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Concur Technologies, Inc. (NASDAQ:CNQR)

F3Q09 Earnings Call Transcript

August 05, 2009 at 5:00 pm ET

Executives

Steve Singh - Chairman and Chief Executive Officer

John Adair - Chief Financial Officer

John Torrey - Executive Vice President of Corporate Development

Analysts

Thomas Ernst - Deutsche Bank Securities

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

Andrew Shaw - Raymond James

Mark Murphy - Piper Jaffray

John Kraft - D.A. Davidson & Co.

Ross Macmillan - Jeffries & Co.

Bradley Whitt - Broadpoint Amtech

Bryan McGrath - Credit Suisse

Sid Parakh - McAdams Wright Ragen

Operator

Good afternoon. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the Concur Technologies fiscal year 2009 Q3 earnings release. All lines 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.

Mr. John Torrey, you may begin your conference.

John Torrey

Thank you, operator. Good afternoon and welcome everyone to the Concur earnings conference call, for our third 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, 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 or 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'd like to turn the call over to Steve Singh. Steve?

Steve Singh

Thank you, John. Good afternoon, everyone. Here are the top five items to take away from the call today. First, we had a very strong fiscal Q3. Subscription revenue grew 4% quarter over quarter, non-GAAP EPS was $0.07 a share ahead of our expectations and free cash flow continue to be very strong. This is all in the context of an economic environment in which unemployment has nearly doubled in the past nine months and corporate travel spend is off 135% year over year.

Second, we saw solid new business growth in Q3 driven by our direct sales force and our partnerships with American Express and EDP. We expect the demand environment to remain strong as we head into fiscal Q4.

Third, against the backdrop of a stabilizing corporate travel environment, our ongoing ability to execute exceptionally well and the large scale opportunity in front of us, we are beginning to reaccelerate our investments across the business.

Fourth, as we head into Q4 driven by subscription revenue, we expect total revenue to grow quarter over quarter organically and we are raising our EPS expectation for fiscal year 2009 as a whole.

And fifth, the financial strength and flexibility of fortified business model and our balance sheet are strategic assets in this economic climate. While competitors cut cost, we have the luxury of investing in new markets and new opportunities that will drive future growth in revenue and in earnings. Our acquisition of Etap-On-Line is a perfect example of the strategic benefit as it now bolters our presence in the European market, it expands our framework for future revenue and earnings growth.

Please turn to slide number four.

Before we speak to Q3 result, let me take a moment to speak to the macroeconomic trends that impact our business. As you recall, there are three core factors that impact customer usage and thus, subscription revenue. Those factors are as follows; unemployment, recession driven attrition whether that takes a form of business failures or M&A, and of course travel budgets. Collectively, these factors have been a substantial drive on the subscription revenue growth rate this fiscal year.

Please turn to slide number five.

While unemployment continues to rise reaching 9.5% as of June, the rate of increase in unemployment seems to be easing. Additionally while travel transactions on a year over year basis were down substantively and sequentially from October to March, we did see some positive indicators in the June quarter as travel transactions did not continue to decline.

While it is comforting to see these negative trends start to abate, it is important to remember that these trends are still negative. We think it is prudent to remain cautious in our growth expectations as it will still take some time to work to the lingering impact caused by the meaningful contraction of our global economy.

Please turn to slide number six.

Turning our attention to Q3 results, we saw solid operating performance across the business. Revenue reached in all time high at $62.2 million with subscription revenue going 4% quarter over quarter and while we are pleased with quarter over quarter growth rates, it is important to note that we continue to see substantial drive on subscription revenue growth rate standing from a significant decline in travel transaction and lower usage level as a result of rising unemployment.

However, driven by a solid subscription revenue growth, non-GAAP EPS for the quarter was $0.32 per share, well ahead of our expectations and driven by stronger earnings and strong cash collections, free cash flow in the quarter was $14.3 million, also ahead of our expectations.

Please turn to slide number seven.

On 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. We signed more than 700 new customer contracts in the quarter and we are very pleased to see there are more than 60% of our new customers selected Concur Travel & Expense.

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

In addition to strong new customer volumes, we saw several large transactions within the quarter. In one case, a global financial institution became a customer of our integrated travel & expense service. Additionally, we saw another large financial institution become a Concur Travel customer.

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

Looking ahead, we see a strong demand environment for our services as we head into our seasonally strong fourth quarter as customers continue to focus on services that can help them reduce operating cost.

Now, let us turn our attention to the American Express partnership. Please turn to slide number eight.

As of June, more than 10% of new business signed came as a result of our partnership. Looking ahead, we believe that partnership can drive up to 20% of new business signed within the fiscal year. To put things in perspective that would put the American Express partnership on par with the ADP partnership within its first year.

I would like to reiterate that we do not expect to see any appreciable revenue benefit in fiscal 2009 from this relationship. 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 of revenue from this partnership that will show up on the P&L will be in early fiscal 2010.

Please turn to slide number nine.

We also continue to build out the Global Concur Connect Network which connects our 9,000 plus customers who spent more than $35 billion annually to content and electronic receipts from hundreds of suppliers that are focused on reducing their operating cost and providing more value to the business traveler.

In Q3, Sixt AG, a leading European car rental provider became a Concur Connect partner.

In the March quarter in support of our customers and our partners, we now see availability of new partner services for data integration and receipt scanning capabilities they stand and have the value of our solutions.

In the June quarter, Ireland-based Tax Back International became a Concur partner helping Concur customers reclaim that cost. Expect us to continue to build out a platform of on-demand services so our customers and our partners can drive even greater value from our suite of services.

Please turn to slide number ten.

As we stated in the past, we believe that our European business can grow to become 30% of revenues in steady-state model. In addition, it is our view that global market leaders are also local market leaders. To that end, we have consistently increased our investment in the EMEA market and we have seen those investments yield and increasing percentage of our customers coming from the European market.

Further to our goal, on Monday, we announced the acquisition of Etap-On-Line. Etap is based on Paris and has approximately 50 employees and 200 corporate customers with a clear and deep understanding of the French market. Etap is led by a solid management team that has consistently run a profitable business while growing their business each year.

While we are excited about the long-term contribution that will come from the Etap acquisition, there will be minimal near-term financial benefit from this acquisition. Etap's historical revenues were predominantly on premise license and service revenues but as customers continue to embrace SaaS solutions, Etap had recently begun the move to subscription revenues. When you factor the conversion of French GAAP to US GAAP and purchase accounting into the equation, revenue contribution from Etap will be minimal to modest for the next few quarters.

On an earnings basis, near term integration cost will cause the acquisition to be dilutive to Q4 2009 non-GAAP earnings. However, we expect the acquisition to be accretive to fiscal 2010 non-GAAP earnings. In addition, the Etap acquisition further strengthens our execution capacity in one of the leading international markets of our largest distribution partner, American Express.

Please turn to slide number 11.

As you know, we believe it 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 a corporate level and will lead to more efficiency in any supply chain. Difficult environments like the one we are in create opportunities. Companies that are willing to invest against the changing supply chain will drive long term benefits for themselves and their shareholders.

As competitors in this market contract their investments, we are accelerating our investments across the business. We are forwarding this opportunity because of the strength of our business model, a solid demand environment for our services, our long history and capacity to execute well and of course, the scale of the opportunity in front of us.

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, afford us the opportunity to make that goal a reality.

Our second and parallel goal to drive growth is to expand our role in the travel supply chain with new services such as Concur Travel, Concur Pay, Concur Analytics, 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 climate is a testament to the scales and market opportunity and our ongoing ability to execute well.

With that, if you please turn to the next slide, I would like to turn the call over to John Adair, our Chief Financial Officer. John will provide more detail on Q3 results as well as our business outlook for the remainder of the year. John?

John Adair

Thank you, Steve. Good afternoon, everyone. By all measures, we were very pleased with the Company's performance for Q3. Despite the challenging macroeconomic climate, Q3 was one of the strongest quarters for new customer contracts in our history. Margins and earnings were at all time highs. Cash flows remain very healthy. Our strong balance sheet grew even stronger and we continue to invest against our long-term priorities of distribution, new service offerings and service excellence.

In my prepared remarks today, I would like to address two primary topics. First, I would like provide more detail on our financial and operating results for Q3. And second, I would like to provide you with more color on our outlook for the remainder of fiscal 2009.

If you would please advance to slide number 13.

As Steve mentioned, revenue in Q3 begun to show the first signs of a trend towards stabilization as the severity of rising unemployment rates, decreased corporate travel spend and economic enforced attrition seen previously this year begun to abate this last quarter. We believe it is very reasonable to expect that it will take quite some time for the global economy to fully stabilize and at this point, we will remain cautious since we begin to see meaningful improvements in year over year core metrics.

However, despite the continuing challenges in the global economy, we saw strong top line performance in Q3. Total revenue for the quarter is $62.2 million was slightly above our expectations representing an increase of 13% over the same quarter of last year. One time revenues were lower as expected this quarter and subscription revenue continued to drive top line performance at 15% growth over the same quarter of last year or 4% growth sequentially. All things considered, we were exceptionally pleased with revenue performance for the quarter.

Please advance to the next slide.

Both gross and operating margins this last quarter continue to show the inherent strength of our business and were well ahead of expectations. As we have consistently done even through the most recent quarters, we continue to invest against our long term strategy of expanding global distribution delivering new service offerings to help our customers manage and reduce employee spend and delivering service excellence.

We also continued to manage spend in other areas of the business to ensure we align our investments but be able to deliver the strongest long term return. Specifically, our investment in sales and marketing was up 16% over Q3 of last year. Our investment in research and development was up 9%. Investments and operations were up 11% and G&A was paired by 14%. As a result, our operating margin for the quarter was very strong going to 25.8% compared to 21.2% a year ago or an increase of 460 basis points.

Q3 non-GAAP earnings were relatively well above our expectations going to $0.32 per share compared to our expectations of $0.25 per share and improving $0.08 over the same period of last year. I would like to reemphasize two points related to our operating margin that I made on the last quarter's earnings call.

First, the growth in operating margin this fiscal year to date is in excess of 400 basis points and is a clear indication there will be inherent operating margin potential and accordingly cash flow potential of this business. For years, we have stated that we believe the appropriate long term operating margin target for this business is 30%. As evidenced, each year we have steadily delivered 100 to 200 basis point improvements, all while balancing growth against greater returns for our long term shareholders. The quarterly performance of the business over the first three quarters of this year is further strong evidence of that long term margin potential.

Second, it is reasonable to expect that operating margin growth in the coming year will be significantly lower as we have essentially provided more than two years of planned operating margin expansion in the current fiscal year. We will continue to manage this business with strong financial discipline against a very clear long term vision and as we see the formation of a stabilizing trend in the global economy, we intend to take the advantage and competitively increase spend in our three core areas of investment.

Please advance to slide number fifteen.

Cash flow from operations and free cash flow were also very strong for the quarter driven primarily by our earnings growth. Our balance sheet remains very solid with large cash reserves and very little debt. Total cash and investments, net of customer funding liabilities grew $15 million during the quarter to $216 million and days sales outstanding were 56 days compared to 64 days for the same quarter last year and for the second quarter in a row remained favorably below our 60 to 70 day target range. While we were obviously very pleased with the continued out performance on days sales outstanding, we believe that level will be very difficult to maintain and expect DSOs to trend toward our long term target range.

Please advance to slide sixteen.

I would like to now turn your attention to the near term future. We believe the downward pressure on the global economy from the continued rise in unemployment, business contraction and consolidations and reduce corporate travel spend will continue into the foreseeable future. However, we have seen the early indications of stabilization within our own business and are hopeful that the impact of these core business metrics will continue to diminish in volatility and a global economy will stabilize in fine bottom.

We believe the following comments and expectations are important to keep in mind as we enter the fourth quarter of fiscal 2009. We expect subscription revenue to continue to organically grow quarter over quarter. We expect one time revenues to decrease in Q4 as more and more of the handful of remaining on-premise customers continue to move to our corporate Travel & Expense service. We expect revenues from the August 1st acquisition of Etap-On-Line to be very modest in Q4 as a comparative size of the business is small, the impact of purchase accounting adjustments will be comparatively significant to those revenues and as we adjust from French GAAP to US GAAP.

This impact from purchase accounting is also expected to continue well into fiscal 2010 as we will only report revenue on a US GAAP basis. We expect the acquisition of Etap-On-Line to be moderately dilutive to non-GAAP earnings in Q4 and we also invest to integrate our two organizations while we expect this acquisition to be accretive to non-GAAP earnings for fiscal 2010. We expect to continue to grow our investments in distribution, new service offerings and service excellence consistent with our long term objectives; more opportunistically accelerate those investments in Q4 as we focus on fiscal 2010.

We expect to deliver non-GAAP earnings per share of $0.27 for Q4 and for the year as a whole, we expect non-GAAP earnings per share to total $1.12 representing an increase of 30% over the prior year. Note that our preliminary estimate of intangible amortization for the acquisition of Etap-On-Line is approximately $300,000 for Q4.

As a result of the above, we expect our non-GAAP operating margin to grow to 22% or more for the year as a whole, a full two percentage points above our commitment of 20% at the beginning of the year and finally, we have raised the bottom end of our cash flow expectations and now expect to deliver free cash flow for the year of between $45 million and $47 million or $0.87 to $0.91 per share.

Now, to slide seventeen and in closing.

Q3 was by all measures a very successful quarter both from a financial result and operation execution perspective. Against that backdrop, we expect market demand to continue to drive strong organic growth quarter over quarter and while as long term shareholders, we will continue to scrutinize every invested dollar, we expect to appropriately reaccelerate our investments and distribution, innovation and service excellence in the coming quarter. We have a strong balance sheet with over $216 million in cash available for corporate operating purposes and we are very comfortable with our ability to perform well in the near term and intend to continue to aggressively pursue the growth of this market.

And finally, I would like to welcome the Etap-On-Line team members to Concur. We are glad you are here and we welcome you to the Concur team. Operator, we would like to now open the call for questions.

Question-and-Answer Session

Operator

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

Thomas Ernst - Deutsche Bank Securities

I think you did a decent job highlighting the demographic drivers as they have been shifting first in the employment and etc rise and not rise as fast. What about the lag in your business? Do you think that you have begun to see a stabilization of transaction volumes as contracts come up for renewal or do you think there is still a little bit of a lag of that? I guess if you could compare that to what you have highlighted with the seasonable strength, is that mildly offsetting…there is a lag effect there. Is that mildly offsetting some of the seasonable strength that is embedded in your guidance?

Steve Singh

Yes, Tom I think that this does not really relate to the renewal element part of the business. But I think that you are absolutely seeing unemployment is easing clearly. The consensus estimate now seems to be about low 10, so 10.2, 10.3 something in that range and that actually back up for 2010. In addition to that, travel transaction certainly did see a flattening out in the June quarter as compared to October to March where you saw a pretty solid decline. I think it is fair and reasonable and in fact it is very pragmatic, it is assumed that there is a bit of a lag effect as this core metrics stabilize. It is going to have a lingering role into our business. So, that is the right way of looking at it.

Thomas Ernst - Deutsche Bank Securities

Okay, separate question. You mentioned the seasonally strong Q4 so I think you have some in Q4 looking back in terms of new customer acquisition. What about your current capacity, best strength for deploying, supporting customer go lives? Do you feel like you have the capacity here given your tight constraints and cost to have a strong typical seasonal Q4 as you normally do?

Steve Singh

Yes, and just to make sure we are clear what we are talking about in seasonally strong Q4 relative to print to bookings, as you all know, Tom we see the strongest bookings in our business in Q3 and Q4 and the answer to your question on deployment capacity, frankly we feel very good about the deployment capacity. It is part of the larger investments that we made at the early part of this fiscal year.

Operator

Your next question comes from the line of Laura Lederman - William Blair & Company, L.L.C.

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

I know you are not giving 2010 guidance but when you say that the investment across the business in this year in 2009, you double the normal profitability. Does that mean that will expect margins roughly next year to be flattish? That is the first question and the second one is can you update us a little bit on the ADP relationship? I know there has been a lot of talk a bit about that and kind of where that stands, if you are able to chat about it and then I have a quick follow up or two.

Steve Singh

Sure. John, I will ask him on the margin question but I think John said it perfectly that this fiscal year in response to the fact that revenue growth was more modest that we would have deferred, we want to make sure that we tamper our investments and totally understood what was happening in the revenue equation and what the yield is frankly better operating margins in this fiscal year than we original planned on.

And so our standing model is one on where we expect to deliver roughly 25% top line growth along with a 100 basis points including operating margin, obviously will not get much better than 100 basis points improvement operating margin this year. We think that the light course of action here is to look at our business on a long term perspective. It is to make sure we balance investment with growth and as we see a great expense in operating margin this year, we can see the priority ought to be to make sure that we ramp up investments next year.

So that is the operating margin side of the equation. John, do you want to add anything to that for the ADP?

John Adair

No, I think you were dead on.

Steve Singh

On the ADP side, frankly I was very pleased with this relationship. I know that there was some information; there were some questions about the relationship in the prior quarter. So, that was a great distribution partner for us. They have been for a number of years. In fact our distribution capacity actually has never been bigger and so very frankly, this is a relationship where each year we continue to improve upon the relationship and continue to modify relationship that would benefit both parties.

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

Okay and the last question really about Etap. When you say a dilutive in Q4, is that maybe by $0.01 or so and also when you say that the revenue for Q4 and for Q1 is marginal and modest, was that a $100,000 or $200,000? I do not know how to frame or get..?

Steve Singh

Yes, obviously the deals were also the small deal for us and the real dilutive impact in Q4 will come from integration cost. As this is a French based company, there is a fair bit of what to do to integrate it seamlessly to organization. We obviously have a lot of experience in immigrating organizations well and the costs related to that are very fund end loaded. So there is going to be some level of dilutive impact that comes as a part of it but that is, I mean, taken the context of something else which is something took our EPS guidance on a $1.11 up to $1.12. So obviously the earnings part of the business is very, very strong.

John Adair

Laura, one thing I would add to Steve's comment as well is recall, I think both Steve and I commented on the prepared remarks that from a revenue perspective, purchase accounting adjustments will be significant to this acquisition in large part because you have conversion of French GAAP to US GAAP and the treatment of revenues is very, very different with our revenue recognition model in which all costs or all revenues generated upfront are deferred and amortized over the life of the relationship. In this case, that will have a significant impact on the acquired revenue from the Etap.

Steve Singh

One last thing Laura, I think obviously to sum it up that does not have much obviously the revenue for the third quarter or frankly the next few quarters. Let me see I understand you that most of Etap's revenues are predominantly license and/or service based revenues that relates to on premised solution but to their credit space, we definitely saw the shift in the world going to on demand and had recently just followed to move over that again revenues.

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

Would you sell any perpetual licenses going forward or not?

Steve Singh

That is not the core of our business and so we are obviously very focused on delivering on-demand services to our customers and I would think that the best model for our customers are best model for us.

Operator

Your next question comes from the line of Terry Tillman - Raymond James.

Andrew Shaw - Raymond James

This is actually Andrew Shaw for Terry. Just a couple of questions for you here. What is the appetite near term for another small telecom acquisition?

Steve Singh

Seriously, we really do not comment on kind of future deals. I would tell you, we look at M&A very selectively where we find great companies that have the capacity to either expand the services that we deliver to our customers or expand the market that we can participate in with a greater level of capacity and opportunity then we are very interested in looking at them. Really since 2002, this is the fourth deal that we have done as well with modest number of acquisitions that we execute on but after, I will you that every deal we do always has to be accretive in the first full year of operations on a non-GAAP EPS basis.

Andrew Shaw - Raymond James

And then second, can you quantify or at least maybe talk qualitatively about your success in cross selling but maybe which the additional services kind of stand out there.

Steve Singh

Yes, it is really no different this quarter than what we saw in the prior quarters. We continue to see great cost selling success. In fact, if you look at the new customer additions, more than 60% of new customers actually both in quick travel and Concur expense as a suite. We continue to see great cross selling success with our analytics services as well. In addition to that, there is a couple other things that are worth noting that I mentioned on the call and that is really that not only do we see a great traction with quarter at the new customer adds. We also saw a number of very large deals than we ever to close in the quarter and the two that we highlighted although we cannot use specific names of the company, one was a global financial institution that bought Concur Travel & Expense and the other is a global, not global but a very large financial institution that also picked up Concur Travel.

I think the trends around that we see are very consistent this quarter with what we saw in last couple of quarters.

Andrew Shaw - Raymond James

And then lastly, you said that last quarter FX had provided a drag about $3 million to revenues for the year at that time. What was the FX impact this quarter on revenue?

John Adair

It is around a couple of hundred thousand of dollars in this quarter as you have seen through the FX exchange rate this quarter. They are relatively low a lot.

Steve Singh

And by the way the $3 million was for the year as a whole.

John Adair

Yes, as of the day of the last quarter $3 million is for the year as a whole.

Operator

Your next question comes from the line of Mark Murphy - Piper Jaffray.

Mark Murphy - Piper Jaffray

On the click book side of the business, did you see any signs of incremental business travel activity for the June quarter that were, would you characterize them being outside of the typical seasonal up tick or was it, do you feel like you are back to normal seasonality?

Steve Singh

That is a tough question, Mark. In this environment, normal seasonality is kind of; I think in relative statements, yes, I need to think you said that what the whole in this you saw was on transaction substantially going down every single month from October to March. We saw a modest up tick in the April period and we saw May and June continued to be flat as compared to April. In my view, that is a very positive indicator that we do not see a further decline. I think it is too early to get comfortable with it; it is starting to move back towards a same store sales comparison as compared to last year.

Mark Murphy - Piper Jaffray

Okay and then just a follow up, regarding the effects of unemployment specifically and your process of reaching out to some of the customers and trying to remediate some of the tougher situations, what ending do you think we are in? Does it feel like you are largely done with that? Do you think there are several more courses to go before that is concluded?

Steve Singh

Obviously we do not speak to specific deal issues but I think that the right way of looking at this and I realized that in a press these days, people are starting to get a little bit more optimistic about the economy and we would love to be just as optimistically but I think it is very important to understand first of all that it is still contracting. The economy is still contracting and employment is still going up. Travel transactions have not started in moving back up to the zero position yet as far as same store sales and so I think the right way of looking at this on a going forward basis is we should assume there is still a lag effect on this and we still got one or two quarters to go.

Mark Murphy - Piper Jaffray

Okay and then one final one for John, I think you commented that you raised the free cash flow guidance. Is that assuming the same operating cash flow guidance or was there a change there?

John Adair

Yes, operating cash flow is disclosed in the earnings release so cash from operations is now 64 to 66 and the top end was 68. CapEx though is now down from 21 to 19 and so free cash flow has been raised from the range of 43 to 47, tightened up to 45 to 47.

Mark Murphy - Piper Jaffray

Okay and then John, just to clarify on that, you raised the earnings guidance and then the high end of the operating cash flow guidance came down a little. Can you just maybe help us understand which line item in the cash flow statement is the swing factor there?

John Adair

Mark, I would not point you any particular line item as well know, cash flow from operation simply ebbs and flows every quarter. So based on where we are at the end of Q3, I think that the appropriate place to set off in cash flows exactly is targeted. In the end, what we really measure is free cash flows, the most important to the business and we have raised the bottom of that range for $2 million for the year.

Operator

Your next question comes from the line of John Kraft - D.A. Davidson & Co.

John Kraft - D.A. Davidson & Co.

John, I just wanted to follow up on your prepared remarks and somebody asked this earlier but just, could you repeat what you said about operating margin for next year? I thought you said that you expect to be down.

John Adair

No, John, we did not. Actually if you look at, so let us just do a little bit of history for the moment. Full operating margin for fiscal 2008 was 19% while our commitment historically has always been to deliver 25% top line revenue growth along with the 100 basis points some more in operating margin growth. So our expectation for this year at the offset was operating margin to grow to about 20%.

Clearly, we have outperformed that to date, offering more margin to date around 22% to 23% year to date with nearly 26 for this quarter. So as you look at the performance this year, we have effectively delivered about 2 years of operating margin growth even at the high end of our historic rate in this fiscal year alone. Obviously the operating margin performance this year has been exceptional.

So as you look out in the fiscal 2010, we will continue to do what we have always done and that is balance growth of the business and the investment of the business with the opportunity to continue to grow operating margins. And so my comment specifically was that as you look out into 2010, you should not expect the same kind of operating growth that we have seen this year. This should be significantly lower because of exceptional performance this year. It should be moderated both because I think we are coming of very, very high this year and we will begin to reinvest to the business as we disclose for Q4 leading into 2010.

John Kraft - D.A. Davidson & Co.

Got you, that helps and then regarding the Etap, you talked about the integration there. Are you also planning on converting them to your subscription platform?

Steve Singh

Yes, over time John and obviously in the deals that we have done, we always have an objective and that is the way we execute on acquisition is to convert those customers over time to a common platform that could cause file in expense platform. However, we have always take on long term perspective on this as view as that a chance to service the customer and make sure the customer has a great experience and that the return on investment is looking for it and so if you look at for example a sector with multiple use to be convert that customer base the exact same thing without that and the exact same thing with Gelco. We would take the exact same approach with Etap.

John Kraft - D.A. Davidson & Co.

Got you and then…

John Adair

One thing I would add to Steve's comment there as well is that similar to all the acquisitions we have done in the past, we always look at the acquired technology and we integrate the best of that technology with our technology to provide a unified platform. So in this case, one of the tremendous benefit of this acquisition is regain tremendous local knowledge, not just the France but with the European continent. It is very much inline with what we have talked about the last several years of growing our investment. This is not only a strong foothold but a tremendous opportunity to bring that technology and that knowledge to all other customers worldwide.

John Kraft - D.A. Davidson & Co.

Got you and then lastly if I may, you said that the American Express represented about 10% of your 700 new client sign. What was ADP? Was it about the historical 20%?

Steve Singh

John, just a clarification and I apologize if I was confusing on that. The American Express relationship is a year to date specimen and it is not based upon customer account, but should rate on dollar value simply because it is predominantly has sold this on a largest customers in the world in the early stages of our relationship with American Express.

Second is ADP which is a very strong quarter with ADP, very consistent with the June quarter trend that we normally see with ADP.

Operator

Your next question comes from the line of Ross Macmillan - Jeffries & Co.

Ross Macmillan - Jeffries & Co.

I have two questions, first on Etap. Without actually getting to specific of the numbers, if I assume revenue was a 100, there are two impacts that I see. One is the conversion to US GAAP and then the other is purchase accounting and I assume for a perpetual license model that purchase accounting adjustment, if you could fast forward a year, effectively goes with back up to 100%. So leaving that aside to one second, what is the adjustment for French to US GAAP and is that permanent and can you quantify that maybe in percentage terms as we think about that kind of revenue that new revenue addition.

John Adair

Obviously I do not want to get too specific. They are historical financial statements. One thing I would say to you is that if you look at how French GAAP treats upfront revenues, they typically are recognized whereas in US GAAP, as you all know; those upfront revenues are deferred and amortized over the expected life of new customer. In our case, that is three or more years and that impact is firm.

Ross Macmillan - Jeffries & Co.

Okay and then just to go back on the MX relationship. My understanding is you still have, if you were the agency or the kind of through reseller relationship ahead of you, when does that really start to hit? In other words, when do we start to see volume as opposed to targeted on larger account opportunities? When should that start to influence the new customer addition numbers meaningfully?

Steve Singh

I think we are still a little away in the quarter. The relationship with American Express start to move into the middle market and so I would look at the benefit that comes from the relationship with American Express in middle market to really not, get out of the amount into probably 2011.

Ross Macmillan - Jeffries & Co.

Would you see it in the customer count numbers in fiscal 2010?

Steve Singh

I would guide you towards mid to late 2010.

Operator

Your next question comes from the line of Bradley Whitt - Broadpoint Amtech.

Bradley Whitt - Broadpoint Amtech

John, just how should we think about the correlation between cash flow from operations and your non-GAAP net income kind of looking at it this year, your non-GAAP net income grew substantially but your cash flow from operation is relatively flat year over year. I am just curious, in the normal environment, how should we think about the correlation then?

John Adair

Sure. In a normalized environment, first of all I would say, if it tend us to understand cash flow from operations and free cash flow, I would also say just go to the balance sheet and build out them all and obviously that is the most accurate way, the way we do it. I think it is when you look at the business to get a true vision of what cash flow from operations and free cash flow would look like.

And second of all, if you are looking for a shortcut, I think pro forma free tax earnings can be use as a proxy for free cash flow with a couple of exceptions. One, you got to look at various changes or fluctuations in working capital. The one thing that I would say relative to that is as you continue to grow a business, you will always have a little bit greater working capital need than you would in a steady state environment and if you also have to adjust working capital for seasonal or other fluctuations and then moving over to CapEx, the one thing that I would say is that in a growth environment or a growth opportunity such as we are in a high growth environment, your CapEx needs, they are always going to be sliding heavier than your run rate on depreciation simply because you are growing the business.

Bradley Whitt - Broadpoint Amtech

And I think Steve you may have touched on this a little bit earlier but just kind of qualitatively, how are the attrition rates with existing customer base relative to your expectation this quarter and relative to the way it has been trending the last couple of quarters?

Steve Singh

Yes, obviously if you look at our long term attrition rates, they are really consistent with what we have seen prior to end of this kind of incompetent environment that was a 98%+ levels. Obviously, in this economic environment, that retention rate would actually decline a bit but not that materially and that I think as the environment continues to be stable and eventually start to improve, you will see that retention rate bounce back to normal historical levels.

Bradley Whitt - Broadpoint Amtech

Okay and I guess final question too around Etap, will you continue to sell that product going forward or it would be somewhat Gelco where you have tried to migrate them over to your platform as you sell Concur going forwards?

Steve Singh

We are taking an approach that is that very comfortable in getting it with Gelco and [Atka_56.56] and that is certainly an objective here over a long term with the Concur platform. However, it is also very important not to deal in a disruptive in the process of laying the Etap group and far more importantly is that there are great components of Etap solution that we need to benefit from, just like we did at Gelco, we did a pay product and by the end of the Concur solution, there are components of Etap solution with the agreement to our solution, not with each of system, the main expertise in the local market as well as saving the public sector in fact.

Operator

Your next question comes from the line of Bryan McGrath - Credit Suisse.

Bryan McGrath - Credit Suisse

Two questions, Steve, first of all, how local is the EMEA travel and expense market? Is Etap-On-Line, does it give you knowledge of all of Europe or is it more of a France specific type of thing and then you would have to go out and acquire it all as your learned knowledge of local markets of Germany, Italy, etc?

Steve Singh

In fact, Bryan, it depends on the size of customer within each market. So, larger company as you could imagine tend to be much more global about perspective of serving them. As you come downstream in any customer base, it becomes much more locally even frankly within United States and they are much more industry specific but in Europe as you come down stream to more middle market account to smaller account, it is much more local market expertise. I will tell you that our view is that in several markets, we can continue to develop that local market expertise and just like we had been doing for a number of years and then frankly from time to time that we select markets that we will look to acquire that expertise and value but that is really on a case by case basis if we find something that is compelling.

Bryan McGrath - Credit Suisse

John, kind of a modeling question, kind of historically in the past, I have had and on a sequential basis, I have been modeling cash base operating expenses direction inline with stock-based compensation and this quarter looks like cash comp went down and stock-based comp went up. So, I wonder if you can just give me a little more on what went on there or if it is just a kind of a one quarter bluff and I should continue to model it kind of inline with each other.

John Adair

Yes, Bryan I think the way you ought to think about it at least is as for, and frankly course as we go forth, from time to time, you will have slide variances in the relationship that you just outlined simply because of the timing of stock based comp awards but over time, there is a line where we should parallel one another so I do not think what you have consider, what you have looked at historically is meaningfully different just because of that any quarter over quarter changes.

Operator

Your next question comes from the line of Sid Parakh - McAdams Wright Ragen.

Sid Parakh - McAdams Wright Ragen

Can you tell us how much of revenues originate in Europe just as a ball park?

John Adair

We are roughly 6% to 7% of total revenues on a weighted measure today are EMEA based.

Sid Parakh - McAdams Wright Ragen

Okay and then the idea is to get that to about 30% in a steady state environment.

Steve Singh

In a steady state environment which was a multiple year about to…

John Adair

Just to be clear Sid, 30% is international……with Asia Pacific as well.

Sid Parakh - McAdams Wright Ragen

Okay, and then just from customer common standpoint, can you maybe help us understand, from the MX relationship since they are mostly large customers, I mean is it fair to say that the number of customer counts is a very small number as compared to the 700 new customers you have added in general?

Steve Singh

I think we are going to be careful not to take one quarter snapshot. Obviously, American Express is a global organization with tens of thousands of customers. Right now as we have outlined the last couple of call, we are focused on making sure we start with the larger accounts and work with the American Express obligation there, also then expanding out to the other seven leading markets outside United States and then we feel that market was kind of moving down to the middle market and SMB accounts.

And so that is the basic game plan. I think that the way to look at this year's predominant focus on larger account and then as we hit the back half of 2010 to start to move into middle market accounts.

Sid Parakh - McAdams Wright Ragen

And final question is since you have worked on the American Express relationship for few months now, what would you say are the positive or negative surprises so far?

Steve Singh

We are very happy with the relationship with American Express. This is the global leader in corporate card services. They provide a best of the product in the industry. Frankly, they do what they say, they are going to do and I think that is fantastic. This is a great world class organization that we have the opportunity to work with and frankly I am very pleased with the result of both organization have delivered against this partnership opportunity.

In the first year to be roughly comfortable to what best relationship prior to this was able to move our business. That is the fantastic opportunity.

Operator

That is all the time that we have for our Q&A session today. I would now like to turn the call over to Mr. Singh for any closing remarks.

Steve Singh

Well John and I would certainly like to thank all of you for joining us for our Q3 earnings call. We look forward to speaking with you after the fiscal year end to give you an update on the business. Thanks everyone. Bye-bye!

Operator

That concludes today's teleconference. You my now disconnect.

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Source: Concur Technologies, Inc. F3Q09 (Qtr End 08/05/09) Earnings Call Transcript
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