Ticker Take: ZUO Q4 FY19


ZUO share price is down sharply before the opening bell this morning, even though the company The company is reporting Q4 results that beat on revenue and met on EPS. Apparently Wall street is disappointed with the company’s revenue forecast for its fiscal first quarter and full year FY20.

Using accounting rule 605 (this is the last quarter ZUO will use this, next quarter they fully transition to reporting based on 606), on which Zuora said Wall Street was basing its estimates, the company said it expects first-quarter revenue of $65 million to $66 million, and fiscal-year revenue of $293 million to $297.5 million. The Street was expecting revenue for the first quarter and year of $66 million and $294.2 million, respectively.

For those more interested in how the company is performing long term, lets look at some of the key financial metrics that ZUO reported in Q1, Q2 & Q3, Q4 their first full year as a public company (these are the metrics I will use in future reports as well):

Dollar Based Net Retention

Q1     Q2       Q3     Q4
112%   112%     115%   112%

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

Q1      Q2      Q3     Q4
441     474     504    526

**Revenue (mil)**
Q1      Q2      Q3     Q4
36.1    41.47   44.5   46.7
Professional Services
Q1      Q2      Q3     Q4
15.6    16.28   17.15  17.33

Total Revenue (mil)
Q1      Q2      Q3     Q4
51.74   57.75   61.64  64.1

**Cost of Revenue (mil)**
Q1      Q2      Q3     Q4
9.86    10.42   10.99  11.72
Professional Service
Q1      Q2      Q3     Q4
16.15*  18.23*  19.19* 20

**Free Cash Flow (mil)**
Q1      Q2      Q3      Q4
(-9.6)  (-7.3)  (-10.3) (-9.8)

**Net Loss (GAAP)**
Q1      Q2      Q3      Q4
(-19.4) (-19.6) (-17.9) (-11.6)

**Cash & Equivalents**
Q1      Q2      Q3      Q4
207.7   185.5   181.4    177.9

**Customer Usage of ZUO Solutions (Billing Transaction Volume:**
Q1      Q2      Q3      Q4
7.2B    7.5B    8.6B    10.8 

My top line take aways:

The good:

*Transaction volume increased 56% year-on-year and actually accelerated from 37% last quarter.
*30% of the company’s revenue now comes from international customers.
*The company beat estimates on Revenue for the quarter.
*While the company’s net retention ratio dropped to 112%, it still is at the high range of the set goal of 108%-112%.
*Contracts over $100k increased 27% Y/Y to 526.

The Bad:

*At 35%, subscription revenue growth slowed. However, this growth rate is higher than the company’s long-term goal of 25%-30%.
*The Company anticipates cash flow in FY20 to be (-$40M). This is a young and growing company and this is in line with their earlier projects…and still, that indicates that getting to profitability is a looong way off.

The Ugly:

*The Company showed no progress in improving the percent of revenue from subscriptions vs. professional services.
*The cost to ZUO to provide professional services was $20M in this quarter, the revenue realized from professional services was $17.33M. In other words, the company lost $2.7M this quarter providing professional services. This is a big red flag for me. I had hoped to see some improvement in this area this quarter.

From the Conference Call https://seekingalpha.com/symbol/ZUO/earnings/transcripts :

On new deals with big customers:

Scott Berg

Congrats on the good quarter. Two questions here. One of the metrics that Tyler talked about was new deals, especially over 250K that were up more than 50% year-over-year, there is [new land] [ph]. Can you help us understand maybe what’s driving that growth because that’s significantly faster than your – than the company subscription revenue growth?

Tien Tzuo

Yes. I mean, if you look at that stat and you couple it with just the amount of transaction volume that is going through our system I think what it really signals and what we see is the maturity of the subscription economy. Yes, it’s early days, there is so many more companies that still have to shift but the ones that are doing so are seeing that this shift drives growth and drives competitive advantage and they are treating these project seriously, compared to say maybe 5-6 years ago where it was more of a science experiment, now they are absolutely committed to it, they see that this is the future and then they are putting a lot more investment dollars behind these type of projects.

On international customers

Hamza Fodderwala

And then you mentioned international, that was actually my follow-up question. On the top of the call you mentioned you’re seeing faster growth in Europe. What do you think is driving that? Do you think you’ve reached an inflection point in Europe in terms of subscription adoption because I think that’s historically lagged the U.S. So any color there would be really helpful.

Tien Tzuo

Yes, I’ll give you the color and maybe Tyler can give - share some numbers. There is nothing about the subscription economy, that’s a U.S. centric thing, all right. The subscription economy, whether you’re a startup and you’re looking to disrupt an industry and steal the customers or you’re an incumbent with the customers saying I can do this transformation and build a different relationship with my customers, there is nothing about that that’s specific to U.S. companies. And so we’re seeing fantastic traction internationally, we saw this early. And the other thing is, if you look at the macro thing is going on where every company is becoming a tech company, [indiscernible] U.S. tech, where tech companies have been dominated by the U.S. But if every company is becoming a tech company then all companies around the world are going through that same transformation. So, I know we’ve said that international is 25% of revenues on the roadshow.

On after market drop in share price

John DiFucci

Tien, these results look good, metrics were strong across everything, deal size, momentum, transaction volume. Your subscription revenue did decelerate a little bit against but this is the most difficult comp of the year. I guess was there anything in the quarter that hasn’t been mentioned regarding the business momentum that we should be thinking about? And the reason I asked, I mean, listen the stock market moves in all different ways and I can’t predict it but the stock is down like 11%, and I’m just wondering what people are thinking about? I’m just wondering if there is something missing.

Tien Tzuo

When I look at the last quarter, I see nothing but enthusiasm and excitement. And when I look at the past year, everything that we’ve really talked about and since the roadshow, the last four quarters with you and our other investors, it’s all coming to fruition, right. I think the governing factor for us is going to be the growth of the subscription economy itself. And – but the important thing for us is, we’re becoming increasingly strategic to subscription economy, we’re seeing more and more interesting companies enter the subscription economy. We are really the only choice when it comes to putting the platform to drive that growth and companies are increasingly realizing why we’re so important, right, why ERP systems are simply not sufficient to deliver on these growth strategies or everything we talked about the usage based billing models, the number of customer engagements, these are the things that all break ERP systems and everything we’ve seen in this past quarter is a reinforcement of everything we’ve said. And so we’re really excited, we thought it was a great quarter and we’re incredibly excited about the future.

From Zuora’s Earnings Report press release https://investor.zuora.com/financial-news/press-release-deta… :

Key Metrics and Business Highlights:

Customers with ACV equal to or greater than $100,000 was 526, which represents 27% year-over-year growth.
Dollar-based retention rate was 112%, compared to 110% in the prior year.
Customer usage of Zuora solutions grew, with $10.8 billion in transaction volume through Zuora’s billing platform during Q4, an increase of 56% year-over-year.
MGI Research named Zuora as the #1 rated solution for agile monetization in their most recently published Buyer’s Guide for Agile Billing Solutions which includes traditional ERP providers such as Oracle, SAP and Amdocs.
Zuora highlighted customers around the world and across multiple industries, including IT provider NEC and workplace technology company Ricoh in Japan; sports streaming service Kayo Sports in Australia; and financial services provider eMoney, online retailer Worthpoint, and aerial agricultural imaging specialist Terravion in the U.S.
Interbrand was added to Zuora’s network of partners to help the world’s most recognized brands succeed in the Subscription Economy through joint business, brand and technology strategy.
The Winter ‘19 product release included new innovation in automation and usability across Zuora Billing, Zuora Collect, and Zuora RevPro.
The newest edition of the Subscription Economy Index™ (SEI) found that over the past seven years, the companies featured in this study, across North America, Europe and Asia Pacific, have seen their sales grow by more than 300 percent, the equivalent of five times faster than S&P 500 company revenues and U.S. retail sales.

That’s what I’ve got for now.

Best, Swift…
Long ZUO
ZUO Ticker Guide


Darn you, Swift!

I was developing questions as I examined your post, but you had to go ahead and answer them!

I really like your format though. I should cheat and copy it for my own reporting. :slight_smile:

Rule Breaker / Market Pass Home Fool & STMP/MTH Maintenance Coverage Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.

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