It’s been a while since I dove into an S-1 and while I almost never get all the way through, here we go with another quick romp through a recent S-1.
Coupa, a ten-year old company that sells cloud-based spend management software and who pitches “value as a service” (ugh) recently filed its S-1. Before diving in, I wonder if I should mention the potential irony in a company that sells “spend management” software running with a 40% operating loss.
But, remember the average SaaS business, per research from my friends at JMP, has negative operating margins at IPO time: the median is -21% and the mean -36%. So cheap jabs aside, Coupa is running a bit on the high side and, more importantly, in a time where I thought the markets were demanding better profitability than in the past. That’s the interesting part. From an operating margin perspective, Coupa is looking like a typical IPO in a market that was supposedly setting a higher bar.
Estimating the shares outstanding after the offering is frankly quite confusing (e.g., share counts in the summary P&L seem to not include conversion of the preferred) and after spending 20 minutes trying to figure this out, I think there will be something like 180M shares outstanding after the offering.
Normally that might suggest a reverse split prior to IPO (as Talend recently did, an eight-for-one) but since I can’t find any evidence to suggest that, I’ll have to assume that Coupa and its bankers are bullish on valuation. Otherwise, if I’ve got the right share count, any valuation less than about $1.8B will put them in single-digit stock price territory (which is the condition companies do reverse splits to avoid).
Highlights from the first pages of the S-1:
- They connect 460 organizations (customers) with over 2M suppliers, globally
- They estimate they have saved their customers $8B to date, on a cumulative basis
- Fiscal year (FY) ends 1/31
- FY15 revenues of $50.8M, FY16 of $83.7M, 65% YoY growth
- FY15 net losses of $27.3M, FY16 of $46.2M, 68% YoY growth
- 1H16 revenues of $34.5M, 1H17 of $60.3M, 75% YoY growth – accelerating
Now, let’s look at the income statement, which I’ve cleaned up and color-highlighted.
Income statement comments:
- Approximately 90%/10% mix of subscription to services, generally good
- $83.7M revenues in last full FY is appropriate IPO scale by recent historical standards
- 75% accelerating YoY growth in 1H17 over 1H16 is pretty strong
- Subscription gross margins running 77% to 80%, pretty standard
- Services gross margins of -89% in FY16 and -59% in 1H17 are horrific. Happily it’s only 10% of the business.
- Overall gross margins run around 60%, which strikes me as a bit low, but according to my JMP data, is roughly on target
- 1H17 R&D of 25% of revenues, at the mean
- 1H17 S&M of 58% of revenues, 7% above the mean
- 1H17 G&A of 17%, 4% below the mean – but after running at a shocking 32% in 1H16
- 1H17 total opex of 100% of revenues, about 3% above the mean
- 1H17 operating margin of -39%, about 3% below the mean
They also present a non-GAAP operating loss which I can’t easily benchmark. They define it as: operating loss before stock-based compensation, litigation-related costs and amortization of acquired intangible assets. There was about a $12.9M delta between GAAP and non-GAAP operating income in FY16, which reduces to only $3.8M in 1H17.
Back to highlights from the S-1 body copy:
- They typically do 3-year contracts
- They say “we rely heavily on Amazon Web Services (AWS)” as a risk in the risk factors
- 29% of revenues from international in 1H17
- They had a “material weakness” in their FY14 audit, unusual
- 25 pages of risk factors in total, normal
- They’ve raised $165M in venture capital, and have $80M in cash
- Almost $7M in litigation costs in FY15
- They claim an estimated LTV/CAC that exceeds 6.0 in each of the past 3 years
- They do an interesting analysis of their 2013 customer cohort concluding that its contribution margin was -249% in FY13, but 75% in FY14-16. (Page 53.)
- Average ARR/customer up from $138K in FY15 to $183K in FY16
Here are the quarterly numbers; things look pretty consistent except for 2QF15, where among other things, they had $7.5M in stock-based compensation expense.
- Operating cash burn of about $4M/quarter (page 67)
- The CEO made $660K in cash comp in FY16, $320K and $340K bonus
- The EVP of sales made $497K in cash comp in F16, $250K base and $247K commissions
Let’s take a closer look at the unicorn round:
- It raised $80M at $4.18/share (page 119)
- The beneficial ownership analysis (page 121) is based on 162.8M shares outstanding as of 7/31/16, but I believe excludes 61M shares associated with granted and un-granted stock options (page 43)
- 162.8M + 61M = 223.8M shares on a fully diluted basis x $4.18/share = $935M
- Not a unicorn you cry! ($935M < $1B)
- But remember these claims are usually based on post-money valuation
- $935M + 80M = $1.015B
- So the math appears to hold up, but it’s also pretty clear Coupa was holding out for a valuation that squeaked them into the club
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