Coupa Software Inc (COUP) 2018 Q2 法說會逐字稿

Ladies and gentlemen, please stand by we're about to begin. Good day, and welcome to the Coupa Software Second 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.

Thank you. Good afternoon, and welcome to Coupa Software's Second 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 most recently filed Form 10-Q. These forward-looking statements are based on our beliefs and assumptions today, and we disclaim any obligation to update any forward-looking statements. If this call is replayed after today, the information presented may not contain current or accurate information.

We'll also present both GAAP and non-GAAP financial measures. A reconciliation 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 prefer to access a 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'll turn the call over to Rob.

Hello, everyone. Thank you for joining us today. So let me start today's call, our fourth earnings call as a public company, by thanking our valued Coupa customers around the world. I continue to be amazed by the commitment I see from our customers toward our partner-oriented model of working together to unleash huge values for their organizations and really helping us transform the spend management industry in the process. Thank you also to our ever-strengthening and expanding global partner community, especially for continuing to share in our unwavering devotion to the success of our customers. And of course, thank you to our shareholders for their support as we endeavor to push the boundaries in information technology and explore new methods of value creation, all in the name in winning in the massive addressable market that lies before us.

As is our custom, I'd like to take a moment on this call to reflect on our companies' 3 core values. We're now more than 800 employees strong. Amidst this aggressive pace of growth, we have new employees joining seemingly every day. Our core values are extremely vital to our success, and it's essential that our new employees understand these values as well as they begin to interact with customers and execute on our vision in the field. It's also imperative that our seasoned Coupa colleagues keep these 3 values fresh and top of mind. I also feel it's important for us to be extremely open with our customers, partners, shareholders and potential future shareholders about these values which inspire and motivate us every single day.

The first is ensuring customer success. And by this, we mean not just focusing on customer satisfaction or our desire for customer success but ensuring measurable results for each and every one of our customers against any and all challenges that present themselves.

The second is focusing on results, which means continually setting specific, measurable, attainable, relevant and time-bound goals, and working relentlessly to deliver against them with a strong buy attraction.

And last but not least, striving for excellence. Committing to an authentic, collaborative, passionate and high-integrity environment, where folks can feel safe in testing themselves, making mistakes, continually learning and improving as professionals and human beings.

Let's touch momentarily on the market opportunity we're going after here at Coupa. The spend management market is massive, and we've only just begun to address it. As part of this, we've asked ourselves, "What is the vision we ascribe to, which gives us confidence that we'll win this market and that keeps us on the right path in our efforts to do so?" At our Coupa Inspire conference in May, we showcased the following simple and measurable way to think about our vision: C-O-U-P-A: comprehensive, open, user-centric, prescriptive and accelerated. We take these 5 visionaries very seriously, well beyond a way to market ourselves. Along with keeping our core values top of mind every day, we continually explore, test and execute on these visionaries. Most importantly, we do so in a framework of real business activities.

For example, how is this particular new feature enhancing or detracting from user centricity? Are we accelerating our customers' path to increase profitability by suggesting that this new business flow is as practiced and we should be using it? These are just 2 examples.

Last Monday, I kicked off a blog series where I examine each of the vision components of COUPA. These blogs can be viewed at coupa.com/blog.

Just earlier today, I released a third blog in this series on the topic of O, openness. We at Coupa are committed to creating a truly open company in terms of spirit, ideas and collaboration. We need to always be unafraid to learn from mistakes and take feedback from customers, suppliers and partners. My blog today examines the topic in more depth, and I hope you'll take a look at this and the other blogs in the series as I believe we are tapping into some new and very compelling thought areas. As always, if they pique your interest, we welcome your thoughts.

We find the COUPA vision components to be an effective tool for execution, but at the end of the day, the only thing that matters is creating enormous value for our customers and making them hugely successful. The rest will follow.

That I can tell you.

With that, let's take a look at some financial results. I'm proud to say that we delivered very strong results across the board in Q2. This includes record quarterly revenues of $44.6 million, a 43% increase from Q2 of last year. Last quarter in Q1, we drove positive operating and free cash flows. I'm excited to say we did so again in Q2, ending the quarter with positive operating cash flows of $9.2 million and positive free cash flows of $8.1 million. As of July 31, we continue to be in a strong capital position with $208 million of cash. We showed breadth and depth in our financial performance for Q2, and Todd will discuss this in more detail momentarily.

Now let me highlight some key new customer wins for the quarter. Unilever, a Fortune 500 company and household name with 2.5 billion customers replaced their legacy systems by selecting Coupa source to order. Their decision was primarily based on Coupa's user-centricity, functional fit, ability to integrate seamlessly with other software platforms, and value-driven business case, some of the foundational visionaries that make up COUPA.

Also, Glencore, one of the world's largest global diversified natural resource companies, selected Coupa also mainly also due to our user-centricity, robust functionality and our ability to accommodate a global platform rollout in an accelerated and highly effective manner.

We added many key customers across various verticals and geographies, including FlexTrade Systems, Mineral Resources Limited in Australia, QuikTrip, Harley Marine Services, Opendoor Labs, Costcutter Supermarkets, Amerisouce Industrial Supply, American National Insurance Company, Armanino and many others. We're excited about all our Q2 customer adds, and we thank them for choosing to partner with us.

Now I'd like to take a moment to touch on a key metric, cumulative spend under management. Cumulative spend under management is a figure that we monitor carefully and report on frequently as one of our key metrics, but I want to dig a little bit or this quarter. For those of you not familiar, we define cumulative spend under management as the aggregate amount of money that has been transacted through the core Coupa platform for all customers collectively since we launched our platform. Explained differently, it's the sum of all purchase orders, invoices not backed by POs and expense reports that have been cumulatively transected in our system.

Now in Q2, we reached a very significant milestone, surpassing $500 billion in cumulative spend under management. To be clear, this does not include any activity from our recent acquisitions of Spend360 and Trade Extensions. In and of itself, $500 billion is an incredible amount of spend activity. You can imagine the type of value we're driving for our customers by funneling this volume actively through the platform. But something I find especially noteworthy is that 1 year ago, the cumulative spend figure was $255 billion. This means that cumulative spend under management going all the way back when we started from the bottom roughly a decade ago has nearly doubled in just one year. This is clear evidence that the volume of spend activities we are capturing is accelerating at a scorching pace.

So what does all this cumulative spend under management we've been able to capture do for us? Well, simply put, there's power in numbers. As we unlock these vast quantities of data, we become infinitely smarter and flexible, and our platform becomes progressively more powerful as an instrument of execution for each and every one of our customers.

In the past, I've discussed the concept we call community intelligence. Community intelligence means that we at Coupa are leveraging the supremacy of our true cloud platform and the power of our entire customer communities to help individual customers optimize the way they spend. Today, customers are using Coupa's advanced community intelligence applications such as Perfect Fit Insights and the Risk Aware to improve decisions, accelerate the pace of business, and reduce risk in ways never before possible in our industry.

Community intelligence is one concrete example of how the most of data we're now fortunate enough to be surrounded by help us to deliver incremental value to our customers. And there is much additional power and leverage in this data which we are just starting to tap into.

Moving on, I'd like to highlight some fantastic industry analyst recognition we received this quarter. In July, we were named one of today's leading global AP automation providers in the 2017 Global AP Automation Report published by PayStream Advisors.

In June, Coupa's travel and expense management capabilities were profiled in a Gartner report on how modern travel and expense management applications can improve the end-user experience and add business value for organizations.

Also in June, Coupa was named in a Billentis report entitled E-Invoicing/E-Billing 2017 as one of the forward-thinking companies that provides disruptive, next-generation technologies to digitize paper-based systems.

We're also extremely proud to say that Coupa was recently selected by the Great Place to Work Organization as a Great Place to Work.

Our company culture is an expression and the result of many things, including the level of energy, professional stimulation and motivation of self and exuded by our employees. Our culture, which is grounded in our core values, influences the way we interact with customers and do business. And in reviewing the detailed certification of results, there were certainly a lot to take pride in as well as areas where we look forward to continuing to strive for excellence. I'm thrilled that Coupa earned this designation in Q2.

Now with regard to our technology platform, we're excited about the upcoming release of R19, which we plan to announce for general availability next month at Inspire London '17. By way of sneak preview, here are a few of the many things we're focused on with R19.

First, prescriptive traveling expense management benchmarks and recommendations created by leveraging Coupa's community intelligence; streamlined invoice management usability, including a further enhanced user experience for suppliers plus invoice audit and compliance capabilities; and improved efficiency and compliance with more agile travel and expense management, and various other synergies and enhancements across the entire Coupa unified cloud platform for business spending.

On last quarter's call we discussed the then just-released R18, which gave our customers more than 50 updates to existing platform applications, plus the general availability of Perfect Fit Insights and Invoice Match, and early access programs for Services Maestro and Risk Aware. I'm happy to say that R18 has been incredibly well received by our customers.

Now also, as discussed on previous calls, we've made some key business acquisitions in calendar '17, including Trade Extensions and Spend360. We've already begun to see positive results and feedback from our customers on the additions we've made. They serve as a great testament to the strategy we outlined during our IPO process of building and, in some cases, acquiring power user applications around our core unified transactional platform, which is driving now hundreds of billions of dollars of spend.

More recently, I was pleased to announce the appointment of Chandar Pattabhiram as Chief Marketing Officer of Coupa. Chandar brings over 23 years of experience in technology companies including Marketo, IBM and Accenture. At Coupa, Chandar will be managing all aspects of marketing, including demand gen, corporate marketing, product marketing and industry marketing as well as, of course, leading our global marketing strategy. We are thrilled to welcome Chandar to the team.

In summary, at Coupa, we, our customers and our partners believe that we are well on our way to creating a distinct, value-driven organization built for the long term. A company that's driving measurable customer results and quickly becoming the gold standard in our space, built with a unique culture and capturing an ever-growing wealth of data to be leveraged for the benefit of our growing customer base.

We're also excited to announce that Coupa will be hosting its first financial Analyst Day on December 11 in New York City. Details will follow in the coming weeks, but we're looking forward to having the entire executive team further detail our growth strategy for fiscal 2019 and beyond.

Now let me turn it over to Todd Ford, who will review the financial details of the second quarter and provide our outlook for the third quarter and full fiscal year. Todd?

Thanks, Rob, and good afternoon, everyone.

We delivered strong results across the board in the second quarter. Total revenues for the second quarter grew 43% year-over-year to $44.6 million. For Q2, subscription revenues were $39.8 million, also up 43% year-over-year and comprised 89% of total revenue.

Our non-GAAP operating loss was $5.7 million or negative 13% of revenue compared to negative 31% 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 upfront. As a result of these changes, we noted that there would be a headwind to calculated billings for Q2 of this year and that we expected it to reverse in the second half of this year and to be roughly neutral for the full year, and that has not changed.

And with this is a backdrop, total calculated billings for the trailing 12 months ended July 31, 2017, were $182.8 million, up 36% year-over-year. Total deferred revenue at quarter end was $95.8 million, up from $72.1 million in the previous 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 second quarter non-GAAP gross margin was 71% compared to 65% in the same period last year. We are continuing to invest in professional services and support organizations, but we are pleased that our gross margins have continued to show scale year-over-year. Non-GAAP gross margin from subscriptions was 81%, and non-GAAP gross margin from professional services and other was negative 9%.

In Q2, we continued to invest in all departments and took the full impact of approximately 50 new employees and contractors from our recent acquisitions. We also renewed our office lease at our worldwide headquarters and added additional space, now occupying the entire building. In Q2, we also expanded our office in Pune, India.

As a reminder, our Q2 results also include approximately $2.5 million of net expense related to our annual Inspire conference that was held in May.

The net result of our Q2 performance was a non-GAAP operating loss of $5.7 million and a loss per share of negative $0.10 on 52.7 million weighted average shares. Given that we are in a net loss position, all outstanding stock options and common stock equivalents are antidilutive and not included in the loss per share calculation.

Now let's move on to the balance sheet and cash flow. Cash at quarter end was $208 million, down from $238 million at the end of Q1. That includes the impact of approximately $39 million net used to fund the Trade Extensions acquisition in Q2.

Cash flows from operations in the second quarter was a positive $9.2 million and $16.3 million year-to-date.

We'd also like to note that operating cash flows were positive on a trailing 12-month basis for the first time, well ahead of our original projections.

Free cash flows for the second quarter were positive $8.1 million and $14 million year-to-date. Given the seasonality in our business, we are expecting operating cash flows to be negative in Q3. As a reminder, we define free cash flow as operating cash flows plus investing cash flows minus the impact of any cash-based acquisitions.

Now let's turn to guidance. From the third quarter, we expect total revenues to be between $44.8 million and $45.3 million. This includes expected subscription revenues of between $40.8 million and $41.3 million, and professional services of approximately $4 million. We are expecting Q3 non-GAAP gross margins to be between 67% to 69%. We expect non-GAAP loss from operations to be between $5.5 million and $6.5 million. We expect non-GAAP net loss per share in the range of negative $0.10 to negative $0.12 per share based upon an estimated 53.8 million weighted average shares for the quarter.

For the full year ending January 31, 2018, we expect total revenues to be between $177 million and $179 million, with non-GAAP gross margins coming in near the high end of the range given for Q3 of 67% to 69%. We expect non-GAAP loss from operations to be between $25 million and $26 million. And we expect non-GAAP net loss per share in the range of $0.48 to $0.50 based upon an estimated 53 million weighted average shares for the full year.

To summarize, we are very pleased with our second quarter performance and the continued leverage we are seeing in our financial model. Our strategy remains the same. We are investing for the long term with a disciplined growth strategy to maximize market opportunity and financial results.

Now we will be happy to take your questions. Operator?

(Operator Instructions) We'll take our first question from Stan Zlotsky with Morgan Stanley.

So first one, just wanted to focus on the partner ecosystem. The work that we've done with talks with partners, and it certainly sounds like they're really struggling to keep up with the volume of work that they're seeing, which is a great problem to have. So how are you thinking about your partner ecosystem? What are you seeing there? And then I have a quick follow up for Todd.

Well, thanks, Stan. And as many may be aware, we started thinking about building an ecosystem or systems integrated around us many years ago as a way to build into our business and have been thoughtfully and carefully certifying partners along the way so that we can build up a lot of folks in that ecosystem who know how to configure Coupa, how to implement Coupa, know how to shorten the change management challenges that may come with any kind of implementations of software, and we're really excited about how that continues to scale. We've now certified nearly 2,000, actually, folks around the world, and many of these system integrators. And we're hoping they can continue to keep up because the customer demand is there and there's a great interest in the value proposition that we offer.

Got it. And a quick follow up for Todd. On the big billings that you guys put up in the quarter, is there anything that we need to keep in mind for this one? Is there something big onetime that hit in the quarter, any maybe duration extensions or billing term changes or anything else like that, maybe FX?

Yes, thanks, Stan. I appreciate the question. There are basically 3 things that drive our billings. And one is net new ACVs, one is renewals, and the other is professional services. And the company executed really strongly along all 3 of those lines. And in particular, I'd like to call out our CSM team who really ran the table on the renewals. They really did a fantastic job in Q2. The only thing I would call out potentially is a onetime thing. And the upside to the billings is we did get additional billings from Trade Extensions more than we had originally forecasted from the opening balance sheet. So I would say that perhaps that $2 million of the calculated billings was related to Trade Extensions, but everything else was really related to solid performance across the organization.

Next question comes from Mark Murphy with JPMorgan.

So wanted to ask you, is there any way to approximate the mix of business that is coming from the T&E side where you've had some really strong reviews lately? And realizing that it is an integrated platform that it may be difficult to kind of pinpoint that, but is there any way to try to illustrate the scale of adoption specifically on the T&E side?

Well, I would tell you that there's no question in our minds that the customer -- the customers have signed on. And many of the prospects that we've continued to see quarter in, quarter out, particularly over the last, I would say, 3 to 4 quarters, are really understanding our vision of the C in COUPA, which is comprehensive, a way to have a pre-approved spend, post-approved spend an, ongoing spend, all in one transactional platform. So a great deal of interest continuously -- we come in here and look at our go lives on a weekly basis and constant go lives coming in from any one of those 3 areas. We've got a great deal of innovative and very interesting capabilities in the expense management area that have drawn a lot of interest, and we continue to see folks subscribing to the full platform story rather than thinking about one point visionary or another over the latest feature set.

And as well, could you comment on the departure of Tom Aitchison? I think it was a few months ago. Just how does it change the go to market? Any structural changes to the sales teams as a result?

Sure, Mark. Over the course of the last 8 or 9 years, with every talent decision we make, we make it very, very thoughtfully, involves some consultation with other members of the management team as well as the individuals that may be departing or being counseled out themselves. We never want to be in a position where we're reacting to anything happening in our business. We always want to be in a position where we're proactive and thinking ahead about where we want to take the company for long-term success. So Tom had transitioned from the company, frankly, a couple of quarters ago, and our new CRO, Steve, has been in the seat for, I guess, over 3 quarters now and continuing to both up-level our talent base and help take us into the future.

One last one, if I may. On the macro, just to the extent that your platform could be viewed as maybe a small-scale macroeconomic indicator similar to [EDT,] what is your sense of the case of purchase orders, invoices, anything and everything that is -- that may be flowing through your platform and sort of the exit trajectory of that coming out of the quarter?

Well, look, I mean, if you look at over $500 billion in cumulative spend, and a year ago, it's $255 billion, that really speaks volumes to the acceleration of adoption. While, obviously, the amount of spend running through our system and the amount of adoption, the amount of outcomes, the amount of value creation is, of course, is correlated with our revenue success. It might not be drawn as a square root of one, but they are obviously equivalent. So that means that we're becoming stickier, we're driving more value, there's acceleration in the amount of adoption we're seeing in all transactional areas. And that's not slowing down, and that's obviously accelerating. So this is our way of thinking about building a long-term business. It's not about, "What have you closed this quarter this quarter or last quarter?" It's about, "Have we driven a lot of customer value? And is that customer value accelerating quarter in, quarter out?" And we're seeing that, and we're excited about it. And I would add as well that one of the incredible outcomes of having hundreds of billions of dollars in transactional spend and accelerating is the power of community intelligence that we're now beginning to bring to the marketplace, the ability to look across all of the data sets in real time and provide insight to each individual customer. I'd liken it to the way many of us use Waze to navigate through traffic using community intelligence to do the most optimal thing as it pertains to spend. And we're in the very early innings of that.

The next question comes from Raimo Lenschow with Barclays.

Rob, can you just -- 2 quick questions from me. First, the $500 billion spend under management, obviously, a huge increase. And I know you're not going to monetize that as like some of your competitors -- or directly try to monetize as your competitors try to do. But can you talk a little bit about the importance of having that number go higher? Is that kind of -- like do I think about it correctly as an attraction to more suppliers to the platform because you have more spend under management? Or how do you see that as kind of a selling point for you?

One of the greatest challenges in this broader space is that people have tried to get help companies manage their spending through electronic mediums, to get them off of paper and phone calls and faxes and maverick spending that happens all over the world that isn't seen, visualized and optimized. And by having them employ our technology platform to manage that spend, they're able to actually have normalized data in front of them. They could see where people are buying things, where they're ordering things, are they paying the right price points. And they're able to then fine-tube their business to route that spend to negotiated rates that either we get to them through Coupa Advantage or they negotiate themselves. And what we've seen is customers saving anywhere between $0.01 and $0.10 on every dollar that they're running through Coupa. So the value is enormous when we can begin to apply the intelligence of that data set from across the entire Coupa collective, for the needs of each individual customer becomes a very, very impactful platform. Obviously, it interacts suppliers, around more than 3 million suppliers that we're helping our buyers transact with. Obviously, it interacts buyers because they see the value being created. And obviously, it helps our business grow because we're being paid fairly in the middle. So we see it as a way to do something that really hasn't been done before, and the data, both in the financials and in the spend metric, are good examples or some symptoms of how that's progressing.

Perfect. And then the -- and I will follow-up for -- on that one. So usually, where -- I seem to remember from my good old German days it's kind of -- it's a big SAP customer, and I know you don't want to talk like too much about the competition. But can you talk a little bit about like we had Caterpillar. A couple of quarters back, Unilever. Can you talk a little bit about how your vision kind of is coming across obviously better than some of what of the guys are trying to sell?

Well, I appreciate that. I mean, I think it's both the reality today as well as the vision that's resonating with customers like Unilever, Caterpillar and others. First of all, in order to be able to play in that type of dynamic, you have to be seen as a legitimate organization that's grounded in strong financials. And as I mentioned in the previous earnings calls, the fact that we're now public and we have a strong track record is a line that you simply have to match. It's an ante to be able to play in that type of environment. But then, when you're looking at your options if you're one of these types of consumers, you're looking at what's on the ground and the platform being offered, the team that's going to be deploying it and the vision. We think we have a very strong team and a strong culture. We think we have one of the best products, if not the best product in this area. And we have the vision that you referred to. And our vision is to have a collectively exhaustive way to address all spend areas. We're the only players that are doing that on one unified platform. We have an open network concept that doesn't charge suppliers, that doesn't increase purchases for suppliers. We're the only players that are really doing that. We're the most user-centric in terms of our application design. We're offering prescriptive insight through the community intelligence that I talked about. And we're focused on getting customers up and live in an accelerated fashion, getting them live quickly so they can recognize the benefits of having a spend under management. And I think when you compare that to some of the incumbent offerings, even though this is a very large market opportunity, it seems to be that companies like the ones you mentioned are choosing us, and we're proud to partner with them.

Great. And last question for me. Todd, on the cash flow side, you're performing really, really well. Can you talk -- you mentioned Q3 will be negative. But can you talk a little bit about the -- does that kind of change your outlook of cash flow going forward? How do you think about like after the 2 strong quarters you have?

Clearly, we're ahead of -- our original projections could be operating cash flow mutual to slightly positive by the end of Q4. It all starts with billings, obviously, as we talked about earlier, and then our collection team has obviously done a fantastic job as well. So I may -- in operating cash flow perspective, we're not going to provide specific guidance for the year, but we definitely expect to be higher than the breakeven to slightly positive for the year now just given the performance in the first half of the year. I would expect that for Q3, the operating cash flows are negative on order of magnitude of $4 million to $5 million, and then that would improve in Q4. So we clearly have line of sight to free cash flow breakeven on a trailing 12-month basis, but it's too early to commit to that right now.

Next question comes from Ross MacMillan with RBC.

Rob, maybe for you to start, just on Unilever. I noticed you called it source to order versus source to pay. I was just curious if there's any nuance there that we should think about. And I also think that Trade Extensions already had Unilever as a customer. I was just curious if that had any influence on their decision and whether you think that could be a catalyst that combine Coupa-Trade Extensions' offering for either other companies in CPG or other industries.

Well, I'd say, more broadly, it never hurts that there's an existing relationship with a company that we may have acquired along the way. But I don't think that's the key to this. I think the key to customer pursuits such as Unilever and others is that they're buying into our comprehensive vision. I mean, that is the C in COUPA. The desire to have one transactional platform for pre-approved, post-approved and ongoing expenditures that is easy to use, and at the same time, having power user applications around the periphery that help you optimize that expense flow. In this case, they were already working on sourcing optimization, spend optimization with Trade Extensions, and they'll have the opportunity to leverage that even more broadly. Look, the outcome of any sourcing event is the need to make the purchasing against that concluded contract happen in the transactional system, and that's what we're really strong in offering. So I think it's a proof point of a alignment with our overall marketplace vision that we've been talking about well before the IPO, but certainly, during the roadshow and the last 4 quarters.

Great. And then 2 quick follow-ups just for Todd. Just on the contribution from Trade Extensions. You mentioned about -- up to $1 million in billings. Can you just help us understand the mix between revenue versus deferred for that incremental? And then I didn't hear you give a net retention rate. I think you said renewals were strong. I wondered if you had that metric.

Yes. So on the upside on the calculated billings, the opening deferred revenue, approximately $700,000 of that, and then several -- there's a few hundred thousand dollars of actual revenue that flowed through the financial statements with respect to Trade Extensions. And then the second question?

Just on the dollar, net retention rate.

Yes. The gross and the net retention rates were virtually unchanged quarter-over-quarter. So on a gross basis, at the high end of our historical range of 90% to 95%. And on a dollar-based expansion rate, still [close to the amount of] $104 million to $107 million, and then lately, it's been in the $108 million to $110 million range. And it's at the high end of that range and ticked up very slightly in Q2 to versus Q1.

Next question comes from Brian Peterson with Raymond James.

So I wanted to hit on Amazon. I know there a partner of yours, but I've gotten a lot more questions than I would've expected on them being a potential competitor down the road. So can you talk about your relationship with them today and how you think that may play out over the coming years?

Well, sure. Amazon is very close to us in a number of ways. And first of all, they're obviously a very good customer of ours. They're running billions and billions of dollars to our platform. Very proud of the ability to shove them through all kinds peaks and troughs like Amazon Prime and ongoing spend through Coupa. They're also a great supplier to us. We're on Amazon and AWS, and continue to buy a range of our businesses and drive our entire platform on Amazon. Thirdly, they're also a great partner of ours. We've recently announced Coupa Inspire, our partnership around the Amazon Business. So for certain areas of spend where customers of ours do not have negotiated rates and they'd like to default purchases Amazon Business when search results are otherwise null, we would actually go and route those to Amazon Business to Coupa business, which is wonderful. We see a lot of great [proximity] with Amazon, and we think we can coexist with them in the space for quite a long time. Their focus areas and areas of their business is a bit different than ours, and it's frankly -- both synergistic.

Got it. And maybe one for you, Todd. Just on the gross margins, down a little bit sequentially in the fiscal third quarter. What should we think be thinking about is driving that sequentially?

In Q2, I would say it was mainly our investment in people. So we called out the headcount that we absorbed from the recent acquisitions, and you couple that with other headcounts that we hired in Q2. Q2 was actually our largest quarter ever for net new hires, including acquisitions. So your CMS flow through the P&L will have the full-quarter impact of the new hires outside of the acquisitions. And we continue to invest in our support infrastructure and our professional services team as well and also our ability to support our partners.

Next question comes from Pat Walravens from JMP Securities.

Rob, circling back to community intelligence. What's sort of the biggest challenge or impediment to applying machine learning in your business?

One of the biggest challenges in the space of doing what we're starting to do for our customers is, first of all, having all of your data -- your customers working off of one code line, which we have, right? So if you've got separate data models out there for each and every one of your customers and, in some cases on premise, in some cases in the cloud, and other methods, then it's very hard for you to pull that data up, get it normalized, get it properly classified and make sure it's well enriched, and then use that insight for the individual customer's leverage. What we've done is, first of all, we have one code line. We have a redundant table scheme for each customer, but our table structures are very much the same for each customer. We're using some of the capabilities from Spend360 to, not only pull that data up, but actually normalize it, properly classify it. And then we're using additional third-party sources like our acquisition of Riskopy and some work we're doing organically to enrich that data. Once it's enriched, then we can begin to use it for the benefit of each individual customer. And we're doing that today with the Perfect Fit Insights. We're doing that today with Risk Aware, which is a supplier intelligence capability based on community intelligence. And we see the opportunity to do that in a whole host of other areas. The beauty of the challenge that you described, Pat, is that we don't fake the hurdle that you would take from that area if you weren't set up to do this from the ground up. And we're been thinking about this for more than 8 years. We've set up our contracts to be able to do this. We've set up our technology platform to be able to do this. And we're on the early stages of making it a real long-term capability for all of our customers.

Okay, that's great. And can I just ask, is there any way to think about the size of the opportunity around doing this for you guys?

Well, if you think about the power of having the insights of hundreds of billions of dollars of spend; companies across every major vertical in a horizontal environment; companies that are large, medium and small; insight to ground; how they should operationally run their businesses; how they should -- what supplier they ought to be working with and what suppliers they may consider not working with; what price points they should be paying or not paying. You get very quickly to a very, very compelling situation. And what's most profitable about it, Pat, is that it creates a massive barrier to entry to our business because if you're a customer and you're thinking about how to optimize your spending, you could go live on an island thinking about features and functions or you can join the Coupa Community and leverage the community intelligence we're creating to your benefit and be smarter, faster, more nimble and more operationally efficient in your industry than your competitor. And I think that's very powerful. How that'll play itself out in terms of revenue to us in years to come and broadening the market opportunity, we'll see how it plays out and we'll, of course, keep you posted quarterly and on an ongoing basis.

Next question comes from Joel Fishbein with BTIG.

I just had a follow-up question to -- which was previously asked. And speaking of partners, David indicated that you've got some momentum in larger company activity. Obviously, you talked about a few today, including Unilever and some others. Rob, do feel like you're in an inflection point with the replacement of legacy vendors? Or -- where are we? Are we past the education phase and moving into more dedicated buying patterns?

We're definitely seeing a great deal of interest from the largest systems integrators, for the first question that was asked. There's no question about that. I mean, we're on par with some of the large SaaS or cloud vendors in terms of the dedication and tiers that they're putting us into. So I do think we're largely through a lot of the early education, but it's still a ground game. You have to make sure that you're in with the partners and the individuals that have the deep relationships with customers around the world so that they take you in. I think what we're past is educating on the fact that we're viable, legitimate, highly referenceable and ready to deliver value for their relationships and their clients. I think as we see some of the sun setting of both on-premise solutions from incumbents come to bear, we want to be in a position where we have the folks on the ground, we have the support on the ground, we have the platform on the ground to be able to deliver for these large customers, these large multinationals for many years to go -- to come. So that has to do with some of the investments we're making, some of the efforts we're making in the field. But we think we're very well positioned to capitalize on what's happening, both with the sun setting that we talked about as well as the depth of relationships with the SIs that we're developing.

I guess, a quick follow-up then. So Unilever, Caterpillar, et cetera, again even I think the -- a lot of guys in Inspire. It seems like these are all just going to use cases that you'll be able to use going into other vertical markets as well.

Absolutely. But we don't have to report to just on those 2 or 3. We have hundreds and hundreds of customers, and many of which, I hope, you had a chance to see at Inspire that were proud enough to hold up signs tens of millions of dollars that they've saved, the value that we've created for them and some really amazing brands across every vertical from technology to financial services to health care to oil and gas to large multinational organizations, mid-market companies, private companies, public companies. So every one of our customers is very, very important to us, and we obviously look for strong references in each one of these areas so that the next customer, #2 and 3 in that vertical or size or sub-vertical will be less inclined to concern themselves with long RP processes and evaluations and would rather spend that time implementing our solutions quickly, getting a lot of value, paying us fairly and helping us build our dreams.

Next question comes from Joseph Foresi with Cantor Fitzgerald.

So it seems like you're ahead of schedule here on the P&L and the cash flow statement. I was wondering, you didn't seem to raise guidance by the same amount. Can you provide a little more detail on the disconnect? I know you talked about seasonality and the cash flow. And how should we think about 4Q?

Yes, so there is seasonality in the business. And if you look historically from a billings perspective, Q4 and Q2 have definitely been the 2 strongest quarters followed by Q3 and Q1. And the billings has a compounding effect since almost all of our contracts are 3 years, they renew at the same time as to when they were originally signed. So from a billings perspective, you will see on an absolute dollar basis that billings will drop in Q3 and then in Q1 because of the seasonality and obviously, billings impacts cash flows. So in Q3, we've noted that we expect it to be somewhere -- operating cash flows negative 3 to 5. And then in Q4, I would expect it to improve on a quarter-on-quarter basis, and on the next call, I think I can give you more much more granular detail on that, but in general, it should improve just given that Q4 is our largest billings quarter of the year. And one of the things I would call out that we've done in the past and for which -- it provides some operational flexibility is making opportunistic spot buys that we would have more positive long-term impact to our operating margin. So we've done that in the past. Last year, in Q3, we've made a large purchase with respect to reserve instances with our web hosting provider in which -- and they're to our benefit throughout this year. So we want to maintain that flexibly as well.

Got it. And can you talk about any potential areas you might be looking into outside of the community intelligence? Any particular vertical or geography that's now starting to stand out from a demand perspective?

Well, there's maybe 2 questions there. Do you mean in terms of -- we're looking at in terms of acquiring companies? Or you mean in terms of where we place investments from a go-to-market perspective? What were you referring to there?

Yes. I'll take both. But if you're trying to look into one, that's okay, too. I was actually thinking more on the demand side, from a demand perspective. Not so much on the M&A, but color on both would be great.

Sure, sure. Well, if I start on the M&A piece, it's very much a strategy we've laid out earlier. I'm happy to take both. In that area, we talked about owning the transactional core, procurement expenses and then working -- remaining organic. And there's a whole host of areas in terms of power user capabilities that we are constantly on the lookout for if we find the right teams, if we find the right deals, if we find the right opportunities to go after there. So everything from what we've done in sourcing, in contracts, in inventory optimization, supplier information management to other areas like -- of that nature are always interesting to us. In terms of go-to-market, look, there is a huge demand globally for using information technologies to optimize the way companies spend money. So it's about where we put our energy and efforts. And the we've done this to date is gone into certain areas of the world, created strong referenceable customers and then leverage the power of that referenceability to land customer 2, 3, 4, 5, 50, 100 and move on. And we've done that in areas of Europe, we've done that across the United States, we've done that in Canada, we're beginning to do that in Latin America, we're beginning to do that in Australia and across APAC. And we think that as the years go on, the quarters go on and the years go on, we should be getting much more of those bets to we place on the periphery playing out for us. We're still very early in Asia. As you may know, we're still quite early in Latin America. So this picture may look very different if you go out a year or 2 as some of the bets we're making in those markets begin to deliver for us.

Got it. And I'll sneak one more in. Maybe you can just talk a little bit about the hire in the marketing department and what that might mean for your future.

Well, as I was talking about talent before, we're always trying to make sure we have the right people, well ahead of when we would need them, so that we could build out the next phase of our company. We had the opportunity to meet Chandar and felt that he was a great cultural fit himself, that his experience really fits in with the vision that we're planning for the company long term. Spend a lot of time -- he's spent a lot of time in the next-generation marketing, digital marketing. He has a very strong mindset around storytelling as a way to evangelize and offering the value proposition which, frankly, is very much in line with mine. And so, we wanted to take this opportunity bring on the next level of talent for us for the coming years, and we're excited to have them join us. It's a very promising position to the executive team.

Next question comes from Robert Breza with Northland Capital Markets.

Rob, 2 questions. One, I was wondering if you could talk about sales productivity/capacity. And then two, I think you mentioned in your commentary that R18 had 50 updates. The way to think -- I was wondering if you could give us just a thought around how to think about R19 next month. I mean, do you think this is going to be the biggest release ever or -- just some additional color on the next release next month.

Sure, sure, sure. Happy to do that. So in terms of sales productivity, sales and marketing productivity, we continue to run the business focused on 3 key areas. Obviously, a greater than 30% revenue growth, focusing on sales efficiency, and then showing bottom line scale in the business, but particularly in terms of cash flow. When you think about sales efficiency, when we're as efficient as possible, given the opportunity to invest in some of the longer-term growth areas that we're targeting, obviously, that includes our mid-marketing programs, it includes some vertical-focused marketing in retail, health care, financial services, and other areas where we want to continue to develop key references. It gives us the chance to invest in new regions where we know the payback may be a little bit longer, gives a chance to get involved in some of these larger, multinational company-type deals that frankly require a bit of global upfront investment in order to be able to be on the ground to deliver for them not only on a pre-sell cycle but beyond. And of course, our continuing to up-level our go-to-market team, continue to up-level our sales professionals, not only through our own internal certification and training, but also through hiring and counseling out those that are aren't able to cut it. So that's how we think about sales productivity and sales efficiency. It's 1 of the 3 areas, and when we have the opportunity to do so, we afford the opportunity to invest for the longer term in that area when we could afford it. In terms of R18 updates, I think that we're known in the industry as being very customer-driven, innovation-driven. And what we try to do is get updates out there that aren't just marketing fluff or just something that is going to -- will be in the press, but things that actually are going to get used. And we monitor how well our customers use these updates. So the 3 -- the 50 additional features that I mentioned was down from hundreds and hundreds and hundreds of enhancements that were voted on by customers and then distilled down by our product management team, down to the types of features we think will get used and will be developed in a way that they have a lot of configuration flexibility. So in many ways, you could call them hundreds of features, if you want, depending on how they're actually being configured for individual customers. We're excited about R19. It's got a lot of very interesting new capabilities. I don't think it's going to be something that is -- something that changes the -- massively changes the trajection of our company, but I think it'll be the next incremental release that will have a lot of key capabilities both our customers are interested in seeing and our product management team believes are going to get wide adoption and wide usage, and frankly, will continue to separate us from our overall value proposition from many of the incumbents or other folks that might be navigating around this space.

The next question comes from Joseph Vafi with Loop Capital.

Wondered if we could talk a little bit about sales and marketing spend. I think clearly, there's a long-term payback that's going on here in terms of your customer acquisition cost. But just wondering if there's going to be some leverage in that line item at any time in the foreseeable future, and maybe perhaps a little bit more color on where that's going these days in enterprise versus the middle market?

Well, yes, as I mentioned earlier, I mean, I think when you think about sales and marketing efficiency, it's along these measures for us, right? We want to make sure that we're maintaining this rapid growth rate. Not overstepping it, but maintaining this rapid growth rate of 30% plus, which we're -- obviously, we're well above at the moment. And maintaining the sales efficiency that gives us the right to make some of the investments that I talked about. Some of the investments are longer-term opportunities. They don't pay back in a moment. When you enter a new market, such as Asia, for example, or Latin America or you start running a high-volume mid-market program, those have a payback period to them that we have -- or are affording to make because of how efficient we actually are in some of the core markets where we're operating. So that's how we think about sales and marketing efficiency. But rest assured, we look at it very, very carefully from an operating perspective internally. We're looking at our sales and marketing efficiency for mid-market, we're looking at our sales and marketing efficiency for enterprise, we're looking at it on a trailing 12-month basis, we're looking at it on a quarterly basis. We're breaking it out to understand what portion of that is discretionary marketing, what portion of that is actual headcount that isn't easily changed. And quarter in, quarter out, we make these determinations around the type of headcount we're ready to take on in Q3 and Q4, quarter-over-quarter. And we've been doing that now for 34 quarters in support of the chance to build our way into business, establish a very strong renewal rate, a very strong LTV to tax. And we think it's the makings of a very valuable business for the long term.

And it appears there no further questions in the queue. I'd like to turn the conference back over to management for closing remarks.

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

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation, and you may now disconnect.