My biggest mistake in April

My biggest mistake in April was selling out of Coupa, which has just kept going up and up without me. To tell you the truth, I don’t understand why it seems to have gone up more than most of my other companies. It’s a good company, or I wouldn’t have been in it in the first place, but it’s not cheap, it’s not growing as fast as any of the others, its adjusted gross margins were equal to or lower than those of most of the other companies. It just doesn’t make any sense to me, and I can’t see anything that I should have seen, which would have made me stay in Coupa at the expense of my other companies.

Just an observation

Best to you all

Saul

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It just doesn’t make any sense to me, and I can’t see anything that I should have seen, which would have made me stay in Coupa at the expense of my other companies.

Saul,

That would mean your decision was not a mistake. Sometimes when the right decision is made, the outcome is not better. But if you add up all your right decisions, you should see a net positive.

Chris

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Saul,

I have had the same observation about Coupa as well.

Assuming that you don’t find anything else that you missed will you still go back into Coupa or is the price moving up an unsatisfactory reason to do that without any other supporting data?

Thanks for your thoughts,

Calvin

I remember Morgan Stanley had made upward price revision and price target of 182 I believe when it was still around 140. It has since moved up very rapidly though market sentiment in April has also changed for the better. So may be a combination of both.

Anyways I have to agree there has been no significant company news lately and it has just continued to go up making new 52 weeks highs. Here I was expecting significant slow down albeit temporary in the short term.

Ruhaan

will you still go back into Coupa or is the price moving up an unsatisfactory reason to do that without any other supporting data?

Hi Calvin, here’s what I wrote:

I can’t see anything that I should have seen, which would have made me stay in Coupa at the expense of my other companies.

That means that I made the decision that seemed correct to me, and still does, and I couldn’t find anything that should have made me make a different one. Stocks you sell out of for good reasons will sometimes go up. That’s life.

Saul

10 Likes

Here are the last three analyst change in ratings for Coupa:

4-23 JP Morgan, neutral to underweight, target: $100
4-14 Morgan Standly, equal weight to overweight, target: $182
3-31 Piper Sandler, overweight to neutral, target: $130

These analyst are all over the map, so I doubt they have affected the share price.

Coupa is in the procurement space and they have a large list of clients that include both large and mid cap /more mid cap since ARIBA/SAP still is the Goliath in this space. I spoke to another company that are in this space with smaller offerings and according to them some the clients are either not renewing or asking for discounts for renewal since they are the most effected. My hypothesis is that COUPA would have a good quarter but will not let out the full year guidance given the lack of visibility. I base it on the fact that companies are holding out on guidance like PAYC who have a larger base of clients but a lot in the SMB and some of the newer offerings of COUPA like the travel add ons will not get the traction in these times. The full impact of COVID will be known mostly by Jul/August when the next quarter earnings or pre earnings are announced.

Typically with any procurement if you have a relationship with your big suppliers then you can still manage the Ops without an expensive software when circumstances are dire and I fear that COUPA will have to discount prices and will not see new sales until things stabilize

I have sold out on COUPA and holding cash as there is a lot of uncertainty in the economic indicators ahead.

There would be more opportunities to re enter COUPA .

Rajesh

6 Likes

Here are my thoughts with Coupa, which have nothing substantial to back them up other than it is just my personal reasoning as to why Coupa almost always seems to stay stronger than many of its others SaaS peers. So take this with a big grain of salt but this is how I personally rationalize it time and time again-

I think Coupa has one of the better stories out of all the companies we discuss. I keep telling myself that the reason it is so resilient might have more to do with qualitative reasoning than quantitative. Some of you might scoff at this, but I strongly believe stocks are driven in part as a result of how people perceive them and their ‘story’ or potential to grow into their TAM.

As a quick aside, its quantitative side (aka the numbers) aren’t so lousy either. Revenue accelerated significantly to 50% growth YoY up from 40% the previous two, meanwhile Op Margins went from -7% to 8% increasingly steadily each year. This alone is enough to make me stay in Coupa.

But back to the qualitative side. While comparing to other stocks in my portfolio such as CRWD, ZM or DDOG, Coupa’s EV/S is usually right up their with that bunch, and might even have a higher fwd EV/S because it is growing so much slower. I am consistently scratching my head at why this is? How can a company growing at 50% be valued up there with those growing around 90%?

I rationalize it by thinking it has to do with the market putting a premium on Coupa due to their belief in its ability to continue growing consistently for many many years to come. I personally can see Coupa growing into its enormous TAM easier than a lot of my other holdings. Again, I don’t have any proof to back up this claim, it is just when I am in bed thinking about my portfolio (hope I am not the only one who does this), I have a much easier time picturing Coupa achieving a 100B+ market cap many years down the road. Maybe others in the market can see it too?

I see a company that is building a huge moat. It is building this moat day by day as it adds more suppliers and clients creating a network effect. Cumulative spend under management is now over $1 trillion! Think of what a selling point that is. I also imagine it is holding up well due to the current economic environment. Can you think of many better software platforms right now than one for spend management? While businesses across the globe are tightening belts, I am not so sure I can. Coupa is designed to ‘help large companies gain visibility into, and control over, the money and resources spent within their organizations.’ I was first drawn to this business several years ago because I viewed that ability to help manage spend as one that is vitally important and something that is only going to become more important in the tough times, and here we are.

There are a few businesses that I believe the market just slaps a premium on them because they have an easier time conceptualizing what the future might hold for them. SHOP is another I would put in this category. Maybe I am the only one who feels this way, but when I look at Coupa, I see a business that is firing on all cylinders with accelerating revenues, increasing profitability, and a fantastic story. I was a bit surprised once I saw Coupa was missing from your April report Saul, as I view this stock as a good one to own in these times. No one knows what a stock will do in the short-term, but looking out long-term, I would say I have the highest conviction in Coupa compared to any other stocks I hold. This is why I think it continually fairs much better than others.

Best,
RW

20 Likes

Thank you MajorFool, I have the exact same thoughts. If there is one company discussed here that I envision a 100, possibly 200 billion market cap, it’s Coupa.
Morningstar wrote that Coupa might be able to monetize Coupa Pay in the future by taking a small cut of each transaction. Just imagine the potential, knowing that trillions of dollars already flow through the platform today.

I consider Coupa to be in the same category as following amazing companies:

Salesforce - 17 billion revenue, still growing 20% organically
Adobe - 11 billion revenue, still growing 20% organically
ServiceNow - 3.5 billion revenue, growing 35% organically

I was also disappointed when I saw the stock disappearing from Saul’s portfolio. However I know that Saul is not really the buy and hold investor, so it could make sense for him.

Stocks you sell out of for good reasons will sometimes go up. That’s life.

Yeah, like SHOP just hit $700 today. Who’d have thunk? So, is SHOP more over-valued than ever, or are they bold and brazen in taking on Square with Shopify POS - and in the right place given the Covid push towards on-line shopping?

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My biggest mistake in April was selling out of Coupa, which has just kept going up and up without me. To tell you the truth, I don’t understand why it seems to have gone up more than most of my other companies. It’s a good company, or I wouldn’t have been in it in the first place, but it’s not cheap, it’s not growing as fast as any of the others, its adjusted gross margins were equal to or lower than those of most of the other companies. It just doesn’t make any sense to me, and I can’t see anything that I should have seen, which would have made me stay in Coupa at the expense of my other companies.

In a spirit of disclosure, I have to tell you that since selling Coupa turned out to be a big mistake, and since I didn’t really have anything against it (not like with Nutanix, for instance, or with Twilio, where I thought the CEO was lying to the stockholders), I decided that I should go back through my information on Coupa and see whether selling out was a real mistake. After reading through all my notes and charts on it over the weekend I retook a starting position in it (a 1.3% position) Monday morning. My first purchase was at $169.30, but I bought most of it at $171.60, with a little later at $178.00. Little did I know that it would move up to close today at $189.73, which is a rather remarkable 12% above my first buy, in two days!

Here are my notes that made me realize that I had erred in selling out. When I quote what someone else had written, the notes are greatly edited, compressed, and paraphrased, so any mistakes are mine.

Jan 2019 – Bert’s Take
Coupa is a leader in the e-procurement space.

It has continued to exceed its targets for growth, earnings, and free cash flow.

It has built a substantial competitive moat that may not be fully appreciated.

It has grown its TAM prodigiously by expanding into ancillary spaces that enhance the value of e-procurement.

At this point, it seems destined to become the absolute leader in its space, and to achieve the kind of profitability that leaders often deliver in the enterprise software world.

Coupa’s evolution - a story of growth and competitive success
It has been more than 2 years since I took a serious look at Coupa. I looked at it just after its IPO, concluded it was expensive, that I couldn’t see its differentiators, and was worried about the falling trend in percent revenue growth and in bookings. However, in the last year, the shares have doubled, so I thought it’s reasonable to revisit it, and see what has changed, and if there is anything unique or enticing for investors to consider.

I discovered that this leopard has grown quite a bit larger than expected and acquired a lot more spots. It has acquired a bunch of companies and now offers a set of solutions which greatly enhance its offering beyond just e-procurement. It now goes far beyond traditional e-procurement functionality, and that explains why, in part, its growth percentage has remained at elevated levels and how it has managed to jump over industry pioneer Ariba (now a part of SAP), in terms of how industry consultants view its positioning.

Over the past couple of years, Coupa has augmented its growth possibilities and has built a rather substantial competitive moat. Both of these are major factors in my current belief that Coupa, despite what appears to be its generous valuation, is an investment that is likely to produce above-average returns over an extended period.

I confess to being somewhat surprised as to just how well it has built a suite of integrated solutions - all of them related to e-procurement, but I have to credit this successful strategy to the CEO, Rob Bernshteyn.

Should you buy the shares? As mentioned, they have doubled over the past year, and the EV/S ratio is quite high (greater than 10X forward). And the analyst estimates are for slowing growth. I think the estimates are likely to prove quite wrong, and I expect Coupa to continue to sustain hyper-growth both this calendar year and on into the future. It has a well-demarcated path to profitability. It has built a substantial competitive moat. The shares will not be immune to any market downturn. While that kind of contraction seems unlikely from the current level of $64/share, anyone investing in Coupa needs to be prepared for a bumpy ride. But I think investing in Coupa makes sense for technology investors.

One of the results of broadening the product set is that the dollar based net retention rate has been rising noticeably. When Coupa went public, the rate was 105% and now is 112%. Clearly, that kind of increase is one of the factors that has driven the growth rate and in time will have a positive input in terms of operating margins. Further, the ARPU is also continuing to rise (Annual Revenue Per User).
One thing that hasn’t changed since my last evaluation – it is still very expensive with an EV/S greater than the average for its growth rate. The real question is: what is the longer-term growth rate? - and just how long is longer-term?

One of many reasons for its valuation is that it has seen a growth re-acceleration. It was up 42% last quarter, up from 38% the prior quarter and 40% for the year. It has a history of beating its estimates and the consensus by substantial amounts. It started the current fiscal year guiding to growth of 23%, but it is likely to be at or above 40%… I think given recent history, it is fair to say that Coupa’s valuation is lower than meets the eye although it’s not a bargain.

Coupa operates in the procure to pay market (P2P). This is a rapidly growing segment, with an overall CAGR of 10% and a CAGR of the cloud segment (where Coupa operates) approaching 20%. Coupa’s estimate of its TAM was $37 billion. You don’t have to believe that number in order to expect that it will be able to maintain hyper-growth for several years into the future.

Gartner describes the market as in the phase in which demand growth is highest, and over the past year a quarter of the vendors in the the space were acquired.

At the moment, the market has two distinct leaders who are clearly favorites to stay market share leaders. Coupa is judged by Gartner as the leader, while SAP, which owns two entrants, Ariba and Fieldglass, occupies 2nd place a bit behind Coupa when it comes to “completeness of vision,” or put another way it trails Coupa in terms of functional capability.

Ariba invented this space and was the market share leader for many years. The fact that Ariba is now in 2nd place behind Coupa, suggests that Coupa has been able to displace Ariba in many accounts and that Coupa is winning a disproportionate share of new opportunities. Needless to say, there are many other vendors of varying sizes and capabilities in the space.

SAP has yet to completely integrate its offerings from Fieldglass and Ariba, leading to a certain level of customer confusion. Ariba itself, by far the larger of the two offerings, has some functional gaps such as its tax engine, and overall, customers give it a below-average rating.

Gartner says that Coupa is the most discussed vendor in the space - it has developed a strong reputation as the leader in terms of innovation and ease of use. It scores best because of innovation that meets evolving customer needs. Coupa’s M&A activity in the couple of years or so, in which it has acquired AI capabilities, supplier risk data aggregation solutions, advanced sourcing optimization, a fraud detection engine and a cross-catalog search capability has given it a breadth of capabilities that is substantially greater than what is available from anyone else in the space.

Last quarter, it saw significant acceptance of what is called “community intelligence risk awareness solutions.” This is a rather unique offering in which users can compare their results with what a community of Coupa users experience to determine where there are outliers, and if these outliers might be a signal of fraud. Overall, more than 50% of new subscription revenue is coming from solutions beyond the core Procure module and this is driving average deal sizes.

Not all of this capability is completely integrated into a single offering - but Coupa has been successful in leveraging its new capabilities and securing new name accounts. That is likely to continue this year and beyond, and is creating a competitive moat and hyper-growth. I missed the potential of that strategy when I last wrote about Coupa, and it is one of the basic reasons for the company’s ability to enjoy hyper-growth.

To sum up, its market is in its highest growth phase at the moment as P2P software becomes ubiquitous. This is leading to a CAGR for Cloud P2P of near 20% over the next few years. Coupa has been able to innovate and acquire its way to a leadership position in the space. At this point, it is the most talked about vendor. It has made a substantial number of strategic acquisitions, which has broadened its footprint to the point where it appears to have the most far-reaching solution in the space. And it has been able to achieve a broad footprint while maintaining ease of use.

Where does Coupa go next?
I imagine that Coupa’s strategy is going to be more of the same. Its competitive moat is that it has built an interconnected set of solutions that surrounds its basic procurement function. It is focused on selling more solutions to larger customers and that means finding more and more solutions that allow it to increase its touch points in B2B e-commerce. And its most significant new offering is Coupa Pay, which is a major initiative for the company and involves a series of integrated solutions on a single platform that facilitate users paying for what they buy as part of the overall Coupa solution.

Coupa has just begun offering a virtual card for PO. That particular solution is designed to accelerate the processing of low-value, high-volume payments. The payment solution is designed to be secure and compliant, it can be used to optimize working capital, and it ensures that users can take advantage of early payment discounts. Coupa Pay, with its substantial revenue potential, is one of the reasons why the TAM has gotten so large and why Coupa has the potential to maintain hyper-growth for an extended period.

Acquisitions:
Last October, it bought Aquiire, a leader in supplier catalog search. It is part of Coupa’s strategy to build a large competitive moat between what it does, and what other more basic solutions can do. The Aquiire technology is patented and will be integrated into Coupa’s real-time search and price comparison engine. This will create an industry-unique shopping model.

Last September, it acquired DCR, a vendor of workforce solutions, which deals with managing the procurement of services as part of the gig economy with its reliance on temporary labor. It is another brick in building a total suite of e-procurement solutions.

Neither DCR or Aquiire by themselves is a major acquisition. Coupa paid about $48 million for the two businesses together and they had a combined revenue run rate of perhaps $12 million when they were acquired. Both of them were loss-making. I think their value is they help solidify its position as the thought leader in the e-procurement space. Further, I expect that the acquisitions will have huge revenue synergies as time passes. Coupa will be able to substantially leverage the technology by presenting it to its own user base. While Coupa’s core e-procurement business continues to grow and attract users and build the amount of spend under management, more and more of the growth will be coming from areas outside of the core. In my opinion, this is what is driving the dollar based net retention rate higher and leading to the growing revenue per user metric. And the ability to sell more solutions to a single buyer will ultimately lead to an improvement in the S&M expense ratio.

Looking at Coupa’s financials and wrapping up the analysis
One can become jaded in writing about companies that grow 40% or more, and lose a sense of just how rare that is at scale. Last quarter, Coupa reported sales growth of 42%, with no material contribution from its latest acquisitions. Billings growth was up by 39% year over year, a slight acceleration from the billings growth results in prior periods. Subscription revenues also grew by 42%, while subscription gross margins rose by about 80 bps GAAP. It is generating small GAAP loses from its services revenue; given its small size, that has a relatively minor impact on total margins.

It improved its operating expense ratio. Surprisingly, most of the improvement was in S&M, where the GAAP expense ratio for that metric went from 47% to 37%. Overall, the operating expense ratio fell from 92% to 82%. These results were actually negatively influenced by the two acquisitions, which added to costs and didn’t contribute materially to revenues.

Coupa has swung to positive cash flow generation. The core e-procurement business, by its nature, does not generate deferred revenues. On the other hand, some of the newer acquisitions, where the revenue stream is based on subscriptions and not based on transactions, can generate deferred revenue. So far, that contribution has not been material.

The Free Cash Flow margin has been 9% for the past 12 months. I expect that it will over-attain on all metrics as it has this last year and before.

With a cash balance of more than $400 million it has more than enough liquidity to finance the kind of acquisitions it has been consummating. It is very likely that Coupa will continue to find small scale tuck-in acquisitions that will strengthen its competitive positioning and create a larger moat.
I would suggest that it is highly likely to experience material sequential growth in this quarter, its fiscal Q4. A substantial component of revenue is transaction based, which will grow as the spend under management expands. Spend under management grew last quarter to $940 billion up from $840 billion in the prior quarter, and revenues grew about 10% sequentially, or around $6 million. It would be difficult for me to conceive of that growth - at least in dollars - declining in the current quarter.

(Bert, still:) I do not currently own Coupa, and I have no immediate plans to add it. There are simply too many attractive opportunities out there for me to own all of them. But should the shares pull back, or should I have room in the portfolio for an additional name, Coupa is one I will consider. I expect, despite what appears to be lofty valuation, that the shares will be able to generate positive alpha over the next year and beyond.

Dec 2018 – Oct quarter results Conference Call
Coupa announced a strategic partnership with Barclaycard, starting with virtual cards to create a fast, secure, and convenient way for businesses to manage payments.
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 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 currently being done 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 to 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 104 to 107, and then about a year ago it started creeping up to 108 to 110, and over the past several quarters it slowly moved up to 110 to 112.

Q - it looks like ARPU (Average Revenue Per User) has been increasing for quite a bit for some time now. And 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, and 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 a 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, 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 Margins
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.

Feb 2019 - Coupa announces product innovations to make global business spend Simpler, Safer, and Smarter
Coupa announced its latest release of product innovations. New industry-first capabilities unveiled as part of this release leverage community intelligence, powered by artificial intelligence (AI), and enhanced global compliance capabilities, to empower businesses to manage their global business spend.
Businesses are facing more complexity and uncertainty than ever stemming from security and fraud risks, to evolving global compliance regulations, and more. The capabilities that we released today were developed in response to conversations with customers who are navigating this landscape every day.

AI-Powered Fraud Prevention
New capabilities in the Coupa BSM Platform enable finance teams to focus on preventing fraud – a growing concern of all businesses – before it happens.

• Coupa Spend Guard is now generally available. Spend Guard leverages AI and insights from the Coupa community to analyze employee behaviors across all spend applications and signal areas of risk, empowering businesses to prevent dollars lost to fraud. With Spend Guard, businesses can shift from after-the-fact fraud recovery efforts to real-time fraud prevention across spend transactions.

Companies simply don’t have the bandwidth to manually review every employee and supplier transaction for fraud. Beyond the sheer volume of transactions, it’s very difficult to isolate intentional fraud from simple accidents. Coupa’s use of AI to intelligently flag suspicious transactions within the spend cycle will allow businesses to focus audit efforts on stopping payments before they happen.

Consumerized Business Spend Management Experiences
New procure-to-pay (P2P) and supplier management enhancements make the employee and supplier user experience simple and friendly while also driving engagement and increasing spend visibility and control.

• Invoice Payments, part of the payment solutions now available with Coupa Pay, enables businesses to manage their money smarter, all within Coupa. Invoice Payments reduces the administrative overhead well as the risk of fraud and error. Customers can pay invoices using their business bank account with support for both domestic and cross-border payments.

• Innovations within Coupa Open Buy bring an improved, Google-like search experience to cross-catalog search. Searches within Coupa now generate real-time results from Amazon Business, Staples, Office Depot, and eleven other business-to-business suppliers.

• “Alexa, open Coupa.” An integration with Amazon Alexa lets businesses use the power of the human voice to manage key spend transactions such as inventory balances, inventory replenishment, or to find item locations.

Global Compliance Controls in Mexico and Italy.
Support for cash advances for employee travel in regions such as Latin America and Asia. Businesses can pre-approve travel budgets and easily reconcile with actual spending through post-travel expense reporting, supporting strategies to deploy global processes while leaving room for local business practices.

Oct 2019 – Stocknovice’s Take from his end of month
A new purchase. Coupa’s main product is a procurement software which links users with their supply chain to provide complete visibility and control over their business spend. They also offer a broad set of solutions surrounding that core module including invoicing and payments. Those non-core offerings have now grown to over 50% of their new subscription revenues. They have a large customer list including clients like Peloton and Shopify. Last quarter Coupa had $1.3 trillion worth of cumulative spend pass through its platform. Helping large companies track and manage how they spend their money sounds pretty mission critical to me. Coupa was just named a Gartner Leader in the Procure-to-Pay space for the fourth consecutive year while finishing first on both axes, which is pretty nifty if you stop to think about it.

They stated last quarter they were reaching a “tipping point in winning a very, very large TAM”. This report appeared to confirm it. Revenue growth has accelerated from 39.4% to 44.3% to 54.3% the last three quarters, and I’d anticipate something mid-50’s again next quarter. While $1.8M of that revenue was due to a recent acquisition, 51% organic growth accounted for most of the acceleration. Subscriptions now account for 88% of total revenues, and have followed a similar path (+45%, +46%, +51%) and Gross margins of 73% aren’t quite as high as some of my other holdings, but COUP has proven itself very efficient by posting positive net and operating margins for five consecutive quarters. It’s a small position, but I’m happy to welcome it on board.

Oct 2019 – Saul: My Write-up
During this last week I took a 4.6% position in Coupa. It had been one of the four little second-tier Saas companies that I had taken trial positions in but had sold out of in March. My reason for selling was that they were all growing at 30% to 40% and had net retention rates of just 110% to 120% and I could do better elsewhere.

I had lost sight of Coupa until recently when Stocknovices post alerted me. When I sold in early March, the percentage revenue increases for the past two years had looked like this:


**2017: 	44%		41%		43% 	        34%**
**2018:	41%		37%		38%		42%**
**2019:	39%**

It looked very unexciting. But since then the two quarters that have reported gave a different picture:


2017: 	44%		41%		43% 		34%
2018:	41%		37%		38%		42%
2019:	39%	**44%		54%**  

Thus we had growth of 44%, up from 37% yoy, and up from 39% sequentially…

Followed by growth of 54%, up from 38% yoy, and up from 44% sequentially.

Subscription revenue was up 46% and 51%.

Adjusted Op Income for the two quarters was $2.2 million, up from $0.3 million, and $4.8 million up from $4.0 million (all positive numbers).

Adjusted Net Income for the two quarters was $2.1 million, up from a loss of $0.1 million, and $5.3 million up from $3.3 million (last two quarters again were positive numbers).

Adjusted TTM EPS was positive 23 cents

Calculated Billings were up 50% and 57% for the two quarters.

This was a different picture than the one I had been looking at.

Oct 2019 –Article from the financial press
Coupa Software benefiting from new product momentum and larger deal sizes

Over the past several weeks, some high-valuation tech stocks have been hit by selling pressure, but Coupa has shown relative strength. The stock is off less than 2% from its all-time high of $156 reached in early September. After rising 101% in 2018, Coupa shares are up 144% YTD.

Demand continues to ramp for Coupa’s cloud-based business spend management (BSM) software. In September, they delivered an impressive quarterly report, sending the stock up 8% in one session.

Coupa is building its presence in spend management. Cumulative spend processed on its platform exceeds $1.3 trillion, up 54% from the year-ago level. It has only penetrated a very small part of the total addressable market (TAM).

In FQ2 (ending July), total revenue of $95 million rose 54%, beating the consensus estimate by 11%. Subscription services revenue of $83.5 million was up 51%, and accelerated from up 46% ithe quarter before. It was the fourth quarter in a row of accelerating subscription revenue growth. Billings growth accelerated to 57% from 50% in the previous quarter.

On the earnings call, management covered a few key revenue drivers, including continued expansion in the enterprise segment. In the quarter, the company closed one of its largest enterprise deals ever. Momentum is also strong in the mid-market, as Coupa in FQ2 closed its largest mid-market deal in company history. The pace of deal cycles remains steady at four to six months for the mid-market and six to 12 months in the enterprise.

It helps that Coupa has limited competition (SAP is the primary rival), which enables the company to maintain solid pricing power. Average annualized recurring revenue (ARR) per logo has risen sequentially virtually every quarter since Coupa’s IPO in April 2018, according to management.

Customers see the value of Coupa’s spend management products as well as the community intelligence features, which leverage the collective wisdom of various vendors across all types of industries.

Coupa’s Risk Aware solution is building one of the richest supplier master records. The product provides real-time supplier risk assessments using collective insights from more than 500 customers worldwide. Risk Aware continuously scores suppliers based on behavior along data related to credit and other risks. When risk levels rise, Risk Aware proactively makes suggestions, including putting spend on hold at specific suppliers.

One of the company’s most promising new products is Coupa Pay, a B2B payment processing and transaction financing solution…

Wall Street Bulls
Even with the stock’s high valuation, Coupa remains a favorite on Wall Street. Following the FQ2 report, RBC Capital raised its price target to $165 from $135, saying Coupa’s best-in-class positioning make it a legitimate market standard comparable to Salesforce in customer relationship management, Workday in human capital management, and ServiceNow in IT management.

Canaccord last month started coverage of Coupa at ‘Buy’ with a price target of $171, citing the accelerating growth rates as proof the company is gaining momentum in BSM. Coupa has figured out how to expand its enterprise and mid-market businesses, while at the same time deliver SG&A expense leverage, says the firm. Canaccord is also positive on Coupa Pay and the company’s positioning in procurement.

Evercore ISI initiated coverage at ‘Outperform’ with a price target of $180, saying Coupa is one of the few mid-cap SaaS vendors that may end up as a real enterprise category-killer platform. It believes Coupa has similar characteristics in terms of scale, TAM and impressive channel network (2,000+ partners) to larger SaaS platforms (such as Salesforce, ServiceNow, Workday, Adobe and SAP).

Among the trends powering digital transformation, BSM has quickly become a much more strategic initiative at many enterprises, according to Evercore ISI. Organizations are shifting to a more integrated suite of spend management applications used to fully optimize operational spend across the entire organization. Evercore ISI believes Coupa has multiple levers to sustain revenue growth for several years.

Oct 2019 – Recognized by Gartner
Coupa is recognized as a 2019 Gartner Peer Insights Customers’ Choice for Procure-to-Pay Suites which is based on feedback and ratings from end-users. e product for Procure-to-Pay.

We believe it is a clear endorsement from our customers that we’ve built a world-class platform that is delivering measurable business value. We are maniacally focused on ensuring customer success and continuing our mission to empower the BSM community spend smarter together."
We have also received research recognition from Gartner, as it was named a Leader in the Gartner Magic Quadrant for the fourth consecutive time. In this report, Coupa was positioned in the Leaders quadrant and placed first for completeness of vision and highest for ability to execute.

Dec 2019 – Oct quarter results
"We delivered strong business and financial results. We reported $102 million of total revenues, up 51%, and were profitable on an adjusted basis for the sixth consecutive quarter.”
Total revenue was $102 million, up 51%.
Adjusted gross margin was 72%

Subscription revenue was $90 million, up 49%, and 88.2% of revenue
Subscription gross margin was 81%

Prof Service revenues were $12 million.
Prof Serv gross margin was 3%

Adj operating income was $11.6 million, up from $5.8 million
Adj net income was $14.2 million, up from $5.5 million
Adj EPS was 20 cents, up from 8 cents a year ago

Operating cash flow and free cash flow were positive $26 million and $22 million.
Calculated Billings of $105 million, up 54%.
Cash was $842 million
TTM Calculated Billings were $416 million, up 53% from $272 million.
Total Deferred Revenue was $193 million, up 48% from $130 million.

Saul: My Take *****
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%. Note though that a small part of their revenue ($3.7 million) came from an acquisition.

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

Calculated billings were up 54%.

Now we get to the GOOD stuff:

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.

TTM Operating Cash Flow and TTM Free Cash Flow were $55 million and $43 million.

Conference Call

Let me also highlight Coupa Source Together, an industry first program that connects members of the Coupa Community to collaborate on group sourcing events… Since launching Source Together midyear, we’ve seen tremendous traction with group sourcing events globally which have generated millions of dollars in negotiated savings.

Now let’s move onto Coupa Pay. We’re excited to announce American Express as a new Coupa virtual card partner. We continue to see incredible interest and strong early traction for all available pay modules including V Cards, Accelerate and Invoice payments. We are still in the early stages with Pay.

Now let me touch on a few more highlights from the quarter. First-off, We were named a 2019 Gartner Peer Insights Customers’ Choice for Procure-to-Pay Suites. In fact, Coupa was the only Procure-to-Pay platform to receive this distinction. We were also excited to be the only vendor to appear in the customers’ choice zone in Gartner’s Peer Insights Procure-to-Pay Voice of the Customer report. These accolades offer a clear endorsement from our customers.

Mar 2020 – Jan quarter results
Our uniquely comprehensive Business Spend Management platform delivers value and savings to our customers by providing visibility, compliance, control and automation.

Quarter
• Total revenues were $111.5 million, up 49%.
• Adj gross margins were 73%
• Subscription revenues were $98.6 million, up 46%
• Subscription margins were 81% (and services margins were 10%) Billings were $181 million (or 62% more than total revenue)

• Adj operating income was $13.3 million, up from $2.4 million, and it was 12% of revenue.
• Adj net income was $15.0 million, up from $3.4 million
• Adj EPS was 21 cents, up from 5 cents.
• Operating cash flows and free cash flows were positive $22.3 million and $20.2 million, respectively.
• Cash was $767 million

Fiscal Year
• Total revenues were $390 million, up 50%
• Subscription revenues were $345 million, up 48%
• Adj operating income was $31.9 million, up from $12.5 million
• Adj net income was $36.6 million, up from $11.6 million
• Adj EPS was 52 cents, up from 18 cents
• Operating cash flow and free cash flow were $68 million and $56 million, respectively. They were 17% of revenue and 14% of revenue.

Saul here, concluding Obviously, after a 12% run-up in two days, not having excess cash, and without any present positions I want to decrease, I’m not sure what I will do in the immediate future as far as adding further, but will have to see. I can say that I have no current intention of trimming or selling this position in Coupa. I think that I can say that I made a mistake in selling, I recognized it, and I did what I could to remedy it

Best,

Saul

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Thank you, Saul! I daresay I can’t add much to the financial analysis you provided, but would emphasize a few other salient points that influenced my decision to invest in them (1 of only 10 public companies in which I own shares). I was fortunate to have invested in this company in January, November and December of 2019, the first purchase at $79/share, so I’ve enjoyed a fruitful relationship with Coupa and it currently occupies about 5% of my portfolio. The company hails from my hometown of San Mateo in the heart of Silicon Valley and is a stones throw from my pied-à-terre. I have followed Coupa since before their IPO in 2016 and watched their sign go up along highway 92 and 101 long before that, though was not able to get in on the IPO itself…(I certainly would have liked to, but not being royalty or a major VC, well, you know…)

Having worked for several SaaS companies and Oracle in my past life, I’ve followed Coupa since their founding in 2006 and know or have known quite a few of their employees, as well as customers over the years; but to be clear, I have ZERO insider information (and certainly would not reveal it or have invested in the stock if I did), just some anecdotal information and good 'ol financial analysis.

The company has limited direct competition and except for Ariba (purchased by SAP and easily the most similar offering) enjoys and fills a wonderful and relatively unique niche with first mover advantage, as well as a massive network advantage that they leverage to offer all their customers massive mutual procurement benefits. The software does not just pay for itself, it probably saves these companies 1000x or more (don’t quote me on this number as I have no basis behind it) what they actually spend on it. The purchasing advantage alone would be enough to justify this as an absolute no brainer and a competitive advantage and I can’t imagine a company being able to compete long term without a similar solution. That said, they don’t rest on their laurels either and have an aggressive track record of company acquisitions to both add to their TAM and leverage their strong customer base with additional offerings, expertise and value add. If anything, their competition has grown by virtue of their company purchases they use to compete with the likes of Concur and others, though I hardly view Concur as a viable competitor, as they are very limited in their offering. Coupa is relatively seamless to implement and the easy to use nature of Coupa’s system sets it apart from its competitors. This I’ve heard first hand from more than a few users. And it is certainly worth mentioning that they manage over $1 trillion, yes with a “T” in spending and procurement across their customer base, and unlike some of my other SaaS companies, Coupa enjoys accelerating POSITIVE operating income, accelerating net income, accelerating EPS, accelerating Operating and accelerating free cash flow. Their “paltry” (dripping with sarcasm) 50% revenue growth is 90% subscription revenue, and this is a company with only a 12.6B market cap that IMHO has a higher likelihood of 5 to 10x-ing itself than many SaaS companies in my lineup of 10 stocks.

Finally, their existing customer base includes the mother of all SaaS companies, Salesforce.com, which is a testament unto itself, as well as vast array of Global Fortune 500 companies (P&G, Unilever, DBS, MGM to name just a couple). At a 12.6B market cap, they may not be growing quite as fast as some of my favorites like CRWD or AYX or OKTA in revenues, but they round out my portfolio of SaaS offering very nicely, are extremely well positioned not just to survive, but to hockey stick out of Covid-19 and the Armageddon it has wrought, and I have no plans to liquidate my investment any time soon…and if you hadn’t noticed, they are at an all time high today and up another 7%. Great write up, Saul!! Thank you, again.

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I read your interesting posts on COUP. In the past whenever I have looked at COUP (Cramer talked about it way back I think) I have to admit that the company had always looked too richly valued for it’s growth rate. But besides that one concern I have had is that this company tends to make a lot of acquisitions. To the point that it is very hard to tell what it’s organic growth really is. We all know what happened to TWLO, and MDB growth rates once the effect of the acquisitions wore off. But perhaps this is a non-issue for this company. Perhaps for it’s space acquisition is the only way to grow and maybe there are companies which have followed exactly that approach and been very successful investments. I have not done that research to see if that is indeed the case for COUP. Anyway would like to hear your view point on this aspect. Thank you.

Hi Poleeko,

Thanks for your insights on Coupa. It’s nice to hear someone who knows what he’s talking about instead of my techo-peasant ramblings. I appreciate your input.

Best,

Saul

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