ZUO Q3 FY20 Earnings


Zuora (ZUO) reported 3Q20 results on December 5 after the market close. Shares have remained relatively flat since that time, moving from $15.02/share on December 5th before the close to $14.34/share on December 24th. The market’s “Meh!” reaction reflects the fact that ZUO continues to struggle in some key areas of its business. And while the company does demonstrate areas of improvement that could indicate a brighter future of growth, investors may continue to be cautious with this company as it burns through cash at an impressive clip and demonstrates no clear path to profitability.

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%   107%     106%

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

FY19:   Q1      Q2      Q3     Q4
        441     474     504    526
FY20:   546     566     586



FY19:    Q1      Q2      Q3     Q4
         35.9   41.47   44.5   46.7
FY20:    47.3   50.6    54

Professional Services

FY19:    Q1      Q2      Q3     Q4
         16.5    16.28   17.15  17.33
FY20:    16.8    19.06   17.78

Total Revenue (mil)

FY19:    Q1      Q2      Q3     Q4
         52.48   57.75   61.64  64.1
FY20:    64.1    69.7    71.8

Cost of Revenue (mil)


FY19:    Q1      Q2      Q3     Q4
         9.86    10.42   10.99  11.72
FY20:    11.9    12.8    13.85

Professional Service

FY19:    Q1      Q2      Q3     Q4
         16.15   18.23  19.19   20
FY20:    20      20.9   20.44

**Free Cash Flow(mil)**

FY19:    Q1      Q2      Q3      Q4
        (-9.6)  (-7.3)  (-10.3) (-9.8)
FY20:   (-3.8)  (11.5)  (- 5.1)

**Cash & Equivalents**

FY19:    Q1      Q2      Q3      Q4
         207.7   185.5   181.4    177.9
FY20:    179.3   174.6   170.4

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

FY19:    Q1      Q2      Q3      Q4
         7.2B    7.5B    8.6B    10.8B 
FY20:    9.7B   10.1B   11.2B

My top line take aways:

The good:

*ZUO new and improved sales team is in place and making progress, according to the CEO.

*ZUO continues to demonstrate progress on the integration between its flagship products, Billing and RevPro.

The Bad:

*At 25% (an improvement of 1% over 2Q), subscription revenue growth rate barely meets the company’s long-term goal of 25%-30%.

*The Company anticipates non-GAAP loss from operations in FY20 to be -$40.8M to -$39.8M. This significant cash burn continues to indicate that getting to profitability is still a long way off for Zuora.

The Ugly:

*ZUO Dollar Based Net Retention Rate fell to %106. This represents a 1% drop from last quarter and a 9% drop from 3Q19. In its 3Q19 conference call the company said its goal in this area was 108%-112%. This result falls below the company’s own stated goal.

*The cost to ZUO to provide professional services was $20.44M in this quarter, the revenue realized from professional services was $17.77M. This means that the company lost $2.66M this quarter providing professional services. While the company is showing some early improvement in this area (2Q loses were $3.3M) and they have brought on new talent to leverage partnerships with systems integrators (see conference all notes below), this continues to be a big red flag for me. I’ll be keeping a close eye on this metric. I’d like to see ZUO make better progress over the next few quarters. Additionally, while ZUO has shown some progress in the overall ratio of subscription revenue vs. services revenue, I continue to believe that the percentage of revenue from services remains too high, reducing margins and demonstrating that the products they sell are difficult to install and complex to use. Without meaningful improvements in these two areas, ZUO remains on my watch list and I remain on the sidelines.

From the conference call:


On new customers and overall market

Tien Zuo (CEO): o first let me talk about what we saw this quarter in terms of overall market trends. In Q3, we continued to see signs supporting our central thesis that there continues to be an early but broad shift to subscription business models that is playing out across multiple industries. And unlike traditional ERP systems that are proving to be too inflexible, our solutions are uniquely positioned to enable companies to succeed in this new economy.

In our core technology vertical, hardware/software, we continue to have market leadership for any company at scale. For example, this quarter we kicked off a deployment at Asana, the work management software company. Asana started off years ago with a simple billing system, but the more successful they became, the more complex their needs became. And they switched over to Zuora to better scale their business.

But of course, what’s exciting about the subscription economy is it isn’t just a technology story. As I’ve noted on prior calls, approximately half of our customers are now outside of the Hi-Tech vertical. In manufacturing, we continue to see strong growth coming from the Internet of Things or connected devices. Our Zuora Central Platform offers manufacturers not only a fast-path to launching new connected services, but more importantly, it also gives them a platform to quickly iterate and innovate as they learn from the marketplace.

In Q3, we had go lives with Johnson Controls and Stanley Black & Decker. Now, these launches feel similar to CAT’s initial go-live from a couple of years ago that began with simple data services to a handful of US based dealers. Today CAT has on-boarded over a 180 dealers globally, launching new bundled services that includes GPS location, machine utilization, fuel burn analysis, engine monitoring and overall maintenance management per machine. CAT is a shining example about companies who use Zuora as a mission-critical solution to iterate and expand their subscription offerings, unlock growth and increase customer value.

In transportation, including auto manufacturers, we continue to see a shift toward access not ownership. This quarter we’re excited to have go-lives with amazing brands like Kia, Fiat Chrysler, as well as Harley-Davidson in motorcycles. The biggest vehicle manufacturers in the world are turning to Zuora to launch digital services, connect with their drivers and unlock new revenue opportunities.

And while we are not ready to call it a full blown vertical for us yet, we continue to see utility companies move away from static product offerings toward flexible energy-as-a-service models. In Q3, you saw us issue press releases with Saint Gobain, one of the world’s largest manufacturers of building materials as we help them move into the business of smart buildings and launch consumption-based services such as the subscription heating and water solutions.

As well as a amaysim, an Australian utility company, which we are helping growth through new offerings and flexible energy plants. It’s still very much an emerging industry for us, but we’ve already [Indecipherable] rolled with other major utility players around the world, such as Origin Energy Sanan, A2A and Centrica.

On improvements to sales operations and partnership with system integrators

We’re excited to have our new CRO, Robbie Traube on-board. He is a recognized leader within the enterprise software industry. He’s worked with some of the biggest companies in the world on digital transformation and he understands the scale and how to build it. Robbie brings a proven track record from Adobe of building world-class enterprise sales teams for subscription businesses.

We’ve also previously talked about the importance of system integrators to our future growth. And I’m incredibly pleased that we hired a new Head of Global Alliances, James Huang to lead these efforts. At previous SaaS companies, James successfully change their implementation model from internal deployments to a significant part handled by partners, and now as part of Robbie’s team, James is working with a few — partners to deepen our go-to-market relationships.

Of course, Robbie and James are joining outstanding group of tenured sales leaders at Zuora, including Richard Terry-Lloyd, who has been the bedrock of our North American sales group for almost a decade. Kevin Niblock, our SVP of Sales Operations and go-to-market expert; and John Phillips, who continues to provide amazing leadership in Europe. We are laying the groundwork and building the infrastructure to capture the broad demand we continue to see in the marketplace for subscription solutions.

Of course, give the number of new folks on the team, it will take us some time for the people and groups to gel and really become effective. So, what we have now is, in my biased opinion, the best sales leadership team in the industry, ready to meet our customers wherever they are in their subscription journey, launching a new service, modernizing it’s billing system, driving large sales scale, digital transformation for automating the recognition of revenue.

On Revpro and Billings

Second, let me provide an update on the integration of RevPro and Billing. I mentioned on the last call that the integration technology is complete and today we’re making steady progress with our customer implementations. We’ve restarted all the paused implementations and are targeting to deliver on our customers’ timelines. In fact, we’ve completed the technical integration phase with a number of customers and three of them, Siemens, LivePerson and Modernizing Medicine are expected to be operationally live using RevPro and Billing in the next couple of months.

This is exciting as our customers now have an end-to-end automated solutions to handle all their subscription needs from quote, to cash, to billing, to revenue automation. We’re working hard to get these customers operationally live on an integrated product by really next year. While this will take some time, but once these customers are operationally live and using the integrated solution, we can start cross selling our RevPro product into our Zuora Billing customer base.

On Dollar Based Net Retention Rate

Sarah – Morgan Stanley – Analyst

Apologies. Hi. Sorry. This is Sarah [Phonetic] on for Stan Zlotsky. Regarding the downtick in net retention this quarter, last quarter you called out a higher number than usual of customers rightsizing and resizing their commitments after signing to large of transaction volumes in the year ago period. Did you see a similar dynamic this quarter and did that play into a net retention?

Tyler Sloat – Chief Financial Officer

This is Tyler. I think I will start. No. We did call out a couple of down-sells last quarter. We also said that, going forward, we kind of gave a heads up that we could see some pressure on this number. To this quarter, we said the same thing just now. So there wasn’t anything dramatic that we called out this quarter, just some year-over-year comp comparisons that are tough and then just normal course of business.

Sarah – Morgan Stanley – Analyst

Got it. Thank you.

Ticker Take conclusion:

ZUO remains a company with a compelling story and an industry leader in this early emerging space, yet their execution against key business indicators continues to be mediocre, they are not yet out of the woods with regards to their sales and marketing challenges, they have made limited progress in securing partnerships with system integrator (in order to bring their costs of services down) and while they continue to land new customers, they have not shown that they can meaningfully expand sales to them over time.

Because I am investor in several SaaS companies, I will continue to watch how Zuora performs in the coming year or two. While I haven’t given up on the long-term potential of the company, I remain an interested observer and not a shareholder. I’ll wait on the sidelines until I see indications of a clear path to profitability for this company.

Best, Swift…
No position in ZUO


One other thought on ZUO. I never buy a company because of its potential for acquisition. It’s nothing more than a guessing game; however, I do believe that ZUO could be an attractive “bolt on” acquisition for Salesforce (CRM).

In fact, I’ll make this my 2020 stock prediction.

This is CEO Tzuo quote from 1Q2019 conference call:

Now, all of our products are underpinned of course by our Zuora Central platform. It’s a dynamic hub designed specifically to orchestrate and automate the entire subscription order to cash process. This is done for our six core engines including a pricing engine, subscription order, rating, global payments, subscription metrics and subscription accounting, all contributing to make our solution the system of record around the transactional data for the customer.

Now, why is this important? Because when you look at our customers, and you see how they’re standardizing on a CRM system plus Zuora Central, plus an accounting system on the cloud, you could see an emerging three cloud architecture that modern companies are using to run these modern business models.

Best, Swift,
No Position ZUO