COUP (2019 - Q1)

Nicole Noutsios - Investor Relations Rob Bernshteyn - Chief Executive Officer Todd Ford - Chief Financial Officer Analysts:

Kevin Kumar - Goldman Sachs Raimo Lenschow - Barclays Stan Zlotsky - Morgan Stanley Ross MacMillan - RBC Capital Markets Peter Levine - Needham and Company Ken Wang - First Analysis Vince Celentano - Raymond James Joseph Vafi - Loop Capital Joseph Foresi - Cantor Fitzgerald Mark Murphy - J.P. Morgan Koji Ikeda - Oppenheimer Eric Lemus - SunTrust Robinson Humphrey Pat Walravens - JMP Securities

Good day, ladies and gentlemen and welcome to the Coupa Software First Quarter Fiscal Year 2019 Earnings Release Conference Call. At this time, all participants are in listen only mode. At the conclusion of our prepared remarks, we'll conduct a question-and-answer session [Operator Instructions]. As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Nicole Noutsios, Investor Relations. Ms. Noutsios, you may being your conference.

Good afternoon. And welcome to Coupa Software’s first quarter conference call. Joining me today are Rob Bernshteyn, Coupa’s CEO and Todd Ford, Coupa’s CFO. Our remarks today include forward-looking statements about guidance and future results of operations, strategies, 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 most recently filed 10-K. These forward-looking statements are based on our beliefs and assumptions today, and we disclaim any obligation to update any forward-looking statements. If this call is replayed after today, the information presented may not contain current or accurate information. We’ll also present both GAAP and non-GAAP financial measures. A reconciliation is included in today’s earnings release, which you can find on our IR Web site. A replay of this call will also be available. And if you prefer to access a replay via phone, you can find information in the earnings release. Unless otherwise stated, growth comparisons are against the same period of the prior year. With that, I’ll turn the call over to Rob.

Hello everyone, and thank you for joining us. We kicked off fiscal '19 by delivering strong Q1 financial results, including 40% year-over-year subscription revenue growth, positive non-GAAP operating income and positive free cash flow. On the business front, we expanded our customer base by adding new blue chip and high growth customers, and we had several marquee customers go live. We also just hosted our largest annual Coupon Star conference in May with nearly 2,000 customers, prospective customers, partners, industry analysts and employees in attendance, and many more joining us online. With the INSPIRE conference on the horizon, we saw several meaningful new customer deals close earlier than expected at the end of the quarter. Last year, we outlined our path to achieving $1 billion of revenue in $37 billion total addressable market. Now of course market trends are factor in helping fuel our growth. Coupa recently commissioned a study by the Economist Intelligence Unit entitled the strategic CFO in a rapidly changing world. The study polled more than 500 CFOs and senior finance executives, and revealed that 60% of finance executives lack complete visibility into the transactions within the organizations. And 76% think that leveraging new technology for improving processes would enable them to better execute their corporate finance strategy. I encourage you to download the report on our IR Web site. Empirical evidence from studies like this show that we've only just scratched the surface in this industry that we call business and management. In our view, there's no limit on how far we can go, no boundaries, and no length. Our cumulative spend under management has reached $747 billion, and we expect to surpass $1 trillion this fiscal year. No one else in our market have this magnitude of transactional spend data in one place, giving us a distinct competitive advantage by allowing us to deliver huge value to our customers through community intelligence. We're helping customers make accelerated data driven decisions through solutions such as Risk Aware, which monitors hundreds of data sources help customers reduce supply chain risk; and Risk Guard currently an early asset, which analyzes spend transactions to help detect potential fraud; and Commodity Insights, which helps businesses identify top suppliers for critical commodities bend benchmark and makes other prescriptive recommendations to maximize value. Now along with the strength of our community intelligence solutions Coupa released 21 of our business and management platform contains many other exciting new solutions and capabilities. Coupa Inventory is now voice activated for early access subscribers, using custom Alexa skills built on top of Amazon's Lex technology, users can locate items, adjust inventory balances and reorder stock. Coupa Open Buy has expanded to include supplier items and pricing content from additional early access suppliers such as Imperial Supplies, Office Depot, and Staples and others. Our platform continues to deliver more user centric experiences increased productivity, such as Approval Cycle Times, which empowers users to speed up or slow down the approval process by comparing their individual performance to peer company performance. Other capabilities include automatic tax coding for supplier invoices, contract creations from Coupa Sourcing Optimization and support for a myriad of other company-specific business and management processes. Many of these new product offerings are supported by the guidance of our rapidly growing customer community. This community includes our Executive Advisory Board, which currently includes members from Capital One, Airbus, Caterpillar, Pearson, MasterCard and other custom organizations, representing a diverse array of geographies, industries and company sizes. These Executive Advisory Board members play an important role in helping us continually strive for excellence, which is of course, one of our key core values. Now, let's move onto new customers in Q1. For example, Ingersoll-Rand selected Coupa Sourcing, Procure-to-Pay, and several power applications based primarily on Coupa’s proven track record around successful and rapid employee adoption in large global organizations. Some of the other customers, value customers, we added in the quarter include First American Financial Corporation, Assa Abloy, COMPAREX AG, Fastweb, Just Energy, Evotec AG, Renew Financial, Simons Foundation, Klöckner & Company, and a local software company, Snowflake. Not only we closed the new customers, but we’re taking them live. And we’re taking them live quickly. After signing a new customer, we go directly into implementation with the goal of a fast go live. Rolls-Royce recently went live in eight countries with Coupa Sourcing and Procure-to-Pay in Phase 1 of a global procurement transformation initiative. Key rollout live areas in this phase included this Coupa Supplier Network, catalog content and cXML integration and business web forms. Blackrock went live with the first phase of its global Coupa rollout in Q1. Blackrock's primary goal with Coupa is around better controls and preapprovals, standardized purchasing activities and increased spend in the management. Blackrock is also looking to provide a more user-friendly solution for its employees, and to increase efficiency through streamlining and automation. We look forward to continued success and value creation with these customers, and so many more in the days, weeks, months and quarters to come. In this quarter, we were proud to be named as leader in two IDC MarketScape Reports. The IDC MarketScape Reports for worldwide SaaS and cloud-enabled sourcing applications, as well as for Procure-to-Pay applications. We thank them and those who continue to understand our vision as we continue our efforts to change the way things are done in business spend management. Now, as I shared before, our company core values are a key driver of our continued success. We've also been honored to witness our customers and partners often exemplify these values, as we continue to build out our rich community of like-minded individuals. Last month professionals from around the world attended INSPIRE to collaborate and innovate around our mutual business spend management agenda. At this conference, we were proud to honor certain customers with Coupa BSM impact Awards for exemplifying our three core values of ensuring customer success, focusing on results and striving for excellence. Our winner for ensuring customer success was Donna Trowbridge, Chief Procurement Officer at DBS Bank, the largest bank in Southeast Asia. Donna embraces this value with the rollout of Coupa, temporarily stepping out of her executive role to focus full-time on the implementation. Donna was able to achieve her vision of implementing a highly adopted global deployment of Coupa in record time. In only six months, DBS achieved 92% digitization of the spend going through Coupa day-time spent on procurement by 70% and reached 99% electronic purchase orders for all spent with Coupa. Our winner for striving for excellence was JR Miller, Senior Vice President of Finance at Leukemia and Lymphoma Society. JR successfully convinced the new management of the opportunity with Coupa, and led the rollout across 56 chapters located in the U.S. and Canada. His work saves Leukemia and Lymphoma Society over $6 million in 12 months, which the organization has reinvested into its core mission of helping save the lives of more than 1.2 million individuals affected by blood cancers each year. Lastly, regarding our value of focus on results. Our partner Accenture and customer Airbus have exemplified this value and space. A year ago, Airbus partnered with Accenture on the strategic value transformation initiative. Successor Airbus finance automation, proper proficiency and wide user adoption. As this year’s INSPIRE, executives discussed on-stage how they’ve achieved their goals by deploying additional modules in a much faster pace than anticipated. To-date, Airbus has decreased their order approval time from 27 days to three days, allowing their buyers to focus on more strategic initiatives. They’ve connected three ERPs and five third-party systems, and over 1,500 users with visibility of over $2.3 billion in spent transactions to-date. Accenture is stead fast, focused on results approach, helps to make our customers successful, and we look forward to continue and growing that strategic partnership. So in summary, we started the fiscal year with strong Q1 business and financial results, leaving us well positioned to achieve our objectives as we move forward. Let me now hand it over to Todd for a detailed breakdown of our financials and guidance. Todd?

Thanks Rob, and good afternoon, everyone. In Q1, we continued to execute against our business plan and demonstrated significant progress towards the mid-and long-term financial targets that we set forth at our Analyst Day in December. Total revenues for the quarter grew 37% year-over-year to $56.4 million. Subscription revenues were $50 million, up 40% year-over-year and comprised 89% of total revenue. Professional services and other revenues were $6.4 million. I would like to highlight that Q1 was the first quarter where all revenues for professional services were based on proportional performance, thus completing our transition from recognizing revenues upon customers go live. During this transition, we also achieved our commitment to reach breakeven for professional services margins. Moving forward, we expect professional services margins to trend from breakeven deposit of 10%, but it's also important to note that we expect quarterly results to fluctuate as we continue to scale. Our total non-GAAP operating income for Q1 was positive $317,000 or 1% of revenue compared to negative 11% of revenue in the year ago period. Total calculated billings for the trailing 12 months were $235.3 million up 41% year-over-year. Total deferred revenue at quarter end was $121.9 million, up from $88.6 million in the previous year. In February, we adopted ASC 606 and as noted on our prior earnings call, we incurred a one-time write-off that negatively impacted Q1 calculated billings by approximately $2 million. This impact was offset by strong bookings near the end of the quarter as we headed into INSPIRE as Rob noted earlier. Let's now turn to operating expenses and results of operations. Our first quarter non-GAAP gross margin was 72% compared to 71% a year ago. Non-GAAP gross margin from subscriptions was 81% in non-GAAP gross margin from professional services and other was 6%. We are continuing to invest in all facets of our business, while delivering on our commitment to show increased leverage in our financial model. In Q1, we delivered a non-GAAP net loss of $537,000 compared to a non-GAAP net loss of $4.5 million a year ago. Now moving onto cash and cash flow. Cash at quarter end was $430 million, up from $413 million at the end of Q4. Free cash flows were $11.5 million for the first quarter and $20.6 million or 10% of revenue on a trailing 12 months basis. We define free cash flows as operating cash flows less purchases of property and equipment. Now turning to guidance. For the second quarter, we expect total revenues to be between $56 million and $57 million. This includes subscription revenues of between $51 million and $5 million and professional services revenues of approximately $5 million. We expect Q2 non-GAAP gross margins to be between 70% to 71%. We expect non-GAAP loss from operations to be between $4.5 million and $5.5 million. As a reminder, our sales and marketing expense spiked from Q2 due to our annual INSPIRE user conference, which we held in San Francisco in May. We expect non-GAAP net loss per share of $0.08 to $0.10 on 56.8 million weighted average shares for the quarter. For the fiscal year ending January 31, 2019, we expect total revenues to be between $233 million and $236 million with non-GAAP gross margins in the range of 71% to 72%. We expect non-GAAP loss from operations for the year to be to be between $8 and $11 million. For the full year, we expect non-GAAP net loss per share in the range of $0.14 to $0.19 based upon an estimated 57.2 million weighted average shares for the year. That concludes our prepared remarks. Now, we’d be happy to take your questions. Operator?

Thank you, Mr. Ford [Operator Instructions]. Our first question will come from Jesse Hulsing with Goldman Sachs.

This is Kevin Kumar on for Jesse. Thanks for taking my question. Question on how you’re at here around direct procurement is evolving. Are you seeing customers interested in using Coupa for direct and where do you feel you need to add features or functionality to be a market leader here as you’re in indirect?

We’ve broken this question down in the past on these calls. And the reality is it’s not as simple as direct and in direct, they sound very much parallel to each other because they make up the world to spend and in some sense they do. The reality is there’s a whole host of use cases underneath each of these constructs. Now, today, we support a whole host of use cases around direct procurement for customers, and we’re managing hundreds of billions of dollars in direct spend for customers along many of those use cases. As we continue to evolve the offering, we keep looking for the types of 80-20 capabilities that we can build on to the platform and then make highly configurable for our customers. So you’ll continue to see us evolve and take on more and more use cases around both direct and indirect, but it’s an evolutionary process rather than a binary process.

And then question on sales and marketing growth, it looks like it decelerated a bit this quarter. Can you just comment on what's driving that and how hiring plans are trending?

We look at this every quarter now for 37 quarters and very carefully manage our sales and marketing expenditures, both sales and marketing; obviously, discretionary marketing, marketing headcount, sales headcount and discretionary sales expenditures. And they’ll ebb and flow a bit, but we stay pretty much close to our three pillars of business obviously on revenue growth, sales efficiency and scale to the bottom line. There is nothing specifically significant to note in terms of being on or off our -- or rather being off of our hiring plans. We’re very much on plan with everything that we plan to do over the past quarter, and going into this coming quarter as well.

And our next question comes from Raimo Lenschow with Barclays.

Two questions on the. Can you talk a little bit about the SI channel, so one of the main takeaways I’ve had at the conference is that they are pretty excited about building practices. Where you see the different SIs in terms of where they are and what’s in the pipes coming in terms of getting people certified et cetera? And I had a follow up for Todd.

So in terms of our SI strategy, this is a strategy that as you know and I think a number of others that have followed us for some time understand, this is an evolutionary strategy that we’ve had now for more than seven years of building an army of systems integrators certified consultants that know how to implement Coupa and do it in a way that drives measurable recurring value for our customers. So we can have the opportunity to keep them forever. We began with key consultancies in the early days and then graduated our way into working with the likes of Accenture KPMG, Deloitte and others. Over the last few quarter and frankly last couple of years but particularly over the last few quarters, we’ve seen much more alignment with us around setting revenue targets around Coupa for each of these businesses. So the number of folks they need to have certified and they’re professional services revenue, they'd like to deliver in 2018 and 2019 and going out to 2020. And in the cases of all three of those systems integrators, there is real growth being planned on their behalf, which we think will form -- will work very nicely with our sales and marketing growth, geographic expansion, our product footprint expansion, and the dominance we want to have in the market. So that continues to develop very nicely, and it’s very encouraging in particular to see business plans with tens and tens of millions of dollars professional services that they’re anticipating to make around Coupa.

And then, Todd, a quick question on cash flow. Q1 was particularly strong, so well done. Any special factors you want to call out here?

It was really based upon strong Q4 billings. Our collections team has done just a phenomenal job. Rick heads it up, so special shout-out for him for doing a killer job. And there’s a bit of seasonality, so Q4 strong billings, the collections in Q1 and then just continued execution on the business. So I think it was a job well done by all parties involved.

And next will be Stan Zlotsky with Morgan Stanley.

I’d like to start with is the Gartner Magic Quadrant for 2018 was released a little bit ago, and you guys showed a very strong -- again, very strong positioning. And that’s even before things like your Services Maestro was included in the evaluation of the product. If you were to compare Coupa 2018 versus a year before, what do you think will be some of the bigger drivers of the positioning within the Q? And then I have a follow-up.

Well, look, Stan as I’ve shared many times in the past, we really view internally here. And I speak freely on behalf of nearly a thousand colleagues here that the greatest competition we have out there is ourselves. And we look at these reports from the analysts and certainly we engage with them to provide them whatever information they need to provide these -- to complete these report as a necessary thing that we need to do, but we look at this as very different. And we have an opportunity to completely innovate in a broad business spend management market where we're pushing on every possible vector that matters to our customers. They care about product footprint that’s actually going to get implemented and is going to drive value for them. That’s why we continue to incorporate more and more use cases, including capabilities around services, capabilities around direct, capabilities around inventory, capabilities around procurement and invoicing and expenses and supplier information management, and probably most importantly, the community intelligence that we’re bringing to market that our customers are engaging with. So we’re really in a process of redefining a much broader category than is being seen by some of the traditional Procure-to-Pay or Source-the-contract type analyst reports. And so what I'd like to see and I think we’re working to see in coming years is a complete redefinition of what is part of business spend management, and we’re working very hard in every area of our business from products to services, to best practices, to consultancies that work with us, to analytics and cross company intelligence, to be the leader of that much broader market. So we look forward to seeing reports on that in coming years.

And maybe a quick on for Todd, billings in the quarter were significantly better than we in-consensus expected. Was there any benefit that we need to keep in mind for maybe ASC 606 going forward, or maybe just overall maybe some pull forward from the quarter ahead of the conference? Thank you.

There’re three components of billing, one is obviously new business and Steve and the sales team executed really well across all fronts in Q1. And as you know, Q1 is historically is a slower quarter out of the year for us. The second piece is obviously professional services. And given that this was the first quarter where everything was recognized on a proportional performance, I would say the team did a really good job with professional services. And part of that came out of the strong Q4 and the implementations that kicked off in Q1. So the professional services team did a fantastic job. And then the third component from a billings perspective is renewals. And our gross renewal rate was above 95% again for the second straight quarter. Our dollar based expansion rate was slightly above 110. So renewals also came in well. With respect to the conference, we did see some deals that were originally slated for Q2 or at least that would come -- Q2 came up and to Q1 with some people that wanted to come in and do inspire as customers, et cetera, and also just good execution by our sales team. So that's really the components of billings and how we executed in Q1.

And next will be Ross MacMillan with RBC Capital Markets.

Rob, just for you. One of the things we picked up at INSPIRE was power apps and the adoption curve there seemed to be accelerating. And I was just curious, would you concur with that, and which of the power apps are you seeing the most traction with initially?

So I think first off, we’ve definitely seen additional uptake of the power user capabilities around our transactional platform. In fact, one of the facts we shared is that the average number of modules purchased have gone up from three to four since INSPIRE last year. And in other instance just because that more that 50% of new revenue that's coming in now for us is outside of the core procurement capability. So that just tells you and it tells us obviously that customers are buying into the Coupa platform because business spend management platform. And we’re seeing this continued shift from the early adopters to their early majority stage where a few years ago we were seeing as really the safe choice was really to do nothing perhaps in some of these larger organizations around the world. Today, people starting to realize that the safe choice as well as the smart choice is to partner with us in so many of these situations. Now, it's a whole host of power user modules. It could be supplier information management. It could be sourcing optimization. It could be greater capabilities around contract lifecycle management. But the bigger story here is the buying into the platform. And for that reason, or as support for that, I will tell you that our average new recurring revenue continues to go up quarter-in and quarter-out, and has done so for virtually every quarter over the last 37 quarters, if not every quarter, to be exact. So customers are seeing this as a new business spend management platform that includes all transactional capabilities, procurement expenses invoicing, and continually developed or acquired and integrated power user capabilities.

And then, Todd, I just wanted to go back onto the adjustments. We had the $2 million write-down. So I presume that would’ve been about $0.5 million impact or so to subscription revenue. And then if we also adjust to three day year-over-year adjustment, we also need to make on subscription revenue right for fiscal Q1 ‘19 versus ’18. Is that right?

So with respect to the billings impact, yes, that's $2 million hit to Q1 calculated billings, and as we noted, that's one time. And we will lose that revenue over the next few years that will be locked revenue as well. The revenue impact in Q1 was relatively minor and we typically breakout things if it’s over $1 million. So it was well less than $1 million in Q1 and some quarters will be several hundreds of thousands in some it will be less, just given the way that it ebbs and flows. And with respect to the number of days from a revenue perspective, you're correct, we lost about $1.5 million in revenues due to there being fewer days in Q1.

And next will be Peter Levine with Needham and Company.

Just one question I have. So one of the things I think about conference was your new payment platform, I know it's not released yet. But if you can provide any color around potential release date and also the impact? Because it seems like every customer on your platform uses a third-party vendor to do this payment solution. So it seems like it could be a game changer at least having it integrated with your procurement.

Sure, well, look, Coupa Payments and our vision for it has a host of solutions part of it. One example of a part of it is Coupa Accelerate, which is part of Payments and that’s actually up for today. This is our offering centered around dynamic discounting and we’re seeing customers adopt that capability, but there's a lot more to payments. And one of the things we shared at the conference is our desire to get into transactional payments, card solutions, as well financing solutions. So these are areas that we’re currently in development around. And if you think about the core competency we have here at our company, it’s really centered to some extent, around user centricity. And where we think is really unparalleled user centricity following the concept of the best UI is no UI. And we want to take the same approach to payments. So I agree with you. I think this could be very meaningful for us. Our goal is to take payments to every core transaction within Coupa; so payments to procurement, payments to invoicing, payments against reimbursing against expenses; and all of that being very flexible, having open connectivity to bank. If you’re at bank or in card networks, you might be using, looking for every rail of payments and trying to support every rail of payments, so we could eliminate paper checks, we could digitize overall transactional payments, reduce the cost to payments and increase the visibility to a lot of these larger companies’ need for cross-border payments. And then of course so something we become very good at, which is integration back into accounting systems, which is important part of Payments. So what we've done every one of these conferences for the last six conferences we have had is that we announced something that is in development and the next time we come back, we typically announced that it’s in early access. And the next time we come back, we typically announce that it’s generally available. And that approach is something that’s working very, very well for our customer community. Just myself at being in this industry for as long as I have, I’ve often seen enterprise software companies either announce something that’s already in GI or they announce something in development, but there is limited accountability to the actual arrival of that product. And so we've done this very diligently in development, in the first conspirer of the second one, either the European or next year's in early access and then finally, in general, availability. And so we’d like to do this in typical Coupa fashion, which is announce all these things at the same time to our customer community and we’re planning to do the same with the Payments.

And just one follow-up to the payments transaction side, do you think about how the HR or payroll guys work so they can keep the fund overnight. Meaning is that anything that you guys can do or not in the model?

Perhaps, but that's at a level of detail that I probably won't be getting into at the moment. I understand exactly what you’re referring. So we've looked at that. We have a good understanding of how that works without a doubt.

And next will be Ken Wang with First Analysis.

Just wondering, can you offer any commentary on your underlying supplier growth during the quarter?

We give our supplier numbers that ones we hit key milestones. And as you may have noted at INSPIRE, we went over 4 million, which I believe is higher than anybody other players in the space. So there is definitely a wild network there and we continue to onboard suppliers at a rapid rate. And we’ll typically give updates on that once we reach key milestones.

And then just on your spend under management figure, I believe you said it was 740 billion for the quarter. Just looking at the dollar, the absolute dollar increase quarter-on-quarter, it looks like it might have slowed down a little bit from last quarter. Any change in underlying composition there that we should be aware of?

Thanks for the question, and it’s a very fair one. I wouldn’t read into that at all. The only thing I would tell you, there is some seasonality related to Q4 on-boarding. As you imagine, a lot of larger companies tend to do a lot more of their spending till the end of the calendar year. So we had a greater maybe uptick in Q4 and then in Q1, you would expect that uptick to be a little bit slower. But nothing statistically significant to suggest anything is better or worse than we would expect.

And next would be Brian Peterson with Raymond James.

This is Vince Celentano on for Brian. Going back to suppliers, I know you had said that there is no particular target that you're aiming for. Is there perhaps an industry that you’re seeing largest pick-up, or is there any other characteristics that you think are worth pointing out?

Not so much so. Our supplier network and the capability around that build itself. Our primary focus and vision of this company is to help companies get smarter and better about the way they spend company money so they can get every -- I think get value at every dollar that they’re spending. That's where our energies are. We think there is a lot of information technology out there that's helping folks tell, we don’t think there is a lot of information technology that’s highly effective and smart, and focused, and usable, and comprehensive, and could be implemented quickly with prescripted insights to help buy-side companies of all sizes get smarter about the way they spend money. So that's where we’re spending our energies. And the network itself is growing organically and very nicely and our customers on the buy-side continues to pay us fairly quarter-in quarter-out. And as I mentioned to Ross’s question, the new subscription revenue per customer continues to grow every quarter. And I think that's pretty meaningful to understand in our world, because we’re not incumbent that absent lock-in on our customers, our customers are with us, because they’re getting value and they’re paying as more every quarter because they’re getting more and more value. And so that's where our energies are focused.

And then so traditionally Coupa platforms provide a pretty significant ROI for customers. I was wondering how you see that base level trending over time in terms of there being additions to community intelligence through additional users and new products perhaps being offset by price increases.

It’s incredible. And if you think about the number of capabilities that have been brought into this product over the course of, let’s say, the last months; you look at the level of support we’re able to provide our customers around the world; you look at the best practices that we've enabled in terms of our size and how they deploy these solutions; if you look at resolution times on live transactional system with millions of transactions running through it all over the world 24/7. You continue to improve become much more efficient and deliver more and more value; and that’s seen in obviously savings on behalf of our customers; that’s seen in spend under management level continuing to grow their customers; that’s seen in risk reduction and supply risk reduction on behalf of our customers. So this is what our customer community is all about, continuing to work with us to drive more and more value for their companies, and all of those metrics that we track around that continues to go up into the right, which gets us more and more excited about this business every quarter.

And next will be Mark Murphy with J.P. Morgan.

This is Matt on behalf of Mark Murphy. You guys mentioned several great wins this quarter. But I know there is some wins that you can’t publicize. I guess, if you think about all the logos you closed this quarter, and perhaps the last couple of quarters. How would you characterize the customer profiles in terms of brand recognition and scale versus year ago? I guess, I am just trying to get at, are you increasingly seeing larger and larger customers? And then along the same lines, are these deals increasingly led by partners or are they continue to be an even mix between partner-led and direct?

So first of all, let me just start by answering your question, everyone of our customers manage that and we go one customers at a time where they are marquee logo, or large customer, or mid-size customers. We’re in this in this business to drive value for every one of our customers. We want to keep every one of our customers forever. And we want to keep them, because we’re delivering value for them on an ongoing basis. But I will tell you without a doubt over the last, let’s say year to year and half, very much since we went public and got to a place of much greater legitimacy in the marketplace, the size of the customers, the marquee brands of the customers, the depth to which they’re taking on the initiatives with us right off the back versus doing a small pilot to get into things, has continued to move in the right direction for us. And our partners continue to represent the pretty significant element of influence on those partners -- on those customers. So while they’re not directly handing at least that we immediately close, roughly two thirds of our deals are influenced in some way by a systems integrator or strategic partner of ours. So very much that continues to look very good for us and it continues to rightfully push organization to scale and grow globally.

And then you recently hired a Japan country manager. What does that market look like now in terms of your presence and where do you expect the new country manager to take things, or what’s your vision for that region?

Well, we’re in very early days in Japan. We have a very meaningful marquee account that we closed that we want to leverage as a reference to continue to build out -- to begin to build out that region. We think that our product and our platform is really right for the Japanese culture, as well as the market opportunity there. We consider going into Japan as far back as five years ago, but didn’t feel we were really ready the level of quality on the platform that will be required for the capabilities that we needed. But we’re ready now and we’re excited that Hiroyuki is there and building out a team, and we look forward to some meaningful progress there. But as with everything we've done in Coupa, we expand organically. We don't put 15, 20 people into region and see something happen. We go in, we get highly referencable customers and make them successful and we leverage their relationship with us and the real value we’ve created together to help us build out the market, and we look forward to doing that.

And next will be Joseph Vafi with Loop Capital.

Just following up on some of the dialogue here in the Q&A about some momentum with SIs and brand recognition. Have you seen an impact to the sales cycle given all of these perhaps positive influences to the business model? And then second one, could you give an update on perhaps some of the middle-market progress versus enterprises and how the development of those two markets is developing?

So we absolutely and we're touching on this earlier of course. We’re absolutely seeing great support from the primary systems integrators and influencing our deals. And there was a point, as you might imagine a few years ago, where we were seeing as innovative up-and-coming disruptive where now I think a lot of these systems integrators are seeing us as really becoming a more standard in this marketplace. And so they’ve done -- in the cases of all three of them, they’ve all done dozens of Coupa implementations, and virtually all cases, they’ve been highly successful in implementation. So there is really nothing stopping them at this point from wanting to push us into their existing customer relationships, which we’re excited about. And we’re also looking at our prospective customer base and looking at those customers with the highest propensity to buy, and focusing on those with these systems integrated so we could accelerate some of these sales cycles and more importantly, accelerate the go lives and value to drive for customers. In terms of midmarket, we continue to see deal sizes increase and we continue work on making that business much more operationally efficient quarter-in quarter-out. So not only we’re growing deal sizes, but we’re properly packaging our solutions and we’re properly driving implementations in terms of time from kickoff to go live. So that it just becomes a no-brainer for that market. And we’re making progress there as well.

Next will be Joseph Foresi with Cantor Fitzgerald.

I was wondering with personal services stable to improving. How do you think about its impact on the numbers over the long-term, particularly on the margin side?

One of the key drives on our gross margins when we went public was professional services, and we had a concerted effort to get that to breakeven. And we believe that that added about 300 basis points to our gross margins to get to breakeven. So over the long-term, as we strive to get professional services margins to 10%, up from roughly breakeven. I believe it will have some impact to gross margins, maybe 100 to 200 basis points. But I think the main leverage from gross margin accretion is going to come from continued scale with what we’re doing on the product side, what we’re doing with the build out of our services and support organization, some of that into India some of that here. And also the fact that we continue to see web hosting costs go down as that market is getting more commoditized with the competitive landscape there. So I think the gross margin accretion will be driven primarily by those factors, and helped around the fringes with respect to professional services margin improvement.

And you seem to be tracking well ahead of your targets. Can you talk about how we should think about them at this point? And it looks like you could potentially be non-GAAP positive this year. Is that too ambitious?

No, we strive for excellence at Coupa and we obviously haven’t guided to that yet. But if we continue to execute, it’s not out of the realm of possibility.

And then one last I want to sneak in. You talked about 50% of your business coming from, I guess the non-core applications. Any relative financials you can give on core versus non-core? Or should we think about non-core as you’re just adding another product onto the system coming in at the same margins. How should we think about that? Thanks.

I would certainly think about it from a new recurring revenue perspective. So when we enter in a quarter, if you think back six years ago, 95% was from one core transactional capability around automating the procurement process and then roughly three years ago, about 75% coming from that core. And towards the end of last year, we saw 50%, more than 50% actually, coming from outside that core procurement capability. So that maybe transactional expense management, that may be invoice processing, that maybe supplier information management, or contract lifecycle management, that maybe our sourcing optimization capability of spend analytics. So every one of these areas we are seeing real traction. And again, I think that the underlying theme here is that our customers are seeing a developing business spend management platform that they can partner with us around for many years to come that can give them more and more value out of all their spend transactions and the way they work with their suppliers. So that’s the underlying theme here, and it's a very promising one.

And next will be Koji Ikeda with Oppenheimer.

Question for Rob or Todd. I wanted to touch on the conversation that you’re having with potential customers. Now that you’ve been public for somewhere around 20 months here and awareness of the Coupa application continues to increase, all the while the spend management category continues to evolve. Can you talk a bit about how your conversations with potential customers had maybe changed over the past two years? Are the spend management pain points more or less the same, or are organizations thinking about spend management differently now, maybe even more strategically than two years ago?

So maybe we split that down into the macro dynamic and then what we're seeing in terms of the conversations for Coupa distinctly. But on the macro piece, we’re clearly seeing companies more interested in these capabilities around spend management broadly, because if they’re growing quickly, they want to make sure they’re doing it in a compliant way and they’re set up for scale. And if they’re already established businesses, they realize that there's operational inefficiencies in the way they spend money and they’ve applied a whole host of approaches to attending out their customer relation management and human capital management capabilities, they might be doing some upgrades around the ERP. But around spend management, in many cases, they still either using paper or they have a whole host of small boutique mom-and-pops deployed solutions all over the organization without one seamless way to get their arms around business spend management. So that's driving some level of interest in looking at this area. And where they are at the right time and at the right place where they solution that does address the vast majority of their business spend management challenges is delivered via cloud-based SAAS platform. When they look at all the lagging indicators around analyst reports and conversations with folks that have been around the space for a while, we tend to bubble up to the surface. But when they really engage with us, that’s when the magic happens, because many of our customers simply want to work with us because they’re excited about the culture of this company. They believe that our company values are aligned with their personal values. They are interested in actually getting to real measurable results rather than just doing a go live, deployment of some technology solution. They realize that there is a modern technology platform opportunity, a once-in-a-lifetime shift from old technology solutions and on-premise, or simply hosted on-premise solutions to modern technology value as a service platform. And they engage with us at that level. And when we go in and start looking at their data and their existing business processes and we -- on earth what's possible together, it becomes pretty much a no-brainer. But the challenge continues to be for us to unearth those opportunities, to build greater awareness. As you mentioned rightfully, we haven't spent an enormous amount on awareness. We’ll continue to manage that carefully but obviously, awareness is critical for us. And as we continue to do that, we think we’re well set up to be the primary leader of this category that we feel responsibility to develop.

Next will be Eric Lemus with SunTrust Robinson Humphrey.

I just had one. We’re little bit after the user conference and there was a fair amount of buzz during the conference with new products and functionality, some readily available and some still in the works. But can you just talk a little bit about the feedback you were getting from some of your customers in regards to the announcement that you made during the conference. What's the buzz and then what's getting people excited?

Well, the feedback was very positive. But besides that, we ask our customers not just to judge our capabilities and our strategy we ask them to be part of that. We've been building a customer community now that has many, many people around the world that are like-minded professionals that can actually partake in developing that strategy. We’ve gotten some very, very, interesting and very meaningful feedback that we continue to develop our community intelligence initiative, what are the use cases where community intelligence would be of greatest value to them. When they came to our conference just last year and we asked them to bring their thoughts and ideas to this, when they saw that we already encoded many of those ideas into the platform and made them available a year later, many of them realized the power of having this being one technology platform one code line for all customers. And they’re engaging with us on this. That’s the most exciting part of what came back in terms of feedback. Of course, we continue to develop certain areas that we need to get deeper in terms of functional richness, that’s just par for the course. But the magic is really happening around the periphery where our customers themselves are engaging in the design and setup of what is the world's next business technology -- business spend management platform for companies of all sizes. Now, if I were to break that down for you by every product area, I'd get you deep into feature, function, ideas and that's probably not the right place to do that on a call like this. But happy to discuss at anytime as well.

Next will be Pat Walravens with JMP Securities.

Todd, one for you and then one for Rob. So Todd, would you say the goal is still to build the company capable sustaining 30% plus top line growth?

Yes, we’re still running the business based upon the three core tenants we outlined at the Analyst Day, which is 30% top line growth for the next five plus years, and primarily focused on driving subscription revenue. We do have a professional services element that our strategy is to partner with SIs, so we do see most of that growth coming from subscriptions. And when we look at our go-to-market teams and how we’re building it, we are definitely building it to sustain that 30% growth, and do it in a very responsible way with reasonable sales efficiency and the key metrics we track, magic number, LTV to CAC, while continuing to show operating margin at the bottom line with respect to operating income and free cash flows.

And then Rob big picture for a second. How do we think about the potential for blockchain in spend management and what are the things that might be holding that back?

To be honest, Pat, I don’t feel like this is a good opportunity for me to share a lot of the views on that. I think a lot of that is still very much developing and very hard to call. And I don’t feel ready personally to make a very direct call as to how that's going to play out. I think there is absolutely very distinct use cases where blockchain is going to be critical. When you think about distributed ledger for example, which could really shake-up some of the big incumbents in the enterprise software world and obviously the use cases around payment. But I'm not in a position yet to share a very distinct point of view on it. But I'm happy to follow-up with you on that in coming earnings calls for sure.

Let me rotate to something I think you probably are, so if you look at your AI acquisition, Deep Relevance and Spend360. How are those working out?

Very, very well. One of things we've discovered and we always known but we've discovered in granular fashion is the power of our data. And this data is something that is not just valuable to individual customers. But when normalized and sanitized and looked at in the context of certain critical use cases, applying artificial intelligence to get you there. We’re in a position now to provide prescriptive intelligence to individual customers around many of the product areas we discussed at the conference. And some of the ones I discussed in my earlier script for the earnings call; so detecting fraud as it pertains to every transactional area from procurement expense to invoicing; identifying opportunities for optimizing spend due to -- for example, contracts are about to expire and suppliers you ought to be working with; understanding how your commodities are shaping-up; who are you actually spending with and you would say top 10 suppliers; and who are best-in-class companies around the world spending with; and perhaps having better result supplier risk, commodity insights, cross company business and benchmarking insights. So we’re really just scratching the surface on what’s possible. And the reality is we’re already scratching it in the sense that many of our customers have deployed Coupa leveraging community intelligence. So you’ll continue to hear more and more about this from us simply because it just makes a great deal of sense. And our customer community is asking for it.

And at this time, there are no further questions. This concludes the conference for today. We do thank you for joining us. You may now disconnect.