Ticker Take: ZUO Q1 FY20

ZUO Fools:

For a second quarter in a row, ZUO share price is down sharply before the opening bell on the market day after they reported their quarterly earnings. Zuora share price declined sharply pre-market based on guidance and also due to an announced restructure of its sales strategy. The company reported a Q1 net loss of $20.59 million, or 19 cents a share. The non-GAAP net loss came to 11 cents per share on revenue of $64.1 million, up 22% year-over-year. Subscription revenue came to $47.3 million, an increase of 32% year-over-year. Wall Street was expecting a non-GAAP net loss of 13 cents a share on revenue of $64.15 million.

Unlike their first conference call as a public company one year ago, there was no joking around and whimsical behavior from CEO Tien Tzou this quarter. It’s clear, Zuora is facing some serious headwinds headed into FY20 and you could hear that in the serious tenor of the comments from the CEO.

For those interested in how the company is performing long term, lets look at some of the key financial metrics that ZUO reported since becoming a public company:

Dollar Based Net Retention

FY19:    Q1     Q2       Q3     Q4
         112%   112%     115%   112%
FY20:    110%

**Customers spending over $100K annual contract volume (ACV)**

FY19:   Q1      Q2      Q3     Q4
        441     474     504    526
FY20:   546

**Revenue (mil)**


FY19:    Q1      Q2      Q3     Q4
         35.9   41.47   44.5   46.7
FY20:    47.3

Professional Services

FY19:    Q1      Q2      Q3     Q4
         16.5*   16.28   17.15  17.33
FY20:    16.8

Total Revenue (mil)

FY19:    Q1      Q2      Q3     Q4
         52.48*  57.75   61.64  64.1
FY20:    64.1

* I adjusted Q1 FY19 results to reflect adoption of ASC 606 in order to show accurate Y/Y results.  I have not similarly adjusted FY19 Q2, Q3, Q4 results.

**Cost of Revenue (mil)**


FY19:    Q1      Q2      Q3     Q4
         9.86    10.42   10.99  11.72
FY20:    11.9

Professional Service

FY19:    Q1      Q2      Q3     Q4
         16.15   18.23  19.19   20
FY20:    20

**Free Cash Flow (mil)**

FY19:    Q1      Q2      Q3      Q4
        (-9.6)  (-7.3)  (-10.3) (-9.8)
FY20:   (-3.8)

**Cash & Equivalents**

FY19:    Q1      Q2      Q3      Q4
         207.7   185.5   181.4    177.9
FY20:    179.3

**Customer Usage of ZUO Solutions (Billing Transaction Volume):**

FY19:    Q1      Q2      Q3      Q4
         7.2B    7.5B    8.6B    10.8 
FY20:    9.7B 

My top line take aways:

The good:


*Percent of Subscription revenue vs. Professional Services revenue is slowly improving.

The Bad:

*At 32%, subscription revenue growth slowed again this quarter as it did last (35%). However, this growth rate remains higher than the company’s long-term goal of 25%-30%.

*The Company anticipates non-GAAP loss from operations in FY20 to be -$49M to -$45M. This indicates that getting to profitability is still a long way off for Zuora.

*Zuora is replacing its director of sales.

The Ugly:

*The cost to ZUO to provide professional services was $20M in this quarter, the revenue realized from professional services was $16.7M. This means that the company lost $3.3M this quarter providing professional services. This continues to be a big red flag for me. I had hoped to see some improvement in this area this quarter, but in fact the numbers are headed in the wrong direction. For this reason alone I do not own shares in Zuora.

From the conference call: https://www.fool.com/earnings/call-transcripts/2019/05/30/zu…

No more joking around:

Tzuo: However, while we had solid Q1 financial results, we did have some challenges, which are impacting our Q2 and our full year outlook. So let me address this upfront. I’ll structure my comments today with the following. I’ll start by talking through the two execution headwinds that we saw in the quarter.

On sales execution:

Tzuo: First, based on what I saw in Q1, we need to improve our sales execution. As you know from our recent calls, Global 2000 companies have been an important source of our recent growth companies like Caterpillar, Ford and Schneider Electric. And so we’ve been expanding our strategic sales teams and have hired a number of talented salespeople over the past year. What we’re seeing in Q1 is that the newer reps were less than half as productive than our more experienced reps. We’re finding that we need to improve the support of our new reps with training, and experienced oversight to help them ramp and close new businesses.

On RevPro product integration:

Tzuo: Second, part of our ability to grow within our installed base has been predicated on our ability to cross sell our two flagship products, Billing and RevPro. However, the product integration for these two products is taking longer than expected. What we are seeing strong demand from our Billing customers to implement RevPro, the technical work to complete the integration is taking time as these are complex mission-critical systems. And so, for our existing billing customers, who have recently purchased RevPro, we slowed down the RevPro implementations this past quarter given the product integration delay.

On ways the company will address these problems:

Tzuo: We’re continuing to acquire and deploy new customers for each product on a stand-alone basis, but naturally this delay has slowed down our cross sell motion. This resulted in lower professional services and subscription revenue in the quarter as well as tempered expectations going forward. So what are we doing to address this? On the sales execution side, we are making three key changes that help create the right infrastructure, process and organization to position us for the next stage of growth.

First, we’ve realigned our strategic account organization in place to many of the newer reps under our more experienced managers. So they can give mentoring and provide oversight to more effectively closed business. Second, we’re revamping our pipeline process. We’re shifting from an evangelical sales motion that worked in our earlier years to a more focused approach of over a more developed market. We’ve also added folks in sales operations, field enablement and demand generation and have already seen the next level of scale. Lastly, we announced a change in our sales leadership. Over the last few years, Marc Diouane has done an incredible job growing our business worldwide.

Let me shift to a more analytical go-to-market approach. Marc and I both feel (ph) it’s good time to find a new leader, who can scale the business to the next level and capture the market growth we continue to see. Marc will stay on for the near term as an advisor as we search for a replacement.

Like many enterprise software companies focused on the upper end of the market, we’ve been able to make our bookings numbers with an all hands on deck approach toward the end of our quarters. This did not happen in Q1 and we recognize that this is not the way to build a sustainable growing enterprise software company. We’re committed to building a go-to-market processes that is more predictable, enable to deliver the consistent performance that we expect.

Now these changes in the sales organization are meaningful till it take time to become effective, but they’re the right changes for the business and we believe this will get us back onto our expected long-term growth trajectory.

Second, on the product integration side, we made a course correction in our approach and I’m confident that we’re on the right track. The integration of our two flagship products is critically important to us and our customers’ success. So, I’m personally spending a lot of my time here to drive this to completion. We expect this to be a short-term delay and to have this resolved by the end of Q3. At the same time, we’re continuing to innovate on our products and I’ll talk more about that later.

On optimism about the future:

Tzuo: Now, despite this, we did see a lot of positive momentum these last three months, especially in the industries outside of technology. For example, in the automobile industry, we recently signed one of the largest auto distributors in Chile. We recently signed a second of the big four GSIs, making both a customer and a partner. We signed one of the world’s largest producers of wind and solar energy, and now count more than 10 utility companies around the world. We signed a largest financial publisher in Belgium, as media continues to be a big growth driver for us globally.

When you look at these trends, it’s hard for me not to be as optimistic as ever about our future. As I have said many times before, we’re in the early stages of the shift to subscription, so we consider ourselves to be a portfolio play for the entire subscription economy. And like a lot of other transformational shifts we’ve seen before, for mainframes to client servers as an example or on-premise to the cloud, this is a shift that will ripple through every industry.

Sooner or later, we believe that every company will have to contend with the shift to subscriptions. Why? Because this is a shift that’s very much driven by consumers. In a recent survey conducted by the Harris Poll, they found the consumers around the world prefer access to services over owning products. Consumers have more subscriptions today than ever and think they’ll add even more in the future.

Key Financial Metrics and Business Highlights from Press Release:

First Quarter Fiscal 2020 Financial Results (prior period adjusted for ASC 606 adoption):

Revenue: Total revenue was $64.1 million, an increase of 22% year-over-year. Subscription revenue was $47.3 million, an increase of 32% year-over-year.
Loss from Operations: GAAP loss from operations was $20.9 million, compared to a loss of $16.8 million in the first quarter of fiscal 2019.

Non-GAAP loss from operations was $12.5 million, compared to a non-GAAP loss from operations of $11.9 million in the first quarter of fiscal 2019.
Net Loss: GAAP net loss was $20.6 million, or 32% of revenue, compared to a net loss of $17.8 million, or 34% of revenue, in the first quarter of fiscal 2019. GAAP net loss per share attributable to common stockholders was $0.19 based on 108.8 million weighted average shares outstanding, compared to a GAAP net loss per share attributable to common stockholders of $0.40 based on 44.9 million weighted average shares outstanding in the first quarter of fiscal 2019.

Non-GAAP net loss was $12.2 million, compared to a non-GAAP net loss of $12.8 million in the first quarter of fiscal 2019. Non-GAAP net loss per share attributable to common stockholders was $0.11 based on 108.8 million weighted average shares outstanding, compared to a non-GAAP net loss per share attributable to common stockholders of $0.29 based on 44.9 million weighted average shares outstanding in the first quarter of fiscal 2019.
Cash Flow: Net cash used in operating activities was $2.2 million, compared to net cash used in operating activities of $7.8 million in the first quarter of fiscal 2019. Free cash flow was negative $3.8 million compared to negative $9.6 million in the first quarter of fiscal 2019.
Cash and Cash Equivalents and Short-term Investments: Cash and cash equivalents and short-term investments were $179.3 million as of April 30, 2019.
A description of non-GAAP financial measures is contained in the section titled “Explanation of Non-GAAP Financial Measures” below and a reconciliation of GAAP and non-GAAP financial measures is contained in the tables below.

Key Metrics and Business Highlights:

Customers with ACV equal to or greater than $100,000 was 546, which represents 24% year-over-year growth.
Dollar-based retention rate was 110%.
Customer usage of Zuora solutions grew, with $9.7 billion in transaction volume through Zuora’s billing platform during our first quarter, an increase of 34% year-over-year.
Zuora announced new customers across multiple industries, including aerial agricultural imaging specialist Terravion, sports streaming service Kayo Sports, and workplace technology company Ricoh.
Zuora added five new U.S. patents in FY’19, reflecting the continuous innovation of our technology team around our two flagship products, Zuora® Billing and Zuora RevPro®.
Zuora released its first “End of Ownership” Report, a survey of over 13,000 adults, across 12 countries found that subscription services are experiencing growth on a global scale.
Next week at Zuora’s annual user conference, Subscribed San Francisco, the company will announce new product upgrades and showcase customer speakers from Unity Technologies, Fender, NCR, Motor Trend On Demand, NewRelic, Solium Capital and more.
As a part of Subscribed San Francisco, Zuora will host an Investor Session on Wednesday, June 5, 2019. Senior management will provide an overview of Zuora’s business, with presentations beginning at 11:15 a.m. and ending 1:30 p.m. PT. A live webcast of the event will be accessible by visiting https://investor.zuora.com and a replay will be made available after the event.


Ticker conclusion: Tough quarter for Zuora.

Best, Swift…
No position ZUO