Concur Technologies F2Q09 (Qtr End 3/31/09) Earnings Call Transcript

| About: Concur Technologies, (CNQR)

Concur Technologies, Inc. (NASDAQ:CNQR)

Q2 2009 Earnings Call

April 29, 2009 05:00 PM ET

Executives

John Torrey - Executive Vice President of Corporate Development

Steve Singh - Chairman and Chief Executive Officer

John Adair - Chief Financial Officer

Analysts

Tom Ernst - Deutsche Bank Securities

Brad Reback - Oppenheimer & Co.

Ross Macmillan - Jeffries & Co.

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

Mark Murphy - Piper Jaffray

Richard Baldry - Canaccord Adams

Bradley Whitt - Broadpoint Amtech

Steve Ashley - Robert W. Baird

Operator

Good afternoon. My name is Catherine and I will be your conference operator today. At this time I'd like to welcome everyone to the Fiscal Year 2009 Quarter Two Earnings Release Conference Call. All line have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

I will now like to turn it over to Mr. John Torrey. Sir, please go ahead.

John Torrey

Good afternoon. And welcome everyone to the Concur earnings conference call, for our second 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 Steve Singh, our Chairman and Chief Executive Officer; and John Adair, our Chief Financial Officer. After their prepared statements today, Steve and John will host a brief question-and-answer session.

Please now advance to slide 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 or risk factors that could cause actual results to differ materially from our current expectations and the forward-looking statements expressed or implied during the 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'd like to turn the call over to Steve Singh. Steve?

Steve Singh

Thank you, John. Good afternoon, everyone. Two of the top five items to take away from Q2 results. First, as we continue to drive meaningful innovation into the $300 billion corporate travel supply chain. We grew revenues 16% year-over-year against the backdrop of more than a 30% decline in corporate travel spend.

Second, we remain to committed to investing against the long-term opportunity in our market. Through that end, we increased investments across our business 8% year-over-year while also improving non-GAAP EPS 33% from the same period last year.

Third, by any measure, the economic environment was difficult last quarter. As corporate travel decreased meaningfully and unemployment rose sharply. However, there are some early indications that the rate of deterioration of key metrics appears to be slowing. With that said we would advice caution in expectations.

As it's impossible to know if we're approaching the bottom of this economic downturn or if other variables could cause the recession to deepen further. Looking ahead it will take a few quarters to work through the impact of these economic trends.

As such we expect Q3 and Q4 subscription revenue growth to be modest and potentially lumpy. We do expect to continue -- year-over-year and generally perform better than the overall technology sector as we continue to build our leadership position against a very large market opportunity.

Fourth, we saw solid new business growth in Q2 and we expect that to continue into our seasonally strong fiscal Q3 and Q4. We're very pleased with the progress by American Express partnership and expected to contribute between 10 to 20% of new business growth in the fiscal year.

And finally, our financial strength and the flexibility afforded by our business model and balance sheet, our strategic assets in this economic environment. We're a clear market leader and like any market leader we saw our win rates improve over the past few quarters.

We're generating significant free cash flow. We have a strong demand environment for our services and incredible leverage that come as a result of our business model and our partnerships.

We're very comfortable that we can continue to prosper in virtually any economic environment.

Please turn to the next slide.

Before we speak to Q2 results, let me take a moment to speak to the macroeconomic trends that impact our business. And how those trends have changed since the last time we spoke.

As you recall, there are four factors that impact customer usage and thus subscription revenue. Those factors are as follows: unemployment, recession driven attrition, whether that takes upon the business carrier or M&A, travel budgets and foreign currency exchange rates.

Collectively, factors were a substantial drag on subscription revenue growth in Q2. And it will likely continue to be drag on subscription revenue growth for the next few quarters. So let's address each of these areas starting with unemployment.

Please turn to slide number five.

At the end of March, national unemployment reached 8.5%, up from 6.2% just six months earlier. The last time our nation saw unemployment at more than 8.5% was during the recession from 1981 to 1983. More importantly, the last time we saw a rise of 230 basis points in unemployment within a six month window, in early 1975.

Unemployment is expected to peak at 10.5% in mid 2010, which will put us on par with record highs over the last 60 years. And there are a couple of things to take away from these data points. First; as unemployment rises there are less people available to use our services. And thus, less revenue that we can be assured of. The second observation is that the consensus estimates are correct that unemployment will tap out around 10.5% in mid 2010, then the rate of deterioration will slow.

In other words, unemployment will move up another 200 basis points, but over 15 months as opposed to the 230 basis points that have rose over the past six months. At a macro level here is what it means, the environment will become more predicable.

The second factor that impacts our existing revenue base is recession driven customer attrition. We have all seen growing consolidation of businesses in all markets, as companies either close the doors or are acquired by another companies. We just generally followed by a reduction in the workforce. As a result, our retention rates dipped modestly in the most recent quarter, from our historic average of 98%. This is nothing more than a reflection of business failures, M&A or a reduction in the workforce.

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 year-over-year basis, travel spend was down across the industry in each of the past six months. Reaching levels that our industry has not seen since the December 2001 quarter.

We also need to be mindful of other variables, such as the recent outbreak of the H1N1 virus. With that said, we have seen some early indications that we maybe approaching a bottom. But it's too early to tell, if these positive indications will become a trend. If the trend holds throughout the quarter, we'll become a bit more optimistic.

Please turn to the next slide.

The fourth factor that impacts our existing revenue base is foreign currency exchange rates. About 10% of our business originates outside the United States. And over the past year, we've seen roughly 20% of new customer additions coming from outside the U.S. The impact of the strengthening dollar is roughly at $3 million reduction in revenue for the fiscal year as a whole.

Please turn to the next slide.

So now, let's put all this in perspective. We're in the midst of the worst economic environment in decades. And we've seen travel spend decline at rates worse than those seen post 9/11. Yet through at all, we grew our business 16% year-over-year, and 6% quarter-over-quarter. We continue to invest in new services, in distribution and service excellence, all while growing non-GAAP EPS 33% year-over-year.

Looking ahead, we see some encouraging signs on key economic indicators. But are mindful, that it will take a few quarters to work through the lingering impact caused by the meaningful contraction of our economy. We expect to grow subscription revenue quarter-over-quarter, although that growth maybe modest and will certainly be lumpy.

We expect to achieve $1.11 in non-GAAP EPS for the fiscal year as a whole. We expect to continue to grow revenue and earnings year-over-year and generally perform better than the overall technology sector, as we continue to build a leadership position against a very large market opportunity.

Please turn to the next slide.

We saw solid operating performance across the business in Q2. Revenue reached an all time high at $62 million, with subscription revenue growing 4% quarter-over-quarter. As I outlined earlier we saw substantial drag on subscription revenue growth stemming from a significant decline in travel transactions and lower usage levels as a result of rising unemployment.

Driven by solid revenue growth and tempered increases in investments, non-GAAP EPS for the quarter was $0.28 per share well ahead of our expectations. And driven by stronger earnings and stronger cash collections free cash flow in the quarter was $18.8 million well ahead of our expectations.

Please turn to the next slide.

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 continue to be very strong. We signed nearly 600 new customer contracts in the quarter and we see a strong demand environment for our services as we head into a seasonally strong third quarter.

As customers continue to focus on services that can help them reduce operating cost. New customers included companies such as Walgreens, the Bill & Melinda Gates Foundation, Rio Tinto, France (ph) and Yamaha Music. We were very pleased to see that well over 50% of our new customers selected Concur Travel & Expense.

Over the past year there has been a clear move in the market towards integrated travel and expense services and the reason is very simply. It provides a greater return on investment for our customers while also significantly improving the end user experience. Our company has been driver of that market shift and you should expect us to continue to drive, the innovation curve in our industry.

Win rates in the quarter were above our long-term average as customers gravitate towards companies, they believe will be long-term providers.

And finally, we continue to focus on expanding our footprint in the European Union and in Asia-Pacific markets. With an emphasis on expanding distribution, marketing programs to support our sales initiatives, and investment in local product development and deployment resources.

Over the past several quarters the EU and Asia-Pacific markets had become meaningful contributors to new customer growth. Look for us to continue spending on investments in these markets.

Please turn to slide number 11.

And now let's turn our attention to the American Express partnership. As of March roughly 5% of new business signed came as a result of our partnership. Looking ahead we believe that partnership can drive between 10 to 20% of new business signed in the fiscal year.

To put that in perspective, now we've put the American Express partnership on par with the ADP partnership. I'd like to reiterate that we do not expect to see any appreciable revenue benefit in fiscal 2009 from this partnership. As you know once we sign a customer on a dollar weighted basis, it takes us an average of two quarters to deploy the customer, which means the first dollar revenue from this partnership that will show up on the P&L would be in early fiscal 2010.

Please turn to the next slide.

We also continue to build out the global Concur Connect network, which connects our 9,000 plus customers, who spent more than $35 billion last year to content and electronic proceeds from hundreds of suppliers, who have focused on reducing their own operating cost and providing more value to the business traveler.

In Q2, we made an investment in RideCharge, a leading provider of ground travel booking services. Concur users can now use their web browser or their smartphone to electronically book ground transportation, pay for their ride via their cell phone and automatically send electronic receipt to Concur Expense for reimbursement.

Concur Travel & Expense is becoming a meaningful platform upon which our partners can add value for our mutual customers. In support of our customers and our partners, we announced the availability of new partner services for data integration and receipt scanning services.

That extend and enhance the value of our solutions. These new solutions are offered by qualified third party companies with demonstrated expertise and experience, in integrating their solutions with Concur's employee spend and management services.

Please turn to the next slide.

Over the course of the past few years, we've driven meaningful change in the competitive landscape. With new services such as, Concur Travel & Expense, Concur Pay, Concur Analytics and Concur Intelligence.

Last quarter we launched a new service called Concur Mobile that allows business travelers to use their smartphones to change airline tickets, to book hotels or car rentals or taxis, and to make dining reservations.

You can also use Concur Mobile to capture expenses while on the road and approve expense reports all within corporate policy all on the road.

Please turn to the next slide.

As you know, we believe there is an incredible opportunity to drive innovation and efficiency into the corporate travel supply chain. Global competition and a contracting global economy will demand more efficiency at the corporate level. And it will lead to more efficiency in any supply chain. Difficult environments like the one we're in create great opportunities. Companies that are willing to invest against their changing supply chain will drive long-term benefits for themselves and their shareholders.

We are not only going to invest against that opportunity, we are able to invest against it, even in a contracting economy. 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 is -- eroding economic climate, but also allows us to capitalize on a large market opportunity. In executing against this market opportunity, we have two high level goals. Our first priority is to grow our base of customers from the 9,000 plus customers we have today to more than 20,000 customers by 2012.

Our investments in product innovation, service excellence, and distribution, including our partnership with American Express, affords us the opportunity to make that goal a reality. Our second and parallel goal to drive revenue growth, is to expend our role in the travel supply chain, with new services, such as Concur Travel & Expense, Concur Pay, Concur Analytics, Concur Mobile and others yet to come.

Successful execution against this 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 environment is a testament to the scale of that market opportunity and to our ongoing ability to execute.

With that, if you please turn to slide 15. I'd like to turn the call over John Adair, our Chief Financial Officer. John will provide more detail on Q2 results, as well as our business outlook for the remainder of the fiscal year. John?

John Adair

Thank you, Steve. Good afternoon, everyone. As Steve has just discussed, despite the challenging macroeconomic climate, the business performed well in Q2. We continue to invest against our long-term priorities, customer activity remained high, and revenue continued to grow and earnings and cash generation were exceptionally strong.

In our prepared remarks today, I'd like to address two primary topics first, I would like provide more detail on our financial and operating results for Q2. And second, I'd like to provide you with more color on our outlook for the remainder of fiscal 2009.

If you would please advance to slide number 16.

Total revenue for the quarter was 62 million met our expectations representing an increase of 16% over the same quarter of last year and a 6% increase sequentially. Subscription revenues were also up 16% over the same period of last year and up 4% sequentially.

One-time revenues for Q2 were above our quarterly trend as certain revenues planned for the second half of the year were delivered in Q2. And as a result, we expect one-time revenues to be significantly lower for the remainder of the year. All things considered, we were very pleased with revenue performance for the quarter.

Please advance to the next slide.

We believe strongly in the long-term opportunity we're pursuing and accordingly we continue to invest during the quarter in distribution, in new service offerings and service excellence. Specifically, our investment in sales and marketing was up 28% over Q2 of last year, our investment in R&D was up 5% and our investment in cost of operations was up 6%, all were driving greater profitability and higher margins.

We also believe strongly in financial discipline and appropriately manage spend in other areas of the business during the quarter. As a result, our gross margin for Q2 was 69.5% up 270 basis points from the same quarter of last year. Our operating margin for the quarter was very strong as well growing to 23.3% compared to 18.8% a year ago or an increase of 450 basis points. This is well ahead of the 20% operating margin we committed to at the beginning of fiscal 2009.

It's important to note that while we do not expect this elevated level to become the basis. For further expansion in fiscal 2010, we nonetheless believe the business is clearly demonstrating the inherent operating margin potential, that we've discussed for years.

The effective GAAP tax rate for the quarter of 36% was in line with our expectations. You 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 intervals to reduce actual cash taxes paid. As a result of our margin out performance, Q2 non-GAAP earnings were above our expectations, going to $0.28 per share compared to our target of $0.22 per share, and improving $0.07 for the same period of last year.

Please advance to slide number 18.

Cash flow from operations and free cash flow were also significantly above our expectations for the quarter. Driven primarily by our out performance in earnings and strong accounts receivable collections. During the quarter, day sales outstanding were reduced to 53 days, well below our 60 to 70 day target range. You'll recall that we bill and collect from our customers on a monthly basis. As such, our customers vote as it were on the value of our services with their monthly payment.

Similarly, our revenue was generated from current amounts billed as opposed to the amortization of amounts deferred from prior periods. With that as the backdrop, the reduction in DSOs to 53 days was even more rewarding. We will continue to focus on the quality of receivables and expect DSOs to be within our target range for the remainder of the year.

One of the strategic assets we posses is a strong balance sheet and in particular large cash reserves. We ended the quarter with total cash of 222 million, up 12 million sequentially from Q1. Based on our expectations of cash flows for the remainder of the year, we expect cash reserve to continue to increase.

We maintain the vast majority of our cash reserves in very short maturity, high quality investments. The interest rate environment for such investments continue to decline for the quarter and averaged roughly 65 basis points for all of Q2. We expect the rate environment to continue at these lower levels for the foreseeable future.

Please advance to slide 19.

I'd like to now provide more color on our expectations for the remainder of fiscal 2009. As we had discussed last quarter, and as Steve has just comments about in greater detail. We expect a downward pressure from rising unemployment levels, business contraction and consolidation, and reduced corporate travel spend to continue through the remainder of the year as the economy seeks to find bottom.

We believe the appropriate focus of our attention is not on when these negative trends will abate, but rather our position the business to emerge in even stronger competitive position. We believe the following framework is important to keep in mind, as we consider expectations for the remainder of the year.

One; we expect subscription revenue to continue to grow modestly quarter-over-quarter, but that growth is expected to be uneven. Two; we expect to continue to grow our investments and distribution, new service offerings and service excellence consistent with our long-term objective.

Third; we will also continue to proactively manage spend in other areas of the business. Four; we expect to deliver pro forma earnings per share of $0.25 for Q3 and for the year as a whole, we expect pro forma earnings per share to total $1.11, representing an increase of 31% over the prior year.

And five; we expect our pro forma operating margin for the year to be above our previously committed 20%, as demonstrated in both Q1 and Q2.

And finally; we expect to deliver free cash flow for the year in between $43 million and $47 million or $0.83 to $0.90 per share.

Now to slide 20 and in closing.

We remain turgidly focused on a large global opportunity before us. And while we will continue to a pragmatic approach to managing the daily operations of the business, we will do so in a context of growing this opportunity and our leadership position.

Specifically, we will continue to drive meaningful innovation into the $300 billion corporates travel supply chain and deliver services that help our customers control, employee spend before it occurs.

We will continue to invest in distribution to extend our global reach and capture a growing share of market demand. We will continue to invest in service quality and raise the market's expectations of service levels.

We believe our business model affords us tremendous earnings leverage and we expect to continue to grow the operating margin over the long-term to 30%.

And finally; we have a strong balance sheet with over $200 million in cash. We're very comfortable with our ability to perform well in the near-term and intend to aggressively pursue the growth and consolidation of this market.

Operator, we now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from line of Thomas Ernst with Deutsche Bank.

Tom Ernst - Deutsche Bank Securities

Good afternoon, gentlemen. Thanks for taking my questions.

Steve Singh

Hi, Tom.

Tom Ernst - Deutsche Bank Securities

So the question I have for you is with the large number of integrated travel wins you mentioned that your win rate is up. How much market share do you think you have at this point and both in terms of what you want perhaps new business but also just in terms of actual travel bookings. I am asking the question not from a competitive perspective but just to gauge how much penetration if -- you still have yet to grow within that market? Thank you.

Steve Singh

Sure, Tom. So I need to break that down a little bit because obviously our market share at Expense is very different than our market share in Travel versus our market share in Travel & Expense together. In Expense as you know our market share is comfortably in the 75% plus range and our win rate in the most recent quarter really across any of our product segments, the historical average is around 75%.

Win rates in the last couple of quarters had been about 10 points higher or thereabout. The market penetration for Expense, we believe to very, very modest in fact low less than 10% market penetration in Expense. On the Travel side, we believe that if you look at from point of view of online travel booking we think that the online travel booking market is still less than 50% market penetrated. A significant portion of travel transactions that are booked today are still booked via non-online booking tools and market share relative to travel booking really depends on the market segment. If you look at the U.S market, we have an increase in percentage of that market in fact if you look at win rates in any given quarter, we are winning more travel deals than probably anybody else in the industry. And in other market segments I think EU were still relatively modest as far as presence in those segment.

Tom Ernst - Deutsche Bank Securities

Okay. Perhaps as a follow-up to that. What about usage you've had much higher usage statistics in the other online booking vendors but with the large number of integrated deals, are you still keeping those usage rates up in customer base?

Steve Singh

Yeah, the usage steps are very high typically in the past the way when you saw a travel only solution in at a customer, online travel booking. The usage rate could be widely variable anywhere from 25% to 65%, 70% kind of numbers. And it depended upon which provider was being used, but what we have found is, when you move to integrate Travel & Expense that usage rate rises subsequently, 80, 85% seems to be a fairly reasonable estimate across integrated Travel & Expense for the travel side, of course.

Tom Ernst - Deutsche Bank Securities

And you're realizing that with your customer base, even with all the big number of new wins the last few quarters?

Steve Singh

Yeah, we are realizing this Tom, but obviously there's a headwind against that which is the number of travel transaction decreasing pretty subsequently. And you saw in one of the charts that represented that the travel transaction on a same-store sales -- in fact on the same-store basis year-over-year have been down each of the last six months sequentially. And in fact, travel spend as a whole dollar spent in the most recent quarter were down more than 30% across the industry.

Tom Ernst - Deutsche Bank Securities

All right. Thank you again.

Steve Singh

Thank you.

Operator

Your next question comes from Brad Reback with Oppenheimer.

Brad Reback - Oppenheimer & Co.

Hi, guys, how are you?

Steve Singh

Hi, Brad.

Brad Reback - Oppenheimer & Co.

Steve, I think it was on the last call, you had talked about some pressure coming back from customers as they looked at their current head count or some M&A activity et cetera. So could you maybe walk us through where you feel you are in that process resetting your business to be inline with what customer expectations are for their business going forward?

Steve Singh

I'll give my best at that Brad. I hope that you and everyone else appreciate that the question is very sensitive from a competitive perspective. So I can't give you a current detail around it. But what I can say is that, a couple of things, first and foremost as we said in the call, subscription revenue growth in the quarter, while we are happy with it, it certainly had a headwind against it which was driven by two factors decline in travel transactions. That's number one.

Number two, was a lower usage level, that was really a result of rising unemployment. I think the question that I would ask you and our investors is, I think about is that, our view is a very long-term perspective on the industry, which is very much driven by the fact; we're always interested in serving our customers exceptionally well, which means just make sure, we pressed out in a great position, have a long-term relationship with them. And make sure that, any given time the issue is regarding relationship.

So if a customer is under a significant amount of pressure because of the significant layoff in their organization, the right thing to do is to make sure that we find a level that works for both the customer and for Concur. And I think that's what any good company would do.

Brad Reback - Oppenheimer & Co.

Great. And you had mentioned seeing some signs of slowing deterioration, could you maybe point to a few of those?

Steve Singh

Yeah sure. Just a couple. And I want to make sure that we don't get overly positive about those things yet. Anytime you see anything positive, the risk is, there is something negative right behind it. And so, here are the two that are important to us that we track, first and foremost just look at unemployment. And I hope we were able to bring this out clearly but I was able to bring out clearly in the slide.

But if you look at unemployment in the last six months, the is rise in it. But we went from roughly 6.2% unemployment on October 1 on a nationwide basis to 8.5 as of March 30th, that's a 230 basis points increase in unemployment in nearly a six month window, right? And so the last time that we saw anything that even remotely approach that was back in 1975. And so that sharp rise is a very hard thing to not only for our customers to deal with, but frankly for any of the vendors to respond to.

And now, if you look at the consensus estimate for where unemployment caps out, that unemployment estimate is expected to be about 10.5% in roughly mid fiscal 2010, I am sorry, calendar 2010.

So our view is that the consensus estimates are right that it caps at around 10.5% in mid 2010, that means there is a 200 basis point increase in unemployment but over the next 15 months, so the rate of deterioration certainly have to slow down, which was never positive to see unemployment move like that. The 4.8 is a lot easier to deal with something when you have time to deal with it, right? And so it becomes a much more predictable environment for us, that's number one.

Number two is, if you look at travel spend, nearly each of the last six months, travel spend has been down on a same-store sales comparison year-over-year for the last six months. And we certainly have seen some early indications and obviously in this month that travel spend deterioration year-over-year is less than what we saw in the last month. And I think, the core thing I will make sure we bring out is some caution around that.

Well, it's a one data point, we have to also be mindful of the fact that now we've got the swine flu virus to potentially impact that plus one data point doesn't make a trend. And so if we see that trend continue in a positive direction over the -- throughout the quarter, then we start to feel a bit more optimistic about it.

But I think the core point is we definitely saw a little bit of improvement in the month of April.

Brad Reback - Oppenheimer & Co.

Great, thanks a lot.

Steve Singh

Thank you.

Operator

Your next question comes from Ross Macmillan with Jeffries & Company.

Ross Macmillan - Jeffries & Co.

Thanks. Steve, this is the first quarter I think where you've seen a sequential decline in new customer adds for certainly for a some time may be ever. So I'm just curious given the very high number you had last quarter and the implication of sort of 50% growth rate in new adds to something more like a 20% growth rate this quarter. Can you just talk to that in the context of everything else it's going on and why that's down sequentially? Thanks.

Steve Singh

Sure. Hi, Ross. So to be fair I'm not sure if it's the only time we've ever seen a sequential down. We do see some volatility between December and March. And it really just depends on very specific deal flows within the quarter. Frankly, we're very happy with the new customer adds in the March quarter. And on top of that it's also important to note that as we walk into the next fiscal quarter, we obviously expect it to be up as we walk into our fiscal -- our seasonally strong fiscal Q3 and Q4 as far as new customer adds. The other piece I think it's important to bring out is that anytime you have a tough economic environment like this you're going to see, any company is going to see more difficult environment relative to closing business.

And I'm not suggesting that's an issue for us. I think the core thing is we'll have to look at say you're going to see some variability from quarter-to-quarter especially for us for our company between December and March. And then between June and September you should expect it to be up quarter-over-quarter.

Ross Macmillan - Jeffries & Co.

And maybe just addition to that this calling you made around subscription revenue that you clearly expect to see growth sequentially. But I think the word you used was uneven. Does that mean we could see spike in growth maybe in one of the next two quarters relative to the others, is that how should we think about it or I'm just curious as to that comment of what you were going to drive towards? Thanks.

Steve Singh

I think you took it exactly right. It just means that there is going to be it could certainly be a spike, it goes from one quarter to the next but we do expect subscription revenues to continue to move up quarter-over-quarter.

I think it's really a reflection of the factors that multiple different variables that impact our business. I talked about them on the call and I know you are very aware of them. But it's very difficult to figure out exactly how each of those variables impact in a very small window.

Ross Macmillan - Jeffries & Co.

Thanks.

Operator

Our next question comes from Laura Lederman with William Blair.

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

Yes, thanks. A few questions, one is I noticed this time you didn't gave a revenue guidance as you did last quarter for sequential increase. And sort of a following up a little bit on the Ross's question, could we potentially instead of seeing a spike sequential in growth see it coming at a little less than maybe you saw in Q1 I guess I'm trying to understand the other more the negative implications possibly affect variability comment, and also why you didn't provide the guidance?

Steve Singh

Good, so Laura I think maybe John and I would talk to you on this. But I think maybe the historic is that obviously the drivers of that business you are very aware which is basically new customer growth and cross selling in these services.

We obviously saw in our view very solid new customer growth in Q2. We expect to see very solid new customer growth in Q3 and Q4. Now having said that there are a number of variables that are negative impact for our business. And I won't reiterate them in detail here because I just walked through them on the call. And you know what they are, they're really unemployment, travel spend, business failures or M&A which result in lower input levels or FX, but FX at this point is fairly well established.

I think that how those four specific items impact us in any given quarter. It's hard to manage exactly what that impact is going to be. It's really driven by case-by case basis on -- with customers.

And that said, we also obviously continue to see upward movement quarter-over-quarter in subscription revenues. It's certainly possible that you could see a nice bump in Q3 and a lower bump in Q4 or a reverse.

And so I think what we're saying is we can't be certain today what that's going to be in what order. We are comfortable, but it will continue to grow. The reason we didn't give guidance on Q3 and Q4 is really nothing more than we think in this environment there's a number of variables, it's very hard to predict exactly how those variables are going to impact us. And it's just not in our view it's just not a position we want to be to speculate on what those impacts are going to be especially since we don't control them. John anything to that?

John Adair

Yeah, Laura, I would add one other thing to Steve's comments and that is you noted in the quarter that one-time revenues were up sharply in the quarter. We had the opportunity to deliver certain revenues that were expected in the second half of the year in Q2. And so you saw the recognition of those revenues this quarter. You heard my comments on the call, we expect one-time revenues to decline sharply for the remainder of the year. But that will add to that lumpiness as well as Steve had discussed.

Steve Singh

Laura, the one other things I want to make sure that I was very clear about, this isn't a function of deployment cycles for us, this is just a function of pressures on the installed based revenue.

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

Talk about sharp decline in one-time revenues, can you give us a feel what kind of one-time revenue spike was this quarter so we kind of know better how to model it out?

John Adair

Yeah, Laura this is John, principally what we were -- certain consulting revenues that were delivered in this quarter that originally had been planned for later in the year. And so just a function of when that work was done, and therefore it was recognized this quarter as the work was delivered as opposed to Q3 and Q4 as we had originally contemplated.

Steve Singh

I think if you just look at the more normalized trend on one-times Laura. If you're saying something we can't hear you.

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

Just trying to understand what that spike was.

Steve Singh

Obviously, if you just look at the normalized trend over last several quarters. I think, you can come up with a fairly reasonable estimate on that.

I am assuming Laura, you're not in the line anymore?

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

No. Shifting gears can you talk a little bit about of why the expenses of where they were so much more under control and the way you were looking forming less sales and marketing, I am just trying to understand where the huge revenue leverage came from earnings leverage came from?

Steve Singh

Well, you note to be fair. We've trying to do $0.22 in earnings guidance and if you look at the actual result we had $0.28 or $0.06 above our target but I think it's important to understand that if you look at the line items we continue to grow them on year-over-year basis about 8% for the whole expenses line, majority of that increase obviously comes in distribution. And then in addition to that in the COGS line item which is really around our service quality, and then our comparable increase in product services, about a 5% increase in product services investment.

And so obviously we want to take more tempered approach as we walk into the quarter, there is a number of variables that we're moving really rapidly, so we take a conservative approach against that and just 500,000 position that we're little bit more conservative than perhaps we should have been.

John Torrey

Operator go ahead.

Operator

And your next question comes from Mark Murphy with Piper Jaffray.

Mark Murphy - Piper Jaffray

Thanks. I was wondering if you could provide any additional color on the Q3 revenue possibilities it's just to the extent that if subscription revenues going to be up sequentially and then the other revenue is going to be down sequentially. Should we think about that as netting out to sequentially flattish total revenue at about 62 million?

Steve Singh

Mark, unfortunately, we didn't provide specific guidance on this and so I really can't give you much more data on that. I think that all we can say is that you should absolutely expect one times to go down, and you should expect subscription revenues continue to move up, although that could certainly be very lumpy. So you could see a modest improvement in this quarter and more subsequent improvement in following quarter or vice versa.

Mark Murphy - Piper Jaffray

And Steve, just as a follow-up, if you look out through the reminder of FY '09 and into FY 2010 in that longer period would you expect to see any quarter where there is a material sequential decline in revenue. I'm just, I'm trying to assess what are the odds of having a quarter in which that pressure on the existing revenue streams kind of out ways the what's you're getting from the new customer driven revenue streams?

Steve Singh

Yeah, it's not our expectation that you could -- that we would expect to see any level of material decline on a total revenue basis in any given quarter, on a quarter-to-quarter basis.

Mark Murphy - Piper Jaffray

And Steve, just one quick last one. How would you assess the pipeline build that you saw coming out of the global user conference that you held in February and was that inline with your expectations?

Steve Singh

It's good question. Obviously our pipeline, we're very happy with we certainly will get leads at the global user conference. But the vast majority of our leads as you all know Mark, really comes from our partners such as American Express, ADP and various other partners. Our pipeline value actually continues to move up. In fact we feel very good about our pipe rides as well into Q3 and frankly even to Q4. Our win rates went up in each of the last two quarters. The other data points that I'm not sure came out here is it you know we were of to fantastic start with our American Express relationship you now about 5% of new business closed as a last month came from the metric express and more importantly if you think about the next couple of quarter we think for the year as a whole that we deject to between 10 to 20% of new business that been driven by the American express relationship and we suggested their positive opportunity for.

Mark Murphy - Piper Jaffray

Thank you.

Steve Singh

Yeah. Hey one last thing keep in mind if um look at the new customer adds if you look it on a six months basis 1300 new customers in the first half of this year versus 900 across that capital last year.

Operator

Our next question comes from Richard Baldry from Canaccord Adams.

Richard Baldry - Canaccord Adams

Thanks. Could you talk a little bit about MX not sure if free to us talk of that in terms of may be geographical but they have been able to bring you in this geography as you want present in prior as wait to get sort of there abilities to standard addressable market and then the is little surprise to see the buyback I can essentially installed in the quarter, when shares to trading fairly substantially below last quarter when you had a pretty meaningful movement on the buyback subject to be may be talk philosophically about that thanks.

Steve Singh

Sure. I'm still on the AmEx relationship just add to the comments are made from Mark to Mark's question NS as the you mentioned the couple of quarters ago eight lead market that focus is on we work with them in a very methodical fashion to lead market obviously the approach of those market is the U.S. market. We are primary focused today is to continue to work with our colleagues in American Express to opportunities in U.S. market.

We are also in fact in the March quarter added additional market including U.K, Canada Mexico, and Australia we will add additional markets over the course of the next of couple of quarters to about the lead market once we get through that we will actually of the other market segment that. But we like in approach we think it leads to better execution, relative to the stock buyback I think which this course take a way from us on the factor that we didn't buy shares in last quarter was really the incredible value for tax rate.

And I think its impossible for anybody at the beginning of the March quarter to know where the economy is going or where the market was headed as hole. And so, we just want to make sure that we took a prudent approach to understanding that market before we did anything further.

Richard Baldry - Canaccord Adams

And, maybe be not keeping going, (ph) how much do hard, but are there any barriers to some of the subsequent markets in long-tern thinking predominantly in terms of same languages addressed that we need see sort of announced to first to understand that should be right to go into those markets.

Steve Singh

No, there are no barriers to the market that we consider with that partner in form of American Express. We actually already have a product available in sixteen languages, today we are deployed in over 90 countries today with serving the tax and read for a requirement to around each of those region, there is really nothing more just a solid and protocol approach to working together, to be successful in each market.

Richard Baldry - Canaccord Adams

Thanks.

Operator

Your next question comes from Brad Whitt with Broadpoint Amtech.

Bradley Whitt - Broadpoint Amtech

Hi guys. Thanks for taken my questions. I'm wondering if I could just get a little more color on how you define modest, if I look at the December quarter where revenue grew close to 2% sequentially, subscription revenue and then looking at the this quarter growing 4% with modestly closer to the December quarter or the recent quarter in the March quarter?

John Adair

April, rather (ph) Brad.

Steve Singh

Brad, we just in... its not appropriate for us to get in more detail right now. I think the core thing is that we do expect to continue to grow, we see some positive indicators. But those positive indicators aren't yet trends. And that we just need to able to get enough data points around those to really understand how its going to impact up. And so, that's the guidance I'd give you.

Bradley Whitt - Broadpoint Amtech

And just a clarification on the AmEx, when you say 5% of business or 10 to 20%, are you talking about as a percentage of new customers or is this percentage of the value, first year contract value, the bookings, how do you define there?

Steve Singh

In that case, so I was talking about the dollars, obviously we are focused on some larger accounts with American Express right now, Walgreens for example was a great win, a mutual win for us, and 10 to 20% represented dollars as well.

Bradley Whitt - Broadpoint Amtech

Okay. So by the end of this fiscal year, when you look back over the entire year, you'll think 10 to 20% was from contributions from the AmEx partnership? Not just product, it sounds like a run rate by the fourth quarter.

Steve Singh

No. We think that for the year as a whole it will become between 10 to 20%. And then we will see where it goes from there. I think the important kind of perspective on that is, it could go multiple years to get to that same level with fantastic partner in the form of ADP. And we think that we can get to that kind of level in the first year with American Express.

Bradley Whitt - Broadpoint Amtech

Okay, great. And just. follow-up on that what exactly, can you give us some color on ADP partnership, its my understanding that, that contract is up for renewal?

Steve Singh

It's up for, it's not really up for renewal we have an on going contract with ADP and we have a fantastic relationship with them. They are as I mentioned earlier, comparable in this generation capacity or core business capacity as position (ph). We value both relationships; we expect both to be great contributors going forward. The other thing that just important to bring out is in fiscal Q3 or fiscal Q2 which is June quarter its fiscal year and for ADC could become to be the strongest quarter. We see no reason that wouldn't continue to be s great quarter a business stream by ADP.

Bradley Whitt - Broadpoint Amtech

Okay, great. And then my final question would be you guys pretty restrictions on corporate travel internally there can go?

Steve Singh

No, we obviously Mexico is something all companies are pretty restrictions on at least make sure that any travel there is absolutely necessary outside of that, now.

Bradley Whitt - Broadpoint Amtech

Okay. Thanks for taking my questions.

Operator

Our next question comes from Steve Ashley with Robert W. Baird.

Steve Ashley - Robert W. Baird

Hi, guys this actually Jack and calling in for Steve. Just a question on cross selling, you talked about sales in new services to existing customers is being one of your two main drivers. We focused a lot on the new customer growth, I wonder if you can just talked about your cross selling efforts and may be quantify what kind of revenue up with that is driving for you guys?

Steve Singh

Yeah, I think that as that becomes a bigger piece of the equation, we will certainly talk even more depth about it. I think right now, what we're comfortable with is really that, in first quarter, it's only been about a year and half now, when we've actually had additional services we can sell into our customer base.

I think the core metrics here are if you look at new customer as how many of those customers bought travel and expense; it was well over 50%, so that number continues to decline each quarter. Concur pay was a very significant portion of our new customers also to Concur pay. Analytics still is relatively early stage cost selling opportunity for us. But, I think I would say as we have little more time around cost selling or services, these additional services into our base we talk about it in little more depth. Right now our focus is really adding more customers one of the goals that I outlined in the call was we crossed, we put some 9,000 customer mark and our goal is to get 20,000 plus customers by 2012.

Steve Ashley - Robert W. Baird

Okay, great. And then a follow-up on AmEx in the quarter or in the second half, do you expect to pay fees or anything that would hit referral fees or sales and marketing that would hit the P&L before that revenue start to flow through that might be impacting margins?

Steve Singh

Jack this is John nothing unusual, its all built in our expectations around the growth in sales in marketing.

Steve Ashley - Robert W. Baird

Okay, great.

Steve Singh

Thanks.

Operator

Ladies and gentlemen, reached a lot of time for question. I would now like to turn back over to the management team for closing remarks.

Steve Singh

Okay. We think our investors for joining us for Q2 earnings call. We look forward to speaking again after the June quarter results. Thank you for your ongoing support of the company.

Operator

Ladies and gentlemen. This concludes today's teleconference. You my now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!