Lululemon Athletica Inc. (LULU) CEO Calvin McDonald on Q2 2020 Results – Earnings Call Transcript


Lululemon Athletica Inc. (NASDAQ:LULU) Q2 2020 Earnings Conference Call September 8, 2020 4:30 PM ET

Company Participants

Howard Tubin – Vice President, Investor Relations

Calvin McDonald – Chief Executive Officer

Meghan Frank – Senior Vice President, Financial Planning and Analysis

Alex Grieve – Vice President and Controller

Conference Call Participants

Lorraine Hutchinson – Bank of America

Mark Altschwager – Baird

Matt McClintock – Raymond James

Adrienne Yih – Barclays

Ike Boruchow – Wells Fargo

Alexandra Walvis – Goldman Sachs

Omar Saad – Evercore

Matthew Boss – JPMorgan

Operator

Thank you for standing by. This is the conference operator. Welcome to the Lululemon Athletica Inc. Second Quarter 2020 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for Lululemon Athletica. Please go ahead.

Howard Tubin

Thank you and good afternoon. Welcome to Lululemon’s second quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; Meghan Frank, SVP Financial Planning and Analysis; and Alex Grieve, VP, Controller.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management’s current forecast of certain aspects of Lululemon’s future. These statements are based on current information, which we have assessed which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today’s earnings press release. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com.

Before we begin the call, I would like to remind investors to visit our investor site where you will find a summary of our key financial and operating statistics for the second quarter as well as our quarterly infrograph. Today’s call is scheduled for 1 hour. So please limit yourself to one question at a time to give others the opportunity to have their questions addressed.

And now, I would like to turn the call over to Calvin.

Calvin McDonald

Thank you, Howard. I am excited to be here with you today to provide an update on our performance for the second quarter, share our learnings as we continue to adapt to and navigate the uncertain COVID-19 environment and highlight trends we are seeing in the business as we look forward to the back half of the year. The results we are sharing today demonstrate the strength of the Lululemon brand as we face these unexpected times and see the future of retail accelerate through an expansion of e-commerce and digital sweat offerings. Our products built with technical innovation and performance fabrics is ideal for enabling the work from home and versatile lifestyle that has grown exponentially in the COVID-19 world. Building upon these components, our acquisition of at-home fitness innovator, MIRROR and our continued expansion globally demonstrates our ability to navigate the near-term while planning for the long-term growth.

Today, I am joined by Meghan Frank, our SVP of Financial Planning and Analysis, who continues to be a supportive partner as she works with me in the team on strategic and operational finance, while our CFO search is ongoing. Alex Grieve, our VP and Controller is also on the call today and be available to answer your questions during the Q&A portion.

Before I detail our results, I would like to speak for a moment about the importance of diversity inclusion at Lululemon. As I mentioned on our last call, we are committed to increasing our investment in education, behavior change and diverse representation within our organization. The Black Lives Matter movement has ignited Lululemon and our collective serving as a powerful catalyst to critically examine our culture and practices. Back in June, we created idea, a commitment to create real and lasting change through inclusion, diversity, equity and action. As a company, we are focused on meaningful transformation, shifting our mindsets and behaviors and living into our core value of inclusion everyday. I look forward to sharing our progress on this going forward as the diversity of our workforce truly begins to reflect the global communities in which we operate.

Let me turn now to our business performance in the second quarter, which exceeded our expectations. Total revenue increased 2%. Consistent with quarter one, we are not reporting same-store sales due to the significant number of stores that remain closed during the beginning of the quarter. Our e-commerce business continued to accelerate with comps in quarter two increasing 157%. Gross margin declined 80 basis points and our product margin was flat with last year. Adjusted earnings per share were $0.74 versus $0.96 last year and our financial position remains strong as we ended the quarter with $1.2 billion in total liquidity.

As we continue to operate and move through the COVID-19 environment, we are seeing a shift in behavior in terms of working from home, sweating from home and the increased importance of living an active and healthy lifestyle. These trends play to our strengths and setup an opportunity for us to continue to innovate and gain market share. We are learning how our guests are changing their behaviors and we are adapting engaging with them in new ways. We remain committed to our Power of Three growth plan, including the doubling of men’s, doubling of e-commerce and quadrupling international by 2023. But we also recognize that 2020 is likely an inflection point for retail and for Lululemon, with certain changes in guest behaviors likely to endure in the post COVID-19 world. We believe Lululemon is uniquely positioned to engage with our guests when, where and how they want based on the strength of our brand, the strength of our operating model and the investments we have been making across the business.

One of our key strengths is our omni operating model. For the last several years, we have been investing in our ecosystem to ensure we have the capabilities to enable a seamless and enjoyable experience whether guests want to engage with us virtually in stores or in the community. What we are learning now during the COVID-19 environment is that omni means much more to our guests and simply enabling purchase transactions across our channels. While our recent investments in transactional omni capabilities are clearly paying off as evidenced by our recent results, we have begun to view other areas of our business, including sweat and events through an omni lens.

Let me now share some of the details. As our stores continue to recover, our e-commerce business has accelerated from a 41% comp in quarter four of last year to 157% comp in the current quarter. Similar to quarter one, we have seen a healthy mix of new guests, existing e-commerce guests and historically retail-only guests now shopping with us online. In order to support growth in the business, capture a potential further increase in demand in quarter four and ensure our guests continue to receive the highest level of service we have accelerated investments this year within our e-commerce channel. These investments include developing site enhancements, building our transactional omni functionality and increasing fulfillment capabilities. These further enhancements were on our roadmap for the next 2 years and given our ecommerce business has currently accelerated beyond our expectations we prioritize and pull forward these investments.

We are also continuing to grow our brand and engage with our guests across our international markets. In China, we are experiencing a strong rebound in store with same-store sales up over 30%, coupled with strengthen in e-commerce, which grew over 130% in quarter two and in Europe, a greater than 160% lift in e-commerce is driving our business as guests are engaging with us more online than ever. When looking at store growth in our regions in quarter two, we opened 9 new locations across Asia and Europe, including our 100th location in APAC, an exciting milestone for our brand in this key growth market.

Let me shift now to speak about the recovery of our store business. While this period continues to be unpredictable, we currently have approximately 97% of our stores open across the globe to serve our guests. On average, our reopened stores are performing at 75% of last year’s volume. As you know, our stores are small and designed to be an efficient use of space with high levels of traffic, which results in high productivity. While these are appealing attributes, the current capacity constraints understandably limit the number of guests who can be in the store at one-time. While we are seeing traffic declines relative to last year and expect these constraints to endure at least through the end of the year, the underlying health of our brand remains strong. Guests are patiently lining up to get into our stores both physically and to our virtual tools. Our product continues to resonate well as evidenced by the strength of our e-commerce channel. And while we expect productivity for stores that we have reopened to remain consistent with the current levels for the remainder of the year, we still expect to grow our top line in quarter three and quarter four.

We continue to believe physical stores are and always will be an extremely important part of our ecosystem. From a sales standpoint, our stores are highly productive and they enable so much more than simply the purchase of apparel by our guests. Our stores are our local hub and communities across the globe, gathering spots for our ambassadors and our connection to local studios facilitate e-commerce transactions via our ship-from-store and buy online pickup in store capabilities and our portal to bring new guests into our brand, particularly men. This year, we plan to open 30 to 35 net new stores, while also accelerating our seasonal store strategy.

In quarter two, we operated just over 50 seasonal stores and we plan to increase to approximately 70 in the second half of the year. Our strategy this holiday will include seasonal stores in key centers in markets where we have existing stores to help us mitigate the current capacity constraints. That being said, we are building new and leveraging our current transactional omni capabilities to ensure a quick and seamless shopping experience for both our store and e-commerce guests. Some of our actions include, first, we have evolved our buy online, pickup in store functionality to buy online pickup by curbside. Second, we have enabled virtual waitlist so guests no longer have to wait in line and instead can be notified via text when it is their turn to enter the store. This functionality has been particularly well received. In the month of August alone, we had nearly 400,000 individual guests utilizing our virtual waitlist across nearly 280 locations, where we implemented the technology. Third, we have continued to expand the number of our Omni educators who receive special training enabling them to help guest in-store and virtually through our guest education center. And fourth, we continue to offer our digital educator and virtual concierge programs and both initiatives continue to be well received by guests. This innovation demonstrates our consistent ability to be agile and anticipate the evolving needs of our guests. We have also enabled omni sweat life capabilities to help our guests stay active both physically and digitally. Many of our ambassadors have been offering live streams on our social channels and we now offer digital content as part of our membership program in the cities where our tests are underway.

I am also excited that in August, we were able to convert our Annual SeaWheeze Half Marathon into an extremely successful virtual event, which over 23,000 people for more than 100 countries participated, including myself. We have partnered with the running app, Strava and offered a 10-K distance in addition to our half marathon. We also curated virtual training programs for both races to help runners prepare and compete at the height of their ability.

Shifting now to product innovation, our guests are now working and sweating from home more than ever and we continue to be there for them with merchandise that offers versatility and flexibility powered by the technical innovation of signs of feel. I am excited to share the ways in which we are making our assortment relevant to more of our guests. Last month, we expanded our on-the-move collection with the introduction of new pant styles for both women and men. Supported by our everyday is a workout campaign. These styles leverage our expertise in technical construction in developing technical fabrics, but they were explicitly designed for out of studio use. For women, we launched the City Sleek 5 pocket powered by our Warpstreme fabric, and for men, we rolled out the Bowline pant in our new utility TAC fabric. Initial response to these new styles has been strong. In particular, the City Sleek has exceeded expectations by a factor of two as the number one performing style in the company during the initial days of the launch and we are chasing into additional inventory to help keep up with demand. While we will always lead with performance-based apparel and technical innovations, we see continued opportunity to grow the on-the-move portion of the business for both women and men.

I am also pleased with our move toward more inclusive sizing. This is an important step forward for Lululemon and I am excited that later this month we will start to offer some of our core styles in sizes 0 to 20 and this is just the beginning. By the end of 2021, the majority of our women’s assortment will be available in our more inclusive size range. When looking at the men’s business overall, we saw sequential improvement relative to quarter one, although it lagged behind the growth in the women’s business. As the work-from-home and sweat-from-home environment continues, we have seen our male guests respond more enthusiastically to shorts, sweats and hoodies. Our merchant teams are chasing into these categories so we can maximize these businesses based on the current shift in demand. And our brand teams are focused on continuing to raise awareness among men and our dual gender line such as on-the-move provide an opportunity to grow in both the men’s and women’s business. Our opportunity within product remains in the early innings. We have only just begun to leverage our work within the signs of feel innovation platform and we have ample ways to expand our key categories run, train, yoga, and on-the-move. In addition, the Lululemon brand is positioned well to take advantage of the shifts we are seeing in the marketplace towards apparel that provides versatility, comfort and technical innovation.

Before shifting to our outlook, let me update you on two of our omni guest initiatives, MIRROR and Membership. MIRROR is a further example of how we are considering and evolving new aspects of our business through an omni lens. As you know, we closed on the MIRROR transaction in early July and I couldn’t be more excited with the potential MIRROR brings to Lululemon and the opportunities Lululemon brings to MIRROR. As I stated, when we announced the acquisition, MIRROR is a standalone revenue generating company and their management team will continue to operate the business from their offices in New York. There is no need for heavy integration work and we have begun the process of bringing them into the Lululemon family so that we benefit from our collective strengths. We are on track to begin offering the MIRROR in 10 to 15 Lululemon stores in the United States by early quarter four when we will also begin leveraging our digital channels to help build the brand awareness.

From a financial standpoint, we continue to believe that MIRROR will be modestly dilutive to earnings this year. We plan to ramp up marketing and advertising spend in the second half of the year to fuel MIRROR’s momentum during the holiday season and into 2021. The initial work we are doing with MIRROR during the upcoming fall season will set the stage for next year when we expect to be more aggressively leveraging the power of the Lululemon ecosystem to grow the MIRROR business. Meghan will provide you with more details in a moment.

Shifting to Membership, I am excited to announce we are continuing to test a program in Edmonton, Chicago and Denver and starting this week we will also bring the program to our guests in Toronto for the first time. The membership program continues to celebrate community connection and provides a range of offering such as special product, dedicated online sweat classes and inspiring guest speakers to extend the Lululemon experience. With COVID-19 in mind, I am proud of how our teams have evolved to a virtual event format with plans to return to studio classes and physical gatherings once safe to do so. As we continue to test and learn through membership and integrate MIRROR into the Lululemon family, we are gaining valuable insights on guest behavior that can help us further improve our offering and enhance the ability of our guests to fully experience the sweat life.

Let me now share our thoughts on how we are approaching the second half of the year. Meghan will share some specifics regarding our financial outlook, but I wanted to provide you with our planning framework for the fall season. Our starting point is that the environment remains uncertain. COVID is not yet contained in many of the markets where we operate and while we expect the recovery to advance, we continue to plan for multiple scenarios this fall and particularly for the holiday season. We have pulled forward several IT investments related to our e-commerce business, increased our DC and fulfillment capabilities, and are continuing to grow the ranks of our omni educators to ensure our guests receive the service and experience they are accustomed to should our e-commerce business spike even more in quarter four. We continue to work with our vendors to ensure the proper timing of upcoming merchandise flows and can pull forward deliveries of select styles should unanticipated demand develop and we continue to protect our downside by tightly managing expenses and the outlay of capital.

Let me now turn it over to Meghan.

Meghan Frank

Thanks, Calvin. I will start by providing details on our Q2 performance and although we are not providing specific guidance, I will offer some color on outlook for the remainder of the year. I will also discuss specifics on our balance sheet, including our cash position, liquidity and inventories. Please note that the adjusted Q2 financial metrics I will share include the operating results of MIRROR beginning on July 7, the date the transaction closed, but exclude $11.5 million of pre-tax acquisition related costs. You can refer to our earnings release and Form 10-Q for more information and reconciliations to our GAAP metrics.

For Q2, total net revenue increased 2% to $903 million. And while we are still in the COVID-19 recovery phase, this was above our expectations of high single-digits decline. In our digital channel, we posted a 157% constant dollar comp increase on top of the 31% increase last year. Given the significant number of temporary store closures in Q2, we do not know store comp is a meaningful metric to evaluate performance. As we evaluate our top line performance, we will continue to be focused on total revenue, our digital business trends and open store recovery trends, which I will offer some additional color on as we move into our outlook. Square footage increased 15% versus last year and driven by the addition of 46 net new stores since Q2 of 2019. During the quarter, we opened 17 new stores 8 in North America, 4 in Mainland China, 3 in other markets across Asia and 2 in Europe. We also completed two planned optimizations. In terms of our digital channel, e-com contributed approximately $554 million of top line or 61% of total revenue. A constant dollar e-com comps exceeded our expectations increasing 157%. Excluding the impact of our online warehouse sale, e-com comps grew 137%, while we were pleased with our online warehouse sale results, I did want to highlight that overall for the quarter, we saw strength and full price sales as reflected on our flat product margin results year-over-year.

In terms of e-com drivers, we continue to see strength and traffic, and conversion which increased over 90% and 45%, respectively. Traffic was driven by channel shift coupled with investments in digital marketing, and conversion continues to benefit from guests response to our product, and the investments we have made in our global digital platforms to improve guest experience. Those profits for the second quarter was $489.5 million, or 54.2% of net revenue compared to 55% of net revenue in Q2 2019. The gross margin decline of 80 basis points was driven by 130 basis points of de-leverage on DC related costs, which was offset by 40 basis points of product team costs leverage and 30 basis points of occupancy and depreciation leverage. Product margin was flat year-over-year inclusive of the online warehouse sale, as lower product costs and product mix offset higher markdowns. They also experienced a 20 basis point negative impact from foreign exchange.

Moving to SG&A, our approach in the current environment has been to protect against downside while also ensuring we continue to invest in our long-term growth opportunities. SG&A expenses for approximately $353 million or 39.1% of net revenue compared to 36% of net revenue in Q2 2019. The deleverage in the quarter resulted predominantly from lower revenues due to COVID-19 related store closures and our commitment to continue to pay our employees through this period of disruption. We also associated with COVID-related supplies and PPE, de-leverage and depreciation and de-leveraged from here. These are partially offset by expense reductions relative to our original budget coupled with a recognition of some government wage subsidies in the quarter.

Adjusted operating income for the quarter was approximately $136 million or 15% of net revenue compared to 19% of net revenue in Q2 2019. Adjusted tax expense for the quarter was $39.2 million or 28.9% of pretax earnings, compared to an effective tax rate of 26.4% a year ago. The increase in our adjusted effective tax rate compared to last year relates primarily to changes and guidance associated with certain U.S. tax reform measures, which reduced the effective tax rate in the second quarter of fiscal 2019. Adjusted net income for the quarter was $96.3 million or $0.74 per diluted share, compared to earnings per diluted share of $0.96 in Q2 of 2019. Capital expenditures were approximately $53 million for the quarter, compared to approximately $67 million in the second quarter last year. Q2 spend relates primarily to store capital for new locations, relocations and renovations technology spent to support our business growth, digital channel and analytics capabilities and supply chain investments.

Turning to our balance sheet highlights, we ended the quarter of $1.2 billion of total liquidity. We have had $523 million in cash and cash equivalents and approximately $700 million of available capacity under our committed revolving credit facilities Inventory grew 36% versus last year with $673 million at the end of Q2. We now believe Q1 was the high point for year-over-year inventory increases for 2020. We expect levels in the second half to moderate further and increase in a 20% to 30% range. Our repurchase program remains on pause as part of our COVID-19 cash management strategy. They have approximately $264 million remaining on our current $500 million purchase plan.

Let me shift now to current trends and share with you some color on how we are looking at the remainder of the year. Due to the dynamic nature of the macro environment, we are not returning to our historical cadence to providing specific guidance for the current quarter and fiscal year. We continue to plan for a number of scenarios in order to ensure we have the appropriate flexibility to manage the business through a range of second half outcomes. These include scenarios around store trend recovery and let us continue COVID-19 impacts across the globe.

We are focused on and benefiting from leveraging our omni-model and digital strength as we navigate this uncertainty. We have continued to see guests shift between channels, which has driven outsized growth on our e-commerce sites. As Calvin mentioned, we have pulled forward investments in our digital channel to ensure our guests continue to receive an elevated experience when shopping our sites and to maximize second half and holiday business. In terms of stores, we currently have approximately 97% of our stores open across the globe with only a handful of closures in North America and Australia. All of our distribution centers are up and running. The average productivity of our reopened service is approximately 75% of last year’s volume.

As we continue to prioritize our people in our guests, we are still limiting capacity and operating on reduced hours in many locations. We believe these restrictions coupled with our relatively small store size and high productivity comparisons continue to impact guest traffic. When looking at new store openings for 2020, we expect to open 30 to 35 net new stores with 15 net new stores open through the end of Q2. These openings will contribute to a low double-digit increase in square footage for the year. In addition, we are maintaining our seasonal store strategy. We operate at just over 50 seasonal stores in Q2 and plan to operate approximately 70 in the second half of the year.

Looking forward for the business overall, we continue to anticipate the trend in total revenue growth to improve sequentially throughout the remainder of the year. Inclusive of MIRROR in Q3, we expect total revenues to increase in the mid to high single-digit range with Q4 increasing in the high single to low double-digit range. It’s important to note that our view on total revenue growth in the back half assumes no improvement to the 75% productivity levels we are currently experiencing in reopened stores. In our digital channels, we expect revenue to remain strong and well above our pre-COVID growth rates of 30% to 40%, but moderate in the second half relative to Q2 with the majority of stores open.

And finally, we are now assuming that MIRROR will generate in excess of $150 million in revenue for the full year 2020. As from our initial expectation, which was revenue in excess of $100 million, we made the strategic decision to increase marketing spend for MIRROR in the second half to take advantage of current trends towards spending from home and capitalize on the opportunity to drive business during the holiday season and into next year. The increased marketing spend, which will help acquire new guests in the near-term and should also produce a return over the longer term through increased product and brand awareness will contribute to modest earnings dilution reflected in our outlook. For gross margin, we continue to expect the second half of the year to be better than the first half with the decline relative to last year in Q3, followed by flat to modestly up gross margin in Q4. We remain on track to deliver savings of $40 million in non-merchandise expenses included with a gross margin relative to our original budget.

In terms of SG&A for the full year, we expect de-leverage to continue in the back half as we prudently invest in select growth initiatives, particularly digital and store traffic likely remains below last year’s levels. In addition, while MIRROR’s dilution on our P&L would be modest for the year overall, the bulk of this will be realized within SG&A contributing to de-leverage in Q3 and Q4. We remain on track to realize $130 million in gross SG&A savings by the end of the year relative to our original budget.

With regard to earnings per share compared to a year ago, if we look at just the Lululemon business, we expect an adjusted EPS decline in the 10% to 15% range in Q3 and adjusted EPS to grow modestly in Q4. When looking at our combined results for Lululemon and MIRROR, we expect an adjusted EPS decline in the 15% to 20% range in Q3 and a modest decline in Q4. For the full year 2020, excluding acquisition costs, we continue to expect MIRROR to be modestly dilutive at less than 5%. In terms of capital spending, we expect CapEx for 2020 to be below our original budget and generally in line with last year. We are prioritizing spending on digital and omni initiatives and fulfillment capabilities, while pulling back somewhat on new store openings and remodels.

Before handing it back to Calvin, I would like to reiterate that we are cautiously optimistic with regard to the holiday season and we continue to plan the business based on multiple performance scenarios. Our guidance assumes store productivity remains consistent with the levels we have seen recently and we experienced ongoing strength in our e-commerce business. Longer term, we remain committed to our power free growth plan and we are excited with the opportunities to remain in front of us.

And now back to Calvin for some closing remarks.

Calvin McDonald

Thank you, Meghan. And I want to take this moment to also thank all of the Lululemon employees around the world to continue to be agile, nimble and creative as we meet and exceed the expectations of our guests during this time. I am proud of the resiliency and flexibility of the business that allows us to deliver results like these that demonstrates both our near-term and long-term strength and I continue to be impressed by how our leadership team is is showing up both as they lead their teams and strategically co-create our future. We all feel that Lululemon is becoming stronger quarter by quarter. And it’s a testament to our people, our ability to innovate, and our enduring connection with our guests. We love to serve. We are now pleased to take your questions. Operator, we can now open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Lorraine Hutchinson with Bank of America. Please go ahead.

Lorraine Hutchinson

Thanks. Good afternoon, I wanted to ask about how you are thinking about managing any holiday volume challenges, whether store capacity constraints or higher shipping costs. It sounds like we will be opening some seasonal stores to help with that. Are there any other plans in place to try to ensure that you can successfully manage through this tough 4Q environment?

Calvin McDonald

Yes, hello, it’s Calvin. Absolutely we I break it into a couple of key strategic buckets that we have been working on early on. The first was pulling forward our investments to ensure that the infrastructure both our supply chain, as well as our websites around the world, were ready for the type of volume that we are anticipating. We have run a variety of scenarios if you think obviously fourth quarter volume is the highest volume within a year. And we are seeing exponential growth on e-commerce. So we sort of applied that modeling to the back half as sort of the benchmark of what we needed to prepare for. And we pulled those investments forward to ensure a readiness on the site and the infrastructure in order to support and then we have been investing into the guest experience, call center, being one of the key areas, looking at how we can mobilize our educators to not just be able to work in the physical but as well as being able to service our guests online, both through a concierge service as well as a call center. So leaning in and ensuring that we have the infrastructure to support and the guest Education Center to support are two of the big important factors and that is anticipating our online volume in a physical space there is a variety of initiatives that we keep innovating to take away the operating constraints, that’s the reality of operating through COVID. We have all seen the lines at our stores we know that guests are, willing and are waiting to queue up. And our challenge is, how do we get more into the store and transact at a quicker rate. So variety of innovations have gone into that from the virtual line lineup that I share, shared as well as how we just check guests out and service them outside of the store. And then the seasonal stores is a is a big shift as well tapping into our nimble fleet where, last year in fourth quarter, we had 51 seasonal stores This year, we are planning on 70. And in some locations, we may even be doubling up in a in a mall or a location where we have an existing store so we can pick up some of that overflow. So those things combined. We feel good that we will be ready for the volume where we need to be in maximizing the potential physical space with some of the innovation that I shared with you.

Lorraine Hutchinson

Thank you.

Operator

The next question comes from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss, your line is live. The next question comes from Mark Altschwager with Baird. Please go ahead.

Mark Altschwager

Hey good afternoon. Thanks for taking my question. On the product margin, can you walk through some of the drivers there relative to the strength that you saw in Q1? I guess specifically, I am wondering how much of an impact the warehouse sale had in the quarter and whether the plus 180 we saw in the first quarter might be a better indicator of the underlying run-rate in the business.

Meghan Frank

Yes, thanks, Mark. It’s Meghan. So, we were really pleased with the strength we saw in product margin in the quarter. As you heard, we did do an online warehouse sale, which compressed really with our stores closed, markdowns selling into one period. But when we look across the quarter, we saw some really nice strength out of full-priced selling. We are not going to offer color on product margin specifically as we move into the second half, but we are expecting gross margins in the second half the year to be better than the first half and expect a decline in Q3, returning to gross margin expansion year-over-year in Q4.

Mark Altschwager

That’s very helpful. Thank you. And then just a follow-up, thanks for all the detail on the productivity trends and digital, does it – any further help on what you are seeing quarter-to-date in each of the channels relative to what you saw in second quarter?

Meghan Frank

Yes. So we are tracking relatively in line with the top line color we have provided, which is total revenue growth in the mid to high single-digit range for the quarter.

Mark Altschwager

Thank you very much. Best of luck.

Operator

The next question comes from Matt McClintock with Raymond James. Please go ahead.

Matt McClintock

Thank you everyone. And it’s McClintock, but good job trying. Honestly, I wanted to start with just fulfillment capacity and it’s kind of a follow-up to Lorraine’s question, but I want to understand the investments that you are making in terms of fulfillment volume, your ability to handle more volume versus customer service your ability to deal with customer service with these higher levels of volume, where does that position you longer term? I understand you are getting ready for the fourth quarter, but I want to think 2 years out, 3 years out that you are already building the ability to handle volume of 5 years from now, 6 years from now or is this because you are going so fast, you are still trying to just kind of keep up with that and still add some safety room? Thanks.

Calvin McDonald

Thanks, Matt. We are definitely well ahead of the volume that we had anticipated and modeled in our 5-year growth plan that we shared last spring. And under the Power of Three and when we looked at doubling our digital business, we are definitely trending ahead of that run-rate. So, these investments that we are making this year, I would break into a number of factors, one is our distribution capability of both fulfilling stores as well as e-commerce, e-commerce orders, ensuring we have the right safety measures in place to maintain continuity of operating the DCs, which I am very proud of the work that the team did today to operate through while maintaining and putting the health and safety of our warehouse distribution, employees front and center on the website, improving this ongoing stability, the ability to take the traffic and convert and we saw traffic in quarter two increase by 91%, conversion increase by 46%. So, these combined with the volume are ahead of where we anticipated and there is just general infrastructure investments you need to make to be able to scale the business like that. Fortunately, we are predominantly cloud based now, which allows us to more easily expand both in North America and internationally. Internationally, our total business was up 37%, that’s including stores in the quarter. Every region in Europe and APAC and China grew and we saw significant growth in e-commerce. So, we are experiencing it in all markets and we are investing there in the infrastructure support that volume. We are definitely going to come out of the year ahead of where we thought we would be in the 5-year plan on a dollar perspective and we will continue to invest in as we look forward to the 23 plan and then obviously our planning beyond that prioritizing the investments. I mean, what’s centered at our strategy is an omni ecosystem and approach and digital plays a big part of that. And we are going to keep investing to ensure that we support the growth of the business and take a long-term view on it.

Matt McClintock

Thanks for that color. And then just as a follow-up, we have started noticing a lot more Lululemon instructors on MIRROR and I was just because we talked about starting to integrate the two companies a little bit, I wanted to get your thoughts on bringing your ecosystem on to MIRROR and how it’s impacting local communities? Are you seeing engagement, greater engagement levels in local communities where you have maybe local instructors teaching on MIRROR now? Thanks.

Calvin McDonald

Great, thanks. I would say, as we have alluded, it is very early. And we, we have started a partnership with MIRROR over a year ago last spring. And, in fact, through that partnership, we had some of our Lululemon ambassadors on the MIRROR platform last fall and that gave us a lot of test and learn opportunities to see how the MIRROR guest was interacting with both that Ambassador as well as the interaction of at home sweat, and that among with many other metrics, gave us the confidence and led to the excitement about making the acquisition so we look forward, we are moving forward with, the notion of a line integration, we are going to be selling in 10 to 15 stores this year, selling it on lululemon.com as it means to building awareness, and it really is set up as a test and learn and focus on 21. And as Meghan shared, even with a light integration, we are anticipating, solid improvement in their forecasts shared earlier, revenues in 150 million. And as we continue to integrate as we continue to, tap into the ambassadors in the community, and expand selling into more of our stores. We are excited about that growth opportunity center of how we are viewing our strategy moving forward, and where we feel it’s very unique versus some other players is the Omni ecosystem that is going to include both physical and digital sweat, so the Lululemon membership is rooted in physical sweat MIRROR is rooted predominantly in digital sweat and we see a relationship between the two and at the community level, so we will continue to innovate and expand into that with more to share. But that is really the unique point of our strategy and vision and MIRROR fits into it well, and will be a part of the community both digitally as well as within the physical representation of our ambassadors, our stores and others as we look to, to drive that business forward.

Matt McClintock

Thanks for those very exciting times.

Operator

The next question comes from Adrienne Yih with Barclays. Please go ahead.

Adrienne Yih

Calvin, I was wondering if you can talk about product category expansion, and the introduction of ongoing innovation newness for both the back half of this year, and then into 2021. And then Meghan, if you can just talk to us about how you have moved through inventory through the, I think there were three channels that you mentioned, or strategies last time, and how we should think about that at the end of both 3Q and 4Q? Thank you very much.

Calvin McDonald

Great, thanks. In terms of our product expansion, we have shared the four key sweat activities that we are focused on as a business, run train and yoga with on the move, being, you know, one of the key categories and we are sort of taking unique point of view is our most recent campaign, sort of picked up on which is notion life is a sport and we see a lot of growth just in how we provide head to toe options and solutions for the guests in those activities equally. We have a number of sweat activities that our loyal guests choose as either their secondary or tertiary sweat options that we equally see opportunity to expand our current assortment. And, and we are working to do that we are innovating into that. And we are excited about bringing a little, continual newness as well as continuity to the sweat activities for both our men’s business as well as our women’s business and accessories. So, there is a lot of new innovation in the pipeline. We shared the launch of our pant business this quarter with the City Sleek initiative with much more OTM planned for the back half and into next year and into these new sweat categories. So, I continue to be incredibly energized about the product pipeline, both the newness as well as the opportunity we have and what we have already declared and then the expansion of new categories that would be completely incremental for us building business, footwear in the coming years. So, I think it’s exciting to see the work that Sun and the teams doing in and around product through signs of feel and really believe we are early in what we offer in North America and then even more so internationally, so see a long runway of growth with product.

Meghan Frank

Great. In terms of inventory, we are pleased with the level of composition coming out of Q2. Our inventory was up 36% year-over-year, which was under our Q1 year-over-year balance. We have previously thought end of Q2 would be our high point and now we expect that will be Q1. So as you know, we did do an online warehouse sale during the quarter we are pleased with those results. But again, I just point back to we are also very pleased with our full price sales results. We do expect inventory to moderate in the second half of the year up 20% to 30% as we move into the third and fourth quarter and I just as again, a reminder, we do benefit from core being approximately 40% of our assortment.

Adrienne Yih

Great, thanks so much. Nice job in a tough environment.

Meghan Frank

Thank you.

Calvin McDonald

Thank you.

Operator

The next question comes from Ike Boruchow with Wells Fargo. Please go ahead.

Ike Boruchow

Hi, just two quick questions. Just back on the inventory, we understand this is the highpoint has been past and it’s going to moderate in the back half, the 20% to 30% is still pretty well above your sales trend, I am just kind of trying to understand your comfort with inventory you are carrying, if we should be on the lookout for more potential events to clear inventory in the third or fourth quarter. And then any chance you guys could explicitly breakout the MIRROR revenue contributions that you are planning in Q3-Q4? Thanks.

Meghan Frank

Yes, thanks. It’s Meghan. So I think in terms of inventory, what I would say is again, just 40% of our assortment is approximately 40% is core and we expect inventory levels to moderate through the second half of the year as we mentioned, 20% to 30% as you know that is about sales growth, but we feel comfortable with the level based on reflowing inventory and taking into consideration that core portion. We do expect gross margin in the second half of the year to improve relative to the first half and we expect again a decline in Q3 and returning to growth in Q4. And then in terms of MIRROR, we are not going to breakdown on the second half estimate, about $150 million, in excess of $150 million for the full fiscal 2020.

Ike Boruchow

Okay, thanks.

Operator

The next question comes from Alexandra Walvis with Goldman Sachs. Please go ahead.

Alexandra Walvis

Good afternoon. Thanks so much for taking the question. I had a question on the e-commerce growth. I was wondering if you could share any more color on the cadence of that growth through the quarter and indeed quarter-to-date. And also whether you might be able to share the composition of e-commerce revenue between existing customers and new to Lululemon customers? That would be really helpful.

Meghan Frank

Great. So, in terms of the e-commerce cadence, we have mentioned that we saw 125% when we were reporting Q1 at the start of the quarter. So, we did see a pickup as we move throughout Q2. And we saw 157% for the quarter and it was 137% excluding online warehouse sales. We have seen as I mentioned in line with our expectation of that year-over-year growth rate moderating as stores opened for the full period of Q3 and into the second half. We do expect e-com to be above the 30% to 40% growth rate that we experienced prior to COVID.

Alexandra Walvis

Great. Very clear. And then one more question from me, you are expanding this loyalty test to another city in Vancouver, any incremental color you can share on what you have learned from the loyalty pilots so far or anything that you are tweaking as you move into the subsequent pilot in Vancouver?

Calvin McDonald

Yes, absolutely. Thanks, Alexandra. First just to clarify the added cities Toronto that we are adding, so we are repeating in 3 of the 4 cities, repeating at Edmonton, Chicago and Denver and we tested in Austin with great results. But we elected to bring in a larger city with Toronto to test and learn so Toronto is going to be the new market. And what we continue to see in the adjustments we have made, obviously the essence of the program is rooted in connection and community with physical being a big part, the team has done a wonderful job shifting to virtual events, the sweats or speaker series, or other tutorials that guests have engaged incredibly well in that really set up a lot of interesting learning as we think forward around the program. And we will moderate as we see studios open and guests being able to physically sweat, but where we have landed is a good balance of physical sweat combined with access to product and then rooted at the notion of community and connection, $168 for the one year, and we go on making it available this week, and we are excited to see the results. And in every test city we have done, we have seen very positive response from the guests, a high loyal team engagement and intend to repeat, and it does have a positive impact on their overall purchases of Lululemon as well as recruitment of new guests. So from a guest metric standpoint, it’s very encouraging. And it is early and we are taking it through a test and learn phased approach Toronto is going to be a great new addition. COVID has been an interesting balance based on the positioning and the membership program, but I am very excited about how the guest has continued to engage in it, if anything has given us more confidence than not about the potential, and we will, test and learn through these markets with, plans to, continue to look at adding additional markets in the coming year.

Alexandra Walvis

Great. Thank you so much for all the color and all the best.

Operator

The next question comes from Omar Saad with Evercore. Please go ahead.

Omar Saad

Hi, thanks. Good afternoon. Congratulations on another great quarter. I wanted to ask a little bit more about your international results kind of compare and contrast versus your core North America market the China number was pretty impressive. Is that a good may be a contrast to compare the patterns you are seeing in those markets online and stores? Did you see experienced pent up demand there? Maybe some of the differences you would call out for the kind of consumer behavior patterns, you are seeing the guest behavior patterns you are seeing in North America and Europe as well it will be great to get that feedback? Thanks.

Calvin McDonald

Great. Thanks, Omar. I will start by just sort of keying up the North American business as we have sort of shared from Q1 to Q2, we are really pleased with the progression we saw in both Canada and the U.S. Stores performed similar in both markets. Predominantly, that’s linked to the operating constraints that we had to operate under with small stores that we are incredibly productive. And we just had challenges being able to match the same productivity numbers as the previous year. Any commerce obviously picked up a large share of that additional demand and overall the mix of the business we are very pleased with and it was a significant improvement from the Q1 performance internationally. I will start with China because it continues to just build steam and momentum from, Q1 when we had the early closings to when the stores reopened, and we are seeing incredible growth in both our e-commerce number which was up 136% in China in stores, which are up, significant, growth, as we saw through the quarter and heading into this quarter. They are benefiting from a lot of the domestic travel that is occurring. But from a brand perspective, we have opened up a number of additional doors, and they have all performed well ahead of plan. In tier two cities. We continue to see great growth and reaction to the brand and we are acquiring new guests and both channels are performing very strong, so very excited about what we continue to see as an inflection in our business in China and the momentum behind it in the growth that it’s driving, which is by far the strongest of any market that we are in to-date in this quarter. And when Europe and rest of Asia-Pacific very positive growth lead in e-commerce, e-commerce numbers similar to that in North America, which is really exciting for us, because it’s acquiring new guests and it’s resetting how high it’s high with our online business and potential as we think about assortment, think about our physical real estate strategy and entering into new markets. So, I am excited overall with the performance of our business internationally and continue to see guest acquisition increase the expansion of the brand led by China, but very strong in all markets that we are in.

Omar Saad

Great. And then a quick follow-up on MIRROR, why only 10 to 15 stores for the fourth quarter, are there capacity constraints or you just want to build it slowly? Thanks.

Calvin McDonald

Yes, it’s definitely, build it slowly and test and learn and be able to go a little bit more aggressive in ‘21 and we are going to test and learn between the balance of making it available and increasing awareness through dotcom, making it available through stores, we are in a good supply chain perspective now. Their average delivery is 7 to 10 days in terms of inventory flow obviously during early COVID, that number was expanded. They have been able to play catch up and we are sitting in a good position, but we see this as an exciting position long-term and there is good momentum already in that and we are going to add to it, but it is really test and learn with the focus on ‘21.

Omar Saad

Thanks. Best wishes.

Calvin McDonald

Thank you.

Howard Tubin

Operator, we will take one more question. Thanks.

Operator

Certainly. Our next question comes from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss

Great, thanks. We will try this again. Calvin, on the inflection that you cited for retail and for Lulu from here, can you first elaborate on investments from market share that you have accelerated during the crisis? And then also in digital, how – what’s the best way to think about the sustainability of digital channel operating margins relative to the 40% plus that you have achieved the last several years?

Calvin McDonald

Yes, I will touch on the inflection as well as how we are leaning in and how we are planning to continue to lean in. Clearly, health, wellness and functional apparel and trends in apparel have changed dramatically and I don’t perceive them defaulting back to pre-COVID sort of awareness with the guests, I think health and wellness trends are here to stay, I think that some of the trends we have seen in fashion and what guests are going to expect in apparel and in how they dress and how they want their apparel to perform are here to stay. And both of those benefits, our brand and our positioning in a number of ways, predominantly linked to our Power of Three growth strategy around product omni guest in creating that ecosystem as well as market expansion. So, I am excited about the potential of growth. And what we do know is and we have shared this before is even with the success of our business to-date, we have awareness opportunities. We have significant awareness opportunities with men in North America and in our international markets, awareness and consideration is – and remains our – one of our big exciting opportunities. So, we definitely leaned in, in Q3 with digital marketing plan to do more of that in the back half and into next year. Part of the success we saw internationally was turning on digital marketing and CRM in a more aggressive way than we have traditionally done in the past and it responded very well. So, the teams are going to continue to learn. We are continuing to sort of play with our rollouts and what we want and expect from the investments in how we get our brand known and have that awareness metric improve in the coming months, in the coming years. So, I just think the world is looking for more of what we have to offer and our opportunity we know is that awareness around offering it is still a big opportunity for us and we are going to lean in and invest in the back half of this year and into next year to do that and that’s all part of the guidance and margin that Meghan has provided and it’s also inclusive – there is no change to our Power of Three 5-year view of the financial model that we shared as well last spring. So, it’s all incorporated in that how we chase and lean, but it’s an exciting opportunity for us to drive awareness and we see the opportunity and we are shifting investment to go after it.

Matthew Boss

Great. And then just one follow-up, just on the digital trend in August and early September, is there any driver of the moderation that you have cited relative to the second quarter or maybe just any commentary to think about as we have tried to think through the magnitude at all as we think about the current momentum that you guys carry so far into the third quarter?

Meghan Frank

Yes, I wouldn’t say there is a driver to the moderation, it’s really looking at the omni trend overall, which again we see in the mid to high single-digit range and just with a lion’s share of the stores open, just not seeing as much of a channel shift trend with our guests being able to access our store fleet.

Matthew Boss

Great. Best of luck.

Meghan Frank

Great. Thank you.

Operator

That’s all the time we have for questions today. Thank you for joining the call and have a nice day.





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Coupa Software Incorporated (COUP) CEO Rob Bernshteyn on Q2 2021 Results – Earnings Call Transcript


Coupa Software Incorporated (NASDAQ:COUP) Q2 2021 Results Conference Call September 8, 2020 4:30 PM ET

Company Participants

Steven Horwitz – VP, IR

Rob Bernshteyn – CEO

Todd Ford – CFO

Conference Call Participants

Bob Napoli – William Blair

Josh Beck – KeyBanc

Chris Merwin – Goldman Sachs

Robert Simmons – RBC Capital Markets

Stan Zlotsky – Morgan Stanley

Brad Sills – BofA

Terry Tillman – Truist Securities

Daniel Jester – Citi

Peter Levine – Evercore

Siti Panigrahi – Mizuho

Koji Ikeda – Oppenheimer

Brian Peterson – Raymond James

Ryan MacDonald – Needham

Joseph Vafi – Canaccord

Operator

Good day, ladies and gentlemen, and welcome to the Coupa Software Second Quarter Fiscal Year 2021 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference call, Mr. Steven Horwitz, VP of Investor Relations. Mr. Horwitz, you may begin your conference.

Steven Horwitz

Thank you. Good afternoon and welcome to Coupa Software second 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 and 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, 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

All right. Well, thank you, Steven. Hello, everyone, and thank you for joining us.

When we started this journey more than a decade ago, we had a very clear vision to forever change the way things were done in what was the procurement space and solve the broader challenges and how businesses manage their spending with the support of innovative and reimagined information technology solutions.

We sought to achieve this by delivering 100% cloud-based comprehensive business spend management platform that would scale for virtually every company in the world, unlocking massive amounts of untapped value. Our platform would provide real time visibility, control, automation, spend compliance, and so much more. We set out to help our customers be more agile, to flourish in great times, and be more resilient in difficult times. And most importantly, we wanted these customers to be smarter together with something completely unprecedented in our industry, the concept of the community and the power of community intelligence. We have made some very significant strides towards fulfilling our objectives, as evidenced by the nearly $2 trillion in cumulative spend under management that has now flowed to Coupa’s transactional core.

Looking at our financials for this quarter. We once again delivered record revenue of $126 million, despite the global macroeconomic headwinds present today. It’s important to note that while we are largely focused on growth, we’re also focused on profitability and cash flows. To that end, Q2 was our ninth consecutive quarter of profitability on a non-GAAP basis. We also reached a new milestone this quarter, having generated more than $100 million in adjusted free cash flow over the trailing 12 months.

Our financial results clearly illustrate the leverage in our model, not to mention the strength in our balance sheet. We delivered solid results across the board. But make no mistake, we are playing to win the market over the long term.

Let me share some additional updates about our business. Sales cycles have not surprisingly extended somewhat from what we were seeing last year. However, many customer prospects, who had paused in the March and April timeframe, reengaged and became the newest members of our Coupa community. We’re also seeing strong pipeline build and an increase in our RFP activity.

Our new customers and prospects are focused on business resilience, and they’re seeing Coupa’s platform as mission-critical for today’s new realities. Many of these customers are testifying to the importance of our Value as a Service platform. A prime example of this is TransUnion, who spoke about Coupa on their June earnings call. They discussed their strategic initiative to transform global operations by creating consistent standards around the world. They specifically highlighted that they are implementing a full lifecycle procure to procure-to-pay system from Coupa, allowing complete business spend visibility globally.

Schneider Electric’s global director of P2P transformation shared comments about their recent successful go-live. She said, I’m extremely proud of my team in deploying Coupa software, harmonizing processes and centralizing our people across France, U.S. and Mexico. We are bringing simplification, compliance and organizational efficiency around the world, delighting our stakeholders.

Another mention came from Westpac Bank. Their CPO said, amazing that someone can access a procurement business application and make purchases within 15 seconds without any manual instructions of training. We’re excited to be implementing this at Westpac. Thank you, Coupa and Deloitte for being on this journey with us. Clearly, their CPO quickly discovered the user-centric aspect of our platform, also known as the U in Coupa.

Now, this quarter, we completed 100% of our go-lives remotely, and did so with great efficiency. We have reduced implementation times by roughly one month, as customers are relying more heavily on our prescriptive approach around best practices.

Now, let me highlight a few of the many customers that have gone live across more than a dozen industries during the quarter. Representing the consumer products industry, ADM, a fortune 50 global leader in human and animal nutrition has recently gone live with Coupa. Even with project teams working remotely, the implementation was completed on schedule.

Joe Canaday VP Global Procurement said, the pandemic certainly added challenges, but I’m extremely proud of our ADM team, Coupa and our business partners for their relentless engagement and focus which allowed us to deliver this go-live as planned.

Using Coupa, ADM enhances end to end process, improves data insights establishes a common platform for spot bids, and standardizes and automates core processes. This is done through a business spend management platform that makes it easy for colleagues to request the goods and services they need and for business partners to engage with ADM.

Representing the process manufacturing industry, Grupo Cementos de Chihuahua, a leading supplier and producer of cement and concrete across Mexico, United States and Canada, has gone live on Coupa. The focus of GCC was to automate supplier management, increase spend control and generate savings.

With Coupa, GCC has gone from disconnected purchasing process to a single digitized platform and has procured millions of dollars in peel back spend in just the first few weeks of being live. Such accelerated user adoption has helped GCC to increase spend management and elevate cost savings through contract compliance.

In the oil and gas industry, ProPetro Holdings completed its implementation of Coupa to enable process improvements for great efficiency and enhanced spend control. Using Coupa, ProPetro established best practices across procure-to-pay, including the use of online catalogs to ensure spend compliance and dynamic approval chains for spend visibility and improve financial controls. Within the first 12 days, they have processed millions of dollars in pre-approved spend through Coupa.

And in the relatively hard hit retail industry, Canadian Tire Corporation went live with Coupa to standardize and automate non-merchandise procure-to-pay purchases. Leveraging Coupa, Canadian Tire has replaced multiple disintegrated systems across its retail locations with a unified enterprise-wide platform. Already more than $1 billion of spend has flowed through the platform.

Our cross-industry impact doesn’t end with these examples. We also completed implementations in the banking, business services, industrial manufacturing, insurance, life sciences, nonprofit, technology and transportation industries during the quarter.

Now, let me welcome some of our new customers, representing companies of all industries and sizes as well. First, let me highlight some up incoming companies such as Confluent, Deli’s, [ph] Gap Materials, SalesLoft, Samancor Chrome, Shorelight Education, Welltok and many others. We also welcome the midsize organizations including CSC ServiceWorks, Strategic Education, Toyota Financial Australia, and others. And of course, we welcomed large enterprise companies such as Canfor, Cycle & Carriage, Engen Petroleum, OneMain Financial, Shaffer, Sekisui Chemical, Westpac Banking and numerous others. Not only are companies of all sizes joining our community, but also across nearly 20 different industries.

Now, as you heard me say many times before, our continued progress in providing customers with prescriptive insights, the P in Coupa is a major reason our prospects and customers are in lockstep with our vision. There is a revolution happening in business where companies are cognitively there with us that they will have a strategic advantage if they can leverage insights from our growing customer community. On a side note, I’m humbled to have the opportunity to share personal thoughts on this subject in our new book, Smarter Together, which is being released this week. This new book is essentially a position paper that builds upon our first book Value as a Service.

Let me share an example of how community intelligence helped The Brock Group, a company who provides specialty craft and maintenance services to diverse industries across the United States and Canada, and employs more than 13,000 employees in over 400 facilities, reduce fraudulent spend. As construction and maintenance projects ramp up at the end of each year, The Brock Group hires seasonal field workers. With so many seasonal employees submitting expenses, it’s difficult for them to review all expense reports for suspicious transactions. This means opportunities for spend leakages and even fraud. Coupa Community Intelligence has helped them address this problem by detecting suspicious transactions at scale across all of their spend. Using artificial intelligence to detect patterns from the Coupa Community, spend that deviates from expected behaviors that would otherwise fly under the radar is flagged as suspicious.

In the first hour after turning on these capabilities, The Brock Group identified tens of thousands of dollars of suspicious transactions. They identified duplicate transactions and even discovered an employee who had submitted thousands of dollars of seemingly legitimate small dollar expenses that were fraudulent. With community intelligence, Brock Group prevented spend leakage and fraud.

The knowledge that comes from assets of data is also extremely important when strategically managing inventory. Detailed inventory studies have shown that company inventory is inaccurate more than one third of the time, and nearly half of companies either don’t track inventory or do so manually. When you consider that inventory represents approximately 15% of the total assets for public companies in the United States, there’s clearly a big disconnect. To remedy the disconnect, Coupa has worked with more than 100 customers to improve visibility, management and optimization in the area of inventory management. Whether your inventory includes a camera, TV, medical supplies or any direct components that are part of your manufacturing process, by linking inventory directly with procurement, customers can optimize their spend.

One of our enterprise customers, Amazon takes advantage of this real time visibility with all their packing materials such as boxes and labels to ensure that their fulfillment centers around the world always have the materials necessary to quickly ship packages to customers. By having a single system of record for orders, receipts and inventory, they can ensure that they aren’t placing duplicate orders and that employees are making purchases from approved suppliers. With hundreds of thousands of transactions every month, the optimization of this inventory process saves the companies significant amounts of money.

Moving on, the pandemic induced focus on cost reduction and risk mitigation has led to higher demand for quick ROI solutions, such as Coupa Advantage, Coupa Risk Assess, Coupa Strategic Sourcing and Coupa Source Together. An example of how our customers address this focus, while simultaneously continuing to tap into our open platform, they owe in Coupa, can be seen with strategic sourcing. A great example is illustrated by a quote from Procter and Gamble’s associate director of purchasing. He said, with the help of Coupa’s sourcing tools, Procter and Gamble significantly optimized several hygiene raw materials purchases. With Coupa, the team was able to manage the end to end source and process more efficiently, collecting bids and running numerous complex scenarios to optimize awards in a short period of time. The process is now more robust and we’re better able to achieve our stewardship goals.

Another area where our customers are extracting meaningful value is to Coupa Pay. As most of you know by now, our pay module has strong value propositions for both, large enterprises and midsized customers. Apart from the efficiency that a company of any size can extract from integrating payments into their spend platform, enterprise customers are able to save hundreds of thousands of dollars per year by eliminating the need for bank integrations. At the same time, midsize companies can migrate from manual to digitized processes. One example of a midsize company that has digitized their payments approach is SambaNova, a next generation AI company that takes innovations from advanced research organizations around the world and makes them available to everyone everywhere. One of our earliest Coupa Pay customers, SambaNova uses the entire time pay module and platforms to consolidate technology and banking, scale payment processes, and significantly improve compliance and control.

Implementing Coupa Pay, they were running a siloed process using spreadsheets — before implementing Coupa Pay, they were running a siloed process using spreadsheets. Hundreds of invoices covering millions of dollars per month were being handled manually. These manual processes not only increased the potential for error, but they were far from optimal for internal process purposes. They also had an inefficient working capital approach, often paying bills by paper check in 15 days in fear of having late payments. Scalability was out of the question. To fix these issues, SambaNova wanted a unified process and integrated platform. Working closely with our customer success team, Coupa Pay was implemented in less than three months, a great example of accelerated or the A in Coupa. Within 90 days of being live, they were 95% of their invoices through the Coupa platform. SambaNova now has confidence in their simple and trackable digital payments process.

They’ve even commented on how feedback from their suppliers is overwhelmingly positive with an appreciation that the money is in the bank and the remittance is right there at Coupa. And the ease of cross border payments has enabled them to confidently scale internationally. Perhaps that’s why their VP of Finance said in a recent webinar, Coupa Pay is an absolute no brainer.

We appreciate the finance people realize the value that Coupa Pay provides. In fact, it’s part of our strategy to continue bringing more value to the office of the CFO as we expand our already comprehensive offering, known as the C in Coupa. To that end, during the quarter, we completed the acquisition of BELLIN, a leader in treasury management. BELLIN’s offering provides real-time transparency on cash balances, centralize the control of cash accounts to prevent fraud, provides efficient liquidity management and supports direct bank-to-bank communications for money transfer.

Treasury is another important department within companies that Coupa is working to help unsilo and make part of a strategic approach for any business. Our intention with Coupa Treasury Management is to make spend, contract data and the risks associated with both clearly visible to and actionable by the Treasury team. As we work to synergize our integrated offering, future capabilities of Treasury will include assets to community intelligence, which will show our customers best practices for conserving cash. They will also be made aware of potential contract risks if a customer has filed for bankruptcy. These are just a few examples representing only the tip of the iceberg when it comes to the value we will be able to create by incorporating treasury management into the Coupa platform.

As I’ve noted before, anytime we look at a potential acquisition, we are focused on adding technology components to maximize and enhance the value of our organic, transactional core engine and/or augmenting this engine with key events power applications that optimize the value of these transactions. This acquisition addresses both aspects of this strategy. Most importantly, BELLIN’s culture and values are in close alignment with ours, and we are already well on our way towards unifying as one.

Now, let’s move on to the Coupa Business Spend Index or BSI. The BSI is a leading indicator of economic growth, analyzing hundreds of billions of dollars in aggregated and anonymized business spend. Before getting into the Q3 outlook, I’d like to once again reiterate that the BSI data is not necessarily indicative of the trends we’re seeing in Coupa’s business.

I previously shared that the Q2 BSI showed a significant decline in economic confidence, likely as a response to the pandemic. The Q3 BSI indicates that business spend sentiment has modestly improved, likely as a correction to the acute scenario witnessed during Q1. Sector data indicates financial services retail and high tech showed improvement quarter-over-quarter. Although it is important to note that all sectors remain below trend. For example, spend sentiment in the retail sector continues to be significantly impacted by the pandemic, but more online shopping has likely contributed to the slight improvement in sentiment relative to the previous quarter. Also, given the continued impact on global supply chains, spend sentiment in manufacturing decreased slightly in Q3. For closer look at our Q3 BSI where we share more details on each of these trends, please visit www.spendindex.com.

Moving on, let me now recognize a few of my colleagues that have made outstanding contributions that clearly demonstrate Coupa’s core values. Let’s start with Kevin Christopher-George, who was recently recognized by his peers for exemplifying a number one core value of ensuring customer success. Customers consider Kevin to be a strategic resource, often feeling like he is part of their company. He holds the customer accountable for their commitments and always delivers on his.

Next, I’d like to mention Terry Kim, how was recognized for focusing on results. We win many deals because of Terry. He works across teams to ensure we are as accurate as possible up front. This sets everyone up for success during implementation. He always pushes projects towards the best outcomes for the customer.

And finally, Srinivas Kannan, embody striving for excellence. Sri passionately pushes everyone to connect, collaborate and improve, and he does so with tremendous inspiration and professionalism. Congratulations. And thank you, Kevin, Terry and Sri.

Further to our core values, we showed great alignment across our employee base in a survey completed by Great Places to Work. 97% of respondents ascribe to our number one core value of ensuring customer success. 98% ascribe to our number two core value of focusing on results, and 97% ascribe to our number three core value of striving for excellence. My aspiration is to get all of these to 100%.

I also believe that having nearly all our employees ascribing to these core values is a big reason Coupa was included in the list of Best Enterprise Software Companies to Work for by Glassdoor. We are proud and humbled to have 95% of survey respondents recommend working at Coupa.

So, in conclusion, we believe that the archaic, old fashioned methods of attempting to deliver value in our industry will soon be a thing of the past. Frankly, those who have been disappointed in the past are vexed, fuming and they’ve had it up to here. We aspire to a completely different level of customer value creation. As we unleash value for our customers like never before, we will continue to emphasize the importance of business resilience. Decisions made today will affect how companies persevere during difficult times and how they position themselves for even stronger economic conditions in the future.

In closing, we are currently well into our 47th quarter of execution. And as we guide our customers through these times as a key priority, we simultaneously remain focused on Coupa’s long-term success and market leadership.

With that, let me now hand it over to our Chief Financial Officer, Todd Ford, who will review our Q2 financial results and provide our outlook for the third quarter and updated fiscal 2021. Todd?

Todd Ford

Thanks, Rob. And good afternoon, everyone. While the world has changed, we’re all adapting to the new normal, our strategy at Coupa has not changed. We continue to manage our business to 30% annual revenue growth, disciplined sales and marketing investment, and demonstrating leverage and our operating model as we continue to grow, specifically operating and cash flow margin. As we continue to grow our business and extend our market leadership position, we’ll do so from a position of operational and financial strength with a focus on resiliency over the long-term.

Now, getting into some of the details starting with Q2 results. Total revenue for Q2 grew 32% year-over-year to $125.9 million, subscription revenue for Q2 was $111.6 million, up 34% compared to Q2 of last year, comprising 89% of total revenue, professional services and other revenue was $14.3 million. Calculated billings for Q2 were $130.5 million, up from $107.7 million in Q2 of last year, representing a 21% year-over-year increase. For the trailing 12 months, calculated billings were $518.5 million, up from $378.8 million in the previous trailing 12-month period, representing a 37% increase. Total deferred revenue at the end of Q2 was $249 million, up from $244.5 million at the end of Q1 and up from $188.9 million at the end of Q2 of last year, a year-over-year increase of 32%.

When considering our billing results, I’d like to remind you of the comments from last quarter on a difficult compare that existed going into the quarter. There were two events from Q2 of last year that impacted the year-over-year compare for billings this year. Specifically, one, some of the new customer billings which were billed in Q2 of last year, were billed in Q1 of this year for the terms of the contract; and two, a onetime spike in billings related to the Exari acquisition that we completed in Q2 of last year. The impact to Q2 billings from these two events was approximately $15 million from a year-over-year compare perspective.

Let’s now turn to margins and results of operations. Our second quarter non-GAAP gross margin was 72.1%, which was above our guidance of 70% to 71%, but down from Q1. The sequential decrease was primarily due to the impact of our acquisition of BELLIN, now Coupa Treasury Management. We typically see a drag in gross margin for the first few quarters after completing

quarter after completing an acquisition, due to immediately post acquisition, we carry the full burden of the acquired business’s costs, but don’t recognize 100% of the revenues, because of the write-down of deferred revenue in the purchase accounting and also, it typically takes a few quarters to complete the full business integration to the point where we can take advantage of expense-related synergies, such as the benefit of combining supplier purchases. We expect to see an impact on margins this quarter and for part of Q4, normalizing for the most part by the end of the year. Consistent with our long-term strategy and disciplined approach, we continue to make investments in our business, including hiring new employees. Even so, we were yet again able to demonstrate the scale and leverage in our operating margin and adjusted free cash flow results.

For the quarter, we delivered non-GAAP operating income of $12.3 million, as well as non-GAAP net income of $15.2 million or $0.21 per share on 73 million diluted shares. I’d also like to note that we booked a general reserve of $2 million in Q2, reflecting the uncertainty in today’s macroeconomic environment.

Moving to cash and cash flows. Entering Q2 cash collection expectations were difficult to predict due to the extended COVID-19 pandemic environment, but the strength of our business was clearly evident in our Q2 cash flows results. GAAP operating cash flows for Q2 were $23.4 million and we delivered record adjusted free cash flow this quarter of $35.7 million or 28% of total revenue. We define adjusted free cash flows as operating cash flows less purchases of property and equipment, plus repayments of convertible senior notes attributable to discount — that discount.

For the trailer 12 months, GAAP operating cash flows were $86.9 million, or 19% of total revenues. For adjusted free cash flows, as Rob noted, we delivered $100.4 million, or 22% of total revenues for the trailing 12 months, a new financial milestone for the Company. Our strong cash flow performance speaks to the quality of our customer base, the mission-critical nature of our platform, and ultimately, the value we’re delivering to our customers.

Cash at quarter-end was $1.34 billion, up from $706 million last quarter. The main driver of the increase was the issuance of our 2026 convertible notes of $1.38 billion, including the exercise of the green shoot. This was offset by $193 million paid for our capped call at an up 125 premium and $484 million paid towards obligations from our first convert, our 2023 notes. At the end of Q2, we still have approximately $16 million of principal remaining from our 2023 notes. We also used $84 million of cash this quarter towards the acquisition of BELLIN and ConnXus.

Now, let’s turn to guidance. With respect to guidance, our operating thesis is similar to last quarter, and that we expect the macroeconomic environment will remain challenging for at least Q3 and into Q4, with the possibility of things beginning to open up more broadly, starting early in the New Year. From a go-to-market perspective, we entered Q3 with a significantly stronger pipeline than the same time last year, both on a gross dollar basis and in terms of what we considered later stage, qualified pipeline.

Not surprisingly, however, many customers and prospects continue to operate with caution, especially those in industries highly affected by the pandemic, making it difficult to predict the timing of when deals will close.

The third quarter and full year 2021 guidance we’re providing today incorporates our current assumptions with respect to the uncertain effects of the challenging macroeconomic environment based on information available to us at this time around new business, renewals, timing of collections and various other inputs. Variations from these assumptions may cause our results to differ. Our guidance also assumes no billings or revenue contribution from Coupa Travel Sabre, formerly Yapta, for the remainder of the year. As you may recall, entering the year, we expected approximately $20 million in billings and revenue contribution from Coupa Travel Sabre.

With this as the backdrop, we expect total Q3 revenue of $123 million to $124 million. This includes subscription revenue of $112 million to $113 million and professional services revenue of approximately $11 million. We expect a Q2 non-GAAP gross margin of 70% to 71% and GAAP income from operations of $4.5 million to $5 million. This results in non-GAAP net income per share of $0.02 to $0.03 on approximately 74 million weighted average diluted shares for the quarter.

For non-GAAP net income per share, please keep in mind that other income and expense or quote unquote, below the line expenses are affected by the drop in interest rates over the last two quarters. Our non-GAAP other income and expense guidance also contemplates potential currency fluctuations and tax liabilities as well as additional cash interest on our latest convert at 0.375%.

On the OpEx side in Q2, we incurred about half of a typical quarter’s expense from acquisition of BELLIN. We will of course have a full quarter of BELLIN expenses in Q3. Also, after generating a record $36 million of adjusted free cash flows this quarter, we expect adjusted free cash flows for Q3 to be breakeven or slightly positive.

For the fiscal year ending January 31, 2021, we expect total revenues of $496.5 million to $498.5 million. This includes subscription revenue of $446 million to $448 million and professional services and other revenue of approximately $50.5 million. We expect non-GAAP gross margin for the year of 71% to 72%. We also expect non-GAAP operating income for the year of approximately $33.5 million to $35.5 million, non-GAAP earnings per share of approximately $0.43 to $0.45, based upon an estimated 73 million averaged diluted shares for the year. We expect adjusted free cash flows to be up year-over-year on an absolute basis.

To conclude, we are still living in unique and uncertain times. As we focus on the safety of our employees and the long-term prospects of our business, we will continue to execute on our strategy, which is founded on growth, financial discipline and operational efficiency, backed by a strong balance sheet to emerge stronger than ever when we all return to some level of efficiency.

Now, we’d be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you, Mr. Ford. [Operator Instructions] And your first question comes from the line of Bob Napoli from William Blair.

Bob Napoli

Thank you. Good afternoon. I was hoping to get an update on Coupa Pay. It is obvious question, just if you could give any trends on attach rates or the reception by certain clients, but some update on Coupa Pay would be helpful.

Rob Bernshteyn

Sure. Well, we continue to see some really good data there and an observable sort of impact in terms of Coupa Pay. For one, without doubt, we continue to build a very rich pipeline in the market. Secondarily, we are closing quite a few deals. And I would say if you look at many of the solutions that we’ve rolled out over the course of the last decade plus, Coupa Pay of all of those solutions has probably taken on the fastest ramp in terms of new customers and in terms of go lives. And that’s really my third point around go lives. You see these customers not only going live but you see them getting measurable value. They’re clearly moving away from paper-based or disjointed processes to more streamlined centralized processes. And they’re more than willing to stand up as references on our behalf in the marketplace. So, it feels like a very promising continued trajectory. And, we can be more excited about it.

Bob Napoli

Thank you.

Operator

And your next question comes from the line of Josh Beck with KeyBanc.

Josh Beck

Thanks for the question, I myself on mute there. I just kind of like to understand a little bit about how you’re thinking about the recovery, as we go through the year. I think, on the last call you had kind of expected Q4 to start to see signs of recovery. This quarter, certainly seems like it came in better than you had anticipated, if you look at the billings number or the spend under management number. But, at the same time, I think you said that you were pushing back a little bit to the first half of next year, when you were starting to factor in that broader macro recoveries. So, maybe just provide a little bit of color on what some of the positive surprise you saw in the quarter? And how that juxtaposes with pushing out the recovery timing just a bit on the macro front?

Rob Bernshteyn

Sure, sure. I appreciate the question. I think, the broader context is worth sharing with everyone on the call. And for those of you that have known us for some time, you know that we’re playing to win in this category without any question whatsoever. And to that end, we’ve continued to develop a really rich and robust and very sizeable pipeline. And we continue to have incredible engagement within that pipeline. So, that it’s not a pipeline that is moving out. It’s a pipeline that is actively engaged with us and building business cases for approval and driving that through their organizations. To that end, we’ve also continued thoughtfully hiring to make sure that we can support that pipeline fulfill demand as it drops. And what as you well know is a really large total addressable market.

And I would say that the environment we’re in right now, to your question, is really bringing even more attention to spend practices. There are new terms and practices that need to be addressed very quickly, kind of higher ROI areas, like sourcing and risk. There’s also the need to really set up companies for the future of how they do business spending.

Now, specifically, I would tell you that the fidelity, as it pertains to precision on any deal close timing, is probably not as high as it might have been historically. Having said that, we continue to close a robust book of business, while building up this pipeline to attack in Q3, Q4 throughout next year as we build this Company into something very, very meaningful and special in the world of information technology, enterprise software, and business.

Operator

Your next question comes from the line of Chris Merwin with Goldman Sachs.

Chris Merwin

I just had one for Rob. I think, you talked in the prepared remarks about an acquired tool for treasury management software. And I guess the question is twofold. Number one, should we see any major impacts to the financials? And number two, I know that there’s an account receivable automation vendors out there that offer treasury management solutions. So, in the future community, can you maybe see you expand more into the accounts receivable automation space? I know, there’s a lot of TAM where you’re now, but just curious when you think about the product or M&A pathway from here? Thanks.

Rob Bernshteyn

Sure. Well, thinking generally around mergers, around M&A or acquisitions that we would be considering is for to fall into the strategy that every one of the acquisitions we’ve done before falls into. A core component that can unlock value at that transactional core or power applications like a BELLIN in Treasury Management that can get even more value out of that massive accelerating transactional flow. With BELLIN, it’s really a no brainer for us. I mean, cash management in real time is pretty important when you think about income of cash and spending of cash, obviously.

Really helping our customers understand cash risk, really understand liquidity and where they are at any given point in time, understanding working capital management. These are the sort of ancillary spaces that the office of CFO has been interested in engaging with us for quite some time. And I would say, the other component that was really powerful here is just to get a little bit deeper into bank-to-bank, money transfer communications, the things we’re doing with Coupa Pay will actually be enhanced with some of the components coming from BELLIN. So, we’re likely to follow very much the same strategic approach to acquisitions. And this one clearly fell right in the sweet spot of that.

Todd Ford

And on the financial contributions, Chris, we obviously spent $84 million for BELLIN and ConnXus in the quarter. 90% of that was approximately BELLIN. Obviously, the full impact of the expenses is in our guidance. And as you’ve seen with the acquisitions in the past, it will take time for the revenue to ramp to steady state. But, as we look out to fiscal 2022, I’d expect $20 million to $25 million in revenue contribution from those two acquisitions, once again, primarily BELLIN being the majority of that. And then, I would also expect as Rob mentioned, additional positive impact to Coupa Pay than overall pricing of the BSM platform as we continue to see our average deal size increase quarter-on-quarter, which we continued to see this last quarter as well.

Operator

Your next question comes from the line of Alex Zukin with RBC Capital Markets.

Robert Simmons

Hi. This is Robert Simmons on for Alex. Thanks for taking the question. So, you had mentioned the customer is over 95% of transactions going through the platform. So, I’m wondering, if you tell us how that’s impacted your ASP, kind of pre-Pay and now with Pay?

Rob Bernshteyn

Sure. So, I’m not sure that directly impacts it. The reality is, we charge based on value delivery. We don’t have a sort of take rate model of some percentage of the electronic transaction model with just a few exceptions, Coupa Pay in some cases being that type of exception. When you think about the overall business, it’s largely a Value as a Service business where there’s a fair recurring subscription revenue price point for value delivery. And to that end, this is our virtually – our 46th quarter, virtually every quarter going up in average subscription revenue per customer. So clearly, they’re seeing more and more value being delivered for them on this platform and Coupa Pay is just an additional module that provides it.

Robert Simmons

And then, can you talk to your net retention rate, what are you seeing there?

Todd Ford

Yes. If you look at the renewal rates, continue to remain strong and best-in-class. Nothing that I would call out related to COVID or otherwise. One of the things I would say though, as Rob mentioned, we’ve seen significant positive trends in upsell with our current customers, and multiple areas, whether it’s Coupa Risk Assess, Coupa Sourcing, Coupa Pay and other. And one of the things that’s important to note and we saw a little bit of impact of this in Q2. When we do these power app add-ons, in many cases, we don’t realize the benefits of a full year billing to the customer on our calculated billings results, because the first billing installment for the add-on modules is often coterminous with the customer’s either annual anniversary or renewal date, meaning that we only build the customer for a partial year upfront. So, while no impact necessarily revenue, does impact billings for partial payments. And it’s likely we’ll see some benefit from this dynamic in Q4 where a significant amount of our deals are billed and transacted.

Operator

[Operator Instructions] And your next question comes from the line of Stan Zlotsky with Morgan Stanley.

Stan Zlotsky

Maybe just one very quick one for me. Todd, I’m not sure if maybe I missed it during the prepared remarks. But, how are you thinking about billings for Q3, either as a point estimate or maybe on a trailing 12-month basis?

Todd Ford

Yes. Thanks, Stan. So, given the current macroeconomic environment, we’ve continued to be very measured with our billings outlook. And if you look at the three components, professional services, renewals and new business, on the professional services front, we went into the quarter with a very strong pipeline, and we’ve also demonstrated the ability to take customers live remotely. As Rob mentioned in the remarks, 100% of our go-lives were done remotely. So, feel good about professional services. Renewals have continued to be strong, and we’ve seen even customers reaching in on the expansion that we have talked about. So, a lot of people expected impact from COVID, and we haven’t seen that at all.

And then on the new business front, I can give you a couple of comments quantitatively and qualitatively. So quantitatively, although you somewhat have to consider the lost small numbers, our new bookings in August were higher than last year. And in entering Q3, as I noted in my remarks, we had a substantially stronger pipeline for the second half of the year compared to that of last year both in terms of gross pipeline and later stage. But as Rob mentioned, it’s also difficult to predict sales cycle’s time. And there’s also some seasonality in Q3 historically, although there’s some trends pointing to perhaps that won’t be the case this quarter. And when we have seen deals push out, it’s typically weeks or months and not quarters. And then on the qualitative side, we are seeing some green shoots, particularly in the level of engagement by our go-to-market teams being extremely high. And overall, I would say my confidence entering Q3 is stronger than that entering Q2. But given historical seasonality and just the macroeconomic environment and expecting to get back to normal hopefully sometime later this year, the point estimate I would use for calculated billings on a trailing 12-month basis would be 27%, exiting Q3. But once again, it’s difficult to determine the order of magnitude just given all the factors I just covered.

Operator

And your next question comes from the line of Brad Sills with BofA.

Brad Sills

I wanted to ask about some of the progress you’ve seen here with the Community Intelligence applications; you mentioned advantage of Risk Assess, Sourcing. It seems like those are picking up. We’re hearing that from the channel as well. Is there a common theme here? Is it just that these offerings are now maturing, where you’re building that analytics capability, really leveraging that data set in there, or is it just awareness growing of the benefits of these solutions? I suspect it’s both. But any color on just what may be driving that? Thank you.

Rob Bernshteyn

Yes. Thanks very much for the question. I think it’s absolutely both. It’s very hard to understand exactly how some of the tipping points develop. But clearly, there’s a massive amount of data that’s going into providing the Community Intelligence back to customers now. I think we’ve passed many thresholds of data volume that we require to make the individual insights that are prescribed or offered up to individual customers be a value. And we’re getting to levels where that is becoming meaningful and valuable for them in making their decisions. I think there’s also an incredible continued willingness amongst our community to share anonymized and sanitized data, so that builds up the likelihood that insights would be valuable. And then, it’s the current times. And I think the current times are an important factor to consider here as well. Many of the conversations I’m having with folks — CFOs and folks in the CFO’s office are about the supply chain disruptions they’re seeing, the risk that they’re seeing amongst their supply base that they need, neighborhood watch type programs like we have built into Community Intelligence to help them mitigate that risk, their need to get advice and insight on how to go from perhaps single sourcing with certain suppliers to multi-sourcing, ideas or input around best practices for renegotiating certain categories of spend, how to prioritize where to renegotiate, where to start and how to move into a much more digital best practices way of doing things. So, there’s a lot of factors that are coming into play, but all of them are producing exactly what I think you’re hearing from our community, which is we’re starting to get real meaningful value from Community Intelligence. And I could tell you, without any reservation, we’re definitely just at the very tip of the iceberg in terms of what’s possible in terms of making all of our customers smarter together.

Operator

And your next question comes from the line of Terry Tillman with Truist Securities.

SEPTEMBER 08, 2020 / 8:30PM, COUP.OQ – Q2 2021 Coupa Software Inc Earnings Call

Terry Tillman

Yes. Thanks for taking my question. It’s related to, Todd, what you just talked about a few questions ago as it related to billing. This concept of the add-on sales, what I’m curious about is, you called that out and how that could potentially impact 4Q. Could you maybe give us a little bit more perspective on how notable that could be? And is this add-on sales motion something that you’ve all been aggressively pursuing, or it’s just kind of happening kind of organically or naturally given the times we’re in?

Todd Ford

Yes. I would say, it’s been more organic in nature and as customers are looking to drive value and get a very quick ROI and reduce risk, right? So, if you look at the sourcing tool, we’ve had customers literally save tens of millions of dollars within the first week, obviously a quick payback. And then, in the COVID-19 environment, you’ve got people especially with supply chains and risk and making sure their supply chain doesn’t go out, go down and potential issues related to bankruptcy and that type of thing. And then, you’ve also seen some uptake in Coupa Pay, which is broader, but there are some slight benefits with respect to digital checks and that type of thing. So, when you look at the number of add-ons we had in Q2, and actually even Q1 to be frank, they were pretty significant. And what I — is it more than $1 million? Yes. And is it less than $5 million? Probably so. So, somewhere in that range. I’m not going to give a specific point estimate. And a lot of that doesn’t show up anywhere. Right? It would come up, meaning from a backlog perspective or deferred revenue, so. But, it should definitely be a net benefit in Q4 as people either go through their annual contracted cycle — billing cycles and/or their renewals.

Operator

And your next question comes from the line of Daniel Jester with Citi.

Daniel Jester

So, the last couple of quarters, you talked about some customers that were using Coupa more for direct procurement. And I’m wondering, given some of your comments about sort of supply chains being reworked, what you’re seeing on that front today.

Rob Bernshteyn

Sure. Well, thanks for the question. That’s absolutely the case, and that’s seen in our pipeline. First of all, let’s just touch on that. When you look at our global systems integrator partners, we have an open pipeline in the hundreds of millions of dollars. And a lot of that has to do, I think, with our proven referenceability in the market and the successes we’ve had, but also the conditions externally where there is real disruption happening, and procurement and CFOs really have a chance to lead. So, you look at capabilities like dynamic strategic sourcing with multi-factoral, AI-powered assessments of where to get the goods and services you need at the right price point for the right delivery through the right freight for a point in time challenge, I mean we have some of the largest companies in the world standardized on Coupa for making those decisions and a pipeline of folks who want to do the same. Similarly in the area of contract management, the ability to very quickly understand where contracts need to be renegotiated, dynamically engage with suppliers on that renegotiation process in the right priority order, taking into account the risk that those suppliers may have to their business, will they even be in business in the next quarter and year, and leveraging community insight to help them make those decisions. We see it in the treasury management area, as I discussed earlier around having liquidity and cash management properly sorted out within your company. We see it in inventory management and the levels that companies are willing to go to, to balance on-hand inventory with outstanding orders. We see it in the area of contingent workforce where we see companies pushing to a greater agility through contingent workforce management with many of the modules we deliver.

So, I mean we’re really in the heart of a very significant focus area for so many companies around the world, large, medium and somewhat aspiring or growing. And our job is to take it one customer at a time and drive value for each and every one of them in a way that’s fair, thoughtful and is going to allow us to build a long-term market-leading business here.

Operator

And your next question comes from the line of Peter Levine with Evercore.

Peter Levine

Maybe could you talk about how customers are thinking about Coupa, whether that be procurement, travel and expense or payments relative to other mission-critical systems in terms of prioritization around spend, especially in this environment? Because I mean, I think — and to your results and your commentary, it seems like investor concerns that some of the back office would have been pushed off. It seems like, at least for Coupa and what you deliver, it seems like that’s not the case. But curious to know how your customers think about your products in terms of prioritization. Thank you.

Rob Bernshteyn

Sure. Well, look, I think the categories around business spend management and that business management is comprised of, has always been — have always been on the priority list as part of the digital transformation set of initiatives. I wouldn’t say that they were first. I think some — to your point, the front office capabilities around CRM and other perhaps came earlier, but we were moving to an area where this was becoming more and more in the spotlight. And I think what has happened now, where there’s just such disconnect — such a disconnection that’s happening around people understanding how subpar their processes are internally around procurement, paper-based invoice processing, complicated payments, difficulty in, not only managing expenses, but maintaining situations where fraud doesn’t escalate, all of these areas in the business management are being seen in a much greater light, and — or I should say, greater light is being put on to them. And we’re in a phase right now that I would assess as one where companies are really trying to figure out how to develop their transformation agendas for the next two, three years for midsize companies and next decade for larger companies. And I really like where we stack up in the marketplace as it pertains to that. And I’m really excited about everything that our team and our partners are doing to make sure that we map our capabilities to those challenges in a way that is most likely, not only to build up a bigger customer base, but to ensure that they are going to get value with us forever and stay with us forever as we build this business.

Operator

And your next question comes from the line of Siti Panigrahi with Mizuho.

Siti Panigrahi

Thanks for taking my question and thanks for all the color in terms of macro. Just wondering, what kind of performance you’re seeing in the U.S. versus international? Any color on geography would be helpful.

Rob Bernshteyn

One of the things with this business is we’ve tried for the last decade-plus to create a really robust portfolio effect for ourselves. And when I say portfolio effect, I mean, so when we get on calls like with our investor base, we will have — we can say with great confidence that we have delivered the goods, if you will, delivered to the best of our ability to manage our, not only quarterly expectations, but to set ourselves up for a bright future. And that portfolio comes in a couple of dimensions. One is certainly geographic, as you mentioned. There are certain quarters where we have a greater impact from Asia or Europe or South America or United States. The other dimension is enterprise and mid-market and our corporate team. There are many quarters where we see a lot more volume, let’s say, in the mid-market business, and there are some quarters where we have significant wails in the enterprise that get us to where we need to be. We also have an incredible portfolio effect in our product areas and modules. We have so many different modules. We began with one in procurement 11 years ago and now have nearly a dozen modules.

So, any given quarter, we’ll see different dynamics from any of those three dimensions. But ultimately, they get us to where we want to be, which is ensuring that every customer we close has a high likelihood of laying out measurable success criteria that we could deliver on, and this quarter was really no different at all.

Operator

And your next question comes from the line of Koji Ikeda with Oppenheimer.

Koji Ikeda

I wanted to ask you a question about deal cycles. Thinking about some of your larger slipped deals from the first half or maybe organizations are thinking about longer sales cycles overall. Have those conversations changed at all, now that companies are becoming more comfortable in the norm for now environment? Are any of those elongated enterprise sales cycles coming back to something more recognizable pre-pandemic? Thank you.

Rob Bernshteyn

That’s a great question. Absolutely, they are. One of the things I shared, and it’s exactly how I see it, the fidelity, the precision of when the actual timing of a deal will naturally come to closure and we could begin frankly the more interesting work, which is the implementation and the results realization, the referenceability and then coming back around. So, that precision is not where it has been pre-pandemic yet, but it is coming back. It has absolutely come back, as Todd shared about the kind of last months of the quarter. And look, due to the pandemic, the sales cycle times in some cases have extended, but they’ve extended in the near term, and we could see our way to them landing. And that is happening in tandem with incredible engagement across the entire pipeline and in tandem with the pipeline growing very, very rapidly at the same time. So, all that really spells for a really healthy medium, kind of longer term prospects on the business, while at the same time allows us to close dozens and dozens of deals, new deals as we’ve done just this past quarter.

Operator

And your next question comes from the line of Brian Peterson with Raymond James.

Brian Peterson

So, Rob, if you have to think about the value — the customer value journey or call it a quest, if you had to put that through the lens of a hard dollar ROI, I’m curious how do you stack rank the value of Coupa Pay specifically relative to some other parts of the platform? Do you think that time-to-value looks materially different?

Rob Bernshteyn

That’s a great question, and I’m not going to be able to give a distinct answer because it really does depend on the maturity of the company and the use cases where they are more mature versus not. We face certain companies that have incredible processes, let’s say around procurement, preordering, everything is clean and done really well. But, when you look at their expense process, it’s completely fragmented or vice versa. They have some incumbent solution for expense management that seems to be okay, but their pre-approval percentage is horrible. Their on-contract spend is horrible. Their invoice processing is paper-based. As I mentioned with inventory, they might not even be tracking inventory. So, our goal here has always been to be really like a Swiss army knife. I mean, you can use any component first, wherever the pain is greatest, wherever the organizational momentum is closest to beginning a business management transformation. And then, as you start to gain value and working with us in this Value as a Service model, we’ll turn on other capabilities. Now that’s not to say there aren’t some customers we face who are doing almost 100% paper-based payments processes or completely disjointed logins to 15 or 16 different systems to run a monthly batch payment job, where clearly the value is much, much greater to begin there than maybe streamlining expense management, for example.

So, it’s very, very customer specific. And one of the things I’m quite proud of is that with our colleagues here, we’ve figured out a way to really be consultative with our prospective customers to — with integrity and honesty, try to see where we can begin with them that can drive the most value for them and then build the experience and partnership with them over a long period of time.

Operator

And your next question comes from the line of Ryan MacDonald with Needham.

Ryan MacDonald

One for you, Rob. As we look at the ConnXus acquisition, obviously much smaller of the two that you made during the quarter. But, there’s an interesting core data set that you’re really acquiring with that business. Could you talk about, one, how that’s enhancing Community Intelligence; but two, how you might be able to use that core data set as a competitive advantage against some of your competitors moving forward? Thanks.

Rob Bernshteyn

Yes, absolutely. And we’re very excited about the new colleagues from ConnXus. And I feel like they’re a completely integrated team. I haven’t heard that name in a while because we’re all Coupa colleagues now. But I’ll tell you, that data set is very, very powerful. I mean, we have a very clear understanding now of supplier diversity. And we are in a position now — and we’ve always focused on this. We’re even in a better position now than ever to help our buyers, right, who are hundreds and hundreds and hundreds of companies around the world and millions of users make decisions in part about whom they spend money with on criteria such as are these minority-owned suppliers, are these diverse suppliers, are these inclusive suppliers. So, it’s another set of criteria that we now have as part of our data set that we can not only expose one customer at a time, but they can give the keys to our community so they can leverage that, add to their data set, build that data set and help us in that regard. And that’s just one example. There’s a whole host of other use cases with which that data will be — will continue to be valuable for us.

Operator

And your next question comes from the line of Joseph Vafi with Canaccord.

Joseph Vafi

Thanks and great results, guys. I was just wondering, it may be a multipart answer, but could you try to frame the competitive landscape around Pay? I know there is a lot of momentum in kind of pure play AP solutions. There’s payment embedded in a lot of mid-market ERPs. You have AR. You’ve got different players here. Just some thoughts on competitive landscape would be appreciated. Thanks.

Rob Bernshteyn

Sure. Well, I think, you touched on it, right. There are incumbent solution providers. There are obviously some smaller kind of new entrants in the marketplace. We’ve done our homework initially probably two years ago when we started thinking about entering into the space. And ultimately, we haven’t seen any of them really flex on us. I mean, we have seen the situation in a way where the greatest competition is ourselves. I mean, we have an opportunity to really reimagine the way companies manage business payments, taking them from a largely still paper-based world, a very dysfunctional, decentralized world and making it much, much easier, making it much more user-centric, which is of course the U in Coupa, making it much more open so they have choice amongst banking relationships, which is the O in Coupa, and we’re really just getting going here. But I will tell you, great leading indicators. When I do see win reports, I do see a number of incumbents and early entrants that we’ve been lucky enough to be chosen over in selections, and I think that as well is still very early innings.

Operator

And your last question comes from the line of Pat Walravens with JMP Securities.

Unidentified Analyst

Hi. This is Mark on for Pat. Thank you so much for taking my question. So, just wondering with everybody working from home, how do you make Coupa a place people want to work in?

Rob Bernshteyn

Sure. Well, it’s not anything new for us. Our goal, our second core value here is focus on results. And so the fact that people are working from home, whether they’re working in the office or they’re working for a different plan, it doesn’t matter to us. It’s the result that we’re focused on. So, we’ve always had a very flexible approach with our employees and our colleagues. We’ve always been highly decentralized as an organization. There’s only a couple of hundred people here at our headquarters and thousands all over the world. And so we are on Zoom. We are connecting over the phone. We are engaging with customers in ways that we actually weren’t able to probably at the pace we would have liked in the past. So, in general, I think, it’s really a net positive for us in that regard. Having said that, there is some level of collegiality and physical presence that is lost, and we’re doing all that we can to emulate that in this environment for now. Looking forward to a time when we could all be together at physical locations and engaging in day-to-day collaboration and banter and everything that comes with work life.

Operator

At this time, there are no further questions. This concludes the conference for today. We do thank you for joining us. And you may now disconnect.





Original source link

Lyft says ride-hailing service continued to recover in August


Lyft on Tuesday released updated ride-hailing numbers that show an uptick in demand for rides.


Robyn Beck/AFP via Getty Images

Lyft Inc. said Tuesday that the ride-hailing recovery is progressing after a steep drop in demand because of the COVID-19 pandemic.

Lyft
LYFT,
+3.90%

said in a filing with the Securities and Exchange Commission that rides rose 7.3% in August from July (although August rides were down 53% year over year), and that in the week ended Sept. 6, it saw the highest number of rides since April. That brings its decline in rides to less than 50% year over year, the company said. In addition, Lyft said its Canadian business — its only operations outside the nation — was rebounding more quickly than its U.S. business, with weekly rides in Vancouver reaching a record high in the week ended Sept. 6.

The company also said it spent less on driver incentives in August as more drivers returned to its ride-hailing app.

Those numbers prompted the San Francisco-based company to say it now expects that its year-over-year change in revenue will outperform the change in rides in the third quarter that ends Sept. 30. Lyft also said its adjusted Ebitda loss for the third quarter will be less than $265 million, compared with an adjusted loss of $128.1 million in the same period a year ago.

See: Lyft revenue and riders fall by more than half, and California could soon be cut off

In its filing, Lyft also said it put an additional $17.5 million into the Proposition 22 campaign, the California ballot measure that aims to avoid complying with a new law that would mean classifying its drivers as employees. Instead, Lyft and larger rival Uber Technologies Inc.
UBER,
+3.24%
,
as well as other companies that rely on independent contractors, are proposing to exempt gig workers from the law.

See: The different routes Uber and Lyft could take as they fight California law

Amid another broad decline for tech stocks Tuesday, with the Nasdaq Composite Index
COMP,
-4.11%

falling 4.1%, Lyft shares rose 3.9% to $30.10, while Uber shares rose 3.3% to $34.32. Both stocks fell roughly 2% in after-hours trading following the filing.



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Misonix, Inc. (MSON) CEO Stavros Vizirgianakis on Q4 2020 Results – Earnings Call Transcript


Start Time: 16:30 January 1, 0000 5:06 PM ET

Misonix, Inc. (NASDAQ:MSON)

Q4 2020 Earnings Conference Call

September 03, 2020, 16:30 PM ET

Company Participants

Stavros Vizirgianakis – CEO

Joseph Dwyer – CFO

Norberto Aja – IR

Conference Call Participants

Kyle Rose – Canaccord Genuity

Ryan Zimmerman – BTIG

Alex Nowak – Craig-Hallum Capital Group

Operator

Good day, and welcome to the Misonix Fourth Quarter Fiscal Year 2020 Earnings Call. Today’s conference is being recorded.

At this time, I’d like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead.

Norberto Aja

Thank you, operator, and good afternoon, everyone. Thank you for joining the Misonix fiscal 2020 fourth quarter conference call. We’ll get started in just a minute with management’s comments. But before doing so, let me take a minute to read the Safe Harbor language.

Today’s call and webcast contain forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995 and can be identified by words such as anticipate, believe, estimate, expect, future, likely, may, should, will, and other similar references to future periods. Examples of forward-looking statements include statements regarding guidance relating to our financial results.

Forward-looking statements are neither historical facts nor assurance of future performance. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances. Therefore, you should not rely on any of these forward-looking statements. And the company undertakes no obligation to publicly update any forward-looking statements that may be made from time to time, whether as a result of new information, future developments, or otherwise.

Today’s call and webcast will include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today’s press release as well as in the company’s Web site.

With that, I’d now like to turn the call over to Mr. Stavros Vizirgianakis, President and CEO of Misonix. Please go ahead.

Stavros Vizirgianakis

Thank you, Norberto, and good afternoon, everyone. Thank you for joining us on the call today to review our fiscal 2020 fourth quarter and full year results. Joining me on the call is Joe Dwyer, our Chief Financial Officer.

Before commenting on our recent performance, I wanted to take this opportunity to thank our employees for their resilient dedication and exceptional work as they have gone up and beyond to ensure that Misonix continues to operate effectively and providing the highest level of customer service and support to healthcare practitioners and patients under the most challenging of circumstances since March of this year.

Taking a quick look at our financial results on a pro forma basis accounting for the Solsys acquisition, total revenue for fiscal fourth quarter 2020 decreased 21.6% while full fiscal 2020 pro forma revenue increased 8.6%. Both led to a net loss for the fourth quarter 2020 of 8.5 million or a loss of $0.50 per diluted share and a net loss of 17.4 million for fiscal 2020 or a loss of $1.19 per diluted share.

Despite the significant headwinds during the second half of our fiscal year and many difficult decisions we’ve had to make, we are pleased with our ability to react quickly and effectively and with the results we had as we work our way through these challenging times.

Taking a look at our business in added detail, let me begin with the wound division. Very early on in the pandemic, our wound division sales were significantly impacted as most wound procedures were viewed as elective. As such, few hospitals were admitting patients for wound care while most outpatient facilities where a great number of wound cases were treated were closed.

However, doctors and providers quickly realized that many of these wounds, especially chronic wounds, were becoming more serious on needing patients to be treated in the operating room and in some cases even having to undergo amputations. This led to many hospitals reversing their positions as well as an increasing number of physicians treating patients in their office.

As such, we had a significant rebound in our wound division during the fiscal fourth quarter as reflected in revenues recovering to approximately 90% of prior year. We have experienced some COVID-19 related disruption in case volumes in specific markets such as Florida and Texas during July and August which were less impacted during the early stage of COVID-19.

We believe that we will continue to see pockets of disruption as the pandemic moves around for the next six months, but remain confident that the long-term opportunities we have to further grow our business continued to be there. We have used these past few months as constructively as possible, engaging with physicians, employees, hospitals and nurses through virtual technology and we’re in the process of launching two new products. The first is Therion, which is an amniotic membrane allograft manufactured by our partners at CryoLife.

We will also soon be bringing to market the CTX Pro [ph], the first new probe under the Nexus platform. CTX will provide surgeons with both a wider surface area to debride as well as faster overall debridement that we expect will help create an even faster adoption of Nexus. It is important to note that CTX is only compatible with the Nexus platform and not our legacy consoles. We’re also close to announcing a distribution deal with a significant partner from abroad in the xenograft arena, so there are a lot of good things happening in our wound business.

As it relates to our surgical division, we experienced a decline of almost 52% in international sales for the quarter. Almost every market was impacted. And although we saw some improvement in July, we believe that international sales will take a bit longer to recover and we will continue to monitor that very closely.

Domestic surgical sales declined dramatically in April after an exceptional first start to 2020 on the back of the Nexus commercial launch. Although domestic surgical sales declined 21% for the quarter, the division returned to growth by the end of June as surgical procedures continued their rebound.

Post our fiscal Q4, we’ve seen good momentum on the surgical business, improving at an even faster rate than the wound business. This is likely the result of the increased profitability for healthcare providers inherent in many of the spinal and neuro procedures we address within our surgical division, as well as the continued strong adoption of Nexus. We had set a goal of placing 150 Nexus units and we’re pleased to report that we exceeded that number.

Moving to the opportunities in our surgical division, we have a very strong pipeline for Nexus and we’ll focus our efforts on leveraging these opportunities to significantly grow and expand the Nexus footprint, providing the foundation for future handpiece and disposable probe sales as well as cross-selling opportunities and new product placements.

The first of these new products in the surgical division will launch later in calendar 2020 and will be the microdiskectomy solution to address microdecompression or microdiskectomy procedures related to herniated discs. In addition, we see many of the lesser complex spinal procedures moving to the ambulatory surgical centers, providing an opportunity for us to aggressively target ASCs as the post COVID-19 environment will likely incentivize physicians to move these procedures out of the hospitals.

We have continued our dialogue with potential partners and acquisition targets throughout the pandemic to evaluate adjacent and complementary technologies to bring on board as we have done on the wound front. We hope to be able to share some of these updates with you in the near future.

From a supply chain and inventory perspective, we have worked diligently to expand and derisk our supply chain, bringing in additional partners and suppliers that we are confident will help mitigate any future challenges to the supply chain and making sure we have dual vendors for each product.

In addition, we have strategically build up inventory levels of the Nexus console as well as the handpieces and disposables to best meet the growing demand we expect in future quarters.

Moving onto our sales resources, we have used these past few months to further the training of our direct sales team via online tutorials, surgeon seminars and other initiatives that provide valuable information and feedback to both physicians and our sales team across surgical and wound. Looking ahead, we expect to once again expand sales forces as we restart the hiring process in the coming months.

On the clinical front, we are happy to announce that we have resumed enrollment in our randomized controlled trial for diabetic foot ulcers and hope to have the significant and valuable study completed by the end of the calendar year.

As it relates to our financial position, which Joe will offer added detail, I want to highlight that we have taken a number of initiatives and put forth stringent controls to ensure we maintain a strong cash position in order to manage through the unprecedented environment, and that we’re in a healthy position financially.

With $38 million in cash, we have the means to adequately support and invest in the business. Be it across our initiatives to gain added operation and efficiency, improve inventory and procurement management, further our sales force training and development while continuing to invest in critically important research and new product development.

Our efforts during these past few months of unprecedented volatility and disruption have been marginally successful and have not only allowed us to overcome these highly uncertain times, but perhaps more importantly has placed Misonix in a position of added strength and improved our ability to leverage the opportunities ahead of us in the near, mid and long term.

In closing, we remain confident that the value propositions our consignment model brings to the healthcare facilities and practitioners has only become more attractive and relevant given the constrained budgets that many healthcare providers are experiencing, in particular regarding capital equipment expenditures and access to hospital facilities.

By consigning Nexus and offering world-class and industry-leading solutions for wound, spine and neuro, we bring a very compelling offering to the table and that is likely to be a changed business and operating environment post COVID-19.

With that, I’d like to now turn the call over to our CFO, Joe Dwyer. Joe?

Joseph Dwyer

Thanks, Stavros, and good afternoon, everyone. Taking a look at our financial results, fourth quarter revenue increased 40.6% to $13.7 million compared to $9.8 million in the fourth quarter of fiscal 2019.

On a pro forma basis, assuming we had acquired Solsys for the full fourth quarter of 2019, total revenue for the fourth quarter of 2020 decreased 21.6%, driven by a pro forma domestic revenue decline of 13.6% and an international revenue decline of 52.6%.

For the full year fiscal 2020, revenue increased by 60.8% to $62.5 million compared with $38.8 million in fiscal 2019. On a pro forma basis, revenue for fiscal 2020 increased 8.6%, which includes pro forma domestic revenue growth of 15.3% offset by an international revenue decline of 12.2%.

I’m pleased to report that top line growth was achieved while maintaining healthy margins with the gross margin percentage on sales for the fourth quarter coming in at 68.8% compared with 69.6% in the fourth quarter of last year. For the full year, gross margin was 70.0% compared with 70.2% in fiscal 2019.

Operating expenses increased $7.8 million during the fourth quarter of 2020 as compared with the fourth quarter of 2019 and increased by $28.4 million for the full year, primarily reflecting the acquisition of Solsys.

In the fourth quarter, sales and marketing expenses were $11.6 million compared with $4.4 million in the prior year period, primarily reflecting the acquisition of Solsys in addition to a $2.2 million bad debt charge we took during the quarter to reserve for exposure of our Chinese accounts receivable.

On a sequential basis without the bad debt reserve, we were able to lower sales and marketing expenses by over $2.2 million or 19% reflecting the various cost-cutting initiatives implemented during the past few months. G&A costs were down on a quarterly sequential basis by about $300,000 or 70% as were R&D expenses which fell by $629,000 or 34% compared with our third quarter.

On a sequential basis before the bad debt reserve, I’m also pleased with our ability to realign our overhead structure resulting in operating costs during the fourth quarter decreasing by $3.1 million or 17.6% from the third quarter of fiscal 2020, reflecting the various cost savings initiatives we implemented, including reductions in salary and headcount, T&E, marketing activities, discretionary spending along with a number of other overhead reductions. This led to a net loss of $8.5 million or $0.50 per share compared with a net loss of $2.3 million or $0.25 per share on the prior year period.

We reported a Q4 adjusted EBITDA loss of $3.4 million compared with an adjusted EBITDA gain of approximately $228,000 in the prior year period and an adjusted EBITDA loss of $3.8 million in the prior quarter. We’re pleased that we’re able to improve adjusted EBITDA in a difficult revenue quarter.

Moving on to cash flow and the balance sheet, we had $38 million in cash at June 30, largely as a result of gross proceeds of $34.6 million related to the equity offering we completed at the end of January 2020. We ended Q4 with approximately $44 million in debt and we are in compliance with all of our debt covenants.

Working capital as of June 30 was $47.7 million compared with $55.2 million at March 31, 2020. Cash used in operations for the fourth quarter was $5.4 million compared with $7.9 million we used in the third quarter and $8 million we used in the second quarter of fiscal 2020.

In the fourth quarter, cash used in operations consisted of $4.5 million for the net loss, less non-cash items and $900,000 for working capital. The sequential quarterly increase in inventory of $1.1 million was strategically made to increase inventory levels so that we are ready for acceleration in demand and procedural volumes anticipated to take place as the pandemic subsides.

Regarding guidance, given the continued uncertainty and volatility in both markets we operate and across the economy at large, we feel prudent not to provide specific guidance at this time.

In closing, we’ve taken meaningful steps to maintain our financial flexibility while continuing to support the growth of the business and positioning Misonix to operate more efficiently going forward, regardless of the operating environment. Despite the ongoing uncertainties, we believe that we are extremely well positioned to capture market share and despite the ongoing uncertainties remain excited about the future.

With that, I’d like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And we’ll take our first question today from Kyle Rose with Canaccord.

Kyle Rose

Great. I’m hoping you can hear me all right. It sounds like you’ve got a tough connection here. I just wanted to follow up a little bit on Nexus. It sounds like you’ve exceeded the 150 units as far as the first year. Maybe help us understand where those are really getting placed? Is it competitive accounts? Is it going deeper into existing, in BoneScalpel, SonaStar accounts? Are you seeing them more from a neuro and ortho or wound care side? Just help us characterize where that business is now and how we should think about that over the course of the next 12 months. Then I have one follow up.

Stavros Vizirgianakis

Sure, Kyle. Hi. In terms of Nexus, we did exceed the 150 units. That was really a combination of upgrade accounts and new accounts, competitor accounts. If we had to categorize it, the biggest gains obviously came on the BoneScalpel side but roughly 15% of the placements included the sale of neuro handpieces. So we basically achieved our goal to get a 15% penetration on the Nexus side on neuro during the first year. Our pipeline remains very robust going forward. So for the new year it’s an excess of 150 units as we stand right now. We’re not going to give specific guidance on it, but it’s even stronger than it was in the prior year. And I will say that we’re expecting more momentum on the neuro side of things to continue as well as we rollout more sites.

Kyle Rose

Great. And then the other question is, I understand that certainly in the hesitancy to provide guidance, particularly from a long-term perspective. Maybe just help investors understand – we’re 10 weeks or 8 weeks into the quarter, help us understand how the trends looked over the course of July and in August? And then you also talked a bit about your distribution agreements and some business development activity both on the wound and on the orthopedic side or the surgical side. How should we think about potential contributions of any types of agreements, particularly over the course of the next 12 months?

Stavros Vizirgianakis

Yes. I think if we have to start on the surgical side, we are hoping to announce a distribution agreement soon and that’s going to be on a complementary product on the neuro side of things. Obviously, it’s a difficult environment to launch new product but we’re going to take this opportunity to get the sales force trained up, just fully vested in the sale process in the coming months and then be in a position in the new calendar year to provide guidance from a revenue perspective. But I think it could add single digits to the sales side in terms of the neuro add. On the wound side, it’s an interesting one. It’s in the xenograft space, again, will probably be launched formally in the beginning of the calendar year. We’ll probably use the last quarter of this year to vest the sales process in the market. I think the focus there will be more squarely on the OR. That is the market that we are going after with the xeno product. But we should have more details and be able to share in the coming weeks, so it’s pretty imminent.

Kyle Rose

Great. Thank you for taking the questions.

Stavros Vizirgianakis

Thank you, Kyle.

Operator

Next, we’ll hear from Ryan Zimmerman with BTIG.

Ryan Zimmerman

Hi, guys. Can you hear me okay?

Stavros Vizirgianakis

Hi, Ryan. Yes.

Ryan Zimmerman

Great. Thank you. So a couple of questions from me. So this one, the new handpiece Stavros that you talked about it, it’s a little choppy but I think it’s called the CTX Pro but correct me if I wrong there. But one, when do you think about bringing that to market? Two, kind of what impact can that have? What’s the pace of launch of that? So that’s my first question. And then I have a couple of follow ups.

Stavros Vizirgianakis

Sure. So for the CTX Pro, we’re in the process of launching literally right now. Obviously this is going into the Nexus account. So from a revenue perspective, it’s not going to be significant straight out of the gate. But we think that this again increases our presence in the OR and as we start more aggressively going after those bigger wounds, we see that product is having a lot of utility. The sales force is also on the wound side fully integrated now and selling wound debridement. Everybody has been cross trained and has their expertise to sort of go into those cases and confidently pull out the product and get the physicians to use them. So we think that Nexus is just the logical next step on upgrade from a product perspective. We’ve seen a lot of positivity coming back from surgeons just in terms of speed of use and the fact that it can be a bigger area. So we think of that as a largely untapped market on the debridement. It’s difficult to quantify given all the disruption and the stop-start. As I say, we found wound a little bit choppy. It hasn’t been as steady as the spine and the neuro business where we’ve seen the most sequential improvement over time. So with wound, it’s a little bit disrupted but nonetheless big interest from the physicians on the product.

Ryan Zimmerman

That’s helpful. Joe, you talked a little bit about some of the things you’ve cut back on. I’d love to understand your expectation for maybe reinvesting back in the business as we recover, what you may have cut back on and what that does or what doesn’t do as it relates to your trials on TheraSkin, which I think Stavros mentioned, expect to resume enrollment here. But I’d love to understand from the expense side and then also the impact or the timing around TheraSkin trials? Thank you.

Joseph Dwyer

Sure. I think on expenses, we’ve reduced across the board with the idea that we would take this on a quarter-by-quarter basis. And we have our own thoughts on where we expect revenue to be if we find that we can exceed on the top line, we’ll start to invest back in, probably start with sales headcount, I would think, and invest in the sales and marketing engine. We have kept I guess a decent amount of money in the budget in the R&D side for these DFU studies that we have going on and we’ve got a number of other engineering projects on the surgical side that we have in development. So we still have a fairly robust budget there. But on things like across the board on T&E and tradeshows and things of that nature that a lot of that’s not happening anyway, but we’re going to keep that lower. And if it does start to come back, then we’ll reconsider.

Ryan Zimmerman

Got it.

Joseph Dwyer

And then you asked about – what was the other question?

Stavros Vizirgianakis

Yes. On the TheraSkin side, Ryan, to reiterate what Joe is saying, the 100-patient DFU study we think is pretty significant. It’s obviously a big spend item. Those are trials which cost well over $2 million. We think that that is the evidence that’s really needed to get more private pay funders to reimburse for all the TheraSkin products. So we’re hoping that by the end of the year we complete that study. Enrollment just passed the 50% mark as we speak and gaining momentum pretty rapidly. Obviously during the pandemic, we just thought it was prudent to stop the spend and also in our hospitals and wound centers that were open, almost frowned [ph] on you if you were coming in talking about clinical trials of any sort. So I think things are normalizing there and we’re hoping – we’ve brought on some additional sites for enrollment, so we’re hoping that we can have that wrapped up by the end of this calendar year.

Ryan Zimmerman

I appreciate it.

Operator

Our next question will come from Alex Nowak with Craig-Hallum Capital Group.

Alex Nowak

Great. Good afternoon, everyone. Following Kyle’s question here just in the prepared remarks, you said wound is back to I think you said 90% of prior levels. Was that a June specific comment and where has that level gone in July, August and so far in September?

Stavros Vizirgianakis

Yes. So in June, it had – basically, we experienced significant improvement from April. I would say April marked the low point. May, we’ve seen rapid improvement. And June, in the southern states, as I’ve said, Florida, Texas we’ve got big chunks of business down there. A lot of our sales force is in the southern part of the country. So we did experience disruption in July and August. We found the business to be choppy. I think the reality is during the early part of the pandemic, those markets were less effective. So we were able to show a fast recovery. And in some instances, no disruption in the Texas market and large parts of Florida at the beginning of the pandemic. So we see that coming back towards the latter part of August. September is a little bit early to tell, but we’re hopeful that September will continue to see the recovery. But we’re also cognizant of the fact that this thing moves around, there’s different disruptions by the week. So we think it will take a couple of months. We haven’t seen the same trajectory in terms of improvement that we’ve seen on the surgical business. Wound started improving a lot quicker and then sort of plateauing out and bumping along, getting better, getting worse; whereas with surgical was really badly impacted. A slower start to the recovery, a big acceleration in June and that has continued from June all the way through July and August and that’s domestic that we’re talking about.

Alex Nowak

To your point that you made about deferment of wound procedures potentially relating to amputations, how much of the improvement that you saw in June and July on the wound side do you think was a backlog that just needed to flush through? And maybe to that point, are there volumes that you’re seeing in August and now in September, would you characterize those as more organic, meaning it’s not a backlog. These are patients that need to be treated and are getting treated right now.

Stavros Vizirgianakis

Yes, I will say that that statement is fair in terms of would. I would say that you could classify it as organic. I think the reality is that if we look at the surgical business, if you draw the direct comparison between the two, I think there was definitely backlog on the surgical to work through. And wound, I would say is more organic. It’s just that you see the disruption in different regions more so than other places.

Alex Nowak

Okay, got it. And I know we’ve been focusing so much here on the U.S. right now, but what are you seeing outside the U.S.? Obviously, Europe is on summer holiday, so hard to engage there. But are you starting to see any signs that the recovery could be underway outside the U.S. as well?

Stavros Vizirgianakis

As I’ve said, the international business is a difficult one to quantify. What we’ve seen is that capital equipment purchases have been significantly impacted. And more than 60% of our international business is around capital equipment. So that has been impacted. Where we’ve seen green shoots is certainly on the disposable side of things. So typically June is a very strong month for us on the sales perspective. June was an extremely weak month on the international side. So if we look at the international business, we’ve actually grown in the month of April. So the slowdown in international sort of came off the domestic slowdown. I think that could have been distributors literally stocking up in April not knowing what was going to happen. In May and June, I think we could have gone on holiday and the international business wouldn’t have been affected. July came out and what was encouraging is most of our distributors were placing orders, but it was for disposable items. That tells us that surgery coming back, the products are sticky and no big capital equipment sales that was apparent throughout the world that there was not much going on, on that side. There’s been a big demand for Nexus. Our international customers have obviously heard about the success that we’re having in the U.S. So there is pressure on us to step up the launch of Nexus on the international front. As you’re aware, we decided to launch Nexus domestically and do very little on the international front. But I think that is pent-up demand. So we’re hoping that by the fourth calendar quarter, we can start rolling Nexus out into the international market. But we still think we’re in for a couple more months of disruption. Depending on the countries that you’re dealing with, the disruption varies from being significant to a gradual recovery. So we’ll know more in the next couple of months on that side.

Alex Nowak

Okay, understood. And then just one more if I could. As we look at others in the wound space, it does appear that you might be taking some share during the COVID environment, although it’s kind of hard to tell. So do you think that’s true? And is there going to be a trend in wound in the post COVID environment that there’s going to be consolidation or maybe standardization of wound products and it’s just harder for reps from smaller organizations to get into these hospitals?

Stavros Vizirgianakis

Yes, difficult one, Alex, to say with complete certainty. What we can share with you of what we’ve seen in the OR which has been a pretty seismic change in terms of access. Before there were no real issues with tissue reps getting into the OR. I think in a post COVID world where people want to limit the footprint in the OR, it’s very difficult if you’re just selling tissue to get into the OR. Where we’re finding – we’re having success is by having the debridement tool that is the door opener to get our people into the OR. I think from a cost perspective, I think that there’s going to be a consolidation in terms of products available on the shelf for surgeons to use. We’ve seen hospitals literally drill down to every dollar that they’re spending right now. Generally the feeling was within product if you were in a certain range, it was pretty much open hunting season in a lot of hospital systems. But what we see post COVID as people are really scrutinizing every dollar of cost, I think the reality is hospitals have been really squeezed from their margin perspective. So if you had to ask me, I would say there is going to be some consolidation that happens down the road. And from an OR perspective, it’s certainly more challenging than ever before to get behind that red line and to get in there and be close to the physician. And that’s what I think having an additional tool, like debridement, could possibly help. That’s how we’ve been – we’ve stepped up the development process for the CTX Pro. That was our first new probe that came out because we see a lot of growth on the OR side of the wound business.

Alex Nowak

That’s great. I really appreciate the update. Thank you.

Stavros Vizirgianakis

Sure.

Operator

This concludes the Q&A portion of the call. I’ll turn it back to management for closing remarks.

Stavros Vizirgianakis

Thank you, operator, and thank you everyone for spending time with us today. We appreciate your interest and support. I’d like to once again extend a very special thank you to the Misonix team members for their contributions in making Misonix a world-class company.

In closing, while the last few months have been extremely trying and the future remains clouded with uncertainty regarding the mid to long-term effects of the COVID-19 pandemic, we believe that our go-to-market product line, our sales resources, new product pipeline, operational efficiency initiative, balance sheet and liquidity and overall talent of the team we have assembled across the company will prepare us well to capitalize on the various opportunities ahead of us.

We look forward to speaking to you again when we report our fiscal 2021 first quarter results. In the interim, should you have any additional questions or if you’d like to schedule a formal meeting with management, please contact Norberto Aja, our Investor Relations firm JCIR at 212-835-8500. Thank you again and goodbye.

Operator

That does conclude today’s conference. Thank you for your participation. You may now disconnect.





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Tilly’s, Inc.’s (TLYS) CEO Ed Thomas on Q2 2020 Results – Earnings Call Transcript


Tilly’s, Inc. (NYSE:TLYS) Q2 2020 Results Earnings Conference Call September 3, 2020 4:30 PM ET

Company Participants

Gar Jackson – Investor Relations

Ed Thomas – President and Chief Executive Officer

Michael Henry – Chief Financial Officer

Conference Call Participants

David Buckley – Bank of America Merrill Lynch

Jeff Van Sinderen – B. Riley & Company, Inc.

Mitch Kummetz – Pivotal Research Group

Sharon Zackfia – William Blair & Company, L.L.C.

Matt Koranda – ROTH Capital Partners

Operator

Greetings. Welcome to Tilly’s Incorporated Second Quarter 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Gar Jackson. You may begin.

Gar Jackson

Good afternoon and welcome to the Tilly’s fiscal 2020 second quarter earnings call. Ed Thomas, President and CEO; and Michael Henry, CFO, will discuss the company’s results and then host the Q&A session. For a copy of Tilly’s earnings press release, please visit the Investor Relations section of the company’s website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days.

Certain forward-looking statements will be made during this call that reflect Tilly’s judgment and analysis only as of today, September 3, 2020 and actual results may differ materially from current expectations based on various factors affecting Tilly’s business, including impacts of and the company’s actions in response to the current COVID-19 pandemic. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2020 second quarter earnings release, which is furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer.

Today’s call will be limited to 1 hour and will include a Q&A session after our prepared remarks.

I now will turn the call over to Ed.

Ed Thomas

Thanks Gar. Good afternoon, everyone and thank you for joining us today. I want to kick off today’s call by thanking our entire Tilly’s team for their hard work combating this unprecedented and unpredictable COVID-19 environment. I’m very proud of everyone’s efforts fighting the unexpected challenges that we have faced together as we approach the six-month mark of the pandemic’s severe impact on our business.

Turning to the second quarter, it began with all 239 of our stores closed for the first two weeks of the quarter, beginning on May 15 and continuing through July, early July. We reopened all but four of our stores in a phased approach with new health protocols, customer traffic restrictions and reduced operating hours in place. Then on July 13 our home state of California ordered the closure of indoor malls. For the remainder of the quarter 33 of our 98 California stores, which are some of our more productive stores, were closed. Despite these complications, our second quarter results were better than we had anticipated.

Total net sales for the second quarter decreased by 16% compared to last year. Net sales from physical stores including all periods of store closures and net sales from new stores not yet open a full year increased 39.6% compared to last year’s second quarter. Comparable net sales from reopened stores declined 18% collectively during the second quarter following their respective reopening dates compared to last year, while customer traffic in reopened stores decreased more than 30% collectively.

E-commerce net sales grew by 128% compared to last year’s second quarter. The period of store closures that crossed the first and second quarters allowed us to focus solely on e-com inventory management and operations and coupled with our digital first merchandising mindset helped us deliver significant e-com topline growth, improved product margins and operational efficiency and profitability from e-com. We also expanded our ship from store capabilities, introduced curbside pickup in selected stores during the quarter, and I’ve just recently identified five or six stores across the country to be utilized as hub stores for additional e-commerce fulfillment, while in-store activity remained significantly reduced.

In terms of merchandising, all departments comp negative as a result of the various periods of pandemic related store closures this year compared to a normal course of business last year. Women’s, men’s and footwear were our best performers. Girls, accessories and boys were weakest. Under Tricia’s leadership we launched several new brands during the quarter, including BDG by Urban Outfitters, women’s Nike, Free People Movement, Lukas Sport [ph], Fjallraven, and several new skate brands. We are excited about the prospects for these new brands and we continue to evolve the Tilly’s merchandise assortment.

Turning to real estate, we continue to negotiate with our landlords to reach mutually acceptable solutions for rents we have withheld during periods of store closures and we continue to negotiate for reductions in future rent obligations in light of the reduced operating hours and customer traffic restrictions associated with the ongoing pandemic. For the most part we have had thoughtful engagements from our landlords.

To date, we have been successful in reaching agreements in principle to address approximately 70% of our total stores. Due to the sensitivity and evolving nature of these discussions, we will not share any particular details for those negotiations other than to say we appreciate the spirit of partnership expressed towards our company by most of our landlords.

In terms of new stores and other capital expenditures, we currently expect to open two new stores during fiscal 2020, with one opening in early October and one opening in mid-November. We sincerely thank those landlords who are understanding about the uncertainties of the current environment and allowed us to defer new store capital expenditures until 2021 for the seven other new stores we had originally planned to open during 2020. We currently expect total capital expenditures for fiscal 2020, including the two new stores and continuing customer facing and other technology investments to be in the range of approximately $8 million to $10 million.

Turning to the third quarter, the back-to-school season is typically our second most important period behind the holiday season for generating sales. We started the third quarter going up against our two largest sales weeks of last year’s third quarter, which got us off to a very tough start in terms of comp sales. We also entered into this year’s third quarter with the 33 California stores closed that I referenced earlier.

In many of the markets in which we operate, school districts have announced delayed start dates compared to last year and/or have converted to an online only or hybrid format and these plans continue to evolve. These factors have had a meaningfully negative impact on our comparable net sales results when compared to last year, which included a normal healthy back-to-school season.

Our August total net sales, including the impact of store closures in net sales from stores not yet open a full year, decreased 35.6% in total with net sales from stores down 46.3% and e-commerce up 40.6%. The trend of our comp performance, while still negative, has been improving from week to week with each passing week following the week one of August. We are encouraged to have seen a recent uptick in business in certain markets wherein some schools have reopened.

We cannot be certain if this improving trend from week to week that we saw in August will continue for the remainder of the quarter, nor can we predict whether current expectations for schools going back will change, whether stores will remain open for the entirety of the quarter or how consumer behaviors may change as the pandemic continues to evolve. However, we are trying to be proactive and in anticipation of this significantly reduced back-to-school period this year, we have planned our third quarter inventory receipts for stores well below last year’s levels.

In closing, I want to thank our team again for working so hard to carefully manage our business during this pandemic period. We are not out of the woods yet so to speak, but we are focused on growing and protecting our business for the longer term despite the ongoing pandemic.

Mike will now provide more details on our second quarter operating performance and balance sheet. Mike?

Michael Henry

Thanks Ed. Good afternoon. As Ed noted, our fiscal 2020 second quarter operating results were significantly impacted by the ongoing COVID-19 pandemic, including various periods of store closures, reduced customer traffic and sales results following the phased reopening of our stores throughout the quarter, and the subsequent re-closure of California indoor malls late in the quarter. Details of our second quarter operating performance compared to last year’s second quarter were as follows.

Total net sales for the second quarter were $135.8 million, a decrease of $25.9 million or 16% compared to $161.7 million last year. Net sales from physical stores were $83.9 million, a decrease of $55.1 million or 39.6% compared to $138.9 million last year. Net sales from stores represented 61.7% of total net sales for the quarter compared to 85.9% of total net sales last year.

E-commerce net sales were $52.0 million, an increase of $29.2 million or 127.8% compared to $22.8 million last year. E-commerce net sales represented 38.3% of total net sales for the quarter compared to 14.1% last year. We ended the quarter with 238 total stores, including one RSQ-branded pop-up store of which 33 California stores were closed as a result of the COVID-19 pandemic. This compares to 229 total stores including three RSQ-branded pop-up stores, all of which were open to the public last year.

Gross profit, including buying, distribution and occupancy expenses was $41.7 million or 30.7% of net sales compared to $51.7 million or 32.0% of net sales last year. Product margins improved by approximately 360 basis points compared to last year, primarily due to strong regular price selling upon the reopening of our stores. Buying, distribution, and occupancy costs, deleveraged by approximately 490 basis points collectively against lower total sales.

Occupancy costs, despite being reduced by $0.4 million on a larger store base compared to last year deleveraged by 270 basis points against lower total net sales. Distribution expenses deleveraged by 200 basis points primarily due to an increase in e-com shipping costs of $3 million associated with the significant increase in e-commerce orders. Buying costs deleveraged 20 basis points on lower total sales.

Total SG&A expenses were $34.0 million or 25.0% of net sales compared to $39.6 million or 24.5% of net sales last year. Total SG&A was reduced by $5.6 million compared to last year, but deleveraged 50 basis points as a percentage of net sales on lower total sales. Total payroll and related benefits decreased by $7.5 million primarily resulting from the various periods of store closures during the quarter and careful management of staffing levels upon reopening.

Most other expenses were also reduced compared to last year. The primary exception to this was increased e-com marketing and fulfillment expenses of $3.9 million due to the significant growth in e-commerce orders. Operating income was $7.7 million or 5.7% of net sales compared to $12.1 million or 7.5% of net sales last year. This decline in operating results was directly attributable to the impact of the COVID-19 pandemic on our retail stores.

Other income decreased to $0.3 million from $0.6 million last year, primarily due to having lower total cash and marketable securities, earning lower interest rates on our investments and paying interest on borrowed cash compared to last year. Income tax expense was $2.8 million or 34.3% of our pretax income compared to $3.4 million or 26.8% of pretax income last year. We cannot accurately predict what our effective income tax rate will be going forward as it is dependent upon our operating results for the back half of the fiscal year, which are also unpredictable in the current environment.

Net income was $5.3 million or $0.18 per diluted share compared to $9.3 million or $0.31 per diluted share last year. Weighted average shares were 29.7 million for both periods.

Turning to our balance sheet, we ended the second quarter with cash and marketable securities totaling $148.9 million including $23.7 million borrowed under our revolving credit facility and approximately $13.9 million of withheld store lease payments. Excluding borrowed cash and withheld store lease payments, total cash and marketable securities were $111.3 million compared to total cash and marketable securities of $124.8 million and no debt or withheld store lease payments last year. We ended the quarter with inventories per square foot down 8.9%. Year-to-date capital expenditures were $4.6 million compared to $4.8 million last year.

Turning to the third quarter, given the continuing unpredictability surrounding the COVID-19 pandemic, including but not limited to its impacts on consumer behavior, our ability to continue to operate some or all of our stores at any point in time, or our e-commerce business, and the adverse impacts on the back-to-school season so far this year, we are unable to reliably predict our future sales or earnings at this time and therefore we will not be providing any specific guidance.

However, we thought it was important to share certain facts to help everyone better understand our current environment. First, as we noted earlier, we ended the third quarter with 33 of our California stores closed. These stores represent 14% of our total store count of 238, and in the aggregate, accounted for $22 million or 14% of our total net sales during last year’s third quarter.

On Friday last week, the State of California issued new guidelines which affected the reopening of businesses, including indoor malls. As a result of these new guidelines, the company was able to reopen 15 of these closed California stores on Monday of this week, 6 more on Tuesday, 1 on Wednesday, and 1 more is expected to open on Friday. We do not yet know when the remaining 10 of these California stores will be able to reopen, most notably in Los Angeles County which has 8 of the 10 remaining closed stores.

Next, if history is relevant in the current environment, fiscal August has represented approximately 50% of third quarter net sales for each of the past four years. Our fiscal 2020, August net sales were $50.2 million dollars compared to $77.9 million for August last year. However, there are a few reasons to believe that results could be relatively better for the remainder of the quarter.

With a delayed back-to-school date this year, we could see some business shift to later in the quarter than in prior years, although still below prior levels overall. Comparable net sales results have been improving trend wise from week to week as we go up against smaller sales weeks from last year. We have also been encouraged to see an uptick in business following the reopening of certain schools within the markets in which we operate. However, we can’t be certain that this near term uptick will sustain for the remainder of the quarter.

Finally collective comparable net sales from reopened stores since their respective reopening dates and through September 1, 2020 compared to the respective comparable fiscal date of last year have declined 25.5%. Taken together, we believe these factors make it appear more likely than not that our third quarter net sales will be meaningfully below last year’s $154.8 million. We cannot predict with any certainty what our net sales may specifically be for the quarter, given all the factors we have discussed.

We continue to carefully manage inventory levels as Ed referenced earlier, as well as all expenses in order to protect our cash position, which as of September 2, was $161.9 million, including borrowed cash and withheld store lease payments. Based on all currently available information, we believe our cash position and credit facility availability will be more than sufficient to support our operations for at least the next year.

Operator we will now go to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from David Buckley with Bank of America. Please proceed with your question.

David Buckley

Hi guys, thanks. Mike, I appreciate all the details. Just thinking about your gross margin in the third quarter for a minute, how are you thinking about each bucket in terms of merge [ph] margin buying, distribution and occupancy? And then, just looking out into the second half of the year, just your overall outlook for the holiday season, how are you planning for stores with traffic likely to remain weak, and the expected e-com mix shift?

Michael Henry

Yes, so I would expect our product margins to remain fairly close to last year, generally speaking, absent some additional store closures or things of that nature. When you look at the year-to-date first half our product margins are only down a little bit compared to last year, and so I would expect that probably to remain somewhat consistent without knowing specifically where that might fall out depending on how the rest of back-to-school plays out. I think you should expect to see some deleverage from distribution and occupancy cost, just as we did in the second quarter.

Given the increase in e-com shipping costs which is likely to continue as we expect e-com to continue to be strong double-digit positive during the third quarter and you’re going to see some occupancy deleverage, because sales are likely to be down relative to last year, even though we have reduced those expenses in raw dollars as we noted during the second quarter. So I think directionally those will probably remain consistent with each other.

As it relates to the holiday season, we’re planning stores continue to be negative for the rest of the year at this stage based on what we know as of today. We noted that for the third quarter we’ve planned our store inventory receipts significantly below last year, the same remains the case in the fourth quarter. We do think there probably will be something of a larger shift towards e-com than even we typically see during the fourth quarter. Where exactly those things fall out is anybody’s best guess.

David Buckley

All right, thanks Mike.

Operator

And our next question is from Jeff Van Sinderen with B. Riley. Please proceed with your question.

Jeff Van Sinderen

First, let me say good work in Q2. Great to see the metrics better than everyone expected. Obviously a tough compare and we see the August metrics, but can you maybe expand on your thinking around back-to-school, just given the sequential improvement that you’ve seen so far week to week? What are you seeing in markets where the kids are actually physically going back to school? I think you’ve sort of touched on that in your commentary, just wondering if there’s any more to add to that.

Ed Thomas

Yes, we’ve only had a fewer markets Jeff, where that have actually gone back-to-school, but where we’ve seen that up, we’ve seen an uptick in my business as Mike mentioned earlier. It’s hard to predict whether that sustains itself, or whether that’s going to happen in every market that goes back-to-school, but certainly we’ve seen some encouraging signs there, some positive signs in terms of improvement in our overall business within those markets. So, it’s hard to predict. I mean, there’s no material difference, there has not been a material difference in performance from mall to mall stores. Traffic has generally been down everywhere, and I don’t think we’re alone with that and where traffic has improved, we’ve seen a relative improvement to our business too.

Michael Henry

Yes and I’m looking at the at the market performance specifically here Jeff. So Florida has been very strong for us in the last two to three weeks. Colorado and Utah has been very strong. Arizona and Nevada have been positive for two to three, four weeks in a row now. And even though the California stores that we mentioned, the indoor mall stores that just reopened, they’ve had strong positive comps these last couple days. Couple of days doesn’t make a long term trend, but it’s at least encouraging and that’s part of what we’re referencing and seeing an uptick is some of these markets, as well as the very near term reopening comps from the stores that had been closed for a month and a half.

Jeff Van Sinderen

Okay so, so it’s possible we could gain some momentum here over the next month or so, I guess we just have to wait and see.

Michael Henry

Yes, it is possible, that’s why we that’s why we phrased our thoughts about the third quarter in particular. You know, August as a percentage has been very consistent, but this year is not a normal August obviously. I’d like to think that August was overly depressed because of the push out of back-to-school dates. And then again, seeing this relative improvement from week to week in trend as well as the positive comps we’ve seen overall the last two days, we’ve had total comp store sales excluding e-com positive the last two days, so that’s a good sign too.

Again, we don’t know if that’s going to sustain. We don’t know, hope it is just a temporary blip, it’s hard to know anything these days, but at least there are some positive signs that maybe we could recover a little ground in the remainder of the quarter as we go up against much smaller revenue weeks than what was in August. Each of the weeks of August is bigger than any other week for the remainder of the quarter. So we’ve taken the hits of going up against the high volume weeks. And that’ll be interesting to see how much ground we can recover and if we can recover through the remainder of this quarter, sorry.

Jeff Van Sinderen

Right, okay that’s helpful. And then Ed, maybe you can just kind of give us a sense of your longer term thinking at this point around the concentration of your business in digital versus brick and mortar. I know you talked about negotiating rents with the landlord’s. Your e-com business I think was approaching 40% of your business in Q2, which certainly I wouldn’t have expected that if you’d asked me last year, but it’s great to see. And then just maybe thinking around how you might evolve your real estate strategy as e-commerce grows?

Ed Thomas

Well, you know, we’ve said for quite a while that we think before the pandemic, we thought there was ample room for growth in both with physical stores and e-com and we thought we were very underdeveloped in e-com which we were. So the time and effort that we’ve put in the last few months dedicated to e-com and being able to concentrate more on it, has shown us how much better it can be. But I don’t think we’ve peaked. I know we have not peaked at all as far as the e-com business goes. So I think we’ve got a lot a lot of runway ahead of a positive runway ahead of us.

In terms of physical stores, I think it’s a moving target right now. We have to understand, I think understanding how particular locations, whether it’s off mall or mall, what they tend to mix ends up with is a big question mark for all of us in the industry. So we’re going to be pretty, like we always are, we’re going to be pretty careful and make sure we understand the core tendency that if we’re going to go in to pick a particular location who’s going to survive and who won’t. But we’re going to continue to open stores. There’s no question about it, and I would say that it’s going to be still be a combination or a continuation of our strategy of opening off-mall and mall stores both.

Jeff Van Sinderen

Okay, and hopefully those rents will be substantially lower than they would have been pre COVID. I’ll leave it there and take the rest offline. Thanks very much.

Ed Thomas

Okay, Jeff. Thank you.

Operator

Our next question is from Mitch Kummetz with Pivotal Research. Please proceed with your question.

Mitch Kummetz

Yes, thanks for taking my questions. I definitely appreciate all the color, particularly around back-to-school, I know you guys, give more information than most, but that being said, I’m still hoping for a little bit more just to make sure I better understand the trajectory. So you gave the kind of August numbers, you also sort of split it out first two weeks, second two weeks. I think first two were down 45. I think I backed into the second two down around 19, but the first two days of I guess, September sounds like they’re positive. Is there any way you can give August by week or can you speak to maybe the last week of August or…?

Michael Henry

Yes directionally, you’re right Mitch. So the first week of August we were down over 50%. In the second week we were down almost 40, and the third week we were down 24, and the fourth week we were down 14. So it’s been moving meaningfully by week. This week, we referenced the last two days being positive overall. The quirk of this week is that Monday we were going up against Labor Day last year.

Labor Day was almost as early as it could possibly be last year it was Monday September 2nd which the comparative date was Monday August 31 this year. We’ll have the positive side of that compare this year coming up this Monday, which will be this year’s Labor Day, which is as late as it can possibly be this year. So we did take a significant negative entering this week, because of that Labor Day compare, we should get the offset of that next week.

Trajectory wise, it just looks like things are continuing to improve from week to week and as we referenced, where we have seen schools go back, we’re seeing some nice upticks in business and again we mentioned the early results from the California reopened store. So there’s reason to hope a little bit.

Ed Thomas

We’ve seen enough now Mitch where the schools are going back, we’ve seen enough of a change in our trends to give us a little bit more confidence in how things will proceed going forward.

Mitch Kummetz

Okay. And do you guys have any metrics that you can speak to on, like, I had a company report earlier this week that said, by the end of August 65% of schools were back versus 95% a year ago, and when they said 65% back then that is combination of in person and virtual versus 35 that had been delayed. I don’t know if you have any numbers that you could speak to around that and the markets where you guys have stores or even, yes.

Ed Thomas

Off the top of my head now, but you know it really varies significantly, not only by state, but within the state itself.

Mitch Kummetz

Yep.

Ed Thomas

So, for example, right in our backyard here, LA County is completely different than Orange County. So and it really is a moving target to try to figure out okay, when are they really going to go back and stuff like that. So we don’t have enough that we could share with you, other than…

Mitch Kummetz

That’s fair.

Michael Henry

It keeps changing. Yes, the last time, I looked at this a couple of weeks ago and I think I had counted 75 stores that had a meaningful delay in their back-to-school timing, relative to last year but again this keeps changing every single week and sometimes within the week so…

Mitch Kummetz

Got it.

Michael Henry

I haven’t kept up with it honestly.

Mitch Kummetz

And then, Mike I was trying to hope to strip out the impact of the closed California stores, and I think you said $22 million in sales in the third quarter of last year, and I think you also made a comment that August typically represents 50% of the quarters. Is it fair to say that those stores we’re about $11 million in August last year, or is it less than that, because California typically goes back-to-school later?

Michael Henry

I don’t have the August break out of those stores in particular, but given the relative penetration of August, it’s going to be pretty close to that plus or minus.

Mitch Kummetz

Okay. And then just a couple of quick ones. Got it. On the margins, so store payroll was down $7.5 million year-over-year in the quarter. I would assume that it will be down as well in Q3, but down less than that, just given how many store opening days you have this quarter versus last quarter, is that the right way to think about it?

Michael Henry

Yes, I think that’s a — I think that’s a fair expectation, certainly. I would expect it to be down year-over-year, but yes, not nearly as much as it was in Q2, with the caveat that stores don’t reclose.

Mitch Kummetz

Sure. And should shipping deleverage be less, less negative in Q3 as ship — as e-com penetration probably goes down a little bit, again just because you’re going to have more stores open or…?

Michael Henry

It just depends what the balance of e-com relative to stores is and how those play out? It’s hard to say for sure.

Mitch Kummetz

Okay, fair enough right. Thanks, guys.

Ed Thomas

But the good thing is we’ve really expanded our ability. We’ve always had the ability to ship from store, but we have a lot more flexibility of where we can ship from in addition to our e-com fulfillment center, and that might — that should help us long-term.

Mitch Kummetz

Okay, thanks again and good luck.

Ed Thomas

All right.

Michael Henry

Thanks, Mitch.

Operator

And our next question is from Sharon Zackfia with William Blair. Please proceed with your question.

Sharon Zackfia

Hi, good afternoon. I guess I had a question on that, that had less to do with back-to-school and just how you’re thinking about driving urgency in the business. And I know historically, you’ve used a lot of events, really to drive excitement around Tilly’s. And in this environment, I’m just curious how you think about driving that excitement for consumers, whether it’s, to come into the stores or to go online?

Ed Thomas

Hi, I Sharon. Yes, the event, the days of the events and localized events are temporarily suspended until we get to somewhat of a normal period out there with store traffic and people shopping patterns, but we haven’t only used events to drive traffic to our stores. And I think you know well that we don’t, generally we don’t promote much as a company. So it’s not going to be price driven.

There’s a big — we continue to work with our loyalty base, our loyalty customers and work with them, keep in contact with them, which those customers end up being the best multichannel shoppers for us. And then continuation of introduction of new categories for new brands has always been part of our formula and we’re going to continue to do that going forward. So pretty much all we know right now.

Sharon Zackfia

Just a follow-up on that. Do you have any stats on how much loyalty is comprising of your sales at this point versus kind of pre-pandemic?

Ed Thomas

We do, but we do not disclose it. Sorry.

Sharon Zackfia

Okay, thank you.

Operator

And our next question is from Matt Koranda with ROTH Capital Partners. Please proceed with your question.

Matt Koranda

Hi guys, thanks. You shared the comp cadence earlier for August which was super helpful, but I was wondering, can you just clarify that was all in year-over-year comparison including e-com, is that correct?

Michael Henry

Yes, that did include e-commerce during, during that cadence for sure.

Matt Koranda

Okay. And any material split in terms of the way to that performs within the month, I mean, I would assume it was relatively steady but any help just on the cadence there?

Michael Henry

The week-by-week cadence?

Matt Koranda

Yes.

Michael Henry

Yes, so we shared that just a few minutes ago when Mitch asked about that. So, week one, we were down a little over 50%. And then it…

Matt Koranda

Mike Sorry, just to clarify, I was talking about e-com specifically, not just the consolidated, I’m just trying to parse out store versus e-com comparison in the month there?

Michael Henry

E-com strengthened as the weeks went on too. So e-com was up double-digits each week, but it continued to strengthen as the month went on. So it was up in the teens in week one, up over 40% in week two, then almost 60% in week three and more than 60% in week four, so it’s been accelerating to the positive just as stores. I guess, I’ve been getting less negative.

Matt Koranda

Got it. Now that makes sense. Okay, that’s very helpful. And then just curious if you could talk about inventory position and how we feel there. Obviously, you guys have done a very nice job managing that down, but are we light anywhere? Are we heavy in particular in areas? And then maybe you could just talk generally about sort of regional differences and sort of merchandise sales. And what are you seeing in areas where you’ve got physical back-to-school versus kind of virtual, any material differences to point out for us?

Ed Thomas

Well as far as the inventory goes, our inventory is in great shape. It’s probably never been as clean as it is. Tricia and the merchandise team did an outstanding job of managing through from the beginning of managing, making sure that we were very surgical in our approach to cancellations, and being able to capitalize on things that we saw that were good. There is always going to be some spots in the inventory, maybe a product so that is such a such a great seller that you’re not going to have enough, but that’s not been caused by anything related to the recent environment at all.

I would say nothing out of the norm. The inventory is really in good shape. And what’s been difficult is to forecast what our sales, store sales are going to be going forward because of all the volatility in the environment stuff and we are somewhat in the more of in a chase mode for certain inventory than we normally would be because of that, but so far, so good.

Matt Koranda

Okay, very helpful. And then maybe one for Mike, I noticed, cash balance still up in the month of August, I guess, the September an imbalance that you shared. Anything to note there, I would just assume, I guess that you guys are still managing inventory very effectively and flushing cash, but anything else that we should be aware of there or think about as it pertains to kind of working capital?

Michael Henry

Well, again, any specific numbers are hard to speak to because it just depends on where sales go and we’ve acknowledged it’s impossible to predict anything right now. That being said, we’ve run all kinds of different scenarios and trying to project our business and what actions we need to take, what we need to do to protect inventory positioning, protect balance sheet positioning. We expect to continue to have, well more than $100 million of cash and investments on a go forward basis for the remainder of this year.

Not expecting to have any meaningful problems from balance sheet perspective. Thankfully, we entered this whole pandemic situation with an extremely strong balance sheet. And we’ve been very, very diligent and serious about managing inventory and expenses in this pandemic period. So I feel as good as I can about our balance sheet in this environment, and really not anticipating having any issues.

Matt Koranda

Okay, that makes sense. Maybe I’ll sneak one more in here. Sorry, guys. I’m just curious if you got like, can you give us a sense for how you’re sort of thinking about market share? I know back-to-school and there’s a lot of gyrations in August and the year-over-year comparisons are kind of a little lackey here, but how are you guys thinking about your overall market share going forward?

It just seems like maybe you guys have outperformed a couple of specialty retailer peers, but are you losing share to big box? I mean, any general whether you guys are tracking market share and how we should be thinking about that, going forward any I think kind of in Q3, Q4?

Ed Thomas

I mean, in my thoughts are, with all the store closures in both specialty and department stores in particular, I think it’s an opportunity to gain more market share sooner rather than later. So I think our merchandise assortment is unparalleled out there by most retailers. And I think it’s an opportunity for us to gain new customers as a result of certain store closures or chain closures.

Matt Koranda

That makes sense. Thank you, guys. I’ll jump back in queue.

Ed Thomas

Okay, thanks.

Operator

And we have reached the end of our question-and-answer session and I will now turn the call back over to Ed Thomas for closing remarks.

Ed Thomas

Thank you all for joining us on the call today. We look forward to sharing further business updates with you following the conclusion of the third quarter, and Black Friday weekend. Have a good evening everyone.

Operator

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.





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