Spend management provider Coupa reported its first full-year financial results as a public company yesterday, beating analyst estimates for the fourth quarter and raising its guidance for the current financial year. Its IPO took place in October last year.
Coupa’s performance in the final quarter ended 31st January 2017 trounced analyst consensus estimates of a 17c loss per share, coming in at a 5c loss instead and bettering the consensus revenue estimate by more than 5% at $38.0 million. Revenue for the quarter was up 44% over the same quarter last year.
Revenue for the year came in at $133.8 million, a 60% increase from the previous year. The company lifted its guidance for fiscal 2018, projecting total revenues between $167 million and $170 million, which pegs growth in a moderate 25-27% range.
Cash flow positive by Q4
While the company remains loss-making at present, CFO Todd Ford said that gross margins continue to improve as the company scales, in part due to “better terms” during the year from infrastructure provider Amazon Web services. CEO Rob Bernshteyn said the company expects to turn the corner on cash flow by the end of fiscal 2018:
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.
Like all fast-growing enterprise SaaS companies, Coupa has to find the right balance between profitability and growth. Securing enterprise deals requires upfront spending on marketing and sales that may take a year or more to recoup. In the meantime, that expenditure eats up the cash flowing in from existing contracts. Bernshteyn says Coupa will keep a close eye on those parameters while it continues to invest in product development and sales and marketing throughout FY2018:
These investments will allow us to capitalize on the enormous market opportunity while we remain focused on a disciplined growth strategy.
20-year customer lifetime
Once the solution is delivered, customers tend to stay loyal, to the extent that CFO Ford says new revenue recognition rules may allow Coupa to amortize sales commissions over as much as a 20-year term:
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.
A key concern therefore is making sure that Coupa reaches the shortlist when deals come up, as it wins in two out of three where it’s properly in consideration says Bernshteyn:
If there is one thing that is keeping us up at night, [it’s] 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.
The company reached what he called “a key milestone” during the quarter, with its customer count passing the 500 mark and reaching 535 by year end. Significant wins include heavy equipment maker Caterpillar — “a marquee enterprise win for us,” says Bernshteyn — and Coupa’s first manufacturing customer in Germany, Paul HARTMANN, which supplies medical and hygiene products. Other wins span many industries and geographies, including Asian Development Bank, Dutch dairy cooperative FrieslandCampina, waterpark operator Great Wolf Resorts, oilfield service company KMG Rompetrol, Kubota Tractor Corporation, and Australian funeral care provider InvoCare.
Focus on outcomes
Bernshteyn noted “a premier consumer transportation company headquartered in China” that had signed in Q3 and is 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.
Declining to discuss which competitors’ products Coupa had displaced at Caterpillar and elsewhere, or to make feature comparisons, Bernshteyn says that Coupa focuses on customer outcomes rather than product capabilities:
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.
We’ll see later on today how the market responds to these results. At first glance, this looks like a solid performance, but with growth coming off the dizzy heights of this year’s 60% as the company begins to scale, sentiment may remain cool. The stock price closed at just over $27 yesterday, around 20% below its close on the first day of trading last October, although comfortably above the $18 IPO price.
From an enterprise buyer perspective, the controlled trajectory towards positive cashflow is reassuring and the growing roster of loyal customers bodes well for the company’s long-term performance. The customer lifetime metric of 20 years is striking, but it’s in line with what other SaaS leaders such as Salesforce and Workday are projecting in the enterprise market.
Meanwhile the acquisition of spend analytics specialist Spend360, which closed in late December, has yet to make an impact on the company’s product offering but will inject valuable extra insights once it has been fully integrated.
Coupa just needs to keep on executing well — and make sure it gets on those shortlists.
Transcription — courtesy of Seeking Alpha.
Image credit - Rob Bernshteyn with Coupa logo behind - via Coupa
Disclosure - Coupa is a diginomica premier partner at time of writing.