Coupa Software (NASDAQ:COUP) Q3: Strong Sales, But Stock Drops On Mild Guidance

Full Report / December 06, 2021
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Spend management software maker Coupa Software (COUP) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 39.7% year on year to $185.8 million. The company expects that next quarter's revenue would be around $185.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Coupa Software made a GAAP loss of $88 million, down on its loss of $60.7 million, in the same quarter last year.

Coupa Software (COUP) Q3 FY2022 Highlights:

  • Revenue: $185.8 million vs analyst estimates of $177.8 million (4.46% beat)
  • EPS (non-GAAP): $0.31 vs analyst estimates of $0.02 ($0.29 beat)
  • Revenue guidance for Q4 2022 is $185.5 million at the midpoint, above analyst estimates of $184.3 million
  • Free cash flow of $28.2 million, down 23.4% from previous quarter
  • Gross Margin (GAAP): 58.2%, down from 61.8% same quarter last year

Founded in 2006 by former Oracle executives, Coupa Software (COUP) is a software as a service platform that helps enterprises manage their spending across procurement, billing and business expenses and get a better visibility into how the money is spent.

The software allows a company to set up an internal e-shop through which employees procure all goods and services they need, giving the management control over who they order from. It also offers a central cloud repository for invoices and expense claims and provides an easy to use interface through which employees can manage and resolve both. Coupa then ties all this financial data together and provides reports to help companies find potential inefficiencies and rooms for improvement.

The company continues to expand its capabilities via its robust integration with third-party sales and finance platforms.

The adoption of financial technology software is propelled by an ongoing drive to reduce costs. The volume of financial transactions happening online is growing at a fast pace and coupled with the complexity of the global supply chain, spend management platforms are likely to continue to witness strong demand in the future.

Competitors in the spend management space include Workday (NASDAQ:WDAY), SAP (NYSE:SAP), Oracle (NYSE:ORCL) and Basware.

Sales Growth

As you can see below, Coupa Software's revenue growth has been impressive over the last year, growing from quarterly revenue of $132.9 million, to $185.8 million.

Coupa Software Total Revenue

And unsurprisingly, this was another great quarter for Coupa Software with revenue up 39.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $6.57 million in Q3, compared to $12.3 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 17.1% over the next twelve months, although estimates are likely to change post earnings.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Coupa Software's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 58.2% in Q3.

Coupa Software Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.58 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Coupa Software's Q3 Results

With a market capitalization of $12.6 billion, more than $667.8 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were very impressed by the strong improvements in Coupa Software’s gross margin this quarter. And we were also excited to see the really strong revenue growth. On the other hand, guidance for the next quarter was only in line with expectations, suggesting the growth might tamper down a little. Overall, we think this was still a good quarter, that should leave shareholders feeling positive. But the market was probably expecting more as the company is down 7.5% on the results and currently trades at $159.85 per share.

Is Now The Time?

Coupa Software may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Coupa Software we will be cheering from the sidelines. Its revenue growth has been impressive, though we don't expect it to maintain historical growth rates. But while its bountiful generation of free cash flow empowers it to invest in growth initiatives, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

Coupa Software's price to sales ratio based on the next twelve months is 14.5x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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