Coupa Software Inc. (COUP) CEO Rob Bernshteyn on Q3 2019 Results - Earnings Call Transcript

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About: Coupa Software Inc (COUP)
by: SA Transcripts

Coupa Software Inc. (NASDAQ:COUP) Q3 2019 Earnings Conference Call December 3, 2018 5:00 PM ET

Executives

Nicole Noutsios - IR

Rob Bernshteyn - CEO

Todd Ford - CFO

Analysts

Raimo Lenschow - Barclays

Joseph Vafi - Loop Capital

Koji Ikeda - Oppenheimer

Stan Zlotsky - Morgan Stanley

Ross MacMillan - RBC Capital Markets

Eric Lemus - SunTrust Robinson Humphrey

Pat Walravens - JMP Securities

Ryan MacDonald - Needham & Company

Joseph Foresi - Cantor Fitzgerald

Matt Coss - J.P. Morgan

Brian Peterson - Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Coupa Software Third Quarter Fiscal Year 2019 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [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.

Nicole Noutsios

Good afternoon and welcome to Coupa Software's third quarter conference call. Joining me today are Rob Bernshteyn, Coupa's CEO; and Todd Ford, Coupa's CFO.

Our remarks today include forward-looking statements about guidance and future results of operations, strategies, market size, products, competitive position and potential growth opportunities. Our actual results may be materially different. Forward-looking statements involve risks, uncertainties and assumptions that are described in our most recently filed 10-K. These forward-looking statements are based on our beliefs and assumptions today, and we disclaim any obligation to update any forward-looking statements. If this call is replayed after today, the information presented may not contain current or accurate information. We 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, if you prefer to access a replay via phone, you can find that information in the earnings release. Unless otherwise stated, growth comparisons are against the same period of the prior year.

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

Rob Bernshteyn

Hello, everyone, and thank you for joining us. Today, I'm delighted to report strong results for our third quarter. At the highest level from a financial results perspective, I will tell you that we finished the quarter with $67.5 million in revenue, representing a trailing 12 month growth rate of 40%, and an annual run rate of well over $0.25 billion per year. We also delivered our fifth consecutive quarter of positive free cash flows on a trailing 12 month basis. It's important to note that we are fully on-track to easily surpass $1 trillion in cumulative spend under management in Q4. But most importantly, from a longer term perspective, we are continuing to make a meaningful impact in the broader enterprise software industry.

We are developing the business spend management category of solutions which we know are of great importance to virtually all companies around the world. We are delivering unprecedented measurable value for each of our hundreds of current customers. We are offering a highly innovative functional and technical platform at significant scale. We are cultivating a culture of colleagues maniacal about customer success, results orientation and a never ending desire to strive for excellence. With that, I'm excited to share with you our strong results for Q3, so let's get after it.

Starting with our customers; I'm proud to report that more than 100 Coupa customers have gone live this fiscal quarter, this fiscal year, rather. Ingersoll Rand went live in the U.S. and Canada in a rapid deployment focused on increased electronic invoicing, improved spend under management, and the achievement of 100% electronic purchase orders. Zurich Insurance went live with Coupa in the UK with a special focus on increased PO matching, electronic invoicing spend under contract and user experience scores. [indiscernible] Group, Denmark's largest retailer went live with Coupa at 600 sites across Denmark in the first phase of a 1,200-site, 4 country rollout. Finally, Inchcape, a leading independent global automotive distributor and retailer, who announced -- who we announced as a new customer just last quarter went live with Coupa in the UK and Australia in the first phase of a major global procurement transformation where Coupa will be rolled out in all operational and corporate locations across the world. We look forward to continuing to help these customers achieve more and more real, measurable results for their organizations over the long-term with our value as a service approach.

Now moving onto new customers; during the quarter we were excited to partner with many organizations and the leaders within them that are aligned with our vision of business spend management. United Airlines selected Coupa to help transform their procurement processes and drive real value in the areas of cost reduction and operational excellence. Another major airline, Finnair, shows Coupa as part of it's procurement digitization journey. Finnair is focused on taking their procurer to pay process and employee experience, both to the next level. ISS Group, a global facility services company with nearly 500,000 employees selected Coupa based on our proven track record of successful implementations across complex global companies. Other new customers we added during this quarter included Golden State Warriors, Coors Distribution Company, Darden Restaurants, owners of the Olive Garden, Capital Grille and other full service dining establishments, Cvent, AAA Club Alliance, Lime Bikes, Axiata, Genesis Energy, SkillSoft, Consolis, KPMG Canada, and many, many others.

Now from a market development perspective, we remain very excited by the large opportunity and continued traction we see in international markets. Last month we held our largest ever Inspire EMEA User Conference, an event which was the same size as our Inspire U.S. event just 3 years ago with nearly 1,000 participants. And Inspire EMEA customers such as Airbus, Lear Corporation, Maersk, Pearson, Rolls Royce, Unilever and Zurich Insurance spoke on the main stage and during breakouts where attendees consumed more than 5,000 hours of content in 1.5 days.

During the quarter, we also held our inaugural APAC Symposium in Sydney, Australia and our inaugural Japan Symposium in Tokyo. During these events a primary focus was on community intelligence; this has become an exciting area for Coupa customers international and domestic alike, and was discussed with great enthusiasm. Our customers leveraged their beginner's minds and brought forth a host of new creative and highly innovative ideas for our consideration in the future development of our platform. Increasingly, and in Q3 alone, the majority of our many hundreds of customers accessed our platforms community insights capabilities; in fact, usage as measured in page views nearly doubled from Q2 to Q3.

Community intelligence is placing prescriptive, the letter P in Coupa, information at our customers fingertips and they are acting on it for the benefit of their organizations. For example, using community insights one of our customers observed a very low first time match rate for invoices compared to leaders in the Coupa community. Upon investigating they realized that they had overly stringent invoice tolerance values in place. They've been reevaluated their approval rules to eliminate unnecessary invoice reviews and gain back significant productivity. This is just one example of community intelligence in action today where we are just beginning to scratch the surface of what's possible. Our latest offering, Spend Guard, which leverages community intelligence and machine learning to identify potential spend fraud is currently in early access for select group of customers, and we are excited to make this offering generally available soon.

We also had several exciting Coupa pay announcements in Inspire EMEA. Coupa virtual card for POs, our first payment solution is now generally available and Barclay card has been named our first card issuing partner for this offering. We also announced the release of Coupa's supply chain finance which brings businesses, suppliers and financial institutions together on our business spend management platform to leverage financing and working capital optimization opportunities. Coupa Pay is helping advance the comprehensive part of our vision, also known as the letter 'C' in Coupa.

Now let's move onto acquisitions. As I stated in the past our acquisition strategy is focused on adding key advanced power user applications that we can seamlessly integrate into our organic transactional engine, and/or acquiring distinct technology components that could enhance this very engine. In Q3 we announced the acquisition of Aquiire, a leader in real-time supplier search supporting side-by-side shopping comparison. This acquisition combined with our native innovation and our previous acquisition of Simeno, allows us to further advance the open or 'O' in Coupa, making us the only platform that delivers real-time cross-catalog and localized search, a truly open B2B shopping experience. With 13 patents pending or issued, Aquiire brings leading innovation to us in this area. We warmly welcome the Aquiire team in Cincinnati to the Coupa community of customers, partners and colleagues.

Now as many of you have come to learn from us, our success at Coupa and that of our customers is underpinned strongly by our core values. At Inspire EMEA we presented several business spend management impact awards to customers who demonstrated our core values to an exemplary degree. The BSM impact award for Ensuring Customer Success went to Dan Cameron, Senior Vice President and Chief Procurement Officer at Pearson. From day one, Dan had the clear objective of ensuring that his internal customers would be successful in finding the products and services they needed in order to quickly and painlessly get their jobs done. He wanted to make procurement accessible and simple leveraging the user centric customer-like -- consumer-like experience of our solution symbolized by the letter 'U' in Coupa. Pearson has brought £500 million of spend under management through Coupa since going live, delivering significant costs savings and strengthening the internal brand of the Pearson procurement organization. Once again, congratulations to Dan for winning this award and to the continuation of Pearson's success with Coupa.

The BSM impact award for Striving for Excellence was given to Debbi Jowitt, Procurement Development Manager and Global Coupa Lead at Rolls Royce. Debbi played a key role in a project seen as one of the most successful transformation projects at Rolls Royce. Rolls recently sited Coupa as an example of an investment in a best-in-class solution that was delivered at a critical time for the company. Debbi and her team have leveraged the deployment of Coupa to help Rolls continue to strive for excellence, returning real and tangible results in the process. Congratulations to Debbi for winning this award. I look forward to continue personally working with the Rolls Royce team as we collectively strive for excellence.

Finally, I'd like to recognize Komal Jogal, who recently won our MVP Award for focusing on results as voted by all of our fellow colleagues at Coupa. As a key member of our technical support team, Komal is increasingly active, always ready to take on challenging new tasks. She is creative, smart and focused on seeing real results and was recently recognized by a very large global customer for outstanding efforts. Congratulations to Komal for earning this award.

Now, in terms of other highlights for this quarter, I'm proud to announce that for the sixth time in a row Coupa was named to Deloitte's Technology Fast 500 ranking of the 500 fastest growing technology, media, telecommunications, life sciences, and energy tech companies in North America. I'm also delighted to share that in Q3 we hired our very first Chief Procurement Officer, Dina Ghobrial. Dina is a passionate results-oriented leader with a deep domain expertise and an accomplished background of procurement, sourcing, digital transformation and information technology overall. She joined us from an existing Coupa customer after a highly successful deployment. In the few months she has been onboard, Dina has already become a key strategic partner to members of the Coupa leadership team and has begun engaging with our customers and prospects. Over the last 10 years, as many of you know, I have approved every single Coupa hire; now well over a 1,000 colleagues around the world and counting. Needless to say, I was very excited to approve this one. Welcome aboard again, Dina.

And last but not least, let me call out several of my Coupa colleagues who went above and beyond to give back to our community. Just this past quarter, Coupa organized a two month competition that resulted in over 400 hours of volunteering to more than 30 local organizations around the globe. During these months, the winning team of Amy Gallagher, Alberto, Chimerela, Sarah Boyn, David Hurl, a leader, Souza [ph], completed over 145 hours of volunteering with Amy truly striving for excellence, contributing 56 hours of her personal time to help out local organizations. Thanks to Amy and all the others for this incredible display of our core values at work in our communities.

So, with this being our 9th earnings call as a public company, and now heading into our 40th quarter of execution, we remain confident that our innovative platform, our resilient culture and our outstanding global community of customers and partners, we are incredibly well positioned to continue winning this market. Q4 is well underway, and we are laser focused on finishing the year strong, no one can do it better and I firmly believe that.

So with that in mind, and as we continue to drive towards our stated long-term financial goal of reaching $1 billion in revenue, let me hand the call over to our CFO, Todd Ford, who can update you on our financial results and guidance. Todd?

Todd Ford

Thanks, Rob, and good afternoon, everyone. In Q3, we continue to execute against the commitments we made two years ago when we became a public company. On a trailing 12 month basis, we have effectively achieved all of the mid-term financial targets that we set forth at our Analyst Day last December.

Total revenues for the third quarter grew 42% year-over-year to $67.5 million. Subscription revenues were $60.6 million, up 42% year-over-year and comprised 90% of total revenues, and professional services revenues were $6.9 million. Our total non-GAAP operating income for Q3 was positive $5.8 million or 9% of revenue compared to negative 5% of revenue in the year ago period driven by solid top line growth, successful integrations of company's acquired and continued scaling of the business. This quarter also marks the 4th quarter in a row where non-GAAP operating income have been positive. On a trailing 12 month basis, non-GAAP operating income was $11 million or 4.6% of revenue. Total calculated billings for the trailing 12 months were $271.7 million, up 39% year-over-year compared to 37% in the same period last year and 38% last quarter.

Let's now turn to results of operations. Our third quarter non-GAAP gross margin was 73.3% compared to 72.6% a year ago. Non-GAAP subscription margin was 81% and non-GAAP professional services margin was 4%. As a reminder, we expect professional services margins generally to trend between breakeven and positive 10% on a trailing 12 month basis. Quarterly margins may fluctuate as we continue building for scale and also due to the near-term impact from acquisition. We are staying the course and continue to investment in all facets of our business while delivering on our commitment to show continued leverage in our financial model. As noted last quarter, there is near-term impact to margins and cash flows as a result of our recent acquisitions but we expect this to normalize over the next few quarters. Including the full quarter impact of DCR to our cost structure, and the partial quarter impact from the acquisition of Acquiire, we delivered Q3 non-GAAP positive net income of $5.5 million compared to a non-GAAP net loss of $2.8 million a year ago.

Now let's turn to the various components of cash flows for the third quarter. Cash at the end of Q3 was $406 million, including $179 million of marketable securities, a decrease of $37 million from Q2. The decrease reflects $48 million paid for the acquisitions of DCR and Acquiire, offset by an increase of $2.6 million generated from free cash flows and other cash inflows of approximately $8 million from employee equity transactions. Also, in Q3 we prepaid approximately $4 million to one of our web-hosting providers for an agreement we entered into which is expected to have a positive impact on our gross margins in FY2022. On a trailing 12 month basis, free cash flows were $20.4 million or 9% of revenue. We defined free cash flows as operating cash flows as property and equipment.

Now let's turn to guidance. For the fourth quarter, we expect total revenues to be between $67.8 million and $68.3 million; this includes subscription revenues of between $62 million and $62.5 million, and professional services revenues of approximately $5.8 million. We expect Q4 non-GAAP gross margins to be between 71% to 72% reflecting the near-term impact of recent M&A activity. Once again, we expect to show continued leverage in our margins once these recent acquisitions have been fully integrated. In Q4, we expect non-GAAP operating income, non-GAAP net income and free cash flows to be roughly breakeven with $59.8 million basic shares and $68 million fully diluted weighted average shares for Q4.

For the fiscal year ending January 31, 2019, we expect total revenues to be between $253 million and $253.5 million with non-GAAP gross margins in the range of 72% to 73%. We expect non-GAAP income from operations for the year to be between $9.5 million and $10.5 million. For the full year, we expect non-GAAP net income per share in the range of $0.11 to $0.13 based upon an estimated $65.3 million fully diluted weighted average shares for the year. We will provide FY20 guidance on our next call but as you begin to roll models forward, I would like to remind you that we've recognize revenue based on the number of days in the quarter. Since Q1 has 3 fewer days in the quarter due to February, our steady state subscription revenues will be approximately 3% lower in Q1 as compared to Q4.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Raimo Lenschow with Barclays.

Raimo Lenschow

Congrats. These are amazing numbers. First, can I ask a little bit about the strategy around Pay because that's obviously kind of a very -- it's a big market; it's a very nice extension to what you're doing at the moment. Like how far do you see this going in terms of like -- where did you make the decision to stop and kind of where did you make the decision to kind of go on and where did you make the decision to stop in comparison to some payment vendors? And then a question on cost, can you talk a little bit about your profitability into [your fee] [ph] were significantly better than we had modeled, where there any items that we should be aware off that you didn't spend in Q3 that might spend in Q4 or is this really like underlying very, very good performance? Thank you.

Rob Bernshteyn

I'll probably take the first and then turn the second over to Todd. In terms of Pay, just like everything we've done to-date, we've worked with our customers around how to solve their primary business needs, how could they get their spend under management, how could they understand the suppliers that they are working with, how could they automate a lot of baseline processes that are still being done on a whole host of older technology solutions or even done on paper in many cases. And there was clearly, an interest amongst our growing customer community to go beyond the traditional procure to okay to pay, all the way to procure to pay as part of our overall business spend management suite. So we began with the areas where we can offer the greatest value and then also leverage our greatest core competencies around usability, around having a transactional platform at scale internationally, around getting our arms around the primary purchasing mechanisms that our customers use our platform for.

So we came out initially with Coupa's virtual cards for POs which is now generally available, and it's going to streamline a lot of processes that are being done today on corporate business cards and in a chaotic sort of ways. We moved into dynamic discounting through Coupa Accelerate that allows our buyers to take advantage of early payment discounts, and that's been GA now for few releases. And we're moving further towards our Coupa invoice payments, and the mechanisms being planned there. So our thought process here is to offer a comprehensive Coupa payment solution that leverages our greatest strengths, and as we continue to develop it, we'll keep you very well informed as we always have at our Inspire conferences, as we go from in-development to early access, to generally available with every capability.

Todd Ford

And on the cost side Raimo, there is nothing that I would call specifically in there; there certainly wasn't anything that shifted from Q3 to Q4. We continue to aggressively hire, in Q3 we did take the full cost with respect to DCR, so you saw a meaningful jump in our cost of sales and also R&D for Q3 as compared to Q2. The other thing I would call out from sales and marketing, in Q3 you saw a bit of a drop and that's also primarily related to the high Inspire cost in Q2. So other than that nothing that I would call out beyond those items.

Operator

Up next is Joseph Vafi with Loop Capital.

Joseph Vafi

Good results. Just on DCR, can we get an update there on how that acquisition is progressing and any cross-sell or other opportunities that we should be aware off? And then, I have a follow-up after that.

Rob Bernshteyn

This is a very, very exciting acquisition for us, the group there that came on really shares our core values, shares our common sense of purpose; even though it's only been a couple of months, I feel like they've been our colleagues for a number of years. And the capabilities that we've taken on with DCR are really powerful in terms of adding value for our customers, this is about managing our contingent workforces at scale, the entire lifecycle of contingent workers when people go and utilize Coupa for finding the services that they need to support their organization, they have these -- now have these advanced capabilities for contingent workforce. We're well underway into integrating these capabilities into our platform, and also on leveraging some of the really exciting AI based capabilities that they came with which is particularly around allowing you to rank [indiscernible] candidates based on likely to success at your internal company.

So we're very excited about this, it's early on in terms of the integration components and bringing the team on but we'll certainly keep you abreast of how that goes, the excitement I could tell you from the customer community is very, very strong.

Joseph Vafi

And then, as the platform continues to expand and touch different processes inside of enterprises, I'm wondering just what you're seeing relative to the internal processes that are there, obviously there is opportunities to continue to expand in enterprises but as you touch more processes, is it becoming -- is it a positive or is it a negative because and [indiscernible] some of these organizations are going to have to reengineer or reprocess how they do things along the way and it's not just buying software anymore.

Rob Bernshteyn

I couldn't agree with you more on that. A lot of this is getting into situation where you are the least friction-less player to mitigate resistance to change and the unwillingness of folks to change process, and we've gotten very good at that from a core competency perspective, every one of these moves that we've been making with our advancements into Coupa Pay, with acquisition of DCR and others, not only expands our TAM, but they are leading to synergistic results for these customers and that's evidenced by the roughly average ARR per deal going up for this company for 39 quarters in a row, both in mid-market and enterprise, and the combination of end-market and enterprise. Our customers are buying a value as a service solution from us and we're delivering that for them in the most frictionless way possible and that's what's so exciting about this community that we're building.

Operator

Up next is Koji Ikeda from Oppenheimer.

Koji Ikeda

Congrats on a fantastic quarter. Just one real quick housekeeping question for Todd, maybe I missed this in the prepared remarks. But did you happen to give the dollar based expansion rate?

Todd Ford

No, but I can answer that for you in some contextual history. If you go back to the time we went public, the dollar based expansion rate was in a range of $1.04 to $1.07, and then about a year ago it started creeping up to the $1.08 to $1.10 range and if you look over the past several quarters, it slowly moved up to the $1.10 to $1.12 range, and in the last quarter it was at the high-end of that range.

Koji Ikeda

And based on our model, it looks like ARPU has been increasing sequentially - on a sequential basis for quite a bit for some time now. And it looks like there are some particular strength in this quarter in our model on ARPU and I guess the question is, is this an effect of bigger customers or is it expand opportunities within the base or maybe is it just a combination of both of these?

Rob Bernshteyn

It's a combination of both and more. I would say there is nothing overly statistically significant about an uptick here and there in any given quarter but in general, if you obviously graph to 39 quarters forward you see that the customers are acknowledging the greater value that we're able to deliver them over and over. And one of the things exciting about our space is that our primary champion is typically procurement who is in the world of buying; so they understand value when they see it and we're excited that they are paying us fairly for it, quarter-in, quarter-out.

Operator

And now we have Stan Zlotsky from Morgan Stanley.

Stan Zlotsky

Maybe the first one; you had your big inaugural event in APAC in Japan, what are you seeing in that region that's driving your focus there, maybe from a market opportunity there? And how should we think about the materiality of that region moving forward? And then I have a quick follow-up.

Rob Bernshteyn

So just to offer a broader context because there may be some newer people to our company on the call. The way we've grown this business is very carefully and organically entered new markets, we go into the market, we find early adopters, we make those customers highly successful and referenceable, we work with them to make sure that they're getting significant value. And then we leveraged their insights and their network, we leverage their referencability to grow to the customer 2, 3, 10, 20, 100 and beyond; that's how we grew our advancement all across Europe, that's how we grow our advancement all across Canada and Australia, and very similarly, we're entering into Japan, largely out of Tokyo. We have some early highly referenceable customers there, we had a symposium event there that drew a very significant crowd and a great deal of interest, we're developing a robust pipeline there and we anticipate that market, as well as other markets that make up our international expansion strategy to incrementally continue to contributing, and contributing and contributing over coming quarters and years, that's how they become very much a substantive contributor for us and that market is a key cloud purchasing market, it's very right for high quality solution such as ours that focus on greater operational efficiency and streamlining. And we think we have a very high likelihood of being quite successful in that market.

Stan Zlotsky

And then a quick follow-up for Todd; just on billings, very strong billings result in the quarter. Was there anything onetime or maybe any kind of pull forward that we need to be mindful off? That's it for me, thank you.

Todd Ford

On the calculated billing Stan, nothing from really a pull forward perspective, we do continue to see a consistent trend of little bit of early renewals as people are expanding with this but nothing that I would call out separately from a dollar perspective. On the acquisitions of DCR and Acquiire, let me provide a little color there. With respect to DCR, there was no beginning deferred revenue balance that was transferred onto our books from a calculated billings perspective and since the acquisition was done beginning in the quarter, revenue expenses were contemplated and the guidance that we gave on our last call; that said though DCR execution was strong from DCR and one of the contributing factors to a strong top line growth for Q3 which indirectly impacts billings obviously.

Regarding Acquiire, the acquisition was done with only few weeks remaining in the quarter. There was a beginning deferred revenue balance that came onto our balance in Q3 which was the benefit to calculated billings after being adjusted down to fair value as part of the purchase accounting. However, on a trailing 12 months basis this benefit was roughly offset by other factors such as the deferred revenue haircut we took at the beginning of the year due to the adoption of 606. So lots of puts and takes but nothing that I would say was plus or minus. And then, from a revenue perspective, for Acquiire, it was nominal in Q3, very small; and there will be incremental expenses for Acquiire in Q4 that was contemplated in our guidance since we only had a few weeks in Q3, that will take the full hit of that in Q4.

Operator

Ross MacMillan from RBC Capital Markets.

Ross MacMillan

So Rob, just one thing that stood out to me was the spend under management that was actually about $100 billion incremental this quarter; I think that was up sequentially from Q2 which is seasonally unusual and it was about $30 billion higher than the Q3 of last year. So I guess just anything in particular that stood out for you in terms of new customer sizes or new customer volume? And then I have a follow-up for Todd.

Rob Bernshteyn

So Ross, with spend under management obviously it's a combination of new customers going live but it is also existing customers continuing to expand, take on additional categories of spend and ultimately drive a lot more value through our platform. There is nothing statistically significant that happened this particular quarter to make note off, but I will tell you what's interesting, particularly with our community intelligence capabilities, we've actually seen particularly over the last quarter some relatively significant statistic such as spend requests from request time to approval are actually taking a bit longer in certain industries and we'll looking at this obviously as an aggregated insight of our hundreds of billions of dollars in spend. But also rejection approval time; rejection amounts have actually increased quite a bit and we think that maybe from a hypothesis driven perspective that maybe an indication that company is becoming a bit more frugal given the economic uncertainty that they might be experiencing.

What's special for us in that situation is that we have this platform that allows all of our customers to see what's going on at an aggregate level, at an industry-by-industry level, through various periods of time, so they could fine-tune how they are reacting to the changing economic times. And I think that also puts our platform front and center in these times when spend is something that you can clearly control, we could be the business spend management platform for them to control that optimally; so very, very interesting.

Ross MacMillan

Todd, I know that last quarter on sales and marketing you had Inspire, but we're still seeing nice leverage on that line and I was just curious, when we had the Analyst Day last December, we're talking about the investments in mid-market, maybe not quite there yet with the unit economics that you wanted to see. I wondered if you could just provide us an update there and whether there is opportunity to sort of accelerate the investment in mid-market as we look into next year. Thanks.

Todd Ford

With respect to mid-market and enterprise, both of those we continue to invest in, we continue to make significant progress and obviously we can always do better in both of those segments. With respect to mid-market, one of the areas we've made a lot of progress is with Sean Darn [ph], his marketing team on this concept of ICP, Ideal Customer Profile, and by targeting those customers that have the highest propensity to buy. And as Rob mentioned, our ARR per deal continues to go up and has gone up now for 30-somewhat plus quarters and it's been very pronounced in the mid-market. So we continue to make progress there, the splits from a revenue perspective are still approximately 80% enterprise, 20% mid-market, and I think that's in large part due to just a low-hanging fruit or low market penetration in the enterprise and mid-market as well. So I don't know that you will see that split change and we continue to invest in that market but we're continuing to invest in other areas as well such as the international expansion that Rob mentioned earlier.

Operator

Terry Tillman from SunTrust Robinson Humphrey.

Eric Lemus

I just had one question on Coupa Pay; it was really good to see you guys sign up a new partner with Barclays card as your first partner but what has been the response from other banks and how do you view banks in terms of them being a friend or foe?

Todd Ford

We are excited to work with Barclay card as the inaugural partner, they are actually historically the company that was first to create business corporate cards; so for them to be our inaugural partner was great but there is a very real interest on behalf of a whole host of financial institutions to work with us. As you might imagine, we have -- as you understand rather, we have hundreds of billions of dollars of spend under management that's accelerating in terms of how much more money is going through our platform, spend is going through our platform; so there is opportunities for banks to engage with us, and engage with us in a number of value-added ways such as supply chain finance opportunities for both, the buy side, as well as the sell side, we have an opportunity there. But I think for the near-term, it is very much a friend opportunity, a number of them are our customers, many of them are partners, and the value that we provide synergistically to our joint customers is very real; so we're working together in that spirit.

Operator

Pat Walravens from JMP Securities is up next.

Pat Walravens

So Rob, you spend a substantial portion of your remarks on personal acknowledgements; I think that's the first time I've heard you do that on one of these calls and I know you're very deliberate about what you say. Why did you decide to do it now?

Rob Bernshteyn

I have actually done it occasionally once in a while in the past. We have a couple of very interesting ongoing traditions at the company, we give most valuable player awards every quarter to employees in the company that exemplify our core values, twice a year we give a leadership award to one individual as voted by all of our colleagues here that exemplifies leadership in a very strong way, and very recently we've realized that our customers are really part of our community when it comes to values we're developing, and so at this recent conference we again decided to give them awards based on their desire and willingness to engage with these values and frankly, exemplify these values themselves. So we felt it will be nice to call them out in any venue and why not will all of you as well.

Pat Walravens

And then if I can add a different one, you touched on this a little bit but what happened to the demand for your procurement solutions in a recession? I mean on one hand, there is a reluctance for new projects, on the other hand you're saving money, how does -- I think you've weathered one of these; so how do you think it plays out?

Rob Bernshteyn

I remember actually meeting with you and speaking with you in 2009 when were just growing to build out this business; so you're right, we have a bit of experience in this. In turbulent economic times, the one thing that you can control as my colleague and our CFO here, Todd, has said many times as your spend. Revenue can be harder and harder to come by, market dynamics can put you in a difficult situation but spend is something you can control and the ability to control spend drives bottom-line results which virtually every company in the world cares about or certainly should care about. So we think we're at a place where we have the gravitas [ph] in the marketplace, we have the legitimacy in the marketplace, we have the proven track-record in the marketplace, both internationally and domestically, in mid-market and enterprise to help companies that are virtually all sizes; and all industries weather the storm and we can not only provide them the opportunity to control that spend, we can now give them really valuable insight based on our AI-powered community intelligence so they can get smarter and smarter by how they spend.

So regardless of where things take us from a macroeconomic perspective, we're pushing on it full throttle to be a partner to this developing community of customers.

Operator

Ryan MacDonald from Needham & Company.

Ryan MacDonald

Rob, it could be really curious to hear more about these events in EMEA and Asia Pac; clearly, community intelligence was a key focus point at those events but now that you're seeing especially in EMEA sort of the scale of these events being the same here in the U.S., based on your customer conversations, where are you seeing maybe some differences in the needs or demands from customer in EMEA versus in the U.S.? And perhaps maybe you can talk about some of the on-core modules that are maybe resonating more with those customers or in that customer base versus in the U.S. market?

Rob Bernshteyn

I will tell you that there are horizontal inputs that we're getting. We're hearing certain flavors that are more interesting perhaps for customers in EMEA or APAC or the U.S. but they are common themes and those themes are really predicated around first of all, getting visibility into spend for their organizations. We did this recent study with the economists that showcase that 60% plus of CFOs don't have visibility to all of their company spend, and 60% plus of them are interested in employing information technology to address that problem, and that is an international data point. So what we're seeing is the interest of our buyer to get better and better at doing that, controlling that spend and optimizing that spend and what I would tell you is the biggest and most inspiring thing for all of myself and all my colleagues at the company is that the conversations with our customers at these events are authentic, they are real; people are sharing what is working, areas for improvement, they're giving us real advice, real insights, they are pushing us in places where we want to be pushed, they are praising us for the successes that we've had and the successes we're delivering for them. So the heart of it is building this global community of like-minded people that want to employ best-in-class information technology to help their companies optimize all of their spending. And that's spirit is stealth [ph] at every one of these events, no matter where you are in the world and it's that spirit that I think is going to continue to drive us forward quarter-in, quarter-out as we build this business.

Ryan MacDonald

And then just a quick follow-up on; I think in past quarters you've talked about percent of revenue or perhaps billings during the quarter that came from non-core modules, could you provide an update on that?

Todd Ford

We actually don't break that out. I mean what we have said is that when customers are coming onboard with us at the number of modules that they are buying has continued to increase per deal, so little over a year ago it was roughly three modules or three functionality, we don't like to use the term modules but that's how you guys think about it but -- and now it's slightly over four; so that's really the only metric that we've talked about in the past.

Operator

And now we have Joseph Foresi from Cantor Fitzgerald.

Joseph Foresi

I was wondering if you could maybe talk a little bit more about margins as we head into next year. I want to make sure we don't get ahead of ourselves here but sales and marketing seem to give you a reasonable amount of leverage versus what we've seen historically. So are you expecting that type of spend to continue to be -- continue to get leverage from that area? And how should we think about the margin profile in FY20?

Todd Ford

From a margin perspective, one of our kind of three commitments to Wall Street is to continue to show in scale as we grow the business with respect to margins and free cash flows. And if you look at the mid-term target that we set out a year ago, gross margins were 73% to 75% and the longer term was 78% to 80%, and we are going to take as I noted in my prepared remarks that -- and there is going to be a little bit of a step back over the next one to two quarters with respect to the M&A integrations and absorbing those costs but then we would expect to see a continual gradual improvement with respect to gross margins and free cash flow margins towards the longer term target now that we've achieved materially all aspects of the mid-term target. And the same goes for free cash flows; if you look at a trailing 12-month free cash flows of 9% that's well at the high-end of the mid-term target and I think you will continue to see quite a bit of scale there.

And on the sales and marketing, yes, definitely expect to see continued leverage there, we're getting more legitimacy in the market; we're seeing system integrators lead more with Coupa and bring us into their installed base. And I wouldn't say we're necessarily a household name yet but the brand recognition is improving and we've made some concerted efforts in the last couple of quarters in that area as well. So, I think we're executing really well and stay in the course with respect to the commitments that we've made.

Joseph Foresi

And then my second question is just on the professional services business; I know you've said in your prepared remarks it tends to be lumpy on the margins and also we've seen in the top line but it seem to have sort of smoothed out over the last couple of quarters and that it seems like we're having some rough air going forward. Maybe you could just provide a little bit of color around your thoughts over the next couple of quarters on both revenue and the margin front? Thanks.

Todd Ford

So on the professional services margins, the team has really done a great job in scaling that business with respect to Q3, and as we look to Q4, there is definitely an impact in particular from the DCR acquisition because we took full impact of that professional services organization and the professional services tend to be more backend loaded or it's lower than what we would charge for our standard Coupa implementation. So I think it will take a couple of quarters but that's normalized but I would expect it to still be within that 0% to 10% positive on a trailing 12-month basis. And as we incorporate that business, I think you'll start to see that improve as we get into Q1 and Q2 of next year.

Operator

Up next is Mark Murphy from J.P. Morgan.

Matt Coss

So, you've historically been able to save your customers sort of a specific percentage of their spending, and -- on average -- and has that changed at all particularly as you look at some of your large customers that have been with you for several years? And do you have anyway to see if the percentage of spending that you're capturing at your customers has changed or improved on a percentage basis as customers adopt more functionality for EMEA?

Rob Bernshteyn

I would say in general terms that continues to trend very positively, existing customers are continuously looking for additional categories of spend to run through our platform, that want to remove maverick spend as much as possible across the organization, they are not only turning on the procurement capabilities but obviously turning on our expense management capabilities, our events, our invoice processing capabilities that continues to trend upward. Last time we did an assessment on this with our customer base was roughly a year ago and we saw somewhere between 88% and 90% of the spend that they were looking to get through our platform is in fact running through our platform on average. So these are really unprecedented level, they are roughly twice the industry benchmarks of 40%, 45%; so we feel really, really good about that. But we don't want to rest there, we want to make sure that we give our customers as much value as we possibly can out of our platform and give them more and more capabilities to drive value against that spend [ph].

Matt Coss

And then just one more; I appreciate the update on the headcount that over a 1,000; is there any comment you can make on the number of customers that you currently have or are we going to get an update later?

Todd Ford

We provided an update on the customer count at the end of the year and with our 10-K, so we'll update you on the customer count at the end of the year.

Operator

Brian Peterson from Raymond James.

Brian Peterson

I don't know if Rob or Todd wants to take this but can you talk about what's driving the net revenue retention higher towards that 112% range; is that early renewals with customers buying more products? And with the launch of community intelligence, in analytics, more broadly, does that have a natural motion back to base where we might see upward pressure on that net revenue retention metric? Thanks.

Rob Bernshteyn

Sure, so let me take a first crack at it. So the first driver of this improvement in around retention is simply that we're delivering value for our customers. And they are interested in getting more value from us, so they are not only staying with us but they are interested in adding on like additional capabilities, that's evidenced by the ARR per deal for new customers and that's evidenced by the additional add-ons for existing customers. Around community intelligence, this is a non-serial impact that we're having for our customers, this isn't just a module, this is the ability to take advantage of the collective intelligence of hundreds of billions of dollars in transactional spend for the benefit of each individual customer; so they are understanding the power of this, it's obviously building a substance of mode [ph] around our business and giving us greater and greater value for every customer.

So it's a very positive indicator but our goal is to not only keep every customer we ever signed but to continue to drive more value for them and get paid fairly for the value that we're driving for them quarter-in and quarter-out.

Operator

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.