Zuora - A review and analysis

Founded in 2007. Zuora is, “Powering the subscription economy” . They are a SaaS company targeting enterprise customers with products that automate and simplify billing, commerce, analytics and financing operations. IPO march 2018 and had their first earning release 5/31 for their q1 2019 quarter. Their customers include some names we are familiar with. Pivotal, OKTA, Illumnia, Ford, IBM, Qualcomm, Zillow, ATT the list goes on. Here is a non-exhaustive list, https://www.zuora.com/our-customers/ . I became interested in the company because I think we are seeing a fundamental business switch toward subscription relationships. Zuora is the only public company that I know of that is focused on helping companies manage and maintain that switch.

Glassdoor review 4.5
G2crowd is a business software and services review website that gives ZUO 3.9 stars. I’m not sure how helpful g2crowd is as it seems more targeted toward the small business market.

Competitors lots of them but nobody does quite what Zuora does. Broadly the ERP market, Enterprise Resource Planning is what is listed but none of them seem to have great packages for SaaS companies which use very different metrics.

-stripe which focuses more on the payments side but also delves into the Saas management world.
Chargify people like iit, not targeted toward enterprise . uses stripe for payments
Chargebee people LOVE it, in the startup phase (i’m guessing we seem them IPO in the next 5 years) OKTA is listed as a client by both chargebee and zuora. Must have switched from one to the other. Probably the most similar to Zuora. Similar to a BOX vs Dropbox, enterprise vs consumer or in the case of zuora vs chargebee enterprise vs small business.
SAP, Oracle The current market leaders but a market share donators. Everything I can find seems to have these other companies stealing customers from them because of old outdated and generally outdated software that isn’t tailored for SaaS.
in house custom systems Excel spreadsheets, custom programs, etc. I’m not sure how big this market is.

Zuora Products
Two main products:

Zuora RevPRO - Revenue recognition and tracking compliant with ASC 606 & IFRS. Continuous revenue tracking, accounts for contract modifications, service delivered changes, contract values, transactions. Basically all the accounting that goes into revenue tracking (which is a lot) it does and it the latest reporting standards. This is a major part of their business but we haven’t seen the impact yet. This business was acquired in 2017, Leeyo. Should see full impact in Q2

Zuora Billing - Billing and Payments that are all tracked in one spot. Taxes, invoices, failed payments. The big sell on this is you can change something and everything down the line get automagically adjusted. Lets say you have a customer billed annually but they change to monthly. This product will automatically adjust when invoices go out, adjust the analytics, adjust your revenue recognition, adjust your taxes, etc.

They have some add-ons to those two main products. Briefly: CPQ -integrates with salesforce for realtime data and feedback for your sales team. Collect- automates and tracks collections. Analytics - Reporting engine for SaaS business and predictive analytics on the business and individual level. I.e. who is likely to renew, who can you upsell, who is likely to churn. Etc.

DRR of 112% - in the conference call they say to expect this number going forward. They don’t ever expect to be in the 120% + range. I don’t understand why not but they are very clearly setting expectations in the 110% range.

Market Cap 3.7 Billion

-2018 Revenue 167.9 for, guiding 221.5 for 32% growth.
-Last 5 quarters of Revenue, 32.3 39.4 46.4 49.8 51.7, This quarter was 60% growth and guiding for 54 million which would be 40% growth.
-Subscription Revenue was 36.1 million up 39%
-Cost of Sub revenue 15.6% down from 24%
-Professional Revenue was 15.6 million up 157% (more below)

  • cost of prof revenue about 108%
    -Not expecting similar professional service revenue, mostly related to swtich from ASC 605 to 606

Going to have higher expenses due to increased sales and marketing related to subscribed conference in q2 2019

Second cash payment of 15 million for Revpro acquisition

Cash from operating activities -7.8 million this quarter compared to -4.3 million q1-2018
FCF was -5.1 million improving from -9.1 Million last quarter (more below)

Cash on hand ~ 202 million
Debt 4 million

They use a metric non-Gaap Sales and Marketing spend 12 month TTM/ yoy increase sub revenue to calculate how efficient their Sales team is working. Lower is better. Last year was 2.5, last quarter 2.3, this quarter 2.2.

Quick valuation
-Enterprise Value of 3.5 billion.
-EV/S 20, forward EV/S 16 using their guidance. If you increase their revenue growth to 50% you still get an EV/S of 14.

Here are some comparisons
EV/S, forward EV/S using guidance, then realistic Foward EV/S, Rev Growth
ZUO 20 16 14 60% (39%)
OKTA 17. 14.5 12 60%
SHOP 20 16 14 73%
AYX 15.1 12 11 50%

Note i didn’t break out subscription revenue growth for the other companies because it was so similar to the number I posted.

But here is the thing. A big part of zuo’s revenue growth was from professional services which was driven by the switch from ASC 605 to 606. That is the kind of revenue growth they don’t want because each dollar of revenue that provided it cost then 110% of that revenue. They were paying for the pleasure of helping companies. Their subscription revenue growth was 39%, while good is not near at the level of these other companies. I’m not sure why ZUO is so expensive. My guess would be that people think they are a huge tail. ZUO itself thinks they can grow at 25-30% a year for a long time but why pay for that growth now when you have any of these other companies growing faster, not losing as much money and in most cases operating cash positive. The one thing that I think could be a catalyst to their growth is RevPro. We haven’t seen what it can do yet and if it will drive meaningful earnings acceleration. I still don’t think it is worth paying this kind of a premium for a company when we have plenty of others that are currently doing “it” better and at better valuations. I like the “idea” of zuo but I don’t like the price. Anyone out there with a different take?

So what are we left with? I didn’t take a position however I thought it was important to post this. I spent a bunch of time on the analysis and hopefully will help anyone else out there looking at the company. If it’s relative valuation changes, earnings accelerate etc then I would take another look because I like the business.



Thank you.

I don’t think I have been saying that enough

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