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Coupa Software (NASDAQ:COUP)
Q3 2019 Earnings Conference Call
Dec. 3, 2018 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 third-quarter fiscal-year 2019 earnings release conference call. [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 third-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. 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. If you prefer to access a replay via phone, you can find the 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, I'm delighted to report strong results for our third quarter. At the highest level, from a financial-results perspective, I will tell you that we finished the quarter with $67.5 million in revenue, representing a trailing 12-month growth rate of 40% and an annual run rate of well over $0.25 billion per year. We also delivered our fifth consecutive quarter of positive free cash flow on a trailing 12-month basis.

It's important to note that we are fully on track to easily surpass $1 trillion of cumulative spend under management in Q4. But most importantly, from a longer-term perspective, we are continuing to make a meaningful impact in the broader enterprise software industry. We're developing the business spend management category of solutions which we know are of great importance to virtually all companies around the world. We're delivering unprecedented measurable value for each of our hundreds of current customers.

We are offering a highly innovative, functional and technical platform at significant scale. We're cultivating a culture of colleagues maniacal about customer success, results orientation and a never-ending desire to strive for excellence. With that, I'm excited to share with you our strong results for Q3, so let's get after it. Starting with our customers.

I'm proud to report that more than 100 Coupa customers have gone live this fiscal quarter -- this fiscal year, rather. Ingersoll Rand went live in the U.S. and Canada in a rapid deployment focused on increased electronic invoicing, improved spend under management and achieved -- and the achievement of 100% electronic purchase orders. Zurich Insurance went live with Coupa in the U.K., with a special focus on increased PO matching, electronic invoicing, spend under contract and user experience scores.

Salling Group, Denmark's largest retailer, went live with Coupa at 600 sites across Denmark in the first phase of a 1,200-site four-country rollout. Finally, Inchcape, a leading independent global automotive distributor and retailer, who announced -- who we announced as a new customer just last quarter, went live with Coupa in the U.K. and Australia in the first phase of a major global procurement transformation where Coupa will be rolled out in all operational and corporate locations across the world. We look forward to continuing to help these customers achieve more and more real, measurable results for their organizations over the long term with our Value as a Service approach.

Now moving on to new customers. During the quarter, we were excited to partner with many organizations and the leaders within them that are aligned with our vision of business spend management. United Airlines selected Coupa to help transform their procurement processes and drive real value in the areas of cost reduction and operational excellence. Another major airline, Finnair, chose Coupa as part of its procurement digitization journey.

Finnair is focused on taking their procure-to-pay process and employee experience both to the next level. ISS Group, a global facility services company with nearly 500,000 employees selected Coupa based on our proven track record of successful implementations across complex global companies. Other new customers we added during this quarter included Golden State Warriors; Coors Distribution Company; Darden Restaurants Group, owners of the Olive Garden, Capital Grille and other full-service dining establishments; Cvent; AAA Club Alliance; Lime Bikes; Axiata; Genesis Energy; SkillSoft; Consolis; KPMG Canada; and many, many others. Now from a market-development perspective, we remain very excited by the large opportunity and continued traction we see in international markets.

Last month, we held our largest-ever INSPIRE EMEA user conference, an event which was the same size as our INSPIRE U.S. event just three years ago, with nearly 1,000 participants. At INSPIRE EMEA customers such as Airbus, Lear Corporation, Maersk, Pearson, Rolls-Royce, Unilever and Zurich Insurance spoke on the main stage and during breakouts, where attendees consumed more than 5,000 hours of content in one and a half days. During the quarter, we also held our inaugural APAC Symposium in Sydney, Australia and our inaugural Japan Symposium in Tokyo.

During these events, the primary focus was on community intelligence. This has become an exciting area for Coupa customers, international and domestic alike, and was discussed with great enthusiasm. Our customers leveraged their beginner's minds and brought forth a host of new creative and highly innovative ideas for our consideration in the future development of our platform. Increasingly, and in Q3 alone, the majority of our many hundreds of customers accessed our platform's community insights capabilities.

In fact, usage, as measured in page views, nearly doubled from Q2 to Q3. Community Intelligence is placing prescriptive, the letter P in Coupa, information at our customers' fingertips, and they are acting on it for the benefit of their organizations. For example, using community insights, one of our customers observed a very low first-time match rate for invoices compared to leaders in the Coupa community. Upon investigating, they realized that they had overly stringent invoice tolerance values in place.

They then reevaluated their approval rules to eliminate unnecessary invoice reviews and gain back significant productivity. This is just one example of Community Intelligence in action today. But we are just beginning to scratch the surface of what's possible. Our latest offerings, Spend Guard, which leverages Community Intelligence and machine learning to identify potential spend fraud, is currently in early access for a select group of customers, and we're excited to make this offering generally available soon.

We also had several exciting CoupaPay announcements at INSPIRE EMEA. Coupa virtual cards for POs, our first payment solution, is now generally available, and Barclaycard has been named as our first card-issuing partner for this offering. We also announced the release of Coupa's financial aid, Finance, which brings businesses, suppliers and financial institutions together on our business spend management platform to leverage financing and working capital optimization opportunities. CoupaPay is helping advance the comprehensive part of our vision, also known as the letter C in Coupa.

Now let's move on to acquisitions. As I stated in the past, our acquisition strategy is focused on adding key advanced power user applications that we can seamlessly integrate into our organic transactional engine and/or acquiring distinct technology components that could enhance this very engine. In Q3, we announced the acquisition of Aquiire, a leader in realtime supplier search supporting side-by-side shopping comparison. This acquisition, combined with our native innovation and our previous acquisition of Simeno, allows us to further advance the open, or O in Coupa, making us the only platform that delivers realtime, cross-catalog and localized search, a truly open B2B shopping experience.

With 13 patents pending or issued, Aquiire brings leading innovation to us in this area. We warmly welcome the Aquiire team in Cincinnati to the Coupa community of customers, partners and colleagues. Now as many of you have come to learn from us, our success at Coupa and that of our customers is underpinned strongly by our core values. At INSPIRE EMEA, we presented several business spend management impact awards to customers who demonstrated our core values to an exemplary degree.

The BSM Impact Award for ensuring customer success went to Dan Cameron, senior vice president and chief procurement officer at Pearson. On day one, Dan had the clear objective of ensuring that his internal customers would be successful in finding the products and services they needed in order to quickly and painlessly get their jobs done. He wanted to make procurement accessible and simple, leveraging the user-centric, customer-like -- consumer-like experience of our solution, symbolized by the letter U in Coupa. Pearson has already brought GBP 500 million of spend under management through Coupa since going live, delivering significant cost savings and strengthening the internal brand of the Pearson procurement organization.

Once again, congratulations to Dan for winning this award and to the continuation of Pearson's success with Coupa. The BSM Impact Award for striving for excellence was given to Debbi Jowett, procurement development manager and Global Coupa Lead at Rolls-Royce. Debbi played a key role in a project seen as one of the most successful transformation projects at Rolls-Royce. Rolls recently cited Coupa as an example of an investment in a best-in-class solution that was delivered at a critical time for the company.

Debbi and her team have leveraged the deployment of Coupa to help Rolls continue to strive for excellence, returning real and tangible results in the process. Congratulations to Debbi for winning this award. I look forward to continue personally working with the Rolls-Royce team as we collectively strive for excellence. Finally, I'd like to recognize [Inaudible], who recently won our MVP award for focusing on results, as voted by all of our fellow colleagues at Coupa.

As a key member of our technical support team, [Inaudible] is increasingly active, always ready to take on challenging new tasks. She's creative, smart and focused on seeing real results and was recently recognized by a very large global customer for her outstanding efforts. Congratulations to [Inaudible] for earning this award. Now in terms of other highlights for this quarter.

I'm proud to announce that for the sixth time in a row, Coupa was named Deloitte's Technology Fast 500 ranking of the 500 fastest-growing technology, media, telecommunications, life sciences and energy tech companies in North America. I'm also delighted to share that in Q3, we hired our very first chief procurement officer, Dina Ghobrial. Dina is a passionate, results-oriented leader, with a deep domain expertise and an accomplished background in procurement, sourcing, digital transformation and information technology overall. She joined us from an existing Coupa customer after a highly successful deployment.

In the few months she's been on board, Dina has already become a key strategic partner to members of the Coupa leadership team and has begun engaging with our customers and prospects. Over the last 10 years, as many of you know, I've approved every single Coupa hire, now well over 1,000 colleagues around the world and counting. Needless to say, I was very excited to approve this one. Welcome aboard again, Dina.

And last but not least, let me call out several of my Coupa colleagues who went above and beyond to give back to our community. Just this past quarter, Coupa organized a two-month competition that resulted in over 400 hours of volunteering to more than 30 local organizations around the globe. During these months, the winning team of Amy Gallagher, Alberto Ciaramella, Sarah Boyne, Dave -- David Hurl, Élida Sousa completed over 145 hours of volunteering, with Amy truly striving for excellence, contributing 56 hours of her personal time to help out local organizations. Thanks to Amy and all the others for this incredible display of our core values at work in our communities.

So with this being our ninth earnings call as a public company and now heading into our 40th quarter of execution, we remain confident that our innovative platform, a resilient culture and our outstanding global community of customers and partners, we are incredibly well positioned to continue winning this market. Q4 is well under way, and we are laser-focused on finishing the year strong. No one can do it better, and I firmly believe that. So with that in mind and as we continue to drive toward our stated long-term financial goal, reaching $1 billion in revenue, let me hand the call over to our CFO, Todd Ford, who can update you on our financial results and guidance.

Todd?

Todd Ford -- Chief Financial Officer

Thanks, Rob, and good afternoon, everyone. In Q3, we continued to execute against the commitments we made two years ago when we became a public company. On a trailing 12-month basis, we have effectively achieved all of the midterm financial targets that we set forth at our analyst day last December. Total revenues for the third quarter grew 42% year over year to $67.5 million.

Subscription revenues were $60.6 million, up 42% year over year and comprised 90% of total revenues. And professional services revenues were $6.9 million. Our total non-GAAP operating income for Q3 was positive $5.8 million or 9% of revenue compared to negative 5% of revenue than the year-ago period, driven by solid top-line growth, successful integrations of companies acquired and continued scaling of the business. This quarter also marks the fourth quarter in a row where non-GAAP operating income has been positive.

On a trailing 12-month basis, non-GAAP operating income was $11 million or 4.6% of revenue. Total calculated billings for the trailing 12-months were $271.7 million, up 39% year over year, compared to 37% in the same period last year and 38% last quarter. Let's now turn to results of operations. Our third quarter non-GAAP gross margin was 73.3% compared to 72.6% a year ago.

Non-GAAP subscription margin was 81%, and non-GAAP Professional Services margin was 4%. As a reminder, we expect professional services margins generally to trend between breakeven and positive 10% on a trailing 12-month basis. Quarterly margins may fluctuate as we continue building for scale and also due to the near-term impact from acquisitions. We are staying the course and continuing to invest in all facets of our business by delivering on our commitment to show continued leverage in our financial model.

As noted last quarter, there is a near-term impact to margins and cash flows as a result of our recent acquisitions, but we expect this to normalize over the next few quarters. Including the full-quarter impact of DCR to our cost structure and the partial quarter impact from the acquisition of Aquiire, we delivered Q3 non-GAAP positive net income of $5.5 million compared to a non-GAAP net loss of $2.8 million a year ago. Now let's turn to the various components of cash flows for the third quarter. Cash at the end of Q3 was $406 million, including $179 million of marketable securities, a decrease of $37 million from Q2.

The decrease reflects $48 million paid for the acquisitions of DCR and Aquiire, offset by an increase of $2.6 million generated from free cash flows and other cash inflows of approximately $8 million from employee equity transactions. Also in Q3, we prepaid approximately $4 million to one of our web hosting providers for an agreement we entered into, which is expected to have a positive impact on our gross margins in FY 2020. On a trailing 12-month basis, free cash flows were $20.4 million or 9% of revenue. We define free cash flows as operating cash flows as property and equipment.

Now let's turn to guidance. For the fourth quarter, we expect total revenues to be between $67.8 million and $68.3 million. This includes subscription revenues of between $62 million and $62.5 million and professional services revenues of approximately $5.8 million. We expect Q4 non-GAAP gross margins to be between 71% to 72%, reflecting the near-term impact of recent M&A activity.

Once again, we expect to show continued leverage in our margins once these recent acquisitions have been fully integrated. In Q4, we expect non-GAAP operating income, non-GAAP net income and free cash flows to be roughly breakeven, with 59.8 million basic shares and 68 million fully diluted weighted average shares for Q4. For the fiscal year ending January 31, 2019, we expect total revenues to be between $253 million and $253.5 million, with non-GAAP gross margins in the range of 72% to 73%. We expect non-GAAP income from operations for the year to be between $9.5 million and $10.5 million.

For the full year, we expect non-GAAP net income per share in the range of $0.11 to $0.13 based upon an estimated 65.3 million fully diluted weighted average shares for the year. We will provide FY '20 guidance on our next call, but as you begin to role models forward, I would like to remind you that we recognize revenue based on the number of days in the quarter. Since Q1 has three fewer days in the quarter due to February, our steady-state subscription revenues will be approximately 3% lower in Q1 as compared to Q4. That concludes our prepared remarks.

Now we'd be happy to take your question. Operator? 

Questions and Answers:

Operator

Thank you, Mr. Ford. [Operator instructions] We'll take our first question from Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow -- Barclays -- Analyst

Hey, congrats, these are amazing numbers. Two questions, if I may. First, can I ask a little bit about the strategy around pay because that's obviously kind of a very -- it's a big market, it's a very nice extension to what you're doing at the moment. Like how far do you see this going in terms of like where did you make the decision to stop? And kind of where did you make the decision to kind of go on? And where did you make the decision to stop in comparison to some payment vendors? And then a question on cost.

Can you talk a little bit about your profitability in Q3 where it's significantly better than we had modeled. Where there any items that we should be aware of that you didn't spend in Q3 that you might spend in Q4? Or is it this really like underlying very, very good performance? Thank you.

Rob Bernshteyn -- Chief Executive Officer

Well, thanks very much for those questions. I'll probably take the first one and then turn the second over to Todd. In terms of pay, just like everything we've done to date, we've worked with our customers to how to solve it, their primary business need. How could they get their spend under management, how could they understand the suppliers that they're working with, how could they automate a lot of baseline processes that are still being done and a whole host of older technology solutions or even done on paper, in many cases.

And there was clearly an interest among our growing customer community to go beyond the traditional Procure to OK to pay, all the way to Procure to Pay as part of our overall business spend management suite. So we began with the areas where we can offer the greatest value and then also leverage our greatest core competencies around usability, around having a transactional platform at scale internationally, around getting our arms around the primary purchasing mechanisms that our customers use our platform for. So we came out initially with Coupa's virtual cards for POs which is now generally available, and it's going to streamline a lot of processes that are being done today on corporate business cards. And in chaotic sort of ways, we moved into dynamic discounting to Coupa Accelerate that allows our buyers to take advantage of early payment discounts.

And that's been GA now for a few releases. And we're moving further toward Coupa invoice payments, and the mechanism is being planned there. So our thought process here is to offer a comprehensive Coupa payment solution that leverages our greatest strengths. And as we continue to develop it, we'll keep you very well informed as we always have at our INSPIRE conferences as we go from in development to early access to generally available with every capability.

Raimo Lenschow -- Barclays -- Analyst

Thank you.

Todd Ford -- Chief Financial Officer

And on me, the cost side, Raimo, there's nothing that I would call out specifically, and there certainly wasn't anything that shifted from Q3 to Q4. We continue to aggressively hire. In Q3, we did take the full cost with respect to DCR. So you saw a meaningful jump in our cost of sale, and also R&D for Q3 as compared to Q2.

The other thing I would call out from sales and marketing, in Q3, you saw a bit of a drop, and that's also primarily related to the high INSPIRE costs in Q2. So other than that, nothing that I would call out beyond those items.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Well done. Thank you.

Operator

Up next is Joseph Vafi with Loop Capital.

Joseph Vafi -- Loop Capital -- Analyst

Hey, guys. Good afternoon. Good results. Just on DCR, can we get an update there on how that acquisition is progressing, and any cross-sell or other opportunities that we should be aware of? And then I'll be -- I'll follow-up after that.

Rob Bernshteyn -- Chief Executive Officer

Well, thanks for the question. This is a very, very exciting acquisition for us. The group there that came on really shares our core values, shares our common sense of purpose. Even though it's only been a couple of months, I feel like they've been our colleagues for a number of years.

And the capabilities that we've taken on with DCR are really powerful in terms of adding value for our customers. This is about managing contingent workforces at scale of the entire life cycle of contingent workers when people go and utilize Coupa for finding the services that they need to support their organization. They have these -- now have these advanced capabilities for contingent workforce. We're well under way into integrating these capabilities into our platform.

And also leveraging some of the really exciting AI-based capabilities that they came with, which is particularly around allowing you to rank template or candidates based on likelihood of success in your internal company. So we're very excited about this. It's early on in terms of the integration components and bringing the team on, but we'll certainly keep you abreast of how that goes. The excitement, I can tell you, from the customer community is very, very strong.

Joseph Vafi -- Loop Capital -- Analyst

OK. And then as the platform continues to expand and touch different processes inside of enterprises, I'm wondering just what you're seeing relative to the internal processes that are there. Obviously, there's opportunities to continue to expand in enterprises. But as you touch more processes, is it becoming -- is it a positive or is it a negative? Because in essence, I think some of these organizations are going to have to reengineer or reprocess how they do things along the way, and it's not just buying software anymore.

Rob Bernshteyn -- Chief Executive Officer

Well, I couldn't agree with you more on that. A lot of this is getting into a situation where you're the least frictionless player to mitigate resistance to change and the unwillingness of folks to change process. And we've gotten very good at that from a core-competency perspective. Every one of these moves we've been making with our advancements into CoupaPay, with the acquisition of DCR and others, not only expand our TAM, but they are leading to synergistic results for these customers.

And that's evidenced by the roughly average ARR per deal going up for this company for 39 quarters in a row, both in mid-market and enterprise, and the combination of mid-market and enterprise. Our customers are buying a Value as a Service solution from us, and we're delivering that for them in a most frictionless way possible. And that's what's so exciting about this community that we're building.

Joseph Vafi -- Loop Capital -- Analyst

Great. Thanks, guys.

Operator

Up next is Koji Ikeda from Oppenheimer.

Koji Ikeda -- Oppenheimer & Co. -- Analyst

Great. Thanks for taking my questions, and congrats on a fantastic quarter. Just one real quick housekeeping question for Todd. Maybe I missed this in the prepared remarks, but did you happen to give the dollar-based expansion rate?

Todd Ford -- Chief Financial Officer

No, but I can answer that for you in some contextual history. If you go back to the time we went public, the dollar-based expansion rate was in range of 104 to 107. And then about a year ago, it started creeping up to the 108 to 110 range. And if you look over the past several quarters, it slowly moved up to the 110 to 112 range.

And then last quarter was at the high end of that range.

Koji Ikeda -- Oppenheimer & Co. -- Analyst

Got it. Thank you for that. And based on our model, it looks like ARPU has been increasing sequentially -- on a sequential basis for quite a bit for some time now. And it looks like there's some particular strength in this quarter in our model on ARPU.

And I guess the question is, is this an effect of bigger customers? Or is it expand opportunities within the base? Or maybe is it just a combination of both of these?

Rob Bernshteyn -- Chief Executive Officer

It's a combination of both and more. I would say there's nothing overly specifically significant about an uptick here and there in any given quarter. But in general, if you obviously graph the 39 quarters forward, you'd see that the customers are acknowledging the greater value that we're able to deliver them over and over. And one of the things that's exciting about our space is that our primary champion is typically procurement who is in the world of buying.

So they understand value when they see it, and we're excited that they're paying us fairly for it quarter in, quarter out.

Koji Ikeda -- Oppenheimer & Co. -- Analyst

Thanks for taking my questions, and congrats on a great quarter.

Operator

And now we have Stan Zlotsky from Morgan Stanley.

Stan Zlotsky -- Morgan Stanley -- Analyst

It's Stan Zlotsky from Morgan Stanley. Thank you so much for taking my questions. So maybe the first one, you had your big inaugural event in APAC in Japan. What are you seeing in that region that's driving your focus there, maybe from a market opportunity there? And how should we think about the materiality of that region moving forward? And then I have a quick follow-up.

Rob Bernshteyn -- Chief Executive Officer

Thanks, Stan. So just to offer a broader context because there may be some newer people to our company on the call. The way we've grown this business is very carefully and organically entered new markets. We go into a market, we find early adopters, we make those customers highly successful and referenceable, we work with them to make sure that they're getting significant value, and then we leverage their insights and their network, we leverage their referenceability to grow to customer 2, 3, 10, 20, 100 and beyond.

That's how we grew our advancement all across Europe, that's how we grew our advancement all across Canada and Australia. And very similarly, we're entering into Japan, largely out of Tokyo. We have some early highly referenceable customers there. We had a symposium event there that drew a very significant crowd and a great deal of interest.

We're developing a robust pipeline there. And we anticipate that market as well as other markets that make up our international expansion strategy to incrementally continue to contributing, contributing, contributing over coming quarters and years until they become very much a substantive contributor for us. And that market is a key cloud purchasing market. It's very ripe for high-quality solutions such as ours that focus on greater operational efficiency and streamlining.

And we think we have a very high likelihood of being quite successful in that market.

Stan Zlotsky -- Morgan Stanley -- Analyst

OK, perfect. And then a quick follow-up for Todd. Just on billings, very strong billings results in the quarter. Was there anything onetime or maybe any kind of pull-forward that we need to be mindful of? That's it for me.

Thank you.

Todd Ford -- Chief Financial Officer

Yes. The uncalculated billings, Stan, nothing from really a pull-forward perspective. We do continue to see a consistent trend of a little bit of early renewals as people are expanding with us, but nothing that I would call out separately from a dollar perspective. On the acquisitions of DCR and Aquiire, let me provide a little color there.

With respect to DCR, there was no beginning deferred revenue balance that was transferred onto our books from a calculated-billings perspective. And since the acquisition was done at the beginning of the quarter, revenue expenses were contemplated in the guidance that we gave on our last call. That said, DCR execution was strong from DCR and one of the contributing factors to a strong top-line growth for Q3, which indirectly impacts billings, obviously. Regarding Aquiire, the acquisition with them with only a few weeks remaining in the quarter, there was a beginning deferred revenue balance that came on to our balance sheet in Q3, which was a benefit to calculated billings after being adjusted down to fair value as part of the purchase accounting.

However, on a trailing 12-month basis, this benefit was roughly offset by other factors such as the deferred revenue haircut we took at the beginning of the year due to the adoption of 606. So lots of puts and takes, but nothing that I would say was plus or minus. And then from a revenue perspective, for Aquiire, it was nominal in Q3, very small. And there will be incremental expenses for Aquiire in Q4 that was contemplated in our guidance.

And we had a few weeks Q3. We'll take the full hit of that in Q4.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. Thank you so much.

Operator

Ross MacMillan from RBC Capital Markets, please go ahead with your question.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thank you so much, and apologies if there's any background noise, [Inaudible] at airport. But maybe one for you, Rob, and one for Todd. So Rob, just on -- something that stood out to me was the spend under management that was actually about $100 billion this quarter. I think that was up sequentially from Q2, which is easily unusual, and it was about $30 billion higher than Q3 of last year.

So I guess, just anything in particular that stood out for you in terms of new customer sizes or new customer volume? And then I have a follow-up for Todd.

Rob Bernshteyn -- Chief Executive Officer

Sure. So Ross, with spend under management, obviously, it's a combination of new customers going live but it's also existing customers continuing to expand, take on additional categories of spend and ultimately drive a lot more value to our platform. There's nothing statistically significant that happened this particular quarter to make note of. But I will tell you what's interesting, particularly with our Community Intelligence capabilities, we've actually seen, particularly over the last quarter, some relatively significant statistics such as spend requests from request time to approval are actually taking a bit longer in certain industries.

And we're looking at this obviously as an aggregated insight over hundreds of billions of dollars in spend. Also rejection approval time. Rejection amounts have actually increased quite a bit, and we think that may be -- from a hypothesis-driven perspective, that may be an indication that companies are becoming a bit more frugal given the economic uncertainty that they might be experiencing. What's special for us in that situation is that we have this platform that allows all of our customers to see what's going on at an aggregate level, at an industry-by-industry level through various periods of time so they could fine-tune how they are reacting to the changing economic times.

And I think that also puts our platform front and center in these times when spend is something that you can clearly control. We could be the business spend management platform for them to control it optimally. So very, very interesting.

Ross MacMillan -- RBC Capital Markets -- Analyst

That's interesting. Thank you. And Todd, I know that last quarter on sales and marketing you had INSPIRE, but we're still seeing nice leverage on that line. And I was just curious, when we had the analyst day last December, we were talking about the investments in mid-market, and maybe not quite there yet with the unit economics that you wanted to see.

I wondered if you could just provide us an update there and whether there's an opportunity to sort of accelerate the investment in mid-market as we look into next year.

Todd Ford -- Chief Financial Officer

With respect to mid-market and enterprise, both of those we continue to invest in. We continue to make significant progress. And obviously, we can always do better in both of those segments. With respect to mid-market, one of the areas we made a lot of progress is with Chandar and his marketing team on this concept of ICP, ideal customer profile, and by targeting those customers that have the highest propensity to buy.

And as Rob mentioned, our ARR for deal continues to go up and has gone up now for 30-some-odd plus quarters. And it's been very pronounced in the mid-market. So we continue to make progress there. The split, from a revenue perspective, are still approximately 80% enterprise, 20% mid-market.

And I think that's in large part due to just a low-hanging fruit or low market penetration in the enterprise and mid-market as well. So I don't know that you'll see that split change. And we continue to invest in that market, but we're continuing to invest in other areas as well such as the international expansion that Rob mentioned earlier.

Ross MacMillan -- RBC Capital Markets -- Analyst

Very good. Thank you. Congratulations again.

Operator

Terry Tillman from SunTrust Robinson Humphrey, please go ahead.

Eric Lemus -- SunTrust Robinson Humphrey -- Analyst

Hey, guys. This is Eric Lemus on for Terry Tillman. I appreciate taking the questions, and a really nice job on the quarter. I just had one question on CoupaPay.

It's really good to see you guys sign up a new partner with Barclayscard as your first partner. But what has been the response from other banks? And how do you view banks in terms of them being a friend of a foe?

Rob Bernshteyn -- Chief Executive Officer

Sure. Thanks for the question, Eric. We are excited to work with Barclaycard as the inaugural partner. They're actually, historically, the company that was first to create business corporate cards.

So for them to be our inaugural partner was great. But there's a very real interest on behalf of a whole host of financial institutions to work with us. As you might imagine, we have -- as you understand, rather, we have hundreds of billions of dollars of spend under management. It's accelerating in terms of how much more money is going to our platform -- spend is going through our platform.

So there's opportunities for banks to engage with us, and engage with us in a number of value-added ways such as supply chain finance opportunities for both the buy side as well as the sell side. We have an opportunity there. But I think for the near term, it is very much a friend opportunity. A number of them are our customers.

Many of them are our partners. And the value that we provide synergistically to our joint customers is very real. So we're working together in that spirit.

Eric Lemus -- SunTrust Robinson Humphrey -- Analyst

Got it. Thanks for that. Nice job.

Operator

Pat Walravens from JMP Securities is up next.

Pat Walravens -- JMP Securities -- Analyst

Great. Thank you. And let me add my congratulations to your continuing momentum. So Rob, you spent a substantial portion of your remarks on personal acknowledgment.

I think that's the first time I heard you do that on one of these calls. But then I know you're very deliberate about what you say. Why did you decide to do it now?

Rob Bernshteyn -- Chief Executive Officer

Pat, it's good to hear from you, and thanks for the question. I have actually done it occasionally once in a while in the past. We have a couple of very interesting ongoing traditions at the company. We give Most Valuable Player Awards every quarter to employees in the company that exemplify our core values.

Twice a year, we give a leadership award to one individual as voted by all of our colleagues here that exemplify leadership in a very strong way. And very recently, we realized that our customers are really part of our community when it comes to the values we're developing. And so at this recent conference, we again decided to give them awards based on their desire and willingness to engage with these values, and, frankly, exemplify these values themselves. So we thought it would be nice to call them out at any venue, and why not with all of you as well?

Pat Walravens -- JMP Securities -- Analyst

Great. And if I can add a different one. You touched on this a little bit, but what happens to the demand for your procurement solutions in a recession? I mean on one hand, there's a reluctance for new projects. On the other hand, you're saving them money.

How does -- I think you weathered one of these, so how do you think it plays out?

Rob Bernshteyn -- Chief Executive Officer

Well, thanks for the question, Pat. And I remember actually meeting with you and speaking with you in 2009 when we were just beginning to build out this business. So you're right, we have a bit of experience in this. In turbulent economic times, the one thing that you can control, as my colleague and our CFO here, Todd, has said many times, is your spend.

Revenue can be harder and harder to come by. Market dynamics can put you in a difficult situation, but spend is something you can control. And the ability to control spend drives bottom-line results, which virtually every company in the world cares about or certainly should care about. So we think we're at a place where we have the gravitas in the marketplace, we have the legitimacy in the marketplace, we have the proven track record in the marketplace, both internationally and domestically in mid-market and enterprise, to help companies of virtually all sizes in all industries weather the storm.

And we can not only provide them the opportunity to control that spend, we can now give them really valuable insight based on our AI-powered Community Intelligence so they can get smarter and smarter about how they spend. So just regardless of where things take us from a macroeconomic perspective, we're pushing on it full throttle to be a partner to this developing community of customers.

Pat Walravens -- JMP Securities -- Analyst

Great. Thank you.

Operator

Ryan MacDonald from Needham & Company, please go ahead with your question.

Ryan MacDonald -- Needham & Company -- Analyst

Yes. Thanks for taking my questions. I'd be really curious to hear more about these events in EMEA and Asia Pac. Clearly, Community Intelligence was a key focus point at those events.

But now that you're seeing, especially in EMEA, sort of the scale of these events being the same here as in the U.S., based on your customer conversations, where are you seeing maybe some differences in the needs or demands from customers in EMEA versus the U.S.? And Rob, maybe talk about some of the non-core modules that are maybe resonating more with those customers or in that customer base versus in the U.S. market.

Todd Ford -- Chief Financial Officer

Sure. Thanks very much for that question. I will tell you that there are horizontal inputs that we're getting. We're hearing certain flavors that are more interesting, perhaps, for customers in EMEA or APAC or the U.S., but there are common themes.

And those themes are really predicated around, first of all, getting visibility into spend for their organizations. We did this recent study with the Economist that showcase that 60-plus percent of CFOs don't have visibility to all of their company spend and 60-plus percent of them are interested in employing information technology to address that problem. And that's a national data point. So what we're seeing is the interest of our buyer to get better and better at doing that, controlling that spend and optimizing that spend.

And what I would tell you is the biggest and most inspiring thing for all of -- myself in all of my colleagues as a company is that the conversations with our customers at these events are authentic. They're real. People are sharing what is working, areas for improvement, they're giving us real advice, real insights. They're pushing us in places we want to be pushed.

They're praising us for the success that we've had and the successes we're delivering for them. So the heart of it is building this global community of like-minded people that want to employ best-in-class information technology to help their companies optimize all of their spending. And that spirit is felt at every one of these events no matter where you are in the world. And it's that spirit that I think is going to continue to drive us forward quarter in, quarter out as we build this business.

Ryan MacDonald -- Needham & Company -- Analyst

Got it. And then just a quick follow-up. I think in past quarters, you've talked about percent of revenue or perhaps billings during the quarter that came from non-core modules. Could you provide an update on that?

Rob Bernshteyn -- Chief Executive Officer

We actually don't break that out. I mean, what we have said is that when customers are coming onboard with us that the number of modules that they're buying has continued to increase per deal. So little over a year ago was roughly three modules -- or three functionalities. We don't like to use the term modules, but that's how you guys think about it.

But -- and now, it's slightly over four. So that's really the only metric that we've talked about in the past.

Ryan MacDonald -- Needham & Company -- Analyst

Got it. Thank you very much.

Operator

And now we have Joseph Foresi from Cantor Fitzgerald.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. I was wondering if you could maybe talk a little bit more about margins as we head into next year. I want to make sure we don't get ahead of ourselves here, but sales and marketing seem to give you a reasonable amount of leverage versus what we've seen historically. So are you expecting that type of spend to continue to be -- continue to get leverage in that area? And how should we think about the margin profile in FY '20?

Todd Ford -- Chief Financial Officer

Thanks, Joe. From a margin perspective, one of our kind of three commitments to Wall Street is to continue showing scale as we grow the business with respect margins and free cash flows. And if you look at the midterm target that we set out a year ago, gross margins were 73% to 75%, and the longer term was 78% to 80%. And we are going to take, as I noted in my prepared remarks, that -- and there's going to be a little bit of a step back over the next one to two quarters with respect to the M&A integrations and absorbing those costs, but then we would expect to see a continual gradual improvement with respect to gross margins and free cash flow margins toward the longer-term target now that we've achieved maturely all aspects of the midterm target.

And the same goes for free cash flows. If you look at a trailing 12-month free cash flows of 9%, that's the high-end of the midterm target, and I think you'll continue to see quite a bit of scale there. And on the sales and marketing, yes, definitely expect to see continued leverage there. We're getting more legitimacy in the market.

We're seeing systems integrators lead more with Coupa and bring us into their install base. And I wouldn't say we're not necessarily a household name yet, but the brand recognition is improving. And we've made some concerted efforts in the last couple of quarters in that area as well. So I think we're executing really well and staying the course with respect to the commitments that we've made.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. And then my second question is just from the professional services business. I know you've said and you said in your prepared remarks it tends to be lumpy, the margins and also we've seen the top line. But it seemed to have sort of smoothed out over the last couple of quarters, and then it seems like we're hitting some rough air going forward.

Maybe you could just provide a little of color around your thoughts over the next couple of quarters on both the revenue and the margin front. Thanks.

Todd Ford -- Chief Financial Officer

So on the professional services margins, the team has really done a great job in scaling that business. With respect to Q3 and as we look to Q4, there is definitely an impact, in particular, from the DCR acquisition as we took full impact of that professional services organization. And the professional services tend to be more back-end loaded or much lower than what we would charge for a standard Coupa implementation. So I think it will take a couple of quarters for that to normalize, but I would expect it to still be within that 0 to 10% positive on a trailing 12-month basis.

And as we incorporate that business I think you'll start to see that improve as we get into Q1 and Q2 of next year.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. Thank you.

Operator

Up next is Mark Murphy from JPMorgan.

Matt Coss -- J.P. Morgan -- Analyst

Hi, good afternoon. This is Matt Coss. On behalf of Mark Murphy, thanks for taking my questions. So you've historically been able to save your customers sort of a specific percentage of their spending and -- on average.

And has that changed at all particularly as you look at some of your large customers that have been with you for several years? And do you have any way to see if the percentage of spending that you're capturing your customers has changed or improved on a percentage basis as customers adopt more functionality from you?

Rob Bernshteyn -- Chief Executive Officer

Matt, thanks very much for that question. I would say, in general terms, that continues to trend very positively. Existing customers are continuously looking for additional categories of spend to run through our platform. They want to remove maverick spend as much as possible their organizations.

They're not only turning on the procurement capabilities, but obviously turning on our expense management capabilities, our events -- our invoice processing capabilities, so that continues to trend upward. Last time we did an assessment on this with our customer base was roughly a year ago, and we saw somewhere between 88% and 90% of the spend that they were looking to get through our platform is, in fact, running through our platform on average. So these are really unprecedented levels. They're roughly twice the industry benchmarks of 40%, 45%, so we feel really, really good about that.

But we don't want to rest there. We want to make sure that we give our customers as much value as we possibly can out of our platform and give them more and more capabilities to drive value against that spend level.

Matt Coss -- J.P. Morgan -- Analyst

Thanks, Rob. And then just one more, I appreciate the update on that the headcount, over 1,000. Is there any comment you can make on the number of customers that you currently have? Or are we going to get an update later?

Todd Ford -- Chief Financial Officer

Yes, this is Todd. So we provide an update on the customer count at the end of the year with our 10-K, so we'll update you on customer count at the end of the year.

Matt Coss -- J.P. Morgan -- Analyst

Thank you.

Operator

Brian Peterson from Raymond James, please go ahead with your question.

Brian Peterson -- Raymond James -- Analyst

Hi, guys, congratulations and thanks for taking the question. So just one for me. So I don't know, Rob or Todd, who wants to take this. But can you talk about what's driving the net revenue retention higher toward that 112% range? Is that early renewals with customers buying more products? And with the launch of Community Intelligence, analytics more broadly, does that have a natural motion back to base where we might see upward pressure on that net revenue retention metric? Thanks, guys.

Rob Bernshteyn -- Chief Executive Officer

Sure. So let me take a first crack at it. So the first driver of this improvement around retention is simply that we're delivering value for our customers. And they are interested in getting more value from us, so they're not only staying with us but they're interested in adding on additional capability.

That's evidenced by the ARR per deal for new customers, and that's evidenced by the additional add-ons for existing customers. Around Community Intelligence, this is a non-serial impact that we're having for our customers. This isn't just a module. This is the ability to take advantage of the collective intelligence of hundreds of billions of dollars in transactional spend for the benefit of each individual customer.

So they're understanding the power of this. It's obviously building a substance of moat around our business and giving us greater and greater value for every customer. So it's a very positive indicator, but our goal is to not only keep every customer we ever signed but to continue to drive more value for them and get paid fairly for the value that we're driving from -- for them quarter in and quarter out.

Operator

[Operator signoff]

Duration: 55 minutes

Call Participants:

Nicole Noutsios -- Investor Relations

Rob Bernshteyn -- Chief Executive Officer

Todd Ford -- Chief Financial Officer

Raimo Lenschow -- Barclays -- Analyst

Joseph Vafi -- Loop Capital -- Analyst

Koji Ikeda -- Oppenheimer & Co. -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

Eric Lemus -- SunTrust Robinson Humphrey -- Analyst

Pat Walravens -- JMP Securities -- Analyst

Ryan MacDonald -- Needham & Company -- Analyst

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Matt Coss -- J.P. Morgan -- Analyst

Brian Peterson -- Raymond James -- Analyst

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