- Overlooked stock
- No change in fundamental picture – revenue story in place
- One of the most forward-looking software companies
- Six areas of potential revenue growth: further penetrating the enterprise market, moving down market, overseas expansion, TripIt functionality, partnerships, and increased transaction levels
- Top-line growth acceleration and margin improvements expected
Concur (CNQR), the leading provider of on-demand corporate expense management software – uniting online corporate travel booking with automated expense reporting -- appears to be an overlooked stock at the moment. For much of the past five years, the company has traded at or near the highest multiples in the software-as-a-service space. While not much has changed from a fundamental picture (the company remains best in class, faces little to no competition, and continues to replace homegrown and/or Excel-based systems), the stock has not seen the appreciation of other well-positioned SaaS names like NetSuite (N), Salesforce.com (CRM), and SuccessFactors (SFSF) despite all four companies growing at roughly the same rate. I believe if the company can reaccelerate its growth above 25%, investors will once again get excited about the company’s strong long-term story and we will see material multiple expansion.
In my view, Concur is one of the most forward-looking software companies. The company moved from an on-premise purely expense reporting application to a fully integrated on-demand corporate expense management software. The current solution unites online corporate travel bookings and expense reporting – the only such offering in the marketplace.
Management estimates that its core market is only 10% penetrated (1 million serviceable firms with more than 75 employees) and that the firm’s total available market is $12 billion. With a current revenue run rate of only $360 million, Concur has significant room to grow. Therefore, the company’s revenue growth story is just getting started, in my view.
Besides further penetrating its core enterprise market, the company has made a number of strategic moves that should benefit results in upcoming years:
1. Moving into the middle market – last year, the company introduced Concur Breeze geared towards SMBs. Although it represents a very modest portion of the overall business today, management believes that the majority of revenue long-term could come from midsize customers.
2. Overseas expansion – The firm’s international revenue comprises only 13% of the company’s total sales. Over the next few years, management plans to expand overseas and increase this percentage to 25%-30%. Longer term, the percentage could move even higher in my view, since most mature software companies generate about 50% of business from international markets. As a significant first step, the company recently launched Concur in Japan and India, the third and fourth largest economies in the world. According to Concur, these locations should start to add material revenue in 2013, however management is often conservative in its estimates (one example being the ramp up of American Express as a partner).
3. Earlier this year, the company acquired TripIt, a provider of mobile trip management solutions. Travelers can now see online or on their smartphone their itineraries, weather, maps, flights, and gate update information, as well as alternative flight advice if there are problems. The offering increased the mobile functionality of Concur’s product. Initial demand has been strong so far. TripIt added more than 500,000 new customers last quarter (resulting in an annualized growth rate of 100%), bringing the total to almost 3 million. Although almost all the new customers are using the free version, Concur is able to monetize the product through advertising revenue. The revenue contribution from TripIt is not expected to be significant until 2013 according to management, who once again is often conservative in its estimates.
4. Recent partnerships with American Express (AXP) and Amadeus should also provide the company with an avenue to revenue growth domestically and overseas.
Besides these opportunities, Concur also is likely to see additional revenue when corporate travel rebounds stronger. The company was materially impacted by the recession and the corresponding reduction in travel volumes. A number of clients asked to be released from their minimum transaction commitments, impacting Concur’s revenue.
While corporate travel spending has grown for six consecutive quarters, we are still not at the dollar spending level witnessed in 2008. Once past that threshold, I expect Concur to witness stronger revenue growth, potentially up to the 30%-plus that the company was growing pre-recession.
As for risks, most concerning is penetration in the company’s core market and whether the firm will be successful moving down market and expanding overseas. However given management’s success navigating the business, I feel comfortable that the firm will be successful in all three areas.
From a financial point of view, Concur is one of the few names that has continued to post solid double-digit revenue growth despite the economy. One reason for the company’s relatively consistent performance is that Concur sells its applications on a subscription basis (cost determined by the level of transactions), providing a steady flow of recurring/predictable revenue that reduces volatility of both revenue and earnings. With customer retention in the high 90s, the company enters any given quarter with 95% revenue visibility.
On the top-line, I am forecasting 24% growth next year (including 1 percentage point from acquisitions) based on better than expected revenue from overseas and from TripIt (where I believe management was conservative) as well a better corporate travel environment, leading to increased transactions and additional revenue for the company. For 2013, my expectation is for 25% growth as the six growth areas all begin to materially push up the revenue figure.
From a margin perspective, the company expects to improve the margin to 30%-plus over time, a reasonable target given the profitability of other software vendors. One thing that will help the firm achieve that goal is the fact that the company’s SMB offerings are more profitable and that the faster growth of those solutions should improve the company’s margin profile. I am assuming this factor will boost margins by 2 percentage points next year and 1 percentage point in fiscal 2013.
As for valuation, the company sells at a discount to similarly well positioned firms. On a EV/sales basis, Concur is trading at a 69% discount to NetSuite, a 50% discount to Salesforce.com, and a 13% discount to SuccessFactors. While I can understand selling at a small discount to Salesforce.com given its market opportunity and its significant growth engines, I believe Concur should be trading in line with both NetSuite and SuccessFactors – firms that are similarly sized, growing close to the same rate, and face more competition than Concur.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.