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Executives

Steve Singh – Chairman and Chief Executive Officer

John Adair – Chief Financial Officer

Analysts

Brendan Barnicle - Pacific Crest Securities

Jack Miller - Robert W. Baird & Co., Inc.

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

Ross Macmillan - Jefferies & Co.

Richard Baldry - Canaccord Adams

Bryan Mcgrath - Credit Suisse

Bradley Whitt - Broadpoint Capital

Sid Parakh - McAdams Wright Ragen

Atesh Drue [ph] - Merrill Lynch

Daniel Cummins – Soleil

Kash Rangan - Merrill Lynch

Concur Technologies, Inc. (CNQR) F3Q08 Earnings Call July 30, 2008 5:00 AM ET

Operator

Welcome to the fiscal year 2008 Q3 earnings release conference call. (Operator Instructions) I would now like to turn the conference over to John Torrey, Executive Vice President of Corporate Development.

John Torrey

Welcome everyone to the Concur earnings conference call for our third 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 web site at www.concur.com. Other information of interest to investors including our SEC filings, press releases, and recent investor presentations can be found on the investor relations page of our web site. We are now on Slide 1.

Our speakers for the call today are Steve Singh our Chairman and Chief Executive Officer and John Adair our Chief Financial Officer. After their prepared statements today, Steve, John, and I 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 Slide 2 and our filings with the Securities and Exchange Commission which are available at www.sec.gov for additional information on risk factors that could cause actual results to differ materially from our current expectations and the forward-looking statements expressed or implied during this conference call. We assume no duty or obligation to update these forward-looking statements even though our situation may change in the future. Please now advance to Slide 3.

At this time I would like to turn the call over to Steve Singh.

Steve Singh

There are five core themes to take away from this call. First we exceeded Q3 expectations across every core metric. Second, we are raising our guidance for fiscal 2008 across every core metric. Third we see a solid demanding environment for our services as we head into Q54. Fourth, yesterday we signed a long-term strategic partnership with American Express that will significantly expand our market reach and fifth, driven by the strength of our business model, our consistent operative performance, our partnership with American Express and the scale of the market opportunity for the remainder of the year and into the foreseeable future we will increase our investments across the business, all within our existing financial objectives.

Please turn to Slide 4.

Driven by exceptional operating performance across the business, Q3 financial results were well ahead of our expectations. Q3 revenue exceeded our expectations reaching an all time high at $54.9 million. Driven by higher than expected revenue and the inherent leverage in our business model, non-GAAP EPS for Q3 was $0.,24 per share, well ahead of our expectations and driven by stronger earnings free cash flow in the quarter was $0.33 per share, also significantly exceeding our expectations.

Please turn to Slide 5.

We saw a very solid demand environment in Q3 as we added more than 700 new customers. New customers included companies such as Getty Images, the William Wrigley company, Datapak and the Denver Center for Performing Arts. We saw continued momentum for our traveling expense service with customers such as Sharp Electronics, Compular and Kline and Company signing up for the integrative service. Concur pay saw continued traction in the quarter and looking ahead we expect to see Concur Pay adopted by the majority of new customers.

As you know, in early 2007 we began increasing our investments in the EU and Asia Pacific markets. Our increase investments included sharp increases in distribution, marketing programs to support our sales initiatives, and investment in local product development. We continue to see early returns from these investments as the EU and Asia Pacific markets continue to be meaningful contributors to new customer growth. New customers in the quarter included Warner Music and Afton Chemical, both of which signed up for Concur Travel and Expense.

Please turn to slide 6.

We continue to expand the network of partners participating in Concur Connect with the addition of SWA Biz, Inner Jet and Volaris. Concur Connect is a global program connecting our customers to content and electronic receipts from hundreds of suppliers. SWA Biz, Inner Jet and Volaris join a growing list of direct connect and electronic receipt providers including airlines such as Air Canada, Jet Blue and Virgin Blue. Hotels such as ISG, Hilton and Marriott, car rental providers such as Hertz, Avis Budget and wheel providers such as Veogrow [ph], SMCF, Rental One, and UK Rail.

Please turn to Slide 7.

Now let’s turn our attention to the demand environment and how the current economic climate impacts our business. We continue to see strong demand for our services across companies of all sizes and all market segments. We expect to sign more customer contracts in Q4 then we did in Q3.

In general our solutions are well received in a tough economic climate, as customer focus on cost controls and on more efficiently reaching and serving their customers. As you know, Concur is focused on our automating employee spend processes transforming manual expenses 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 up front 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 is also important to remember that we are operating in a market that is under penetrated and frankly one in which we are the innovator and clear market leader. We expect to continue to grow our business at compelling rates for the foreseeable future.

Please turn to Slide 8.

So we just posted a great Q3 and we raised our expectations for the rest of the year. Let’s pause for a moment to take a step back. We are operating in a big market and we have an opportunity to build a global brand. We believe the scale of our market opportunity is comparable in size to the $12 billion payroll processing market. Let’s see how our incremental steps put us in a position to capitalize on that opportunity and then let me highlight our high-level goals.

Our marketing opportunity is maximized by driving efficiencies into the travel supply chain and the foundation of our market opportunity is expense management. With the shift to an on demand business model we greatly expanded the addressable market to well over one million corporations, but even as we established a clear leadership position in the expense management market, in concert with our customers and years in advance of the rest of the industry, we saw an opportunity to drive a better end user experience and deliver greater value to our corporate customers by integrating travel booking with expense reporting.

To execute against that opportunity we acquired Outcast in 2006. At the start of fiscal 2008 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.

Customer adoption of our integrated travel and expense service has forced the rest of the industry to change its approach. Over the next year it will no longer be the norm to buy a stand-alone travel booking service or a stand-alone expense reporting service. Integrated travel and expense will become the minimum requirement.

Last year we introduced Concur Connect which is a global program connecting our 7,000 plus customers who spent more than $35 billion last year to travel content and electronic receipts from hundreds of suppliers. Then at the start of fiscal 2008 we acquired Gelco with a goal of driving scale, which would allow us to invest more aggressively in our business and deliver greater value to our customers. The acquisition and integration has been well managed and has progressed smoothly. Concur Pay, which comes as the direct result of the Gelco acquisition, was launched in the March quarter and is trending to be a service that the majority of our customers will opt in for.

Last week we announced Concur Analytics, the next generation of corporate travel spend analytics which is an industry first and available only from Concur. It enables clients to automatically reconcile travel bookings to actual spend at the line item level, all from one seamless service accessing one comprehensive source of data and available at the click of a button.

Innovations such as Concur Travel Expense, Concur Pay, Concur Connect and Concur Analytics 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 cost of doing business for our customers and their suppliers.

Along the way we have been investing aggressively distribution in both direct and indirect through partners such as ADP, US Bank, Citigroup, Bank of America, BCD Travel and Cossen Light and Lee [ph].

Yesterday we signed a long-term distribution partnership with American Express turning our largest potential competitor into one of our largest partners giving us a channel into tens of thousands of potential customers. In executing against this marketing opportunity we have two high-level goals. Our first priority is to grow our base of customers from the 7,000 tough customers we have today to more than 50,000 customers.

Our investments and distribution, including our recently announced partnership with American Express affords us the opportunity to make that goal a reality over the next decade. Our second and parallel goal to drive growth is to expand our role in the travel supply chain with new services such as Concur Travel, Concur Pay, Concur Analytics, and others yet to come.

At this point it should be obvious why aggressively investing in distribution, leading the markets in product innovation, and setting the standard for operational and service excellence is so critical to our success. Successful execution against this market opportunity will drive compelling and sustainable growth in revenue, earnings and cash flow for years to come, creating compelling value for our long-term shareholders.

Please turn to Slide 9.

Let me highlight the key elements of the American Express Partnership and then outline how the partnership will impact our business over the next year.

The first component of the partnership is a long-term distribution agreement that significantly expands our market reach and our distribution capacity. Our objective in this partnership is simple: promote Concur services to the American Express customer base through the American Express field organization. Under the terms of the partnership American Express will exclusively promote Concur Expense to their customers and prospects on a global basis.

As you may already know American Express is a leading global payments and travel management company with tens and thousands of customers across the globe. A variety of industry analysts estimate that American Express has 60% plus market share in the corporate card market. Additionally, the American Express corporate card sales and account management team is at least an order of magnitude larger than our field organization, so depending on the market segment American Express field organization will either pass leads to Concur or sell Concur services into their customer base; however in all cases the customers contracting with Concur will be deployed by Concur and they will be serviced by Concur.

This partnership validates our industry leading services for TD expense management and it focuses two market leaders on driving even more value for their mutual customers.

Please turn to Slide 10.

The second component of the partnership is that American Express will become a minority investor in Concur. The investment was very important to American Express as it allows them to be vested in and benefit from the long-term value that can be created from this partnership. Specifically American Express invested $251 million to purchase 6.4 million shares of Concur stock, which represents a 13% equity position in Concur. The investment was priced at $39.27 per share and was based on a 17% premium to the trailing 30-day average at closing.

Concur also issued to American Express 1.28 million warrants also priced at $39.27 per share. The warrants are non-transferable and can be exercised any time over the next two years. Assuming the full exercise of the warrants, American Express would own 15.2% of Concur after having invested $302 million. The investment is mutual to GAAP and non-GAAP EPS over the near term.

Please turn to Slide 11.

As part of the equity investment Ed Gilligan, Vice Chairman of American Express was appointed to the Concur board of directors. I have known Ed for years and believe he will add incredible value to our board of directors.

It is important to note that in all matters except M&A and select Concur share issuances, American Express will vote its shares in the manner recommended by the Concur board of directors or in proportion to votes cast by all other shareholders. Additionally we put in place a standstill agreement for the term of the partnership which limits American Expresses ability to increase its ownership position above 15.2%. Our companies share a common culture, we are both innovators with a goal of driving efficiency and value into the markets we serve. We look forward to working with American Express to deliver compelling value to our mutual customers.

Please turn to Slide 12.

Now lets talk about how this partnership will impact our business for the remainder of fiscal 2008 and fiscal 2009. As with any partnership it will take two to three quarters for our organizations to learn how best to work together to develop a pipeline of business and to close the very first deal and as you know, once we sign a customer on a dollar weighted basis it takes us an average of two quarters to deploy the customer, which means that first dollar of revenue from this partnership will show up in early fiscal 2010; however to execute against the partnership we will immediately increase our investments in distribution capacity on a global basis to align ourselves with American Expresses fuel organization.

We will immediately increase our investments in customer service and customer deployment teams to support the expected increase in new customer; however given the strength of our business and the leverage in our operating model, we can meet our investment needs while still improving non-GAAP operating margin by 100 basis points from fiscal 2008 to fiscal 2009, in other words, within our existing financial targets for operating margin. Speaking specifically to Q4 of fiscal 2008, our operating leverage is so strong that we can absorb the planned increases in spend while still allowing us to raise our guidance for the fiscal year.

The first external signs of success of this partnership will be acceleration of new customer growth which we expect to see in mid-fiscal 2009. We are in the fortunate position of having executed exceptionally well through out the fiscal year and of being able to raise our guidance yet again.

While we are pleased with our quarterly results, we are focused on the long-term. We are driving the innovation curve in our market and delivering compelling value to our customers. We are investing in long-term distribution capacity and we are committed to setting the standard for operational and service excellence in our industry. We are committed to creating long-term shareholder value that can endure for generations to come.

With that if you would please turn the slide to number 13; I would like to turn the call over to John Adair, our Chief Financial Officer. John will provide more detail on Q3 results as well as our business outlook for Q4 and fiscal 2008.

John Adair

In my prepared remarks today I will provide you with more detail on Q3 results and our fiscal 2008 expectations.

Q3 was another record quarter for revenue, earnings and cash flow and in light of that performance and our visibility into the coming quarter, we are for the third time this year raising our expectations across all three metrics.

Please advance to Slide 14.

Total revenue for the quarter reached an all time high of $54.9 million, $1.9 million higher than expected. This reflected an increase of 65% over the same quarter of last year, driven by 76% growth in subscription revenue. One-time revenues were also down 40% compared to Q2 of this year, exactly as expected. Out performance in revenue was entirely driven by upside in subscription revenue which came from faster than expected deployments of new customers which has the effect of pulling forward the commencement of revenue streams for those customers.

Please advance to the next slide.

We continue to see strong margin and earnings performance in the quarter. Our business model is highly scalable and affords us the benefit of driving strong and improving gross and operating margins as we add more customers and sell additional services into those customers. At the gross margin level we continue to add more transactions and revenue on top of a highly scalable infrastructure driving strong period over period gross margin expansion.

For the quarter we generated a gross margin of approximately 68%, up 300 basis points from the same quarter of last year. Operating costs across the business were largely as expected for Q3 as we continue to invest against our objectives of growing distribution, adding new innovative services such as Concur Analytics, and service excellence.

Our non-GAAP operating margin for the quarter of 21.2% compared to 18.5% for the same period of last year. As a result, Q3 non-GAAP earnings were above our expectations, growing to $0.24 per share compared to our target of $0.20 per share and growing $0.09 per share over the same period of last year.

Please advance to Slide 16.

Cash flow from operations and free cash flow were also very strong for the quarter. Our cash flow growth is closely aligned with our growth in new customers, the addition of new services sold into existing customers and the leverage in our operating margin. In addition to out performance in earnings, cash flow growth was again this quarter bolstered by an improvement in day sales outstanding as accounts receivable was sequentially reduced while revenue sequentially grew.

Cash flow from operations for Q3 totaled $19.4 million compared to $8.8 million for the same quarter of last year and after capital investments of $4.1 million free cash flow was $15.3 million for the quarter compared to $4.7 million last year. During this quarter we again repurchased shares of our outstanding stock. This quarter we repurchased $367,100 shares at an average price of $35.07. Year-to-date we have repurchased $1.4 million at an average price of $30.87. As our long-term investors have come to expect from us, we take a long-term approach to cash and equity capital management. We fully intend to continue to opportunistically repurchase our stock through the open market when there is a meaningful difference between our long-term expectations of performance and the markets expectations.

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

Please advance to Slide 17.

Turning now to our expectations for Q4 and fiscal 2008 as a whole, we continue to be very confident in our growth and earnings outlook. We will continue to invest in distribution. The relationship with American Express, that we announced yesterday, is an exciting new global distribution channel and we fully intend to invest in that opportunity as well as to continue to invest broadly in our own direct distribution channel.

We will continue to invest in new service offerings like Concur Analytics. Not only are we focused on adding new customers, but we are keenly focused on delivering greater value to each customer and therefore growing the revenue opportunity with each customer and we will continue to invest in service quality.

Our objective is to deliver the highest level of customer service on a progressively scalable platform to an increasing number of markets across the globe. Coming off of another record quarter and considering our visibility into the coming quarter we are once again raising our expectations for total revenue, earnings per share and cash flow for fiscal 2008. Let’s look more closely at Q4 and the fiscal year as a whole.

Please advance to the next slide.

Total revenue for Q4, we expect it to grow year-over-year by nearly 57% to $56 million, including the out performance in Q3 of nearly $2 million over our expectations we are raising our expectation for total revenue in fiscal 2008 by an additional million or $3 million in total to $214 million for the year as a whole, representing 66% growth in revenue this fiscal year.

Please advance to Slide 19.

As a result of our announcement yesterday regarding our new distribution partnership with American Express, appropriate questions were asked regarding our planned investments in Q4 and their impact on our expected performance for the quarter, so let me be clear — we expect to continue to invest aggressively against our long-term objectives. More leverage in our business model affords us the opportunity to simultaneously invest in future growth and at the same time generate increasing operating margins and cash flows.

Let me repeat that statement. The leverage in our business model affords us the opportunity to simultaneously invest in future growth and at the same time generate increasing operating margins and cash flows. We have committed to investors for several years to invest to grow our top line on an organic basis by 25% annually and improve our operating margin by at least 100 basis points annually and that commitment remains. Including our continued investment against these objectives, our non-GAAP earnings for Q4 are expected to be $0.22 per share and we are again raising our expectations for total earnings for fiscal 2008 from $0.79 per share to $0.84 per share.

To be explicit, we exceeded guidance in Q3 by $0.04. We have raised guidance for the year by $0.05. Implicitly we have raised our expectations for Q4 by $0.01, even in light of the increased investments expected for the quarter.

For those modeling the share count in the business, please remember that our outstanding shares increased by 6.4 million shares yesterday related to the minority investment made by American Express. Considering the interest benefit on the $251 million in proceeds, we expect the impact of that share issuance to be neutral to Q4 earnings per share. In addition we issued a warrant for 1.28 million shares at the same exercise price of $39.27. Those warrant shares will be included in our calculation of fully diluted shares going forward; however under the prescribed treasury stock method of accounting we expect no meaningful impact on fully diluted shares for Q4. In total we expect fully diluted shares for Q4 to be approximately 51, to 51.5 million shares.

Please advance to the next slide.

Based on a revised expectation of higher revenues and higher 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 $55 million or $1.14 per share compared to 32 million or $0.78 per share for fiscal 2007. Now we are raising our expectations for free cash flow to total $40 million or $0.83 per share for fiscal ’08 compared to $20 million or $0.48 per share for fiscal ’07.

Now to Slide 21 and in closing, we began fiscal 2008 expecting to deliver $200 million in revenue, 18% operating margin, $0.70 in pro forma earnings and $28 million in free cash flow. As we now head down the home stretch of this important fiscal year in which we acquired an integrated our principle competitor, launched the first integrated travel and expense service and partnered with the largest corporate payments provider in the world, we expect to deliver a meaningfully higher operating margin on a revenue base that is 7% higher than our initial estimate, all while nearly doubling free cash flow from last year and increasing the earnings we deliver to our share holders by more than 55%. There is still much to do and we look forward to fiscal Q4 and beyond.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brendan Barnicle with Pacific Crest Securities

Brendan Barnicle - Pacific Crest Securities

I want to just follow up a little more on the logistics of how you do some of the training and the [inaudible] sales force and then how you leverage that on the international side. Maybe you could give some more details on what the plans are there.

Steve Singh

We will expand, as we mentioned we are going to increase our investments internally. Part of that will be expansion of our sales organization and staff within that organization that works with partners. That will obviously be on a global basis. We are not going to walk through the specifics of how we will increase that staff, but it will be on a global basis. In addition to that we will also increase the size of the direct sales force, again arriving to the distribution of American Expresses field organization and then begin that training process effective immediately. Then over the next 90 days we hope to be able to get through the first phase of that training.

Again, 90 days is just the first phase in that training. As we mentioned on the call it takes a minimum of two to three quarters to be able to go through that ramp, figure out how best to work together, develop the pipeline and then frankly hope we can close the first deal.

Brendan Barnicle - Pacific Crest Securities

Just to get a sense of if you think about kind of the long-term opportunity here, obviously the American Express sales force and distribution channel is significantly larger than what you’ve got right now. Is this something where you could potentially see new customers in the quarter doubling from where we are now ultimately?

Steve Singh

I think it is a little too early to speak exactly to the scale of increase in new customer ads; however I think it’s fair, from an investor point of view, to look at it and say when do we expect to be able to see the first visible signs of the impact of the American Express relationship and of course we believe that can be some time in the middle of fiscal 2009.

Having said that, we are a company that has 7,000 plus customers, they have literally tens of thousands of customers with a field organization that is at least an order of magnitude larger than ours and as I defined in our prepared remarks, we hope to get them 7,000 customers to 50,000 customers. This past fiscal year and fiscal 2007 we added about 2,100 customers. This year we expect to add a little bit more than that, so obviously it is going to be at least some indicator of a mark-up from that number of customers.

I just don’t know at this point that it makes a lot of sense to be specific about the number of customers we expect to see in 2009.

Operator

Your next question comes from Steven Ashley with Robert W. Baird & Co., Inc.

Jack Miller- Robert W. Baird & Co., Inc.

Actually it’s Jack Miller for Steve Ashley. Congratulations on the quarter. I just have a quick question on the development times that were again faster than expected that drove the upside to your subscription revenue. Can you just comment on that and maybe give a few of the factors that contributed to that faster than expected times and what we can expect going forward?

John Adair

I think you meant deployment times, so from time to time we do see customer deployments occur a little bit faster than we had expected. What drives the deployment times is actually a pretty wide variety of items. Obviously Concur has a high incentive to deploy customers as quickly as possible. So are the customers because they want to go live on our services as quickly as possible to start driving the return on investments; however any time you are coordinating across two organizations, especially on global deployment, it is not a predictable pattern so to speak.

Sometimes we significantly exceed our customer deployment objective, sometimes we are right at them, so I don’t know that we can specifically guide to an expectation that we expect to beat customer deployments again. I think that that right way of approaching this is to assume that that the average deployment cycle is about six months.

Jack Miller- Robert W. Baird & Co., Inc.

Does that change as more customers opt for the integrated travel and expense solution?

John Adair

Yes obviously whenever you redeploy multiple products, which integrated travel expense is not really multiple products, but it is a broader suite of services we provide, typically the deployment times expand. So working against that trend though is that our deployment teams are getting better and better, our tools are getting better and so even as we are deploying more complex solutions, we are also shrinking deployment cycles, so I think that it nets out to roughly about six months.

Operator

Your next question comes from Laura Lederman with William Blair & Company, L.L.C.

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

Can you talk a little bit about travel and expense customers that bought both in the quarter and half quarters you have given us, a bit of a sense of that and also just any details on uptake so fare in Concur Pay?

Steve Singh

Sure we saw frankly great traction on Concur Travel and expense, very similar to the mix we saw in the prior quarter about the 40% kind of range. Obviously the number of customers we signed in the June quarter was significantly above what we signed in the March quarter, in fact it was actually a record, it was the largest number of customers we have ever signed. Concur Pay, obviously in the March quarter when we first launched it we had a very modest number of customers. We saw a fairly sharp up tick on that, better than 20% of our customers picking up Concur Pay.

We do expect over time, because it is such an obvious service that customers can benefit from, we do expect over time the majority of our customers to select Concur Pay. To give you a sense though of why we believe that, obviously Concur Pay comes from a technology base that we acquired with Gelco and Gelco saw over their history, just shy of 100%, actually 97% I think was the number of their customers selected Gelco pay.

Does that give you the color you are looking for?

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

Yes, thank you so much. Can you also talk a little bit about the overages in the quarter? Obviously the upside of the quarter came from customers getting up and running sooner than you thought, but was the overages kind of the usual 1% or so? What did they look like in the quarter?

Steve Singh

Yes exactly it was less than that 1½ % range and frankly we just don’t see a lot of variance there. I certainly understand where some investor concern might come from relative to transactional volume because obviously the price of oil goes up and the economy get tougher, the natural inclination is to believe that travel transactions go down. That is not what we saw. In fact if you look at indicators from companies such as American Expresses business travel group, that you saw travel transactions go up in the last quarter.

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

Given the success you have had so far at increasing operating margins and uno [ph] relationships can you just give us an updated view on long term operating margin potential?

Steve Singh

Sure and John and I will tag team on this. Obviously our first priority is to focus on 2008, which we just updated the pro forma operating margin number from our expected 18% to now it would be 19%. We are still very comfortable with our objective of improving the pro forma operating margin 100 basis points per year going forward. We think that 30% long-term operating margins is a very fair and reasonable target.

Operator

Your next question comes from Tom Ernst - Deutsche Bank Securities

Tom Ernst - Deutsche Bank Securities

Following up on one of the earlier questions, you had favorable timing again this quarter. Last quarter you had just a break out kind of sequential growth and then you talked about some favorable timing of the go lives, so repeated this quarter. I guess my question was it as strong this quarter as last quarter? Do we have a similar kind of tough compare as we look forward a quarter or was it a little bit less than last quarter?

John Adair

In all fairness Tom, it fluctuates from quarter to quarter so if you go back to, I guess it would be the December quarter, it was less of an out performance against our goal than the March quarter and then the June quarter obviously was still non performance, but a little less than the March quarter, but yet higher than the December quarter. So the out performance in the last three quarters, as in every single quarter, it is just very largely driven by the mix of customers we signed two to three quarters earlier.

The complexity of the deployments, whether they are 90 country deployments or they are relatively modest two country deployments, there is just a wide variety of variables. It also depends on frankly, is it in the middle of vacation season when customers or employees might take vacations and therefore may not be able to feed the information we are looking for fast enough to drive the deployments, so there is literally a kind of variables that impact that.

Tom Ernst - Deutsche Bank Securities

The rate of investment to support the American Express partnership, do you think you will achieve that full rate here in Q4 or do you see a further ramp as we get into 2009?

Steve Singh

We will absolutely increase the absolute dollar investments in Q4 very substantially and we will continue to increase them into fiscal 2009. Obviously though it is governed by our objective in making sure we can continue to improve the pro forma operating margin by 100 basis points.

Operator

Your next question comes from Ross Macmillan - Jefferies & Co.

Ross Macmillan - Jefferies & Co.

My first question is on cost of operation, which I think was down sequentially. I know you have been investing in that and it has been ramping, but I guess I am still surprised to see it down sequentially. Can you just talk to that and how we would expect to see that on a go-forward basis?

John Adair

The fluctuation in cost of operations quarter-over-quarter, I wouldn’t read too much into it. From quarter to quarter we will see fluctuations based on some additional incremental spend in the period. I think what I would look at more appropriately is just the gross margin in the business. Last year gross margin was 67%, this year we are 68% year-to-date for the quarter, 69%, so you should expect as the business continues to scale to see gross margin continue to scale appropriately. You may see small fluctuations quarter-over-quarter, but I wouldn’t read too much into either one.

Steve Singh

Obviously year-over-year it was up fairly substantially and I think that’s the piece that we ought to look at.

Ross Macmillan - Jefferies & Co.

Just one other one on the American Express relationship, I know it’s kind of focused the exclusive piece around expense, but I would imagine as they go and leach in etc... that there is a fair amount of incumbent product or a fair amount of in-house build around expense management and the key proposition that you guys have is the integrated approach which implies that although it is exclusive around expense, if this works out you are going to get pull through on other services.

Can you just maybe highlight whether you think a lot of this is going to be replacement of existing expense tools and really the value prop is the integrated platform. Is that kind of where you think about it from a high level?

Steve Singh

No, not at all. I want to make sure we bring this out because this is a core tenant of the marketplace that we serve and that is the vast majority of corporations in the world, right that million corps that I referenced in the prepared remarks? The vast majorities of them, better than 95% of them, use paper or Excel templates. They are not internally developed systems and they are not workflow systems, they are not integrated with the financials, they are not integrated into the payment systems, nothing. It is literally paper or Excel templates. So typically when we walk into a customer we are replacing a completely manual process and that is the same whether we are calling on that customer through our own degeneration or of course through the American Express organization.

The next piece is to talk about kind of, by the way that is also true whether you are talking about a large corporation or a small corporation. So for example a couple of quarters back and it just happens to be the one company that comes to mind really quick is Semantic. It is obviously one of the bigger technology companies in the world; they were using paper before they went live in our system.

Having said that, let’s talk a little bit about kind of what we expect to happen. Obviously our focus in the Amex relationship is, with Concur Expense, it is an exclusive relationship relative to expense; however what we see in the industry is that customers are moving to integrated travel and expense and so when we walk in and talk to a customer we are obviously talking about the entire process. Travel and expense integration including Smart Expenses, including Concur Pay, including Concur Analytics, and so I expect that what we sell will be very much a function of what the customer sees as the right value equating to go solve, which is the integrated suite.

Operator

Your next question comes from Richard Baldry - Canaccord Adams

Richard Baldry - Canaccord Adams

Could you talk a little bit about the changes at the board level? It looks like there is maybe a slot open, at least now, if not maybe two. Then maybe about the decision to have American Express really relegated to voting only on some narrow issues. Given the depth of the background of the person to take that slot, it almost seems like it could still actually be value add in in adding in other areas, so I am just curious as to the motivation behind that.

John Adair

Obviously we are very excited about the partnership with American Express. I am very excited about Ed joining our board. Ed and I have known each other for a dozen plus years and the limitations relative to biscuit [ph] boarding restrictions relative to American Expresses equity position is not to limit the contributions that Ed can make to our board or to our strategy or to our long-term view of what the market is. In fact I am counting on his guidance in that area. Obviously you are absolutely right, he has got incredible experience base.

However, Concur is an independent stand-alone company that is focused on its own market opportunity. It happens to be very analogous to and very related to the market opportunity that American Express is pursuing and so it is very important that our two companies work together to drive value for each other.

What we wanted to make sure we did with the boarding restrictions and with the stand still agreement is to make sure that Concur had the opportunity to continue to run its business in a way that builds long-term value for our shareholders.

Operator

Your next question comes from Bryan Mcgrath with Credit Suisse.

Bryan Mcgrath - Credit Suisse

I appreciate the color on the increased operating expenses and the investments and I totally understand why you are doing them, but I was just wondering should we expect kind of a corresponding increase maybe in CapEx kind of in anticipation of more customers coming on board once the ADP relationship ramps?

John Adair

Year-to-date CapEx is around $10 million. If you kind of walk through the guidance we have given around free cash flow we are expecting about $16 million in total CapEx, so we have set aside around $5 million for the coming quarter. Not terribly different from what we have seen this past quarter. Not a tremendous impact in CapEx related to the annex relationship.

Bryan Mcgrath - Credit Suisse

I get that, but you are not really expecting customers to be coming on for let’s say three or four quarters and you can see how CapEx is trended kind of as a percentage of revenue if you will or how you have added customers in the past, so I am just wondering if you are going to see maybe a little bit more of a spikiness to CapEx maybe beyond Q4?

John Adair

You shouldn’t expect to see any spike in CapEx from that relationship. You will continue to see CapEx build kind of sequentially as you have seen in the past, so just looking at CapEx comparatively year-over-year you referenced to the percentage of revenue. CapEx last year fiscal ’07 ran roughly 10% of revenue; CapEx this year will run roughly 75 of revenue, so you see some very nice leverage on CapEx as well.

Bryan Mcgrath - Credit Suisse

Keep modeling it smoothly, that’s the take away, I guess.

Steve Singh

Yes, Bryan let me just add a little color to John’s comments. Obviously we invest in our business ahead of when we expect customer additions, right? So that is exactly why historically we have been investing ahead of the customers up take, so we have a fair bit of capacity in what we already have in our hosting infrastructure and deployment capacity.

What we can do is as we see the pipeline develop, as we see the pipeline go through to a closed position for customers is start to ramp our investments fairly smoothly to match the expected close of customers and revenue that’s coming from those customers, knowing that up front we have a fair bit of capacity already.

Operator

Your next question comes from Bradley Whitt - Broadpoint Capital

Bradley Whitt - Broadpoint Capital

Did you give the number of sales reps in total employee count, John?

John Adair

No we did not give the number of sales reps. In fact we have stated in the past that we wanted to get to somewhere between 140 to north of that by the end of the fiscal year. We are on target to do that. I will tell you, however, that going forward we are not going to give a specific number of sales reps other than to say we want to aggressively expand it.

Bradley Whitt - Broadpoint Capital

Steve, one of your statements you mentioned that you think a year from now companies will not be buying expense reporting and travel bookings separately. That is a pretty bold statement; what gives you confidence in that? Can you give us any more color on that?

Steve Singh

Sure, it is not meant to be a bold or controversial statement. I think it is nothing more than just a realization that markets evolve. Two years ago when we introduced the concept of integrated travel expense, customers looked at it and said well this seems very interesting, it seems like it could have a lot of value. The competitors looked at it and said well geez, we don’t do it and so it’s not going to work and then what we saw was as we proved out that there is real economic value to the customer, the customer saw the economic value and they said, great, this makes a lot of sense, plus it actually makes it easier for my employees. Then if you over lay against that, what we have actually seen in trending new customer sales over the last several quarters, we are seeing that the trend is clearly moving towards customers saying “ I want both integrated travel and expense” right?

So this is nothing more than we happen to listen to our customers and understand that that is where they wanted to go, we delivered that service, the customers are moving down that path and eventually whether it is a year from now or 15 months from now, or 9 months from now, or whatever it might be, that will become the predominant choice. It may not be 100% of the choice to that point, but it will be a predominant choice.

Operator

Your next question comes from Sid Parakh - McAdams Wright Ragen.

Sid Parakh - McAdams Wright Ragen

Can you talk a little bit more about the international business and how maybe you see that evolve with the American Express relationship?

Steve Singh

Sure, maybe John and I can tag team on this. Obviously beginning in fiscal 2007 we really started increasing our focus on markets outside of North America. I want to be clear, let’s define that a little bit. We obviously already sell and support customers on a global basis. We are actually deployed in over 90 countries. We have, I believe, 16 different localizations of our product in native languages; however looking at where deals originate. A relatively modest portion of our business originate outside of the US so over the last couple of quarters that has averaged about 9 or 10% and we think that there is plenty of opportunity to grow the number of deals that actually originate outside the US.

So, a year ago we started ramping our investments in distribution, ramping our investments in lead generation and ramping our investments in local product development resources and customer support of course.

Amex obviously fits into that strategy very, very well because they are obviously the largest global corporate card insurer and so what we want to do is continue to execute against the strategy we started a year ago and leverage the market position that Annex has. So with that hopefully we will start driving the international portion of our business to be even more substantive.

Sid Parakh - McAdams Wright Ragen

Will you be adding more resources above and beyond the American Express relationship internationally as well?

Steve Singh

Yes of course, I mean we are going to add more resources globally.

Sid Parakh - McAdams Wright Ragen

Then finally a question on competition, with the Amex deal closed recently, how do you see that shape up?

Steve Singh

I am not sure I entirely understand the reference to the Amex deal and shape up?

Sid Parakh - McAdams Wright Ragen

Well I mean you know investors have had some concerns about American Express maybe being a competitor at some point in time. With that changed who do you see out there in the market and maybe you can talk a little bit about that?

Steve Singh

Sure, I just didn’t quite understand your question. Obviously our focus has always been on driving innovation in this market, driving value for our customers and that is what we have been executing against. We clearly saw a wide range of competitors. We have always been respectful of American Express, because they are a fantastic organization that has the capacity to compete effectively in any market that they choose to be in and so we definitely viewed them as a potential competitor. Obviously this relationship changes that equation entirely and moves American Express from being a potential competitor to being a very substantial partner.

However the competitive landscape has not at all gone away. I mean we have got some amazingly large competitors, SAP, Oracle, IBM, there is just a wide range of companies that can compete here and I think the next thing that is important to understand is that any time a market grows and shows that it can be a very substantial market, competition will always come and that is no different in our market, so the way we look at it is let’s assume there is going to be mass competition in the future, which we 100% believe that there will be and lets go focus on making sure that we deliver the best value in our market across any potential competitor, lets make sure we have the broadest distribution and the best quality of service, which of course lines up exactly to the same three bullet items we have been talking about the last seven years.

Operator

Your next question comes from Atesh Drue [ph] with Merrill Lynch.

Atesh Drue [ph] - Merrill Lynch

What is the earlier than expected customer deployments for the first quarter and the second quarter mean for future quarters?

Steve Singh

If I understand your question correctly, all it does is layer in those deployments and the cash flows at the time the customer goes live so it incrementally increases the revenue in the forward quarters.

Atesh Drue [ph] - Merrill Lynch

In the forward quarters or in the quarters you reported?

Steve Singh

Obviously in the quarter we reported.

Atesh Drue [ph] - Merrill Lynch

But does it kind of limit the upside in the future quarters because you are deploying those customers in the current quarter or?

Steve Singh

We set guidance for our quarters based upon what we think we can achieve. There is not a question of does this limit future up sight.

Atesh Drue [ph] - Merrill Lynch

And the other question I had is was there any revenue upside or surprise from Concur Pay which you had not initially factored in your initial guidance or?

Steve Singh

We don’t break it out at that level of detail.

Atesh Drue [ph] - Merrill Lynch

What kind of revenue lists do you get from Concur Pay direction, I mean qualitatively from a customer?

Steve Singh

Roughly $0.15 on the dollar.

Atesh Drue [ph] - Merrill Lynch

And following up on the American Express investment, most of the selling will be done by the American Express field sales, so can you just talk to specific investments where exactly you are going to be making specific investments for your sales force?

Steve Singh

Sure I will be happy to speak to that. First of all the statement you made is incorrect. The selling is not being done by the American Express sales organization. It can be, but it is not necessarily presumed to be. For example, as we mentioned they have an order of magnitude more sales people than we do and in the vast majority of markets, markets being defined by the size of customers or geographic region, in the vast majority of the markets we actually receive leads from the American Express field organization and our field organization will go close the sales.

Keep in mind these are very complex enterprise solutions that we deliver and they’re very different than the types of products that American Express delivers, although they are obviously interrelated from the point of view of the value they can add to the customer. However, in certain market segments American Express may choose to resell the solution, but in all cases it is resold on our paper. In all cases we deploy it and in all cases we service the customer.

What that means as far as resources is that we plan on expanding our distribution resources across the globe and across all market segments.

Atesh Drue [ph] - Merrill Lynch

So where American Express allows resale’s you have your direct sales force aligned with American Express, do I understand this correctly?

Steve Singh

That is correct, but even where they resell we will also increase our investments there to support them.

Operator

Your next question comes from Daniel Cummins with Soleil.

Daniel Cummins – Soleil

Are there senior level key hires that you need to make with respect to the MX relationship? If so what kind of qualifications and background are you looking for?

Steve Singh

When you say key hires I am assuming you mean senior staff, is that a fair assumption?

Daniel Cummins – Soleil

Yes I mean just seasoned alliance people, perhaps have worked with Amex before on these types of relationships?

Steve Singh

Sure, so absolutely from that point of view we absolutely have a desire to keep expanding our, not only our fuel organization, but frankly our alliance team and there is a pretty broad opportunity to go get high quality people from a lot of terms. Frankly, we don’t seem to have any problem at this point in hiring high quality people.

Daniel Cummins – Soleil

Okay would you presume that they would be on board by calendar year end or?

Steve Singh

Yes absolutely, in fact those head counts had been opened up already. We are already starting to hirer and at least the first wave of folks we hire in that area will be on board by the end of the calendar year.

Daniel Cummins – Soleil

Okay, the CapEx for fiscal ’09, do you think closer to $20 million or closer to $30 million?

Steve Singh

We didn’t provide a CapEx number for fiscal 2009, so that $20, $30 million number is just way too high, just even at the face of it. For this fiscal year, just to be specific, we expect CapEx to be $15 million and incrementally it increase at absolute dollars year-over-year.

John Adair

And Dan recall we have grown from last year at $12 to $15 million this year with better than 50% growth in revenue.

Daniel Cummins – Soleil

Concur invoice, could you just give us a little color there on the re-branding and I didn’t catch how many of the new accounts you bought in the quarter have either taken it or seriously looking at it?

Steve Singh

Sure and re-branding obviously is to continue to kind of drive some clarity around what that service provides; we frankly saw very good, solid traction for Concur invoice in the quarter. I can’t tell you specifically how many customers we have signed. It was modestly higher than we’d expected within the quarter and certainly above what we saw in the prior quarter, but I would not be comfortable saying exactly how many because I don’t know the exact number.

Operator

Your last question comes from Kash Rangan with Merrill Lynch.

Kash Rangan - Merrill Lynch

Steve, I am wondering if at this point you are seeing any up tick at all on the Gelco subscription. I mean I know you have set expectations for people to model that flat, but are we seeing any up tick at all with almost a year under your ownership right now?

Steve Singh

Absolutely zero. In fact if anything we are converting those customers to Concur, so to be technically accurate it is actually declining; however the declines being met was an increase in Concur revenues, just all we are doing is transitioning those customers from one platform to our platform.

Kash Rangan - Merrill Lynch

Got it, makes sense. Also, I am not sure if you talked about it on the call earlier, same store sales or renewal rates for existing customers that are coming up for contract notes, any color quantification you can provide would be great.

Steve Singh

To be honest with you we have seen absolutely zero variance in renewal rates. Our retention rates are running around 98% and we have seen no variance on that.

Kash Rangan - Merrill Lynch

Finally with you guys consolidating your hold on the TNE market I would imagine that companies might want to engage with Concur even more on a broader, strategic level. So with that action are you seeing demand for ELAs or call it EAs on the horizon?

Steve Singh

I want to make sure I understand the nomenclature for ELA.

Kash Rangan - Merrill Lynch

Well yes you are welcome to, the oracles and this end of the word tend to do these enterprise license agreements that cover a scope of two to three years what not and the deal sizes tend to be on the larger side.

Steve Singh

Sure thanks and obviously every company is a different nomenclature so that’s just not the nomenclature we use, but I get the concept you are talking about. That is not something that exists in our industry. We price on a transactional model with minimum commitments and so it is much like a, I guess is a cell phone plan is the crude analogy and so that is the model we see. It allows our customers to have a very well defined cost structure and it’s just completely different than the licensing software world that Oracle and others exist in.

Steve Singh

I want to thank everyone for joining us for our Q3 earnings call. John and I look forward to speaking with everyone again after the Q4 results and updating you on the progress of your business. Thanks everyone.

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Source: Concur Technologies, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript
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