Coupa - Answering Dreamer's question

My question is: given you recently tried and cut PLAN, and now are in COUP…is there a particularly method to why you chose COUP over something like SMAR? COUP is a 40% grower currently…pedestrian compared to your top holdings (which is amazing to say). SMAR is on track for full year 57-58% y/y growth, in comparison. Neither are profitable yet, and COUP slightly larger in rev and mkt cap. COUP just seemed like an outlier compared to your other stocks, so was trying to understand your process in choosing them as a try-out position vs others you may have considered?

Good question Dreamer,

Here are my notes from the Coupa earnings report and conference call. I stumbled on Coupa, and I can’t buy all the wonderful stocks. And Coupa is a 2% position while Twilio is over 20%. Besides that, I’ve often said that anyone who invests in these stocks and doesn’t subscribe to Bert’s newsletter is out of his mind, considering the minimal cost and huge benefit. Bert wrote it up a couple of months ago.

Saul

Fiscal Third Quarter Results

Total revenues were $67.5 million, up 42%
.
Subscription revenues were $60.6 million, up 42%, and 90% of total revenue

Adj operating income was $5.8 million, up from a loss of $2.4 million

Adj net income was $5.5 million, up from a loss of $2.8 million.

Adj EPS was 8 cents, up from a loss of 5 cents.

Operating cash flow and free cash flow were $4.0 million and $2.6 million, respectively.

Subscription Gross Margin has been about 81% and steady.

Total Gross Margin has been about 73% and steady.

Recent Business Highlights:

• New customers in Q3 included: United Airlines, Finnair, Golden State Warriors, Coors Distributing, and many others.

• Coupa Community Intelligence continued to garner great enthusiasm from our growing community of customers. In Q3, the majority of our customers accessed our platform’s Community Insights capabilities, as evidenced by a near doubling of page views from Q2 to Q3.

• Coupa purchased Aquiire, the leader in real-time supplier catalog search, to extend Coupa’s capability to deliver a comprehensive business-to-business (B2B) shopping experience spanning real-time, cached, and localized catalog search.

• Coupa unveiled its vision for a B2B payments solution called CoupaPay. This industry-first offering spans a set of payment and financing solutions that empower businesses to spend smarter at every transactional step of their BSM process.

• Coupa announced a strategic partnership with Barclaycard, starting with virtual cards to create a fast, secure, and convenient way for businesses to manage payments.

Conference Call

Our 5th consecutive quarter of TTM positive free cash flows.

We are offering a highly innovative functional and technical platform at significant scale. We are cultivating a culture of colleagues maniacal about customer success, results orientation and a never ending desire to strive for excellence.

Our adj operating income was $5.8 million or 9% of revenue up from a loss of 5% of revenue a year ago.

This was the 4th quarter in a row of positive adj operating income.

TTM adj operating income was 4.6% of revenue.

Adj prof services margin was 4%. As a reminder, we expect TTM prof services margins to trend between breakeven and 10%.

TTM free cash flows were 9% of revenue. We defined free cash flows as operating cash flows minus property and equipment.

We recognize revenue based on the number of days in the quarter. Since Q1 has 3 fewer days due to February, our steady state subscription revenues will be about 3% lower in Q1 compared to Q4.

Q - Congrats. These are amazing numbers. First, can I ask a little bit about the strategy around CoupaPay because that’s kind of a very big market; it’s a very nice extension to what you’re doing at the moment.
A - We came out initially with Coupa’s virtual cards for POs, and it’s going to streamline a lot of processes that are being done today on corporate business cards chaotically. We moved into dynamic discounting through Coupa Accelerate that allows our buyers to take advantage of early payment discounts… And we’re moving further towards our Coupa invoice payments, and the mechanisms being planned there. So our thought process is to offer a comprehensive Coupa payment solution, and as we continue to develop it we’ll keep you very well informed, as we go from in-development, to early access, to generally available with every capability.

Q - as the platform continues to expand and touch different processes inside of enterprises to you encounter resistance to change?
A - A lot of it is getting to where your solution is the least friction path, to reduce resistance to change, and we’ve gotten very good at that.

We are giving synergistic results to these customers and that’s evidenced by our ARR (Annual Recurring Revenue) per deal going up for 39 quarters in a row, both in mid-market and enterprise. Our customers are buying a valued service solution from us and we’re delivering it for them in the most frictionless way possible.

Q - Dollar based expansion rate?
A - If you go back to when we went public, it was $1.04 to $1.07, and then about a year ago it started creeping up to $1.08 to $1.10, and over the past several quarters it slowly moved up to $1.10 to $1.12, and in the last quarter it was at the high-end of that range.

Q - it looks like ARPU (Average Revenue Per User) has been increasing for quite a bit for some time now. And it looks like there is particular strength in this quarter on ARPU and I guess the question is, is this an effect of bigger customers or is it expanding within the customer, or maybe a bit of both of these?
A - It’s a combination of both and more.

Q - One question on Coupa Pay; it was really good to see you guys sign up Barclays card as your first partner, but what has been the response from other banks?
A - We are excited to work with Barclay card as the inaugural partner, they are actually historically the first to create business corporate cards; so for them to be our inaugural partner was great but there is a very real interest on behalf of a whole host of financial institutions to work with us. As you might imagine, we have hundreds of billions of dollars of spend under management, and that’s accelerating in terms of how much money is going through our system
Q - And then if I can add a different one, what happens to the demand for your procurement solutions in a recession? I mean on one hand, there is reluctance for new projects, on the other hand you’re saving money?
A - In turbulent economic times, the one thing that you can control is your spend. Revenue can be harder to come by, market dynamics can put you in a difficult situation, but spend is something you can control, and the ability to control spend drives bottom-line which virtually every company in the world cares about

Q – Gross Marginws
A - If you look at the mid-term target that we set out a year ago, gross margins were 73% to 75% and the longer term was 78% to 80%. There is going to be a little bit of a step back over the next one to two quarters with respect to absorbing the costs of integrating our acquisitions, but then we would expect to see a continual gradual improvement with respect to gross margins and free cash flow margins towards the longer term target, now that we’ve materially achieved the mid-term target. And the same goes for free cash flows; if you look at a trailing 12-month free cash flows of 9% that’s well at the high-end of the mid-term target and I think you will continue to see quite a bit of scale there.

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Thanks Saul…great info.
The Coupa Pay was not something I was aware of and is interesting.

Right now, my stocks are: TTD, TWLO, NTNX, BZUN, ZS, AYX, and SMAR.

On my short watchlist are Coupa-ish type stocks like NOW, CRM, WDAY, ZEN, TEAM, and PLAN.
Different levels of maturity, but all have been great stock investments, like COUP, if you owned them the past year or more.

Like you stated…hard to own all these great companies without feeling like you are starting a mutual fund.

SMAR reports on March 19th or about 3 weeks. I will try to include a write-up after their ER to add to the mix of Enterprise Software stocks like COUP and the above and see how they compare.

I don’t think you can do wrong with any of these right now…just a matter of trying to select the best stock as of today. In just scanning Bert’s SA profile, I can see he has written about NOW and WDAY and TEAM in the past too. I am guessing it is only a matter of time before he chimes in on SMAR.

Dreamer

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Hello,
I am new to the board, and I have seen the name Bert thrown around a few times.
I tried to find information about his Newsletter on the Knowledgebase but wasn’t successful.

I googled Bert investment Newsletter and found Bert Hochfeld from seekingalpha, is that him?

Many thanks,
-Daniel

That is the one. His website is ticker target.

Yes. Tickertarget.com

I googled Bert investment Newsletter and found Bert Hochfeld from seekingalpha, is that him?

Yes, and he has his own newsletter called Ticker Target which is what is referred to when someone posts about Bert’s newsletter.

Saul

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