Coupa Software Inc (COUP) 2018 Q1 法說會逐字稿

Good day and welcome to the Coupa Software first-quarter fiscal 2018 earnings conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Cynthia Hiponia. Please go ahead, ma'am.

Thank you. Good afternoon and welcome to Coupa Software's first-quarter fiscal 2018 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 and plans, 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 Form 10-K filed with the SEC on April 3, 2017. 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 will also present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP 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; and if you'd prefer to access the replay via phone, you can find that information in the earnings release. Unless otherwise stated, growth comparisons are against the same period of the prior year.

With that, I will turn the call over to Rob.

Thank you, Cynthia. Hello, everyone. Let me start today's call with a few much-deserved thank yous. First and foremost, thank you to our valued customers and global partners. A few weeks ago in San Francisco, we held our fifth and largest-ever annual Coupa Inspire '17 conference.

Our customers and partners at the conference brought forth an incredible spirit. We discussed ideas openly, focused on problem solving, and collaborated on how best to jointly maximize value creation. By the time Inspire wrapped up, my Coupa colleagues and I left with a stronger-than-ever conviction towards continuing to drive leadership in the spend management market.

The enthusiasm of our customers and their commitment to our partner oriented model of working together towards common goals is what inspires us, day in and day out, to transform this market. And for that we thank them.

We also want to thank our developing partner community. From around the globe, they share our unwavering commitment to the success of our customers.

And last and certainly not least, and especially in light of our successful follow-on offering in April, we'd like to thank our shareholders for their support as we continue to develop our business and attack the massive market opportunity that lies before us. Thank you all.

As I've noted on prior calls, and on every Company meeting we've had, a key binding mechanism and strong differentiator for Coupa is our commitment to our three core values. As I'm representing all my colleagues all across the world, I'd like to take a moment to review them.

The first is ensuring customer success. This means not just focusing on customer satisfaction or desire for customer success, but ensuring measurable results for each and every one of our customers against any and all challenges that may come.

Our second core value is focusing on results. This means setting specific, measurable, attainable, relevant, and time bound goals and working tirelessly to deliver against them with a strong bias for action.

And our third core value is striving for excellence: committing to an authentic, collaborative, passionate, and high-integrity environment where folks can feel safe in testing themselves, making mistakes, learning, and improving as professionals and human beings.

As always, we remain acutely focused on empowering companies of virtually all sizes and across all industries to pursue their visions of becoming fitter, more efficient, more business effective, and more profitable. Helping them reap the benefits of real measurable business value in their organizations is our vision.

The way we approach this vision can be broken down into five fundamental components for Coupa. The first is addressing spend comprehensively. We don't just think about specific types of spend, one-off business processes that need to be automated, or features that can be reduced with a bit of workload. Our aim is to help companies get their arms around all the different ways they spend money: procurement, invoice management, expense management, and all the power user tools that can help optimize the spend flowing through these collectively exhaustive channels.

The second area is our commitment to a vision of creating a truly open company in our industry. We question whether all companies in our industry are truly open and transparent; whether they are freeing their customers from fiction and removing barriers or building a great wall, or burdening them with [onerous] and unnecessary taxes. Our vision is to be truly open in terms of spirit, in terms of ideas, and in terms of collaboration, and always unafraid to learn from mistakes and take feedback from our customers.

In the past 12 months, we have had over 29,000 visits to our online Coupa customer community. We've had over 1,000 ideas proposed and I'm proud to say that over 150 ideas have already been implemented in code.

This open and collaborative approach has yielded results so far, most notably seen in our strong renewal rates, but also in the granular metrics of Coupa usage. For example, our open platform approach has led to over 80 million monthly API calls and we've exceeded 3 million total suppliers that we've enabled our buyers to transact with.

The third part of our vision is that commitment to our core competency of driving user-centricity. Ultimately, our belief is that the best UI is no UI. The software should revolve around and work for the user, rather than the user laboring at the behest of the software.

In our vision, anything that software can do, it should; only bothering the employee if they themselves can add value to any particular scenario. The advancements we continue to make in our technology are all designed with user-centricity ultimately in mind and are evidenced in part by our learn once, know everywhere approach to the platform. And it's something we've been known for.

Our fourth area of vision is centered around prescriptive intelligence. Over $420 billion of spend is now run through the Coupa platform. We see this as our responsibility to leverage this rapidly growing, aggregated, and sanitized data set for the benefit of our customer community.

At Inspire, we announced our vision of community intelligence and also launched a number of new capabilities available in early access that take advantage of community intelligence. This is just the beginning of our execution around this vision in artificial intelligence.

Finally, our fourth vision area is all about acceleration. We strive to help our customers accelerate their businesses, make decisions faster, and retain agility. We provide them with relevant data, targeted subscription-based reports, and other tools to make faster decisions. We have been devoting Coupa in record time, and we have been leaving our customers with a platform that can easily be reconfigured without the need for detailed code-level efforts. Our customers are deploying the Coupa platform quickly and are seeing measurable results sooner, and their businesses are benefiting from it.

Our vision is to keep improving and improving in this area of time to value, agility, and accelerated outcomes. This is the vision that Coupa is pursuing -- neatly, transparently, and memorably described with each vision area, timelessly committed to the letters in the name of our company, Coupa: comprehensive, open, user-centric, prescriptive, and accelerated. The pursuit of this vision is where our execution comes in.

Now in terms of execution, as evidenced by financial results, I'm proud to say that we kicked off fiscal 2018 by delivering strong results across the board in Q1. We delivered our best revenue quarter in the history of the Company, specifically coming in at $41.1 million, a 41% increase over Q1 of the prior year.

Non-GAAP total gross margin was 71%, and non-GAAP subscription gross margin came in at 80%. As planned, we are clearly starting to see real scale in our operating model, and we could not be more excited about it.

I'd like to take a moment to highlight a few new customer wins. Scotiabank, Canada's international bank and a leading financial services provider in North America, Latin America, the Caribbean, and Central America, and Asia-Pacific, selected Coupa's source to pay solution because of our strong business case and their expectation that Coupa would be best suited to help them achieve the specific objectives they have identified for their spend management project.

Pearson, the world's learning company, with expertise in educational courseware, the technology-based teaching and learning services company, selected our source to pay solution in Q1 to optimize their supplier contract process, enhance user experience, and improve transparency.

Eurofins International Support Services, a global leader in bioanalytical testing and one of the world's leaders in genomic services, also selected our source to pay solution based largely on the fact that Coupa offered a truly organic, unified, cloud-based suite of spend management applications.

Other new customers not mentioned came from a wide variety of industries, including retail, technology, aerospace and defense, healthcare and life sciences, and financial services, including a Fortune 500 financial services company that we expected to close in Q2 but came in much faster than historical norms.

We are proud to have partnered with many new customers this quarter and we can't wait to dig in and help them realize measurable business value. In fact, in some cases, we are already well underway in doing so.

Now just last week, the Forrester Wave, and e-procurement industry report for Q2 2017, was released. And we at Coupa were proud to have received the highest scores of all e-procurement service providers evaluated for the two fundamental areas of current offering and strategy as the key criteria. This is the second consecutive time Coupa has been named as a leader in the Forrester Wave. This ranking is important because it independently confirms our industry standing.

Also a few weeks ago we announced the launch of Coupa Open Buy with Amazon business, an easy way for business, higher education, and public sector employees to quickly search, find, and buy goods, all while the required spending and budget controls of their organizations are applied automatically.

This partnership gives Coupa users embedded visibility and optional, instant access to millions of items beyond the catalogs typically managed by their employer. We are very excited about our developing relationship with Amazon as one of our key suppliers, our valued customer, and now also our partner in the area of Amazon Business.

Now, in terms of developing the Coupa unified cloud platform for business spending, we were recently pleased to announce the general availability of Coupa Release 18, our second major platform update of the calendar year. R18 gives customers more than 50 updates to existing platform applications, all designed to increase the breadth and depth of optimizing spend management processes.

A few key areas of R18 are worth noting. As part of R18, we announced a general availability of Perfect Fit Insights, a new capability that leverages the community intelligence approach I described earlier. Perfect Fit Insights offers automated recommendations along with goal setting and measurement to help customers maximize their operational spend programs based on a comparison to the aggregated and sanitized benchmarks seen from across the Coupa community of users.

We also kicked off early access programs for Services Maestro, an application for managing complex services procurement. And Risk Aware -- Risk Aware is a new community intelligence powered capability that prescribes actions for our customers regarding their supply base. It utilizes the same sanitized, normalized, and enriched, properly classified intelligence we now have about millions of suppliers in the world.

One final item from R18 that I'd like to highlight is the general availability of InvoiceSmash, now out of early access. This application makes invoice processing faster, easier, and less expensive compared to legacy OCR solutions. InvoiceSmash also helps drive improved compliance, data quality, and supplier participation for our customers.

Now as we've described since the time of our IPO last year, we continue to organically develop and carefully evaluate the acquisition of key power user capabilities to integrate with our transactional unified cloud platform.

In April, we announced an agreement to acquire Trade Extensions, a strategic sourcing company based in Uppsala, Sweden. We're extremely excited about the team and the technology of Trade Extensions. The technology platform is used by many of the world's largest brands to run sourcing optimization projects around direct and indirect spend for the most complex categories, including transactional -- transportation and logistics, production planning, and supply chain design.

With the acquisition of Trade Extensions and our earlier acquisition of Spend360 for artificial intelligence-based classification, we are continuing to deliver on the execution plan set out before our public debut.

I'd also like to mention several certifications we obtained. We recently achieved ISO 27001 certification for our information security management system supporting the Coupa spend management cloud. We were also recertified as Built for NetSuite against NetSuite release 2017.1. This signifies that Coupa is able to connect to NetSuite quickly, often within one day, using prebuilt NetSuite connectors, allowing customers to spend less time building and maintaining technical integrations.

Finally, Coupa was certified by the SAP integration and certification center, and also achieved SAP certification as integrated with SAP S/4HANA. While we do not technically require these certifications to integrate with these ERP systems, keeping these certifications current is consistent with our strategy to offer a way to seamlessly work with any and all ERP systems in the market.

So before I hand it over to Todd, I'd like to briefly circle back to the growth strategy I laid out for you last quarter, as we wrapped up fiscal 2017 and kicked off fiscal 2018.

Our execution strategy includes a few key components: first, innovating and further developing our platform. With the release of R18, the general availability of InvoiceSmash, and Perfect Fit Insights and the acquisition of Trade Extensions following the acquisition of Spend360 earlier this year, it's clear we have made huge strides with our technology platform this year to date. We will continue to execute on this strategic objective. The focus is on more and more real value for our customers via the best technology platform in the market.

Secondly, deepening existing customer relationships. We have some key power application add-ons from installed base customers in Q1. We view add-on business as a direct result of the value our installed base customers are getting from our solution, and the continued expansion and strengthening of our overall offering. We believe that the more value we can offer, the greater the likelihood that more value will be sought from us.

Thirdly, growing our global customer base. While many of our key Q1 customer wins came from the US and Europe, we continue to see increased traction in Asia and Latin America, and we continue to make meaningful investments to expand our footprint in these geographies. Our partner ecosystem is key to our global strategy, and we continue to develop and expand these relationships as well.

And finally, our disciplined growth strategy. With a 41% year-over-year revenue increase, we continued to deliver strong top-line growth in Q1. We also saw strong gross margins and narrowed our non-GAAP operating loss significantly compared to Q1 of last year. This is more evidence of the scale we are continuing to see in our operating model.

So with that, let me now hand it over to Todd, who will discuss our first-quarter financials in more detail and provide our outlook for the second quarter and full fiscal year 2018. Todd?

Thanks, Rob, and good afternoon, everyone. We delivered strong results across the board in the first quarter. Total revenues for the first quarter grew 41% year-over-year to $41.1 million, as Rob noted. For Q1, subscription revenues were $35.7 million, also up 41% year-over-year, and comprised 87% of total revenue. Our non-GAAP operating loss was $4.6 million or negative 11% of revenue, compared to negative 34% in the year-ago period.

As noted in prior calls, in Q4 we began using the proportional performance method of revenue recognition for new professional services engagements. And at that time, it was no longer our practice to bill for professional services engagements up front. As a result of these changes, we noted that there was a headwind to calculated buildings for Q2 of this year that we expected to reverse in the second half of this year, and to be roughly neutral for the full year. And that has not changed.

As a result of these changes, there was also a tailwind to our professional services revenue through Q1 of this year, as we are still recognizing professional services revenue upon customer go-lives for contracts signed before Q4 of last year. And in addition, we are recognizing professional services revenue under the proportional performance method for new contracts signed since Q4 of last year.

As a result of these tailwinds to professional services revenue, we recognized $5.5 million in professional services and other revenues in Q1. We expect professional services revenues to go down significantly in Q2, with lower professional services revenues being recognized upon customer go-lives, and while revenues recognized under the new proportional performance method continue to ramp throughout the rest of this year.

Now turning to calculated billings. Calculated billings for the trailing 12 months were $166.9 million, up 40% year-over-year. Total deferred revenue at quarter end was $88.6 million, up from $67.5 million in the prior year.

As a reminder, we define calculated billings as the change in deferred revenue on the balance sheet for the period, plus revenue recognized during the period. Our calculated billings and deferred revenue results often fluctuate on a quarterly basis due to seasonality, timing of renewals, and timing of annual contracted billings.

Let's now turn to operating expenses and results of operations. Our first-quarter non-GAAP gross margin was 71% compared to 60% in the same period last year. Our gross margin improvement benefited from several factors, including higher professional services revenues, scaling of our operations team, maturity of our spend management platform, and better terms from our web hosting provider.

It is also important to note we made significant investments in our support organization in Q1 which will temper gross margins in Q2.

Non-GAAP gross margin from subscriptions was 80%, and non-GAAP gross margin from professional services and other was positive 10%.

Now turning to operating expenses for Q1. Over the past two quarters, we accelerated our hiring across all departments, and that is reflected in our Q1 results and the guidance we are providing.

The net result of our Q1 performance was a non-GAAP loss per share of negative $0.09 on 50.6 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 $238 million, up from $202 million at the end of Q4, which includes $23 million from primary shares sold into secondary and $7.6 million from stock option exercises and ESPP contributions. For modeling purposes, please note we used approximately $41 million in Q2 for the Trade Extensions acquisition.

Cash flows from operations in the first quarter were positive $7.2 million, and free cash flows for the first quarter were positive $5.9 million. Cash flows benefited from favorable working capital balances (technical difficulty) exit in Q4 driven by seasonally strong billings in Q4 and solid execution across the board by the Company.

As a reminder, we define free cash flow as operating cash flow, plus investing cash flows, less the impact of any cash paid for acquisitions.

Now, let's turn to guidance. For the second quarter, we expect total revenues to be between $41.3 million and $41.8 million. This includes expected subscription revenues of between $37.5 million and $38.0 million, and professional services revenues of approximately $3.8 million.

With lower Q2 professional services revenue, recent investments in our support organization, and the addition of headcount from our recent acquisitions, we are expecting Q2 non-GAAP gross margins to be between 67% to 69%. We expect non-GAAP loss from operations to be between $9 million and $10 million. With the Trade Extensions acquisition, we estimate that our Q2 charges for acquired intangible amortization will go up by approximately $1.5 million to $2.0 million per quarter.

We expect non-GAAP net loss per share in the range of negative $0.18 to negative $0.20 per share based upon an estimated 52.5 million weighted average shares for the quarter.

For the full year ending January 31, 2018, we expect total revenues to be between $172 million and $175 million, with non-GAAP gross margins coming in near the high end of the range given for Q2 of 67% to 69%. We expect non-GAAP loss from operations to be between $25 million and $27 million, and we expect non-GAAP net loss per share in the range of $0.49 to $0.53 based upon an estimated 54 million weighted average shares for the full year.

We're not providing near-term targets for cash flows, but we reiterate our expectation to be operating cash flow neutral to positive -- slightly positive for FY18, and sustained free cash flow positive beginning in Q4 of FY18 on an annualized basis.

Please note that cash flows and operating expenses will be impacted by approximately $3 million in Q2 for our annual Inspire conference that took place in May.

To summarize, we are very pleased with our first-quarter performance. We are investing for the long-term, for the disciplined growth strategy to maximize market opportunities and financial results.

Now, we would be happy to take your questions. Operator?

(Operator Instructions). Stan Zlotsky, Morgan Stanley.

You recently acquired Trade Extensions and Spend360, and we heard a number of customer wins on the direct side of the business. Could you give us an update on how that part of the business is coming together? And what parts of your product suite you feel that you still need to build out to really go head-to-head versus some of the other vendors in the direct spend management space?

Sure, Stan. Thanks for the question. So, as you know, our philosophy -- or as you may know, our philosophy has always been to look at spend comprehensively. If you look at the letter C in the name Coupa, it stands for comprehensive. And so the idea is to capture -- help companies capture as much spend under management as possible in all categories, direct and indirect.

Our approach to comprehensiveness is picking off, one by one, the use cases where we believe we can drive a great deal of value around all areas of spend. Those use cases are -- include things like pre-approved spend and procurement, post-approved spend and expenses, ongoing expenditures with invoicing, the ability to do complex spend optimization and sourcing events, the ability to analyze areas of spend that should be targeted but are currently not under management.

So when you look at the acquisitions we made here, they are very much in line with what we discussed before the IPO as our execution plan, which is to continue to focus our energies on developing the organic, transactional, unified cloud platform; and build or buy capabilities like Trade Extensions, like Spend360, like the development of our contracts capability, or supplier information management capability.

With every one of these new sets of functionality, it opens up our opportunity to attack more and more use cases that customers want. So, in terms of traction we're seeing, certainly we're seeing customers that are signing on for the full source to pay transactional procurement and spend management transformation that they'd like to do. And they will be deploying, in many cases, the full suite of our products. In some cases, we'll be entering in with one area or another and then expanding from there.

So, we think we're still very much in the early days. There is a whole host of other capabilities that we'd like to do more broadly in areas we'd like to go deeper and as we execute on this plan.

That's great. That's very helpful. And one more for you. We've heard a lot of your traction on the enterprise. But we also heard -- before the IPO, you guys were really focusing on the midmarket efforts and building out the sales teams there. Could you just give us a quick update on how the midmarket is coming together for you guys? And that's it for me. Thank you very much.

Sure, sure, happy to. Operationally, internally, Todd and I and the team manage our midmarket business and our enterprise business somewhat separately in terms of the metrics that we look at around sales and marketing efficiency, around average subscription price points, around which products we enter in with, and how quickly we begin to deploy those solutions and get customers to value.

And we're continuing to see a very healthy business in the midmarket in terms of volumes, in terms of speed of closure and speed of implementation. And what's very nice to see is that we're seeing different entry points. If you look back four or five years ago, the entry point was typically pre-approved spend. Now, more and more we're seeing the entry point being invoicing or expense management and expanding from there.

So we think we've got a good, healthy business there, and we're managing it carefully.

Mark Murphy, JPMorgan.

Thank you, and I'll add my congrats. So, Rob, I wanted to ask you what the typical profile of an Amazon business customer is looking like. I think we understand that they are typically on the smaller end.

And could you walk us through the Coupa Open Buy with Amazon business, which you launched last month and mentioned on the call, just in terms of how it works? I think, from time to time, Amazon will state that it offers purchasing analytics and business-only price savings. And so we're trying to understand the line of demarcation between Coupa and Amazon, in those cases where a customer is using both environments.

Sure, sure. Fully understood. And I will say that, first off, Amazon continues to be a great supplier of ours, a great customer, and also now a partner in this Amazon Business area.

What we're using -- the partnership really is centered around spot buy purchasing. So there are a host of categories that companies sometimes don't have a supplier relationship for. They may not have catalogs loaded into Coupa. And they may not have a way to offer a user something that they would like to requisition and purchase. And, effectively, the search result may come up blank.

In those cases, we are sending that information over to Amazon Business. Amazon Business will render, in-line within the system, with a very non-clumsy environment, the opportunity to have access to millions of different catalog items that are available through Amazon Business, put them into the Coupa shopping cart, get them approved, and get them purchased.

Now, you'd have to ask Amazon Business specifically their target market, but -- where it cuts off. But obviously it's largely centered around smaller organizations, certainly smaller than the ones we're targeting here at Coupa. We don't see much of an overlap there at all.

But what you get with Coupa and Amazon is access to a wide range of spot buy purchasing options while at the same time having the controls, the cross-company analytics, the workflow, the category analysis and spend analysis capability, the supplier information management capabilities -- all the things that would come with core, cloud-based, enterprise software -- versus what Amazon offers, which is this wide catalog for spot purchasing.

Okay. And as a follow-up, you mentioned Service Maestro, which I think you also launched last month, around procurement of complex services like consultants. And so I'm curious, with the release of that product, do you think it's going to accelerate the spend on services compared to physical goods through the Coupa platform? And also if you could just remind us where does that mix stand today between services and goods?

Sure, sure. So let me start with that reminder, and one of the things that's not typically maybe not as well-known as it should be. Of the $420 billion cumulative spend run through Coupa, more than half of that today is actually services, so we're very much in the services procurement space.

Now, what Services Maestro offers is a way to manage more complex services procurement, such as timesheets and tracking of delivery against service requests, and breaking out the components of hourly rates, and all of the things that begin to matter in the services procurement area.

But we absolutely would anticipate, of course, as that product -- that capability gets out there, more spend running against it. Whether it will change the ratio that I just described, it's hard to tell. But wherever the value is, we're going to try to drive it for our customers.

And then one last one if I may, Todd. You had mentioned -- I'm sorry, Rob -- you had mentioned a win that came in a quarter early with a Fortune 500 financial services firm. But I wanted to ask Todd, is that being mentioned as -- potentially as an indication that sales cycles are shortening broadly across the pipeline as we speak? Or are you mentioning that for us to be mindful that there might have been a transaction pulled forward as we sit down and run our forecasts for Q2 billings?

Thanks, Mark. I would say, anecdotally, we've seen a couple instances where we're starting to see some of the legitimacy from the IPO come to bear. It's early to call it a sustained trend, but clearly we hadn't forecasted that to be a Q1 deal. And when you look at the legal process and usually the back and forth that happens with a Fortune 500 company, it can be prolonged.

And as you would note from our calculated billings for Q1 were substantially higher than where Wall Street was, and that was one of the factors, along with some other things for calculated billings. So we wanted to call that out so that people understood what was happening, but also to give you a sense of what's happening from a legitimacy and how we're being viewed by large global corporations.

Okay, got it. Thank you.

Raimo Lenschow, Barclays.

Congrats from me as well. I start with a question for Todd and then Rob, actually. Todd, you -- just following on on that billings number, how much was the impact from the professional services change on the accounting side for billings in Q1? Because obviously you had a big beat; a contract with one of them. But you had pointed out last quarter that PS will be an issue for the [links]. How much did that contribute?

Net-net, from a change from the calculated billings for professional services, it was definitely a hit to what we would've been if we had been under the [other] method, but the professional services organization -- yes, I can't say enough great things about those guys. They executed extremely well. And the number of go-lives and the revenue that we got from professional services was certainly above where we thought it was going to be.

And from a calculated billings perspective, the professional services did contribute to the beat. And I would say it was maybe, call it, 20% to 25% of the beat.

Okay, perfect. That's helpful. And then, Rob, going back to Stan's question at the beginning in terms of -- compared to other guys, you are still expanding the opportunity organic, but through acquisitions as well.

Can you talk a little bit about your criteria? But also how -- you did some more in AI, and we talked about it last quarter a little bit, just how this whole -- your expansion of the market and how the evolution of AI all fits together. Thank you.

Sure, sure, happy to. Well, first, I think it's worth, as you asked, to just step back to understand the strategy around when and where we would even think about acquiring. As we've always said, a unified, integrated cloud platform for all transactional spend, and doing that organically, is something that we're committed to.

So when you look at all pre-approved spend and procurement, post-approved spend and expenses, and ongoing expenditures through invoice processing -- all of that is unified, organic, cloud platform.

Now, there are power user capabilities, which are capabilities used by a subset of users where we'd consider continuing to build and/or buy. And in some cases, we made some acquisitions here. Now, one of them, of course, with Trade Extensions, allows us to help companies do very complex sourcing optimization which helps them figure out the very best price points, the time of delivery, the material on hand. All the different scenarios you could possibly imagine for purchasing or spending company money can be taken into account.

And that's not something we wanted to invest, nearly a decade and a lot of PhDs to go and develop, when we were able to meet an incredible team that has a very similar culture to ours and a desire to build a great business the way we do. So we went ahead and decided to join forces.

A similar approach was taken with Spend360 around machine learning and AI capabilities for normalizing supplier data that they have run now over $1 trillion worth of normalization of supplier data. So we were able to leverage their experience and also the culture of that team to join forces with us.

Now, what that allows us to do, in the case of those acquisitions and some others that we've thought about, is bring about better insight from all this data that we now transactionally manage for our customers, now more than $420 billion worth of spend data.

And what we've decided to do and we announced very formally at Inspire is launch this concept of community intelligence. And this concept is not just a concept; it's something we're making real within every area of our product.

And we showcased one of those examples, called Risk Aware, which allows us to use the capabilities of Spend360, normalize all of the supplier data across our platform, sanitize that data, aggregate it, and then help each individual customer get smarter and smarter about who they are doing business with, and make decisions around which suppliers they may want to actually stop doing business with because they were not well-regarded by the community or they've overbilled or they've shipped broken goods. Or there are other disputes that our buyers might have had with them.

So this is just one example that we've taken live and is now in early access with Risk Aware that allows us to leverage this community intelligence concept and bring AI to life, not as a buzzword but as a real value-added capability that we can build upon with customers for quarters to come and, frankly, years to come.

Perfect, thank you.

Ross MacMillan, RBC Capital Markets.

My congratulations as well. I have one for Rob and a follow-up for Todd. So Rob, as you start to get success both in terms of the investments you made beyond procure to pay, but in areas like expense and invoicing, as you start to build out these other power user capabilities, what's the best way for us to think about how that is impacting the model?

And I wondered if you had any metrics around contribution from those modules in terms of new ACV, or even in terms of number of modules being purchased per customer today versus what it was a year ago or two years ago. Thanks.

Sure, sure. And I really appreciate the question. And as I've always shared, the idea of thinking about things purely as modules in some ways is a relic of an enterprise software environment where we sold products and we had SKUs or license keys to something. In many ways, we could have 1,000 products or we could have one platform. We could slice it a lot of different ways.

So that's why we shared metrics like -- well, first of all, I would say to you that our annual subscription per customer historically, if we look at it historically, as gone up virtually every quarter. So we've been very pleased with the fact that our customers are seeing value in the overall platform, regardless of how it's sliced.

But the best metric we've found for that is the growth and spend under management. Because that's not just about selling; that's about actually using the platform and getting value out of it. So, as you know, roughly 5 quarters ago we were at, I think, $160 billion. Last quarter, cumulatively, $360 billion. And just now we announced $420 billion.

So you could see an accelerated growth in not just the adoption of our platform by people spending money with us; but adoption by them actually using it, and therefore getting quite a bit of value out of it.

So the best measure that we've been able to find for you to track with us is spend under management, and we're pretty excited about how that's growing.

(multiple speakers) I'll layer on a couple of the specific numbers. The modules or functionality, a couple years ago, was maybe one of the three up front. Now it's two of the three up front, meaning procurement, invoicing, or expenses. Many of the power user apps, which are really just starting to take hold. So, on average, customers will start with one of those.

But I think the key thing is what Rob mentioned, is that the average deal size has continued to trend up, year over year and quarter over quarter.

And then on the other measure obviously is the dollar-based expansion rate. And historically we've said that's been in the 104 to 107 range. And in the past few quarters, it's been in more of a 108 to 110 range. So maybe that gives you a little bit more color.

Yes, that was part of my second question, so thanks for that. Just one clarification. When we talked about the change in pro services billing, I think we talked about a $4.5 million hit in the first half, split about $3 million in Q1 and $1.5 million in Q2.

Did that end up being less because of the success of the pro services organization in terms of revenue upside? So was that $3 million that you thought it might be, a quarter ago, less in reality?

I would say it was more timing. The number of go-lives that happened in Q1 was higher, so we did get some more revenue. We also got some more billings from that. So I think the net impact is roughly the same, but there's just the timing amongst the two quarters.

Understood. Congrats again.

Pat Walravens, JMP Securities.

Congratulations on a great result. So I'm wondering how you are feeling about -- I mean, clearly the quarter was really good -- but just in general, how you are feeling about how your sales organization is scaling up; and whether there are any regions or areas that you feel like still need leadership to come on board.

Well, there's two sides to that coin, Pat. There are days when we feel amazing and there are days we feel like everything could be done better, and that's been like that for 33 quarters now. So there's never a point in time where everything is perfect, without a doubt.

But I will tell you, in general terms, things are scaling quite well. Todd and I continue to manage our sales and marketing efficiency, quarter in and quarter out. We think that we are doing a pretty good job there. We feel like we've got some pretty good coverage now in all the places where we really want to have it. And we're continuing to seek talent in places where we want to continue to expand.

We're not shy in our organization about counseling people out, and we're also not shy about going a little bit faster when we see the opportunity in front of us. But I would say, all in all, we are feeling pretty good and pretty confident and excited to continue into Q2, Q3, and beyond.

Great. Thank you, Rob.

(Operator Instructions). Eric Lemus, Raymond James.

I just had one quick one for you guys. Now that we've passed the conference, and we heard a lot of excitement from customers and quite a few announcements about functionality, products, and partnerships, do you have any early feedback from customers? Whether it be excitement around the new functionality -- or are there any particular items that customers are talking about and more excited about?

Sure, and I'll tell you. Well, thanks for that, and -- I'm not sure if you did, but if folks stayed till Friday, you would have seen hundreds of customers staying late through Friday, getting trained up on some of the new release and some of the latest capabilities we have coming out. And so there's no shortage of enthusiasm, not just about the things coming up; but all the things that are already in their hands that they can begin to deploy for their companies.

I think the biggest areas of great interest across the customer base and prospective customer base is the community intelligence capability that I described earlier. This is something that has really never been done, certainly in our space. Frankly, I haven't seen it done in a lot of other spaces.

We're talking about taking sanitized transactional data, aggregating it, and helping each individual customer in the community get smarter and smarter about the way their company spends money based on the collective intelligence of hundreds of companies and hundreds of billions of dollars in spend.

And so I can tell you, in virtually all the one-on-one meetings I've had and many of the prospect sessions since then, there's been a great deal of interest in that; and great ideas, frankly, coming from our customers on ways we could turn on these capabilities across our suite. So we think we're just getting going there.

Great, thanks.

Joseph Vafi, Loop Capital.

Just following up on Pat's question previously. If we ask the question the other way around, when do you think we may start to see some significant leverage on the sales and marketing spend moving forward?

Well, look, the way we have approached this business has been very much the same for, as I mentioned, 33 quarters and over eight years. One is we continue to have a very disciplined growth strategy. So, the thought about disciplined growth is not something that came up when it was invoked to be -- to watch your cash or vice versa. We've always been thoughtful about disciplined growth.

We've also always been very thoughtful about our sales and marketing efficiencies. We look at our magic number, SaaS magic number; we monitor our LTV to CAC; we monitor overall sales efficiency in both our enterprise as well as our midmarket; and we actually look at it as we enter new markets as well. So sales and marketing efficiency is the second.

And the third is getting scale in our business. As you've seen this quarter, we're starting to see real scale here with our margins and the way our cash flows are working out. So this is how we're going to continue to approach it.

Okay. And then secondly just on Trade Extensions: how should we think about Trade Extensions moving into the revenue line at this point?

This is Todd. It's going to take some time. So obviously when you acquire a company that has recurring revenue, the majority of the deferred revenue gets wiped out at time of the acquisition. And then obviously as new deals happen, with our sales cycles between three and nine months, we will build up the deferred revenue and start recognizing revenue.

So I think from an FY18 perspective, it would be immaterial. But I think you would start to see it in a bigger way in FY19. But we haven't guided to that; and when we get there, we will update you accordingly.

All right. Thank you very much.

That does conclude today's question-and-answer session. At this time, I'd like to return the conference to Cynthia Hiponia for any final remarks.

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

This does conclude today's conference. Thank you for your participation. You may now disconnect.