Concur Technologies' CEO Discusses Q1 2011 Results - Earnings Call Transcript

Feb. 2.11 | About: Concur Technologies, (CNQR)

Concur Technologies (NASDAQ:CNQR)

Q1 2011 Earnings Call

February 02, 2011 5:00 pm ET

Executives

John Torrey - EVP of Corporate

S. Singh - Chairman and Chief Executive Officer

Frank Pelzer - Chief Financial Officer and Principal Accounting Officer

Analysts

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

Brent Thill - UBS Investment Bank

Brad Reback - Oppenheimer & Co. Inc.

Brendon Barnicle - Pacific Crest Securities

Steven Ashley - Robert W. Baird & Co. Incorporated

Ross MacMillan - Jefferies & Company, Inc.

AjayKumar Kasargod

Bradley Whitt - Gleacher & Company, Inc.

Stephanie Withers - Goldman Sachs Group, Inc.

Gregory Dunham - Crédit Suisse AG

Robert Breza - RBC Capital Markets, LLC

Operator

Good afternoon. My name is Marvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 FY '11 Concur Earnings Release Conference Call. [Operator Instructions] I would now like to hand the call over to our host, Mr. John Torrey. 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 2011. 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 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 our prepared statements today, we 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 this Slide 2 and our filings with the Securities and Exchange Commission, which are available at sec.gov for additional information on risk factors that could cause actual result 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?

S. Singh

Thank you, John. Good afternoon, everyone. There are four key highlights to take away from our call today. First, Q1 was another very strong quarter, exceeding our expectations for revenue, earnings, free cash flow and customer growth. Second, we continue to see a significant opportunity in our industry as customers, suppliers and technology and social trends continue to migrate the market towards a more efficient supply chain that's more transparent, delivers higher quality services and affords customers and suppliers both differentiation and sustainability. We believe we are well-positioned to add value for all our stakeholders, corporate clients, business travelers and suppliers. And as such, we continue to invest in the excess earnings leverage inherent in our business model against our core growth initiatives. Third, we continue to make great strides against our five core growth initiatives. As we've expanded distribution, we've seen stronger customer growth rates, and that's showing up in the ongoing predictability and strength of our business results. Our investments in innovation have helped us participate in an ever greater portion of the travel and expense management process. We continue to scale our operations to effectively handle our global growth while maintaining world-class service. And a few weeks ago, we expanded our foundation to enable stronger growth in the years ahead, with the acquisition of TripIt and the formation of Concur Japan. And fourth, we are comfortable with our expectations that our growth rate in fiscal 2011 will be ahead of our growth rate in fiscal 2010, as Q1 was nicely ahead of our expectations and Q2 matches our original expectations coming into the fiscal year. While my prepared remarks are largely focused on growth opportunities, let me take a moment to quickly highlight fiscal Q1 results.

Please turn to the next slide. In Q1, we saw exceptional operating performance across the business. Revenue grew 19% year-over-year and reached an all-time high at $80.2 million. Coming into the quarter, we expected revenue growth of 17% year-over-year. Our outperformance 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 a share, which was also ahead of our expectations. And driven by stronger earnings and strong cash collections, free cash flow in the quarter was $6.1 million, also ahead of our expectations.

Please turn to the next slide. As we've stated over the last several earnings calls, we see a number of significant growth opportunities within the business travel and expense management market. First and foremost, we continue to see significant opportunity to expand our customer base in the markets we currently serve. Second, we see a number of large and interesting markets outside of North America, and we're focused on expanding our global presence. Third, we believe the SMB market can and will be a material portion of our revenue base over the next decade. Fourth, we see a significant opportunity to deliver compelling value to the business traveler while they're on their trip. And finally, we are focused on creating a high-value ecosystem through the Concur Connect platform that connects our customers, our partners and suppliers together in a model 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 as the continued establishment of a foundation from which Concur and its partners can continue to drive innovation and compelling value for our mutual customers.

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 continue to increase our investments in distribution, market development and innovation. Those investments continue to pay dividends as we just recorded our strongest Q1 in terms of new customer growth. Our partnership with American Express continues to strengthen both in North America and across the globe, and we expect that partnership to continue to drive value for both parties in the years ahead.

Please turn to the next slide. We believe the only way to be a truly global company is to be a truly local company. 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 are investing in and continue to see compelling success in markets such as Australia, Singapore, Hong Kong, France and the U.K. as our transaction volume and local customer wins continues to grow substantively. Coming into the year, it was our expectation to establish Concur Japan and Concur India in the first half of the fiscal year. A few weeks ago, we signed a definitive agreement to establish Concur Japan in partnership with the SunBridge Corporation. SunBridge's Chairman and CEO Alan Miner founded Oracle Japan and has successfully taken companies, such as Salesforce.com, into Japan. We are also very pleased to have Marc Benioff as a direct minority investor in Concur Japan. I'm confident that Alan, the SunBridge team and Marc can help Concur succeed in one of the three largest economies in the world. It's important to understand that Concur already processes several hundred thousand transactions in Japan each year for non-Japanese multinationals in the local language and in compliance with local tax and regulatory requirements. Over the next two years, we will build out a local distribution, development and service capacity in Japan. And our initial focus will be the more than 2,000 Japanese multinationals that employ a few thousand employees or more. Given the high labor cost in Japan, there's a strong focus on driving efficiency across the organization. While Concur Japan will be a significant investment initiative over the next 36 months, we do expect to sign our first local customers in Japan in early 2012 and see revenue contributions from those investments either in late 2012 or early 2013. Over the next decade, we expect Concur Japan to be a significant portion of our global revenue.

Please turn to the next slide. In support of our third growth initiative, we are also investing to deliver our services to small- and medium-sized businesses on a global basis. We believe that this market segment is underserved and can be a significant portion of our revenue and profits over the next decade. Concur Breeze continues to see solid early success. We've seen several thousand travel accounts established, and we're seeing conversion rates above our expectations. We've also been very pleased with the interest we've seen from companies with less than 50 employees, as they account for more than 75% of our Breeze customers. We've seen 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. We expect to materially increase our investments in direct and partner distribution over the course of the next few years. And as we stated in the past, while we are incurring cost 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. Over the next two years, across the world, there will be nearly 1 billion net new smartphones sold. That's roughly equal to the number of notebooks and desktops in use today on a global basis. Smartphones and App Stores are transforming how we consume technology and manage our lives while we're on the road. Serving the needs of the business traveler is central to our growth initiatives, and TripIt is central to this portion of our growth strategy. In combination with our suite of services, TripIt allows Concur to participate in every element of the travel process, from trip planning and booking to in-trip activities and sharing trip information to post-trip expense reconciliation and reimbursement. This enables Concur to meet the requirements of the individual business travelers within the context of corporate policies, while fundamentally enabling the direct relationship between travel suppliers and their tens of millions of end customers in both the managed travel market, which Concur has served for a long period of time, and the unmanaged travel market, which is a new opportunity for us that nearly doubles our addressable travel spend. I know many of you are frequent travelers and may already be TripIt users, but let me tell you a little bit more about our new offerings and how we intend to monetize it. Millions of travelers use TripIt to organize and share their travel plans regardless of where they book their travel. In fact, TripIt supports travel itineraries for more than a thousand travel sites, including, of course, our own industry-leading travel booking service. TripIt can automatically capture itineraries or travelers can simply pull their travel confirmation emails to plans at TripIt.com. TripIt's technology creates a master itinerary or super P&R that you can access on the web or on your mobile phone with all of your travel plans, plus maps, directions, weather and other helpful items, all driven from the only single source of complete travel information, the individual traveler.

TripIt users can automatically share their travel plans via integration of social networks, such as LinkedIn and Facebook, or via the tens of thousands of user-generated company groups that TripIt supports. Just as we share our personal lives with our friends on Facebook everyday, business travelers have a fundamental need to share their travel plans with their colleagues and customers towards the goal of making business travel more productive, and frankly, for goals as simple as keeping our friends and family informed about where we are and where we're going. It's a concept we call business social. And we believe the incorporation of social networking technologies will become standard for all business activities. We, along with other complimentary social networking services, such as Salesforce.com's Chatter, are at the very forefront of enabling this innovative concept for the tens of millions of users and hundreds of thousands of customers that will define the growth trajectory of this particular marketplace over the next decade.

Let me spend a few seconds to outline TripIt's revenue model. TripIt is delivered and will continue to be delivered in a freemium model. This is a business model that's additive to our revenue model and one that we think will become a standard part of enterprise software models in the years ahead. TripIt's revenue mix includes both advertising and end-user subscription revenues. In 2011, TripIt's revenues will be insignificant against our overall revenues. And as we noted in the announcement of the acquisition, we expect TripIt to be dilutive to pro forma operating margin in fiscal 2011. It should be noted that the margin profile of the TripIt revenue streams at scale are expected to be comparable to Concur's core revenue base. And as we look ahead, we expect TripIt to be an appreciable stream of revenue in fiscal 2012 and a significant stream of revenue in fiscal 2013. Just as the integration of travel booking and expense reporting changed the trajectory of our market five years ago, embracing the direct relationship between travel suppliers and individual travelers, as well as the businesses for which they work, will redefine our industry once again. We're very excited about this element of our strategy as it expands our opportunity within the markets we currently serve and affords us the opportunity to expand to new markets on a global basis. We encourage you to sign up with TripIt and see why we're excited about it.

Please turn to the next slide. Even as we drive the innovation curve in the business travel and expense management market, we recognize that we cannot be the sole source of innovation to the marketplace. In fact, and as only one example, there are thousands of third-party travel applications available today on the Apple App Store, and users are free to adopt and consume those applications as they see fit. Our job is to accelerate the delivery of that innovation to travelers and to businesses. On the last earnings call, we previewed for you the upcoming launch of version 2.0 of the Concur Connect platform. This next generation of our cloud-computing offering will 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 that individual employees can rely upon everyday. From applications designed for small and medium businesses to vertical applications of our Travel & Expense service to innovative new mobile applications to location-based services to specialized travel content or services, all integrated into your Concur experience and 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, it will create new revenue streams for Concur beyond our traditional subscription revenue model. In fact, TripIt deployed an open platform into which more than 700 partners have already integrated their applications. The TripIt platform fundamentally supports and extends our platform strategy.

Please turn to the next slide. We are very pleased with our consistent and strong record of execution. We see significant growth opportunities in the markets we serve today. And our leadership position and the strength of our business model affords us the opportunity to invest in multiple growth opportunities that expand our addressable market and build upon our leadership position. We saw our revenue growth rate improve from 2009 to 2010, and we expect it to improve once again in 2011 as we trend back towards our steady-state growth target. 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 please turn to the next slide, I'd like to turn the call over to Frank, who will provide the details on Q1 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, Q1 was another quarter of strong financial and operational results, starting the year with higher-than-expected revenue and earnings. Second, we are excited about the strategic initiatives announced over the last few weeks. We believe that the acquisition of TripIt and the formation of Concur Japan will create businesses that will be strong contributors to our long-term growth. And third, we have strong operating leverage in our core business. We have and will continue to use the business' operating leverage to ramp investment in our five growth initiatives to further drive our top line growth rates.

If you would, please advance to Slide #13, and let's look at Q1 results. Q1 revenue was above our expectations at $80.2 million, growing 19% year-over-year and 4% sequentially. Recognized revenues in the quarter benefited from strong transaction volume, excellent traction in new customer deployments and existing customers adding new services. Customer retention rates were again strong for the quarter, consistent with our core historical averages in the high-90s.

Please advance to the next slide. Operating costs in Q1 were in line with our expectations. Our gross margin was up approximately 50 basis points year-over-year to 72%, reflecting increased economies of scale. As we mentioned on our last call, we continue to increase our rate of investment in our core growth initiatives that Steve highlighted. Excluding share-based compensation expense, our sales and marketing spend increased 26% year-over-year, reflecting our investment in distribution. Excluding share-based compensation expense, our G&A spend increased 36% year-over-year, reflecting investment in new initiatives. Our non-GAAP operating margin for Q1 was 22.2%. With our higher-than-expected revenue and achievement of our margin expectations, Q1 non-GAAP earnings were above our expectations at $0.30 per share compared to our target of $0.28. The $0.30 of earnings excludes approximately $0.01 of acquisition and other related costs. New authoritative guidance on business combinations requires us to record on the statement of operations certain items that at the time of acquisition would've been recorded in goodwill under old authoritative guidance. We believe investors should understand the effects of these items on our operations. We have separated out acquisition and other related costs in our GAAP to non-GAAP reconciliation statement and will continue to do so in the future. These expenses primarily consist of professional service fees, travel expenses and other one-time direct costs associated with strategic activity, in which we may deploy capital. Please note that we conform the prior periods' presentation for this authoritative guidance and had no similar activity in fiscal Q1 of 2010.

Please advance to Slide #15. Cash flow from operations and free cash flow were ahead of our expectations, primarily driven by continued strong performance of the business. Cash flow from operations exceeded our expectations, totaling $10.9 million for Q1. And after capital investments of $4.8 million, free cash flow was $6.1 million for Q1. Free cash flow benefited from operational improvements, such as a three-day reduction in DSOs comparing quarter-over-quarter. Our balance sheet continues to be very strong and provides us tremendous leverage in continuing to expand our market and our leadership. Cash and investments, net of customer funding liabilities, grew approximately $5.2 million by quarter end. And despite the continued challenges businesses face as the global economy recovers, cash collections were strong, and days sales outstanding ended at 59 days, below our 60- to 70-day expected range. Based on the overall growth in the business, deferred revenue grew to approximately $60 million by quarter end, reflecting approximately 18% growth over the same period of the prior year.

Please advance to Slide #16. Now let's turn the discussion to Q2 and the remainder of the fiscal year. Over the past few weeks, we announced the acquisition of TripIt and the formation of Concur Japan. Both of these businesses are well aligned with the long-term growth initiatives Steve has been discussing over the past year. With TripIt, we extend our mobile and platform strategy by providing leading itinerary management functionality that not only expands capabilities to our existing markets but also allows us to penetrate the unmanaged business travel market. We also gain the ability to grow new revenue streams, such as advertising over time. In Japan, our joint venture with SunBridge and Marc Benioff has the potential to be a significant contributor to accelerating our long-term growth rate. In the near-term, neither opportunity is expected to contribute much to revenue. We are investing in distribution and infrastructure to develop a sales pipeline that will lead to recognized revenue in fiscal 2012 and beyond. Due to the previously communicated sunsetting of legacy products, we expect Q2 revenue to grow approximately 15.5% year-over-year. We are reaffirming our expectations for the full year and still expect the overall revenue growth rate to increase year-over-year compared to that of 2010. As seen in Q1 and recent developments in Q2, we are increasing our rate of investment in global distribution, new geographies, new service offerings and our Concur Connect platform. As a result, we expect non-GAAP pretax net income per share to be $0.24 in fiscal Q2. Non-GAAP pretax income excludes the effects of non-cash-related items, such as stock-based compensation expense, amortization of intangible assets and the accretion of the discount on our senior convertible notes. It also excludes the non-cash accounting implications and the cash cost of acquisitions and other related strategic activity, in which we may deploy capital.

Accounting for the dilutive impact of TripIt, we now expect our non-GAAP operating margin for fiscal 2011 to be 21.5% or more. Driven by the uncertainty on the mark-to-market accounting of the TripIt contingent liability deal structure, we will not provide future expectations of GAAP EPS and our effective tax rate. Cash flows for fiscal 2011 are expected to remain strong. With the dilutive impact of the TripIt acquisition, we now expect cash flow from operations, excluding acquisition and other related costs, to total between $84 million and $87 million. For fiscal 2011, we still 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 $57 million to $62 million for the year. We expect our cash tax rate to remain in the low single-digits for the remainder of fiscal 2011 as we continue to utilize tax NOLs to reduce our cash tax payments. Please note that our effective tax rate for Q1 was 25.5%, primarily due to the retroactive catch-up associated with the passage of the R&D Tax Credit in December.

Please advance to the last slide. In closing, we believe that 19% year-over-year growth rate in Q1 was a testament to the strength of our core business. We expect revenue growth rates for fiscal 2011 to continue to grow despite the dip down in fiscal Q2 due to the sunsetting of certain products. Due to the strong operating leverage of the core business, we continued and will continue to invest in our core growth initiatives that should bear additional awards over the medium- to long-term. Part of these investments include the acquisition of TripIt, which is expected to lower our pro forma operating margin by approximately 150 basis points for the full year. And finally, we have a strong balance sheet with significant cash reserves. We are very comfortable with our ability to take advantage of [indiscernible] market. Operator, we would now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brad Reback with Oppenheimer.

Brad Reback - Oppenheimer & Co. Inc.

Two quick questions. Number one, can you give us any sort of overview what the accounting would look like for the revenue split coming out of Concur Japan?

S. Singh

Yes, Frank and I will tag team on that. We are the majority shareholder of Concur Japan, roughly 75% shareholder of Concur Japan. And so obviously, if you look at the P&L for Concur Japan, we will consolidate that fully and then back-out the minority interest effectively. The other thing I would just point out is that we really don't expect in fiscal 2011, really it's just costs, which of course, we had contemplated when we first gave guidance around fiscal 2011. And then what we expect is that you'll see the first real customers get signed in Japan sometime in fiscal 2012, early fiscal 2012, and the first revenue will show up either later fiscal 2012 or early fiscal 2013. Keep in mind that because we're targeting comparatively large Japanese multinationals, the deployment cycles there will probably be on the higher side initially, anyways, on the higher side of our averages than we've seen historically here in the U.S.

Brad Reback - Oppenheimer & Co. Inc.

And moving on to the Concur open platform. Can you give us maybe some examples of ways you see monetizing that? Are people going to have to pay for API access or other ways?

S. Singh

We think there's multiple monetization components of the Concur Connect platform. We certainly think the API access is one component of the monetization strategy. In fact, that's exactly what TripIt provides for within the TripIt platform today, albeit it's relatively small, simply because of the scale of their user base in their platform. We also think that advertising is a potential revenue stream across the platform. And of course, the ability as our partners, third-party developers are able to deliver their applications and get consumed by our customers, we certainly believe that there's a monetization opportunity around delivering those applications.

Operator

Our next question comes from the line of Stephanie Withers with Goldman Sachs.

Stephanie Withers - Goldman Sachs Group, Inc.

So first, we've seen some better payroll data coming out, and I'm wondering if you guys are seeing that at all in your business, if you're able to see transaction lines improving so far? And then secondly, any chance you'll give us any more color on what exactly the sunsetting of the legacy products is for the second quarter?

S. Singh

So obviously, what led to the upside in fiscal Q1 results was transaction volume for travel and for expense and accelerated deployments. We're absolutely seeing overall that obviously, the economy is more stable and it's growing, payrolls are growing. But keep in mind that the incremental changes in payroll are relatively modest from period-to-period. And so if you look back at when unemployment basically plummeted, or I guess increased, depending on the way you're looking at it, when it went from 5.6% up to 10.2% or so, it was a relatively fast change. And the speed in which it had changed was the real driver of any negative impact. And so to the extent, you see a very fast change in the other direction, you might see a short-term positive hit to us. But what we're seeing, in fact, is actually very, very modest changes, and we're certainly not counting on improvement in the payroll environment to drive the top line growth of the business.

Stephanie Withers - Goldman Sachs Group, Inc.

And then on the sunsetting of the products, any more color there?

S. Singh

Really not a lot more to provide. As we mentioned, with some legacy products that we had, we wanted to sunset in the March quarter, so basically January 1. This is something that frankly that we had planned now for quite some time. We're very pleased with how that process is progressing. And really, the guidance that we just provided contemplates that. Obviously, frankly, it contemplated it before we even started the fiscal year.

Stephanie Withers - Goldman Sachs Group, Inc.

As we look at how the margin guidance has ticked down this year, how should we think about how that splits between Japan and TripIt? Is it kind of majority TripIt or is much of that Japan? Or was Japan sort of already of factored in and just general investments for international growth?

S. Singh

It's 100% TripIt. Japan, and frankly, India was factored or contemplated in our model, our expectations for the year as a whole when we first spoke to it at the beginning of the year.

Operator

Our next question comes from the line of Robert Breza with RBC Capital Markets.

Robert Breza - RBC Capital Markets, LLC

Steve, I was wondering if you could talk to us about, I think, in your prepared comments, you talked about 2013 for TripIt being significant. Should we think about that in terms of like a 10% type contribution? Or can you just kind of help us understand the context?

S. Singh

Well, obviously, I can't speak yet to the percentage of revenue at this point. I do think it's important to understand that the impact in 2011 of TripIt revenues is insignificant. And keep in mind that the dilution we're talking about is entirely driven by TripIt, and it's a relatively small company of 50 or so employees. And so as such, you can kind of determine that there's not much revenue that we'll see in 2011 from that. We do, however, see it as a business that has the potential to grow very, very quickly. In fact, if you think about the deal structure we put together in the TripIt acquisition, it's very much driven by the core construct that we expect that asset to grow quickly over the next couple of years. And so we try to give just some overall color around how to look at that. So the words, I think, we used are appreciable in 2012 and significant in 2013. And then I think that gives you at least a flavor for the rate of growth that we expect to see out of that business.

Robert Breza - RBC Capital Markets, LLC

And maybe just a follow-up, Steve. As you think about the advertising component to the TripIt business, it's very unique and I think could be very beneficial to you. How do we think about that component used across the rest of the base?

S. Singh

That's a great insight, great question. The way we look at it, TripIt is a fantastic tool for every Concur user. I'm talking about the largest companies in the world or some of the [indiscernible] users on its services. So we obviously [indiscernible] 15 million of our users should be using TripIt. So it takes some time to [indiscernible] that roll through every one of our users. [indiscernible] Our view is [indiscernible] core themes that [indiscernible] like in the travel industry. And that is really the impact of mobile computing, [indiscernible] are the behaviors that are more and more geared towards the business traveler [indiscernible] and substantive part of process in consuming any sort of applications. And so we think the mobile application's become very material. Those mobile applications will be delivered [indiscernible] freemium models and advertising is a piece of that.

Operator

Our next question comes from the line of Ross MacMillan with Jefferies.

Ross MacMillan - Jefferies & Company, Inc.

I was curious, the TripIt, in particular, they seem to have done a really good job at becoming a layer almost within other applications. I noticed, for example, the American Express business card and Platinum Card users are already being offered TripIt Pro service. How fast -- well, two questions, will you bring the TripIt Pro app to your customer base on an equivalent pricing model as it is today for TripIt Pro? And how fast you think that your customers would adopt that [indiscernible]

S. Singh

Well, first of all, you don't see [indiscernible] the pricing model of TripIt or TripIt Pro. It's obviously available free to our end users, and it'll continue to be available free. TripIt Pro is available on an end-user subscription basis. Obviously, businesses can buy TripIt Pro in a model that's designed for a large number of users or basically TripIt for Business type of model. And so you'll see different pricing models depending upon how it's actually consumed. I don't know that I can comment today on the speed at which we expect that adoption of TripIt Pro across the 15 million users that we have. Frankly, I'd be ecstatic if we can get 15 million at TripIt or TripIt Pro or TripIt for Business over the next several years.

Operator

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

Steven Ashley - Robert W. Baird & Co. Incorporated

I wonder, in terms of the Concur Connect 2.0 platform, what might be the timing on when we might start to see new revenue streams generated from that platform?

S. Singh

If I understood the question correctly, it's the timing of Concur Connect platform revenues. [indiscernible] second quarter to officially launch it and announce it, which we expect to happen in the first half of this fiscal year. So effectively, this -- and then obviously, what we want to do is build incredible value around the platform in the form of applications and services that we can be delivered to the end customer. And as I said before, there's really three streams of revenue that's existing and something that we think we can tap into relatively immediately. And that's not only advertising-based revenues and API-based revenues, but also effectively channel-based revenues to deliver these services into our user community. And I think the way I would look at it, it's hard to see a reasonable stream of revenue in 2012.

Steven Ashley - Robert W. Baird & Co. Incorporated

And Steve, could you talk about who are some of maybe the top two or three travel agencies by size in the Japanese market?

S. Singh

[indiscernible] of interesting. And JTB is, by far, the largest American [indiscernible] travel [indiscernible]. And frankly, the way we look at this is we want to go to market in [indiscernible] in manners that [indiscernible] markets that we're already in today. That model that's often measured to [indiscernible].

Steven Ashley - Robert W. Baird & Co. Incorporated

Just lastly, Frank, in terms of a pro forma tax rate, are we still using 37.5% for modeling purposes for this fiscal year and for the second quarter?

Frank Pelzer

[indiscernible] probably just a federal [indiscernible] cash tax [indiscernible] tax rate parts of the contingent, up from quarter-to-quarter. And because that has [indiscernible] effective tax rate GAAP purpose, it guides you towards a 35% federal estimate.

Operator

Our next question comes from the line of Laura Lederman with William Blair.

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

We haven't talked about competition in a long time. You've obviously pulled way ahead. But companies like Workday say they are going to do expense management and service SAP. And I realized they don't have travel bookings. But are you running into them at all in terms of sales cycles or not really?

S. Singh

Certainly not at a level that is even remotely significant. Look, but I don't want that to be taken in the wrong way. We [indiscernible] whenever they come. In fact, that's part of the reason why we are aggressively investing in the business is that we want to make sure that we're always in a position that we're adding more value for our customers for business travelers, for suppliers than anyone else in the marketplace. And in our view, great companies, that's what their apps are doing, making sure that valuation they can deliver into the market is far beyond what anyone else can deliver in the market.

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

As you grow and add new markets and distribution channels, can you talk about investments in customers that may need [indiscernible]?

S. Singh

I heard your question on customer support. Obviously, that's part and parcel to our investments across the business in any given year. The right way of thinking about that is look and feel the business pretty substantively over the last several years, and along that [indiscernible] have been able to not only grow on a global basis but support our customers [indiscernible] What's important is that if you look at our strategy on global expansion, it's very much a local feat. It's very much driven by how we're exceptional in the U.K., how are we exceptional in the [indiscernible], Japan, India, Hong Kong, Singapore and Australia. And so we're very much driven by local operations that can sell, support and service and deploy our customers on a local basis.

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

Switching gears, you're actually working to increase total level of market, and I remember in the old days, you talked about, I think it was $9 billion, the same size payroll. As you look at adding things like TripIt and the additional Connect platform, any thoughts on resizing that TAM, even if it's just sort of a high-level view?

S. Singh

I think the way we look at the addition of the TripIt business unit into Concur is that it effectively doubles the market segments that we were targeting. So if you look at overall travel market segments -- for the purposes of our discussion, you can break it out about third [indiscernible], the managed travel, unmanaged travel and leisure. [indiscernible] focused on leisure and our [indiscernible], travel. So for all practical purposes, doubles the addressable market for us. Obviously, it takes some time to reach that scale of a market. And to be fair, we're not even remotely capped out in the market segments that we're in today.

Operator

Our next question comes from the line of Brent Thill with UBS.

Brent Thill - UBS Investment Bank

Frank, on the deferred revenue, sequentially, the last three years, it actually grew sequentially. So was there something that happened one-time this year that was an anomaly?

Frank Pelzer

I'd [indiscernible] back to the earlier [indiscernible] talked about in terms of sunsetting certain products. Legacy products was pulled off the maintenance streams, as you can imagine. Our [indiscernible] cycled back in [indiscernible] had maintenance associated with it. With the sunsetting of those legacy products, those maintenance streams came down. That's a big addition to the deferred revenue, and that's why you see it flat sequentially.

Brent Thill - UBS Investment Bank

And I realize you don't give us contracted, not billed revenue balance, but we would assume that's probably on a much faster rate. And I was wondering if you could give us some high-level markers in terms of how you're feeling about that metric.

Frank Pelzer

We feel quite strong. We don't actually guide to that or talk about it. But I think Steve can talk to you [indiscernible].

S. Singh

Obviously, if you go back the last few quarters, you saw the June and September quarters being our biggest quarters in history on a sequential basis. And then finished December with the strongest Q1 that we've seen. So we're seeing great solid growth in new customer [indiscernible].

Operator

Our next question comes from the line of Greg Dunham from Credit Suisse.

Gregory Dunham - Crédit Suisse AG

Just one on TripIt. Do you envision integrating the TripIt mobile app with your Concur mobile app? And if so, what timeframe do you think that could happen over?

S. Singh

With time, what you're going to see is a very integrated single experience across booking of travel, managing their travel plans down the road. And then obviously, filing the expense report related to that. And so we absolutely intend to integrate across our product line. That will obviously take a bit of time to complete. And we expect to do that over the course of the remainder of this year.

Gregory Dunham - Crédit Suisse AG

Frank, I don't think I heard the tax rate on a non-GAAP basis. I think you got to 35%, but it was a little static-y.

Frank Pelzer

Again, it was 55% on a pro forma tax rate.

Operator

Our next question comes from Ajay Kasargod with Morgan Keegan.

AjayKumar Kasargod

My first question comes down to this. I wanted to touch the platform consolidation just for perspective. What are the dates and the products that are being sunsetted? And what type of customers are being impacted by that?

S. Singh

Ajay, we didn't speak at all to the specifics around the sunset of our legacy products, only that products were sunsetting this quarter. And there's no value in speaking in any further depth around it other than for our competitors.

AjayKumar Kasargod

Second question, quickly, is talking about TripIt, I realize that you've made a comment that the impact on revenue will be very minimal. But to clarify that, did it have any earnings impact? Can you walk me through Q2, Q3, Q4 impact to the model frame?

S. Singh

So on revenues, you're absolutely right. It's insignificant relative to our revenue base this year. The cost related to TripIt are -- I would look at it two-fold. Number one is obviously it's cost structure-related to the TripIt organization. And given that their costs are higher than revenues, it's going to be dilutive to us. On top of that, [indiscernible] that business unit over the course of the year. And then so the net impact if you think about it for the [indiscernible] operating margin in fiscal 2011.

AjayKumar Kasargod

But it will scale to be more profitable as we get through the year, and then the total year impact of 150 basis points to that margin.

S. Singh

That's exactly right.

AjayKumar Kasargod

We haven't talked about overall bookings for a while. I remember Q3 '10, you guys had your best bookings quarter of all time, maybe it was better in Q4, I don't remember. But can you just to us about booking trends?

S. Singh

Q3, when we stated that, [indiscernible]. That's fiscal Q4 just to be clear. And fiscal Q1 -- quarter --

[Audio Gap]

Operator

Our next question comes from the line of Brendon Barnicle with Pacific Crest.

Brendon Barnicle - Pacific Crest Securities

I just wanted to follow up, and I think you had said some of it with response to Ajay's question about just the impact of gross margins as we model them through the remainder of the year.

S. Singh

Yes, so -- [indiscernible] for the quarter of fiscal 2011 is the impact to the operating margin. Keep in mind that the gross margin of our business obviously continues to be very, very compelling. In fact, what you saw in the December quarter is that we outperformed against our revenue growth rate -- [indiscernible] very comparable [indiscernible].

Operator

Our next question comes from the line of Brad Whitt with Gleacher and Company.

Bradley Whitt - Gleacher & Company, Inc.

My question would be that I think you said that the revenue in Q1 was higher than you expected but that the revenue in Q2 was going to be in line with what you expected at the beginning of the year. So I'm just trying to reconcile those two and wondering maybe if you can go back to the comments you made around bookings in Q1 because it seems like that was possibly less than you expected?

S. Singh

[indiscernible] Q1. [indiscernible] on Q2 [indiscernible] We're going to end the call right there. I apologize for any problems we've had on the telephone. Thanks for joining us.

Operator

And this concludes today's conference call. You may now disconnect.

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