Coupa Software Incorporated
Q2 2018 Earnings Call Transcript

Published: 6 Sep 2017

[Operator:]

Ladies and gentlemen, please stand by, we are about to begin. Good day, and welcome to the Coupa Software Second Quarter of Fiscal 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Cynthia Hiponia. Please go ahead.

[Cynthia Hiponia:]

Thank you. Good afternoon and welcome to Coupa Software's second quarter fiscal 2018 conference call. Joining me today are Rob Bernshteyn, Coupa's CEO; and Todd Ford, Coupa's CFO. Our remarks today include forward-looking statements about guidance and future results of operations, strategies and plans, market size, products, competitive position and potential growth opportunities. Our actual results may be materially different. Forward-looking statements involve risks, uncertainties and assumptions that are described in our most recently filed 10-Q. These forward-looking statements are based on our beliefs and assumptions today and we disclaim any obligation to update any forward-looking statement. If this call is replayed after today, the information presented may not contain current or accurate information. We'll also present both GAAP and non GAAP financial measures. A reconciliation of non-GAAP to GAAP is included in today's earnings release, which you could find on our Investor Relations Web site. A link to the replay of this call will also be available, and if you prefer to access the replay via phone, you can find that information in the earnings release. Unless otherwise stated, gross comparisons are against the same period of the prior year. With that, I'll turn the call over to Rob.

[Rob Bernshteyn:]

Hello, everyone. Thank you for joining us today. So, let me start today's call, our fourth earnings call as a public company by thanking our valued Coupa customers around the world. I continue to be amazed by the commitment I see from our customers toward our partner-oriented model who are working together to unleash its huge value for their organizations and really helping us transform the spend management industry and the process. Thank you also to our ever-strengthening and expanding global partner community, especially for continuing to share in our unwavering devotion for the success of our customers. And of course thank you to our shareholders for their support as we endeavor to push the boundaries of information technology and explore new methods of value creation all in the name and winning the massive addressable market that lies before us. As is our custom, I'd like to take a moment on this call to reflect on our company's three core values, we are now more than 800 employees strong, amid this aggressive pace of growth we have new employees joining seemingly every day, our core values are extremely vital to our excess and it's essential that our new employees understand these values as well as they begin to interact with customers and execute on our vision in the field. It's also imperative that our season Coupa colleagues keep these values fresh and top of mind. I also feel it's important for us to be extremely open with our customers, partners, shareholders, and potential future shareholders about these values, which inspire and motivate us every single day. The first is ensuring customer success. And by this, we mean not just focusing on customer satisfaction or a desire for customer success, but ensuring measurable results for each and every one of our customers against any and all challenges that present themselves. The second is focusing on results, which means continually setting specific, measurable, attainable, relevant, and time-bound goals, and working relentlessly to deliver against them with the strong bias for action. And last but not least, striving for excellence, committing to an authentic, collaborative, passionate, and high integrity environment where folks can feel safe in testing themselves, making mistakes, continually learning and improving as professionals and human beings. Let's touch momentarily on the market opportunity we are going after here at Coupa. The spend management market is massive, and we've only just begun to address it. As part of this, we've asked ourselves, "What is the vision we ascribe to, which gives us confidence that we will win this market and that keeps us on the right path, and our efforts to do so?" At our Coupa Inspire Conference in May, we showcased the following simple and measurable way to think about our vision, C-O-U-P-A

[Todd Ford:]

Thanks, Rob, and good afternoon everyone. We delivered strong results across the board in the second quarter. Total revenues for the second quarter grew 43% year-over-year to $44.6 million. For Q2, subscription revenues were $39.8 million, also up 43% year-over-year, and comprised 89% of total revenue. Our non-GAAP operating loss was $5.7 million or negative 13% of revenue compared to negative 31% in the year ago period. As noted in prior calls in Q4 we began using the proportional performance method of revenue recognition for new professional services engagements and at that time it was no longer our practice to bill for professional services engagement upfront. As a result of these changes, we noted that there would be a headwind to calculate billings through Q2 of this year and that we expected it to reverse in the second half of this year and to be roughly neutral for the full year and that has not changed. And with this as backdrop total calculated billings for the trailing 12 months ended July 31, 2017 were $182.8 million up 36% year-over-year. Total deferred revenue at quarter end was $95.8 million up from $72.1 million in the previous year. As a reminder, we define calculated billing as a change in deferred revenue on the balance sheet for the period was revenue recognized during the period. Our calculated billings and deferred revenue results often fluctuate on a quarterly basis due to seasonality, timing of renewals and timing of annual contracted billings. Let's now turn to operating expenses and results of operations. Our second quarter non-GAAP gross margin was 71%, compared to 65% in the same period last year. We are continuing to invest in professional services and support organizations, but we are pleased with our gross margins have continued to show scale year-over-year. Non-GAAP gross margin from subscriptions was 81%, and non-GAAP gross margin from professional services and other was negative 9%. In Q2, we continue to invest in all departments and took the full impact of approximately 50 new employees and contractors from our recent acquisitions. We also renewed our office lease at our world-wide headquarters and added additional space, now occupying the entire building. In Q2, we also expanded our office into India. As a reminder, our Q2 results also include approximately $2.5 million of net expense related to our annual Inspire conference that was held in May. The net result of our Q2 performance was a non-GAAP operating loss of $5.7 million, and a loss per share of negative $0.10 and 52.7 million weighted average shares. Given that we earn a net loss position, our outstanding stock options and common stock equivalents were anti-dilutive and not included in the loss per share calculation. Now let's move on to the balance sheet and cash flows. Cash at quarter end was $208 million, down from $238 million at the end of Q1, but includes the impact of approximately 39 million net dollars used to fund the Trade Extension acquisition in Q2. Cash flow from operations in the second quarter was positive $9.2 million and $16.3 million year-to-date. We would also like to note that operating cash flows were positive on a trailing 12-month basis for the first time, well ahead of our original projections. Free cash flows for the second quarter were positive $8.1 million and $14 million year-to-date. Given the seasonality in our business, we are expecting operating cash flow to be negative in Q3. As a reminder, we define free cash flow as operating cash flow plus investing cash flow minus the impact of any cash paid for acquisitions. Now let's turn to guidance. For the third quarter, we expect total revenues to be between $44.8 million and $45.3 million. This includes expected subscription revenues of between $40.8 million and $41.3 million, and professional services of approximately $4 million. We are expecting Q3 non-GAAP gross margins to be between 67% and 69%. We expect non-GAAP loss from operations to be between $5.5 million and $6.5 million. We expect non-GAAP net loss per share in the range of negative $0.10 to negative $0.12 per share, based upon on estimated 53.8 million weighted average shares for the quarter. For the full year ending January 31, 2018, we expect total revenues to be between $177 million and $179 million, with non-GAAP gross margins coming in near the high-end of the range given for Q3 of 67% to 69%. We expect non-GAAP loss from operations to be between $25 million and $26 million, and we expect non-GAAP net loss per share in the range of $0.48 to $0.50 based upon an estimated 53 million weighted average shares for the full year. To summarize, we are very pleased with our second quarter performance and the continued leverage we are seeing in our financial model. Our strategy remains the same. We are investing for the long-term with a discipline growth strategy to maximize market opportunities and financial results. Now, we will be happy to take your questions. Operator?

[Operator:]

Yes, sir. Thank you. [Operator Instructions] We will take our first question from Stan Zlotsky with Morgan Stanley.

[Stan Zlotsky:]

Hey, guys. Good afternoon, and thank you for taking my question; a very nice quarter here. So, first one, just wanted to focus on the partner ecosystem, the work that we've done, we've talked to partners, and it certainly sounds like they are really struggling to keep up with the volume of work that they're seeing, which is great problem to have. So, how are you thinking about your partner ecosystem? What are you seeing there? And then I have a quick follow-up for Todd.

[Rob Bernshteyn:]

Well, thanks Stan, and as many may be aware, we started thinking about building an ecosystem of systems integrators around us many years ago as a way to build into our business, and have been thoughtfully and carefully certifying partners along the way, so that we can build up a lot of folks in that ecosystem who know how to configure Coupa, who know how to implement Coupa, who know how to shorten the change management challenges that may come with any kind of implementations of software. And we are really excited about how that's continuing to scale. We have now certified nearly 2,000 actually folks around the world that [indiscernible] systems integrators, and we are hoping they can continue to keep up because the customer demand is there and there is a great interest in the value proposition that we offer.

[Stan Zlotsky:]

Got it, thank you. And quick follow-up for Todd; on the big billings [beat] [ph] that you guys put up in the quarter, is there anything that we need to keep in mind for this one? Is there something big one-time that hit in the quarter, you know, maybe duration extensions or billing term changes or anything like that, maybe affects? Thank you.

[Todd Ford:]

Yes, thanks Stan, I appreciate the question. There is basically three things that drive our billings. One is net new ACV, one is renewals, and the other is professional services. And the company executed really strongly along all three of those, those lines, and in particular, I'd like to call out our CSM teams, who really ran the table on the renewals, they really did a fantastic job in Q2. The only thing I would call out potentially is a one-time thing, and the upside to the billings is we did get additional billings from Trade Extensions more than we had originally forecasted from the opening balance sheet. But I would say that perhaps a $2 million dollars of the calculated billings was related to Trade Extensions, but everything else was really related to solid performance across the organization.

[Stan Zlotsky:]

Perfect. Thank you.

[Operator:]

Next question comes from Mark Murphy with JP Morgan.

[Mark Murphy:]

Yes, thank you very much, and I'll add my congratulations. So, I wanted to ask you, is there any way to approximate the mix of business that is coming from the T&E side, where you've had some very strong reviews lately? And realizing that it is an integrated platform that it maybe difficult to try to pinpoint that, but is there any way to try to illustrate the scale of adoption specifically on the T&E side?

[Rob Bernshteyn:]

Well, I would tell you that there's no question in our minds that the customers have signed on in many of the prospects that we continue to see quarter-in quarter-out, particularly in the last, I would say, three to four quarters are really understanding our vision of the C in COUPA, which is Comprehensive, a way to have pre-approved spend, post-approved spend, and ongoing spend, all in one transactional platform. So, a great deal of interest. Continuously, you know, we come in here and look at our go-lives on a weekly basis, and we constantly have go-lives coming in from any one of those three areas. We've got a great deal of innovative and very interesting capabilities in the expense management area that have drawn a lot of interest, and we continue to see folks subscribing to the full platform story rather than thinking about one point solution area and other over the latest feature set.

[Mark Murphy:]

And as well, could you comment on the departure of Tom Aitchison, I think it was a few months ago, just how does it change the go-to-market, any structural changes to the sales teams as a result?

[Rob Bernshteyn:]

Sure, Mark. Well, over the course of the last eight or nine years with every talent decision we make, we make it very, very thoughtfully both in consultation with other members of the management team as well as the individuals that maybe departing or being cancelled out themselves. We never want to be in a position we are reacting to anything happening in our business. We always want to be in position where we are proactive and thinking ahead about where we want to take the company for long-term success. So, Tom had transitions from the company, frankly a couple of quarters ago, and our new CRO, Steve has been in the seat for, I guess, over three quarters now, and continuing to both up level our talent base and help take us into the future.

[Mark Murphy:]

One last one, if I may, on the macro, just to the extent that your platform could be viewed as maybe a small scale macroeconomic indicators similar to ADP, what is your sense of the pace of purchase orders, invoices, anything and everything that is -- that maybe flowing through your platform and sort of the exit trajectory of that coming out of the quarter?

[Rob Bernshteyn:]

Well, look, I mean if you look at over $500 billion in cumulative spend and a year ago is 255, I mean that really speaks volume to the acceleration of adoption. Well, obviously, the amount of spend running through our system and the amount of adoption, the amount of outcomes, the amount of value recreation is of course correlated with our revenue success. It may not be drawn as our square to one, but they are obviously correlated. So, that means that's becoming secure, we are driving more value, there is acceleration in the amount of adoption we are seeing in all transactional areas. And that's not slowing down. I mean that's obviously accelerating. So, this is our way of thinking about building a long-term business. It's not about what have you closed this quarter or last quarter, it's about have you driven a lot of customer value, and is that customer value accelerating quarter-in quarter out? And we are seeing that and we are excited about it. And I would add as well that one of the incredible outcomes of having hundreds of billions of dollars in transactional spend and accelerating is the power of community intelligence that we are now beginning to bring to the marketplace; the ability to look across all the datasets in real-time and provide insight to each individual customer, I liken it to the way many of us use ways to navigate through traffic using community intelligence to do the most optimal thing as it pertains to spend, and we are in the very early innings of that.

[Operator:]

Thank you. Next question comes from Raimo Lenschow with Barclays.

[Raimo Lenschow:]

Hey, thanks for taking my question and congratulations from me as well. Rob, can you -- just two quick question for me, first, the $500 billion spend on the management is obviously a huge increase, and I know you are not going to monetize that as like some of your competitors [indiscernible] try to monetize as your competitors try to do, but can you talk a little bit about the importance of kind of having that number go higher? Is that kind of -- like, do I think about it correctly as an attraction to more supplier to the platform because you have more spend on the management or how do you see that as kind of a selling point for you?

[Rob Bernshteyn:]

Well, one of the greatest challenges in this broader space is that people have tried to get health companies manage their spending through electronic mediums to get them off the paper and phone calls and faxes and Maverick spending that happens all over the world that isn't seen visualized and optimized. And by having them employ our technology platform to manage that spend, they are able to actually have normalized data in front and they can see where people are buying things, where they are ordering things, are they paying the right price points, and they are able to then fine-tune the business to route that spend to negotiate a [indiscernible] that we get for them through Coupa Advantage or they negotiate themselves. And what we're seeing is customers saving anywhere between a penny and $0.10 and every dollar that they are running through Coupa. So, the value is enormous. And when we can begin to apply the intelligence of that dataset from across the entire Coupa collective to the needs of each individual customer, it becomes a very, very impactful platform. Obviously, it then attracts suppliers. We have more than three million suppliers that we're -- helping our buyers transact with. Obviously, it attracts buyers because they see the value being created. And obviously, it helps our business grow because we are being paid fairly in the middle. But we see it as a way to do something that really hasn't been done before. And the data both in our financials and in the spend metric are good examples or sort of symptoms of how that's progressing.

[Raimo Lenschow:]

Perfect. And then the -- and I have a follow-up on that one; so Unilever, I seem to remember from my good old German days, it's kind of a -- it's a big SAP customer, and I know you don't want to talk like too much about the competition, but can you talk a little bit about like, you know, we had Caterpillar a couple of quarters back, Unilever, can you talk a little bit about the -- how your vision kind of -- is coming across obviously better than some of what -- some of the other guys are trying to sell?

[Rob Bernshteyn:]

Well, I appreciate that. I mean, I think it's both the reality today as well the vision that's resonating with the customers like Unilever, Caterpillar and others. First of all, in order to be able to play in that type of dynamic, you have to be seen as a legitimate organization that's grounded in strong financials. And as I've mentioned in previous earnings calls, the fact that we are not public and we have a strong track record is a line that you simply have to match, it's an [anti] [ph] to be able to play in that type of environment. But then when you are looking at your options, if you are one of these types of consumers, you are looking at what's on the ground in the platform being offered, the team that's going to be deploying it and the vision. We think we have a very strong team and a strong culture. We think we have one of the best products, if not the best product in this area. And we have the vision that you referred to, and our vision is to have a collectively exhaustive way to address all spend areas, we are the only players that are doing that on one unified platform. We have an open network concept that doesn't charge suppliers, that doesn't create friction for supplies. We are the only players that are really doing that. With the most user-centric in terms of our application design, we are offering prescriptive insight to the community intelligence, as I talked about, and we are focused on getting customers up and live in an accelerated fashion getting them live quickly. They can recognize the benefits of having their spend in their management. And I think when you compare that to some of the incumbent offerings, even though this is a very large market opportunity, it seems to be that companies like the ones you mentioned are choosing us, and we are proud to partner with them.

[Raimo Lenschow:]

Great. Last question for me, Todd, on the cash flow side, you are performing really, really well. Can you talk -- like you mentioned Q3 will be negative, but can you talk a little bit about the -- does that kind of change your outlook of cash flow going forward, or how do you think about, you know, like after the two strong quarters you had?

[Todd Ford:]

I mean, clearly we are ahead of our original projections to be operating cash flow neutral to slightly positive by the end of Q4. It all starts with billings obviously and we talked about earlier, and then our collection team has obviously done a fantastic job as well. So, from an operating cash flow perspective, we're not going to provide specific guidance for the year, but we definitely expect to be higher than the breakeven to slightly positive for the year now just given the performance in the first half of the year. I would expect that for Q3, the operating cash flows are negative on the order magnitude of $4 million to $5 million and then that it would improve in Q4. So, we clearly have line of sight to free cash flow breakeven on a trailing 12-month basis, but it's too early to commit to that right now.

[Raimo Lenschow:]

Perfect. Thank you. Well done.

[Operator:]

The next question comes from Ross MacMillan with RBC.

[Ross MacMillan:]

Thanks a lot and my congratulations to the Coupa team as well. Rob, maybe for you to start just on Unilever; I noticed you called it source-to-order versus source-to-pay, I was just curious if there is any [new on fare] [ph] that we should think about, and I also think that Trade Extensions already had Unilever as a customer, I was just curious if that had any influence on their decision and whether you think that could be a kind of catalyst that combined Coupa/Trade Expansions offering for either other companies in CPG or other industries?

[Rob Bernshteyn:]

Probably I'd say more broadly, we've never heard if there is an existing relationship with the company that we may have acquired along the way, but I don't think that's the key to this; I think the key to customer pursuits such as Unilever and others is they are buying into our comprehensive vision. I mean that is the C in Coupa. There is the desire to have one transactional platform for pre-approved, post-approved and ongoing expenditures that is easy to use. And at the same time having power user applications around the periphery that help you optimize that spend flow, in this case, they were already working on sourcing optimization, spend optimization with Trade Extensions, and they'll have the opportunity to leverage that even more broadly. Look, the outcome of any sourcing event is the need to make the purchasing against that concluded contract happen in the transactional system, and that's what we are really strong at offering. So, I think it's a proof point of an alignment with our overall marketplace vision that we've been talking about well before the IPO, but certainly during the IPO road show in the last four quarters.

[Ross MacMillan:]

That's great. And then, two quick follow-ups just for Todd; just on the contribution from Trade Extensions, you mentioned about -- up $2 million in billings, can you just help us understand the mix between revenue versus deferred for that incremental? And then, I didn't hear you given net retention rate, but you said renewals were strong; I wondered if you had that metric. Thanks so much.

[Todd Ford:]

Yes. So, the -- from the upside on the calculated billings, the opening deferred revenue -- approximately 700 grant of that and then several -- just a few hundred thousand dollars of actual revenue that flow through the financial statements with respect to Trade Extensions, and then the second question….

[Ross MacMillan:]

Just on the dollar…

[Todd Ford:]

Oh. Yes, the growth in the net retention rates were virtually unchanged quarter-over-quarter. So, on a [gross] [ph] basis, at the high-end of our historical range of 90% to 95%, and on the dollar-based expansion rate, you know, historically 104 to 107, and then lately it's been in the one away to 110 range, and it was at the high-end of that range and ticked up very slightly in Q2 versus Q1.

[Ross MacMillan:]

Thanks so much. Congrats again.

[Operator:]

Next question comes from Brian Peterson with Raymond James.

[Brian Peterson:]

Congratulations, gentlemen; great quarter. So, I wanted to hit on Amazon, I know they are a partner of yours, but I've gotten a lot more questions than I would have expected on them being a potential competitor down the road. So, could you talk about your relationship with them today and how you think that may play out over the coming years?

[Rob Bernshteyn:]

Well, sure. Amazon is very close to us in a number of ways. I mean, first of all, they're obviously a very good customer of ours, they're running billions and billions of dollars to our platform; very proud of the ability to serve them through all kinds of peaks and troughs, like Amazon Prime and an ongoing spend through Coupa. They are also a great supplier to us. We are on Amazon now and AWS, and continue to buy reserve instances and drive our entire platform on Amazon. Thirdly, they are also a great partner of ours. We've recently announced at Coupa Inspire partnership around Amazon business. So, for certain areas of spend, where customers of ours do not have negotiated rates and they like to default purchases to Amazon business when search results are otherwise now, we would actually go and route those to Amazon business exclusively, which is wonderful. We see a lot of great [technical difficulty] with Amazon, and we think we can coexist with them in this space for quite a long time. Their focus areas and area of their business is a bit different to ours, and it's frankly quite synergistic.

[Brian Peterson:]

Got it, thanks. Thanks for that, Rob. And may be one for you, Todd, just on the gross margins, down a little bit sequentially in the fiscal third quarter, what should we be think about is driving that sequentially? Thanks.

[Todd Ford:]

In Q2, I would say with mainly our investment and people, so we called out the headcounts that we absorbed from the recent acquisitions. And you couple that with other headcounts that we hired in Q2, Q2 was actually our largest quarter ever for net new hires, including the acquisitions. So you're seeing that flow through the P&L will have the full quarter impact of that the new hires outside of the acquisitions, and we continue to invest in our support infrastructure and our professional services team as well, and also our ability to support our partners.

[Brian Peterson:]

Thanks, Todd.

[Operator:]

Next question comes from Pat Walravens with JMP Securities.

[Pat Walravens:]

Great, thank you. Hey Rob, circling back to community intelligence, what's sort of the biggest challenge or impediment to applying machine learning in your business?

[Rob Bernshteyn:]

One of the biggest challenges in the space of doing what we're starting to do for our customers is, first of all, having all of your data; your customers working of a one code line which we have, right? So, if you got separate data models out there for each and every one of your customers, in some cases on premise, and in some cases in the cloud, and other method, then it's very hard for you to pull that data up, get it normalized, get it properly classified, make sure it's well-enriched and then use that insight for the individual customer leverage. Now what we've done is, first of all, we have one code line, we have a redundant table schema for each customer, but our table structures are very much the same for each customer. We are using some of the capabilities from Spend360 to not only pull that data up, but actually normalize it, properly classify it, and then we are using additional third-party sources like acquisition of Riskopy and some work we are doing organically to enrich that data. Once it's enriched, then we can begin to use it for the benefit of each individual customer. And we are doing that today with Perfect and Fit Insights, we are doing that today with Risk Aware, which is a supplier intelligence capability based on community intelligence, and we see the opportunity do that in a whole host of other areas. The beauty of the challenge that you described, Pat, is that we don't face the same hurdle you would face in that area if you weren't set-up to do this from the ground often. We've been thinking about this for more than eight years. We've set-up our contracts to be able to do this. We've set-up our technology platform to be able to do this, and we are on the early stages of making it a real long-term capability for all of our customers.

[Pat Walravens:]

Okay, that's great. And then, can I just ask, is there any way to think about sort of the size of the opportunity around doing this for you guys?

[Rob Bernshteyn:]

Well, if you think about the power of having the insights of hundreds of billions of dollars in spend, companies across every major vertical and horizontal environment, companies that are large, medium, and small insights of around how they should operationally run their business, how they should -- what suppliers they ought to be working with, and what suppliers they may consider not working with, what price points they should be paying or not paying; you get very quickly to a very, very compelling situation, and what's most powerful about it, Pat, is that it creates a massive barrier to entry to our business because if you are a customer and you are thinking about how to optimize your spending, you could go live on an island thinking about features and functions, or you could join the Coupa community and leverage the community intelligence we are creating for your benefit, and be smarter, faster, more nimble and more operationally efficient in your industry than your competitor. And I think that's very powerful. How that will play itself out in terms of revenue to us in years to come and broadening the market opportunity, we will see how it plays out and we will of course keep you posted in a quarterly and on an ongoing basis.

[Pat Walravens:]

That's great. Thanks, Rob.

[Operator:]

Next question comes from Joel Fishbein with BTIG.

[Joel Fishbein:]

How you doing, guys? I just had a follow-up question to something that was previously asked, and speaking to partners, they've indicated that you've got some momentum in larger company activity, obviously you talked about a few today including Unilever and some others; Rob, do you feel like you are in an inflection point with the replacement of legacy vendors or where are we there, did we pass the education phase and moving into more dedicated buying patterns?

[Rob Bernshteyn:]

Well, we are definitely seeing a great deal of interest from the largest systems integrators. So, for the first question that was asked, there's no question about that. I mean. They were on par with some of the other large SaaS or cloud vendors in terms of its dedication and the tiers that they're putting us into. So, I do think we're largely through a lot of the -- sort of early education, but it's still a ground game, you have to make sure that you are in with the partners and the individuals that have the deep relationships with customers around the world, so that they take you in. I think what we are passed is educating on the fact that we are viable, legitimate, highly referenceable and ready to deliver value for their relationships and their clients. I think as we see some of the sunsetting of old on-premise solutions from incumbents, come to bear, we want to be in a position where we have the folks on the ground, we have the support on the ground, we have the platform on the ground, we have to deliver for these for these large customers, these large multinationals for many years to go with the comps. So, that has to do with some of the investments we are making, some of the efforts we are making the field, but we think we are very well-positioned to capitalize on what's happening both with the sunsetting that you have talked about as well as the depth of relationships with the [SIs] [ph] that we are developing.

[Joel Fishbein:]

Right. I guess just as a quick follow-up then, so Unilever, Caterpillar, et cetera again meeting with a lot of guys in Inspire, it seems like these are all just going to be used cases that you will be able to use going into other vertical markets as well?

[Rob Bernshteyn:]

Absolutely. But we don't have to focus just on those two or three. We have hundreds and hundreds of customers, and many which I hope you had a chance to see at Inspire that we are proud enough to hold up signs with the tens of millions of dollars that they save, the value that we have created for them and some really amazing brands across every vertical from technology to financial services to healthcare to oil and gas to large multinational organizations, mid-market companies, private companies, public companies. So, every one of our customers is very, very important to us. And we obviously look for strong references in one of these areas, so that the next customer, number two and three in that vertical or size or sub vertical will be less inclined to concern themselves along our key processes and evaluations. I would rather spend that time implementing our solution quickly, getting a lot of value, paying us fairly and helping us build our business.

[Joel Fishbein:]

Okay, thank you.

[Operator:]

Next question comes from Joseph Foresi with Cantor Fitzgerald.

[Joseph Foresi:]

Hi. So, it seems like you are ahead of schedule here on the P&L and the cash flow statement, I was wondering, it doesn't seem to your raise guidance by the same amount; can you provide a little more detail on the disconnect, I know you talked about seasonality on the cash flow, and how should we think about 4Q?

[Todd Ford:]

Yes. So, there is seasonality in the business. And if you look historically from a billings perspective, Q4 and Q2 have definitely been the two strongest quarters followed by Q3 and Q1. And the billings has a compounding effect since almost all of our contracts are three years, they renew at the same time as to when they were originally signed. So, from a billings perspective, you will see on an absolute dollar basis that billings would drop in Q3 and in Q1, because of the seasonality, and obviously, billings impacts cash flow. So, in Q3, we have noted that we expect it to be somewhere -- operating cash was negative three to five, and then in Q4, I would expect it to improve on a quarter-on-quarter basis, and you know, when we get to next call, I can give you much more granular detail on that. But in general, it should improve just given that Q4 is our largest billings quarter of the year. And one of the things I would call out that we've done in the past and which we want to provide some operational flexibility is making opportunistic spot buys that would have more positive long-term impact to our operating margin. So, we've done that in the past, last year in Q3, we made a large purchase with respect to reserved instances with our web hosting provider you know, what's -- and they'll drive benefit throughout this year. So, we want to maintain that flexibility as well.

[Joseph Foresi:]

Got it. And can you talk about any potential areas you might be looking into outside of the community intelligence, any particular vertical or geography that's now starting to stand out from a demand perspective?

[Todd Ford:]

Well, there's may be two questions to that; do you mean in terms of when we are looking at in terms of acquiring companies, or you mean in terms of where we place investments from a go-to-market perspective, what you are referring to there?

[Joseph Foresi:]

Yes, I'll take both, but if you want to go just one, that's okay too, I was actually thinking more in the demand side -- from a demand perspective, not so much on the M&A, but color on both will be great.

[Todd Ford:]

Sure, sure. Well, if I start in the M&A piece, you know, it's very much the strategy we laid out earlier; I'm happy to take both, in that area, we talked about owning the transactional core, procurement expenses, and invoicing remaining organic, and there's a whole host of areas in terms of power user capabilities that we are constantly on the lookout for if we find the right teams, if we find the right deals, if we find the right opportunity set to go after there. So, everything from what we have done in sourcing and contracts to inventory optimization to supplier information management to other areas like -- of that nature are always interesting to us. In terms of go-to-market, look, there is a huge demand globally for using information technology to optimize the way companies spend money. So, it's about where we put our energy and efforts, and the way we have done this to-date is gone into certain areas of the world, created strong referenceable customers and leverage the power of that referenceability to land customer two, three, four, five, fifty, 100 and move on. And we have done that in areas of Europe. We have done that across the United States. We have done that in Canada. We are beginning to do that in Latin America. We are beginning to do that in Australia and across APAC. And we think that as the years go on, the quarters go on, the years go on, we should be getting much more of those best we placed on the periphery playing out for us. We are still very early in Asia. As you may know, we are still quite early in Latin America. So, this picture may look very different if you go out year or two as some of the bets we are making in those markets begin to deliver for us.

[Joseph Foresi:]

Got it. And I will sneak one more, and maybe you could just talk a little bit about the hire in the marketing department and what that might be in for your future? Thanks.

[Rob Bernshteyn:]

Well, as I was talking about talent before, we are always trying to make sure we have the right people, well ahead of when we would need them, so that we can build out to the next phase of our company. We have the opportunity to meet Chandar, and felt that he was a great cultural fit, we felt that his experience really fits in with the vision that we are planning for the company long-term, spent a lot of time -- he had spent a lot of time in next-generation marketing, digital marketing, he has a very strong mindset around storytelling as the way to evangelize an offering in a value proposition, which frankly is very much in alignment with mine. And so, we wanted to take this opportunity to bring on the next level of talent for us for the coming years, and we are excited to have them join us. It's a very promising addition to the executive team.

[Joseph Foresi:]

All right, thank you.

[Operator:]

Next question comes from Robert Breza with Northland Capital Markets.

[Robert Breza:]

Hi, nice quarter. Rob, two questions; one, I was wondering if you talk about sales productivity/capacity, and then two, I think you mentioned in your commentary that R18 had 50 updates. The way to think -- I was wondering if you could give us a -- just a thought around how to think about R19 next month, I mean, do you think this is going to be the biggest release ever or -- help just some additional color in the next release next month?

[Rob Bernshteyn:]

Sure, sure, sure, happy to do that. So, in terms of sales productivity, sales and marketing productivity, we continue to run the business focus on three key areas, obviously greater than 30% revenue growth, focusing on sales efficiency, and then showing bottom line scale in the business particularly in terms of cash flow. When you think about sales efficiency, when we are as efficient as possible gives us the opportunity to invest in some of the longer term growth areas that we are targeting, obviously that includes our mid-marketing programs that include some vertical focused marketing and retail, healthcare, financial services and other areas where we want to continue develop key references. It gives us a chance to invest in new regions, where we know the payback may be a little bit longer, it gives us chance to again involve in some of these larger multinational company type deals that frankly require a bit of global upfront investment in order to be able to be on the ground to deliver for them not only in a presale cycle, but beyond. And of course, are continuing to up level our go-to-market team, continue to up level our sales professionals, not only through our own internal certification and training, but also through hiring and counseling out of those that are unable to cut it. So, that's how we think about sales productivity and sales efficiency. It's one of the three areas. And when we have the opportunity to do so, we afford the opportunity to invest for the longer term in that area when we could afford it. In terms of R18 updates, I think that we are known in the industry as being very customer-driven, innovation-driven, and what we try to do is get updates out there that aren't just marketing fluff or just something that is going to look and impress, but things are actually going to get used, and we monitor how well our customers use these updates. So, the three -- the 50 additional features that I mentioned was just down from hundreds and hundreds and hundreds of enhancements that were voted on by customers and then distilled down by our product management team down to the types of features we think will get used, and will be developed in a way that they have a lot of configuration flexibility. So, many ways you could call them hundreds of features if you want dependent on how they are be actually being configured for individual customers. We are excited about R19. It's got a lot of very interesting new capabilities. I don't think it's going to be something that is -- suddenly changes the -- massively changes the trajection of our company, but I think it'll be the next incremental release that will have a lot of key capabilities, both our customers are interested in seeing and our product management team believe they are going to get wide adoption or wide usage. And frankly, will continue to separate us from our overall value proposition for many of the incumbents or the folks that might be navigating around the space.

[Robert Breza:]

Thanks, nice quarter.

[Operator:]

Next question comes from Joseph Vafi with Loop Capital.

[Joseph Vafi:]

Hey, guys, thanks for taking my questions, afternoon and congratulations on the good results. I wonder if we could talk a little bit about sales and marketing spend. I think clearly there is a long-term payback that's going on here in terms of your customer acquisition costs. But I was wondering if you [indiscernible] going to be some leverage in that line item at any time in the foreseeable future, and maybe perhaps a little bit more color on where that's going these days in enterprise versus the middle market. Thanks.

[Rob Bernshteyn:]

Well, as I mentioned earlier, I mean I think when you think about sales and marketing efficiency, it's along these measures for us, right? We want to make sure that we are maintaining this rapid growth rate, not overstepping it, but maintaining this rapid growth rate of 30% plus, which obviously were well above at the moment, and maintaining a sales efficiency that gives us the right to make some of the investments I talked about. Some of the investments are longer term opportunity. They don't payback in a moment. When you enter a new market such as Asia for example or Latin America, or you start running a high volume mid-market programs, those have a payback period to them that we are affording to make, because of how efficient we actually are in some of the core markets where we are operating. So, that's how we think about sales and marketing efficiency, but rest assured, we look at it very, very carefully from an operating perspective internally. We are looking at our sales and marketing efficiency for mid-market. We are looking our sales and marketing efficiency for enterprise. We are looking at on a trailing 12 months basis. We are looking at a quarterly basis. We are breaking it out to understand what portion of that is discretionary marking, what portion of that is actual headcount that isn't easily changed. And quarter-in quarter-out, we will make the determinations around the type of headcount we are ready to take on in Q3 and Q4 quarter-over-quarter. And we've been doing that now for 34 quarters, and support us the chance to build our lanes of business, establish a very strong renewal rate, a very strong LTV to CAC, and we think it's the makings of a very valuable business for the long-term.

[Joseph Vafi:]

Great, thank you very much.

[Operator:]

And it appears there are no further questions in the queue. I would like to turn the conference back over to management for closing remarks.

[Cynthia Hiponia:]

Great, thank you everyone for joining us today, and we look forward to updating you again on our next earnings call.

[Operator:]

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation, and you may now disconnect.