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Concur Technologies Inc. (NASDAQ:CNQR)

F1Q10 Earnings Call

February 3, 2010 5:00 pm ET

Executives

Steve Singh - Chairman & Chief Executive Officer

John Adair - Chief Financial Officer

John Torrey - Executive Vice President of Corporate Development

Analysts

David Hilal - FBR Capital Markets

Mark from - Piper Jaffray

Brad Reback - Oppenheimer

Thomas Ernst - Deutsche Bank

Laura Lederman - William Blair

Richard Baldry - Canaccord Adams

John Kraft - D. A. Davidson

Bryan McGrath - Credit Suisse

Steve Ashley - Robert W. Baird

Sid Parakh - McAdams Wright Ragen

Brad Whitt - Broadpoint Capital

Operator

Good afternoon. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Concur Q1 earnings conference 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)

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

John Torrey

Thank you, operator. Good afternoon and welcome everyone to the Concur earnings conference call for our first quarter of fiscal 2010. My name is John Torrey, EVP of Corporate Development for Concur.

This call includes presentation slides that will accompany our prepared remarks. To access these slides, please visit 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, 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 four items to takeaway from the call today. First, fiscal Q1 was a strong quarter against all of our key metrics. Second we driven by our execution capacity and ongoing stability in the macro environment. We are comfortable that we can achieve our revenue, earnings, and free cash flow targets for the year as a whole just as we outlined at the start of our fiscal year.

Third, we see several long term growth opportunities for our business including growing our customer base in the markets we currently serve. Geographic expansion into new markets, addressing the emerging business sector, and expanding the range of services we deliver to our customers and as such we are investing aggressively across the business.

That investment will include any incremental margin that maybe realized throughout the course of the year from the inherent leverage of our business model, and fourth, we announced strategic partnerships over the past week, design to help us deliver on some of the growth opportunities I just outlined.

Please turn to the next slide. Turning our attention to Q1 results we saw strong operating performance across the business. Revenue reached an all time high at $68.7 million driven by 4% quarter-over-quarter growth in subscription revenue. At 16% year-over-year growth in revenue led to non-GAAP EPS for the quarter of $0.30 per share, which is ahead of our expectations.

However, as I stated earlier you should expect us to invest at incremental margin during the course of the year and driven by stronger earnings and stronger cash collections free cash flow in the quarter was $10.5 million, well ahead of our expectations. We also saw solid new customer growth in the quarter and we expect the demand environment to remain strong throughout the fiscal year.

Please turn to the next slide. The economic climate continues to stabilize. Unemployment while north of 10% seems to have stabilized. It seems likely that any economic recovery will be a jobless recovery in the near term and that unemployment will remain high for the next few years and we have seen around when unemployment might return to previous session levels seems to be converging around 2015.

Travel spend is starting a slow recovery process and trending back towards, but not yet near the waterline. Based on the data we have seen from prior recession, it will likely take at least until 2011 before travel spend fully recoveries.

Please turn to the next slide. Its company to see stability in the key macro trends that impact our business and we are very pleased with Q1 results. Putting this into the context of how we view fiscal 2010 as a whole, we remain comfortable that we can achieve our revenue, earnings and free cash flow targets just as we outlined at the start of our fiscal year.

I want to interject a little caution here. It maybe tempting to get over the optimistic of what we can achieve in fiscal 2010. We think it’s premature to put the challenges of the economic environment behind us, we device caution in terms of near term growth expectations.

Please turn to the next slide. Over the past several years our views in the market opportunity and the customer requirements to date have been validated and therefore it puts us in a unique leadership position to expand the market from our foundation. As we look ahead to the next several years, we see substantive growth for our business. Those growth opportunities are in the following areas.

First, expansion of our customer base in the markets we currently serve, second, geographic expansion into new markets, third, serving the needs of emerging businesses, and fourth expanding the breadth of services we can offer to our existing customers. Consistent with commentary on the last two earnings calls we have significantly ramp it our investments across the business against these opportunities.

Please turn to the next slide. In support of our first growth initiative which is to expand our base of customers in the markets we currently serve we continue to expand our internal distribution capacity and our investments in market development and very much inline with our commentary at the start of the fiscal year.

Additionally, coming into the fiscal year we saw opportunities to enter to new strategic partnerships that can improve our distribution leverage and our long term growth capacity. Last week we announced the expansion of our distribution partnership with American Express global commercial card group to include American Express Business Travel. Of course you know that American Express Business Travel is one of the leading corporate travel agencies in the world.

This partnership affords both AMEX businesses the capacity to deliver comprehensive corporate travel and expense management services that include travel booking, agency services, expense management services, consulting services and payment services for our joint customers on a global basis. As you would expect, we will continue to ramp our investments in channel management in support of this partnership.

While we are excited about the opportunity that the new AMEX Business Travel partnership affords to both of our companies and the value that we can deliver to our mutual customers, I want to point out that it will take sometime to ramp the partnership to drive leads and then sign the first joint client and as you know, once we sign a client it takes an average of six months before the customers fully deployed and contributing to our revenue stream.

Please turn to the next slide. In support of the second growth initiative, which is geographic expansion into new markets, we continue to expand our internal distribution capacity our investment in market development and our local product development capacity, again very much inline with our commentary at the start of the fiscal year. We see significant opportunity across Europe in China, India, Japan, Australia, Southeast Asia and Brazil.

These investments are very long term in nature and are not expected to appreciably continue to new customer growth at least until 2012 and just as we did in the case of the Etap-On-Line we may augment our organic growth with targeted M&A, or partnerships even when those opportunities arise. Also in support of our geographic expansion objectives, yesterday we announced a strategic partnership with Amadeus, the leading global distribution system in Europe.

Amadeus is the market share leader across Europe in terms of travel content delivery and online booking tools. The purpose of our partnership from Concur’s perspective is to deliver our expense management services to all customers who use Amadeus booking tool. While the customer will enjoy the choice of which booking tool to use, we will enable the Amadeus booking tool to integrate directly into Concur expense to enable a full end-to-end offering.

As part of that partnership agreement, Concur will get access to Amadeus’ core distribution technology, specifically value added functionality and like low fare search, master pricier and Amadeus ticket changer. Other than Amadeus control, but the only online booking tools to have access to these technologies, we expect this partnership to drive new customer growth towards the end of this fiscal year or the early part of fiscal 2011.

Over the past several years we have driven part innovation in our market and the delivery of compiling services. We’ve shifted the entire corporate travel market towards integrated Travel & Expense. The reality of that market shift is clearly evident in the partnerships we have announced over the past few weeks.

Please turn to the next slide. In support of our third growth initiative, we’ve also been investing to deliver employee spend management services for emerging businesses on a global basis. Very much inline with our commentary at the start of this year, we define emerging businesses as companies that employ between one and 215 employees nearly a third of the U.S. workforce is employed by company in this market segment and nearly 40% of the global workforce is employed by emerging businesses.

We believe this market segment is underserved and can generate incremental long term revenue and earnings growth. We expect to enter this market in fiscal 2010 and we expect the investment to contribute to revenue in 2011 albeit modestly.

Please turn to the next slide. Finally we continue to invest aggressively in innovation to expand the range of services we can offer our customers. Those investments and innovation fall into three major categories, mobile services, web services and SAS 2.0. Last year we introduced Concur Mobile for BlackBerry, Windows Mobile and iPhone platform.

As a reminder Concur Mobile extends the power of our service by giving you the capacity to change flight, book taxies, hotels or dining, capital expenses and approve expense all from your handle devices, all with in policy and all while on the road. With filtration the smartphones and the mobile applications, mobile phones are for all practical purposes becoming purchasing and payment instruments.

We see a tremendous opportunity to deliver value to our customers by integrating a wide range of mobile applications into our technology platform. Over the long term, mobile platforms and applications will provide for new and incremental revenue and earnings growth opportunity.

In support of our Concur Travel & Expense service we’ve also invested aggressively to bill out the global connect network, which connects our 10,000 plus customers who spend more than $35 billion annually to content and electronic receipt from hundreds of suppliers, that are focus themselves, I am reducing their operating cost and providing more value to the business traveler.

Over the past year, we ramp up our investments to deliver web services that will expand the Concur network into a platform that allows our customers and our partners to deliver content electronic receipts or build web based applications or mobile applications that extend and enhance the value of our services.

In the area of SAS 2.0, 10 years ago as John and I went from investor meeting we talked about how on demand computing is software services was the next generation of software. How the cost, delivery and maintenance benefits of this type of business model were so compelling that all software were moved to this business model over the next few decades. Understandably there was some debate about that concept back then.

Today there’s no debate. In fact, the new debate will be around SAS 2.0. As more and more companies outsource business processes they are not mission critical and not central to the value that they deliver to their customers. They are looking to outsource all elements of the business process.

In the area of Travel & Expense management the majority of those business processes can be automated via technology and delivered in an on demand model. Earlier this year we released the first version of Concur Advantage Services, a wide range of offerings that allow our customers to get greater value from our core suite of services, examples include customized report authoring and also report delivery, expense report auditing that recovery and digital mailroom services for invoice and receipt handling. In the coming quarters we’ll add new services such as automatic fraud detection. We expect to Concur Advantage Services to contribute meaningfully to bookings in 2010.

Please turn not next slide. The strength of our core business not only affords us the opportunity to deliver compelling revenue, earnings and free cash flow growth in fiscal 2010, it affords us the opportunity to invest in the growth initiatives that I just outlined that will enable incremental revenue and earnings growth opportunities in the years ahead.

As you know we believe there’s an incredible opportunity to drive innovation and efficiency into the corporate travel supply chain. Our market leadership position in a challenging economic climate has afforded us a unique opportunity to expand our position. It’s an opportunity that we intend to capitalize on. Successful execution gets us this opportunity and will drive sustainable growth in revenue 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 climate is testament to the scale that market opportunity and our ongoing ability to execute. So with that if you please turn to the next slide I would like to turn the call over to John Adair our Chief Financial Officer.

John will provide details on Q1 results as well as our business outlook for 2010. John.

John Adair

Thank you, Steve and good afternoon everyone. The results for the first quarter of this year can be aptly described are positive and consistent with the expectations for the year as a whole. As we stated at the outset of this quarter we will continue to keep a watchful eye on the global economy and we are absolutely focused on executing against our long term objectives of laying down foundation for the years to come.

There are three key messages that I would like to take from my prepared remarks this afternoon. First, Q1 financial performance was strong with earnings in cash flow growth coming in slightly ahead of our expectations at certain investments straddle the quarter into Q2. Revenue growth was within the range of our expectation for the year as a whole and customer deployment tracked very well for the quarter.

Second, the impact of the global economic recession on our customer base played out consistent with our expectations for the quarter. Corporate travel spend is improving over the same periods of the prior year. Customer attrition rates are beginning to normalize and the unemployment rate showed the first is signs of stabilizing as it held around 10% for the December quarter. We expect every step of this recovery to be hard fought and it will favor those companies who are willing and able to intelligently invest in the growth of their markets, distribution and innovation. We intend to do just that.

Third, we track very well against the long investment objectives for the quarter. There are opportunities to drive our top line growth rates above our steady state target over extended period of time and based on the execution results from this last quarter, we continue to be confident that these investments are sound and appropriate.

If you would please, advance to slide number 14 and let’s look at Q1 results. Q1 revenue was slightly ahead of our expectations at $67.7 million reflecting strong traction in customer deployments continued stabilization in the existing customer base, and higher levels of corporate travel spend, which we view as discreet to Q1.

You will note that subscription revenue represented the vast majority of total revenue for the last several years and we expect it to continue to do so. We have consolidated revenue reporting in the one line simply titled revenue. Notwithstanding the fact that corporate travel spends was very weak in Q1 2009, corporate travel spends in Q1 of 2010 improved more than expected in what is typically a seasonally weak quarter for the travel industry.

We believe this was driven in part by pent up demand in corporate travel and we do not expect it to continue. Retention rates continue to stabilize in Q1 and while they are not up to historic norms we see nothing at this point to change our opinion that the historic retention rates will return as the global economy strengthens. The unemployment rate stabilized for the month of December and was inline with our expectation, which was encouraging. We continue to expect unemployment to be choppy and we do not expect a significant rebound in the near term.

Please advance to the next slide. Progress toward our long term objectives was strong during Q1 and was in part evidenced by the series of announcements we made over the last several weeks expanding our relationship with American Express to now include the global business travel organization, which is the leading corporate travel agency in the world was further evidence of our long term value of this partnership and the value integrated Travel & Expense solution creates for our customers.

Further, our newly announced relationship with Amadeus will ensure we have unrivaled access to the widest array of global content available through any travel booking provider and extends the reach of our corporate travel booking and expense management services further into markets outside the U.S.

Both growth and operating margin this last quarter continue to growth and reflect the underlying strong long term earnings power of our business. Our gross margin was inline with our expectations and up 70 basis points over the same quarter of last year and our non-GAAP operating margin of 23% was up 215 basis points compared to the same period last year. This operating margin level is consistent with our expectation for the fiscal year as a whole. With strong revenue and margin performance Q1 non-GAAP pre-tax earnings were above our expectation at $0.30 per share compared to a target of $0.27 per share.

Please advance to slide number 16. Fiscal Q1 is typically our low point for cash flow. However, cash flow from operations and free cash flow were very strong for the quarter driven by both in earnings as well as strong performance across virtually every element of working capital.

Cash flow from operations for Q1 totaled $14.1 million compared to $3.8 million in the same period last year and after capital investments of $3.6 million, free cash flow was $10.5 million for the quarter compared to use of $1.8 million in Q1 of the prior year. A balance sheet also continues to grow stronger.

Cash and investments net of customer funding liabilities are in excess of $220 million, up more than $10 million sequentially and despite the challenging economic environment day’s sale outstanding improved to 60 days from 65 days last quarter and we are at the low end of our 60 to 70 day expected range. Deferred revenue, which as you recall consist of one month advance billing rather than the full value of our contractual relationships continue to grow during the quarter as we deploy customer base and recurring revenues grew.

Please advance to the next slide. Let’s now turn the discussion to our outlook on Q2 and fiscal 2010 as a whole. While we will continue to keep a watchful eye on the economy we are steadfast in our focus on the long term opportunity ahead of us. The services we deliver enabled customers to more efficiently manage corporate expenses to increase automation control and visibility, regardless of the economic climate this is answer area of focus for businesses of all sizes.

Our objective for fiscal 2010 and beyond is to continue to deliver greater innovation and therefore value to our customers and to expand our leadership in this large and growing market. As we’ve discussed, the economy has continued to show signs of stabilization. When taken in combination with the performance in Q1, we remain comfortable with our expectation that revenue in Q2 will continue to grow at a rate that is consistent with the growth rate experienced at the end of fiscal 2009 and then trend up more significantly in the second half of the year.

We believe it is a global economy gradual re gains its footing that we’ll continue to be opportunities for us to strengthen our leadership position, especially in new markets and through new service offerings. Accordingly, we will continue to increase our rate of investment in global distribution, new service offerings and service excellence as Steve has previously discussed.

As a result, our non-GAAP pre-tax earnings for Q2 are expected to be $.27 per share or $.17 per tax affected at 36.5%. Our non-GAAP pre-tax earnings for fiscal 2010 as a whole are expected to be $1.27 per share or $0.80 when tax affected 36.5%. In our non-GAAP operating margin for fiscal 2010 is expected to be 23% or more. Working capital will fluctuate quarter-over-quarter, cash flow for fiscal 2010 are expected to remain strong and continue to grow as annual earnings grow.

For fiscal 2010 as a whole, we continue to expect cash flows from operations to total between $71 million to $74 million and after capital expenditures approximately $16 million, we expect free cash flow to total between $55 million to $58 million. Our cash tax rate we expect it to remain in the slow single digits for fiscal 2010 as we continue to utilize tax to reduce tax cash payment and for the fiscal year as a whole we finance to expect that our GAAP effective tax rate will be approximately 36.5%.

Now to slide 18 and in closing, by all measures Q1 was a successful quarter and we remain confident that our willingness and ability to invest where others will not provide us for the opportunity to continue to strengthen our leadership position in this market. We also believe that there’s an opportunity over the longer term to drive our top line growth rates above our steady stated target and as such we are investing aggressively in product innovation, distribution capacity, and service excellence.

To that end, our recent new partnership announcements are representative of the nature of the long term investments we are focused on and we look forward to sharing more with you over the course of the year. With the successful Q1 behind us and a global economy stabilizing we remain comfortable that our direction is sound and we are focused on daily execution.

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

Question-and-Answer Session

Operator

Your first question comes from David Hilal - FBR Capital Markets.

David Hilal - FBR Capital Markets

I guess first, Steve, I wanted to understand that Amadeus partnership is a little bit better and specifically, what the go to market strategy is with Amadeus?

Steve Singh

First of all, obviously, we’re pleased about this partnership. This is really designed to help us at least in the prospective. The design helps us to increase our market penetration in Europe, and really if you look at Amadeus, maybe the places start here. Amadeus is the single largest market share player for global distribution system in Europe. Also the largest travel booking market share in Europe and our objective is to work and with Amadeus and with travel management companies, basically whole travel ecosystem to go deliver our expense service into the European marketplace.

David Hilal - FBR Capital Markets

So is Amadeus, did they do that via direct model and does that mean their reps are going to be incentive and has been trained on Concur. I guess that’s what I’m trying to understand?

Steve Singh

I think the GDS is really as technology provider and to travel management companies and to other travel providers such as Concur. There’s an overall travel ecosystem that we think is critical that we actually become partners with and that we actually engage with in such a matter that we can go out and get content from anyplace in the world that content exist and then go deliver that content through all the different relevant channels into that customer base.

So I think you have to look at Amadeus relationship in part with the travel ecosystem, so specifically American Express travel. You can look at it with respect to BCD, and Carlson, and SEM and a whole bunch other travel management companies that work with the various GDSs and technology providers to go deliver those services into the ecosystem. I think, the other piece is very important here is that if you look at the travel technology that Amadeus provides, only their booking tool and are the only booking tools available on a global base that access all that distribution technology.

David Hilal - FBR Capital Markets

Then let me ask you about the revenue ramp for the year. You guys talked about it accelerating with each successive quarter of the year, and I wanted to understand is that predicated on the environment improving or is that predicated on business you signed and you are waiting for those customers to come on Board. I guess I want to understand the things accelerating throughout the year?

Steve Singh

Sure. Let’s revisit how we look at the start of the fiscal year. Our viewpoint was as we entered the fiscal year that you see Q1 and Q2 revenue growth roughly inline with our exit rate out of fiscal 2009 that you would see Q3 and Q4 more inline with our entrance into fiscal 2009, so effectively good solid revenue growth from Q1 to Q2 accelerating into the back half of the year. Those assumptions were driven off of the fact of what we signed in customers over the past several quarters.

Now if you look at the quarter we just finished, obviously we saw 16% year-over-year growth. The vast majority of that year-over-year growth was driven by customers that we signed over the past several quarters. However, clearly and John referenced this in his remarks, we did see a little bit of typical up tick in travel spend.

Certainly if you look at the December quarter, it tends to be seasonally weak and obviously if compare it to the prior December quarter, we expect that to be up, but it was up more than we’d expected and we think largely is pent up demand that exist with companies that are now seeing stability in the market. So we think it’s a onetime benefit you saw in the quarter.

David Hilal - FBR Capital Markets

Then finally I’m not trying to push John out of the seat, but is there any update on the CFO search? I mean do you have an estimated time as to when that transition may take place?

Steve Singh

The search is going very well and we’ve obviously seen some very good candidates. As soon as we have, the candidates will update and transition plan worked out, we’ll announce it publicly.

Operator

Your next question comes from Mark from - Piper Jaffray.

Mark from - Piper Jaffray

I was wondering if you can provide the number of customer ads in the December quarter here.

Steve Singh

Mark, we didn’t provide that and obviously, I want to make sure everyone understands. We are making great progress towards our goal 20,000 customers. In the markets that we currently serve today, hitting that 20,000 customers by the end of fiscal 2012, but the reality is our business is diversified both in terms of the new market segment that we’re about to serve as well as in terms of our ability to expand our relationship with existing customers. So frankly, we don’t think that the new customer metric will be an appropriate leading indicator on a go forward basis.

Mark from - Piper Jaffray

So we’re not going to see that metric anymore?

Steve Singh

No. Again, if fact we had a strong quarter. We expect to continue to see strong customer demand going forward, but we want to make sure that that metric is meaningful.

Mark from - Piper Jaffray

Then Steve, just as a follow-up to you, I think last quarter you had talked about a goal of becoming the largest sales force in the corporate travel industry in the next handful of years and I just wanted to revisit that and ask you to realize that goal. What actually does that mean numerically in terms of the headcount additions that you would have to consummate?

Steve Singh

Obviously, we didn’t give a specific number on the number of headcount. I can tell you this that the largest sales force in corporate travel is American Express to the best of my knowledge. They are now our partner. We are going to work with them on a global basis to deliver our services and their services into the marketplace.

The second largest sales force in corporate travel is Carlson Wagonlit, also one of our partners that we intend to work with go deliver our services in to the customer base, but at the end of the day, as we’ve always stated, latterly for last 10 years we’ve been committed to the fact that we need to own our own distribution capacity.

That we need to provide is substantive channel not only for our products and services, but for partners who deliver value on top of what we deliver. So we’re committed to move in that direction. I also want to make sure that you understand, but while we’re move in that direction, I don’t want to give the specifics on this, because they are doing educating my customer from our competitors.

Mark from - Piper Jaffray

Steve, just one last one if I may, it looks like very clearly you’ve had a very solid quarter here. You are even commenting that some of the travel spend dynamics were seasonally ahead of what you would have expected and yet at the same time you had this cautionary commentary on near term growth, which I think arguably I don’t recall you making that commentary last quarter. So I wanted to clarify. Is that just relating to this what you think was a onetime release of pent up demand in the December quarter and not wanting us to extrapolate into the March quarter?

Steve Singh

I think that’s a very good interpretation. I think the reality is that the quarter actually came in very much inline with what we expected. Obviously, there’s a little bit of positive related to that pent up demand that I referenced. If you look at our guidance relative to the revenue trajectory, it’s exactly inline what we expected walking into the fiscal year.

So if you look at Q2 and Q3, the commentary that we are making is no different in the commentary we made at the beginning of the year. So, I think it’s the acknowledgment of the macro environment just as much. We had one quarter now, I guess one and a half quarter in our stability and I just don’t to want get ahead of that at this point.

Operator

Your next question comes from Brad Reback - Oppenheimer.

Brad Reback - Oppenheimer

Steve, some of the new initiatives you talked about, some of the new partnerships that you’ve announced here, they seem to have sort of a put and take on average selling price going forward. Clearly AMEX, maybe Amadeus can help you increase ASP to your biggest customers, obviously going to developing markets and down market with some of the products can impact ASP to the down side. When you sort of put it altogether as we look forward, how should we be thinking about the net impact?

Steve Singh

First of all, I think that’s a great observation. In fact all these different initiatives will have competing impacts on the average selling price. I think right now is too early to give you an exact or even a fairly good approximation of what the net impact is going to be. The thing I do want to point out is that we’re the interested in profitable new customer addition in any segment that we go after.

So obviously, we are building our business model that way from the point of view of cost of delivery as well as cost of deployment. Generally speaking of course, if you think about the overall scale of the market opportunity, we’ve much greater number of companies in the low end of the market than you do at the high end and so in general, if I had to say, “Where is the average selling price going?” I’d say generally it’s trending down. That does not at all equate to profitability trending down.

Brad Reback - Oppenheimer

Just to be clear on that, the new services you are talking about the new opportunities, all those should be gross margin neutral?

Steve Singh

Yes, we are in the business fundamentally of delivering services in software technology model that have the gross margin and profiting margin profiles of the other products and services we sale. I think the only thing I would factor into that is the wrap up time to these services, right. So when we deliver a brand new service it’s going to have a different profitability profile in the near term then would in a steady state model.

John Adair

Brad, I would add on to that as well that as we provided guidance out into the remainder of fiscal 2010, any impact of the items that you’re referencing are all built into our expectations.

Operator

Your next question comes from Thomas Ernst - Deutsche Bank.

Thomas Ernst - Deutsche Bank

I know you want to talk less definitively about the traction with AMEX and you highlighted that it does take time to drive leads, sign deals and then get the revenue. In the past you’ve given us some insight into the pretty rapid traction in getting some bookings. If you won’t give us the details can you share with us qualitatively how is the progress going relative to what you’re seeing? Is your discussion today something new perhaps in terms of the way you have to recognize the revenue or the signatures with the deals, or is this progressing as you expected?

John Adair

Let’s make sure we break that up into two component parts, because I think that you might be looking at both of them as one. So first of all, our relationship with American Express’s Global Commercial Card, that’s a relationship we signed about a year and a half ago, that remains very, very solid. In fact it’s actually improving every single quarter. We have an improving quarterly output through that relationship. That is exactly progressing as we expect it.

Now in addition to that, we expanded that overall agreement to include American Express Business Travel, which is a whole different division within American Express so my comments relative to the fact that that will take time to ramp that partner. I was referring to specifically to American Express Business Travel. I think there you should assume that’s going to take two to fours to start ramping that relationship and driving the first set of joint customers and then obviously to sometime post that to deploy those customers and have that revenues straight hit the P&L.

Thomas Ernst - Deutsche Bank

As a follow-up to that, do you see the relative potentials from the new partnership as large as the original and what about the structure of the partnership? Are there similar quota attachments and commissions as the first AMEX partnership deal?

John Adair

It’s and foremost, it’s a referral base relationship just as the American Express’s Global Commercial Card business agreement is. American Express corporate card has 65%, 70% market share from our perspective. I think it’s hard for any other; it’s hard to look at the travel agency business and say it’s got the same level of market share.

In fact our best estimate is around 35% market share. So by definition, I think it’s a smaller overall opportunity, but I think in combination, it’s a very, very powerful message to the end customer, very, very powerful set of values. So we can deliver to the end customer. So view this additive and to the overall relationship.

Thomas Ernst - Deutsche Bank

Okay and structurally any differences?

John Adair

No, very similar structures.

Operator

Your next question comes from Laura Lederman - William Blair.

Laura Lederman - William Blair

Can you talk a little bit about following up on the earlier question of ASPs? If you look at the profitability of the new emerging customers and your best of guess there versus large and what has historically been your middle market. Where do you think the profitability by customer will look like?

John Adair

Laura it’s too early to tell what possibly by customer will look like. Obviously, we’re not yet into the emerging business sector. I will tell you again, that in the way you run the business is the way I would look at profitability and I think, I would ask you for right now to bring it back up to a corporate level. Our long term operating margin targets remain at exactly in line with what we stated, which we think in a steady state models at 30% operating margin business. We don’t see these new business focus points as something that would take away from that 30% operating target margin.

Laura Lederman - William Blair

Can you give us more examples of the Concur advantage services that will add so I can try to get a bit of sense of the total available market and maybe another way to answer in addition to what type of services would be add, how additive do you think this will be? In other words, in the past you’ve said if a dollar is sort of the benchmark, if you add analytics it’s $0.20. If you add travel bookings it’s $0.30. Can you give us that sort of view?

John Adair

Let’s back up. I want to make sure that the interpretation of our investment focus is right. First and foremost as I mentioned is number one areas of investment that we are putting capital against is to take our existing opportunity, right that 10,000 plus customers we have and go drive it to 20,000 plus customers by 2012. That remains our core area of investment, but we think on top of that, there are other investment opportunities and I outlined them during the call.

So I don’t think there should be any read or they’re going after different opportunities, because there’s lack of growth or lack of profitability in the areas that they’re in today. That remains very, very solid opportunity, but we think the market leaders take the opportunities and say we have a competitive advantage and we have the investment capacity to go after new long term growth opportunities, we should go do that, because they provide our capacity to grow with the kind of rates we want to grow at in years ahead, so three into five year up kind of window.

On advantage services, we think this is a significant opportunity that will drive additional revenue per customer, an additional value obviously to the end customer, but drives up the revenue per customer. We haven’t given at this point any specifics as far as what the percentage is going to be.

Laura Lederman - William Blair

Any more examples of the type of services you might add?

John Adair

We’ve given a few examples, but one of our new examples that might be interesting is really fraud detection. So the ability to mind that expense data and be able to look at that and look at that for patterns of fraud and bring that to the attention of our customers in a real-time model.

Operator

Your next question comes from Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

Can you talk about that whether there’s anything unusual in the G&A line on seasonality has stepped up fairly substantially sequentially after being held fairly flat throughout ‘09?

John Adair

No, there’s not. On a sequential basis in Q4 annually we can sometimes see an up tick and typically the things like external accounting fees and things of that nature are some more focused on Q4, so nothing unusual.

Richard Baldry - Canaccord Adams

A thought about tear in two pieces either like that sort of business failure company dropping the service altogether versus a dollar basis less employees per customer, when you’re talking about churn improvement can you kind of look at in those two pieces and talk to each of them?

John Adair

Really, Rich when we talk about churn in the customer base, what we had seen earlier and throughout in fiscal 2009 was in the volume of customers that we’re incurring financial difficulties. That translated into either history of customers or customers coming back and renegotiating contracts.

What we’re certainly seen over the last several months of that trend has stabilized and in fact, it starting to move back the other direction toward that long term retention rate that we’ve seen over the past decade or so of 97%, 98% in the high end of the market, and 92% to 93% at the low end. We’ve seen nothing at this juncture that would make us believe that those long term retention rates aren’t absolutely intact.

Richard Baldry - Canaccord Adams

Overtime as you move into the more emerging market side, I assume that will have probably a much higher attrition rate especially early into that cycle. So overtime, would you expect that number to sort of stabilize and come down, or do you see long term it still have an ability to stay at its historic levels?

John Adair

I think if you look at the emerging business sector with companies 100 to 250 employees, by definition we are going to see a lot of churn in that sector just because turn key companies may or may not be there in subsequent periods. So I think, if you look at then the churn rate on overall basis, of course that will have to come down, but again I think, if you look at churn within each of the different market segments, we really don’t see any kind of specific churn rates in those market segments are going to trend down.

In fact, we see them trending back to our historical averages. In the emerging sector, we’ll come up a churn rate after we’ve been in that sector after for a long enough period of time.

Operator

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

John Kraft - D. A. Davidson

Just wanted to circle back on the emerging market, obviously it’s an important segment or potentially, and I guess the question is, what are you going to be doing different to attack that market and how we’re going to track that? I mean, as far as the technology perspective, what are you doing differently?

John Adair

First of all, our basic philosophy is that we will deliver these technologies on a Concur platform. Obviously, the level of services and functionality in how it’s actually partition for each segment will be depended upon that particular segment. How we are actually going to market, we’ll actually define that as we deliver our first set of services into that marketplace, but it’s obviously again need your own capacity online as well as working with partners. As far as the details of that, you’ll have to give us sometime to announce the details.

John Kraft - D. A. Davidson

Lastly, without some sort of a new customer add metric for us to track, have you considered some sort of maybe more meaningful total end user or subscribe member?

John Adair

Right now we don’t have a different metric. I think again we will look at how to provide some leading indicator guidance to investors, but at this point we don’t have anything that we would say that is adding a point too.

At the end of the day, just keep in mind that, there are multiple different components here right now. As I said, our business is diversifying and so not only we’re targeting new segments, we have ASPs and new dynamics around them, but we’re also seeing that our relationship for that matter any given customer is also expanding. The thing I will tell you though as we provide a fair bit of information around what we expect in the company, as far as the companies results near term and over the long term.

Operator

Your next question comes from Bryan McGrath - Credit Suisse.

Bryan McGrath - Credit Suisse

Most of my questions have been asked. Just wondering I’ve been monitoring some of the press releases from SAP saying that they’re coming out with an expense solution and they state on-demand and just wondering if you’ve seen any sign of it in the marketplace.

John Adair

Obviously, we’re aware of SAPs announcements around delivering expense management services, delivering HR services and apparently CRM services as well in on-demand model. We respect all competition and always will, so we take any new entrant in the marketplace with the seriousness that it deserves. I will tell you at the end of the day though that it takes a lot to deliver on-demand services successfully.

For example, if you listen to some of the press commentary from SAP that they’ll be out in the marketplace in the June time period with their on-demand offering that they’ll be profitable by the end of the fiscal year or by end of the calendar year. If we look at that and say “How do you do that in an on-demand model?”

We know what to take to get the gross margin zero, unless you’re going to add a few thousand customers in the first six months and get them all deploying for six it will be hard to do, but exactly there’s a long ways to go and still understanding what on-demand computing is.

Operator

Your next question comes from Steve Ashley - Robert W. Baird.

Steve Ashley - Robert W. Baird

Maybe you can just comment on add on activity maybe Concur pay invoice if you’ve seen any change there as we’ve entered the end of the calendar year or you got into the recent quarter, how that’s factored?

Steve Singh

Very similar to what we saw on the last few quarters. Pay is now in nearly every one of our new customer relationships. The travel affinity that we’ve seen remains very high at 60% plus range. Invoice is still a relatively new marketplace that we are still investing in and expanding. We think that that marketplace is several years behind where the core travel expense market is.

Steve Ashley - Robert W. Baird

The mobile opportunity, I know we’re really early there, but could you talk about maybe the initial or early response to that and maybe just at a high level how the pricing model works with that?

Steve Singh

Today we delivered Concur Mobile on the BlackBerry device that with the mobile device and the iPhone of course and our commitment is to make sure that it’s delivered across any significant mobile operating system. So the interpretation of that would be that Google’s got a very interesting operating system with Android. We think that’s going to do well overtime so you should expect us at some point to deliver a version for Android machine.

I think that the way we look at it today is, let’s go deliver our core services in a mobile, on a mobile platform and get our customers to see the value behind these services, Global RideCharge to our customers. We think that there’s a lot more we can do around mobile services well above beyond we already delivered and those services we think, we can actually see real value that’s generated for the customers and frankly real value that’s generating for Concur.

At the end of the day, it is how I think about mobile device. Think of it as a purchasing instrument. Obviously, not just repurchasing, it’s also payment instrument. So we think that if you look at travel from a purchasing and payment perspective, a mobile phone is an incredible device to go capitalize on.

Steve Ashley - Robert W. Baird

Just lastly was Etap-On-Line dilutive in the quarter?

Steve Singh

Etap-On-Line?

Steve Ashley - Robert W. Baird

Yes. Etap.

Steve Singh

No, in fact I think what we stated was that in the quarter in which we acquired it, which was the September quarter that it would be dilutive in that particular quarter, but there would be accretive for fiscal 2010 as a whole and we see no change to that expectation.

Operator

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

Sid Parakh - McAdams Wright Ragen

Just a quick one on the sales cycle, have you seen any changes in sales cycles? Given that we’re in a better or slightly better macroeconomic environment. Are you hearing customers maybe wanting to push it out or maybe stopped out here? Can you talk a little about that?

Steve Singh

Sure. We haven’t seen any real changes in the sales cycle and to be fair I think it’s very important to categorize the economic environment as fairly consistent quarter-over-quarter. I don’t see it as substantive better at all, and I certainly can appreciate the prospective that when things aren’t declining as fast as they were in the first three quarters of 2009, that always looks better in comparison.

I guess our caution would be that, look it’s still a difficult economic environment. We still have high unemployment. We’re still well below the waterline on travel spend and we should be cautious in looking at the economic environment and everything that entails.

Sid Parakh - McAdams Wright Ragen

I was just saying relative or better relative to what we just went through, but that’s good insight. On the AMEX relationship on the travel side, will you be using the same sales force that you used on the AMEX card side or will you be billing out a different sales force? I mean can you talk a little bit about that and maybe even Amadeus?

Steve Singh

From a Concur perspective, we have one global sales organization. They target different segments of the customer spectrum and we work with all of our partners through that less sales organization. From an AMEX perspective, obviously these are two different business units within AMEX and different sales organizations and we’ll work with both those sales organizations. The same we hold through the Amadeus.

John Adair

As we had our new partners as to sales supported in those channels is an area, where we will continue to invest as well.

Sid Parakh - McAdams Wright Ragen

Then just finally, given that you’ve signed all these partners with most at larger players in the travel industry, can you talk about how you feel about the competitive dynamics now?

Steve Singh

I think that the competitive dynamics are relatively consistent over the last several quarters. I think that we benefit frankly any leading company in its marketplace. We benefit in difficult economic environments and frankly that’s what we have seen over the last year, but at the end of the day, the surest way do not be the winning the market is to get about it. So we look at business, we look at how do we continue to win over the long term and that’s by keep pushing the envelope on innovation. Keep pushing the envelope on distribution and that’s what our investments are really geared after.

Operator

Your final question comes from Brad Whitt - Broadpoint Capital

Brad Whitt - Broadpoint Capital

I may have missed this. I know your consolidated revenue, but I was wondering if you could break it out for us to some subscription versus consulting and other?

John Adair

As you know, if we look back over the last couple of years, our subscription revenue has represented 95% to 97% of total revenue and it just keeps going up. So from a GAAP perspective, once it’s below that 95% threshold for over two years and expected to be the same going forward. It doesn’t get broken out and so I wouldn’t expect anything different on the trajectory of those onetime revenues other than I just continue to decrease.

Brad Whitt - Broadpoint Capital

Steve, I was wondering if you could, I didn’t get your comment about unemployment in calendar year 2015, exactly what you meant by that and also if you could comment as to your best guess, I guess is when you think corporate travel spend well kind of reach the levels, prior to the recession.

Steve Singh

Sure Brad, first of all let me just add one thing to John’s comment and that is, there’s nothing unusual in onetime in fiscal Q1. Now, coming back to your question on unemployment or my remarks around that, so if you look at consensus estimates around the next couple of years, I think most economist, most companies look at the economic recovery largely being a jobless recovery. That doesn’t mean that unemployment will stay at 10.2 percentages I mean, it will be remain high for the two years.

An advantage if you look at the analysis that’s available from leading economists from leading investment banks, what you’re seeing is that in order to get back to the call it high kind of 5% unemployment levels, that we saw prior to the recession. You need a level of GDP growth that’s fairly substantive and fairly sustained and the reality is, that would translate into roughly about five years of pretty reasonable growth in GDP to get back to about 6% or 5.5% unemployment, so that’s what we are talking about.

On the travel side, it’s fairly straightforward. In fact, if you look at the last several recessions, you’ve seen that prior to the recession, that the travel spend that existed prior to the recession, it would take roughly within one to two years to get back to that travel spend, once the recession started and so with one exception that is after 9/11.

After 9/11, you saw at least two year claim back to travel spend prior to 9/11 and I think that what you saw here in 2009, the recession is obviously very, very deep and it’s obviously the most difficult economic environment we’ve seen a long, long time. We think that the closest proxy to this is what we saw after 9/11. So we think that two year claim back to the travel spend levels we saw pre-recession.

Brad Whitt - Broadpoint Capital

When you talk about kind of your target operating margin of 30% John I’m just curious just, what type of gross margin does that entail?

John Adair

Obviously, look we have stated that our gross margins is sitting around 70%, we expect it to trend up modestly over a number of years and, pretty as high as between 75% to 80%, it certainly get there. Because, obviously you can do the math on the incremental margin, that’s coming in any given quarter and that’s sitting between 75% and 80%. We think over a steady state environment, you can see gross margin in that 75% to 80% range.

So Brad thanks very much. We’re going do wrap up the call right here, we’re past one hour that is allotted. Operator, thank you very much and to all our investors thank you very much for joining us for Q1 earnings call. We look forward to seeing you after Q2. Thanks so much.

Operator

This does conclude today conference call and you may now disconnect.

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Source: Concur Technologies Inc. F1Q10 (Qtr End 12/31/09) Earnings Call Transcript
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