Coupa Software Inc (COUP) 2017 Q3 法說會逐字稿

Good day and welcome to the Coupa Software third-quarter FY17 earnings conference call. Today's conference is being recorded and at this time I would like to turn the conference over to Cindy Hiponia. Please go ahead, ma'am.

Thank you, Matt. Good afternoon and welcome to Coupa Software's third-quarter FY17 conference call. This is Cynthia Hiponia, Coupa Investor Relations and joining me today on the call are Rob Bernshteyn, Coupa's CEO; and Todd Ford, Coupa's CFO.

The primary purpose of today's call is to provide you with information regarding our FY17 third quarter performance, in addition to our financial outlook for our FY17 fourth quarter and full year. Just a reminder that our remarks today include forward-looking statements about our guidance and future results of operations, business strategies and plans, market size, products, competitive position, industry environment and potential growth opportunities. Our actual results maybe materially different.

Forward-looking statements involve risks, uncertainties and assumptions that are described in our earnings release and in our final prospectus filed with the SEC on October 6, 2016. 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 during the call may not contain current or accurate information.

Some key metrics discussed, such as customer savings to date, are based on internal estimates from applying certain savings rates derived from the industry benchmarks. During the call we'll also present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings release, which you can find on our Investor Relations website.

A link to the replay of this call will also be available there and if you prefer to access the replay via phone, you can find that information in the earnings release as well. Unless otherwise stated, gross comparison made on this call are against the same period of the prior year. With that, I'll turn the call over to Rob.

Thank you, Cynthia. Good afternoon, everyone.

With this being our first earnings call as a public company, I want to start by taking a moment to thank everyone that's been part of our journey so far. It's really been extraordinary to see the dedication, to see the focus, and to see the relentless effort that's been put into making our Company into something that we think is very, very special. It's something that we can all take pride in.

On behalf of all my colleagues at Coupa, I'd like to thank our customers first and foremost. I'd like to thank them for the willingness to bet on us early in our Company life cycle, like to thank them for their commitment toward a partner-oriented model of working toward common goals despite any and all challenges in our path, and I'd like to thank them for their enthusiasm, their enthusiasm in embracing what we believe is a game changing value as a service approach.

I'd also like to thank our fast growing list of global partners for their courage, their courage in also embracing us early and for working with us hand in hand to always do what is fundamentally best for our joint customers. I'd also like to thank all of the investors that have backed us for the last 31 quarters and supported us through six very carefully considered funding rounds. It's worth noting that we've always tried to be extremely thoughtful in how we manage our spending and we have no plans to alter that approach.

Upon the completion of our recent IPO, we've all been humbled and honored by the sentiments of congratulations, the sentiments of support and inspiration we receive from folks across the world. These sentiments came from our customers, our partners and our friends. We could not be more proud.

There is just so much that we aspire to undertake together. Now, for those of you who are getting to know Coupa, it's important to understand our three core values. The first is ensuring customer success.

By ensuring customer success we don't mean just focusing on customer satisfaction or having a desire for customer success. We're talking about ensuring it, against any and all obstacles and any and all challenges in our path.

Our second core value is focusing on results, and here we mean not just focusing on process or focusing on procedure without goals in mind. We mean maniacally focused on delivering results in all that we set out to do each day of the week.

Our third core value is striving for excellence. Here we mean not just continuously learning for the sake of it but keeping our heads up and driving ourselves for the arguably unreachable pinnacle of excellence day in and day out.

I think it's important to understand that the foundation of our Company and much of our strength comes from these values. They reside at the core of everything we do and make us who we are. We consider ourselves an organization, not just a Company, because we're organized around our commitment to these core values.

But it not just about values. We're also committed to a very bold vision. We believe that most organizations of the world -- in the world today are not optimally leveraging information technology to help them strategically, cost effectively, and prudently spend money.

We see a huge opportunity in helping them improve how they spend money for all of the goods and services they need to manage more operationally efficient businesses. The more spend under management we could drive for our customers on our unified cloud platform, the greater the likelihood of our joint ability to optimize it. We are working to unlock measurable financial value for our customers so that they themselves are better positioned to pursue their own company visions -- that is our vision.

Toward this, we are pursuing what we call a value as a service approach. This approach is designed to make sure that each and every customer we work with is getting a clear and measurable set of financial outcomes from partnering with us.

We believe that enterprise software deployments with no clear success criteria are a rear-view mirror artifact. We are ready, we are willing, and we're able to fight any and all resistance to changing from that unacceptable status quo in our industry. We have been built to deliver value as a service for our customers.

Now while we manage our business quarterly and we will update you quarterly, we will also do our best not to be distracted from our long-term goals. There are trillions of dollars in business spending that need to be optimized and through that lens, our work has only just begun. In terms of quarterly information shared, we will continue to approach the investment community with a spirit of transparency and clear communication in as much as it is practical to do so.

We want the public to fully understand our developing strategy and our ongoing execution against that strategy. Speaking of execution and quarterly updates, let me share some highlights from our fiscal third quarter before I turn it over to Todd for a comprehensive financial update.

In Q3 we crossed a key milestone of more than $300 billion of cumulative spend that has flowed through the Coupa platform, including more than $100 billion of spend in the first nine months of FY17 alone. This has helped us deliver over $10 billion in cumulative savings to our customers. It is the success of our customers that is driving the strong financial results of our business.

We achieved record third-quarter revenues of $35.4 million, up 55% year over year, lead by strong execution in both North America and Europe. We're also seeing early but accelerated traction in emerging regions such as Latin America and Asia Pacific. This is primarily the result of continually strengthening relationships with our global systems integrator partners.

Some key customer wins with our partners include Anheuser-Busch InBev, Lear Corporation, Frontier Airlines, Huntington Bank and Cooper Standard. Our cloud platform is easily configurable to meet the needs of virtually all sized companies. It's for this reason that large global enterprises and growing mid-sized companies are leveraging Coupa to help them manage their organizational spend.

Coupa allows them to control their business spend, extract incremental value from their ERP deployments and take advantage of deep supplier discounts we make available to all our valued customers. We can illustrate this with some important customer wins just in Q3. These wins include FedEx, Nasdaq, CityFibre Holdings -- the largest alternative provider of wholesale fiber in the UK, Jive Communications -- a global unified communications provider and Toyota of Puerto Rico -- the regional hub of the world's largest car manufacturer.

We continue to expand our global footprint. In Q3 we announced that Paul Watts will lead the Company's Asia Pacific region as Vice President of Sales. Paul brings 20 years of go to market in sales leadership in Japan, Hong Kong and Singapore.

We intend to grow the region effectively with his strong leadership. In fact, just this quarter we closed DBS Bank, a leading financial services group in Asia with more than $300 billion in assets.

Immediately following our IPO we hosted our annual Inspire European Conference in London. I'm proud to say that this event has become one of Europe's premier spend management events. My Coupa colleagues and I look forward to Inspire Europe every year.

It gives us the opportunity to connect closely with some of our most valued customers and partners. Many key industry leaders were in attendance this year. Some of the speakers in Inspire included Gartner, Deloitte, and KPMG, who spoke with Aon about their expanded global rollout of the Coupa e-Invoicing solution.

Additional sponsors included IBM, BearingPoint, The Hackett Group, and additional partners such as OJC Conseil, Solmate, Acantis, Xoomworks and Excelerated S2P. Coming immediately after the IPO, Inspire Europe was a perfect opportunity for us to turn our focus squarely back to delivering value for our customers.

Now by way of update, we continue to build our supplier network. Our customers are using Coupa to do business with over 2 million suppliers. Additionally, we are leveraging the collective spend of our customers to further grow Coupa Advantage.

Of course, Coupa Advantages are our pre-negotiated supplier discount program. This quarter we added suppliers in telecom with the addition of Meta, and employee perks with addition of AnyPerk. In Q3 we were also proud to donate to organizations including the Boys and Girls Club, the American Cancer Society, the Nature Conservatory and the Leukemia and Lymphoma society and a host of others.

Of course, this was all done on behalf of Coupa, our customers and our partners. To date the Coupa Advantage program has made donations to over 100 charities, which represents hundreds of thousands of dollars in donations. We could not be prouder.

Earlier this year, we were once again named the leader in Gartner's annual Magic Quadrant for our industry. We were also identified by Forrester Research as one of six SaaS vendors disrupting the status quo and becoming a breakout leader in our category. In September, we achieved a global ranking of 17 on the Forbes 2016 Cloud 100 list, which recognizes companies for financial growth and excellence.

In November, PayStream Advisors released their procure-to-pay navigator assessment for our industry and Coupa received the highest score for proficiency. We were noted as a leader in many areas of financial process automation, particularly in travel and expense management, a key solution offering on the Coupa platform. The report also noted that the Coupa solution is modern and intuitive and its transparency and versatility make it a strong option for larger organizations.

We're honored by these recognitions. We see them as a testament to our technology innovation and industry leadership and believe me, we are very proud and honored by them. We continue to invest significantly in innovation and core platform development.

Much of our focus in development is driven by collaboration with our trusted customers. In October we announced the general availability of Coupa Release 16.

This is a third major release of the year. R16 delivers enhancements across our unified cloud platform, includes new analytics capabilities and allows for management at all levels to instantly see and control business spend.

In summary, Coupa is driving measurable value for companies of all sizes and all industries. We're focused on something very different here, measurable business value and at Coupa, business value is achieved and measured rather than simply promised. This is just one of the many reasons we are passionate about growing our value as a service business.

Now let me turn over the call to my colleague Todd, who will discuss our third quarter financials in more detail and provide our outlook for the fourth quarter and fiscal year.

Thanks, Rob. Good afternoon, everyone.

We delivered strong results across the board in the third quarter. Total revenues for the third quarter grew 55% year over year to $35.4 million. Subscription revenues were $30.8 million, up 48% year over year and comprised 87% of total revenue.

Our non-GAAP operating loss was $2.9 million, or negative 8% of revenue, in Q3 compared to a non-GAAP operating loss of $7.4 million, or negative 32% of revenue, in Q3 of FY16. As our Q3 results demonstrates, we are in the early stages of showing scale in our financial model. Since some of you are new to Coupa, let me provide a brief overview of how we recognize revenue.

We begin recognizing subscription revenue once our product is delivered to the customer, typically within days of a customer signing. Revenue from professional services have historically been recognized upon customer go live; however, we expect that beginning in Q4, revenue from new professional services contracts will be recognized as services are delivered, which will better align revenue with expenses. Revenue from Pro Serve on contracts signed before Q4 will continue to be recognized upon customer go live.

In Q3, we recognized $1.4 million from a significant customer go live, which is substantially higher than historical norms. With that, let me give you more background on our Pro Serve strategy. Professional services revenue was $4.6 million, or 13% of total revenues for Q3.

We don't view Pro Serve revenue as a key growth driver for our business. The primary objective of our Pro Serve business is to make our customer successful and to grow our relationships with system-integrated partners.

Our long-term target is to have less than 10% of our total revenue coming from professional services. We believe our Pro Serve strategy and commitment to system-integrated partners will maximize long-term value in the form of higher recurring revenues, better customer retention rates, and improved sales efficiency.

Now looking at calculated billings and deferred revenue, we define calculated billings as a change in deferred revenue on the balance sheet for the quarter plus revenue recognized during the quarter. Our Q3 calculated billings was $36.3 million, up 28% from the previous year. Total deferred revenue at quarter end was $73 million, up 39% from the previous year.

Our quarterly calculated billings and deferred revenue results are often influenced by seasonality, timing of renewals and timing of annual contracted billings. As a result, we don't necessarily view quarterly changes and deferred revenues in calculated billings as the best indicators of in-quarter activity.

For example, in Q2 of this year, we billed the second annual installment of a significant multi-year deal that had closed in early Q3 of last year, as we typically invoice annual billings and renewals up to 30 days in advance of the contract anniversary date. As a result, the billings for Q2 of this year were significantly higher and as a result set up a difficult compare for Q3.

Let's now turn to operating expenses and results of operations. Our third-quarter non-GAAP gross margin was 69% compared to 65% in the same period last year. Our gross margin improvement was impacted by the revenue from the large customer go live discussed earlier and also benefited from the scaling of our operations team and better terms from our web hosting provider.

Non-GAAP gross margin from subscriptions was 81% and non-GAAP gross margins from professional services was negative 5%. It's important to note that we recognize professional services costs as incurred regardless of when revenue was recognized. Our margins will fluctuate quarter to quarter and our midterm targets for overall non-GAAP gross margins are in the range of 65% to 67%.

Our third-quarter loss from operations measured on a non-GAAP basis was $2.9 million, or negative 8% of total revenue. Operating expenses were largely in line with what we expected, but let me highlight a few areas for you. We are continuing to invest in R&D and will for the foreseeable future.

We recently celebrated the one year anniversary of our technology center in Pune, India, where we are expanding our engineering team and support organization. We're delighted with the quality of talent we've been able to attract and the contributions they have made to our organization.

On the sales and marketing front, we continue to hire and expand our global footprint. As Rob noted, we recently hired our first sales VP in the APAC region and we're continuing to invest in our enterprise and mid-market segments. For modeling purposes, it's important to note that our sales and marketing expenses spiked in Q2 for costs related to our annual Inspire conference and spikes again in Q4 due to a seasonally strong bookings quarter and as members of the sales team hit their accelerators.

On the G&A front, we've made significant investments in our infrastructure over the past several quarters in anticipation of becoming a public company and we expect the rate of investment in G&A to subside over the next several periods. Our non-GAAP loss per share in the third quarter was negative $0.22 on 18.4 million weighted average shares. Given that we are in a net loss position, all outstanding stock options and common stock equivalents are anti-dilutive and not included in the loss-per-share calculation.

Now let's move on to the balance sheet and cash flows. Cash at quarter end was $220.6 million, up from $79.9 million at the end of Q2, largely due to the capital raised in our initial public offering in October, which netted $142.5 million. Excluding proceeds from the IPO, we used $1.8 million in total cash in Q3.

Cash flow from operations in the third quarter were negative $2.8 million and negative $10.5 million year to date. Our free cash flows, defined as operating cash flows plus investing cash flows, for the third quarter were negative $3.8 million and negative $14 million year to date. Now let's turn to guidance.

For the fourth quarter, we expect total revenues to be between $35.5 and $36 million. This includes expected subscription revenues of between $31.8 million and $32.3 million compared to $30.8 million we saw in Q3.

Professional services revenues are expected to be approximately $3.7 million in Q4 compared to $4.6 million in Q3. Once again, Q3 Pro Serve revenue included the impact of the significant one-time customer go live discussed earlier.

Traditionally, due to seasonality, the fourth quarters is strongest new business quarter of the year and Q1 has traditionally been our slowest quarter of the year. We expect non-GAAP loss from operations to be between negative $7.4 million and negative $8.4 million in Q4. We expect non-GAAP net loss per share in the range of negative $0.16 to negative $0.19 per share based upon an estimated 49.7 million weighted average shares for the quarter.

For the full year ending January 31, 2017, we expect total revenues to be between $131.3 and $131.8 million. We expect non-GAAP loss from operations to be between negative $29.9 million and negative $30.9 million. We expect non-GAAP net loss per share in the range of negative $1.67 to negative $1.73 per share based upon an estimated 19.6 million weighted average shares for the full year.

We're not providing near-term targets for cash flows but we expect to be operating cash flow neutral to slightly positive for FY18 and sustain free cash flow positive beginning in Q4 of FY18. To summarize, we are very pleased with our third-quarter performance. We are investing for the long term with a disciplined growth strategy to maximize market opportunities and financial results.

With that, Rob and I will be happy to take your questions.

(Operator Instructions)

We'll take a question from Stan Zlotsky with Morgan Stanley.

Hey, guys. Good afternoon and thank you so much for taking our questions. Two quick ones, first one on the partner channel. Looking at the logos that you announced, it certainly sounds like that part of the business is doing well, so maybe if you can just provide a little bit more background on how the partner channel is tracking through the year. Then a quick one for Todd. If you could just tell us, give us some guidance on how you're thinking about calculated billings as we're going into Q4 of this year. Thank you.

Thanks very much, Stan, for the questions. In terms of the partner channel, I think it's worth it to get a little bit of history around how we thought about partnerships from the start. We've always had a vision at this Company of having a powered by Coupa type platform where a whole host of systems integrators and value-added partners can work within our software as a service model to drive more and more value for our customers. It's one of the reasons that our ratio of recurring revenue to overall revenue is so extremely high, because we want to build that out from the outset.

As the quotas and years went on, we had certified a whole host of folks, now well over a thousand around the world, at some of the best known systems integrators as well as boutique consultancy on how to take the Coupa platform and drive it for value with our customers. Those relationships continued to flourish with each of those partners, with each of those systems integrators. They continue to invest behind the Coupa platform. We continue to see them recommending us as a best-in-class solution when working with their constituents and their existing clients and we see that continuing -- to continue to grow for us globally. We think it's one of the ways we'll be able to expand in some of the markets that we're just beginning to enter in earnest such as Asia-Pac and Latin America.

Stan, yes, on the calculated billings, one of the things with our business as you would see in other enterprise software companies is we do have some seasonality. As I noted in the script, Q4 is our largest quarter of the year followed by Q2, and then Q1 and Q3 tend to be the weaker quarters when you look at it over the past several years. We do have a compounding effect over the last seven years where we closed a lot of business in Q4 whereby whether it's the renewals or the second year of a multi-year contract where we would expect Q4 to be the largest billings quarter of the year. As I also noted in my script, there is a lot of ins and outs on a quarterly basis and if you look at the billings increase year over year in Q2, it's 76% and then it was lower in Q3, but there were inter-quarter billings activity. We're not going to give formal guidance going forward on a billings perspective, but on the earnings call similar to what we did today, we will give you color if there were some (inaudible) events that happened to clarify what happened on the billings.

Thank you, guys.

At this time we'll take a question from Mark Murphy with JPMorgan.

Yes, thank you and congrats on the nice results. Todd, I wanted to ask you, the margin improvement is very pronounced pretty much across the board. It is much more favorable than we would have expected. In particular, that is true on the professional services gross margins. I know you mentioned this, but could you shed any more light on the large go live which you said occurred earlier than expected? Why was it deployed so rapidly? When had you expected that deal to go live? Did you expect it in Q4 or actually after Q4?

It might be helpful to give you a little background on our professional services, because there's a couple things that's going to drive our margins long term since they have been negative for the past several quarters. If you go back to one of Coupa's core value of ensuring customer success, three years ago or so, we didn't even charge for professional services and over time we started to charge our customers and charge a fair rate. As such, we didn't have systems in place that tracked the billings as we deployed the customers and as such, we recognize the revenue as customers go live. We have since changed that and will be recognizing those pro serve revenues on a percentage of completion basis beginning in Q4. With respect to the margins, historically the expense has come in as incurred and the revenues are delayed, so the margin loss that you saw historically was more pronounced than really what was happening underneath.

With respect to the go live in Q3, one of the things that we've done with our professional services revenue has been conservative, so I wouldn't say that we necessarily thought it was going to happen in Q3/Q4 or early of next year, but we didn't want to be in a position where we were counting on a go live and it's slipped for reasons beyond our control. It was something we didn't factor into our guidance. When the customer's ready and they are set up to be successful, we turn them live.

Okay, that makes sense. Rob, I wanted to ask you as well about the trend in adoption by all. When we look back on it, you clearly have focused on end-user experience with consumerization and mobility being very front and center. I noticed, and you did mention in your script, that Coupa was just rated number one out of all competitors for proficiency. I'm wondering, from your vantage point, are the legacy incumbents still stuck with a focus on the power users which isn't really working for them or do you have any kind of broader update on the adoption trends within your install base?

Well, I would tell you ultimately everything that we do as a company is focused on measurable value for our customers. One method of delivering that measurable value is a focus on much more streamlined set of usability. That usability is not just for the end users or the casual users, but that's for the power users, that's for the facility folks, that's for the category managers, that's for the approvers, the rejectors and everyone else in the organization.

One area of our differentiation is around usability, but that usability is toward the end of getting more spend under management and greater savings compliance and visibility for our customers. We think that, that is something that we're very, very good at, third parties think we're very, very good at but truthfully, I think we're really just scratching the surface on what's possible for us in that area. Because we're developing everything on one code line, every new innovation, every new piece of data we surmise as to how our customers are using a product gives us opportunity to further and further optimize the tool in that area.

I think that's only one of the areas we are focused on. The other one is a tightly unified cloud platform. In other words, all of the business processes underneath are working together seamlessly. We are not focused on as many possible features that we could check off unless we think those features are actually going to get used, are going to get broadly adopted and are going to drive value for our customers. Analysts and others are starting to recognize the importance of proficiency not just in terms of long list of features, but in terms of features that are actually going to get used. We think we're pretty strong in doing that.

I think the third area that's important to note is that we are really a value as a service company and the traditional players in our industry really began as product companies and are probably currently in the mode of transitioning themselves to as a service type organizations. We see ourselves as a value of the service company, so every one of our customers has clear success criteria defined for their deployments. The teams work hand in hand to get the customer live. Perhaps that is part of the reason our margins are better this quarter; we were able to out execute where we initially planned to do and we think we're on a good path there.

We spend very little time looking at what some of the traditional incumbents are doing. They have a lot of different approaches they could take to the market, whether it be trying to fix their user interface or focus on integrating some of the acquisitions they've acquired. We leave that to them. For us, we feel like as a public company and we're in the big leagues now and even though it's still early innings, we've got a great runway to go here as we tick off our first earnings call here.

Okay, great. One last one. I think you have referenced a couple times on the call the historically seasonally stronger nature of Q4 but that there can be variances and puts and takes year to year. Any comment on the forward deal pipeline? As you think through the number of qualified deals, the coverage ratios, how do you feel about it entering Q4 versus a year ago? In particular, any qualitative color on vectors of change in the pipeline, whether it's geographic mix or enterprise versus mid-market or just anything else that's noticeable to you?

Well, I'll tell you, we've been managing the business very carefully for the last 31 quarters and we look at all sides of it. We look at pipeline conversion ratios, clearly. We look at new markets we want to enter and when we enter them, we enter them carefully. We look at existing markets and how we could better penetrate them. We look at how we're spending our sales efficiency marketing dollars, how we're looking at how carefully to manage those ratios quarter in and quarter out. I don't think there's anything statistically significant that's changed here when I look out from this vantage point compared to the vantage point that had in previous quarters. It's a continuation of executing against the opportunity with everything we have, which is ultimately what this is. This is an execution play, an execution business on driving real measurable value for customers and we couldn't be more excited about it.

Thank you very much.

We will now move to Raimo Lenschow with Barclays.

Thanks for taking my question and congratulations from me as well. Two questions. Rob, first for you. Pre-IPO, if you look at the competition with the SAP (inaudible) [voice], a lot of time we heard from customers that it was down to SAP account management and you were still a private company. Do you see, first, evidence that now that you're public that this is slowly changing for you? Then I have a follow-up for Todd.

Well, I would say, Raimo, thanks for the question, from the moment that we sort of rang the bell or pushed the button in Times Square to this moment here sitting with you, I'm not sure I had anything statistically significant that I could point to that suggests things in one direction or another. I could tell you that as we always have, we will continue to compete on value, on differentiated value, on the differentiated approach to driving that value for customers, maintain a frictionless move towards getting our solutions implemented for them, looking for other areas to drive value for our customers.

The incumbents in the market will likely react one way or another but astute CIOs, astute CPOs, astute CFOs are really looking for real measurable value. They want it fast and they want that to be sustained. That's where all of our energies are focused on. I'm not sure I can tell you much more about the way others are reacting.

Perfect, that's clear. For Todd, just a clarification. When you talked about Q4 and the big emphasis, are you talking about the same scenario or the same effect that someone like Salesforce has been talking about for a while, that you have a compounding effect on Q4 because of the renewals and so that means Q4 billings are stronger but then we also need to be aware in Q1, you're running against -- that impacts Q1 then as well. Is that kind of the same effect we need to think about besides, obviously, deal signings?

That's exactly right. There's basically three things, right? Renewals, multi-year contracts, and Q4 has historically been our biggest year, so that impacts it and then new business. Those are the three factors and Q4, while we aren't giving formal guidance on calculated billings, will certainly be our largest of the year because of those three factors.

All right, perfect. Thank you. Congratulations.

Thank you.

We will now move to Ross MacMillan with RBC Capital Markets.

Thanks a lot and my congratulations as well. Rob, one for you and then a follow-up for Todd. Rob, on the product portfolio, any thoughts on prioritization across areas of functionality that you're really focused on right now to build out the product set? Todd, any update on customer count and dollar base net retention? Thanks.

Sure, I appreciate the question. I think it's worth a little bit of historical context as to how we think about our product strategy, our platform strategy and before I get into the details, what we're planning now and anticipate in coming quarters around product. The strategy here since very early was to focus in on the core transactional capabilities that helped companies have a collectively exhaustive way to manage all their spending. That includes pre-approved spend and procurement, post-approved spend and expense management, as well as ongoing expenditures that come into the invoices. We're the only player, the only player in the marketplace that has a unified cloud platform with a common data model, common set of work flow, common set of usability constructs, capture all three of these transactional areas of spend.

Once we've captured that transactional spend, we can turn on what we call power user capabilities that are on the periphery of that spend that help companies get more value out of that spend. That might be tracking their inventory. That might be greater analytics capabilities. That might be the ability to run sourcing events or to collaborate around contracts. In every area of our product suite, we're going both deeper, driven by customer input, wider, driven by the market opportunity and introducing innovation in ways that the marketplace has never really seen, based on our own intuitive understanding of what customers may appreciate and based on the innovation of some of our products, people, product managers, and engineers.

In coming quarters you'll see us expose more and more analytic capabilities to take advantage of the hundreds of billions of dollars in transactional spend we can see running through our platform in real time. We think it's something that's going to help companies get a lot of value out of the value as a service offering that we're delivering. That doesn't mean we aren't going to continue to go deeper in certain areas of the product to expose more value.

Just to make it very real for you, Ross, and make it something that's approachable, just in Release 16, something we have just launched very, very recently, we introduced the simple feature called At Mention, and at the way you would see the symbol on Twitter. Rather than having a work flow process that's very serial in nature and very structured, nor having a process of completely collaborative and hard to control, we found a way to marry the two. As you're processing anything through the work flow within Coupa be it a purchase order, expense report, or an invoice, you can At Mention anyone else's organization and it will be brought into the loop to comment on whether or not that invoice or expense report or purchase order ought to be approved or it ought to go back for renegotiation or some other way of evaluating it.

These are the types of innovations we are able to push into one code line that's now being accessed by hundreds of companies all over the world and ways that we can tap into all types of business spending processes in the company and with a few lines of code modify it in a way that drives more value for them. These are just some examples of the types of things we're able to do and types of things we'll be doing in coming quarters.

That's helpful.

Let me give you some color on your questions. On the customers, with respect to how we go to market, which I think is really important in the driver of our business versus actual customer count, the beginning of this year we doubled down on the mid-market segment and we hired a very senior lady to run that group. We also doubled down on our inside sales team and that's really started to produce results in the second half of the year. If you look at it on a logo basis, the mid market contributed 60% and the enterprise balance at 40%. If you look at it on a dollar basis, obviously the enterprise segment was roughly 75% to 80% and the balance coming from mid market. when you look at the total addressable TAM, and we estimate it to be about $25 billion, we think the mid market is about $14 billion of that and then the enterprise, the $11 billion. We're not going to get into the minutia of customer count; however, we will give you customer count updates when we hit key milestones.

On the dollar-based retention question that you asked, there's several components in there. The first one is really the gross renewal rate that doesn't factor in, expand and upsell, and historically that ranged from 90% to 95%. If you look at where we ended up in Q3 on a trailing 12-month basis, it was at the high end of that range. Then if you look at the dollar-based expansion range, it historically has been in a 104% to 107% range and in Q3 we did have some significant expand orders. Our focus in going into customers is what we call the hunting, getting the customer and then driving additional spend through the platform. We haven't historically been focused on the gathering or expand and upsells, if you will.

That said, we did have some big expand orders in Q3 and dollar-based expansion rate was in excess of 110%. We think that will continue to fluctuate over time, especially as we add more power-user applications, things such as strategic sourcing, invoicing, analytics, et cetera. Hopefully that gives you a good overview.

Very helpful, thank you.

We'll move to Pat Walravens with JMP Securities.

Great, thank you very much. Congratulations, you guys, on some great results. I was wondering what you can share with investors in terms of key points for your longer term growth aspirations. You just grew 55%, which is blistering and I think the consensus estimates for the out years are more like 30%, so how should people think about it?

Thanks, Pat, appreciate the question. I think that the over arching way is to go back to our vision as a Company around getting as much spend under management as possible and optimizing that spend for organizations. As I've said many times, you think about any of the organizations you've ever worked for and you ask anyone in that company, do you feel like your company is doing an amazing job in optimizing the way they spend money on all of the goods and services it needs, you'll likely get an answer or a grimace that probably not. The follow-on question is, are you using it from technology in an effective way to optimize the way your company spends money and then you definitely get a reaction of probably not.

There's trillions and trillions of dollars in spend that's happening in B2B commerce around the world in purchasing and reimbursement and paper-based invoicing and sourcing and contract collaboration and inventory management. We want to go into that environment and help companies optimize that spend. If there's one fundamental area to monitor for us, it's spend under management on our one unified code line. Not just which company has the most spend under management, because there are many organizations with disparate code lines and models all over the place, but one unified cloud platform managing hundreds of billions of dollars in spend and hopefully in not too long a future, trillions of dollars of spend.

That's what we are focused on. Along the way, we hope to get paid fairly by our customers globally. In the mid market, in the enterprise, we see a $16 billion to $25 billion global opportunity here that we're going after and we think if we keep our eye on the prize of spend optimization we're going get there with that long-term orientation.

Regarding the financial model, Rob mentioned the total addressable market. It is a massive market and the approach Coupa has always used for the last seven years since Rob has been here, and it well preceded my tenure here at Coupa, is one of disciplined growth. We believe that as we enter new markets, whether it's sales efficiency, we do it in a very structured manner. We put some feet on the ground, we see some success and we continue to build upon that. If you look at the way that we've even deployed capital, for every dollar that we've burned since inception, we've created more than $1 in recurring revenue.

The broader picture when you look at long-term modeling, we're going to continue to employ a strategy of disciplined growth, but given the TAM, the fact that we truly believe it's an execution play, we believe we have the best products, we believe we have the best people, we have the best people on the street executing, we believe that it's a 30% growth for the foreseeable future and that's how we look at it from a long-term perspective. Now in the near term, those percentages may be higher due to the law of small numbers, but that's how we think about the business. As we indicated in the guidance on the cash flow targets, we are narrowing the gap and year over year we've showed scale in the business model and ultimately we want to get to a 20% free cash flow margin and above.

That's super helpful. One add-on there. Rob, as the economy ebbs and flows, how does it impact your business?

One of the things that I really have always loved about this business is that it's interesting in great times and it's interesting in tough times, because profitability, as I've said many times, it really doesn't go out of style. There is an opportunity to take advantage of both climates. Of course, we're sober enough to realize that if certain budgets get cut or not cut during tough times, that could have an impact on us, but our value proposition is very, very strong, it's very, very quantifiable, it's very, very value oriented. It's something that's been realized by hundreds of referencable customers and we think we can ride out tough times and we think we can grow in amazing times just the same. It's all about our execution.

Thank you both.

(Operator Instructions)

We'll now move to Terry Tillman with Raymond James.

Good evening, guys. I was afraid I wasn't going to get in. Can you all hear me okay?

We can.

Okay. Congratulations on the IPO and the strong results. Rob, the first question, I've read and reread value as a service. You're talking about $300 billion of cumulative spend under management, $100 billion year-to-date, saving over $10 billion for your customers. In terms of a vision question, do you foresee an opportunity where you could get paid for the value you're providing?

Sure. Thank you very much. First of all, I'm humbled by you reading the book and thank you for the question. First off, let me say that the value we're driving for our customers includes savings but also includes compliance, includes visibility, includes access to a understanding of their supply base and how best to optimize that supply base for their ongoing operations as a business. There's a lot more that we do for our customers and with our customers than just the act of actually saving them money.

But it is wonderful to know that underneath it all there is a hard dollar savings that's part of our core value proposition. In today's environment when the customer is primarily used to purchasing an on-premise software product from some of the incumbents, it is a change in their mind set to move to a subscription-based model to begin with. To introduce value-based pricing this early in the game is something that may not be absorbed by the marketplace, but we have over the last two to three quarters seen early indications from perspective customers to look to move more into value-based subscription type approach. They are willing to put a certain portion of their subscription price onto the platform and have perhaps a portion of it at risk based on the value we can both realize together on the Coupa platform.

So the long-term vision? Absolutely. Absolutely vendors like ourselves, software as a service, value service customers ought be paid fairly for the value they are creating customers and it's a matter of change management and a willingness on behalf of customers to embrace that approach and one that we think they will be ready for in coming quarters and certainly coming years.

Rob, I'm curious, though, on the in direct sourcing and the indirect procurement side, you guys have great traction and it's very easy to understand your value prop, but what about direct sourcing and direct procurement? Where are you on that and how much are you interested in that opportunity?

Sure. Well, thank you for that question. We're very interested that opportunity and it's not as well known as we probably like it because we're innovating very, very quickly and expanding obviously very, very quickly. We have a whole host of customers that are processing direct spend through the Coupa platform, some of those marquis names in the world that we're working with on the bleeding edge of using cloud technology for direct spend management. We're approaching it the same way we approached indirect procurement, the same way we approached the expense management, same way we approach every area of our product set, to develop the types of things that are actually get used, develop the types of things that are going to drive the most value for customers and work with the best organizations in the world to design these things and then make them accessible for everyone in our customer base.

Just as it was a little known fact that we do invoicing four years ago, it's now very clear we do global invoicing. It was a little known fact a couple years ago that we were best-in-class in expense management, we're best-in-class on expense management. Just in the came say we're very deep now in direct spend management as well, but for the things that really matter, the things we haven't built yet, we're focusing on doing that with some of the best perspective and existing customers in the world.

Okay, thank you for that. I guess Todd, one last question for you is, that's a big change, though. In terms of fourth quarter you're going to be able to recognize revenue as you're delivering it for the PS? I understand in the third quarter you had a large milestone deal and so $1.4 million, but given this change, why wouldn't sequentially we see up professional services given that you've recognized this business in the forth quarter you're signing, recognize the PS as you're delivering it? Thank you.

Yes, so thanks, Terry. On the professional services front, so the switch for the percentage of completions and new contract signed last year had a very minimal impact in Q4. We signed a customer as we go through planning and scoping but typically the rollout can be anywhere from 30 days to nine months and in some cases a year. We don't expect to see a lot of leverage in the model on professional services in the near term. We actually think it will take about a year for it to completely permeate through our financial model. What our target there is to get the professional services margins to zero to plus 5%, but there will be a change over time. Any contract signed before Q4 will still be recognized under the old method upon customer go live.

Got it. All right. Thanks again. Nice job.

This will conclude the Q&A session. I'll turn it back to Cynthia Hiponia for closing remarks.

Great. Thank you, everyone, for joining us this afternoon and we look forward to updating you again on our next call.

Again, that does conclude today's conference call. Thank you all for your participation.