COUPA SOFTWARE INCORPORATED
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q. As discussed in the section titled "Note About
Forward-Looking Statements," the following discussion and analysis contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our
results to differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, impacts on our business and general
economic conditions due to the current COVID-19 pandemic, those identified
below, those discussed in "Note About Forward-Looking Statements" and those
discussed in the section titled "Risk Factors" under Part II, Item 1A in this
Quarterly Report on Form 10-Q.
Overview
We are a leading provider of Business Spend Management ("BSM") solutions. We
offer a comprehensive, cloud-based BSM platform that has connected our customers
with more than seven million suppliers globally. Our platform provides greater
visibility into and control over how companies spend money, optimize supply
chains, and manage liquidity. Using our platform, businesses are able to achieve
real, measurable value and savings that drive their profitability.
We refer to the process companies use to purchase goods and services as business
spend management and to the money that they manage with this process as spend
under management. Our BSM platform delivers a broad range of capabilities that
would typically require the purchase and use of multiple disparate point
applications. The core of our platform consists of procurement, invoicing,
expense management, and payment solutions that form the transactional engine for
managing a company's business spend. In addition, our platform offers
specialized modules targeted for power users, to help companies manage more
technical and strategic areas of BSM, including areas such as strategic
sourcing, contract management, contingent workforce, supplier risk management,
supply chain design and planning, treasury management, and spend analysis.
We also provide purchasing programs, such as Coupa Advantage, which offers
access to pre-negotiated discounts from various suppliers, and Source Together,
which connects community members to engage in group sourcing events, allowing
them to leverage pooled buying power to achieve better contracting terms and
capture greater savings. Moreover, through our Coupa Open Business Network,
suppliers of all sizes can list their goods and services, establish pricing, and
interact with buyers electronically, thus significantly reducing paper,
improving operating efficiencies, and reducing costs.
We offer access to our platform under a Software-as-a-Service business model. At
the time of initial deployment, our customers often make a set of common
functions available to the majority of their licensed employees, as well as
incremental modules for select employees and procurement specialists, whom we
refer to as power users. Therefore, we are typically able to capture a majority
of the expected annual recurring revenue opportunity at the inception of our
customer relationships, rather than targeting specific power users at the outset
of the customer relationship with the intention of expanding and capturing more
annual recurring revenue at later stages of the customer relationship. Customers
can rapidly implement our platform, with implementation periods typically
ranging from a few weeks to several months. Customers also benefit from software
updates that typically require little downtime.
We market and sell our solutions to a broad range of enterprises worldwide. We
have a diverse, multi-national customer base spanning various sizes and
industries and no significant customer concentration. No customer accounted for
more than 10% of our total revenues for the three and nine months ended
October 31, 2021 and 2020, respectively.
We market our platform primarily through a direct sales force and also benefit
from leads driven by our partner ecosystem. Our initial contract terms are
typically three years, although some customers commit for longer or shorter
periods. The large majority of our customers pay annually, one year in advance.
Our subscription fee includes access to our service, technical support and
management of the hosting infrastructure. We generally recognize revenues from
our subscription fees ratably over the contractual term of the arrangement. We
do not charge suppliers who are on our platform to transact with our customers.
We believe this approach helps attract more suppliers to our platform and
increases the value of our platform to customers.
We have continued to make significant expenditures and investments for long-term
growth, including investment in our platform and infrastructure to deliver new
functionality and modules to meet the evolving needs of our customers and to
take advantage of our market opportunity. We intend to continue to increase our
investment in sales and marketing, as we further expand our sales teams,
increase our marketing activities, and grow our international operations.
Internationally, we currently offer our platform in Europe , the Middle East and
Africa , Latin America and Asia-Pacific , including Japan . The combined revenues
from non-U.S. regions, as determined based on the billing address of our
customers, constituted 40% and 37% of our total revenues for each of the nine
months ended October 31, 2021 and 2020, respectively. We believe there is
further opportunity to increase our international revenues in absolute dollars
and as a percentage of our total revenues. As a result, we are increasingly
investing in our international operations and we intend to expand our footprint
in international markets.
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Operating in international markets requires significant resources and management
attention and will subject us to regulatory, economic and political risks that
are different from those in the United States . While we are gaining additional
experience with international operations, our international expansion efforts
may not be successful in creating additional demand for our platform outside of
the United States or in effectively selling subscriptions to our platform in any
or all of the international markets we enter.
In March 2020 , the World Health Organization declared COVID-19 a global
pandemic. This pandemic has infected populations within the United States and
many other regions at fluctuating rates. Recently, infection and hospitalization
rates in many regions in the United States , Europe and elsewhere have been
increasing - in many cases notwithstanding concurrently increasing rates of
vaccination - largely due to the emergence of discovered variants that are
thought to be more contagious (such as the increasingly widespread "Delta
variant"). The pandemic continues to evolve, as evidenced by the recent "Omicron
variant" reports. The COVID-19 pandemic has resulted in authorities implementing
numerous measures to try to contain and mitigate the virus, including travel
bans and restrictions, business shut-downs and limitations, quarantines, and
shelter-in-place and social distancing orders.
The extent to which the COVID-19 pandemic may impact our financial condition or
results of operations in future periods remains uncertain. The effect of the
COVID-19 pandemic may not be fully reflected in our results of operations and
overall financial performance until future periods. We may experience decreased
customer demand, reduced customer spend, customer bankruptcies and other
non-payment situations, shorter contract duration, longer sales cycles and
extended payment terms, any of which could materially adversely impact our
business, results of operations and overall financial performance in future
periods. The extent and continued impact of the COVID-19 pandemic on our
operational and financial performance will depend in part on future developments
and conditions, including the duration and spread of the outbreak; government
responses to the pandemic; the impact on our customers and our sales cycles;
extent of delays in hiring and onboarding new employees; and effect on our
partners, vendors and supply chains, all of which are uncertain and difficult to
predict. In the first quarter of fiscal 2021, we closed our offices globally and
required our employees to work remotely. During the second quarter of fiscal
2022, we implemented a phased-in approach in re-opening certain of our offices
and invited our employees to return to work if they wished to do so. Our
employees' health and safety is our top priority, and we will continue to
monitor local restrictions across the world, the administration of vaccines, and
the number of new cases, as we continue to slowly move towards re-opening
certain of our offices. Our offices will re-open on a staggered,
region-to-region basis in accordance with local authority guidelines while
ensuring that our return to work is thoughtful, prudent, and handled with a
safety-first approach. The impact, if any, of these and any additional
operational changes we may implement is uncertain, but changes we have
implemented to date have not materially impaired and are not expected to
materially impair our ability to maintain operations, including financial
reporting systems, internal control over financial reporting and disclosure
controls and procedures. See the section "Risk Factors" for further discussion
of the possible impact of the COVID-19 pandemic on our business.
Recent Business Developments
In February 2021 , we acquired all of the equity interest in Pana Industries,
Inc. ("Pana"), a corporate travel booking solution company. The purchase
consideration was approximately $48.5 million in cash (of which $7.1 million is
being held in escrow for fifteen months after the transaction closing date). In
addition, we issued 23,822 shares of unvested common stock with an approximate
fair value of $7.6 million to two of Pana's shareholders. These shares are
subject to service-based vesting conditions including continued employment with
us.
In March 2021 , we established a joint venture with Japan Cloud. This joint
venture is intended to enable us to scale to support the growing number of
Japanese companies looking to gain greater efficiency and agility through BSM.
As of October 31, 2021 , we had a 51% controlling ownership interest in the joint
venture.
In fiscal 2022, we announced the launch of Coupa Ventures , a fund to foster
innovation in BSM. Coupa Ventures will invest in early and growth-stage
companies that we believe are breaking down inefficiencies in how businesses
manage their spend, aligning processes and decisions across supply chain,
procurement, and finance. As of October 31, 2021 , we have invested a total of
$10.0 million in portfolio companies.
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Our Business Model
Our business model focuses on maximizing the lifetime value of a customer
relationship, and we continue to make significant investments in order to grow
our customer base. Due to our subscription model, we recognize subscription
revenues ratably over the term of the subscription period. As a result, the
profitability of a customer to our business in any particular period depends in
part upon how long a customer has been a subscriber on our platform. In general,
the associated upfront costs with respect to new customers are higher in the
first year than the aggregate revenues we recognize from those new customers in
the first year. We believe that, over time, as our customer base grows and a
relatively higher percentage of our subscription revenues are attributable to
renewals versus new customers or upsells to existing customers, associated sales
and marketing expenses and other allocated upfront costs as a percentage of
revenues will decrease, subject to investments we plan to make in our business.
Over the lifetime of the customer relationship, we also incur sales and
marketing costs to manage the account, renew or upsell the customer to more
modules and more users. However, these costs are significantly less than the
costs initially incurred to acquire the customer. We calculate the lifetime
value of our customers and associated customer acquisition costs for a
particular year by comparing (i) gross profit from net new subscription revenues
for the year multiplied by the inverse of the estimated subscription renewal
rate to (ii) total sales and marketing expense incurred in the preceding year.
On this basis, we estimate that for each of fiscal 2021 and 2020, the calculated
lifetime value of our customers has exceeded six times the associated cost of
acquiring them. Other companies may calculate lifetime value and customer
acquisition costs differently than our chosen method and, therefore, may not be
directly comparable.
Key Metrics
We review the following key metrics to evaluate our business, measure our
performance, identify trends affecting our business, formulate business plans
and make strategic decisions:
As of October 31,
2021 2020
Cumulative spend under management (in billions) $ 3,032.1 $ 2,112.1
Remaining performance obligations (in millions) $ 1,182.7 $ 747.8
Deferred revenue (in millions) $ 366.3 $ 255.9
Trailing twelve months calculated billings (in millions) $ 805.9 $ 553.0
Customers with annualized subscription revenue above $100,000 1,315 1,000
Cumulative Spend Under Management
Cumulative spend under management represents the aggregate dollar value of
transactions through our core platform for all of our customers collectively
since we launched our core platform. We define our core platform for purposes of
this metric as our procurement, invoicing and expense management modules. We
calculate this metric by aggregating the actual transaction data for purchase
orders, invoices and expenses from customers using our core platform. Cumulative
spend under management does not include spending data or transactions associated
with modules from acquired companies. We regularly review our process for
calculating this metric and periodically make adjustments to improve its
accuracy. We believe that any such adjustments are immaterial unless otherwise
stated.
The cumulative spend under management metric presented above does not directly
correlate to our revenue or results of operations because we do not generally
charge our customers based on actual usage of our core platform. However, we
believe the cumulative spend under management metric does illustrate the
adoption, scale and value of our platform, which we believe enhances our ability
to maintain existing customers and attract new customers.
Remaining Performance Obligations and Deferred Revenue
Remaining performance obligations represent the amount of consideration
allocated to unsatisfied performance obligations related to non-cancelable
contracts, which include both the deferred revenue balance and amounts that will
be invoiced and recognized as revenue in future periods. In calculating the
remaining performance obligation amount, we elected to apply the two expedients
under the revenue standard to exclude remaining performance obligations amounts
related to contracts that are twelve months or less and contracts where revenue
is being recognized under the as-invoiced method.
We generally execute multiple year subscription contracts for our platform and
invoice an initial amount at contract signing followed by subsequent annual
invoices. At any point in the contract term, there might be amounts that are not
due for billing yet. These amounts are not recorded in our condensed
consolidated financial statements, and are considered to be part of the
remaining performance obligations amount.
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The remaining performance obligations amount is intended to provide visibility
into future revenue streams. We expect remaining performance obligations to
fluctuate up or down from period to period for several possible reasons,
including amounts, timing, and duration of customer contracts (including changes
that we may see to customer contracts as a result of the COVID-19 pandemic), as
well as the timing of billing cycles for each order.
Our deferred revenue consists of non-cancelable amounts that have been invoiced
but not yet recognized as revenues as of the end of a reporting period. The
majority of our deferred revenue balance consists of subscription revenues that
are recognized ratably over the related contractual period.
Trailing Twelve Months Calculated Billings
Trailing twelve months calculated billings represents total revenues recognized
during the period of consecutive twelve months ended October 31, 2021 and
October 31, 2020 plus the change in deferred revenue for each of those same
periods. Trailing twelve month calculated billings is comprised of subscription
contracts with existing customers (including renewal contracts and add-on
contracts), subscription contracts with new customers, term-based license
contracts, and contracts for professional services, training and other revenues.
The trailing twelve months calculated billings is intended to provide
information about our subscription revenue growth over time, and can typically
be seen as an early indicator of trends in revenue growth. While trailing twelve
months calculated billings can increase as our revenues grow, it may fluctuate
up or down from period to period for several reasons, including amounts, timing,
and duration of customer contracts, as well as the timing of billing cycles for
each order.
Customers with Annualized Subscription Revenue Above $100,000
We define customers with annualized subscription revenue above $100,000 as the
total number of customers that contributed subscription revenues in excess of
$25,000 during the relevant fiscal quarter, which corresponds to $100,000 on an
annualized basis. For purposes of this metric, we generally define a customer as
a separate and distinct entity (such as a company or an educational or
government institution), a distinct business unit of a large corporation or a
partner organization, in each case that has a distinctive active contract with
us to access our services. Most of the subscription revenue we recognize each
quarter is attributable to customers that accounted for more than $25,000 of
that revenue during the quarter, and our sales and marketing strategy focuses
heavily on the acquisition of customers that have the potential to contribute at
least $100,000 in subscription revenues annually. Accordingly, we believe that
this metric is a useful tool to aid investors in understanding a key factor that
drives changes in our subscription revenues from period to period and in
assessing trends in our growth, penetration of our core customer market, and our
overall performance. Because the dollar threshold is tied to the actual revenue
recognized during a particular quarter, customers that we acquired midway
through or at the end of the quarter may not yet be included in this count, even
if they have placed orders representing more than $100,000 in annual
subscription revenue.
Components of Results of Operations
Revenues
We primarily offer subscriptions to our cloud-based BSM platform, including
procurement, invoicing and expense management and pay. We derive our revenues
primarily from subscription fees, professional services fees and other.
Subscription revenues consist primarily of fees to provide our customers access
to our cloud-based platform, which includes routine customer support at no
additional cost. Term-based licenses are sold as bundled arrangements that
include the rights to a term license and post-contract customer support ("PCS").
Accordingly, we allocate the transaction price to each performance obligation.
The revenues related to the amount allocated to PCS are included in subscription
revenue, which are recognized ratably over the contract term beginning on the
license delivery date. Professional services fees and other include deployment
services, optimization services, training, and revenues allocated to license
component for the sales of term-based licenses. Subscription revenues are a
function of renewal rates, the number of customers, the number of users at each
customer, the number of modules subscribed to by each customer, and the price of
our modules.
Generally, subscription fees are recognized ratably as revenues over the
contract term beginning on the date the application is made available to the
customer. Our new business subscriptions typically have a term of three years,
although some customers commit for longer or shorter periods. We generally
invoice our customers in annual installments at the beginning of each year in
the subscription period. Amounts that have been invoiced are initially recorded
as deferred revenue and are recognized ratably over the subscription period.
Amounts that will be invoiced and recognized as revenue in future periods are
reflected as remaining performance obligations within the notes to our condensed
consolidated financial statements.
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Professional services revenues and other consist primarily of fees associated
with the implementation and configuration of our subscription service and
revenues allocated to the license component for sales of term-based licenses.
Professional services are generally sold on a time-and-materials or fixed-fee
basis. Revenue for both time-and-material and fixed-fee arrangements are
recognized over-time as the services are performed. We have the ability to
reasonably measure progress towards completion of the professional services
arrangements. For fixed-fee and time-and-material arrangements, we recognize
revenue on the basis of performed hours relative to the total estimated hours to
complete satisfaction of the professional service arrangement. For the license
component from the sales of term-based licenses, we recognize revenues at the
start of the license term when delivery is complete.
Our professional services engagements typically span from a few weeks to several
months. For this reason, our professional services revenues may fluctuate
significantly from period to period. The terms of our typical professional
services arrangements provide that our customers pay us within 30 days from the
invoice date. Fixed-fee services arrangements are generally invoiced in advance.
We have made significant investments in our professional services business that
are designed to ensure customer success and adoption of our platform. We are
continuing to invest in expanding our professional services partner ecosystem to
further support our customers. As the professional services practices of our
partner firms continue to develop, we expect them to increasingly contract
directly with our subscription customers and we incentivize our sales force to
further this objective.
Cost of Revenues
Subscription
Cost of subscription consists primarily of expenses related to hosting our
service and providing customer support. Significant expenses are comprised of
data center capacity costs; personnel and related costs directly associated with
our cloud infrastructure and customer support, including salaries, benefits,
bonuses and stock-based compensation; allocated overhead; and amortization of
acquired developed technology and capitalized software development costs.
Professional Services and Other Cost of Revenues
Cost of professional services and other cost of revenues consist primarily of
personnel and related costs directly associated with our professional services
and training departments, including salaries, benefits, bonuses and stock-based
compensation; the costs of contracted third-party vendors; amortization of
acquired developed technology; and allocated overhead. These costs are generally
expensed in the period incurred.
Professional services associated with the implementation and configuration of
our subscription platform are performed directly by our services team, as well
as by contracted third-party vendors. In cases in which third-party vendors
invoice us for services performed for our customers, those fees are accrued over
the requisite service period.
Operating Expenses
Research and Development
Research and development expenses consist primarily of personnel costs of our
development team, including salaries, benefits, bonuses, stock-based
compensation expense and allocated overhead costs. Our cycle of frequent updates
has facilitated rapid innovation and the introduction of new modules throughout
our history. We have aggressively invested, and intend to continue to invest, in
developing technology to support our growth. We capitalize certain software
development costs that are attributable to developing new modules and features
and adding incremental functionality to our platform, and we amortize such costs
as costs of subscription revenues over the estimated life of the new application
or incremental functionality, which is typically three years.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related costs
directly associated with our sales and marketing staff, including salaries,
benefits, bonuses, commissions and stock-based compensation. Commissions earned
by our sales force that are considered incremental costs for obtaining a
non-cancelable subscription contract are deferred and amortized over a period of
benefit that we have determined to be five years. For commissions earned from
the sale of term-based license contracts, we allocate the costs of commission in
proportion to the allocation of the transaction price of license and PCS
performance obligations. Commissions associated with the license component are
expensed at the time the related revenue is recognized. Commissions allocated to
PCS are deferred and then amortized over five years. Other sales and marketing
costs include promotional events to promote our brand, including our Inspire
conferences, web advertising, events, allocated overhead and amortization of
customer relationships and trademark.
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General and Administrative
General and administrative expenses consist of personnel costs and related
expenses for executive, finance, legal, human resources, recruiting, and
administrative personnel, including salaries, benefits, bonuses and stock-based
compensation expense; professional fees for external legal, accounting,
recruiting and other consulting services and allocated overhead costs. During
the nine months ended October 31, 2020 , general and administrative expenses
included a benefit of $12.5 million related to the reversal of the Yapta
contingent consideration payable. Refer to the Company's consolidated financial
statements for the year ended January 31, 2021 for details of the contingent
consideration payable.
Interest Expense Interest expense consists primarily of interest expense associated with our outstanding convertible senior notes.
Other Income (Expense), Net Other income (expense), net consists primarily of interest income earned on our investments in marketable securities and cash and cash equivalents, and gain or loss on conversion of convertible senior notes, in addition to the effects of exchange rates on our foreign currency-denominated asset and liability balances, which are recorded as foreign currency gains (losses) in the condensed consolidated statements of operations. Benefit from Income Taxes Benefit from income taxes is primarily related to the reversal of aU.S. deferred tax liability as a result of current year intangible amortization and convertible note original issue discount amortization and excess tax benefits related to stock-based compensation, and remeasurement of deferred tax assets due to tax rate changes in theUK , partially offset by income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on net deferred tax assets of ourU.S. entities as we have concluded that it is not more likely than not that the deferred assets will be utilized. Results of Operations The following tables set forth selected condensed consolidated statements of operations data and such data as a percentage of total revenues for each of the periods indicated: 33
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Three Months Ended Nine Months Ended
October 31, October 31,
2021 2020 2021 2020
(in thousands, except percentages)
Revenues:
Subscription $ 164,745 89 % $ 118,083 89 % $ 461,079 87 % $ 335,399 89 %
Professional services and other 21,071 11 14,881 11 70,912 13 42,700 11
Total revenues 185,816 100 132,964 100 531,991 100 378,099 100
Cost of revenues:
Subscription 52,279 28 36,528 27 154,701 29 99,335 26
Professional services and other 25,341 14 14,259 11 81,865 15 42,729 11
Total cost of revenues 77,620 42 50,787 38 236,566 44 142,064 38
Gross profit 108,196 58 82,177 62 295,425 56 236,035 62
Operating expenses:
Research and development 39,990 21 30,528 23 125,625 24 87,459 23
Sales and marketing 83,779 45 53,204 40 237,902 45 149,831 40
General and administrative 40,513 22 32,092 24 116,139 22 69,941 18
Total operating expenses 164,282 88 115,824 87 479,666 91 307,231 81
Loss from operations (56,086) (30) (33,647) (25) (184,241) (35) (71,196) (19)
Interest expense (31,130) (17) (29,308) (22) (90,854) (17) (61,820) (16)
Other income (expense), net (1,298) (1) 746 1 (2,746) (1) 8,833 2
Loss before benefit from income
taxes (88,514) (48) (62,209) (47) (277,841) (53) (124,183) (33)
Benefit from income taxes (476) - (1,411) (1) (2,697) (1) (5,453) (1)
Net loss (88,038) (48) (60,798) (46) (275,144) (52) (118,730) (32)
Net loss attributable to
redeemable non-controlling
interests (273) - - - (790) - - -
Adjustment attributable to
redeemable non-controlling
interests 3,438 2 - - 8,673 2 - -
Net loss attributable to Coupa
Software Incorporated $ (91,203) (49) % $ (60,798) (46) % $ (283,027) (53) % $ (118,730) (32) %
Three Months Ended October 31, 2021 and October 31, 2020
Revenues
Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
Subscription $ 164,745 $ 118,083 40 %
Professional services and other 21,071 14,881 42 %
Total revenues $ 185,816 $ 132,964 40 %
Total revenues were $185.8 million for the three months ended October 31, 2021
compared to $133.0 million for the three months ended October 31, 2020 , an
increase of $52.9 million , or 40%. Subscription revenues were $164.7 million , or
89% of total revenues, for the three months ended October 31, 2021 , compared to
$118.1 million , or 89% of total revenues, for the three months ended October 31,
2020 . This increase in absolute dollars was predominantly driven by the increase
in the number of customers with annualized subscription revenue above $100,000 ,
which was 1,315 as of October 31, 2021 , compared to 1,000 as of October 31,
2020 . Professional services and other revenues were $21.1 million for the three
months ended October 31, 2021 compared to $14.9 million for the three months
ended October 31, 2020 . The increase of $6.2 million , or 42%, was primarily due
to increases in implementation services related to new customers.
We will continue to monitor the COVID-19 pandemic carefully and its impact on our customers and customer acquisitions.
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Cost of Revenues
Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
Subscription $ 52,279 $ 36,528 43 %
Professional services and other 25,341 14,259 78 %
Total cost of revenues $ 77,620 $ 50,787 53 %
Cost of subscription was $52.3 million for the three months ended October 31,
2021 compared to $36.5 million for the three months ended October 31, 2020 , an
increase of $15.8 million , or 43%. The increase in cost of subscription was
primarily due to an increase of $8.5 million in amortization of developed
technology assets related to acquisitions, an increase of $3.6 million in
employee compensation costs related to higher headcount, including stock-based
compensation costs, an increase of $1.5 million in hosting fees to accommodate
increased customer spend, and an increase of $2.2 million in other costs driven
by our overall growth.
Cost of professional services and other was $25.3 million for the three months
ended October 31, 2021 compared to $14.3 million for the three months ended
October 31, 2020 , an increase of $11.1 million , or 78%. The increase in cost of
professional services was primarily due to an increase of $6.8 million in
employee compensation costs related to higher headcount, including stock-based
compensation costs, an increase of $3.4 million in amortization of developed
technology assets related to acquisitions, and an increase of $0.9 million in
other costs driven by our overall growth.
We will continue to monitor the COVID-19 pandemic carefully and its impact on
our cost profile in providing hosting solutions and services to our customers.
Gross Profit
Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
Gross profit $ 108,196 $ 82,177 32 %
Gross profit was $108.2 million for the three months ended October 31, 2021 ,
compared to $82.2 million for the three months ended October 31, 2020 , an
increase of $26.0 million , or 32%. The increase in gross profit was primarily
due to the acquisition of new customers with annualized subscription revenue
above $100,000 . Gross margin was 58% for the three months ended October 31,
2021 , compared to 62% for the three months ended October 31, 2020 . The decrease
in gross margin was primarily due to the increase in amortization of developed
technology assets related to acquisitions.
Operating Expenses
Research and Development
Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
Research and development $ 39,990 $ 30,528 31 %
Research and development expenses were $40.0 million for the three months ended
October 31, 2021 compared to $30.5 million for the three months ended October
31, 2020 , an increase of $9.5 million , or 31%. The increase was primarily due to
an increase of $8.2 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, and an increase of $1.3
million in other costs driven by our overall growth.
Sales and Marketing
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Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
Sales and marketing $ 83,779 $ 53,204 57 %
Sales and marketing expenses were $83.8 million for the three months ended
October 31, 2021 compared to $53.2 million for the three months ended October
31, 2020 , an increase of $30.6 million , or 57%. The increase was primarily due
to an increase of $12.6 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, an increase of $10.5
million in amortization of customer relationship assets related to acquisitions,
an increase of $5.1 million in marketing and advertising activity costs, and an
increase of $2.4 million in other costs driven by our overall growth.
General and Administrative
Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
General and administrative $ 40,513 $ 32,092 26 %
General and administrative expenses were $40.5 million for the three months
ended October 31, 2021 compared to $32.1 million for the three months ended
October 31, 2020 , an increase of $8.4 million , or 26%. The increase was
primarily due to an increase of $6.6 million in employee compensation costs
related to higher headcount, including stock-based compensation costs, an
increase of $1.5 million in recruiting costs, and an increase of $0.3 million in
other costs driven by our overall growth.
Interest Expense
Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
Interest expense $ 31,130 $ 29,308 6 %
Interest expense was $31.1 million for the three months ended October 31, 2021
compared to $29.3 million for the three months ended October 31, 2020 . The
increase in interest expense is primarily related to amortization of the debt
discount and issuance costs on the convertible notes.
Other Income (Expense), Net
Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
Other income (expense), net $ (1,298) $ 746 NM
Other expense, net was $1.3 million for the three months ended October 31, 2021
compared to other income, net of $0.7 million for the three months ended October
31, 2020 . The $2.0 million decrease in other income (expense), net was primarily
due to a decrease of $1.5 million in income earned from our investments in
marketable securities and money market funds primarily as a result of a reduced
amount of investments and a decrease of $0.5 million in other miscellaneous
items, including unfavorable fluctuations of foreign currency exchange rates.
Benefit from Income Taxes
36--------------------------------------------------------------------------------
Three Months Ended
October 31,
2021 2020 % Change
(in thousands)
Benefit from income taxes $ (476) $ (1,411) (66) %
The benefit from income taxes was $0.5 million for the three months ended
October 31, 2021 compared to a tax benefit of $1.4 million for the three months
ended October 31, 2020 . The benefit from income taxes for the three months ended
October 31, 2021 was primarily related to the reversal of a U.S. deferred tax
liability and foreign excess tax benefits related to stock-based compensation,
partially offset by foreign tax expense. We maintain a full valuation allowance
on net deferred tax assets of our U.S. entities as we have concluded that it is
unlikely that these deferred income tax assets will be utilized.
Nine Months Ended
Revenues
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
Subscription $ 461,079 $ 335,399 37 %
Professional services and other 70,912 42,700 66 %
Total revenues $ 531,991 $ 378,099 41 %
Total revenues were $532.0 million for the nine months ended October 31, 2021
compared to $378.1 million for the nine months ended October 31, 2020 , an
increase of $153.9 million , or 41%. Subscription revenues were $461.1 million ,
or 87% of total revenues, for the nine months ended October 31, 2021 , compared
to $335.4 million , or 89% of total revenues, for the nine months ended October
31, 2020 . This increase in absolute dollars was predominantly driven by the
increase in the number of customers with annualized subscription revenue above
$100,000 , which was 1,315 as of October 31, 2021 , compared to 1,000 as of
October 31, 2020 . Professional services and other revenues were $70.9 million
for the nine months ended October 31, 2021 compared to $42.7 million for the
nine months ended October 31, 2020 . The increase of $28.2 million , or 66%, was
primarily due to increases in implementation services related to new customers.
Cost of Revenues
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
Subscription $ 154,701 $ 99,335 56 %
Professional services and other 81,865 42,729 92 %
Total cost of revenues $ 236,566 $ 142,064 67 %
Cost of subscription was $154.7 million for the nine months ended October 31,
2021 compared to $99.3 million for the nine months ended October 31, 2020 , an
increase of $55.4 million , or 56%. The increase in cost of subscription was
primarily due to an increase of $22.8 million in amortization of developed
technology assets related to acquisitions, an increase of $11.9 million in
employee compensation costs related to higher headcount, including stock-based
compensation costs, an increase of $10.6 million in hosting fees to accommodate
increased customer spend, an increase of $4.8 million in other costs driven by
our overall growth, an increase of $3.7 million in software costs to manage our
platform, and an increase of $1.6 million in amortization of capitalized
development costs.
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Cost of professional services was $81.9 million for the nine months ended
October 31, 2021 compared to $42.7 million for the nine months ended October 31,
2020 , an increase of $39.2 million , or 92%. The increase in cost of professional
services was primarily due to an increase of $21.7 million in employee
compensation costs related to higher headcount, including stock-based
compensation costs, an increase of $15.4 million in amortization of developed
technology assets related to acquisitions, and an increase of $2.1 million in
other costs driven by our overall growth.
Gross Profit
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
Gross profit $ 295,425 $ 236,035 25 %
Gross profit was $295.4 million for the nine months ended October 31, 2021 ,
compared to $236.0 million for the nine months ended October 31, 2020 , an
increase of $59.4 million , or 25%. The increase in gross profit was primarily
due to the acquisition of new customers with annualized subscription revenue
above $100,000 . Gross margin was 56% for the nine months ended October 31, 2021 ,
compared to 62% for the nine months ended October 31, 2020 . The decrease in
gross margin was primarily due to the increase in amortization of developed
technology assets related to acquisitions.
Operating Expenses
Research and Development
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
Research and development $ 125,625 $ 87,459 44 %
Research and development expenses were $125.6 million for the nine months ended
October 31, 2021 compared to $87.5 million for the nine months ended October 31,
2020 , an increase of $38.2 million , or 44%. The increase was primarily due to
an increase of $32.0 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, an increase of $2.1 million
in hosting fees, and an increase of $4.1 million in other costs driven by our
overall growth.
Sales and Marketing
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
Sales and marketing $ 237,902 $ 149,831 59 %
Sales and marketing expenses were $237.9 million for the nine months ended
October 31, 2021 compared to $149.8 million for the nine months ended October
31, 2020 , an increase of $88.1 million , or 59%. The increase was primarily due
to an increase of $40.8 million in employee compensation costs related to higher
headcount, including stock-based compensation costs, an increase of $32.1
million in amortization of customer relationship assets related to acquisitions,
an increase of $7.6 million in marketing costs, an increase of $1.0 million in
third party services, such as contractors and consulting fees, and an increase
of $6.6 million in other costs driven by our overall growth.
38
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General and Administrative
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
General and administrative $ 116,139 $ 69,941 66 %
General and administrative expenses were $116.1 million for the nine months
ended October 31, 2021 compared to $69.9 million for the nine months ended
October 31, 2020 , an increase of $46.2 million , or 66%. The increase was
primarily due to an increase of $33.2 million in employee compensation costs
related to higher headcount, including stock-based compensation costs, a
non-recurring prior period benefit of $12.5 million arising from the reversal of
the Yapta contingent consideration liability, an increase of $3.8 million in
third party services, such as legal and accounting fees in relation to certain
acquisitions, recruiting and other costs driven by our overall growth, offset by
a release of allowances for credit losses of $3.3 million .
Interest Expense
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
Interest expense $ 90,854 $ 61,820 47 %
Interest expense was $90.9 million for the nine months ended October 31, 2021
compared to $61.8 million for the nine months ended October 31, 2020 . The $29.1
million increase in interest expense was primarily due to amortization of the
debt discount and issuance costs on the 2026 Notes issued in the middle of the
second quarter of fiscal 2021.
Other Income (Expense), Net
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
Other income (expense), net $ (2,746) $ 8,833 NM
Other expense, net was $2.7 million for the nine months ended October 31, 2021
compared to other income, net of $8.8 million for the nine months ended October
31, 2020 . The $11.5 million decrease in other income (expense), net was
primarily due to a decrease of $5.1 million in income earned from our
investments in marketable securities and money market funds primarily as a
result of a lower market yield and reduced amount of investments, a decrease of
$3.5 million in gains from early conversions on the 2023 Notes, and $2.9 million
decrease in other miscellaneous items, including unfavorable fluctuations
related to foreign currency exchange rates.
Benefit From Income Taxes
Nine Months Ended
October 31,
2021 2020 % Change
(in thousands)
Benefit from income taxes $ (2,697) $ (5,453) (51) %
The benefit from income taxes was $2.7 million for the nine months ended October
31, 2021 compared to a tax benefit of $5.5 million for the nine months ended
October 31, 2020 . The benefit from income taxes for the nine months ended
October 31, 2021 was primarily related to the reversal of a U.S. deferred tax
liability, foreign excess tax benefits related to stock-based compensation, and
remeasurement of deferred tax assets due to tax rate changes in the UK offset by
foreign tax expense. The decrease in the current year benefit compared to the
same period in the prior year is mainly attributable to an increase in income
tax expenses and a decrease
39
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in the foreign excess tax benefits related to stock-based compensation. We
maintain a full valuation allowance on net deferred tax assets of our
Liquidity and Capital Resources Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations. As ofOctober 31, 2021 , we had cash and cash equivalents of$458.2 million , and marketable securities of$209.7 million . We had outstanding 2023 Notes, 2025 Notes and 2026 Notes with principal amounts of$1.8 million ,$805.0 million and$1,380.0 million , respectively, as ofOctober 31, 2021 . As ofOctober 31, 2021 , the remaining 2023 Notes with a principal amount of$1.8 million and 2025 Notes with a principal amount of$805.0 million are convertible at the option of the holders. We have the ability to settle the Convertible Notes in cash, shares of our common stock, or a combination of cash and shares of our common stock at our own election. As ofOctober 31, 2021 , there were no unsettled conversion requests related to the 2023 Notes. FromNovember 1, 2021 to the date of this filing, we have received additional conversion requests for an immaterial principal amount of the 2025 Notes, which are expected to be settled during the quarter endedJanuary 31, 2022 . The 2026 Notes were not convertible as ofOctober 31, 2021 . It is our current intent to settle conversions of the remaining 2023 Notes, 2025 Notes and 2026 Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock. In conjunction with the issuance of the Convertible Notes, we entered into capped call transactions that reduce our exposure to additional cash payments above principal balances in the event of a cash conversion of the Convertible Notes. We may owe additional cash to the noteholders upon early conversion if our stock price exceeds$63.821 per share for the 2023 Notes,$295.550 for the 2025 Notes, or$503.415 for the 2026 Notes. Although our incremental exposure to the additional cash payment above the principal amount of the Convertible Notes is reduced by the capped calls, conversion of the Convertible Notes by noteholders may cause dilution to the ownership interests of existing stockholders. We did not exercise the capped calls for the converted 2023 Notes and 2025 Notes. As ofOctober 31, 2021 , all the capped calls for the 2023 Notes, 2025 Notes and 2026 Notes remained outstanding. Our cash equivalents are comprised primarily of bank deposits and money market funds. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled "Risk Factors." However, we believe our existing cash and cash equivalents and marketable securities will be sufficient to meet our projected operating requirements for at least the next 12 months from the filing date of these financial statements. Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings and the continuing market acceptance of our services. We continually assess potential acquisitions and expect to continue to pursue acquisitions of or investments in complementary businesses, services and technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. Operating Activities Cash provided by operating activities for the nine months endedOctober 31, 2021 was$103.9 million , compared to$57.8 million for the nine months endedOctober 31, 2020 . The increase was primarily driven by cash collections from customers. Investing Activities Cash provided by investing activities for the nine months endedOctober 31, 2021 of$5.5 million was primarily related to$72.5 million of net cash receipts from purchases, maturities and sales of short-term marketable securities, partially offset by$46.7 million in cash used for acquisitions,$10.3 million for the purchases of property and equipment, and$10.0 million for other investments. Financing Activities Cash provided by financing activities for the nine months endedOctober 31, 2021 of$25.5 million was primarily due to approximately$29.0 million of proceeds from the issuance of common stock under the ESPP and exercise of stock options, and investment from redeemable non-controlling interests of$2.2 million , partially offset by$5.7 million for repayments of the 2023 Notes. 40 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements ThroughOctober 31, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Commitments and Contractual Obligations Our principal commitments and contractual obligations consist of our Convertible Notes, obligations under operating leases for office facilities and contractual purchase obligations for hosting services and web development services that support our business operations. The following table summarizes our non-cancelable contractual obligations as ofOctober 31, 2021 : Payments Due by Period Less Than 1 More Than 5 Total Year 1-3 Years 3-5 Years Years (in thousands) Convertible senior notes (1)$ 2,186,745 $ 3
6,188 12,366 10,853 -
Operating lease obligations 44,674 15,021 21,846 7,040 767
Purchase obligations 211,266 47,413 89,820 74,033 -
Total contractual obligations $ 2,472,092 $ 68,625 (1)The conversion period for the 2023 Notes and 2025 Notes was open as ofOctober 31, 2021 , and as such, the net carrying value of the 2023 Notes and 2025 Notes are included within current liabilities on our condensed consolidated balance sheet. The principal balances of$1.8 million and$805.0 million of the 2023 Notes and 2025 Notes, respectively, were reflected in the payment period in the table above based on the contractual maturity assuming no conversion or repurchase. (2)Represents estimated aggregate interest obligations for our outstanding Convertible Notes that are payable in cash. Critical Accounting Policies and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year endedJanuary 31, 2021 . Recent Accounting Pronouncements Refer to Note 2, "Significant Accounting Policies" in the notes to our condensed consolidated financial statements for analysis of recent accounting pronouncements that are applicable to our business. NonGAAP Financial Measures In addition to our results determined in accordance withU.S. generally accepted accounting principles, or GAAP, we believe the following nonGAAP measures are useful in evaluating our operating performance: •Non-GAAP operating income; •Non-GAAP net income attributable toCoupa Software Incorporated ; and •Adjusted free cash flows.
We regularly review and consider these measures when we evaluate our business and for internal planning and forecasting purposes.
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The following tables provide a reconciliation of loss from operations to
nonGAAP operating income, from net loss attributable to Coupa Software
Incorporated to non-GAAP net income attributable to Coupa Software Incorporated ,
and from net cash provided by operating activities to adjusted free cash flows
(in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
2021 2020 2021 2020
Loss from operations $ (56,086) $ (33,647) $ (184,241) $ (71,196)
Stock-based compensation 50,459 36,811 145,251 94,851
Amortization of acquired intangible assets 33,518 11,110 100,575 30,338
Change in fair value of contingent - - - (12,500)
consideration payable
Non-GAAP operating income $ 27,891 $ 14,274 $ 61,585 $ 41,493
Three Months Ended Nine Months Ended
October 31, October 31,
2021 2020 2021 2020
Net loss attributable to Coupa Software $ (91,203) $ (60,798) $ (283,027) $ (118,730)
Incorporated
Stock-based compensation 50,459 36,811 145,251 94,851
Amortization of acquired intangible assets 33,518 11,110 100,575 30,338
Change in fair value of contingent - - - (12,500)
consideration payable
Amortization of debt discount and issuance 29,454 85,716
costs 27,370 58,727
Loss (gain) on conversion of convertible senior 228 36 357 (3,166)
notes
Income tax effects and adjustments (2,362) (1,503) (8,744) (6,801) Adjustment attributable to redeemable 3,438 8,673 non-controlling interests - - Non-GAAP net income attributable to Coupa$ 23,532 $ 13,026 $ 48,801 $ 42,719 Software Incorporated Three Months Ended Nine Months Ended October 31, October 31, 2021 2020 2021 2020
Net cash provided by operating activities
$ 103,908 $ 57,798 Less: purchases of property and equipment (3,594) (2,531) (10,256) (9,559) Add: repayments of convertible senior notes 821 872 1,338 27,208 attributable to debt discount Adjusted free cash flows$ 28,242 $ 17,342 $ 94,990 $ 75,447 We define non-GAAP operating income as loss from operations before stock-based compensation, amortization of acquired intangible assets and the change in fair value of contingent consideration related to an acquisition. We define non-GAAP net income attributable toCoupa Software Incorporated as net loss attributable toCoupa Software Incorporated before stock-based compensation, amortization of acquired intangible assets, the change in fair value of contingent consideration related to an acquisition, amortization of debt discount and issuance costs, gain or loss on conversion of convertible senior notes, the adjustment attributable to redeemable non-controlling interests, and related tax effects, including non-recurring income tax adjustments. We define adjusted free cash flows as net cash provided by operating activities, less purchases of property and equipment, plus repayments of convertible senior notes attributable to debt discount. We believe non-GAAP operating income and non-GAAP net income attributable toCoupa Software Incorporated provide investors and other users of our financial information consistency and comparability with our past financial performance and facilitate period to period comparisons of operations. We believe non-GAAP operating income and non-GAAP net income attributable toCoupa Software Incorporated are also useful in evaluating our operating performance compared to that of other companies in our industry, as these metrics generally eliminate the effects of certain items that may vary between companies for reasons unrelated to overall operating performance. 42 -------------------------------------------------------------------------------- We believe adjusted free cash flows provides useful information to investors because it is an indicator of our capital strength and liquidity, and we also use it to measure performance of our business operations. We exclude repayment of convertible senior notes attributable to debt discount in calculating this measure in part because our use of cash to satisfy this obligation (relating to the Convertible Notes) was discretionary, and we have the ability to satisfy similar obligations in the near future through shares of our common stock, or a combination of cash and shares of our common stock, at our election. However, you should bear in mind that this measure does not reflect any reduction for cash settlements of our debt obligations, nor does it represent our residual cash flow available for discretionary expenditures. Due to these and other limitations, you should not consider this non-GAAP measure in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. We use non-GAAP operating income, non-GAAP net income attributable toCoupa Software Incorporated and adjusted free cash flows in conjunction with traditional GAAP measures as part of our overall assessment of our performance and liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance and liquidity. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP operating income, non-GAAP net income attributable toCoupa Software Incorporated and adjusted free cash flows should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP. We compensate for these limitations by providing investors and other users of our financial information a reconciliation of nonGAAP operating income to loss from operations, non-GAAP net income attributable toCoupa Software Incorporated to net loss attributable toCoupa Software Incorporated , and adjusted free cash flows to net cash provided by operating activities. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view nonGAAP operating income, non-GAAP net income attributable toCoupa Software Incorporated , and adjusted free cash flows in conjunction with loss from operations, net loss attributable toCoupa Software Incorporated , and the condensed consolidated statements of cash flows. 43
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