Coupa Software Inc (COUP) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coupa Software Second Quarter Fiscal Year 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Nicole Noutsios, Investor Relations. Ms. Noutsios, you may begin your conference.

Good afternoon, and welcome to Coupa Software's second 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. This call is replayed after today. 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 Investor Relations website. A replay of this call will also be available, and if you prefer to access a replay via phone, you can find that information in the earnings release. Unless otherwise stated, growth comparisons are against the same period of the prior year.

With that, I'll turn the call over to Rob.

Hello, everyone, and thanks for joining us. I'm delighted to report strong results for Q2, highlighted by 38% year-over-year revenue growth, positive free cash flows and positive non-GAAP operating income for both Q2 and the trailing 12 months. Cumulative spend under management through our platform surpassed $840 billion during the quarter as we've continued to make progress toward our next milestone of $1 trillion. I'm also excited to share strong results in a host of other areas of our business, so let's get after it.

During the quarter, we made significant strides in driving our cross-platform community intelligence agenda, leveraging our fast growing transactional spend data and our artificial intelligence development efforts. I'm excited to share that our development efforts continued full speed in the areas of operational insights, supplier insights and commodity insights, all powered by community intelligence.

From a go-to-market perspective, we saw a significant uptake of some of our latest offerings in this area. For example, in Q2 alone, 17 new customers subscribed to our community intelligence-powered Risk Aware solution, far exceeding our expectations for this new innovative offering.

I'm excited to share that we are really just beginning to scratch the surface of what's possible with this prescriptive part of our vision, also known as the letter P in Coupa. At the end of last year, greater than 50% of new subscription revenues has come from solutions beyond our core procure module, and that figure has continued to increase in the first half of this year along with a continued increase in average deal sizes. From a marketing perspective, just last week, we rolled out a major update of our coupa.com website and now offers a modern, intuitive and engaging experience to visitors and features an abundance of new, rich and easy-to-digest content, while showcasing the depth and breadth of our value as a service solutions along with the voices of our growing customer community.

We added a number of new customers in Q2, and those included Telenor, McCain Foods, Leprino Foods, US Concrete, Wabash National, Hubert Burda Media, Boyd Gaming, Veeam Software, Tencent, The NPD Group, Inchcape, Benteler and many others. As well, we had some outstanding customer go lives in Q2. Unilever went live in North America in the first stage of a global procurement transformation initiative. Western Europe and Brazil are the next planned locations as Unilever continues to roll out their Coupa-powered Easy Buy solution across the globe with a focus on rapid user adoption as a key measurement of success.

Also, the co-op went live with Coupa Source to Pay and supplier management in the first phase of their deployment, addressing spend at their food depots and support center. The co-op is now planning and scoping their next phase and is considering expanding Coupa to additional categories. These examples of quick time to value showcase the accelerated part of our vision, also known as the letter A from Coupa.

As many of you have gotten to know us, you've learned that we take great pride in working single mindedly alongside our customers to help them achieve success, and together, we and they are the ones who devise and drive the plan. More and more, we're seeing the benefit of our focus on results core value being played out for all to see in public domain. For example, at their 2018 capital markets events, Rolls-Royce highlighted the introduction of Coupa across various ERPs and major geographies as a replacement to outdated legacy systems, noting that Coupa is now helping them reduce procurement spend by a target of GBP 400 million this year, all with an internal team that is 23% smaller than it was while also managing fixed fees to 5% industry benchmark savings rate. Also, 2 customers, Aon and Cornerstone OnDemand, referenced our solution on their own quarterly earnings calls, citing the cost savings and optimized spend they were realizing from their newly implemented Coupa deployment. As we set out every day to express our core value of ensuring customer success, it's both humbling and inspiring to receive validating endorsements like these.

As I've noted in the past, over time, we carefully evaluate thoughtful acquisitions when the right opportunities present themselves. Our approach remains tied to our set strategy of adding key advanced power user applications that can seamlessly integrate into our unified organic transactional engine and/or acquiring distinct technology components that enhance this engine.

Today, we announced the acquisition of the technology assets of DCR Workforce, a leading SaaS application provider of contingent workforce and services procurement management. DCR's advanced capabilities enable businesses to source, procure and manage their contingent workforce spend. Depending -- building upon Coupa's Services Maestro offering, which focuses on basic requisitioning and procurement of services spend, DCR's advanced capabilities will help our customers go that much farther, faster. DCR supports resource evaluation, categorization, approval, risk profiling, onboarding and statement of work management, delivering on the full life cycle of advanced contingent workforce management in a compliant way at scale.

I'm also particularly excited by its machine learning capabilities which leverage algorithms for temporary labor candidate ranking based on an already large and fast growing dataset. This acquisition further solidifies Coupa's vision of enabling businesses to manage all of their business spend on our platform comprehensively, also known as the letter C in Coupa.

And in making any acquisition of any type, this I can tell you. Alignment with our 3 core values is of paramount importance. And we've gotten to know the DCR team during the past year. We welcome them to the Coupa community of customers, partners and colleagues with no reservation whatsoever.

Now during the quarter, we were also pleased to receive some additional industry recognition. First, Coupa was again certified as a great place to work by the research and consulting firm, Great Place to Work. I'm thrilled to report that 99% of responding employees said that they were proud to work at Coupa. In Q2, we were also pleased to be named as the leader in Gartner's Magic Quadrant for Source-to-Pay suites for the third time in a row.

Last but certainly not least, let me mention our third core value of striving for excellence. As an example of this value in action, I'd like to call out my colleague, Raja. Raja dealt with a customer who was used to a complex and relatively convoluted way of managing his business process in an older system we replaced. Despite resistance to change, we got to challenge the dated approach and championed a more streamlined and thoughtful method with Coupa that led to greater value for the customer. He was recently recognized for personifying our third core value of striving for excellence as part of our quarterly company Most Valuable Player Awards.

So in closing, with this being our eighth earnings call as a public company and now heading into our 39th quarter of execution, we are very much staying focused on building the most innovative platform in our space, the most resilient culture as a company and the most robust and active customer community in the world of business spend management. All this effort continues to move us toward our stated long-term financial goal of reaching $1 billion in revenue.

With that financial goal in mind, let me now hand the call over to our CFO, Todd Ford, who can provide an update on how we're tracking to our financial targets along this journey. Todd?

Thanks, Rob, and good afternoon, everyone. In Q2, we continued to execute against our business plan and made significant progress towards the mid and long-term financial target that we set forth at our Analyst Day in December.

Total revenues for the second quarter grew 38% year-over-year to $61.7 million. Subscription revenues were $55.4 million, up 39% year-over-year and comprised 90% of total revenue, and professional services revenues were $6.3 million. Our total non-GAAP operating income for Q2 was positive $4 million or 7% of revenue compared to negative 13% of revenue in the year-ago period driven by solid top line growth and continued scaling of the business. This quarter marks the first time our trailing 12-month non-GAAP operating income was positive. On a trailing 12-month basis, non-GAAP operating income was $2.9 million or 1.3% of revenue.

Total calculated billings for the trailing 12 months were $252.3 million, up 38% year-over-year compared to 36% year-over-year growth in the comparable period. As a reminder, our trailing 12-month calculated billing numbers are negatively impacted by approximately $2 million related to the onetime write-off from our adoption of ASC 606 in February. This impact was offset by early renewals that we experienced during the period.

Let's now turn to results of operations. Our second quarter non-GAAP gross margin was 74.6% compared to 71% a year ago. Non-GAAP subscription margin was 82%, and non-GAAP professional services was 8%. As a reminder, we expect professional services margins to trend between breakeven and positive 10% on a trailing 12-month basis. Quarterly margins may fluctuate as we continue building for scale and also due to the near-term impact from the DCR acquisition.

Consistent with prior quarters, we are investing in all facets of our business while delivering on our commitment to show continued leverage in our financial model. In Q2, we delivered non-GAAP positive net income of $3.3 million compared to a non-GAAP net loss of $5.4 million a year ago.

Now let's move on to cash and cash flows. Cash at quarter end was $443 million, which includes $161 million of marketable securities, up from $430 million at the end of Q1. Free cash flows were $9 million for the second quarter and $21.6 million or 10% of revenue on a trailing 12-month basis.

Now let's turn to guidance. Please note that our guidance reflects the impact of the DCR acquisition we announced today. For Q3, we expect minimal revenue contribution from DCR and a full quarter impact for operating expenses. With this in mind, for the third quarter, we expect total revenues to be between $62 million and $63 million. This includes subscription revenues of between $56.5 million and $57.5 million and professional services revenues of approximately $5.5 million. We expect Q3 non-GAAP gross margins to be between 71% to 72%, and we expect non-GAAP loss from operations to be between $1 million and $2 million. We expect non-GAAP net loss per share of $0.01 to $0.04 on 57.9 million weighted average shares for the quarter.

Regarding cash flows, given the DCR acquisition and seasonality in our business, we expect Q3 free cash flows to be negative $5 million to $7 million. We expect that the free cash flows generated in Q4 will more than offset the negative free cash flows expected in Q3.

For the fiscal year ending January 31, 2019, we expect total revenues to be between $243 million and $245 million with non-GAAP gross margins in the range of 72% to 73%. We expect non-GAAP loss from operations for the year to be between $1 million and $4 million. For the full year, we expect non-GAAP net loss per share in the range of $0.06 to $0.11 based upon an estimated 57.5 million weighted average shares for the year.

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

(Operator Instructions) Our first question will come from Ross MacMillan from RBC Capital Markets.

Either Rob or Todd, it's impressive to see the acceleration of the cost comp both on spend under management and on calculated billings, and I just wondered if there was anything in particular that you'd call out in terms of driving the spend this quarter.

Ross, thanks very much, and hopefully, the tiny [bit] we had there captured all of our remarks between Todd and I. In terms of your question, I won't say there's anything specifically significant that happened this particular quarter that either spiked calculated billings or spend under management. I think it's just continued execution quarter in, quarter out. I think the marketplace is starting to really galvanize around our business spend management vision for the category. I think our platform continues to get stronger and stronger. I think our reference base continues to get stronger, and the value we're delivering is becoming more and more pronounced. And we continue to execute into now our 39th quarter. So nothing specifically significant but look, another strong quarter for us, and we're proud of it. We're well into the future already.

That's great. And maybe just to follow up for Todd on DCR. You mentioned all the cost and really none of the revenue in fiscal Q3. Is there any way for you to help us size that business in terms of revenue run rate, subscription revenue, anything like that?

Yes. So with DCR, the interesting thing about that acquisition is there's 2 key businesses there. One is the VMS, vendor management system, the piece that we're most interested in. And then they also have a managed service provider business. So the deal that we did was an asset acquisition so that we picked up the assets related to the vendor management system and the key people there as well. From a revenue perspective and billings, they -- one of the things we have to do now that the deal is completed is contract assignment, and that's why we're not factoring in much contribution from DCR in Q3. Maybe we'll see something in Q4, but kind of consistent with our historical strategy, let us prove the results and then give us credit. One thing I will say about it is the amount that we paid, which you'll see in the 10-Q, is $25 million upfront. And then there's an earnout potential over the next several years. And if all of the earnouts are hit, the revenue multiple that we'll pay will be between 3.5 and 4x. And I think for now that's about as deep as we want to go into the contributions until we have more clarity, and as we prove it out, we'll give you guys more color on the next earnings call.

Our next question will come from Joseph Foresi with Cantor Fitzgerald.

I wanted to stay with DCR for a second. Maybe you can give us a little bit more color on how it fits into your business model and just your thoughts around integration where you can really see some upside from a revenue perspective.

Sure. Well, look, this is an acquisition that is very consistent with the strategy we laid out since the beginning of building out this organization all the way through our IPO roadshow, and I repeated on these earnings calls a number of times, as we've acquired the assets of a number of technology companies, this capability is in the area of contingent workforce management and advanced capability around contingent workforce management. In our core offering, we handle all of the transactional capabilities for spend in a collectively exhaustive way, the way you procure, the way you expense and the way we invoice for spend components. And interestingly enough, a very significant portion of that spend is actually services today. There are certain situations where you need advanced capabilities for power users when you talk about managing the services of a contingent workforce, and that includes a lot of different components in the full life cycle, frankly, of working with these folks. So that means handling onshore and offshore management of projects. That means tracking of all resources and onboarding and offboarding those resources, managing those resources in a compliant and auditable way. Look at it from a talent pool perspective as well as an individual perspective and a freelancer perspective and looking at everything from the requisitioning and sourcing of those assets to onboarding them and tracking them in time sheets and invoicing against them. There's a whole host of capabilities that have interaction, [we'd be surprised], evaluating them, categorizing them, making sure they meet your requirements, making sure you collectively understand the risk profile of different temporary labor you might bring on, utilizing questionnaires for individual candidates, Onboarding them in a way where you have background checks and drug tests and full resource pool tracking. So this is advanced management of a category of spend that we manage today transactionally but are now enabling, in an advanced way, for a whole host of our customers and prospective customers who'd be very interested in this. Uniquely, we're particularly keen on some of the AI capabilities as it pertains to the automatic ranking of some of these temp labor candidates. This is a incredible system that the team had built there using algorithms of -- well, absolutely no bias, for machine learning a large dataset with a closed loop. So when you understand who your resources are and whether or not they're successful in fulfilling contracts, you're more likely to bring on those types of resources in the future. So this is a very exciting, very synergistic addition. It's something that our existing customers, we believe, will be quite interested in and we know the marketplace as a whole ought to embrace with open arms as well.

Got it. And it seems like you have tons of opportunity to cross sell different services. So a couple of questions around that. What's next on the horizon? Does anything particularly stand out to you? I know you just did one now and maybe on the payment side, this has been thrown out there a lot. And then just one final one, maybe some thoughts on what cumulative spend looks like this year.

Sure. Well, today, we want to talk about the -- and give real respect to the team that just joined us. We're obviously always open to looking at all kinds of interesting power user applications or technology components that I've always articulated as part of our strategy. But I can tell you with this, we always talk -- often talk about the C in Coupa standing for comprehensive, and now we have a continuation -- continued push around our platform in this area. This is very similar with DCR to what we did with Trade Extensions and the Simeno acquisitions just last year. DCR adds significant breadth as well as depth to this overall business spend management platform, and it does so in areas where there's a lot of demand out there. This new functionality will definitely be attractive to many of our current customers. We know that, and we think it'll be very interesting to the market at large. So we're very excited about it.

Our next question will come from Stan Zlotsky with Morgan Stanley.

Maybe just staying with the DCR theme. In as much as we look at your existing customers and your addressable market as a whole, what proportion of your customers or maybe your broader market is involved with contingent labor management? And then I have a quick follow-up.

It's hard to say the exact amount, Stan, but I could tell you, best-in-class organizations of all sizes obviously care about services procurement and can use more advanced capabilities in managing that spend. A very significant of our transactional spend today, again, is in the area of services. Everything from janitorial services to security to consulting services to staff augmentation, but some of the larger companies, clearly, are interested in more advanced capabilities in managing that along all the areas and more that I mentioned in answering an earlier question. So we're really excited about what this is and the team we brought on as well as the product and looking forward to keeping you updated on how this becomes part of our overall BSM platform.

Okay, perfect. And then just a sort of a blast from the past. So with the Ariba sunsetting their on-premise product in a couple of years, in 2020 and IBM moving away from the Emptoris product, what are you guys seeing from those legacy customers? And what kind of success are you having with possibly converting them to sort of Coupa platform. That's it for me.

Sure. Thanks for the question. Absolutely, we continue to see customers join us, prospects that become our customers who convert from a whole host of legacy solutions or subpar barely deployed incumbent solutions as well as continue to win in competitive scenarios with some of the larger incumbent solution providers that are offering some of those same solutions in a ASP or hosted environment. So we continue to see strong traction there. And I will tell you, when you say blast from the past, let me tell you, ultimately, our competition in this market is ourselves. It's not any of the incumbents, early entrants or any other competitors that might be called out on some of these reports. We have a very bold vision we want to do in this business spend management marketplace. We feel like we're in the early innings of what's possible and we're 100% focused on the, longer term as we always have been for nearly a decade now.

Next, our question will come from Brian Peterson with Raymond James.

So Todd, one for you. Just wanted to hit on the sales and marketing spend this quarter. It looks like when you include the Inspire spend, it was actually down sequentially, so just want to get your thoughts on how you're thinking about sales and marketing investments going forward.

Yes. So with respect to Q2, it's really a tough comp versus what we would have seen in the first half of last year. A part of that is the introduction of ASC 606 that we sort of began capitalizing more of our commissions, which is dragging near-term tailwind to reduce our sales and marketing expense. With respect to Inspire, one of the things that benefited sales and marketing in Q2 was we're generating more sponsorship fees than expected when we gave our guidance, which is an offset to the expense recognized for that event. As we look forward, we're investing -- continue to invest heavily in sales and marketing. As you might have noted, we hired a leader in APAC 6 months ago now. So we're continuing that depot internationally, domestic and across the organization. So I think you'll continue to see the sales and marketing expense go up as we make investments. And 2 to 4 quarters from now, you'll see the unwinding of the benefit of ASC 606 as we're our capitalizing that now so we get a near-term benefit. But as that starts to amortize over the appropriate period, which for us is about 3 years -- excuse me, 5 years, then the expense will start to come back onto our books.

Got it. And just a follow-up. You mentioned that early renewals helped in billings this quarter. Any update on how the retention levels trended this quarter?

Yes. So the retention rates continued to be at the high end of the range, so I wouldn't call anything out specifically. Our renewal rate's very high. Our dollar-based expansion rate continues to be strong as well, so no meaningful change quarter-on-quarter.

Our next question will come from Ken Wang with First Analysis.

So just wondering just in regards to DCR, does this possibly bring in any new previously unaddressed customers? Or is this really just more being able to sell more to your existing customer base?

Sure. Thanks for the question. We think it's a combination of both, absolutely, a combination of both. There is very real and known interest both amongst our existing customer base for advanced services for procurement and contingent workforce management solutions. And there is absolutely interest in the broader marketplace for a more comprehensive solution that covers some of these areas. So I think it'll help them both.

That's helpful. And then again on DCR, you talked a little bit about AI. But is there kind of a community intelligence angle to this as well?

Absolutely, and that's at the core of that area that I was describing. When you think about selecting candidates for a given set of temporary labor initiatives, the contingent workforce labor initiatives at your company, it's important to understand how to rank those candidates, and a system that has a closed loop approach to thinking through how to rank those candidates is very powerful. Now it becomes even more powerful when it's overlaid on a large existing dataset and a growing dataset. So you could clearly envision that as we continue to offer subscriptions of this product to our existing and new customers, that dataset will grow as will the community intelligence that is brought out from that dataset, making those rankings that much more powerful. And so as you know, we're continually looking for ways to expose valuable use cases of community intelligence across the application to provide prescriptive insights for our customers. As you know, that's the letter P in Coupa, prescriptive.

Next, will take questions from Ryan MacDonald from Needham & Company.

Most of my questions have been asked. I guess, maybe expanding upon the point of the success of selling some of the noncore applications, can you talk about maybe how this -- how conversations of customers have been evolving over the past few quarters here and maybe some of the new applications outside of the core that are really starting to resonate within and drive new consumer adoption and existing customer expansions?

Sure, sure. Thank you for the question. When we think back, let's say, 6 or 7 years or so, we really were largely seen as a point solution or best-of-breed solution in 1 or 2 primary functional areas. And as we've continued to develop the company, develop our platform, scale the platform, include multi-currency, multilingual capabilities, global compliance capabilities, more functions and more modules both in the core as well as in the advanced power user applications, we went public and took on some of the largest deployments in the world and made them highly successful. We become seen more and more as a business spend management platform by our prospective customers as well as our existing customers. So the conversations are less and less about should we pick this module or that module as a point solution or should we pick these capabilities to deploy. It is more about the platform experience and what is the right order and staging of those capabilities over time. And that's a very powerful thing for us. We're seeing that continuing to develop, and then ultimately, we've transitioned over into a tipping point where we are known as a comprehensive platform in every area. We are certainly being seen more and more as that. And as we continue to develop organically as well as acquire specific advanced power user capabilities around the periphery of our transactional engine, we will make our case that much stronger for being the de facto platform solution provider in 1 of the big 4 areas of enterprise software related to supplier management, supplier relationship management, spend management.

Our next question will come from Jesse Hulsing with Goldman Sachs.

This is [Stewart] on for Jesse. Question first on the mid-market, how is the mix of new ACV trending versus the enterprise? If that's increasing, what's really driving that success? And then second, have you received any early feedback on Coupa Pay? And do you have any updated thoughts on monetization there?

Sure. So let's take those one by one. So regarding mid-market, mid-market continues, without a doubt, to be a key contributor to our business. We have and continued to focus on decreasing the cost of customer acquisition, decreasing the time to close, increasing our average deal sizes and also standardizing our implementation methodologies. But having said that, we're committed to striving for excellence. And given the success to date in mid-market, we will be driving increased focus in this area to drive long-term scalable growth of the company. It will continue to be a key contributor for us, and we will continue to drive increased focus here. And then in terms of Coupa Pay, look, Coupa Pay has one early component that's generally available called Coupa Accelerate. This is our early payment discount solution. It's generally available. We've had a lot of interest in this offering early out the gate. And we are continually looking at other use cases to see where we can provide the most value in payments, and we're prioritizing those first. I can tell you that -- I can tell you today that the next product that we will be entering into Early Access is virtual credit card payments, and we'd be talking more about that at our coming Inspire conference and beyond. Monetization for us is very important, but it's secondary to driving value, measurable value, and in each of these cases, both our suite and mid-market as well as these offerings in Coupa Pay are all focused on that first and foremost.

Next, we'll take a question from Mark Murphy from JPMorgan.

This is Matt Coss calling in on behalf of Mark Murphy. So core procurement was at, if I have -- if I'm correct, it was 75% of revenue about 3 years ago. Now it's less than half. Where does that go and sort of what are the other products primarily that are taking up the rest of that mix, if there's anything in there that's been coming particularly large as a percentage of your new business?

Sure, sure. Thanks for the question. And that's an exciting development for us obviously because, as we shared in the past, our average annual subscriptions continue to rise virtually every quarter, quarter in, quarter out. So we're getting more of the value being realized by our customers and a fair payment to us from an ongoing subscription perspective, which is wonderful. The other capabilities tend to be either on the transactional core, so expense management, invoice management or even our Coupa Pay product, which is starting to have an early entry into our revenue mix and then the power user application, everything from spend analysis, which I think, by this point, you're quite familiar with our capabilities there, spend management -- supplier management overall. We should see contribution, of course, from contingent workforce with DCR now being part of the Coupa family but also strategic sourcing and contract management. So any of these capabilities could be contributors, and in fact, all of them are contributors. But that mix continues to expand, and that's largely due to the earlier question I got, which is that we're being seen much more as an overall platform solution for the whole host of valuable capabilities that we can offer.

I agree. And then just one more just to make sure nothing has changed. So I assume the acquisition of DCR, that's for the power user app. And do you ever consider making a tuck-in acquisition for the core platform? Or is that just going to continue to be for power user applications?

There's absolutely no change to the strategy whatsoever. We'll continue to either acquire power user applications around our transactional engine or very distinct technology components that could be an expansion to the transactional core. Just to give you a sense for that so it's not confusing, if you look at our InvoiceSmash acquisition a number of years ago, that's a distinct technology component that created value around our transactional invoice management module. But absolutely no interest in rolling up or tucking in transactional core capabilities. There's a huge value in having them be organic on a highly scalable, global, secure platform that we've created here.

Our next question will come from Raimo Lenschow with Barclays.

Can I go back to DCR? Rob, like the -- some of -- in that field, you had like guys like [FieldClock], et cetera. When you looked at kind of going into that space, are you like entering a field? Or are you changing the game that is going on there? Can you talk me through how you fit in there in that space?

Sure, sure. Thanks for the question. It's a combination of both. We are entering an area that is around advanced contingent workforce, something that if we were to build on our own from scratch would take a number of years and some very focused effort, effort that we're focused on in other areas but at the same time, we're doing so in a highly innovative way. The other 3 solution providers that we're aware of in the marketplace have very dated, older technology platforms that were optimized for a very different time. When temp labor was clearly not the percentage of -- and growing of the workforce that it's becoming, they weren't built on a scalable platform. They weren't built for Software-as-a-Service the way DCR was, and they certainly weren't grounded in principles of none of us as smart as all but then intelligence built in. So we're entering this area both innovatively as well as an area that we're familiar with but one that's interesting to customers and prospects alike.

Okay, perfect. And then one follow-up for Todd. Todd, you talked about like they had to manage services on. Are they continuing to do -- become like -- offer like a managed service and they use the -- your -- like, in a way, then your software as the underlying foundation? Or how -- or you just stopped doing the whole thing?

Yes. So as I noted, there's 2 pieces, the VMS and the MSP, and we acquired the VMS. And to the extent that there are customers that are using both, the VMS and the MSP, we will continue to support those customers and that business will still continue to operate. So there is some overlap, but our contribution and financial impact will be limited to the VMS piece.

Next, we'll take our next question from Terry Tillman from SunTrust Robinson Humphrey.

This is Eric Lemus on for Terry. It was touched on earlier, but looking at emerging market and you recently hired some new heads there, can you give us the overall progress report in emerging market? And as far as the go to market, would that be more so focused on the core platform or more so power app and selling the overall platform itself?

Sure, sure. Well, thanks for the question. First off, without a doubt, it'll be focused on the full BSM platform. So we have a platform here that has capabilities of interest to companies large and small and around the world. And our strategy in terms of entering new markets has always been the same. We go in. We get a healthy dose of highly referenceable successful customers, and we build our business around that. Now having reviewed what we're doing around the world just recently here at the office in some detail, I can tell you that the return on investment we're seeing in terms of our early entrants into Asia Pac, Latin America, Canada and a couple of other very distinct markets is really, really strong. But we're going to continue to build the business along our overall 3 pillars of 30% top line growth, very careful sales and marketing efficiency and of course, continued leverage to the bottom line. So that's the way we're approaching it. All of our offerings on the platform are available, multilingual, multicurrency, globally compliant, and we're ready for business in those new markets without a doubt.

Great. And then just one other question. Any sort of clarification on the update with your global SI influencers? Where do they stand in the aptitude and the proficiency of the solutions?

Yes, thanks for that. That continues to trend in all the right directions. we continue to certify, key systems integrators on our offering. They continue to do a really strong job with us if you take a high-level view, CEO overview on all of the projects we've taken live just this last quarter as an example. And we're excited about the revenue targets that each of them are setting for their own professional services revenues they'd like to see of the tail end of this year and going into next year. So all of that is trending really nicely and continues to be a real contributor to our development of business.

Our next question will come from Koji Ikeda with Oppenheimer Funds.

Just -- I just have a quick follow-up on a previous question on sales and marketing efficiencies [anniversarying] on P&L. And last year at the Investor Day, we got to see a really nice presentation from you guys about how you're looking at and thinking about and attacking the opportunity from a marketing scorecard view. Could you maybe give us an update on if there's any significant changes to that thought process now that we're more than halfway through this year? And I have one follow-up after that.

Sure, Koji. Look, no significant changes whatsoever. In fact, no changes of any kind. It's the same approach of focusing on sales and marketing efficiency. Thinking through how much we're spending on fixed sales cost, discretionary marketing costs, fixed marketing costs, how we manage our pipeline, how we manage our degrees of flexibilities to invest more when opportunities arise and how to be cost efficient when we feel there's opportunities on as readily present, how to go into new markets in a slightly less efficient way paid for by the greater efficiency in more mature markets. So as we look at all the different levers available to us, we make calculated investment decisions and we manage the business quarter in, quarter out. So in short, no changes whatsoever to our approach here.

We typically don't call things out if it's less than $1 million. But if you look at the amount that would have been expensed under the old rules, it would have been close to $1 million more in Q2, just to give you a sense of the tailwind that we got from the ASC 606 rules.

And just on the follow-up, gross margin trend going forward, just thinking about the acquisition of DCR here and -- what's the best way to think about gross margins going forward? I know the long-term target over the next 3 to 5 years is 70% to 80%. And in this quarter, subscription gross margin, I think, were a record high at slightly above 82%. And even the professional services continues to inch towards that 10% mark. I mean, is it that long-term target still achievable even with the acquisition of DCR over the next 3 to 5 years?

Absolutely. We are going to take a near-term hit with respect to margins because of DCR as we outlined during the call. But yes, the continued progress in our model and the scale that we've been able to show will continue towards that longer-term target that you called out of 75% to 80%. And if you look -- or 70% to 80%. If you look at the midterm targets that we outlined last December from a -- pretty much every target we fit that. So we will take a -- 1 step back and go 5 steps forward as we continue to scale the business, but we're investing. And we're going to go attack this market, but we're going to stay true to our commitment, which is, as we continue to grow, we're going to continue to show scale at the bottom line with respect to operating margins and free cash flow margins.

Our next question will come from Joseph Vafi from Loop Capital.

Most things have been asked but maybe get a little update on the U.S. federal government opportunity. And then I'll just have a quick follow-up.

Sure. Thanks for the question. We continue to develop on 2 fronts there. One is a very strong and interesting pipeline, not dropping to the bottom line yet to be very candid, a very strong and interesting pipeline in that area. And we've also made very significant strides in the product area to make sure we have virtually every check box required such that a whole host of both federal and state institutions would be interested in deploying our business spend management platform.

Okay. Maybe I'll just add a follow-up question on that same topic, though, is are we looking at kind of an enterprise or, I guess, a government-wide solution. Or do you see yourself kind of penetrating perhaps a certain department or agency first and then spreading out from there?

Well, the beauty of our platform is that we're open entry in either way, and we have early conversations and then as well as real pipeline in both approaches. So that isn't the constraint. The constraint, in some cases, is completely out of our hands unfortunately and something that is on behalf of the buyer. But we continue to be optimistic about what we could do there, and we're going to continue to push.

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