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Concur Technologies Inc. (NASDAQ:CNQR)

F4Q09 Earnings Call

November 17, 2009; 05:00 pm ET

Executives

Steve Singh - Chairman & Chief Executive Officer

John Adair - Chief Financial Officer

John Torrey - Executive Vice President of Corporate Development

Analysts

Jeff Keane - William Blair

Brad Reback - Oppenheimer

David Hilal - FBR

Brian Schwartz - Piper Jaffray

John Craft - D.A. Davidson

Bryan McGrath - Credit Suisse

Brad Whitt - Broadpoint Capital

Sid Parakh - McAdams Wright Ragen

Harish Parwani - Jeffries

Operator

Good afternoon. My name is Bailey and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal year 2009 and quarter four earnings release call. 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.

I would now like to turn the call over to John Torrey, Executive Vice President of Concur. Sir, you may begin your conference.

John Torrey

Thank you, operator. Good afternoon and welcome everyone to the Concur earnings conference call for our fourth 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 onto 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 on risk factors that could cause actual results to differ materially from our current expectations and the forward-looking statements expressed or implied during this conference call. We assume no duty or obligation to update these forward-looking statements, even though our situation may change in the future.

Please now advance to slide three.

At this time, I’d like to turn the call over to Steve Singh. Steve.

Steve Singh

Thank you, John. Good afternoon everyone. Here the top five items to takeaway from the call today. First, fiscal Q4 was ahead of our expectations on all key metrics. Revenue reached a record high of $64.8 million, non-GAAP EPS was $0.29 per share and free cash flow was $17.5 million.

Second, we are very pleased with our performance for the years a whole. As we delivered 15% year-over-year growth in revenue, while improving non-GAAP operating margin to 23% and delivering 33% growth in non-GAAP EPS. Even as unemployment nearly doubled and travel budgets saw unprecedented declines.

Third, bookings were exceptionally strong as we sign more business in Q4 than any previous quarter in company history. Looking ahead, we expect the demand environment to remain solid throughout the fiscal year.

Fourth, we’ve seen nearly two quarters of some stability in macro environment. As we head into fiscal 2010, we expect year-over-year revenue growth rates to modestly trend up in the first half of fiscal 2010 and more substantially trend up in the second half of fiscal 2010. Finally, driven by continuing stability, improving growth rates, consistent execution, and the large scale opportunity in front of us; we are aggressively ramping investment across the business.

Please turn to the next slide. Turning our attention to Q4 results, we saw strong operating performance across the business. Revenue reached an all time high at $64.8 million and driven by 3% growth in subscription revenues on a quarter-over-quarter basis. That revenue our performance let to non-GAAP EPS for the quarter of $0.29 per share, $0.02 of share ahead of our expectations and driven by stronger earnings and strong cash collections. Free cash flow in the quarter was $17.5 million, nearly $2 million ahead of the high end of our expectations.

Please turn to next slide. As you know, our long term growth rate for both revenue and earnings is driven by new customer additions and cost selling of new services. We sign more new business in Q4 than any previous quarter, with strong performance across all geographies and all market segments. In fact we sign more than 800 new customer contracts in the quarter and we’re pleased to see that more than 60% of our new customers selected Concur Travel & Expense.

As we’ve seen throughout the fiscal year, we saw several large transactions with in the quarter. Of particular interest is the fact that the financial services sector was the single biggest vertical contributing to new bookings growth in fiscal 2009. Also within the year, American Express became our single largest distribution partnership as we executed against the first phase of our market rollout strategy. We’re excited about this partnership and we expected to contribute significantly in fiscal 2010.

Looking ahead, we see a strong demand environment for our services as customers continue to focus on services that can help them reduce their operating cost. It should be noted that the December and March quarters are typically or seasonally weakest quarters for new customer growth.

Please turn to the next slide. Before I outlined our expectations for fiscal 2010, let me take a moment to speak the macroeconomic climate, which continues to stabilize. As you will recall there are three core factors that can negatively impact customer usage and thus subscription revenue.

Most factors are unemployment, recession driven attrition and of course travel budgets. Collectively these factors have been substantial drive on the subscription revenue growth rate over the past several quarters. Of course the positive factors that impact subscription revenue are new customer additions and cross selling new services into our existing customers. We have seen solid momentum on these fronts throughout the fiscal year.

Please turn to the next slide. Unemployment continues to raise reaching 10.2% as of October, and until this past month the rate of increase in unemployment was easing. While the 40 basis points jump from September to October, make us cautious in our outlook. We don’t have any reason to believe that the unemployment rate will exceed the economist estimates of approximately 10.5%.

Looking at travel spend on a year-over-year basis, we saw substantive and a sequentially decline from October 2008 to March of 2009, a flattening out from April 2009 to August 2009 and a modest move back in the direction of the waterline link in the month of September.

While it is comforting to see these negative trends start to abate, it’s important to remember that unemployment today is double what it was 14 months ago and travel spend is still down substantially on a year-over-year basis. Looking at this macro trends in aggregate, we think it’s prudent to remain cautious in our growth expectations as it will still take sometime to work to the lingering impact caused by the meaningful contraction of our global economy.

Please turn to the next slide. Over the next two years, we expect to return to our steady state revenue growth targets. In fact, we expect to trend towards those steady state growth targets over the course of fiscal 2010, but as we look out several years, we believe there’s an opportunity to drive our top line growth rates above our steady state targets. Thus we are investing aggressively across the business, driven by continued momentum in new customer growth.

We will continue to increase our investments in service excellence by ramping up our investments in customer service and deployment teams. We expect to significantly increase our distribution capacity in fiscal 2010. Additionally, we expect to sign new strategic partnerships to reach new market segments and we will increase our investments in channel management in support of those partnerships.

Please turn to the next slide. We’re in a position to increase our investments in distribution and generate a compelling return on invested capital in large part because of our ongoing investments in innovation. Over the past several years, we have driven product innovation in our market and have shifted the entire corporate travel market towards integrated travel and expense services. That change occurred for a simple reason. We provide a greater return on investment for our customers while significantly improving the end user experience.

In support of our Concur Travel & Expense service, we’ve invested to build out the Global Concur Connect Network, which connects our 9,000 plus customers who spend more than $35 billion annually to content and electronic receipts from hundreds of suppliers that are focused on reducing their own operating costs and providing more value to the business traveler.

In Q4, we signed a unique content agreement with Southwest Airlines, which gives Concur Travel & Expense clients unrivaled access, direct access to Southwest Airlines fares and schedules otherwise available only at southwest.com. Additionally, over the past year we’ve ramped up our investments to deliver web services that will expand the Concur Connect Network into a platform that allows our customers and partners to extend and enhance the value of our services.

Also in Q4, we released Concur Mobile for the iPhone. Concur Mobile extends the power of our service by giving you the capacity to change flights, book taxis, hotels, dining, or capture expenses and approve expense reports all from your handheld device all within policy and all while on the road. We believe that over the medium term mobile platforms will provide for new and incremental revenue and earnings growth opportunities.

Please turn to the next slide. Additionally, earlier this year we released the first version of Concur Advantage Services, a wide range of offerings that allows our customers to get greater value from our suite of services. Examples include customized report authoring, expense report auditing, that recovery, and digital mail room services for invoice and receipt handling. The vast majority of our services are delivered on a subscription basis and we expect Concur Advantage Services to contribute meaningfully to bookings in fiscal 2010.

We’ve also been investing to deliver Employee Spend Management services for emerging businesses a global basis. We define emerging businesses as companies that employ between one and 250 employees. We believe that this market segment is under served and can generate substantial revenue and growth opportunities over the medium term.

Please turn to the next slide. The net impact of a stabilizing macro environment and strong customer demand is the following: We expect our year-over-year revenue growth rates to trend up modestly in Q1 and Q2 and then trend up more substantially in Q3 and Q4 of fiscal 2010. Over the past several years, our views in the market opportunity and the customer requirements have been wholly validated.

Therefore it puts us in a unique leadership position to expand the market from our foundation. So as we look out several years, we believe there’s an opportunity to drive our top line growth rates above our steady state targets. As such, we are investing aggressively across the entire business in the areas of product innovation, distribution capacity, and service excellence. The impact of these investments is that we will hope non-GAAP operating margin, which is the highest in the software services comp group as flat as possible in 2010 as compared to 2009.

Please turn to the next slide. As you know, we believe there’s an incredible opportunity to drive innovation and efficiency into the corporate travel supply chain. 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 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 be announced. Successful execution against this market opportunity will drive compelling and sustainable growth in revenue, earnings and cash flow for years to come creating compelling value for our long term shareholders. In fact the strength of our business even in the face of a very difficult economic environment is a testament to the scale of that market opportunity and our ongoing ability to execute.

Before I turn the call over to John, I’d like to take this opportunity to speak to the announcement we made earlier today in which we stated that John expects to retire from this position as CFO of Concur during fiscal 2010 in order to attend to the needs of his family. Needless to say, John is more than just a trusted colleague. Over the years we have become very close friends. He embodies our core values and has worked to drive increasing value for our customers, our partners and our shareholders.

While I will miss his counsel and his contributions, I completely respect his decision. Concurs seasoned leadership team that has an average of ten years combined with our consistent execution and business momentum affords us the flexibility of a planned and thoughtful transition. Until a successor is named and the transition process is complete, John will continue to serve as Concurs Chief Financial Officer.

With that if you please turn to the next slide I would like to turn the call over to John.

John Adair

Thank you, Steve. Good afternoon everyone. Before I speak to this past quarter and the coming year, let me first add onto Steve’s comments about my coming retirement from Concur. Anyone who knows me knows that my two great passions in life are my family and this company. Although professionally very difficult I have made the decision to retire to attend to the needs of my family.

Obviously the company’s in a very strong position which will allow us the opportunity to undertake a very thoughtful and thorough process and purposefully manage through this change. Nothing in my day-to-day our responsibilities will change and until we find the right successor and we have made a smooth and seamless transition I will continue in my role as CFO.

Now, let us look at this last quarter and the coming year. There are three key messages I would like to you take from my prepared comments this afternoon. First, Q4 was another strong quarter of financial and operational performance, capping a year of incredibly strong margin and earnings growth.

Second, this last quarter has provided us with further evidence that the economic headwinds we have faced for the last year are beginning to decrease. While we believe there will continue to be mixed messages coming from the global economy for some time to come, we believe the current evidence suggests that the low point of the trough is being established and we expect revenue growth to accelerate more noticeably during the second half of the coming year.

Third, we believe that there is a medium term opportunity to drive our top line growth rates above our steady-state target of 25% and as such we are ramping investments and new service offerings, distribution, and service excellence in fiscal 2010. If you would, please, advance to slide 14 and let’s look at Q4 results. Q4 revenue was above our expectation at $64.8 million and tapped a year in which total revenue grew by 15% to $248 million placing Concur in the top tier of software company performance for the current year.

During Q4 we saw the downward trend and travel spend continue to stabilize and begin to show modest improvement late in the quarter. Unemployment on the other hand appears likely to continue to provide some headwind with recent consensus pointing to the possibility of stabilizing by mid 2010. Finally, retention rates stabilized in the September quarter and we expect that overtime they will trend back to our historic norms.

Please advance to the next slide. Operating costs in Q4 were inline with our expectations and consistent with our comments at the end of Q3 as we saw the underlying revenue metrics of the business continue to stabilize we began to reaccelerate investments in global distribution and delivering innovation to new service offerings and in service excellence. Both gross and operating margins this last quarter continue to be very strong consistent with our out performance throughout the entire year.

For fiscal 2009 as a whole our gross margin was up 120 basis points to nearly 70%. Even more significant our operating margin was up nearly 400 basis points for the year to 23%. You will recall that historically we have committed to an annual improvement of 100 basis points in operating margin. This last year we clearly delivered well in excess of that commitment with the growth in operating margin representing nearly four years of operating margin expansion.

Said in another way, we have already hit the operating margin we expected for fiscal 2012. With revenue and margins exceeding our expectations, Q4 non-GAAP earnings were above our expectations at $0.29 per share compared to our target of $0.27. Earnings for the year as a whole grew to $14 per share an improvement of $0.28 per share or 33% over last year.

Please advance to slide 16. Cash flow from operations and free cash flow were also very strong for the quarter driven primarily by our growth in earnings. Cash flow from operations for Q4 totaled $20.4 million compared to $18 million in the previous quarter and after capital investments of $2.9 million, free cash flow was $17.5 million for the quarter compared to $14.3 million in Q3 and for the year as a whole, free cash flow totaled nearly $49 million.

Our balance sheet continues to be very strong and provides us tremendous leverage to continue to expand our market and our leadership. Cash and investments net of customer funding liabilities are in excess of $200 million as a result of increased sales activity; day sales outstanding were 65 days and remained comfortably within our 60 to 70 day expected range.

Deferred revenue continued to grow during the quarter and we have little in the way of debt. As we focus on fiscal 2010 and beyond our capital structure remains a tremendous strategic asset and affords us the ability to continue to expand our global leadership.

Please advance to slide 17. Let’s now turn the discussion to the coming fiscal year. Based on our expectations of a continuing economic recovery, we expect year-over-year revenue growth rates to modestly trend up in the first half of the fiscal year and then trend up more significantly in the second half of the year.

Taking into account that the December quarter is seasonally slow for corporate travel, and customer deployments naturally precede at a slower pace as a result of holidays, total revenue for the first quarter is expected to grow moderately over this past Q4. Despite the significant issues facing the global economy over the last year, demand for our services has remained strong and we added more than 800 new customer contracts this last quarter.

We believe as the economy continues to regain its footing, we have the opportunity to further strengthen our leadership position especially a new markets and with new service offerings. In light of this and our out performance in margin expansion in fiscal 2009, we are increasing our rate of investment in global distribution, new service offerings and service excellence as Steve has previously discussed.

As a result, our non-GAAP earnings for Q1 are expected to be $0.27 per share, our non-GAAP earnings for fiscal 2010 as a whole are expected to be $1.27 per share and our non-GAAP operating margin for fiscal 2010 is expected to be 23% or more.

Please advance to the next slide. Cash flows for fiscal 2010 are expected to remain strong and continue to grow inline with earnings growth. For fiscal 2010 as a whole we expect cash flow from operations to total between $71 million to $74 million and after capital expenditures of approximately $16 million.

We expect free cash flow to total between $55 million to $58 million and just as a reminder you will recall the Q1 cash flows are typically lower than Q4 with a payment of certain annual commitments. We also expect our cash tax rate to remain in the low single digits for fiscal 2010 as we continue to utilize tax NOLs to reduce cash tax payments for the fiscal year as a whole we expect our GAAP effective tax rate will be approximately 36.5%.

Now to slide 19 and in closing, against to backdrop of the most severe economic crisis in decades, fiscal 2009 was a testament to the strength of our business with revenues growing 15%, non-GAAP earnings per share of 33% and our non-GAAP operating margin up nearly 400 basis points. We expect revenue in fiscal 2010 to continue to grow quarter-over-quarter with revenue growth accelerating more quickly in the second half of the year as the global economy improves.

As we look out several years, we believe there is an opportunity to drive our top line growth rates above our steady-state target of 25% and as such we are investing aggressively in product innovation, distribution capacity and service excellence. Finally, we have a strong balance sheet with significant cash reserves. We are very comfortable with our ability to take advantage of a recovering economy and intend to continue to aggressively pursue the growth of this market.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeff Keane - William Blair.

Jeff Keane - William Blair

First of all I want to wish John good luck, and could you also talk about for the quarter were there any changes sequentially in sales cycles, contract terms or billing terms.

John Adair

Jeff on the question related to changes in sales cycles, there were none that were of any note.

Steve Singh

Nothing on billing terms or anything of that nature as well, contract length, all the same.

Jeff Keane - William Blair

Did you guys mention what the AMEX relationship contributed as a percentage of bookings?

Steve Singh

We didn’t. I think that as we head out into fiscal ‘10 and ‘11 it is going to end up obviously being pretty material relative to a pretty significant probably is a better way of saying it relative to overall bookings. Suffice to say after year one it is now the biggest single external partnership we have and expect to stay that way for some time to come.

Jeff Keane - William Blair

How much of the new investments next year will be overseas?

Steve Singh

I don’t know that I can speak to what percentage exactly is going to be international versus domestic. However, having said that over the last several calls we have been speaking of the fact that Europe and Asia are very significant growth opportunities for our business. Our Europe today is still a lion’s share of that incremental investment, but you should plan on late 2010 also into 2011 you will see a lot more investment in Asia for us, and then of course incremental investments around the areas I highlighted on the call.

Operator

Your next question comes from Brad Reback - Oppenheimer.

Brad Reback - Oppenheimer

Steve during your prepared remarks and in the slides you talked about increasing investment and distribution and channels and some channel management. Can you give us a sense of what the opportunities are there?

Steve Singh

First of all, we think that, we are a long ways, years away from having reaching any kind of Max on investment in distribution and direct sales force. Today we are probably a third largest sales force in corporate travel. We think that overtime, sometime in the next handful of years we can be the largest sales force in the corporate travel industry. We have been going after that for sometime and we’ve seen tremendous opportunity in that arena first.

Second is that by the way that is not just U.S. centric. It is obviously on a global basis and more than that, it is also on a market segment basis from the biggest accounts in the world to some of the smaller accounts in the world. In addition that we think there’s some very significant partner opportunities that are driven by segments, depending on the size of the customers what we’re targeting, as well as banking markets. You’re going to see additional partnership opportunities in Europe that are fundamentally different from what you will see in the U.S. or Asia as well as different sites of customers.

Operator

Your next question comes from David Hilal - FBR.

David Hilal - FBR

First just to follow up on the AMEX question, I know you said they’re your largest partner. I want to confirm that’s may state the obvious, but that’s a function of them contributing more not necessarily ADP declining?

Steve Singh

That’s exactly right, David.

David Hilal - FBR

Then just wanted to make sure I got that. Steve, on the AMEX partnership when you guys first did this partnership, a lot of the deal flow seemed to be coming from larger enterprises and I know there was a goal and hope that it would go down stream more into the mid market of AMEX core base, and I wanted to get some color on that, please.

Steve Singh

You’re absolutely right. In year one the primary focus of our relationship were on the bigger opportunities, basically global accounts and what we call primary accounts, so the larger corporations in the world and to be fair, very U.S. centric in year one although we did expand outside the U.S. just modestly.

As we start year two of the relationship, you’re going to see us not only continue to rollout in the U.S. down to smaller size companies, mid market size companies, but you will also see us expand our distribution substantively into the European marketplace. One other data point to give you around that is AMEX has identified eight lead markets, which I think we referenced before.

Off the top of my head it’s the U.S., Canada, Mexico, the U.K., France, Germany, Italy, and Australia. I think that’s eight and those are obviously in no particular order, but our objective is to get each of those market segments up and down the size of customers. We think that over the next two years, we should be able to comfortably do that.

David Hilal - FBR

Then finally you alluded to kind of the smaller market basically one to 250 employees. I wanted to understand a little more detail from a product strategy standpoint is that dumping down the current products? Is that a new product to be announced? How are you going to attack that market?

Steve Singh

David, here unfortunately I won’t be able to give you a lot of detail on the product. We will provide a substantial amount of detail upon the announcement of that product. What I can tell you is we think it’s a very significant opportunity. One third of the U.S. workforce is in that segment of the employee count, so roughly one to 250 employees.

Also frankly if you look outside the United States in lead markets across Europe and Asia, there’s a significant number of companies that have employees in that segmenting. The other thing I think is very important to make sure we highlight here is that as we stated for years, middle market accounts, even SMB accounts tend to be the most profitable accounts.

Operator

Your next question comes from Brian Schwartz - Piper Jaffray.

Brian Schwartz - Piper Jaffray

This is Brian Schwartz sitting in for Mark Murphy. Steve, in your introductory comments and really throughout this call you’ve making it quite clear that you’re increasing investments must see opportunity and demand building internally. Just wondering if you can give us comments, what you’re hearing among the existing customer base regarding their expense report volume trends?

Just assuming that AP managers and/or CFOs are starting to plan next year’s budgets and wondering if there’s any early indication of their expectation for their own organization expense report volume to be up or down or flat for next year? Thanks.

Steve Singh

As I mentioned in the prepared remarks, here is what I guide you to. Obviously, we don’t speak to specific expense report volume. What I can speak to is a couple of things that will help you understand that. First and foremost is travel spend, travel spend obviously was down pretty substantially in the first six months of fiscal 2009. It flattened out in the back half of 2009 and trended up just a tad in the last month fiscal 2009.

The expectation right now is that you’re going to see it very modestly trend up overtime, which of course has an impact on the number of trips you take, the number of expense reports you file and so on. I think John referenced in his comments that if we’re to look at the retention of our customer base, that we see a flattening out of attrition so to say and that we expect that the retention rates to return to normal levels in the relatively near future. So I think that would tell you that we are seeing generally good trends in our customer base.

Finally, I think the third item, which is just always one to keep an eye on is unemployment. Unemployment, I think the consensus estimates are about 10.5%, which is roughly in the March through May time period of 2010 is when it’s expected to happen.

I would tell you that by in large we have been pleased with the rate at which unemployment has certainly eased and it has come off a lot from the first six months of fiscal 2009. However, I think John and I will be the first to tell you that when you saw the 40 basis points jump from September to October it’s something we should take note of and exercise caution around.

Brian Schwartz - Piper Jaffray

One quick follow-up with John Adair, first of all, congratulations on the move, certainly miss you. You did a great job there on the call, but help put you on the spot here, in your comments on the Q1 guidance, you’re referencing you would expect the revenue to grow, but grow modestly sequentially. Wondering if there is any way to help us with the words modestly? Are you talking maybe flat to low single digit growth, sequential growth or you talking maybe mid single digit growth?

John Adair

As we enter into fiscal 2010, obviously coming off of fiscal 2009 where revenue growth was up 15% over the prior year, obviously Steve has talked through some of the implications of what we see happening in the customer base and so as we look at revenue growth going into fiscal 2010, we expect that growth to be sequentially up each quarter. So organically up each quarter in the first half of the year growing more modestly and accelerating more significantly in the back half of the year.

Steve Singh

I just want to add a little bit more color to that. Obviously, I think that what John and I are trying to focus everybody on is that the rate of growth on a year-over-year basis for each quarter is trending up. So if you look at the rate of growth in 2009 for each quarter, it trended down from Q1 to Q4. We expect the rate of growth in fiscal 2010 to actually increase every single quarter on a year-over-year basis generally.

Operator

Your next question comes from John Craft - D.A. Davidson.

John Craft - D.A. Davidson

Sounds like there’s not really a rush to find a replacement here, is there some sort of timeline you guys have set?

John Adair

No, John, there’s no timeline. From perspective of how we move forward as I said in my opening comments, I’m fully engaged in my current role and nothing changes on a day-to-day basis. Obviously, the company is in a very strong position to make this change. So it allows us to go through the process in a very I guess what I call thoughtful and thorough manner.

My personal objective in seeing this through is that we find the absolutely right person to take this role and until we find the right person, get them into the business, get a smooth transition done. I’m in my current role and nothing changes. However, long that takes is however, long that takes and our business quite well. You’ve been around the business for quite sometime.

We will focus on ensuring that we find an individual who is a tremendous cultural fit for the business. We have a tenure here of the team as Steve mentioned over ten years. It is a tremendously stable group to go through this process and frankly we’re in a great position, I think as strong as the company is. We’ve the opportunity to pick from the best talent in the world. So as long as it takes to get this done, as long as it takes to get this done.

John Craft - D.A. Davidson

Then both you guys mentioned the retention rates expecting those to return to more historical norms and obviously the majority of the run off here is de-converting users due to unemployment trends, but I guess from a competitive standpoint are you seeing any changes there? Are you seeing clients looking just to consolidate vendors and migrations from that?

Steve Singh

No. In fact, it’s just the opposite. We are the consolidator. I think the retention rate run off is exactly what you referenced, which is unemployment. If the folks aren’t there, it’s a little hard to say that they can use the service. So that’s the primary overwhelmingly primary reason for the run off in retention rates.

John Adair

John, the other thing I’d say that we’ve seen during this period of time and we talked with this on prior calls, win rates have gone up and that continued through this last quarter, and frankly we’ve seen with addition of new customers that those customers have looked at the competitive landscape and taken a flight to quality and they’ve come to Concur.

John Craft - D.A. Davidson

Just one last question if I may. As far as the Etap integration, you were expecting that to be dilutive. Was it in fact in the quarter and is there a way to quantify that for us?

John Adair

Yeah. Obviously we expected it to be dilutive in Q4. It was dilutive in Q4. I’m not sure we provide any specific numbers around the dilution. Obviously it’s a relatively small deal. So the impact to it is rather insignificant. We obviously expect it to be accretive in 2010.

Operator

Your next question comes from Bryan McGrath - Credit Suisse.

Bryan McGrath - Credit Suisse

A couple of questions, as far as like the language you talked about as far as revenue growth, how much of that or what color can you give about how much of it is from these new service offerings you’re talking about?

John Adair

The revenue growth in 2010?

Bryan McGrath - Credit Suisse

Yes.

John Adair

This is really focused on is driven by the customers we’ve sold in the prior period, and that’s really the single biggest factor in revenue growth. It’s unlikely that any of the new services will contribute materially to 2010 revenue growth.

Bryan McGrath - Credit Suisse

We’ve kind of touched on it, but I’m just trying to get a sense of how decoupled what your revenue growth expectations are from kind of the broader I guess consensus macro view? Like you said, I think you said on average unemployment is going to top out of 10.5%, but of course the opinions vary and it could get lot worse, but it seems like you have some real hard data as far as what’s going on in your pipeline. I wonder, if you could give us a rough idea of how varied do you think your expectations are going to be if the economy changes wildly?

John Adair

So that’s a tough question to answer only because it’s purely and utterly speculative. I think that, if you look at the beginning of fiscal 2009 for us, which happened to coincide with the financial services sector meltdown and the economy really starting to decline precipitously. I don’t think anybody at that time could have pegged exactly what would happen in the next 12 months with any level of accuracy.

I do think that unemployment obviously has a direct impact on us, but I think that there are levels of unemployment that are beyond just an equational impact from unemployment to us. I think that if you look at unemployment rates and say when was the last time unemployment in this country was ever above 12%, and I think you would have to go back to the depression to reach that number. So I think a lot of this is if unemployment rises precipitously, I think that you have much more significant problems to deal with.

From our point of view, one of the things I love about our business is that we have a lot of visibility into what we’re doing and so we have the capacity in the environment where things change dramatically for the worst in a broad macro basis that we can make appropriate adjustments in our business. So I’m not worried about our ability to be highly profitable and manage the business to be successful in virtually any environment.

Operator

Your next question comes from Brad Whitt - Broadpoint Capital.

Brad Whitt - Broadpoint Capital

John, it looks like the R&D jumped up more than we expected this quarter. Is that kind of the base level we should think about going forward or is there anything unusual in the September quarter?

John Adair

Brad, nothing unusual, base point of the central themes that Steve talked to in his prepared remarks is the fact that we’re making significant investments in R&D and in new product offerings. We’re looking towards the future opportunities for the business. Certainly, as we look at the opportunities in EMEA, we are building out product and offerings that afford us the opportunity to go deeper and deeper into these markets, and there’s a lot, you will continue to see us as we have in the past invest for heavily in R&D. That level should not be considered unusual for our run rate going forward.

Brad Whitt - Broadpoint Capital

I see now that probably includes the Etap acquisition.

John Adair

That’s right.

Brad Whitt - Broadpoint Capital

Steve, could you kind of remind us again what you consider quote, unquote your steady rates of revenue growth?

Steve Singh

The steady state target that we obviously had been shooting after is 25%, and obviously prior to fiscal 2009, it was relatively consistent for us, so that’s our steady state target.

Brad Whitt - Broadpoint Capital

Have you made any changes to your strategy in fiscal ‘09 or going forward as far as how you charge for travel booking? I mean, are you bundling that more and more and just making that part of the basic service or and going even there?

Steve Singh

I’d answer that question in two different components. First of all, we had many changes to our strategy. We have got a very focused strategy and how we deliver Concur Travel & Expense, that pricing and delivery model hasn’t changed at all since we introduced the product a couple years ago. In the most recent quarter, in fact the last several quarters more than 60% of new deals signed were for both travel and expense. I think that is the way I would look at this.

Brad Whitt - Broadpoint Capital

Last question, I noticed a lot of Silicon Valley companies kind of withdrew executive bonuses in ‘09, and are now expecting that to come back in 2010. How do you characterize executive bonus situation there Concur this year versus next fiscal year?

Steve Singh

By in large if we don’t speak to confrontation for the company. I think that the right focus point I pointed to is that, we delivered 15% top line growth, 33% pro forma operating margin, and I think the company has performed exceptionally well, and then obviously the philosophy of how we compensate or not just the executives is our company, in fact the executive compensation is detailed exactly the same way that every other person in the company is compensated.

So if for some reason, the bonuses aren’t paid, it’s not just not paid to the rank and file of the company, it’s also not paid to the executives we’re all in the same pool. We actually detailed this compensation philosophy out in our proxy statement.

Operator

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

Sid Parakh - McAdams Wright Ragen

I think my questions here, just a question on the buyer behavior. As the economy has stabilized, have you seen some of the buyers maybe buy more products like some of the other kind of more across selling type stuff?

Steve Singh

We certainly have seen more cross selling over the course of the last couple of years obviously, in part because, we’re delivering great value add services that are helping reduce the operating costs for our customers and improve the end user experience so also in part because that’s been a focus point for us as well, and so I think that that’s part of our near term growth initiatives is continuing to cross sell new value added services into our existing customer base.

Sid Parakh - McAdams Wright Ragen

What I’m trying to see is from a macroeconomic perspective since everybody is feeling better I mean are they even buying more or is that really not much of a factor?

Steve Singh

I think, it’s hard to make generalizations, Sid, but I guess what I would pointed to is that if you look at the number of customers that bought travel and expense in the quarter it was 60%. If you look at the last several quarters it has actually been in that same ballpark. So you could argue that we’re seeing customers pick up additional services when they initially buy.

In addition, to that if you look at the financial services sector, for example, in 2009, it was our single biggest vertical for bookings. Some of those customers were brand new customers. Some were existing customers who bought additional services from us.

Sid Parakh - McAdams Wright Ragen

I think the message you’re trying to get through the call was, that you do believe at some point in the future your steady straight growth rate could be higher and I think you mentioned that John mentioned it can you maybe elaborate on why do you feel that way and is it purely from an existing product standpoint or is it a significant expansion of where you are today?

Steve Singh

I think that there’s an opportunity for better than steady state growth, and I emphasize the word opportunity. Any time that you’ve materially improve the growth rates of the business you’ve got to invest against that improvement. I outlined in the call fairly extensively the areas that we’re actually investing. They include the following. Number one, obviously we think that mobile is a very significant opportunity for our company. It represents incremental revenue and margin opportunity.

Number two is, we think that Concur Advantage Services represents incremental revenue and margin. We also think that emerging markets, so companies that are between one and 250 employees on a global basis represents significant growth opportunities and earnings opportunities. In addition to that, we also think that there is a tremendous opportunity to continue to expand in Europe and Asia just in our core business, in our core markets, so I continue to go after what is fundamentally an under penetrated market opportunity.

Sid Parakh - McAdams Wright Ragen

Just last question for me, from a CFO search standpoint, it seems like the emphasis is on an external candidate. Is that the way we should think about it?

Steve Singh

Sid, I’m not going to comment a lot on the exact process we’ll go through. Obviously, we will use an external and in fact have already engaged an external search firm. We will look at external candidates and also internal candidates, but I think John said it very well. I think we are in a very fortunate position that we’ve got an incredible business that is doing very well that we can have a very thorough and planned transition. So we’ll look at all the different candidates that are available to us and find the person who is not only the most qualified individual for that role, but also a tremendous cultural fit.

Operator

Your final question comes from Harish Parwani - Jeffries.

Harish Parwani - Jeffries

I am wondering if you can quantify if there was any significant impact from FX in the quarter.

Steve Singh

Yes. The FX impact in the quarter wouldn’t quantify as significant. We have certainly seen volatility over this last year, but the FX impact in Q4 was I wouldn’t characterize it as significant.

Harish Parwani - Jeffries

Then looking at your balance sheet, do you have almost $5 of cash per share and I think you guys have done a great job in detailing the new investments coming next year. So wondering apart from those, any other thoughts on share buybacks? Are you guys still open for M&A or does that take that off the table?

Steve Singh

I think the way we look at it first and foremost our priorities is investment in the business against growth opportunities that we can uniquely leverage and we can drive great profitable growth. That’s priority number one. In addition to that obviously we want to put our capital by the way that investment in the business is typically entirely paid for out of cash flows from the business. Priority number two is obviously look at the cash that we have in the balance sheet and say, what is the best way to use it in our view there are three priorities.

It is repurchase of shares, pay down of debt, which at this point we have done to speak of, and M&A where the M&A makes great sense for our business, and I think that you already have examples of the kind of M&A that we’re interested in if you just look at the deals we have done over the last eight years. So those are the priorities and we go after each of those priorities, honestly on a very real time basis and make judgment calls in each of those with the best information that we have at the time.

Harish Parwani - Jeffries

Last one from me is AMEX relationship if I understand correctly the middle market segment part of that strategy will kick in probably towards the latter half of this fiscal year. I mean is it fair to assume that the new customers you sign in a quarter which was a little way under this quarter is going to significantly jump when that part of the market starts kicking in?

Steve Singh

Yes. I would tell you that it would be a lot easier for me to answer that committee after the fact. So we’re very excited about the AMEX relationship. We think it has tremendous growth opportunities for us. Frankly for American Express as well and so our job is execute against that. Once we do, then we’d be happy to walk through the impact of that. So with that, I’m going to wrap up the call. I can truly appreciate the time of all of our investors and John and I look forward to updating you again on the next earnings call. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Concur Technologies Inc. F4Q09 (Qtr End 30/09/09) Earnings Call Transcript

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