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Concur Technologies (NASDAQ:CNQR)

F4Q10 Earnings Call

November 10, 2010 5:00 p.m. ET

Executives

John Torrey - EVP of Corporate Development

Steve Singh - Chairman and Chief Executive Officer

Frank Pelzer - Chief Financial Officer

Analysts

Stephanie Withers - Goldman Sachs

Brad Reback - Oppenheimer

Brent Thill - UBS

Laura Lederman - William Blair

Michael - FBR Capital Markets

Thomas Ernst - Deutsche Bank

Ross MacMillan - Jefferies & Company

Steve Ashley - Robert W. Baird

Sid Parakh - McAdams Wright Ragen

Ajay Kasargod - Morgan Keegan

Brad Whitt - Gleacher & Company

Brendan Barnicle - Pacific Crest Securities

Operator

Good afternoon. At this time, I would like to welcome everyone to Concur Technologies Q4 Fiscal 2010 earnings conference call. [Operator Instructions] I would now like to turn the conference over to our host, John Torrey, executive vice president of corporate development. Please go ahead sir.

John Torrey

Thank you, operator. Good afternoon, and welcome everyone, to the Concur earnings conference call for our fourth quarter of fiscal 2010. My name is John Torrey, executive vice president of corporate development for Concur.

This call includes presentation slides that will accompany our prepared remarks. To access these slides, please 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 1. Our speakers for the call today are Steve Singh, our chairman and chief executive officer; and Frank Pelzer, our chief financial officer. After their prepared statements today, Steve and Frank will 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 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 the slide 2 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 3. At this time, I'd like to turn the call over to Steve Singh. Steve?

Steve Singh

Thank you John. Good afternoon everyone. Q4 was another very strong quarter, exceeding our expectations for revenue, earnings, free cash flow, and new customer growth. Looking ahead to fiscal 2011, we expect our annual revenue growth rate to improve over 2010, driving significant growth in revenue and earnings. And, we expect to significantly expand our investments across five key growth areas that are expected to drive further revenue and earnings growth in the medium and long-term.

In our call today, I'm going to focus the majority of my prepared remarks on key growth opportunities and how we expect to deploy capital. Please turn to the next slide.

Before I do that though, let me give you a quick summary on Q4 results. We saw exceptional operating performance across the business. Revenue grew 20% year-over-year and reached an all-time high at $77.5 million. This growth was driven in part by faster than expected deployments of new customers and in part by stronger than expected transactional volume. Strong revenue growth led to non-GAAP EPS for the quarter of $0.30 per share, which was ahead of our expectations. And, driven by stronger earnings and strong cash collections, free cash flow in the quarter was $17.2 million, well ahead of our expectations. Please turn to the next slide.

As I noted in prior earnings calls, we see a number of growth opportunities for the business. First and foremost, we're focused on significantly expanding our customer base in the markets we currently serve. Second, we'll materially expand our global presence. Third, we believe the SMB market can be a material portion of our revenue base. Fourth, we see a significant opportunity to deliver compelling value to the business traveler while they're on their trip. And finally, we're creating a high-value ecosystem through the Concur Connect platform that connects our customers, our partners and suppliers, together in a manner that drives compelling value for all members of the ecosystem.

We view our successful execution in these five growth areas as both opportunities for growth and the continued establishment of a competitive platform, which will be extremely difficult for our competitors from any vantage point to replicate or approach. I'd like to give you a little more color around each of these opportunities and speak to our expectations in each area. Please turn to the next slide.

In support of our first growth initiative, which is to grow our customer base in the markets we currently serve, we'll continue to increase our investments in distribution, market development, and innovation to continue to expand our customer base and the range of services that we can deliver to those customers. In the most recent quarter, new customer growth was the strongest in our history, aided in part by our partnership with American Express.

In fact, in fiscal 2010 we exceeded our target for new business coming from the American Express partnership. Additionally, in Q4 American Express exercised a 1.28 million share warrant that was part of the 2008 investment agreement, and while that exercise added another $50 million to our balance sheet, far more importantly it's a reflection of the continued and substantive success of the partnership between our companies.

In early 2010, we introduced Concur Extended Services, and over the course of the year it became one of our most successful new product introductions. These SAS 2.0 services include services such as managed reporting and analytics, expense report auditing, VAT recovery, automatic fraud detection, and digital mailroom services for invoice and receipt handling.

We also continue to expand our internal distribution capacity, our investments in market development, and our local product development capacity across Europe. And in 2010, France became one of the largest markets in EMEA in terms of new customer growth. So as we head into 2011, we'll look to extend that success into Central Europe.

We'll do that by increasing our existing footprint in Germany through increased investments in local distribution, service, and development capacity. Today, EMEA's contribution to total new sales is outpacing the region's addition to current recognized revenue, and if this trend continues, we would expect EMEA to represent a higher percentage of total reported revenue in the future. Please turn to the next slide.

We believe that we can be truly global by being truly local. Our objective over the next five years is to become the market-leading provider of travel and expense management services in each major economy. To that end, we continue to see compelling success in markets such as Australia, Singapore, and Hong Kong as our transaction volume and local customer wins continue to grow substantively.

In fiscal 2011, we will establish Concur Japan and Concur India. Concur Japan will focus on the local needs of the third-largest economy in the world, a market that has embraced cloud computing services from companies such as salesforce.com. Japanese multinationals comprise more than 15% of the Global 2000, and with higher labor costs, there is a strong focus on driving efficiency across the organization.

Concur in India will serve the local needs of a market that's forecasted to grow more than 5% a year for the next 20 years, a market that's likely to become the third-largest economy in the world over that time period. More than 20% of the Financial Times 500 are Indian multinationals, and while labor costs are not yet a challenge, skilled operations, at that rate of growth, are made possible through the use of technology.

Concur already processes several hundred transactions across India and Japan each year, in the local language, and in compliance with local tax and regulatory requirements. Over the next two years, we'll build out our local distribution, development, and service capacity in each country, and our initial focus in each market will be large multinationals.

It's our expectation to be operational in Japan and in India by the middle of fiscal 2011, and we expect to sign our first local customers in each country in late 2011 or early 2012. While Concur Japan and Concur India will be significant investment arenas over the next 24 months, we expect both countries to be significant portions of our global revenue over the next decade. Please turn to the next slide.

In support of our third growth initiative, we're also investing to deliver services for small and medium sized businesses on a global basis. We believe that this market segment is underserved, and can generate incremental long-term revenue and earnings growth. We continue to see compelling growth in the 100-500 employee segment of the SMB market, and in the emerging business segment, which is companies that have less than 100 employees.

We remain very enthusiastic about our opportunity as early indicators around the strength of the product and new customer growth are very encouraging. We see meaningful contributions from the American Express and Google channels. However, and not surprisingly, our direct channel is by far the biggest contributor to new customer growth.

Also, we're finding particularly strong success with companies that have less than 25 employees. Looking ahead, we expect to materially increase our investments in direct and partner distribution over the course of the next few years. And, as we've stated in the past, while we are incurring costs today in the emerging business sector of the SMB market, we don't expect our initiatives in this market segment to contribute meaningfully to revenue until 2012. Please turn to the next slide.

Today Concur automates the travel booking and expense reporting process. Or, said another way, we're delivering incredible value to our customer before they leave on their business trip, and after they return. Our fourth growth initiative is focused on bringing value to the business traveler while they're actually on their business trip. We already deliver itinerary management capabilities to all Concur clients, and we deliver more itineraries to more mobile devices than anyone in the industry.

In the first half of fiscal 2011, we will extend our itinerary management capabilities and location-based services to include itineraries from any source. Concur's itinerary management services will allow the business traveler to manage all their travel plans in one location, whether those plans are booked through their corporate travel agency or directly with the supplier, or both.

Whether the trip goes according to plan or has to be modified along the way, the business traveler can view those plans via the web or on their mobile device and share those plans with colleagues, friends, or family. And of course, Concur Travel will automatically populate those itineraries for the more than 7 million business travelers using Concur services, and automatically integrate into Concur's expense management services.

We will integrate that itinerary management capability with a range of location-based and contextual based services that can deliver value to the business traveler throughout the trip. Those services will be delivered by Concur or its partners through the Concur Connect platform, and all those services will be available for both managed and unmanaged travel, and of course will be delivered globally. Please turn to the next slide.

Since we introduced integrated travel and expense to our industry nearly five years ago, we've invested in Concur Connect in order to provide our customers with seamless access to the broadest selection of travel content available anywhere in the world, through any provider. With Concur Connect, we've enriched the vast traditional carrier content provided by leading global distribution systems with direct connections to airlines, thousands of major hoteliers, ground transportation providers, rail providers, car rental agencies, dining establishments, and other travel services.

This multi-GDS, multi-direct connect strategy that's encapsulated within Concur Connect has improved customer choice and has helped to bring about transparency and efficiency to a supply chain that was, and is, sorely in need of both. In doing so, we've created value for more than 10,000 corporate customers, more than 7 million business travelers, and an entire industry of travel suppliers who frankly have become disintermediated from the $700 billion of products and services that they produce each year. Please turn to the next slide.

In the first half of fiscal 2011, we will launch the Concur Connect platform, version 2.0 of our cloud computing offering to support our ecosystem of travel partners, customers, and end users. The Concur Connect platform is a set of open, cloud-based APIs and tools that allow our customers, our partners, and for the first time, third-party developers, to connect to and extend the Concur technology platform with a whole set of applications and services, the individual employees can rely upon every day.

From applications designed for small and medium businesses, to vertical applications of our travel and expense service, to innovative new mobile applications, to location-based services, to specialized travel content and services, all integrated into your Concur experience and all available through both traditional desktop and mobile interfaces. The Concur Connect platform creates new sources of value for our ecosystem partners, and as a result will create new revenue streams for Concur beyond our traditional subscription revenue model.

We'll have a great deal more to share on this point when we launch the platform, but suffice it to say, the success of our integrated travel and expense offering has put us in a unique position in our industry to add new value to the travel supply chain with our technology platform. Please turn to the next slide.

With a sizable balance sheet and increasingly strong free cash flow, we've received a number of inquiries on how we expect to deploy the capital on our balance sheet. Let me take a moment to speak to this line of questions.

First and foremost, we are focused on the corporate travel and expense management market. We believe that there is substantive growth opportunity in the market we're focused on, and you should expect us to remain focused on that market over the next decade. Second, we are highly disciplined acquirers, and see no need to change our approach to M&A. And third, our specific areas of interest when it comes to the deployment of our capital are within the growth areas that I just spoke to. Please turn to the next slide.

We're very pleased with our consistent and strong record of execution, quarter after quarter and year after year. We expect our annual revenue growth rate in 2011 to improve over 2010, and we see a number of compelling growth opportunities that can help us improve the value we deliver to our customers, increase our market leadership position, improve our competitive advantage in the market, and increase our revenue growth rates as well as our operating margin.

We are aggressively investing in those opportunities through the inherent leverage of our business model, and we expect those investments to start to pay off in 2012. Successful execution against our market opportunity has driven, and will continue to drive, compelling and sustainable value for our long-term shareholders.

With that, if you'd please turn to the next slide, I'd like to turn the call over to Frank, who will provide more details on Q4 and fiscal 2010 results, as well as our business outlook. Frank?

Frank Pelzer

Thank you Steve, and good afternoon everyone. I would like to convey three key messages in my prepared comments this afternoon. First, Q4 was another quarter of strong financial and operating results, capping a year of strong revenue, earnings, and free cash flow growth. Second, while the global economic environment remains sluggish, we see signs in the markets that we serve that are consistent with the general market sentiment of gradual but choppy global improvement. And third, we believe we have the opportunity to further drive our top line growth rates. For this reason, we have continued, and will continue, to ramp investment in new geographies, new service offerings, and new market segments. If you would, please advance to slide number 15, and let's look at Q4 results.

Q4 revenue was above our expectations at $77.5 million, growing 20% year-over-year, and 3% sequentially. Q4's revenue outperformance capped a year in which total revenue grew by 18% to $293 million, outpacing fiscal '09's 15% year-over-year growth and placing Concur in the top tier of peer company performance for the current year.

Recognized revenues in the quarter benefitted from higher than expected transaction volume, strong traction in new customer deployments, and existing customers adding on new services. Customer retention rates were again strong for the quarter, consistent with our historical averages in the high 90s. Please advance to the next slide.

Operating costs in Q4 were in line with our expectations. For fiscal 2010, our gross margin was up approximately 150 basis points to 72%. As we have discussed throughout the year, we continue to increase our rate of investment in our core growth initiatives, as Steve highlighted. Excluding share-based compensation expense, our sales and marketing spend increased 11% sequentially, 33% Q4 '10 over Q4 '09, and 27% for fiscal '10 over fiscal '09, reflecting our investment in new opportunities. Our non-GAAP operating margin for the year was 23%.

With revenue exceeding, and margins in line with, our expectations, Q4 non-GAAP earnings were above our expectations at $0.30 per share, compared to our target of $0.29. Earnings for fiscal 2010 grew to $1.21 per share, which includes the impact of $0.08 of cash interest expense from our April convertible debt offering. Please advance to slide number 17.

Cash flow from operations and free cash flow were very strong for the quarter, primarily driven by the continued strong performance of the business. Cash flow from operations exceeded our expectations, totaling $23.1 million for Q4 and $80.3 million for the fiscal year. And after capital investments of $18.6 million, free cash flow was $61.7 million for the fiscal year, up 27% year-over-year. This growth rate benefitted from operational improvements such as a 3-day reduction in DSOs, comparing Q4 '10 to Q4 '09.

Our balance sheet continues to be very strong and provides us tremendous leverage to continue to expand our market and our leadership. Cash and investments net of customer funding liabilities grew approximately $70 million by quarter end. This increase included the exercise by American Express of its $50 million warrant, a strong tribute to the ongoing partnership by both companies. And despite the continued challenges businesses face as the global economy slowly recovers, cash collections were strong and days sales outstanding ended at 62 days, again at the low end of our 60-70 day expected range.

Based on strong revenue performance as well as strong contract signings, deferred revenue grew to approximately $60 million by quarter end, reflecting 3% sequential growth and 22% growth over the same period of the prior year. Please advance to slide 18.

Now let's turn the discussion to the coming fiscal year. Taking into account that the December quarter is seasonally lower for corporate travel, and customer deployments naturally proceed at a slower pace as the result of the holidays, total revenue for the first quarter is expected to grow 17% year-over-year. This growth rate represents a 150 basis point increase from the same time last year.

Additionally, we expect some lumpiness in Q2's year-over-year growth rate, due to previously communicated sunsetting of legacy products. However, based on the continued strength in the business, we expect the overall growth rate for fiscal '11 to increase year-over-year. Despite the significant issues facing the global economy over the last year, demand for our services has remained strong. We believe we have the opportunity to further strengthen our leadership position, especially in new markets, and with new service offerings.

As seen in Q4, we are increasing our rate of investment in global distribution, new geographies, new service offerings, and our Concur Connect platform. As a result, our non-GAAP pre-tax earnings for Q1 are expected to be $0.28 per share, including $0.04 of cash interest expense, or $0.18 when tax affected at 37.5%. We expect our non-GAAP operating margin for fiscal 2011 to be 23% or more.

Cash flows for fiscal 2011 are expected to remain strong and continue to grow. For fiscal '11 as a whole, we expect cash flow from operations to total between $88 million to $92 million. Please note the full year impact of interest expense relating to the convertible debt offering in fiscal 2011.

For fiscal '11, we expect capital expenditures of approximately $25 million to $27 million to support the areas of growth that Steve highlighted. We expect free cash flow to total between $61 million to $67 million for the year. Just as a reminder, you will recall that Q1 cash flows are seasonally lower than Q4, with the payment of certain annual commitments. We expect our cash tax rate to remain in the single digits for fiscal 2011, as we continue to utilize tax NOLs to reduce cash tax payments. For the fiscal year as a whole, we expect our GAAP-affected tax rate will be approximately 37.5%. Please advance to the last slide.

In closing, against a backdrop of continued macroeconomic challenges, fiscal 2010 was a testament to the strength of our business, with revenues growing 18%. We expect revenue growth rates in fiscal 2011 to continue to grow. As we said at the beginning of the year, we planned for, and made, investments in our core growth initiatives, which should bear rewards over the medium to long-term. In fiscal 2011, we will continue to invest in five key growth areas, including our core business, geographical expansion, the emerging business segment, business traveler value-added services, and the Concur Connect platform.

And finally, we have a strong balance sheet with significant cash reserves. We are very comfortable with our ability to take advantage of a recovering economy and intend to continue to aggressively pursue the growth of this market.

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

Question-and-Answer Session

[Operator Instructions.] Your first question is from Stephanie Withers with Goldman Sachs.

Stephanie Withers - Goldman Sachs

You are sounding kind of a lot more upbeat than you have in some more recent quarters. So I'm wondering if you could give me a little bit of an update on how you're feeling about the environment. Has the renegotiation of minimums [inaudible] worked through all of that from the downturn now, and what's just a general update on the environment?

Steve Singh

You're right. We do feel a lot more upbeat about the environment. We think the economy is still a little bit uneven and a bit challenging in certain parts of the world, but in general for us the real measure of our confidence is new business. The growth over the last several quarters has been very strong. A reasonable portion of that has been driven by the AmEx relationship, and as I said on the call, for the year as a whole we actually exceeded our target for new customer growth via the American Express relationship.

Stephanie Withers

And if I could just ask one more. It sounds like you're talking about a lot of new incremental services and investment in the Connect platform. Should we expect R&D to be ticking up at all? Is there a lot more R&D investment involved in these new additional services?

Steve Singh

Frank and I will tag team on that. You're absolutely right. There's a lot more innovation that we're investing in. What we're seeing is frankly incredible adoption of that innovation across our customer base. There's a real opportunity not only to continue to add value for the business traveler, the entire business booking, taking a trip and filing an expense report processes, but also for the overall ecosystem. How do we actually deliver value for every member of that ecosystem in a model that drives value for all members of that ecosystem. Frank, would you like to speak to the -

Frank Pelzer

Stephanie, as we look at our models for 2011 we're seeing a slight increase in the percent of revenue that we're spending on R&D on a year-over-year basis, and obviously given the natural growth in revenue and the increasing spend as a percent of revenue, you can imagine that we are investing more in R&D.

Operator

Your next question is from Brad Reback with Oppenheimer.

Brad Reback - Oppenheimer

Frank, could you maybe remind us of the legacy products that are being sunset and what type of revenue impact that is expected to have?

Steve Singh

Brad, I'm going to take that. We obviously don't speak to the specific legacy products that we're sunsetting. The thing I think is important to take away from this, though, is that this is not new news to our customers in the slightest. This is something that we've obviously communicated across multiple years, and in fact legacy products tend to be obviously either acquired products or our original products from back in their licensed days. But there's an orderly transition that we've planned for those products as we migrate those customers over to the Concur travel and expense platform. The thing you should take away from this is that we do expect some lumpiness in year-over-year growth rates to show up in fiscal Q2.

Brad Reback

And Steve, if you look at the new bookings in the quarter, can you give us a sense of maybe what percent came from some of these new SAS 2.0 services that you mentioned earlier?

Steve Singh

I don't know that I can speak to the percentage that came from the new SAS 2.0 offerings. I can speak to the fact that we're seeing a level of success with those SAS 2.0 offerings that are comparable to what we saw in the introduction of Travel and the introduction of Concur Pay and so on. So we're seeing really solid adoption of that and over time we really do expect our customers to adopt the entire suite of services that we offer.

Operator

Our next question will come from Brent Thill from UBS.

Brent Thill - UBS

On the margins, if your guidance holds for this year it will be three years of roughly flattish margins. I'm assuming in 2011 the bulk of the spend is spent on international investments. And I guess if you could just help us understand is it fiscal '12 where we're expecting potentially more margin expansion? Or is that yet to be seen in terms of the investments you need to lay.

Steve Singh

Just one minor correction. If our guidance holds it would be two years of margin holding constant at 23%. Keep in mind in 2009 it actually went up 400 basis points over 2008. And you're right that the investments are going very heavily to international, but also keep in mind that we have five core growth areas that we're investing in. Certainly we're not at all done investing in our core business of continuing to grow our customer base, and then obviously the SMB sector, as well as global expansion, as well as going after delivery services that provide value to the business travel. And then frankly a big area of investment is the Concur Connect platform, which we think is a fundamental game changer in our industry. This is something that really provides incredible value for the suppliers, for our customers, and for our end users, and of course third party application providers, who can integrate on top of our platform.

Brent Thill

And just as a quick follow up, just on the cap ex. I believe you had high single-digit growth in '10 and your guidance implies at the mid-point close to 40% growth. Maybe you can just walk through what's in that number?

Frank Pelzer

What we've traditionally said in the past is that we expect cap ex to range between 6% and 8% of total revenue in any given year. We were at the low end of that for fiscal 2010. We are expecting to be spending more to support these growth initiatives as we talked about. I think that's kind of what we're expecting.

Operator

Our next question will come from Laura Lederman from William Blair.

Laura Lederman - William Blair

I was following up on the question of profitability. Maybe another way to ask the question is if you look at the business five years out, seven years out, whatever time frame, at a more normalized growth, and less investment mode, how high do you think profits can be? I've heard you guys talk in the 30s in the past, maybe even as high as 35. Can you just give us a sense of long-term where you think profits can go? And also separately, a little bit more discussion on the balance of investment and also profit improvement.

Steve Singh

First of all, the target possibility for the business, 30% plus, has not changed in the slightest. Clearly we've ramped investments in 2010 pretty substantively, and you saw us be able to maintain our operating margin even as we ramped those investments pretty aggressively. Our guidance, of course, is that we plan to deliver 23% or more in operating margin in 2011, and obviously as you can tell from my comments we plan to increase investments pretty substantively in the business.

So that just speaks to incredible operating leverage that exists within the business model and so we see no reason at all that the 30% plus operating margin long-term should change. I think we just need to put it in the right context, though. Ultimately it's important to keep in mind that we're pursuing a multi-billion-dollar global opportunity, and that's around delivering our services not only to the end user but also to corporations and delivering a platform that allows each member of our ecosystem within the travel and expense sector to be able to interact in a way that drives real value for each member of that ecosystem. And frankly, of course, Concur as well.

Laura Lederman

You said revenue growth for '11 would be greater than what you saw in '10, which is 18%, but can you give us sort of a theoretical to be as high as, or as low as, or the factors that will determine where it falls within the range? Because greater than 18 - I think the Street was at 20 if memory serves me - but maybe talk about if you're willing to bet and if you're not comfortable with that maybe talk about the different factors that would cause it to be lower and higher?

Steve Singh

So obviously we're not going to give any more color on the 2011 growth rates than what we just did, which is we expect it to be higher than what was in 2010. I do think it's important to look at the fact that if you look at our guidance for fiscal Q1 2011 of 17% year-over-year, that's a 150 basis point improvement in top line growth rate as compared to the same quarter last year. And we're expecting in Q2 for that year-over-year growth rate to trend down a bit for the reasons we've already highlighted, and then that in combination with the fact that we expect the overall growth rate for the year to be higher I think provides a fair bit of color.

Laura Lederman

Following up on the sunsetting of the old products, could you talk about why they would specifically hit revenue? In other words, if they switch from the old to the new, why is that a revenue hit, because they're not going to be doing transactions during that period? If you'd just help us understand that.

Steve Singh

The only reason why it would hit revenue is because if we're not delivering that service we can't charge for that service. But outside that I wouldn't be willing to provide any further detail.

Laura Lederman

All right. Final question from me, if you look at the acquisition pipeline, obviously part of the growth strategy is to use some of the capital from the money you raise. Can you give us a sense of pricing out there and the level activity of businesses you're seeing out there that are willing to sell themselves?

Steve Singh

I don't know that I have anything unique to add here outside of what I think all of you see in the marketplace. But what I can tell you is look, we are very disciplined in how we look at acquisitions, or how we look at strategic investments, or for that matter how we look at partnerships. And we look at this and say look, there's tremendous opportunity here. We'd bring a lot of value to any entity that we partner with or acquire, and outside of that I think we'll give you updates as we move along. The thing I want you to remember, though, is our growth strategy is predominantly organic. It's organically focused. That's what's been driving our growth rates for the last several years.

Operator

Our next question will come from David Hilal from FBR.

Michael - FBR Capital Markets

Hey guys this is Michael on behalf of David. Given the healthy transaction volumes that really have continued to exceed your expectations, you guys have had strong customer growth and then both growing distribution organically and via partnerships, why do you expect revenue growth to decelerate in the first quarter of fiscal '11?

Steve Singh

You mean December quarter?

Michael - FBR Capital Markets

Yes, December.

Steve Singh

It's really if you look at transaction volume in our industry there's seasonality to it and the December quarter is typically the slowest quarter as far as growth, simply because of vacation schedules, right? You've got Thanksgiving and Christmas as fairly large blocks of vacation. The other piece that's important is that the two biggest drivers of our growth are really transaction volume and deployments. And because people take vacations, deployments tend to be a bit more muted as far as growth rates in the December quarter. And that's really it. It's the same thing we see literally every December quarter.

Michael - FBR Capital Markets

And then can you provide some metrics on customer wins in the SMB market and also your thoughts on how the experimentation with different business models has been received by the customers in that market?

Steve Singh

Sure. So let's make sure we understand. The SMB market's a fairly big market for us. It includes companies that are 500 employee organizations on down, and the specific thing I think you're referencing is the emerging business sector which is 100 employees down to 1 employee. And there what we've seen is actually a couple of things that are worth noting.

Number one, really strong adoption in the 1-25 employee segment. So we're seeing these companies literally sign on over the web, deploy over the web, and start using the product right off the website, which means frankly that we have the right product for that particular segment. And of course, above that segment, we've always had the right product. That's what we've been delivering above that segment for years.

So we're really pleased with the fact that we really nailed the product requirements for the emerging business segment. And then on top of that, not only have we seen good solid progress through the American Express channel, particularly in the emerging business segment, but also through Google.

What's been great is our own capacity to sell off our website or through telesales has been fantastic. So we're seeing more volume go through our own channels, which we would always prefer to go through our own channels than anywhere else, and I think this goes back to our core theme, which is part of the value we built for our shareholders is making sure we have incredible capacity to reach and service our customers.

Michael - FBR Capital Markets

And then any thoughts on different business models and how they're being received in that emerging market?

Steve Singh

I think that you're going to see a number of different models emerge in the emerging business sector, or for that matter even higher up. But right now, as far as the Concur Breeze product, what we're finding is that this is predominantly a per-user, per-month fee model. But you should not assume that our revenue models are limited to just that, because we're introducing new products and new services that are not only targeted after the emerging business sector, but frankly should be quite successful on up the corporate size ladder as well as on a global basis. So for example, if you look at the platform that we've just spoke to on the call you're going to see a number of different revenue models emerge as a part of the platform that are as applicable in the emerging business sector as they are in the Global 2000 sector.

Operator

Our next question will come from Tom Ernst from Deutsche Bank.

Thomas Ernst - Deutsche Bank

I just wanted to explore the difference in business model. I think you started to allude to this in the previous question, but with Concur Connect. Any difference from the current business models today as we look forward in terms of pricing or revenue pass-through in terms of the expenses that come with it?

Steve Singh

There's a number of differences. First of all, Concur Connect obviously is really a set of technology services we've used to link suppliers, whether they're airlines or hotels or car rental or whatever it might be, into our travel booking and expense reporting solutions, whether that's integrating content or integrating with electronic receipts. When you go to the Concur Connect platform, what we're talking about is building out, instead of cloud-based APIs and tools, that our partners, our customers, or third party application providers, can actually use to integrate on top of the Concur technology platform. And we think that not only improves the value of our services across that ecosystem, but it's actually monetizeable as well. And you're going to see different monetization models depending on the particular types of services delivered. It's also important on that to understand that we'll launch the Concur Connect platform within the first half of fiscal 2011.

Thomas Ernst

Will there also be free access on any sort of basis to this, or do you expect to monetize all access points -

Steve Singh

I think I'm going to ask you to wait until we actually launch it, and then we'll walk through a little bit more detail as far as how we'll monetize it. But obviously, we want to charge for value where we can create value. If we're really just plugging people together, perhaps that's a different economic equation.

Thomas Ernst

And maybe one more final follow up on this. Have you had the chance to show this to customers already and beta test it?

Steve Singh

As you can see in the graphics, we certainly have been working with various companies that are engaged with us in the platform, and with us stating that we'll be launching it in the first half of 2011 you have to assume we're pretty far down the path.

Operator

Our next question will come from Ross MacMillan from Jefferies.

Ross MacMillan - Jefferies & Company

Can you just comment on the cap ex increase? As you think about India and Japan, is that a significant component of the cap ex step up as you have to provision local data centers with infrastructure?

Steve Singh

At the end of the day we think that the increase in cap ex is predominantly more driven by growth in our workforce, but certainly there are some incremental spends that will be required in our data centers, which frankly are already globally distributed, so we're not talking about building out one specific data center in a specific country at this point. We're talking about continuing to grow our global network capacity.

Ross MacMillan

And as you talked about the growth rates for this year, the revenue growth consistent with last quarter, higher than fiscal '10 and fiscal '11, but I guess I'm curious do you continue to believe the path here is to get back to your historical run rate or trend growth that you've long described of 25%? Is that still very much a target?

Steve Singh

Yes.

Ross MacMillan

But obviously no timeframe on that?

Steve Singh

I think it's a little premature to give you a timeframe on that, but we certainly are trending back in that direction. Obviously, if you go back to each quarter of 2010, and this is off the top of my head, I think what we saw was 15%, 17%, 20%, and 20% as far as year-over-year growth rates for each of those quarters? Q1 obviously is typically a down quarter relative to growth rates, and we're saying that for the year as a whole we should be trending up. And then of course we're making a substantive number of investments across the business that are designed to drive incremental revenue and earnings opportunities. So we really see a clear path to getting back to our steady state targets. I think the important thing to understand across all this is that we are big shareholders in our own company, and our view is that if we can't deploy that capital with a compelling rate of return on that invested capital, then we shouldn't do it. And so what you're hearing from us is because we're willing to deploy it, we think there's a very compelling rate of return we're going to get on that deployed capital.

Ross MacMillan

That's fair. And just one last one, just as I think about modeling that Q1 to Q2 transition. Should we think of the year-over-year growth rate in Q2 being below that of Q1 and being the trough for the year?

Steve Singh

Yeah, I think that's a fair way of looking at it.

Operator

Our next question will come from Steve Ashley from Robert W. Baird.

Steve Ashley - Robert W. Baird

I'd like to drill on the international business a little. You alluded, Steve, in your prepared remarks, that the bookings contribution was greater than the revenue contribution and that was a good prelude. Just wondering if you could give us any kind of size or relative size to what percentage of bookings you are now seeing for international? And then within Europe, you called out France as being strong, and just wondering what kind of response you were seeing in Germany and U.K. today?

Steve Singh

Sure. So I'm going to tag team with Frank on this. I can't break out the specifics on this. I can tell you, or Frank can tell you, exactly the mix of international as a percentage of total revenue. Frank, do you have that number?

Frank Pelzer

It's about 13% for Q4.

Steve Singh

So what's reasonable to assume is the bookings as a percentage of total bookings that are coming out of Europe are obviously north of that 13% range, and of course that's being driven by the fact that we started investing over the last couple of years - actually go back to almost to mid-2007, started investing in growing out our European and Asian operations. And then with the acquisition of Etap, what we saw was as we had great local expertise in a particular region, we saw new bookings in that particular region to start to take off. Not at all surprising of course. And so that's what's driving it. We've got expertise in each region that's driving growth, and that growth is obviously north of 13% of the total bookings.

Steve Ashley

Have American Express travel booking in Amadeus helped drive leads and drive business in Europe?

Steve Singh

Yes, and right now, all I want to speak to is the American Express piece of it. American Express continues to be a fantastic partner for us, and if you'll recall back when we first signed that partnership we spoke to eight primary markets that we'll go work together in initially, and certainly if you think about eight primary markets a handful of them are going to be in Europe. And so we have seen great results from that relationship, not only in the U.S. but the U.K. and France. And you should expect us to be able to continue to leverage that relationship into every other market that we go into.

Steve Ashley

And just lastly, if we look at the Concur Connect platform is that going to support a myriad of different mobile devices and you're going to have iPhone, and Android, and RIM operating systems, would conceivably all those be supported in the future off the Connect platform?

Steve Singh

And so the short answer to that question is it already does. And so yes, it will support every major smart phone OS that customers adopt. Today we already support the iPhone, the RIM, the Droid and Windows.

Operator

Our next question will come from Sid Parakh from McAdams Wright.

Sid Parakh - McAdams Wright Ragen

On visibility, in the past, probably a year and a half or two years ago, you said that typically on a next 12 month basis you have about 90% visibility in revenues, and given that you're sounding incrementally upbeat going forward, are you seeing that visibility kind of come back into your business?

Steve Singh

Yeah, it is. Yes, we're very comfortable with being able to model out our business. I think it's important to understand that our comments don't reflect that we have lower visibility into the business. That's number one. And number two is it's also important to bring out the retention rates, which are a very important part of how we look at the business, have gotten back to our historical high-90s percentage and have stabilized there.

Sid Parakh

And just to understand the whole Concur Connect platform maybe in some more detail here, is there something like a Concur app store in the offing, or something where, you know, me as a user can go down and download certain apps that some of these partners are going to build? And then from a monetization, I don't know how much you're willing to speak to that, but would me as a user being paying for those, or would it be a monetization aspect tied to your partners there?

Steve Singh

I'm not going to speak to details here just yet. I think that once we launch it officially into the marketplace we'll give you a lot more color around it. Where we create value we expect to be able to monetize that value, and we'll give you a lot more depth around that later. Part of what we want to deliver to our end user is an easy way for them to be able to use those services.

Operator

Our next question will come from Ajay Kasargod from Morgan Keegan.

Ajay Kasargod - Morgan Keegan

The first question is this kind of taking a step to frame your long-term opportunity - can you kind of review with us the dollar volume of expenses you're processing or give us some kind of a perspective on where you are now and with the global expansion of your business what kind of dollar volume you could process in the future? Just some way to understand how this market expands for you through international expansion. And then I've got a couple details.

Steve Singh

I'm going to give you a number, but keep in mind that we haven't officially updated those numbers since 2007, and that's the volume of travel products and services going through our ecosystem of products is about 35 billion. It's actually north of that. And that number was last updated in our 2007 filings.

Ajay Kasargod

And then with the international expansion, what does that do to that number? Does that double? Does that triple? Just help us frame that.

Steve Singh

Obviously it’s not going to double overnight as you would understand and appreciate. I think the way I would frame this is keep in mind Japan is the third largest economy in the world. In fact, up until a quarter ago it was the second largest economy in the world. India is growing at 5% a year plus and is expected to grow at that rate for the next 20 years, which by itself is a mind boggling statement. And so if you're looking at how do we expand not only in the U.S. but also the U.K., France, every major economy in Europe, and then India and Japan, you're talking about a fairly substantive expansion of our capacity to deliver travel products and services through our network. The thing perhaps to keep in mind is if you look at global TD spend, I think it was in 2009, it was about $700 billion.

Ajay Kasargod

Now to come back to the guidance number on revenue, what I basically see is with the implication of 17% growth in Q1 and then a downtick in Q2, you basically see a sequential trend of 2% in Q1 in sequential revenue growth, around 5% in Q2, and then accelerating to let's just call it 7% plus in Q3 and Q4. So what gives you the confidence that you accelerate the growth in the second half of FY11 versus the first half.

Steve Singh

First of all I'm obviously not going to speak to your particular assumptions there. It all comes down to the bookings that we've already done in our core business. Just to give you some sense of this, go back to our comments back this time last year, where we told investors that hey, expect the year-over-year growth rate to start off roughly comparable to what we exited 2009 at, and then grow throughout the course of the year to equal roughly comparable to what we started 2009 at. And look at what we actually did. Each quarter we outperformed and we're a bit better on year-over-year growth rates. And that's all fundamentally driven by new business that we have sold.

Ajay Kasargod

And then lastly and then I'll drop off here, when it comes to the impact of Japan and India in terms of op ex, I think the question was asked already about cap ex, and I know Frank answered that, about moving to the higher end of the 6-8% range. But when you look at the op ex impact for the year it's very clear that FY11 for you is a big expansion year in terms of your infrastructure and your business. But help us understand what India and Japan are doing to the op ex, to keep op margins at 23%.

Steve Singh

Let's just make sure we understand also that the cap ex, what we specifically said is our historical averages were 6-8%, and that this year we expect to spend roughly $26.5 million at the mid-point of our guidance on cap ex. As far as the op ex costs related to Japan and India, frankly there'll be a drag on earnings in fiscal 2011. Right? We're building out our organization there. That includes sales and marketing, R&D, customer support, leadership within those regions. And those are expenses that will hit our P&L this year. But the other piece I would just bring out is it's broader than just Japan or India. We want to succeed in every major market across Europe and also across Asia.

Ajay Kasargod

And I think the point I was getting to is clearly there's incremental margin expansion in the operating model, but as you guys have more aggressively expanded into these newer geographies it is dragging what we're seeing in the P&L in FY11 versus prior years.

Steve Singh

Absolutely. I don't know that I would characterize it as dragging, but perhaps that's just my view versus your view on that. We already have, frankly, industry leading operating margins across any SAS provider, and we're at least holding that going forward. And you're right that our investments in India and China and Europe are loss leaders in 2011.

Ajay Kasargod

I will drop off, but Frank, just real quick, are there better working capital assumptions, because your cash flow numbers for FY11 are very strong despite the flat operating margins.

Frank Pelzer

We're not modeling any different expectations in terms of working capital assumptions in 2011.

Steve Singh

Let me just hit one last point on that. I think if you're saying is there a lot of operating leverage in the business that we're choosing to reinvest back in the business, that would be a fair statement.

Operator

Our next question will come from Brad Whitt from Gleacher & Company.

Brad Whitt - Gleacher & Company

I don't know if you commented much on customer churn or revenue churn, however you want to look at it. How has that been trending over the last couple of quarters?

Steve Singh

Very steady. We're holding in the high 90s as far as customer retention, and so we really haven't seen any change over the last several quarters on attrition rates.

Brad Whitt

And can you give us a little color on your deployment cycles as you sell more and more services. I'm curious if your deployment cycles are getting a little bit longer. How should we think about bookings and when that turns to revenue?

Steve Singh

Actually the deployment cycles have been slightly better than our average six month cycles, which has actually led to the upside in the last several quarters of results. And so what that speaks to is that our capacity to continue to drive deployments even as we sign more and more customers. We're very pleased with that capacity. And then I'm sorry, I didn't hear the last part of your question?

Brad Whitt

As you add more and more services, does that increase the complexity of the deployments, or are you seeing that they'll adopt the basic expense reporting and then move on to some of the other services?

Steve Singh

It's kind of yes to both. Obviously as you add more products it increases the complexity of deployments, but of course against that we've gotten better and better as an organization on deployments. And so thus the better than six months on average and thus the better than expected results of the last several quarters. On the issue of the customers buying one product and moving up to buy other products, that happens certainly from time to time, but still the majority of our customers tend to buy a broad suite of our products up front and deploy them.

Brad Whitt

And then final question, I know you don't want to give away too many secrets on the Connect future revenue streams but is that something that will be contingent upon acquisitions or something that you can deploy, or plan to deploy, based on your current offerings.

Steve Singh

The Concur Connect platform is something that we plan to deploy. It's organically driven. We plan to deploy in the first half of fiscal 2011.

Operator

Our last question will come from Brendan Barnicle from Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Steve, a lot of these investments you mentioned are 24-month investments, so as we start to think a little further out should we be sort of expecting this kind of more modest up margin improvement through this year but even next year given the size and scale of some of these investments?

Steve Singh

We didn't give 2012 guidance yet. We expect to do 23% or more in 2011. You're absolutely right. Our investments are both near term and over the long-term. But I think it's also important to take away from this that the services that we expect to deliver are high margin services. So not only are they different revenue models, they're also very high margin products, so it’s not like each individual service should be a drag on operating margin.

Brendan Barnicle

And is there any way to look at the [TAM] on the traditional business as you move into some of these newer businesses and kind of figure out where we are and sort of a saturation level of that core legacy customer you've had, sort of the Global 1000 who are looking at the traditional expense management and maybe the travel piece?

Steve Singh

A couple parts to that question. Number one, we don't see any tapping out of the existing marketplace we're in right now. We've got a lot of growth opportunity in that marketplace. However, we do see a lot of additional opportunity, and that opportunity is something that we are in a unique position to leverage and go after. And that builds a ramp for us to go drive compelling top line and bottom line growth rates for a decade, and that's a great investment choice to make. As far as the [TAM], absolutely we see it expanding. It's not only as big of course as the core expense management market that we originally started off pursuing, but it includes not only travel booking, but now an opportunity to go after multiple different geographies and coming downstream all the way to the smallest companies in the world, and of course a very substantive opportunity in providing an ecosystem for all of our customers and our partners and third party developers to be able to add value for each other.

Brendan Barnicle

Is there a way to put a number around that [TAM] now with all these new opportunities?

Steve Singh

One way to think about it is if you look at the goods and services that are sold in the corporate travel industry, you're talking about a $700 billion annual market. Obviously we're not going to get all of that, but we think one interesting place to start is to look at it and say what's the total set of goods and services that are delivered and how can we add value within that ecosystem between the supplier and the end buyer. And obviously we believe we can add a lot of value there. Outside of that I would ask you to let us play this out a bit and you'll see. One last thing around this. I don't want anyone to take away from our comments that there's not an incredible amount of operating leverage in our business, but in fact it's just the opposite. The fact that we're choosing to invest in this many different interesting growth opportunities, and these are being funded by our existing operating margin, just speaks to the incredible leverage in the business.

Operator

And ladies and gentlemen, that is all the time we have for questions. I will now turn the call back over to Steve Singh.

Steve Singh

Myself and John and Frank want to thank all of you for joining us for our Q4 earnings call. We look forward to speaking with you in late January, early February, to update you on the progress of your company at that point. Thanks so much everyone.

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