Coupa Software Inc (COUP) 2019 Q4 法說會逐字稿

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

Our remarks today include forward-looking statements about guidance and future results of operations, strategies, market size, products, competitive position and potential growth opportunities. Our actual results may be materially different. Forward-looking statements involve risks, uncertainties and assumptions that are described in our most recently filed 10-Q. These forward-looking statements are based on our beliefs and assumptions today, and we disclaim any obligation to update any forward-looking statements. If this call is replayed after today, the information presented may not contain current or accurate information.

We'll also present both GAAP and non-GAAP financial measures. A reconciliation of certain of these measures 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 replay via phone, you can find the 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 as we speak to you from our newly opened New York City offices located in Midtown Manhattan.

To start, I'm pleased to share that we closed out fiscal 2019 with our strongest financial performance ever as a company. Subscription revenues for the year grew 42%, and we are profitable for the full fiscal year, delivering free cash flow margins of 11.5%. Tomorrow, we'll be holding our second financial Analyst Day at the NASDAQ MarketSite in Times Square as we continue on our path to $1 billion of revenue, a financial objective and theme we shared at our first Analyst Day.

During our presentation, we'll share details on why we believe we are uniquely positioned to win and capture the business spend management market and make a meaningful impact on the broader enterprise software industry.

With that, let's start with customers. Well in excess of 100 Coupa customers went live this fiscal year. It's important to note that Coupa-certified partners led more than 80% of these deployments as the size, global reach and technical depth of our partner ecosystem continues to proliferate. To give you a real-time sense of our implementations in action and the partnership we look to forge with all our customers, let me highlight just a few here today.

National Grid, a FTSE 100 energy and utilities company, recently went live with Coupa BSM in a U.K.-wide rollout. Their defined key success metrics with Coupa included improved requisition-to-order time, significant increases in electronic invoicing, spend under contract and increased self-service procurement for field personnel. We look forward to continuing to partner with National Grid as we progress their implementation, integrating it with SAP S/4HANA globally.

Copa Airlines, operating in 33 countries with a fleet of over 100 aircraft, went live with the first of 3 phases of their BSM initiative called invoicing for fuel. Fuel alone represents 27% of Copa's total operational spend. They achieved an aggressive initial go-live date, driven by savings commitment within the organization for their 2019 strategy.

DXP Enterprises, a distribution management company, recently went live with Coupa BSM. Since go-live, DXP has enabled more than 18,000 suppliers and processed over 85,000 invoices, helping them towards their goal of increasing electronic invoicing, reducing invoice approval cycle times and optimizing for early payment discounts.

Farfetch, a global technology platform for luxury fashion, recently went live in 2 countries with Coupa BSM as part of an expansive systemwide technology transformation that has increased AP efficiency, with over 90% supplier invoices being processed through Coupa. Global rollout is planned by the end of 2019 to deliver increased visibility and control over spend.

KPMG U.K. went live in the first phase of their deployment, enabling their internal procurement operations and focusing primarily on their central functions spend. The next phase will be KPMG U.K. rolling out Coupa BSM across their entire organization for the very first time.

lululemon athletica is a designer, distributor and retailer of healthy lifestyle and smart athletic apparel and accessories through 400-plus stores and online. lululemon is now using Coupa BSM in North America, with a full global rollout planned for the coming quarters. We're excited that Coupa is helping lululemon achieve the next level of their digital transformation.

And Monash University, the largest university in Australia, went live with Coupa BSM in less than 6 months with integration to SAP. This is the first of 2 phases in the university-wide rollout across 9,000 faculty, students and staff.

In a typical implementation ranging from 3 to 8 months in length, the speed of Coupa deployments is helping accelerate time-to-value for our customers, also known as the letter A in Coupa.

Now moving on this quarter, we signed many great new customers who are aligned with our success-oriented Value as a Service approach to business spend management. New customers in Q4 included Air Methods, Bank of Hope, Canadian Tire, Emerson Electric, Freshworks, Guardian Industries, InVisionApp, Kin Group, KPMG Australia, Looker, Munich Re, Novo Nordisk, Pacific Life Insurance Company, Peloton Interactive, Prudential Asia, Randstad U.S., Shopify, Sibanye-Stillwater in Africa, Telia, Provident, and many, many others.

I'm also very proud to share a new marquee customer in federal government, the United States Postal Service, one of the largest organizations in the world, with procurement spend exceeding $12.9 billion annually, has selected Coupa for its eBuy+ program. Coupa is providing our core BSM solution to help the United States Postal Service achieve stronger financial controls, better spend management and visibility, improved pricing, higher contract compliance rates and lower overall life cycle costs.

We look forward to helping all our new customers capitalize upon the user-centric nature of our platform, or the letter U in Coupa, to drive widespread user adoption upon completing their successful deployments.

Now as I noted earlier, at our Analyst Day tomorrow, we plan to go deep on why we are uniquely positioned to capture our market opportunity. For starters, during Q4, we achieved a significant milestone, surpassing $1 trillion of cumulative spend under management. The fact that we possess this massive aggregation of data on one platform puts us in the position to do some very innovative things.

One example of this innovation is our Coupa 2019 Benchmark Report released earlier this week. This report is based on aggregated transactional data on the Coupa platform and identifies key performance indicators for driving profitability and growth through business spend management. It allows our prospects and customers to explore how they might best optimize their own companies' processes by benchmarking the performance levels of industry peers.

Another example of innovation in this area is the Coupa Business Spend Index, or Coupa BSI, which we plan to release in coming months to share some of our insights broadly. The Coupa BSI will include spend metrics for approval cycle times, approval rates and average spend per employee across all key industries.

By way of preview, our January data suggests that in aggregate, the spend sentiment going into this calendar year was positive across all major industries, of course, at varying degrees.

So clearly, this aggregated, anonymized and fully sanitized spend data has powerful benefits. But the area where these are most pronounced is with our game-changing Community Intelligence offering that has been continually developed to generate more and more value that is prescriptive for each of our customers, also known as the letter P in Coupa.

To that end, we continue to see strong traction in this area. In Q4, our community insights capabilities were once again accessed by the majority of our customers with significantly increased usage compared to Q3 as measured in page views. And JR Miller, SVP of Finance and Controller at The Leukemia and Lymphoma Society noted in a Forbes article, "Real-time supply risk information is a game changer. Coupa Community Intelligence intelligently applies AI and analytics across an extensive community and flags risky suppliers that we conduct significant spend with that I would have not noticed otherwise. This helps me make real-time decisions to minimize supply chain risk." This is, of course, just one example of a customer leveraging one of our Community Intelligence capabilities in a generally available offering called Risk Aware.

More broadly, during the quarter, we launched our latest major release, R23, which is full of exciting product innovations and industry-first capabilities that also leverage Community Intelligence. By way of highlight, R23 includes the general availability of Coupa Spend Guard, our fraud prevention solution that uses artificial intelligence and community insights to help customers evolve from antiquated after-the-fact fraud recovery methods to real-time fraud prevention across procurement, expense management and invoice processing, an example of the comprehensive nature of our platform, also known as the letter C in Coupa. In fact, by using Spend Guard, one of our customers recently identified $150,000 in duplicate invoices on one day. Not good. With different invoice numbers that they would then able to immediately address.

Next, as we continue our development in the payments space, we are excited to launch an early access program for our Coupa Pay invoice payment solution, which, once generally available, will support both domestic and cross-border invoice payments for our customers. Over time, this has the potential to be the most widely deployed Coupa Pay module. Unlike other payment point solutions on the market, we're able to leverage our proven core competencies in developing intuitive user interface design, AP automation, dynamic workflow and other areas of the -- of our business spend management expertise. This supports our ability to extend the Coupa platform to the next natural step in the transactional spectrum, the payment of the invoice.

Now of course, Coupa virtual cards for POs and Coupa Accelerate are already generally available. In continually developing our payments road map, we are working closely with our customers. And the more money we come across, the more problems we see. These problems are ones that we are uniquely positioned to go help our customers overcome. Though still very early, we have received great feedback on Coupa Pay's current set of capabilities and future vision, and we're very excited about this new addition to the core of our platform.

Finally, as part of R23, new innovations within Coupa Open Buy are bringing an improved Google-like search experience to cross-catalog search, representing the open nature of our platform, or the letter O in Coupa. Searches in Coupa now generate results from Amazon, Amazon Business, Staples, Office Depot, Imperial Supplies and many other B2B suppliers in a highly intuitive and seamless fashion.

Now let's move on to acquisitions. As many of you have probably come to know, our acquisition strategy is focused on adding key events to power user applications that we can seamlessly integrate into our unified organic transactional engine and/or acquiring distinct technology components that enhance this engine. In Q4, we completed the acquisition of Hiperos, a leading third-party risk management provider, whose technology addresses advanced risks such as information security, bribery, corruption and demanding new data privacy regulations like the General Data Protection Regulation, also known as GDPR. We see the area of third-party risk and compliance as a growing initiative that has historically been addressed inefficiently with point solutions.

As an integral part of our BSM platform, Hiperos will have to equip customers with the advanced technology they need to protect themselves by comprehensively evaluating the risk of their full supply base. Additionally, the Hiperos power user capabilities will not only be seamlessly integrated into Coupa's core transactional engine, but the supplier risk data will become a key component of our Community Intelligence, thereby increasing its value for each of our customers in the future. My Coupa colleagues and I once again warmly welcome the Hiperos team to our community of customers, partners and colleagues.

Now as many of you have come to learn about us, our success is founded upon our 3 core values of ensuring customer success, focusing on results and striving for excellence. Seven years ago at Coupa, we instituted a key component of our annual performance assessment called the shuffle. The shuffle includes promotions of exceptional performers, transfers to new roles within Coupa and the canceling out of individuals where, through authentic and real discussions, is determined that there is a mismatch and often a joint desire to part ways. This year, we promoted 144 colleagues, transferred 28 and canceled out 54. I highlight our shuffle as an example of the meritocratic culture we're cultivating here at Coupa, one that keeps us agile and on point.

Now during Q4, we were excited to hand out 3 MVP awards, one for each of our core values, as voted by our colleagues at Coupa around the globe. Michael Hsu won the award for ensuring customer success. Michael's colleagues stated that he lives and breathes customer success, doesn't shy away from difficult situations and always takes a proactive approach internally when dealing with customer issues. Fernanda Faustino da Silva was the winner for focusing on results based upon her thoughtful, collaborative approach and her willingness to do anything necessary to drive results, even if it's outside the scope of her position. And finally, [Celeste Johnson] won for striving for excellence due to, and I quote, "Her tireless, never-ending, insightful, outstanding efforts and around-the-clock support and in-depth product knowledge." Big congratulations to Michael, Fernanda and Celeste. Inspiring.

Now before finishing up, let me touch on a few more highlights. First, we are proud to be named the leader in the IDC MarketScape Worldwide SaaS and Cloud-Enabled Accounts Payable Applications 2019 Vendor Assessment and in the Forrester Wave Source-to-Contract CLM, Q1 2019 report for contract life cycle management. We greatly appreciate the supports of the industry analyst community and consistently seek their input and willingness to collaborate around what is best for our marketplace.

Secondly, I'd like to touch upon some of our community outreach efforts through our Coupa Cares program. In March, a group of 10 of our Coupa colleagues will be traveling to Costa Rica to spend a week working on local sustainable community development projects and just pouring the foundation for community centers, planting organic gardens at a local school and painting and tiling community kitchens. I'm also proud to report that courtesy of Coupa Advantage, we have now moved donations to more than 360 charitable organizations. It feels so good to be able to give in this way.

So with this, our 10th earnings call as a public company, and as we now head into our 41st quarter of execution, my fellow Coupa colleagues and I are more excited and confident than ever about the future we are jointly developing in our industry. At our Analyst Day tomorrow, we look forward to sharing a wealth of new information about Coupa.

With that in mind, and as we continue our path to reaching $1 billion in revenue, let me now hand the call over to our CFO, Todd Ford. Todd?

Thanks, Rob, and good afternoon, everyone. Last year was a record year for the company as we have continued to execute on all fronts and deliver on the commitments we have made to our stakeholders. Our execution is reflecting in our financial results and key metrics.

Let's now look at some of the highlights for the fourth quarter and fiscal year. Total revenues for Q4 were $75 million, up 39% year-over-year. And for the year, total revenues were $260 million, also up 39% year-over-year. Furthermore, subscription revenues for Q4 were up 45% year-over-year and up 42% for the year.

Calculated billings for Q4 were $127 million, up 51% year-over-year. Several factors contributed to the strong billings in Q4: one, our largest new ACV quarter ever; two, our largest renewal quarter ever; and three, billings contribution from the Hiperos acquisition.

From a revenue visibility perspective going into this year, total deferred revenue and backlog at year-end was $532 million, up from $359 million a year ago, representing a year-over-year increase of 48%. Deferred revenue at the end of Q4 included approximately $6 million from the Hiperos acquisition.

As a reminder, we define calculated billings as the change in deferred revenue on the balance sheet for the period plus revenue recognized during the period. Further, we define backlog as future noncountable amount on multiyear contracts that are not yet contractually -- that we are not able to contractually invoice. Until these amounts are invoiced, they are not recorded in revenues, deferred revenues, accounts receivable or elsewhere in our consolidated financial statements and are considered by us to be backlog.

Our calculated billings, backlog and deferred revenue results often fluctuate on a quarterly basis due to a number of factors, including seasonality, the timing of renewals and the timing of annual contracted billings.

Let's now turn to margins and results of operations. In Q4, we made significant investment in the business with the acquisition of Hiperos and the new headcount, ending the year with 1,202 full-time employees, up from 833 last year. Even with these significant investments, our fourth quarter non-GAAP gross margin exceeded our previous guidance of 71% to 72%, ending at 72.5%, and non-GAAP operating margins also came in ahead of expectations at 3.1%. For the fiscal year, our non-GAAP gross margins were 73% and our non-GAAP operating margins were 5%.

Now let's discuss net income and EPS results. Driven by our strong Q4 revenue performance and leveraging our financial model, we delivered non-GAAP net income of $3.4 million and non-GAAP earnings per share of $0.05 on 66.5 million diluted shares.

Now moving on to the balance sheet and cash flows. Cash and short-term investments at quarter-end were $321 million, down from $406 million at the end of Q3. This includes $95 million in cash paid for Hiperos in Q4, which was offset by positive free cash flow of $7 million and positive $3 million for financing activities. For the fiscal year, free cash flows were $30 million or 11.5% of revenue, up year-over-year on both an absolute dollar basis and as a percentage of revenue.

Now let's turn to guidance. For the first quarter, we expect total revenues to be between $73.5 million and $74 million. This includes subscription revenues of between $67.5 million and $68 million and professional services and other revenues of approximately $6 million.

As a reminder, every Q1, subscription revenues are negatively impacted by approximately 3% because subscription revenues are recognized based on the number of days in the quarter, and there are 3 fewer days in Q1. This Q1, the impact due to number of days in the quarter will result in reduction to subscription revenue in excess of $2 million.

Q1 also reflects the first full quarter impact to expenses from the Hiperos acquisition. With this backdrop, we expect Q1 non-GAAP gross margins to be approximately 70%, and we expect non-GAAP loss from operations to be between $2 million and $3.5 million. We also expect non-GAAP net loss per share of $0.03 to $0.06 on 61 million basic weighted average shares for the quarter.

Although margins are expected to be impacted in the near term due to acquisitions, we don't expect a material impact to billings or free cash flows. To provide additional clarity for Q1, we expect billings growth to be approximately 38% on a trailing 12-month basis and free cash flows to be approximately $15 million.

For the fiscal year ending January 31, 2020, we expect total revenues to be between $325 million and $327 million, with non-GAAP gross margins in the range of 71% to 72%. We expect non-GAAP income from operations for the year to be between $3 million and $7 million. As a reminder, our sales and marketing expense spiked in Q2 by approximately $3 million to $4 million due to our annual user conference, which will be held in Las Vegas this year from June 24 to June 27.

For the full year, we expect non-GAAP net income per share in the range of $0.04 to $0.10 based upon an estimated 70 million diluted weighted average shares for the year. We are now providing specific guidance for cash flows. But similar to last year, we expect free cash flows to be up year-over-year, both in terms of absolute dollar and as a percentage of total revenue.

To conclude, we are confident in our ability to continue to execute and win this large market opportunity by focusing on results and delivering on the commitments we have made to our customers, employees and shareholders.

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

(Operator Instructions) We will now take our first question from Stan Zlotsky from Morgan Stanley.

So maybe just first one for me, on the performance in the quarter, what did you guys see from your sales organization at the end of the year from a productivity standpoint execution that produced strong results? And then a quick follow-up for Todd on the guide for fiscal '20, what are you guys baking in as far as inorganic contributions into the revenue numbers?

Thanks, Stan. So as you have come to see from us, very strong, continued execution from our sales organization; very, very high contribution in terms of individual reps across the team, both domestically and internationally, as well as in mid-market and enterprise, so very healthy, continued execution of our global sales team and the continuation of scaling that organization around the world.

Hey, Stan, on the acquisition revenue factored into 2020, as we noted in the call, the deferred revenue from the Hiperos acquisition at the end of the year was about $6 million. And obviously, there'll be some additional revenue from Hiperos recognized during the year from incremental billings. But I would caution that we need to be mindful that due to the deferred revenue haircut and timing of incremental billings and renewals, it will take several quarters for revenues to reach their historical run rate. In addition, given we just acquired Hiperos and are still in the process of integrating them into our business and product line, we have assumed a minimal revenue contribution before the -- beyond the deferred revenue balance at the end of FY 2019. And as we noted in prior calls, the contribution from DCR and Aquiire is small as well.

So is it then fair to say that the fiscal '20 contribution from acquisitions is -- that's implied in your revenue guidance, is quite minimal?

That's right. And typical with our historic fashion, especially since these are new acquisitions, all of them were done in the second half of last year. Let us execute, and then give us credit.

We will now take your next question from Ross MacMillan from RBC Capital Markets.

Two questions, maybe first one for Rob. As you go down the payment opportunity, I think a lot of the early moves have been around financing with things like accelerate and the virtual procurement cards. As you think about the e-payment opportunity, maybe you could just give us your thoughts around how that will evolve. Will you be sort of enhancing data on third-party rails? And maybe the timing that you would expect to have an e-payment offering in market. And then I had a follow-up for Todd, just on Hiperos, I wonder if you could just maybe be specific about the subscription revenue contribution in fiscal Q4, if material.

Well, thanks very much for the questions, Ross. So in terms of Coupa Pay, in very typical Coupa fashion, we go through 3 stages of release in terms of products. The first is declaring that we have something in development. Second is launching it in early access, which means making it available for a certain set of customers, and we learn from our deployments with those customers, of course. And thirdly is GA, and that is generally available. And when we say generally available, that means it is available for any prospective customer to leverage. And the order of our deployment with Coupa Pay began with virtual cards in development, went to early access and is now generally available and actually getting used by quite a few customers with a very nice pipeline developing. The second is Coupa Accelerate, which is, as you called out, our early discount solution, began in development, early access and now generally available. Currently, what we have in early access is something called Coupa Fit Pay for invoice payments. And we think this is indeed a very interesting area to delve into. This allows us to run batch payment runs on invoice along a whole host of payment rails that companies might want to leverage, whether it be bank-to-bank or cross-border. And so as we take that out from early access to generally available, we'll be hitting what we believe is a rich part of the market. And when we're ready to make it generally available, we'll obviously make that broadly known.

Hey, Ross, just on the revenue contribution for Hiperos, obviously, a very strong subscription revenue result in Q4. And most of that was driven by the strong performance of Steve and the sales organization and the linearity of the bookings in the quarter, December in particular, which was our largest month ever for new bookings. If you look at Hiperos, the deferred revenue that was on the balance sheet of $6 million, obviously, that will bleed into revenue over the next year, the majority of it anyhow. So the amount for Q4 was minimal that you could kind of infer from the opening deferred balance that there was some, but nothing that I would call out separately.

We will now take our next question from Chris Merwin from Goldman Sachs.

First, I just wanted to touch on Community Intelligence a bit. As I understand it now, some of the offerings are included in the platform fee, and some of the newer offerings like Risk Aware and Spend Guard are monetized separately. And I think in your remarks, Rob, you talked about increased usage of the products. So maybe can you just talk a bit about the incremental opportunity for Community Intelligence as it relates to adoption and monetization of newer products. And then I just had a follow-up.

Sure. Well, I think you actually understand it pretty well, but I'll expand a little on it. Community Intelligence is really incorporated throughout the platform. And the purpose of it is to leverage data from the community, for the community to equip customers to get powerful information they could use to fuel a whole host of applications. Risk Aware and Spend Guard are just 2 of those applications. Now of course, you know the data is obviously aggregated, anonymized, normalized when it's presented to customers. But the real opportunity here from a monetization perspective is not only the incremental apps like the ones I just described but the actual evolution of the platform pricing over time. With more and more value that our customers get from subscribing to Coupa, the more we anticipate them to continue to pay us fairly for the value we're delivering. We see ourselves as a Value as a Service company. And I'm really proud to tell you that now that it's been 40 quarters here, and the average annual subscription per customer has gone up virtually every quarter for 40 quarters, which is a testament of this incremental value we continue to deliver for our customers.

Okay. That's great. And just as it relates, Todd, to the non-GAAP op income guidance for fiscal '20, it looks like it's a little bit below I think what you've put up in fiscal '19. And I know there's a lot of operating leverage in the model, and the unit economics are up there in software. So maybe can you just talk about some of the investments that you're making in the business and if there's any impact from the acquisitions being accounted for in guidance as well?

Yes. So as you kind of work through the year, it's a typical one for margins to be down in Q1, given that the subscription revenues are lower because of the number of days in the quarter. And obviously, we're getting impacted by the acquisitions as well. If you look at what we've kind of indicated with respect to revenue contribution from Hiperos and versus the expense profile, it's going to take a few quarters before the revenue reaches kind of steady state and catches up with the expenses. And obviously, we're taking all the expenses upfront, and Q1 will be the first quarter of that, that impacted the expenses. And we're going to go through this in more detail tomorrow when we talk about the new midterm targets, et cetera. But if you look over the next 12 to 18 months, we do expect the gross margin profile to reach a range of the 74%, 75% range. So the scale in the model is continuing. Obviously, we're taking a couple of steps back with the impact of the acquisitions. But obviously, long-term, we think there's a significant amount of shareholder value that's going to be created here.

We will now take our next question from Brian Peterson from Raymond James.

So Rob, I wanted to follow up on one of your comments. You mentioned with the more money you come across, maybe the more money you'll see. I'm just curious what you can say about the price points of some of your products, particularly on the modules as they generated more value for these customers.

Sure. Brian, thanks for the question. The interesting thing about Coupa Pay is that it was really driven by customers to begin with. We have customers come to us who said "look, if we're buying through Coupa, why can't we also be paying through Coupa?" And when we went in to look at the ways that these customers are doing payments, we did really see a great deal of problems and problems in terms of being able to handle complex batch runs, a lot of complex integrations, a lot of different rails and forms of payment, a whole host of complexity around reconciliation. There really are very meaningful problems there to go solve. And what we've been doing strategically is peeling back the onion on the most low-hanging fruit, the most intuitive areas where our core competencies can be leveraged to drive value for customers, and digging deeper and deeper into the core. And that will be monetized as we monetize everything with our customers. We sit on the same side with our customers. We don't penalize them. We don't tax them. We charge them a fair recurring subscription price for the value that we offer through our software. And in some areas of pay, we'll be determining distinct models where we can share on some of the transactional leverage there. But we're not ready to talk about specific model scenarios publicly at this moment. We're in early access with some of the newest capabilities. And as we bring them to market, we'll, of course, share more. No question about it.

Understood. And Todd, maybe one for you, you mentioned the record renewals. Anything you can share on the dollar-based revenue retention?

Yes, so when you look at the renewal rates, both at gross and dollar-based expansion, same trend continues, small improvements quarter-over-quarter but basically within the same range that we highlighted last quarter.

And we'll now take our next question from Joseph Foresi from Cantor Fitzgerald.

This is Drew coming on for Joe. I was wondering if you could highlight a couple areas of growth maybe by geography and functionality.

That's a very interesting question but a tough question to slice. So one of the things we really pride ourselves on at Coupa is being able to work with customers and enter the relationship via -- wherever they are in their maturity model. They may be struggling with automating their expense reports. They might not have most of their spend on contract. They might have very low usability of whatever solutions they have at the moment from incumbents. There might be a lot of paper-based processing. So we enter in wherever the biggest pain point is and where the biggest value driver is from a functional perspective, and then we go from there. And we take folks further and further up the value maturity curve. From a geographic perspective or a market perspective, we're seeing very strong growth in our mid-market business. We're seeing very strong return on investment in our international investments from a sales and marketing perspective. And we're obviously seeing continued cultivation of the market opportunity domestically in enterprise. So in every sector, we're seeing very strong growth. We have a nice portfolio effect as we build out our business organically. And that would be the best way I could address your question.

Perfect. And can you discuss any macro expectations that are baked in the guidance and how the overall demand environment looks?

Yes, the only thing I would call out here, Rob, kind of highlighted some of the macro trends we see from our data set and that things continue to look strong. And from a guidance perspective, obviously, macro can change at any time, though we look more towards what does our pipeline look like and how do we feel good about closure rates. And you'll actually see a lot of good stuff from Chandar and Steve tomorrow with respect to how we're continuing to build the pipeline, how we're getting more prescriptive in targeting customers and how that's resulting in stronger ACV, deal sizes continuing to go up, et cetera. So that's how we look at guidance and the visibility that we have.

We will now take our next question from Ryan MacDonald from Needham & Company.

I guess, first question is around the federal government opportunity. Obviously, really great to see the USPS deal. Would love to hear maybe a little more color, if you can, on the potential scalability there and then also sort of you're seeing in the pipeline on the federal government vertical heading into fiscal year '20 here.

Yes, sure, happy to address that, Ryan. So in terms of United States Postal Service, specifically, obviously, this is, I think, well known, but it's one of the largest organizations in the world, over 0.5 million people, over $7 billion in revenue. Their annual spend is obviously managed in billions of dollars. We're looking at 65,000-plus initial users, a 5-year kind of transaction and they're using us for all the great things that we're known for: streamlined -- streamlining and improving their user experience, improving their item categorization and searchability, reducing overall invoice errors, improving pricing, driving higher contract compliance rates. These are just some of the things off the top of my head, I mean, the lower overall life cycle cost, spend management visibility, and they're going to be doing this across a whole host of spend categories from maintenance and repair to signage, displays, marketing, you name it. And the ROI on a project like this is really, really strong, measured in millions and millions of dollars annually. So it's these types of large-scale projects that we're really well suited to deliver for the federal government where our greatest core competencies are around usability, high-volume transactional capabilities on a 24/7 basis with a very, very strong customer support, customer success team. So we're excited about this opportunity. And the pipeline overall continues to develop nicely. One of the areas we're concerned about entering federal is that the time to close is quite long, and the payback is quite long. But we've been at this for a bit, and we're starting to see some really good fruits of our labors starting to drop. And USPS is obviously a great example of that.

Great. And then for my follow-up question, it's really around platform functionality with workflows. Based on some of our recent fieldwork, we've heard that ServiceNow is developing a workflow specifically for the procurement process. And I think you offer some similar functionality with, say, dynamic approvals around procurement. Just trying to look for some color on what sort of demand you see from the customer base around driving workflows like that within the core procurement engine?

Sure, sure. Well, I firmly believe that every large-scale enterprise software product has to have some elements of core workflow capabilities. You're automating some business processes in some way. So I imagine the vast majority of the large-scale enterprise software companies you may cover or run into are doing that. We're doing, obviously, a great deal more than that. Our workflow engine is highly dynamic, and it's highly suited to the business spend management process, having been thought through to deliver for that process. So we think we're in a very good position to continue to scale that as part of our platform, no doubt.

We will now take our next question from Raimo Lenschow from Barclays.

Rob, as we start a new year, I'm sure you had the sales kickoff meeting or it's coming any day now, can you talk a little bit about what you do with the sales force in terms of the new -- the acquired new modules, kind of in a way, new modules you are getting in terms of is that a -- how do you cross sell? Do you cross-sell at the renewal point? Or are you -- is the sales force incentivized to do -- to go into the accounts straightaway once you get them? And then one for Todd, is there any changes to sales force -- structured sales force compensation as we go into the next financial year?

Sure. Well, thanks, Raimo. Well, first of all, we actually don't have one annual kickoff. We don't really have much time for that. We do local QBRs and -- quarterly business reviews, and we get moving into the quarter. And we've been doing that for many years. We interact online all the time and share best practices across our sales marketing teams, in fact, the entire company overall. So we're moving very, very quickly, and we're proud of that. In terms of the capabilities we acquire, we see it on 2 perspectives: one is the need to very quickly integrate these power user capabilities into our transactional core. That is both on the platform side as well as the usability side, the permission side. And I can tell you that with every acquisition that we've done, including the latest, a large part of that work has already been done, which is very, very rewarding to see. Great work by our development team and our products team in making that happen. And on the go-to-market strategy, we quickly create positioning of materials, and we go both to the customer base of the acquired company as well as to our customer base and new prospects with the overarching integrated platform. Our demos showcase the integrated platform, our positioning showcases the integrated platform and our pricing is adjusted accordingly. And the reality is, Raimo, that our prospective customers are looking for one business spend management platform solution that addresses all of their spend management needs. And with every one of these acquisitions we've done, we've gotten closer and closer on delivering that comprehensive solution.

Hey, Raimo, with respect to the sales organization, if you look at what Steve has been doing, our CRO has been here 2.5 years now or a little bit longer than that, and they're very thoughtful in building out the sales team, promoting people in the right places, in cases where maybe some minor adjustments were made, been very proactive on that front. So I would say really nothing out of the ordinary. And as we've talked about before, starting to invest a little bit more heavily in international expansion in Q4, as some of you noted in your job tracker surveys. We went pretty hard in the paint on acquiring and hiring a new sales talent in Q4. So we see great opportunity there. And I think Steve has built the right team to capitalize on it.

We will take our next question from Terry Tillman from SunTrust Robinson Humphrey.

Most of my questions have been answered, but I started with a list of 30 questions, so I actually still have a few. So I guess, maybe one thing, Rob, could you talk about why and provide any quantification possibly about partner investment? It sounds like you've got a lot of momentum with partners, but where are incremental opportunities? Is it geographies or verticals? Just maybe a little bit more color on the partner channel.

Sure, Terry. Well, look, first of all, let me tell that SIs, broadly speaking, are absolutely investing more in terms of their own dollars to get Coupa folks trained -- to get their folks trained and certified on Coupa, which is a wonderful thing we see happening. Some of that is driven by customer demand, a lot of those is driven by their desire to have the right talent base involved with their own prospective customers. And secondly, we're seeing them bringing us into more deals. We're seeing them bringing us into more deals domestically as well as internationally. And we really see this as a ground game. We have -- we're developing very strong relationships all over the world with some of the most marquee systems integrators. We're coming to those relationships with a portfolio of highly successful customers in many of the verticals that they service. And so those relationships are coming together quicker than what we might initially anticipated simply because of the track record we developed. So overall, very healthy.

Okay. And on Coupa Pay, and I'm assuming we're going to hear more tomorrow, but just anything you can say about the materiality of Coupa Pay, whether it's billings or some other metrics in FY '20? And the sales force payment processing and payment workflow all the way through to that part of procure-to-pay cycle, are they adept at selling? Or do you need overlay people?

Yes. So that's a 2-part question. I think, to some extent, there will be overlay folks required in some cases. And I'm not talking about a huge overlay team with double comp and all kinds of things of that nature but really just what we've always done, some specialists in a certain area that's relatively new to the Coupa sales process and Coupa overall platform that can help jump start some of the work we're doing there. So certainly, we will invest there. But we'll invest there within the same highly efficient sales and marketing constraints that we placed on us now for over a decade. In terms of how the model will materialize, as I mentioned, it's early days in that area. We have several customers, and some of the products were already taken GA. We've seen thousands of transactions in Coupa Pay, which is very promising, and we continue to develop a very strong pipeline. So a lot of work has happened and a great deal of work to be done that we're really excited about.

We will now take your next question from Mark Murphy from JPMorgan.

Rob, so you had mentioned last quarter that you have looked into your data and seen that the time to approval for spend request was taking a bit longer in certain industries and also that the rejection amounts had increased quite a bit. It looks like to your commentary on the spend index, and it sounded like -- that sounded quite positive for this year. So just wondering, has that trend diminished with the time to approval and the rejection amounts, has that diminished or changed at all in recent months?

Well, thanks, Mark, for the question. Let me first break apart that question, so there's complete clarity. When we talk about what's happening in the business and as it pertains to our business, our business and our pipeline remain strong, and we feel we're really well positioned to execute and extend our position as a leader in our industry. Now when we look at the overall data as part of this Coupa Business Spend Index that we'll be bringing out shortly, there are some very interesting insights that come from the data. Generally, every one -- all industries we've seen a great deal of bullishness coming into January. But if you look at financial services, for instance, okay, and if you look at the metric of time to approve, so average time to approve, that actually has taken a bit longer in Q4 over Q3. And then suddenly we saw a burst of approvals happening in the first month of January on an average per user basis, so a sudden burst in approval time and speed in January. Alternatively, when you look at something like retail, we saw really strong spend growth in Q4 over Q3 and then a marked deceleration in that growth coming into 2019. That's looking at average spend per person. If you look at average approval rates, you look at an industry like HITEC, we saw decelerating spend growth coming into 2019 and a marked increase in spend rejections coming into January. So the interesting thing here is we're seeing leading indicators across all of these different industries around what's happening. And these are just some examples that I could point to, much of which will be distilled down as part of our Coupa BSI. And we're in the process of backwards testing that and making sure that when we launch it, it's statistically significant enough to matter for folks like yourselves as well as the industry at large.

Okay. Yes, very clear. Makes sense. Todd, just as a follow-up, I think coming back to Hiperos to try to strip out the -- some of the temporary accounting noise, I think we're just wondering at a high level, what was the ACV level or the ARR run rate of the company around the time you acquired it? I think that's all we're trying to look for is a little help on that.

Fair. So one of the things that we did since it was a material acquisition is we filed an 8-K, which had -- with Hiperos historical, there were 2 entities, and one of those got spun out before we acquired it. And if you back into the numbers, the run rate of that business was in the, call it, $15 million range, slightly higher. And as I said, we acquired that company in December, end of the year, and their process was to bill 60 days in advance. So most of the Q4 billings that you have a seasonally strong Q4 for enterprise software, that didn't inure to our benefit. So a lot of the billings is going to come in Q4, and then that's when -- by that time, you also have the in-quarter billings throughout the year, and revenue will start to get to that run rate. And that business was roughly breakeven on a non-GAAP basis. So if you think about the amount of additional expense that we're taking, that's what's really impacting the near-term gross margin and operating margins, although it was roughly breakeven from a free cash flow perspective.

Okay. So just to clarify, the run rate of the remaining portion after the -- a part of it got spun out is $15 million.

A little bit more than $15 million.

We will now take your next question from Koji Ikeda from Oppenheimer.

Just thinking about that $1 billion revenue target, how much of that is from Coupa Pay, the existing product of Coupa Pay and even future products of Coupa Pay 2 is built into that $1 billion revenue target?

Thanks, Koji. One of the interesting things about our business, and we'll be sharing some of this at the Analyst Day tomorrow, but if you look at where we began, 100% of our revenue was coming from our core procurement product. And by the time of our IPO, something like 50%, and now it's roughly 1/3. So what's happening is that, as I mentioned earlier to Raimo's question, we're seeing a desire by this customer to have a comprehensive business spend management solution. And all of these components, all of these information-technology modules, if you will, are part of that overall solution. So for us to break out whether or not what portion will come from this module or that module is very, very difficult to do. What isn't difficult to do is to see the average annual subscription revenue per customer and how that's grown now for 40 quarters. So we continue to drive that as part of our solution set. Rest assured, we haven't modeled some crazy model around payments and how that is going to have some massive impact to getting us to $1 billion. It's just another set of capabilities that we believe is key to the overall business spend management platform vision we're working towards.

Super clear. And I just had a follow-up question to a previous question on the USPS win in the quarter. Curious to hear if winning USPS required some level of set brand certification or a visible path to certification on Coupa's end to secure that win.

So the answer to that question is yes. But I think the broader context to it, Koji, is that there's a whole host of very complex requirements that the government takes you through in order to become -- to be in a position to serve them. So once you get through them once, they help you the second time; and you get through them the second time, they'll help you the third time. And so we've done a lot of work in the last 18 months or so to prepare ourselves to become a partner of the United States Postal Service, and we think that positions us very, very well for other federal customers down the road.

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.