organizations are going to work together. We’re a 1,000 person company, working with a 50,000 person company and obviously it’s quite a difference in scale, and so the real focus was on how do we coordinate, how do we make sure that we can drive leads for each other and how do we execute on an operational basis with the greatest amount of efficiency.

Ultimately that measured really in two near term variables. The first is growth in the pipeline which we saw very early on in the relationship, and the second is in going through that pipeline and actually signing customers. Our expectation walking into the year or walking into the partnership would generally take roughly about two quarters to kind of get from a standing position to a position where we’ve got a solid pipeline, we’re actually closing deals, so roughly mid-fiscal 2009 that we would see the first new customer additions and that’s exactly what we expect. So, literally in the March quarter we expect to see the first wave of new customer additions from the American Express partnership.

The other part of the question you asked was really about AMEX training and we’re happy with where the training is at. Obviously we still have a lot more work to do. AMEX is a very large organization, so it takes time to be able to work with every single individual and make sure that we all understand exactly what our objectives are, exactly how to sell, exactly how to drive leads, but we are on track and frankly we’re very pleased with the opportunity here. I think the other piece I would ask you to think about its training is ongoing.

Thomas Ernst - Deutsche Bank

Okay. Thanks, again.

Steven Singh

Thank you, Tom.

Operator

Our next question is from the line of Brendan Barnicle with Pacific Crest Securities. Please go ahead with your question.

Brendan Barnicle - Pacific Crest Securities

Great, thanks. Steve, I just wanted to get some clarity around the guidance, because I think there is some confusion. I mean you’re guiding to basically about 17% top line growth, first half of this year versus first half of last year and if I look at my model it looks like at least where the EPS and cash flow guidance is coming in and it’s largely inline with what I had based on the previous revenue top line guidance.

Can you explain why you don’t want to commit on any sort of revenue top line. I understand things are uncertainty, but it seems like you’re committing to an awful lot in terms of guidance, but that one piece.

Steven Singh

Yes, I think that maybe I've to start from a high level and then we can drill down into your question. First and foremost the driver of our business, the long-term growth driver of our business, is very important that everyone understands what that is and it's fundamentally two things is new customer sales and cross selling of new services into our existing customers.

We saw very strong traction against those two core drivers of our long-term revenue growth rate in Q1 and frankly, we’ve seen that over the last several quarters, but there are negative impacts that can impact our existing customer revenue base and I think that it’s important to acknowledge that the economy has actually gotten worse. Significantly worse in the last four months; more importantly that the rate of negative change on several of the key factors that would have a potential impact on us, that rate of change has actually accelerated.

So if you look at December 2007 to September 2008, I think we all knew the economy was in recession. You saw a gradual slow down of the economy, but between October and January, there has by anyone’s assessment been a sharper decline in the economic environment. That’s the component.

Then on top of that, if you look at what’s happening with unemployment? The rate at which unemployment has jumped in the last 60 days is very substantive. The rate at which business failures is increasing is very substantive. The rate at which travel budgets decline, especially in the month of December and this is on an industry wide basis was very substantive and now we’ve seen travel budgets come back a bit in the month of January.

I think the core thing that we’re trying to say is, with that level of volatility, with that level of change, it’s very hard to predict exactly where this all ends up and that is something that impacts how we look at the out year revenue targets. We do certainly expect to grow substantively in Q2; in fact about 6% quarter-over-quarter and we certainly expect to grow from Q2 to Q3 and from Q3 to Q4.

Brendan Barnicle - Pacific Crest Securities

Well, I think I can understand that, but how can you be confident then in giving cash guidance and EPS guidance?

Steven Singh

I think if you look at our business model, there is obviously from ‘08 to ’09, a fairly substantial amount of growth that we expect to see. You can make your assessment of what you think that growth is going to be, but the expense growth and this is the important part; in order to deliver $1.11, you have to grow expenses, fairly substantively year-over-year. So we have a lot of control over what we can do and so I think what you’re hearing us say is that we have flexibility in that, we moderate our expenses to be in line with what we’d like our EPS target to be.

Brendan Barnicle - Pacific Crest Securities

Great and just one last housekeeping, 700 customers this quarter, what was that against for last year?

Steven Singh

Last year it was roughly 400.

Brendan Barnicle - Pacific Crest Securities

Great, thank you.

Steven Singh

Thank you.

Operator

Our next question is from the line of Ross McMillan with Jeffries. Please go ahead with your question, sir.

Ross McMillan - Jeffries & Co.

First on, just a quick follow-up on that; just to be clear, I think the change here is that you’re saying your operating margin will be 20% or higher. Is that the key change? Because you’re guiding to same EPS for the year, 2 million light of the prior cash flow from operations at the midpoint, but you’re also reiterating the 20% operating margins. So, I just want to be clear, is the change here in the margin point 20% plus?

Steven Singh

Well Ross, what we stated was that we expect to deliver 20% pro forma or non-GAAP operating margin or better.

Ross McMillan - Jeffries & Co.

Okay. Yes, I’m just trying to compare with last quarter given that you did give a revenue number and now you’re not, but the margin and the EPS are exactly the same.

Steven Singh

Correct.

John Adair

That’s right.

Ross McMillan - Jeffries & Co.

Secondly, just if you had to weight the impact to your business between, let’s say fewer transactions per customer per month, versus erosion of the base through other factors, such as business failure or non-renewal or whatever those other factors might be; which is the dominant factor right now?

Steven Singh

Ross, I think if we can weight those with any level of accuracy, we would give you our guidance for revenue. I think that these things are unfortunately very specific on a customer by customer basis or they can be very specific and frankly they are externally driven. So, it’s very hard for us to know exactly where each of these metrics will end up.

Ross McMillan - Jeffries & Co.

Okay and then finally, is it fair to say that you would expect to see net new customer addition acceleration once the American Express relation fully kicks in? I know that we’ve already really seen that in this quarter that you’re reporting with the 50% increase in net new customers; I’m just curious, would you expect to see that accelerate further off that 50% or is that too difficult to say?

Steven Singh

I think the demand environment is very strong as is evidenced by the results we just walked through on Q1 fiscal 2009. The demand environment has not changed at all. We expect as I mentioned, a wave of new customer additions in Q2 that are driven by the American Express relationship. How fast it grows and the magnitude at which it grows, that’s PVD, but certainly when you have a global brand with the strength of American Express in a market segment that’s very closely linked to our market segment, there’s tremendous opportunity.

When you have tens of thousands of customers like American Express and we have the capacity to work with them in a constructive joint model to grow and drive our services into those customers, would actually add value to Concur, would add value to American Express payment services and adds value to our customers, these are all the right ingredients to drive great long-term growth.

Ross McMillan - Jeffries & Co.

Great. Thank you.

Operator

And our next question is from the line of Brad Reback with Oppenheimer. Please go ahead with your question sir.

Brad Reback - Oppenheimer & Co.

Hi guys, how are you?

Steven Singh

Hi Brad.

Brad Reback - Oppenheimer & Co.

When I look at the guidance and I may have missed this during the prepared remarks, sequentially with EPS being down I was looking back on the model, I couldn’t find a year where it was sequentially down. So I’m assuming some of the expense saving and measures you put in place in the December quarter, you’re freeing them up a bit here to drive demand for the rest of the year. Can you tell us where we should look for increased spending?

Steven Singh

Sure. I don’t want to comment specifically to kind of how we are looking at those expense increases quarter-over-quarter. Obviously we pared back a little bit on the investment in Q1 and we saw some benefit, obviously from that, which showed up in the EPS line. It’s important to understand there’s $600,000 of revenue that also showed up on the EPS line as well.

Relative to where we are increasing our investments, Brad fundamentally the business is exactly the same today as it was several quarters ago. There are three areas we spend and in the order that we tend to weight them today, is very much distribution, new investments in customer service and also product development. Those three drivers are the things that really drive our leadership position and that’s the weighting that we’ve seen over, frankly the last 7 years, because that hasn’t changed.

Brad Reback - Oppenheimer & Co.

Okay, great and on the share repurchase front, Steve or John, at what point do you get uncomfortable, since they bought back too much stock, but what’s the minimum level of cash you want to keep on the balance sheet?

Steven Singh

We’ll tag team on this. I think first of all we have a very long-term perspective on our business and so we look at share repurchases on a long-term basis. I think relative to cash, you know from following our business for many years, that we have been able to run the business on relatively modest cash positions on the balance sheet, because our business frankly drives great cash flows. John, you want to add anything to that?

John Adair

Yes, I think it’s relative to the sustainable level of cash on the balance sheet Brad. We’re very comfortable running the business with less cash than we have on the balance sheet today. As Steve mentioned, the business is cash flow positive; funds 100% of our operating needs, as well as our capital and investment needs on a month-over-month basis. So while we certainly like to retain a sizable amount of cash on the balance sheet, there’s nothing that precludes us from utilizing the cash that’s there today for strategic reasons.

Steven Singh

And there is a wide range of possibilities around those strategic reasons that are not just share buy backs.

Brad Reback - Oppenheimer & Co.

On the acquisition front, do you see yourselves getting more active here or is it that just whatever comes along opportunistically?

Steven Singh

I think it’s very optimistically. We’ve got a great organic growth business and that’s what we’re focused in on. We invest in that business to go drive a long term growth in the business, both top line and bottom line.

If we find interesting opportunities that can expand the footprint of services we deliver to our customers, to the economic buyer that we serve, or if we can expand the geographic footprint of our company, those are things that we’re interested in, but I also think it’s all very important to come back to something we’ve always stated, but it’s important for you and for every investor to hear is that, we are only interested in deals, where they’re accretive, where they drive incremental value to our business and to our shareholders.

Brad Reback - Oppenheimer & Co.

Great. Thanks a lot.

Operator

And our next question is from the line of Steve Ashley with Robert W. Baird. Please go ahead with your question.

Steve Ashley - Robert W. Baird

Thank you. You talked about all of the pressures that could come to bear on the existing customers in terms of cross selling ability. Is that something you saw occur in the December quarter or something you expect to occur going forward?

Steven Singh

Steve, I want to make sure I understood your question, because I think I heard you say pressures on cross-selling.

Steve Ashley - Robert W. Baird

That’s right and just what I would call comparable store sales.

Steven Singh

Okay. So we may be speaking about slightly different things and I want to make sure we clarify this. When we say cross selling, we’re talking about selling new services to existing customers. So, if a customer might happen to incur expense, the ability to sell them Concur travel and expense, Concur pay Concur Analytics and others, that’s cross selling to us. I think what you may be referencing is usage and existing customers. Do I understand that correctly?

Steve Ashley - Robert W. Baird

That’s correct. I’m more interested in the usage levels.

Steven Singh

I think that there are potential pressures on both, right? So in the month of October and November, I was covering this in the slides so that you can reference it if you like, but in the month of October and November, travel spend, which at some level has a correlation to travel transaction, was off year-over-year, but very much in line with what the industry consensus was around it.

However, in the month of December, travel spend was down very sharply, much more so than the industry consensus and those types of things have an impact on our business, as well as if those trends continue or if they get worse or for that matter if they improve, those would have impacts on our business. I think the answer to your question is both.

Steve Ashley - Robert W. Baird

Great and then with American Express you talk about hopefully seeing the first wave of customer ads there, any quantification around that? Are we expecting a single digit number, a couple dozen, is there anything you can tell us about that?

Steven Singh

Sure, I think that it’s hard to gauge exactly what that would be. I think that the contribution would be significant simply because of the scale of American Express, simply because of the fact that this is an important relationship for both of us, but I think it’s also important to set an expectation that that range of contribution will grow over time.

Steve Ashley - Robert W. Baird

Great and lastly John, do you know what FX kind of assumption you might be making in your ‘09 or in your second quarter guidance.

John Adair

Sure. So if you look back at what’s happened with FX rates. If you take the last year and more noticeably in the last quarter, FX rates during our fiscal ‘08 were relatively stable, but the rates during the month of December, the latter half of our Q1 obviously deteriorated quite substantially, especially as it relates to the British pound and the Euro; the two currencies in which we predominantly have our foreign contracts, not denominated.

So, that impact was fairly significant in the latter half of Q1. We expect that rate environment to continue for Q2 and frankly would not be surprised -- the industry expectations around currency rates are that we’ll continue to see this type of rate environment for the foreseeable future. It’s what we expect in our numbers as well.

Steve Ashley - Robert W. Baird

Thank you.

Steven Singh

Steve, let me just add one additional point to your earlier question and I think it’s helpful to understand this because it helps you understand the complexities in determining the exact impact in the forward year, but if you think about the month of December, the industry-wise numbers here where that travel spend was down roughly 20%. However, in that same quarter, our subscription revenues were up 22%. So it’s not a direct correlation. I want to make sure you understand that.

Steve Ashley - Robert W. Baird

Thank you.

Operator

Our next question comes from the line of Mark Murphy with Piper Jaffray. Please go ahead with your question.

Mark Murphy - Piper Jaffray

Thank you, Steve. Just wondering from what you’ve seen historically in prior cycles, how does the relationship between the number of business trips and the number of expense reports work? Just for example, if business trips are down 10%, would expense report volumes drop 5% or just what kind of a formula have you observed in the past?

Steven Singh

So, thanks Mark. Mark, we really don’t speak to that specifically, in large part because there is no simple formula here. It can depend very much on where travel is down and to what degree it’s down, and so it’s not a simple formula and it’s not something that we have specifically equated in the past.

However, I do think it’s important to go back to a comment I made at the end of Steve Barrett’s question, which was very much that, if you look at travel spend in dollars, that was down roughly 20% year-over-year in the month of December and obviously down in October and November as well on a year-over-year basis, yet our subscription revenues were up 22% year-over-year. So there is not a direct one-to-one correlation on these things and we don’t provide a specific equation on that.

Mark Murphy - Piper Jaffray

Thanks, Steve. Just as a quick follow-up, your customer adds the last three quarters have been just extremely strong and I just wanted to try to drill down a little into the relative value of this quarter. So if you look at them in June, September and December, and try to consider the size of the customers being added either in terms of annual contract value or their likely T&E volumes, are those all relatively comparable or would it be fair to say that the September quarter was kind of eclipsed to the other two in size or any color you can add there would be helpful.

Steven Singh

Sure, Mark. So in general, there are a couple of rules that have been consistent in the past; however, I’d ask you to think about the future with a slightly different lens. In the past, June has typically been a heavily small or mid customer driven quarter. It happens to be ADPs fiscal year end. They drive a lot of business for us and so you can see that in the June quarter, there is a larger percentage of more modest sized deals.

In the September quarter, where it happens to be our fiscal year end and historically we’ve had a greater number of sales people at the higher end of the market, serving the higher end of the market, those cycles tend to be a little larger. However, as we have been growing over the last several years, we have been adding more and more sales people and those sales people as you would expect, will start to reflect the bell curve of distribution of company’s throughout any market segment and that will start to show up as more and more F&B or higher end of middle market deals.

Then the next factor I’d like you to consider, is that especially as the AMEX relationship continues to build, American Express has tens of thousands of customers and by definition there have to be a lot of middle market and smaller customers, plus of course global accounts.

Mark Murphy - Piper Jaffray

Okay. Thank you.

Operator

And our next question is from the line of Brad Whitt with Broadpoint AMTEC. Please go ahead with your question.

Brad Whitt - Broadpoint AmTech

Hey guys. Thanks for taking my questions. Steve, did I hear you correctly say that your retention rates were the same at 97% to 98%?

Steven Singh

The retention rates in the most recent quarter were consistent with our historical averages, around 97% to 98%.

Brad Whitt - Broadpoint AmTech

What kind of assumptions are you making around that going forward?

Steven Singh

Brad, I think that’s the core point that we’re trying to drive in our commentary, which is that there’s an amazing amount of volatility in the macroeconomics which impact our business. Unemployment for example right; as of the end of October, unemployment stood nationally at 5.7% and at the end of December it was at 7.2%. Back then everyone thought unemployment would peak around 8%. Today the consensus estimate seems to be 9% plus.

So these are fairly substantive changes in a very short period of time and I think that prudent management teams have to look at this and say, we will look at what’s available in the industry for this data and try to do our best to model that.

Brad Whitt - Broadpoint AmTech

Okay and then Steve, can you give us an idea what types of conversations you’re having with your customers. I assume they’re coming back to you and asking for lower minimum commitments.

Steven Singh

Brad, we didn’t comment about that at all and we don’t comment about individual customer conversations.

Brad Whitt - Broadpoint AmTech

No, just in general I mean.

Steven Singh

Obviously our number one objective is to serve our customers exceptionally well and whatever form that takes, it takes.

Brad Whitt - Broadpoint AmTech

So are you changing the contracts where there’s not a monthly minimum, it’s going to completely be driven by usage from month-to-month?

Steven Singh

Brad, we didn’t speak to that at all and we’re not interested in changing our business model or changing the way we deliver our services. I think it’s important to understand that we deliver a great value equation to our customers and our customers are obviously acknowledging that. In fact it’s represented by the fact that we just added nearly 700 new customers in the quarter and we just beat on Q1 estimates.

Brad Whitt - Broadpoint AmTech

Okay. Thanks for taking my questions.

Steven Singh

Thanks.

Operator

And our next question is from the line of Laura Lederman with William Blair. Please go ahead with your question, ma’am.

Laura Lederman - William Blair

Yes, I got a follow-up on some of the prior questions. I think I’m having a bit of trouble understanding how with no visibility of revenue you can hold profitability and maybe a way to ask the question better is where would you cut, would it be a cutting head count or how would you achieve that and how comfortable are you that you can do that even if let’s say revenue growth is below what you’re thinking right now, even though you’re not sure in your thinking.

Steven Singh

Laura, let’s start with the first part of your statement. We didn’t say anything about no visibility on revenues. That would be a wrong interpretation. We said there’s a lot of volatility in the environment and that volatility can impact our revenues. We also provided some perspective on that. We said that Q2 is expected to be up roughly 6% quarter-over-quarter, which I’ll just remind you, the largest increase we’ve ever forecast on a quarter-over-quarter basis.

In addition to that, the way that we look at the EPS targets and the operating margin targets is that keep in mind in order to go hit a $1.11 in earnings, we would have to increase our expenses year-over-year assuming a wide range of revenue growth targets and so what we are doing is moderating our investments as we get more and more data.

Laura Lederman - William Blair

What types of investments are you moderating if you could give us a sense?

Steven Singh

I want to be clear because it’s too easy to not understand this. We are in fact increasing investments quarter-over-quarter. We are in fact increasing investments year-over-year. We are moderating the rate of growth of those investments and the areas that we invest in are the same three areas we have been increasing our investments over the last seven years. (1) Is to increase investments in sales and marketing, to guide distribution of our services; (2) Is in what we commonly refer to as service excellence, which is delivering an amazing experience for our end customers and the third is on new product innovation.

Laura Lederman - William Blair

Second question is following up on an earlier one on the minimums. I thought that the minimums give you through the rest of the year a little bit more revenue visibility so our people are asking for the minimums to go down, because I thought the large companies commit to those, a year in advance or is it more the middle-market customers that are evergreen are calling in and when their subscriptions or contracts roll over they’re calling to say can you please let us to a lower minimum? Are you already seeing that or is that something you expect? I think the question was that specifically that if you make that question more general, are you seeing a lot of that weakness already or are you expecting it?

Steven Singh

Laura, I want to make sure I go back to the statement I made earlier, that we’re not commenting on specific customer contracts and it’s also important to make sure we reiterate that we didn’t say we have no visibility into the future. What we said is that there is a lot of volatility in that future outlook and we moderated the way we run the business to try to set ourselves up to be able to react to that on a very, very near term basis.

Laura Lederman - William Blair

Okay, final question, which is once again a follow-up of what somebody asked earlier. Given all the new customer additions you’re having, would it be logical to expect revenue year-over-year growth to accelerate in the second half of the year since the customer additions have been so strong?

Steven Singh

Laura, I give you credit for asking this question in multiple different perspectives, but I just refer you back to the answers I just gave.

Laura Lederman - William Blair

Thank you.

Steven Singh

Thank you.

Operator

Our next question is from the line of Michael Nemeroff from Wedbush Morgan. Please go ahead with your question.

Michael Nemeroff - Wedbush Morgan

Thank you for taking my questions. Just a brief one on the sizes of the customers and the customer base; with 8,000 customers, could you possibly break down the number of small, medium and large customers just on a percentage basis, just to give us a sense of what you have in your customer base?

Steven Singh

Michael, I can give you the following information. We as a business started selling and serving the higher-end of the market. We have over time really expanded our capacity to grow serve customers of virtually any size basically down to 75% company, that we can proactively call on and sell and service and support effectively.

We don’t provide a break-out of exactly what that mix is, but I think it’s fair and reasonable to assume that when you have 8,000 plus customers, that there has to be some general approximation to the bell curve distribution of companies in any marketplace; whether you talk about the US market or EU market broadly or the German market, whatever it might be.

Michael Nemeroff - Wedbush Morgan

And then I don’t know if you’re going to answer this, but I’m going to try anyway. When you talk about your customers and the number of transactions being the volatile nature of what you can't predict going forward, could you just maybe give us a sense, because we have no base to work from, what percent decline you are expecting or what you’ve seen either in this current quarter, last month or just any color around the volumes or the percent declines that you’re seeing from existing customers that are causing you to be a little bit more cautious on your outlook?

Steven Singh

Sure, I’ll attempt to answer it as best I can within the context that I’ve already given, and that is that there is volatility in the overall market, right; so there is volatility in business failures, right. Well, let’s back up, there’s an increase in business failures over the last 12 months; there’s an increase in the unemployment rates in the last 12 months; there is a decrease in the number of dollars being spent on travel in the last two months, with a sharp decline in December.

So these things have an impact not only on our customers, they at some level have an impact on the relationship that our customers have with us and for example if a customer is not there anymore, obviously that has a direct and immediate impact on our business; if the customer has cut its work force in half that has a direct and immediate impact on us.

If you look at, for example in the last month, you saw a number of reductions in work force that were announced, about 100,000 employees were either let go or planned to be let go. The vast majority of those companies that announced those layoffs were our customers. So I think that all these things have an impact. When they have an impact? How big of an impact they have, is very much a customer-by-customer basis and we don’t break out the specifics.

Michael Nemeroff - Wedbush Morgan

So in general as a follow-up, would it be fair so say that as the unemployment rate continues to go up, as well business closures and bankruptcies continues to rise, the variability or the lack of visibility will also rise with respect to your growth going forward?

Steven Singh

I think that’s the wrong way of characterizing it. I think the right way of looking at it is you should look at our business as it’s got two forces acting upon it right now. The first is that our long-term growth rate is driven by new customer additions and selling new services to existing customers, and those obviously are upward drivers of revenue and frankly of the growth rate.

There is in the near term, some level of pressure that comes from four variables that I outlined in the call and those typically impact the existing customer base, and so it has at some point a finite level of impact that it can have. So we very much look at the volatility around those four variables as well as the near term volatility. Ultimately as deployment of new customers continues, it will eventually eclipse the level of downward pressure that you can see from those variables.

Michael Nemeroff - Wedbush Morgan

Thanks for taking my questions.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Singh, do you have any final remarks you’d like to make today?

Steven Singh

No, thank you very much. We do thank all of our investors for joining us for our Q1 earnings call. We look forward to speaking to you in April to update you on the progress of the business through the March quarter. Thank you very much.

Operator

This does conclude today’s conference call. We’d like to thank you for your participation. You are now free to disconnect.

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Source: Concur Technologies F1Q09 (Qtr End 12/31/08) Earnings Call Transcript
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