Coupa Software (COUP) Q1 2023 Earnings Call Transcript

Coupa Software (COUP)
Q1 2023 Earnings Call
Jun 06, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Coupa Software first quarter fiscal year 2023 earnings conference call. Our host for today's call is Steven Horwitz. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

I would now like to turn the call over to your host, Mr. Horwitz. You may begin, sir.

Steven Horwitz -- Vice President, Investor Relations

Thank you. Good afternoon and welcome to Coupa Software's first quarter conference call. Joining me today are Rob Bernshteyn, Coupa's CEO; and Tony Tiscornia, 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 and uncertainties and assumptions that are described in our most recently filed 10-K. 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. Unless otherwise stated, growth comparisons are against the same period of the prior year.

With that, I will now turn the call over to Rob.

Rob Bernshteyn -- Chief Executive Officer

Thanks, Steven. Welcome, everyone, and thank you, everyone, for joining us. I'm excited to share our first quarter business results with you today from our New York offices. It's been amazing getting back in front of customers to collaborate in face-to-face, real-time sessions to help them fully understand what we're doing here at Coupa.

We're giving them visibility, control and agility over their business spending, helping them build foundational resilience in their back-office operations for the long term and empowering them to make strategic, data-driven decisions that yield positive outcomes for their businesses. As we look at our results, let me start by sharing a few financial highlights from the first quarter, this being our 53rd quarter of execution. In Q1, we delivered $196 million of total revenue, including $178 million of subscription revenue. Calculated billings for the quarter were $188 million.

We once again reported strong free cash flow margins, coming in at 23% for both, the quarter and the trailing 12 months. We're able to deliver strong free cash flows while simultaneously continuing to make thoughtful investments into our business to capitalize on our growth opportunity. Our approach remains dynamic and agile in the context of consistently changing times, which we have navigated over the last 13 years of operational execution. We continue to drive meaningful top line growth while maintaining best-in-class unit economics and sales efficiency and strong free cash flow metrics as well.

As our business -- as business is planned for tougher economic times, we believe our model of growth with profitability makes us especially resilient over the long term. And speaking of resiliency, we were overwhelmed with incredible positive energy from the thousands of our customers and prospects that we connected with live at our Inspire events in Las Vegas and Berlin this quarter. The resiliency they showed with respect to their businesses leveraging our platform was nothing short of humbling and inspiring for all of us at Coupa. As well, they are preparing to use our platform to help their businesses navigate the potential uncertainties ahead.

Now, as we are all acutely aware, the global business environment is currently highly volatile. We have seen some early signs of potential softening in Europe, especially as the war in Ukraine and inflationary pressures appear to be weighing more on business leaders than they were before. Yet in this context, we remain agile and pragmatic in how we run our business and make investments. With that backdrop and a strong pulse on our business, we feel confident raising our subscription revenue guidance for both, the second quarter and the full year.

Now more than ever, it's undeniable that business leaders recognize the importance of optimizing their business spend. Coupa is empowering companies to build the transformational business architecture they need to forge on into this uncertain future. Through our industry-leading BSM platform built on our vision areas of being comprehensive, open, user-centric, prescriptive and accelerated, we are providing our customers with one source of truth to run their businesses. And as we look to the coming years, we believe that we're on our way to becoming the de facto business spend management platform for CPOs, CFOs and with the support of forward-thinking CIOs.

Now, our path to winning the BSM market and unlocking vast amounts of real measurable value for our customers is paved by our three-wave strategy: first, capturing all spend; secondly, optimizing every dollar spent; and finally, amplifying community value. For the first wave, capturing all spend, let me share a couple of customer stories that demonstrate how our platform increases operational efficiency by digitizing processes. The first story is that of CBRE, the world's largest commercial real estate services and investment firm. CBRE uses Coupa in 49 countries around the world, including in Japan where the digital payments process for more than 700 supply partners were streamlined.

They were quickly able to mitigate 80% of the region's spend from manual processes to digital e-invoicing. Not only did they reduce cycle times by more than 50%, they were also able to improve payment fulfillment in Japan by 85%, positively impacting cash flow. I'm appreciative of the comment they shared with us, which was: "Coupa has made material improvements in CBRE's cross-functional collaboration internally and with their business partners. The platform is critical to our ability to execute our business spend management strategy." Another example of transforming business spend from manual to digital is that of Rivian, an electric vehicle automaker.

They're a testament to how businesses scale on our platform. By leveraging Coupa's ability to improve processes and drive automation, Rivian has maintained the same procurement operations team size while its overall employee base has grown 20x in the last 18 months. They've gone from a completely manual approach having 93% of their purchase orders and 90% of their invoices processed electronically. With Coupa, Rivian has gained visibility into and control over their spend and has benefited greatly from the scalability of our platform.

As many of you know, a key component of our first wave is Coupa Pay. Our attach rate on new customer deals in Q1 has again -- was again meaningfully above 30% with mid-market attach rates being well over 50%. Also, we surpassed $10 billion of cumulative total payment volume in Q1 and are now processing payment transactions at a run rate of more than $1 billion per month. Now, let's move on to the second wave of our strategy, optimizing every dollar spent through suite synergy.

The first example I'll share with you is that of Ally Financial, a financial services and insurance company that is experiencing firsthand the benefits of end-to-end business spend management. Ally greatly simplified its IT landscape by replacing several systems with one integrated Coupa platform. They are using Source-to-Pay, Contingent Workforce, Third-Party Risk, Supplier Diversity and T&E. By taking a comprehensive approach, Ally is able to work more strategically and collaboratively across the organization, delivering strong ROI and maintaining the agility to make changes when necessary.

Another example is Microsoft, who is a Coupa supply chain design and planning customer. Microsoft joined us at our Inspire conference a couple of months ago to discuss the importance of using data to manage their supply chain. With such a wide range of products for multiple types of customers that get delivered through so many different distribution channels, they clearly have an extremely complex supply chain to manage. Microsoft emphasized that with massive amounts of data coming in every day, digitization is incredibly important to them.

The data helps drive the organization to make the correct decisions today while also considering the necessary planning as far out as three to five years. Each business decision can't just be correct for one part of Microsoft. Collectively, all the decisions need to work in concert with each other. Using Coupa's supply chain design and planning solution, Microsoft is achieving its goals of maximizing the cost-benefit equation, minimizing lead times and working toward being carbon-neutral by 2030, all with data as a driving force.

Now, it's also data along with community collaboration that makes up the key components of our third wave, amplifying community value. With our cumulative spend under management reaching nearly $3.6 trillion this quarter, our customers are tapping into real-time spend data and prescriptions to better identify ways to reduce risk, increase efficiency and be more profitable. While the best is yet to come, we continue to unlock value for our customers through community.ai, and we see an increase in utilization of prescriptions by our customers. Nearly 70% of customers that are live on the platform have used Community Insights or Community Connections multiple times per month on average.

A common example of one of these prescriptions might be contextually informing the customer that they should move specific unstructured spend to on-contract spend. By linking negotiated contracts, the customer can ensure better pricing and compliance to the company's preferred suppliers. As I mentioned, collaboration is also key to our third wave. Our App Marketplace is a collaborative environment where customers can connect their enterprise systems to Coupa to further break down silos.

We offer enterprise apps that are used for connecting to systems both inside and outside of Business Spend Management. We now have nearly a dozen apps that are prebuilt and certified. These applications are easy to use and are essentially instantly accessible for our entire growing customer community. Coupa certification comes from our engineers with a specific focus on reliability, performance and security.

A great example of one of these prebuilt apps is a key solution from Antares. Customers using the Antares app can access supplier risk at the time of sourcing but also provides ongoing monitoring of third-party data and instant visibility into supply risk scores across cyber, ESG, financial, geopolitical and operations. This is just one example of the value our customers can extract from our platform and how it's expanding through our growing App Marketplace. As we continue our pursuit of winning the BSM market, our thought leadership and innovation play an increasing role in the mind activation of our community, especially through ESG.

Our customers are establishing key ESG goals that they want to achieve but aren't necessarily sure how to accomplish. To help these customers, we have introduced more than 80 different capabilities in our sustainable BSM toolkit to impact ESG. One example of functionality we deliver to our customers is providing minority-owned and sustainability data on their suppliers as well as the suppliers of their suppliers. And we provide that data at the time a transaction takes place to help our customers make better decisions that will help them achieve their ESG goals.

Now speaking of ESG, we are making an impact on each area. For environmental, we recently introduced price benchmarks for ocean freight and Scope 3 carbon emissions tracking. We've also launched a partnership with a climate software platform to help measure and reduce carbon footprint. On the social front, we recently shared our own diversity, equity and inclusion statistics via vlog by our chief people officer, Ray Martinelli, and have reinforced our commitment to continued improvement in our own hiring processes.

While we are early in the process, in 2021, we increased our global female representation and our underrepresented minorities in our colleague base. And we are already doing more in 2022, as we believe that by increasing diversity, we become more creative, empathetic and productive. Along the lines of governance, we joined the Chief Executives for Corporate Purpose, an organization that advises companies on how to further their corporate-purpose strategies and shares actionable insights with a CEO-led coalition to address stakeholder needs. Now speaking of making an impact, let me share with you, Coupa's MVP award winners for Q1 who best exemplify our core values as voted by colleagues.

I'll begin with Kate McIntire, who exemplifies our first core value of ensuring customer success. Kate consistently finds solutions to challenging issues. She quickly earns the trust and respect of our customers. She helps get situations addressed expediently and positively.

Kate always puts the customer success first. Next, Rahul Mehta was recognized by epitomizing our second core value, focusing on results. Rahul makes sure we aren't just delivering functionality, but rather using the feedback of all members of the community to deliver a solution that is highly impactful and adoptable from day one. Regardless of how complex a problem is, Rahul is there to successfully drive toward an elegant solution with a strong bias for action.

Finally, Julie Prochasson-Restrepo was recognized for our third core value, Striving for Excellence. Julie played a key role in our journey together. She had and has an amazing focus and attention to detail that enables us to maximize the likelihood of success on each project. Our customers commended her on her tireless work ethic, which resulted in clear value delivery.

My congratulations go out to Kate, Rahul and Julie. As we recognize our colleagues for their contributions, we're also humbled to be recognized for the value-as-a-service we're delivering to the market as a company. Forrester recently published its first-ever comprehensive analysis of the business spend management market in their Supplier Value Management Wave Analysis. We are proud to have achieved the highest scores in the industry in strategy and technology.

This recognition is also a result of the deep relationship we have with our community of customers and partners. As I mentioned earlier, we couldn't have been more thrilled to reunite with these groups at our Inspire event in Las Vegas a couple of months ago and again more recently in Europe. We welcomed thousands of attendees who continue to embrace being united by the power of spend and who appreciate the value of being part of a global community of forward-thinking leaders from supply chain, procurement, finance, treasury and IT. There was incredible excitement and energy at both events with customers sharing their transformation success stories and learning from each other.

We're thankful to the dozens of customers who share their stories at our event. They include ADM, AstraZeneca, BMW, DHL, General Mill, General Motors, Jabil, Lowe's, Mastercard, Maersk, Microsoft, Staples, Unilever, UPS, Walmart and so many more. Now, before I turn it over to Tony, let me restate the obvious that the global market environment remains uncertain, yet we are well positioned to navigate and thrive. We continue to deliver solid top line growth, best-in-class unit economics and strong free cash flows.

Keep in mind that we built the foundation for this business during the heart of the financial crisis over a decade ago, and the discipline forged during those years is in our DNA. We are the leader in business spend management, which has a huge total addressable market. We couldn't be more excited about our journey toward becoming one of the world's best enterprise cloud software companies by delivering unprecedented value to our customers. With that, let me now hand the call over to our CFO, Tony Tiscornia.

Tony?

Tony Tiscornia -- Chief Financial Officer

Thanks, Rob, and good afternoon, everyone. As Rob highlighted, we delivered strong top line growth, margins and cash flows for Q1. Let's dive right into the numbers. Total revenue for the quarter was $196 million, including subscription revenue of $178 million, up 27% year over year.

Total calculated billings for Q1 was $188 million, up 26% year over year. Subscription calculated billings for Q1 was $170 million, up 37% year over year. In Q1, we benefited from some renewals that closed earlier than we anticipated, contributing approximately $10 million to calculated billings. If you make this adjustment, our reported subscription billings growth would have been 29%.

Also in Q1, due to the strength of the U.S. dollar, particularly against the euro, both subscription and total calculated billings were impacted by approximately 200 basis points on a constant currency basis. Non-GAAP gross margin for the quarter was 74%. Non-GAAP operating income was $14 million or 7% of total revenue.

And non-GAAP net income was $5.5 million or $0.08 per share on approximately 86 million diluted shares. Q1 operating cash flows were $50 million. Q1 adjusted free cash flows were $46 million or 23% of total revenue. For the trailing 12-month period, adjusted free cash flows were $171 million or 23% of total revenue.

As we head into Q2, we continue to make thoughtful investments into our business to drive growth. However, along with growth and on the back of best-in-class unit economics, we also prioritize sales and marketing efficiency and free cash flow margins as key pillars of our financial performance. Over the past five years we've delivered adjusted free cash flow margins that have scaled from 8% to 23%. While we are focused on growth, we will continue to make investments thoughtfully as we continue on our path toward our long-term target of 30% to 35% adjusted free cash flow margin.

Cash at quarter-end was $786 million, an increase of $57 million from last quarter. Our rule of 40 for Q1 was 41% as we continue to demonstrate our ability to deliver meaningful growth with strong cash flows and margins. As a reminder, we define rule of 40 as the total revenue growth rate plus the adjusted free cash flow margin for the period. Here are a few other key data points for Q1.

This quarter, we reported $18 million of professional services and other revenue. In Q1 of last year, we reported $27 million. As we've highlighted in the past, the decrease is due to our planned migration of supply chain implementation work to Coupa partners and conversion of legacy term license contracts to subscription. In Q1 of this year, we had $3.6 million in supply chain, pro serv and license revenue.

That's compared to $8.6 million in Q1 of last year. The impact of this decrease in year-over-year professional services revenue from supply chain was approximately 400 basis points on our total revenue growth rate. As I'll discuss in a few moments, we will be providing additional details on subscription billings, which is more reflective of the underlying health of our business. Also in Q1, our gross renewal rate was in our consistent historical range of 94% to 96%.

Dollar-based expansion was in the 110 to 112 range. The number of customers with annualized subscription revenue greater than $100,000 was 1,441 at the end of the quarter, up 27% from a year ago. And we ended the quarter with $1.3 billion in total RPO, a 35% year-over-year increase. With that, let's now turn to guidance.

Before sharing guidance, as Rob noted, toward the end of Q1, we began seeing signs of some potential softening in the European demand environment driven by the Russia-Ukraine conflict, pressure on European currencies and inflation. Though we have not yet seen a meaningful impact on our business, we have factored this uncertainty into our guidance. For Q2, we expect subscription revenue of between $185 million and $188 million and professional services and other revenue of approximately $17 million, yielding total revenue of between $202 million and $205 million. With respect to calculated billings, given the impact of the year-over-year decline in professional services and license revenue, we are also providing guidance on subscription calculated billings, which is more reflective of the health and heart of our business.

Also factored into our guidance is the assumption that FX rates will remain similar to today's rates, which would result in a 100 to 300 basis-point impact to our subscription revenue and billings results for Q2 and for the rest of the year. Given the timing of the $10 million in earlier-than-anticipated renewals in Q1 that will not benefit Q2, let me normalize our subscription billings guidance by first sharing guidance for the first half of fiscal '23. For the first half of fiscal '23, we expect year-over-year subscription calculated billings growth of approximately 25% on an as-reported basis and between 26% and 28% on a constant currency basis. Since we haven't shared this data in the past, I'll now share our historical subscription billings figures going back to the beginning of last year.

For fiscal '22, subscription billings were $124 million for Q1, $173 million for Q2, $172 million for Q3 and $298 million for Q4. For Q1 of this year, subs billings were $170 million, and we expect approximately $202 million for Q2. Also for the first half of this year, we expect year-over-year total calculated billings growth of approximately 19% on an as-reported basis and between 20% and 22% on a constant currency basis. Incorporated in these figures is our expectation of total calculated billings of approximately $220 million for Q2.

Moving down the income statement. We expect a Q2 non-GAAP gross margin of approximately 72.5%. We expect Q2 non-GAAP operating income of $9 million to $12 million and non-GAAP net income of $6 million to $9 million, resulting in non-GAAP net income per share of $0.07 to $0.10 on approximately 87.5 million diluted shares for the quarter. We expect Q2 adjusted free cash flows of approximately $20 million, coming off the strong collections finish we had in Q1.

Now, let's move on to the full fiscal '23 guidance. We expect subscription revenue of $762 million to $767 million. We expect professional services and other revenue of approximately $76 million or 9% of total revenue. This would result in total revenue between $838 million and $843 million for fiscal '23.

We expect non-GAAP gross margin for the year of between 72% and 73% and non-GAAP operating income for the year of $36 million to $41 million, resulting in non-GAAP net income per share of $0.21 to $0.27 on approximately 88.5 million weighted average diluted shares for the year. That concludes our prepared remarks. We will now take your questions. Operator?

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Matt VanVliet. Your line is open.

Matt VanVliet -- BTIG -- Analyst

Yes. Good afternoon. Thanks for taking the question. Guys, nice job in the quarter.

I just wanted to touch on kind of what are some of the factors that you're seeing driving the weakness that you talked about in Europe. Are you seeing any even early signs of similar trends in other regions? Or maybe conversely, what gives you the confidence to raise the subscription guidance revenue here, given that you are starting to see a little bit of weakness in one of the bigger markets? Thanks.

Rob Bernshteyn -- Chief Executive Officer

Sure. Thanks for the question. I would say that weakness in Europe was something we saw late in the quarter. It's sort of early signs of weakness due to obvious macro -- obvious conditions with the Ukraine conflict.

We're not seeing that in other parts of the world. And I would also say, in Europe, that weakness feels much more of a lagging indicator than a leading indicator. As I mentioned, we just came back from Berlin, I think about two weeks ago, where we had just an incredible Inspire conference with nearly 2,000 people, many, many customers, hundreds of prospects, incredible energy, lots of conversations about transformational projects getting back on the rails that have been sort of arguably postponed for a number of years. So, we're feeling pretty bullish all around.

But we did want to call that out because we saw it toward the end of -- the kind of tail end of last quarter in Europe.

Matt VanVliet -- BTIG -- Analyst

Great. Thank you.

Operator

Thank you. And our next question comes from Keith Weiss. Your line is open.

Keith Weiss -- Morgan Stanley -- Analyst

Thank you guys for taking the question. Nice quarter. Carrying on that last question a little bit, maybe one for Tony and one for Rob. For Tony, how do you reflect that softness, if you did at all, that you saw in Europe in the guide? Was there any extra layers of conservatism that you added or sort of like changes in your assumptions around close rates when it came to that European business? Or was it like small enough that you just didn't really reflect it mechanically in the forecast on a go-forward basis? And then, the question for Rob, you guys have been through cycles before.

Can you remind us, intuitively, what you guys do should become even more value-add when people are dealing with what they're dealing with right now, like inflationary pressures and trying to sustain operating margins and the like? At what point does sort of the softening demand like get counterbalanced or sort of outweighed by, listen, this is just what you need to do in these types of times to support your operating margins? And can the environment ever become a tailwind in that sense?

Rob Bernshteyn -- Chief Executive Officer

Yes. Sure, Keith. Let me touch on both a little bit and then -- before I turn it over to Tony to tell you more about Europe. But generally speaking, some of the softness we saw late in the quarter in Europe drives kind of a wider range of potential outcomes.

And that's what you're seeing in some of our projections. But you'll hear more about that from Tony. In terms of the climate, and I appreciate you calling out that we did see this before. If you think about 2009, 2010, 2011, some of the wind in the sails of the value proposition we offer were there and are here today, the focus on tightening expenditures, the focus on getting more spend on contract, the desire to have greater visibility to business spending.

But I would tell you, we were a very, very small company in 2009, '10, '11. Viability was a concern. Our platform wasn't yet scalable. We weren't able to support multilingual, multicurrency deployments.

Today, we're incredibly viable. We have thousands and thousands of customer references and proof points in virtually every industry. And we think that really bodes well for us as we enter these uncertain times with the value proposition that can deliver. And the last component, I think, worth calling out as well.

What we saw during COVID is that people become more and more aware of just how their back-office information technology capabilities were lagging those of front-office capabilities, particularly in the cloud. And that gives us an opportunity to really take folks in a much more modern, agile, resilient world with, as I mentioned, thousands of proof points to get them comfortable. But let me turn it over to Tony on Europe.

Tony Tiscornia -- Chief Financial Officer

Sure. Thanks, Rob. I think you covered most of it, Rob, but -- and thanks for the question, Keith. Overall, I would say our guidance methodology has not changed from last quarter.

There's always a range of outcomes, and now there's a broader range of outcomes given the uncertainty in European demand. You also have to consider the constant currency impact of between 100 and 300 basis points for billings in Q2 and for the rest of the year, and this is factored into our guidance. But definitely, we feel excited about our pipeline, and we're excited about Q2.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. Thank you, guys.

Operator

Thank you. We have a question from Raimo Lenschow. Your line is open.

Raimo Lenschow -- Barclays -- Analyst

Thank you. Can I follow on there a little bit? Rob, if you think about the opportunity to revisit clients and upsell or cross-sell, can you speak a little bit about the recently acquired assets like Exari? And then also, you talked about the payment attach there. Like what sort of payment are they taking? Is it the virtual card? Is it a prepay? And then, one for Tony. Last quarter, you talked about sales capacity increases.

Is that still on the cards or are you changing your tone there? Thank you.

Rob Bernshteyn -- Chief Executive Officer

Sure, Raimo. Well, we're seeing really nice attach rate across the board. As you know, our average subscription value per deal has grown virtually every quarter now for 53 quarters. But specifically to Pay, the largest attach rate ever in this quarter, meaningfully greater than 30%.

Mid-market, I mentioned, well over 50%. The total payment volume cumulatively has exceeded $10 billion with $1 billion a month now happening. We're seeing a whole host of adoption across the board. So mid-market is very strong.

We're seeing strong uptake of virtual card in the enterprise, and we continue to push upmarket with our digital payments capability. And the beauty of Pay is that it's part of our first wave strategy. All of that has been built organically and continues to improve three times a year with our releases.

Tony Tiscornia -- Chief Financial Officer

Raimo, thanks for the question. As I noted in my prepared remarks, we're definitely still investing for growth, but we're doing so thoughtfully. You saw this quarter that we delivered 27% subscription revenue growth, and we had meaningfully higher sales and marketing opex, as well as other areas. But we're doing so thoughtfully, and we delivered 23% free cash flow margins for the quarter and for the trailing 12 months.

Part of our calculation, of course, is we meet every quarter and discuss our investments very carefully. And one of the things informing our decisions is the momentum of our business. New business consisting of new logos and add-on business was up nearly 40% year-over-year in Q1. So, all those things are factored into our investments.

But the key point here is that we're continuing to invest for growth but doing so thoughtfully with respect to sales and marketing efficiency and free cash flow margin.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Very clear. Congrats. Thank you.

Operator

Thank you. And we have a question from Aleksandr Zukin. Your line is open.

Alex Zukin -- Wolfe Research -- Analyst

Hey, guys. Thanks for taking the question. I guess, maybe just the first one is with respect -- I know you're going to get this question five times on macro, but are we -- is it longer sales cycles? Is it more signatures required on deals? And the confidence, Rob, that you have that this was a Europe-only issue given the war and the factors and not something you're seeing in the U.S., but are you being prudent in the sense that some of your outcomes do incorporate degradation of the same factors domestically? And then for Tony, I appreciate you guys talking about efficiency in cash flow a lot more in the script, and that makes total sense given what we're seeing both in the demand environment but also with valuations. How -- I guess you talked about the Rule of 40.

This quarter, you talked about it on a trailing 12-month basis. Is there more also a commitment to try to hit that rule of 40 either next quarter or for the current year? And in general, how are you positioning for that?

Rob Bernshteyn -- Chief Executive Officer

Sure, Alex. Well, look, I would tell you, obviously, we're looking at every segment of our business both geographically as well as mid-market, upper mid-market, enterprise, strategic. And we look at a whole host of operational metrics to make sure we have not only a really strong portfolio effect, but that we're properly investing against opportunities in front of us quarter in, quarter out. With the exception of some of the late quarter softness we saw in Europe, I can tell you that all of our other segments are just really executing beautifully, and we're scaling them accordingly with their -- with how they're progressing along the way, making thoughtful investments as we've done for obviously dozens of quarters now.

Tony Tiscornia -- Chief Financial Officer

Yes. And Alex, on your second question, look, I mean, we definitely are investing in growth to take advantage of a large market opportunity and the momentum we have with our new business. And we're doing so thoughtfully, though, right, with respect to both, sales and marketing efficiency, unit economics, free cash flow margins. We don't look at them independently.

We look at them all in conjunction with each other, and we have strong controls of our investments and data to support them. So, we're focused on both, top line growth but also thoughtful about free cash flow margin.

Alex Zukin -- Wolfe Research -- Analyst

OK. Understood. Thank you, guys.

Operator

We have a question from Siti Panigrahi. Your line is open.

Siti Panigrahi -- Mizuho Securities -- Analyst

Thank you. Thanks for taking my question. Just wondering, are you looking into the remaining quarter in this macro environment? Are you now trying to focus going back to the base, or any kind of changes you are doing in the incentive structure? Anything would be helpful.

Rob Bernshteyn -- Chief Executive Officer

Yes. Sure, sure. It's a great question. Our primary vehicle for growth has been and continues to be via what we call hunting, right? We're -- we have a strong desire to win this market within a huge total addressable market.

So, our primary vehicle has and continues to be hunting. But as we continue to grow the scope, the scale of our business, we obviously see opportunity in harvesting. And to date, investments that we've made in harvesting has been very measured. But the opportunity to unlock value there is real.

And I would tell you that as with all elements of our business, we continue to make, as Tony mentioned, thoughtful investments quarter in, quarter out to make sure we maximize the opportunity for many years to come.

Siti Panigrahi -- Mizuho Securities -- Analyst

Thank you.

Operator

Thank you. We have a question from Brad Sills. Your line is open.

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

Great. Thanks, guys. I wanted to ask about mid-market. You called out, Rob, some mid-market strength.

We're certainly hearing that in the channel as well. What are your observations there? Is this a potential leading indicator for perhaps the enterprise segment coming back? And then on the net revenue retention, if you could help us unpack a little bit where the incremental add-ons expansion kind of deals are happening within the power user stack. There's just so much in there, and there's a lot of moving parts right now with the macro and supply chain. I would imagine that there's quite a difference today in terms of the mix of business you're seeing versus, say, a year ago.

Rob Bernshteyn -- Chief Executive Officer

Well, look, first of all, in the mid-market -- and thanks to an incredible leadership and it's just an amazing growing team in mid-market. We just have a business that is frankly on fire. It's very, very scalable. Our approach to customer acquisition is measured, and the deal sizes are fair.

And so, we continue to just push into that market quarter in, quarter out. And we feel like it's very predictable as well, which is a wonderful thing to have from a portfolio effect perspective and just the continued growth -- for the continued growth of our business. From net retention and add-on, it's across the board. It really looks like a pizza pie.

I mean you -- obviously, you have add-on business in terms of users that's across the board. But in terms of modules, it's everything from supplier risk to supply chain design and planning to contingent workforce. We're seeing utilization, we're seeing more and more inventory management, treasury, strategic sourcing. So, it's really across the board.

And I think that's because our customer base really is in a state of vision lock with us in terms of what it takes to orchestrate comprehensive business spend management. It's simply a question of where to begin and how to navigate that transformation. So, that's what we're seeing there. And then sort of the last part of your question was in the middle there in terms of is what we're seeing in mid-market indicative of the enterprise.

I don't know if I would say that specifically, but I will tell you, as I look at the enterprise business, particularly what we saw in the U.S. and other regions around the world, the larger scale, more transformational projects are coming back on line, and we're engaging in the flesh, physically, with prospects. And we're navigating these sales cycles from early awareness as we've always done all the way through to close. So, it certainly feels promising, and that's seen in how we're thinking about the business and how we're investing into the business.

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

Great to hear. Thanks, Rob.

Operator

[Operator instructions] And we have a question from Brian Peterson. Your line is open.

Brian Peterson -- Raymond James -- Analyst

Hi, gentlemen, thanks for taking the question. So Rob, I was actually in that Microsoft session out of Inspire, and it was interesting to hear kind of the value proposition for them. I'd be curious to get an update on how the supply chain business is looking both from like a pipeline and deal cycle perspective. There's obviously a lot of news there in terms of challenges there across the globe.

But I'm curious what you're seeing and how should we be thinking about the growth of that business going forward? Thanks, guys.

Rob Bernshteyn -- Chief Executive Officer

Sure. I appreciate the question. I would say at the core, the -- sort of the negative element is that most companies are still in a very acute phase as it pertains to dealing with this supply chain disruption. So, engaging more broad transformational supply chain design and planning engagements hasn't been as fast as we would like.

Having said that -- having said that, we're seeing incredible buildup in the pipeline of that area. We're seeing the deal sizes of -- within supply chain design and planning to grow even from a lagging indicator perspective. And we feel really bullish about what's possible there in this kind of multiyear journey to get to one comprehensive suite that we have this vision lock with our customers around. So, boding very well for us, when you look at this in a kind of mid- to long-term arc rather than a short-term kind of add-on quick growth kind of arc.

Operator

We have a question from Peter Levine.

Peter Levine -- Evercore ISI -- Analyst

OK. Great. Thanks. Congrats on a good quarter.

Rob, I mean, obviously, the climate -- talked about fundamentals in the environment of playing in your favor, obviously with the tech you provide. But is there a change in tone on your longer-term outlook of sustaining organic 25% growth? Like, can we see that long-term growth target perhaps come down near term and offset with higher margins, cash flow? Allow me to squeeze in a second. What are your hiring plans for the year, specifically within sales? Thanks.

Rob Bernshteyn -- Chief Executive Officer

Well, look, as Tony mentioned, when we think about hiring and then we think about -- not just sales, when we think about hiring sales head count, we think about investment in sales training and enablement, when we think about discretionary marketing investments and how to place those, that is a quarterly planning process for us. We always want to be not too far ahead and not too far behind. We want to make sure we're very thoughtful in the way we manage our own business spending, Peter. But, as you could tell from the tone of both our comments, what we're seeing in the market is one that bodes well for us in terms of wanting to be a little bit ahead of the curve because it's returning results for us.

Having said that, it's dynamic out there, and we're prudent executives that are going to be very, very thoughtful with the money that we have to spend against the opportunity. And we'll make those calls each and every quarter.

Peter Levine -- Evercore ISI -- Analyst

Thank you.

Operator

We have a question from Gabriela Borges. Your line is open.

Gabriela Borges -- Goldman Sachs -- Analyst

Good afternoon. Thanks for taking the question. Tony, I'm hoping you can give us a little more detail on what you're seeing in the business with the return to office and particularly travel and expense volumes coming back. I think in the past, you've given us a little bit of commentary around the portion of the business that is tied directly to T&E expense management.

Maybe just a little more detail there. Are you seeing a recovery in that business? How much could it contribute to your growth in the year?

Rob Bernshteyn -- Chief Executive Officer

Gabriela, maybe -- this is Rob. Maybe I'll start. So interestingly, when we look at our business spend index and look at the data there, it's showing a pretty steady increase in travel. And obviously, we've seen it ourselves, which is a wonderful thing to see in our own company.

We talk to agencies that we have as partners. They expect to see a return to pre-pandemic levels by 2024. Obviously, they're not fortune tellers, but that's kind of the consensus of what we're hearing out there. And that is incredibly good timing for us to have released our own travel booking solution, which we've been working on now for roughly a year or so, and that is just incredibly usable product that is in its early stages.

It will begin its journey in the mid-market, primarily in the U.S., and we think it could be a really promising growth vector for us as travel continues to emerge.

Tony Tiscornia -- Chief Financial Officer

Yes. And thanks, Gabriela, for the question. As Rob noted, we're very excited about our positioning as travel begins to reemerge from COVID. I'd also point out with respect to our spend under management figures, which are roughly $1 trillion running through our core on a trailing 12-month basis, that the large majority of that is from POs and invoices.

And there's a small percentage in there, very, very small, that's directly related to T&E. So, we have hundreds of customers using our T&E solution, and we're excited about the go-forward.

Gabriela Borges -- Goldman Sachs -- Analyst

Thank you.

Operator

We have a question from Terry Tillman. Your line is open.

Terry Tillman -- Truist Securities -- Analyst

Yes. Thanks for taking my question. It's a two-part question. First, for Rob, it's going to be about vendor consolidation.

We're hearing a lot from our enterprise software companies where because of their platform capabilities, they're seeing bigger deals, though, as they can displace point solutions. So, I'm curious on these larger enterprise deals, is the ticket size actually increasing still? And then for Tony, last quarter, you did, I think, give some perspective on current RPO at about 33% growth. I know the total RPO was similar to last quarter, 35%, but anything on the current RPO?

Rob Bernshteyn -- Chief Executive Officer

Thanks, Terry. Well, look, I mean, the beauty of our deal size -- the positive on our deal size is that virtually every quarter, as I've shared in the past, they've continued to grow and 53 quarters of growth in deal size. The negative side of that is given the incredible value we're delivering to our customers that's measurable, that visible, we'd like to see that grow even faster, right? So there's two sides to that, but generally quite healthy, generally quite healthy. And in many cases, yes, displacing smaller point solutions along the way.

It's all about getting that vision lock with the prospect around comprehensive business spend management, showcasing for them references in their industry in which -- in cases where we have literally hundreds in every industry, being the platform and the partner that's highest likelihood to help them succeed and lowest likelihood of failure. And in all those areas, we feel really good. So, that's how it's faring for us.

Tony Tiscornia -- Chief Financial Officer

And thanks, Terry. As you pointed out, our total RPO growth year-over-year was 35%. Our CRPO growth year-over-year was similar. It was around 35%.

We actually manage -- we don't manage our business by CRPO. It's more of a metric that is driven by the results. We actually manage our business for subscription billings. So, going forward, that's what we're going to focus on.

But CRPO was around 35% for Q1.

Terry Tillman -- Truist Securities -- Analyst

All right. Thank you.

Operator

We have a question from Michael Turrin. Your line is open.

Michael Turrin -- Wells Fargo Securities -- Analyst

Hey there. Thanks. Good afternoon. Appreciate you taking the question.

Tony, you mentioned the move to emphasizing subscription billings. Makes sense given some of the moving piece of the model. You mentioned FX. How should we think about the impacts of the conversion of supply chain revenue from license subscription on that metric? I know you mentioned $5 million less on professional services.

But is there anything you can add to help us like-for-like compare license versus subscription pricing? And would you expect the seasonal profile of subscription billings to play through similar to prior years, just with a much heavier Q4 weighting? Thank you.

Tony Tiscornia -- Chief Financial Officer

Sure. Michael, we definitely benefited in fiscal '22 from being very successful with the conversion of legacy supply chain licenses to subscription and also from rebilling customers at 100% for the deferred revenue components that came over at a 50% haircut. However, as we look forward, we're confident in mid-20s subscription calculated billings and mid-20s subscription revenue growth.

Operator

Thank you. We have a question from Joseph Vafi. Your line is open.

Joe Vafi -- Canaccord Genuity

Hey, guys. Good afternoon. Thanks for taking my question. I thought I'd just follow up a little bit on some of the previous questions on enterprise versus mid-market and also then drill down on some of your comments on the Pay module.

I know the attach rate in mid-market, I know was quite a bit higher than in enterprise. And sometimes, those are more transformational. But are you seeing more kind of entrenched AP players or AP players that have -- where the enterprises have already embraced them and perhaps the mid-market is still a little bit more greenfield or what you're seeing exactly on the Pay module in those two markets? Thanks.

Rob Bernshteyn -- Chief Executive Officer

Thanks, Joe. Well, certainly, the mid-market is generally more greenfield as it pertains to every one of our modules, but we continue to push upmarket with pay capabilities not only in virtual cards but in digital payments. And we're getting more and more functionality built into the offering that makes it something that large and larger enterprises can leverage. I will tell you, Joe, early enterprise adopters should be using the platform in the coming two to three quarters, which should drive much more transaction volume and should really bode well for us in terms of building up a revenue -- a reference base rather and being able to go wider and wider with the solution.

So, we're feeling really good about the progress we're making there. It's not a one-, two- or three-quarter kind of story, obviously. It's a multiyear journey, but we're really into that journey now. And as we shared, I think, I guess it was Analyst Day 1.5-year ago or so, we're in this accelerate phase now where we're making it happen.

Operator

We have a question from Ryan MacDonald. Your line is open.

Ryan MacDonald -- Needham and Company -- Analyst

Congrats. Nice quarter. You talked about the Inspire in the U.S. and internationally.

Just curious, as you're now two months beyond the event and [inaudible] conversion of that pipeline is flowing through from an in-person event as opposed to some of the virtual events from prior years? Thanks.

Rob Bernshteyn -- Chief Executive Officer

Sure, Ryan. You're breaking up a little bit there, but I think at the core of your question was how we feel about pipeline, particularly coming out of these in-person events. And look, I can tell you, proudly, we again have the largest pipeline we've ever had as a company. For certain, the movement of that pipeline from early stage through to close is something where we're strongly focused on.

We've continued to scale our sales capacity to be able to move that pipeline from early stages through to close. And my instinct, if I could be so bold, is that the pipeline that is touched physically, particularly in the enterprise, tends to move a bit quicker than purely through Zoom or virtually. But that, of course, remains to be seen. And we want to be very prudent with how we manage our expectations for everyone involved, especially -- and especially how we make our investments quarter in, quarter out.

Operator

We have a question from Taylor McGinnis. Your line is open.

Taylor McGinnis -- UBS -- Analyst

Yes. Hi, thanks for taking my question. Just looking at 1Q. So, if we adjust total billings growth for the early renewal, it looks like the upside was a little bit softer than what we've seen in the past.

And so, I appreciate the shift to subscription billings. But just in that quarter, was there anything else aside from some of the professional services headwinds that you'd call out? And then, as a second part to this question, just when we look into 2Q, the guide for subscription revenue and billings looks pretty strong, just given that it looks like 2Q has the toughest comp and some of the macro commentary you called out. So, is there like one or two drivers, whether that's large deal activity returning or some upsells returning, that you would point to, to help us bridge some of those comments? Thanks.

Tony Tiscornia -- Chief Financial Officer

Thanks, Taylor. So with respect to total calculated billings, first of all, as everyone knows, the U.S. dollar has been strengthening meaningfully against some of the foreign currencies, including the euro. And a lot of that occurred very acutely in April, which was the very end of our quarter.

So the first thing you have to do is add back a couple of points for constant currency that we didn't necessarily anticipate. And the second thing is on the services and license transition for supply chain. Honestly, it's going faster than we even originally expected. And really, this is to the benefit of our customers and our subscription business.

We have more trained partners that are ready. So, if you add back those two things, you get closer to mid-20s for total calculated billings.

Operator

Thank you. And our last question comes from Robert Simmons. Your line is open.

Robert Simmons -- D.A. Davidson -- Analyst

Hey. Thanks for taking the question. [inaudible]

Rob Bernshteyn -- Chief Executive Officer

Robert, if you're speaking, we can't hear you. Operator?

Robert Simmons -- D.A. Davidson -- Analyst

Sorry. Can you hear me now?

Operator

Go ahead, please.

Robert Simmons -- D.A. Davidson -- Analyst

Sorry about that. Thanks for taking the question. I was wondering if you could update us on the progress that you're making on getting more involved on the direct side of the equation. I know that can be a gray area at times, but just can you kind of help there would be appreciated.

Rob Bernshteyn -- Chief Executive Officer

Sure. You're referring to direct spend that our customers process to the platform, right?

Robert Simmons -- D.A. Davidson -- Analyst

Yes, exactly.

Rob Bernshteyn -- Chief Executive Officer

Yes. Sure, sure. Well, so look, first of all, it should be noted that of the $3.6 trillion or so that's run through our platform cumulatively, a significant portion of that is in fact direct spend and has been growing in proportionality for years. And we've made significant strides in helping our customers manage inventory for their spend, help them manage complex strategic sourcing as it pertains to their expense, now over the last few quarters, helped them in their supply chain design and planning for direct spend.

So for us, we're quite agnostic in terms of how we engage with our customers. We start from the indirect, the longest of the long tail, the most complex supply chain and direct spend requirements that they have and find ways to bring them into a modern cloud platform that drives value for them. So, it's boding quite well for us.

Operator

And we have no further questions in queue at this time.

Steven Horwitz -- Vice President, Investor Relations

Thank you, everyone, and we look forward to speaking to you next quarter. Thanks.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Steven Horwitz -- Vice President, Investor Relations

Rob Bernshteyn -- Chief Executive Officer

Tony Tiscornia -- Chief Financial Officer

Matt VanVliet -- BTIG -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Alex Zukin -- Wolfe Research -- Analyst

Siti Panigrahi -- Mizuho Securities -- Analyst

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

Brian Peterson -- Raymond James -- Analyst

Peter Levine -- Evercore ISI -- Analyst

Gabriela Borges -- Goldman Sachs -- Analyst

Terry Tillman -- Truist Securities -- Analyst

Michael Turrin -- Wells Fargo Securities -- Analyst

Joe Vafi -- Canaccord Genuity

Ryan MacDonald -- Needham and Company -- Analyst

Taylor McGinnis -- UBS -- Analyst

Robert Simmons -- D.A. Davidson -- Analyst

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