Concur Technologies Management Discusses Q3 2012 Results - Earnings Call Transcript

Aug. 1.12 | About: Concur Technologies, (CNQR)

Concur Technologies (NASDAQ:CNQR)

Q3 2012 Earnings Call

August 01, 2012 5:00 pm ET


John Torrey - Executive Vice President of Corporate Development

S. Steven Singh - Chairman and Chief Executive Officer

Rajeev Singh - Co-Founder, President, Chief Operating Officer and Director

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


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

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

Brent Thill - UBS Investment Bank, Research Division

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

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Marc Fuller

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


Good afternoon. My name is Allie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal Year 2012 Third Quarter Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, John Torrey, Executive Vice President of Corporate Development.

Mr. Torrey, you may begin your conference.

John Torrey

Thank you, operator. Good afternoon and welcome, everyone, to the Concur Earnings Conference Call for our third quarter of fiscal 2012. My name is John Torrey, Executive Vice President for Corporate Development at Concur.

This call includes presentation slides that will accompany our prepared remarks. To access these slides, please register for the webcast on our website, Other information of interest to investors, including our SEC filings, press releases and recent investor presentations, can be found in the Investors section of our site.

We are now on Slide 1. Our speakers for the call today are Steve Singh, our Chairman and Chief Executive Officer; Rajeev Singh, our President and Chief Operating Officer; and Frank Pelzer, our Chief Financial Officer. After our prepared statements today, we will host a brief question-and-answer session.

Please now advance to Slide 2. Before we get started, we want to remind you that during the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. These forward-looking statements are based on information available to us as of today's date and are subject to risk and uncertainty. We encourage you to review the details on the Slide 2 and our filings with the Securities and Exchange Commission, which are available at, 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. Before we get started, I wanted to share a small milestone. 19 years ago today, Mike Hilton, Raj Singh and I started Concur. So it gives me great pleasure to report that we had an incredible quarter.

Revenue, earnings, operating margin, as well as operating and free cash flow were well ahead of our expectations. New customer growth continues to be very strong as we signed more than 1,000 new customers in the quarter. We also signed what we believe to be the largest enterprise cloud applications contract ever awarded, a $1.4 billion, 15-year contract with the GSA.

Consistently strong execution is the hallmark of any great and enduring company. And we'll spend a great deal more time detailing Q3 results during this call. But as happy as we are with the quarter-in/quarter-out execution by the more than 2,300 Concur employees around the world, we're focused on a goal much bigger than what we are today.

With our entry into the unmanaged travel market 18 months ago and our expansion into the public sector market, validated by this past quarter's ETS2 award, we have BBB addressable market than we have been previously serving, creating the opportunity for the perfect trip for all travelers.

But we're not content with merely automating the front end of an increasingly ubiquitous business process. Through the Concur T&E Cloud, we can constructively disrupt and drive efficiency into the entire corporate travel supply chain for the benefit of the business traveler, the companies that they work for and the suppliers that serve them.

We are committed to truly and fundamentally improving the experience and value delivered across the entire corporate supply chain, and this commitment is the foundation of a long-term company that's woven into the fabric of how global commerce is conducted. We fully expect to become that company.

Before we expand upon our strategy and recent business highlights, let me discuss our Q3 operating results. Please turn to Slide #4. In Q3, we exceeded our expectations across every core metric. We delivered $113.2 million in revenue, up 26.5% year-over-year. Revenue outperformance was driven by a number of factors: deployments were ahead of schedule, travels transaction volume was modestly ahead of expectations, and we're starting to see early returns on our investments in new markets, such as the SMB market and the unmanaged travel market.

We are pleased with our revenue and customer growth rates on top of what's already the second highest revenue scale in the software-as-a-service sector, once again reflecting the profit discipline we have long enforced on the business. Non-GAAP EPS was $0.34 and non-GAAP operating margin was 19%, both ahead of our targets as revenue outperformance dropped straight to the bottom line, and cash flow from operations and free cash flow were well ahead of our expectations.

Please turn to the next slide. Looking at Q4 and fiscal 2012. Driven by the strength of bookings earlier in the fiscal year and our revenue performance year-to-date, we expect full year revenue growth of 26%. And even as we invest aggressively against large underserved markets, because of our revenue outperformance, we're raising our operating margin, earnings, cash flow from operations and free cash flow expectations for the full fiscal year.

Please turn to Slide #6. Looking ahead further, let me highlight a few leading indicators. The single largest driver of our future growth rate is new bookings and the related deployment of those services. The largest drivers of bookings are the demand environment and sales productivity. We are seeing a strong demand environment and an improving productivity profile across our sales force as we signed well more than 1,000 new customers in Q3, reflecting solid demand across all key markets and segments. In particular, we saw much stronger-than-expected bookings in the SMB segment of North America. And with time, we expect to see similar trends in the SMB segments of every major economy we serve.

We're also starting to see consistently stronger-than-anticipated bookings in Japan. Looking ahead to the next few quarters, we expect the demand environment to remain robust across all geographies and customer segments.

Over the past several quarters, travel transaction volume has been a gentle tailwind to our revenue growth rate. Given the slowdown in the broader economic environment, we think it's prudent to plan on travel transactions being a gentle headwind to our future growth rates.

And as we look forward, we continue to expect we will exit Q1 of fiscal 2013 on a roughly $500 million revenue run rate, and we remain comfortable with our long-term growth expectations for the coming years.

Please turn to Slide 7. As you know, last quarter, Concur was awarded a $1.4 billion contract to power the U.S. GSA program for managing online bookings, travel authorizations and voucher processing. In fact, Concur was awarded this contract on a sole-source basis. We were impressed with the evaluation and business process around the RFP and the eventual award.

The GSA was looking for best-in-class services that could deliver best-in-class cost savings, while meeting the exacting needs of its constituent federal agencies. In other words, no different from how any private sector company would select a partner to automate a key business process. Additionally, the GSA was looking to benefit from ongoing advancements in technology over the term of the award. And for some perspective on that, think about what mobile computing was 5 years ago, it was virtually nonexistent. Or think about the lack of integration of travel and expense before we delivered that innovation to the market in 2006. The GSA was also looking for a supplier that could meet its needs and drive significant savings as compared to its current cost structures. We believe our solution can save the U.S. government billions of dollars over the next 15 years.

We're excited about working with the GSA and the civilian federal agencies to meet their travel and expense management needs, while driving billions of dollars of cost savings to the American taxpayer.

As we mentioned previously, its our expectation that we will not see the first dollar of revenue from this award until fiscal 2014 and no appreciable revenue stream until fiscal 2015. We expect to see a meaningful stream of revenue hit our P&L by fiscal 2016 and then continue to build from that point.

On the cost side, we are continuing to ramp investments in sales, deployment, customer service and partner programs in support of the sole-source award. We are pleased with our progress against these objectives and are comfortable with our ability to execute well against the sole-source award.

As you know, Carlson Wagonlit also bid on the GSA contract. CWT was a provider to the U.S. government over the course of the ETS1 contract. And while I can't speak to the nature of their bid or the suitability of their services, it's important that you know that CWT filed a protest against the GSA for the sole-source award to Concur. The protest has a defined 100-day process for resolution and is expected to be resolved by the end of September.

Please turn to the next slide. We are very pleased with the continued strong execution that we're seeing across the entire business, and we're comfortable with our long-term growth prospects in the years ahead. But we're just getting started. Over the past decade, we built Concur into one of the world's largest enterprise cloud application companies. Looking ahead to the next decade, we will build upon that success and scale by leveraging our investment in content aggregation and delivery in big data and in mobile computing to evolve Concur into not just a leading applications company but also a platform for content and commerce in the $1 trillion travel market. And in doing so, we'll deliver incredible value to business travelers, corporate customers, third-party developers and suppliers by linking them together in a massively efficient real-time supply chain that starts with an incredible user experience.

Please turn to Slide #9. Central to our success and the evolution of Concur into an applications, content and commerce company are the investments we are making in distribution and in innovation. As we stated previously, we expect to double our distribution capacity over the 24-month period, starting with fiscal 2012 and ending in fiscal 2013, and we are on track to do so. The investments we are making in innovation are centered around 3 themes: The Perfect Trip, which is a business traveler initiative; the Concur T&E Cloud, within which we have 2 primary programs, the first being the Concur Connect platform, which is a developer and partner initiative, and the second, being our global content strategy, which is a supplier initiative. And across each of these is the integration of our big data strategy, which allows us to integrate these valuable data sets together in a model that improves the experience and value for every member of the supply chain.

Over the past several earnings calls, we've outlined our strategy around each of these initiatives and the services that we're delivering and partnerships that we're enabling against each initiative.

As Concur forges its leadership role in innovating the corporate travel supply chain, I wanted to invite Raj Singh, Concur's President and Chief Operating Officer and Co-Founder, to highlight some of our recent product and business initiatives. Raj?

Rajeev Singh

Thank you, Steve. Please turn to Slide 10. Over the past several quarters, we've painted our vision of The Perfect Trip. For the benefit of newer investors, let me start with that vision.

Our ambition over the next decade is to deliver to every business traveler what we call The Perfect Trip. The Perfect Trip would be booked on a mobile device by merely voicing your travel needs, whether that is a flight, a train, a hotel, car service, dinner reservation or any activity that's part of a normal business trip. We would automatically manage your itinerary, rebooking your flights when canceled or delayed, upgrade your seat where possible, be your traveler concierge along the way, checking you into the exact hotel room of your choice as you walk off the jetway, allow you to use your cell phone 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 services such as Taxi Magic that are integrated into the Concur T&E Cloud. All of this would be done based on your corporate policies, you're spend patterns and your preferences. And best of all, your expense reports would file themselves automatically throughout your business trip. To see our vision of The Perfect Trip, check out the link at the bottom of this slide.

To continue to deliver on the vision of The Perfect Trip, this past quarter, we introduced Concur Open Booking. Concur Open Booking allows business travelers to book hotels and car rentals in whatever manner it's easiest for them, either at the supplier website or within Concur Travel while still providing a single easy-to-manage itinerary and the personalization in content that they expect.

For our corporate clients, Concur Open Booking provides access to their negotiated rates, improves compliance and significantly enhances their ability to meet their duty of care responsibilities. Suppliers achieve the best of all worlds, reduce distribution costs with increased personalization for the traveler and enhanced service for their corporate clients.

We believe Concur Open Booking is a win-win-win, and some of the best and most innovative companies in the world agree. They include Concur clients, like and Google, who are both embracing Concur Open Booking and leading a group of clients representing billions of dollars in travel spend in the Concur Open Booking alliance, and they include some of the most forward-thinking suppliers in the world.

At the Global Business Travel Association Conference last week, Avis Budget, Best Western International, Choice Hotels, Hertz, InterContinental Hotels, La Quinta Inns, Marriott International and Starwood Hotels announced support for Concur Open Booking. We also announced a partnership with Gogo, which allows all Concur clients to purchase Gogo in-flight Internet access when they book their flights.

To deliver The Perfect Trip for travelers, the entire T&E supply chain must embrace the vision and collaborate towards this goal. With each day, we get closer to that goal.

Please turn to Slide 11. We are building out the Concur T&E Cloud through investments in the Concur Connect platform and our global content strategy so business travelers can leverage the power of Concur's T&E Cloud and consume content from all corners of the world and innovative services from the brightest minds in the industry. We launched the Concur Connect platform about 15 months ago. And just a few months ago, at Concur Fusion, we announced that more than 40 partners have delivered application and services on top of the Concur T&E Cloud.

We have already seen these applications and services consumed. This past quarter, leading solution providers such as AdvantageMS, Healthcare Data Solutions, MedPro Systems, Porzio Pharmaceutical and R-Squared announced integration to the Concur T&E Cloud to provide enhanced capabilities that support compliance with the Patient Protection and Affordable Care Act.

We are also using our balance sheet to accelerate the delivery of compelling new services and global content. Let me give you just a few examples. We are funding innovative companies such as Room77, whose goal it is to allow you to book the specific hotel 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 of our Concur customers can seamlessly access the widest range of hotel and air content from India's market leading OTA, ClearTrip, in which we are the largest shareholder and where we just expanded our investment.

We are also the largest shareholder in Yapta, a company whose first product is a price assurance service. And there are several other groundbreaking companies that you'll hear about in the coming quarters, companies that we are enabling through the Concur T&E Cloud.

Please turn to Slide 12. As all of you know, nearly 90% of the world's electronic data has been created in just the past few years. Just as cloud, mobile and social computing are creating vast amounts of new data, this data must be aggregated into logical consumable groupings.

When you think about the intersection of cloud computing and big data within the travel ecosystem, you can see the incredible value that can be delivered to the business traveler, the corporate customer and the supplier. If my own spend patterns and corporate policy indicate a preference for a certain style and price point of hotels, does it make sense to clutter the precious real estate of my smartphone with choices that I would never select? Do I benefit from hoteliers understanding my preferences and competing for my business? Of course, I do.

Last quarter, we began delivering hotel recommendations within TripIt, leveraging the transaction data from over 18 million business travelers, Concur and TripIt provide personalized hotel recommendations based on the travelers' past trips and preferences and in accordance with their company's travel policy. And as we enable more value and a more efficient supply chain, we're enabling new sources of value for our customers, an efficient channel for our partners and suppliers and new sources of revenue for Concur.

With that, I would like to turn the call back to Steve. Steve?

S. Steven Singh

At the start of the fiscal year, we highlighted our plans to significantly ramp investments across the business with a focus on doubling our distribution capacity by the end of fiscal 2013 and on continuing to drive the innovation curve in our industry. We are cracking well against these investment objectives, and we expect to see the increasing benefits of these investments in fiscal 2013, '14 and '15.

To support our growth and innovation objectives, we now employ nearly 2,300 incredible individuals, and we expect to exit the fiscal year with more than 2,500 members of the Concur team. Even as we invest aggressively against large underserved markets, the strength of our revenue outperformance is driving better-than-expected earnings and operating margin. And at this point, we expect earnings for the full fiscal year to be significantly ahead of our original expectations, and we are once again raising our operating margin expectations for the full fiscal year.

When you think about our increasing ability to reach a market that is under penetrated and the scope of innovation that we're both driving and enabling, it should be obvious why we're so excited about the next decade. Collectively, through our investments and the successful execution against our goals, we can constructively disrupt and drive efficiency into the entire corporate travel supply chain. And by reinventing the corporate travel supply chain over many years, all while executing each and every quarter, we're focused on creating higher and higher levels of shareholder value.

With 18 million business travelers, 2.5 million of which are now using our mobile services on a regular basis, and with more than 15,000 corporate customers and the capacity to invest against a compelling vision on a global basis, we're the best company in the world to deliver on that future. That's our ambition and that's what drives us.

And with that, if you'd please turn to the next slide, I'd like to turn the call over to Frank, who'll provide more details on Q3 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 very strong quarter in Q3 across all metrics. Ongoing strength in our core business drove strong financial and operational results, continuing the year with higher-than-expected revenue, non-GAAP earnings and cash flow.

Second, we continue to execute against our business objectives designed to further drive top line growth in the coming years. Our investment thesis continues to be validated by the global demand we're experiencing for our services.

And third, we are increasing our expectations for the non-GAAP operating margin, non-GAAP pretax EPS in both operating and free cash flow for fiscal 2012 as a whole. We are lowering our capital expenditures expectation for fiscal 2012. And after already raising revenue expectations 3x for fiscal 2012, we are reaffirming both our revenue growth expectation and our expectation for -- and our expectation that we'll exit calendar 2012 on roughly a $500 million annualized revenue run rate.

If you would, please advance to Slide #15, and let's look at Q3 results. Q3 revenue was above our expectations at $113.2 million, growing 26.5% year-over-year. This growth rate beat our expectations by 100 basis points. Recognized revenue in the quarter benefited from excellent traction in new customer deployments and higher-than-expected transaction volume. As a reminder, our Q3 growth was largely achieved from the investments and distribution over the past several fiscal years leading to new business signed approximately 3 quarters ago. Customer retention rates improved slightly and were again strong for the quarter, consistent with our historical averages in the high 90s.

On a separate note, as a reflection of the substantial growth in our international business over the last several years, the Q3 constant currency revenue growth rate was more than 100 basis points higher than the reported revenue.

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 74% for the quarter, an improvement of 160 basis points year-over-year and 50 basis points quarter-over-quarter. Our sales and marketing expense increased 26% year-over-year reflecting our ongoing 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 Q3.

We continue to be on the path to doubling our sales capacity by the end of fiscal 2013 from where we started at the beginning of fiscal 2012. Our R&D expense increased 42% 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 year, we expect investments that we are making now in distribution and innovation to benefit our growth in FY '13 and beyond.

Our G&A expense increased 45% year-over-year, reflecting infrastructure investments to support our global growth. Even with all these investments, better-than-expected revenue growth led to operating margin exceeding our expectation, coming in at approximately 19% for the quarter. Inclusive of the investments that we have been making, the inherent leverage in our model help push our higher-than-expected revenue down to the bottom line. As a result, Q3 pretax earnings per share exceed our expectation by 10%, coming in at $0.34.

Please advance to Slide 18. Cash flow from operations and free cash flow were quite strong for the quarter driven by the continued strong performance of the business. In Q3, cash flow from operations totaled over $25 million. Capital expenditures in Q3 were $7.2 million. Free cash flow for the quarter was approximately $18 million, exceeding our expectations. Our balance sheet continues to be very strong and provides us tremendous leverage to continue to expand our market and our leadership position.

Driven by customer growth, days sales outstanding ended at 68, on the high-end of our 60- to 70-day expected range. Deferred revenue grew to over $83 million by quarter end, reflecting approximately 4% sequential growth and 23% 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 of our bookings growth since we bill the vast majority of our customers monthly. Over longer cycles, deferred revenue is a solid measure of the overall expansion in the business, so we are pleased with its continued growth.

Please advance to Slide #19. Now let's turn the discussion to expectations for Q4 and the full year. As Steve mentioned, demand for our services has remained strong. Given the strong customer growth in our core business, inclusive of some FX headwinds, we expect total revenue in the fourth quarter to grow approximately 24% year-over-year. We are reaffirming our expectations for the full year and expect overall revenue to grow approximately 26% year-over-year compared to fiscal 2011. Our Q3 revenue performance combined with our Q4 expectation equates to approximately 25% growth in the second half of fiscal 2012, up over 400 basis points of growth over the equivalent and very strong period in fiscal 2011, which had been, at the time, our highest 6-month growth rate since 2008.

Throughout fiscal 2012, we are increasing our rate of investment in global distribution, new geographies, our SMB business, new innovations, the Concur T&E Cloud and our government T&E Cloud. We believe this action is prudent given the strong demand environment experienced -- evidenced by our recent operating results. We will try to spend some of the year-to-date overperformance in Q4 to ramp distribution and support the government contract win. However, given the scale of the revenue outperformance in the first 3 quarters of the fiscal year, we now expect our overall operating margin to be approximately 19% for the year as a whole.

We expect Q4 operating margin to be above this level. Accordingly, we expect Q4 pretax earnings per share to be $0.38. Factoring in expectations for both annual revenue and operating margin, we are increasing our expectation for pretax earnings per share to $1.37 for fiscal 2012.

Let me now turn to cash flows. Cash flows in Q4 are expected to remain strong. We now expect cash flow from operations, excluding acquisition and other related costs, to be at least $88 million, at or above the high end of our previous expectation of $84 million to $88 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 world-wide with a focus on our 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 investments as well as our normal capital spending levels to support the growth in the business, we now expect capital expenditures of approximately $36 million to $38 million for the year. As a result, we expect free cash flow to total at least $50 million for the fiscal year.

As we mentioned over the last few quarters, the effects of the TripIt acquisition and several other factors have rendered our effective tax rate unpredictable. We continue to expect minimal recurring cash payments for income taxes for the foreseeable future as we continue to utilize NOLs to offset taxable income of the business. For IBES consensus purposes, considered using the 35% federal statutory rate but recognize this does not reflect the taxes we pay.

Please advance to Slide 20. With the guidance of $1.37 for fiscal 2012's pro forma pretax EPS, I would like to spend a moment discussing one of the adjustments we experienced this quarter and may impact us in the coming quarters. Given the strong performance in our stock price and GAAP's fully diluted share count calculation guidance, we made an adjustment for the first time this quarter between our fully diluted GAAP and non-GAAP share count by approximately 767,000 shares, benefiting our non-GAAP pretax EPS by less than $0.005 in the quarter and even less than that year-to-date.

Let me provide some additional detail. As you know from past calls and our public filings, we purchased a hedge, a note hedge, simultaneously with the issuance of our $287.5 million senior convertible note. The call option purchased with the strike price of $52.35, offset by the warrants sold with the strike price of $73.29, protect our investors from dilution of the underlying shares of the convertible bond between these 2 stock -- strike prices.

For the quarter, our stock price averaged $60.85. GAAP requires that we exclude items that are anti-dilutive. In this case, the purchased call option portion of our note hedge. This requirement adds approximately 767,000 shares associated with the dilution from the senior convertible notes even though our investors are not financially diluted. We believe it is useful for our investors to understand the economic benefits of the note hedge in relation to our operational results, and therefore, have included the anti-dilutive impact of the note hedge in our non-GAAP share count calculation. Please note, we will include dilutive impact of the warrants on our non-GAAP diluted share count if and when our stock price averages above the strike price of $73.29.

Please advance to Slide 21. In closing, we achieved another great revenue growth rate in Q3 achieving 26.5%. This rate would have been over 100 basis points higher using FX rates from Q3 2011. We are reaffirming our year-over-year revenue growth expectation of approximately 26% for the full year. Using 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 long term.

We continue to experience strength in new business generation that will continue to benefit our top line growth in future quarters. Driven by a revenue outperformance in the first 3 quarters of the year, we now expect our pro forma operating margin to be 19% for fiscal 2012. Even with accelerated investment, we exceeded our pretax EPS by $0.03 or 10%. We expect Q4 pretax EPS to be $0.38, and are increasing our full year target to $1.37.

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


Your next caller is from David Hilal with FBR.

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

I guess first on the sales expansion, I know you said by the end of '13 you'll have matched your goal of doubling capacity. Where do you think you are today relative to that? And how should we think about that from a margin standpoint as you continue to add through '13?

S. Steven Singh

Sure. So -- while it's not exactly a straight-line calculation from the beginning of fiscal '12 to the end of fiscal '13. They're -- that's a reasonable proxy, obviously a little bit more back-end loaded but not heavily back-end loaded. And from a cost perspective, you might think about it that way. We, obviously, are very pleased with where we are relative to 3 quarters in, how we're doing against the sales hires. I think the important piece to bring out in that is that these sales folks are really not yet contributing to the bookings growth that we've seen so far. And so it's not -- I wouldn't read anything more into it than that -- it's just, obviously, we have an objective to go higher here.

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

Okay. Now let me ask you on -- you mentioned, Steve, some of the travel transactions might -- I think you say go from a gentle tailwind to a gentle headwind. When we think about growth for next year, and I know you didn't give guidance for next year, but what -- how many points of growth do you think this headwind can cause against you guys this coming fiscal year?

S. Steven Singh

It's on the margin. I think the way to think about this is the same way we've been chatting about this for the last couple of years or so. We've always felt that as long as you got a moderately changing environment, either to the positive or to the negative, the best way to think about it is a gentle tailwind, whether that's driven by employment or an unemployment or whether that's driven by travel transactions. So on the margin, it's a very, very modest impact to us. I think the important piece to recall here is that we, obviously, for the back half of fiscal 2012, we expect to grow the business at least 25% year-over-year. And we obviously expect to exit fiscal Q1 of '13, which is the December quarter, on a $500 million, roughly about a $500 million run rate. And we're comfortable with our long-term growth targets for the years ahead.


Your next question comes from Laura Lederman with William Blair.

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

Can you talk a little bit about turning to ETS2 and kind of how that process works? How long does it take to like hit each of the agencies? Do you reach out to them? Are they reaching out to you? And I understand when you expect the revenue will hit, but I'd like a better -- or to help, but I'd like a better understanding of how that process works in terms of you winning that business.

S. Steven Singh

Sure. So let me provide some broad-based color commentary here. Outside of that, I'd rather see us put a little bit of execution behind us on this before we provide too much more color. On a broad basis, here's how to think about it. There's roughly 90 civilian agencies. I think, actually it's 93. And we would engage with each of these agencies to walk them through what our products and services provide, the value they deliver and engage with them in a deployment model and change management model to deploy our products and services across their agency. We think that -- let's just call that a sales cycle. That traditional sales cycle, you should plan on being about 9 months. And obviously, one thing that's very important to know here is that Ps and Cs relative to the pricing and contract [ph] are already prenegotiated. They're part of that, the RFP that we bid on. So what we're really working through is putting together an implementation plan, putting together a success plan and change management plan with each of the agencies. Once that's put in place and agreed upon, then we are working to actually deploy those agencies. And I think you should assume that it's going to be, on average, 9 to 12 months for a typical deployment. So realistically, you're out into 2014 before you see any stream of revenue. Now the -- that's a bit complicated by the fact that CWT, who was the other bidder on the ETS2 contract, when they were notified that they were not selected, in fact, Concur was going to be a sole-source award -- awardee, they actually filed the protest. That protest obviously has to work its way through the normal processes of GSA procurement. And we expect that protest to be resolved by the end of September.

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

Okay, that's helpful. As analysts, we always have to ask a neurotic question because it's in our nature. 26.5% revenue growth this quarter expectation for 24 next, how much of that is due to that subtle headwind versus what other factors that have impacted in terms of the year-over-year growth sequentially?

S. Steven Singh

It is neurotic. Look, the quarter came in above our expectations in large part. In fact, in every quarter, the single biggest driver of our performance is customer deployment. And as we said before, every once in a while, we'll get a gentle tailwind around travel transactions or a gentle headwind from them. This is -- the business is very much the same as what we've seen in the last 10 years. It's driven by deployments. But keep in mind, the growth that we just recorded was on top. And if you look at the second half of fiscal 2011, it was the strongest growth we've seen since 2008. So we're very, very pleased that we can record stronger growth in Q3 on top of a very, very strong growth number last Q3. And then frankly, the guidance for this quarter is on top of the 23% growth that we saw in Q4 of last year, which was the best quarter we've seen in about 4 years or so.

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

Okay. A less neurotic final question then which is you mentioned that the SME was better than expected. Can you talk a little bit about is that business bigger than a bread box now? Just give us a sense of how material it is.

S. Steven Singh

Yes, the SMB business is a -- obviously, it's a fairly broad segment. And this segment is a market segment that we started investing aggressively in about 3.5 years or so ago. And these were customers that are less than -- basically ballpark, less than 800, 900 or so employees. We're seeing great growth there. And in fact, what we're seeing is every quarter, we're doing better than what we had -- not only what we anticipated but better than our raised internal expectations around that market segment relative to new customer adds. And in this last quarter, we added over 1,000 new customers. Obviously, you can't add more than 1,000 new customers without doing exceptionally well within the SMB segment. The other things I'd just bring out around this is the SMB segment, as we said before, is a very profitable piece of business for us. And so we look at this and say, look we're ecstatic [ph] about how well we're doing in the SMB segment. And moreover, we think that the execution success we've seen within the North American SMB segment ought to be replicated in every major economy around the world. And obviously, the last component, which is why we are so bullish around the SMB segment, is that we have a tremendous capacity to go deliver additional services such as TripIt or other unmanaged travel offerings including Concur Open Booking.


Your next question comes from Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

Just on the government win, does that change the trajectory of your hiring on -- across different divisions of the company? Or do you feel like this can be subsumed inside the normal trajectory that you're on right now?

S. Steven Singh

Yes, Brent, it certainly does change the hiring trajectory. We obviously had not -- I think it's not prudent for any business to plan on a sole-source award in this kind of scenario. We had planned on a dual-source award, and we have staffed accordingly. We had a staffing trajectory that was appropriate. Obviously, once we were notified that we had a sole-source award here, we wanted to make sure that we continued the staffing objectives around the business to be aligned towards that sole-source award. And we immediately started ramping up our investments. Now obviously, in the fiscal year that we're in today, we've already started ramping that investment, but the strength of our core business is so strong that frankly, as in the first 3 quarters as we beat on the top line, all of that revenue is falling through to the bottom line. And so it's -- that inherent leverage in our business model is really -- is more than making up for the investment that we're making around the ETS2 award in this fiscal year.

Brent Thill - UBS Investment Bank, Research Division

Okay. I realized you haven't given margins for 1 year or 2 years out. But you don't think this will alter the overall shape of the margin profile for the company?

S. Steven Singh

I think that, as we said before, Brent, I think that this certainly can be a near-term impact to margin that's driven by the ETS2 award, but it's certainly not a medium to long term at all. We think that the operating margin profile around the government, our broader public sector business, is very, very comparable to our private sector business. And also, remember that the revenue opportunity around this is much more than just the ETS2 award. We are obviously bidding on state and local opportunities, as well as government opportunities outside of the U.S.


Your next question comes from Steve Ashley with R.W. Baird.

S. Steven Singh

Brent, let me just add one thing. I'm sorry, Steve. Let me just add one last thing to that. Obviously, when we look at the additional spend around a sole-source, it's also important to factor in that there's obviously additional revenue opportunities around that as well. And so this should have some reasonable kind of balancing effects around that. I'm sorry, Steve, go ahead.

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

Yes, no problem. So we talked about the transaction volume been a mild tailwind, could be a mild headwind. Does that mean that the overage revenue that you incur, which I know was a very small low single-digit kind of thing is, declines in the future? Does that mean that the high 90% renewal rate is a tick lower? Is that how we should think about that?

S. Steven Singh

No, not at all, Steve. It's -- the retention rates that we measure are obviously on a -- not only on a dollar basis but also on a customer basis. You might see less business travel transactions, that doesn't mean that we have less customers or less overall transaction volume. Because remember that we largely monetize our products and services around the per-expense-report basis. And we certainly have some customers where they're -- some of the earlier customers we signed with, they are travel-only customers. And that's where you'll see any kind of modest headwind or tailwind.

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

Got it. And then I wanted to ask a question on -- you talked about availing your API, you talked about global content suppliers in the future going to be able to provide content directly to customers. Is -- can you talk about the monetization opportunity around that? Is there one or how we might think about that?

S. Steven Singh

Yes, absolutely. I'm sorry, I'm just kind of real-time processing some of the second question now around the gentle headwind or tailwind. I think it's important that people don't read too much into this. I think that the -- look, it's important for companies to be prudent in their outlook on the future, and that's all we're really trying to do. On the issue around how -- or the opportunity on how we monetize the supply chain, I think there's a number of different ways that we can monetize it. Not the least of which -- look, as Raj mentioned on the call, we have a number of third-party applications and service providers who announced products and services at the Concur Fusion Conference. And these products and services are actually already being consumed by our customers. And so there's not [ph] an opportunity to monetize that consumption. And it's going to be different based upon the types of applications and services that are being delivered because they provide very different value and are monetized in very different ways. But we certainly feel comfortable we can monetize the applications and services that are being delivered into the Concur customer base through the Concur T&E Cloud. In addition to that, we think there's a very interesting opportunity to take the supply chain, the consumption of content, and make it much more efficient than it's ever been before. And by driving that kind of efficiency, it's not only a great value to the supplier, which is obvious, it's also a great value to the corporate customer and to the end business traveler. And we think there's an opportunity to monetize that efficiency. And so there's at least 2 different ways that we see we can go off and monetize the Concur T&E Cloud and the integration of great applications and services along with global content into that T&E Cloud. So today, it's still a very modest piece of anything that we're seeing, but we expect over time to really see some very substantive and interesting revenue opportunities or revenue monetization around the T&E Cloud.


Your next question comes from Michael Nemeroff with Credit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Steve, I'd be remiss if I didn't ask you about the ADP relationship and how that contributed during the quarter.

S. Steven Singh

Sure. It didn't. Look, the -- I think we've spent a lot of time talking about it, that ADP relationship. I think that the important piece to remember here is that it's fundamentally about future opportunities and fundamentally about how do we deliver more and more value to that base of customers. What I'm incredibly pleased by is the fact that we've been working with that base of customers and migrating them from the legacy expense platform over to the Concur T&E platform. We're seeing as those customers move over. Obviously, just moving over really doesn't, by itself, provide any positive revenue impact to us, but we're seeing great adoption of our additional services like travel, like itinerary management, like our expanded services. And so that's been a very, very positive impact. The revenue potential on that is still very early. It's obviously going to take some time for that to build. The part that I think that is undervalued or not as well understood, and that should be is what's really happened to that relationship is the number of leads that ADP is driving to Concur has gone up substantively. And not only has that number of leads gone up substantively, the amount of deals we're closing from those leads has gone up substantively, literally 8x to 10x kinds of levels. And so we think that's fantastic for the long-term growth opportunity in the business. And then frankly, the other way around is also important. We are the second, I believe, the second largest lead source now for ADP.


Your next question comes from Michael Huang with Needham.

Marc Fuller

It's actually Marc on for Michael. Just a quick question around Concur Japan. And if I remember correctly, you had near 1,000 attendees. Just kind of wondering how that's going along and if any of these you're in active sales dialogues with or if you've gotten any of these opportunities closed yet?

S. Steven Singh

Yes. We've seen just a much better-than-expected success in Concur Japan. We have a fantastic team there that's led by a -- just a dynamic incredible CEO of Concur Japan. And obviously, in the last few quarters, we've seen better-than-expected bookings coming out of Concur Japan. We did -- although not in the last quarter, we did see a very large deal close in fiscal Q4, which we're just ecstatic with. And that was certainly driven by the attendance that we saw at that 1,000-user launch event.

Marc Fuller

Got it. And then last question, can you update us on Concurforce? Are you seeing any business out of that channel yet?

S. Steven Singh

Yes. I'm going to give that to Raj, and let him speak to it or add to this, but we certainly are pleased with the initial trajectory of Concurforce. We're very pleased with the partnership around that with Salesforce. Raj, do you want to add anything to it?

Rajeev Singh

Only, Steve, I think, that we've, one, seen great traction here in the United States as we rolled out here in the U.S. and Canada, and we're just really beginning the outsets of a European rollout with Concurforce and with the Salesforce sales team.

S. Steven Singh

Yes. And the only other thing was, that's probably worth adding to that, is that this is focused on the SMB segment where we're seeing great traction through our own distribution capacity and where we expect to see very, very solid traction in partnership with Salesforce.


Your next question comes from Ross MacMillan with Jefferies.

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

So you've obviously been ramping expenses this year. But as I did a little bit of math, it definitely looks like, compared to where you guided off your December quarter, so after Q1, it looks like the rate of spending has been a little bit light of where you were thinking. Is there anything that's kind of influenced that? Is it just the pace that we should've been able to hire? Or are there any other factors that have impacted that sort of initial plan going back to the start of the calendar year?

S. Steven Singh

Sure, Ross. So certainly, it's impossible to be at 100% of your targeted spend. The vast majority of our spend is headcount-related. And we obviously are very picky about who we bring onto the company. Having said that, we're very, very close to the spend levels that we want to be at. We are at roughly 2,300 full-time employees as of today. We expect to be at 2,500 or so by the end of September. R&D is obviously up a very substantive portion, I think roughly about 40% or so year-over-year. Our sales and marketing is up very substantively as well. I think that we will continue to be very, very selective about the people we bring on board, and that might have some minor impacts on delays in that spend. But it's certainly not -- I wouldn't read anything into that discrepancy of what you might have modeled. Any outperformance that you see in the operating margin or in the earnings is fundamentally driven by revenue outperformance, the opportunity we see long term is no different than we've seen over the last several years, and we're investing against that opportunity. So folks, if there's one more question, we'll take it. If not, we're going to go ahead and wrap up. Operator, are there any other questions?


And due to time constraints, sir, there are no further questions at this time. I would like to hand things back over to you, Mr. Singh, for closing remarks.

S. Steven Singh

Thank you. On behalf of Raj, and John and Frank and also my other co-founder, Mr. Hilton, I want to thank all of you for joining us for our Q3 earnings call. We look forward to getting back on the phone with you in November to update you on the progress of new business at that point. Thanks so much, and we'll see you soon. Bye.


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

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