Executives
John Torrey - EVP of Corporate
S. Singh - Chairman and Chief Executive Officer
Frank Pelzer - Chief Financial Officer and Principal Accounting Officer
Analysts
Brendan Barnicle - Pacific Crest Securities, Inc.
Laura Lederman - William Blair & Company L.L.C.
David Hilal - FBR Capital Markets & Co.
Richard Baldry - Signal Hill Capital Group LLC
Michael Huang - Needham & Company, LLC
Brent Thill - UBS Investment Bank
Brad Reback - Oppenheimer & Co. Inc.
Steven Ashley - Robert W. Baird & Co. Incorporated
Ross MacMillan - Jefferies & Company, Inc.
Concur Technologies (CNQR) Q2 2011 Earnings Call May 3, 2011 5:00 PM ET
Operator
Good afternoon. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Concur Technologies Fiscal Year 2011 Second Quarter Earnings Release Conference Call. [Operator Instructions] I will now turn the conference over to John Torrey, Executive Vice President of Corporate Development.
John Torrey
Thank you, operator. Good afternoon, and welcome, everyone, to the Concur Earnings Conference Call for our second 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 in the Investor Relations section 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 this 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?
S. Singh
Thank you, John. Good afternoon, everyone. There are four key highlights to take away from our call today. First, we had another strong quarter, as we exceeded our expectations for revenue, earnings, free cash flow and new customer growth. Second, as we look ahead, we see a strong demand environment for our services on a global basis. Third, we made some significant investments in new growth opportunities that both expand our addressable market and that we expect to be additive to our already improving growth rate in the medium and long term. And fourth, as we head into the back half of the fiscal year, we see an improving revenue growth rate environment and remain comfortable with our pro forma operating margin target.
Please turn to the next slide. In Q2, we saw strong operating performance across the business. Revenue grew 16% year-over-year and reached an all-time high at $84.6 million. As is typical, our outperformance was driven in part by faster-than-expected deployment of new customers and in part by stronger-than-expected transactional volume. Strong revenue growth led to non-GAAP EPS for the quarter of $0.25 per share, which was also ahead of our expectations. And driven by stronger earnings and strong cash collections, free cash flow in the quarter was $8.1 million, also ahead of our expectations. New customer growth continued to be very strong across nearly every market segment, with North America, EMEA and the SMB segment showing particularly strong growth. We also saw solid performance in the very small business market served by Breeze as well as Asia-Pacific. And of course, our relationship with American Express continues to grow and serve the needs of both partners.
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 a 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 are 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 focusing on creating a high-value ecosystem through the Concur Connect platform that connects our customers, our partners and suppliers, together in a manner that drives value for all members of the ecosystem. We view our successful execution in these five growth areas as both opportunities for growth and as a continued establishment of a foundation from which Concur and its partners can continue to drive innovation and compelling value for our mutual customers.
Please turn to the next slide. As we have consistently stated over the past few years, we believe the only way to be a truly global company is 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 are investing in and continue to see compelling success in markets such as Australia, Singapore, Hong Kong, France, Scandinavia, the U.K. and Germany as our transaction volume and local customer wins continue to expand. Coming into the year, it was our expectation to establish Concur Japan and Concur India in the first half of fiscal 2011. In January, we signed a definitive agreement to establish Concur Japan in partnership with SunBridge. And our original expectation was to sign our first local customers in Japan in early 2012 and see revenue contributions from those investments in 2013. That is still our expectation.
Having said that, I'm pleased to report we signed our first customer in Japan in the March quarter, but caution that it is important to keep our expectations in perspective as Japan deals with the aftermath caused by the recent earthquake and tsunami. Over the next three years, we will build out our local distribution, development and service capacity in Japan. And as such, Concur Japan will be a significant investment initiative over that time period. But over the next decade, we expect Concur Japan to be a significant portion of our global revenue. Also, last month, we announced the formation of Concur India to serve the needs of an economy that's forecast to become the third-largest economy in the world over the next few decades. As you may know, we already serve multinationals doing business in India with our integrated travel booking, itinerary management and expense management service. As we build out Concur India across the sales, marketing, business development, product development and customer service functions, we will deliver our service to Indian companies that range in size from SMB clients to global multinationals.
I'm also pleased to report that we signed our first 2 clients in India. And while we are pleased with the quick start, it's prudent to expect Concur India to operate at a loss for the next 3 years as we build scale in distribution, development and customer service for the Indian market. Additionally, I'm pleased to report that we signed a strategic partnership and made a $40 million equity investment in Cleartrip, which is India's second-largest and fastest-growing online travel agency, serving every major market segment of that rapidly growing and sizable travel market. Our partnership with Cleartrip affords us the ability to integrate the best online booking tool for the Indian market directly into our suite of services and affords us to access to unique content, catering to the needs of the Indian business travelers.
Please turn to the next slide. As you know, we also acquired TripIt in the March quarter. I am very pleased with the overall performance of the acquisition since we acquired the company a few months ago. In the March quarter, we added more than 500,000 new TripIt users, and today, announced the availability of TripIt for the iPad. While we are still very much in the early stages of building out the TripIt business, I look forward to the contribution that TripIt can make to our overall business over the next few years.
Please turn to the next slide. Our consistent and strong execution as a business affords us the opportunity to invest aggressively in innovation. However, even as we drive the innovation curve in the business travel and expense management market, we recognize that we can't be the sole source of innovation to the marketplace. In fact, and is 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. At our user conference in February, we launched the first phase of the Concur Connect platform. And as a reminder, 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 and services, all integrated into your Concur experience and all available through both traditional desktop and mobile interfaces. In Phase 1, we've enabled the Concur Connect platform for our customers and have already seen customers use Concur Connect to deliver services ranging from realtime integration into their financial systems to realtime updates of billable codes used in completing expense reports to integration with Salesforce.com. And while we see interest from companies of all sizes, some of our early customers include pharma companies such as Bristol-Myers Squibb, technology companies such as Google and consumer product companies such as Kraft. We're excited to see the adoption of the Concur Connect platform within our customer base, and we will expand the availability of the platform to our partners and third-party developers over the course of this year.
Please turn to the next slide. We see significant growth opportunities in the markets we serve today. 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. While we are excited about the multiple growth opportunities we're investing against, we know that those opportunities are only made available through great execution within our core market quarter-after-quarter and year-after-year. As we enter the second half of the fiscal year, we expect that execution to continue as we expect Q3 growth rate to be higher than what we saw in Q2 and Q4 to be higher still. The Q4 growth rate will be the highest growth rate for the company since before the start of the recession even while the company has grown 50% larger. So with that, if you please turn to the next slide, I'd like to turn the call over to Frank who will provide you with details on Q2 results as well as our business outlook. Frank?
Frank Pelzer
Thank you, Steve, and good afternoon, everyone. I would like to convey four key messages in my prepared comments this afternoon. First, Q2 was another quarter of strong financial and operational results, continuing the year with higher-than-expected revenue and earnings. Second, we will continue to use the business' operating leverage to ramp investment in our five growth initiatives to further drive our top line growth rates. Third, we are excited about the strategic initiatives announced over the past few months. We believe the acquisition of TripIt, the formation of Concur Japan and the launch of Concur India, augmented by the strategic investment in Cleartrip, will create businesses that will be strong contributors to our long-term growth. And finally, our strategic activity this quarter impacted several areas of our reported financial statements. I would like to walk you through some of those areas to provide more clarity for comparison purposes.
If you would, please advance to Slide #11 and let's look at Q2 results. Q2 revenue was above our expectations at $84.6 million, growing 16.2% year-over-year and 5.5% quarter-over-quarter, our highest sequential growth rate in the year. We are particularly pleased with the growth rates given that Q2 was the first quarter without revenue from the legacy products that we sunsetted at the end of Q1. 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 historical averages in the high 90%s.
Please advance to the next slide. Unless otherwise stated, please note that all of my comments reference non-GAAP operating metrics. Operating costs in Q2 were in line with our expectations, with gross margins at 72.7%. As we mentioned on our last call, we continue to increase our rate of investment and our core growth initiatives that Steve highlighted. Our sales and marketing expense increased 38% year-over-year, reflecting our investment in distribution. Our R&D spend increased 15% year-over-year, driven by the acquisition of TripIt. Our G&A spend increased 16% year-over-year, reflecting investment to support our global growth. Operating margin for the quarter was 17.9%. With our higher-than-expected revenue and achievement of our margin expectations, Q2 earnings were above our expectations at $0.25 per share compared to our target of $0.24.
Please advance to Slide #13. Cash flow from operations and free cash flow were ahead of our expectations for the quarter. Cash flow from operations totaled $16 million for Q2, down 12% year-over-year from increased investment in global growth. And after capital investments of $7.9 million, free cash flow was $8.1 million for Q2. Our balance sheet continues to be very strong and provides us tremendous leverage to continue to expand our market and our leadership position. Cash and short-term investments, net of customer funding liabilities, decreased approximately $64.7 million, mainly due to the capital investments we made in TripIt and Cleartrip. Cash collections remained strong as days sales outstanding ended at 65 days in the middle of our 60 to 70 day expected range. Based on the overall growth in the business, deferred revenue grew to approximately $65 million by quarter end, reflecting approximately 17.5% growth over the same period of the prior year.
Please advance to Slide #14. Let's now turn the discussion to Q3 and the remainder of the fiscal year. As many of you know, our core business is driven by our ability to sell, implement and then bill for our services. Our average implementation time frame is 6 months. Therefore, several quarters typically pass between the time we contract with customers and when we begin to recognize revenue from their transactions. Due to the record bookings we experienced in Q4 of fiscal 2010, we expect Q3 revenue to grow approximately 18% year-over-year and improve further in fiscal Q4. We are reaffirming our expectations for the full year and still expect the overall revenue growth rate to increase year-over-year compared to fiscal '10. As we stated at the start of fiscal year, we expect to invest any earnings in excess of our annual target against our 5 growth initiatives. As such, we expect non-GAAP pretax net income per share to be $0.29 for Q3. We are reaffirming our expectations that the non-GAAP operating margin will be 21.5% or more for the full year. We are also reaffirming our full year expectations for cash flow from operations, excluding acquisition other related costs to total between $84 million to $87 million and capital expenditures of approximately $25 million to $27 million. We expect free cash flow to total between $57 million, $62 million for the year. As we mentioned last quarter, the effects of the TripIt acquisition has switched our GAAP income to a loss and rendered our effective tax rate incomparable across periods. 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 cash tax payments. For IBES consensus purposes, consider using 35% federal statutory tax rate but recognize this does not reflect the taxes we pay.
Please advance to Slide #15. In the quarter, we made several investments that impacted our financial statements and made comparisons to previous periods challenging. I'd like to spend a few minutes providing more clarity on specific income statement items that can be found in our GAAP to non-GAAP reconciliation. Let me begin with the effects of the TripIt acquisition. As discussed last quarter, we acquired TripIt with a structure that results in a potential contingent cash payout after 30 months, the amount of which, if any, depends on our stock price performance. This deal feature creates a contingent liability on our balance sheet. GAAP requires us to remeasure the fair market value of the liability each quarter and report the change in value on our income statement. For example, in this quarter, the rise in our stock price from the acquisition date to March 31 theoretically lowers the final cash payout creating a gain of $1.3 million. Please note that the ultimate cash payout will be determined by the earlier of our stock price reaching the level where the contingent liability is extinguished or the level of our stock price near the end of the 30-month measurement period. Between now and then, we will continue to measure the change in the liability from quarter-to-quarter and record the gain or loss on our income statement.
Let me point out two other items, each of which is already included within the total TripIt deal consideration, but GAAP requires us to run them through our income statement. The first is recording a portion of the deal consideration as compensation expense as a result of continued employment requirements for certain employees who are former shareholders of TripIt. The second item results from the conversion of TripIt stock option plan to our RSU plan. These expenses totaled approximately $6.2 million for the quarter and are recorded in our non-GAAP statement in our press release. In the quarter, we also made strategic investments in Concur Japan and Cleartrip. Our controlling interest in Concur Japan JV requires us to consolidate the entity's financial statements into our results. 100% of the revenues and expenses run through our operating results. Our partner's non-controlling interest is broken out below the net income line in our income statement. We reconciled their interest in our operating results in our non-GAAP statement in our press release. We also made an investment in Cleartrip that requires us to record a portion of that investment using the equity method of accounting. We recorded this portion of Cleartrip's net income on the other income portion of our income statement and reconcile it out in our non-GAAP pretax income. Finally, we incurred approximately $2.1 million in acquisition and other related costs for the quarter. As a reminder, 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 advance to the last slide. In closing, the 16.2% year-over-year revenue growth rate and the $0.25 of pro forma pretax earnings in Q2 were ahead of our expectations for the quarter. We continue to experience strength in new business generation that will benefit our top line growth rate in future quarters, more than offsetting the loss of revenue from sunsetting legacy products at the end of Q1. We expect the revenue growth rate and earnings to increase in the back half of fiscal '11 due to the strong customer sales we experienced several quarters ago. Using the strong operating leverage of our core business, we continued and will continue to invest in our core growth initiatives, which should bear additional rewards over the medium to long-term. 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
[Operator Instructions] Your first question is from the line of David Hilal with FBR.
David Hilal - FBR Capital Markets & Co.
I guess first, housekeeping. Frank, on the reconciliation, in the past, you would reconcile to a non-GAAP pre- and post-tax number and that $0.25 reconciliation this time looks like it's pretax number because I don't see a pro forma tax number in here. I guess, am I missing something or can you walk me through that?
Frank Pelzer
Sure. You're not missing anything. It's just that, as I mentioned in the prepared remarks, the effective tax rate is going to bounce around considerably, and we felt that it was a less meaningful number for us because of that. And so we're really focused on the pro forma pretax net income number, which is what we've got it to and what we talked about in the past. If we do encourage you to use the 35% tax rate just for modeling purposes, but again, do recognize that, that is not reflective of our cash tax payments.
David Hilal - FBR Capital Markets & Co.
Okay, great. And, Steve, on the guidance, so you're kind of back into kind of what's implied in Q4. I know you said Q4 will be better than Q3 but it's the implication is it's a lot better in terms of year-over-year growth. There's a big kind of step up from Q3 to Q4. And is that based on bookings kind of done in that 6 months implementation or is that assuming end markets get better and business picks up in that quarter?
S. Singh
It's a fair question. And in fact, it does assume that the Q4 growth rate is a fair bit better. In fact, it's north of 20%. It's really driven by the bookings that we had in prior periods. So it doesn't assume that we're looking for a better economic environment or a better bookings performance in the coming quarter. It's obviously driven by prior bookings. I think the other message I was just get -- just wanted to make sure you hear is we literally delivered the best growth rate we've seen since we entered the recession.
David Hilal - FBR Capital Markets & Co.
And then my last question is on TripIt. You mentioned 500,000 users signed up. Can you talk about the split maybe between consumers. I use it, I love it but I use the free version. How many businesses are you signing up to use it and people paying for versus maybe consumers using the free version?
S. Singh
Right. So the 500,000 actually referred to the TripIt free version. And one thing I think is really important to bring out is that, and this holds true in the most recent quarter in the same way that what we saw in the details of the TripIt business before we acquired it, which is the vast majority of TripIt users are in fact business travelers. And that's not any different today. In fact, the number is well, well, well north of 50%. And from a conversion perspective, really we're not seeing any different in conversion than what we saw when we acquired TripIt, which I think that the numbers we shared back then were in the small single digit.
David Hilal - FBR Capital Markets & Co.
Small single-digit conversion ratio?
S. Singh
Yes, just a small conversion, yes.
Operator
Your next question is from the line of Ross MacMillan with Jefferies.
Ross MacMillan - Jefferies & Company, Inc.
I guess, Steve, just when you're thinking about this guidance for Q4 and the acceleration, if I think about going faster just by 10 basis points this year and your current guide would suggest about 21.5% -- a little bit over 21.5% growth rate in Q4. But I'm just curious, if we step back prior to the recession, the business albeit smaller was growing at 25% type growth rates and that's a number, I think, you've always held as a kind of optimal medium-term growth rate. How do you think about that growth rate now as we think forward and do you think the business organically can get back to those sorts of levels of run rate growth?
S. Singh
Yes, we absolutely do. We definitely believe we can get back to 25% organic growth. Obviously, it takes a bit of momentum and investment to get back to that. We're certainly trending in that direction. As you implied -- the Q4 number certainly trends very nicely in that direction. That's not to say we won't do M&A in the future. That will certainly have an impact on the growth rate. But the way we model the business or we plan the business is around organic growth and our ability to go hit that mid-20% growth rate. And that's how we're building out the business, and that's how we expect it to operate over the midterm.
Ross MacMillan - Jefferies & Company, Inc.
And then just -- I had a follow-up on TripIt as well, maybe two questions around it. One is that 500,000 new users albeit free or premium, I believe the base was a couple of million. So is that right that the run rate additions are running at about 100% annualized? And then second, aside from the traditional conversion of some of the free to the pro-paid version, what other things are you doing to maybe stimulate paid users in that business?
S. Singh
Yes, so the first is you're absolutely right. The assumption or the conclusion is about 100% annualized growth in free users, which is obviously fantastic. And I think that's really driven by the fact that this is a -- it's a fantastic business traveler tool. In fact, I often don't comment on these things, but yesterday the TripIt product actually won a Webby. And I think it just speaks to the fact that individuals really like great single-purpose tools that really drive value for them. And I think that's frankly what drives adoption of the product. So we're really pleased with the value it's delivering to the end customer and the fact that end business traveler is actually embracing it. The other thing I think that's important to bring out is we deliver it free, but we also obviously monetize those free users through a couple of different ways, not the least of which is advertising and also through platform fees.
Operator
Your next question is from the line of Steve Ashley with Robert W. Baird.
Steven Ashley - Robert W. Baird & Co. Incorporated
We'll I'm actually going to say on the same line of questioning that David has started, and Ross just talked about a little bit and that's the stepped up growth rate in the fourth quarter. And I think what you've mentioned is that, that really is based on bookings that are already done and in your hand. But really, what has changed to drive the acceleration that you've seen? Has it been just more cross-selling into the installed base, is it new customer growth, is it the International business stepping up? I wonder if you could just give us any color on where the acceleration is coming from.
S. Singh
Sure. Look, I want to be sure that I don't leave you with the impression that our quarter revenues are already done. That's not the impression I'm trying to leave. We still actually have to implement those customers. So we have work to do to go hit our target. Having said that, what's driving that growth is fundamentally customer sales that we saw in Q3, Q4 and early part of Q1 in the prior period, and there was just strong new customer sales. In fact, Q3 was our largest quarter at that point in time, frankly, in history. And then Q4 then replaced that quarter as the largest quarter in history, and Q1 was the largest Q1 we've ever had. So this is all being driven by just organic growth across multiple segments. As I said in the last couple of calls, we're actually seeing pretty consistent growth across all different geographies. Obviously, North America, the Western Europe and the SMB markets tend to be a little bit stronger for us because, frankly, they are markets we've been in longer and that's really our core business.
Steven Ashley - Robert W. Baird & Co. Incorporated
And then Europe, are you seeing any strength? You've mentioned in the past that really the acquisition of Etap got you jump-started in France and things were strong there. Have you seen strength in other markets in Europe as well?
S. Singh
Yes, we're actually -- so absolutely, I'm really happy with the Etap deal. I think it really helped us get a strong foothold in the French market and continue to build really world-class products for that particular market. This goes back to our core premise that the only way to be fantastic on a global basis, you got to be fantastic on a local basis. But we're seeing the same basic opportunities and execution against that opportunity in the Nordics as well as Germany and the U.K. So it's really -- it's largely at this point Western Europe, but we are obviously expanding that to include India and Japan as great -- growth opportunities for us. And then the last thing on Europe I'd just bring out is that the, I guess, about 18 months ago or so, we put together a partnership with Amadeus and that's certainly helping us in Europe.
Frank Pelzer
Steve, if I can give a little -- to give a little meat to the numbers, last year around this time, we did just about 8% of our total revenue in Europe and in this quarter, it's closer to 10%.
Operator
Your next question is from the line of Brad Reback with Oppenheimer.
Brad Reback - Oppenheimer & Co. Inc.
Steve, on sales force headcount or capacity additions, is that running sort of ahead of where revenue growth has been running here recently?
S. Singh
We are certainly investing pretty aggressively in sales. While we don't necessarily break out the number of sales headcount that we have, we just don't see how that's anything but information that helps our competitors. The one thing I will tell you, it's the number one investment priority we have in the business, right. So if you look at the five investment priorities that I outlined, number one with a bullet is increasing our distribution capacity in the core business, in the core markets we serve. And so I would love to see that distribution capacity double over the next 18 to 24 months. So that's where there's a significant amount of investment going. In fact, it's growing faster than the revenue growth rate at this point.
Brad Reback - Oppenheimer & Co. Inc.
Great. And attach rates for some of your newer products, do they continue to accelerate?
S. Singh
Yes. They do. I think that the -- there's a point at which it's not going to increase any further. I mean, our attach rates are incredibly strong at this point. So if you look at Travel & Expense, it's in the 70% range, and it's a very, very high attach rate. Concur Pay is very, very close to 100%. And so I think that we've kind of leveled off on where the attach rates are, and we don't really expect it to move up that much further. I do think that this is really -- the growth going forward is twofold if you look at it only from a product perspective. Number one is higher revenue per customer per transaction, and number two is new customers. I would put it in different order, but those are the two drivers.
Operator
Your next question is from the line of Laura Lederman with William Blair.
Laura Lederman - William Blair & Company L.L.C.
Yes. Thank you for taking my questions. A few -- one, can you talk a little bit about the new business pipeline going forward? Obviously, you had a record Q3 and kind of how Q3 and Q4 pipeline are looking versus the great new customer addition quarters you had last year, and also, maybe just a little bit of qualitative view on the Q2 new business. And I realize it's not typically a huge new business quarter, but just wanted to talk about that from a high level and then...
S. Singh
Laura, you have to understand that we're rather superstitious, and we hate to talk about the out-quarter new customer bookings. Having said that, I'll give you some basic color around it. Q3, our fiscal Q3, which is the quarter we're in right now and our fiscal Q4 tend to be the biggest quarters for us in terms of new customer bookings and it's driven by some very simple parameters. Number one is that June happens to be the end of the fiscal year for one of our partners, and September is the end of our fiscal year. And so sales comp tends to have a real impact on customer growth. December happen to be a very strong quarter for us, and sometimes you'll see December being a little bit stronger than March. Sometimes you see March being a little bit stronger than December, but they're certainly not the two strongest quarters that we have from a new customer book perspective. Overall, we definitely see a very healthy demand environment on a global basis. And I'll just bring out that in Japan and India where we just started doing business, and while I'm not at all looking to set a expectation at this point, I am certainly pleased that in Japan, we signed our first customer. In India, we signed our first two customers. I think it's more indicative of the fact that there's real opportunities in these markets, that there's real opportunity to go drive value for our customers.
Laura Lederman - William Blair & Company L.L.C.
Well, speaking of partnerships, something we haven't talked about in a while but just gets a lot of attention on the calls was American Express relationships. So maybe if you could update us on where that is in terms of the global rollout and different parts of the business, middle market, high end and whatever way you're willing to kind of talk about that [indiscernible] at this point in time?
S. Singh
Well, not a lot of changes. I mean, we just continue to see a solid expansion of that relationship and a solid value driver for both parties on that. We are -- at this point, it's kind of hard to go and see every of those details. We're already globally rolled out in the markets where we do the primary portion of our business, which is basically North America and Western Europe. We obviously hope to continue to expand that relationship into new geographies, and we are already in various stages, frankly, already rolling it into not just with the global accounts but all the way through the SMB accounts. But these things always take time to deliver results, and I'm certainly happy as can be with the partnership. But I think the great thing about it is that this is a partnership that already had value for both our companies for at least a decade.
Laura Lederman - William Blair & Company L.L.C.
Okay. One final question for me. Can you talk a little bit about the M&A appetite? Lately, you've been creating a lot of partnerships, making acquisitions. So kind of your thoughts at a high level on absorbing what you've done versus opportunistically signing new deals and making the acquisitions.
S. Singh
Sure. We -- I realized in the last quarter, we certainly announced a few relationships and/or M&A activities. But as you well understand, we don't do a lot of acquisitions. In fact, including TripIt, we've done five in the last nine years. And so we're very, very selective about the kinds of deals we actually get engaged in. We are really focused on can we in fact integrate those acquisitions and successfully? Can we actually go drive value to, in my mind, the two core leverage points that we have in our business, which is distribution and of course technology? To the extent the answer to those questions is a very, very strong yes, then we look for, frankly, great strategic and cultural fit. And if we find that and we really feel like we can build value, we'll engage in that transaction. We certainly have the capacity to handle the Japan initiative, the India initiative and the TripIt acquisition. That's one of the great things about being a much larger company today than we were even, frankly, two years ago.
Operator
Your next question is from the line of Brent Thill with UBS.
Brent Thill - UBS Investment Bank
Steve, can you just help us understand some of the trends you're seeing in the average transaction size, and when you talked about the volume of customer growth kind of how you're seeing both those trend? I know you won't give out specific metrics, but if there's any color you could add, it would be helpful.
S. Singh
Sure, Brent. And Brent, if you can give me one second, I just want to add one more thing to Laura's question. There's so much around M&A that we take to be second nature at this point, that I forget that, frankly, that there's some really valid undertones to the question that ought to be addressed. That is, look, I accept that a lot of M&A -- you see a lot of struggling with acquisitions in the tech industry in particular. I think that if you look at our business, we're fortunate that if you look at the last 4 deals we've done -- I'm sorry, the first 4 deals we've done, we've had just absolutely home run integration and successes with them. TripIt's too early to tell, but certainly, I'm encouraged with the first quarter. And so we're very, very mindful of the fact that M&As are very hard to do, which is why we're so darn selective about it. So I just want to make sure that you heard that, Laura. Brent, on the average transaction size, what you should hear is that in each segment, it's actually going up a bit and it's reflective of the fact that in each segment, customers are buying more than just one product. So they're buying our core Expense product, but also Travel and Pay and so on. But the other thing to take away from that is that the core price is very, very consistent. In fact, it has been [indiscernible] time. So we are absolutely seeing average transaction pricing in each segment just continue to trend up. But obviously, we're seeing more and more of our customers come from the SMB and the middle market, right. This, as you know, has been a trend that's been underway for at least a decade.
Operator
Your next question is from the line of Brendan Barnicle with Pacific Crest Securities.
Brendan Barnicle - Pacific Crest Securities, Inc.
I apologize if you've already hit this, but we've seen some nice improvement in gross margins. Do you expect that we'll continue to see some improvement as we go through? Should we think about it at sort of these levels for the second half of the year?
S. Singh
Frank and I are going to tag team on this. Look, we obviously are very mindful of the margins in the business, and yes, they have trended up of late. But really right now, the core margin we're focused on is the operating margin. We want to make sure we deliver 21.5%. Frankly, any leverage we get at the gross margin level, our objective is largely to reinvest that back into the business. I guess [indiscernible].
Frank Pelzer
I think, Brendan, I wouldn't expect it to swing much more than 50 basis points plus or minus. But that's the anticipation right now.
Brendan Barnicle - Pacific Crest Securities, Inc.
Okay. Great. And then as you've done partnerships for India and Japan and had success there, is that the way we should think about as you go into some other big and emerging markets?
S. Singh
No, I think you're going to see that it's going to be very specific to that market. Japan is a very Japan-specific approach, which is a partner-warranted approach into that market segment, much like the Salesforce entry into Japan or for that matter, Oracle's entry into Japan a number of decades ago. I think in India, our approach is very much an organic approach, which is really we're building out the entire sales, marketing, business development, customer support, product development, business [ph] service organization that's designed to compete with any local company in India. The one caveat, the other one kind of twist to that is travel booking is an amazingly complex set of services, and it's very, very hyper local, perhaps one way of saying it. And we felt like it's really critical to make sure we had a tool that was optimized for the Indian market, and specifically, for content related to that Indian market. So we wanted to go partner with a company that was fantastic in that space. But I think, really, the partnership will excel in the SMB to as high as the Indian multinationals. But frankly, for multinationals that are actually from outside of India doing business within India, we think Cliqbook would actually still be the primary booking tool. So it will vary from market-to-market.
Operator
Your next question is from the line of Richard Baldry with Signal Hill Capital.
Richard Baldry - Signal Hill Capital Group LLC
While I hate using small samples to answer questions, I'm curious about the first wins in Japan and India, whether they're large enterprise customers that you may have had prior relationships with, sort of the strategy around who you'd go after for your first wins, whether it's kind of midsized to help you build and flush out the systems or whether it might be enterprise to try to go after big wins first for flagship referenceability. Any help there would be helpful.
S. Singh
Sure. So in India, these are local companies. In Japan, it happens to be a local company in Japan that is a multinational, but we also happen to have a relationship with that company outside of Japan as well. And so certainly, any market segment we enter, where we already have an existing relationship with that customer outside of that particular market, we tend to do a fair bit better, where the sales cycles tend to be a little bit faster. But I think your observation to let's not draw too many conclusions from very small sample set is critically important. The other thing I would just say is that, look, I think that we got off to a good start here. But keep in mind, there is no revenue coming from these particular transactions anytime soon.
Richard Baldry - Signal Hill Capital Group LLC
And just a quick housekeeping. I'm not sure if I missed it, if you gave a headcount number exiting the quarter. And then if you could give us just maybe even qualitatively sort of a ballpark on the sunsetted product impact, whether it's a couple hundred thousand, $0.5 million, $1 million just so we can sort of gauge, that would, obviously, offer a better sequential increase even over what you did put up, which was the best in the year.
S. Singh
Yes, I'm not sure we have a lot more to add to the sunsetting of the products kind of color. I think the only thing I would say is that, look, it was a quarter in which we expected the growth rate -- which is the quarter we just finished -- to come down a bit and we actually ended up performing above that not because there was less sunsetting. It was more because, frankly, the growth of new customers is what led to and frankly, transaction volume led to that, okay. The one thing you should know about the sunsetting of those customers is that these are not necessarily customers that are lost. These are just -- they're really customers that we think are opportunities in the future as they look to move on to broad-based services.
Operator
And that question is from Michael Huang with Needham & Company.
Michael Huang - Needham & Company, LLC
Just a quick follow-up on the Japan win. I was curious, was that a salesforce.com customer given the shared JV partner with salesforce? And did you actually believe the low hanging fruit will be customers that have already selected salesforce to come, or do you think there'll be other organizations outside of that? And then I have a follow-up.
S. Singh
A few question, it was not a salesforce.com customer. As I mentioned, it happened to be a customer of ours outside of Japan as well. We do think that there's obviously opportunity to work with partners to target as far as account growth, and salesforce is certainly one of those potential partners, which is why I think that the value of the SunBridge was marked [ph] relationship in Japan. Your follow-up question is what?
Michael Huang - Needham & Company, LLC
Just in terms of if I were to kind of look into your crystal ball around some of these significant growth opportunities, if you were to look at Concur Breeze in Japan and India 3 years out, which one do you think is the biggest contributor to revenue and maybe you could just order for me?
S. Singh
Sure. I think I heard your question, which is basically rank kind of the different growth opportunities. So that's a little tough to do because each of these are actually on a slightly different trajectory and because the market dynamics for each of these is quite different. Japan market dynamics are quite different than India versus Breeze versus TripIt for that matter. And so it's kind of like asking a parent which do kid you like the most. Look, I think these are -- we don't invest in places where we are not compelled by the opportunity for top line growth. And so if we don't see a material opportunity there, we have plenty of great areas to invest in. We just don't invest in areas that can be relatively modest in growth opportunities. I mean, India, you're looking at an economy that's growing at north of 5% a year, and every bank that you talk to will tell you that it's forecasted to grow north of 5% a year for 40 years. That's a fantastic growth environment to be in. Mobile, which is really the biggest single driver of TripIt and, of course, our own mobile offerings is perhaps the single biggest trend outside of cloud computing that's happening in our industry. So it's -- I don't know that it'd be a fair characterization to try to handicap any of these. All I can tell you is if I did, I'd get it wrong. One thing I will tell you is it should be additive to our growth rate.
Michael Huang - Needham & Company, LLC
Okay. Last question, if I may. Just on the TripIt platform, are you comfortable sharing how many third-party partners you have that are now either building a connection to compare [ph] platform or a live dot net [ph] and just thoughts around how you're monetizing [ph] some of these partners?
S. Singh
Sure. So we have hundreds of partners on TripIt. In fact, I think it's well north of 700 partners on TripIt. We obviously launched Concur Connect this most recent quarter, and we have a three-phased launched of Concur Connect. First phase with our customers, second phase with partners, third phase is with third-party developers. And I couldn't be more pleased with the early adoption around the customer. The customers are embracing Concur Connect. In fact, I mentioned a couple on the call in the prepared remarks. I'll just repeat them real quick. We're seeing customers like Bristol-Myers Squibb, like Google, like Kraft and they're obviously very large enterprises. But we're also seeing customers that are much smaller than that, look at the Concur Connect platform for a number of different reasons. And I think it's really fascinating to see what they're doing with this. Some of them are really back-office innovation. So real time integrations to financial systems or HR systems, real time integration from those systems back into Concur Expense. So for example, project codes that are being updated on a real time basis are being sent into Concur Expense so that your expense reports are being tagged with the right project codes, which may be updated on a global basis every evening or every day. The other part which I think is really pretty interesting is we're seeing customers link travel and expenses to sales opportunities. So there's a lot of our customers who are looking to integrate this with the salesforce.com implementations, which -- it's fascinating to see especially how they're doing it in a different UI that they're actually engaging in.
Michael Huang - Needham & Company, LLC
And just kind of around the monetization with some of these customer connections, are you actually directly monetizing that or is that more a driver of customer stand [ph] and retention?
S. Singh
There's going to be mix here. Obviously, we're relatively early into this. I don't want to set a precedent yet on how it's going to be monetized. We certainly see an opportunity to monetize it in a number of different ways, not the least of which is higher transactional fees because we're actually delivering more value. In other cases, it may not be transactional fees. It might be onetime types of benefit. But right now, the primary objective is to make sure that we enable that integration and let's see the kind of value that our customers are driving.
So I want to thank everyone for joining us on the Q2 earnings call. John and I and Frank look forward to speaking with you over the course of the next quarter and then again, of course, to report Q3 results. So thank you very much, everyone.
Operator
Thank you for joining today's conference call. You may now
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