Coupa Software Incorporated
Q3 2018 Earnings Call Transcript

Published: 5 Dec 2017

[Operator:]

Please stand by, we are about to begin. Good day, everyone. And welcome to the Coupa Software Third Quarter Fiscal 2018 Earnings Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Ryan Hutchinson. Please go ahead, sir.

[Ryan Hutchinson:]

Thank you. Good afternoon. And welcome to Coupa’s third 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 statements. If this call is replayed after today, the information presented may not contain current or accurate information. We’ll also be presenting both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP is included in today’s release, which you can find on our Investor Relations website. 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, growth 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. I’d like to start today’s call by thanking all of the members of our Coupa community. First, thank you to our customers great commitment to unleashing real value to the organization. Thank you to our strategic partners, analysts and industry friends for sharing our vision. Thank you to our shareholders for their continued investments and support. And last but not least thank you to my Coupa colleagues around the world for their pledge to ensure customer success, focus on results and continually strive for excellence. Coupa is more than 800 employees strong and we remain unwavering in our commitment to our three core values, which are vital now as they have ever been for our continued success. The first is ensuring customer success, not just focusing on customer satisfaction or desire for customer success, but ensuring tangible measurable results for all our customers, overcoming any challenges that we may face. The second is focusing on results, setting specific measurable, attainable, relevant and time bound goals and working relentlessly to achieve them. And thirdly, striving for excellence, committing to an authentic, collaborative, passionate and high integrity environment where all our colleagues are living life without fear and feeling safe, they are pushing boundaries, making mistakes, learning and improving as professionals and human beings. Lastly, we had our final Board meeting of the year at Coupa headquarters, along with the full management team and Board member annual dinner event. I was inspired to see the camaraderie, healthy dialogue and commitment toward continuing to build a very special company. The market opportunity in the San Mateo market is huge and we are attacking it thoughtfully. In doing so we are continuing to execute on the strategic approach we laid out at the time of our IPO just over a year ago. Cultivating a winning customer success-oriented culture, expanding our global brand awareness and demand generation, maintaining a discipline growth strategy and scaling our enterprise and midmarket go-to-market capabilities and capacity, launching innovations to drive greater share of wallet and customer add-on business, acquiring key assets to further broaden our value proposition, and expanding and developing our global partner ecosystem around Coupa. The differentiated vision we are offering in the market can be broken down into five fundamental components, simply explain with five letters that make up our name, C-O-U-P-A. Our vision is Comprehensive, Open, User Centric, Prescriptive and Accelerated. With every new feature we develop, acquisition we make, integration we built and investment we set forth, our intent is to bolster our offering in one or more of these areas. I recently finished up a blog series, I mentioned on last quarter’s call with these vision areas. The blog can be found on the Coupa website for those that are interested. Now let’s talk about one non-financial measure we use to track our progress, Spend Under Management. Last quarter we reached some key milestones suppressing $500 billion in Cumulative Spend Under Management. This figure continues to grow at fast pace, landing at $570 billion at the end of Q3. It’s really an amazing thing. I also can help you consider that with the colossal sum of transactional spend and the related data and information that has run through our platform, we have created meaningful competitive barriers to entry. With each new data element we track, our Community Intelligence gets smarter as does the value of our offering for our customers. So with that, let’s take a look at some key financial results for Q3. I am proud to say that we again delivered strong results across the Board, including quarterly record revenues of $47.3 million. Earlier this year we drove positive operating and free cash flows in both Q1 and Q2. I am delighted to say that we did so again in Q3, ending the quarter with positive operating cash flows of $5.2 million and positive free cash flows of $3.9 million. Year-to-date we have generated positive operating cash flows of $21.5 million and positive free cash flows of $18 million, and we have $219 million in cash as of October 31, 2017. While we took many customers live this quarter, let me highlight Caterpillar, the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel electric locomotives, who has already gone live with Coupa at their first location just months after kicking off the project with us earlier in the year. Now, of course, we have plenty of exciting new customer wins in Q3 as well, Toyota financial services, a leading provider of automotive financial services, offering financial products to Toyota customers and dealers selected Coupa source-to-pay and contract lifecycle management to streamline their core source-to-pay process, leveraging the power of Coupa’s unified platform and suite synergy. Zürich Insurance, a leading multiline insurer that serve these customers in global and local markets selected Coupa source-to-pay and expense management, replacing an incumbent solution, based primarily on usability and employee adoption, as well as of course, product innovation. Some of the other customers we added during the quarter include Razer in Asia-Pacific, CrossFit, CHEP USA, Host Analytics, SoftServe, CrossCountry, TeamHealth, Bristol Hospice, Auction Edge, Moovel, P.F. Chang, Dansk Supermarked Group, the largest retailer in Denmark and many others. We are excited to partner with all these new customers and partners. In October, we hosted our Annual European Spend Management Conference, Coupa Inspire ‘17 in London. The conference featured speakers from some of the world’s leading brands, both customers and partners of Coupa, which included Airbus, IKEA, Deloitte, Accenture, Maersk, Pearson and others. The event flowed with debate and discussion around value-based innovation and the atmosphere was simply invigorating. My Coupa colleagues and I left Inspire London with a renewed sense of energy and alignment as we look to finish what has been a very successful year thus far and prepare for next year. Next on the agenda will be Coupa Inspire San Francisco in 2018, which is slated for Q2 of next year and currently being planned. Also in October we announced the general availability of Coupa Open Buy with Amazon Business. This offering expands customer buying options by giving employees access to the Amazon Business marketplace. We believe this to be a game changer for unified catalog management and guide [to buy] [ph]. In just last week we announced the addition of Coupa to the AWS Marketplace where customers can now quickly discover and subscribe to Coupa Spend Management solutions. Overall, we are excited that we continue to expand our relationship with Amazon, a valued customer, key supplier and strategic partner to Coupa. At Inspire London we announced the general availability of Coupa Release 19. Release 19 is further evidence that the Coupa platform for business spending continues to set the innovation agenda for the industry. R19 enhances the platform with more than 70 new capabilities, modernizes risk management and redefines sourcing optimization. R19 is prescriptive with recommendations which are identified through Coupa Community Intelligence. Other advancements in R19 includes streamlined invoice management, enhanced user experience to suppliers connected to the platform and increased compliance and audit capabilities. Reception thus far from our customers has been simply outstanding. Today I also want to take a moment to touch on our Coupa Advantage program. Coupa Advantage offers our customers large and small supplier discounts, which are negotiated by leveraging the billions of dollars of transactional spend running through the Coupa platform. New customers’ sign up for Advantage right away, free of additional charge and start recognizing hard dollar savings right off the bat. Now core principle advantage is that a portion of the proceeds generated are donated towards inspiring not-for-profit causes around the world, as well as funding our Coupa cares corporate responsibility program, which is focused on three main areas, sustainability, diversity and civic engagement, and under a year we have blogged over 1,300 volunteer hours from employees around the world. Moving on, as we laid out at the time of our IPO, we continue to invest heavily in organic development on our modern cloud platform and carefully evaluate potential acquisitions when the right opportunities present themselves. Our acquisition strategy continues to be aimed that adding key power user application technology that we can integrate into our unified platform and our key technology components then enhance our transactional engine. Consistent with this strategy we have successfully executed upon a series of acquisitions over the past decades. In October we are proud to announce our latest Deep Relevance based here in the in the San Francisco Bay Area. Deep Relevance uses Artificial Intelligence and relationship analytics to identify individual employee and collusive fraud and other suspicious transactions. The addition of Deep Relevance allowed to accelerate our vision of helping our customers reduce fraud through Community Intelligence. Some areas of fraud detection with this technology includes conflict of interest, bidding integrity, fraudulent invoices, inflated expense claims, duplicate expenses and personal expenses. I am very excited about the value of this technology and what will -- it will bring to our customers and the expanding mode of Community Intelligence we are building around our unified cloud platform for business spending. Recently I was pleased to announce deployment of Mark Riggs as our new Chief Customer Officer at Coupa. Mark brings over 25 years of experience with a consistent track record of creating and scaling customer-facing teams across organizations large and small. Mark is here to help us continue maximizing the lifetime value of Coupa for our customers. We are very excited to have Mark on Board. In fact many of you will see Mark and the rest of the Coupa management team next Monday, December 11th at Cooper’s first-ever Financial Analyst Day, which we -- will be held at NASDAQ MarketSite in New York City. Analyst Day is the perfect form for us to give the investment community an opportunity to meet new team members and our management team, review some of our accomplishments, and most importantly, better understand our go-forward strategy as we plan to take our business to the next level. I look forward to seeing many of you there next week. In summary, we are very pleased with our Q3 performance. We are in a very strong position in the market as we continue to execute. To-date we have put together 34 consecutive successful quarters in a row from both the financial and business goals perspective. With Q4 upon us, we are laser focused on finishing out the fiscal year strong. Let me now turn the call over to Todd who will review our Q3 financials in detail and provide our outlook for Q4 and full fiscal year. Todd?

[Todd Ford:]

Thanks, Rob, and good afternoon, everyone. The company continues to execute and once again delivered strong results for the quarter. Total revenues for the third quarter were 34% year-over-year, $47.3 million. For Q3 subscription revenue was $42.8 million, up 39% year-over-year and comprised 90% of total revenue. Our non-GAAP operating loss was $2.4 million or negative 5% of revenue compared to negative 8% in the year ago period. Total calculated billings for the trailing 12 months ended October 31, 2017 were $195.7 million, up 37% year-over-year, which was up slightly from our trailing 12 months billings growth rate at the end of Q2 of 36%. Total deferred revenue at quarter end was $97.6 million, up from $73 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 third quarter non-GAAP gross margin was 72.6%, compared to 69.4% in the same period last year. Although, we continue to invest in our professional services and support organizations, we have continued to show gross margin improvement. Non-GAAP gross margin from subscriptions was 81% and non-GAAP gross margin from professional services and other was negative 5%. Operating expenses were in line with our expectation and the net results of our Q3 performance with a non-GAAP net loss of $2.8 million and a loss per share of negative $0.05 on 53.8 million weighted average shares. Given that we are in a net loss position, all outstanding stock options and common stock equivalents are 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 $219 million, up from $208 million at the end of Q2. Cash flow from operations in the third quarter was positive $5.2 million and $21.5 million year-to-date. Free cash flows for the third quarter were positive $3.9 million and $18 million year-to-date. Q3 also marks the first time that free cash flow has been positive on a trailing 12-month basis, exceeding our original expectations. Given the seasonality in our business, similar to Q4 of last year, we are expecting cash flows to be negative in Q4. That said, we expect operating and free cash flows to be positive for the current fiscal year. 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 fourth quarter we expect total revenues to be between $48.3 million and $48.8 million. This includes expected subscription revenues of between $43.8 million and $44.3 million and professional services revenues of approximately $4.5 million. We are expecting Q4 non-GAAP gross margins to be between 69% and 71%. We expect non-GAAP loss from operations to be between $7.5 million and $9 million. We expect non-GAAP net loss per share in the range of negative $0.14 per share to negative $0.16 per share based upon an estimated 54.7 million weighted average shares for the quarter. For the full year ending January 31, 2018, we expect total revenues to be between $181.5 million and $182 million, with non-GAAP gross margins coming in near the high-end of the range given for Q4 of 69% to 71%. We expect non-GAAP loss from operations to be between $19.5 million and $21 million, and we expect non-GAAP net loss per share in the range of $0.37 to $0.39 based upon an estimated 53 million weighted average shares for the full year. We will provide FY19 guidance on our next call, but I’d like to remind you a few things regarding Q1 of next year as you begin to roll your models forward. First, we recognize revenue based on the number of days in the quarter. Since Q3 has three fewer days in the quarter due to February, our steady-state subscription revenues will be approximately 3% lower in Q1 as compared to Q4. Secondly, in Q1 of next year, the new revenue recognition will take effect. We have not yet finalized our analysis, however, we expect some deferred revenue will need to be eliminated which will have a corresponding impact on our Q1 revenue and calculated billings. To conclude, our strategy remains the same. We are investing for the long-term, with a disciplined growth strategy to maximize market opportunity and financial results. Now we would be happy to take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And your first question will come from Stan Zlotsky with Morgan Stanley.

[Stan Zlotsky:]

Hey, guys. Good afternoon and thank you so much for taking my question. And maybe just to start off, the Amazon partnership, it certainly sounds like this over the last couple months that there has been a lot of movement there and then we’ve seen from various webinars you guys have been advertising, there is certainly a lot more marketing around partnership. Maybe just walk us through, what kind of opportunity do you see there and what kind of -- look what’s the profile of the customer that you see as the target for the Amazon partnership?

[Rob Bernshteyn:]

Thanks, Stan. Well, beyond what we reported in our earnings call and what I shared as part of the opening comments, there is really nothing new to formally report regarding the partnership. When we see good business opportunities we would like to take advantage of them and we are sure that Amazon thinks very much the same way. We have a great relationship with Amazon as a customer, as a supplier and we found ways to partner on a host of different initiatives like the ones that I described. We see an opportunity for a whole host of customers across just about every company size and every vertical to take advantage of some of the synergies we are bringing in the market together.

[Stan Zlotsky:]

Got it. And maybe just one for Todd, the impact to Q1 from ASC 606 and what -- I am guessing it and also with broader fiscal ‘19. Can you just maybe as much you are still evaluating, what are the puts and takes there as far as, what will cause the headwind to revenue being recognized?

[Todd Ford:]

I’d say when we adopt 606 beginning next year different bank with respect to BEST, professional services that may have been impacted due to go lives under the prior method. So there will be amount of revenue that gets eliminated. We think the overall impact is going to be small but if you look at it from a Q1 perspective it will be a few million dollars and quite frankly, we won’t know what it is until we close Q4, but we just want to at least call it out so that there is no surprises on the next earnings call.

[Stan Zlotsky:]

And you expect most of that -- most of that pressure you -- that take place on pro services line, right?

[Todd Ford:]

Yeah. It will also be a subscription revenue, some things that were calculated under different allocation methods that we have to eliminate revenue on.

[Stan Zlotsky:]

Got it. Understood. Okay. Thank you very much.

[Todd Ford:]

Thanks, Stan.

[Operator:]

From JP Morgan, Mark Murphy.

[Mark Murphy:]

Yes. Thank you very much and congrats on the execution in Q3. So, Rob, the wins with Zürich and Dansk look are very impressive potentially in terms of scale. Any commentary on what percent of spend you’ll have under management with those organizations? And also were they swayed by the Community Intelligence or the volume of data that you are bringing to the table or any of the newer AI capabilities that you have been layering in?

[Rob Bernshteyn:]

Sure. Thanks for that question. One of the things we do I think is quite special in this market is with every one of our customers at the exploration of identifying value for them, then going into delivering that value and optimizing that value we set very clear measurable goals. Very often those goals are round getting certain amount of Spend Under Management and some cases it’s certain amount of savings targets, whatever maybe and they are very unique and specific to every one of our customers and are confidential with that customer. We like to use Spend Under Management as the key non-financial measure for the organization, because at the end of the day if you are not capturing investments, you don’t have an opportunity to optimize it, look for greater value propositions around it. And as you have seen our Spend Under Management numbers continue to grow faster and faster and faster. So there’s an acceleration there and it’s clearly correlated with value being delivered.

[Mark Murphy:]

Okay. And then, a question for you, Todd, the Deep Relevance acquisition, do you have any metrics in terms of the number of employees or number of customers, bookings or revenue, run rate, just anything that would help us to approximate the size and scale of the organization?

[Todd Ford:]

Yeah. Thanks, Mark. It’s consistent with our other M&A strategy we’ve done. This one I would classify more of the, an Apple hire smaller groups. So nothing that would be I would call out from the customer revenue standpoint.

[Mark Murphy:]

Okay. And Todd as well, are we still on track for, I think, in round numbers do you have a billings benefit of something like $1.5 million for Q3 and then roughly $3 million for Q4, just going back and relating to the change in the professional services rev rec?

[Todd Ford:]

We are definitely seeing the -- that billing headwind subside, if you were to look at Q3 in particular year-over-year the professional services revenue was down 2%. So while we did see a slight positive impact in Q3 it wasn’t as pronounced as I would have originally anticipated, but I think you’ll see that turn faster in Q4.

[Mark Murphy:]

Thanks.

[Rob Bernshteyn:]

Hey, Mark. This is Rob. I want to try answer the second -- I want to try answer the second part of your question because I don’t think I addressed that, I was trying to make sure I understood, you said Zurich Insurance, I couldn’t hear you well. In terms of the value proposition to customers like Zurich and others, the P in Coupa which stands for Prescriptive is the method by which we deliver the Community Intelligence capabilities to our customers, right. We are able to see across hundreds of billion dollars spending and be Prescriptive to them about information such as supplier risk and the like. Without question many of our customers over the course of the year recognize the value of that vision and many of them already taken advantage of that with our latest release around Community Intelligence focused on Perfect Fit Insights which are operational benchmarks running across company, as well as our Risk Aware product which we made generally available at the last Inspire event. So without a doubt this is an area that continues to be of high interest for our prospective customers and one that continues to build huge barriers essentially for us in the marketplace given the hundreds of billions dollar of data, the spend data we are tracking on one unified cloud platform.

[Mark Murphy:]

Thank you.

[Operator:]

Next question will come from Raimo Lenschow with Barclays.

[Raimo Lenschow:]

Hey. Thanks for taking my questions. And first one for you Rob on -- can you - with kind of big wins like you had Zurich now and Caterpillar and Unilever the quarter before. Can you talk about the evolution of the partner ecosystem around there, because I would assume there is going to be lot more work coming your way with your success at the moment? How happy are you with Rev AR and what’s their progress?

[Rob Bernshteyn:]

Well, we are not going to be happy until every primary partner as the biggest system integrators engages with their clients and tell them they should consider optimizing their spend leveraging platform such as Coupa and that’s where we will be able to say our goal is complete. But without a doubt we are continuing to make significant progress there. All the key systems integrators of notes are beginning to build practices around Coupa with real revenue targets. We are continuing to certify hundreds of consultants around the world that are equipped to implement Coupa and we think we are continuing to make progress moving well past the early adopter stage of customers to the early majority stage where the heart of the market lies and as you know as we shared many times we believe this is the $25 billion type market that we are in the very early phases of continuing to take share.

[Raimo Lenschow:]

Perfect. And then next one I had on, it looks like Caterpillar is going to be huge installation for you guys and you mentioned like parts of that are already live, like how -- can you take us through a big account like Caterpillar, like how do we have to think about a rollout of Coupa in that in terms of timing, is it on the regional level, is it on the business unit level, how do we think about that?

[Rob Bernshteyn:]

Like we said the way we think about it internally and give you some leading indicators to how we will recognize it. The way we think about internally is that we never want to be the bottleneck. We never want to be the obstacle to adoption as fast as the customer is willing to adopt us. Now very often sales run change management programs for tumor transformation initiatives around the Coupa deployment, although we are sitting around and asking what can you do this or that in Coupa or do we have technical constraints. So we provide as much agility as possible to the customer and then we allow them to work in concert with the system integrators to get customers deployed. The leading indicator metric of adoption of course is the one key non-financial measure that we share and that is Spend Under Management. How quickly they continue to adopt? They may adopt division by division. They may go product category by product category. They may go geography by geography. They may go business process by business process. We want to have the agility that they desire. But to get value in an Accelerated way which is of course the A in Coupa.

[Raimo Lenschow:]

Yeah. Okay. And then last question one for Todd, Todd, you mentioned earlier 606 in Q1 give you some headwinds and you mentioned some on the subscription side as well. And what’s driving that -- anything is -- you have other vendors that have some small parts of the business as on primary solutions and hence you have a change in revenue recognition. Is that kind of the same case for U.S. as well or how can subscription be impacted for you guys?

[Todd Ford:]

Yeah. it’s a process -- it is a very, in the whole scheme of thing very minimal and certainly as you noted company that have long-term solutions have a much more material impact from 606. There are times based upon BEST where different allocations are made between subscription revenue and professional services revenue. For example, for giving professional services is a way for free and it’s a big implementation, you have to reallocate some of that subscription revenue. So while it’s a very much a corner case to achieve those situations like that that under the new rules they will know how to be able to recognize the deferred revenue, so we would be completely eliminated. So it’s -- the few cases of those that exist that would be no longer recognize revenue going forward.

[Raimo Lenschow:]

Okay. Make sense. Thanks for that. Okay.

[Operator:]

From BTIG, Joel Fishbein.

[Joel Fishbein:]

My congrats as well on a fantastic sprint. Rob for you, just to love to hear how your sales ramp is ramping and also how are you doing on your sales productivity metrics?

[Rob Bernshteyn:]

Sure. Thank you. Thank you for that question. So when we think about the build out of this business, we are obviously consistently looking at managing our overall sales and marketing expense and continue to scale our reps and utilize our discretionary marketing effectively and carefully. So there is a lot of aspects that go into developing this business. One is, of course, how many reps are on the ground for coverage but of course the regional pipeline metrics, discretionary marketing elements, the systems integrator pull, I think, Raimo was asking about, how we would continue develop our brand, how we are aligning our talent and training our talent from a sales training program perspective, the marketing collateral, we are creating the product maturity that we are driving. So in balancing all those, the negatives that we continue to feel better and better about the team we are putting on the ground and the expenditures we are putting in place to maximize the opportunity, all against the three pillars of our business. So absolutely a continued area of investment and focus for the business and we continue to mature it.

[Joel Fishbein:]

Great. Thank you.

[Operator:]

Next we will hear from Ross MacMillan with RBC Capital Markets.

[Ross MacMillan:]

Thanks so much and my congrats as well. One for Rob, first of all, when I look at your Spend Under Management metric, I think, that’s up $270 billion, when I look at the incremental in the last year and that’s actually much larger than your big competitor that also discloses the business network incremental Spend Under Management number. So you know you’re smaller, you’re growing that number to faster rate, I guess, is the point? And I just curious as to getting your perspective on how much of that is just your success in kind of core procure-to-pay or how diversified is that number becoming, so I think at the time of the IPO we are about 90% procure-to-pay, but I was curious to get a sense for how that’s evolving? Thanks.

[Rob Bernshteyn:]

Ross thanks for those comments and the question. It absolutely continues to diversify. When we look at our capability mix the customers are subscribing to quarter-over-quarter, I think, looking back as far as 34 quarters, it continues to broaden. So with the value of the service that we are offering is really will customize our buying, they are not buying module, they are not buying a product, they are buying subscriptions value and that value continues to get border as well as richer whatever release we come out with three times a year. We are also learning how to implement the solution more effectively. We are doing it, as I mentioned, in Accelerated way. So I think all of those capabilities are -- that we are developing are part of why they Spend Under Management number continues to grow at such a fast pace.

[Ross MacMillan:]

Is it possible to talk to how big those other non-procurement pieces are within the mix yet or should we keep -- better try for the Analyst Day?

[Rob Bernshteyn:]

Yeah. I was just going to suggest we will go into some planning to share some of that information at our pace, so look forward to give you more color on that.

[Ross MacMillan:]

Great. And maybe just one follow-up for Todd, just on, you given us the TTM gross to net dollar base retention rate. Historically, I wondered if you have those numbers then.

[Todd Ford:]

Yeah. They remained virtually exactly the same for the past three quarters, so no real new updates there. It’s trending basically flat for the last three quarters.

[Ross MacMillan:]

Thanks so much and congratulations.

[Rob Bernshteyn:]

Thanks, Ross.

[Operator:]

From Raymond James, Brian Peterson.

[Brian Peterson:]

Hi. Thanks and congrats on the quarter guys. So maybe just a high level perspective, if we think about the data opportunity that’s in front of you, clearly with the $570 billion in spend, I am curious how you think about that are you thinking that that going to actually evolve into a monetization strategy or you guys really going to have a growth opportunity where that would be more about acquiring new customers at this point?

[Rob Bernshteyn:]

It’s a great question. Look ultimately I was sharing this in the early question. We are offering these customers value as a service. So the more data we have and the more Community Intelligence we develop and the more use cases with which we elevate that many intelligence so that at the point of need is being given to the particular user or the particular customer for them to make a business decision, the more valuable we are going to offer and for that incremental value we hope to be paid fairly and we anticipate being paid fairly. So we will look for different ways to bring these capabilities out as part of the subscription, but there’s no question they drive a great deal of value and that as well as the network effect that created in this marketplace, the leverage of buy side aggregation that we have created through Coupa Advantage and Community Intelligence, we think we are building a significant barrier to entry for anyone else entering the market, most importantly, we are able to drive more and more value for customer for the near-term and the longer term.

[Brian Peterson:]

Got it. Thanks Rob. And Todd, maybe one for you real quick, just on the gross margin guidance, the 69% to 71%, it’s down a little bit sequentially. Any moving parts you want to highlight there? Thanks guys.

[Todd Ford:]

Just continued investments and all areas of professional services and the support organization and then Q4 different groups may have bonuses and payments associated with contribution margin, so nothing that I would call out a significant in that guide.

[Rob Bernshteyn:]

Operator, next question.

[Operator:]

That will come from Pat Walravens with JMP Securities.

[Pat Walravens:]

Oh! Great. Thank you and congratulations you guys. Rob, I guess, I’m wondering big picture as the -- as workday in SAP and Oracle are all starting to really push moving financials to the cloud. Does that created tailwind?

[Rob Bernshteyn:]

Well, look, as I have said many times in the earnings calls and as I witnessed someone on a daily basis working with prospects and customers, we think the, although, this is a large size market, there always be plenty of players, ultimately the only competition here is ourselves. The opportunity is very real. We are not a financial application ERP provider we are a Spend Management provider that work very seamlessly just about any ERP system that’s out there. So we think long-term we have this big market opportunity to build into and so as you know we are being very thoughtful about how we manage first all three pillars, our revenue growth, our sales and market efficiency and how we are scaling our operating margins and cash flow markets. So we are going to continue to be very thoughtful about that. We know that there are options for folks we consider, but for many of the ones that sign on with us there becoming more and more of the early majority stage and they are signing up for future modern cloud-based and management solutions that can work seamlessly with any of the companies you just name.

[Pat Walravens:]

Okay. And what -- where we are going to end up on this sort of machine learning AI journey, what is your vision, not 10 years out, but two years or three years from now, what would you like to be able to do that you can’t do today?

[Todd Ford:]

Look our vision in one area of others I think is worth talking about is that the best AI is no AI and the way that goes deeper simply…

[Pat Walravens:]

Yeah.

[Todd Ford:]

If the machine can handle the processing work to make the decisions the machine should do that and strongly interface with the human being in areas where they themselves can have some sort of value. So there are whole host of permutations where that comes up to the surface. The need to do data entry is going to remove in a lot of places through machine learning, as we are doing within our InvoiceSmash capabilities as one example of that. The need to process a lot of spend data off-site somewhere for lower cost can be automated through machine learning capabilities to drive spend analysis and we will give you a in -- a deep understanding of categories you want to focus on or opportunities for savings, opportunities for value. I will give you two examples, so consistently thinking about ways where we can remove repeated tasks that drive end-user proactive sort of interaction with our system to areas that we can streamline for them through machine learning capabilities. And the biggest opportunity I would say of all and the one that we are clearly focused on is around overall Community Intelligence data. So leveraging the sanitized that’s build inside from transactional data happening around the world daily, millions of transactions, hundred of billions of dollars are spend information and help each customer gets smarter and smarter about the way their organizations spend money and drive value and that’s what we are applying for without a doubt.

[Pat Walravens:]

Awesome. Thank you.

[Operator:]

From Northland Capital Markets, Robert Breza.

[Robert Breza:]

Hi. Thanks for fitting me in. Rob maybe just a big picture question, as you think about the business model margins, you had 800 employees now, how do you think about devising the go-forward employee headcount, I specifically want to really get some insight from you with the customers that you mentioned on the international side versus North America, how are you thinking about the investments going forward just from a headcount perspectives? Thanks.

[Rob Bernshteyn:]

Sure. So those investments obviously cross every function in our business and we manage the business annually. We also manage -- we manage the business quarterly. From sales and marketing investment perspective we have committed to staying within the tight band of sales and marketing efficiency. We have stayed within that band now for 34 quarters. So as we continue to build our recurring revenue base we invest accordingly. In areas where we feel that we are overly efficient perhaps and some of the deeper markets where we have good -- we are beginning to get good penetration that pays for some of our broader investments that might be less efficient in the shorter-term but may payoff in the longer term, example will be, our midmarket business, some of our international areas, some of our federal accounts to-date. So that’s how we think about that line. As we move down we look at our cost, well, as we go out and look at cost of goods sold we look at ways to manage carefully our operating infrastructure through Amazon, as we think about margins we think about our services capability and the number of -- the kind of oversight we need of internal services consultants and the type of ecosystem we need to build out there as systems integrators to drive value for customers. And then moving on down to support where we want to make sure that we can maintain all that’s relates to customers given the level of support that they need internationally, always looking for areas to be more thrifty the way we bring those resources to bear in places like Rhino and Dublin and Pune. And last but certainly not least, we are always looking at development and thinking carefully about how we can bring on the type of talent that not -- cannot only help us push the platform but not going too fast just having people idle and not knowing exactly how to contribute, not going too slow such as we missed the opportunity to develop the breath that we want to this platform longer-term. The rest assured on quarterly and annual basis the team and I sit down and thinking carefully how we manage this money and I think a good result of that has been our conservative -- how thoughtful we have been with the money we spent. I am proud to say that to-date we have created much more recurring revenue than the amount of money we have burned since the date of our inception. We plan to be and continue to be talk more about it in the quarters to come.

[Robert Breza:]

Sounds great. Thank you very much.

[Operator:]

From Cantor Fitzgerald, Joseph Foresi.

[Mike Reid:]

Hi, guys. This is Mike Reid on for Joe. I appreciate you taking our question. I just had a question, if there was any more detail maybe on international outlook performance demand outside of the big wins in Europe this period?

[Rob Bernshteyn:]

I would say for the time of this earning call there is nothing material that would be worthy of your attention to focus on. I wouldn’t say that there’s something happening internationally that would be elevated to an earnings call transcript or big marquee capital we want to showcase at the moment. Having said that we play certain bets and we have seen some good pipeline attractions and some good closures in certain markets that we believe we can build off. When we look back to the way we built Europe which now supports nearly 30% of our current revenue base. We began very carefully by lending key marquee accounts, making them highly referenceable in each country and building off of that and we are taking a very similar strategy to the other markets around the world.

[Mike Reid:]

All right. Thanks. And then on R19, are there any new capabilities that you want to call out specifically and are there any more releases coming up soon?

[Rob Bernshteyn:]

Sure. We have committed three times a year releases, three releases per year. We obviously share the details of those that in our -- at our Inspire event. It also gives a whole host of channel through which we communicate with our customers and prospects such as webinars and our online customer community. The latest release on R19 has more than 70 new feature capabilities, our committee voted on hundred future capabilities from which we distill those 70. And I would say the highest level they hit across three different dimensions of our strategy. One is continuing to go deeper in key modules. The second is continued to go wider to enhance the breadth of our application set. And thirdly to develop something that’s innovative and never been done before in our market and you are seeing many of those coming through Community Intelligence broadly but also in each functional module area. I wish I had a time to share with you everything that that we have done there but certainly at Analyst Day we will cover more of that and show demonstrations and go much deeper.

[Mike Reid:]

Great. Thanks guys.

[Operator:]

[Operator Instructions] We’ll go to Ken Wang with First Analysis.

[Ken Wang:]

Great. Thanks for taking my question and congratulations on the strong quarter. Just wondering if you can offer just any commentary on where you might see potential functionality gaps in the Coupa suite currently?

[Rob Bernshteyn:]

Well, I would tell you that the concept of a gap is something that is my mind very much driven by feature-based selection process and when I think back to the way customers show software in the late ‘90, it was largely driven by how many features you have and the more features you have the more likely you were to be chosen. But what we discovered a decade later is, there wasn’t amount of features that matter to whether or not you go live and get value, it was more about how deep the capabilities were, how usable those capabilities were and most importantly how much they were tied to the measurable value drivers that your customer is actually trying to get. So our focus doesn’t begin with to get into feature and function parity of incumbent solution providers, our focus is on how do we get customers in an Accelerated way to recognize measurable value and be able to build off that value in the years to come and the strategy we have chosen is very straightforward. We want to nail all the transactional areas of spent in a collectively exhaustive way, procurement, invoice management and expense management, once we get the company Spend Under Management and transactional flow is growing, hundreds of millions of dollars are going through collectively, we then have the ability to get the more power user capabilities to optimize that spend well and that’s an area that we have been focusing on particularly over the last three years or four years in both the build and acquire manner. And I can tell you that many of our customers particularly those in the early adopter stage moving to early majority, understands that on this platform that we will be able to get the full breadth of capabilities for driving spend and that is very much in line with what planning we are here.

[Ken Wang:]

Perfect. Thanks. Congratulations again.

[Operator:]

And that concludes then question-and-answer session and today’s conference. Thank you for your participation. You may now disconnect.