Running ZUO through the Anti-fragile Framework

Greetings Fools,

I don’t post too often here, but am an avid lurker :slight_smile: I saw the discussion of Zuora and wanted to throw my two cents in. You can see the results of the framework below, but I wanted to add a few thoughts here on the comments made.

Personally, the professional services don’t both me at all. This is the cost of getting people set up. And its also a sign of a moat – the switching costs for customers are high. If Zuora had trouble getting people to sign up, that’d be a problem. But that doesn’t seem to be the case – the number of contracts with over $100K in annual subscription volume has more than doubled in less than three years. As has been mentioned many times, I think this will be less and less of an issue as time passes.

Personally, what seems the most important is that revenue retention has increased since going public, and subscription revenue growth has accelerated since going public.

I’ll get off my soap box now:) Here’s my run-down, and in full disclosure, ZUO makes up 2.2% of my real-life holdings.

Using my Anti-fragile framework, I wanted to show how ZUO stacks up.

Barbell Strategy

Mission Statement
“to enable all companies to be successful in the subscription economy.””

Earlier on the webpage that contains the mission statement, it outlines what it sees happening in the world, namely, that “one day, every company will be part of the subscription economy.”

Simple: Yes.
Optionable: Very optionable – right now, billing and revenue recognition are the main focuses. But there are a zillion different directions this could take.
Inspirational: Yes! I love the idea of people owning less, but that’s just me :slight_smile:

+2 points


Network Effect: This is a weaker moat, but an important one nonetheless. There really aren’t that many companies as laser-focused on this niche as Zuora. The more clients the company gets – and it has highlighted in conference calls that we’re talking about much more than just tech companies, like Porta Potties and lawn mowing services – the more data it has on where this niche is headed. It will be one of the only companies with this data, and it can use it to make better and more relevant solutions than the competition.
+1.0 points

High Switching-Costs: Let’s focus on RevPro and billing, since those are the major products the company offers. (It has also recently started bundling products). Once a company has everything streamlined on Zuora’s platform, the switching costs are high. Not only that, but Zuora can collect and dissect data for customers that they likely can’t take with them if they choose another provider. In the end, the dollar-based retention rate has consistently stayed above 100% (115% in the most recent quarter), which means customers are sticking with Zuora.
+2 point

That 115% retention rate is important. It shows that Zuora customers are not only sticking with the service, but they are adding more functionality over time as well. I’m not certain the company would ever venture outside of offering software (and the requisite professional services that come with helping set them up). But there are so many areas it can touch in the subscription economy. It’s already gotten revenue recognition and billing, but there’s a lot more to be had.

+2.5 points

Skin in the game

Role of founder: Tien Tzuo is still the CEO
+1 point

Insider Holdings As of the last proxy, Tzuo owned 10% of shares outstanding, and insiders held 43% of the company’s shares.
+1 points

Glassdoor: With 260 reviews, Zuora has a 4.6 star rating. Tzuo has a 97% approval rating, 95% would recommend to a friend, and 95% have a positive business outlook.
+1 point

Financial Fortitude

Financial statements
Cash: $175 million
Debt: $12 million
Free Cash Flow: ($33 million)

Having – basically – zero debt is enormously important. Zuora is still investing heavily in its infrastructure and grabbing market share. That said, while I don’t think it will continue losing $33 million for much longer, such a cash outflow does introduce some fragility in the short term if there were an economic downturn.
-0.5 points

Concentration Risk
+0 points

Total Score: 10 points

I’ve run companies through this framework for well over a year, but I do it anew every time (I find that doing so…while laborious…forces me to be more aware of the current situation). As such, I don’t have a huge database to draw from. This lands Zuora near the top of the list.

See all my holdings here:

What is Antifragile framework and how has it performed?

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Hi Brian.

I think you know that I’m a big fan of your Antifragile analyses, but I wanted to highlight something, although it is probably off-topic for this board…

Inspirational: Yes! I love the idea of people owning less, but that’s just me :slight_smile:

A lesson that I learned early in life is that owning is better than renting, provided you’ve chosen the assets appropriately. I’ve always lived below my means, and agree that owning less is better than owning more. The premise that owning more brings greater happiness proves illusory upon close inspection. However, the idea of subscribing is more akin to “renting” than either “ownership” or “doing without” (or, even better, not feeling as if you “need” that thing in the first place). As such, because the upfront payment seems manageable, I suspect a subscription model entices greater consumption (and cost burden), rather than less, for many people. That’s not bad for a company like Zuora, but I’m not sure it serves the greater good, so it is an “idea” I’d be hesitant to “love”.

For most investors saving for retirement, their outcome is determined less by asset allocation and more by savings rates. I don’t have any links that back that statement, but I know T. Rowe Price has referenced studies that make that claim. Asset choices like the ones being made on this board are indeed game-changing, but rare enough that I think the studies are accurate. So I’d advise anyone who is unsure they can sustainably achieve Saul-like returns to save first, own judiciously, and subscribe/rent even more judiciously.

Fool on!
Thanks and best wishes,
TMFDatabaseBob (no position in ZUO, but it has been on my Watch List for a while. It seems to be a first-mover in an interesting niche, and claims that the subscription model is difficult to code into most companies’ systems. I’ve always been a bit too suspicious of that claim to make an investment, but I’d love to hear evidence to the contrary.)
See my holdings here:
Peace on Earth

Please note: I am not a member of any newsletter team. My opinions are my own and do not necessarily reflect those of the TMF advisers. I am not an investment professional, merely an investor.


I love the idea of owning less.
Less headaches to deal with.

Time is money. Time is precious. Priceless even!

It’s annoying when my dishwasher or washing machine breaks down. Or when there’s a leak in the bathroom.
Normally I spend some time trying to fix it, give up, and figure out whether the item is still under warranty or not.
Same with cars. I’ve lived without a car for 10 years. I dread moving to a place where a car is required. The nuisance of taking it in for a service every year…etc

If I could, I’d rent everything. So long as the cost of renting/leasing it is not too much of a premium over the cost of owning it + servicing it for the average life-time of the product.
Why shouldn’t you be able to lease a washing machine from a company, pay a very slight premium so they’re profitable, where they have a network of people ready to service/replace the machine if anything goes wrong. Minimal down-time, minimal costs.
Same with a car.

This all relies on healthy competition though, to keep costs down. The problem with housing is that it’s always in short supply. You’re pretty much guaranteed to have your rent go up, or the standard go down. This should not be the case for technology and commodity products.

Love your anti-fragile framework. Question though - how has it held up? Your oldest, top-ranked companies - how have they fared?


Database, I love everything about that response. Thank you.

As for the framework, I started it as a way to analyze sticks for David Gardner’s Explorer missions. Across all the missions (about 4 years now) I ran second among those with a minimum level of participation.

In real life (my own portfolio) I’ve averaged or performing the S&P by about 7 percentage points per year for about a decade. Not Saul-esque, but I’ll take it!