Quick ZUO take

Hey guys,

Not a premium analyst, just sharing my thoughts.

It’s kind of scary to see a stock down 15%+ after hours, but remember – this just puts it back where it was on about Valentine’s Day. Let’s not forget that.

I wrote an article about what I was hoping for which you can read here: https://www.fool.com/investing/2019/03/20/zuora-earnings-2-t…

Overall rev growth I don’t really care to analyze.

Here’s what we know about the important stuff:

Subscription revenue grew 35%

Yes, that’s a slowdown from the previous quarter. But it’s also 35% subscription revenue growth.

Customers with contracts over $100K reached 526 – up 27% for the year

That’s a pretty solid number. These customers represent 85% of subscription revenue for the company, so it’s really the key figure to be watching.

Dollar-based net expansion was 112%

Some might be upset about this as it slowed from 115% last quarter. But it’s also on the high-end of management’s long-term guidance.

Here’s how I’m thinking about it:

  • Lots of investors see SaaS companies growing like bonkers – TWLO, MDB, OKTA. These guys are providing something that people want right now and their net expansion rates are bonkers.

  • ZUO is growing nowhere near that fast. CEO/Founder Tien Tzuo (who, I agree with some skeptics, can be a bit to rah-rah) has said from the beginning subscription rev growth will be between 25% and 30% for a number of years – maybe even a decade. If that’s true, we should be more than happy to buy now and let that compounding happen. (25% growth for a decade compounds to 830% subs revenue growth – or about $1.6 billion in subscription revenue)

  • Unlike TWLO, MDB, or OKTA – ZUO has to convince their customers than subscriptions make more sense than one-off sales. That’s not an easy sell – and it’s something that investors need to carefully consider before buying into ZUO.

  • The company will lose over $40M in FCF next year (though it would be $32M if not for a new HQ). It will probably be FCF negative in the following year as well. But this is what it said would happen when it went public, so that shouldn’t be too surprising

  • The real question is this: Is this a one-trick pony. Zuora Billing does most of the heavy lifting. Tzuo talked about Collect – but it felt forced. RevPro is supposed to be the next big contributor, but that remains to be seen. I have to believe with all the data ZUO has, it should be able to offer new tools, but that will take time.

In the end, I think it was a solid report – even if the stock movement is a bit disheartening. I bought the largest bulk of shares when they were near $16 – so I’m still very happy with my gains. At roughly 2% of my portfolio – I’m at a wait and see place.

My 2 cents,

Long ZUO


Not a premium analyst, just sharing my thoughts.

Eh? I thought your status of premium analyst was a universally accepted and immutable fact.

I guess you didn’t get the memo.