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Coupa Software: Recovering From The Pandemic Effects

Seeking Alpha ·  {{timeTz}}

SummaryCoupa Software's stock has been dropping over the course of the year because of macroeconomic concerns like the pandemic and rising interest rates.The company is a clear market leader in an area called Business Spend Management that has a TAM of $94 billion.As pandemic concerns wane, the near-term prospects for the company rise as its software will be needed to help repair broken supply chains caused by COVID-19.Coupa has consistently passed the "Rule of 40" for SaaS companies for the last 5 years.Coupa Software is a buy for both its short term and long-term prospects.

Sundry Photography/iStock Editorial via Getty Images

Coupa Software (NASDAQ:COUP), a Business Spend Management ("BSM") cloud company, by almost every measure is a smash hit over the past 5 years since its IPO in 2016. As I write this, Coupa is up almost 702% from its IPO closing day price.

However, this year, the company appears to have run into a wall. Coupa Software has lost 35% YTD.

Data by YCharts

The reason why the stock has been dropping over the course of the year could be blamed on a multitude of reasons from the macroeconomic reasons that have been affecting most growth stocks this year to company specific reasons.

Some of the macroeconomic reasons might include various concerns like the possibility of rising interest rates and the lingering uncertainty about the damage that COVID-19 is still causing supply chains. Since Coupa Software is a company that largely deals with supply chains, it would make sense that the current disruptions in supply chains around the world might affect Coupa.

Some of the company specific reasons for the drop in Coupa's stock include the fact that the company was selling at a relatively high valuation at the beginning of the year, while at the same time the company's growth rates were rather lackluster compared to what could be found in other SaaS companies.

In addition, Coupa has a lot of debt on the balance sheet and if interest rates are increased in the midst of an upcycle, it could affect Coupa's ability to repay its loans.

Investors also might not like the fact that the company's earnings losses have been getting larger over the course of the year, which seems not to be ideal in a market still filled with a lot of uncertainty.

Data by YCharts

Why Buy Coupa Software

Source: Coupa Software Investor Presentation

Coupa is a clear market leader in the BSM space that has a TAM of $94 billion. Coupa also has excellent fundamentals and a very strong long-term opportunity ahead in an area that might be under-appreciated by many investors that do not know what BSM is or what Coupa Software does.

The Coupa Software platform specializes in an area called Business Spend Management ("BSM"). What this platform does for customers is to help analyze a company's expenses, accounts payable, and purchase decisions in order to provide actionable insights that can lead to improved inventory management, optimized supply chains, while making smarter purchasing decisions and realizing cost savings.

Especially in times of broken supply chains that now require repair, the demand for Coupa Software's platform should only go higher as the company's supply chain design and planning solutions help companies to create real-time digital twins of their supply chain to show where shortages might appear that could impact a customer and identify those shortages ahead of time, as well as help solve the problem.

Over the shorter term, the most recent financial results have shown that the business has been re-accelerating as the pandemic weakens over time. Moving forward fundamentals are expected to only get increasingly better and the company has strong possibilities of beating future expectations, especially as Coupa management has a reputation of being very conservative in their future estimates.

The company has also recently seen an improvement in billings in its Q2 earnings that exceeded some analysts' expectations and the company's sales cycles is currently trending in the right direction, as COVID-19 concerns wane.We’re seeing sales cycles continue to move towards normalizing even if they’re still a bit longer than we – they were before the pandemic. We’re seeing enterprise customers – companies become more engaged as evidenced by theincreased number of seven-figure deals we closed this quarter. We’re seeing global scale and improved predictability in our mid-market business. We continue to welcome new Coupa Pay customers with another quarter of achieving 30%-plus attach rates on new deals.Source: Coupa CEO Rob Bernshteyn -Q2 2022 Earnings Conference Call

Let's look at the company's fundamentals from the latest quarter.

Coupa Software Q2 FY22 Earnings Results

Source: Coupa Software Investor Presentation

The most important metrics to track in order to assess the health of Coupa's financial model is the revenue growth (+30%), sales & marketing expenses as a percentage of revenues (want to see going lower over time), and operating & free cash flow margins (want to see going higher over time).

Data by YCharts

Total revenue for Coupa's Q2 FY22 was $179 million, up 42% year-over-year. These revenues beat estimates by 16.27M.

Subscription revenue was up 40% year-over-year to $156 million, beating consensus estimates by $13.2M.

Professional services revenue was up 60.5% year-over-year to $23.02M beating consensus estimates of $19.9M.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Source: Coupa Q2 FY22 Earnings Release

Coupa Q2 FY22 GAAP Gross Profit was 100 million and Gross Margins was 55.80%.

Coupa Q2 non-GAAP gross margin was approximately 71.5%.

Data by YCharts

Coupa Q2 FY22 GAAP R&D was $41.80 million, S&M was $76.28 million and G&A was $36.25 million for total Operating Expenses of $154.33 million.

Data by YCharts

Coupa Q2 FY22 non-GAAP R&D was $30.74 million, S&M was $50.91 million and G&A was $20 million for total Operating Expenses of $101.64 million.

The following chart shows the scaling of non-GAAP operating expenses from FY16 to FY21, which suggests that Coupa is able to fully capable of increasing revenues at a +30% rate without excessive costs in S&M and other expenses.

Notice that S&M expenses as a percentage of revenues dropped from 64% in FY16 to 31% in FY22. So, Coupa is showing increasing efficiency in Sales & Marketing, which the company sees as a key ingredient for long term success.

Source: Coupa Software Investor Presentation

Coupa Q2 FY22 GAAP Operating Loss was $54.30 million and GAAP Operating Margin was -30.3%.

Data by YCharts

Coupa Q2 FY22 non-GAAP Operating income was $26.72 million compared to $12.3 million for the same period last year. Non-GAAP quarterly Operating Margin was 14.9%.

The following shows the trends of non-GAAP TTM Operating Margins up until Q1 FY22 demonstrating the operating leverage the company has:

Source: Coupa Software Investor Presentation

GAAP net loss attributable to Coupa Software Incorporated was $91.5 million, compared to $43.1 million for the same period last year. GAAP net loss per basic and diluted share attributable to Coupa Software Incorporated was $1.24 beating estimates by $0.17. This compares to an EPS loss of $0.64 for the same period last year.

Data by YCharts

Non-GAAP net income attributable to Coupa Software Incorporated was $20.3 million, compared to $15.2 million for the same period last year. Non-GAAP net income per diluted share attributable to Coupa Software Incorporated was $0.26 beating estimates by $0.32. This EPS compares to $0.21 for the same period last year.

SaaS Rule of 40

The rule of 40 shows the financial health of a SaaS company. This rule says that when a SaaS company's growth rate is added to its free cash flow margin the result should equal 40 percent or higher. Many investors are aware of this metric and tend to reward SaaS companies with higher valuations over other SaaS companies that fail to pass this rule. Only a few elite SaaS companies can pass this rule.

The following shows Coupa's rule of 40 metrics from FY17 to FY22:

Source: Coupa Software Investor Presentation

Balance Sheet

Coupa Software ended Q2 FY22 with $633.56 Million in cash and short-term investments.

Coupa ended Q2 FY22 with current debt at $616.40 million and Long-Term Debt was $914.99 amounting to $1.53 billion in total debt.

Coupa has a quick ratio of 0.737. A company with a quick ratio of 1.0 and above can easily pay current liabilities. A company that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term.

Coupa has a current ratio of 0.786. In general, a good current ratio is anything over 1, with 1.2 to 2 being the ideal. A current ratio above one means the company has more than enough cash to meet its liabilities while using its capital effectively.A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.

Coupa had a debt-to-equity ratio of 1.67, which is a measure of the ability to pay long-term liabilities.

Companies with a debt-to-equity ratio of more than one means that total liabilities are greater than total equity and also indicates that more than 50% of the company's assets have been funded by debt. In general, such companies are considered riskier than firms whose debt-to-equity ratio is less than 1.0, as the company is more likely to default if interest rates were to rapidly increase.

Coupa has an Interest Rate Coverage of -2.14. In general, a low or negativeinterest coverage ratiois usually a major red flag for investors of possible trouble paying off debt in the future.

In an environment with rapidly rising interest rates, the market would likely not treat Coupa's stock very kindly as the company could undergo some credit stress if interest rates rise too fast.

On Business Insider's website, Coupa Software's debt is rated at a 6 on a scale of 1 to 10 with ten being the riskiest on the Moody's Daily Credit Risk Score, meaning that Coupa is currently rated at high medium risk for their debt.

Coupa's operating cash flows and adjusted free cash flows were positive a $40.8 million and $36.9 million, respectively.

Free Cash Flow margin was 20.59%.

Data by YCharts

The following chart is Coupa's Operating and Adjusted Free Cash Flows Trailing Twelve Month ("TTM") showing that the company has increasing cash flows over time.

Source: Coupa Software Investor Presentation

Guidance

The Coupa CFO highlighted in the earnings call that guidance for Q3 is being affected by last year's acquisition of LLamasoft. Coupa is in the process of migrating legacy LLamasoft term license arrangements to subscription plans while shifting the professional services aspects of the acquisition to its partners.

The above action will continue a declining trend for Coupa's professional services and other revenue segment, which is by design. This transition to subscription plans will be a headwind in Q3 and Q4 on a year-over-year compare basis.

Subscription revenue results will be a better indication of growth in Q3 and Q4 rather than the total revenue results because total revenues contain the declining professional services segment.

Coupa's management expects total Q3 FY22 revenue in the range of $177 million to $178 million, which would be up approximately 33% over Q3 FY21. Subscription revenue is projected to be in the range of $158 million to $159 million up approximately 34% over Q3 FY21, while professional services and other revenue is expected to be approximately $19 million.

Coupa projects to exit Q3 with a calculated billings on a TTM basis at a year-over-year growth rate of approximately 41%.

Q3 adjusted free cash flows is expected to be approximately $10 million.

Coupa Q3 FY22 expects a non-GAAPgross margin of approximately 69%, a Q3 non-GAAP operating income of $6 million to $7 million, and non-GAAP net income of $1 million to $2 million, resulting in non-GAAP net income per share of $0.01 to $0.03 on approximately 77 million diluted shares for the quarter.

Notice that the Q3 FY22 projected Gross Margin is lower than thesecond quarter's 71.5%, which is a reflection of the company's heavy acquisition strategy as Gross Margins temporarily go down as the company makes acquisitions.

In the second half of fiscal 2022, Coupa has already indicated plans to continue investing in its business to capture the market opportunity (meaning that more acquisitions are likely), which has been factored into full year FY22 non-GAAP gross margin expectations of approximately69%, non-GAAP operating income of $40 million to $41 million, and non-GAAP net income of $21 million to $22 million. This results in full Year FY22 non-GAAP net income per share of $0.27 to $0.29 on approximately 76.5 million diluted shares for the year.

Full year FY22 total revenues is expected to be in the range of $706 million to $708 million which would be up 30.5% over the mid-point of guidance year-over-year. Subscription revenue is expected to be in the range of $616 million to $618 million which would be up 31.2% over the mid-point of guidance year-over-year, and professional services and other revenue is expected to be approximately $90 million.

Coupa reiterated its expectation that its adjusted free cash flows will be up on an absolute dollar basis year-over-year for fiscal 2022.

Coupa M&A Strategy

Coupa is a highly acquisitive company having made at least 20 acquisitions over the past 5 years in multiple different sectors such as Supply Chain Management Software, Finance & Accounting Tech, Online Travel and more. Some of these acquisitions almost seem to stretch the concept of what BSM software actually is.

Coupa makes these acquisitions to address a wide variety of business use cases to both support and expand upon Coupa platform’s core functionality. Coupa believes in a concept calledSuite Synergywhere the resulting value of the whole is far greater than the sum of the original standalone parts.

Source: Coupa Software Investor Presentation

Coupa's acquisitions range from large acquisitions like the $1.5 billion acquisition of AI-Powered Supply Chain Design and Planning Leader LLamasoft, to smaller tuck-in acquisitions that address key customer concerns, to really small acquisitions that essentially amount to “acquihires”.

The likely reason that Coupa has loaded up its balance sheet with convertible debt is due to the company's heavily acquisitive strategy. Investors that do not like companies that have heavy acquisition strategies should probably avoid investing in Coupa Software.

However, one thing to note is that Coupa is not solely reliant on acquisitions for growth. Coupa Software does have strong organic growth, so it is NOT a company that is simply making acquisitions to cover up weak organic growth.

Last but not least, Coupa has shown success in their acquisition strategy by showing a record of long-term gross margin accretion with many of its acquisitions.

Source: Coupa Software Investor Presentation

Risks

Short-term risks: My biggest concern over the near-term with Coupa is if interest rates should rise to rapidly because it could possibly overly stress the company's balance sheet.

Another short-term risk is if COVID-19 related impacts get substantially worse. The biggest COVID-19 impact is the destruction of the global supply chain which is currently producing a huge backlog of ships off the coast of California that are unable to deliver their cargo. Supply chain woes are expected to affect this holiday season.

Long-term risks: Like most companies that are serial acquirers, Coupa faces integration risks with the companies that it acquires. It can often be very difficult not only integrating two companies' cultures but software integration can also present problems.

Valuation

Source: Yahoo Finance

The above is based on 20 Wall Street analysts offering 12-month price targets for Coupa Software in the last three months. The average price target is $296.45. The high forecast is $345.00 and the low forecast is $230.00. The average price target represents an approximate 18% increase from the last price of $250.77.

Conclusion

Coupa Software is one of the higher quality SaaS companies in the stock market. The company has great growth, a largely untapped market and great long-term future growth prospects.

In addition, the near-term future is brightening for Coupa as the pandemic's effects begin to recede. Coupa Software is a buy for both near-term and longer-term growth investors at current prices.

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