Coupa just filed for a $75M IPO and is the latest enterprise SaaS unicorn to do so publicly. Morgan Stanley is the lead book-runner and the company will trade with the ticker “COUP” on the NASDAQ exchange. Given my interest in private SaaS companies and the SaaS IPO market, I wanted to share a few thoughts from reading through their S-1. Coupa is a great business — they have broken away from the competition in the crowded procurement and spend management software space with their cloud-first approach and broad suite of products.

Company and Product Summary

Coupa, founded in 2006, is a leader in spend management software. Customers use Coupa’s platform to have control and visibility into how they are spending money. Coupa has 460 customers, 2M+ suppliers and more than $250B of cumulative customer spend on the platform, which has grown at an impressive 129% CAGR from FY ‘11 to FY ‘16 . The company says to have saved customers almost $8B in costs since inception. The core of the platform includes modules in procurement, invoicing and expense management. They also offer supporting modules including sourcing, analytics, contract management, supplier management, inventory management and storefront. Here is a graphic from the S-1 that illustrates their product suite.

The free Coupa Business Network is where suppliers integrate and due to this, Coupa creates some natural network effects in their business, which is less common for enterprise software companies and an important part of their story. As Coupa adds more customers, the spend under management grows, which attracts more suppliers, hence attracting more customers that want to connect to the expanding network. Here is a graphic illustrating this from their S-1.

The company serves mostly larger enterprises and has 1.5M+ licensed users and given the customer base of 460, it implies ~3,300 users per customer. Customers are from a variety of verticals, in more than 100 countries, and no customer represents more than 10% of annual revenue. If you multiply last quarter’s subscription revenue of $27.8M by four to get an implied *rough* ARR figure ($111.1M), the average ARR/customer is ~$250K. I imagine they have some very large 7-figure customers too. Coupa sells their product through a direct sales force (inside and field)and through their partner program, Coupa Partner Connect. In terms of competition, Coupa competes with large ERP vendors like SAP (Ariba and Concur) and Oracle, and also smaller more niche vendors.

Market Opportunity

Coupa’s market opportunity are the core tenants of spend management — procurement, invoicing and expense management. They believe their current TAM to be ~$16B, which is the sum of the global market for invoicing applications ($4.3B), SaaS expense management ($2.2B), and supply chain management application software ($9.5B). Coupa also states that there are almost 200K companies with more than 500 FTEs, which are all potential customers.

Coupa’s market size is likely much less than the $16B they present (of companies that they could actually serve), but public market investors like to make the case for continued, long-term growth, and it’s helpful for Coupa to paint a picture for the entire potential market, not just what they could serve.

Investors

The company has reportedly raised almost $170M from investors including Mohr Davidow (16.3% pre IPO stake), Battery Ventures (16.2% pre IPO stake), El Dorado (13.9% pre IPO stake), BlueRun (12.7% pre IPO stake), Crosslink (11.1% pre IPO stake), ICONIQ (5.1% pre IPO stake) and T. Rowe (5.1% pre IPO stake). Meritech is also an investor but not listed as a 5%+ shareholder. The CEO, Robert Bernshteyn, has a 5.8% pre IPO stake. The last reported valuation was $940M.

Financials and Metrics

Coupa only discloses their GAAP P&L beginning in FY 2015, but has shown very impressive growth over the past few years. They grew revenue 75% in the 6 months ending July 31 2016, and reported $60.3M in revenue. They lost $24.3M during the same time period, which was essentially flat over the same time period the year before, clearly showing there is leverage in the business model. Depending on the quarter, ~85–90% of Coupa’s revenue is subscription, with the remainder professional services. The gross margin on subscription revenue is almost 80%, while the gross margin is negative on professional services. Their blended gross margin was 61% in the first half of the year. Many companies give away their professional services for free (at a loss) as a business strategy to on-board new customers without excess cost. Coupa’s customer contracts are typically 3 years in length and most customers pay annually, or a year in advance. The company prices it’s platform based on number of users per module, and as the number of users increases, subscription price per user decreases. Coupa does not charge suppliers who are on the platform.

Coupa has an LTV of over 6x and they calculate it 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. They also provide a cohort analysis of customers they acquired during FY 2013. In 2013 those customers generated $4M in revenue, at a (249)% contribution margin. In the 2nd, 3rd and 4th years, Coupa generated ~$10M from those same customers, representing an annual contribution margin of ~75% (output below).

I’ve put some outputs of their financial and KPI performance below:

Cumulative Spend Under Management ($B)

GAAP P&L (000's)

Implied ARR Over Past 8 Quarters ($M)

What is interesting below is that while the company is growing quickly, the net new implied ARR has fluctuated over this period. In the last 8 quarters they have added $7M, $4M, 12M, $14M, $10M, $8M, and $10M in the most recent quarter. You can see the total implied ARR below.

Cash Flows (000's)

Cohort Output from S-1

Valuation

Obviously the company hasn’t set an IPO price yet, but we can back into some general ranges (note the analysis below is very simplistic and subject to change). Given Coupa is not profitable and growing quickly, the company will likely be priced on an enterprise value / revenue multiple. The median NTM EV / revenue multiple of high-growth SaaS companies (a bucket of 30%+ YoY growing SaaS businesses like New Relic, Zendesk, Atlassian, ServiceNow, Twilio, and others) is around 6–7x today.

Coupa generated $60.3M in revenue and grew 75% for the six months ending July 31, 2016, and grew revenue 7% and 10% over the past two quarters, respectively. LTM revenue was $109M. If you assume the business will grow 10% QoQ for the next four quarters, their NTM revenue would be ~$160M. This is likely conservative since they grew 75% in the first 6 months of this year, but I’ll use that as the bottom of my range. Assuming a range of growth rates and NTM revenue multiples, you can see the implied illustrative range of enterprise values below. Again, this could change quite a bit depending on when the company actually goes public. For example, if the company prices in early 2017, the NTM revenue would obviously be much higher on current course.

As I mentioned, Coupa is an amazing software business and has grown consistently over the past 10 years. Their platform has become a premium offering for enterprises wanting to run a cloud-based spend management platform. While it’s a great business, their lack of profitability could give some investors pause — Coupa has ~(40%) operating margins. The “growth at all costs” mentality from technology investors has shifted over the past year. Investors are now very focused on profitability for SaaS businesses and Coupa will likely have to demonstrate their plan to get there in the next few years to get a premium SaaS multiple, even with their impressive growth and scale.

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