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Concur Technologies F4Q07 (Qtr End 09/30/07) Earnings Call Transcript

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Concur Technologies, Inc. (CNQR)

F4Q07 (Qtr End 09/30/07) Earnings Call

November 19, 2007 5:00 pm ET

Executives

John Torrey - EVP of Corporate Development

Steve Singh - Chairman and CEO

John Adair - CFO

Analysts

Laura Lederman - William Blair

Thomas Ernst - Deutsche Bank

Jason Maynard - Credit Suisse

Robert Schwartz - Jefferies & Co.

Mark Verbeck - Cantor Fitzgerald

Daniel Cummins - Banc of America Securities

Ajay Kasargod - Piper Jaffray

John Kraft - D. A. Davidson

Robert Breza - RBC Capital Markets

Richard Baldry - Canaccord Adams

Presentation

Operator

Good evening. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Concur Fiscal Year 2007 Fourth Quarter Earnings Release Conference Call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)

At this time, I would like to turn the call over to Mr. John Torrey, Executive Vice President of Corporate Development. Sir, you may begin your conference.

John Torrey

Thank you, operator. Good afternoon and welcome everyone to the Concur Earnings Call for our fourth quarter of fiscal 2007. 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 log on to our website at www.concur.com/investors. 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 John Adair, our Chief Financial Officer. After their prepared statements today, Steve and John 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 two, and our filings with the Securities and Exchange Commission, which are available at www.sec.gov, for additional information on risk factors that could cause actual results to differ materially from our current expectations and the forward-looking statements expressed or implied during this conference call. We assume no duty or obligation to update these forward-looking statements, even though our situation may change in the future.

Please now advance to slide 3. At this time, I'd like to turn the call over to Steve Singh. Steve?

Steve Singh

Thanks, John, and welcome to the Concur team. Good afternoon everyone. We had a great Q4. While there is a lot of ground to cover today, there are five simple messages to take away from this call.

First: we had an incredible quarter and year, meeting or exceeding our recently raised expectations on every core metric. Q4 revenue, reached an all time high at $35.7 million. In fact, our growth rate continued to accelerate as year-over-year growth in Q4 was higher than year-over-year growth in Q3, non-GAAP earnings per share was $0.16, and free cash flow for the year was $20 million.

Second: new customer additions in the quarter was substantially higher than in any previous quarter, as we added more than 525 new customers and saw continued demand across all markets segments and industry verticals.

Third: we are raising our fiscal 2008 guidance across all key metrics. We are raising our revenue expectations to $200 million, our pro forma EPS expectations to $0.70 per share, and free cash flow expectations to $28 million.

Fourth: with the acquisition of Gelco, which closed on the first day of fiscal 2008, we strengthened our leadership position in the travel and expense management market and we're building the scale needed to capitalize on a market opportunity that's comparable in size to the $12 billion payroll processing market.

And fifth: Concur Travel and Expense with Smart Expense went live in October.

Please proceed to slide number 4. So with that as a backdrop, let me share with you, how we are redefining the travel and expense management market. Last year, we painted a vision of a unified travel and expense management platform; one that could dramatically improve the end-user experience, while driving down the cost of doing business for our customers and their suppliers.

Over the past few quarters, we've unveiled numerous innovations against that vision. These innovations are fundamentally changing the competitive landscape, while driving tangible and immediate value for our customers.

Last month, we made One Touch Business Travel, a reality with the launch of Concur Travel and Expense with Smart Expense. This is an industry first innovation, and it completely changes the notion of the traditional expense report.

With Smart Expense, Concur enables business travelers to book their trip and then enjoy virtually automatic processing of their expense report. The click that books the trip becomes the click that files the expense report.

Now the three trusted sources of expense information. Itinerary data that's captured at the time of booking, corporate card charges incurred while you travel, and electronic receipts captured directly from the supplier, can all be easily reconciled within one seamless travel and expense process.

Concur Travel and Expense, uses these three sources of data to create Smart Expenses. Creating trusted fully reconciled transactions that automatically complete the expense report. With Smart Expenses, expense reports can be automatically completed, audited and paid, all within corporate policy with very little need for human intervention.

Please proceed to slide number 5. Customers should be able to access that service in an on-demand model, at a value equation that is the best in the industry. We should be able to eliminate as much of the administrative elements of business travel as is possible; things such as filling out expense reports, paying your employees and your credit card providers.

Later in the fiscal 2008, we will drive on-demand analytics to the next level. As an example it should be point and click simple to compare contract spend to actual spend, to compare your spend to that of a peer group.

We will also push analytics to become predictive and integrate it into the corporate travel booking process; allowing our customers to monitor and take action against the prior contracts on a real time basis, to increase program adoption and to target spend reduction.

Also in the early part of fiscal 2008, ahead of our original expectations we will complete the integration of Gelco's payment processing services into Concur travel and expense, allowing us to pay employees and credit card providers on behalf of our customers. Further reducing the cost of doing business for our customers, it is nothing short of one touch business travel.

Please proceed to slide number 6. The foundation of Concur travel and expense is the spend management technology platform that it is built on. It is a multi-tenant, open architecture platform that seamlessly integrates supplier content to Concur Connect and seamlessly integrates into the ERP, HRMS, payroll and payment systems of our thousands of corporate customers.

Based upon open standards, Concur Connect is a set of web services, delivering content from over a 100,000 suppliers, including GDSs, direct connections with airlines, hotels, rail, car rental providers, limos, parking and even restaurants. This platform gives clients access to services and content that are otherwise unavailable to traditional managed travel programs.

Please proceed to slide number 7. But unlike other content aggregators, we don't stop at reservations. Concur Connect gathers electronic invoices and through Smart Expense delivers live electronic data that can be used to generate expense reports.

We've established eReceipt relationships with numerous suppliers including Avis Budget, Hertz, InterContinental, Crowne Plaza, Hotel Indigo, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites, Hilton, Conrad Hotels and Resorts, DoubleTree, Embassy Suites, Hampton Inn, Hilton Garden Inn, Homewood Suites, Waldorf Astoria, VIA Rail, Evolvi, Rail1, Die Bahn, SNCF, and OpenTable.

They expect us to continue to aggressively expand Concur Connect to connect suppliers from around the world to the over $35 billion of travel spend driven by Concur's 6,200 clients.

So what's the net result of all this? With best-in-class travel & expense services, an open platform, an integrated predictive analytics, we are driving transparency into the corporate travel supply chain and we are putting control back in the hands of corporate customers. Concur and its customers are forcing the travel supply chain to become more efficient and to start working on behalf of the customer.

Please proceed to slide number 8. You can see the power of this service and the transparency that it drives by the fact that customers are embracing the vision. In the September quarter, we signed more than 525 new customers and saw solid demand in all market sectors, whether that's measured by company size, geographic region or vertical industry segment.

More than 30% of our new customers signed up for the integrated Travel and Expense service and several customers signed up for integrated Travel, Expense and Vendor Payment.

One of the largest new customer additions in the quarter was the global contract with Merrill Lynch for Concur's Travel Expense and Vendor Payment services. Last week, we had an opportunity to spend time with nearly 1,000 Concur customers at the Concur International User Conference. Customers see the clear value of integrating the travel and expense proceeds and of using technology to drive the efficiency in the corporate travel supply chain.

Looking ahead, we see continued demand for our services as customers look to drive down operating cost and focus more of their corporate resources on acquiring and serving their customers.

Please proceed to slide number 9. As you know, we closed the acquisition of Gelco on the first day of fiscal 2008. 45 days into the integration of Gelco, we are very pleased with the progress.

One of the biggest processes in the acquisition was the ability to add over 200 incredible individuals to our team. These individuals share a passion for our business, our deep sense of personal and corporate integrity and our commitment to great execution. We significantly expanded our headcount in research and development and are on track to integrate Gelco payment services into the Concur Travel and Expense platform by the middle of fiscal 2008.

We have significantly expanded our sales and marketing organization, expanding our investments in marketing programs and growing our quarter carrying headcount to 110 sales executives. We will continue to invest in distribution and in supporting marketing programs as we’ve realized additional operating leverage that comes from the increasing scale of our business.

Last month, we had the opportunity to meet with our new customers at the Gelco User Conference. We have reaffirmed our long-term commitment to supporting our customers and shared our vision for where the corporate travel industry is headed. There was a strong alignment in our viewpoints and customers embraced our vision for integrated travel and expense.

Please proceed to slide number 10. As evidenced by our quarterly results, for the past several years, we are executing exceptionally well. Based on the strength of Q4 results, the demand environment we see for our services and the progress we've made in integrating Gelco into Concur, we are raising our revenue, earnings and cash flow expectations for fiscal 2008.

We are driving innovation in our market, and we are forcing the market to become more efficient by driving down the cost of doing business for our customers and their suppliers. Great execution and compelling innovation are the fundamentals of long-term success.

As I have said before, we are operating in a big market and we have the opportunity to build a global brand. While there is tremendous opportunity in front of us, we will also face strong competition. As we look five years down the road, it is clear that we need to drive scale.

We need to increase our investments in distribution. We need to innovate at a faster pace, and we need to continually raise the bar for customer service. In partnership with our customers, each stage of innovation that we are driving sets the standard for what it takes to compete in this market.

Over the past several years, we have consistently grown revenue. We have consistently grown earnings and we have consistently exceeded our customers' expectations. Looking ahead, we expect to do more of the same.

With that, let me turn the call over to John to provide color on Q4 results, and detail our business outlook, as well as, provide some closing remarks. John?

John Adair

Thank you, Steve, and good afternoon, everyone. If you would please advance to slide number 11.

As Steve mentioned, Q4 finished very strong and the business met or exceeded every updated expectation we provided in early September. We are very pleased with the continued strong operating performance of the business and remain focused on the long-term opportunity.

In my prepared remarks today, I'd like to address three topics. First, I'd like to provide you with some more color on Q4 results. Second, the improvement in our effective tax rate, and third, we are raising our expectations for fiscal 2008.

If you would please, advance to slide number twelve. Total revenue for the quarter of $35.7 million was up 30% over the same quarter of last year, driven by 37% growth in subscription revenue.

New customer deployments during the quarter were strong, and even considering seasonally lower corporate travel in the September quarter, we grew subscription revenue 7% sequentially over Q3. By comparison, this was higher as well than a sequential growth of 6% for the same quarter of last year.

In addition, new customer acquisitions during the quarter, which drive growth in the future revenues, continued to accelerate resulting in a strongest growth in new customer signed in company history.

Please advance to the next slide. Our pro forma operating margin for the quarter of 18% was on the high side of expectations, driven principally by stronger revenue growth. As a result, pro forma earnings were above our expectations going to $0.16 per share compared to our updated target of $0.15 per share and growing $0.4 per share over the same period of last year.

Let's advance to slide 14. Cash flow from operations was in line with our expectations at $7 million or $0.17 per share compared to $0.06 per share for the same quarter of last year. And after capital investments of $2.8 million, free cash flow was $4.2 million or $0.10 per share compared to $0.01 per share for the same quarter of last year. These improved results were driven by our out performance in earnings and balanced working capital growth, and allowed us to make another advanced debt payment totaling $6 million at the beginning of July.

As we've discussed before, while there will be fluctuations in quarterly working capital to the impact of growth in the normal timing of collections and payments. We expect to maintain a reasonable balance between the growth and liquid assets and near term obligations over any 12-month period, such that we are able to fund the organic growth of the business through cash generated by the business.

In addition to cash flow generated by the business during the quarter, we also completed a secondary equity offering related to our acquisition of Gelco. Effective September 24th, the company issued 5.4 million shares at $28.50 per share generating approximately $145 million in net proceeds. These proceeds were utilized on October 1, for the acquisition of Gelco.

Please advance to the next slide. For the year as a whole, total revenue grew by 33% to $129 million, driven by an increase in subscription revenue of 44%. Our operating margin expansion clearly surpassed our expectations at the beginning of the year rising to 17% for the year as a whole, or an increase of over 200 basis points compared to 15% for the prior fiscal year.

And both revenue growth and margin expansion drove pro forma EPS to $0.54 for the year compared to $0.36 in fiscal '06 and free cash flow to $20 million for the year compared to $1 million in fiscal '06. All-in-all fiscal 2007 was another watershed year for the company.

Please advance to slide 16. Turning to taxes for a moment, you will note that we saw a significant improvement in our effective tax rate in Q4, which bought the rate down to just over 39% for the year end total. This change was primarily driven by an improvement in the book tax treatment of our foreign operations. You will recall that our foreign operations have historically generated tax losses as we have expanded into new markets.

However our international operations are now beginning to generate profits, which has resulted in a more normalized book tax rate. On a go-forward basis, we expect our book effective tax rate to range between 39% and 44%. And please remember that for cash flow purposes we expect to pay relatively little in actual cash taxes, as we will continue to utilize our net operating loss carry forwards of approximately $250 million to reduce actual taxes paid. Our actual cash tax rate for the next number of years is expected to be in the low to mid single-digits.

Please advance to slide 17. Turning now to our expectations for fiscal 2008, we are very pleased to be able to close the acquisition of Gelco on October 1, nearly three months ahead of our initial expectations when we announced the transaction in July. We made tremendous progress on the integration of the two companies and are optimistic that the integration of Gelco will be as effective and efficient as was Outtask in fiscal 2006.

Taking into consideration the strength of new customer signings this last year and including revenue from Gelco, we expect total revenue in fiscal 2008 to grow 55% year-over-year. Our operating margin is expected to continue to improve this year by 100 basis points and pro forma earnings are expected to grow by 30%, driving continued improvements in cash flow from operations and free cash flow.

Please advance to the next slide. Looking more specifically at revenue we are raising our expectation for total revenue to $46 million for the first quarter. In addition based on strong new customer growth in the quarter just completed, we are raising our expectations for total revenue in fiscal 2008 to $200 million.

With customer lives now exceeding five years, the value of every customer relationship continues to grow providing greater long-term revenue visibility and operating leverage. Additionally, our customer base is very diversified, both in terms of size and industry. We continue to see strong activity across all customer segments and because we help customers reduce operating costs, we have the opportunity to see growth even in segments that are under economic pressure.

Please advance to slide 19. With our strong market leadership position and now the acquisition of Gelco, we have a unique opportunity to drive greater innovation and value to a large and growing set of customers. Consistent with our comments from the past three years, we'll continue to responsively invest in distribution, new services, service quality and now the integration of Gelco.

With the continued strengthening of our operating margins, we are raising our expectation for pro forma earnings for Q1 from $0.11 to now $0.13 per share and we are raising our expectations for total earnings for fiscal 2008 from $0.68 to $0.70 per share. We reiterate our expectation of pro forma operating margin for the year as a whole to increase approximately 100 basis points to 18%.

Please advance to the next slide. Based on expected growth in revenues and operating margins, we expect cash flow for the year to continue to grow as well. Although cash flows in Q1 will likely be negative as a result of the payment of merger-related costs and incentive compensation. We are raising our expectation of cash flow from operations for fiscal 2008 to $42 million or $0.88 per share, compared to $32 million for fiscal 2007. And we are raising our expectations for free cash flow to total $28 million or $0.58 per share for fiscal '08, compared to $20 million this last year.

It's also important to remember that our cash flow is generated from the monthly fees paid by our customers. Our billing model is very different from companies that bill and collect the contract value upfront. We bill and collect from customers on a monthly basis. At the same time our customers generate costs savings and value from our services. As such our cash flow is closely aligned with the growth and predictable monthly recurring revenues and the profit we generate from them.

Now, turn to slide 21. In closing, this last quarter was exceptional for the business and for our customers. We continue to execute well against our long-term business plan as well as our near-term objectives, resulting in another quarter of record financial performance. As a result, we have raised our fiscal 2008 expectations for revenue, earnings and cash flow.

Operator, we would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions)

Your first question comes from Laura Lederman from William Blair.

Laura Lederman - William Blair & Company

Not much, just a few quick questions. While on the Merrill Lynch deal, can you talk a little bit about what you were replacing and competitively, were you competing against several products? You obviously have a broader suite than other companies do and can you also talk about sales reps and what type of head is Concur expecting to have this coming year and then I will circle back?

Steve Singh

Sure, Laura. So first, at Merrill Lynch, obviously it's a global victory for us. It is replacing the existing travel booking tool that's in place at Merrill Lynch. It is replacing the existing expense management tool that was in place at Merrill Lynch, and then adding in vendor payments, which is a new business process at Merrill Lynch's [armory].

One of the important things to note in this is that when we go in to sell corporate travel, booking, expense management and also vendor payment, it's often sold into the exact same department, often in fact exact same team that are made to travel or expensed in our process.

So there are a lot of synergies in the sales process, a lot of synergies for the customer in a deployment process, and of course the ROI that's generated from it. So specifically, we did in fact replace existing players on the booking side and existing player on the expense management side, and then replacing paper on the vendor payment side.

The folks we're facing on the booking and expense side are point players that have been incumbent at Merrill for a number of years. The main reason why Merrill chose to go down this path is frankly they are looking for the integration of these business processes that drive frankly greater saving and frankly a much more robust global deployment than they were able to achieve with the existing players.

On the sales side, we walked into fiscal 2008 with a 110 sales executive, 80 of which came from Concur prior to the acquisition of Gelco and about 30 in ballpark numbers that came over with the Gelco team.

You should expect us to continue to add to our distribution capacity. As operating leverage continues to grow in the business, our objective is to deliver 100 basis points improvement in pro forma operating margin over the course of the year and try to re-invest as much as possible back into the business with any leverage above and beyond that.

Laura Lederman - William Blair

And just real quickly on the Merrill Lynch deal and the vendor payment, any sense on what type of volume are you're going to get for that? And separately, you mentioned that there were several new vendor payment customers. Can you talk a little bit about that?

Steve Singh

Well, we don’t ever give the specific dollar value of a contract. Obviously, Merrill Lynch is a large customer for us. And the interesting thing slightly about Merrill is that I think there is a lot of concern a lot in financial services sector.

And what happens as that sector just goes under a little bit pressure right now with this economy and with the sub-prime issues, WHAT we are seeing frankly is, not just in the financial services sector but slightly across the board, customers are focused on cost controls. And to the extent they can drive value by automating business processes that are expensive, we benefit from that. So that’s an absolute benefit to us in this type of economy.

And to curb vendor payments, in general, you should expect a volume of transactions. Of course, you know the word transaction-based IT model. The volume transaction has Concur Vendor Payment tends to be greater than anywhere from 1 to 3x greater than the volume of expected (inaudible).

Laura Lederman - William Blair

Thank you so much. I’ll pass it on.

Steve Singh

Yes.

Operator

Your next question comes from Thomas Ernst from Deutsche Bank.

Thomas Ernst - Deutsche Bank

Well, thank you for taking my question.

Steve Singh

Tom?

Thomas Ernst - Deutsche Bank

Following up on the question on Merrill Lynch, it’s curious with the big deal at Merrill Lynch, and you mentioned another one in the press release with RBC. I know there has been some discussion on the street on this. What is your financial services exposure and do you see any sluggishness there in that vertical for you?

Steve Singh

Well, Tom, we really have no industry segment, no customer segment or geographic segment that is any substantial piece of the business, so more than 5% of the business. So we really have very limited exposure to things such as what you are seeing right now in the financial serves sector.

In fact, I don’t want to be overly positive, but in general, we tend to do better in a tougher economy, simply because most organizations look for where are the cost controls I can put in place and get quick victories on. And so, automation of travel booking, automation of expense reporting, automation of pay for parking-like vendor payment. So, we've been through the cycle in the past, right? Obviously, in the last seven years, we've gone through ups and downs in the economy, and as we go through that, we tend to do better in tougher economies.

Thomas Ernst - Deutsche Bank

Okay, great. And with the raise in guidance, obviously you are coming off of what's a very strong quarter. First, just a point of clarification, Gelco closed after the quarter. So, all those 525 new customers were all organic. But then also the second part of the question, what have you gotten to see now that you have Gelco behind the wall and you can take a closer look? Do you still feel confident in the customer base that you have there? Are there any disappointments or any upsides that you saw after you bought them over?

Steve Singh

Sure. So, first of all, your first point is 100% accurate. The 525-plus customers that we signed are all Concur organic growth customers. The Gelco acquisition closed on October 1st, so any impact from that transaction won't show up until fiscal Q1 the quarter we're in right now.

Second is, frankly, we're very pleased with the integration of Gelco. It's a great team to people, great customer base. In fact, we had a chance to spend time with Gelco's customers in mid-October at the Gelco Perspectives User Conference. Really saw -- you walk in any of these conferences whenever you buy a company, you want to walk into the conference with obviously open mind and find out how exactly how your customers, new customers are going to receive you.

And what we found was these customers look better, but it's great deal for Gelco. It's an opportunity to improve the investments in the business to support around the Gelco services, the innovation around the products that the customers are using. We saw tremendous support around integrated Travel and Expense.

It was just an absolutely -- just a clear communality between the customers perspectives and where this industry is heading, and where our perspective and where this industry is heading.

The other part is if you look at the integration of core Gelco services into a Concur platform, when we did the deal, we thought it would take about a year before you saw a Gelco's payment services integrated into the Concur Travel and Expense platform. We now think that will be done within the first six months of the fiscal year.

So, we are ahead of schedule on that. We are ahead of schedule on integration of our sales force, integration of the support organization, in fact, the integration across the entire organizations of both businesses.

Thomas Ernst - Deutsche Bank

Great. Thank you, again.

Steve Singh

Thank you.

Operator

Your next question comes from Jason Maynard from Credit Suisse.

Jason Maynard - Credit Suisse

Hi, guys. Actually, I want to follow up just kind of thread around that you could do better in a tougher economy. I think the number you sort of quite confirmed was that 30% of the 525 customers chose both the Travel and Expense and the Smart Expense. Are you seeing, because of maybe the worry about recession and controlling cost, more customers are saying, let's go with the integrated solution here to get a handle on, really all the maverick spend?

Steve Singh

Yes, Jason, that's exactly right. Well, I want to expand it though. The core point that you just brought up is right in the money, which is that customers are saying, let's automate both, get a handle on the entire process, not just what you buy and not just what the processing cost savings can be, but how those two costs come down in an innovative process.

More broadly though, if you think about the vast majority of the operations out there, they fundamentally used paper-based processes or manual, human-based processes to book travel or file expense report. And so, we are seeing the vast majority of our growth is coming from customers who had not automated these processes in the past.

Now, in the case of Merrill Lynch, of course, they feel they're different, because they had automated those two processes, but didn't get the level of ROIs they were expecting from those vendors. And so there was an opportunity to go drive real ROIs with an established provider to Concur. But at the end of the day its all about taking paper based processes and going to drive real automation and driving real ROIs.

And so that's what we are seeing driving the interest, the 30% of the customers in the quarter that sign up for integrated travel and expense. I think the only thing that's important to keep in mind is that before we actually even launch integrated travel and expense, with Smart Expenses launch in mid-October.

Jason Maynard - Credit Suisse

That's fair. Well, let me ask you this question. When you are involved in the sales cycle and you are talking about the ability to generate the ROI. What are the typical payback periods that customers see? How quickly can they get a return and maybe what's the requirement, given a potentially, tougher IT spending climate, in the 12 months out that you think is a hurdle rate that needs to met?

Steve Singh

Yeah. So first of all a ROI in an on-demand model, the way we price our services on a monthly basis and the value-equation that we deliver, because we bill monthly, the ROI is literally immediate monthly, as soon as you go live. For every transaction that you conduct it’s higher, through automation you paid X, for every transaction that you conduct after automation, that X comes down by 80% or plus or more. So the ROI is literally immediately and that's what's unique about an on-demand business model and frankly what's unique about making sure you drive very competitive pricing in the marketplace.

Then on top of that there is an opportunity to continue to drive greater ROIs by taking the -- if you just choose for example, just expense management, then by automating with travel bookings and expense management and then also adding in things like vendor payments.

The other piece is now just bringing out -- look at what's happening with the average length of customer relationships, they are actually going up. This is just an indicator that says that fundamentally, customers are very happy with your services and they see great ROIs around it.

Jason Maynard - Credit Suisse

That's fair. Alright. Thank you very much. Good job on the quarter.

Steve Singh

Thanks.

Operator

Your next question comes from Robert Schwartz from Jefferies & Co.

Robert Schwartz - Jefferies & Co.

Thank you very much. What does the customer have to do with who has been a customer in the past and wants to move Smart payments?

Steve Singh

Is that to Smart Expense?

Robert Schwartz - Jefferies & Co.

Smart Expense, yes.

Steve Singh

Right. So one of the great things about on-demand services is to the extent you are on our on-demand platform, and you are an Expense customer, or for that matter if you are a travel customer. To turn on Travel and Expense integrated with Smart Expense is just literally a button you turn on, and say I'd like to use this service.

Robert Schwartz - Jefferies & Co.

So that's true, so the 30% of customers you have just signed, now that it’s available, it is literally just turning a switch for them?

Steve Singh

Yeah, so let's make sure we separate those two out. The customers we've just signed, are brand new customers, they have not even yet deployed the service. These are literally customers who were using paper or manual processes for travel booking expense reporting in the past. They just came on to Concur Travel and Expense in an integrated model.

So those customers, the 6,200 customers that we currently have, said they would like to move forward and turn on the integrated Travel and Expense service. It is a click of a switch.

Robert Schwartz - Jefferies & Co.

And what have you said, now that you have it integrated to the Gelco customers about the future of their product lifecycle and how you're going to integrate their products into your offerings?

Steve Singh

On that we have, the position we take is that, we have a very long-term orientation in our relationship with our customers. So the value of relationship we have with Gelco's ExpenseLink customers. We will support them on the ExpenseLink platform for a number of years, and we will provide a compelling set of services around integrated corporate travel booking and expense reporting and vendor payment. That really should serve as a strong motivation to move to the newest platform.

And so as customers hit inflection points in their internal IT programs and when it's convenient for them to move over, that's when they will make the switch. Just as an example, think about many years -- five years ago, we bought a company called Captura and we migrated the Captura customers over a five-year horizon, and we were able to do that acquire the company, manage the relationships and migrate those customers over very profitably overtime.

Robert Schwartz - Jefferies & Co.

And lastly, you saw a change in your tax status because it was less international. Maybe you could talk about the health of the international markets relative to the United States and where you are seeing success?

Steve Singh

We are going to divide that in two parts. I’ll talk about the health of international markets and then let John speak to the specific mix and change in the tax rate. Now obviously the core thing, those driving the change in the tax rate is that international operations or the majority of the international operations became profitable, which is the first indicator of the health of our international business.

Some basic data points are the following; prior to the acquisition of Gelco, about 13% of our business originated outside of North America. After the acquisition of Gelco the mix moved to 9%, simply because Gelco's operations were predominantly North American operations. We do see very strong demand in addition to the North American market, but also outside of the North American market. And so we are investing, not just in distribution capacity, which we have been doing for the last several quarters, but frankly also in a center of excellence for product development, customer service and in the hosting operations. We just opened an office in Prague to be the centre of excellence. And so we are seeing solid demand there. We are investing to get that demand. We are driving new content to make sure we provide a host or suite of services for our customers in EU as well as Asia Pacific. John, you want to address the tax side?

John Adair

Sure, from a tax perspective, historically as you know, we have been investing pretty heavily in international markets and drawing our presence there. Because of that heavy investment, those international operations as you identify, ran at a tax loss. But today because of increased scale, we're running at a profit so, fundamentally that negative impact, the effective tax rate we've historically seen from those international tax losses goes away, our affective tax rate for '07 then fell 39% as adjusted in Q4. And we expect to continue operations at a fixed rate of about 39% to 44% Federal Rate.

Robert Schwartz - Jefferies & Co.

Thank you very much.

Operator

Your next question comes from Mark Verbeck from Cantor Fitzgerald.

Steve Singh

Hey, Mark.

Mark Verbeck - Cantor Fitzgerald

Can you tell me, order of magnitude, how much additional opportunity is someone turning on Smart Expense, and have you gone and started marketing that back into the install base?

Steve Singh

Mark, I think the way to look at Smart Expense is much like we originally spoke to the added revenue for customers, that comes from integrating corporate travel booking [it]. So, Smart Expense is, frankly, a free feature that is delivered to all of our customers. But what it drives is increased adoption of corporate travel, which typically raises the revenue per customer by about 25%.

Mark Verbeck - Cantor Fitzgerald

Okay. And then, what does it mean when you get Gelco payment services integrated. What does that mean for your business and customers?

Steve Singh

Gelco's payment services are an additional service that we provide to our customers that allows us to pay their employees and their corporate card issuers on their behalf. So, it generates additional revenue for Concur, simply because it's driving greater cost savings to our customers, we're taking a component of functionality that's very expensive for them and driving that down subsequently. The way I would look at it today is that, it's an incremental 10% to 15% of revenue per transaction.

Mark Verbeck - Cantor Fitzgerald

Okay. And then taking on the international business, can you update us on how many languages you are supporting?

Steve Singh

Mark, I apologize, I don’t know the number of the top of my head. It is north of 16 languages that we support, north of 90 countries that we are localized into for tax regulatory requirements and north of 90 countries that we are actually deployed in.

Mark Verbeck - Cantor Fitzgerald

Great. Thanks a lot. Congratulations on the quarter.

Steve Singh

Thanks, Mark.

Operator

Your next question comes from Daniel Cummins from Banc of America Securities.

Daniel Cummins - Banc of America Securities

Thanks. A couple of questions. I wanted to get an update on your distribution alliances and what are you using to judge performance versus your expectations? And Steve, if you could just give us a little more on the effort, the organic effort you are putting into the analytic platform, that sounds very exciting for you this year? And then I was curious if there is any support overlays right now that come off over time? Thank you.

Steve Singh

Thanks, Dan. So let's start with the partner channels and how they are growing, how do we gage them. I think it's always important to start with our foundational growth rate. We expect to grow the business organically at least 25% a year for the forward three years. So what that means, all channels, we expect that type of growth across all channels, so whether it's ADP or US Bank or Banc of America or whoever it might be, well, in direct sales channel. We expect that type of growth across all channels. That's what we've seen in the past. That's what we expected to see going forward.

The topic on analytics, this is an exciting opportunity for our business. We have with the travel booking part of the equation an incredible repository of corporate supplier contracts along with accumulated data that comes with results of booking travel.

On the expense management side of the equation, we have all line item details, literally every penny of spend that a corporation incurs in business travel. Being able to marry those two services together and be able to analyze that information and provide our customers, not just analytics that allows them to compare how much did you expect to spend and how much did you actually spend, how much did you spend against your contract rates, but also things like how do you spend against your peer group.

Like if you're a company of 5,000 employees in the tech sector or financial services sector, what does your spending look like against the other company of your size within a particular marketplace? All that information is frankly available at the click of a button in systems like Concur. And the ability to since now make this available to our customers is very powerful for us, is very compelling for end customers.

Now, above and beyond that, you can take analytics many levels above and beyond that, what it actually starts to do, what we would call predicted analytics, taking actions on behalf of the customer to modify booking choices based upon contractually committed expense.

So, there is a lot more that can be done in analytics than simple reporting. And we're going to go drive that into our services, make that available to our customers at a very compelling cost models and frankly take a lot of inefficient services that they utilize today and drive a need for those services away by delivering a state within our core set of services.

Daniel Cummins - Banc of America Securities

Yes, I mean you have your fingers on the pulse of a lot of spend in time and I know you are all about driving the value right into the bundle and the product. Is it possible though that there could be another product spun-off from these kinds of efforts?

Steve Singh

Yes, Mark --Dan, I would suggest that right now, all we are going to speak to is what we will deliver in integrated travel and expense, analytics and payment services. There is absolutely a lot of different opportunities around this, but first and foremost, we want to go ahead and execute against the opportunities right in front of us, which is frankly very large. You had a third --.

Daniel Cummins - Banc of America Securities

Yes, a question on, are there any support overlays right now and maybe legacy from Outtask or Nuance from Gelco that we might see roll off over time?

Steve Singh

Yes. As you would expect anytime you acquire companies, there are support overlays and those support overlays with time would go away. However, I think what's important to understand is looking at [lastly] how we grow the business and how we spend across the business. Our objective is you should see us continue to push at least 25% topline growth for the foreseeable future. Then you would expect the gross margin continue to improve.

For example, when we started fiscal '07, we said we would exit fiscal '07 at around 65% gross margin. Obviously, we exited above that at 67%-68%. And then, we said we would exit fiscal '08 at 70% gross margin. And it's clear at this point that you should expect 70% or better, exiting fiscal '08. And we don't see 70% as the cap for gross margins.

And then the question just becomes, what do you want to do with that incremental margin? And our philosophy hasn't changed on this front. As long as we can see responsible spend that drives compelling growth rate, we will go ahead and continue to spend against sales and marketing objectives, our development objectives and support objectives. We do see the operating margin line continuing to improve at about 100 basis points a year.

Daniel Cummins - Banc of America Securities

Thank you very much.

Operator

Your next question comes from Ajay Kasargod from Piper Jaffray.

Ajay Kasargod - Piper Jaffray

Very good. Thank you and congratulations on your quarter. The first question would be, you talked to a lot of customers and clearly excited about the new product portfolio. One thing they have expressed is there is continuity for continued growth and support and tool development. So in your guidance, Steve and John, what have you factored in, in terms of headcount additions on service and support?

Steve Singh

Well, Ajay, we don't break out specifically the headcount additions by department. What you should, though, expect is that we are investing aggressively across the business. And the guidance that we provided both on the soft guidance we just outlined on our gross margin, the specific guidance on operating margin should give you a pretty good feel for investment.

If I look at the order of priority of investments, and you have to give me some slack on this. It's a priority 1, priority 1A, priority 1b, which is increasing investments in, increase investments in services and increase investments support in customer support and operations.

And those are three areas that for the last five years we have been driving investments out there. You want to look at where our support factor is into the business, it's really in the COGS line item where you are seeing a very solid growth, quarter-over-quarter, year-over-year.

Ajay Kasargod - Piper Jaffray

Okay, great. And then just on -- there is one thing I want to ask you. I know you have updated the guidance especially for Q1 and I know you provided guidance for preliminary guidance for Q1 on September 14. So, just what's changed in terms of the outlook, in terms of the revenue and also the EPS? I think you'd guided $0.11 sense on a cash EPS basis. Now, you are at $0.13. What's changed in your thinking on the updated guidance versus September 14?

Steve Singh

You know, obviously we have more data since September 14. We have got two months of additional operating experience that is factored into our guidance. And what we have seen is that the integration of Gelco has gone very smoothly, and we are driving a lot of benefit there.

We are also frankly seeing great new customer growth, right, not just in new customers that we signed on in September quarter and also in the June quarter and also in the March quarter prior to that, but also we are seeing incremental growth within the customers. And so that's what's driving the increased outlook on revenue, taking that revenue guidance up by $1 million.

And then frankly, if you take the revenue guidance up by $1 million, some portion of that is going to fall through to the bottom-line. And what we are saying is about $0.02 will fall through to the bottom-line.

Ajay Kasargod - Piper Jaffray

But that $0.02 is just the first quarter and not for the rest of the year?

Steve Singh

Well, right now, we think that the prudent way to look at the business is that let's update the say the near-term, which is taking the revenue up by $1 million, taking the EPS up by $0.02. Obviously, we also took revenue for the backend up by another $1 million, because we just had came off of a very strong bookings quarter in the September quarter, and I just think that it just leads to just a very solid business momentum.

Ajay Kasargod - Piper Jaffray

Okay. And then just a last thing, very quickly, just you talked a lot about analytics and I believe expanding your offering in some potential long-term opportunities, just wanted to know, assuming I know it’s preliminary, what are some of the vendors you are signing up for, do you still think about getting more expensive or getting an analytics products out. How does that impact a relationship or potential relationships with some of those vendors and thanks for your time?

Steve Singh

Sure, I want to make sure, I captured that, I think I did, but if I didn’t please interrupt me on this. The reason why our suppliers are signing up as eReceipt provider is fundamentally, because it lowers their cost of doing business with their customers, like being able to deliver electronic receipt or invoices, and that's really what electronic receipt is, fundamentally electronic invoice. Being able to deliver an electronic invoice, through our products and services directly to the end customer.

And so, it helps drive down that cost. In addition to that, I think that suppliers look at this very much as an opportunity to provide additional value to their customers. So, for example, when you log on to Concur's booking tool and you are a vendor that has your eReceipt enabled, you have an eReceipt that shows up. I am just going to use a simple example, you log on and you are Avis. You have an eReceipt logo right next to the Avis booking option. And if you are car rental company that does not have a eReceipt enabled booking option, what you are finding is a that users look at this and say, what I'd rather have the eReceipts option because it basically takes entire entry of that expense report and automates the report. So, there is tremendous value at the employee level which the supplier wants to capitalize on.

Ajay Kasargod - Piper Jaffray

Okay, alright. That’s great. Thank you.

Steve Singh

Yeah.

Operator

Your next question comes from John Kraft from D. A. Davidson.