Q2 2020 Earnings Call
Good day, ladies and gentlemen, and welcome to the Cooper 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.
If you would like to ask the question you Me Press Star one on your Touchtone pad that any time, if anyone should require assistance during the conference. Please press the star zero on your Touchstones by that any time.
As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference call Mr., Nicole Knottiest Investor Relations.
Mrs. Nokia's you may begin your conference.
Good afternoon and welcome Nick.
Second quarter Conference call. Joining me today are Robert <unk>, CEO and Todd Ford CFO . Our remarks today include forward looking statements about guidance and future results of operations strategies market size product competitive position and potential growth opportunities.
Our actual results may be materially different.
Forward looking statements involve risks and uncertainties and exceptions 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.
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 and if you'd prefer to access a replay via phone you can find that information in the earnings release.
Other unless otherwise stated growth comparisons are against the same period of the prior year with that I'll turn the call over to Rob.
Hello, everyone and thank you for joining us today on what is our 12 earnings call as a public company on behalf of my Cooper colleagues that myself.
I'm excited to share our strong business and financial results for the second quarter.
I believe that they are further evidence that our leadership standing in business spend management is here at position. There we're excited to strengthen as well as advanced as we continue executing on our vision.
But until 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.
No.
From a business perspective, there were a host of exciting new developments this quarter.
Above all let me say that we have now seen a clear meaningful advancements in the development and cultivation of our Cooper community.
This was most evident at our inspire conference in Las Vegas in late June our Premier business spend management industry events.
This year inspire was a wash with a palpable new dynamic the inspiration about RBS envision 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 more step change and vibrancy felt across the developing cubic community has inspired my colleagues in 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 that coupon we deliver value as a service to our customers offering a time to value proposition, that's 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 3000 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 Cooper BSM.
Here are a few examples from Q2 that selected to showcase our ability to support international and mid market customers.
Along with subs subsidiary deployments that often grow into large global partnerships.
From an international perspective, let me highlight Axiata group, one of Asia's, leading telling me telecommunications groups.
Cooper Axiata Axiata is automating and standardizing processes with the goal of capturing 100% of their indirect spend under management through the Cooper platform.
From a mid market perspective, let me highlight a few examples.
See events, a leading meeting events and hospitality provider with more than 4000 employees 27000 customers and 300000 users worldwide.
Went live with Cooper Cooper, BSM to create tighter controls and greater visibility into spend across its U.S. operations.
C bench is looking forward to increased Peel back spend and reduce manual steps in their A.P. workflows.
Peloton interactive is using technology is designed to connect the world through fitness empowering people to be the best versions of themselves.
Pellets on one live with Cooper BSM in North America, and less than six months.
As part of a larger technology transformation Palatine is using cooper to standardize its purchasing processes and gain in on demand visibility into their spend.
Next is the international rollout of Cooper, beginning with the UK.
[noise] Shopify complete commerce platform that lets you start growing manager business recently went live with Cooper BSM is Canadian and US operations in a rapid four month deployment.
Shopify chose Cooper 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 subsidiary, let me highlight cores distributing company a beverage subsidiary of Molson Coors.
They went live with Cooper modernizing their policies for greater visibility into budgets and spend.
Group is providing them with a highly user centric experience a wonderful real World example of our vision area of user Centricity or the letter you in coupon.
The accelerated component of our vision.
As captured by the letter Eying Cooper 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 was leaders are tightly aligned with our success oriented values of service approach to BSM.
New customers, we welcome to our community included affirmed networks Auckland savings Bank.
Carousel Commonwealth Bank of Australia.
Las Vegas Valley Water District, Suntory rocket 10.
Redfin.
Sainsbury supermarkets.
Tullow oil University of Saint 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 Cooper community is becoming more comprehensive and expansive everyday.
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 Basil.
Five offices in the Asia Pacific region, including Tokyo, Prune, a hydro Bod 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 Cooper European inspire events.
Taking place on November 5th through the seven in London.
These events are driven by strong community participation and the continued commitment to business spend management and Cooper that we're seeing in these regions.
The permutation of Cooper 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 the validation in Q2.
Cooper 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 Coupal was Pratt 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 Cooper 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 Cooper community intelligence.
We ended the intelligence Leverages the collective wisdom of the community.
And the now more than 1.3 trillion of cumulative spend under management.
To prescribed ways for companies to optimize their spend management outcomes.
One example of community intelligence inaction is with the Andersons an organization, serving the aggregate business agribusiness industry.
The andersons spend occurs at various corporate sites and field locations and Chad Mcdonald director of procurement is tasked with a difficult job of finding ways to optimize spend for savings and efficiency.
Now in the past Chad knew that undo supplier proliferation with limiting his savings opportunities, but it was hard to pinpoint these opportunities clearly and make the case for company wide sourcing.
With Cooper community Intelligence, Chad can now see is companies commodity spend profile and fall prescriptions.
To consolidate suppliers.
For example, he 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 spend to preferred suppliers with negotiated discounts and quality controls.
And 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 Pean Cooper.
Our offering massive value to customers and creating meaningful barriers to entry for any future or currently claimed to participants in our space.
Also on the topic of innovation, we continue to be very excited about the ongoing rollout of Cooper pay.
Coop inspire was the perfect venue for showcasing our latest Cooper 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 accelerates and virtual cards for Peos.
We announced a number of key partnerships with Citibank transformation stripe and Paypal.
As we continue our focus on being a truly open platform as represented by the litter Oh in Cooper.
Unlike other payment solutions in the market Cooper pay has a distinct advantage of sitting on top of the supplier master record and the supplier invoice transactions in the Cooper ATP automation cycle.
Some of our strongest areas of expertise.
The alternative which is operating on the backend 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.
Though still in the early stages of execution for Cooper pay our vision is clear and we will continue to keep you posted on progress.
I'm also excited to announce the release of the Q3 Cooper business spend index today.
This is our second quarterly release after the inaugural VSR report last quarter.
The Cooper Dxi 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 B ESI is surprise 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 be ASI.
Let me make it clear that what we're seeing in the BSA data is not indicative of the trends we're seeing in Cooper's business.
With that said, let me share some of our font findings.
The Q3 Cooper be OSI indicates that businesses globally, maybe growing more cautious about the economy threat 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 from 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 and 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 tensions.
Detailed Q3 be ESI findings are now available on spend index dot 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 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 commitments of 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 body the spirit of each of our values.
The winners are nominated but nominated by their peers for their unique contributions to our company our customers and our broader community.
This quarter Perry Elm was recognized for ensuring customer success pair consistent consistently shows professionalism and persistence, enabling customers to achieve long term success.
For a customer he's not looking just to see smile and enjoy yourself with near term satisfaction.
Success is the objective.
Nick Meyer, who joined Cooper through our DCR workforce acquisition won the award for focusing on results.
As a product manager Ares managers specializing in our Cooper contingent workforce solutions.
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 Cooper Finance received the award for striving for excellence.
Day in and day out Robin fully committed to making herself her team and every Cooper 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 us.
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 that drives repeatable and measurable value.
Unlike the letter seeing Cooper, our patent program is also a comprehensive capturing functional inventions across our entire platform.
This quarter, we proudly earned our 16th 17th and 18th Us patents.
Our 16th U.S. pads enables customers in our community to propose more accurate translations of terms used in localized versions of our solution.
Our 17th New patent involve the use of machine learning to automatically decipher the contents of invoices and other transactional documents.
And our 18th New patent is focused on automatically recognizing the geographic locale of a document based on language cues when the docket within the document itself.
With more than 75 additional patents pending in the pipeline we are 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.
But as we look to the back half of the year and with our 40 threerd quarter of execution well underway, we remain steadfast in our vision and focused on consistent strong execution.
We believe that the values of 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 fiscal year, Todd Thanks, Rob and good afternoon, everyone.
The second quarter with 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 month 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 exemplary acquisition, which while 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 exemplary.
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 seven cents per share on 70.9 million diluted shares.
All of which were ahead of our previous commitments.
Even with the full quarter impact from exemplary.
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 thing of convertible notes we issued in June .
Offset by $210 million of net cash used to purchase exemplary.
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 a $11 million and purchases of property and equipment.
Cash flows for the quarter were favorable.
Due to strong performance by our fire collection team, which drove accelerated customer payments and improved linearity.
[noise].
We expect total revenues for Q3.
To be between 95 and $96.5 million.
This includes subscription revenues of between 86, 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 and $5.5 million.
This results in a non-GAAP net income per share of between five and eight cents on approximately 71.7 million weighted average diluted shares for the quarter.
For the fiscal year, ending January 31 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 and $13 million.
We further expect non-GAAP net income per diluted share in the range of 11 to 16 cents based upon an estimated 70 million weighted average diluted shares for the year.
To conclude we remain focused on driving results in delivering on the commitments, we have made to our stakeholders.
Now, we're happy to move into Q and a.
Before we go into Q and I would ask.
That you limit your questions to one or two questions and we'll follow up with you at the end. If we have time as we have a long queue of people seeking to ask questions.
With that I'll hand, it over to the operator.
Thank you Mr. Floyd, ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
Your first question comes from the line of Stan Zlotsky.
From Morgan Stanley . Your line is now open.
Perfect. Thank you so much for Oh for your time and congrats on a very strong result, I'm just once you get a better sense for the contribution of AAC sorry in the quarter you just looking through the filings.
I mean.
At the end of March IQ, sorry had about a little over 20 million of deferred revenue.
And just want to make sure I have the numbers right, so sounds like coming into the quarter that the after deferred revenue write downs that dropped to 4.7 and then you finished at 2.8 of deferred contribution.
Folks sorry, and then I have a quick follow up.
Yes that is correct the amount that actually came on our books was $4.7 million and that takes into account the.
The discount from their hair cut to acquire deferred plus also the transition from six so five to six or six which we did in concert with the acquisition so for.
You know the second quarter the.
They are our revenue that was recognized from XR in total with 2.8 million.
Got it perfect and then a quick question on the on macro we've heard from a number of companies, where they're you know they're either seeing something.
Some unevenness or maybe some some hesitancy on what are you guys seeing because you know you are you obviously you have your business spend.
Index you have.
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 Thats. It from me. Thank you.
Sure. Thanks, very much so 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 things.
Perfect. Thanks.
Your next question comes from the line of Mark Murphy from Jpmorgan. Your line is now open.
Hi, Good afternoon. This is Matt costs on behalf of Mark Murphy, Thanks, very much for taking our questions.
Rob as companies move along the arc of their digital transformation, you, how often does business spend management surface.
In those conversations and then as an appendage to that.
Do you perceive the market is at a point, where cooper versus instead of being viewed as sort of a new less well known choice. The opposite has now true over Cuba is now sort of the safer go to choice.
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 CIO is and what we're starting to see more and more of as Ceos as well so that's great.
The second part is that it's in our best interests and it's 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 thought thoughtful growth as well as Ah Ah greater efficiencies for just about any company.
On the planet.
And thirdly, I would say it is still upon us to continue to carefully and thoughtfully develop awareness of Cooper.
In the world of <unk>, we have a massive markets measured in tens of billions of dollars that we're going after oh, we've penetrated a very small percentage of that market and the global 2000 in the fortune 500, and certainly across all mid market. So with careful thoughtful a awareness development and execution into the market.
We think we're on the way to developing and building a very special company.
Thank you.
Your next question comes from the line of Alex Zukin from RBC capital markets. Your line is now open.
Hey, guys. Thanks for taking the question congrats.
I guess, maybe just the first one given that you've now accelerating subscription revenue growth four quarters in a row can you maybe talk about whether is this being driven by larger initial lands were accelerating expands within the customer base and then how should we be thinking about that dollar based net expansion on both the near and long term time horizon.
Well, thanks very much. So the question I would say on the on the revenue side that a couple of very interesting and frankly promising developments in our Midmarket engine is really working you know 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 has gone quite well also in fact, the in enterprise. We also closed one of our largest deals Justin just in Q2.
I'm now in terms of global expansion, a global expansion something we continue to manage very carefully a were 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 topline expansion.
One of the framing that you may appreciate a alexandre there's just thinking about it in terms of price speed and win loss the three components of driving revenue.
On the price side, our average air our per logo has gone up sequentially in virtually every quarter.
Since the IPO and beyond that and that's in total as well as well as by segment.
In terms of speed.
Our speed of close it has stayed relatively steady at four to six months for mid market and call. It six to 12 months for enterprise.
And around win loss I could tell you quoted qualitatively and I've said this in the past.
That our strong sensors that are only competition years ourselves and our ability to lead this developing market as new components come on line were there to service them.
So either way you want to look at it that's that's what that's what's happening in our world.
Alex This is Todd your with respect to renewal rates and a dollar based expansion rate, but 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 their very high under range that Weve. Historically quoted of one tender 112, and I think over time, if we will be able to get that closer to 120 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.
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.
Sure I mean, all three components that we have today are all very valuable scene is quite valuable by prospective customers on the customers. We've acquired that they're using them. So clear interest in virtual cards clear interest in a accelerate and very good early in <unk> 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 the heavy lifting that's done a whole host of the our ERP systems as I mentioned in my prepared remarks.
Perfect. Thank you guys congrats again.
[noise].
Your next question comes from the line of Michael Turits from Deutsche Bank. Your line is now open.
Hey, great. Thanks. Good afternoon, you took the revenue guide for the year up significantly more than we saw this quarter can we just talk more about what it is you are seeing is leading to that big step up for the rest of the year.
Yeah, it's really just execution across the organization. It's kinda spoke about in our prepared remarks. The enterprise sales team continues to execute the Midmarket team is executing professional services team international et cetera. So its you know it's part of the execution and results in Q2 flowing through the model and you know as Rob mentioned, you know very strong pipeline heading into the back half of the year.
Okay. That's helpful. Todd just not just on margin you also came in notably ahead there of what we were expecting and what prior guidance is calling for is that is that mostly just a function of flow through from the top line outperformance did anything shift there during the quarter or anything else to call out there.
Yeah, mainly at topline performance as you noted.
Great. Thanks.
Your next question comes from the line of Steve Koenig from Wedbush. Your line is now open.
Hi, guys. Thanks, again, my questions and congrats on the quarter I'm just too.
First one is so on Cooper pay how do you guys think about the Tam, which I don't think its part of your $56 billion Tam and what kind of part of the B to b payments opportunity kind of is going to be addressable to you guys. And then just secondly, any color you can give us on a pretty large convert you've done kind of how to how to think about what you know how you might use that for both organic and inorganic initiative.
Sure. So thanks for the question. So I would say first off that's crack that pay is not in the Tam that that we've shared at a previous analyst days as part of our our calculations, we think that's a large.
Addressable opportunity that we're working our way into it not spending a lot of time or thinking about the full scope of what's possible. We know we're managing now 1.3 trillion and cumulative spend so clearly there's something to go after and we're going after it thoughtfully with with our customers in terms of the proceeds of the convert.
No.
Obviously, as we leverage our arc our cash it will be for continued growth of the business, but in terms of acquisitions were currently in a period of what I would call a culture ration and integration and some of the companies that have become part of the Cooper journey and we'll continue to use the exact same criteria. We've shared in the past around any potential acquisitions downstream.
Great. Thanks, guys.
Your next question comes from the line of Joseph Foresi from Fitzgerald. Your line is now open.
Hi, My first question is just on margins it looks like.
Maybe help us understand the balance between gross margins and operating margins 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 mid term guidance and I'm not going to ask you to change that now, but maybe give us some color on what you're expecting margins to do this year and next year.
Hey, Jeff Todd.
From.
Gross margin perspective.
We do expect that that will continue to trend towards the mid term targets and clearly one of the things that with that play.
In Q2 with the integration of exemplary 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 head of the expense with minimal revenue contribution and 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 DNA costs related to the acquisition and consulting fees et cetera, and one of the things that we're working on on the gross margin side of what backup there is the rationalization.
How their 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 towards the longer term targets as well.
Got it and then 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.
That revenue this year heading into next year. Thanks.
I would look at the professional services and with respect to the federal sector in particular.
The U.S.P.S. 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 than we would normally be with other deals.
Thank you.
Your next question comes from the line of Koji Ikeda from Oppenheimer. Your line is now open.
Hey, really great quarter, guys and I. Thank you for taking my questions.
Okay. So I saw in the press release, the business was named as a as a leader in the Gartner Magic quadrant for our procure to pay and actually our Cooper is the highest of inferred this right on that magic quadrant.
So congratulations on that achievement I guess my question is if you could curious to hear your perspective on it theres, maybe a specific part or module or maybe even a platform feature that Cooper has that is really the big differentiator. There that is driving that leadership positioning of the business. Thank you.
Yes. Thank you could you know I think what Gartner and others have recognized which were obviously very proud of is the differentiated vision of our overall platform and the reason why in every one of these earnings calls we tend to call out what the letters and Cooper stand for these customers are looking for comprehensive solutions.
With all the capabilities working together synergistically in a way that drives business spend management value and that's the scene Cooper.
They want to be able to integrate to any existing systems. They have out there whether it's oracle S&P a whole host of different ERP and third party products and they need an open platform and that's the only Cooper.
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 EU for that purpose stands for user Centricity something were continually focused on.
They want to learn from the community of customers that they join we now have a massive global community and they want to take distilled anonymized data from that community to community intelligence and get prescriptive advice and that is the peak in Cooper and lastly, they want to get the value quickly that tired of multi year deployments that go nowhere and they're stuck with big bills that don't deliver results.
So that stands for accelerated and Cooper and as I shared many times before our time to value equation is really really strong. So these five differentiated visionaries and approaches of our company are delivering results for our customer community and we think these visionaries and continue to deliver results for many of the customers that will.
I'd be happy to attract in quarters to come.
Thanks for that Rob and maybe just one follow up.
I guess.
Since the core Coupal platform is a is a pretty big implementation out there for you know all 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 implemented all at once and thank you for taking my questions.
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 was some customers, though we'll 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 a an approach where they turn everyone on that they'll turn everyone on to a certain use case and then turn on different used cases. So we have a whole host of best practices approaches that we have in our toolkit and that was certified our 3000 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.
Okay.
So thanks for the question Cody.
Your next question comes from the line of Brian Peterson from Raymond James Your line is now open.
[noise], Oh, hi, Thanks, gentlemen, and congrats on the strong results, so Rob but wanted to get back to your your early comments on the Cooper community that was definitely a theme we picked up out of inspire a at a high level I'm curious, where we should see that Phil in terms of the financials.
Is that something that would that should really be in kind of new customer HCV or is that maybe more in that revenue retention metrics. Just curious how you guys think about that thank you.
Sure. Thanks for the question, Brian I think it's all of the above first of all we should be well and we are seeing it in the platform right. So the transactional platform pricing as I mentioned, new AC new air our per logo, where average era for love the gun ops or sequentially.
Virtually every quarter for four years now and that's happened by segment because customers are seeing the value of community intelligence embedded in the platforms. That's number one.
Obviously, as we continue to get more and more data and the value of the committee intelligence community intelligence insights or deliver even more high fidelity prescriptions that should be seen in retention because we become a platform with very strong barriers to entry if 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 a coupe of risk aware, that's notifying you a supplier risk, allowing you to bring in third party data feeds, allowing you to calibrate components of supplier as were building the richest supplier amassed a 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.
Thanks, Rob.
Your next question comes from the line of Brian not dialogue from Needham. Your line is now open.
Hi, Robyn Thanks for taking my question I guess first off on Cooper Peg clearly, there's 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 in and as Youre looking at sales cycles for the Cooper paid solution. What your expectations are compared to sort of the corporate average is moving forward. Thanks.
Sure. So thanks for the questions I I wouldn't I don't think we have any gating factors to speak of I think it's the overall gating factors as a company, which is continued awareness development continuing to get or our sales team get our marketing in line getting 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 a lag effect there, but it's progressing in in in a healthy way in terms of how we how we manage it very similarly to.
All the modules, we've built over time to get them in front of customers hands. We continue to evolve feature function requirements, we distill, the things actually matter and get them into our current core code line and three times, a year customers are getting greater and greater value and I see that happening no differently a with the three typically modules, we have today and the number that we have are on the docket as well.
Excellent and then just a quick follow up for Todd as we're looking at sort of the guidance be for third quarter in the fiscal remainder of the fiscal year for backing into sort of the fourth quarter Opex numbers. It looks like there is perhaps some some ramp up of expense in the fourth quarter. There is there anything outside of normal seasonality that we should expect that you'd point out or anything related to the recent acquisitions, that's being thrown in there. Thanks.
There is a piece of seasonality in there of course, you know, especially with respect to sales commissions and people hitting accelerators and that type of thing, but you know at the higher level I would say, it's more that we're aggressively investing in the business and as we look at you know the the runway ahead of us and what we're seeing we are investing more heavily in some of the go to market teams et cetera, So you're seeing that reflected in Q4 as well.
I would only go ahead also I would also add to that and I think it's important from an investment perspective than stand that not only are we aggressively 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 not manage the business purely on a on on how much we spend look spend rules everything around us its been doing that for over her over 10 years here. It's a it's doing it thoughtfully and doing it in a way that's going to deliver results for for the business.
Your next question comes from the line of Chris Merwin from Goldman Sachs. Your line is now open.
Okay, great. Thanks for taking my questions.
I wanted to ask about our sales efficiency. It looks like that continued 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 or you're just seeing really strong efficiency gains within the enterprise.
Just curious what's what's been the main driver of the improvement in that metric that a follow up thanks.
Well look if we take Midmarket standalone 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 really are we getting really took place where we have componentized implementations in a flywheel, they're spending a really nicely. When you look at salt sales and marketing costs overall, which was at the start of your question.
A if you look at you know most recently, our non-GAAP sales and marketing costs as a percentage of revenue have been about 34% in bulk Q1, as well as as well as Q2.
So were spending carefully against the against the revenue opportunity. We're also looking at the components of sales and marketing just to give you a sense of the of the fidelity here. So you know you might find interesting that.
We look carefully at the ratio of sales to marketing expenditures.
You know incidentally that ratio has been relatively consistent over the last 18 months. So it's a calibration of sales to marketing, it's understanding our fully loaded sales costs costs as well as the components of sales sales head count and incentive comp, it's understanding the marketing components headcount as well as discretionary marketing spend.
And trying to put forth the best.
The best spend profile for the revenue opportunity that exists in the quarter and to plan ahead, and just underscore what Todd said and as reflected in our guidance. We continue to certainly invest behind this business and I'll tell you you know we couldn't be more excited about it and the opportunity yet.
Okay, that's great and then just one on on.
Federal are you still on track to be asset ramps certified by the end of the year and anything any commentary you could just provide on traction with some of those other federal customers as you move through sale cycles. Thanks.
Yeah, absolutely. Thanks for the question. So the pipeline continues to progress really well be the U.S.P.S. deployment itself is progressing really well in fact, you know in Q1, we became.
Fed ramp authorized and were given authority opt to operate at U.S.P.S. on the on the path to broader authority fed ramp. So continues to call a continue to go well it that deployment as well as pipeline.
We'll continue to we'll continue to inform inform you how that how that progressed as a though.
All right. Thanks, Rob to clarify whether it was in Q2 that we got the authority to operate with the U.S.B.S. not Q1.
Got it I misspoke.
Thank you.
Okay.
Your next question comes from the line of Barry Cure Walla from first analysis. Your line is now open.
Hey, good afternoon, and congratulations on the quarter.
You referenced the acquisition integration costs earlier, and I'm, just wondering whether the actual amount where the timeline is ahead matching or behind your expectations.
Yes, the one at one of the things we've done with the number of acquisitions, we've done over the past several years is really built out the built out some strong muscle memory and with respect to eggs Ari I would say, it's tracking or you know honestly slightly ahead of schedule and our team did a really good job at integrating the team from Macquarie a culture rating them. A you know spending time with them on the coupe of core values et cetera, 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 and from our perspective also rightsizing. The business. So I think we're actually on track there's still more work to be done from a non people perspective, but.
We're doing quite well.
I would also add if you kind of look at it from the way, we think about internally around the metrics around though the framework of people you know technology and process. All 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 underway or in terms of integration as Todd called out at the U.I. level at the platform level at the business logic level and by far. Most importantly, we think people are really joined this journey that we've been on now for over a decade and are equally fired up to make this a an incredible company a in the years to come they're all our Cooper colleagues now I went on remotely think of them as acquired colleagues store. All one set of group of colleagues with one set of core values focused on one common vision.
Great. Thank you.
Your next question comes from the line of Scariest television.
From Suntrust Robinson Humphrey Airlines now open.
Hey, gentlemen, congrats and thanks for fitting me in I had two quick questions first Todd could you just give us an update for the full year on whether they are our revenue expectation for exemplary and then remind is for next year and then I had all four out Rob. Thank you.
Yeah, so with respect to exotic <unk>, we haven't broken out what we expect obviously, we had the opening deferred revenue of 4.7 million. We recognized 1.9 of that in Q2 and the way the waterfall works it'll be slightly less than that from the deferred revenue bleed off in Q3, obviously, a the seasonality what exactly is similar to that of other software businesses and our business, where you know a fair amount of it would be build and 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 in to our guidance.
Okay fair enough and I guess, Rob just reminiscing about your book the road a couple of years ago value as a service or I guess more than a couple of years ago. It is the product in the platform is evolving more and more do you see kind of that vision or aspirationally goal starting to play out where you actually get paid on value and I know some of the products like Cooper pay like with the invoice payments.
Our processing you know that there are 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.
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 air our per customer going up and et cetera, but in terms of transactional spend a component of value and sharing in value. We continue to test that on the fringes. Our biggest barrier. There is a customer's willingness to change and adapt that type of mindset and I think as we continue to gain market leadership, there will be a greater willingness to engage in these types of dynamics. So we're very open to it and we continue to test on the fringes.
[noise].
Thank you nice job.
Your next question comes from the line of Rhino last show from Barclays. Your line is now open.
Hey, Thanks for squeezing squeezing me in and congrats from me as well and two quick questions first Rob can you talk a little about it.
Now that you have these.
Expansions to the platform and Rob was talking about like the increasing pull on that attention can you talk about the cross selling where you are in terms of you 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 Dan now and the sales guys kind of getting that message to the market and then I had one follow up for Tom Please.
Yes, Thanks, Raimo look we're pretty self deprecating here. So we think we can always do a lot better but I would say generally speaking there is a pretty strong awareness amongst 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 a from a business perspective, I think that's going quite well everyone's been cross trained on 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 we're well underway if I had to point out a challenge for US is just simply awareness amongst the global.
As I say 2000, as well as all mid market customers prospective customers around the world. That's such a comprehensive open user centric prescriptive and accelerated platform is available for them to subscribe to to get the kind of value that are well over a thousand suddenly customers are getting today.
Okay perfect. Thanks, Thats really helpful. And then Tom can you remind us. So if you got to have these acquired assets you write down deferred the coming back within a year or so I guess you started recognizing revenue at the customer news is that typically within a year that you get the benefits back.
Yeah, I mean, it obviously depends on when we do an acquisition so doing an acquisition at the end of Q4, because obviously the worst time for that right. Because you have the asset for a year before you get to go back and rebuild it and start recognizing the revenue, but yes. The renewal would come up obviously, we believe that we can start see the full revenue recognition from that.
Okay perfect. Thanks, Thanks, Congrats from me.
Your next question comes from the line of Brent Bracelin from Keybanc. Your line is now open.
Oh. Thank you one for Rob that's all for Todd Rob I wanted to go back to the Cooper via site index on one hand.
You are selling some of your customers are being a little more cautious I think you cited retail as one of those areas financial services, but another hand, you're you're taking numbers up in the second half of the year I guess my question for you is.
Is this an environment, where as people tighten up that they are willing to spend more on your software to save or walk us through how we should interpret the b OSI index and some caution cautionary comments there versus your own business and looks very very strong sure Charlotte. Thanks for that question. So just to level set aside for those that are kind of new to it is based off of hundreds of billions of dollars of pure transactional data and we think is 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 an average rate of spend approval. How long does it take to get something approved within the company. What is the how often are it's been rejected 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 Cooper, 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 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.
Helpful. And then just Tom as a follow up.
A couple of numbers on accelerating can you you mentioned $2.8 million is one number in the quarter and the 1.9 million. So what was the subscription component public sorry in the quarter and then as a follow up to that if I just think about the subscription growth profile here.
You are now three straight quarters of over 45% growth is there any sort of on a balance between kind of geo or large enterprise or mid market. What what would you say is kind of driving that sustained momentum even if I back out kind of the 2.8 million of like sorry, but I wanted to make sure. That's the right number. Thanks.
Yes. So they are from exemplary in Q2. It was 2.8, which includes the the 1.9 amortization of the acquired deferred revenue number and when you look at the subscription growth rate. 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.
You know the Midmarket as Rob mentioned is really starting to hit on all cylinders and you know as you noted we closed our largest deal there so average deal sizes 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 risk of choice and I think thats changed with the awareness in the market the advocacy of our customer base, the five bringing us into their install base. So that I really cant point to one thing as to what's driving it.
So thats all I had thank you.
[noise].
Your next question comes from the line of Rod sales from Bank of America Merrill Lynch. Your line is now open.
Great Hi, guys. Thanks for taking my question here I wanted to ask about power amps I know the focus is primarily on landing accounts and you've done great. There sounds like across Midmarket 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 the renewal where you are focusing on some of that renewal expansion activity.
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 can drive the fastest value and overcome the greatest areas of resistance change that they might be dealing with that might be the spend.
Sourcing optimization that might be the spend analytics and that might be a advanced contract lifecycle management approaches are contingent workforce, but we typically like to see customers engaged in the transactional app application areas first because that's where the greatest amount of value we recognized almost instantaneously when they when their employees across the world begins to spend against contracted rates study that we brought to the table, where they brought to the table through their own negotiations. So continues to be a that type of approach and its it feels very healthy.
That's great. Thanks, Rob and then one more if I may just please on.
Cuba pay how would you characterize the ESI channel readiness here or are you feeling like you're getting the message out to the the the Psi channel is it resonating and.
Just just general channel readiness for Cooper pay thank you.
I would say were in the early innings of that and we need to continue to work to do a better job in that area. I think you call out a very interesting point, where were aware of and I don't think were 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 of 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 trajectory.
That's great. Thanks, so much Rob.
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.
[noise].