Concur Technologies Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Concur Technologies, (CNQR)

Concur Technologies (NASDAQ:CNQR)

Q4 2013 Earnings Call

November 06, 2013 5:00 pm ET


Todd Friedman

S. Steven Singh - Chairman and Chief Executive Officer

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


Michael B. Nemeroff - Crédit Suisse AG, Research Division

Brent Thill - UBS Investment Bank, Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Samad Samana - FBR Capital Markets & Co., Research Division

Ross MacMillan - Jefferies LLC, Research Division

Michael Huang - Needham & Company, LLC, Research Division


Good day, ladies and gentlemen, and welcome to the Concur Technologies Fourth Quarter Fiscal 2013 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Todd Friedman, Head of Investor Relations. Sir, you may begin.

Todd Friedman

Thank you, operator. Good afternoon, everyone, and welcome to the call. Today, we're discussing Concur's results for the fourth quarter of fiscal 2013. This call includes presentation slides that will accompany our prepared remarks. To access these slides, as well as the press release and 8-K from today's earnings, please visit the Investors section of our website at

We are now on Slide 1. Our speakers for the call today are Steve Singh, our Chairman and Chief Executive Officer; and Frank Pelzer, our Chief Financial Officer. Rajeev Singh, our President and COO, will join us for Q&A. After their prepared statements, we'll host a brief question-and-answer session.

Please now advance to Slide 2. Before we get started, we want to remind you that during the course of this conference call, we'll 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 they are subject to risk and uncertainty. We encourage you to review the details on this Slide 2, and our filings with the SEC, which are available at, for additional information and risk factors that could cause actual results to differ materially from our current expectations and the forward-looking statements expressed or implied during this conference call. We assume no duty or obligation to update these forward-looking statements, even though our situation may change in the future.

On the call today, we'll also be discussing certain non-GAAP financial measures. Reconciliations of those measures to the comparable GAAP measures can be found in the table within our press release.

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

S. Steven Singh

Thank you, Todd. Good afternoon, everyone, and thank you for joining us. During the course of the earnings call, we're going to focus our remarks on 3 topics. First, we just delivered an exceptional Q4, capping a fiscal year that was transformative for our business. It's important that you understand the drivers of those results.

Second, we're investing against 2 key corporate objectives that are the drivers of our addressable market, each of which is a multibillion dollar opportunity, where our success against one objective drives our success against the other. We want to help you understand the scale and interrelationship of these corporate objectives. And third, we want to give you some color on our financial and business objectives for fiscal 2014. Briefly, we couldn't be more pleased with our industry position and market opportunity. And we are debuting initial revenue guidance for fiscal 2014 that is above our steady state growth objective of 25%. And we are choosing to expand investments around our Open Booking and Open Platform initiatives to accelerate our ability to go after new revenue opportunities.

Please turn to the next slide. Two years ago, at the start of fiscal 2011, we outlined an operating plan intended to roughly double our distribution capacity and help us establish an industry-wide North Star for how products and services should improve the business travel experience. We called that North Star, The Perfect Trip.

Today, at the end of those 2 years, we have seen our distribution capacity double, we've seen our win rates climb even higher and we've seen our annual growth rate improve from 19% to nearly 24%. And as our guidance suggests, we expect those growth rates to continue to climb.

We've also seen customers, partners, developers and suppliers embrace The Perfect Trip and begin to build upon that vision with us.

Please turn to the next slide. Looking at Q4 specifically, revenue grew 31% year-over-year to $154 million, the fastest revenue growth that we've seen in more than 5 years, even as the scale of our business has increased more than 2.5x in that period.

As usual, revenue growth was driven by strong customer deployment. Additionally, transactions were modestly ahead of our expectations. Non-GAAP EPS was $0.39 per share, exactly as expected, as we reinvested revenue upside back into the business. Cash flow from operation and free cash flow were both ahead of our expectations.

Please turn to the next slide. More importantly, new customer bookings continue to be very robust, with bookings in fiscal '13 up more than 40% as compared to fiscal '12, not inclusive of the tremendous success we saw in ETS2. In fact, we saw very strong customer growth across all geographies and market segments.

New customer growth in the SMB segment grew 50% year-over-year and we now serve more than 8,000 SMB clients around the world, as we drive the benefits of managed Travel & Expense programs to companies of all sizes.

Our enterprise business had a very strong year and continues to be the largest driver of our growth, adding marquee customers from around the world to the Concur family, including one of the largest financial institutions in the world with more than 200,000 users; one of the largest technology companies in the world with more than 100,000 users; and one of the largest oilfield products companies in the world with more than 60,000 users.

We also signed our first customer in Fortune Magazine's Global 100 list for Japanese multinationals. Driven by a great team and our market-leading product offerings, our operations in Japan continue to exceed our expectations.

In fact, across the business, we added more than 4,000 new customers in fiscal 2013, as every business unit and region executed well throughout the year.

Our bookings growth rate has continued to move up each of the past 3 years. And frankly, demand for our products has never been higher.

Our expanding distribution footprint and growing market presence are helping to drive the pipeline growth that is sustaining sales productivity and fueling our hiring plans. These data points affirm our bullish view for the demand environment for our products and services.

Please turn to the next slide. We saw continued success against the ETS2 opportunity. Even after the addition of a second approved vendor, we signed additional business. More importantly, we saw new agencies go live. The Department of Interior, one of the 5 largest agencies under the ETS2 contract and an organization that would rival the size of many of our largest customers, went live this month. We're excited to be working with Travel Incorporated, our TMC partner, Travel Port, our GDS partner, and our colleagues at the Department of the Interior.

Let's put this into perspective. Two years ago, we had responded to an RFP for the GSA. One year ago, we had just started selling into the civilian agencies. Today, we stand with a long list of signed agencies, dozens of deployments underway, live implementation and a dozen TMC partners delivering services to new customers under our embedded TMC program.

While providing the U.S. government with greater control and visibility into their travel spend, we're also building a decade's worth of visibility into our business model.

Please turn to the next slide. As we've shared with you in the past, we are aligned around 2 corporate goals. First, we want every company in the world processing their expense reports through Concur. And second, we want to reinvent the corporate travel supply chain to be more transparent, more efficient and to better serve the business traveler.

Each of these objectives represent a multibillion dollar annual revenue opportunity and we believe that they are deeply intertwined. As you know, virtually every dollar of revenue that we generate today is driven by our first objective, to have every company in the world process their expense reports to Concur. This is a market in which we are less than 10% penetrated globally, where we have decades of compelling growth ahead of us.

Looking out over the just the next few years, given our bookings performance, our pipeline and our goal of 25% annual growth, we have a clear line of sight to crossing the $1 billion revenue mark in 2016.

Please turn to the next slide. As you think about the opportunity to drive efficiency into the corporate travel supply chain, ask yourself the question: What is an expense report? Well, it's the final arbiter of all things related to business expenses, most significantly, business travel.

When we launched Concur Travel 7 years ago, most of the industry scoffed and wondered what was an expense reporting company doing in the travel world. Well, today, more than 70% of all new customers signed up for both our Travel & Expense service, and we're the largest online booking tool for corporate travel.

Now, even as we continue to gain market share, we believe the engagement model for corporate travel needs to be reimagined. It is antiquated and it relies on the traveler doing all the work every single time they travel. That reimagination is being driven by the business traveler and is being enabled by well-established technology trends: cloud, mobile, search, Big Data. These are all intersecting at the point of purchase.

So why isn't my travel booking experience radically better? Why aren't a range of highly relevant travel options delivered to me automatically? Because our customers engage with us across a variety of compelling applications and because we understand their corporate policies, as well as their personal preferences and spend patterns, we have an opportunity to drive even greater value for them. We have an opportunity to anticipate their needs, to proactively help them during the course of their trip even before they ask for help. We are being afforded a position of trust and engagement to deliver value. And that's changing the distribution model in corporate travel, and that opportunity is truly massive. It has the potential to expand our addressable market many times over and serve as the foundation for a multibillion dollar revenue company. All of this is enabled by our deep commitment to deliver The Perfect Trip.

Please turn to the next slide. To do that, we are investing to build an open platform that will allow all members of the ecosystem: customers, partners, suppliers, TMCs and developers, to add value to and benefit from the consumption of content.

Now let me take a moment to announce that in Q4, we added a new constituency to this ecosystem, system integrators. We are pleased to welcome leading system integrators like Imperial [ph] and Aqueous [ph] as Concur partners. Over the coming quarters, we expect to add several more system integrators to our partner community to help deliver against the implementation requirement that accelerating customer demand is creating and to enhance the solution delivery capabilities across the ecosystem of partners, who are embracing the Concur T&E Cloud and enabling The Perfect Trip.

Our open platform affords everyone the capacity to work against a common data set or system of record. It affords everyone the capacity to optimize their investment dollars around an open global platform.

And the benefits are obvious. Through open collaboration, companies can deliver superior products and services. Through an open platform, companies can absorb and integrate more data from more sources to make more intelligent spending decisions. Through an open platform, content owners can more effectively reach their end customers, understand their preferences and make better recommendations. Through an open ecosystem, we can enable The Perfect Trip.

Please turn to the next slide. Our goal is to establish Concur as a central platform for this kind of collaboration. Perhaps the most visible sign of progress against that goal is the customer and industry adoption we're seeing around broad trends such as Open Booking and open platforms. In the 2 quarters since the launch of TripLink, our open booking service, roughly 400 customers have embraced TripLink. With time, we expect to see the same level of adoption around TripLink as we've seen for Concur Travel.

Within the year of the launch of the Concur T&E Cloud, we saw more than 50 applications built to leverage the platform. As of our first Annual Developers Conference last month, more than 150 additional developers joined the Concur platform and either shipped apps or are building apps to drive value for business travelers.

Last quarter, Marriott joined the growing list of travel suppliers that are supporting TripLink. And over the course of the fiscal year, we will continue to meaningfully expand our supplier partnerships. We're also very pleased to see a growing number of TMCs embrace the Concur technology stack and the Concur T&E Cloud as the core platform around which they will deliver a wide range of innovative TMC services.

In the same manner, the companies like Concur, Workday and are the next generation of technology companies, innovative TMCs such as Travel Incorporated, World Travel Incorporated, Adelman and Travel Leaders are the next-generation travel management companies. We look forward to working with them in the decades ahead as they materially grow their businesses.

Please turn to the next slide. As our customers and partners embrace industry trends like Open Booking and open platforms, the decision to accelerate our investment around the Concur T&E Cloud and TripLink was an easy one, as the risk/reward profile is very compelling.

However, we will cap that investment level by establishing a sustainable floor for non-GAAP operating margin. That floor is 10% and it's the low end of our guidance range for fiscal 2014.

With that said, the logical question is where are we investing? First, our bookings growth demonstrates that even as we've aggressively expanded our sales force, we have not outgrown the market opportunity.

You may have heard us say before that the formula here is very simple. We have expectations for sales rep productivity. As long as our new reps are hitting their goals in the timeframe we expect, then clearly, we have pipeline to support incremental growth and we will continue to hire.

Importantly, we're not even close to capacity in terms of having enough distribution to meet global demand so we'll continue expanding our distribution capacity across all geographies and all market segments.

Second, we believe that the industry response to our open platform has been so strong that we need to rapidly expand the range of offerings provided by the Concur T&E Cloud to include services such as data analytics as a service, recommendations as a service, loyalty and electronic payments as a service, among many others.

Third, we will accelerate investments around TripLink to expand the breadth and depth of suppliers that we can integrate via TripLink into the Concur T&E Cloud on a global basis.

With the confidence that comes from a rapidly growing business that affords a high degree of visibility into the years ahead, we are comfortable with the decision to expand our investments around our Open Booking and open platform initiatives, to accelerate our ability to go after new revenue opportunities.

What we want to be 100% sure of is this, can we be incredible at providing platform services for the corporate travel market in a model that affords members of the ecosystem, customers, partners, suppliers, TMCs, developers and system integrators the opportunity to add value and benefit from the consumption of content? If we are incredible, our ability to drive value for all of our customers is very clear. Expanding and accelerating our investments against these objectives gives us a comfort to be sure.

The opportunities of the next few decades are a direct result of the incredible execution over the past few decades. We couldn't be more excited about the opportunity to reinvent the corporate travel supply chain or the opportunity to deliver on our vision of The Perfect Trip.

As always, we thank you for your continued support. And with that, let me turn the call over to Frank, who will provide you more details on Q4 results, as well as our business outlook. Frank?

Francis J. Pelzer

Thank you, Steve, and good afternoon, everyone. Today, I would like to review our results for Q4 and fiscal 2013, as well as discuss our outlook for fiscal '14. Our core business drove strong financial and operational results in Q4 and for the year as a whole.

In Q4, our non-GAAP revenue, which excludes approximately $2.8 million of revenue from businesses we intend to divest, grew approximately 31% year-over-year and 11% sequentially, our highest growth rates in many years.

For fiscal 2013, non-GAAP revenue grew by $103 million or 23.5% year-over-year. Non-GAAP operating margin was approximately 16% and non-GAAP pretax income per share was $1.33.

Fiscal 2013 cash flow from operations, excluding previously discussed items, such as acquisition-related expenses and various tax benefits, was approximately $90 million, which was better than expected for the year.

We continue to execute against our investment objectives designed to further drive top line growth and expand our role in the trillion dollar travel market. Our increased investment in distribution and innovation continue to drive strong bookings performance in Q4.

Our focus on investing in growth continues to be validated by the global demand we are experiencing for our services and the ecosystem coming together around the Concur T&E Cloud.

Finally, our successful execution of our strategy is creating a foundation for sustainable growth at best-in-class levels.

If you would, please advance to the slide titled Revenue Summary, and let's look at Q4 and FY '13 results.

Unless otherwise stated, please note that all of my comments reference non-GAAP operating metrics.

Q4 revenue was ahead of our expectation at $154.2 million, growing approximately 31% year-over-year and 11% quarter-over-quarter.

Fiscal 2013 revenue capped a year in which total revenue grew 23.5% to $543 million, ahead of our expectations. Please note that this excludes $2.8 million of revenue from operations acquired from TRX that we intend to divest. For GAAP purposes, we were not able to classify these operations as discontinued at yearend, but you should expect that we will in the future.

Recognized revenues in the quarter benefited from excellent traction and new customer deployments, existing customers adding new services and strong transactional volume.

Additionally, the strong demand for our products has served as a catalyst for the formation of a partner implementation program to assist in certain customer the deployments. As you are probably aware, when a third-party performs an implementation, we demonstrate standalone value for those services.

With standalone value, revenues from implementation services also provided by third parties must be recognized as delivered, as opposed to deferred and amortized over the customer life when standalone value cannot be established.

There was a nominal positive impact from that addition in Q4. Customer retention rates were again strong for the quarter, consistent with our historical averages in the high 90s.

The following comments refer to my next 2 slides. Throughout the year, we demonstrated the leverage and profitability inherent in our business model. Gross margin was 72% for the quarter, down year-over-year largely from the margin mix of acquired businesses. Gross margin for the year ended at 73%. Gross margin is a reflection of the economies of scale inherent in our business model with high-margin products offset by our investments made to support our growth initiatives.

As we have stated repeatedly, our goal is to invest across the business to expand our distribution and product capabilities.

For fiscal 2013, sales and marketing expense increased 35% year-over-year, reflecting our ongoing and sizable investment in reaching prospects and customers. I would like to emphasize that bookings growth of more than 40% outpaced sales and marketing growth, reflecting the health of our end markets and the strong performance by our sales force.

R&D expense increased 34% year-over-year, driven by growth in headcount to drive the innovation curve in our industry. G&A expense increased 17% year-over-year, reflecting investments in corporate infrastructure to support our global growth. Operating margin for the year was approximately 16%, in line with our expectations.

The higher-than-expected revenue offset by the reinvestment of this top line upside resulted in Q4 and fiscal 2013 pretax earnings per share of $0.39 and $1.33, respectively, both ahead or in line with our expectations.

Please advance to slide titled Cash Flow Summary. Cash flow from operations and free cash flow were very strong for the quarter, primarily driven by continued strong performance for the business.

Cash flow from operations for the year, excluding contingent consideration payments, cash paid for acquisition and other related activities and the tax benefits reported in financing activities as opposed to cash flow from operations, was approximately $90 million, ahead of our expectations.

Capital expenditures for the year were approximately $50 million or approximately 9% of fiscal 2013 revenue, in line with our expectations.

Free cash flow was $40 million for the year, ahead of our expectations.

Our cash position is very strong and provides us tremendous leverage to continue to expand our market and our leadership position.

Cash and short-term investments, net of customer funding liabilities, ended the year at $796 million. Use of cash in the quarter was primarily driven by acquisitions of TRX and GDSX and investments made through the Perfect Trip Fund.

Days sales outstanding ended at 62, at the low end of our 60 to 70-day expected range, primarily due to strong yearend collections.

Deferred revenue grew to over $104 million by quarter end, reflecting approximately 19 [ph] growth over the same period the prior year. As we have mentioned in the past, please note that the change in deferred revenue is not an accurate measure of our bookings growth, since we bill the vast majority of our customers monthly.

Please advance to the next slide. Now let's turn the discussion to the coming fiscal year. As Steve mentioned, demand for our services has remained strong. We expect total revenue for fiscal 2014 to grow approximately 26% year-over-year. We expect total revenue for the first quarter to grow approximately 27% year-over-year. Driven by seasonality, the growth rate we see in fiscal Q1 tends to be slightly lower than the growth rate we see in other quarters throughout the year. Having said that, Q1 2014 growth rate is expected to increase materially over the same quarter last year.

In fiscal 2014, we plan to continue to increase our rate of investment because we see a strong global demand environment for our services and we continue to efficiently penetrate new markets.

The investments in distribution that we will make this year will begin to drive revenue growth in late fiscal '15. We believe we have a large and strategic window of opportunity to further strengthen our leadership position, especially in new markets around the globe, our government business and new service offerings associated with our Concur T&E Cloud platform.

As a result, our expected revenue growth, combined with our planned investments, yields an operating margin for fiscal 2014 in the range of 10% to 14%.

We expect Q1 operating margins to be slightly below this level, Q2 to be below Q1, Q3 to be in the range, and Q4 to be at the high end of the range. As Steve mentioned, we intend to invest every dollar of our 26% year-over-year revenue growth back into the business with an annual floor of 10% operating margin.

Our revenue and operating margin expectations result in non-GAAP pretax earnings per share of at least $0.93 in fiscal 2013. We expect Q1 to contribute $0.19 out of the total for the year. I will remind everyone that as a business, we target annual non-GAAP operating margin and EPS goals and are less focused on variations that happen quarter-to-quarter.

Let me now turn to cash flows. The cash generating dynamics of our business continue to be strong and cash flow from operations should continue to be largely linked to non-GAAP earnings.

In fiscal 2014, we have a continuing dynamic that impacts this relationship. We still have a large U.S. federal tax NOL associated with the excess tax benefits from share-based compensation that we cannot record as an asset under GAAP. Once we are able to use the excess tax benefits to offset cash tax payments that would otherwise be due, GAAP requires that we record the usage as a cash outflow from operations and a cash inflow from financing activities.

In other words, the use of the NOL associated with the excess tax benefits creates a geography issue on the cash flow statement. It is important to note that the actual U.S. federal income tax cash payments will be much less than what we report in GAAP cash flow statements as cash outflow from operations.

With strong revenue growth, offset by our higher rate of investment, we expect cash flow from operations, excluding acquisition and other related costs and excess tax benefit from share-based compensation for fiscal 2014 to be at least $70 million.

Regarding our tax rate, we are still utilizing a large NOL balance. For first call consensus purposes, we encourage you to use 35% federal statutory rate but recognize this does not reflect the taxes we pay.

For fiscal 2014, we expect cash income tax payments to be single-digit percentage of pro forma and pretax income.

In fiscal 2014, we expect to spend 8% to 9% of revenue on capital expenditures due to additional infrastructure investments, including global facilities, data centers and information system enhancements.

Please advance to the next slide. In closing, we were very pleased with the execution across the business in fiscal 2013. The company delivered Q4 revenue growth above expectations and the highest growth in 5 years. We expect Q1 fiscal 2014 revenue growth to be materially above Q1 last year.

We are seeing strong initial traction around TripLink and the Concur T&E Cloud, which allows us to execute to our second corporate objective Steve described.

We're accelerating our investments against that objective to drive additional streams of revenue. With a clear strategy, world-class team and an incredible base of global customers, we look forward to the decades ahead.

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

Question-and-Answer Session


[Operator Instructions] Our first question comes from Michael Nemeroff of Crédit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Just 2 quick ones, Steve. The GSA -- ETS2 contract obviously going very well. Do you anticipate that the rollouts will be complete by fiscal '15 on all of the outstanding contracts? And then, the second question is on the open platform. Investors that I talked to kind of think that it's an abstract kind of theory. Could you maybe just give us some specifics on how you plan on monetizing the open platform over the next couple of years?

S. Steven Singh

Absolutely, Mike. So let's start with the ETS2 question. I think that the way to think about the ETS2 deployment, which I think is the crux of your question, is that it will take a few years for us to be complete on those deployments. We're certainly right now a little bit ahead of schedule on a few of those deployments, but it's really important on expectations around ETS2, as far as revenue expectations, to try to be a little bit more prudent, simply because we have no historical experience relative to the consumption of the transactional flow. And as you know, the way we recognize revenues around the ETS2 contract is entirely usage-driven. Having said that, look, we -- we're executing exceptionally well. We're seeing implementations continue to progress forward. But I think that we ought to set an expectation that all rollouts will probably take a little bit beyond fiscal '15. And then, on the monetization of platform -- of the platform strategy, look, I -- we certainly appreciate that this is a hard concept to understand. But let me see if I can give some very specific examples. First and foremost, think about the platform as a place where a number of different parties can come to actually add value. So whether you're talking about application developers or customers or suppliers or TMC partners or system integrator partners, and as they add value, right, the single biggest thing that -- there's 2 things that we really deliver within that ecosystem, 2 very large things. First and foremost is the ability to help that value become substantially greater by helping our partners understand who they're actually selling to, right? And then, on top of that, to be able to make a -- to affect the distribution of that content in a very efficient model. Those 2 things are not only incredibly valuable, but they actually make the experience better for the traveler and better for the customer. And we think that's monetizable. There are many different you might consider monetization, not the least of which is in the distribution of content, that is, it's certainly possible that you could look at them and say, "You know what, as suppliers work through existing distribution channels, there's a cost of distribution for that content. And what might that cosmic look like within a Concur open platform model?" In addition to that, you could see advertisers -- advertising-based models that are also transaction opportunities or developer fees or distribution fees that are part of that monetization opportunity. And what you're going to see is that each of these is dependent upon the relationship that we have with the type of partners in that situation and how that value is best consumed. A couple of things to keep in mind on that. As we talked about in the prepared remarks, think about where we were when we first introduced the Concur T&E Cloud ecosystem about 1.5 years or so back. Within the first 12 months, we saw 50 developers build applications on top of that platform. We've actually seen those developers successfully selling to customers. We have an opportunity to actually share in that monetization with those developer partners. And today, at the Developers Conference we held in early October, we've seen the developer community grow to about 200 and our view, as you can see, they continue to grow over time.


Our next question comes from Brent Thill of UBS.

Brent Thill - UBS Investment Bank, Research Division

Steve, just as it relates to '14 operating margins, I think, we all understand that you're spending to get growth, but this will bring you back to 2005 levels on the op margin. I'm just curious if you sort of draw a floor going forward and saying -- as some of the other SaaS companies that we've got to spend at some point we can draw the line and say at 10% we shouldn't go below that. Have you thought through that or is this just continuing to be a moving target based on the upside on the top line?

S. Steven Singh

Yes. Brent, we've actually spent a fair bit of time thinking through that. We think 10% is the floor. And to the reason we get to that, obviously, there's multiple different considerations, but not the least of which is thinking about our capital structure and making sure that we've got the right property margin and business model to support the cash structure we've got in place. In addition to that, we also think about in terms of what can we get for that investment, right? Are we going to see demonstrated and meaningful return on that investment? And so as we talked through the 2 primary drivers behind, how we might invest additional capital, we set a floor for that and that floor is 10%.

Brent Thill - UBS Investment Bank, Research Division

Okay. And for Frank, and I apologize if I missed that. If you take the 40% bookings number and you look at it without the government influence, is there a metric that you can share with us when you kind of x out the government business?

S. Steven Singh

Brent, I'll take that, in fact, I said that in the prepared remarks. That 40% bookings growth is not inclusive of ETS2.

Brent Thill - UBS Investment Bank, Research Division

Okay. So with ETS2, what would it have been?

S. Steven Singh

We didn't provide a specific on -- with ETS2, but I think you know on ETS2 that the full scale of the opportunity is fairly public information. It's about $1.4 billion, and you could divide that over 15 years and say that these guys have signed over 70% of that business. But keep in mind that the implementation timeframes are totally different. The revenue recognition around our ETS2 customers is all usage-based. So you're not going to see the same translation between bookings in ETS2 to revenue on the P&L.


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

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

I wonder if you could give us any type of quantification of your expectation for growing your sales force and your headcount going forward into next year, 2 years, as you look out?

S. Steven Singh

Yes, Steve. As we think about sales headcount growth, it's really driven by a relatively simple kind of a parameter, which is we have a set of expectations around productivity for each sales rep and it's all obviously time-based. From the time they're hired, we allocate a certain amount of time before we expect full productivity. And as long as we can see their productivity levels continue at the levels that we expect, we're willing to keep growing the sales organization. I think, the thing we're seeing very loud and clear is that we're nowhere near full capacity just to meet demand. And the operating margin guidance that we just provided presumes that we'll continue to grow that sales organization, at least 2x from where it is today. I think, we're not as focused on 2x over what time period. We're focused more on just continued growth on the sales organization.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Great. And then, Frank, I had a question on gross margins, they came in around 72%. We know you've layered in a couple of new acquisitions. Is 72% the new normal we should think about for the coming year? And what are the longer-term kind of targets for your gross margin line?

Francis J. Pelzer

Yes. So you're right. Gross margin was just a little bit below where it was in the prior quarter. I wouldn't think about any structural change to gross margin going forward. Obviously, we have been hiring in our deployment organization and that's certainly going to have an impact on gross margin. And that, of course, is all driven by the fact we're seeing great customer growth and so we're hiring in advance of that customer growth. But I think, as you think about this over the next several years, you should expect gross margin to, in general, continue to move up. And we don't see any reason why, in this day-to-day model, that it can't be in the mid-80s.


Our next question comes from John DiFucci of JPMorgan.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Steve, you continue to put up impressive numbers and this is kind of going to go back to Brent's question, too, because it's probably a question that we're going to have to talk a lot to investors on tomorrow. Increased investment at this time makes a lot of sense, especially the way you and Frank lay it out. But just trying to reconcile that investment relative to the top line growth you're forecasting for next year, you obviously have great visibility into your top line, but are we seeing here less certainty in what that investment will yield? Or is it more around just less certainty around the timing of when that growth will come?

S. Steven Singh

So John, this is a totally fair question. And look, we not only expect our investors to ask that question, we ask the question internally before we elect to increase our investments. Let me start with a couple of basics around this. If you look -- just address the question around are we getting less efficient that I think was inherent in your question. If you look at just the last year, right, our increase in sales and marketing spend as far as investment was less than the increase in bookings, right? So our bookings went up faster than our sales and marketing spend went up. And to be fair, and everyone who's ever run a business knows this, that the increase in sales and marketing spend, a good chunk of that was back-end loaded and it couldn't possibly have been helpful to our bookings growth in the year. And so, what that ought to tell you is, boy, the demand environment is very, very strong and we're executing exceptionally well against that. And now, as we look forward, if we're willing to increase investments that would yield an operating margin between 10% and 14% next year, the question is where are we increasing those investments. And we are certainly -- there's 3 areas. The first area is really continued distribution investment because we see a great demand climate for us. The -- and that is an equation we understand exceptionally well, that's an equation that we're executing on and the metrics that anybody can look at would show that we're executing on that exceptionally well. But the other 2 areas of investment are certainly areas where we're putting in a fair bit of capital upfront, for which you won't really see revenue right away, and that's around the Concur T&E Cloud platform, as as well as our TripLink services, so all around Open Booking and open platform. However, we do think that you're going to start to see the benefit of those investments later in fiscal 2015. And so these are not investments that we look at and say they're at least 3 or 4 years out before we see the benefit of it. And in fact, one last thing I'd add to that is we -- the way we get comfort to say, hey, you know what, it makes sense to increase investments around the open platform and Open Booking initiatives is we saw early traction against both of those. So TripLink, in the first 2 quarters that we delivered our Open Booking solution, we've seen nearly 400 customers, enterprise-class customers, sign up for TripLink. We see the developer community go from 50 to roughly 200. We've seen new supplier partners join the open platform initiative. And then, just as importantly, we're seeing travel management companies make decisions that say, hey, you know what, we're going to build all of our services and solutions on top of the technology stack that Concur delivers. Okay. And we've seen system integrators get behind the set of services we're delivering because they've seen opportunity to go in and add value that scale to enterprise-class customers. And so those are the metrics that we track and we got comfortable with. And we said, look, we're seeing great traction here, it makes sense to invest behind this. But keep in mind, every benefit we get against our second corporate objective, which is to go drive efficiency in the corporate supply chain, drives benefit from our first corporate objective, which is we want every company in the world processing their expense reports on Concur. These are totally symbiotic objectives.

John S. DiFucci - JP Morgan Chase & Co, Research Division

That's really helpful. And my follow-up is going to sort of being a follow-up to the first, I had a different one, but I guess, on those 3 areas of investment, I guess, just in the distribution side, if you can just roughly say past [ph] the investment because I'm just trying get a sense of -- because that -- like you pointed out, you've executed really well on that. You know the timing of when that's likely to start to bear fruit. And in...

S. Steven Singh

I would say a significant chunk of the additional investment is around distribution but I don't know that it makes sense to say it's greater than x percent [ph] , a significant chunk is in distribution in the area, of course, where we, as I said earlier, we have just tremendous experience and comfort.

John S. DiFucci - JP Morgan Chase & Co, Research Division

And in the capital upfront part, is that an Open Booking and open platform? Is that mostly R&D, but you mentioned sort of distribution, you mentioned Aperio [ph] in your prepared remarks, which specializes in implementing SaaS solutions done really well and I was glad to hear that. So are you the building out scale? Is that what you're doing?

S. Steven Singh

So as you know, John -- and then, we'll move to the next caller, but as you well know, the reality is, yes, there's a significant amount of R&D. As I mentioned, we want to deliver data analytics as a service, that's just one example, loyalty or payment as a service. So these are interesting examples of additional services we want to deliver. So it's much more than -- but it's much more than just R&D. As a part of delivering these services, we actually got to be able to work with our partners in a distribution model. So sales and business development are also parts of that investment.


Our next question comes from David Hilal of FBR.

Samad Samana - FBR Capital Markets & Co., Research Division

This is Samad Samana in for Dave. A couple of questions. Has there been any progress on adding airlines to the Concur T&E Cloud?

S. Steven Singh

All I can tell you is that we expect to add a significant number of partners over the course of this fiscal year.

Samad Samana - FBR Capital Markets & Co., Research Division

Okay. And then, as I think about that long-term $1 billion target that you talked about today, what percentage of revenue do you see coming from T&E over that longer term in the mix?

S. Steven Singh

I'm sorry, can you repeat that question?

Samad Samana - FBR Capital Markets & Co., Research Division

Yes. So as you think about the TripLink product, what contribution do you expect that to provide to that long-term $1 billion target as you look out into the future?

S. Steven Singh

Yes. So we think that TripLink is really -- it's monetized at the customer level, and it certainly has monetization opportunities at the partner level as well. When we think about crossing that $1 billion mark in 2016, it's really driven by the business we have today, delivering world-class travel itinerary management, expense management, and of course, TripLink services into corporate customers. And it's that first corporate objective that I mentioned, right, how do we get every company in the world processing expense reports on Concur. And so if you look at the bookings that I just highlighted in this call, plus the pipeline comments that we made and plus our comfort that mid 20s growth rate is achievable over the next several years, the math is actually fairly straightforward and you'll cross $1 billion in revenue in 2016.

Samad Samana - FBR Capital Markets & Co., Research Division

Okay. And then, last question and I'll hop. So can you give us an update on the progress of customers using the expense management solution versus customers that are using end to end expense and travel management and what progress has been there versus last year?

S. Steven Singh

On -- I think, I understand your question. But this has been fairly consistent over the last several years, which is about 70% of our customers that we sign in any given year sign up for both our Travel & Expense service. And I think, that ratio, while it moves up from time to time, is a good ratio to look at. Okay? I think that one other thing that's worthwhile though within that, that you ought to think about is we think TripLink will see that kind of adoption over time as well.


Our next question comes from Ross MacMillan of Jefferies.

Ross MacMillan - Jefferies LLC, Research Division

So I actually had a couple of quick questions just to make sure I understand the impact from TRX and GDSX. So I know you broke out the part of those businesses that you are going to classify as -- you're going to classify them for disposal. But if we think about the piece that you want to keep, you talked to part of the deal that those acquisitions would contribute approximately $5 million in quarterly revenue once purchase accounting adjustments were completed in fiscal Q2 '14. And I was just wondering, in the quarter itself, is there any way you could help us understand what the revenue contribution from those acquisitions actually was?

S. Steven Singh

Yes. Ross, I think, we mentioned this on the last call, that it was insignificant in the quarter we just completed, which is the quarter we acquired them. And we expect it to build from that level back to roughly $5 million, and we're just using a round number there in, call it, the March quarter. We're exiting the March quarter, we expect that they'd kind of get back to that level. The -- I will tell you, it's very important to understand that, unfortunately, this is -- across the entire TRX business, there was, over time, a general lack of investment and what you saw was a business that generally was in a declining revenue equation. Having said that, the access that we're most interested in, of course, were around mid-office and reporting solutions, around which we are wrapping our investments fairly substantively.

Francis J. Pelzer

Ross, this is Frank, and I just would add that when we set expectations for Q4 3 months ago, it was part of the expectations that we set and it came in pretty much exactly what we had anticipated as part of those expectations.

Ross MacMillan - Jefferies LLC, Research Division

That's helpful. And then, maybe just on the Q1 revenue guidance, I know that you commented it would be the highest growth, and I think it's reflecting the compare. But when I think of sequential, on a non-GAAP basis, I think it comes out to about 1%, which would be quite a lot lower than certainly what we've done over the last few quarters, and I think, I'd have to go quite far back to think about a 1% sequential quarter. Is there something more seasonal now in the business, maybe with the acquisition of those assets? Or is there anything else that's impacting that sequential growth rate?

S. Steven Singh

I think, if you go back over the last several years, there's seasonality into our fiscal Q1, and this is just our guidance around that seasonality. And so I don't know if there's anything more to read into it than that. We also know that the bookings that we typically drive tend to be back half of the year loaded, which tends to impact the back half of the forward year as far as the revenue growth rate. And then, on top of that, you also -- which would imply that the front half of the forward year would have lower bookings but lower revenue growth rate. But unfortunately, Q1 is also impacted by seasonality around travel. And so having said that, what's the important thing to focus on is that the growth rate into Q1 is 27%, that's our expectation, which is up from, I think, we did 22% in the same quarter last year.

Ross MacMillan - Jefferies LLC, Research Division

Yes, that's right. Maybe one very last one if I could squeeze it in on CapEx, this will be the second year, I think, in that sort of higher range 8% to 9% or so of revenue. You mentioned some of the build out in investments you're making. How would you think about that CapEx level going forward? Are we sort of in a slightly inflated period right now that could moderate over time? How would you have us think about that?

Francis J. Pelzer

Absolutely, Ross. I think, we are in a slightly inflated period, I guess. We really haven't sat down and said exactly what it's going to be in '15, '16, '17 and beyond. My sense is we'd probably be at the high end of that 6 to 8 range for some period to come, just as we continue to invest and build out our global infrastructure, particularly on the facilities across the globe. So I would expect it in that higher range for the foreseeable future but we've tried to tell you exactly what we expect for this coming year.


And our next question comes from Michael Huang of Needham & Company.

Michael Huang - Needham & Company, LLC, Research Division

Just a couple of questions for you. First of all, given your comments about being distribution-constrained, and obviously, there are numerous growth drivers that you're executing on. I was wondering, if you thought [indiscernible] that bookings growth rate in fiscal '14 could be trending more or less consistent with kind of what you saw in fiscal '13, which is really impressive, I didn't know if you have any kind of directional thoughts around that? And then I have one more follow-up.

S. Steven Singh

I look forward to telling you about it in 12 months.

Michael Huang - Needham & Company, LLC, Research Division

Okay. Just switching gears, I guess. In terms of the mega win in Japan, I mean, that's great. I was wondering if you could comment on maybe who you competed with and was this an integrated Travel & Expense win here across all employees or maybe if you could just provide some color around the scope and just at the higher level, in terms of Japan, like what are your assumptions around kind of how that does next year versus kind of what you saw this year?

S. Steven Singh

Hey, Mike, I was just teasing around with you a little bit there. I certainly will not comment on what we expect bookings to be this year in fiscal '14. Our practice is at the end of each year, we give you color around it. Having said that, look, we certainly made clear in our prepared remarks that the demand environment looks very, very strong. And obviously, we're growing our distribution capacity. So we expect to have healthy growth in bookings in the forward year. Look, I want to make sure that you don't equate adding distribution investment in fiscal '14 with added bookings growth in fiscal '14. I know you understand this very well. You know that there's a time lag between when somebody comes on board and when they actually are productive. And so the headcount that we bring on board in distribution in fiscal '14 really won't have an impact to bookings growth rate until fiscal '15. And so I would just want to be 100% clear about that piece of it. On Japan, a couple of things, over the last several quarters, we've been commenting a little bit more about Japan, simply because even as we set higher and higher internal expectations around it, it continues to do even better than that. And just a couple of recent highlights just are worth noting. We had a conference where we were able to talk about the value integrated Travel & Expense services into the Japanese marketplace. We had 1,500 prospects attend that conference, and frankly, in this most recent quarter, signed the biggest deal we've ever seen in Japan in the quarter. And so what we're seeing is that not only are we executing really well in the business side, we're seeing great demand environment, we're seeing great progress with partners, such as Rakuten, which is obviously a very significant provider of hotel reservation services in the Japanese market, we're integrating that into our product set. And so the team in Japan led by Mosso [ph] is just doing a phenomenal job in filling out a very disciplined, strong business. And we expect it to continue to grow. And in fact, with time, as you would with expect, Japan is one of the largest economies in the world, and as you would expect, they should be a very large piece of the Concur's revenue stream.

Okay. Folks, I think, that's all the questions we have in the queue. Look, John and I and Frank and Todd and Raj want to thank you for your time and thank you for your faith and investment in Concur. We look forward to updating you on the progress of your company next quarter. Thanks so much, folks.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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