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Coupa Software (NASDAQ:COUP) Reports Strong Q2, Stock Soars


Full Report / September 07, 2021
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Spend management software maker Coupa Software (COUP) beat analyst expectations in Q2 FY2022 quarter, with revenue up 42.3% year on year to $179.2 million. Coupa Software made a GAAP loss of $86.7 million, down on its loss of $43.1 million, in the same quarter last year.

Coupa Software (COUP) Q2 FY2022 Highlights:

  • Revenue: $179.2 million vs analyst estimates of $162.9 million (9.98% beat)
  • EPS (non-GAAP): $0.26 vs analyst estimates of -$0.06 ($0.32 beat)
  • Revenue guidance for Q3 2022 is $177.5 million at the midpoint, above analyst estimates of $168.8 million
  • The company lifted revenue guidance for the full year, from $682.5 million to $707 million at the midpoint, a 3.58% increase
  • Free cash flow of $36.9 million, up 23.6% from previous quarter
  • Gross Margin (GAAP): 55.8%, up from 52.2% previous quarter

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 very strong over the last year, growing from quarterly revenue of $125.9 million, to $179.2 million.

Coupa Software Total Revenue

And unsurprisingly, this was another great quarter for Coupa Software with revenue up an absolutely stunning 42.3% year on year. On top of that, revenue increased $12.3 million quarter on quarter, a very strong improvement on the $3.38 million increase in Q1 2022, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 18.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Profitability

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, licences, technical support and other necessary running expenses was at 55.8% in Q2.

Coupa Software Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.55 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 Q2 Results

With a market capitalization of $19.2 billion, more than $633.5 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 impressed by how strongly Coupa Software outperformed analysts’ revenue expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 7.55% on the results and currently trades at $283.74 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.

Given its price to sales ratio based on the next twelve months is 25.5, Coupa Software is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. 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.

The Wall St analysts covering the company had a one year price target of $270.6 per share right before these results, implying that they didn't see much short-term potential in the Coupa Software.

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