Zuora, Inc.
Q1 2021 Earnings Call Transcript

Published: 3 Jun 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Zuora First Quarter Fiscal 2021 Earnings Conference Call. . I would now like to hand the conference over to your speaker today, Joon Huh, VP of Finance. Thank you. Please go ahead, sir.

[Joon Huh:]

Thank you. Good afternoon, and welcome to Zuora's First Quarter Fiscal 2021 Earnings Conference Call. Joining me today is Tien Tzuo, Zuora's Chief Executive Officer. The purpose of today's call is for us to provide some color on our first quarter results as well as provide our financial outlook for the upcoming quarter. Some of our discussion and responses today will include forward-looking statements. So as a reminder, our actual results could differ materially as a result of a variety of factors. You can find information regarding those factors in the earnings release we issued today in our most recent filings with the SEC.

[Tien Tzuo:]

Thank you, Joon. Thank you, and welcome to Zuora's first quarter earnings call for fiscal 2021. Before we begin, let me state that Zuora unequivocally stands with the Black Lives Matter movement. Individually and collectively, we at Zuora stand up against injustice. We condemn intolerance. Systemic racism must be fought. Awareness, understanding and empathy for these injustices must happen before meaningful deliberate change can occur. Now, more than ever, we must support one another as allies. I also want to express on behalf of every ZEO, our gratitude to the health care and essential workers who continue to be on the front lines, battling the coronavirus, taking care of those affected and keeping us safe during these unprecedented times. COVID-19 is first and foremost a public health crisis, but it's also a massive forcing function, changing our society and economy in profound ways. We will get through this crisis. So we also all recognize that our world has irrevocably changed. And so while I plan to spend some time talking about the quarter, I'm going to focus on answering the question, what does a post-COVID-19 world look like for Zuora? So far, we learned three things. One, the foundation of our business is solid. Subscription models are proving incredibly resilient during this crisis. Not only are we a subscription business, but our customers are subscription businesses. Two, there has never been a time when the importance of what we do is more apparent. More and more companies are realizing that direct-to-customer business models, in other words, subscription models are the future. And this crisis has only highlighted the strategic value of our technology in this new world. And third, our business continues to execute through this challenging environment. While COVID-19 has impacted our business, we believe we are adapting well to the new environment and that the underlying demand for our technology remains solid. Before drilling into these 3 areas, let me quickly highlight our Q1 performance. Overall, we had another healthy quarter of growth as revenue, operating income and free cash flow all came in ahead of expectations. In addition, we launched Zuora Revenue, an updated version to RevPro, fully integrated with Zuora Billing and the entire Zuora order-to-revenue suite of applications. We helped 42 customers go live on our solutions. We launched the Subscribed Strategy Group to provide customers with guidance on how to win in the subscription economy.

[Joon Huh:]

Thanks, Tien. As Tim mentioned, the world is very different since we reported earnings three months ago. Most of us are working remotely, meeting virtually and social distancing as a part of our daily lives. But what has not changed is our commitment to our employees, customers and partners around the world. We still have a great opportunity ahead of us to help companies succeed in the subscription economy. Looking at Q1, we came in ahead of expectations for our subscription revenue at $56.9 million and total revenue of $73.9 million. We came in well ahead on non-GAAP operating loss of $7.7 million as we saw lower expenses resulting from limited travel and events. And the lower expenses, combined with the beneficial timing of payments, led to better-than-expected results for free cash flow of negative $2.2 million for the quarter. Now digging into the details, let's start with the key operating metrics, and then I'll move to the transaction volume process on our platform in Q1. Starting with our customer number. We added a net 19 more customers with over $100,000 in ACV in the quarter, resulting in 18% growth year-over-year. Despite the virtual sales motion for part of the quarter, the majority of the increase was from new customers. This customer group continues to represent the vast majority of our business as it makes up 90% of our annual recurring revenue.

[Operator:]

. Your first question comes from the line of Scott Berg with Needham.

[Scott Berg:]

Tien and Joon, congrats on the good quarter. I guess, Tien, lots of things to digest there. Let's start with the comments around billings that -- for the second quarter that I think both you and Joon discussed is, when we think about lower billings in the quarter, how should we think of it in terms of whatever that number ends up being is a certain percentage from the current sales environment is a certain percentage from downsells coming? Is it a certain percentage of maybe other buckets out there? That would be super helpful.

[Tien Tzuo:]

Yes. Maybe I'll start and Joon, you can add some color here. But we've always signaled that billings is a complicated number, right? There's typically a bunch of factors. There's a mix of annual versus quarterly. There's the always impact that we can pull in deals from one quarter to another, early renewals, if you will, that affects billings. And I would say, right now in this environment, billings is even more complicated. And so there are certainly situations we're restructuring contracts for our customers where it's a longer-term contract, the TCV value is the same. But given the current environment, right, and given the industries that they're in, they might need some short-term relief that we're trading off for more long-term relationships. And certainly, you would expect a tick up in downsells as well. And so what we're trying to signal is the long-term picture really does not change. But there's definitely a lot of short-term variability that's going on right now, and we thought to give the best signal possible for Q2, we wanted to provide that commentary.

[Joon Huh:]

Yes. And what I could just add there, Scott, is that we want to be prudent here, right? And we want to do it right for the customer. So there are some relief programs that we have in place that, as Tien mentioned, that will slightly impact that number. But the important thing is that we feel great about the long-term view here and the long-term growth. And so hopefully, I think the prevailing view is that Q2, Q3 potentially are the lower quarters. But hopefully, it comes back quicker than that. And the overall economy comes back quicker than that.

[Scott Berg:]

Quite helpful. And then from a follow-up perspective, there was a comment around targeting lighter deals right now. I actually like that approach in general, hopefully, quicker, smaller deals, get a foothold, get a footprint, allow you to show value and upsell and expand from that. But can you help us kind of understand if the traditional sales process brings in the dollars' worth of maybe ARR for you. What does this lighter sale mean? Is it 50% of that number, 75% of that number? And then a follow-up to that, of course, is, how quickly do you think you can upsell those lighter contracts to bring that up to a normalized level?

[Tien Tzuo:]

Yes. So I kind of bring you back to the last quarter. We had talked about . He has now got two quarters under his belt. The last quarter, as we entered the year, we talked about some of the sales restructuring really to have long-term -- to have a mindset of long-term ownership of the customer relationship, right? And so versus a hunter that closes the deal and flips it over the fence to a farmer. And so now that, that structure is in place, right, we want the reps to be able to do what's right for the customer. And in this situation, if the customers say, look, this project is really important, this is our future, but help us out with some cash situations. We want the flexibility to do that, right? And we don't want the reps to be penalized, and we want an alignment between what we're doing what the customer is doing. And so I would say in the first part, this is part of the long-term trend -- longer-term trend of making sure that we're always focused on long-term customer relationships. Hopefully, that does -- is one of the things that Joon talked about that should lead to higher net dollar retention. It's hard to put a specific number on it, right, because it really depends on the deal, depends on the region, depends on the person. But we're seeing that this really just makes sense in this environment. We've got the flexibility to do that. It's one of the benefits of having a subscription model where you can take that long-term customer view. And it's one of the things that -- it might have put some short-term pressure on the billings number, but it's going to lead to a much, much better long-term business.

[Operator:]

Your next question comes from the line of Brent Thill with Jefferies.

[Luv Sodha:]

Congrats on the good print. This is Luv Sodha on for Brent Thill. Two questions for me. One was maybe, Tien, you made some commentary around how the pipeline is holding up and it's improved sequentially month-over-month. So maybe if I could ask, like what are you seeing out there versus what's being implied in the billings guidance that you guys gave?

[Tien Tzuo:]

Yes, absolutely. You guys talk to a lot of companies out there. I would say that what we're experiencing, and every company is a little bit different internally. The COVID-19 economic situation impacts people differently. But what we're seeing is pipeline generation is good. And that might be an effect of a lot of people are at home, right? They're online, right? They're looking at channels. It's easier to make calls. If you think about our SDRs that are generating pipe, they could actually do more conversations in the day now that everybody's at home on Zoom than they could before. And so the pipeline generation is good. I think what the difficulty is it's hard to take the historical conversion metrics that you see in previous quarters and years and simply apply it to the current situation, and just because it's a new situation. And so while we feel good about the pipeline generation, I think we're just being cautious, right, cautiously optimistic, but cautious, nevertheless, to say, hey, let's just watch this pipeline carefully, and let's see how it evolves as these deals move through the system.

[Joon Huh:]

Yes. And if I could just add there, Luv. When we looked at the quarter and how we had progressed, I mean when the coronavirus impact first hit, we obviously saw some requests from our customers, and we obviously wanted to be good partners for them. So things like payment deferral, term changes, those came in. But what we've noticed is that, yes, the pipeline has gotten better throughout the quarter in terms of velocity and quality. And so those things are in our favor. But -- and we were able to close a number of the slip deals from Q1 to Q2 in May, as Tien had mentioned. So I mean we have good trends and good momentum. I think -- but we want to do the prudent thing here in terms of thinking about the next quarter.

[Luv Sodha:]

Got it. And maybe another one, if I may, on the margin side. It sounds like you guys had a healthy beat relative to where our expectations were and even where guidance was. Sort of is there a way for this to be a more material step-up going into the future in terms of what profitability you guys can deliver over a longer period of time? Or is it -- would you categorize this as more like a short-term beat?

[Tien Tzuo:]

Well, yes. I was...

[Joon Huh:]

Why don't I take this one, Tien?

[Tien Tzuo:]

Sure.

[Joon Huh:]

So in terms of the margins and our costs, like many other companies, we came in a little bit better on costs because that limited P&E and travel and virtual events and things like that. So that certainly helped. The real question is how long does this last? And how long is this sort of lower cost structure does it stay in place? And so we'll have to see. I think every company probably going through this is seeing savings here, and we certainly see that and we expect some of that to continue for the year. But it's hard to tell when this will get back to normal, right? Because next year, hopefully, we are traveling. Hopefully, we are doing events, and hopefully, we are meeting in person. And then those costs would go up. So we're factoring all that in. But the important thing is that we are trying to match our revenue and expenses in terms of how much we grow and how much we invest. And so that's why it's important for us to maintain our margins and actually improve them over time and maintain the free cash flow target by the end of the year.

[Operator:]

. Your next question comes from the line of Joseph Vafi with Canaccord.

[Joseph Vafi:]

Nice quarter. Just -- I know there's a few moving parts to revenue growth here. I just thought maybe we'd talk about how we should think about dollar-based retention versus, say, signing new customers above $100,000 of ACV. From here, if perhaps you're going to be focusing a little bit on more of a land-and-expand strategy with new customers? And then secondly, I know you're not providing guidance, but how should we think about that dollar-based retention for the rest of the year we think it stays above $100,000? Or when we think it may start inflecting up? And then maybe I have a follow-up.

[Tien Tzuo:]

Sure. Yes. Why don't...

[Joon Huh:]

Do you want to take this, Tien, and I'll add on?

[Tien Tzuo:]

Sure. Let's do that. So the macro level picture for us is every quarter, there are more companies that are moving into the subscription economy. You can feel that. And the technology is driving it, customers driving it. The economy is really tilting to the environment. And we actually -- our hope is the current COVID-19 situation is going to accelerate that trend. And so we can't take our eye off the ball on engaging with new logos. And so we try to run a balanced environment where we are simultaneously looking at engaging with new companies, looking to shift in the subscription economy. Obviously, we want a business model that allows us to grow as we continue to provide more value to our customers as well. And so you're going to see a balance of that. I mean what we saw in Q1 was given the situation, customers had a strong need. And so we just spent a lot of time with our customers, right, making sure they're unlocking the agility that our system provides and trying to drive the changes that they needed to drive the business. There's a couple of things about the net dollar retention number that Joon will cover, right? One is -- because it's a 4-quarter effect on that. We suspect what you're going to see is some of the shorter-term downward pressures you should have in the net dollar retention related to downsells and things like that will affect us. It'll probably take a few quarters for that to kind of work it out through -- work through the system from a numbers perspective. Maybe Joon, you can add some color to that.

[Joon Huh:]

Yes. And so I would say it's a trailing 12-month metric. So just keep in mind, it will take some time -- some quarter to sort of lap over that, if you think of it that way. But I talked a little bit about some of the things that we're doing in the field, investing in our customer success, rightsizing our initial land and ramping up our cross-sell. So we're very focused on improving that. That said, there are some industries that are impacted, right? So if you look at even our SMB, we don't have a kind of exposure. It's about 10% or less than 10% of our recurring revenue. So we don't have a ton of small business exposure, but we do have some of those customers. And so that's going to impact some of the downsell that we talked about. But the idea is that it would moderate or see some pressure for the near term. But overall, through these initiatives and through these things that we have in place that it would get better.

[Joseph Vafi:]

Okay. That's helpful. And then just given -- we've kind of moved into kind of a steady-state COVID environment or whatever you want to call it at this point. How has that kind of changed what's coming into the pipeline in terms of the types of opportunities, the size, the industries? Any color there may be helpful.

[Tien Tzuo:]

Yes. I would say -- I know after a couple of months, the human ability to adapt and be inure to changes starts to kick in. But I think it's a little hard to say that we're in a steady state just yet, right? There's still quite a bit of unknowns. You're seeing ripple effects in the U.S., you're seeing, what is it, 40 million unemployment. And so there has to be other ripple effects that are going to come about, resurgences of virus, things like that. So it's hard to say it's a steady state. But I would say this -- I would say what we're seeing and we try to share some of the anecdotes. When we're seeing that companies are pausing their CRM deployment, but continuing with ours. We're seeing manufacturing companies that are -- quite frankly, are having a hard time selling because of what they do. But they have 1 million, 2 million, 3 million assets in the field that are all connected, and they're seeing new revenue streams related to their existing purchase in market connected products, and they're continuing with our projects. And you're seeing other companies saying, "Gosh, we wish we had a subscription business. If we did, we would have been able to weather the storm just a little bit better." We think that really bodes well. And then we're seeing it play out in our early conversations with these companies. But I would say COVID and shelter-in-place really hit mid-March, and we're still fairly early through this. And so we're going to be in the same boat as other companies in terms of understanding that the short-term future just does have a lot of uncertainty and chaos associated with it.

[Operator:]

Your next question comes from the line of Stan Zlotsky with Morgan Stanley.

[Sarah Quander:]

This is Sarah on for Stan. I don't think you guys mentioned during the call, but I want to double check. Did you guys give a percentage of your total revenue that you have exposed to COVID-related verticals that being travel, retail, hospitality?

[Joon Huh:]

We didn't actually give a number for the specific industries, but the overall number, right, if you look at it on an aggregate, it's less than 5% of our overall business. So that includes travel, retail, hospitality. They're the ones that office space transportation. Those would be the categories. But in aggregate, it's less than 5% of our overall business, if you look at it on a recurring revenue basis.

[Sarah Quander:]

Got it. And I also had a quick follow-up. So you guys had continued traction in growing at greater than $100,000 ACV cohort. I guess how should we be thinking about that? Are you seeing existing customers growing their contracts? Is that larger new customers coming in? Just the dynamics and how that cohort is growing?

[Joon Huh:]

Why don't I take this one? So the customer group is growing pretty much in line with last quarter, 18% growth year-over-year, net out of 19. And the majority of those were actually new logos. So Robbie Traube and his team have done a really good job of landing new customers. It's because the majority are new customers coming on board versus once that are graduating from below $100,000 to above. The other point that I would make is that this goes to show -- I mentioned that it's 90% -- this customer group represents 90% of our of our business or ACV. So if you think about our customers, they are much more of the medium and larger customers that we're going after. But we're seeing nice growth here and I think, hopefully, that continues.

[Operator:]

The next question comes from the line of Chris Merwin with Goldman Sachs.

[Christopher Merwin:]

I wanted to ask about Zuora Revenue. It sounds like it's an update to the RevPro product that you've already had out there in the market and -- with some added functionality. So what can you say about the initial customer feedback to that so far? Does this introduce any new set of potential competitors? Or is this kind of like mainly going to be a net new deployment for the customers that take it? Just curious any color you could share there.

[Tien Tzuo:]

Yes. So that is what we used to call RevPro. We pushed out a major release of RevPro. The centerpiece of that was the productized integration that we've been talking about in multiple quarters on these calls. We feel pretty good about it. And I think to be honest, I still slip and call it RevPro all the time and product folks get mad at me, but we're just trying to harmonize name. We have Zuora Billing. We have Zuora Revenue now and that's name of the product going forward. But it's the same product as RevPro now fully integrated with Billing. That integration continues to go well. I think we're up to 10 customers that are live, closing their books, running things through. If a company comes to us and say, look, you'd help us have the time it takes to close the books by now running integrated solutions. So we're feeling pretty good about that joint offering.

[Christopher Merwin:]

Got it. And then I guess when we look at the transaction revenue growth, and apologies if this was touched on before, but it looks like it picked up a bit this quarter. I know in the past, you've sort of, I think, discouraged analysts from reading too much into quarter-to-quarter trends in that metric. But just wondering how we should contextualize that number relative to the prior quarter and anything we should take away about the potential for the end market.

[Tien Tzuo:]

Yes. I mean that's another number that has a trailing 12-month impact to it, right? So -- aspect to it. And so we just want to continue to show that number to show that companies are gaining value from our system, right, the way we monetize, as you mentioned, is not a straight in quarter 1 to 1 translation between that number and our revenues. And so there's a lot of things that are in the mix in terms of how those 2 things are related. But we feel pretty good. We feel good -- pretty good about it. The other number that we have that's a similar number, but we talked really about just the growth of subscription businesses. Like twice a year, we published a Subscription Economy Index. And given all the changes that are going on, we went to a monthly mode to try to help companies see that as I think -- your firm has been using some of that information as well. But the contrast that we wanted to show there was subscription businesses continue to grow, even as you see the GDP shrinking and you see revenues of the S&P 500 shrinking. And so it just really shows the resiliency of the model, and it shows that this is the growth engine of the future.

[Operator:]

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.