Coupa Software Inc (COUP) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coupa Software First Quarter Fiscal Year 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Nicole Noutsios, Investor Relations. Ms. Noutsios, you may begin your conference.

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

Our remarks today include forward-looking statements about guidance and future results of operations, strategies, market size, products, competitive position and potential growth opportunities. Our actual results may be materially different.

Forward-looking statements involve risks, uncertainties and assumptions that are described in our most recently filed 10-K. These forward-looking statements are based on our beliefs and assumptions today, and we disclaim any obligation to update any forward-looking statements. If this call is replayed after today, the information presented may not contain current or accurate information.

We'll also present both GAAP and non-GAAP financial measures. A reconciliation is included in today's earnings release, which you can find on our IR website. A replay of this call will also be available. And if you prefer to access a replay via phone, you'll 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. We kicked off fiscal '19 by delivering strong Q1 financial results, including 40% year-over-year subscription revenue growth, positive non-GAAP operating income and positive free cash flows.

On the business front, we expanded our customer base by adding new blue-chip and high-growth customers, and we have several marquee customer Go Lives. We also just hosted our largest annual Coupa INSPIRE conference in May, with nearly 2,000 customers, prospective customers, partners, industry analysts and employees in attendance and many more joining us online. With the INSPIRE conference on the horizon, we saw several meaningful new customer deals close earlier than expected at the end of the quarter.

Last year, we outlined our path to achieving $1 billion of revenue in a $37 billion total addressable market. Now, of course, market trends are a factor in helping fuel our growth. Coupa recently commissioned a study by The Economist Intelligence Unit entitled The Strategic CFO in a Rapidly Changing World. The study polled more than 500 CFOs and senior finance executives and revealed that 60% of finance executives lack complete visibility into the transactions within their organizations and 76% think that leveraging new technologies or improving processes would enable them to better execute their corporate finance strategy. I encourage you to download the report on our IR website.

Empirical evidence from studies like this show that we've only just scratched the surface in this industry that we call business spend management. In our view, there's no limit on how far we can go, no boundaries and no length.

Our cumulative spend under management has reached $747 billion, and we expect to surpass $1 trillion this fiscal year. No one else in our market has this magnitude of transactional spend data in one place, giving us a distinct competitive advantage by allowing us to deliver huge value to our customers through community intelligence. We're helping customers make accelerated data-driven decisions through solutions such as Risk Aware, which monitors hundreds of data sources to help customers reduce supply chain risk; and Risk Guard, currently in Early Access, which analyzes spend transactions to help detect potential fraud; and Commodity Insights, which helps businesses identify top suppliers for critical commodities, spend benchmarks and makes other prescriptive recommendations to maximize value.

Now along with the strength of our community intelligence solutions, Coupa Release 21 of our business spend management platform contains many other exciting new solutions and capabilities.

Coupa Inventory is now voice-activated for Early Access subscribers. Using custom Alexa skills built on top of Amazon's Lex technology, users can locate items, adjust inventory balances and reorder stock.

Coupa Open Buy has expanded to include supplier items and pricing content from additional Early Access suppliers, such as Imperial Supplies, Office Depot and Staples and others. Our platform continues to deliver more user-centric experiences to increase productivity, such as approval cycle times, which empowers users to speed up or slow down the approval process by comparing their individual performance to peer company performance.

Other capabilities include automatic tax coding for supplier invoices, contract creation from Coupa Sourcing Optimization and support for a myriad of other company-specific business spend management processes.

Many of these new product offerings are supported by the guidance of our rapidly growing customer community. This community includes our executive advisory board, which currently includes members from Capital One, Airbus, Caterpillar, Pearson, MasterCard and other company -- customer organizations, representing a diverse array of geographies, industries and company sizes. These executive advisory board members play an important role in helping us continually strive for excellence, which is, of course, one of our key core values.

Now let's move on to new customers in Q1. For example, Ingersoll Rand selected Coupa Sourcing, Procure to Pay and several power applications based primarily on Coupa's proven track record around successful and rapid employee adoption in large global organizations.

Some of the other customers -- valued customers we added in the quarter include First American Financial Corporation, Assa Abloy, COMPAREX AG, Fastweb, Just Energy, Evotec AG, Renew Financial, Simons Foundation, Klöckner & Co and a local software company, Snowflake.

Not only are we closing new customers, but we're taking them live, and we're taking them live quickly. At the signing of a new customer, we go directly into implementation, with the goal of a fast Go Live. Rolls-Royce recently went live in 8 countries with Coupa Sourcing and Procure to Pay in Phase 1 of a global procurement transformation initiative. Key rollout areas in this phase included this Coupa supplier network, catalog content and cXML integration and business web forms.

BlackRock went live with the first phase of its global Coupa rollout in Q1. BlackRock's primary goal with Coupa is around better control for the preapprovals, standardized purchasing activities and increased spend management. BlackRock is also looking to provide a more user-friendly solution for its employees and to increase efficiency through streamlining and automation.

We look forward to continued success and value creation with these customers and still many more in the days, weeks, months and quarters to come.

In this quarter, we were proud to be named as the leader in 2 IDC MarketScape Reports: the IDC MarketScape report for Worldwide SaaS and Cloud Enabled Sourcing Applications as well as for Procure-to-Pay Applications. We thank them and those who continue to understand our vision, as we continue our efforts to change the way things are done in business spend management.

Now as I shared before, our company core values are a key driver of our continued success. We've also been honored to witness our customers and partners often exemplify these values, as we continue to build out our rich community of like-minded individuals. Last month, professionals from around the world attended INSPIRE to collaborate and innovate around our mutual business spend management agenda. At this conference, we were proud to honor certain customers with Coupa BSM Impact Awards for exemplifying our 3 core values of ensuring customer success, focusing on results and striving for excellence.

Our winner for ensuring customer success was Donna Trowbridge, Chief Procurement Officer at DBS Bank, the largest bank in Southeast Asia. Donna embraced this value with the rollout of Coupa, temporarily stepping out of her executive role to focus full time on the implementation. Donna was able to achieve her vision of implementing a highly adopted global deployment of Coupa in record time. In only 6 months, DBS achieved 92% digitization of the spend going through Coupa, saved time spent on procurement by 70% and reached 99% electronic purchase orders for all spend with Coupa.

Our winner for striving for excellence was JR Miller, Senior Vice President of Finance at the Leukemia & Lymphoma Society. JR successfully convinced the new management of the opportunity with Coupa and led the rollout across 56 chapters located in the U.S. and Canada. His work saved Leukemia & Lymphoma Society over $6 million in 12 months, which the organization has reinvested into its core mission of helping save the lives of more than 1.2 million individuals affected by blood cancers each year.

Lastly, regarding our value of focus on results, our partner Accenture and customer Airbus have exemplified this value in spades. A year ago, Airbus partnered with Accenture on the strategic value transformation initiative. Success for Airbus meant automation, process efficiency and wide user adoption. At this year's INSPIRE, executives discussed on stage how they've achieved their goals by deploying additional modules at a much faster pace than anticipated. To date, Airbus has decreased their order approval time from 27 days to 3 days, allowing their buyers to focus on more strategic initiatives. They have connected 3 ERPs and 5 third-party systems and over 1,500 users with visibility of over $2.3 billion in spend transactions to date. Accenture's steadfast focus on results approach helps make our customer successful, and we look forward to continuing and growing that strategic partnership.

So in summary, we started the fiscal year with strong Q1 business and financial results, leaving us well positioned to achieve our objectives as we move forward.

Let me now hand it over to Todd for a detailed breakdown of our financials and guidance. Todd?

Thanks, Rob, and good afternoon, everyone. In Q1, we continued to execute against our business plan and demonstrated significant progress towards the mid- and long-term financial targets that we set forth at our Analyst Day in December.

Total revenues for the quarter grew 37% year-over-year to $56.4 million. Subscription revenues were $50 million, up 40% year-over-year and comprised 89% of total revenue. Professional Services and other revenues were $6.4 million.

I would like to highlight that Q1 was the first quarter where all revenues for Professional Services were based on proportional performance, thus completing our transition from recognizing revenues upon customer Go Live. During this transition, we also achieved our commitment to reach breakeven for Professional Services margins.

Moving forward, we expect Professional Services margins to trend from breakeven to positive 10%, but it's also important to note that we expect quarterly results to fluctuate as we continue to scale.

Our total non-GAAP operating income for Q1 was positive $317,000 or 1% of revenue compared to negative 11% of revenue in the year-ago period.

Total calculated billings for the trailing 12 months were $235.3 million, up 41% year-over-year. Total deferred revenue at quarter-end was $121.9 million, up from $88.6 million in the previous year. In February, we adopted ASC 606. And as noted on our prior earnings call, we incurred a onetime write-off that negatively impacted Q1 calculated billings by approximately $2 million. This impact was offset by strong bookings near the end of the quarter as we headed into INSPIRE, as Rob noted earlier.

Let's now turn to operating expenses and results of operations. Our first quarter non-GAAP gross margin was 72% compared to 71% a year ago. Non-GAAP gross margin from subscriptions was 81%, and non-GAAP gross margin from Professional Services and other was 6%. We are continuing to invest in all facets of our business while delivering on our commitment to ensure -- to show increased leverage in our financial model.

In Q1, we delivered a non-GAAP net loss of $537,000 compared to a non-GAAP net loss of $4.5 million a year ago.

Now moving on to cash and cash flows. Cash at quarter-end was $430 million, up from $413 million at the end of Q4. Free cash flows were $11.5 million for the first quarter and $20.6 million or 10% of revenue on a trailing 12-month basis. We define free cash flows as operating cash flow less purchases of property and equipment.

Now turning to guidance. For the second quarter, we expect total revenues to be between $56 million and $57 million. This includes subscription revenues of between $51 million and $52 million and Professional Services revenues of approximately $5 million.

We expect Q2 non-GAAP gross margins to be between 70% to 71%. We expect non-GAAP loss from operations to be between $4.5 million and $5.5 million.

As a reminder, our sales and marketing expense spikes in Q2 due to our annual INSPIRE user conference, which we held in San Francisco in May.

We expect non-GAAP net loss per share of $0.08 to $0.10 on 56.8 million weighted average shares for the quarter.

For the fiscal year ending January 31, 2019, we expect total revenues to be between $233 million and $236 million, with non-GAAP gross margins in the range of 71% to 72%. We expect non-GAAP loss from operations for the year to be between $8 million and $11 million. For the full year, we expect non-GAAP net loss per share in the range of $0.14 to $0.19 based upon an estimated 57.2 million weighted average shares for the year.

That concludes our prepared remarks. Now we'd be happy to take your questions. Operator?

(Operator Instructions) And our first question will come from Jesse Hulsing from Goldman Sachs.

This is Kevin Kumar on for Jesse. A question on how your strategy around direct procurement is evolving? Are you seeing customers interested in using Coupa for direct? And where do you feel you need to add features or functionality to be a market leader here as you are in indirect?

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

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

Sure. We look at this every quarter now for 37 quarters and very carefully manage our sales and marketing expenditures, both sales and marketing, obviously, discretionary marketing, marketing headcount, sales headcount and discretionary sales expenditures. And they'll ebb and flow a bit, but we stay pretty much close to our 3 pillars of the business, obviously, on revenue growth, sales efficiency and scale to the bottom line. There's nothing statistically significant to note in terms of being on or off our -- or rather being off of our hiring plans. We're very much on plan with everything that we've planned to do over the past quarter and going into this coming quarter as well.

And our next question comes from Raimo Lenschow with Barclays.

The -- two questions from me. Rob, can you talk a little bit about the SI channel. So one of the main takeaways I had at the conference is that they're pretty excited about building practices. Where are the -- where you see kind of the different SIs in terms of where they are? And what's kind of in the pipe still coming in terms of getting people [throughout the fight], et cetera? And I have a follow-up for Todd.

Sure, Raimo, no problem. So in terms of our SI strategy, this is a strategy that as you know and I think a number of others that have followed us for some time understand, this is an evolutionary strategy that we've had now for more than 7 years of building an army of systems integrators, certified consultants that know how to implement Coupa and do it in a way that drives measurable recurring value for our customers so we can have the opportunity to keep them forever. We began with boutique consultancies in the early days and then graduated our way into working with the likes of Accenture, KPMG, Deloitte and others. Over the last few quarters and frankly the last couple of years, but particularly over the last few quarters, we've seen much more alignment with us around setting revenue targets around Coupa for each of these businesses. So the number of folks they need to have certified and the kind of Professional Services revenue they'd like to deliver in 2018, 2019, even going out to 2020. And in the cases of all 3 of those systems integrators, there is real growth being planned on their behalf, which we think will form -- will work very nicely in unison with our sales and marketing growth, geographic expansion, our product footprint expansion and the kind of dominance we want to have in the market. So that continues to develop very nicely, and it's very encouraging in particular to see business plans with tens and tens of millions of dollars Professional Services that they are anticipating to make around Coupa.

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

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

And next will be Stan Zlotsky with Morgan Stanley.

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

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

Got it. And maybe a quick one for Todd. Billings in the quarter were significantly better than we and consensus expected. Was there any benefit that we need to keep in mind from maybe ASC 606 pulling forward or maybe just overall maybe some pull-forward from the quarter ahead of the conference?

Yes, there are 3 components of billing. One is, obviously, new business, and Steve and the sales team executed really well across all fronts in Q1. And as you know, Q1 is historically a -- the slower quarter out of the year for us. The second piece is, obviously, Professional Services. And given that this was the first quarter where everything was recognized on proportional performance, I would say the team did a really good job with Professional Services. And part of that came out of the strong Q4 and the implementations that kicked off in Q1. So the Professional Services team did a fantastic job. And then the third component from a billings perspective is renewals. And our gross renewal rate was above 95% again for the second straight quarter. Dollar-based expansion rate was slightly above 110. So renewals also came in well. With respect to the conference, we did see some deals that were originally slated for Q2 or that we thought would come in Q2 came up into Q1 with some people that wanted to come [and do] INSPIRE, customers, et cetera, and also just good execution by our sales team. So that's really the components of billings and how we executed in Q1.

And then next will be Ross MacMillan with RBC Capital Markets.

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

Sure, Ross. So I think, first off, we're definitely seeing additional uptake of the power user capabilities around our transactional platform. In fact, one of the stats we shared is that the average number of modules purchased has gone up from 3 to 4 since INSPIRE last year. And another interesting statistic is that more than 50% of new revenue that's coming in now for us is outside of the core procurement capability. So it just tells you and it tells us obviously that customers are buying into the Coupa platform, this business spend management platform. And we're seeing discontinued shift from the early adopters to the early majority stage, where a few years ago, we were seen as really the -- the safe choice was really to do nothing perhaps in some of these larger organizations around the world. Today, people are starting to realize that the safe choice as well as the smart choice is to partner with us in so many of these situations. Now it's a whole host of power user modules. It could be supplier information management. It could be sourcing optimization. It could be greater capabilities around contract life cycle management. But the bigger story here is the buying into the platform. And for that reason or as support for that, I will tell you that our average new recurring revenue continues to go up quarter in, quarter out and has done so for virtually every quarter over the last 37 quarters, if not every quarter, to be exact. So customers are seeing this as a new business spend management platform that includes all transactional capabilities, procurement expenses and invoicing and continually developed or acquired and integrated power user capabilities.

That's super helpful. And then, Todd, I just wanted to go back on to the adjustments. We had the $2 million write-down. So I presume that would have been about $0.5 million impact or so to subscription revenue. And then if we also adjust, it's a 3-day year-over-year adjustment we also need to make on subscription revenue, right, for fiscal Q1 '19 versus '18. Is that right?

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

And next will be Peter Levine with Needham & Company.

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

Sure. Well, look, Coupa Payments and our vision for it has a host of solutions that are part of it. One example of a part of it is Coupa Accelerate, which is part of Payments. And that's actually offered today. This is our offering centered around dynamic discounting, and we're seeing customers adopt that capability. But there is a lot more to Payments. And one of the things we shared at the conference is our desire to get into transactional payments, card solutions as well as financing solutions. So these are areas that we're currently in development around. And if you think about the core competency we have here at our company, it's really centered to some extent around user centricity and what we think is really unparalleled user centricity following the concept of the best UI is no UI. And we want to take the same approach to Payments. So I agree with you. I think this could be very meaningful for us. Our goal is to take Payments to every core transaction within Coupa, so payments to procurements, payments to invoicing, payments against reimbursing against expenses and all of that being very flexible, having open connectivity to bank -- to your bank or any card networks you might be using, looking for every rail of payments and trying to support every rail of payments, so we can eliminate paper checks, we could digitize overall transactional payments, reduce the cost of payments and increase the visibility that a lot of these larger companies need for cross-border payments. And of course, with something we've become very good at, which is integration back into accounting systems, which is an important part of payments. So what we've done in every one of this conferences for the last 6 conferences we've had is that we announced something that is in development. And the next time we come back, we typically announce that it's in Early Access. And the next time we come back, we typical announce that it's generally available. And that approach is something that's working very, very well for our customer community. Just myself have -- being in this industry for as long as I have, I have often seen enterprise software companies either announce something that's already in GA, or they announce something in development, but there's limited accountability for the actual arrival of that product. And so we've done this very diligently. In development in the first INSPIRE; the second one, either the European or next years in Early Access; and then finally in general availability. And so we'd like to do this in typical Coupa fashion, which is announce all these things at the same time to our customer community, and we're planning to do the same with Payments.

And just one follow-up to the Payments transaction side. I mean, do you think about how the HR or the payroll guys work, where they can kind of keep the funds overnight. Is that anything that you guys could do, or it's kind of not in the model?

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

And next will be Ken Wang with First Analysis.

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

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

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

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

And next will be Brian Peterson with Raymond James.

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

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

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

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

And next will be Mark Murphy with JPMorgan.

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

Sure. So first of all, let me just start by answering the question and tell you that every one of our customers matters to us. And we go one customer at a time, whether they're marquee logo, a large customer, a midsize customer, we're in this business to drive value for every one of our customers. We want to keep every one of our customers forever. And we want to keep them fairly, because we're delivering value for them on an ongoing basis. But I will tell you without a doubt, over the last, let's say, year to 1.5 years, this is very much since we went public and got to a place of much greater legitimacy in the marketplace, the size of the customers, the marquee brands of the customers, the depth to which they're taking on initiatives with us right off the bat versus sort of doing smaller pilots to sort of get into the things has continued to move in the right direction for us. And our partners continue to represent a pretty significant element of influence on those partners, so -- on those customers. So while they're not directly handing us leads that we immediately close, roughly 2/3 of our deals are influenced in some way by a systems integrator or a strategic partner of ours. So very much that continues to look very good for us, and it continues to rightfully push our organization to scale and grow globally.

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

Well, we're in very early days in Japan. We have a very meaningful marquee account that we've closed, that we want to leverage as a reference to continue to build out -- to begin to build out that region. We think that our product and our platform is really ripe for the Japanese culture as well as the market opportunity there. We considered going into Japan as far back as 5 years ago, but didn't feel we were really ready for the level of quality on the platform that would be required, for the capabilities that we needed. But we're ready now, and we're excited that Hiroyuki is there and building out his team, and we look forward to some meaningful progress there. But as with everything we've done in Coupa, we expand organically. We don't put 15, 20 people into a region and see if something happens. We go in, we get highly referenceable customers and we make them successful and we leverage their relationship with us and the real value we've created together to help us build out the market. And we look forward to doing that in Japan.

And next will be Joseph Vafi with Loop Capital.

Just kind of following up on some of the dialogue here in the Q&A about the some of the momentum with SIs and brand recognition. Have you seen an impact to the sales cycle, given all of these kind of perhaps positive influences to the business model? And then second would be to get an update on perhaps some of the middle market progress versus kind of enterprises? And how that -- the development of those 2 markets is developing?

Sure. So we absolutely -- and we were touching on this earlier, of course. We're absolutely seeing great support from the primary systems integrators in influencing our deals. I mean, there was a point, as you might imagine, a few years ago, where we were seen as innovative, up and coming, disruptive. Where now, I think a lot of these systems integrators are seeing us as really becoming a -- more of a standard in this marketplace. And so they've done -- in the cases of all 3 of them, they've all done dozens of Coupa implementations. And in virtually all cases, they've been highly successful implementations. So there's really nothing stopping them at this point from wanting to push us into their existing customer relationships, which we're excited about. And we're also looking at our prospective customer base and looking at those customers with the highest propensity to buy and focusing on those with these systems integrators, so we could accelerate some of these sales cycles, and more importantly, accelerate the Go Lives and value we can drive for customers. In terms of mid-market, we continue to see deal sizes increase, and we continue to work on making that business much more operationally efficient quarter in, quarter out. So not only are we growing deal sizes, but we're properly packaging our solutions and we're properly driving implementations in terms of time from kickoff to Go Live, so it just becomes a no-brainer for that market. And we're making progress there as well.

Next will be Joseph Foresi with Cantor Fitzgerald.

I was wondering, with Professional Services stable to improving, how do you think about its impact on the numbers over the long term, particularly on the margin side?

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

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

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

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

Sure. I would frankly think about it from a new recurring revenue perspective. So when we enter in a quarter, if you think back 6 years ago, right, 95% was from one core transactional capability around automating the procurement process. And then roughly 3 years ago, about 75% coming from that core. And towards the end of the last year, we saw 50%, right -- more than 50% actually coming from outside that core procurement capability. So that may be transactional expense management. That may be invoice processing. That may be supplier information management or contract life cycle management. That may be our sourcing optimization capability of spend analytics. So in every one of these areas, we are seeing real traction. And again, I think the underlying theme here is that our customers are seeing a developing business spend management platform that they can partner with us around for many years to come, that can give them more and more value out of all their spend transactions and the way they work with their suppliers. So that's the underlying theme here, and it's a very promising one.

And next will be Koji Ikeda with Oppenheimer.

A question for Rob or Todd. I wanted to touch on the conversations that you're having with potential customers. Now that you've been public for somewhere around 20 months here and awareness of the Coupa application continues to increase, all the while the spend management category continues to evolve, can you talk a bit about how your conversations with potential customers have maybe changed over the past few years? Are the spend management pain points more or less the same? Or are organizations thinking about spend management differently now, maybe even more strategically than 2 years ago?

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

Next will be Eric Lemus with SunTrust Robinson Humphrey.

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

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

Next will be Pat Walravens with JMP Securities.

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

Yes. We're still running the business based upon kind of the 3 core tenets we outlined at the Analyst Day, which is 30% top line growth for the next 5-plus years and primarily focused on driving subscription revenue. And we do have a Professional Services element that -- our strategy is to partner with the SI. So we do see most of that growth coming from subscriptions. And when we look at our go-to-market teams and how we're building it, we are definitely building it to sustain that 30% growth and do it in a very responsible way with reasonable sales efficiency and kind of the key metrics we track, magic number, LTV-to-CAC, while continuing to show operating margin at the bottom line with respect to operating income and free cash flows.

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

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

Okay. Let me rotate to something, I think, you probably are. So if you look at your AI acquisitions, right, like Deep Relevance and Spend360, how are those working out?

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

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