Coupa results

Investment Analysis Clubs Saul’s Investing Discussions
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Coupa had what I thought were awesome results.

Revenue growth was up 51%, second only to last quarter’s 54%. The next closest looking back three years was 44%

Subscription Revenue was up 49%, and was 88% of revenue.

Calculated billings were up 54%.

Now we get to the GOOD part:

Operating Income was 11.6 million. (By comparison the previous 7 quarters were 0.9, 0.3, 4.0, 5.8, 2.4, 2.2, and 4.8. Making $11.6 looks like they are breaking out).

Adjusted Net Income was 14.2 million. (By comparison the previous 7 quarters were 1.4, (0.1), 3.3, 5.5, 3.4, 2.1, and 5.3. Making $14.2 also looks like they are breaking out).

EPS was 20 cents. The previous high ever was 8 cents.

And even better stuff:

Operating Cash Flow and Free Cash Flow were $26 million and $22 million. A year ago they were $4 million and less than $3 million.

Looks awesome to me. I don’t know about you.

Saul

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Saul, does the operational loss increasing as fast as revenues give you pause at all?

Up front, yes I’m concerned - by yet another Saas company reporting a “gross profit” increase of 50% YOY, but when you factor in their Opex - SG&A, R&D, Marketing - it all magically disappears into an actual Loss from Operations that is going up exactly as fast as revenues - because their expenses are.

Non-GAAP profit trumpeted to the skies, but GAAP losses buried. Theory, this is why most of the Saas sector’s stock prices have topped since the summer/September.

What am I missing?

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What am I missing?

What you are missing is that most people pay little or no attention to GAAP because it has so much nonsense built in to it. Adjusted earnings are the real earnings. The money that the company can put in the bank. Adjusted figures are the ones that the management uses for their internal deliberations. Adjusted is what analysts use for their estimates. I literally don’t even look at GAAP figures. I don’t even copy them into my notes. I feel that they are irrelevant.

Theory, this is why most of the Saas sector’s stock prices have topped since the summer/September.

Technology rapid growth companies have been using adjusted figures for at least 20 years. Your theory is that they just started affecting SaaS prices 2 months ago, and caused them to temporarily top?

Saul

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GAAP tries to get you to believe the impossible! Here’s an example.

Coupa had $22 million in Free Cash Flow. Free Cash Flow is real money that they have in the bank, any way you look at it.

GAAP wants you to believe that they had net loss of more than $26 million! If GAAP had any reality, and they had a “real” net loss of $26 million, then where did that $22 million of free cash flow, that they put in the bank, come from? That’s what I mean when I say that GAAP is useless for understanding how the company actually did.

The Adjusted Net Income of positive $14.2 million sure makes a lot more sense with that positive free cash flow, now doesn’t it?

Saul

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Question regarding COUP.

I’m looking at how they had a big jump in growth rate in Q2.

Revenue has progressed as follows:

Using Calendar Years

Q3 2018     $67.5M(+42%yoy)
Q4 2018     $74.9M(+39%yoy)  
Q1 2019     $81.3M(+44%yoy)
Q2 2019     $95.1M(+54%yoy)
Q3 2019     $101.8M(+51%yoy)

That was quite a big sequential jump compared to all the other quarters.

They completed an acquisition of Exari in early Q2. According to this SEC filing by COUP that disclosed Exari’s financial Operations, Exari had $28.3M in revenues in 2018 and $7.9M in revenues for quarter ending March 31, 2019(+20%).

https://investors.coupa.com/static-files/7d3718cc-a69d-4911-…

So COUP must have received around an $8M bump in revenue for Q2 and Q3. They didn’t talk about the financial impact too much in the Q2 transcript other than to say they received about $2.8M from Exari’s deferred revenue balance as revenue in the quarter.

Taking out the Exari Revenue COUP organic growth is probably somewhere closer to 39-40%. Unless I’m missing something.

Darth

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Darth,

Toward the end of the 2nd quarter call they addressed the extra revenue from Exari.

Brent Bracelin – KeyBanc – Analyst

Helpful. And then just, Todd, as a follow-up, a couple of numbers on Exari. I think you mentioned $2.8 million is one number in the quarter and then that $1.9 million. So, what was the subscription component of Exari in the quarter? And then as a follow-up to that, if I just think about the subscription growth profile here, you’re now three straight quarters of over 45% growth. Is there any sort of balance between kind of Jio [Phonetic] or large enterprise or mid-market, what would you say is kind of driving that sustained momentum, even if I back out kind of the $2.8 million of Exari? But I want to make sure that’s the right number. Thanks.

Todd Ford – Chief Financial Officer

Yeah. So the ARR from Exari in Q2 was $2.8 million, which includes the $1.9 million amortization of the acquired deferred revenue number. And when you look at the subscription growth rate, to your question, it really is execution across the board. Our revenue from international went up slightly during the quarter, but nothing I would call out. The mid-market, as Rob mentioned, is really starting to hit on all cylinders. And as you noted, we closed our largest deal there. So average deal size is getting bigger, more recognition. And we’ve talked about this before, but I think when we went public roughly three years ago now, we were viewed as maybe the risky choice, and I think that’s changed with the awareness in the market, the advocacy of our customer base, the FIs bringing us into their installed base. So I really can’t point to one thing as to what’s driving it.

$2.8 M in revenue from the acquisition of Exari for last quarter. They also had a large contract start with the USPS last quarter, which drove the larger pro services number.

Jim

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Jim,

I am trying to make sense of what they are saying because they are talking a lot of accounting lingo in there without giving a specific total revenue contribution from Exari.

In Q1 they said this…

Clearly, we’re not going to give guidance on FY2021 yet, but I think it is fair to ask what we would expect on a – for next year with respect to Exari, given it was a large acquisition. And at this point and we’ll see how things roll in with 606 in the deferred revenue haircut, but when you look at FY 2021 we would expect Exari to contribute revenues of approximately $25 million.

So they are predicting next year to get $25 from Exari which jives with the numbers I gave (assuming low balling and some billing consolidation post combining).

Notice they are specifically saying ARR. I don’t know anything about Exari but perhaps they are contributing significantly more revenue that is not ARR as defined by Coupa. Notice the question by the analyst from your post was “so what is the subscription component of Exari”. The question was not “what component of subscription is Exari?” See the distinction?

It’s very confusing with the “606 haircut talk”. Which is because they had to account for revenue that under 606 would have been already accounted for I believe.

Darth

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It is confusing with all of the accounting talk.

I think $2.8 M was all the revenue from Exari last quarter.

This Q they said the revenue was $3.7 M (from Exari).

They also reiterated the $25 M for next year.

So I think what they are doing is rolling out Exari to all of Coupa’s customers, as an add on product, and they expect the revenue to continue to increase each quarter.

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Saul - I also like the bottom line development

Darth - I agree, the inorganic contribution from acquired revenues does cloud the current bump in growth rates. I also don’t like the flat QoQ guidance.

Whilst I have seen Coupa crop up and get adopted amongst very small and large companies alike with a very light touch selling and implementation experience, I have to say I’ve noticed a real come back in Ariba across the board with Multi National Corporation clients of ours where procurement platforms are pushing vendors to not just sign up to their platforms but to adopt the universal vendor ID system of Ariba across all client purchasing platforms. If this keeps going it will definitely have a network effect that would allow them to extend their competitive reach vs other procurement software platforms like Coupa.

I will be looking at this one quite hard!

Ant

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I think you are probably right Jimbo. Something is going on with the deferred revenue from accounting from Exira and Coupa transitioning them to 606. It’s just hard to wrap my head around why Exira’s revenue is nearly half what it was in Q1. $3.7M vs $7.8M. Can a deferred revenue “haircut” do that much damage? I guess so. They didn’t explain it very well.

Here’s some snippets on this from the Q3 call now that it’s out.

https://seekingalpha.com/article/4310178-coupa-software-inco…

Question:

Todd, just real quickly we typically don’t see high growth company has double operating profit sequentially here really strong performance.Was the doubling of op margins to 11% year driven solely by integration or are there other factors at play relative to timing of hires, obviously really strong performance. What drove that and is that sustainable?

ToddFord

We’ve always had a disciplined growth approach to Coupa where – not only the 30% plus growth on the top line but continuing to show operating leverage at the bottom line. And I think it’s very strategic investments when we have an incremental dollar to invest we think about it very thoughtfully. Your point on M&A is absolutely true. We’ve done actually what I would consider a very good job at integrating our acquisitions and that was part of the strong cash flows in Q3 as well. So I would expect we took some near-term hit. And if you look at Exari for example, we’re still haven’t reached steady-state run rate there because of 606 and the deferred revenue haircut.

So that will continue to improve. But by integrating the acquisitions quickly and getting them profitable and cash flow positive and being very accretive to our bottom line it also helps.

AlexZukin

Got it. And then, Todd, just back to the outperformance on the operating line, were there any one-time items to consider or are there any kind of repeatable things that could come through over the next couple of quarters as well?

ToddFord

Nothing that I would necessarily call out as major item and obviously we expect margins to improve as Exari gets to steady run rate. The inorganic contribution from Exari in Q3 was $3.7 million. And as we noted last quarter, we expect that to get up to $25 million next year.

What a weird way to drop that $3.7M number, the only place it appears. On a question about the operating line. From the way it’s worded with context to the $25M(and knowing that reference was specific to revenue next year), that looks like he is saying the “Contribution” was to revenue. But, in the context of the question, it could also mean contribution to operating expenses or operating profit(loss). Especially considering how he answered the previous question about how good they are at integrating acquisitions and how that impacted cash flows.

If indeed the contribution last quarter was $2.8M and this quarter $3.7M, the impact to organic COUP growth is not too significant then. What appears to be happening is that Exari revenue is suppressed some way due to accounting changes and that those effects will sunset and Exari revenue will return closer to the previous levels.

Darth

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What am I missing?

FlyingCircus

If indeed the contribution last quarter was $2.8M and this quarter $3.7M, the impact to organic COUP growth is not too significant then. What appears to be happening is that Exari revenue is suppressed some way due to accounting changes and that those effects will sunset and Exari revenue will return closer to the previous levels.

Darth

Imagine for a moment that during the Olympic Games the Gods changed the speed of the clocks timing the events and that they used stretchy measuring tapes. That’s what the FASB Gods do to GAAP making it useless to compare quarter to quarter and year to year. Because GAAP is CRAP one has to use reliable numbers that GAAP can’t screw up. Cash flow is one such number. Earlier revenue was quite reliable but now that they changed how revenue is recognized it has become less reliable. I also have problems with how R&D is accounted for, expensed vs. capitalized, expensing stock based compensation, and mark-to-market pricing of some financial assets which, combined, turn GAAP into worthless CRAP that one has to reverse engineer to try to find reality. Accounting is supposed to help, not hinder.

What to do? One has to trust management’s adjusted numbers and, if you lose faith in management, invest in something else.

COUP has been very choppy these past few months

https://softwaretimes.com/pics/coup-12-02-2019.gif

but the option market seems very bullish on the stock. Even with the 1.6% drop to $146.50 in after-hours trading my option trades are still money makers. Per Saul’s rules, no discussion of options, please. I just brought it up to reinforce Saul’s bullish take on Coupa Software.

Denny Schlesinger

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Upgrades Today, post earnings:

-Raymond James Reiterates Outperform On Coupa Software, Raises Target To $170 Notes ‘we’d use any weakness as a buying opportunity, as we’d be hard pressed to find companies growing revenue/billings 40%+ organically’

  • JP Morgan Maintains Neutral 100.0
  • Barclays Maintains Equal-Weight 141.0
  • Morgan Stanley Maintains Equal-Weight 151.0
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2 more, wish we could edit posts…:
Cantor Fitzgerald Maintains Overweight, $166 Target On Coupa Software Sees Strength In Co’s ‘cloud-based spend management platform, its extensive network of suppliers, which builds on itself, and recurring revenues generated by its SaaS-based model’

Morgan Stanley Maintains Equal-Weight On Coupa Software, Raises Target To $151 Notes ‘With conservative outlook for Q4 and nuances about Q3 subs rev result, we would be long-term buyers with a 2:1 bull/bear skew’

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GAAP stuff

Ok, got it. Been a long time since my accounting classes and I haven’t bothered with fundamental analysis / projections in 20 years. So, part of my re-education is that Cash & Cash Flow is not impacted by GAAP. Obviously that’s critical in these cases because, actual cash is king (as it was in the late 1990s when MS set new records for cash balances quarterly).

prices topping
My point, inartfully made, was, in hunting for a possible reason why several of your favorite stocks in this sector suddenly dropped in August-September and have stayed roughly flat since then, the suggestion was perhaps that major institutions started getting tired of the revenue and cash growth only story with no “GAAP profits” in the foreseeable future.