Coupa Software Inc (COUP) 2018 Q4 法說會逐字稿

Good day, everyone. Welcome to the Coupa Software Fourth Quarter Fiscal 2018 Earnings Conference. Today's call is being recorded. At this time, for opening remarks, I'd like to turn the program over to Nicole Noutsios. Please go ahead, ma'am.

Good afternoon, and welcome to Coupa Software's fourth quarter conference call. Joining me today are Rob Bernshteyn, Coupa's CEO; and Todd Ford, Coupa's CFO.

Our remarks today include forward-looking statements about guidance and future results of operations, strategies 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 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 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 IR website. A link to the replay of this call will also be available. And if you 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'll turn the call over to Rob.

Hello, everyone, and thank you for joining us. I'm proud to report that in Q4, we delivered our best performance in company history, producing excellent financial and business results across the board to close out fiscal 2018. Revenues, calculated billings, cash flows and margins all came in very strong. And for the first time, we were non-GAAP net income positive. I believe that our results for the period are a testament to the strength of our company culture and the ever increasing, highly differentiated Value as a Service that we're delivering for our customers.

Let's talk about our opportunity. In December, we held our first-ever Analyst Day at the NASDAQ market site in Times Square. The theme of the day was our path to becoming a $1 billion revenue company. During our presentation, we laid out the key strategic drivers that we are focused on as a company in fiscal 2019 and forward.

First, driving enterprise and mid-market customer expansion and global sales capability. Secondly, expanding global brand awareness and demand generation. Third, developing and expanding our partner ecosystem. Fourth, acquiring key assets to broaden our value proposition. Fifth, launching innovations to drive a greater share of wallet. And finally, and perhaps most importantly, cultivating a winning, core values-driven culture.

As I've mentioned in all our company -- public company earnings calls to date, our core values are ensuring customer success, focusing on results and striving for excellence. These values serve as our organizing principles and unite us together in everything we do as we aggressively pursue our substantial market opportunity. And by our calculations, our total addressable market has grown to roughly $37 billion. Executing on these growth drivers and unified by these values, we intend to continue tackling our massive TAM one customer at a time in both taking market share and developing the business spend management market in tandem.

As we track our progress, one nonfinancial metric we monitor closely is the spend under management we are driving for our customers on the Coupa platform. We believe this to be a key metric because with each transaction, our data grows and our platform gets smarter, and that benefits all our customers. In fiscal 2018, we increased lifetime cumulative spend under management from $365 billion to $680 billion. And we expect to surpass $1 trillion this fiscal year.

There is now no doubt that this vast accumulation of transactional data has evolved into a significant and fast-growing competitive moat for us while also translating into prescriptive and instantly actionable community intelligence-based value for our customers.

And speaking of customers, let me now highlight some exciting new customer wins in Q4. Lululemon selected Coupa's Source to Pay, Expenses and several power applications based on Coupa's demonstrated commitment to success, cultural fit and proven track record in the retail sector. Bass Pro Shops selected Coupa's Source to Pay based on our proven ability to drive value across organizations with many distributed lines of business. And Grupo Bimbo, the world's largest baking company based in Mexico City, selected Coupa's Source to Pay as the best fit to manage spend across its complex and diverse global operational infrastructure.

Some of the other valued customers we added during the quarter include Qatar Airways, Farmers Group, American Water Works Company, Jobvite, Canadian Imperial Bank of Commerce, or CIBC, the Co-op Group, National Grid, National Gallery Singapore, Exabeam, American Zinc Recycling Corporation, Grupo Dasa and San Mateo County libraries right here in our own headquarters' hometown of San Mateo, California.

But of course, signing a new customer is only the initial phase of our partnership with them. The next step is a successful deployment. With that, I'd like to call out a few recent customer go-lives. NASDAQ is a leading provider of trading, clearing, exchange technology, listing, information and public company services across 6 continents. NASDAQ went live in Q4 with a global deployment on Coupa's Source to Pay. Their primary objective with Coupa is to better control spend through pre-approvals and standardized purchasing activities.

DoorDash is a technology company that connects people with their best local businesses by facilitating door-to-door delivery and other services. DoorDash went live on Coupa Procure-to-Pay in a rapid deployment of just 10 weeks, a good example of our platform's agility and our ability to partner with customers around assertive goals. DoorDash engaged Coupa to better manage their rapid growth and address visibility and control into spending.

Razer Inc. is the world's largest -- world's leading gaming lifestyle brand. The company is dual headquartered in San Francisco and Singapore. Razer is a pioneer of e-sports and has built the largest gamer-focused ecosystem of hardware, software and services. Razer implemented the Coupa Expenses solution for their offices in the U.S., China, Hong Kong, Taiwan and Germany.

From signing to go-live to many years of ongoing success, and I mean very many, we at Coupa are focused on working side-by-side, hand-in-hand with our customers to deliver Value as a Service over the long term. This is achieved by continuously ensuring customer's success, which, as you know, is one of our core values.

Let me share an example of that value in action. Just last month, our longtime colleague, Ben, was promoted to Solutions Architect Director. Several employees here at Coupa remarked that Ben is always acutely focused on customer success, never tiring or losing his positive attitude, consistently applying a driven, meticulous, results-oriented approach to each project he takes on. And he has taken on dozens and dozens of projects over the years. Truly living our core values is one of the ways we differentiate from others in our industry, and the difference is palpable to our customers.

So now let's talk about our platform. I'm excited to share that it continues to grow in both breadth and depth. From a financial perspective, just 3 short years ago, over 75% of our new subscription revenues came from our core procurement applications. But today that figure is less than 50%, with more and more coming from expense management, invoice management, supplier information management and a host of other key offerings. From a products perspective, in Q4, we launched our most recent major release called R20.

R20 addresses supply chain risk reduction through Community Intelligence, management of complex services spend with Services Maestro and a fresh approach to early payment discounts with Coupa Accelerate. Overall, R20 added more than 50 new features across the platform, covering areas such as e-invoice compliance capabilities in additional countries, expense management trip pre-approvals, contract request pre-approvals and the ability to screen suppliers against government-restricted lists, and much, much more.

As you'd expect, delivering incredible solutions requires a results-oriented approach. This is where our core value of focus on results comes into play. Let me give you another example. A few years back, our mobile engineering team recognized the incredible opportunity for Coupa on Android. Our colleague, Aaron, was obsessed with delivering a stellar app for our Android users, so he led the effort to encode an unprecedented user experience. Each time a new iOS feature is rolled out, he ensures the same enhancements are made available in Android shortly thereafter. It's this very personal, specific level of commitment to our customers, born out of our values, our core values, that helps us continue to set the bar.

And setting the bar is what we're out to do. In that vein, let me now mention a few industry accolades that we were recently proud to receive. In January, IDC released its first-ever MarketScape report for worldwide SaaS and cloud-enabled procurement applications. Coupa was named the leader, as shown on IDC's well-known 2-dimensional chart, receiving the highest ranking for both evaluated dimensions. Those dimensions being capabilities and strategies.

Also, last Monday, IDC released its MarketScape report for travel and expense management, and we were proud to be recognized as a leader in this area as well. We were also honored to win the 2017 Innovative Sourcing Technology of the Year category at the annual PayStream Advisors awards competition. On behalf of my Coupa colleagues and myself, we warmly thank all those in our industry who have taken the time to fully understand our vision and support it.

Now, one previously discussed component of our growth strategy is to consider acquiring key assets to further expand the depth and breadth of our offering while simultaneously investing heavily into organic R&D. Continuing our execution in this strategic area, in December, we announced our acquisition of Simeno, based in Basel, Switzerland. Simeno's team has deep domain expertise in advanced catalog management and will help us continue our quest to provide the most open platform in our industry. The acquisition also increases our local presence in key German and Swiss markets. We are very excited about our new colleagues that have joined us from Simeno.

Overall, I'm very pleased with our business progress and the financial results we generated during the quarter. Before I hand the call over to Todd for a detailed breakdown of our financials and guidance, I'd like to take a moment to thank our growing and highly valued community of customers, partners, analysts, industry friends, and of course, my Coupa colleagues around the world. With common purpose and shared values, we can continue to maintain and be prosperous.

With that, let me hand it over to Todd.

Thanks, Rob, and good afternoon, everyone. As Rob noted, Q4 was a breakout quarter for the company and that is reflected in our financial results and key metrics. Total revenues for the fourth quarter grew 41% year-over-year to $53.8 million. For Q4, subscription revenues were $46.6 million, up 38% year-over-year and comprised 87% of total revenue.

Professional services revenues were $7.1 million, of which approximately $2 million was onetime in nature, representing the last instances of professional services revenues that were being deferred and recognized upon customer go-live. As a reminder, we transitioned to proportional performance in Q4 a year ago, and engagements signed prior to that were deferred and recognized upon customer go-live.

Our non-GAAP operating income was positive $884,000 or 2% of revenue compared to negative 6% in the year-ago period. Calculated billings for the year were $224 million, up 40% year-over-year. In Q4, calculated billings benefited by approximately $3.5 million related to a few customers that renewed early who would have normally renewed in Q1. Total deferred revenue and backlog at year-end was $359 million, up from $259 million a year ago, representing a year-over-year increase of 39%.

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. Further, we define backlog as future noncountable amounts on multiyear contracts that we are not yet contractually able to invoice. Until these amounts are invoiced, they are not recorded in revenues, deferred revenues, accounts receivable or elsewhere in our consolidated financial statements and are considered by us to be backlog. Our calculated billings, backlog 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 fourth quarter non-GAAP gross margin was 73%, similar to a year ago. Non-GAAP gross margin from subscriptions was 82%, and non-GAAP gross margin from professional services and other was positive 18%, benefiting from the onetime professional services revenues in the quarter which I noted earlier. Driven by our strong Q4 revenue performance and leverage in our financial model, we delivered non-GAAP net income of $1.4 million and income per share of $0.02 on 62 million diluted shares.

Now let's move on to the balance sheet and cash flows. Cash at quarter-end was $413 million, up from $219 million at the end of Q3. This includes $200.4 million net cash from the convertible bonds we issued in January. Cash flows from operations in the fourth quarter were negative $1.7 million and positive $19.8 million for the year, well ahead of our original commitment to be breakeven to slightly positive for the year.

Free cash flows were negative $2.6 million for the fourth quarter, which excludes $6.5 million for the Simeno acquisition, and were positive $15.3 million for the year or a positive 8% of revenue for the year, again, well ahead of our expectations. As a reminder, we define free cash flows as operating cash flows plus investing cash flows minus the impact of any cash paid for acquisitions.

Now let's turn to guidance. In February, we adopted ASC 606. Our guidance incorporates the impact of the adoption of this new standard. In Q1, we expect a one-time write-off of approximately $2 million of deferred revenue with the adoption of 606. With that factored in, we expect a calculated billings growth rate of approximately 36% on a trailing 12-month basis exiting Q1.

For the first quarter, we expect total revenues to be between $51 million and $51.5 million. This includes subscription revenues of between $46.5 million and $47 million, and professional services revenues of approximately $4.5 million. In addition to the impact of 606, Q1 subscription revenues will be negatively impacted by approximately $1.5 million because we recognize subscription revenue based on number of days in the quarter, and there are 3 fewer days in Q1 as compared to Q4.

We expect Q1 non-GAAP gross margins to be between 68% and 70%, which reflects the impact of integrating the Simeno acquisition we completed last December. We expect non-GAAP loss from operations to be between $5.5 million and $7 million. We expect non-GAAP net loss per share of $0.11 to $0.13 on 55.8 million weighted average shares for the quarter.

For the fiscal year ending January 31, 2019, we expect total revenues to be between $227 million and $230 million, with non-GAAP gross margins in the range of 70% to 72%. We expect non-GAAP loss from operations for the year to be between $11 million and $14 million. As a reminder, our sales and marketing expense spikes in Q2 by approximately $3.5 million due to our annual user conference, which will be held in San Francisco this year from May 6 to May 9.

For the full year, we expect non-GAAP net loss per share in the range of $0.23 to $0.28, based upon an estimated 57.2 million weighted average shares for the year. We are not providing specific guidance for cash flows, but we expect free cash flows to be up year-over-year both in terms of absolute dollars and as a percentage of total revenue.

To conclude, our strategy remains unchanged. We are building our go-to-market engine for long-term sustainable and profitable growth. We have a disciplined approach, as reflected in our sales and marketing efficiency metrics and cash flow margins, as we continue to show operating leverage. And we are focused on winning this large and growing market opportunity that lies before us. Now, we would be happy to take your questions. Operator?

(Operator Instructions) We'll hear first from Stan Zlotsky with Morgan Stanley.

Maybe just I'll start off with a question for Rob. Really an outstanding way to finish the year. When you look at the performance that you saw in Q4, what really -- was there a couple of things that you could highlight that really stood out in your mind as the key drivers to your performance in the quarter?

Sure, Stan. Thanks very much for the question. Good to hear from you. I would say if I had to frame it, I'd put it into 2 buckets. One that we've been talking about on these earnings calls for some time, which is the legitimacy that we are continually gaining in the marketplace and how that continues to move us from the early adopter phase of years past to the early majority and into the heart of the market. And I think when I look at some of the sales cycles we had and some of the ways in which our prospective customers engage with us over the course of the quarter, that greater legitimacy and being seen more as really the leader, as most of the industry analysts have called us out to be, is being felt in sales cycles and being seen on behalf of our prospects, and that is very much a wonderful thing to see and it's helping us.

I would say the other side of it is the execution of our team and the core values that I talked about and the willingness to do whatever it takes, not only to close business but to align with our prospective customers on the measurable results that we want to deliver together with the use of our platform and our best practices and their know-how of their business and locking in on measurable success criteria and then going and driving it. So again, 2 things: our establishment in the marketplace as a leader and wider recognition of that; and secondly, the continued step changes we're seeing internally around our execution and our focus with our customers. That's how I'd frame it.

Perfect. And then a quick follow-up for Todd. Todd, when you look at setting a guidance for fiscal year '19, any changes to the way you'll approach the process versus what you've done in prior years? And that's it for me.

Thanks, Stan. Our guidance strategy hasn't changed. We continue to make investments across the organization to support our model of 30%-plus sustained growth while continuing to drive leverage in our cash flow margins. Our initial guidance implies 26% growth in subscription revenues and roughly flat growth year-over-year in professional services revenue, primarily driven through the lack of incremental professional services revenue from customer go-lives in FY 2019. And similar to last year when our initial guidance was well below 30% revenue growth, we'll update our numbers and guidance accordingly throughout the year based on execution.

We'll hear next from Mark Murphy with JPMorgan.

Todd, I'm curious how many suppliers are on the network at year-end. And do you see that long tail of the smaller suppliers continuing to grow a lot in the coming years? Or are we essentially going to reach a point where you've already attracted kind of that entire long tail onto your network and it sort of remains consistent?

Mark, if you wouldn't mind, I'm happy to take that first. Our vision, as you all know, for the company is to help organizations get smarter and better, using information technology to apply to the problem how they spend money. So our primary focus is on the spenders. And because we've selected that as our vision and because our value proposition is tied directly to that vision, we've been picking up millions and millions of suppliers on to our platform in terms of how we interact with them. So we didn't actively go out and have an internal target that says we'd like to get to 3.5 million or 4 million suppliers or something of that nature. That continues to grow organically because their own buyers are inviting them and folks are understanding that this is a very low-friction way of doing business. So it's hard to say whether or not that's going to grow to 5, 7, 8, 9 or 10, but I can tell you it's not one of the metrics that we're overly concerned about. Our focus is largely around helping organizations spend smarter, optimize the way they spend money, help them get value out of every dollar their company is spending.

Okay. And Rob, as well, is it possible to separate out the company's specific execution strength in Q4 versus potentially any broader uplift in the demand environment? And what I mean by that is do you sense CFOs or CIOs or purchasing managers moving ahead any more quickly because of tax reform or any other macro factor?

I would have small sample sets but nothing that I would feel is statistically significant enough to go call it out. When I -- interestingly enough, right in front of me, I have our sales force instance up and I can see all the deals that we closed last quarter, and some were the typical kind of 3- to 4-month cycle in the upper mid-market, some were big enterprise deals that actually took over a year, some big enterprise deals that took -- here's one for 190 days or something. So I don't think we have enough of a data set. And definitely we don't have enough of a statistically significant argument to support or refute what you're putting forward.

Okay. The final one for me, Todd, you have this goal out there for over 30% sustained top line for 5 to 7 years, and then the guidance for this year is coming in at 23%. And I heard the prior comment that you made. I just wanted to clarify, is any of that, any material amount of that spread being impacted by adoption of 606? Or is anything unusual about this year? Or is it sort of the typical conservatism that we've seen from you over the years?

I would say our guidance strategy hasn't changed. I mean, clearly, there is going to be some revenue impact from 606. We're basically writing off $2 million of deferred in Q1 because of 606. And while it's less than $1 million on a quarterly basis, it's well over $1 million for FY '19, so there's definitely some impact there. And then clearly, on the professional services revenue perspective, last year we benefited from some customer go-lives in addition to the professional services revenues that were being recognized on a proportion of performance. So, I mean, it's small numbers. It's a few million dollars, but I think it's consistent with our strategy of let us execute and then give us credit for it.

And from Barclays, we'll move to Raimo Lenschow.

Rob, can you talk a little bit about what the acquisition of Simeno will do for the international build-out? I mean, a lot of U.S. software companies struggle as they go to Continental Europe. Now you've kind of acquired a -- it looks like a really nice starting point and a nice base to have there. Can you help me understand a little bit how you kind of go about it in terms of the international expansion from there?

Sure, sure. If you look back, Raimo, at kind of the way we've grown the business over the last 9 years or so, it's always been in an organic fashion. We typically don't go into a new environment, put a lot of people in and wait for the payback to come in a longer period of time. We do this organically. We put a few folks into a given environment, we land some key marquee, highly referenceable accounts. We make them highly successful in a measurable way, and then we leverage that success to grow and expand. And we're continuing that mindset as we enter new and emerging markets.

Now, in the case of Simeno, there are 2 components that are of interest to us. One component is just the domain expertise in what we call advanced catalog management. And this is really part of our overall vision to provide an open platform in our industry and to support the value proposition I was just discussing with Mark. So that's one thing. The domain expertise in that area is very important to us. And secondarily, they happen to have a local presence in German and Swiss markets where we've hired organically, but why not pick up the opportunity to have new folks join us, who ascribe to our common set of values, who are already present in those markets, who have some very interesting interactions with customers and prospects in those markets? And together, we can develop the business around that. I'm actually very much looking forward to visiting them here the week after next and many of the members of the team here have been in Switzerland and the team has come here. We already don't feel like they are some sort of acquired entity. They are very much part of our Coupa colleagues here and we're excited to build the business with them.

Perfect. And then, the other question I had is like as you think about flat professional services in '19, but really, the overall business keeps growing nicely. So that, to me, suggests that the system integrators are getting on board even more than before. Can you talk a little bit about what you're seeing in the SI market around Coupa?

Sure, sure. And maybe we'll -- both Todd and I can address this because it sounds like it had a -- the question was broad but also had some potential financial implications to it. So we are seeing continued momentum with the large systems integrators. There's no question about it. There is a whole host of relationships that the systems integrators have with prospective customers all over the world. And I think it's fair to say there's a very strong feeling of safety in working with Coupa and that we're able to get customers to meaningful, measurable value in a rapid time frame, and that working with us will be something that they would look very well to continue to promote.

We're continuing to certify folks from each of these systems integrators on Coupa. In fact, in some markets, in some areas, we're trying to go as fast as possible. We almost don't feel like we have enough ability to certify fast enough, and we're catching up to doing that. So the relationships are very healthy, they're robust, they're growing. And each of these folks are putting real, measurable professional services revenue targets that they'd like to build out for themselves working around the Coupa platform. So very healthy.

And then from a financial perspective, Raimo, first, we've never looked at professional services as a growth driver of the business. But over the next several years, I would expect professional services revenues to increase because we're still providing customer oversight. We're still making a big investment in that organization. So I would view FY '19 as more of an anomaly than a long-term trend.

We'll hear now from Joel Fishbein with BTIG.

I guess, Rob, I have a question just on pipeline and deal sizes. Any qualitative information you can give us there? As it appears larger customers are adopting here quicker. Any commentary there would be helpful.

Sure, sure. Thanks for the question. One of the things that's very important to us is that we continue to grow the business by tying the value that we have -- that we offer to our customers with the recurring subscription revenue that will continue to build up, preferably for forever with these customers. So this is very, very important to us. Now one of the things that I will tell you, qualitatively or quantitatively, the average annual subscriptions we're seeing from our customers continues to go up. And when I look back over the last 36 quarters, it's virtually every quarter, not every quarter, that continues to go up. And now that goes up again, commensurate with the value that we're offering to customers. With every quarter, our platform is more robust. Our best practices of deployment is stronger. Our ability to tie their success metrics and lean back on existing customers, where we've either stumbled or done something very, very well, learn from the stumbles and accelerate the things that we've done well. So that's a very healthy metric for us that we track and it's trending very much in the right direction, no doubt about it.

And we'll move now to Ross MacMillan with RBC Capital Markets.

So Rob, you commented on spend under management, and I think your number was $680 billion, which incrementally means over $300 billion in the year, which I -- by my math is orders of magnitude larger than your biggest competitor on an incremental spend under management, which is obviously super impressive given your scale versus theirs. And I was just curious, obviously there are a lot of drivers to that, but I was interested in your take on kind of what you think the primary drivers are on that. And then also we're seeing the take rate, your subscription revenue on that spend going up. And I'd love your thoughts on what's driving that as well.

Sure, sure. Thanks very much for the question. As we said, I think it was in our first earnings call, 6 calls ago, the one nonfinancial metric that we really care about and we wanted to keep you all apprised of quarterly is this spend under management measure. Because it's such a strong leading indicator to the kind of adoption that we're seeing across our customer base and the pace of that adoption. And I'll tell you, there are a couple of things that play into that. One, of course, is the pace of the wins, right? So you have to have customers that subscribe before you can begin to implement them. So greater wins, more wins, more robust wins, more sort of aspirational projects that attempt to take on big, big categories of spend, whether it be indirect, direct, long tail, across services and products. All that plays into that. So wins is a big thing.

Categories of spend expansion is a big thing. So you have customers that have done very, very well with us. They've addressed their goals for year 1, 2, 3, but maybe in year 4, 5 and 6, they're tackling even harder-to-reach categories in highly distributed organizations, where they just simply weren't able to get at those categories before. Now, through highly user-centric technology that is very intuitive, that has gotten very, very sticky across the organization, empowers our buyer to get even more aspirational about the categories they can undertake. So that's second.

And third is simply go-lives, just the pace of go-lives. And we have dozens and dozens of go-lives happening here on a quarterly basis. And so as they go live, more spend begins to run through. And it is a very rewarding thing. And I appreciate you calling it out. But when you say $680 billion cumulative, but just at the end of last year, it was roughly half of that. So this is accelerating. And for us, it's something to be proud of because it's a leading indicator to the value that we're delivering for our customers. And that feels very healthy.

That's great. And Todd, maybe a quick one for you. I heard you on the early renewals on billings. Should we assume most of those would have fallen into Q1? And then I guess, as we are thinking about calculated billings for Q1, we should include that as well as the deferred write-down on our math?

That's correct. Those were definitely Q1 renewals that renewed in Q4. And part of that was upsells and expansion within those accounts, so a lot of times they'll do them all at once. But yes, definitely the write-off related to 606 and then the quarterly renewal boundary would be something that will impact Q1 calculated billings.

We'll go next to Joseph Foresi with Cantor Fitzgerald.

I wonder if you could just maybe break out for us again any thoughts about expenses in the upcoming year? I think you talked about in your initial remarks a couple of items and then the Q2 conference. But maybe if you could just point to a couple of different expenses lines that we should be building in for CapEx.

For CapEx or the other operating income?

I'd take both if you wanted to.

Okay. I thought you said CapEx. From a CapEx perspective, we can hit that first. Obviously, very low CapEx requirements at Coupa. Typically, on a quarterly basis, it's somewhere between $1 million and $1.5 million, so I wouldn't say there's anything material there. And then when you look at the other expense lines, in Q1 we noted a pickup in some of the cost of sales related to the Simeno acquisition as a fair number of that headcount hits cost of sales, and we'll have a full quarter impact from there. But other than that, on a cost of sales perspective, we're going to continue to hire people in our professional services organization, our support organization, et cetera. So I would view that as kind of normal run rate expense increasing.

We're continuing to invest heavily in R&D. And particularly in the first half of this year, we're going to be more aggressively hiring R&D people as compared to historically. Sales and marketing, kind of the same thing. That's something we actually look at on a quarterly basis and adjust based upon what we're seeing in the market, how we've performed. Certainly, from a G&A perspective as a percentage of revenue, I would expect you to see that come down in the second half of FY '19. We've just recently gotten through SOX, 606, a lot of M&A activity last year. So G&A expenses were definitely higher last year as a percentage of revenues than I would expect it to trend over the next several years.

Got it. And then maybe you could just highlight for us a couple of areas of growth and maybe you can do it in 2 different categories: geographically and then from a functionality standpoint. I know you talked about, I guess, it's R20. So maybe you can give us some color on both those areas.

Sure. So maybe I'll take the functional first and this is something we've shared over time, but I think it's important that you understand the underlying strategy, which is an organic transactional engine that's collectively exhaustive in terms of all spend areas, which includes procurement, expenses and invoicing. Something we're continuing to go deeper and deeper into to address virtually any permutation of spend across those 3 different spend approaches. And then a whole host of what we call power user applications, applications that wouldn't necessarily be used by everyone in the company but will be used by certain individuals to help get more and more value out of that ongoing spend and able to optimize that ongoing spend. So we continue to make strides in our spend analytics engine, our contracts life cycle management, contracts collaboration capabilities, our supplier information management capabilities, our inventory management capabilities and much more. And we're looking forward to sharing a lot more of what we've done and what we plan to do with this strategy at our upcoming Inspire Conference here during May.

In terms of geographic expansion, we started, again, historically in the United States, expanded into all areas of Europe, and then more recently have been going into emerging market areas, both north of us in Canada, down into South America, certain areas of South America and in APAC, Australia and areas around APAC, specific countries where we can land those initial key marquee accounts and build our business around that. And both strategies around product depth and breadth and expansion as well as geographic depth and expansion continue to be areas that we execute on and monitor quarterly and carefully so we're getting the best bang for our buck in terms of our expenditures and delivering the best future for the company.

And from SunTrust Robinson Humphrey, we'll hear from Terry Tillman.

Rob, I guess, the first question is, in terms of community intelligence, post the quarter or postmortem, have you been able to look at some of those larger deals, some of those signature wins and some of these new country markets or even in the U.S. and see how relevant analytics and your all's emerging strength in analytics and community intelligence had to play in the deals? And where are you potentially in a monetization cycle with community intelligence?

Sure, Terry. Well, thanks for the question. This is an area that's very exciting for us and an area that a lot of our energy is focused on because we just see the opportunity so clearly in front of us. There's no question that some of our large deals as well as mid-market deals across geographies had a component of understanding on behalf of the prospect about what we have done in community intelligence and what we are planning to do in community intelligence. We have this really once-in-a-lifetime opportunity to take this huge, multi-hundred billion dollar transactional spend data store and normalize and sanitize data to distill insights that can be made available to individual customers so they can all get smarter and smarter about the way they employ their spending.

And we are doing that today in a host of areas from operational prescriptive community intelligence to key domain community intelligence, around suppliers you should or shouldn't work with, around areas of operations that you should fine-tune or make quicker or better. So absolutely, this vision, as well as the reality of what we've created to date in our releases, is something that our prospective customers and now many of our customers are not only using but are engaging with. And we think we're just at the very, very beginning of that.

In terms of how that plays out from a monetization perspective, again, our strategy has always been to be paid fairly for the value that we are delivering. So the more value we deliver to our customers, the greater the likelihood we'd be able to command the right price point. And so we can dissect these things into many different products and charge that way or we can charge as part of our platform for community intelligence. We've got a whole host of different ways that we're doing that. And again, I'm looking forward to sharing more about this at Inspire. But very much at the tip of the iceberg of what's possible for us.

That sounds good. I guess, Todd, just one for you, not to keep you out of this. One of the things that we've been watching is to see some of the purposeful investments and focused investments in mid-markets, make that a very repeatable business as opposed to just orders coming in. And I may not be articulating that perfectly right, but in terms of the investments you're making to create more volume and velocity in mid-market, where are you and are you seeing some fruits of the labor there?

I'm going to let Rob take this one.

Yes, sure. No, I'm happy to take it, and I appreciate the question, Terry. So let me break that also a little bit in 2 parts. I would say in terms of the things that we're doing, we absolutely are focused on, number one, being able to better identify targets in every sector, but let's talk about that sector. So much smarter about specific industries and sub-industries where there's a higher likelihood or propensity to work with us. We're getting better at that. We're getting much better at formulating our overall packaging strategy so that, that prospective customer is more likely to need or desire the things that we offer and packaged properly. We're also are getting much better at the best practices deployments for those types of customers because they tend to be a little bit more streamlined than a more -- a large enterprise deployment where there may be many more moving parts.

I think we're getting better at commanding the right price points and winning more business in those markets. So all of that is going well. At the same time, I will tell you that we continue to be very careful and very thoughtful about the way we spend our resources from both a sales and marketing efficiency perspective and just an overall company efficiency perspective as thoughtful executives. So we don't want to put all of our eggs in certain baskets that may or may not produce over the longer term. So we're very, very thoughtful, very careful about it. But I will tell you, it continues to be a very positive element of our business. It contributes to our ongoing growth, and I don't see that changing anytime soon.

We'll go next to Koji Ikeda with Oppenheimer.

I just got a quick question here on the partner network. One of the big positives that we hear out there on Coupa is a very enthusiastic partner network that's investing heavily in the Coupa practices there. I guess, what's the best way to think about the partner network over the next 12 to 24 months and its contribution to your growth?

Yes, thank you for that question. It's also a very thoughtful question. You know, the O in Coupa stands for open, and we've designed our product to be very, very open such that partners, technology partners, can build capabilities that when working with Coupa, would provide more than 1 plus 1 equals 2 but rather 1 plus 1 equals 2.5 for the customer, and to do it quickly and seamlessly. We continue to see that program grow and more and more technology providers coming to us for those use cases that we may not be building anytime in the near future but that are things that are their core competency and could help our customers. So we would anticipate that continuing to grow.

I think the other area of openness is not just technology partners but open in spirit to working with existing incumbent ERP providers and getting continually certified so we can seamlessly work with any ERP system. In many of these global deployments we're doing, we see instances of one ERP 3x, another ERP 4x, a third ERP 3x, 16, 17, 18 different instances of ERP, and Coupa is the one cloud solution of choice for all of spending that sits on top of all of them, the postmodern ERP paradigm that Gartner and others talk about. So we're going to continue to grow in this way, and we think it's really the way applications and approaches should be in the future, and we want to be on the very front end of that.

And from JMP Securities, we'll hear from Pat Walravens.

This is Mathew Spencer on for Pat. Could you talk about any changes Mark Riggs has made as Chief Customer Officer since you brought him on end of last year? And should we expect Coupa to hire any other C-level executives this year?

Thanks for the question, Matt. First of all, we really enjoyed getting to know Mark, and I think I speak on behalf of all my colleagues here on the management team. He's brought in a great deal of experience, having been a customer success officer in the past. And also a very open mindset to understanding that just taking approaches from the past and replicating them is not a recipe for necessary success. Now, I would say in that area of our business, we've had a very good and well-structured organization. But as we continue to scale into the future, we want to make sure that it not only stays that way but it continues to get better and better. Our third core value of strive for excellence comes into play.

So we have seen some great meetings that have been conducted by him with senior leaders coming to headquarters. Real thoughtfulness on how to get more leverage out of certain areas. How to not continually have repeat processes in certain subdepartments, but find ways to centralize them, create more self-service, get smarter and smarter about how to prioritize tickets and how to manage tickets and how to be more responsive to customers. So that area is really something that we anticipate getting more and more operationally efficient and more and more customer-oriented as we continue to scale the business. And we're excited about his leadership in that area.

And could you just maybe provide some high-level bullet points on what's driving the traction you're seeing beyond your core procurement offerings?

Sure. Well, I think that's twofold. One is obviously, one of the things we're most proud of is that we see a lot of companies out there that simply want to work with us. They see a company that has values that are aligned with theirs. They see a company that's willing to do what it takes to drive measurable results for them, using what is a phenomenal modern technology platform. And speaking of that technology platform, the second piece is that they're seeing it as a platform. When we were growing 6 years ago, 5 years ago, it was still a matter of do you have the features or functions of this sub-area? Or can you meet the requirements of this area? We're well past that. We've done now dozens and dozens of releases. We've been tested by some of the largest companies in the world. Of course, it's a never-ending story and you want to get better and better and better. But I think customers are really starting to see us as the business spend management platform that we're becoming. And because of that, they are betting on that platform for their future. And that's really rewarding for us to see.

We'll hear next from Ken Wang with First Analysis.

I'm just wondering, can you comment a bit on just sales and marketing? It was down as a percentage of revenue quite a bit in Q4. I mean, was that any upsell success? Or was it sales productivity? Any color there would be really helpful.

Yes, I think it was a bit of both. One of the things that we saw with some of the earlier renewals was some of our larger customers expanding. And historically, our dollar base expansion rate has been in the 107% to 110% range, and in Q4, it was actually above that range. I would caution that I don't necessarily know that, that's a long-term trend yet, so I wouldn't get ahead of ourselves there. But we definitely did see significant expansions in Q4 as well as also new ACV growth. And we don't break that number out, but if you look at the sales organization, they executed quite well. And as Rob referenced, part of that is the traction with the systems integrators, the sense of legitimacy in the market. So all of those things contribute to sales efficiency. And to Steve's credit, over the last year, he's made some changes to the sales organization, not wholesale changes but in key roles. And we've started to see some impact to that in Q4 as well. So I wouldn't necessarily point to one specific thing, but overall, just solid execution.

That's helpful. And any notable change in gross or net retention rate during the quarter?

So the gross renewal rate, historically or say over the past several quarters, has been in the 94% to 95% range. And in Q4, it was slightly above that range. So once again, we did see some pickup in the gross renewal rate, albeit small but definitely trending in the right direction. And then on the net retention rate, as I mentioned, it was greater than 110%.

And we'll hear from Brian Peterson with Raymond James.

So just wanted to hit on a few quick ones. So Todd, any update on the customer count? I'm sure we'll get that in the K, but anything you can share there? And I guess, just thinking through seasonality, I mean, obviously there's a lot of moving parts, particularly as it relates to billings. But, Todd, should we increasingly model seasonality of billings more towards a fourth quarter ramp going forward? Just trying to -- how should we think about that?

Yes, so let me take the billings question first. So clearly, there's seasonality in our business, especially from a new ACV perspective. And if you look historically on an absolute dollars basis, Q4 is by far the biggest number from a billings perspective, followed by Q2, then Q1 and Q3 are the lower quarters. So definitely we would expect that trend to continue. With respect to customer count, we will update that in the K, and that's one of the things we're going through right now is what is the best way to communicate that to you guys. Because we do have customer count from acquisitions as well. So we'll update that in the K and find out the way to best represent that at that time.

We'll move on to Needham & Company's Peter Levine.

Just to piggyback off some of the prior questions in services, in terms of partner-led implementations, obviously, that -- they're better incentivizing these guys. But can you quantify any impact to bookings, change to your attach rates or the deal size entering the funnel through these partners? And I don't know if you gave the metric, but can you provide the percentage of bookings or ACV that's partner-influenced?

What was the last part of the sentence? You cut off at the very end of the sentence.

Oh, the percentage of bookings or ACV that is partner-influenced?

Partner-influenced. Got it. That's exactly right, and that's the right word, influence. This is not a direct correlation or a cause. There's no causal effect that we're really seeing in this market between a partner and directly handing over a business to us, nor the other way around. But there definitely is a large portion of influence. And what we've seen historically, anywhere between 2/3 and maybe 70% or so of our deployments and new customers have partner influence, and obviously, in the positive direction. So it's very encouraging for us that, that continues to be -- the metric continues to be in that kind of range. And so what we're focused on is getting wider and wider in terms of awareness. So not only all the partners with their deep relationships around the world with prospective clients hear of us, but also clients themselves hear of us from a branding perspective and realize that there's a business spend management solution for them that can help them optimize their spending. And they're great folks that can help implement it for them in a best-practices way. So very encouraging in that area as well.

The final question. Todd, for ASC 606, can you talk about the amortization period for your sales commissions? Did that change?

Yes, it has changed. But the impact in FY '19 is going to be muted. It's a positive for FY '19 but not as much as you might think. And the amortization period has increased to 5 years compared to 3, but the benefit is offset by the fact that approximately $12 million we've already expensed from prior years is being pulled back under the balance sheet and will be expensed again over the remaining amortization period. So we won't start seeing a meaningful benefit until the majority of these recapitalized expenses have bled off over the next few years. But net-net, it's a slight positive for FY '19 to sales expense.

And that will conclude today's conference for today. We do thank you all for joining us. You may now disconnect.