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Concur Technologies Inc. (NASDAQ:CNQR)

F2Q08 (Qtr End 03/31/2008) Earnings Call

April 30, 2008 5:00 pm ET

Executives

John Torrey - EVP, Corporate Development

Steve Singh - Chairman and CEO

John Adair - CFO

Analysts

Laura Lederman - William Blair

Bryan McGrath - Credit Suisse

Jack Miller - Robert Baird

Sid Parakh - McAdams Wright Ragen

Ajay Kasargod - Piper Jaffray

Ross MacMillan - Jefferies & Company

Michael Whitney - Taylor Investment Council

Mitesh Dhruv - Merrill Lynch

Brian Wallins - Broadpoint Capital

Dan Cummins - Soleil

Operator

Good evening. At this time I would like to welcome everyone to the FY08 Q2 earnings release conference call. (Operator Instructions).

Mr. John Torrey, you may begin your conference.

John Torrey

Thank you, Operator. Good afternoon and welcome, everyone, to the Concur Earnings Call for our second quarter of fiscal 2008. 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 onto our webcast 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 one.

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 two.

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 three.

At this time, I'd like to turn the call over to Steve Singh. Steve?

Steve Singh

Thank you, John. Good afternoon, everyone. Thanks for joining us for our Q2 earnings call. There are four keys things that you should take away from this call. First, we exceeded Q2 expectations across every core metric.

Second, we are raising our guidance for fiscal 2008, also across every core metric.

Third, we see a solid demand environment for our services. With new customer growth expected to accelerate into Q3 and Q4.

And fourth, driven by the strength of our business model, our consistent operating performance and the scale of our market opportunity, for the remainder of the year we will increase our investments across the business.

Please turn to slide four.

We entered fiscal 2008 with a goal to transform our industry and our business. One Touch Business Travel became a reality with the launch of Concur Travel & Expense with Smart Expenses. This was an industry-first innovation that completely changed the notion of a traditional expense report.

With Smart Expenses, expense reports can be automatically completed, audited and paid with very little need for human intervention. We also acquired Gelco in an effort to drive scale across our business and deliver greater value to our customers. The acquisition and integration of Gelco crossed another major milestone with the successful launch of Concur Pay. But transformations become reality only when they're met with incredible execution.

Please turn to slide five.

We're off to a great start in fiscal 2008. Driven by exceptional operating performance across the business, Q2 financial results were well ahead of our expectations. Q2 revenue reached an all-time high at $53.7 million, $3.7 million higher than expected. There were two drivers behind that revenue out-performance.

First, the majority of the upside in subscription revenue came from faster than expected deployments of new customers, including several large customers. This has the effect of pulling forward the commencement of revenue streams from those customers. In fact, subscription revenue was $2.7 million higher than expected.

Second, one-time revenue was $1 million higher than anticipated, as some existing on-premise customers continued to expand their global deployments. So, driven by higher than expected revenue, and the inherent leverage in our business model, non-GAAP earnings per share for Q2 was $0.21, $0.04 per share ahead of our expectations, and driven by stronger earnings, free cash flow for the quarter was $0.31 per share, also significantly exceeding our expectations.

Please turn to slide six.

We saw a very solid demand environment in Q2, as we added more than 500 new customers. New customers included companies such as Carlson Hotels and Symantec. We also saw continued momentum for our Travel and Expense service with more than 40% of our new customers signing up for the integrated service. New Travel and Expense customers included Ameriprise, General Reinsurance and Frost & Sullivan.

We also launched Concur Pay and saw customers such as Waddell & Reed and Emerson Embedded Power sign up for the service. Concur Pay automatically reimburses employees and credit card vendors for approved expense reports. We expect Concur Pay to be well received by our customers, as it drives a clear and immediate return on investment.

In early 2007, we began increasing our investments in the European Union and Asia-Pacific markets. Our increased investments included share increases in distribution, marketing programs to support our sales initiatives, and investment in local product development and deployment resources.

In Q2 we saw early returns from that investment, as the EU and Asia-Pacific markets became meaningful contributors to new customer growth, including a global deployment of Concur Travel & Expense at Deutsche Bank. Look for us to continue expanding our investments in these markets.

Please turn to slide seven.

We continue to expand the network of partners participating in Concur Connect, with the addition of Choice Hotels. Concur Connect is a global program connecting our customers to content and electronic receipts from hundreds of suppliers. Choice Hotels joins a growing list of Direct Connect and electronic receipt providers, including airlines such as Air Canada, JetBlue Airways and Virgin Blue; hotels such as IHG, Hilton and Marriott, as well as car rental providers such as Hertz and Avis, and rail providers such as VIA Rail, SNCF, Rail1 and UK Rail.

Innovations such a Concur Travel & Expense, Concur Pay and Concur Connect are transforming our market and they are driving transparency into the corporate travel supply chain, putting control back into the hands of corporate customers and driving down the costs of doing business for our customers and their suppliers.

Please turn to slide eight.

Now let's turn our attention to the demand environment and how the current economic climate impacts our business. Clearly we're very pleased with Q2 results, as we signed more customers in Q2 than we did in Q1. Looking ahead we continue to see strong demand for our services across companies of all sizes and in all market segments. We expect to sign more customers in Q3 than we did in Q2, and we expect year-over-year customer growth in Q3 to exceed year-over-year customer growth realized in Q2.

In general, our solutions are well received in a tough economic climate as customers focus on cost controls and are more efficiently reaching and serving their customers. As you know, Concur is focused on automating employee spend management processes, transforming manual, expensive and labor-intensive business processes into one quick, simple and efficient process that significantly lowers the cost of doing business for our corporate customers. When combined with the economic advantages of being delivered in an on-demand model in which there are modest upfront costs and the customer is billed for the service as they use it, the value equation is very compelling as is the time horizon for return on investment.

With that as a backdrop, it's also important to remember that we're operating in a market that is under-penetrated. And frankly one in which we are the innovator and the clear market leader. We expect to continue to grow our business at compelling rates for the foreseeable future.

Please turn to slide nine.

Clearly, we're off to a great start of fiscal 2008. We are executing exceptionally well, and the leverage of our business model is very evident. We are operating in a big market, and we have an opportunity to build a global brand.

We believe that the employee spend management market is comparable in size to the $12 billion payroll processing market. We remain committed to building a multi-billion company in this market and we'll invest against our core initiatives against that goal.

Yet even as we invest against such a large-scale opportunity, we hold ourselves accountable to compelling return on investment. Here's how we govern our investment decisions. First and foremost, we're committed to our operating targets for the fiscal year.

Second, we're committed to investing incremental margin back into the business to drive compelling and sustainable growth in both revenue and in earnings, which of course drives long-term shareholder value. We expect our investments to drive a minimum of 25% growth in annual revenues for the forward three years, and to yield 100 basis points of operating margin improvement each year.

Our investment objectives are targeted and they're focused on driving scale. Those objectives are as follows.

First, we're committed to a highly scalable delivery model which, allows us to exceed the service and quality expectations of our customers, while driving compelling operating leverage in the business. We already have millions of end users across more than 7,000 customers, and our on-demand deployments are some of the largest in the world.

Each year we're adding more customers than the year before. To support growth in new customers you will see us continue to invest in hosting operations, customer support and customer deployment in anticipation of new customer growth.

How will you know if we're succeeding? Very simple. Operating margin should be expanding every year and customer retention rates should be consistent with our industry leading 97% retention rate. In fact, that's exactly what you're seeing in our business today.

Second, we need to increase market penetration. We need to get from the 7,000 customers we have today to 50,000 customers. Our current investment priorities put us on track to achieve that objective over the next decade. We'll continue to invest aggressively in distribution and marketing programs to develop that market and to increase our market penetration.

This is a consistent theme for our company and one that we believe is critical to building long-term shareholder value. You should expect us to continue to grow our direct sales force on a global basis and you should expect us to add new channel relationships in the European Union and Asia-Pacific markets.

And third, we will continue to invest in new services, setting the pace of innovation in our market and expanding the relationship that we have with our customers. Concur Travel & Expense and Concur Pay are the most recent examples of that commitment to innovation. You will see more in the quarters ahead.

Please turn to slide 10.

Clearly, we are very happy with our performance for the first half of the year, and as you can see from the press release, we are raising our estimates for the second half of the year. In a few minutes John will walk you through details of Q3 and fiscal 2008 guidance.

For those that are new to our business, it's helpful to understand how our revenue model works. New customers added in Q2, and those added in Q3 and Q4, drive revenue growth in fiscal 2009 and have no appreciable impact on fiscal 2008 revenue.

Q3 and Q4 subscription revenue is driven by customers we've sold in prior quarters that are expected to go live in the coming quarters. In other words, subscription revenue expectations for the remainder of the year are fairly well defined.

In addition, we expect one-time revenue to be $1.5 million or less in Q3 and in Q4. As you know, one-time revenue is largely driven by existing on-premise customers that are expanding their global deployments. These expansions are largely complete.

As is evident from Q2 results, our business affords us compelling operating leverage. Clearly, we expect to achieve our operating margin targets for fiscal 2008. We are also committed to investing that incremental margin back into the business to drive compelling and sustainable growth in both revenue and earnings, which of course drives long-term value.

Please turn to slide 11.

We're in the fortunate position of having executed exceptionally well in the first half of the year and of being able to raise our guidance for the second half of the year. We're driving the innovation curve in our market and delivering compelling value to our customers.

We added more new customers in Q2 than we did in Q1, and we expect to add more customers in Q3 than we did in Q2.

And with services such as Concur Vendor Payment, Concur Travel & Expense, Concur Pay and the soon-to-be-launched Concur Analytics, we're delivering added value that is increasing the revenue we can generate with each customer. That's a great foundation for long-term success.

With that, if you would please turn to slide 12, I'd like to turn the call over to John Adair, our Chief Financial Officer. John will provide more detail on Q2 results, as well as, our business outlook for Q3 and fiscal 2008. John?

John Adair

Thank you, Steve, and good afternoon, everyone. As Steve has outlined, our performance for Q2 was very strong. In my prepared remarks today I'll provide you with more detail on those results and our fiscal 2008 expectations, which we are again raising in light of our Q2 performance and our increased expectations for the second half of the year.

If you would, please advance to slide 13.

Total revenue for the quarter of $53.7 million, was up 74% over the same quarter of last year, driven by 82% growth in subscription revenue. This also compares very favorably to the year-over-year growth from Q1.

Total revenue growth improved from 69% in Q1 to 74% in Q2 and subscription revenue growth improved from 80% to 82% this quarter. Our stronger than expected growth in subscription revenue was driven largely by customer deployments, especially large customers, that went live much faster than expected. As a result these customers began generating revenue earlier than expected, providing a sizable life in the current quarter's revenues.

Please advance to the next slide.

Margins have continued to improve over the prior year, with our gross margin running at approximately 67% year to date, up 100 basis points from last year. Operating costs across the business were largely as expected for Q2, including integration costs related to Gelco.

Our non-GAAP operating margin for the quarter of 18.8% was higher than expectations, driven entirely by stronger revenue growth. As a result, Q2 non-GAAP earnings were well above our expectations, growing to $0.21 per share, compared to our target of $0.17 per share and growing $0.09 per share over the same period of last year.

Please advance to slide 15.

Cash flow from operations and free cash flow were also very strong for the quarter. In addition to out-performance in earnings, cash flow was up as accounts receivable were held flat even as revenue grew 9% sequentially. Cash flow from operations for Q2 totaled $17.8 million, compared to $10.8 million for the same quarter of last year. And after capital investments of $3.2 million, free cash flow was $14.6 million for the quarter, compared to $7.7 million last year.

During the quarter we also repurchased through the open market just over 1 million shares of our outstanding stock at an average price of $29.46. Roughly half of that purchase was made with operating cash flow generated during the quarter with the remainder from cash on hand and debt.

As we have mentioned in the past, we have and fully intend to continue to opportunistically repurchase stock through open-market means when there is a meaningful difference between our expectations of future performance and the market's expectations. With the volatility of the market this last quarter, we had just such an opportunity and retired 1 million shares.

As we've stated for many years now, our priorities for the use of cash are funding the growth of the business, acquisitions, and the repurchase of our stock for the benefit of our long-term shareholders. We have consistently operated against these priorities and expect to continue to do so as we focus on the long-term growth of the business.

Please advance to slide 16.

Turning now to our expectations for Q3 and fiscal 2008 as a whole, we continue to be very confident in our growth and earnings outlook. One of the benefits of our business model is the power of our recurring revenue stream which provides long-term visibility into our revenue trajectory and allows us to invest early and efficiently with a high degree of confidence.

We are growing profitably and rapidly today, because of investments that were made in prior years. That intentional focus on driving long-term profitable growth against a large opportunity has not changed. We will continue to invest in distribution, new services and service quality. Taking into consideration the strength of our performance this last quarter and visibility into our future revenue growth, we are once again raising our expectations for total revenue, earnings per share and cash flow for fiscal 2008.

Please advance to the next slide.

Let's look more closely at Q3 and the fiscal year as a whole. Total revenue for Q3 is expected to grow year over year by nearly 60% to $53 million, driven by continued subscription revenue growth. As more and more of our historic on-premise license customers have moved to our subscription offerings, we've shifted a large portion of our consulting resources to focus on deploying the growing number of subscription customers. As a result of this shift, we expect one-time revenue to be below $1.5 million per quarter for the remainder of the year. Note that with the accelerate customer deployments in Q2, which deliver recurring revenues from these new customers earlier than anticipated, the sequential increase in subscription revenue in Q3 will naturally be lower.

Including the strong revenue performance in Q2 and our increased expectations for the second half of the year, we are again raising our expectation for total revenue in fiscal 2008 to $211 million or an increase of $7 million over our prior expectation. Since September of 2007 we have now raised our revenue expectations by $13 million or 7%.

Please advance to slide 18.

As we've stated for many years now, we're focused on investing against our long-term growth objective of 25% annual growth, delivering market-leading innovative solutions and delivering superior and efficient customer service.

Including our continued investment in these areas, our non-GAAP earnings for Q3 are expected to be $0.20 per share, and we are again raising our expectations for total earnings for fiscal 2008 from $0.74 to $0.79 per share. We also reiterate our expectation of non-GAAP operating margin for the year as a whole to increase approximately 100 basis points to 18%.

Please advance to the next slide.

As we have commented in the past, the operating cash flow in our business is directly related to the monthly fees paid by our customers, as opposed to companies that collect the contract value up front. Much like license software providers, we bill and collect from our customers on a monthly basis as our customers consume the service. As such, our cash flow growth is closely aligned with the deployment of new customers, additional services sold into existing customers and expansion of our operating margin.

Based on our expectation of higher revenue and earnings for the year, we are also raising our expectation of cash flows. We now expect cash flow from operations for fiscal 2008 to increase to $46 million or $0.96 per share, compared to $32 million for fiscal 2007, and we are raising our expectations for free cash flow to total $32 million or $0.67 per share for fiscal '08, compared to $20 million this last year.

Now Slide 20, and in closing, while we have continued to see strong financial and operational performance, our focus remains on the long-term opportunity. We have the privilege of being the clear leader in a large, un-penetrated market, and we are focused on expanding our leadership position. Against that opportunity we will continue to focus our efforts on our long-term business plan, investing in distribution, new services and service quality.

And finally, based on Q2 performance and our increased expectations for the second half of the year, we have again raised our fiscal 2008 expectations for revenue, earnings and cash flow.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Laura Lederman with William Blair.

Laura Lederman - William Blair

Yes. Can you hear me?

Steve Singh

We can, Laura.

Laura Lederman - William Blair

Okay. Great quarter. Thank you very much. Just a few quick questions on the subject of the economy, which is everybody's favorite question. I guess you would have positive and negative impacts. On the positive do you think that customers are getting up and running more quickly or deciding to become customers so they can save money, therefore a negative economy's helping you there? And on a negative side, what were the overages in the quarter? Usually it runs about 1% of revenue. Is there any change in that? And then I'll follow up with a few additional questions.

Steve Singh

Sure. Hey, Laura, it's Steve. I think that in general we tend to do pretty well in a tough economic climate. We see greater customer wins, and that's exactly what we saw in Q2. We saw over 500 new customers added in the quarter. And I don't think the next piece has anything to do with the current economic climate, but I think that with our expansion of the number of services we're offering, we saw great traction relative to Concur Travel & Expense. More than 40% of our customers signed up for both services. We saw some early success with Concur Pay.

Relative to overages, by the way the last thing on that is obviously we expect Q3 new customer victories to actually be higher than what we saw in Q2. Relative to overages, nothing unusual on that. We did see a little bit more volume than we would have expected, but nothing different than the 1% kind of cap that we would normally guide to.

Laura Lederman - William Blair

Okay. Moving on, Gelco, converting any of those customers, can you give us an update on that? And also vendor payments and how that's going and any new customers won there?

Steve Singh

Sure. On Gelco conversions, we did see some conversions within the quarter. We can't quite at this point speak to whom, but we continue to see conversion opportunities for Gelco. And there, to be very fair, we really look at that very much from the point of view of working with the customer to find what's the right time for them to convert over to Concur Travel & Expense. And we continue to see our customers really embracing the Travel and Expense service. But I think the way to look at Gelco conversions is over a multiple year period, which is what we guided to when we first acquired the company.

With respect to Concur Vendor Payment, we did see good solid traction in that marketplace. I honestly don't know exactly how many customers we signed there. We signed well north of ten certainly but I just don't know the exact number off the top of my head. There, I would point to that that we're seeing good traction there. We are clearly solving a real customer problem. But it's still very early in the game for us on Vendor Payment. We do think that over time we're going to see a significant number of our customers become Vendor Payment customers as well. I think that they way I would look at Vendor Payment is that the revenue opportunity around it is very consistent, at least in the customers we've signed so far. Very consistent with our original thoughts, with an opportunity to effectively double the revenue per customer.

Laura Lederman - William Blair

Great. And final question for me and I'll pass it along, which is can you talk a little bit about the Analytics? How much you think the average customer will buy just like the Vendor Payment doubles the customer? Can you talk a little bit about Analytics, and has it been in beta if you will with a few customers and what is the initial feedback there and that sort of thing?

Steve Singh

Yes. Analytics again we're not--we haven't launched it yet. We expect to launch it in the back half of fiscal 2008. The revenue opportunity is, as we've talked about before, about $0.25 on the dollar. And we don't see any reason why it shouldn't be roughly in that ballpark.

Laura Lederman - William Blair

Great. Thank you so much.

Operator

Your next question comes from the line of Bryan McGrath with Credit Suisse.

Bryan McGrath - Credit Suisse

Hey, guys. Can you hear me?

Steve Singh

Yes, sir.

Bryan McGrath - Credit Suisse

Quick question on the migrations from Gelco. As this continues to go on, can you give us a little bit of an idea how long one of these migrations take? Because I was just surprised to see the expectations for consulting and other revenue to be so low if you're kind of going through this constant migration.

Steve Singh

Sure. So let's make sure we separate out these two concepts. One is migration of Gelco customers over to Concur platform, and the other is consulting revenues. They are two completely different revenue sources. Think about the consulting revenue generated as only related to existing license customers. It has absolutely nothing to do with on-demand customers, whether they're Concur on-demand customers or from the Gelco platform. So the revenues that we're talking about churning down are really driven by the fact that we have a finite universe of license customers and their expansion or their deployments are largely complete.

Now, related to Gelco, which is completely separate from that, those customers migrate over from the Gelco platform over to the Concur platform, and it's really and I would look at it the same basic way as we look at a brand-new Concur on-demand customer, which is a very modest setup fee. Which is of course spread over the expected life of that customer and recognized over that time period. And then there's a monthly fee that that customer pays. And that all shows up in subscription.

Bryan McGrath - Credit Suisse

Okay. And one of the things you've talked about in the past is given if the economy continues to be tough that perhaps average dollar spent on business travel might come down but the actual number of trips wouldn't actually change, and in theory that would show up as kind of the average dollar per expense report comes down. I'm just wondering if you've actually seen that happen over the past few months?

Steve Singh

We want to be careful not to get too much into customer-specific data. But I think, the general theme is right. That's what we've seen in the past where in a tougher economic climate you see not so much a negative trend in number of transactions, but more of a lower number of dollars spent per travel trip, so to speak. And there's a couple of interesting data points around that. Anybody can pick up various travel publications and you can see various surveys on this, but Business Travel News and also NBTA conducted a survey and they saw that the dollars flowing into mid-tier hotels was increasing relative to dollars flowing into higher tier hotels. Which is of course a natural reaction when you have a tougher environment; you stay more at a moderately priced hotel.

And again I don't mean to be overly anecdotal about this, but you don't eat at a Smith & Wollensky. You eat at a more moderate-priced restaurant. Again, nothing against Smith & Wollensky. But the core thing is you see more responsible behavior relative to how much you spend on travel. What you don't see is customers saying, "I don't want to go visit my customers," or, "I don't want to go call upon prospects."

Bryan McGrath - Credit Suisse

Great. Thank you very much. I'll pass the baton.

Operator

Your next question comes from the line of Steve Ashley with Robert Baird.

Jack Miller - Robert Baird

Hi, guys. This is actually Jack Miller filling in for Steve. Congrats.

Steve Singh

Hi, Jack.

Jack Miller - Robert Baird

Just one question. Steve, you talked about having good success with your new customers going to Travel & Expense and also moving Gelco customers onto that product. Just wondering what kind of traction that product's getting among your existing Concur expense install base, and maybe if you have a percent or customer count that is on that product?

Steve Singh

You're talking about Travel & Expense?

Jack Miller - Robert Baird

Yes.

Steve Singh

Okay. You know, I will tell you that our focus predominantly is on new customers. And so, that's why we really point people to look at what's happening in new customer growth. If you look at the last three quarters, it's been roughly 30%, 35% and then 40% sequentially, as far as uptake on Travel & Expense with new customers. As of the end of the last fiscal year we're about 15% penetration into the existing customer base. That penetration is increasing. The thing I'd point you to is that really only at the beginning of this fiscal year did we establish a direct sales force that was focused on our existing customers and cross-selling our new services into those accounts. I wouldn't read anything more than, look our focus is on new customer expansion. But we certainly see that same level of interest from existing customers that we see in new customers.

Jack Miller - Robert Baird

Okay, great. And then for the second quarter in a row at least you've had a lot of deployments being completed faster than expected. Just wondering what the assumption is in your guidance with respect to that, and I guess room for possible upside to your guidance.

Steve Singh

I appreciate that we certainly had a meaningful upside this quarter. I think there are a couple of things that we ought to look at and factor into how we think about Q3 and Q4. First of all the number of the accounts that we're actually deploying, that will actually show up as Q3 and Q4 incremental revenues, are deals we sold back in Q1 of this fiscal year, Q4 of last fiscal year and Q3 of last fiscal year.

And so, the deals we sold in Q2, the ones we'll sell in Q3 and Q4 clearly have no impact on 2008 revenues. So, I think, there's a small universe of companies that we're deploying against. And so I would guide everyone to the expectations that we're setting for Q3 and Q4. I think that we have a pretty tight band on where we expect subscription revenues to show up.

Jack Miller - Robert Baird

Okay. Great. Thanks very much.

Operator

Your next question comes from the line of Sid Parakh with McAdams Wright Ragen.

Sid Parakh - McAdams Wright Ragen

Hey. Good afternoon, guys. Great quarter. Congratulations. Just want to ask quickly about, you've talked about customers or customer growth kind of accelerating into Q3. How should we think about revenue growth in future quarters, I'm not asking about Q3 or Q4, but more like fiscal '09? If I go back and if you back out the Gelco numbers, subscription revenues have grown pretty nicely from, say, 35% in the third quarter of last year to about almost 50% in the current quarter. Can you give us a sense of how you see FY09? And then how does that compare to your 25% longer-term outlook?

Steve Singh

Yes, sure. And I'll take at face value the numbers you just quoted, because I just don't know them off the top of my head, minus Gelco. We just don't think in those terms, very frankly. But fair enough on your analysis. I think that the way we would guide investors to look at 2009 and 2010 revenue, 2011 revenue, is really the 25% topline growth that we've been talking about. That's how we run the business. We look at it very much from the point of view of how do we invest to get sustainable growth rates? And 25% is a very healthy growth rate to target, and that's what I would guide everybody to.

Sid Parakh - McAdams Wright Ragen

Okay. That's fair. And quickly can you talk about how much of your revenue there are coming from international customers now?

Steve Singh

Sid, I'll be happy to touch upon that. Let me hit one last thing on the other question you asked. It's also important to keep in mind that not only 25% topline growth that we expect in the forward three years, but we're also synchronously growing earnings, 100 basis points a year on the pro forma operating margin line.

Relative to international, again we're very early in our penetration into the European Union and Asia-Pacific market opportunities. As I mentioned, we really only in fiscal 2007 started ramping our investments in that area. This quarter, frankly, was one of the first quarters we saw a real nice payback on those investments, right. So, if you go back the last three or four quarters, we started ramping our investments in R&D, we started ramping our investments in distribution, we started ramping our investments in marketing programs. And what we saw in the March quarter is that's really starting to pay off. We saw revenues coming out the EU and Asia-Pacific environments, or new customer growth more accurately really start to become material to our overall growth. In fact Deutsche Bank, it's a great account for us. They're one of the largest companies obviously in Germany, and they are going to deploy Concur Travel & Expense on a global basis.

Sid Parakh - McAdams Wright Ragen

Okay. Can you give us any metrics, or you don't want to be doing that?

Steve Singh

I can't speak to specific metrics on any given customer. I would look at it and say that we think over the long term, and we're not ready to define what long term is yet, that revenues that originate outside the US ought to be 30% plus in the business.

Sid Parakh - McAdams Wright Ragen

Okay. That's great. And final question then. On the economic front have you seen any of your customers come back and say; hey. We don't think we'll be doing, say, 5,000 transactions this year or could you lower the minimum for us? Have you seen that happen and to what extent?

Steve Singh

Sure. Again I'm not going to speak to specifics on this, but here's the thing that might be interesting for you. Of course we see customers who say. You know what? I'm probably not going to do that many transactions. I want to lower them. But what might surprise you is we probably see as many or more that actually increase the number of transactions.

Sid Parakh - McAdams Wright Ragen

Okay. That's what I was trying to get to as well. So thank you. Thank you very much, guys.

Steve Singh

Thank you, Sid.

Operator

Your next question comes from the line of Ajay Kasargod with Piper Jaffray.

Ajay Kasargod - Piper Jaffray

Hi, John and John. Congratulations on the quarter. First question would be around partners. I just want to ask you, Steve, have you adjusted any of your relationships with partners like an example being banks, whether it be in terms of the actual relationship or economics of those deals?

Steve Singh

No, Ajay. We obviously are very focused on making sure that the majority of our new customer victories come through our own distribution channel, our own direct sales force. Having said that, of course, we are very appreciative of the relationships we have with our channel partners. The credit card providers, such as US Bank and Bank of America, as well as, ADP. We did expand our relationship with ADP to include ADP Canada, either the beginning of last quarter or the end of the prior quarter. I'm not sure exactly when that occurred. I think that the way I would look at our distribution relationships are that we will continue to expand those relationships, ideally one new relationship every year that's meaningful. And then that will always be, I guess, matched up against increased distributions in our own direct sales force.

Ajay Kasargod - Piper Jaffray

Actually to that point, I know that one thing you had commented on was that in the European Union, maybe even Asia-Pac, you're looking to expand partners in those markets. So are you looking for financial services, bank-type partners like you have in the past? Or what type of partners are you looking at?

Steve Singh

That's a great question, and I think that that's exactly the right way of looking at it is that the partnerships we've had here in the US are in fact great indicators of the kind of partnerships we're pursuing outside the US market. So, financial institutions are fantastic partners. They drive great leads. As well as, frankly companies like ADP. And so, this is something that we will continue to expand in much the same philosophy as we see in the US.

Ajay Kasargod - Piper Jaffray

Okay. And then on this partner, just one more question regarding partners was that, I know, that you said you focused all your new customer wins on direct sales, but just to understand products like Vendor Pay and Concur Pay are those products that are also resold through partners or is that purely direct?

Steve Singh

That depends on each partner in all fairness. Concur Travel, recently we expanded our relationship with ADP to also sell Concur Travel, in fact, as Concur Travel & Expense. And with some partners it makes sense and with some other partners it's really more important to focusing on just Concur Expense. And then use our direct sales force to sell the additional products.

Ajay Kasargod - Piper Jaffray

Last question would just be on customer wins. I know you had 500. Clearly momentum in terms of the number of customer wins. Is there any change in the distribution of the size of the customer being large, medium and small in this quarter maybe versus last quarter or a year-ago period?

Steve Singh

I wouldn't look at this and say that there's any meaningful change. There are changes from quarter over quarter. So for example in the June quarter, the quarter we're in right now, you'll probably see more middle-market deals just because it happens to be the fiscal year end for ADP, one of our larger channel partners. What we're absolutely seeing is the average revenue per customer that we're seeing is going up across all segments.

Ajay Kasargod - Piper Jaffray

So average revenue pertaining your customer base or new customers is going up?

Steve Singh

It's actually both, but obviously with new customers it is going up, because we're seeing greater number of new customers buying multiple services. And then as we cross-sell into the existing customer base we're seeing that exact same effect.

Ajay Kasargod - Piper Jaffray

And then I might have missed this at the beginning of the call, and then I'll stop here. Is it still your goal to get to 140 to 160 reps on what you are carrying on the head count by the end of the year?

Steve Singh

Yes, 140-plus. And it's really largely dictated by our capacity to hire high-quality individuals in that time period.

Ajay Kasargod - Piper Jaffray

Are you still at 110, or did you add in the quarter?

Steve Singh

We did add in the quarter and so we're on our way to that 140-plus target. The only thing that I would say, Ajay, is that we don't really break down kind of where we add the reps. We think it's competitive data that we just don't want to share.

Ajay Kasargod - Piper Jaffray

Good job, Steve. Thanks.

Steve Singh

Thank you. See you.

Operator

Your next question comes from the line of Ross MacMillan with Jefferies & Company.

Ross MacMillan - Jefferies & Company

Thank you. I think most of my questions have been answered, but just maybe going back to Concur Travel & Expense. You're getting that 40% of new customers that are taking both. As you think about the base and the pace at which you can get those customers to convert over, do you expect it to be a gradual transition or would you expect that potentially at some point [Technical Difficulty].

Steve Singh

Is there the rest of that sentence? We may have lost, sorry about that. But I'll try to answer the question I did hear. I would tell you that at the end of the day it's really not about the base of customers that we have. We have 7,000-plus customers. There's a million-plus companies in the US and the EU that have 75 employees or more, so we're very focused on that 1 million minus 7,000 prospect base. Having said that, again I wouldn't read anything negative into that, because we're obviously selling our additional services back into our customer base and very successfully. Next question, please.

Operator

Your next question comes from the line of Michael Whitney with Taylor Investment Council.

Michael Whitney - Taylor Investment Council

I just have a quick clarification. I think you answered this and I missed it. On the accelerated deployments, could you talk about why that's happening, that why you're able to accelerate faster? Are customers just that excited to be deploying the product because they're looking forward to savings, or what the real drivers are there?

Steve Singh

Well, I think, Michael, the drivers there tend to be two-fold and they vary from customer to customer. But in some cases it's really we continue to improve our capacity to deploy customers. And so, that has a positive impact in any given relationship. But in others, and we do see this a fair bit with our customers, they see the opportunity to complete this deployment and start an automated service, that frankly is cheaper than what they were doing before. So I do think there's benefit to the customer in getting those deployments done quickly and starting to drive real savings.

Michael Whitney - Taylor Investment Council

Okay. And does the time of year have anything to do with this? Is it possible this is just a slower time and that at other times of the year there may be resources devoted to doing other things? I mean, at the customer sites?

Steve Singh

No, I don't think so, Michael. I don't think that time of year has much to do with it. I think it has more to do with what's happening at any given customer site. Look, I think in Q2, the quarter we just finished and are reporting on, we had exceptional deployment success. And that always does accelerate the revenue stream for us. And we're not going to always have that. Some quarters it will be a little bit less benefit from accelerated deployments. Some quarters it'll be exactly what we expected.

Michael Whitney - Taylor Investment Council

Okay. Great. Thank you.

Steve Singh

Thank you.

Operator

Your next question comes from the line of Mitesh Dhruv from Merrill Lynch.

Mitesh Dhruv - Merrill Lynch

Hey, guys. Congratulations on a good quarter. Just a couple of quick questions. Clearly there's an up-sale and cross-sale case to be made with all these modules you're introducing, Concur Pay, Travel, whatnot. But how do the customers pay for these modules? Is it an additional transaction for them?

Steve Singh

Sure. It's really not about additional transactions per se. It depends on the actual module, right. So if it's Concur Pay, then there's a higher fee per transaction, because there's additional value we're delivering to the customer. There's additional value or the additional cost that the customer is able to reduce within their internal organization. Concur Vendor Payment tends to be more of like it drives the number of transactions up pretty materially. So it just depends on the service.

Mitesh Dhruv - Merrill Lynch

And on Concur Pay specifically, what kind of fees is that, a 15%, 20% fee of the base?

Steve Singh

No. Again we're not going to speak to exactly the fee structure. But in general and the guidance we've given is that you should expect about a 15% lift. But again, I'm not going to get into the specifics of how we price it.

Mitesh Dhruv - Merrill Lynch

Okay. And just one quick questions on the deferred revenues. On the cash flow, the benefit from deferred revenue was $4.3 million, yet on the balance sheet if you see the difference it's only about $2 million. Was there a currency impact to that this quarter?

John Adair

I think you just have to pull together short-term and long-term.

Mitesh Dhruv - Merrill Lynch

Yes, I'm looking at short-term and long-term. Total deferred was $41.2 million for this quarter and $39.4 million last quarter.

John Adair

Yes. Its part of that may be the adjustment from acquisition as well.

Mitesh Dhruv - Merrill Lynch

Okay. But there's no currency benefit reflected in this cash flow statement?

John Adair

No. Not anything material that would have any impact.

Mitesh Dhruv - Merrill Lynch

Okay. Thank you so much. That's it for me.

John Adair

Thank you.

Operator

Your next question comes from the line of [Brian Wallins] with Broadpoint Capital.

Brian Wallins - Broadpoint Capital

Hi, thank you. This is Brian for Broadpoint.

Steve Singh

Hi, Brian.

Brian Wallins - Broadpoint Capital

Hi. I was wondering if you could just possibly describe if even just directionally where your capital expenditures expectations stand for the remainder of the year?

John Adair

Sure. So, year-to-date we're about $6.5 million on CapEx. Our expectations are we'll be somewhere in the neighborhood of $14 million in total for the year.

Brian Wallins - Broadpoint Capital

Okay, great. Thank you. That's all I have.

John Adair

You bet.

Operator

Your next question comes from the line of Dan Cummins with Soleil.

Dan Cummins - Soleil

Thanks. I had two quick questions. I know you had a revenue overage, but the business seems to be running at about a 19% margin right now, with integration costs for Gelco, and I'm just curious if your opinion, your longer-term opinion, has changed in terms of how profitable the business is at this amount of scale? And then I had another question related to some kind of same-store metric. Thanks.

John Adair

Sure, Dan. So you're right, this last quarter we ran at about 18.8% operating margin. That did include all the costs in the business inclusive of integration costs. I wouldn't read too much into the inclusion of those integration costs. Our target is 100 basis point improvement on a year-over-year basis. That improvement this year included the impact of integration costs. And we think on a year-over-year basis into the foreseeable future we'll continue to run at that improvement of about 100 basis points. On a long-term basis, expect us to get to around 30% on an operating margin. And that's been our perspective for quite some time now.

Steve Singh

There's no way that I would read anything into this to say that it's different than our ongoing expectations. In fact if anything the business continues to perform better than we had anticipated.

Dan Cummins - Soleil

No, I heard you clearly up front. You said you want to invest more in the near term. To get back to that comment that eventually you envision tens of thousands of customers over the next decade, in order to do that you'd have to roughly double the rate at which you're pulling in new accounts. And I recognize that's a very long-term vision, but I just wonder when we might see Concur able to add approximately 1,000 customers per quarter. But you don't have to answer that today.

Steve Singh

Yes, I can't just address that today.

Dan Cummins - Soleil

My question was in terms of the organic growth rate of the company right now, which seems to be right around 30%, how much of that would you attribute to some sort of core same-store metric, looking at the customer base as it stood a year ago?

Steve Singh

Insignificant, Dan. I think the biggest variable to growth right now is new customer additions. Certainly we're starting to see some success with cross-selling into our customer base, but on a percentage of overall revenues it's around a year.

Dan Cummins - Soleil

If I could just ask one last follow-up. Just for the gigantic customers that you've had for some time, and this really gets to a question about the macro-environment, what are they doing right now versus a year ago in terms of business travel and T&E volumes?

Steve Singh

This varies depending on the customer, but, I guess, I would step back and not look at just Concur here. I would look outside of Concur and see what's happening in the broader environment. I think that one of the bellwethers in this area is American Express. They just had an earnings call a few days back and they talked about how the revenue in their business unit, business-to-business unit, and their number of transactions in that unit was actually up year over year. I think that's a broader read on the environment.

Dan Cummins - Soleil

Okay. Thanks.

Operator

At this time there are no further questions.

Steve Singh

Okay. Well, John, and John, and I thank you for participating in our Q2 2008 earnings call. We look forward to speaking with you again next quarter to update you on Q3 results. Thank you very much.

Operator

This concludes today's FY08 Q2 earnings release conference call. You may now disconnect.

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Source: Concur Technologies Inc. F2Q08 (Qtr End 03/31/2008) Earnings Call Transcript
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