As businesses grow, they become much more complicated. It is becoming increasingly important for management and shareholders to have an idea of whether or not the company is functioning optimally. This is especially true when it comes to countless important transactions that the companies in question must ultimately undertake for the purposes of their day-to-day operations. A company dedicated to meeting this need is Coupa Software (NASDAQ:COUP). While the company’s shares aren’t exactly cheap, they don’t seem too expensive for a company that’s growing as quickly as it does. The stock is also trading near the bottom of the scale compared to similar companies. But of course, especially in turbulent times, that picture could change in no time. And what better time to reassess the status and health of a company like this than when management releases the financial results for the last quarter. Fortunately, such a day is fast approaching, with the company due to release its financial performance covering the second quarter of its fiscal year 2023 after the market closes on September 6.
Understanding Business Spend Management
According to Coupa Software’s management team, the company’s operations revolve around a concept known as enterprise expense management. As the name of this concept suggests, the picture is as simple as tracking and managing how companies spend their money. The company provides this service through its own cloud-based platform which has connected its existing customers to more than 7 million providers across the planet. Through these connections, the company provides greater visibility and control over how businesses spend their money. But it also helps them optimize their supply chains and manage their own cash.
The company prides itself on having an easy-to-use platform that is incredibly flexible, even mobile-friendly. And by using the data, the company is able to provide valuable insights into the spending activities of businesses on its platform so that customers can use this data to better control their various spending-related activities. At the heart of the company’s platform is its ability to provide customers with procurement, billing, spend management and payment solutions, but the company has also expanded into other initiatives. . For example, its Coupa Community.ai capabilities, based on the data it collects, help customers by offering prescriptive insights into spend and risk management recommendations.
Over the years, Coupa Software’s management team has done a great job of growing the company’s revenue. Revenue has increased in each of the past five years, from $186.8 million in 2018 to $725.3 million in fiscal 2022. A key driver of this increase has been a significant increase in cumulative expenses tracked by the company’s platform. As its customer base grew, the company saw that spend drop from $680.2 billion to $3.34 trillion. Between 2019 and 2022, the remaining performance obligations, commonly referred to as backlog, fell from $498.6 million to $1.28 billion. And between 2020 and 2022, the number of customers the company bills for an annual amount of $100,000 or more has increased from 813 to 1,370.
In the end, things were a bit more volatile. Any fast-growing business is bound to generate losses. And that is precisely what we have seen in recent years. In fact, between 2018 and 2022, the company’s bottom line deteriorated, with net losses dropping from $43.8 million to $379 million. While this was the case, operating cash flow improved from $19.6 million to $168.1 million over the same period. Meanwhile, the company’s EBITDA has also improved from negative $3.2 million to positive $236.9 million over the past five years.
The company’s performance continued to be strong, in many respects, in fiscal 2023. For the first quarter of the year, sales reached $196.4 million. This compares favorably to the $166.9 million generated a year earlier. This increase can largely be attributed to an increase in the number of large customers from 1,133 to 1,441. These customers, in turn, pushed me not to spend from $2.58 trillion to $3.60 trillion of dollars. And the remaining performance obligations for the company fell from $972.9 million to $1.32 billion. As far as profitability is concerned, the picture is somewhat mixed. The company went from a net loss of $100.4 million in the first quarter of 2022 to a loss of $81.5 million in the same period this year. Operating cash flow also improved from $32.1 million to $49.7 million. But the company’s EBITDA deteriorated from $41.9 million to $24.3 million over the same period.
In terms of the company’s valuation, it’s worth noting that management expects revenue this year to be between $838 million and $843 million. At the midpoint, this would translate to a 15.9% year-over-year increase. Adjusted earnings per share, meanwhile, are expected to be between $0.21 and $0.27. In absolute dollars, this would translate to adjusted earnings of $21.2 million. We have no official revenue estimate. And, in general, earnings are a bit problematic from a valuation perspective. I have therefore decided to value the company based on the results obtained during the 2022 financial year. Under this approach, the company trades at a forward price against the multiple of the operating cash flows of 25.6 and at an EV multiple to EBITDA of 23.9. As the chart above illustrates, these prices are significantly lower than if we were using fiscal 2021 results. As part of my analysis, I also benchmarked the company against five similar companies. On a price/operating cash flow basis, these companies ranged from a low of 4.7 to a high of 63.4. Two of the five companies were cheaper than Coupa Software. And on the EV to EBITDA approach, the range was 8.9 to 65.7, with only one of the companies cheaper than our prospect.
|Company||Price / Operating Cash||EV / EBITDA|
|Coupa Software Embedded||25.6||23.9|
|DoubleVerify Holdings (DV)||63.4||52.7|
|SPS Commerce (SPSC)||44.5||46.1|
|NCR Corporation (NCR)||4.7||8.9|
|Tenable Holdings (TENB)||39.8||64.2|
|Box Inc. (BOX)||15.8||65.7|
Given current economic conditions, it is not unthinkable that Coupa Software’s financial performance could change materially from quarter to quarter. For this reason, investors should keep a close eye on the second quarter results release when management releases them on September 6. Currently, analysts are forecasting revenue of nearly $204 million. That would represent a 13.8% increase from the $179.2 million reported a year earlier. The company’s loss per share, meanwhile, is expected to be $1.20, while adjusted earnings are expected to be $0.09 per share. Using results from the second quarter of last year, the company reported a net loss per share of $1.24 and adjusted earnings per share of $0.26. Current expectations therefore do not seem very far from last year’s results.
Based on the data provided, I think the future of Coupa Software is definitely bright. Barring the unexpected, the business should continue to grow over the long term. As earnings approach, investors need to keep a close eye on revenue and profitability. But they also need to pay attention to the cash flow and cumulative expense data on the company’s platform. These numbers, combined with significant customer subscription data and remaining performance obligations, will go a long way in determining what the near-term outlook for the company will look like. And given how the stock is priced both on an absolute basis and relative to like-minded players in the run-up to the company’s earnings release, I’d say that’s a reasonable buying prospect. , although expensive.