ZUO - Careful with your money

I wrote ZUO up for the board back in June, https://discussion.fool.com/zuora-a-review-and-analysis-33099873…. At the time ZUO was trading for an EV/S of 20 which seemed wildly over valued and the market seemed to agree and promptly cut them in half. From my eye ZUO is always going to be a 25-32% growth company, too much of their revenue is from professional service, and always has been.

             
             Sub Rev             Prof Rev                  % Prof Revenue
Q1-17      26                       6                          19
Q2-17      28.7                    10.6                        27
Q3-17      31                       15                         33
Q4-17      --
Q1-18     36.1                    15.6                         30            
Q2-18     41.4                    16                           28
Q3-18     44.5                    17.1                         28

Professional revenue use to be 18% of total revenue, now it spiked to the 30s because of ASC 606 and their acquisition. So what happens when that revenue is flat to declining? Their total revenue growth declines and gross margins go up. We have seen what happens to a stock when that happens. NTNX dropped from 60 to 35 and that is despite them clearly indicating what was happening. ZUO isn’t clear about anything. That q2 conference call was a mess.

So here is what I see happening, They are guiding 63 million next quarter, sub revenue of 45.5 which implies prof revenue of 17.5. They will probably do a little better on both, but lets use their numbers. Lets extend that out for q1 2019, give them 40% growth on their sub revenue, so 50.5 million, and prof revenue decrease to 16 million. So 66.5 million q1 2019 total revenue compared to 51.7 q1 2018. That means their total revenue growth will decrease to 28%. I don’t think the market is going to like that. And that story is going to be the same every quarter of 2019.

I’d stay away, no reason to invest in that scenario when you have a company like NTNX that is on the other side of it and now the numbers are working in its favor.

Best
Ethan

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Ethan
What do you think of ESTC?

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bear had a nice review, I posted my thoughts here.
https://discussion.fool.com/thanks-for-the-estc-update-a-few-com…

Basically, nice growth, not worried about expenses rising faster than earnings, need to follow stock based compensation closely. Last quarter was too much. I own a small try out position.

-e

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NTNX stock got clobbered after a big run up; ZUO stock’s 60% decline may have already discounted any growth slowdown.

Mgt. has made it very clear that this business will continue to grow 25-30% CAGR for many years, if not decades. At this valuation and after factoring in a multiple compression 8-10 years out, stock should produce 18-20% CAGR - each to their own but I’ll happily take this expected annualised return.

Best,

GM

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GM, The more I think about it, you are probably correct. Having said that NTNX was never valued near as highly as ZUO was. NTNX peaked at an EV/S of 10ish, ZUO around 20. Maybe/probably the market has already factored in ZUO’s revenue slow down. My problem is revenue is going to continue to slow down for the next 9-12 months (maybe 6-9). Things I did like, there Net revenue retention rate is moving up, subscription revenue accelerated. Some good signs there. Anywho, you rightly point out that ZUO has already gotten clobbered. For me, I’ll check them out again in 6 months.
-e

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Ethan, if the business continues to grow top-line by 25-30% CAGR for a decade, stock should rise 8x by 2029. But it all depends on how the company performs and whether it can deliver.

ZUO is a 4.5% position for me; if it doesn’t work out, it won’t wipe me out.

Best,

GM

I hope nobody was surprised by this ER.


             Sub Rev             Prof Rev                  % Prof Revenue
Q1-17      26                       6                          19
Q2-17      28.7                    10.6                        27
Q3-17      31                       15                         33
Q4-17      --
Q1-18     36.1                    15.6                         30            
Q2-18     41.4                    16                           28
Q3-18     44.5                    17.1                         28
**q4-18     46.7                    17.4                         27**

Here is what I said back in January about this quarter and the rest of the year.

So here is what I see happening, They are guiding 63 million next quarter, sub revenue of 45.5 which implies prof revenue of 17.5. They will probably do a little better on both, but lets use their numbers. Lets extend that out for q1 2019, give them 40% growth on their sub revenue, so 50.5 million, and prof revenue decrease to 16 million. So 66.5 million q1 2019 total revenue compared to 51.7 q1 2018. That means their total revenue growth will decrease to 28%. I don’t think the market is going to like that. And that story is going to be the same every quarter of 2019.

so they did slightly worse, clocked in a very unimpressive 35% subscription growth. Professional service revenue should stay relatively the same going forward, maybe a little bit up or a little bit down. Look for more of the same in the future. This is in a company that is losing money hand over fist, free cash flow was -9.8 million which was actually worse than a year ago.

So many better companies out there.

-Ethan

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I’d also like to point out I singled out NTNX as a better investment…welllll, we all know how that worked out.

:wink:

ethan

1 Like

Ethan,

Not sure you if you saw my post from earlier today - but I sold my position with a very tiny profit; right after the ER was released.

You were/are so right - this company is bleeding money and the subscription revenue growth is unimpressive at this size (and it is slowing).

FYI - the additional press release citing the strength of the ‘subscription economy’ really got under my skin.

Best,

GM