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Executives

John Torrey - Executive Vice President of Corporate Development

S. Steven Singh - Chairman and Chief Executive Officer

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

Analysts

Brent Thill - UBS Investment Bank, Research Division

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

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

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

Kash G. Rangan - BofA Merrill Lynch, Research Division

Michael Huang - Needham & Company, LLC, Research Division

David M. Hilal - FBR Capital Markets & Co., Research Division

Concur Technologies (CNQR) Q1 2012 Earnings Call February 1, 2012 5:00 PM ET

Operator

Good afternoon. My name is Tamaria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Concur Technologies Fiscal Year 2012 First Quarter Earnings Release Call. [Operator Instructions] I would now like to turn the conference over to our host, Mr. John Torrey. Sir, you may begin your conference.

John Torrey

Thank you, operator. Good afternoon, and welcome, everyone, to the Concur earnings conference call for our first quarter of fiscal 2012. 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, concur.com, for a webcast of this call. 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. Our call today will end promptly at 2:45 p.m. Pacific Time. [Operator Instructions]

Please now advance to Slide 2. Before we get started, we want to remind you that during the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. These forward-looking statements are based on information available to us as of today's date and are subject to risk and uncertainty. We encourage you to review the details on the Slide 2 and our filings with the Securities and Exchange Commission, which are available at 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. Steven Singh

Thanks, John. Good afternoon, everyone. Our ambition over the next decade is to deliver to every business traveler what we call the perfect business trip. The perfect business trip will be booked on a mobile device by merely voicing your travel needs, whether that's a flight, a train, a hotel, car service, dinner reservation or any activity that's part of a normal business trip. Your itinerary will be automatically managed by TripIt, which would, of course, rebook your flights when canceled or delayed, upgrade your seats where possible, be your concierge for ancillary supplier services along the way, check you into the exact hotel room of your choice as you walk off the jetway, allow you to use your cellphone to open your hotel room door and check you out of your room as you come down the elevator and jump into the cab that was booked and paid for via Taxi Magic. And perhaps, most noticeably or unnoticeably, your expense reports will file themselves, automatically and throughout the business trip.

The perfect business trip is a compelling vision and it's a big opportunity. And we're investing to realize both. With 15 million business travelers, 15,000 corporate customers and the capacity to invest against that vision on a global basis, we are the best company in the world to deliver on that future. We are investing in innovation today to realize every element of the perfect business trip. We are investing in distribution to reach and serve every business traveler across the globe, regardless of the size of the business that they travel for. We are investing in the Concur Connect platform so those business travelers can leverage the power of the Travel & Expense cloud and consume content from all corners of the world and innovative services from the brightest minds in the industry. That's our ambition, and that's what drives us. In each quarter, we move one step closer to realizing that ambition. In fact, we invite you to share your vision of the perfect business trip. Tweet us @theperfecttrip.

Please turn to the next slide. A few minutes ago, we reported significantly better-than-expected results for Q1 of fiscal 2012 and, once again, raised revenue expectations for the fiscal year as a whole. As pleased as we are with Q1 financial results, we are equally pleased with the demand environment, the innovations that we're delivering into the market and our outlook for the remainder of the fiscal year.

Turning to Q1, it was an exceptional quarter against all key metrics. We grew revenue 25% year-over-year and delivered our first $100 million quarter. As you can see from the chart on the bottom, driven by strong bookings in prior periods, we've seen year-over-year revenue growth rates move up nicely over the past several quarters. From 16% in the March 2011 quarter to 19%, to 23% and to 25% in the most recent quarter. The strength of bookings growth in 2011 allowed us to enter calendar 2012 on a $400 million revenue run rate and affords us the expectation that we will exit calendar 2012 on a $500 million revenue run rate. So within 12 months, we expect to grow our run rate by $100 million. Non-GAAP EPS of $0.32 and non-GAAP operating margin of 20% were each ahead of our targets, as revenue growth significantly outpaced our expectations, continuing to underscore the earnings potential of our business model.

Last quarter, we highlighted our plans to significantly ramp investments across the business, with a particular goal of doubling our distribution capacity over the next 2 years. It's important to understand that these investments were never designed, nor needed, to achieve our 2012 growth rates. But rather, they were aimed at the significant market opportunity we see in front of us. That should be more obvious now. As just 90 days into our planned investments, we are delivering accelerating revenue growth rate, on top of what's already the second highest revenue scale in the SaaS industry.

Please turn to the next slide. The biggest driver of our growth rate has been, and for many years to come will continue to be, new bookings and the related deployment of those services. As you recall from our last earnings call, new bookings grew substantively in 2011, and we're pleased to report that we saw solid new bookings in Q1 of fiscal 2012. Collectively, those bookings and the expected deployment of those services affords us greater than 95% visibility into revenue for the full fiscal year.

Looking ahead to the rest of the fiscal year, it's our expectation that the demand environment should remain robust and, with successful execution, serve as the foundation of revenue growth for fiscal 2013. Like any business, there are secondary drivers that can influence our growth rate. But as long as there are no massive shifts in those drivers in a compressed period of time, those influences tend to be rather modest. Those secondary drivers include the employment rate and travel transaction volumes, and we're seeing the trend lines for each of these to be very encouraging.

Employment is stable on a macro basis and improving in certain sectors, and absent massive shifts, the employment environment has a very modest impact on our growth rate, serving as a gentle tailwind in an improving environment or a gentle headwind in a deteriorating environment. In 2008, we predicted that travel spend would likely recover to prerecession levels by the end of 2011. That prediction has borne out in the global travel spend chart. As we look forward, we expect travel spend to grow largely in line with economic growth or corporate profits. Again, absent massive shifts, growth in travel transactions has a modest impact on our growth rate, serving as a gentle tailwind in an improving environment or a gentle headwind in a deteriorating environment. To reiterate, fundamentally, our growth rate is dictated by new bookings and the deployment of our services.

Please turn to the next Slide. Let me give you a little more color around the demand environment and our distribution investments. The investments we're making in distribution, which are under way today, are entirely focused on delivering against growth opportunities for the business in the years ahead, not fiscal 2012. We're adding distribution capacity across all geographies and customer segments, with some emphasis on the SMB segment, Europe and Asia. We expect to be able to double our distribution capacity by the end of fiscal 2013.

A critical driver of the productivity of our direct sales organization is the strength of our partner referral channel. So we're also ramping investments to support our partners. Our partnership with American Express continues to flourish and drive meaningful value for both companies and our mutual customers.

As we enter the fourth year of the partnership, we're confident that the relationship will continue to build upon the success of the first 3 years. In fact, in 2 weeks, American Express will join us on stage at the launch of Concur Travel & Expense to nearly 1,000 prospects in Tokyo. Japan is a new addition to the 8 country markets we launched with American Express over the past 3 years.

Our partnership with ADP also continues to flourish, and we expect that partnership's contribution to grow on a year-over-year basis. We are very pleased with the early progress we've seen in upgrading the transition customers to Concur's T&E cloud. And with the adoption rate of additional services, such as our travel booking service, our itinerary management service and Extended Services. Our plan is to upgrade all the transition customers to Concur's T&E cloud over the next few years. And it's also important to understand that the value and strength of our partnership is bidirectional, as Concur has grown into one of ADP's largest lead generation vehicles, a relationship that we expect to build upon as the scale of our distribution capacity continues to grow.

Please turn to the next slide. As you know, we announced a strategic partnership with salesforce.com in August of 2011. The partnership was designed to deliver Concur's market-leading travel and expense management service on top of the Force.com platform. With a deeply integrated user experience that would leverage the strength of Salesforce's sales and service clouds with the strength of Concur's T&E cloud. In November, we delivered Concurforce, and earlier this month, we launched Concur's mobile application on salesforce.com's AppExchange mobile. Perhaps most importantly, in January, we saw our first customer sign up, deploy and go live on Concurforce. And while we don't expect any material revenue contribution this fiscal year, we are excited about the potential of our partnership to drive meaningful value for both of our companies and for our mutual customers.

Please turn to the next slide. As you know, we continue to invest in innovation, to deliver on the vision of the perfect business trip. In Q1, we launched the first mobile application that allows you to book and complete in-policy air reservations directly from your iPhone, your iPad, Android or BlackBerry device. If you are a Concur customer, we encourage you to download Concur Mobile. It's getting incredible reviews and will likely become your primary interface into all Concur services.

The TripIt user base continues to thrive and now has nearly 4.5 million users. Like Concur Mobile, TripIt gets rave reviews, and we continue to deliver compelling new services, such as the integration of TripIt with Avis, Yammer and salesforce.com's Chatter service, as well as the launch of TripIt for the Kindle Fire.

We continue to build out the Concur Connect platform to both enable innovation and to make that innovation available to all business travelers. To accelerate the delivery of compelling new services, we are funding innovative companies, such as Room77, whose goal it is to allow you to book the specific room that you want at any hotel in the world. We significantly expanded our investment in RideCharge, the makers of Taxi Magic, which allows you to book, track, pay for and automatically file an expense report for ground transportation, such as taxis and sedans. All Concur customers can seamlessly access hotel and air content from India's market-leading OTA, Cleartrip, in which we are the largest shareholder. And last quarter, market-leading companies such as Frommer’s and HP integrated their services into the Concur Connect platform. And of course, Concur and its clients continue to build services such as the Concur's Salesforce connector, which allows existing Concur and salesforce.com customers to link expense reports to opportunities, to paint a fuller of picture of client acquisition costs.

Please turn to the next Slide. Concur has defined and will continue to define the growth curve in the corporate travel and expense management market. Based on the strength of Q1 results and bookings growth that we saw in Q1, we are raising our revenue and earnings expectations for the full fiscal year. And while we are certainly pleased with our quarterly performance and outlook, we are squarely focused on the scale of the opportunity in front of us. Our ambition over the next decade is to deliver the perfect business trip, to serve every business traveler. 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 in the Concur Connect platform, we're enabling value for all members of the ecosystem: our customers, our partners, business travelers, 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 that corporate travel supply chain over many years, all while executing each and every quarter, we're focused on creating higher and higher levels of shareholder value. That's our ambition, and that's what drives us.

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 details on Q1 results, as well as our business outlook. Frank?

Francis J. Pelzer

Thank you, Steve, and good afternoon, everyone. I would like to convey 3 key messages in my prepared comments this afternoon: First, we had a strong quarter in Q1 across all metrics. Customer growth in our core business drove strong financial and operational results, starting the year with higher-than-expected revenue, earnings and cash flow. Second, given the global demand we are experiencing for our services, we will continue to use the business's operating leverage to ramp investments in our growth initiatives that further drive our top line growth rates in the coming years. And third, based on the Q1 outperformance, we are increasing our expectations for revenue growth, pretax EPS and cash flow from operations for fiscal 2012 as a whole. We are reaffirming our expectation regarding capital expenditures for fiscal 2012.

If you would, please advance to Slide #11, and let's look at Q1 results. Q1 revenue was above our expectations at $100.4 million, growing 25% year-over-year, our highest year-over-year growth rate since the beginning of the recession. This quarter marked the first time we surpassed the $100 million mark, and we are well on our way to achieving the $0.5 billion revenue run rate by the last quarter of this calendar year. Recognized revenues in the quarter benefited from excellent traction in new customer deployments and higher-than-expected transaction volume in what is typically a seasonally slow quarter. As a reminder, this growth was largely achieved from the investments in distribution over the past several fiscal years, leading to new business signed 3 quarters ago. Customer retention rates were again strong for the quarter, consistent with our historical averages in the high-90%s.

The following comments refer to the next 2 slides. Unless otherwise stated, please note that all of my comments reference non-GAAP operating metrics. Economies of scale inherent in our business model, offset by investments in the support of delivering our services, resulted in a gross margin of 73% for the quarter. Our sales and marketing expense increased 33% year-over-year, reflecting our ongoing and sizable investment in reaching prospects and customers. We have been investing heavily in our distribution and product capabilities over the past year and continued this trend in Q1. As Steve mentioned, we plan on doubling our sales capacity by the end of fiscal 2013. Our R&D expense also increased 28% year-over-year, driven by growth in headcount to drive the innovation curve in our industry. Given the dynamics of our business model, which I have discussed in depth over the past 3 quarters, we expect investments that we are making now in distribution innovation to benefit our growth in FY '13 and beyond.

Our G&A expense increased 20% year-over-year, reflecting infrastructure investments to support our global growth. Even with all of these investments, the operating margin ended the quarter at approximately 20% above our expectations. Despite the accelerated investments we have been making, the inherent leverage in our model helped push our higher-than-expected revenue down to the bottom line. As a result, Q1 pretax earnings per share exceeded our expectations by approximately 10%, coming in at $0.32.

Please advance to Slide 14. Cash flow from operations and free cash flow were strong in a seasonally weak quarter, driven by the continued strong performance for the business. In Q1, cash flow from operations totaled approximately $7.5 million. This amount adds approximately $1.1 million of actual cash paid for acquisition of the related cost to our reported GAAP cash flow from operations. As a reminder, in Q1, we have large cash payments for annual services, most notably our corporate bonus plan. Capital expenditures in Q1 were $7.6 million. Free cash flow for the quarter was minus $100,000, better than our expectation.

Our balance sheet continues to be very strong and provides us tremendous leverage to continue to expand our market and our leadership position. In the quarter, we repurchased approximately 16,000 shares of our common stock at a cost of approximately $600,000 or an average price of $36.72. 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 to approximately $74 million by quarter end, reflecting approximately 3% sequential growth and 24% growth over the same period of the prior year. As we have mentioned in the past, please note that the change in the deferred revenue is not an accurate measure for our bookings growth since we bill a vast majority of our customers monthly. Over longer cycles, deferred revenue is a solid measure for the overall expansion in the business, so we are pleased with its continued growth.

Please advance to Slide 15. Now, let's turn the discussion to expectations for Q2 and the full year. As Steve mentioned, demand for our services has remained strong. Given the strong customer growth in our core business, we expect total revenue for the second quarter to grow approximately 25% year-over-year. Based entirely on the Q1 outperformance and our revenue expectation for Q2, we are increasing our expectations for the full year and now expect overall revenue to grow 25.5% for the year compared to fiscal 2011.

As mentioned last call, throughout FY '12, we are increasing our rate of investment in global distribution, new geographies, our SMB business, new innovations, Concur Connect and our government business. We believe this action is prudent given the strong demand environment evidenced by our recent operating results. As a result, we are reaffirming our operating margin expectations for fiscal 2012 to be approximately 18% for the year. Exactly as we discussed on our last earnings call, we expect Q2 operating margin to be below this level and to drift back up throughout the balance of the year. Accordingly, we expect Q2 pretax earnings per share to be $0.28. On account of the raised guidance for fiscal 2012 revenue, we are increasing our pretax earnings per share expectations to be $1.27 for fiscal 2012. As we discussed in the beginning of the year, we are targeting both an annual operating margin and pro forma EPS goal and will be less focused on variations that happen from quarter-to-quarter.

Let me turn to cash flows. Cash flows for fiscal 2012 are expected to remain strong. We now expect cash flow from operations, excluding acquisition as a related cost, to be between $81 million and $85 million, up from our previous expectation of $80 million to $84 million for the fiscal year. As mentioned last quarter, we are increasing our rate of investment in capital expenditures to support the accelerating global growth we are experiencing. We are currently expanding offices in Manila, Frankfurt and San Francisco. We anticipate completing work on our European data centers by the end of the fiscal year.

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 level to support the growth in the business, we still expect capital expenditures of approximately $38 million to $42 million for the year. As a result, we expect free cash flow to total between $39 million and $47 million for the fiscal year. As we've mentioned over the last few quarters, the effects of the TripIt acquisition have rendered our effective tax rate unpredictable for the next 18 months. 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 of the business. For IBES consensus purposes, consider using the 35% federal statutory rate, but recognize this does not reflect the taxes we pay.

Please advance to Slide 16. In closing, we achieved several important revenue milestones in Q1. We surpassed the $100 million quarterly run rate for the first time in our history and only the second SaaS company to achieve this level of revenue. Also, we returned to 25% year-over-year growth rate target for the first time since the start of the recession. We continued to experience strength in new business generation from our core business that will continue to benefit our top line growth in future quarters and allows us to increase year-over-year revenue growth expectation to 25.5% for the full year.

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 revenue growth rate and which should bear additional rewards over the medium to the long term. With our 20% pro forma operating margin for this quarter, we continue to demonstrate the inherent operating leverage in the business. We plan on investing the incremental upside in any quarter and on achieving our 18% pro forma operating margin target for fiscal 2012. Even with accelerated investment, we exceeded our pretax EPS by $0.03 or 10%. We expect Q2 pretax EPS to be $0.28 and are increasing our full year target to $1.27. 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] Your first question will come from the line of Brent Thill.

Brent Thill - UBS Investment Bank, Research Division

Steve, you're adding a lot of new solutions to your product set. Can you just remind us how you see monetizing a lot of these new solutions that you're adding on?

S. Steven Singh

Sure, Brent. Obviously, our core service is Concur Travel & Expense. And obviously, the add-on on top of that, as far as the core service, is TripIt. And each of these services actually monetizes differently. So, for example, for Travel & Expense, the transactional fee that we charge for that service. TripIt, of course, is predominantly a free service that you can also upgrade to our pro version and pay an annual end user subscription fee for. You're absolutely right, there are additional services we're delivering. Each of these additional services will actually have different -- depending on what services they are, they will have different monetization components to them. For example, Extended Services, which is something that we introduced last year, about a year ago, in fact, it was actually our most successful new product launch in history. That's actually an uplift to our transactional costs related to CTD. Things like Global Expense, which is a small company we acquired in the U.K., actually adds to those suite of extended services that we deliver and underscores frankly the add-on opportunities that we see in each of our customers. But other services such as, for example, is a company that builds applications delivered on top of the Concur Connect platform. We see opportunities from everything from revenue share to advertising-based revenues. And those will -- we'll detail out as they become much more interesting as far as the component of revenue.

Operator

Your next question will come from the line of Brad Reback.

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

Steve, you talked about getting the opportunity to get into the customers at ADP had sort of had a control over until fairly recently. Can you give us any sense of what your expectations are around the ability to upsell and expand those relationships? So if those customers are spending $1 today, do you think by the time you're done, they'll be spending $1.20 with you?

S. Steven Singh

Yes, absolutely. So, first of all, that's a very substantive opportunity for us over the next few years. It will take us a few years to fully capitalize on the opportunity to go deliver real value to our customers. But I think the way to think about it is that we think we can double to more than double the value and obviously revenue that we get from those customers. But our first order of business is really just to migrate those customers from the legacy Concur Expense platform over to the integrated CTE platform that we deliver across all of our customers. And this is -- I think the important thing here is that this is really all about the unmanaged travel space and the ability to go deliver incredible value to a group of customers that will really be ideal consumers of our unmanaged travel offerings.

Operator

Your next question will come from the line of Laura Lederman.

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

Two quick questions. One, could you talk about any impacts you're seeing at all on travel in Europe given the economic situation? And number two, can you update us on government and where the central contract might stand, so the outlook for when we might see movement on those.

S. Steven Singh

Yes, absolutely, Laura. On travel in Europe, we have data that is really not all that different than what you're seeing at different data points, such as the airline booking transactions within Europe or corporate card transactions within Europe. But what we have is a sense of what customers are booking on any given day. This gives us [ph] 6 weeks visibility into what they're booking. And what we're seeing is actually a pretty robust environment, not only in the U.S., but also frankly in Europe and also in Asia. Granted that it's robust, but keep in mind there is ultimately going to be 6 weeks of outlook into that. I think that this really comes back to think about why our customers buy our products and services. They look to drive efficiencies in the organization, take processes that are largely manual or paper-based processes and go drive them to automation to be much more efficient and lower costs. But having said that, we're definitely seeing pretty robust environment for travel still. And then on EPS, on the government opportunities, here's where we are. We believe the ETS2 award will be granted sometime in the, I'd say, April, May time period. I think that realistically, the way we are we plan for it and the way that I would ask investors to think about it is the following, which is realistically there will be 2 award recipients. We expect it to be Concur and Carlson Wagonlit Travel. We think that even with that award grant, it's important to look at this really as nothing more than, for lack of better way of saying it, a hunting license, which affords us the capacity to go in and deliver our services into each of the agencies. And I think the [ph] think about that sales cycle, even though the fees and contract pricing is already pre-negotiated, I think you ought to think about the average sales cycle as being about 9 months and the average deployment cycle as being about 9 months or so. So before you even see the first dollar of revenue that comes from the government opportunity, you're talking about 2014. Having said that, 2 of the things that are really important to understand. We're actually spending today against that opportunity. And obviously, as I said before, we expect it to be a dual award, but we love our opportunity against that, or we love our chances against that opportunity. We think we've got a very compelling solution that's really driven by its commercial off-the-shelf services that can deliver incredible value to our government agencies. And we think that we'll do quite well against any other award recipient.

Operator

Your next question will come from the line of Steve Ashley.

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

You were kind enough last quarter to tell us that your bookings growth was 35% in the fourth quarter. Wondering if you could give us a little color how bookings growth was relative to that growth rate in the first quarter.

S. Steven Singh

Sure. Steve, obviously, as you well know, and I know you understand this exceptionally well, you know that our -- the bookings numbers that we -- the percentage growth that we talked about, that in combination with our deployment model, effectively gives us about 9 months visibility into the full year. And so expect us to update that bookings growth number on a once-a-year basis. So basically, every -- at each November earnings call expect us to speak to what was the overall bookings growth that we saw in the prior year. Having said that, look, we expected to deliver 25% top line growth this year. We said in just our color commentary that we had a very solid quarter in Q1 relative to new bookings. They were up on a year-over-year basis very nicely. And we obviously took the annual revenue guidance up by half a percentage point to 25.5%. And you know that the bookings in Q1 added to that, our deployment cycle. That's really the driver of Q4 revenue or the incremental revenue stream we have seen in Q4. So we obviously had a strong enough quarter to lift the guidance up a little bit.

Operator

Your next question will come from the line of Kash Rangan.

Kash G. Rangan - BofA Merrill Lynch, Research Division

Steve and -- Steve, maybe the question for you is: At what point do you think that your growth rate can stabilize without margins being taken down proactively? I completely can see the fact that you're investing in sales and marketing to keep the revenue growth rate accelerating. But when do you strike the balance where you can get -- start to get the natural margin lift in the business without having to spend more in sales and marketing? Also, as a derivative to that question, if I could, since you plan to double the distribution, by the end of 2013, what's the right way to think about operating income growth rate or cash flow growth rate? Because at some point, the growth starts to normalize, but it doesn't seem like based on investment profile we’re at the inflection point. I just wanted to get some clarity there. That's it for me.

S. Steven Singh

Thanks, Kash. Let me try to address that series of questions. So first and foremost, you know that we walked into the year with a conservative set of decisions that says, look, we see a lot of opportunity in front of us and we want to get that opportunity to go capitalize on the opportunity, not just in our existing markets, but frankly, in the emerging markets that we're investing in. And the biggest portion of that investment is distribution to go after the customer base opportunity. If you think about what you just saw on the current quarter, obviously, we are ahead of our expectations in revenue and that drove an operating margin that was actually ahead of what we had planned on. In fact, I think we guided to roughly about 18% or so in operating margin for the quarter. We ended up around 20%, and that's really reflective of nothing more than revenue being ahead of expectations. I think at this point, although we can't -- I'm not interested today in providing guidance for the next several years out. Our view is that right now, there's plenty of opportunity to keep growing the business at very, very compelling growth rates. In fact, we think at higher growth rates. And as long as we can continue to improve the growth rates, we're willing to keep the operating margins flat. I think that we, like any other company, will assess that mix of revenue growth rate, the operating margin on a continual basis. So if we find that the market can only sustain a 25% or 24% or 23% growth rate, we have a different posture on what we want to happen with operating margins. In that case, we want to move operating margin up. But for right now, we believe we can continue to deliver 25% or better growth rate for the foreseeable future. And as long as we feel like we can do that, then we we're willing to invest and keep the operating margin where it’s at. Relative to cash flows, I think you ought to think about cash flows -- and Frank can jump in here, wherever you like Frank, but I think you have to think about cash flow as largely in line with the net pro forma operating margin.

Operator

Your next question will come from the line of Michael Huang.

Michael Huang - Needham & Company, LLC, Research Division

Just a quick question for you guys. So in terms of what you're seeing in Japan, I think you had mentioned that you have an event with 1,000 prospects signed up. Just curious, what are the -- what's the cross-section of these prospects maybe from a size or industry standpoint? And if you could just update us on the number of customers that you have signed up already in this region, that would be helpful.

S. Steven Singh

Yes, of course, Mike. First of all, obviously everyone knows, all investors know that we opened Concur Japan or formed Concur Japan about this time last year. Obviously, Japan had a very difficult year last year. And as we've really seen that environment kind of stabilize, we obviously are interested in doubling down on our investments because we actually frankly slowed them after the tsunami and the earthquake last year. So we decided to ramp up our investments again as the environment in Japan settled down. What we're finding is we're getting fantastic support from partners like American Express. In fact, American Express, our original partnership with them focused on 8 core markets. This is an expansion of that relationship to include Japan. Also partners like salesforce.com. As you know, Mark's an investor -- a small investor in the company, in Concur Japan, and he's been tremendously helpful in helping us get connected within the customer and partner opportunities in Japan. I would tell you, when we put together this launch event in Tokyo, we had expected a couple of hundred prospects to register and attend. We expect them to largely be large Japanese nationals. What we're finding, obviously, we're incredibly pleased to have 1,000 prospects that will attend the event. But what we are finding is the interest is across a broad range of companies, not just large Japanese nationals, but also even mid-sized kind of corporations. And so obviously, while we're pleased with the initial interest, we have a lot of execution to do and we’ll execute against. But I would tell you that certainly the right kind of start to this and now, if we can execute against this, we're going to start to see some reasonable revenue coming out of Japan in 2013.

Operator

Your next question will come from the line of David Hilal.

David M. Hilal - FBR Capital Markets & Co., Research Division

Steve, you talked a bit about doubling distribution capacity by the end of next year. How much of that comes from adding direct sales folks versus potentially new partnerships? And then I have a follow-up.

S. Steven Singh

Sure. David, the -- all of that, when we talk about doubling distribution capacity, we're talking about our direct distribution capacity. So all of that is increasing our own headcount. So of course, we're also interested in finding select phenomenal partners that we can go to market with and add value to our customers. So things -- companies like American Express, like ADP and like salesforce.com, we think these are fantastic partnerships. But there are others that we're also interested in securing.

David M. Hilal - FBR Capital Markets & Co., Research Division

And then my follow-up would be as it relates to small business opportunity, in the past, you've talked about needing to scale that profitably, and that's hard to do with that end market with just direct sales reps. And so partnerships always seem to be maybe the best way to ultimately accomplish that. Is that still your thought? And is that still the strategy you’re pursuing with breeze in the small business?

S. Steven Singh

Yes, David. That's a fair observation. Let me just add a little color around that. I think when we say SMBs, obviously, it's a pretty broad categorization of company sizes. And it can be companies that are 100 employees or so to 1,000-person companies. These are SMB companies for us. The very small businesses are smaller than 100 employees. When we're referring to SMBs, we're talking about a segment of customers that we can effectively reach either through a sales or tele-sales model. The partnerships are incredibly important part of that simply because they actually drive awareness and obviously leads related to those opportunities. The thing that I think is really important, if you take a giant step back, it's really important to understand is that in direct model, although that's not the entire focus for us in the SMB segment, a direct model can be made to work in that segment. Look at Paychecks. Paychecks is a phenomenal payroll processing company that -- where the average customer size is 14 people, and this is a company that delivers somewhere in the neighborhood of 30% after-tax margins. So also look at salesforce.com. They've actually -- they were quite effective in delivering their services over the web and through their own sales organization into the SMB market. So we feel like we can do this quite effectively. In fact, we're finding in that segment that we believe those customer relationships can actually be more profitable over time than some of the largest accounts we have.

Operator

And we have reached the end of the allotted time for questions and answers for today. I would now like to turn the call over to Mr. Steve Singh for closing remarks.

S. Steven Singh

Thank you. First of all, I want to thank everyone for joining us today in the earnings call. We obviously look forward to reaching out to all of our investors and analysts over the next day or so, as we try to close the loop with you on any additional questions you may have. Thank you very much for your support in the company. We look forward to updating you on the business after the end of this quarter. Thank you so much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect.

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