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Despite the Current Macro Headwinds, Enterprise Spend Remains High

In light of the current inflation fueled market volatility which essentially have placed markets in bear market territory, thanks to the selloff since last Friday (June 10) and today’s significant follow-up decline, we have the S&P with a decline of -21.3% YTD, while the Nasdaq is posting a -30.9% YTD return. Given that last Friday’s much anticipated US May CPI print came in at +8.6% y/y versus expectations calling for +8.3% y/y, the peak inflation theory has effectively been killed while talk at this week’s Fed meeting will be if a 75bp (not 25bp or 50bp) rate hike will be warranted for this June or July. Though strained supply chains and waning demand have certain sectors reeling, within the chaos one can always find opportunity. From the hard hit tech sector, value tech (aka quality tech) has consistently performed well as most recently displayed by Oracle’s (ORCL) solid fiscal Q4 results which as announced on June 13, topped both the top line (revenues of $11.84B vs consensus of $11.66B) and bottom line (adjusted earnings of $1.54 vs consensus of $1.38). Cloud was the growth engine once again with significant momentum in NetSuite and Fusion. One key takeaway from Oracle’s quarter is that enterprise spend remains healthy while themes such as cloud migration and digital transformation remain as important as ever. These themes are critical to the longer term business viability and are much less susceptible to the current macro headwinds or to any seasonality.

Building on this theme, positive quarterly earnings were also seen earlier in June from Coupa Software (COUP) which reported fiscal Q1 revenues of $196M vs consensus of $189M and adjusted earnings of $0.07 vs consensus of $0.05. Gross margins amounted to 73.8% compared to expectations calling for 70.9%. Guidance for FY/2023 was set higher at a revenue midpoint of $840M, representing 16% y/y growth while Q2 expected billings of $220M represents +13 y/y growth. EPS was also increased to between $0.07-$0.10 compared to consensus expectations seeing $0.05. In the very same vertical, ServiceNow (NOW) also reported a strong Q1 with total revenues of $1.722B vs consensus of $1.700B and earnings of $1.73 vs consensus of $1.70. Guidance was reported with a midpoint for subscription revenue at $1.673B representing 26% y/y growth. Longer term, revenue targets of $11.0B+ is seen for FY/2024, increasing to $16.0B+ by FY/2026.

When it comes to cloud based business spend management software (payment, procurement, supply chain management and analytics), we believe both of the above mentioned companies will continue to benefit from solid enterprise spend and an ever increasing need for workplace automation. All of this while also increasing both product and cross selling opportunities. Once again, with a longer term outlook to navigate through the current volatility, we feel that Coupa’s relative underperformance (-65.0% YTD) to the Nasdaq Index is unjustified given its current profitability, strong customer retention rate, solid FCF, track record for topping expectations and achievable revenue growth targets.


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