Weekly Dashboard 12/18/2020: Coupa Software Q3 Earnings Teardown

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Strong recovery for growth names, led by macro news of stimulus, Fed reiterating low rates and continuing to provide liquidity by buying assets.

Check out Jon Ma's breakdown on the bull case for Bitcoin!

1️⃣ SaaS Stock Prices vs. Benchmarks 📊

Change since bear market start (2/19/2020):

• ZM: +290.7%
• Top 10 SaaS: +149.9%
• Bessemer Cloud Index (EMCLOUD): +82.0%
• B2B SaaS: +57.8%
• S&P 500: +9.6%

Change in the past week:

• ZM: +2.3%
• Top 10 SaaS: +8.2%
• Bessemer Cloud Index (EMCLOUD): +8.1%
• B2B SaaS: +6.7%
• S&P 500: +1.3%

Market update 📈: The major indexes reached record highs as expectations grew for the passage of another federal coronavirus relief package. Energy stocks lagged despite oil prices touching nine-month highs on strong demand from India and China. After weeks of stalled negotiations, signs of progress emerged in congressional attempts to craft a new $900B stimulus bill.

On Tuesday, stocks seemed to get a lift after Senate Majority Leader Mitch McConnell vowed that Congress would remain in session until a deal on the stimulus was reached. Global stocks pulled back on Friday, however, on reports that Republicans were demanding a provision barring the incoming Treasury secretary from providing the Federal Reserve with more emergency lending funds in 2021.

The rollout of the Pfizer-BioNTech coronavirus vaccine on Monday also seemed to bolster sentiment. On Thursday, a U.S. Food and Drug Administration (FDA) advisory panel gave its approval to Moderna’s similar mRNA vaccine, which would nearly double the expected number of total doses available by the end of the year. Current coronavirus trends remained daunting, however, with the U.S. setting records for daily deaths. The heavily populated southern part of California emerged as the new epicenter of the crisis, despite strict lockdown measures.

2️⃣ B2B SaaS EV/NTM Revenue Valuation Multiples 🔥

• High growth SaaS (>40% rev growth): 31.2x
• Medium growth SaaS (20-40% rev growth): 16.9x
• Low growth SaaS (<20% rev growth): 7.1x
• Median B2B SaaS: 12.2x

3️⃣ SaaS Earnings - Coupa Software (COUP) 💸

I think Coupa Software remains one of the most misunderstood B2B SaaS companies. The company, the category leader of budget spend management, extends beyond just procurement (from which they started). Coupa has expanded into B2B payments over the past year through Coupa Pay. While, the company's subscription revenue segment grows at a modest 31% y/y, Coupa Pay (should be valued as a payments company) is at an inflection point in the company, and its high revenue multiple is attributed to the massive potential for continued growth and upsell.

Because of its frothy 43.1x NTM revenue multiple, investors have overlooked Coupa - despite the fact that it spent most of 2020 trading as an expensive software stock, but cheap payments stock.

Payment infrastructure companies trade at higher revenue multiples than even best-in-class SaaS. Here are a few reasons why Coupa trades at such an expensive multiple:

1. Coupa Pay has an unconstrained market size: its market is horizontal and global. Coupa Pay is designed to support global customers/currencies/use cases from day 1.
2. Coupa Pay has surpassed, and will likely see additional catalysts as it overcomes additional regulatory hurdles: The emerging regulatory framework mandates management and transmission of financial data that are consumer centric, private, transparent, and digital – Coupa pay is the new pipe that enables transition.
3. Few possible winners: For B2B payment processors like Coupa Pay, this is in developing their existing sticky relationships with customers they've acquired from their BSM platform. The barriers to entry will result in only a few scaled players that are each important standalone platforms. First mover advantage is more important here than other industries because of rapidly changing regulations, and displacement of legacy systems. This is Coupa Pay's opportunity to lose.

COUP Q3FY21 Financials:

• Total revenue: $133M (+31% y/y). Subscription revenue was $118M, +31% y/y.
• 62% of revenue came from US, 38% from international.
• Calculated billings: $140M +33% y/y (+21% in Q2)
• non-GAAP gross margin was 72.5%
• non-GAAP operating income of $14 million (11% margin), non-GAAP net income of $13 million or $0.18 per share on $73.8 million diluted shares.
• Management noted that G&A expenses in Q3 included more than $2 million of consulting services related to the LLamasoft acquisition that once again closed in Q4.
• Free cash flow: $17.3M (13% margin, down from 22% a year ago)

COUP Q3FY21 Highlights:

• Coupa strengthened their Coupa Pay partner ecosystem with the addition of American Express, which now supports virtual card payments in the US.
• Coupa Pay's customer growth is accelerating: it took nearly two years to reach the 100 customer milestone for Coupa Pay. That number has grown to over 150 in just the last two quarters and 30% Coupa Pay attach rate to new logos.
• On growth in this environment: management noted that growth this quarter came despite the headwinds of a difficult market environment and the fact that their most recent offering and invoice payments has only been available for a few quarters.
• Acquisition: acquired AI-powered supply chain design and planning leader, LLamasoft, in November 2020.
• Category leader: named a Leader in the 2020 Gartner Magic Quadrant for Procure-to-Pay suites for the fifth consecutive time.

Takeaways from Q3 FY21 earnings:

1. Coupa Pay is at an inflection point.

Coupa Pay is the organic payments and financing solution built on Coupa’s BSM platform which brings a seamless experience for customers to pay and finance the spend that is managed in Coupa.

Coupa Pay enables customers to take advantage of every payment rail with a single platform and a single interface, spanning domestic bank transfers, cross-border payments, virtual cards, and digital checks. The Coupa Pay application has been architected to allow customers to batch, release, and approve their payments across all payment rails and to initiate payments from any bank account or card account that they have with their treasury banks. With a single secure control point in Coupa Pay, customers can release payments from banks worldwide without having to log in to each of their bank portals or card payment applications. Coupa’s automated capabilities facilitate integration with both the company’s banks to pull funds from, and with the general ledger system for automated payment and charge data reconciliation.

• New logo attach rate on Coupa Pay outpaces existing % of customers using Coupa Pay: I believe this is a forward indicator of Coupa Pay's traction. New logos saw an attach rate of 30% to Coupa Pay. Management also mentioned that among the customers that have signed on with Coupa, their adoption rate is accelerating, and this was their fastest growing new module.
• Coupa Pay removes a ton of friction and offers immediate ROI for customers: management highlights a specific customer, Couchbase, who needed to toggle between multiple systems, which created room for error and complicated reconciliation processes. With Coupa Pay, Couchbase now makes their invoice payments from the Coupa platform in one seamless integrated experience that provides the financial organization with increased visibility into their payments, greater data accessibility and a streamlined approvals process. They are now processing approximately 90% of their payments through Coupa Pay and are planning to take advantage of cross-border payments and virtual credit cards soon.
• Coupa Pay improves Coupa's existing best-in-class unit economics: customer LTV is likely prolonged and increases as companies move their B2B payments onto Coupa's platform with less friction, which improves retention and ARPU expansion. Similarly, expansion from procurement into payments unlocks new verticals where previously, the total addressable market (TAM) for software was too small and/or the cost of acquiring customers was too high.
• Despite guiding for lower margins in the short-term, higher contribution as Coupa Pay ramps up will result in underrated margin improvement: Coupa pay is likely undermonetized at the moment, and the potential for take-rate normalization on B2B payments represents a massive opportunity as the platform scales.
• Coupa Pay could represent a larger portion of long-term revenues, and certainly represents a larger opportunity with uncapped potential:

2. Llamasoft acquisition remains underappreciated by investors.

• LLamasoft is an AI powered supply chain design and planning software company. This acquisition represents Coupa's continued expansion of direct spend capabilities and is in line with their declared vision of comprehensively managing all business spend. Supply chains are being required globally. Today, it's all about agility and the ability to design, transact, learn and optimize very quickly combining LLamasof's data driven platform with Coupa's $2 trillion plus of community powered spend data creates a synergy that can build on itself introducing that amount of new timely and relevant data to what is already considered the supply chain design and planning platform of choice will help customers make optimized supply chain decisions.
• Coupa aims to distance themselves from other BSM platforms with the acquisition: with demand uncertainty on one hand, and supply volatility on the other, companies are in need of supply chain technology that can help them assess alternatives and balance trade-offs to achieve desired business results. Llamasoft provides these capabilities with an AI-powered cloud platform that empowers companies to make smarter supply chain decisions, faster. Those smarter decisions will drive additional direct spend through Coupa's platform, which will in turn yield additional valuable data. This cycle will allow newly integrated supply chain design and planning technology to continually improve and yields greater and greater value for customers.
• LLamasoft will create a meaningful drag on gross margins for at least the next two to three quarters, which is reflected in Coupa's guidance: primarily due to the fact that post-acquisition, Coupa will carry the full burden of the acquired businesses costs, but doesn't recognize 100% of the revenues, because of the writedown of deferred revenue in the purchase accounting. Likewise, it takes several quarters to complete the full business integration to the point where Coupa can take advantage of expense related synergies.
• Llamasoft customers represent a market for Coupa to own: going forward, Coupa plans to sell the hosted SaaS solution to new customers. For the LLamasoft install base customers with on-prem licenses, Coupa intends to transition the majority of them to the cloud over the next several quarters.

3. Coupa is focused on removing every bit of friction from the budget spend management process.

• Coupa is widely considered the undisputed leader in the BSM space: they have a better, all-encompassing product (which allow them to land more effectively than competitors) and offer mission-critical service with high barriers to entry & switching costs.

Coupa's platform has a flywheel effect that continues to further its moat in this space:

Coupa started in procurement, but management has always thought bigger: The Llamasoft acquisition was demonstration of this.

Likewise, this quote from Coupa's CEO sums up their strategy:

"When we land in an account we deliver value very, very quickly to our customers, and then they choose over time to add on more and more capabilities. As you know, we started procurement and procurement does not represent the majority of what we offer our customers today. So that's a very exciting development. What I'm most excited about is not one individual module. There's certain quarters when one module leads, there are other quarters a different module leads. There are certain industries when one module leads, there's certain company sizes where a different module leads." - CEO Rob Bernshteyn, Q3 FY21 earnings call.

• Management is focused on owning the entire process: Coupa aims to address every need in the business spend process and recognizes the synergy among their modules: from someone thinking that they need to request some good or service, all the way to the workflow, the ordering, the receiving, the ability to invoice from the supplier, the management the supplier experience, all the way through managing the inventory and on-hand inventory, and reordering times, and updating the contracts with the suppliers, and managing the money in an organization and the expense processes, all the way back to the AI and algorithms that are being used within LLamasoft to help design and plan the way businesses go about spending money and plan our supply chain.

Despite declining gross margins in the short term (as Coupa Pay accelerates and Llamasoft integrates), Coupa will be extremely profitable in the long-run:

As always, feel free to shoot me an email if you have any questions, feedback, or concerns.

Stay safe everyone,

Albert Wang, Public Comps Team

albert@publiccomps.com

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Views expressed in theses emails are ours and ours alone and don't represent that of our previous or current employers. Public Comps provides financial and industry information regarding public software companies as part of our weekly dashboard, our blog, and emails. Such information is for general informational purposes only and should not be construed as investment advice or other professional advice.

Full disclosure: I own CRWD, TWLO, SHOP, TDOC, FB, COUP, MSFT, DDOG, ESTC, AYX, PLAN, ZM, and DASH.