Overall, the company put forward another very solid performance during the quarter as it added a number of new, prominent customers like Air Methods, Emerson Electric (EMR), Randstad, Pacific Life Insurance, and Prudential Asia. Also, while COUP continued to invest aggressively in its business through acquisitions and head-count expansion, its gross margin still came in at 72.5%, ahead of its 71-72% guidance.
As we discuss in more detail below, COUP is capitalizing on the fact that many companies, regardless of industry and size, are still using outdated methods and technology for managing and tracking expenses. With only 20-30% of companies already using an IT platform to manage expenses, the total addressable market remains enormous. Furthermore, COUP has carved out a niche in this space, establishing itself as a market leader.
The company's mixed guidance, however, is a divergence from its recent performance. Looking back at the past three quarterly reports, COUP has provided upside revenue and EPS guidance on each occasion. This time, though, it guided for 1Q19 EPS of ($0.06)-($0.03), below the $0.02 consensus, and for FY19 EPS of $0.04-$0.10 compared to the $0.23 expectation. Its revenue outlook for both periods was still above estimates at $73.5-$74.0 mln and $325-$327 mln.
The good news, though, is that the mixed outlook isn't due to an anticipated change in market conditions -- as evidenced by the solid revenue forecast. Rather, COUP is expecting its Q1 margins to be negatively impacted by expenses related to its Q4 acquisition of Hiperos, a third-party risk management provider. Specifically, the company sees non-GAAP gross margin dipping to about 70% compared to 72.5% in 4Q18, which will drive its profitability lower for the quarter.
While margins and operating income will take a hit in Q1, billings and free cash flow shouldn't be impacted. The company projects billings growth of 38% and free cash flow of about $15 mln. Additionally, COUP sees margins rebounding after this dip in Q1, guiding for FY19 non-GAAP gross margin of 71-72%.
So, while the mixed guidance doesn't look too great on the surface, the fact that it's related to some one-time expenses due to an acquisition integration, and the fact that demand outlook remains quite strong, is reassuring. That said, the mixed outlook, combined with the stock's 65% run from late December, is causing some weakness in the stock this morning.
Circling back to its acquisition, on December 10, COUP announced that it had bought Hiperos, previously a division of Opus. The acquisition provides businesses with the technology needed to extensively evaluate the risks of their supplier base to further protect their brands and financial health. COUP didn't provide any financial details for the transaction in the press release, but management is enthusiastic about the acquisition. During the call last night, management commented that they see the area of third-party risk and compliance as a growing initiative that has also been addressed inefficiently.
From an organic perspective, COUP also continues to tack new features and products onto its platform. One newer area in particular on which COUP is focusing is community intelligence, which applies AI and analytics across an extensive community and flags risky suppliers that businesses conduct significant spend with. This product, called Risk Aware, goes hand-in-hand with the Hiperos acquisition; the combination of the two help companies make real-time decisions that minimize supply chain risk. COUP commented that it continues to see strong traction for its community intelligence offerings.
To conclude, COUP's quarterly results demonstrate that business remains robust, as revenue growth rates continue to hover in the 40-45% range. COUP also still has plenty of runway for growth ahead. However, investors have become accustomed to "beat and raises" from COUP, so its downside EPS guidance likely caught some investors off-guard. And with many investors sitting on substantial gains from the sky-rocket move higher over the past couple of months, the stage was set for a "sell-the-news" profit-taking move this morning. However, the downside EPS guidance is due to some non-recurring expenses related to an acquisition. Beyond that, COUP expects business to resume as normal once that integration is complete.