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Executives

Frank J. Pelzer - Chief Financial Officer and Principal Accounting Officer

John Torrey - Executive Vice President of Corporate Development

S. Steven Singh - Chairman and Chief Executive Officer

Analysts

Laura Lederman - William Blair & Company L.L.C., Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

Michael Huang - Needham & Company, LLC, Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Brad Reback - Oppenheimer & Co. Inc., Research Division

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Ross MacMillan - Jefferies & Company, Inc., Research Division

Concur Technologies (CNQR) Q4 2011 Earnings Call November 15, 2011 5:00 PM ET

Operator

Good afternoon. My name is Kirsten, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q4 and Fiscal Year 2011 Earnings Release Conference Call. [Operator Instructions] Thank you. At this time, I'd like to turn the call over to our host, Mr. John Torrey, Executive Vice President of Corporate Development. Please go ahead.

John Torrey

Thank you, operator. Good afternoon, and welcome, everyone to the Concur Earnings Conference Call for our Fourth 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 and our webcast, 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 their 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 on www.sec.gov, for additional information 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. Steven Singh

Thank you, John. Good afternoon, everyone. A few minutes ago, we reported outstanding results for Q4 of fiscal 2011, and introduced revenue expectations for fiscal 2012 that are comfortably above even the most optimistic expectations. Frank and I have a lot of detail we want to cover today. We encourage you to take the time to listen to the entire earnings call. And as always, we're happy to address as many questions as we can.

So let's start with Q4 results, the trend lines we're seeing in our business, our view of fiscal 2012, and the current demand environment. Please turn to the next slide. Q4 was an exceptional quarter. We delivered 23% year-over-year revenue growth. This comes on top of a relatively tough comparable as the year-ago quarter grew 20% year-over-year. In fact, as the chart illustrates, revenue growth increased sequentially every quarter in fiscal 2011, from 3.5% in Q1 to 5.5%, to 5.7%, and to 6.4% in Q4. Non-GAAP EPS of $0.37 was exactly at our expectation, and non-GAAP operating margin was 24%, continuing to underscore the earnings potential of our business model. For the quarter, cash flow from operations was $34 million and free cash flow was $27 million, both well above our expectations.

Please turn to the next slide. The trend lines in our business are very encouraging. At the macro level, the economic environment is relatively stable as mature economies continue to grow, albeit at very nominal rates and developing economies continue to slide. Employment is stable at a macro basis, and improving in certain sectors. And as long as there are no massive shifts in the employment levels, in a compressed period of time, the employment environment has a fairly muted impact either to the positive or to the negative on our growth profile. And as you can see, in the global airline revenue and passenger traffic chart, travel continued to recover across developed economies, and continues to grow rapidly in emerging economies.

Please turn to the next slide. That collective macro stability is happening at the same time that we are witnessing the best ever demand environment for our services. As we stated over the last several earnings calls, new customer growth has been robust. In Q4, we saw that trend continue. It was the single largest quarter we have ever recorded in terms of new customer bookings. For the year as a whole, new customer growth, measured in terms of dollar-based booking, was up roughly 35% year-over-year. As we head into fiscal Q1, the demand environment continued to be robust. The bookings growth that we delivered in the previous 3 quarters, and the incremental bookings growth that we expected to deliver this quarter, are expected to deliver revenue growth for fiscal 2012 of 25%.

Please turn to the next Slide. While our long-term shareholders already know this, for the benefit of newer listeners, let me walk you through how bookings translates to revenue in our business model. On a dollar weighted basis, we expect our average deployment cycle to be roughly 6 months. In other words, bookings that occurred in Q1 don't actually contribute to revenue growth until Q4. This is very different from most other cloud computing providers that tend to start recognizing revenue within the same period in which the booking occurs. So as the chart illustrates, the 19% revenue growth we recorded in fiscal 2011, that section in orange, was driven by bookings that occurred from Q2 of fiscal 2010 through Q1 of fiscal 2011. The 25% revenue growth we expect to see in fiscal year 2012, that section in Green, is being driven by a 35% bookings growth we saw from Q2 of fiscal 2011 to Q4 of fiscal 2011, and the new bookings we expect to deliver in Q1 of fiscal 2012, the quarter that we're in right now.

Please turn to the next slide. The reason I wanted to share our bookings growth rate and highlight how bookings translates to revenue on our P&L is to highlight the difference between bookings and billings and the translation of either to revenue on Concur's P&L. For most cloud computing companies, investors and analysts measure the current period revenue growth and change in deferred revenue to compute billings for the period. And for most companies, that might be a good proxy for revenue growth. In the case of salesforce.com, you'd see a graph like the one you see on this slide, where the billings growth rate and revenue growth rate appear to be directly correlated.

As the chart on the left illustrates, in the case of Concur, where revenue recognition on average begins roughly 6 months after the customer signs, after which we start billing on a monthly basis, there is absolutely no correlation between billings growth and revenue growth. For most cloud computing companies, billings translates to revenue growth. For Concur, bookings translates to revenue growth. And given the fundamental difference between billings and bookings in our model, you should never rely upon interpretation of calculated billings to understand the trends in our business. Those interpretations will surely mislead you.

Please turn to the next slide. There are 3 important things to take away from all this data. First, the 25% revenue growth that we expect to deliver in fiscal 2012 is being driven by the roughly 35% bookings growth that we delivered across the previous 3 quarters, and the bookings growth we expect to deliver this quarter. Said another way, our fiscal 2012 revenue expectations have largely been risk adjusted for customer demand trends. And the output of our sales organizations and channels during the course of this fiscal year will largely contribute to revenue growth in fiscal 2013.

Second, for most cloud computing companies, the 25% revenue growth forecast for any given fiscal year are driven and subject to the future achievement of 25% or higher billings growth that must occur within that same fiscal year. And then third, we are delivering, and expect to accelerate top-tier bookings growth for new business on top of what is already the second-highest revenue scale in the SaaS industry.

Please turn to the next slide. Let me give you a little more color around the demand environment. As I mentioned earlier in the call, bookings in fiscal '11 were up roughly 35% year-over-year, and we see a robust demand environment coming into the quarter and expect that to continue throughout the fiscal year. Our direct sales organization continues to grow and increase productivity, and in Q4, we posted our largest quarter in history in terms of dollar based new bookings, comfortably exceeding our internal expectations. A critical driver of the productivity of our direct sales organization is the strength of our partner referral channels. Our partnership with American Express continues to flourish and drive meaningful value for both companies and our mutual customers.

As we come to the end of the third program year of our partnership, we recorded the strongest quarter and expect to record the strongest year of our partnership. And to give you some perspective. In fiscal Q4, bookings generated through the American Express partnership were roughly 50% of the customer bookings we generated during the entire first year of our partnership.

Please turn to the next slide. Our partnership with ADP also continues to flourish. Earlier this year, we transitioned our long-standing reseller relationship to a referral relationship. The impact of that change was immediate and positive. The volume of customers signing up for our services went up substantively. And the reason for that increase in deal volume was simple. Historically, ADP would file a lead to their dedicated expense sales team, and while close rates were always great, the capacity to sign customers was governed by the number of ADP sales people that were dedicated to our expense product.

Over the years, we've built out the largest direct distribution capacity in the corporate Travel & Expense management market. So it became obvious that while ADP's enormous sales force and customer base were the right sources of high volumes of leads, Concur's large dedicated sales force was the right group to turn those leads into customers. Earlier this month, we took another step to improve the performance of the strategic partnership that our 2 companies enjoy and the value that we can deliver to our mutual customers. ADP assigned to Concur all rights and obligations relating to Concur solutions for clients historically resold by ADP. What that means is that we now have direct relationships with the clients that were already using our expense services, opening up significant new opportunities to deliver value to them.

We look forward to working directly with our clients, to continue serving their needs and introducing them to the full range of Concur's market leading innovations, such as our travel services, our mobile services, and itinerary services. We could not be any happier with the strategic partnership we have with ADP, and are committed to driving value for both of our companies and our shared customers.

Please turn to the next slide. I'd also like to highlight a partnership that I think has tremendous potential. A few months ago, we signed a strategic partnership with salesforce.com, through which we will deliver Concur expense on top of the Force.com platform, and we expect to deliver the initial release of Concurforce this month, and expect to continue to innovate on the Force.com platform to drive even greater value for our mutual customers. While we don't expect any revenue contribution from Concurforce in fiscal 2012, we do expect to see some uplift in new bookings over the course of the fiscal year.

Please turn to the next slide. In fiscal 2011, we delivered best-in-class operating margin and top-tier bookings that are expected to drive top-tier revenue growth in fiscal 2012. We finished the fiscal year at $349 million in revenue. We expect to exit our first quarter of fiscal 2012, this quarter, on a nearly $400 million run rate, and expect to exit calendar 2012 on $0.5 billion run rate. Within 4 quarters, we will have improved that run rate by $100 million. In fact, we see a clear path to becoming a $1 billion revenue company in the corporate Travel & Expense management market. That's our ongoing enthusiasm for what we're seeing in our market.

Please turn to the next slide. Given the strength of the demand environment across all geographies and all market sectors, our capacity to execute against that demand, and our desire to drive meaningful and sustainable long-term value, we expect to further ramp investments across the business to meet 3 simple goals. Over the course of the next 24 months, we expect to double the scale of our direct sales organization. We expect to drive the innovation curve in our industry even faster and deeper into the supply chain and we expect to ramp our investments in customer deployment and customer service teams to support the level of growth that we plan to deliver.

In the context of that demand environment and our ability to grow the business at even faster rates, we expect our operating margin in fiscal 2012 to approximate 18% on a non-GAAP basis. We will, as always, continue to invest wisely, and it's conceivable that we may not reach our full year goal of 18% operating margin as fast as we would like. However, we would advise that you model the business in that manner.

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 & Expense management market. Some near term in nature, some medium term, and others long term. As evidenced by our fiscal 2012 revenue expectations, the near-term investments we've been making are delivering compelling value. And we are pleased to see that each of these areas of investment are gaining traction and executing to our expectation. Concur defined, and will continue to define the growth curve in the integrated travel and expense management market. And to that end, we've been executing within the managed travel market for a number of years, and that market segment drives the vast majority of our revenue and our earnings. It's a market segment that we believe is less than 10% penetrated. Within that market opportunity, we are investing to expand our customer base in the market segments we serve, and expanding our geographic footprint to capitalize on large and interesting markets outside of North America. Additionally, we are investing to expand the breadth of our products that we can deliver to our corporate customers and their business travelers as well as driving the innovation curve deeper into the supply chain.

We've also been delivering expense management services into the unmanaged travel market for a number of years. Last year, with the acquisition of TripIt, we put in place the product foundation for integrated Travel & Expense management to serve the unmanaged travel market. Successful execution within this market will double the total addressable market for our services. Within the unmanaged travel market, we are investing to expand our distribution and product footprint, and with time, we will expand the geographic market that we serve. As cloud computing replaces client/server architectures, and as mobile devices bring computing to every corner of the world, the rate of innovation is accelerating. So to serve both of these broader markets, we are creating a high-value ecosystem through the Concur Connect platform, the primary purpose of which is to accelerate the delivery of innovation to travelers and to businesses, whether that innovation is driven by Concur, our customers, our partners, or third-party developers.

Please turn to the next slide. We believe there are a number of ways in which we can add value for our customers, our partners, suppliers, and third-party developers and thus, a number of ways in which we can monetize that value. Since the launch of the Concur Connect platform in February, about 50 of our largest corporate customers have signed up to use the platform, to implement services, ranging from real-time integration into their financial systems, to real-time updates of billable codes used to complete expense reports, the integration of data and Application of Services to comply with the Sunshine Act, fee integration with other cloud services like salesforce.com.

This past quarter, Cvent joined a growing list of third-party application providers that will integrate their services into Concur's Travel & Expense management services. There are a number of natural innovation points between the corporate Travel & Expense management market and the meetings management market, both at the product level and at the supplier level. A number of our corporate clients have asked us to either deliver means management services or partner with leading companies to deliver deeply integrated services.

Through the Concur Connect platform, we are doing just that. We look forward to working with Cvent to make integrated meetings management services available to our clients. Also this past quarter, Avis and TripIt, partnered to link TripIt accounts to Avis accounts. Now when you book a car at Avis, your reservations automatically link to your TripIt itinerary. And if you enable the office feature, look for compelling offers from Avis within your TripIt itinerary. Over the next few quarters, we will continue to expand the breadth and depth of customers, partners, and third-party developers that are using Concur Connect to deliver new services that companies and travelers can take advantage of to make the travel experience better.

By driving the innovation curve, we are delivering unparalleled services and value to our customers. By increasing our distribution capacity, we are rapidly expanding the breadth and number of customers that are turning to Concur for their travel and expense management needs. And by investing with Concur Connect platform, we are enabling value for all members of the ecosystem, our customers, our partners, suppliers, and third-party developers. Collectively, through our investments and successful execution against our goals, we can constructively disrupt and drive efficiency into the entire corporate travel supply chain. And by reinventing the corporate travel supply chain over many years, all, while executing each and every quarter, we are focused on creating higher and higher levels of shareholder value. Our goal is nothing less.

With that, if you would please turn to the next slide, I'd like to turn the call over to Frank who'll provide details on Q4 results, as well as our business outlook. Mr. Pelzer?

Frank J. Pelzer

Thank you, Steve and good afternoon, everyone. I would like to convey 3 key messages from my prepared comments this afternoon. First, our core business drove strong financial and operational results in Q4, ending the year with higher-than-expected revenue and earnings which achieved our expectations. Second, I would like to outline several important aspects of our business that differ from other Software as a Service public companies so that you may more effectively model our business. And third, given the global demand we are experiencing for our services, we will continue to use the business' operating leverage to ramp investments in our growth initiatives to further drive top line growth rates in the coming years.

If you would, please advance to Slide #18 and let's look at Q4 results. Q4 revenue was above our expectations at $95.2 million, growing 23% year-over-year, our highest year-over-year growth rate since the beginning of the recession, and 6% quarter-over-quarter, our highest sequential growth rate in over a year. Q4's revenues outperformance capped a year, in which total revenue grew over 19% to $349.5 million, outpacing FY '10's 18% year-over-year growth. Recognized revenues in the quarter benefited from 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%.

The following comments refer to the next few slides. Unless otherwise stated, please note that all of my comments reference non-GAAP operating metrics. Investment in support of our outlined growth initiatives offset by economies of scale inherent in our business model drove the gross margins to 73% for the quarter. Our stated goal entering the year was to invest heavily in our distribution and product capabilities. In the quarter, we continued this trend. Our sales and marketing expense increased 20% year-over-year, reflecting our ongoing and sizable investment in reaching prospects and customers. Our R&D expense also increased 20% year-over-year, driven by growth in headcount to drive the innovation curve in our industry.

Our G&A expense increased 19% year-over-year, reflecting infrastructure investment to support our global growth. Even with all these investments, the operating margin increased over 400 basis points in the quarter to approximately 24%. The operating margin for the year was an industry-best 21% and consistent with our expectations. Throughout the year we demonstrated the leverage and profitability inherent in our business model. With our higher-than-expected revenue and accelerated investment, Q4 pretax earnings per share met our expectations of $0.37. Pretax earnings per share for fiscal 2011 was $1.20.

Please advance to Slide 21. Cash flow from operations and free cash flow were very strong for the quarter, primarily driven by the continued strong performance of the business. Cash flow from operations for the year totaled $80.3 million, in the middle of our $78 million to $82 million expected range. This total adds approximately $3.4 million of actual cash paid in fiscal 2011 for acquisitions and other related costs to our reported GAAP cash flow from operations. Capital expenditures ended the year at $27.9 million. Free cash flow ended the year at $52.4 million, exceeding the high end of our expectations by $1.4 million.

Our balance sheet continues to be very strong, and provides us tremendous leverage to continue to extend our market leadership position. Cash and short-term investments, net of customer funding liabilities, grew approximately $22.7 million quarter-over-quarter. In the quarter, we repurchased approximately 48,000 shares of our common stock at a cost of approximately $1.8 million. Driven entirely by new customer growth from record bookings, days sales outstanding ended at 65, in the middle of our 60 to 70 day expected range. Based on the overall growth in the business, deferred revenue grew approximately $72 million by quarter end, reflecting approximately 7% sequential growth and 21% growth over the same period of the prior year.

Please advance to Slide 22. Before I discuss the outlook for FY '12, I would like to outline several key differences between our business model and other Software-as-a-Service public companies, so that you may better understand our business. Our core business is driven by our ability to sell, implement, and then bill for our services. Our average implementation timeframe 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. This aspect of our business model affords us strong visibility into the coming quarters and the full year as a whole.

Another important distinction in our business from other SaaS vendors is the way we bill and collect for our services. We typically invoice for our services on a monthly basis and therefore do not collect cash upfront for our transactional services. Many other vendors bill for a year or more worth of services when the contract is signed. Their billings are seen in the deferred revenue lines of the balance sheet and correlate closely with revenues for those services as they are delivered over the passing months. Since we typically bill for only one month a time, one cannot look at the change in deferred revenue as approximation for our billings and expect some correlation of future revenue as highlighted on this Slide. Importantly, bookings are a much better proxy for expected revenue growth. We expect bookings to grow approximately 35% when combining the growth from the last 3 quarters to the incremental bookings we expect to deliver this quarter. We continue to be pleased with the upward trajectory of this metric, driven by our investment in distribution, and innovation, and the overall execution of the business.

Please advance to Slide 23. Now, let's turn the discussion to the coming fiscal year. As Steve mentioned, demand for our services has remained strong. Within a very strong year, we experienced the best Q3 and Q4 bookings quarters in the history of the company. Our sales and marketing engine executed well, as evidenced by a record number of sales people achieving or exceeding their quotas for the year. Given the strong bookings growth we have experienced in the last 3 quarters, and what we anticipate achieving this quarter, we expect total revenue for FY '12 to grow approximately 25% year-over-year. Taking into account that the December quarter is seasonally lower for corporate travel and customer deployments naturally proceed at a slower pace as a result of the holidays, total revenue for the first quarter is expected to grow approximately 23% year-over-year. We expect year-over-year revenue growth to continue to trend up throughout the course of the year.

We believe we have the opportunity to further strengthen our leadership position, especially in new markets throughout EMEA and Asia, and with new service offerings, such as mobility. In FY '12, we plan to increase our rate of investment in global distribution, new geographies, our SMB business, new innovations, our platform and our Government business. As a result, we expect our operating margin for fiscal 2012 to be approximately 18% for the year. We expect Q1 operating margin to be slightly higher than this level, Q2 and Q3 dipping below 18% and exiting the year above 20%. Our revenue and operating margin expectations result in pro forma pretax earnings per share of $1.25 for FY '12. We expect Q1 to contribute $0.29 out of the $1.25. Please note that we are targeting the annual operating margin and pro forma EPS goals, and will be less focused on variations that happen from quarter-to-quarter.

Let me now turn to cash flows. The cash generating dynamics of our business continued to be strong, and cash flow from operations should continue to be linked to non-GAAP earnings. With strong revenue growth offset by a higher rate of investment, we expect cash flow from operations, excluding acquisition as a related cost, to grow modestly year-over-year to between $80 million to $84 million. We are increasing our rate of investment in capital expenditures to support the accelerating global growth we are experiencing. First, we are building out a second global operations center in Manila, the Philippines, to complement our sting operating center in Prague. As with Prague, we expect our personnel in Manila to perform various roles in the business, ranging from customer service, to sales and marketing, to finance. Overtime, this investment will both increase our gross margin and give us access to another incredible market for highly educated and driven personnel.

Second, we will further build out our European data center capabilities to provide our global clients more options for hosting, improve our redundancy and continue our global expansion. Finally, we have several IT initiatives that should drive greater global back end processing efficiencies as we continue to grow the business. Given these initiatives, as well as our normal capital spending levels to support the growth of the business, we expect capital expenditures of approximately $38 million to $42 million for the year. As a result, we expect free cash flow to total between $38 million and $46 million.

Just as a reminder, recall that Q1 cash flows are seasonally low and sometimes even negative, with payments to certain annual commitments. As we mentioned over the last few quarters, the effects of the TripIt acquisition have rendered our effective tax rate meaningless for the next few years. We continue to expect minimal recurring cash payments for income taxes for the foreseeable future as we continue to utilize NOLs to offset the taxable income business. For IBES consensus purposes, consider using 35% federal statutory tax rate, but recognize that this does not reflect the taxes we pay.

Please advance to Slide 24. In closing, the 23% year-over-year revenue growth rate for Q4 was ahead of our expectations, while the $0.37 of pro forma pretax earnings achieved our expectations. We continue to experience strength in new business generation from our core business that will continue to benefit our top line growth in future quarters. Using the strong operating leverage of the core business, we continued, and will continue to invest in our growth initiatives, which are bearing rewards in the form of our expected fiscal 2012 growth rate, and which should bear additional rewards over the medium to long-term.

With 24% pro forma operating margin this quarter and our best-in-class overall operating margin, we continued to demonstrate the inherent operating leverage in the business. We clearly have the ability to ramp operating margins to our steady-state targets, and will do so when the strong growth dynamics of our market matures. We expect FY '12 revenue to grow approximately 25% year-over-year, a 600 basis point rise over the strong growth rate we experienced in FY '11. Given the strong demand we see for our services, we plan on increasing our rate of investment in delivering 18% operating margins for the full fiscal year, resulting in pro forma pretax earnings per share of $1.25.

And finally, we have a strong balance sheet with significant cash reserves. Our general capital strategy continues to be to use our balance sheet wisely to aggressively pursue the growth of our market. Now, I'd like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from the line of Steve Ashley with Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

I guess maybe we could just start with the guidance for 2012. You said that your bookings were up 35%, or that they were for 9 months and that you would assume, if you include the first quarter of this December quarter, and for that period they'd be up 35%. You also talked about them possibly accelerating going forward. Why wouldn't that lead to 35% revenue growth going forward?

S. Steven Singh

Steve, let me try to answer as much of that as I caught, and if I missed something, please let me know. So yes, bookings grew 35% year-over-year for the full year and also frankly, for those 3 quarters plus the quarter we're in right now, is our expectation that it will grow 35% as well. And that, because of the way we typically have an average lag of 6 months to deploy our customers before we start recognizing revenues, because of our deployment model, it doesn't show up as revenue growth for an average of 6 months. So therefore, that 35% bookings growth on top of obviously a fairly substantial revenue base, yields about 25% revenue growth. Now, if bookings grow for even faster than that, then it would imply that revenue growth in that period would be a little bit more. If bookings growth is slightly less than that, it would imply that revenue in that period would be slightly less. But what we see, obviously, is a very, very strong demand environment. We're accelerating our investments because of that exceptionally strong demand environment. And so obviously, our expectation is we should continue to drive accelerating bookings growth.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

And then just maybe a little bit more color, you talked about stepped up investment, and kind of the second bullet point was to drive the innovation curve deeper into the supply chain. Can we get just a little bit more color on what you mean by that?

S. Steven Singh

Absolutely. Obviously, our priority over the last decade has been just build out a fantastic set of services for our corporate customers and our business travelers who use our products. And then, we have also added to that, the capacity to integrate with content, such was there's content that's being consumed or electronic receipts that are being used for the expense report. So we've actually been integrating deeper and deeper into that supply chain. However, we think we can take that even further. So, for example, if you look at the Concur Connect platform, all the investments we're making there, there's a number of different things that we're doing in that initiative that are providing deeper integration into the supply chain. Let me give you one quick simple example. If you look at, for example, Avis, which is a partnership deal we just announced between TripIt and Avis this last quarter, what you saw was that if you link the Avis account and a TripIt account, that every time you book an Avis reservation, it automatically shows up in your TripIt itinerary. The same is true in reverse, so for example, if you book air and hotel, one of the things that Avis will be able to do is look at your itinerary and notice that you don't have a car reservation for that period, and make you an offer to go reserve a car from Avis. So we think that the more we can provide smart integration and content delivery across the supplier chain, the more we can add value for our customers, the more we can add value for suppliers.

Operator

Your next question is from David Hilal with FBR Capital Markets.

Samad Samana

This is Samad here for David. I just wanted to see, could you give us an update on the GSA contract and where that stands?

S. Steven Singh

Sure. Obviously we provided a lot of detail in the last earnings call relative to our initiatives around the federal government contract that we're bidding on. You'll recall also that the primary reason we spoke at such length around that relationship was because the federal government had made that public. At this point, we don't have anything further that we would really add as far as update. We still see an opportunity to see that award being granted sometime between March, and April, May time period. And we obviously believe we're in a very, very strong position to be able to win either a significant part of that business or certainly more than our share of that business. I think the core thing that you should focus on is look, we are progressing as we outlined in the last earnings call as far as timeline. We don't see any real reasons we should be expecting anything different. And we certainly don't look at that piece of business as anything that should add that we currently assume will be additive to our growth rate. So it's not factored into our 2012 growth rate.

Operator

Your next question is from the line of Brad Reback with Oppenheimer.

Brad Reback - Oppenheimer & Co. Inc., Research Division

Steve, you had alluded to, I think, during the script about the change in the relationship with the ADP, we'll call it the ADP Concur customers. I think you're taking responsibility for them going forward. Can you give us a little color on that? Were there any economic terms associated with that?

S. Steven Singh

Yes, honestly, it was a relatively modest terms around that. So it was immaterial to our business. I think really the way to think about the change in that relationship is on a go-forward basis. This is fundamentally about having a more direct relationships with those customers, so that we can actually go deliver great innovations like our travel services, like our itinerary services, our mobile services or for that matter, our extended services. So we have a full range of innovation we can go deliver into that customer base. And this affords us a very efficient way to go do that. And we obviously are very excited about that. And just importantly, in this is that we've got a fantastic ongoing relationship with ADP, that changed from a reseller to a referral relationship that we put in place earlier this year. It's something that was really designed to make sure that there is a greater efficiency between the wonderful leads that ADP is able to deliver to Concur, and our capacity to go post them as fast as possible, and then go drive the deployment of those customers. The other piece I would just add is that leads are going both ways. So we're just as committed to ADP as they are to us, so we're driving leads to ADP as well.

Brad Reback - Oppenheimer & Co. Inc., Research Division

One quick follow-up on that, Steve. Traditionally, you've always talked about your distribution capacity most focused on signing new customers. As we look at the doubling of the sales force over the next 2 years, this changing relationship with ADP customers, is there now an opportunity to focus more on sort of the farming aspect as opposed to just the hunting aspect?

S. Steven Singh

Yes, absolutely. We've obviously been delivering with all of our new customers, trying to deliver as many of our core innovation as is possible right upfront, and more and more of our customers are in fact consuming those innovations in the first relationship with Concur. However, there's obviously a significant opportunity to go sell additional services into the ADP customers that are now having a direct relationship with us. You will see us allocate more of our direct distribution capacity to that. However, having said that, it's such a Greenfield opportunity that we're operating in, the vast majority of our people are still largely focused on new customer additions.

Operator

And your next question is from Laura Lederman with William Blair.

Laura Lederman - William Blair & Company L.L.C., Research Division

Could you talk a little bit about long-term operating margin? And let's say you someday growth closed 10%, just throwing out a number, what do you think your slow growth operating margin number would be? And then I have 2 quick follow-ups.

S. Steven Singh

Sure, Laura. So look, I couldn't agree more. It was a great bookings year, and one that we hope obviously continues going forward, hopefully even accelerates going forward. I think relative to the operating margin question, let's break that down to a couple of different components. First and foremost, we don't see any change to our steady-state target of 30% plus operating margin. There's just no reason that, that operating margin can't be achieved, and frankly even improved upon. It's important to note that, look, we're already in the market across our industry sector. We are already the highest operating margin across the peer group. But if you look at the most recent quarter, we delivered 24% pro forma operating margin. So the idea that operating leverage can be achieved in this business model should be very, very obvious and very, very clear. So then the question becomes when do you want to go achieve that steady-state operating margin target? And our view is look, if revenue growth rates which are driven by bookings growth rates are either slow -- or consistent or slowing, then we should move the operating margin up because that's the right thing to do from a capital investment perspective. However, what we're seeing is the exact opposite, which is the demand environment's accelerating. If the demand environment is accelerating, our view is the best way to add long-term shareholder value, is to go and grow that revenue base as fast as possible. And pulling that all the way back, we're growing, we're delivering effectively best-in-class bookings growth, while delivering best-in-class operating margin, and top-tier, at some point here best-in-class revenue growth as well.

Laura Lederman - William Blair & Company L.L.C., Research Division

Following up and trying to better understand the bookings growth metric you're giving, if you were to grow bookings for the next 4 quarters at 35%, this is theoretical, what would revenue grow in '13?

S. Steven Singh

That's exactly why Frank and I provided that chart. I think it's slide...

Laura Lederman - William Blair & Company L.L.C., Research Division

I don't have the slides. I'm on a phone, traveling phone.

S. Steven Singh

No issue. But if you look at that slide, you can see exactly how bookings translates to revenue. And so it should be fairly straightforward, right? While we continue bookings number in any period, what's more important is not that bookings number, but how it actually translates to revenue. So for example, we if we told you look, 35% bookings growth coming into the fiscal year, and we told you how it translates into revenue for the forward year, then realistically, you've got 9 months of visibility at that point into what the revenue growth rate for the full year is going to be, right? So the only metric you're missing at that point is what is bookings growth in Q1. And so that's clearly hypothetical. Let's say bookings growth was slightly soft in Q1, and we didn't quite achieve that 35%, then the full year revenue growth should be slightly less than the 25% that we just articulated. However, if it's at 35%, then we should deliver 25% growth. If it's above 35%, we should deliver above 25% growth. General rules on this, look, it’s about 5% to 10% -- percentage points higher is required in bookings to deliver a revenue growth of 25%.

Laura Lederman - William Blair & Company L.L.C., Research Division

Okay moving on, why double the sales force now? It seems just a little aggressive. Why not grow it a little slower and not hit margins much? It's sort of a weird theoretical question but just why so aggressively? Unless the competition is trying to catch up with you, you don't try to expand as much and how much of it's due to losing ADP in terms of them actually physically taking the paper and selling?

S. Steven Singh

So I think that the ADP comment, I think you just got that slightly skewed. We'll come back and fix that in just a second. But the reason you want to increase distribution capacity is because it's the demand environment that says you should. So there's enough customers that you're seeing that you can actually educate a bunch of products and then go sign them on as customers, that's what dictates how much you want to invest in distribution. So, for example, in this fiscal year, a much greater percentage of our direct sales force, which by the way is our entire sales force, of our sales force hit quota or exceeded quota and is making their presence felt, too [ph]. What that typically means, is that we have a bigger demand environment than what we're able to serve with the distribution capacity we have today. And so that's why we're looking at how do we go double the sales force over the next 24 months. That doubling is driven by what we're seeing in the demand environment. On the ADP comment, please keep in mind that the relationship we have in ADP is really nothing more than continuing to improve and continuing to get more and more strategic. And so we move from a reseller to referral deal and what ends up happening is that the deal volume that was closing actually increased. And it was for a simple reason. ADP has an incredible sales force and an incredibly large customer base that they're introducing our products to. And we have a much bigger sales force from a point of view that is dedicated to Travel & Expense management. So instead of delivering those leads to their internal expense specific sales people, they deliver it to our sales force. And by doing that, we can increase the throughput of deal closures.

Operator

Your next question comes from Michael Huang with Needham & Company.

Michael Huang - Needham & Company, LLC, Research Division

So a couple of questions for you. First of all -- so I think you mentioned Q4 was the strongest bookings quarter ever. I'm assuming that this is on a dollar basis. Was this the best growth rate quarter of the year as well?

S. Steven Singh

It was each of those, yes.

Michael Huang - Needham & Company, LLC, Research Division

And then I know that you had talked about Concurforce. And I know that's early, but we could see some early wins around this product next year. How does the opportunity around Concurforce compared to Concur Breeze? Are they going after the same market opportunity? Could you talk about which one you think is the bigger contributor next year from a bookings standpoint?

S. Steven Singh

I think that -- first of all, you're talking about 2 different customer segments that Concurforce and Concur Breeze are targeting. I think that the Concurforce will absolutely add 0 revenue to fiscal 2012. I think that it should drive some uplift in bookings. Concur Breeze, is actually on a very nice trajectory and it's got a year's head start on Concurforce. And so I believe that both will do quite well. I think, again, because they serve very different market segments, we're seeing strong demand across each of those. So I think they'll both do quite well. I think simply because Concurforce is targeting a bigger average customer size that you'll see the contribution from Concurforce in 2013 be appreciable.

Michael Huang - Needham & Company, LLC, Research Division

And then last question for you, I think you had talked about 50 large customers on Concur Connect already. Now, are you monetizing any of those connections yet, or are they contributing at all anything to revenue?

S. Steven Singh

Yes, we are starting to monetize them. And what's great about that is our customers are getting real value from those that API and the Concur Connect platform immediately. And so, I mean, these are some of the biggest companies in the world. They're using it for a wide range of services, everything from integration into their financials, to integration to other cloud services, to integration to receipt stores. So there's a number of different ways we're monetizing it. And it's all being driven, of course, simply because it's adding value for those customers. We expect that to continue. On top of that, we're also seeing monetization starting to occur in key third-party relationships. So for example, we just signed a deal with Cvent where they are one of the leaders in the meeting management space, which obviously has a lot of synergies to Travel & Expense reporting market, and not only integrating on a product level. We expect to integrate across the supplier content that we deliver and we should be able to drive value for both our companies in a meaningful way that obviously drives economics for us.

Operator

Your next question is from Ross MacMillan from Jefferies.

Ross MacMillan - Jefferies & Company, Inc., Research Division

Frank, just to get clarity, I thought you said cash flow from operations was $80 million for fiscal '11. We had it at $77 million and the reason I asked is because you had guided to $78 million to $82 million just last quarter. So it implies you actually missed your cash flow guidance for Q4. Could you just give us some clarity there?

Frank J. Pelzer

If you go back to my prepared remarks, you'll see that out of the acquisition and other related cost, which is $4.2 million, we actually paid $3.4 million of that. And as I always discussed, that guidance excluded that amount we spend on acquisition and other related cost. So if you take the $77 million or I think it's $76.9 million, and add the $3.4 million, you'll get to the $80.2 million that I talked about.

Ross MacMillan - Jefferies & Company, Inc., Research Division

My second question was on that 35% bookings growth that you've seen. Do you have a sense for what's organic in that or what's inorganic within that?

S. Steven Singh

That's just the organic growth rate of new customer signings.

Ross MacMillan - Jefferies & Company, Inc., Research Division

And then gross margins for this year, a lot of this investment appears to be around operating expenses. Is there any way we should think about gross margins this coming year flat? Flat to up? Up? Any view on that?

S. Steven Singh

For us, gross margin is just a source of leverage. So right now, our objective is to take any additional leverage we have and go throw it back into business. Having said that, there's no reason to assume that with any reasonable period of time, that gross margins shouldn't continue to generally trend up.

Ross MacMillan - Jefferies & Company, Inc., Research Division

And then really the big question, I guess, is just, Steve, historically this business has driven 25% growth, with operating expenses growth lower than that and we're going to be entering now the third year with fiscal '12 where operating expenses growing faster than revenues and this year obviously it's going to be operating expense growth materially faster than revenues. And I'm stepping back here, I'm just trying to really understand what's changed? What's changed in the business? I hear what you're saying about investments but frankly the outlook here is radically different from what we've seen in history and I'm just trying to understand the real driver of change.

S. Steven Singh

Sure, Ross. The driver of change is very simple. It's just a bigger demand environment. It's flat out bigger demand environment against the bigger market segment, both the managed travel market and the unmanaged travel market. So what you're seeing is not only are bookings growing. They're expected to continue to accelerate on their growth. And if you think about the fact that the bookings continue to accelerate, it just means you've got a revenue growth environment that's improving. And so we're willing to invest against that improving bookings and revenues growth environment.

Operator

Your next question is from Richard Baldry with Wunderlich.

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Can you talk a little bit about your sales productivity sort of ramp that you normally see with new hires? Maybe as a way to gauge how when you double the sales force, how quickly they should impact bookings? And then will you be able to share, sort of along the way, your bookings growth rate, and your ramp?

S. Steven Singh

First of all, Richard, I hope you're doing well. Look, we expect a ramp of sales productivity to continue to be relatively consistent as what we've seen in the past, which is on average. It takes a couple of quarters to bring a new sales rep up to full capacity. And then our deal, average deal sizes -- or not sizes but time to close the deal, ranges really from 3 to 4 months in the low end of the market to about 6 or 7 months in the high end of the market. And then, there's an average of 6 months deployment cycle across all those customers. So you're talking about 18 months in the time a sales rep comes on, to the time we actually start to see revenue contribution from those individual reps. And that's very consistent with what we've seen over the last almost a decade or so. So we don't see any changes there. On the bookings comment, look, as you know, we haven't provided bookings specifics in several years. I think the important thing to keep in mind is that providing that bookings growth number, for example, walking into the fiscal year, you effectively now have the next 9 months of revenue growth visibility. And so let's say that if you want to know how bookings are going, if we come back at the end of January, at our Q1 earnings call and say, hey look, this is truly hypothetical, hey look, revenue growth should be 24%, then bookings in the December quarter are probably less than what we expected. If we come back and say, hey revenue growth should be 25%, then the new bookings will probably be right at what we expected, which is roughly 35% for that period. If we say, for example, there's going to be 26% growth for the year, then bookings growth in the December quarter was actually higher than expected. So you effectively got with our delay, we go from bookings to revenue in our P&L, plus the one data point that says look for the trailing period of time, you have 35% bookings growth, you effectively got one year of visibility.

Operator

Your next question is from Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Frank, I was wondering when you refer to the 35% bookings growth, what exactly is that number? I guess I'm confused as to whether that's an aggregate bookings figure or are you looking at a subsegment which we should think of as new customer bookings, which implicitly would exclude renewals from the install base?

S. Steven Singh

[indiscernible] we never look at renewals. Our retention rates are in the high, high 90s. So it's kind of immaterial to take credit for the fact that our customers stay with our services. So we don't ever look at that. The way that we look at bookings growth is dollar based annual contract value. And that's new customers or existing customers buying new services from us. So it's literally additive to the revenue stream.

Frank J. Pelzer

So, Mark, for example, if we signed a 3-year deal, you wouldn't take 3 years of that, it's just the one-year annual contract value.

Mark R. Murphy - Piper Jaffray Companies, Research Division

So, yes, thank you. I appreciate that Steve. I think that's a part of the confusion that Steve Ashley and myself were wondering about here. I guess looking at it a different way, if you're guiding to about 25% growth next year, implicit in that would be if we looked at your aggregate bookings and included all the renewals for the prior 3 quarters, and the one that you're coming in to, that you think that, that is running around 25%, correct?

S. Steven Singh

I think you're really looking at this the wrong way. This is why I spend so much time trying to walk through billings and bookings. When we say bookings growth, we're talking about new additive revenue to our base of revenue. So whether that's additive revenue from a brand new customer, or an existing customer buying new services, additional services from us, not renewing their existing relationship. So it's literally brand-new revenue that we think we can layer on top of the existing revenue. Having said that, keep in mind that if our average retention rate is 97% or thereabouts, that means we're losing about 3% of that revenue base every year. So you just factor that in. It's a very simple equation. Hopefully that addressed it for you.

Operator

I'm showing there are no further questions at this time. Do you have any closing remarks?

S. Steven Singh

No. We obviously look forward to updating our shareholders on the progress of their business at the next earnings call. And we look forward to talk to you then. Thanks so much.

Operator

Thank you, sir. This does conclude today's conference call. You may now disconnect.

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