Coupa Software Incorporated
Q4 2016 Earnings Call Transcript

Published: 14 Mar 2017

[Operator:]

Welcome to the Coupa Software Fourth Quarter and FY '17 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Miss Cynthia Hiponia. Please go ahead, ma'am.

[Cynthia Hiponia:]

Thank you, Cody. Good afternoon. This is Cynthia Hiponia, Coupa Investor Relations and I'm pleased to welcome you to Coupa Software's fourth quarter earnings conference call. Joining me today are Rob Bernshteyn, Coupa's CEO; and Todd Ford, Coupa's CFO. The primary purpose of today's call is to provide you with information regarding our FY '17 fourth quarter performance, in addition to our financial outlook for our FY '18 first quarter and full year. Just a reminder that our remarks today include forward-looking statements about our guidance and future results of operations, business 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 earnings release and our Form 10-Q filed with the SEC on December 9, 2016. 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 during this call may not contain current or accurate information. During the call, we'll also present both GAAP and non GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings release which you could find on our Investor Relations website. A link to the replay of this call will also be available there and if you prefer to access the replay via phone you can find that information in the earnings release as well. Unless otherwise stated, gross comparisons made on this call are against the same period of the prior year. With that, I'll turn the call over to Rob.

[Rob Bernshteyn:]

Good afternoon, everyone. On behalf of my colleagues at Coupa, I'd like to start by thanking our customers. Thanking them for their continued commitment to a partner-oriented model of working together towards common goals despite any and all challenges in our path. We thank them for their enthusiasm and embracing our game-changing value as a service approach. Together, we're doing things never before done in our industry in terms of time to value, teamwork, agility and the attainment of measurable results. I'd also like to thank our fast growing list of global Partners, who work with us and our customers hand in hand with the relentless customer success orientation. And last but certainly not least, I'd like to thank all our investors for their continued support as we continue to develop our business. As I've now stated in each of our 59 Company meetings to date, a key binding mechanism and strong differentiator for Coupa is our commitment to our three core values. The first is ensuring customer success. By ensuring customer success, we don't mean just focusing on customer satisfaction or a desire for customer success. But we mean ensuring measurable results for each and every one of our customers against any and all challenges that may come. Our second core value is focusing on results which means setting specific, measurable, attainable, relevant and time bound goals and working relentlessly to deliver against them. And our third core value is striving for excellence. Committing ourselves to expressing ourselves with our full capabilities and continuously improving as professionals, colleagues and human beings. It's critical to understand that the continued success of our Company is strongly correlated with our commitment to these values day in and day out. We're an organization primarily due to how we're organized around our core values. With each passing quarter and each passing year, we remain steadfast in our commitment to a bold vision. We want to help empower companies of all sizes and across all industries to pursue their vision by unleashing huge measurable value in their organizations. This value comes from helping them become more operationally efficient and better able to optimize how they spend their money. A key metric we follow to measure the success of our business is spend under management on the Coupa platform. This metric continues to grow at a sweltering pace. As of the end of the year, a cumulative total of more than $360 billion worth of spend has flowed through our system. This includes $61 billion in spend for the fourth quarter and $175 billion for the full FY '17 year. These are massive numbers running on one platform and the pace continues to accelerate. In our pursuit of our vision, we're taking a value as a service approach. With this approach, our customers partner with us on achieving a clear and measurable set of financial and operational outcomes. And today, we're just scratching the surface of what's possible. So with that, I'm proud to say that Q4 was a great quarter. We delivered the best quarter in Company history to close out a very successful FY '17. We produced record revenues and gross margins and reached a key milestone, surpassing 500 total Coupa customers and ending the year with 535 customers, including some truly fantastic wins this quarter. For example, the addition of Caterpillar was a marquee enterprise win for us in Q4. Caterpillar is a Fortune 100 Company with over 95,000 employees worldwide. A displacement of a legacy solution, we're proud that Cat has selected Coupa's P2P platform for full Companywide deployment. Cat's selection of Coupa was based on the belief that Coupa's exceptional usability and the single organic cloud platform will drive widespread adoption throughout the entire organization. Together, we're on a mission to drive real measurable value at Cat, leveraging the power of the Coupa platform with agility and speed. We continued to expand our global customer base. As one example, we earned a key win with the addition of Paul HARTMANN, a leading provider of medical and hygiene products and our first manufacturing customer in Germany. Other wins this quarter crossed a broad range of industries and geographies in both the large enterprise and mid-market segments. They included Asian Development Bank, FrieslandCampina, Clark Construction Group, Great Wolf Resorts, GoHealth Urgent Care, KMG Rompetrol, Brightpoint Health, U.S.O World Headquarters, Reliance Properties, Kubota Tractor Corporation, InvoCare and many more. Let me share a notable update regarding the deployment of Coupa at a premier consumer transportation Company headquartered in China who signed just in Q3. They are already live. KPMG China was Coupa's implementation Partner for this rapid 10-week spend management transformation project which focused on purchasing and invoice processing. While we're known for fast deployment in the United States and Europe, a 10-week large scale deployment in a country that is relatively new to us is clear evidence that we're able to reach far and wide globally at an unprecedented pace. We also made huge advancements with the Coupa platform during the fourth quarter. Coupa Release 17, our first major platform update of the calendar year, rolled out in January. Release 17 leverages data network effects to deliver comprehensive B2B insights to our customers, allowing them to spend smarter and drive increased value. We also announced our acquisition of Spend360 during the fourth quarter. This is also a huge step in our Company's journey. Spend360's technology uses machine learning to normalize, enrich and properly classify data. And bending 360 into the Coupa platform will catapult customers to new levels of visibility and insight, further compounding the value they will be able to extract from working with us. Together, Coupa and Spend360 combined have processed or analyzed more than $1.3 trillion in total spend to date. The continued accumulation of massive amounts of structured, transactional data over time will be a powerful tool for us as we look towards several long term opportunities around big data and artificial intelligence. Now let's turn to our financial highlights. In FY '17, we recorded a full-year revenue of $133.8 million, this represents a 60% increase from the previous year. We continued to see strong execution in both North America and Europe. Also, though we're still in the early innings in other key regions, we're seeing increased traction in the Asia Pacific region and in Latin America. As Todd will Delve into more deeply, we're beginning to see scale in our operating model. In particular, I'm pleased about our gross margin results for Q4. Non-GAAP total gross margin was above 70% for the first time in Company history and non-GAAP subscription gross margin came in at 82%. We're excited also to make our debut appearance in Gartner's 2017 Magic Quadrant for strategic sourcing suites. Gartner also issued a report entitled Market Opportunity Map Enterprise Resource Planning Worldwide and we're proud to be one of only five vendors in the report named as a mega vender and emerging ERP provider. We were also one of 50 companies named as one of the best places to work by the Silicon Review. We're continuing to invest in and grow our Coupa Advantage program as part of Coupa's social responsibility initiative. To date, Coupa Advantage has made donations to more than 100 charities and we could not be prouder or more honored to support them. Strong continually developing relationships with key market suppliers are allowing us to have success with Coupa Advantage. Now let me take a moment to touch on our upcoming annual Coupa Inspire 2017 Conference. Inspire is our way of bringing our customers, Partners and Coupa colleagues together to collaborate, learn from each other and leave inspired to drive our collective vision. Inspire has become a premier spend management industry event. This year's conference, our fifth annual and largest ever, will take place in mid-May in San Francisco. We expect to welcome more than 1,500 attendees from around the world. This year, we're focusing on the theme of unleashing real value everywhere, a cause near and dear to my heart, as many of you know. Also, we were thrilled to recently announce that Apple Co-Founder, Steve Wozniak, will be a distinguished speaker at Coupa Inspire 2017. So now let me hand it over to Todd who will discuss our fourth quarter financials in more detail and provide our outlook for the first quarter and full-year FY '18. Todd?

[Todd Ford:]

Thanks, Rob and good afternoon, everyone. We delivered strong results across the board in the fourth quarter. Total revenues for the fourth quarter grew 44% year over year to $38 million and revenues for the full FY '17 year grew 60% year over year to $133.8 million. For Q4, subscription revenues were $33.8 million, up 45% year over year and comprised 89% of total revenue. Our non-GAAP operating loss was $2.3 million or negative 6% of revenue. As our results demonstrate, we're continuing to show leverage in our financial model. In Q4, we began using the proportional performance method of revenue recognition for professional services engagement. This means that for newly signed pro serve engagements revenue is recognized as the services are delivered and this will be the method used for new engagements going forward. For engagements signed prior to Q4, in general, professional services revenues were and will continue to be deferred and recognized upon customer go live. Since it is no longer our standard practice to invoice customers up front for professional services engagement nor invoice upon completion of milestones, our calculated billing from professional services will be lower in Q1 and Q2. However, as more of our professional services revenue is recognized as services are delivered, we should realize an offsetting benefit to calculated billings in the second half of FY '18. For the year, calculated billings were $159.7 million, up 48% year over year. Total deferred revenue at year end was $90.8 million, up 40% from the previous year. As a reminder, we define calculated billings as a change in deferred revenue on the balance sheet for the period plus 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 fourth quarter non-GAAP gross margin was 73%, compared to 64% in the same period last year. Our gross margin benefited from several factors, including the scaling of our operations team, maturity of our spend management platform and better terms from our web hosting provider. Non-GAAP gross margin from subscriptions was 82% and non-GAAP gross margin from professional services was negative 5%. It's important to note that we recognize professional services costs as incurred, regardless of when revenue is recognized. Now turning to operating expenses for Q4, during the quarter, we accelerated our hiring across all departments and ended the year with 652 employees, up from 502 employees at the end of last year. In Q4, we also significantly ramped our hiring in sales and marketing across all regions and market segments to address the large opportunity that lies before us. For modeling purposes, please remember that our sales and marketing expense spikes in Q2 related to our annual Inspire Conference. In Q4, we also continued our investment in R&D and in particular, the build out of our technology center in Pune, India. Since opening the Pune office in August of 2015, we've added over 70 employees there, most of which are in R&D and support. Although we expect G&A expenses to moderate, G&A expenses were higher in Q4 due primarily to M&A related activities. The net result of our Q4 performance was a non-GAAP loss per share of negative $0.05 on 49.8 million weighted average shares. Given that we're 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 $202 million, down from $221 million at the end of Q3. Cash flow from operations in the fourth quarter were negative $10.3 million and negative $21 million for the year. Free cash flows for the fourth quarter net of $6.8 million paid for the Spend360 acquisition were negative $11.4 million and negative $25.4 million for the year. We define free cash flow as operating cash flows plus investment cash flows less the impact of any cash paid for acquisitions. Now let's turn to guidance. For the first quarter, we expect total revenues to be between $38 million and $38.5 million. This includes expected subscription revenues of between $34 million and $34.5 million and professional services revenues of approximately $4 million. Please note that subscription revenue end margins will be impacted by approximately $1.1 million in Q1 compared to Q4 with there being three fewer days in Q1 due to the shorter February month. We're expecting Q1 non-GAAP gross margins to be between 66% and 69%. We expect non-GAAP loss from operations to be between $6 million and $8.5 million. We're providing a broader range on non-GAAP loss from operations in Q1 to account for the potential spike in payroll tax expense that could occur in Q1 from employees selling non-qualified stock options once the lockup expires on April 3. Taking these factors into consideration, we expect non-GAAP net loss per share in the range of negative $0.12 to negative $0.17 based upon an estimated 50.8 million weighted average shares for the quarter. For the full year ending January 31, 2018, we expect total revenues to be between $167 million and $170 million, with non-GAAP gross margins of between 67% and 69%. We expect non-GAAP loss from operations to be between $27 million and $30 million and we expect non-GAAP net loss per share in the range of $0.53 to $0.58 based upon an estimated 53 million weighted average shares for the full year. We're not providing near term targets for cash flows, but we reiterate our expectation to be operating cash flow neutral to slightly positive for FY '18 and sustained free cash flow positive beginning in Q4 FY '18 on an annualized basis. To summarize, we're very pleased with our fourth quarter performance. We're investing for the long term with a disciplined growth strategy to maximize market opportunities and financial results. With that, let me turn it back over to Rob for some final remarks.

[Rob Bernshteyn:]

Thank you, Todd. Our execution and focus in FY '17 produced strong financial results. Looking ahead to FY '18, I really want to remind investors of our growth strategy. First of all, we will continue to invest in R&D to innovate and further develop our organic cloud platform. Our Coupa community and customer advisory boards have been an important part of our platform development. Our ability to rapidly innovate in response to feedback has been a key driver of our market leadership and our road map includes solutions that will continue to deepen existing customer relationships. Secondly, we will continue to invest in sales and marketing to take advantage of the enormous market opportunity ahead. Our growing global customer base is a testament to the success that we've had to date and we expect to follow the success of our European expansion with an increased footprint in Asia and Latin America. Our partner ecosystem is key to this strategy as we continue to develop and expand these relationships. These investments will allow us to capitalize on the enormous market opportunity while we remain focused on a disciplined growth strategy. We began to see the scale in our operating model in full FY '17 with narrowing operating losses. In FY '18, we remain focused on achieving operating cash flow neutral to slightly positive for the full year and sustained free cash flow positive on an annualized basis beginning in Q4. Now Todd and I will be happy to take your questions. Operator?

[Operator:]

[Operator Instructions]. We'll take our first question from Stan Zlotsky with Morgan Stanley.

[Hamza Fodderwala:]

This is Hamza Fodderwala in for Stan Zlotsky. I just wanted to dig into the Caterpillar win, if I may. Could you give us any additional detail around the size of that win? Was it a firm-wide deployment and how we should think about the impact to billings in FY '18? Thank you.

[Rob Bernshteyn:]

Sure let me start out with that, this is Rob. So Caterpillar is I'd say a very sizeable Fortune 100 Company. This is a firm-wide deployment, potentially impacting nearly 95,000 employees. One of the things that we're very proud of as we've been building this business, we have a lot of customers that feel like Caterpillar and no one customer represents anywhere near 5% of our recurring business. This was in fact a platform decision and we have aligned our teams around driving measurable value for them likely to be done within nine months or so. So another exciting win for us, no doubt.

[Hamza Fodderwala:]

Okay. And then maybe just one more if I may. You've also had success on the direct spend side with your source to pay offering. On that side of the product, the source to pay that is, how do you feel that you are competitively positioned against some of the larger competitors out there? Or is there more significant work to do or investments to be made to close the gap there?

[Rob Bernshteyn:]

Sure. Well first of all, we view the competition that we have in this marketplace is ourself. We've been focusing on customer driven developments for eight-plus years and we'll continue to do so. Our current process -- we currently process lots of indirect. I gave one example of a customer that signed on with us just this quarter, Paul HARTMANN in Germany, who is looking to leverage us for both direct and indirect. But it's important to understand that we aren’t in the production planning game or the materials management game. Those are components that really need to live in core ERP solutions. That's not where we see value being created. We're creating value in our core complex sourcing activities. We're going to be focusing on third-party invoice processing. We're focused on supply performance and supply risk which is something that is badly in need of modern technology solutions. We're focusing on PO distribution and collaboration around POs and sourcing event collaboration. So we're peaking off the use cases where we can drive real meaningful measurable value for customers and not trying to reinvent ways of doing things that are being done well to date. We see that expansion continue both in our core transactional capabilities, those being procurements, invoice management and expense management. Where, by the way, we're seeing significant acceleration in our business. And in all of the power user capabilities from sourcing to inventory to analytics, to supply information management and more. So this is the way we've done things to date and we plan to continue much along the same path.

[Operator:]

We'll now move on to our next question from Mark Murphy with JP Morgan.

[Mark Murphy:]

Yes, thank you very much. Nice finish to the year. I wanted to ask you, Rob, going back to the Caterpillar win, I believe you said it was a displacement of a legacy platform. Could you comment just on the relative vulnerability of the incumbents, especially Ariba and Oracle and just what are the limitations or pitfalls of those platforms? And is that dynamic or their perception of that changing at all in a way that's allowing you to land some of these larger transactions?

[Rob Bernshteyn:]

Sure. Well, I would tell you that we've obviously replaced incumbent solutions a couple of dozen times at some of the largest global multi-national companies in the world. And we really don't focus too much on whether they have limitations or new capabilities that they are adding. We're really focused on the value we can drive for customers. We aren’t a products company at all. We're a value as a service company and we see an opportunity to save many of these organizations tens of millions of dollars, give them an opportunity to become much more operationally efficient, give them visibility to their spend practices. And conduct spend management and procurement transformations in their organization. So along the way, we'll continue to replace a lot of these older deployed solutions that are not deployed to the level that many of these customers deserve. And so like I said in the last question, the competition here is really ourselves. It's much less of what some incumbent solution providers might still be offering out there.

[Mark Murphy:]

As well, we noticed you crossed the 500 customer mark. So I'm actually curious, is there a network effect that you're seeing that it creates for your B2B insights products or any of the other analytics that you can provide across that network?

[Rob Bernshteyn:]

Well there are a couple of network effects. The one network effect without question is just the word of mouth from customers that are realizing real value in virtually every industry that we've had the pleasure of serving them in. Regardless of industry that we enter, we focus on outcomes for these customers and once we deliver those outcomes for them they are more than willing to talk to their colleagues in their own industry. There are of course networks effects in our offering as well. There are network effects around cross-company benchmarking that we offer our customers. There's network effects around the Coupa Advantage program, where we aggregate buy side demand and offer our buyers better deals by the moment they sign on to the platform. And there's network effects in the analytics that we're distilling down in a normalized fashion for many of these customers and offering them insight that they would never be able to get in a standalone product-based solution. So we're consistently looking for some of these types of approaches to help us scale. But all of that is done with the same maniacal spirit of ensuring that each and every customer gets measurable value from working with us. They are able to point to it, they are able to quantify it and they are very often willing to share those outcomes with their colleagues in the industry.

[Mark Murphy:]

Rob, if I may, I wanted to ask you as well if you're able to comment on the linearity of billings during Q4? And curious, did you sense that the mood was changing post-election in December or January, et cetera as the stock market began to strengthen, was there more willingness for companies to move ahead with this kind of transformational projects?

[Rob Bernshteyn:]

I'm not sure I have anything statistically significant to point to when you look at any of these particular months in the quarter. But I would say that what we've seen over all of the last eight years is that there is a desire for our buyer to think through the decision and very often our deals wind up being back end loaded in terms of the quarter. But they get done and they get done at a fair price point and more importantly than anything, we would begin the deployments right away and we get them to value. So nothing statistically significant that I could point to in those particular months that you called out.

[Mark Murphy:]

And then sorry, as well for Todd. You'd just mentioned that there would be a billings impact in the first half and then an offsetting impact in the second half. I think it was related to the change in the professional services revenue recognition methodology, if I understood that correctly. And I guess I'm curious, is there any way you can size that up just in terms of the magnitude of that impact so that we can roll it forward properly in our models?

[Todd Ford:]

Thanks, Mark. Historically Q1, in particular, is a big billings month for professional services because Q4 is our largest new ACV month or quarter. So the impact in the first half of the year will be approximately $4 million to $5 million, with the majority of that coming in Q1 and then we expect that to offset in Q3 and Q4. Because it will have much higher revenues because now all of the revenues at that point should be based on proportional performance method.

[Operator:]

We'll now take our next question from Raimo Lenschow with Barclays.

[Raimo Lenschow:]

Thanks for taking my question and congrats as well from me. Rob, can you talk a little bit about the Spend360 acquisition? It's like the whole industry talks about AI and machine learning now, but can you just give us a little bit more detail how that impacts you and what you could expect here in terms of how it could change the industry for you?

[Rob Bernshteyn:]

Yes, absolutely. This is something very interesting to us. In our space, the term spend analytics typically means professional services companies with maybe a lightweight product, but primarily it's people running spreadsheet data to try to understand how companies spend their money. What we've done with Spend360 to date is very interesting and what we're planning to do is even more interesting. There is a machine learning capability built within Spend360 that allows you to normalize supplier data and normalize spend data, commodity level data. So you could actually really understand who are all these suppliers that your Company is buying from and what are the price points you're paying, how often are you disputing things with these suppliers. Really get a full sense of the supply base and they've done work on over $1 trillion worth of spend. Our transactional platform has processed over $350 billion worth of spend, so together, we've got a lot of intelligence and a lot of insight that we can bring to our individual customers over time. So we will be working with them to first normalize our comprehensive data set, enrich that data set with more information about suppliers and items and then begin to classify that data so that each individual customer could take advantage of it. There is a very interesting and important intelligence that could be brought to every one of our customers around the insights that we develop with Spend360. So it's very early days, but very excited to get the right pieces in place to build out something we think can really revolutionize our industry.

[Raimo Lenschow:]

Perfect. And the other thing I was interested in is on when you talked about the first premier or the new big premier new customer in China, can you talk a little bit about how does that work there? Do you have -- do you rent data center capabilities there? Do you it there or what's your approach on a country and what's your opportunity in that respect?

[Rob Bernshteyn:]

I could tell you broadly speaking with our relationship with Amazon, we can service companies all over the world 24/7. With our support capability, we could service companies all over the world 24/7. We could serve them in any currency and we could serve them in virtually every language. So our ability to get customers deployed is not limited by our hosting. It's not limited by our people. If anything, it's limited by a desire to lock in on very clear and measurable success criteria, project plans that make sense and the wherewithal and desire to execute very quickly to get to results. And we've gotten very good at that as an organization. And it's something we're able to do for this particular firm in China and we look forward to doing for many customers around the world in the coming weeks, months, quarters and years.

[Raimo Lenschow:]

Perfect. Could I squeeze in one last for Todd? So if you modeled this year in terms of cash flow, I know -- is there -- can you talk a little bit about the linearity we need to think about?

[Todd Ford:]

Obviously, cash flow is going to ebb and flow with billings. And historically, Q2 and Q4 have been the strongest billing months and there's a compounding effect as the renewals come up in Q2, Q4. So there's been seven years of history where Q2 and Q4 were the stronger months. So I think that Q2 and Q4 would be stronger months. We also have a good compare going into Q1, just given the strength of our billings in Q4. But all we've really formerly guided to so far is operating cash flow neutral to slightly positive for the year, but it will ebb and flow with historical billing trends.

[Operator:]

I'll move on to Ross MacMillan with RBC Capital Markets.

[Ross MacMillan:]

So, Rob, just had a quick question for you. First on pricing, as the product portfolio expands, how do you think about pricing and I'm curious whether you're making any changes in the pricing model at all as the product set expands? Thanks.

[Rob Bernshteyn:]

Well thanks for the question. I would tell you the best way to think about that is the new annual contract value or average subscription price per deal and that's gone up virtually every quarter now for 32 quarters on average. So with that says to us is that our customers are appreciating the value that we're driving with our solution set with every new release that we come out. We evolve the pricing, our core platform is getting -- there's more value in our core platform, there's greater value in the incremental capabilities built around that platform. So there's no reason to believe that in coming releases, coming quarters, we can't continue that trajectory. We don't see a ceiling ahead of us that would block that. It's a very exciting dynamic that's happening with us. And frankly, it's really the right spirit for our industry which is customers paying fairly for a subscription to more and more value as they sign on for a relationship with us.

[Ross MacMillan:]

And a follow up for Todd if I could, I just wondered if you could recap again on the precise nature of the changes to the professional services business and why that hits deferred and will there be a way to normalize for that? And then also, if the quarter wasn't unusually linear, any other comments on the higher DSO that we saw in Q4? Thank you.

[Todd Ford:]

Yes, so with respect to professional services and there's a bit of a historical framework to discuss. When Coupa started many years ago, we didn't even charge for professional services because we were focused on driving value. Then over time, we started to charge and then we started to charge more a fair rate. And historically, the professional services were billed up front and we would lead that down as we provided professional services. And often, we wouldn't get compensated for that value beyond the initial contract or billing that was done up front. So now that we're recognizing professional services as services are delivered, we're billing them in a similar fashion. Whereas before, we may have had a bigger spike in Q1 as a result of the business that closed in Q4. But as we got through the year, oftentimes, we weren't getting paid for the services that we were providing. Consistent with our message of creating value as a service, but now that we've changed the methodology we've changed the way that we're billing customers up front. And then the second point with respect to linearity, we will see the impact, as I mentioned, in the first half of the year. But as more and more of the professional services are recognized as they are delivered, it will offset the upfront billing that we're no longer doing. So we expect that change to take a full year to permeate through our financial statements which would be through the end of this Q3. So I think it will normalize by the end of Q3. So the hit will be approximately $4.5 million in the first half of the year which I would say approximately $3 million is related to Q1, $1.5 million Q2 and then it will reverse out in the second half of the year. And then with respect to DSOs and that type of thing, what I can tell you is we're an enterprise software company so it is definitely more back-end loaded. If you look at our accounts receivable over 90 days which is really how we run the business, it's virtually zero. So we have a great collections team and our ability to collect is strong. So I wouldn't read anything into that metric.

[Operator:]

We'll now take our next question from Pat Walravens with JMP Securities.

[Pat Walravens:]

So one for Rob and one for Todd. Rob, back on Spend360 for a minute, why build or why buy rather than build it yourself?

[Rob Bernshteyn:]

That's a really great question, Pat. There is a certain level of experience and depth that some of the folks had the pleasure of meeting that Spend360 had which we could go out and attempt to develop on our own. But it just made a lot more sense to make them part of our organization. When we look at some of the tuck-in type acquisitions that we've made over the course of the years, there were primarily driven by the people. The people, the commitment to this industry, their desire to do something very special that has never been done before and the ability to apply their intellect and their experience to that problem. And I've been extremely pleased with some of the collaboration we've had so far with Paddy and his team who ran Spend360 and are now a unique and integrated group of people as part of Coupa. So we're really excited to have them with us.

[Pat Walravens:]

Okay, got it. And then, Todd, I want to ask you about 606 to the extent you can comment on it. Where are you, do you guys plan to do a full retrospective? And then perhaps most importantly because I'm sure you saw what Workday did, do you foresee any impact on billings that we should be prepared for?

[Todd Ford:]

Sure. So with respect to 606 and the new rev rec rules that are coming out, we don't have virtually no impact from a revenue perspective. So we're still going through all of the impacts and analysis. But the only area where I believe it's going to impact us is on sales commissions and it's actually going to make it -- we're going to end up capitalizing more. Because even though the contract life may be three years which is how we would amortize our commissions now, now we have to look at the lifetime value of the customer. And just given our strong renewal rates, that would be somewhere in the 20-year range. So now we would have to amortize that out over a much longer period, so it will actually make our results better. And my perspective on 606 is that you're have to go to cash flows because for most companies it's going to be a disaster to try to figure out what's really happening and I think you're going to end up back at cash flows. With respect to billings, now that you can bill even though you haven't billed the customer. It's one of the reasons I'm not a big fan of billings as you know and why we don't guide to it and why Workday has also pulled guidance as you noted. So I don't know that it's going to have a huge impact to us on billings, but we're still looking into it. I do believe the only impact will be on -- major impact will be on sales commissions.

[Operator:]

I'll now take the next question from Terry Tillman with Raymond James.

[Terry Tillman:]

Okay, well first congrats on the quarter and the momentum. Rob, I guess the question for you just relates to your several quarters as a public [Technical Difficulty] reporting since your IPO, the successful IPO. What has happened post the IPO from a [Technical Difficulty]? Are you in a better position where you feel like you're seeing all the opportunities and then covering the opportunities, particularly in these house accounts for the ERP visitors? Or do you still feel like you've got a lot of wood to chop to make sure your brand is out there and you're seeing everything, particularly from an RFP and opportunistic perspective?

[Rob Bernshteyn:]

Sure, thanks for the question, Terry. I think there's two dynamics that are worth noting since we went public. We had one hypothesis pre IPO and during the road show that being a public company would help us in terms of greater legitimacy in the marketplace. At our earnings call last time, I didn't feel like we had enough statistically significant insight to say whether or not that was actually helping us. I would say six months in, there are very good early indicators that having that behind us and being a legitimate public company is helping us in terms of brand presence. And ultimately just a legitimate organization that folks should be very seriously considering for a partnership around optimizing their spend. So that is working out very nicely. I would say if there is one thing that is keeping us up at night that despite the fact that this is a $25 billion-plus global market opportunity, I do still worry there are deals out there that are happening where Coupa is not in the mix. And so it's the job of our marketing team, it's the job of our sales team, it's my job, it's the job of everyone inside our organization to make sure that prospective customers out there are aware of solutions beyond some of the things they might have to deal with from some of the incumbent providers. So we're doing the best that we can to invest in that and we're doing the best that we can from an execution perspective. Because when we're in situations where we're fairly evaluated against the alternatives, 67%-plus of the time to be factually correct, we're definitively the solution of choice and we can drive a lot of value for customers.

[Terry Tillman:]

Okay. And in terms of I think one of your comments was accelerated, your sales and marketing investment. I guess were those sales and marketing investments that you accelerated towards the end of the year, were they more weighted towards the enterprise business or the mid-market business? And if you accelerated those investments, could that have an upside implications potentially for billings in FY '18 that you otherwise wouldn't have thought about?

[Rob Bernshteyn:]

Right. Well look our investment was across the board. We obviously internally look at both our mid-market business and our enterprise business. We look at all of the metrics underneath in terms of sales and marketing efficiency and how fast we're able to capture new ACV, the amount of new ACV, the number of logos captured et cetera. But the investment was across the board. I will tell you that our sales cycles and rather our ramp of sales professionals in mid-market is 3 to 6 months and roughly 6 to 9 months for large enterprise. So we're investing to capitalize against this market opportunity and these investments were made with a disciplined growth thought process in mind, a sales and marketing efficiency thought process in mind that allows us to very easily step on the gas a little bit more in certain points and step a little bit on the brake or ease off the gas if we need to. And that's the approach, as I think you know, we've taken now for eight years and we plan to look at it exactly the same way going into this year.

[Terry Tillman:]

Okay. And, Todd and thanks, Rob. Todd, a question for you on the financials. Just so I can have this clarified. So the $3 million in the first quarter, $1.5 million in the second quarter from just the lack of billings now that you would have had up front on PS. Are you saying that that completely offsets in the back half of the year? Because what I'm getting at -- I also would be -- well that's the first part of the question.

[Todd Ford:]

Yes, it should offset in the back half of the year. Because typically what would happen, we would have billed a lot in Q4 and then depending on when the customer go live happens is when the revenue would have happened. So we're taking the upfront hit on billings, but then as those deployments start we're starting to recognize the revenue that we wouldn't have otherwise had. So by the time we get into Q4, it should have completely reversed.

[Terry Tillman:]

So I guess though as it relates to -- because people do look at billings and you all's story rightly or wrongly. And I guess as we either get into the back half of FY '18 or maybe in FY '19, a large variance or meaningful variance between top-line growth and billings growth, could we see that minimized by the second half of 2018 or is that more of an FY '19 thing?

[Todd Ford:]

No you should see it on a full-year basis, the gap will narrow significantly.

[Terry Tillman:]

In 2018?

[Todd Ford:]

Yes.

[Operator:]

[Operator Instructions]. We'll take our next question from Joseph Vafi with Loop Capital.

[Joseph Vafi:]

I was just wondering if you can quantify at this point in the Company's evolution the ROIs and if you wanted to break your market into two pieces, the mid market and the enterprise market, if you're seeing different ROIs emerge there for your sales and marketing spend? And then I have one more follow up after that.

[Rob Bernshteyn:]

So let me try and understand the question. ROIs to the customer of working with Coupa or ROI on our -- the salespeople we hire and their ability to bring in recurring revenue?

[Joseph Vafi:]

Yes, I think in your ROI as you invest your sales and marketing dollars to drive your P&L.

[Rob Bernshteyn:]

Well I would say we've been in a very tight band of return on investment for our discretionary marketing expenditure, as well as our sales headcount. I don't think there's anything very specifically you could point to in the enterprise versus mid-market. If anything, I'd say maybe it's a little bit more dilutive in the mid-market than in enterprise, but that's about getting to scale and that's about getting a high-volume business going globally in the mid-market. But I would say broadly, we've been in a very tight band of sales and marketing efficiency for 32 quarters now. And that's allowed us to not only build up a very rich recurring revenue base, as you may know, the vast majority of our revenue is recurring, something like 85%-plus is recurring, if not 89%. And secondly, when you look at our renewal rate and you look at our LTV to cap ratio, you realize that once we get these customers on board, not only are we driving value for them but they are very strongly inclined to stay for a long time. So we stay within tight bands in both markets and we look to build up a very strong recurring revenue base that will benefit the Company for years to come.

[Joseph Vafi:]

And then just on the Q1 revenue guide with the change in rev rec. Should we expect to see a bump up in services revenue then just as the previous methodology probably still has revenue with it and now we're going to see perhaps a little bit more based on current run rate both of work being done in the quarter?

[Todd Ford:]

Yes, so there is a bit of a tail wind on professional services revenue. It's encapsulated in the guidance that we gave for Q1 of approximately $4 million in professional services. But you're correct, there for a couple quarters and Q4 was one of them, you've got the compounding effect of go lives plus the proportional performance, although in Q4 it was pretty small. But you will see that pick up Q1, Q2, Q3 and that's what we will provide the offsetting billings offset in the second half of the year through the degradation in Q1.

[Operator:]

We'll now move on to our next question from Robert Breza with Northland Securities.

[Robert Breza:]

Just quickly, as you guys think about the expense side of the equation and you talked in your prepared remarks about investing in Pune, India. Can you walk us through what you're seeing from a cost savings perspective and maybe just talk a little bigger picture about the investments you're making there relative to how we should think about the improvements in not only gross margins but overall operating margin? Thanks.

[Rob Bernshteyn:]

I'll let Todd touch on the metrics on the cost side of the equation. But when you look at the value side of the equation, I could tell you that our team in Pune is not a separate center and not something that's going to run on its own somewhere purely for some savings in cost. They are an integral part of our overall development organization, our services organization, they are part of our 24/7 coverage from a support perspective. They are uniquely intertwined with our Company from a cultural and core value adherence perspective and they are our colleagues. They simply happen to be in Pune. I'll let Todd touch on the--

[Todd Ford:]

So we opened the office in August of 2015. And as I noted in the prepared remarks, the amount of talent that we've been able to find in Pune has far exceeded expectations. And if you look at our leadership and our engineering team with JP and his group, they have strong ties to India and we've been just getting extremely quality talent. And certainly it's cost effective from our perspective as well. And we should also note we're continuing to hire everywhere, it's not just Pune, India. But it's definitely a fraction of the cost here in Silicon Valley. But more importantly, we're getting great talent. And when you look at the operating leverage that you were referring to, we're really trying to operate the business out of several different vectors. But one of them is sustained long term growth of greater than 30%. Rob has talked about the sales efficiency, the LTV to CAC and we certainly look at the magic number. But when you take into consideration that our gross renewal rate without expand and upsells has been pegged at about high end of the 94%, 95% range, the LTV to CAC is very strong and that's why we've been accelerating our investments in sales and marketing. And then the third rail that we're operating the business on is to achieve operating cash flow neutral to slightly positive this year. So Rob and I literally meet on a quarterly basis and decide which levers to pull which ones to accelerate, et cetera. But we're focused on top-line growth, being efficient in how we spend capital and driving to our cash flow targets as well.

[Operator:]

Thank you. That does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Rob Bernshteyn for any additional or closing remarks.

[Rob Bernshteyn:]

Thank you all very much for the insightful questions. Thank you for your time and we'll look forward to keeping you updated on a quarterly basis. Take care.

[Operator:]

That does conclude today's conference. Thank you all for your participation. You may now disconnect.