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Coupa Software Incorporated (COUP) Q2 2019 Earnings Call Transcript

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Coupa Software Incorporated (NASDAQ: COUP)
Q2 2019 Earnings Call
Sep 3, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Coupa Software Second Quarter Fiscal Year 2020 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 -- Investor Relations

Good afternoon, and welcome to Coupa Software's second 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-Q. These forward-looking statements are based on our beliefs and assumptions today and we disclaim any obligation to update any forward-looking statements. This call is replayed after today. The information presented may not contain current or accurate information.

We'll 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. And 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 -- Chief Executive Officer

Hello, everyone, and thank you for joining us today, and what is our 12th earnings call as a public company. On behalf of my Coupa colleagues and myself, I'm excited to share our strong business and financial results for the second quarter. I believe that there are further evidence that our leadership standing in Business Spend Management is here, a position that we're excited to strengthen as well as advance as we continue executing on our vision.

Financial highlights from Q2 include $95 million of total revenues, representing a trailing 12-month growth rate of 46%. And also, once again, we were profitable on a non-GAAP basis. Todd will of course cover other financial results later in the call.

Now from a business perspective, there were a host of exciting new developments this quarter. Above all else, let me say that we have now seen a clear meaningful advancement in the development and cultivation of our Coupa community. This was most evident at our Inspire conference in Las Vegas in late June, our premier Business Spend Management industry event. This year, Inspire was awash with a palpable new dynamic. The inspiration about our BSM vision that our colleagues and I have been advancing and asserting for many years was clearly reflected back on to us by our customers, partners and even prospective customers. As we progress to the back half of the year and beyond, the marked step change and vibrancy felt across the developing Coupa community has inspired my colleagues and me like never before.

Now, in the spirit of focusing on results, let's talk about customer go-lives. As many of you will know at Coupa, we deliver value as a service to our customers, offering a time to value proposition that simply can't be matched in our industry. We do this by combining the best practices and core competencies we've honed over the past 10-plus years with the technical depth and global reach of the broader BSM community. This community now includes nearly 3,000 trained consultants within our global systems integrator partner ecosystem. This has been and continues to be a winning formula for us and our partners alike.

In the first half of this fiscal year, more than 90 customers in our community have gone live with Coupa BSM. Here are few examples from Q2 that I've selected to showcase our ability to support international and mid-market customers along with subsidiary deployments that often grow into large global partnerships. From an international perspective, let me highlight Axiata Group, one of Asia's leading telecommunications groups. With Coupa, Axiata is automating and standardizing processes with the goal of capturing 100% of their indirect spend under management through the Coupa platform.

From a mid-market perspective, let me highlight a few examples. Cvent, a leading meeting, events, and hospitality provider with more than 4,000 employees, 27,000 customers and 300,000 users worldwide, went live with Coupa BSM to create tighter controls and greater visibility into spend across its US operations. Cvent is looking forward to increase peel-back [Phonetic] spend and reduce manual steps in their AP workflow. Peloton Interactive, which is in technology and design to connect the world through fitness, empowering people to be the best versions of themselves. Peloton went live with Coupa BSM in North America in less than six months. As part of a larger technology transformation, Peloton is using Coupa to standardize its purchasing processes and gain an on-demand visibility into their spend.

Next is the international roll-out of Coupa beginning with the UK. Shopify, a complete commerce platform that lets you start, grow and manage a business, recently went live with Coupa BSM and its Canadian and US operations in a rapid four-month deployment. Shopify chose Coupa to optimize spend management and implement spend controls, ensuring better reporting and analytics against negotiated contracts with preferred vendors. Shopify is also looking to increase efficiency by automating manual inventory management processes.

Lastly, as an example of starting a new relationship with the division or a subsidiary, let me highlight Coors Distributing Company, a beverage subsidiary of Molson-Coors. They went live with Coupa, modernizing their processes for greater visibility into budgets and spend. Coupa is providing them with a highly user-centric experience, a wonderful real-world example of our vision area of user-centricity with the letter U in Coupa.

The accelerated component of our vision as captured by the letter A in Coupa helps us get customers live quickly, so they can start tackling inefficiencies and unaddressed opportunities and begin to drive a meaningful measurable return on investment. We look forward to continued -- to the continued creation of increased profitability and long-term prosperity working alongside these customers and our entire global BSM community in the weeks, months and years to come.

Now let's move on to new customers. During the quarter, we added many fantastic organizations across numerous geographies and industries whose leaders are tightly aligned with our success-oriented values and service approach to BSM. New customers we welcomed to our community included Affirmed Networks, Auckland Savings Bank. Carousell, Commonwealth Bank of Australia, Las Vegas Valley Water District, Suntory, Rakuten, Redfin, Sainsbury's Supermarkets,Tullow Oil, University of St. Augustine, Volkswagen Group Australia, Waste Management Incorporated, Wawa and many others. We look forward to partnering with these and all our new customers to drive success and unlock massive value.

Now let's move on to some other business updates. The richness of content and frequency of interaction within our Coupa community is becoming more comprehensive and expensive every day. The mix in our community is also becoming more global along with offices in North America, including our headquarters here in California. We now have more than a dozen offices in Europe, including London, Frankfurt, Dublin and Basel, five offices in the Asia Pacific region, including Tokyo, Pune, Hyderabad and Singapore, and several offices in Latin America, including in Mexico and Brazil. For the second consecutive year, we will be holding our APAC Symposium in September in Sydney and our Tokyo Symposium in November. We're also adding several events in Sao Paulo for the back half of the year.

Now, of course, we're also looking forward to our Annual Coupa European Inspire event taking place on November 5th through the 7th in London. These events are driven by strong community participation and the continued commitment to business spend management and Coupa that we're seeing in these regions. The permutation of Coupa across the global enterprise software ecosystem is propelled by our rapid pace of innovation in our applications, in our platform, and in our community. As one point to validation, in Q2, Coupa was named as a leader in the Gartner 2019 Magic Quadrant for Procure-to-Pay Suites for the fourth consecutive time. For the first time, Coupa was proudly ranked highest on both axes Completeness of Vision and Ability to Execute. The report cited strong innovation, deep market understanding, and high quality customer experiences as just some of the reasons for Coupa's standing. Industry recognition such as this only serves to amplify our excitement as we continue setting the standard for cutting-edge, technological innovation.

Now, speaking of innovation, let me touch on Coupa Community Intelligence. Community Intelligence leverages the collective wisdom of the community and now more than $1.3 trillion of cumulative spend under management to prescribe ways for companies to optimize their spend management outcome. One example of Community Intelligence in action is with the Anderson's [Phonetic], an organization serving the agribusiness industry. The Anderson spend occurs at various corporate sites and field locations and Chad MacDonald, Director of Procurement is test with the difficult job of finding ways to optimize spend for savings and efficiency.

Now in the past, Chad knew that undue supplier proliferation was limiting his savings opportunities, but it was hard to pinpoint these opportunities clearly and make the case for a companywide sourcing. With Coupa Community Intelligence, Chad can now see his company's commodity spend profile and follow prescriptions to consolidate suppliers. For example, we found that he had three times as many safety equipment suppliers as other companies in his industry. Using these insights, Chad is now having meaningful conversations with business units and safety professionals to consolidate spent the preferred suppliers with negotiated discounts and quality controls, an initiative which is expected to help them save up to 10% on this category alone. With examples like this, it's clear the Community Intelligence and prescriptive insights as captured by the letter P in Coupa are offering massive value to customers and creating meaningful barriers to entry for any future or currently claims participants in our space.

Now, also on the topic of innovation. We continue to be very excited about the ongoing roll-out of Coupa Pay. Coupa Inspire was the perfect venue for showcasing our latest Coupa Pay capabilities. We received tremendous early interest in the launch of our newest pay module invoice payment. We also continue to see strong interest in our other available solutions, accelerate and virtual cards for POs. We announced a number of key partnership with Citibank, Transfermate, Stripe and PayPal. As we continue our focus on being a truly open platform as represented by the letter Oin Coupa.

Unlike other payment solutions in the market, Coupa Pay has the distinct advantage of sitting on top of the supplier master record and the supplier invoice transaction in the Coupa AP [Phonetic] automation cycle. Some of our strongest areas of expertise. The alternative, which is operating on the back-end of numerous ERP instances is clearly less effective less efficient and certainly more costly. We've heard many nasty horror stories about this process from our customers. So, still in the early stages of execution for Coupa Pay. Our vision is clear and we'll continue to keep you posted on progress.

I'm also excited to announce the release of the Q3 Coupa Business Spend Index today. This is our second quarterly release after the inaugural BSI report last quarter. The Coupa BSI analyzes hundreds of billions of dollars in aggregated and anonymized spend behavior to serve as a leading indicator of economic growth based on current business spending decisions. As companies across industries seek economic indicators that they can trust and make smart decisions, our goal with the BSI to provide a powerful tool that utilizes the collective wisdom of the BSM community to help companies of all sizes spend smarter.

Now before we go into the results of the Q3 BSI, let me make it clear that what we're seeing in the BSI data is not indicative of the trends we're seeing in Coupa's business .With that said, let me share some of our findings .The Q3 Coupa BSI indicates that businesses globally may be growing more cautious about the economy through at least the end of 2019. At an industry level, retail is performing well above trend, but retailers confidence in economic growth may be slowing for where it has been in recent quarters .Similarly, financial services companies appear to be growing less confident in the economy for the next six months. Alternatively, manufacturing sentiment seems to be increasing though still below trend. One hypothesis for this particular trend maybe the manufacturers are looking to domestic options due to global trade tension. Detailed Q3 BSI findings are now available on spendindex.com.

Now let's talk a bit about our culture. With our market leadership position, we believe our future success is only limited by our ability to execute. This quarter, we were proud to be recognized as a great place to work for the third consecutive year based on survey results, which evaluated our organizational resilience, commitment to personal and professional growth, product innovation, leadership effectiveness and of course our core values. In fact, our three core values of ensuring customer success focusing on results and striving for excellence are foundational to our success.

As such, each quarter, we recognize the most valuable player colleagues who truly embodied the spirit of each of our values. The winners are nominated by their peers for their unique contributions to our company, our customers and our broader community. This quarter, [Indecipherable] was recognized for ensuring customer success. Perry consistent -- consistently shows professionalism and persistence enabling customers to achieve long-term success. For a customer, he is not looking just to see smile and enjoy yourself with near-term satisfaction. Success is the objective. Nick Meyer who joined Coupa through our DCR Workforce acquisition won the award for focusing on results. As a product manager specializing in our Coupa contingent Workforce Solution. Nick has quickly proven his dedication to industry innovation and has been able to prioritize a very complex set of requirements to maximize customer results.

Last but not least, Robin Turner of Coupa Finance, received the award for striving for excellence .Day in and day out. Robin fully commits to making herself her team and every Coupa colleague a better professional .She is always willing to take extra time to explain and teach as well as listen and learn huge congratulations to pair Nick and Robin and thank you for inspiring all of them.

Before finishing up, let me briefly touch on something I'm very excited about. Our growing patent portfolio as a company, we continue to execute on our vision of delivering a comprehensive platform to drive repeatable and measurable value and like the letter C in Coupa our patent program is also comprehensive capturing functional inventions across our entire platform. This quarter, we proudly earned our 16th , 17th, and 18th US patents. Our 16th US patent enables customers in our community to propose more accurate translations of terms used in localized versions of our solution. Our 17th new patents involve the use of machine learning to automatically to say for the contents of invoices and other transactional document. And our 18th new patent is focused on automatically recognizing the geographic locale of the document based on language cues when the document -- within the document itself. With more than 75 additional patents pending in the pipeline, we're continuing to set the innovation agenda for our industry, while also protecting our intellectual property for years to come.

As I wrap up, let me say that as we look to the back half of the year and with our 43rd quarter of execution well under way, we remain steadfast in our vision and focused on consistent strong execution. We believe that the value of the service we are delivering to our customers through our applications, our platform and our community is unlike anything that's been done before in enterprise software. We could not be more excited about our opportunity to continue leading in this space.

Let me now hand it over to our Chief Financial Officer. Todd Ford, who will review our Q2 financial results in detail and provide our outlook for the third quarter and full FY. Todd?

Todd Ford -- Chief Financial Officer

Thanks, Rob, and good afternoon, everyone. The second quarter was a well-executed quarter for us. Throughout the organization, we fired on all cylinders, achieving excellent financial results across the board. Total revenues for Q2 grew 54% year-over-year to $95 million. Subscription revenues for Q2 were $83 million, up 51% compared to Q2 of last year. Professional services and other revenues were $11.7 million, which was an uncharacteristically large quarter for us. On professional services, while the vast majority of our implementations remain partner-led, in the quarter, we took a few strategic customer implementations directly, for example in the federal sector.

For the trailing 12 months calculated billings were $379 million, up from $252 million in the previous trailing 12-month period, representing a 50% year-over-year increase. Our strong billings performance was driven by outstanding execution across the sales organization as well as the benefit from the Exari acquisition, which I will cover in a moment. Total deferred revenue at quarter-end was $189 million, up from $129 million at the end of Q2 last year, a year-over-year increase of 47%. With respect to Exari, opening deferred revenue from the acquisition was $4.7 million and revenue recognized during the quarter from the acquired deferred revenue was $1.9 million, resulting in an ending acquired deferred revenue balance of $2.8 million.

Let's now turn to margins and results of operations. Driven by strong revenue performance and leverage in our model, our Q2 non-GAAP gross margin was 72.7%, exceeding our previous expectations of 70% to 71%. This included professional services and other non-GAAP gross margin of 10.7%, which reflects great execution by our professional services organization. We delivered non-GAAP operating income of $4.8 million as well as non-GAAP net income of $5.3 million or $0.07 per share on 70.9 million diluted shares. All of which were ahead of our previous commitments even with the full quarter impact from Exari.

Cash and investments at quarter-end were $808 million, up from $346 million at the end of Q1. This includes $667 million of net proceeds from convertible notes we issued in June, offset by $210 million of net cash used to purchase Exari. Operating cash flows for Q2 were $1.3 million and free cash flows were negative $2.3 million. On a trailing 12-month basis, operating cash flows were $34 million, or 11% of total revenues and free cash flows were $23 million or 7% of total revenues after taking into account $11 million in purchases of property and equipment. Cash flows for the quarter were favorable due to strong performance by our collection team, which drove accelerated customer payments and improved linearity.

We expect total revenues for Q3 to be between $95 million and $96.5 million. This includes subscription revenues of between $86 million and $87 million and professional services revenues and other of approximately $9.5 million. For calculated billings, on a trailing 12-month basis, we expect to exit Q3 at a growth rate of approximately 45% and we expect free cash flows for Q3 to be breakeven or slightly positive.

Now let's look at the expense profile for Q3. We expect Q3 non-GAAP gross margin to be approximately 71% and non-GAAP operating income to be between $3.5 million and $5.5 million. This results in a non-GAAP net income per share between $0.05 and $0.08 on approximately 71.7 million weighted average diluted shares for the quarter. For the fiscal year ending January 31st, 2020, we expect total revenues to be between $369 million to $372 million with non-GAAP gross margin in the range of 71% to 72%. We expect non-GAAP operating income for the year to be between $10 million and $13 million. We further expect non-GAAP net income per diluted share in the range of $0.11 to $0.16 based upon an estimated 70 million weighted average diluted shares for the year.

To conclude, we remain focused on driving results and delivering on the commitments we have made to our stakeholders.

Now we're happy to move into Q&A. [Operator Instructions] With that, I'll hand it over to the operator.

Questions and Answers:

Operator

Thank you, Mr. Todd. [Operator Instructions] Your first question comes from the line of Stan Zlotsky from Morgan Stanley. Your line is now open.

Stan Zlotsky -- Morgan Stanley -- Analyst

Perfect. Thank you so much for your time, and congrats on a very strong result. Just wanted to get a better sense for the contribution of Exari in the quarter. Just looking through the filings at the end of March, Exari had about a little over $20 million of deferred revenue. And I just want to make sure I have the numbers right. So it sounds like coming into the quarter that -- after deferred revenue writedowns that dropped to $4.7 million and then you finished at $2.8 million of deferred contribution for Exari. And then I have a quick follow-up.

Todd Ford -- Chief Financial Officer

Yes. So Stan, that is correct. The amount that actually came under our books was $4.7 million and that takes into account the discount from the -- to acquired deferred plus also the transition from 605 to 606, which we did in concert with the acquisition. So for the second quarter, the ARR revenue that was recognized from Exari in total was $2.8 million.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. Perfect. And then a quick question on macro. We've heard from a number of companies where they're either seeing something some unevenness or maybe some hesitancy. What are you guys seeing because you obviously have your Business Spend Index throwing off various signals, but what are you actually seeing when you look at your pipeline as you go into the back half of the year? That's it from me. Thank you.

Rob Bernshteyn -- Chief Executive Officer

Sure. Thanks very much, Stan. No, we continue to see a very strong pipeline, real good positive conversations with prospective customers as well as existing customers that are interested in the full Business Spend Management platform that we offer. So quite positive from where we're looking at.

Stan Zlotsky -- Morgan Stanley -- Analyst

Perfect. Thanks.

Operator

Your next question comes from the line of Mark Murphy from JP Morgan. Your line is now open.

Matt Coss -- JP Morgan -- Analyst

Hi, good afternoon. This is Matt Coss on behalf of Mark Murphy. Thanks very much for taking our questions. Rob, as companies move along the arc of their digital transformation, how often this Business Spend Management surface in those conversations. And then, as it appendage to that, do you perceive the market, is it a point or Coupa instead of being viewed as sort of a new less well known choice, the opposite is now true, but Coupa is now sort of the safer go to choice?

Rob Bernshteyn -- Chief Executive Officer

Sure. Thanks very much for the question. First, I would say it absolutely does surface as part of a broader digital transformation agenda. The value proposition is obviously very, very strong and is becoming more and more of a focal point for CFOs, CIOs and we're starting to see more and more of CEOs as well. So, that's great. The second part is that it's in our best interests. And is the right thing for our prospective customers that we surface it even if they're not surfacing it because the value proposition, again is very strong. We can help drive profitability, compliance and thoughtful growth as well as greater efficiencies [Indecipherable] any company on the planet. And thirdly, I would say it is still upon us to continue to carefully and thoughtfully develop awareness of Coupa in the world. We have a massive market measured in tens of billions of dollars that we're going after. We've penetrated a very small percentage of that market in the Global 2000 and the Fortune 500 and certainly across all of mid-market. So with careful thoughtful awareness development and execution into the market, we think we're on the way to developing and building a very special company.

Matt Coss -- JP Morgan -- Analyst

Thank you.

Operator

Your next question comes from the line of Alex Zukin from RBC Capital Markets. Your line is now open.

Alex Zukin -- RBC Capital Markets -- Analyst

Hey guys. Thanks for taking the question. Congrats. I guess maybe just the first one, given that you've now accelerated subscription revenue growth four quarters in a row, can you maybe talk about whether -- is this being driven by larger initial lands we're accelerating expands within the customer base? And then how should we be thinking about the dollar-based net expansion on both the near and long-term time horizon?

Rob Bernshteyn -- Chief Executive Officer

Well, thanks very much, Alex, for the question. I would say on the revenue side that a couple of very interesting and frankly promising developments. Our mid-market engine is really working. Just to give you a sense for that in Q2, we closed our largest mid-market deal in Company history. I would say our enterprise business is going quite well also. In fact, in enterprise, we also closed one of our largest deals just in Q2.

Now in terms of global expansion, global expansion is something we continue to manage very carefully. We're very sales and marketing efficient as we go into these new markets and we develop our way in. So it really comes back to this model that we've been working on for 42 quarters now staying within a tight band of sales and marketing efficiency and continuing to drive top line expansion. One of the framing that you may appreciate Alexander is just thinking about it in terms of price, speed and win-loss, the three components of driving revenue.

On the price side, our average ARR per logo has gone up sequentially and virtually every quarter since IPO and beyond that. And that's in total as well as by segment. In terms of speed, our speed of close has stayed relatively steady at four months to six months for mid-market and call it six months to 12 months for enterprise. And around win-loss, I can tell you qualitatively. And I've said this in the past that our strong sense is that our only competition here is ourselves and our ability to lead this developing market. So, as new components come online, we're there to service them. So either way you want to look at it, that's what's happening in our world.

Todd Ford -- Chief Financial Officer

Hi, Alex. This is Todd. With respect to renewal rate and a dollar-based expansion rate. So the gross renewal rate continues to trend at 95% plus. On the dollar-based expansion, it's slightly ticked up, but it's still in the very high-end of range that we've historically quoted of 110% to 112% [Phonetic]. And I think over time, if you will be able to get that closer to 120% [Phonetic]. And I do view that as a long-term target. Although we've added some resources to go after the installed base, our clear focus is still on landing large new customers.

Alex Zukin -- RBC Capital Markets -- Analyst

Got it. Thank you, guys. And maybe just one more on payments. You talked about the uptick that you're seeing in enthusiasm from your customer base. Can you maybe just rank order, the payments opportunity in terms of what's most needle moving in the near term and in the mid to longer-term?

Rob Bernshteyn -- Chief Executive Officer

Sure. I mean all three components that we have today are all very valuable, it's seen as quite valuable by our prospective customers and the customers we've acquired. They're using them, so clear interest in virtual cards, clear interest in accelerate, and very good early interest in invoice payments. I would say my sense at the moment is that the medium- to longer-term opportunity around invoice payments is probably the most interesting because we'd be taking on a great bulk of the heavy lifting that's done in a whole host of the ERP systems as I mentioned in my prepared remarks.

Alex Zukin -- RBC Capital Markets -- Analyst

Perfect. Thank you guys. Congrats again.

Operator

Your next question comes from the line of Michael Turrin from Deutsche Bank. Your line is now open.

Michael Turrin -- Deutsche Bank -- Analyst

Hey, there. Great, thanks, good afternoon. You took the revenue guide for the year up significantly more than the beat we saw this quarter. Can we just talk more about what it is you're seeing misleading to that big step-up for the rest of the year?

Todd Ford -- Chief Financial Officer

Yeah, it's really just execution across the organization. So kind of spoke about in our prepared remarks, the enterprise sales team continues to execute, the mid-market team is executing ,professional services team, International, etc. So it's part of the execution and results in Q2 flowing through the model. And as Rob mentioned, very strong pipeline heading into the back half of the year.

Michael Turrin -- Deutsche Bank -- Analyst

That's helpful. Todd. Just on the margins, you also came in notably ahead there of what we were expecting and what prior guidance is calling for. Is that mostly just a function of flow through from the top line outperformance? Did anything shift there during the quarter, anything else to call out there?

Todd Ford -- Chief Financial Officer

Mainly top line performance as you noted.

Michael Turrin -- Deutsche Bank -- Analyst

Great. Thanks.

Operator

Your next question comes from the line of Steve Koenig from Wedbush. Your line is now open.

Steve Koenig -- Wedbush -- Analyst

Hi guys. Thanks for getting my questions, and congrats on the quarter. Just two. First one is -- so on Coupa Pay, how did you guys think about the TAM, which I don't think it's part of your $56 billion TAM? And what kind of part of the B2B payments opportunity kind of is going to be addressable to you guys? And then just secondly, any color you can give us on pretty large convert you've done kind of how to think about what -- how you might use it for both organic and inorganic initiatives?

Rob Bernshteyn -- Chief Executive Officer

Sure. So thanks for the question. So I would say first off, that's correct. That pay is not in the TAM that we've shared at previous analyst days as part of our calculations. We think that's a large addressable opportunity that we're working our way into and that's spending a lot of time thinking about the full scope of what's possible. We know we're managing now $1.3 trillion in cumulative spend. So, clearly there is something to go after and we're going after it thoughtfully with our customers.

In terms of the proceeds of the convert, obviously as we leverage our cash, it will be for continued growth of the business. But in terms of acquisitions, we are currently in a period of what I would call acculturation and integration in some of the companies that have become part of the Coupa journey and we will continue to use the exact same criteria we've shared in the past around any potential acquisitions downstream.

Steve Koenig -- Wedbush -- Analyst

All right. Thanks guys.

Operator

Your next question comes from the line of Joseph Foresi from Fitzgerald. Your line is now open.

Joseph Foresi -- Fitzgerald -- Analyst

Hi. My first question is just on margins. It looks like if you could help us understand the balance between gross margins and operating margins. Because it looks like gross margins might have ticked down a little bit, what would be the cause of that? And then I know you've given midterm guidance and I'm not going to ask you to change that now, but maybe you could give us some color on what you're expecting margins to do this year and next year?

Todd Ford -- Chief Financial Officer

Hey, Jeff. Todd. From a gross margin perspective, we do expect that, that will continue to trend toward the mid-term targets. And clearly one of the things that was at play in Q2 was the integration of Exari. We took the full impact of the expense and the revenues will come in over time. And then on the operating side, it's kind of the same story as well. We took the full hit of the expense with minimal revenue contribution and where we would expect those to continue to trend over time. And actually on the OpEx side, we're in pretty good shape. We had some higher G&A costs related to the acquisition, consulting fees, etc. And one of the things that we're working on the gross margin side to flip back up there is the rationalization, how they're hosted the different contracts that the acquired companies had and there's quite a bit of opportunity for us to drive more scale and leverage there as we execute over the next few quarters on that front. So I think we're well positioned to attack the mid-term targets and have the infrastructure in place to start moving toward the longer-term targets as well.

Joseph Foresi -- Fitzgerald -- Analyst

Got it. And the second one, I guess is on the professional services side. I think you mentioned there was maybe some federal contracts that you started to work on. Was there any pull forward and how should we think about that revenue this year, heading into next year? Thanks.

Rob Bernshteyn -- Chief Executive Officer

I would look at the professional services and with respect to the federal sector, in particular the USPS contract as more of a one-time thing. Our strategy remains the same, to have the majority of them be partner-led, but given the significance of this initial deal in the federal sector, it made sense for us to be more involved and we would normally be with other deals .

Joseph Foresi -- Fitzgerald -- Analyst

All right. Thank you.

Operator

Your next question comes from the line of Koji Ikeda from Oppenheimer. Your line is now open.

Koji Ikeda -- Oppenheimer -- Analyst

Hey, really great quarter guys, and thank you for taking my questions. Okay. So I saw in the press release, the business was named as a leader in the Gartner Magic Quadrant for Procure-to-Pay and actually our Coupa is the highest up and for this [Phonetic], right on that Magic Quadrant. So, congratulations on that achievement. I guess my question is if you could curious to hear your perspective on if there's maybe a specific part or module or maybe even a platform feature that Coupa has that is really the big differentiator there that is driving that leadership positioning of the business. Thank you.

Rob Bernshteyn -- Chief Executive Officer

Yeah. Thank you, Koji. I think what Gartner and others have recognized which we're obviously very proud of is the differentiated vision of our overall platform. And it's the reason why in every one of these earnings calls, we tend to call out what the letters in Coupa stand for. These customers are looking for a comprehensive solution with all the capabilities working together synergistically in a way that drives Business Spend Management value and that's the C in Coupa. They want to be able to integrate to any existing systems they have out there whether it's Oracle, SAP, a whole host of different ERPs and third-party products and they need an open platform and that's the Own Coupa. They're tired of very complex, difficult-to-use solutions that were really built for back-office professionals. And they want something as simple as they experience in their home purchasing environment and the U for that purpose stands per user-centricity, something we're continually focused on.

They want to learn from the community of customers that they join. We now have a massive global community and I want to take distilled anonymized data from that community through community intelligence and get prescriptive advice. And that is the P in Coupa. And lastly, they want to get the value quickly the tide of multi-year deployments that go nowhere and they're stuck with big bills that don't deliver results so that stands for accelerated in Coupa and as I shared many times before our time to value equation is really, really strong. These five differentiated vision areas and approaches of our Company are delivering results for our customer community and we think these vision areas will continue to deliver results for many of the customers that will be happy to attract in quarters to come.

Koji Ikeda -- Oppenheimer -- Analyst

Thanks for that, Rob. And maybe just one follow-up. I guess since the core Coupa platform is a pretty big implementation out there for all of these large enterprise organizations. And I think it's safe to assume that, hey, is a pretty big implementation too. Are you seeing any demand out there from prospects or maybe even customers that are currently in implementation. Just to implemented it all at once? And thank you for taking my questions.

Rob Bernshteyn -- Chief Executive Officer

Sure. It's very interesting. We have a host of different ways that we may enter. Our goal, as a company, is to be as frictionless as possible on the entry point. There were some customers that will implement internationally same day for everything that's not that common, but we've seen that. More likely we see customers implement perhaps country by country or function by function or they'll take an approach where they turn everyone on, but they'll turn everyone on to a certain use case and then turn on different use cases. So we have a whole host of best practices approaches that we have in our tool kit and that we've certified our 3,000 plus consultants on to go in and drive quick value for customers, so they can expand as the months and quarters go by. So that's the way we're thinking about it, and we're continuing to see really strong traction with that approach. Thanks for the question, Koji.

Operator

Your next question comes from the line of Brian Peterson from Raymond James. Your line is now open.

Brian Peterson -- Raymond James -- Analyst

Hi. Thanks gentlemen, and congrats on the strong results. So Rob, wanted to get back to your early comments on the Coupa community that was definitely a theme we picked up at Inspire. At a high level, I'm curious where we should see that fell in terms of the financials, is that something that would -- that should really be in kind of new customer ACV, or is that maybe more in the revenue retention metrics? Just curious how you guys think about that. Thank you.

Rob Bernshteyn -- Chief Executive Officer

Sure. Thanks for the question, Brian. I think it's all of the above. First of all, we should be when we are seeing it in the platform, right? So the transactional platform pricing, as I mentioned, new ARR per logo or average ARR per logo has gone up sequentially, virtually every quarter for years now. And that's happened by segment, because customers are seeing the value of Community Intelligence embedded in the platform. That's Number 1. Obviously, as we continue to get more and more data and the value of the Community Intelligence insights delivers even more high fidelity prescriptions that should be seen in retention because we become a platform with very strong barriers to entry for anyone that would be interested in entering our space, but we also offer more and more accelerated value to existing customers because of that data.

And thirdly, there are certain modules which we offer that are fundamentally Community Intelligence driven. If you look at a module like Coupa Risk Aware that's notifying your supplier risk allowing you to bring in third-party data feeds allowing you to calibrate components of supplier risk, we're building the richest supplier master record in the world we believe and the fidelity of insight about suppliers is going to grow as well. So the answer is absolutely all of the above. And we think we're really in the early innings of something very, very special here.

Brian Peterson -- Raymond James -- Analyst

Thanks, Rob.

Operator

Your next question comes from the line of Ryan MacDonald from Needham. Your line is now open.

Ryan MacDonald -- Needham -- Analyst

Hi, Rob, and thanks for taking my question. I guess, first off on Coupa Pay, clearly there is a lot of interest building for the solution. Rob, can you talk about sort of as you're having these discussions with prospective customers sort of what the gating factors right now to adoption are? And as you're looking at sales cycles for the Coupa Pay solution, what your expectations are compared to sort of the corporate averages moving forward? Thanks.

Rob Bernshteyn -- Chief Executive Officer

Sure. So, thanks for the questions. I don't think we have any gating factors to speak of. I think the overall gating factors as a company which has continued awareness development continuing to get our sales team, get our marketing in line, getting [Phonetic] front of prospective customers, staging deployments properly. So as you might expect, once customers buy it, it takes time to go live and start doing transactions and production. So there is a little bit of lag effect there, but it's progressing in a healthy way. In terms of how we manage it, very similarly to the all the modules we've built over time to get them in front of customers' hands. We continue to evolve feature function requirements to distill the things that actually matter and get them into our core code line. And three times a year, customers are getting greater and greater value and I see that happening, no differently with the three Coupa Pay modules we have today and the number that we have on the docket as well.

Ryan MacDonald -- Needham -- Analyst

Excellent, and just a quick follow-up for Todd, As we're looking at sort of the guidance beat [Phonetic] for third quarter in the fiscal -- remainder of the fiscal year. If we're backing into sort of the fourth quarter OpEx numbers, it looks like there is perhaps some ramp-up of expense in the fourth quarter there, is there anything outside normal seasonality that we should expect that you point out or anything related to the recent acquisitions that's being thrown in there? Thanks.

Todd Ford -- Chief Financial Officer

There is a piece of seasonality in there, of course, especially with respect to sales commissions and people hitting accelerators and that type of thing. But at the higher level, I would say it's more that we're aggressively investing in the business. And as we look at the runway ahead of us and what we're seeing, we are investing more heavily in some of the go-to-market teams etc, so you're seeing that reflected in Q4 as well.

Rob Bernshteyn -- Chief Executive Officer

I would also add to that. And I think it's important from an investment perspective to understand that not only we're progressing assertively investing behind this business, but we're trying to do it as thoughtfully as possible, every step of the way. So we want to make sure that 100% of these expenditures are both led and managed effectively and that management business purely on how much we spend, look spend rules everything around us, it's been doing that for over 10 years here. It's doing it thoughtfully and doing it in a way that's going to deliver results for the business.

Operator

Your next question comes from the line of Chris Merwin from Goldman Sachs. Your line is now open.

Chris Merwin -- Goldman Sachs -- Analyst

Okay, great. Thanks for taking my questions. I wanted to ask you about our sales efficiency. It looks like that continue to improve and I know you're focusing more on mid-market. So, are you able to sell those mid-market deals with the same efficiency as you are in the enterprise, are you just seeing really strong efficiency gains within the enterprise? Just curious what has been the main driver of the improvement in that metric. Then, I had [Phonetic] a follow-up. Thanks.

Rob Bernshteyn -- Chief Executive Officer

Well, look, if we take mid-market stand-alone as I mentioned earlier, the engine is absolutely working not only are we doing very well in terms of the size of deals, but we've really we're getting really took place where we have component ties, implementations and a flywheel there spinning really nicely. When you look at sales and marketing costs overall, which was at the start of your question, if you look at -- most recently, our non-GAAP sales and marketing costs as a percentage of revenue have been about 34% in both Q1 as well as Q2. So, we're spending carefully against the revenue opportunity. We're also looking at the components of sales and marketing, just to give you a sense of the fidelity here. So, you might find interesting that we look carefully at the ratio of sales to marketing expenditures, incidentally, that ratio has been relatively consistent for over the last 18 months.

So it's a calibration of sales to marketing, it's understanding are fully loaded sales costs as well as the components of sales, sales headcount and incentive comp; it's understanding the marketing components, headcount as well as discretionary marketing spend and trying to put forth the best spend profile [Technical Issues] for the revenue opportunity that exists in the quarter and to plan ahead. And just on this call, what Todd said, and is reflected in our guidance, we continue to certainly invest behind this business. And I'll tell you, we couldn't be more excited about it and the opportunity ahead.

Chris Merwin -- Goldman Sachs -- Analyst

Okay, that's great. And then just one on Federal, are you still on track to be FedRAMP certified by the end of the year? And anything -- any commentary you could just provide on traction with some of these other federal customers as you move through sales cycles? Thanks.

Rob Bernshteyn -- Chief Executive Officer

Yeah, absolutely. Thanks for that question. So, the pipeline continues to progress really well. The USPS deployment itself is progressing really well. In fact, in Q1, we became FedRAMP authorized and were given authority to operate at USPS on the path to broader authority for FedRAMP. So, continues to -- continue to go well with that deployment as well as pipeline, and we'll continue to inform you how that progresses without a doubt.

Chris Merwin -- Goldman Sachs -- Analyst

All right. Thanks, Rob.

Rob Bernshteyn -- Chief Executive Officer

To clarify, it was in Q2 that we got the authority to operate with the USPS, not Q1.

Chris Merwin -- Goldman Sachs -- Analyst

Got it. thank you.

Operator

Your next question comes from the line of Terry Kiwala from First Analysis. Your line is now open.

Terry Kiwala -- First Analysis -- Analyst

Hey, good afternoon and congratulations on the quarter. You referenced the acquisition integration costs earlier and I'm just wondering whether the actual amount or the timeline is ahead, matching are behind your expectations?

Todd Ford -- Chief Financial Officer

Yeah, so one of the things we've done with the number of acquisitions we've done over the past several years is really built out some strong muscle memory. And with respect to Exari, I would say it's tracking or honestly slightly ahead of schedule and our team did a really good job at integrating the team from Exari, acculturating them, spending time with them on the Coupa core values, etc. And as Rob mentioned, we're really only limited by our ability to execute and that really drives down to the people and getting them up to speed and from our perspective also, rightsizing the business. So, I think we're actually on track. There is still more work to be done from a non-people perspective, but we're doing quite well.

Rob Bernshteyn -- Chief Executive Officer

I would also add, if you kind of look at it from the way we think about internally around the metrics -- around the framework of people, technology and process, all of those are progressing very well. Our teams are now fully integrated into our overall process of everything from marketing, sales, support, operations, our technology stack is well under way. In terms of integration, as Todd called out, at the UI level, at the platform level, at the business logic level, and by far, most importantly, we think the people are really joined this journey that we've been on now for over a decade and are equally fired up to make this an incredible company in the years to come. They're all our Coupa colleagues now and we don't remotely think of them as acquired colleagues. They are all one set of Coupa colleagues, with one set of core values focused on one common vision.

Terry Kiwala -- First Analysis -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Terry Tillman from SunTrust Robinson Humphrey. Your line is now open.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Hey, gentlemen, congrats. And thanks for fitting me. And I had two quick questions. First, Todd, could you just give us an update though for the full year on whether it's ARR or revenue expectation for Exari, and then, remind us for next year? And then, I had a follow-up for, Rob. Thank you.

Todd Ford -- Chief Financial Officer

Yeah. So, with respect to Exari, we haven't broken out what we expect. Obviously, we had the opening deferred revenue of $4.7 million, we recognized $1.9 million of that in Q2, and the way the waterfall works that will be slightly less than that from the deferred revenue bleed off in Q3. Obviously, the seasonality with Exari is similar to that of other software businesses and our business, where fair amount of it would be built in Q4 and then the revenue would be recognized. So, I still think it's a relatively small contribution and not something that we would break out separately at this time other than what's kind of baked into our guidance.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Okay, fair enough. And I guess, Rob, just reminiscing about your book fee to eroded a couple of years ago value-as-a-service, I guess, more than a couple of years ago. Is the product in the platform is evolving more and more? Do you see kind of that vision or aspirational goal starting to play out, where you actually get paid on value? And I know some of the products like Coupa Pay like with the invoice payment or processing that there is some potential there, but just maybe an update on how you can package and monetize your products going forward given where you are now? Thank you.

Todd Ford -- Chief Financial Officer

Yeah. Thanks very much for the question. So, look in many ways, we are getting paid based on value delivery. And we have been for a number of years as you can see by our average ARR per customer going up and etc. But in terms of transactional spend, a component of value, and sharing and value, we continue to test that on the fringes. Our biggest barrier there is customers willingness to change and adapt that type of mindset. And I think as we continue to gain market leadership, there'll be a greater willingness to engage in these types of dynamics. So, we're very open to it and we continue to test it on the fringes.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Thank you. Nice job.

Operator

Your next question comes from the line of Raimo Lenschow from Barclays. Your line is now open.

Raimo Lenschow -- Barclays -- Analyst

Hey, thanks for squeezing me in and congrats from me as well. And two quick questions. First, Rob, can you talk a little bit about -- now that you have these expansions to the platform and Rob was talking about like the increasing dollar net retention, can you talk about the cross-selling, where you are in terms of, -- you mentioned, everything is in place, everyone feels like one company, but what do you see in terms of like customer understanding of the much broader offering there now and the sales guys kind of getting that message to the market? And then, I had one follow-up for Todd. Please.

Rob Bernshteyn -- Chief Executive Officer

Yeah, thanks Raimo. Look, we're pretty self-deprecating here. So, we think we could always do a lot better. But I would say generally speaking, there's a pretty strong awareness among our entire sales team in terms of how to position the entire platform. And they clearly see the synergistic value of these capabilities, working together at all levels of the technology stack, and in terms of the value they deliver from a business perspective. I think that's going quite well. Everyone's been cross-trained in every capability. All of our core platform demo environments as well as production environments can be turned on with all the capabilities working together. So, we're well under way. If I had to point out a challenge for us is just simply awareness among the global, as I say 2,000, as well as we all mid-market customers -- perspective customers around the world. That's such a comprehensive open user-centric prescripted and accelerated platform is available for them to subscribe to get the kind of value that are well over 1,000 something customers are getting today.

Raimo Lenschow -- Barclays -- Analyst

Okay, perfect. Thanks. That's really helpful. And then can you remind us -- so, if you can have these acquired assets, your writedown deferred, are they coming back within the year or so? I guess you started recognizing revenue as the customary renews. Is that typical within a year that you get the benefits back?

Todd Ford -- Chief Financial Officer

Yeah, I mean, it obviously depends on when we do an acquisition. So, doing an acquisition at the end of Q4 is obviously the worst time for that, right, because you have the asset for a year before you go back and rebuild it and start recognizing the revenue. But, yes, as the renewal would come up, obviously, we built it and then we can start the full revenue recognition from that.

Raimo Lenschow -- Barclays -- Analyst

Okay. Perfect. Thanks. Congrats from me.

Operator

Your next question comes from the line of Brent Bracelin from KeyBanc. Your lines now open.

Brent Bracelin -- KeyBanc -- Analyst

Thank you. One for Rob and a follow-up for Todd. Rob, I wanted to go back to the Coupa BSI Index, on one hand you're seeing like some of your customers are being a little more cautious. I think you cited retail as one of those areas, financial services, but on the other hand, you're taking numbers up in the second half of the year. I guess, my question for you is this an environment, whereas people tighten up that they're willing to spend more on your software to save or walk us through how we should interpret the BSI Index and some cautionary comments there versus your own business that looks very, very strong.

Rob Bernshteyn -- Chief Executive Officer

Sure. Well, thank you for that question. So just to level set BSI for those that are kind of new to it, it's just based on hundreds of billions of dollars of pure transactional data. And we think it's a real leading indicator versus a lagging indicator, because we've done some heavy testing, including historical regression analysis against other indices and markers before rolling this out. And just to give you a sense of why we think it's a leading indicator, look -- we're looking at average spend -- rate of spend -- average rate of spend approval. So how long does it take to get something approved within the company? What is the -- how often are -- it's been rejected? The spend that we never even see hit the economic environment, because it was rejected through our platform. And also looking at things like average spend per person. So, we think it's a strong leading indicator.

Now, when we look at our business separately from that, as I mentioned, we see a good strong pipeline. We are having great conversations -- positive conversations with prospects, as well as existing customers. So how do you kind of map these two together? Well, what I'd say to you is, as Coupa, we may not yet be at the scale where our sheer, brute force execution can't overcome any potential economic headwinds.

Only time will tell whether that's the case or not. And secondly, I do think that profitability doesn't go out of style. You have companies that are using very antiquated systems and paper-based processes for doing the fundamentals around Business Spend Management. So that's how I would put those two together.

Brent Bracelin -- KeyBanc -- Analyst

Helpful. And then just, Todd, as a follow-up, a couple of numbers on Exari. I think you mentioned $2.8 million is one number in the quarter and then that $1.9 million. So, what was the subscription component of Exari in the quarter? And then as a follow-up to that, if I just think about the subscription growth profile here, you're now three straight quarters of over 45% growth. Is there any sort of balance between kind of Jio [Phonetic] or large enterprise or mid-market, what would you say is kind of driving that sustained momentum, even if I back out kind of the $2.8 million of Exari? But I want to make sure that's the right number. Thanks.

Todd Ford -- Chief Financial Officer

Yeah. So the ARR from Exari in Q2 was $2.8 million, which includes the $1.9 million amortization of the acquired deferred revenue number. And when you look at the subscription growth rate, to your question, it really is execution across the board. Our revenue from international went up slightly during the quarter, but nothing I would call out. The mid-market, as Rob mentioned, is really starting to hit on all cylinders. And as you noted, we closed our largest deal there. So average deal size is getting bigger, more recognition. And we've talked about this before, but I think when we went public roughly three years ago now, we were viewed as maybe the risky choice, and I think that's changed with the awareness in the market, the advocacy of our customer base, the FIs bringing us into their installed base. So I really can't point to one thing as to what's driving it.

Brent Bracelin -- KeyBanc -- Analyst

Todd, thank you.

Operator

Your next question comes from the line of Brad Sills from Bank of America Merrill Lynch. Your line is now open.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great. Hi, guys. Thanks for taking my question here. Wanted to ask about PowerApps. I know the focus is primarily on landing accounts and you've done great there, it sounds like across mid-market and big enterprise. But are you seeing any change in momentum? Would you call it any specific application maybe where you're seeing stronger attach on the initial sale or even a renewal where you are focusing on some of that renewal expansion activity?

Rob Bernshteyn -- Chief Executive Officer

Sure. That's a great question, Brad. I mean, when -- I wouldn't say we're seeing anything statistically significant in that area. The key for us is to enter with our customers in a way that we could drive the fastest value and overcome the greatest areas of resistance to change that they might be dealing with. That might be via spend sourcing optimization, that might be via spend analytics, that might be via advanced contract life cycle management approaches or contingent workforce. But we typically like to see customers engage in the transactional application areas. First, because that's where the greatest amount of value to be recognized almost instantaneously when their employees across the world begin to spend against contracted rates that either we brought to the table or they brought to the table through their own negotiations. So continues to be that type of approach and it feels very healthy.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

That's great. Thanks, Rob. And then one more if I may just please on Coupa Pay, how would you characterize BSI channel? You're readiness here, are you feeling like you're getting the message out to the BSI channel, is it resonating and just general channel readiness for Coupa Pay? Thank you.

Rob Bernshteyn -- Chief Executive Officer

I would say we're in the early innings of that and we need to continue to work, do a better job in that area. I think you call out a very interesting point that we're aware of. And I don't think we're -- where we will be in coming quarters. It's still quite early, but it does sort of parallel the way we've launched other modules in years past. Each quarter, we get broader and broader reach, awareness, certification, deployment, value realization and then referenceability, renewal and more customers. So it's very similar to past trajectories.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

That's great. Thanks so much. Rob.

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.

Duration: 66 minutes

Call participants:

Nicole Noutsios -- Investor Relations

Rob Bernshteyn -- Chief Executive Officer

Todd Ford -- Chief Financial Officer

Stan Zlotsky -- Morgan Stanley -- Analyst

Matt Coss -- JP Morgan -- Analyst

Alex Zukin -- RBC Capital Markets -- Analyst

Michael Turrin -- Deutsche Bank -- Analyst

Steve Koenig -- Wedbush -- Analyst

Joseph Foresi -- Fitzgerald -- Analyst

Koji Ikeda -- Oppenheimer -- Analyst

Brian Peterson -- Raymond James -- Analyst

Ryan MacDonald -- Needham -- Analyst

Chris Merwin -- Goldman Sachs -- Analyst

Terry Kiwala -- First Analysis -- Analyst

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Brent Bracelin -- KeyBanc -- Analyst

Brad Sills -- Bank of America Merrill Lynch -- Analyst

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